Federal Bankruptcy Court Judge Robert Gerber approved the sale of most General Motors assets to a new corporation to be owned by the governments of the United States, Canada and the province of Ontario, the United Auto Worker’s Voluntary Employee Benefit Association trust (“VEBA”), and GM bondholders.  Gerber today also denied a “fast track” appeal to the Second Circuit Court of Appeals, by groups of people with product liability and asbestos-related claims.

Gerber stated that he would not stay (hold) the sale while the groups appealed to the Second Circuit because he saw no “substantial possibility” that the groups would prevail, given how that court previously ruled on Chrysler’s similar sale.

The sale is expected to go through on or before Friday.  The US government has pledged to cut off $50 million in funding to GM if the sale isn’t approved by Friday, which would force GM to liquidate.

The new GM will include Buick, Cadillac, Chevrolet, and GMC brands, with the automaker divesting itself of Hummer,  Saab, and Saturn. It will also include some overseas operations, including those in China and Brazil. Pontiac will be closed.

GM has indicated it will back warranties on existing cars, although it has closed 1,000 dealers.  As with the Chrysler bankruptcy, consumers may have to travel farther for sales, service and warranty claims.

According to the Detroit News, General Motors reversed the closing of 41 of the 2,100 dealerships originally targeted to be closed as part of GM’s bankruptcy and restructuring. 

GM has listened to appeals from hundreds of dealers, and has allowed 41 so far to remain open.  This is in stark contrast to Chrysler, which received Bankruptcy Court permission to close 25% or 789 dealerships although it had no dispute or appeals process of any sort. 

A group of influential members of Congress, including House Majority Leader Steny Hoyer, D-Md., introduced a bill last week to try to force GM and Chrysler Group LLC to keep dealers open. The Automobile Dealer Economic Rights Restoration Act of 2009, would restore the economic rights of automobile dealers to protect jobs, workers and small-business owners. It has 40 House co-sponsors, although it is unclear whether Congress has any power to change the Chrysler closings. 

A House Energy and Commerce subcommittee chaired by Rep. Bart Stupak, D-Menominee, has held hearings on the closing dealerships and heard from GM CEO Fritz Henderson and Chrysler President James Press.

It has been reported that Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, is considering a similar bill in the coming weeks. Sen. Bob Corker, R-Tenn., has a separate bill that would make closing dealers financially whole by forcing automakers to buy back unsold parts and inventory.

The problem with this legislation is that federal bankruptcy law trumps state contract law by allowing existing contracts to be “rejected” by the Debtor, with Court approval.  This is exactly what happened to the Chrysler dealers.  Chrysler filed a motion to close certain dealers because it would strengthen Chrysler’s economic position, testimony was presented, and the judge ruled to grant the motion.

For more information, see the article in the New York Times.

The full Supreme Court Tuesday decided not to hear the merits of a challenge to the sale of Chrysler assets to a group comprised of Fiat, the US, Canada and the Chrysler Auto Worker Union Retirement Trust.  The unanimous court, in a two-page-opinion, lifted the temporary stay granted by Justice Ruth Bader Ginsberg on Monday, and stated that the challengers had not met their burden of proof that their grievances merited the court’s attention.

A group of Indiana pension funds and consumer groups who opposed the sale of Chrysler had filed an emergency motion with the U.S. Supreme Court, asking that the sale be “stayed” or put on hold while they continue their attempts to block it.  The pension funds owned a small portion of Chrysler’s secured debt and claimed the sale was unfair to secured lenders. Under the sale, the pension funds will receive just 29 cents on the dollar, less than unsecured creditors like the United Auto Workers Union.  The consumer groups contend that the sale doesn’t sufficiently address warranties of existing Chrysler, Dodge and Jeep products. 

After the ruling, Chrysler issued a statement saying the sale will close “very shortly.” The New York Times reports the deal is scheduled to close at 9 a.m. today.  Fiat shares were up as much as 3 percent early Wednesday morning. 

Also Tuesday, the Bankruptcy Court approved Chrysler’s motion to terminate 789 dealer franchises immediately, which Chrysler contends would significantly cut costs.  Scores of dealers had opposed the closings. 

