Thomas Lauria, attorney for Chrysler creditors that are refusing to accept the Obama administration’s plan (in which senior creditors would give up their claims in order to feather the bed of the UAW), has filed a motion arguing that the administration’s scheme is unconstitutional.
I’m not a lawyer, but I have to say that the argument sounds compelling. It seems that the Supreme Court, in Louisville Joint Stock Land Bank v. Radford, found that creditors have a 5th Amendment right to property that cannot be set aside by a change to the law (such as TARP):
1. The bankruptcy power, like the other great substantive powers of Congress, is subject to the Fifth Amendment.
2. Under the bankruptcy power, Congress may discharge the debtor’s personal obligation because, unlike the States, it is not prohibited from impairing the obligation of contracts; but it cannot take for the benefit of the debtor rights in specific property acquired by the creditor prior to the Act.
3. The Fifth Amendment commands that, however great the Nation’s need, private property shall not be taken even for a wholly public use without just compensation.
4. If the public interest requires, and permits the taking of property of individual mortgagees in order to relieve the necessities of individual mortgagors, resort must be had to proceedings by eminent domain, so that, through taxation, the burden of the relief afforded in the public interest may be borne by the public.
5. The provisions added to § 75 of the Bankruptcy Act by the Act of June 28, 1934, known as the Frazier-Lemke Act, operate, as applied in this case, to take valuable rights in specific property from one person and give them to another, in violation of the Constitution.
I’ll be looking for commentary from the law bloggers, but this makes it sound as though the senior creditors’ position is very strong. The Chrysler deal looks to me likely to go down.
POSTSCRIPT: Can you imagine furor if the government were to (as the Radford decision says they must) use tax money to compensate the creditors, all for the benefit of the UAW? It’s hard to picture that happening. Still, many things have already happened during the past year that seemed impossible.