Now that the Bankruptcy Court has approved the sale of Chrysler’s assets to a consortium of buyers lead by Italian carmaker Fiat, the next major issue is which Dealer Agreements will be assumed and which ones will be rejected. 

On May 17, Chrysler filed a motion (the “Rejection Motion”) in the Bankruptcy Court seeking authority to reject almost 800 Dealership Agreements.  Under the Bankruptcy Code, Chrysler can review dealer agreements on a dealer-by-dealer basis, to consider if it makes sense in its “business judgment” to continue with current pending contracts, such as dealer agreements.  If, in Chrysler’s business judgment, a contract has more burdens than benefits, it is allowed to reject that contract.  A rejection of a contract is a breach of that contract, but the other party to the contract is only left with filing a claim in the bankruptcy case.  

For all of the dealer agreements that Chrysler does not reject, they will, as part of the sale of assets to Fiat, et. al., assume the agreements and assign them to the new owners.  This means the contract remains in effect, and is binding on the dealer, and the new owners of Chrysler. 

Car dealers whose agreements are rejected (the “Affected Dealers”) are at risk of losing everything, severely affecting local jobs and economies.  If the Court approves Chrysler’s Rejection Motion (the hearing on this motion is this week), Affected Dealers will no longer be able to sell their new inventory with manufacturer warranties, offer rebates or incentives, or use the Chrysler, Jeep or Dodge trademarks on their dealerships. Many will essentially become used car lots, with new vehicles being sold as used. The dealers who sold exclusively Chrysler, Dodge or Jeep products (rather than selling Jeep and Nissan, for example), many at Chrysler’s insistence, will be the hardest hit.

Affected Dealers have filed 197 responses to the Rejection Motion, including objections, statements, briefs, letters and separately filed declarations.

Generally, these responses argued that the rejections violate certain antitrust laws; the rejections were based upon bad faith, discrimination or other improper considerations; Chrysler failed to satisfy the traditional business judgment rule for various reasons, such as cost analysis; the Court should consider the harm to the Affected Dealers from rejection (and deny the rejection because of it) rather than relying solely upon the Chryslers business judgment; and the Affected Dealers are not getting their day in court and are not getting due process .  Chrysler filed a response to the objections, claiming that the issues raised by the Affected Dealers are inconsequential, because it is Chrysler’s “business judgment” that counts and, even if flawed, it must prevail, unless there is “bad faith, whim, or caprice.” Chrysler further urges the Court that it should not “balance the equities” between the losses by the dealers, and Chrysler’s need to reject franchise agreements.

Affected Dealers did have the opportunity to enter into an “accommodation” with Chrysler in which Chrysler promised to try to help dealers redistribute the existing inventory, parts and special tools/equipment.  Nothing specific, is promised, however, and dealers still would still have to accept substantial discounts on vehicles.

Evidence on these issues was taken yesterday.  If necessary, oral argument on the motion will be today.

Meanwhile, the Senate Committee on Commerce, Science and Transportation is reviewing Chrysler’s decision to close 789 dealerships and GM’s decision to close 1,100 dealerships.  According to the Washington Post:

Because the federal government is slated to own most of General Motors and 8 percent of Chrysler, some of the senators said they have a responsibility, as major shareholders do, to review company decisions.

Tags: Affected Dealers, bad faith, business judgment, car dealers, Chrysler, Chrysler Bankruptcy, Commerce, Dealership Agreements, Dodge, GM, GM Bankruptcy, Jeep, Rejection Motion, Science and Transportation, Senate

This entry was posted on Friday, June 5th, 2009 at 5:45 am and is filed under Automobile industry, Chrysler Bankrutpcy, GM Bankruptcy, bankruptcy, economy, finance, recovery. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.