The Wall Street Journal calls the Supreme Court decision a victory for the Obama administration:

The high court’s move marks a victory for the Obama administration and its ambitious plan to remake the American auto industry by pushing both Chrysler and General Motors Corp. through quick and painful restructurings under Chapter 11 bankruptcy.

But the order is a setback for a group of Indiana pension funds and others who maintained the government’s heavy-handed treatment of creditors in the case could chill private lending to distressed firms and alter the rules of bankruptcy reorganizations.

The Court’s decision appears not to provide advance clearance for any other government rescue plan — such as the similar administration-backed bankruptcy of General Motors.  It also does not rule on the constitutionality of using federal bailout funds to rescue a private company.

This afternoon, the United States Supreme Court issued a stay of the sale to Fiat SpA of the assets of Chrysler LLC, currently attempting to exit bankruptcy proceedings so that it may proceed as a going concern in the global automotive industry.

Late last Saturday, a group of Indiana pension funds opposed to the sale of Chrysler to Italy’s Fiat filed an emergency motion with the U.S. Supreme Court, asking that the sale be “stayed” or put on hold while they continue their attempts to block it. The motion came after the Second Circuit on Friday upheld the Bankruptcy Court’s approval of the sale.  The stay asks for the extension of a temporary hold put in place by the appeals court until Monday at 4 p.m. EDT or when the high court decides whether to intervene.

With the stay approved, the Chrysler deal with Fiat could be delayed for weeks or months.  Fiat can pull out of the deal if it does not go through by June 15. 

The pension funds contend that secured creditors would have fared better if Chrysler had sold its assets piecemeal instead of in bulk to the Fiat consortium.  They also object to the sale because secured creditors are in a worse financial position than unsecured creditors as a result of the sale. 

Justice Ruth Bader Ginsburg hears all emergency motions arising from the Second Circuit.  She issued the one sentence ruling herself. She could have refered the motion to the entire court, rejected the appeal outright or requested other parties involved in the case file briefs.

Until the stay, the sale could have closed today.  

A group of citizens with product liability claims against Chrysler filed a brief with Ginsburg early Sunday that supported the Indiana pensioners’ case. Consumers are concerned that “New Chrysler” is not assuming product liability claims for cars sold prior to the sale, and that “Old Chrysler” will not have enough assets to take care of these claims.

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.

General Motors Corporation filed a petition for Chapter 11 bankruptcy protection this morning in the Second District of New York Bankruptcy Court.

According to the bankruptcy filing, as of March 31, 2009, General Motors employed approximately 235,000 employees worldwide.  In addition, General Motors had consolidated global recorded assets of approximately $82.3 billion and liabilities of $172.8 billion.  Global revenues recorded for fiscal year 2008 aggregated approximately $150 billion.

In the bankruptcy filing, GM announced its intention to support certain “customer programs,” in connection with the marketing and promotion of the sale of their vehicles, and parts and accessories. These programs include Warranty and Service Programs, Recall Programs, GM Card Programs, Sales Incentive Programs, Dealer Support Programs, Vehicle Repurchase Programs, and Trade Customer Programs. 

The main difference between the GM bankruptcy and the Chrysler bankruptcy is that Chrysler is selling its assets to a new buyer comprised of Fiat, the US, Canada and the Chrysler Auto Worker Union Retirement Trust. GM proposes to transfer certain well-performing assets (including vehicles from its Cadillac, Chevrolet, Buick and GMC units) into “New GM” while the federal bankruptcy court supervises the sale or liquidation of unprofitable brands, such as Saturn and Hummer, and at least 11 unwanted factories.

The devil is in the details, but we anticipate the fall-out will be similar to that of the Chrysler bankruptcy. GM will “reject” dealer agreements with certain dealers and will support the warranties and rebate programs for the “accepted” dealers.  There may be a dip in overall prices for GM cars, but the value of phased-out brands and models will decline rapidly.  In addition, consumers may have to travel farther to purchase or service a GM vehicle.  

Meanwhile, no other bidder has come forward and Judge Gonzalez has entered an order approving the sale of certain Chrysler assets to the Fiat Group.  This is the first and largest step toward Chrysler’s emergence from bankruptcy, although an appeal was filed by lawyers for three Indiana pension funds who own a 1% stake in Chrysler and oppose the sale.  Chrysler, like GM, continues to support the warranty and rebate programs of the “rejected” dealers, until the final order is entered to cancel the rejected dealer agreements.

