Judges OK Chrysler sale; appeal to top court likely

NEW YORK (Reuters) - The sale of bankrupt automaker Chrysler LLC to a group including Italian carmaker Fiat SpA and the U.S. government was upheld by a U.S. appeals court on Friday, but the deal is expected to be appealed to the Supreme Court by a group of investors.

A three-judge panel of the U.S. Court of Appeals for the Second Circuit stayed the closing of the sale until Monday afternoon, or until the Supreme Court decides whether to hear an appeal.

If the sale is allowed to close, a "New Chrysler" will exit bankruptcy on Monday, reorganizing the automaker in less than 60 days as demanded by the White House.

The decision also reinforces the case of General Motors Corp, which is using a similar quick sale strategy in its bankruptcy.

The appeals court said it would issue a written order later Friday. The judges returned their decision 10 minutes after lawyers finished presenting their arguments.

"There's one more stop on the train," Tom Lauria, a lawyer for the Indiana pension funds at White & Case, which appealed the sale order, told reporters after the decision.

Earlier this week a bankruptcy court judge approved the sale of most of Chrysler to a group led by Fiat, a union-aligned trust and the governments of the United States and Canada. The group agreed to pay $2 billion to secured lenders, who were owed $6.9 billion.

Nearly two hours of oral arguments on Friday in the appeal of the bankruptcy judge's decision followed familiar themes established from the outset in Chrysler's bankruptcy.

The pension funds argued that the sale unlawfully rewarded unsecured creditors such as the union, ahead of secured lenders and that Chrysler was pursuing a covert and illegal reorganization plan through a sham sale.

"This is a transaction to reorganize Chrysler as a going concern... even the President said so," Lauria said in his opening statement before the panel, which included Judge Dennis Jacobs, Judge Amalya Kearse and Judge Robert Sack.

Chrysler attorneys countered that giving unions a stake in the New Chrysler and paying suppliers was necessary to add value to the company's operations. Without their involvement and concessions, Chrysler would be liquidated and secured lenders would get less, an argument the chief judge appeared to agree with.

"You can't wait for a better deal to come in from Studebaker," Judge Dennis Jacobs told the pensioners lawyer.

The Studebaker was once a popular automobile brand.

The pension funds also argued the U.S. government, which kept Chrysler afloat with emergency loans prior to the automaker's bankruptcy and financed its Chapter 11 filing, overstepped its authority by using bailout funds Congress intended for banks.

"TARP is not a gigantic slush fund," said Glenn Kurtz, a White & Case lawyer also representing the pension funds.

During the hearing, Judge Jacobs asked Kurtz to clarify his arguments about whether the Treasury's funding was harming his clients' constitutional property rights, and asked "Should we give the Supreme Court a swing at this ball?"

Kurtz admitted his firm was already working on the papers for an appeal to the Supreme Court.

The automaker's attorneys, however, argued on Friday that an economic emergency forced the government to take charge. Other lawyers including the union, Fiat and Chrysler's unsecured creditors' committee stood up in support of the deal, saying the only alternative to the deal would be Chrysler's liquidation. Fiat can walk away from the deal if it is not closed by June 15.

"The big implication is the precedent this sets for GM," said Stephen Lubben, a law professor with Seton Hall University School of Law in Newark, New Jersey. He said he doubted the Supreme Court would take the case.

A group representing people with product liability claims against Chrysler and several consumer advocacy groups also joined the appeal.

The appeal is: In re: Chrysler LLC, U.S. Court of Appeals for the Second Circuit, No. 09-2311. The bankruptcy case is In re: Chrysler LLC, U.S. Bankruptcy Court, Southern District of New York, No. 09-50002.

(Reporting by Emily Chasan and Tom Hals; editing by Carol Bishopric)