Indianapolis, Indiana – An appeal of Chrysler’s bankruptcy sale by the Indiana Treasurer of State’s Office could extend the automaker’s stay in bankruptcy protection and could potentially derail the company’s agreement with Fiat.

The Treasurer’s Office received word late on the evening of June 2 that its petition for a stay in the bankruptcy sale had been granted by the U.S. Court of Appeals for the Second Circuit in New York City. As a result, the scheduled bankruptcy sale, originally set for Friday, June 5 will not occur on that date.

The court has agreed to hear legal arguments on behalf of the Indiana State Police Pension Fund, the Indiana Teacher’s Retirement Fund, and the Major Moves Construction Fund, with arguments to begin on June 5. The pension funds hold about US$42 million of Chrysler’s $6.9 billion in secured debt.

In a statement, Indiana treasurer Richard Mourdock said that secured creditors, such as the Indiana funds, have been made secondary to unsecured creditors, in contravention of longstanding bankruptcy law. The proposed sale gives majority ownership of the company to the government’s preferred unsecured creditors, while secured creditors receive only 29 cents on the dollar. The statement also claimed that the federal government had illegally used Troubled Asset Relief  Program (TARP)  funds to leverage the sale, arguing that the U.S. Congress intended TARP funds to be solely used to aid financial institutions, which Chrysler is not.

“We are pleased the Court of Appeals has agreed to hear our arguments,” Mourdock said. “As we have stated from the beginning, Indiana retirees and Indiana taxpayers have suffered losses because of unprecedented and illegal acts of the federal government.”

Chrysler had hoped to secure an early exit from bankruptcy and has said that Fiat can potentially walk away from the deal if it is not completed by June 15, 2009.

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