Chrysler Dealers Want to Keep Non-Bankruptcy Rights

Chrysler LLC’s dealers asked a bankruptcy judge to let them claim legal protections they lost when the automaker filed for Chapter 11.

The Chrysler National Dealer Council, in a statement filed May 16, asked U.S. Bankruptcy Judge Arthur Gonzalez in Manhattan to allow dealers to assert the rights that typically protect them under state laws.

“It is Chrysler’s dealers that bear the risks and costs associated with selling Chrysler’s cars to the public,” such as absorbing inventory, the council said in court papers.

Chrysler, based in Auburn Hills, Michigan, asked Gonzalez on May 14 for permission to cancel 789 dealership agreements using the authority of a federal bankruptcy court to bypass protections that dealers have under state laws.

Each dealer facing elimination will have an opportunity to argue against Chrysler’s motion. Typically, judges only apply the U.S. bankruptcy code in deciding whether a company can cancel a contract.

“They’re going to lose,” turnaround consultant Michael Boudreau said of the dealers. “Hope isn’t a strategy for these guys.”

Boudreau, a managing member with O’Keefe & Associates in Bloomfield Hills, Michigan, said most of the smaller dealers Chrysler is cutting will close because they won’t be able to affiliate with another carmaker. General Motors Corp. has said it won’t renew contracts with about 1,130 retailers and Ford Motor Co. isn’t looking to grow its dealer network.

Thinning Ranks

The proposed reductions represent about 25 percent of the 3,200 Chrysler, Dodge and Jeep-brand dealers. Those on the cut list will be gone by about June 9, Chrysler said. Chrysler’s dealers employ 140,000 people and serve, on average, 9,800 Chrysler customers, the dealer group said.

The council, in its court filing, disputed Chrysler’s claim that thinning the dealer’s ranks would help the reorganized automaker that is to be managed by Italy’s Fiat SpA.

“There is no evidence that by rejecting dealership agreements New Chrysler will save money to any material degree or enhance its competitive position,” the group said in the filing. “To the contrary, closing dealers narrows distribution and reduces Chrysler’s sales and income as fewer dealers buy fewer cars and retail sales are lost to other brands.”

15 Dealers

Leonard Bellavia, partner at Bellavia Gentile & Associates, said he has around 15 dealers who will argue against the contract rejections. Bellavia said he will file court papers today stating that because Chrysler’s dealer rejection letter appeared only two business days before a deadline for objections to Chrysler’s proposed sale to Fiat, it didn’t give rejected dealers enough time to react.

“Dealers have been deprived of their day in court,” Bellavia said in a phone interview.

“There are many people, many families, and many local economies across the country directly affected by the court’s decisions regarding these matters,” the dealer council said.

Shrinking the number of outlets helps ensure profits for those that survive, Chrysler President Jim Press said. Stronger dealerships have the resources to invest in properties, maintain a uniformly high level of service, and sell more cars, Press said on a conference call.

Chrysler culled mostly among retailers that had annual sales of 100 or fewer vehicles; sold just one Chrysler brand; or carried inventory from multiple automakers, he said.

Surviving dealerships will be urged to purchase autos and replacement parts from closing dealerships, Press said. The closure list collectively accounted for 14 percent of the company’s sales, Press said.

The case is In re Chrysler LLC, 09-50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan)

(Published by Bloomberg - May 18, 2009)