The US government-backed sale of Chrysler's assets to Italian automaker Fiat has run into a last-minute hitch following an appeal filed in the US Supreme Court by three Indiana pension funds, which are objecting to the sale.

Pleading for an emergency stay of the sale of Chrysler's assets to Fiat, the three pension funds holding about $42 million, or less than 1 per cent of Chrysler's $6.9 billion debt, say that the Detroit-based automaker has broken many bankruptcy laws, which illegally benefits unsecured creditors, while secured lenders are left in the cold.

The US Second Court of Appeals on Friday gave the nod to US Bankruptcy Judge approving the sale, (See: Court approves Chrysler's sale to Fiat) which has led to the three pension funds filing an appeal, which,  if the US Supreme Court decides to hear, the Chrysler-Fiat deal would be stalled till the Supreme Court announces its final verdict.

The three pension funds 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 new owners of Chrysler, which had filed for bankruptcy protection under chapter 11 on 30 April, (See: Chrysler may seek bankruptcy protection as lenders refuse to write off debt) would have been the United Auto Workers union trust with 55 per cent stock, Fiat initially with 20 per cent, the US government would hold 8 per cent and 2 per cent by the federal and provincial governments of Canada and Ontario.

The transaction with Fiat would help create the world's sixth-largest carmaker, a merger Chrysler was not able to achieve outside bankruptcy because of opposition by some of its secured lenders.

Fiat's 20-per cent stake could be increased to 35 per cent if the company meets certain milestones.

The $40-billion bailout given so far to the US auto industry would come under severe strain if the Supreme Court decides to grant the stay, which could jeopardize more than 10,000 jobs with lengthy court proceedings and Fiat could walk away from the deal if the sale is not closed by 15 June, the day when Chrysler is supposed to come out of bankruptcy.

In a 39-page appeal filed before midnight Saturday, lawyers for the pension funds wrote, "The negative economic consequences of permitting an unlawful sale to proceed may well over time dramatically outweigh Chrysler's short-term harm. The public is watching and needs to see that, particularly when the system is under stress, the rule of law will be honored and an independent judiciary will properly scrutinize the actions of the massively powerful executive branch."

The US Treasury had agreed to pay off secured creditors of Chrysler with $2 billion in cash for $6.9 billion in debt, which works out to nearly 29 cents on the dollar.

The three Indiana pension funds had bought the debt at an average price of 43 cents on the dollar while the US Treasury had agreed to give 29 cents on the dollar, thereby the funds would incur a loss of about $13 million on their $42 million investment.

Chrysler's 22 US factories with about 26,800 hourly workers have been on idle since 1 May and in its 30 April filings, listed assets of $39.3 billion and liabilities of $55.2 billion, making it the fifth-largest bankruptcy in US history, according to data compiled by Bloomberg News.