Chrysler dealers getting axed may not find solace in court

May 15, 2009

By: Marie Price

The Journal Record

OKLAHOMA CITY – Chrysler dealers who received letters from the bankrupt automobile company Thursday essentially axing their franchise contracts will not find bankruptcy court a particularly dealer-friendly place, Oklahoma attorneys said. Chrysler has asked a bankruptcy judge to allow it to reject dealer contracts. “Each one of the 50 states has their own individual state laws dealing with how you accomplish the closing of this type of dealership,” said bankruptcy lawyer Stephen J. Moriarty. “Unfortunately, from the dealers’ perspective, the federal bankruptcy law will trump those 50 state laws.

Moriarty, with the Fellers Snider law firm, said a section of the bankruptcy code allows companies to reject contracts that are burdensome to them. “They just have to make a showing that those contracts are burdensome to the bankruptcy estate and have no value to the bankruptcy estate, and the court will go ahead and allow them to go ahead and reject those contracts,” he said. Moriarty said the fact that Chrysler is in bankruptcy court may also affect its union contracts. “Those contracts would come under a similar analysis,” he said. “Chrysler may have the ability to go ahead and reject those contracts under federal bankruptcy law.”

When it comes to the dealers’ recourse, Moriarty said dealers would be considered creditors with unsecured claims against Chrysler for the amount of damages suffered as a result of rejection of their contracts. He said unsecured claims come behind the claims of secured creditors, priority creditors and the costs of administration of a bankruptcy case. “If I’m a dealer and my contract is terminated or rejected by Chrysler, I may have an unsecured claim against Chrysler for, say $2 million, but that goes into the pot, and it could be that I see little or no recovery ever on that $2 million claim,” Moriarty said.

Some dealers have considerable debt loads, having obtained floor-plan financing that allowed them to purchase cars on credit, repaying the loans as they sell cars, he said. “Without the ability to sell cars, they have no business to continue and no ability to repay what they owe,” Moriarty said. “So, they become potential Chapter 11 people themselves.” He said that the problems being experienced within the automobile industry now may just be scratching the surface. “We’re just starting to set some of these dominoes off,” Moriarty said. “I think it’s going to have to play out over the next two to three to five years,” Moriarty said.

Attorney Eric Johnson, with Phillips Murrah, said dealers with rejected contracts have some options to consider, including appealing to Chrysler to try to get their name taken off the list, hoping they survive future cutbacks. He said national groups have been formed to talk to Congress and the company to try to keep some dealerships open. “If those routes fail, I think an owner is looking at trying to mitigate their losses as best they can,” he said. “That would include selling their inventory to other dealerships that are on the approved list.” Johnson said Chrysler has indicated it will not buy back any vehicles, parts or specialty tools that are used in the dealerships. “They will assist the dealer with trying to find another dealer within their area to purchase the vehicles, parts or tools,” he said. “It would help the owners that are on that list, at least pay down some of their obligations, and offload some of their inventory so they can pay those down.” After they do that, Johnson said, some dealers could also seek another franchise. “In today’s market, I think that’s tough to come by,” he said. Johnson said he understands Thursday’s announcement may be just the first wave from Chrysler, that another 25 percent or so of its dealers could be due for closure down the road. He pointed out that the rejection list may change as dealers appeal to the company or make certain concessions.