Its Official: Chrysler Wins Court Battle, Immediately Severs Ties With 789 Dealerships

Jun 9, 2009 8 Comments ›› Erik Wong

NEW YORK (AP) – A bankruptcy judge on Tuesday approved Chrysler’s plan to terminate 789 of its dealer franchises, while the automaker’s plan to partner with Italy’s Fiat hinged on the Supreme Court’s interest and both automakers warned that the deal could fall apart if it’s not completed soon.

U.S. Judge Arthur Gonzalez issued an order Tuesday afternoon saying the franchises, which represent about 25 percent of the company’s dealer base, can no longer act as authorized Chrysler, Dodge and Jeep dealers, effective immediately. A written ruling explaining the decision was expected to be filed later.

The sale of Chrysler’s assets to Fiat Group SpA had been expected to close more than a week ago, but Supreme Court Justice Ruth Bader Ginsburg’s decision to delay the sale now threatens to derail Chrysler’s restructuring plans.

In a brief filed with the Supreme Court Tuesday afternoon, Chrysler and Fiat warned that the deal will terminate if it does not close by June 15. While a new agreement could be negotiated, there’s no guarantee that one will be reached or that Chrysler will be able to be jump start its operations after the deadline, they said.

Earlier in the day, more than 25 attorneys representing hundreds of dealers from across the country argued in court that little would be gained by terminating the franchises, while Chrysler maintained that the move is a necessary part of its plan to cut costs and quickly emerge from Chapter 11.

Many of the dealers were trying to sell the last cars on their lots and preparing to shut their doors for good at the end of the day, while others planned to sell used cars or other brands after severing ties with Chrysler.

At Tuesday’s hearing, Chrysler attorneys also said that the automaker would extend until Monday its program to help the affected dealers send any unsold vehicles to other dealers.

The Auburn Hills, Mich., automaker has been flying through five weeks of bankruptcy proceedings and appeared all but certain to complete the sale of its assets to Fiat before the June 15 deadline. But Ginsburg issued a stay Monday to review an appeal by a trio of Indiana pension and construction funds which own a small part of Chrysler’s secured debt.

The delay may be only temporary. Ginsburg could decide on her own whether to end the delay, or she could ask the full court to act.

Fiat has the right to walk away from Chrysler after June 15 and leave the struggling U.S. automaker with little option but to liquidate. But a Fiat spokesman said Tuesday that the Italian automaker will not turn its back on a deal despite the Supreme Court stay.

Indiana officials, representing the state funds challenging the Chrysler sale, submitted a short statement to the Supreme Court Tuesday that calls attention to Fiat’s statement.

“The Indiana Pensioners respectfully submit that the risk of termination by Fiat if the transaction does not close by June 15 no longer provides a basis for driving the timing of these proceedings,” the officials said.

But Chrysler and Fiat said that the sale agreement will terminate automatically if the sale doesn’t close by the deadline, and there’s no guarantee that they could negotiate a new deal.

“Given Chrysler’s precipitous state, every day past June 15 increases the risk that Chrysler’s business will not be able to restart successfully,” the company said.

Meanwhile, the Obama administration said in a separate filing that each day of delay consumes more of the financing provided by the government.

“If the closing is delayed by more than approximately 10 days, a sufficient amount of the current commitment of debtor-in-possession financing from the United States will have been consumed as to require the government either to increase its overall funding to the detriment of taxpayers, or abandon its role in the transaction,” the administration said.

Production at Chrysler’s manufacturing plants remains halted pending the closing of the sale. Chrysler, which says it is losing $100 million every day its plants are closed, said it had no comment until it receives further information from the court.

Chrysler’s ability to speed through the bankruptcy process has partially been a result of the involvement of the Obama administration’s auto task force, which provided $4.5 billion in financing and helped negotiate a deal between the company’s stakeholders.

Under a deal brokered in the days leading up to Chrysler’s April 30 Chapter 11 filing, Fiat will receive up to a 35 percent stake in the new company created by the sale, in exchange for sharing the technology Chrysler needs to create smaller, more fuel-efficient vehicles.

The United Auto Workers union will get a 55 percent stake that will be used to fund its retiree health care obligations, while the U.S. and Canadian governments will receive a combined 10 percent stake.

Meanwhile, the automaker’s secured debtholders would get $2 billion in cash, or about 29 cents on the dollar, for their combined $6.9 billion in debt. Some of the debtholders balked at the deal, saying as secured lenders they deserved more.

The Indiana funds filed an objection to the sale and later appealed to the 2nd U.S. Circuit Court of Appeals and the Supreme Court. They claim the sale unfairly favors Chrysler’s unsecured stakeholders such as the union ahead of secured debtholders like themselves.

The funds also are challenging the constitutionality of the Treasury Department’s use of money from the Troubled Asset Relief Program to supply Chrysler’s bankruptcy protection financing. They say the government did so without congressional authority.

The funds hold about $42.5 million, or less than 1 percent, of Chrysler’s $6.9 billion in secured debt. They bought it in July 2008 for 43 cents on the dollar.

The appeals come as Congress scrutinizes the Obama administration’s restructuring of Chrysler and GM. The Senate Banking Committee said it planned to call Ron Bloom, a senior adviser to the auto task force, and Edward Montgomery, who serves as the Obama administration’s director of recovery for auto communities and workers, to a hearing Wednesday.