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GM Dealers on Edge, Chrysler Dealers Head for Court

Spurned dealers say state laws protect their franchises

By Truman Lewis
ConsumerAffairs.com

May 15, 2009

• GM Offers Money-Back Guarantee • GM's Newest California Showroom: eBay • GM, Chrysler Personal Injury Victims Left Stranded • 'New GM" Exits Bankruptcy • Judge Greenlights GM Bankruptcy Plan • Obama Set to Sign 'Cash for Clunkers' Bill • States Challenge GM Sale • Supreme Court Okays Sale of Chrysler to Fiat • Supreme Court Blocks Chrysler Sale • GM To Scrap Medium-Duty Trucks • Penske Hopes to Drive Saturn Off GM's Lot • New Chrysler Agrees To Honor Old Lemon Law • Consumer Groups Appeal Chrysler's Lemon Law Reprieve • Dumped GM, Chrysler Dealers Not Going Away Quietly • The Hummer Lives to Fight Another Day • GM Files for Bankruptcy; Chrysler Gets Court Approval • Chrysler Sours on Lemon Law Obligations • UAW, GM Agree On New Contract • Consumer Groups Challenge Chrysler Bankruptcy • GM Notifying 1,100 Dealers They're Being Dumped • GM, Chrysler May Close 3,000 Dealers • GM Moves Up Saturn Execution, Plans to Drop 2,600 Dealers • GM Prepares to Scrap Pontiac • U.S. Carmakers Getting More Federal Aid • GM Cuts More Jobs, Eyes China --- • Consumer Complaints about GM • Consumer Complaints about Chrysler

As General Motors dealers wait to find out if they will lose their franchise, many of the Chrysler dealers ordered shut down yesterday are mounting a legal challenge to the action.

Earlier this week, Chrysler asked U.S. Bankruptcy Judge Arthur Gonzalez to reject dealer agreements for 789 dealers nationwide -- roughly 25% of its 3,200 dealers -- by June 9. Under bankruptcy law, the dealers will receive no compensation. Many dealers who signed personal guarantees to finance their inventory face personal financial disaster as well as the loss of their business.

The dealers do not have to close their doors and some will try to remain in business selling only used cars and operating their service centers. Others may try to affiliate with other brands, although the pickings there are likely to be slim.

Not ready to surrender, the dealers have formed a coalition and hired high-powered legal help. The spurned dealers' lawyer, Stephen Lerner, said he has scheduled a meeting with President Obama's auto task force next week and will ask for federal intervention, including financial assistance for the dealers.

Lerner says the closures are unlawful and that roughly 100,000 employees stand to lose their jobs and says the dealers will sue if their 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," The National Law Journal quoted Lerner as saying.

But the feds may not be sympathetic. In a statement, the U.S. Treasury Department said the 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," a Treasury Dept. statement said.

In its bankruptcy court filing, Chrysler, which has taken $4 billion in federal loans so far, said it simply has too many dealers -- that many dealers' sales are too low, too many stores are competing with each other, and foreign competition is too tough for many dealers.

Most imported car brands -- particularly the Japanese -- limit the number of dealerships in a given area. While there might be only one Toyota dealer in a town, it's not unusual to have two, three or even more Chrysler or GM dealerships. The dealers compete not only with stores selling different brands of vehicles but also with each other, thus driving down the cost of U.S. cars while enabling Japanese brands to maintain higher prices.

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. Many of the dealers sell too few vehicles to be profitable. About half of the dealers being stripped of their franchise sold fewer than 100 new vehicles in 2008, Chrysler officials said.

Chrysler said it sold an average of 303 vehicles per store in 2008, compared to 1,292 per dealer for Toyota and 1,030 for Honda.

"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.

After the dealership restructuring is complete, 80 percent of its dealers will carry all three Chrysler brands -- Chrysler, Dodge and Jeep, the company said.

But 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.

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."

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