The rulings, by the two different judges who handled the cases, cited Bankruptcy law precedents that ultimately went back to the 19th century.
Politicians are not known for their memories or consistent application of laws they have passed, as the latest hearings on the bankruptcy reorganizations of Chrysler and General Motors demonstrate. The decisions by two different judges, who handled the cases with surprisinging speed, cited U.S. Bankruptcy law precedents that went back to the 19th century.
The Bankruptcy code was established as law and subsequently modified by the U.S. Congress, the same institution that is now raising questions about its validity. Some members seemed shocked that the Auto Task Force used a well-tested legal strategy that at its core is consistent with the purpose of bankruptcy law, which is the preservation of the maximum value of the corporation, or “estate” in legal terms.
At least two areas of the proceedings continue to evoke concern in Congress. One is the closing of dealerships; the other is the use of the so-called Section 363 sale under Chapter 11 of the code, which allowed Chrysler and GM to survive by preserving some assets and contracts in newly formed corporations while liquidating other assets and voiding contracts that threatened the survival of the new entities.
Both of these broad issues were raised this week at hearings by the Subcommittee on Commercial and Administrative Law in the House of Representatives. One clear danger of government ownership of large stakes in the new auto companies is the possibility of political meddling in what should be straightforward business decisions. And although the Obama Administration at the executive branch level appears to have handed over the running of the Chrysler Group and General Motors Company to seasoned business and industry professionals, the same cannot be said about the legislative branch, which continues meddling by way of hearings and proposed new laws.
Section 363 Sale
Objections to the 363 sale are easily dealt with in my view. There was no other way to preserve as much of the companies as was saved by using this method. Liquidation where everybody looses, except the lawyers, was the other choice. Taxpayer financing during the bankruptcies was made available since the private credit markets were not interested in advancing money to either ailing company, a fact proven by the complete absence of other bidders under the sale procedures.
The judges’ rulings were upheld as consistent with congressionally established law at the appellate court level, and in the case of GM, the Supreme Court declined to review the case. Except for the ongoing grumbling by parties not satisfied with their settlements, the questions of law are resolved.
Dealership Closings
The dealership closings present more political questions than legal ones. The cancellation of some franchise agreements by Chrysler, and the refusal of GM to renew franchises for certain dealers after the fall of 2010 when they expire has been subject to ongoing debate. And last week the House voted to reverse the closing of almost 3,000 dealers, which is key to the restructuring plans of Chrysler Group and General Motors Company.
The political problem is that some dealerships will close in many Congressional districts. But in doing so GM claims, with good reason, it will preserve more than 200,000 jobs at its remaining dealers along with hundreds of thousands of jobs with GM’s direct manufacturing and supplier network.
The contract cancellations are provided for in the Bankruptcy Code. The political meddling is not.
Even though both Chrysler and GM have provided detailed testimony in June as to why the closings are necessary, and GM has taken steps beyond those required under the Bankruptcy code, the meddling continues.
After identifying dealers that would not be retained, GM offered those dealers “wind-down agreements” which, when accepted, permits them to remain in business until October 2010 – the expiration date of their current dealer agreements.
“This allows dealers to exit their businesses in an orderly fashion – for the benefit of GM, our dealers and our customers,” said Michael Robinson, Vice President and General Counsel of North America for General Motors Company. “The wind-down agreements also offered some financial assistance to smooth that process. In the aggregate, this will be about $600 million. GM notified dealers about our planning as soon as possible – on May 15, in most cases. While this process is far from painless, we think it is far preferable to an abrupt termination. GM also implemented an appeals process, reviewing approximately 900 appeal requests to date, and acted favorably on 70 to date,” he said.
The next step in this sad saga will probably come in the U.S. Senate. It appears at this time that a Senate version of the bill will not advance in the Senate. As the debate in the House heated up, the Democratic Senate Majority Leader, Harry Reid, dismissed congressional meddling in a bankruptcy ruling, and said he wasn’t interested in the issue. “It’s nothing that is certainly on the top of the agenda in the Senate at this time,” Reid said. When you have a bankruptcy, there are winners and losers,” he noted. Well, yes, but this is politics. Anything can happen. Thank goodness the summer recess is coming.
Comment by Peter Grady, Vice President Network Development and Fleet, Chrysler Group LLC:
“There’s been a lot said about why Chrysler LLC decided to trim its dealer network and how it chose those dealerships that would not go forward as part of the new Chrysler Group LLC. I was there working on these issues and participating in the decisions. I’m sorry to say a lot of what’s been said and written is wrong, or, at the least, misleading.
As Congress considers legislation aimed at reversing our decisions, I feel it’s important to set the record straight—not with opinion or rhetoric, but with straight facts. Just like those paint sets we played with as kids, it’s best to do this by the numbers. So here goes.
