Supreme Court Ignores US Constitution

By now you have probably heard that the United States Supreme Court lifted the stay Ordered by Justice Ginsberg late on Monday and the bankruptcy deal that will give Chrysler to Fiat, UAW workers and the US and Canadian governments is now clear to go through, most likely on Wednesday, June 10, 2009.  I will not call this deal a sale of Chrysler to Fiat, as many are, because a sale presupposes that a buyer will pay for an acquisition.  As ridiculous as it sounds, Fiat will not actually buy Chrysler, but rather they will be given a 20% stake in Chrysler without paying a dime.  They merely need to share their small automobile technology with the newly reformed Chrysler when it exists bankruptcy, all in exchange for a 20% initial ownership stake, which could grow to 50% or more eventually.  This is a very sad day because today marks the day that the US Supreme Court ignored the US Constitution, ignored bankruptcy laws and made it all but certain that it will be impossible for most businesses to afford to borrow money, and extremely difficult for even the most healthy businesses to borrow money.  This will cripple much of the US economy, and in particular will disproportionately harm independent inventors, entrepreneurs and start-up businesses who absolutely require funding from investors to successfully launch and succeed.  This is a very sad day indeed.

In relevant part, the Supreme Court ruling stated the following:

In determining whether to grant a stay, we consider instead whether the applicant has demonstrated (1) a reasonable probability that four Jus-tices will consider the issue sufficiently meritorious to grant certiorari or to note probable jurisdiction; (2) a fair prospect that a majority of the Court will conclude that the decision below was erroneous; and (3) a likelihood that irreparable harm will result from the denial of a stay.


A stay is not a matter of right, even if irreparable injury might otherwise result.  It is instead an exercise of judicial discretion, and the party requesting a stay bears the burden of show-ing that the circumstances justify an exercise of that discretion. The applicants have not carried that burden.

I don’t doubt that the Supreme Court properly characterized the law relating to whether the Court should grant a stay, but it is indeed odd that the law says that a stay is not a matter of right even when might result.  In this situation, it is not a question of “might,” but rather a question of “will” result in irreparable harm.  The issue of overriding importance is a practical one.  The US government per President Obama forced this deal on secured creditors, and elevated unsecured creditors over secured creditors.  In a bankruptcy proceeding secured creditors, typically those who have lent money and received “secured” status are at the front of the line, with unsecured creditors at the back of the line.  In the typical situation secured creditors receive a certain number of pennies on the dollar, and unsecured creditors receive nothing.   That was at least until now.

This is tragic news because it will mean that lenders can never again believe with certitude that they will be able to lend money and have assets secured as collateral.  This is why many lenders give loans — because if you don’t pay they at least have rights to certain property that they can sell or obtain in order to pay them back for money provided that has been lost and will not be repaid.  This is how the mortgage industry works, and why banks lend money for us to build and buy houses.  It is also why banks and other lenders provide money to companies, because if the company fails they at least can look to the assets of the company to recoup something.

Starting today, secured lenders will never again be secure in the knowledge that they are first in line.  If the government wants to favor unsecured creditors, unions and employees at the expense of secured creditors then what we will see from now own is far more cautious lenders, and you can for the most part say goodbye to lenders providing large money, which could just evaporate at the whim of the government.  For those lenders who are still willing to provide loans, the cost of obtaining those loans will skyrocket, likely to near usurious rates, which means that even if you do get lucky enough to get a loan you are going to be paying so much in interest there will be little profit remaining, which means less expansion, fewer jobs created and a whole host of other terrible and negative consequences.

What the Obama Administration is doing to secured creditors is clearly illegal and unconstitutional, and the fact that the Supreme Court was not willing to take the case and rule that way has to make one wonder what role the Supreme Court plays.  The most pressing economic and social issue of our time and the Supreme Court passes.  Perhaps Justice Scalia thinks bankruptcy and the US economy are as much gobbledygook as patents are.  Truly sad.

The reason this Chrysler deal is unconstitutional is because the US Constitution provides Congress the power “[t]o establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States.”  Uniform bankruptcy law means that the same rule of law applies to everyone, and unless Congress is now going to retroactively pass legislation that says secured creditors in all situations must go to the back of the line, what the Obama Administration has done cannot be considered to fit within any uniform set of laws or rules.  Treating people differently is not uniform.  On top of that, as far as I know it was not Congress who did anything in this situation, but rather the White House and the Department of Treasury that did the deal making.  It is truly maddening that all of the Judges who participated in this case decided to abdicate their Constitutional role to check and balance the Executive Branch.  It would have also been nice for the Judges to follow the law enacted by Congress and to consider following the Constitution as well.

I try not to be a doomsayer, but this is bad news of epic proportions.  Anyone who owns a business or works for a business or has an invention might consider contacting your Representatives and Senators and letting them know you have grave concerns.  I am not suggesting anything radical, but we all deserve answers and explanations.  We deserve to know what is going to happen to lending and whether the promise of an American dream will continue to exist moving forward.

