Some auto dealers that Chrysler LLC plans to close are beginning a
challenge to the automaker's plans to quickly sell itself in bankruptcy.
The group, which calls itself the Committee of Chrysler Affected
Dealers, filed papers on Tuesday asking the bankruptcy court to delay
hearings that would approve the sale and allow Chrysler to reject
almost 800 of its dealership franchise agreements, or about 25 percent
of its overall dealer network.
The committee, which said it represents nearly 300 dealers in 45
states, said in a statement it needed more time from the court to
investigate the issues and present their defense.
Chrysler's proposed asset sale and request for immediate
termination of the dealer franchises will destroy several hundred
independent businesses, ruin the livelihoods of their owners, cause the
loss of thousands of jobs and precipitate inevitable personal and
business bankruptcies, Stephen Lerner, an attorney at Squire Sanders
& Dempsey representing the committee, said in a statement.
The dealers are mounting the third major challenge to Chrysler's
plan to sell itself to a New Chrysler that will be owned by the
company's union, Fiat, and the government. The two previous challenges
have largely disbanded, as a group of dissident senior lenders dropped
their protest and the new company told concerned nonunion retirees last
week that it intends to continue their benefits.
But while the previous challenges have dealt with payment rights,
the dealers' challenge goes to one of the core economic issues in
Chrysler's business plan.
Chrysler says it needs a smaller dealer network to be profitable.
But the dealers argue they are Chrysler's main source of revenue, bear
much of the risk on car sales, and employ thousands of people.
In 2008, Chrysler sold about a million new cars at about 3,300 U.S.
dealers compared with industry leader Toyota, which sold about 1.6
million cars at a dealer network of about 1,200 dealers, less than half
the number of Chrysler dealers, according to court documents.
If you're Chrysler and you want to have a viable business going
forward, you can't possibly have the structure in any way, shape or
manner that you had -- you have to shrink the structure, said Richard
Mikels, a bankruptcy attorney at Mintz Levin.
Chrysler has argued in court documents that its dealers compete not
only with dealers selling (Fords and Toyotas), but also with each other
in surrounding markets, which hurts its ability to charge more for its
But Chrysler's dealers are challenging that motion, saying that
there is no evidence that by rejecting dealership agreements New
Chrysler will save money to any material degree, according to court
documents filed last week on behalf of Chrysler's National Dealer
They say closing Chrysler dealerships goes against simple economics
because Chrysler dealers buy all of Chrysler's cars, and customers
alienated by the closing of their hometown dealer will simply be lost
to other brands.
Dealers produce revenue, not expense, for Chrysler ... it is
Chrysler's dealers that bear the risks and costs associated with
selling Chrysler's cars to the public, the National Dealer Council
General Motors Corp has also said it plans to cut more than 1,000
dealers by 2010, but those dealers would have more time than Chrysler's
terminated dealers, which are expected to lose their franchise
agreements early next month.
The dealers, once they lose their franchise, expect to have few
options to save their businesses as other carmakers may not be willing
to expand their dealer networks and pick up some of the closed dealers,
as overall U.S. car sales are still very depressed.
Another group of terminated Chrysler dealers who say they have
stronger sales than some of the dealerships that are staying open also
plan to challenge Chrysler about the closures, according to a person
familiar with their plans.
But the ability of any bankrupt company to pick and choose which
contracts they want to reject is one of the chief benefits of filing
for bankruptcy at all, and Chrysler is arguing that such cuts, while
painful, are necessary for its survival.
The beauty of Chapter 11 is that you can accomplish these things
that would be very difficult outside of Chapter 11, Mintz Levin's