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Chrysler Back in Court to Get OK to Dump Dealers

AP
Tuesday, 9 Jun 2009 | 2:48 PM ET

Chrysler headed back to bankruptcy court Tuesday to get a judge to approve the termination of 789 dealer franchises, while Chrysler's plan to become a stronger automaker partnered with Italy's Fiat awaits action by the nation's highest court.

Chrysler Bankruptcy
Chrysler Bankruptcy

The sale of Chrysler's assets to Fiat had been expected to close more than a week ago, but Supreme Court Justice Ruth Bader Ginsburg's decision to delay the sale now threatens to derail Chrysler's restructuring plans.

More than 25 attorneys representing hundreds of dealers from across the country argued in bankruptcy court Tuesday that little would be gained by terminating their franchises, while Chrysler maintained that the move is a necessary part of its plan to cut costs and quickly emerge from Chapter 11.

Kevyn Orr, an attorney for Chrysler, said the automaker doesn't deny that it's slashing its dealer base because it's in bankruptcy protection. The automaker wants to reduce its dealer ranks by about 25 percent.

"We make no bones about it that bankruptcy provides the dealer with certain rights it wouldn't have outside," Orr said in court.

But he said Fiat has made it clear that the number of dealerships needs to be reduced, whether it happens inside bankruptcy protection or later on.

The dealers also argued that any ruling by U.S. Judge Arthur Gonzalez should be put on hold pending Supreme Court action on the Chrysler sale.

Stephen Lerner, an attorney for the Committee of Chrysler Affected Dealers, a group of about 340 dealers, said dealers' lives will be destroyed and communities across the country will suffer because of Chrysler's decision.

He said the automaker could have treated the dealers in accordance with state franchise laws and provided a "softer landing" for those slated to lose their franchises. General Motors plans to cut about 40 percent of its 6,000 dealers by the end of 2010, but most won't be let go until their contracts end late next year.

"This did not need to happen," Lerner told the court. "It's unconscionable for these dealers to be suffering with no benefit to the estate."

Arguments wrapped up early Tuesday afternoon and Gonzalez said he would issue his ruling later in the day.

Chrysler has been flying through five weeks of bankruptcy proceedings and appeared all but certain to complete the sale of its assets to Fiat before a June 15 deadline. But Ginsburg issued a stay Monday to review an appeal by a trio of Indiana pension and construction funds which own a small part of Chrysler's secured debt. It is not clear how long the stay will last or if the high court will take up the case.

A federal appeals court in New York approved the sale Friday, but gave opponents until 4 p.m. Monday to try to get the high court to intervene. Ginsburg issued a one-sentence order blocking the sale minutes before the deadline.

The delay may be only temporary. Ginsburg could decide on her own whether to end the stay, or she could ask the full court to decide.

Will Fiat Walk Away?

Fiat could walk away from the Chrysler deal after June 15 and leave the struggling U.S. automaker with little option but to liquidate. But a Fiat spokesman said Tuesday that the Italian automaker will not turn its back on a deal despite the Supreme Court stay.

Indiana officials, representing the state funds challenging the Chrysler sale, submitted a short statement to the Supreme Court Tuesday that calls attention to Fiat's statement.

"The Indiana Pensioners respectfully submit that the risk of termination by Fiat if the transaction does not close by June 15 no longer provides a basis for driving the timing of these proceedings," the officials said.

But production at Chrysler's manufacturing plants remains halted pending the closing of the sale.

Chrysler, which is losing $100 million every day its plants are closed, said it had no comment until it receives further information from the court.

Chrysler's ability to speed through the bankruptcy process has partially been a result of the involvement of the Obama administration's auto task force, which provided $4.5 billion in financing and helped negotiate a deal between the company's stakeholders.

Under a deal brokered in the days leading up to Chrysler's April 30 Chapter 11 filing, Fiat will receive up to a 35 percent stake in the new company created by the sale, in exchange for sharing the technology Auburn Hills, Mich.-based Chrysler needs to create smaller, more fuel-efficient vehicles.

The United Auto Workers will get a 55 percent stake that will be used to fund its retiree health care obligations, while the U.S. and Canadian governments will receive a combined 10 percent stake.

Meanwhile, the automaker's secured debtholders would get $2 billion in cash, or about 29 cents on the dollar, for their combined $6.9 billion in debt. Some of the debtholders balked at the deal, saying as secured lenders they deserved more.

A group of investment firms that held about 4 percent of Chrysler's secured debt filed an objection to the sale shortly after the automaker's Chapter 11 filing, but the group later dissolved, saying it didn't have enough members to mount an effective challenge.

Later on, the Indiana funds, represented by the same law firm as the dissident debtholders, filed their own objection and eventually appealed to the 2nd U.S. Circuit Court of Appeals and the Supreme Court. They claim the sale unfairly favors Chrysler's unsecured stakeholders such as the union ahead of secured debtholders like themselves.

The funds also are challenging the constitutionality of the Treasury Department's use of money from the Troubled Asset Relief Program to supply Chrysler's bankruptcy protection financing. They say the government did so without congressional authority.

The funds hold about $42.5 million, or less than 1 percent, of Chrysler's $6.9 billion in secured debt. They bought it in July 2008 for 43 cents on the dollar.

Compensation for such claims would have to be sought from the parts of the company not being sold to Fiat. But those assets have limited value and it's doubtful that there will be anything available to pay out.

The appeals come as Congress scrutinizes the Obama administration's restructuring of Chrysler and GM. The Senate Banking Committee said it planned to call Ron Bloom, a senior adviser to the auto task force, and Edward Montgomery, who serves as the Obama administration's director of recovery for auto communities and workers, to a hearing Wednesday.

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