The reality is that business as we know it, and the ability to innovate, form a business and grow it to become successful, has fundamentally changed today.  Is this change you can believe in, or change you just can’t believe?

This is a mess of epic proportions, and I am certainly not heartless with respect to the employees of Chrysler and the parts providers and dealers, many of whom got their own bad and unfair news today.  I grew up in a family where my father was a union worker, as are many in my family still.  My dad worked in a factory and lost his job when NAFTA passed because the parent company was a Mexican conglomerate that moved factories south of the border as soon as NAFTA passed.  Back when I first became a lawyer I even represented several unions, police unions, in New Hampshire.  Having said all of this, standing the Constitution on its head and ignoring well established bankruptcy laws does no one any good now or in the future.

If the Chrysler bankruptcy were to follow anything that even remotely resembles a typical bankruptcy the company would be able to borrow money to keep operations open as downsizing occurs.  You don’t hear about this much in the papers or on the TV, but companies do successfully borrow money when they are in bankruptcy all the time because the lender who provides financing to the bankrupt company moves to the head of the line.  So don’t be fooled.  This bankruptcy didn’t have to go this way, and it shouldn’t go this way.  The public is being sold more hype and hyperbole again, just like we were when we were told the last stimulus package had to be passed and there wasn’t even time for the bill to be read.  Now we find ourselves three months removed and 95% of the money still hasn’t been spent, so how much of an emergency could it have been?

Regardless of whether you agree with me, I implore you to get involved and ask questions.  We must participate in a respectful way and let our leaders know what we think.  This is not the America I want to live in, and not the America I want to leave for generations to come.  Innovation and the American dream must remain more than fairy tale ideals.


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11 comments so far.

  • [Avatar for Gene Quinn]
    Gene Quinn
    June 12, 2009 09:57 am


    Fair enough. I never get upset when someone takes a stand based on a personal interest. Who among us doesn’t do that? And after buying a used Chrysler to get me by for a while after my vehicle suddenly died, I am sure willing to agree that there is not a lot of reason to be supportive of Chrysler quality, or should I say a lot of reason to acknowledge the lack of quality in Chrysler.

    I am still waiting to hear what recourse the bond holders could have on the merits. I think the failure to take this extraordinary writ means the case is over because their claims will be extinguished. I wish I could share your optimism!


  • [Avatar for David Koepsell]
    David Koepsell
    June 12, 2009 04:52 am

    Maybe it’s because I own a Fiat, and it’s a hell of a lot better than any Chrysler I ever owned 😉

    I think the shareholders and creditors are getting a bargain. The freedom of contract ensures that parties can make contracts for any consideration, and the consideration here is the value of Fiat’s manufacturing and marketing base.

    SCOTUS ruled on the injunction, not the ultimate merits, so I still think it’s premature for you to say they have somehow undone the Constitution. I’m just a an optimist, I guess.

    I believe, frankly, that the government has no role in propping up any of these companies, and we should let the free market sort it out. So I’m pleased, at least, that there is some free market activity in this case, unlike the other bailouts.

  • [Avatar for Gene Quinn]
    Gene Quinn
    June 11, 2009 02:04 pm


    How can you say that? There is nothing free or fair about the Obama Administration handing over 20% of Chrysler to Fiat for $0. It also puts fundamental legal principles of contract law on their head, and is the epitome of non-uniform bankruptcy treatment, which is unconstitutional.

    You and Rendini say there are other avenues, but no one is suggesting any. The whole point of bankruptcy is to extinguish claims. The secured lenders will have their claims extinguished and will have no recourse, so there is simply no monetary recovery that will be possible. Their only chance was to challenge in bankruptcy, and they have lost. They will get about 29 cents on the dollar in exchange for extinguishment of their claims and rights, while certain unsecured creditors (i.e., employees and unions) will make out far better. That is against the rule of law and secured creditors should be very afraid moving forward. This will raise the cost of getting loans, because secured status no longer means anything.

    Don’t fool yourself. Chyrsler could have continued operation and restructured without screwing the secured creditors. The unsecured creditors would have been wiped out, secured creditors would receive funds and bankruptcy debtor financing could have been obtained. The US government could have even done that. This is all about the retirees and their health care and pensions. So those who were unsecured and contributed in large part to this disaster are now rewarded and at the same time business all across America suffer. This is huge for innovation because without loans innovation never gets off the ground, and now that secured status means nothing lending rates will likely approximate exceptionally high credit card rates, which does nothing to advance the economy.

    If I am missing something tell me, but merely saying that there is an adequate remedy at law without explaining what that remedy would be is not helpful. Give me a theory, explain how those who have their rights extinguished have any opportunity to be made whole? Bankruptcy changes the typical “adequate remedy of law” option as far as I can see.