We chose the network that we felt would best represent the new Chrysler Group LLC in each and every market. The process began with a thorough review of every market, and the realistic sales volume opportunity given the significantly reduced industry. We then chose the proper number of dealers for each market so that those dealers could realize a return on their investment, and ultimately further invest in the market and our customers.
We reduced our U.S. dealer network by 789 dealers, leaving 2,385 doing business across the nation. Critics have complained that this move left customers in many areas underserved. On the contrary, of the 2,385 remaining dealers:
1364 Chrysler, Jeep®, and Dodge dealers are located in rural areas.
592 Chrysler, Jeep and Dodge dealers serve the 124 largest metro areas.
429 Chrysler, Jeep and Dodge dealers serve the next largest population areas, or what we call secondary markets.
On the other side of the coin, our rationale for choosing which dealerships would not be going forward with the new company has been criticized as unfair and unfounded. That accusation is rebutted in large part by a key finding by U.S. Bankruptcy Court Judge Arthur J. Gonzalez, who wrote, “The Court also finds that no evidence has been presented to the Court showing that the Debtors made their individual rejection decisions irrationally, such that the rejections demonstrate bad faith or whim or caprice.” This is no small statement. Thirteen Chrysler employees were questioned thoroughly by dealer lawyers in depositions, including Bob Nardelli, Jim Press, Steven Landry and me. Chrysler employees testified and provided statements at the hearing on the sale of assets to the new Chrysler Group and the hearing on rejected dealers. Many rejected dealers also testified and were deposed. In all, some 350,000 pages of Chrysler documents were turned over to dealer lawyers and the bankruptcy court for examination.
Together with that Court finding, the numbers make the case.
The 789 rejected dealers achieved on average only 73 percent of their contractual minimum sales responsibility. This resulted in 55,000 missed vehicle sales and $1.5 billion in lost revenue to Chrysler. This represents lost economic value to the local communities and states, as well.
It represents $33 million in annual costs to the company to maintain the 789 discontinued dealers for everything from personnel to support ordering, auditing, processing of payments, and other myriad of administrative services.
It costs the company $150 million annually for marketing and advertising for the 789 dealers—that’s above and beyond dealer contributions.
It would cost $1.4 billion over four years to develop and engineer overlapping “sister” vehicles, if a significant minority or a majority of our dealer network did not sell all three brands under one roof.
The fact is Chrysler didn’t just jump into reducing its dealer network. The process began more than a decade ago with widespread dealer support. However, the bankruptcy reorganization made it necessary to accelerate the reduction and complete it during the court process.
If Congress reverses this process, it flies in the face of a U.S. vehicle market that has declined 40 percent since 2007. Indeed, the U.S. dealer network was built to serve a market that once sold 16 million vehicles a year. Those days are gone.
Last year, annual vehicle sales industry wide in the U.S. dropped to 13.5 million units and for 2009, that number is expected to fall to 10 million units.
There are simply too many dealers for not enough sales.
When there are too many dealers in an area each dealer is less profitable and that means a reduced ability to invest in the business, risking a negative customer experience. You only get one chance at a first impression and once a customer is lost, it’s very difficult to win them back.
Too many dealers in an area drives down vehicle values due to unhealthy competition, and that can chill residual values, costing consumers money when they trade in their vehicles.
It also makes it tough to hang onto the best sales people who might triple their income at dealerships selling other makes. More numbers:
233–Average annual vehicle sales at the 789 rejected dealers
405—Average annual vehicle sales at Chrysler LLC dealerships prior to the recent dealer network adjustments.
525—Average annual sales at U.S. dealerships.
692—Average annual sales at Nissan dealerships
1,219—Average annual sales at Honda dealerships
1,292—Average annual sales at Toyota dealerships
Some final numbers: They relate to the 789 rejected dealerships, and Chrysler’s efforts to provide a “soft landing” for them.
More than 50 percent are still in business selling other manufacturers’ new vehicles, selling and servicing used vehicles, or operating new business ventures such as acting as a buyer’s advocate for consumers purchasing new vehicles.
100—the percentage of remaining vehicle inventory redistributed as a result of Chrysler working with major wholesale floorplan lenders. We weren’t obligated to help out with this; we just felt it was the right thing to do.
590 requested assistance from Chrysler with parts distribution, with 528 (almost 90 percent) receiving commitments for redistribution.
All we ask is that Congress, dealers, journalists, and of course, our customers, take a close look at the numbers. I’m convinced they add up to a true representation of why we had to make some decisions about our dealer network that were not only necessary and tough, but, ultimately, fair.”