NEW YORK (Reuters) -- Some auto dealerships that Chrysler LLC plans to close are beginning a challenge to the automaker's plans to quickly sell itself in bankruptcy.
The group, which calls itself the "Committee of Chrysler Affected Dealers," filed papers on Tuesday asking the bankruptcy court to delay hearings that would approve the sale and allow Chrysler to reject 789 of its dealership franchise agreements, or about 25 percent of its overall U.S. dealer network.
The committee, which said it represents almost 300 dealers in 45 states, said in a statement it needed more time from the court to investigate the issues and present their defense.
"Chrysler's proposed asset sale and request for immediate termination of the dealer franchises will destroy several hundred independent businesses, ruin the livelihoods of their owners, cause the loss of thousands of jobs and precipitate inevitable personal and business bankruptcies," Stephen Lerner, an attorney at Squire Sanders & Dempsey representing the committee, said in a statement.
The dealers are mounting the third major challenge to Chrysler's plan to sell itself to a "New Chrysler" that will be owned by the UAW, Fiat S.p.A. and the U.S. government. The two previous challenges have largely disbanded, as a group of dissident senior lenders dropped their protest and the new company told concerned nonunion retirees last week that it intends to continue their benefits.
Heart of the matter
But while the previous challenges have dealt with payment rights, the dealers' challenge goes to one of the core economic issues in Chrysler's business plan.
Chrysler says it needs a smaller dealer network to be profitable. The dealers argue they are Chrysler's main source of revenue, bear much of the risk on car sales, and employ thousands of people.
"If you're Chrysler and you want to have a viable business going forward, you can't possibly have the structure in any way, shape or manner that you had -- you have to shrink the structure," said Richard Mikels, a bankruptcy attorney at Mintz Levin.
Chrysler has argued in court documents that its dealers "compete not only with dealers selling (Fords and Toyotas), but also with each other in surrounding markets," which hurts its ability to charge more for its cars.
Chrysler's dealers are challenging that motion, saying that "there is no evidence that by rejecting dealership agreements New Chrysler will save money to any material degree," according to court documents filed last week on behalf of Chrysler's National Dealer Council.
They say closing Chrysler dealerships goes against simple economics because Chrysler dealers buy all of Chrysler's cars, and customers alienated by the closing of their hometown dealer will simply be lost to other brands.
"Dealers produce revenue, not expense, for Chrysler ... it is Chrysler's dealers that bear the risks and costs associated with selling Chrysler's cars to the public," the National Dealer Council argued.
More time at GM
General Motors has also said it plans to eliminate 1,124 dealerships by 2010, but those dealers would have more time than Chrysler's terminated dealers, who have been told theyll lose their franchise agreements June 9.
The dealers, once they lose their franchise, expect to have few options to save their businesses. Other carmakers may not be willing to expand their dealer networks and pick up some of the closed dealers, as overall U.S. auto sales remain depressed.
Another group of terminated Chrysler dealers who say they have stronger sales than some of the dealerships that are staying open also plans to challenge Chrysler about the closures, according to a person familiar with their plans.
But the ability of any bankrupt company to pick and choose which contracts they want to reject is one of the chief benefits of filing for bankruptcy at all. Chrysler is arguing that such cuts, while painful, are necessary for its survival.
"The beauty of Chapter 11 is that you can accomplish these things that would be very difficult outside of Chapter 11," Mintz Levin's Mikels said.