Dealers: Take Suzuki deal or fight?
Accepting settlement means waiving other rights
Suzuki is asking U.S. dealers to surrender their franchise agreements voluntarily in exchange for a cash settlement and new contracts to run Suzuki parts and service outlets.
Photo credit: REUTERS
LOS ANGELES -- Suzuki dealers face a decision: Give up their franchises in exchange for cash or fight the factory in bankruptcy court.
American Suzuki Motor Corp. filed for Chapter 11 bankruptcy on Monday, Nov. 5, to wind down its U.S. automotive division. It seeks to reject the franchise agreements of its 220 U.S. auto dealers.
American Suzuki is asking dealers to surrender their franchise agreements voluntarily in exchange for a cash settlement and new contracts to run Suzuki parts and service outlets.
The question for dealers: Are the offers comparable to what they would have received under state franchise laws?
Had Suzuki simply canceled the franchises, outside bankruptcy court, state franchise laws would have compelled the automaker to buy back new-vehicle inventory and parts and to compensate dealers for facilities and other costs.
A National Automobile Dealers Association official last week said Suzuki dealers should receive what they would be entitled to under franchise laws and advised them to consult attorneys. Dealers were receiving the offers late last week and were bound by confidentiality agreements.
Suzuki dealers can choose not to sign the settlement offers and file a claim in the bankruptcy case for what they believe they are owed. But such a move means a dealer's claim could be worth just pennies on the dollar by the time Suzuki pays off other, higher-priority creditors.
If dealers accept Suzuki's offer, they are guaranteed to collect the full settlement amount, calculated by measuring dealership sales, rent, vehicles in inventory, facilities investment and other metrics.
Freddie Reiss, Suzuki's chief restructuring officer and a senior managing director at FTI Consulting Inc., in court documents said the dealer settlement plan is intended "to maximize the assets available to Automotive Dealers and to promote public safety by the preservation of a network of service and parts dealers." Suzuki has pledged to honor consumer warranties.
But dealers taking the deal must waive the right to file any other claims against Suzuki, according to court documents. The bankruptcy filing also has put on hold lawsuits pending against Suzuki, including a suit by former Suzuki dealer Gary Linam, who has accused Suzuki of ordering dealers to report false vehicle sales so company management could secure bonuses.
Suzuki Motor Corp. plans to buy the motorcycle, ATV, marine engine and automotive service and parts operations out of bankruptcy for $95 million to form a new company, leaving the auto sales operation and current dealership agreements behind in the bankrupt estate of the current American Suzuki.
The tactic concerns NADA, according to James Moors, the group's director of franchising and state law.
"If Suzuki had chosen to exit the market and terminate the franchise agreements, it would have been subject to state franchise termination assistance provisions such as buying back vehicle inventory, parts, tools and rent on the dealership facility," Moors wrote in an e-mail.
According to court documents describing the deal, Suzuki dealers must waive those rights in exchange for the settlement.
"NADA would be concerned if Suzuki is attempting to use the bankruptcy process to avoid its obligations to its dealers," Moors wrote. "NADA is reviewing this proposal and believes that Suzuki dealers should not receive less than what they are entitled to under their franchise agreements and applicable state law."
He added that NADA "cannot provide legal advice, but urges Suzuki dealers to seek advice from their lawyers."
American Suzuki estimates the total cost to settle with dealers to be $50 million, according to court documents. That's an average of $227,000 per dealer. A small group of Suzuki dealers account for most of the brand's U.S. sales. Meanwhile, about 130 Suzuki dealers sell fewer than five cars a month, according to court documents.
Leonard Bellavia, an attorney with Bellavia Gentile & Associates in Mineola, N.Y., said Suzuki's estimated settlement expense is less than what Suzuki likely would pay if it terminated franchises outside bankruptcy.
"The damages on a per-dealer basis are really in the many millions of dollars," Bellavia said, referring to the cost of vehicle and parts inventory buybacks, rent reimbursements and breach of contract considerations.
Bellavia, who also represents Saab dealers in that company's bankruptcy, is trying to organize and represent Suzuki dealers. He said he expects soon to represent "a majority" of Suzuki dealers seeking more buyouts.
"That's not to suggest that we expect that we're going to collect 100 percent of what the damages are to the dealers, but at a minimum, we'd like the inventories to be addressed," Bellavia said. "We don't sense that the dollar offer that Suzuki will be making will address the value of the inventory losses."
Suzuki's automotive wind-down plan hinges on its dealers. Suzuki wants to sell the roughly 5,000 remaining new vehicles in the United States through dealers. It also needs many dealers to operate service and parts outlets because it has promised in its filing to honor customer warranties and provide genuine Suzuki parts.
That gives dealers leverage, Bellavia said.
Bellavia also said the $50 million claim dealers collectively have in Suzuki's case makes dealers "by far" Suzuki's largest unsecured creditor.
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