Judge Approves Chrysler Dealership Cuts
Tuesday, June 9, 2009 5:31 PM
NEW YORK, June 9 -- A federal bankruptcy court this afternoon approved Chrysler's request to sever ties with 789 dealerships, overruling the objections of hundreds of business owners who begged, at times in tears, that they be allowed to continue to operate.
The ruling means Chrysler's sales network will shrink by a quarter, effective immediately. The rejected dealers must now take down promotional materials and billboards with the Chrysler logo. They are no longer allowed to offer repairs or services of any Chrysler products as an authorized dealer.
The rejection "constitutes an exercise of sound business judgment by the Debtors, made in good faith and for legitimate commercial reasons," U.S. Bankruptcy Judge Arthur Gonzalez wrote. It is "appropriate and necessary under the circumstances."
Gonzalez's decision comes as Chrysler and the Obama administration wait for word from the U.S. Supreme Court, which Monday stayed the sale of the company to a new entity run by Fiat while it considers whether or not to have a hearing. A hearing could delay the government-orchestrated sale of Chrysler's assets to Italian carmaker Fiat by weeks, perhaps months, potentially jeopardizing the Obama administration's efforts to revamp the ailing auto industry.
Attorneys for the dealers had argued during a four-hour hearing earlier today that the business owners be allowed to operate until at least the Supreme Court made its decision.
"Hopefully Congress will remedy it," said Stephen Lerner, who represents hundreds of rejected dealers, said in an interview after the hearing. "Whether they can do anything in time to remedy the Chrysler dealers is unclear."
The dealers had sought to continue providing warranty services on vehicles sold before the April 30 bankruptcy filing, as well as extra time to get rid of their unsold inventory of cars and car parts. Several dealers testified last week that they had agreed, at the pleading of Chrysler executives in the weeks leading up to the bankruptcy, to buy hundreds of cars they didn't need in order to help the automaker with its severe cash flow problems. Some said they continued to receive shipments even after they had received a May 15 letter from Chrysler informing them of the termination.
"It's unconscionable," Lerner said in court. "They could have provided a softer landing."
General Motors, which followed Chrysler into bankruptcy last week, plans to cut more than 2,000 of its 6,000 dealers, but most would be allowed to operate until their contracts end next year.
During roughly four hours of oral arguments, Lerner and about two dozen other lawyers argued that Chrysler had used arbitrary measures in choosing which dealers to reject, and that there was no pressing need to shutter the dealerships immediately. The process, they added, trampled on the dealers' their rights under state law, including those that guarantee more than the 25 day-notice the dealers received to wind down their businesses.
Chrysler had sought to terminate its agreements with dealers as of today. Chrysler has been trying to trim down a bloated dealer network for several years. It said it used criteria such as location and sales volume to determine which dealers to keep. The company also wants dealerships that offer all three brands, Chrysler, Jeep and Dodge.
"No dealer wants to be rejected -- we understand that," said Kevyn Orr, an attorney for Chrysler, adding that federal bankruptcy law supercedes local laws.
He urged the judge to approve Chrysler's dealership termination request as is, saying rejected dealers would be in violation of trademark and copyright laws if they were allowed to keep operating under the Chrysler name after the emergence of new Chrysler.
"There needs to be a bright line for rejection," Orr said, adding, "The 2,300 assumed dealers have rights too . . . They have rights not to compete with rejected dealerships."
The U.S. and Canadian governments, which are providing $4.5 billion to keep Chrysler operating while its in bankruptcy, had budgeted for 25 percent fewer dealers. Chrysler dealers are eligible for reimbursements under the automaker's car sales incentive programs, Orr added.
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