  • [Avatar for David Koepsell]
    David Koepsell
    June 11, 2009 05:31 am

    J.E. Rendini is absolutely right. The loss of something that can be fixed with money is never irreparable. It can always be fixed with money. There’s no reason to panic nor prophesy doom here. We should celebrate the sale as the correct action of a free market, which helps eliminate the need for more governmental interference either by bankruptcy or bailout.

  • [Avatar for Gene Quinn]
    Gene Quinn
    June 10, 2009 11:25 am


    You raise an excellent point. I don’t know what the answer is really. What remedy could they pursue? Who would their remedy be against? Would any right to money damages be foreclosed as a result of being wiped away in bankruptcy?

    Does anyone know of a situation where secured lenders had this or some other type of claim where a follow on claim for money damages after close of a bankruptcy proceeding was pursued?

    Thanks for raising this issue. Things are moving so fast and with so much uncertainty. If what you say is correct then there is less to worry about, although I would have liked the Supremes to take it and address those fears/concerns, particularly after Fiat publicly announced they would not walk away even if the deal could not be done by June 15.


  • [Avatar for J.E. Rendini]
    J.E. Rendini
    June 10, 2009 11:20 am

    I agree with Gene that the Chrysler deal violates the secured creditors’ rights under the Bankruptcy Act and may be an unconstitutional taking. But isn’t the Court’s decision merely saying that any violation of the property rights of the secured creditors can be adequately remedied by an award of money damages and that therefore the plaintiffs have not shown the “irreparable” damages necessary to justify injunctive relief, e.g., an order staying the bankruptcy proceeding? If so, the Court’s decision is neither clearly wrong nor very shocking. The prospect of mere monetary damages practically never constitutes adequate grounds for injunctive relief. Distinguishing between an equitable remedy and a remedy at law does not mean that the Court has ignored the Constitution.

    What this means is that the Court’s decision to deny the stay does not ratify the Chrysler deal. The secured creditor plaintiff’s should not lose heart. Instead, they should prepare to pursue their remedy at law when they suffer their inevitable, if not irreparable, money damages.

  • [Avatar for Foxwood]
    June 10, 2009 11:04 am

    Our Constitutional right are being ignored, but the sad truth is we don’t know it. We don’t know our rights, and some just don’t care. That is why we are where we are.

  • [Avatar for Gene Quinn]
    Gene Quinn
    June 10, 2009 09:55 am


    I am sure you are right. This is not the first Supreme Court to ignore the Constitution, and I am afraid not the last. With all that is going on in government these days it is hard to believe that all branches of government are turning their back on American principles. I can’t believe this is what people voted for when they voted for change. Maybe I am naive and simply out of touch, but the people I talk to every day are increasingly worried, even those who voted for Obama. We are at a pivotal time. I sure hope those making these radical decisions are correct, but everything I know about history, law and economics suggests they are not, which is extremely troubling to me.


  • [Avatar for Gene Quinn]
    Gene Quinn
    June 10, 2009 09:52 am


    Thanks for your message. I have to confess that I didn’t know the history, but it makes sense. I will try and get my hands on the IDB article you mention, and Geisst’s book. Thanks for contributing.


  • [Avatar for EG]
    June 10, 2009 08:53 am


    This isn’t the first time SCOTUS has ignored what our Consitution says. Kelo v. City of New London on when a “taking” is constittuional is the most disgraceful example of SCOTUS standing our Bill of Rights on its head.

  • [Avatar for Mike Kondoudis]
    Mike Kondoudis
    June 10, 2009 08:15 am


    Your post touches on one of the fundamental pillars of our country and its success – the absolute respect for property rights. The subject of property rights, like many Constitutional principles, is not always interesting or easy to understand by the general public and is certainly not one that lends itself to TV/cable news coverage. That is why we, as attorneys, have an duty to take the lead and to at least question the recent path our country seems to have taken. It would be a tragedy for this country to jettison over 200 years of precedent without at least some thoughtful debate before doing so.

    From the Investor’s Business Daily May 28, 2009 editorial title “Stiffing GM’s Creditors Will Backfire.”

    Historians pinpoint the beginnings of U.S. power at 1811, with the liquidation of the First Bank of the United States, founded by Alexander Hamilton. Amid the winds of the War of 1812, First Bank ignored political pressure and insisted that even British bondholders, from the nation the U.S. was preparing to fight, be paid in full. The debt was paid because that was the law.

    This single act reverberated for years. Word got back to Europe that the word of this fledgling country was good, even with enemies. As a result, European capital to finance the great steamships, railroads and other engines of American growth flowed.

    “The return of their funds became an important chapter in American finance because it showed that the government was willing to do business on an impartial basis, and that would influence future British investments for decades to come,” wrote Charles R. Geisst in his 1979 “Wall Street: A History.”