Bloomberg reports that Magna International Inc., Canada’s largest auto-parts supplier, is in talks with General Motors Corp. about acquiring the Saturn brand as the automaker shrinks operations, people familiar with the discussions said.

Bloomberg states that other potential buyers are Penske Automotive Group, Inc and private-equity firm Black Oak Partners, Inc.

GM announced earlier this year that it plans to eliminate its Saab, Hummer and Saturn brands, and shrink the models offered under the Pontiac brand as part of a restructuring plan submitted to the federal government.

Chrysler LLC will eliminate 789 dealers, or 25 percent of its U.S. network, by June 9, according to a memo sent today to retailers in one sales region, obtained by Automotive News.

In addition, General Motors, which is preparing for a 40 percent cut in its dealer network by the end of 2010, this week will send warning letters to nearly 1,000 dealers, sources told Automotive News today.

The letters will be sent Thursday to about 1,000 “underperforming” dealers and will arrive at their dealerships on Friday, said one of the sources familiar with GM’s plan. The letters will warn dealers that their franchise agreements will not be renewed when they expire in October 2010, and will outline each dealership’s deficiencies and detail how the dealership failed to meet the requirements of GM’s sales and service agreements, said one of the sources familiar with the contents, the sources said.

Chrysler sent letters via UPS to dealers, which should be received today, according to the memo. 

Dealers will get 23 business days for a “court review” of their cases, according to the memo, from a sales manager to district dealers. 

“All of this information is subject to change,” the memo says.

“Chrysler will not be required [per bankruptcy law] to buy back the vehicles or tools and parts from rejected dealers,” the memo says. “We will match you with an accepted dealer(s) to buy your parts, tools and vehicles.”

The memo says Chrysler will send letters to 4 million customers of the rejected dealers after June 9, when the stores are to close.

In the memo, Chrysler says that after the closings, 80 percent of its dealers will carry all three brands under one roof, compared with 62 percent currently. Since early 2008, Chrysler has been consolidating its dealer body under Project Genesis, a plan to put the Dodge, Jeep and Chrysler brands under one roof wherever possible.

Chrysler officials said they could not comment until documents are filed in U.S. Bankruptcy Court.  For background on why dealers are being cut, click here.  Click here for a complete list of dealers targeted to be cut. 

Dealers affected in Virginia include Battlefield Jeep of Charlottesville, VA; Berrang Chrysler Dodge Jeep of Waynesboro, VA; Dominion Car Company in Salem, VA; Dulles Jeep in Leesburg, VA; Edinburg Motors in Edinburg, VA; Grafton Dodge in Grafton, VA; John P. Hughes Motor Company in Madison Heights, VA; Pearson Dodge in Midlothian, VA; Kern Motor Company in Winchester, VA; Airport Chrysler Jeep in Richmond, VA; Nelson Dodge in Martinsville, VA; Ourisman Chantilly Dodge in Chantilly, VA; Parsons & Parsons in Winchester, VA; Pohanka Chrysler Dodge of Leesburg in Leesburg, VA; Family Chrysler Dodge Jeep of Marion, VA; Scott Newcomb Chrysler Jeep of Bassett, VA; Britt Chrysler Jeep of Fredericksburg, VA; Tysinger Motor Corp in Hampton, VA; University Motors in Christianburg, VA;  Waverly Motors in Waverly, VA; and Cowles Chrysler in Woodbridge, VA. 

Dealers affected in North Carolina include:  Bob Mayberry Chrysler Dodge Jeep of Monroe, NC; Brown & Wood Jeep in Greenville, NC; City Motors of Greensboro, NC; D&E Car Exchange in Wilmington, NC; Edenton Motors in Edenton, NC; Serramonte Chrysler Dodge Jeep in Charlotte, NC; Stevenson Chrysler Jeep in Jacksonville, NC; Moore Motor Company in Washington, NC; Johnson Chrysler Dodge Jeep in Durham, NC; Metroliner Chrysler Jeep Dodge of Charlotte, NC; Southern States Dodge of Raleigh, NC; Stearns Chrysler Jeep in Graham, NC; and Williamson Motors in Clinton, NC.