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UPDATE 3-Pension funds lose Chrysler fight in district court

(Adds quotes from judge’s order)

NEW YORK, May 26 (Reuters) - A U.S. federal judge denied a request by a dissenting lender group to delay bankrupt automaker Chrysler LLC’s sale hearing and remove the bankruptcy case to district court.

After a federal court hearing in Manhattan on Tuesday, U.S. District Judge Thomas Griesa said he would deny a motion by a group of Indiana pension funds that the government did not have the authority to provide funds to Chrysler for its proposed sale. The funds had asked the judge to prevent Chrysler’s scheduled sale hearing in bankruptcy court on Wednesday from going forward, but the judge also denied that request.

Judge Griesa said that once the bankruptcy judge rules on Chrysler’s sale, the objecting parties should have a “fair” opportunity to appeal that decision.

In an order issued Tuesday evening, Griesa said that the bankruptcy court was able to interpret non-bankruptcy statutes such as the Emergency Economic Stabilization Act of 2008, which established the Troubled Asset Relief Program (TARP).

“At this late stage, when the Bankruptcy Court is nearing the completion of its work, it would be disruptive to remove the issues from a bankruptcy judge who has the background and is ready to complete his work,” Griesa wrote.

Chrysler, which filed for bankruptcy protection on April 30, is seeking approval this week to sell itself to a "New Chrysler" owned by the U.S. and Canadian governments, Chrysler's union and Italian carmaker Fiat SpA FIA.MI.

The pension funds argued in court on Tuesday that the government was trying to jam the sale through bankruptcy court and the speedy timeline of the sale meant their rights were being trampled.

“This (sale) is basically a sham,” Glenn Kurtz, a lawyer at White & Case LLP, representing the Indiana pension funds, told the court.

The pension funds said they paid about 43 cents on the dollar in August 2008 for their portion of Chrysler’s $6.9 billion in senior secured debt and that the government is improperly offering them just 29 cents, while giving much bigger payouts to more junior creditors, such as the union.

He said the idea the government’s moves are necessary to save Chrysler, because the automaker is like a “melting ice cube” that is quickly losing value, were disingenuous.

“The government took it out of the freezer and put it out in the sun and said: ‘It’s melting, now let me do what I want to do,’” Kurtz argued, saying the government lacks authority under TARP or the Constitution to give funding to Chrysler.

But Chrysler, and attorneys for its unsecured creditors' committee, lender JPMorgan Chase & Co JPM.N, Fiat and the U.S. and Canadian governments fought back against the pension funds, arguing a delay in the sale would mean almost certain liquidation for the iconic U.S. automaker.

“The reality is the alternative to this transaction is liquidation,” Kenneth Eckstein, a Kramer Levin attorney representing Chrysler’s creditors committee, told the court.

Chrysler’s attorney, Tim Cullen of the Jones Day law firm, said the company has a deadline of June 15 to close the sale or Fiat and the government could walk away.

Cullen said the government had once offered more money to Chrysler’s senior lenders prior to the bankruptcy. If the government had been able to get 100 percent of Chrysler’s lenders to support the deal it would have offered them $2.25 billion, instead of $2 billion for the automaker, but that attempt failed, Cullen said. About 92 percent of Chrysler’s senior lenders support the government’s plan with Fiat, according to JPMorgan, which is the agent for the loans.

APPEAL AHEAD?

Judge Griesa’s ruling, however, foreshadowed a likely future legal battle in the case, as he said the objectors to Chrysler’s sale should have a fair opportunity for an appeal of the bankruptcy court’s ruling.

“I’m convinced that the issues you raise are issues,” Griesa told the pension funds in court.

Chrysler had asked in court papers last week that the pension funds be required to put up a $2 billion bond -- the amount of cash the government is offering for Chrysler’s assets -- if the judge was going to allow their request to stay the proceeding. But Judge Griesa was surprised to hear that amount mentioned in court on Tuesday, even though such bonds are typically requested by the seller when objectors seek to delay a bankruptcy sale.

“He basically said we’re here on appeal,” Kurtz told reporters after the court hearing.

The bankruptcy case is In re: Chrysler LLC, U.S. Bankruptcy Court, Southern District of New York, No. 09-50002. The district court case is in U.S. District Court, Southern District of New York, No. 09-04743. (Reporting by Emily Chasan, additional reporting by Phil Wahba; Editing by Andre Grenon)

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