Obama lawyer: Chrysler-Fiat must be allowed

U.S. solicitor general asks Supreme Court to ignore appeal of Chrysler bankruptcy made by Indiana pension fund.

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By Aaron Smith, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- A top Obama administration lawyer urged the Supreme Court on Monday to allow Chrysler's bankruptcy to proceed, noting that the needs of the economy outweigh the needs of the deal's detractors.

U.S. Solicitor General Elena Kagan filed a request that the court deny an appeal by Indiana pension funds that had invested in Chrysler and say they will lose $6 million because of the bankruptcy.

Indiana Treasurer Richard Mourdock argues that the Chrysler case upends long-standing bankruptcy law. He also says President Obama has overstepped his authority by using funds from the $700 billion TARP bailout, originally enacted to rescue the financial sector, for an automaker bailout.

Kagan defended the use of funds from the Troubled Asset Relief Program and argued that Indiana's appeal lacks legal merit. In addition, she said the losses to the Indiana funds "cannot outweigh" the potential broader problems a collapse of Chrysler would present.

"As an economic matter ... blocking the transaction would undoubtedly have grave consequences," Kagan wrote.

This is the last opportunity for Mourdock to stall Chrysler's bankruptcy process, following his unsuccessful appeal to the U.S. Courts of Appeals for the 2nd Circuit.

Mourdock filed his appeal on behalf of three Indiana pension funds, representing state police and teachers as well as a "Major Moves" construction fund.

The U.S. Supreme Court has until 4 p.m. ET on Monday to either listen to Mourdock's appeal, or ignore it, allowing Chrysler to proceed with its bankruptcy process.

The Indiana funds represent $42 million of Chrysler's $6.9 billion debt, which the automaker is trying to unload through the Chapter 11 process. Mourdock has told CNNMoney.com that it's his duty as state treasurer to oppose Chrysler's bankruptcy, because some $6 million worth of pension funds would get wiped out in the deal.

Chrysler, which filed for Chapter 11 on April 30, is trying get approval to transfer its best-performing assets, such as factories and dealership contracts, to a new company called Chrysler Group, partnering with the Italian automaker Fiat.

Fiat would own 20% of Chrysler Group initially, though this share could eventually increase. The biggest share of 55% would be controlled by a United Auto Workers union trust. A minority stake of 8% would go to the U.S. government, and 2% would be held by the federal and provincial governments of Canada and Ontario.

Fiat has until June 15 to change its mind on the deal. After that date, Fiat is locked in.

Chrysler's asset transfer was approved just hours before the bankruptcy filing of General Motors (GMGMQ) on June 1. The Chrysler bankruptcy process is being closely watched by investors, to see how it might impact GM.

The recession has dried up consumer demand, pushing Chrysler and GM to the edge of survival. Rising fuel prices, job losses and the bank industry's temporary hiatus from offering car loans have all contributed to the decline of the Detroit-based auto industry.

President Obama pushed Chrysler and GM toward bankruptcy, after the auto makers failed to satisfy his expectations for an industry overhaul. Obama has requested that the Chapter 11 process be completed within 30 to 60 days. To top of page

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