The judge overseeing the bankruptcy of Chrysler LLC has taken a significant step toward allowing the sale of the ailing US automaker to Italian rival Fiat. Judge Arthur Gonzalez also approved Chrysler's request to begin using $4.5 billion in government loans, a key step in the automaker's plan to emerge quickly as a stronger, global company.

Gonzales rejected arguments from a group of Chrysler lenders, who wanted the deal blocked. He said that the plan was a "fair and ordinary" process and stressed the "urgent need" for a sale.

The decision is seen as a victory both for Chrysler and for the US government, which has backed the plan. Chrysler has asked for permission for a quick sale of most of its assets to a new company held by Italy's Fiat, a United Auto Workers union healthcare trust and the US and Canadian governments.
 
A group of 20 lenders, including hedge funds, had said the plan would go against normal bankruptcy principles. The proposed procedures are not legitimate and do not maximise the sale price of the assets, the group's lawyers said.

The group objected to the way the restructuring benefits the UAW, which is an unsecured creditor, for the $10.6-billion Chrysler owes to its retiree healthcare fund. It claimed that Chrysler's proposed plan "inverts" the usual priority scheme, whereby senior secured creditors are paid in full first, followed by junior lenders, administrative claims, unsecured lenders and equity holders.

The lenders complained that the reorganisation plan strips them of their property rights and that the proposed sales process has been tainted because it was dominated by the Treasury Department, which is taking "unconstitutional actions to help the United States address difficult economic times," they asserted.  "The Court should not permit a patently illegal sales process to go forward," the lenders' attorneys wrote in court papers. 

In addition, they have requested anonymity because they feel they are unfairly becoming the focus for a political backlash. In a court filing the lender group said some of their members have received death threats and have thus requested anonymity. 

However, the judge said the identities of the Chrysler creditors should be disclosed by Wednesday morning. Some of the lenders that have been publicly identified include OppenheimerFunds and Stairway Capital, a hedge fund based on Long Island.
 
When President Barack Obama unveiled the proposed Chrysler bankruptcy last week he called the lender group - who hold more than $300 million of secured Chrysler debt - "speculators". The president blamed the lenders, which include several hedge funds and other investment firms, for preventing the government from reaching an out-of-court accord to reorganise Chrysler.

The group holds about 10 per cent of Chrysler's secured debt. The government had offered about 33 cents on the dollar for their loans.

The rest of Chrysler's secured lenders, dominated by several large banks that have received government assistance in recent months, had supported the out-of-court deal, but it was not enough to keep Chrysler from filing for bankruptcy protection Thursday.

In a 300-page document filed Sunday night, lawyers representing Chrysler asked Gonzalez, a veteran judge who has overseen Enron and WorldCom cases, for a swift hearing that would allow it to re-emerge as a new entity led by Fiat. Chrysler is asking for a hearing that would clear the way for a sale of assets to be held as soon as 21 May.

However, Tom Lauria, a lawyer for some of the dissident lenders, said he had not had "meaningful" time to review the documents and Gonzalez agreed to delay a decision until 2:30 p.m. Tuesday.