Dealers Fight Chrysler Franchise Cuts in Court

NEW YORK, June 4 -- Eldon Palmer was preparing for a grand opening of his upgraded Chrysler dealership -- a $3.2 million project he pursued at the automaker's urging -- when the letter came.

In formal language that seemed to belie their 52-year business relationship, Chrysler informed Palmer that his Indiana dealership, along with another he runs, would be among the 789 dropped as the automaker seeks to emerge from bankruptcy as a new leaner, healthier company.

"We were ready to roll," said Palmer, recounting the millions he has spent over the past two years expanding his Chrysler brands and putting them under one roof in a new facility. He had done so, Palmer added, at the request of Chrysler, which was trying to establish a more efficient dealership network.

One after another, Chrysler dealers slated for closure took the witness stand Thursday in a federal bankruptcy courthouse in Lower Manhattan. Some openly wept.

Chrysler, which plans to emerge from bankruptcy as a new company led by Italian automaker Fiat, is seeking court approval to terminate agreements with roughly a quarter of its dealerships. Thursday's hearing is to be followed by oral arguments Tuesday, after which U.S. Bankruptcy Judge Arthur J. Gonzalez will rule.

Chrysler executives have said that whittling down a bloated dealer network was necessary to be more competitive with foreign manufacturers. The executives said the company used business criteria such as sales productivity and customer service satisfaction to determine which dealers to cut. Chrysler also wants to bring its three product lines -- Chrysler, Dodge and Jeep -- under one dealership roof.

During cross-examination by a Chrysler attorney, Palmer acknowledged that his dealership met a mere 37 percent of its sales target for 2008. "It was embarrassing," Palmer said, in part blaming the poor showing on the condition of the building he purchased, which he has since renovated. "It is a beautiful facility now.

Larry Crain, a dealer in Little Rock, told a similar story, saying he invested in expanding his product offering at the encouragement of Chrysler. And like many others, Robert Melvin, a Nevada dealer, testified that he bought more cars from the company in recent months at the request of executives as Chrysler, faced with plunging sales, tottered on the brink of bankruptcy with insufficient cash flow.

He received a rejection letter last month. To his dismay, Melvin added, he received a shipment of more cars from Chrysler last week.

Despite the dealers' pleas, bankruptcy experts said the dealers have an uphill legal battle. In bankruptcy proceedings, companies have more leverage to ignore state franchise laws that protect dealers. And even if the dealers succeed in preserving their dealership agreements, the nature of the Chrysler case complicates the dealers' battle.

Chrysler is seeking to sell most of its assets to a new company led by Fiat, but the dealer contracts are with the "old" Chrysler that is being liquidated.

"It's a long shot," said Scott Van Meter, managing director of LECG, a consulting firm.

Furthermore, in an opinion approving the sale this week, Judge Gonzalez noted that the underlying argument of many opposing the transaction is the desire to have the government protect every stakeholder from economic loss -- not just those that the government perceives as being essential to the survival of a successful new Chrysler.

"For example, any dealership rejection that is approved will cause hardship to the particular dealership involved but may well be necessary if New Chrysler is to survive," Gonzalez wrote.

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Massive Cuts at GM - shed 23,000 jobs, kill Pontiac brand

WASHINGTON – General Motors Corp. will cut an additional 7,000 to 8,000 factory jobs in the United States, kill the Pontiac brand and shed 2,600 dealers by 2010 under a revised business plan developed under the Obama administration's eye.

The plan, along with an offer to bondholders to exchange $27 billion in GM debt for about 10% of a reconstituted GM and a small amount of cash, makes clear that the automaker's fate over the next few weeks rests with President Barack Obama. His auto task force set the terms of the bond deal and the goal of having 90% of the debt exchanged, and the U.S. government would become GM's majority shareholder if the plan succeeds.


GM Chief Executive Officer Fritz Henderson warned today that should the exchange not meet the task force's target, GM would file for bankruptcy on or before June 1. To succeed, GM will need thousands of GM debtholders to agree -- from individuals to some of the largest investors in the world -- by May 26.


"It's not impossible, but it’s a tough task," Henderson said, adding: "If we were to materially fall short, we would fall into a bankruptcy process."


As part of the debt offer, GM said, the administration would consider converting 50% of its loans to the company into GM stock. Combined with a similar request to the UAW for converting half of the $20 billion owed to a retiree health-care trust to shares, the plan envisions the government owning at least 50% of a reconstituted GM and the union holding about 39%.


Obama's auto task force said in a statement today that GM’s offer was an “important step,” but noted that its concessions hinge on bondholders and the UAW agreeing as well.


“We will continue to work with GM's management as it refines and finalizes this plan and with all of GM's stakeholders to help GM restructure consistent with the president’s commitment to a strong, vibrant American auto industry,” the task force said.


The new plan Henderson unveiled would get GM to profits in a U.S. market of 10 million vehicles -- a far lower rate than GM imagined just a couple of months ago. Should the debt swap succeed, GM will cut its debt by $44 billion and its structural costs by 25% by 2010.

"The objective here is not to survive, the objective is to develop an operating plan that allows us to win," Henderson said.


The new job cuts bring the total number of hourly jobs eliminated under GM’s plan to 21,000 by 2010 and 23,000 by 2011. GM said additional cuts among salaried workers would be expected, but did not give a specific target. As it had indicated earlier this month, GM now plans to close 13 plants by 2010 and an additional five plants by 2012.

Henderson said the Pontiac brand would be closed by 2010, calling it an “extremely personal decision.” In addition to speeding up decisions on Saturn, Saab and Hummer, GM will be left with four brands – Chevrolet, Buick, GMC and Cadillac.


He said while talks continue on Saab and Hummer, there was no deal on the table yet for Saturn that would allow GM to keep building those models beyond this year.


GM said it now expects it will need $27 billion in total from the Treasury to withstand the recession, including the $15.4 billion it's already received. That includes $2.6 billion it will need this quarter and an additional $9 billion after that, some of which includes the cost of deeper job cuts and plant closings.

Henderson said dealers targeted for closing would begin hearing from GM in a matter of weeks. Dealers have been apprehensive about a GM bankruptcy, but it's not clear how quickly GM could close outlets given a bevy of state laws protecting dealers.

Through the cuts in brands and models, GM will shed 14 models through 2010, although the Chevrolet Volt electric car remains on track for a 2010 launch

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