Squire, Sanders & Dempsey all revved up..
Chrysler dealers prepare to sue over requested closures
In a court filing, Chrysler Corp. asked U.S. Bankruptcy Judge Arthur Gonzalez to reject dealer agreements for 789 dealers nationwide — roughly 25% of its 3,200 dealers — in a effort “to conserve cash and pursue transactions that maximize value.” The dealerships, which are set to close June 9, have until May 26 to appeal the motion. A hearing is set for June 3.
The announcement, meanwhile, revved up Squire, Sanders & Dempsey, which is representing a coalition of rejected dealers and has scheduled a meeting with President Barack Obama’s auto task force next week to ask for federal intervention, including financial assistance. The law firm claims that the closures are unlawful and that roughly 100,000 employees stand to lose their jobs. It vows to litigate if franchise rights are ignored.
“Our hope is to resolve this without the need for extensive litigation to make sure that dealers are not disproportionately injured. However, we are fully prepared, as early as next week, to begin the litigation process because we can’t sit idly by and have these dealers’ lives ruined without the opportunity to raise the issues with the bankruptcy court in New York,” said Stephen D. Lerner, a partner in the Cincinnati and New York offices of Squire Sanders who is representing the dealerships.
Lerner said, however, that he is confident the White House will “fully understand the devastating impact that these closures will have on dealers.”
In a statement today, the U.S. Treasury said Chrysler’s cuts are necessary:
“The sacrifices by the dealer community…are necessary for this company and the industry to succeed. And a stronger Chrysler, supported by an efficient and effective dealer network, will provide more stability for current employees and the prospect for future employment growth.”
Lerner’s firm, meanwhile, is working on behalf of the Committee of Chrysler Affected Dealers, a coalition of dealers that is fighting for their franchise rights. Chrysler dealerships also have hired Washington’s Arnold & Porter to help preserve their franchise rights under the new Chrysler-Fiat alliance.
Lerner said Chrysler’s rejection of the dealer agreements and ordered closures violates numerous state franchise laws, which are designed to protect dealers from unfair business practices by the large auto manufacturers.
“We believe there is a legal basis that will either forestall the rejection of their franchise agreements or provide the dealers with the protections that state law requires,” Lerner said. “Chrysler is attempting to use the bankruptcy to avoid their obligation to these dealers. The other thing that is remarkable is that Chrysler has not provided — at least not in the filings that we’ve seen — any soft landing or opportunities for dealers to have time to address these concerns.”
He added: “Chrysler is seeking to put 789 dealers and all of their employees out of work on June 9. The shortness of time here is stunning and disappointing.”
Chrysler, which has taken $4 billion in federal loans and has been in bankruptcy since April 30, justified its decision to shut down the dealerships in court documents. The company said that many dealers’ sales are too low, too many stores are competing with each other, and foreign competition is too tough for many dealers.
In its motion, the company said that a little more than 50% of dealers account for about 90% of the company’s U.S. sales.
“Dealerships located in the markets at issue lack the operational, market, facility and [brand] characteristics necessary to best contribute to the ongoing dealer network under current or future ownership,” Chrysler said in court documents.
Chrysler also stated in court documents that it has many dealerships that sell one or two of its brands, with Chrysler-Jeep dealerships competing against Dodge dealers as well as other automakers’ stores nationwide. In the future, the company plans to have 80% of its dealers carry all three brands.
“In addition, as suburbs grew and the modern interstate system continued to evolve, longstanding dealerships no longer were in the best or growing locations,” the company said in its motion. “Many rural locations also served a diminishing population of potential consumers. Some dealership facilities became outdated. Other locations faced declining traffic count and declining populations.”
Chrysler also said that its dealers are facing stiff competition from foreign brands. According to its filing, Chrysler sold an average of 303 vehicles per dealer in 2008. In contrast, Honda Motor Co. sold about 1,200 vehicles per dealer; Toyota Motor Corp. sold nearly 1,300 per dealer.
Dealerships on the closure list, meanwhile, will continue to sell vehicles until June 9. Chrysler also will continue to pay incentives and warranty charges until that date, and it plans to mail a letter explaining coverage details to customers who purchase their vehicles from a dealer on the closure list.
May 14, 2009