Chrysler Bankruptcy Judge Okays Dealer Rejections: Closing Day for 789 Dealers

Today is closing day for almost 800 Chrysler dealers nationwide. In response to a last bid challenge by about 300 of the closing dealers, the bankruptcy court ruled today that Chrysler's sloughing off of these dealers may proceed.

As reported by the Detroit Free Press, U.S. Bankruptcy Judge Arthur Gonzalez approved the rejection of 25% of Chrysler's dealer agreements. Tomorrow, these dealerships will no longer sell new Chyslers or Jeeps. Chrysler will also no longer honor agreements to supply parts or warranty repayment, taking away Chrysler repair work those dealerships may have had on vehicles they sold. Chrysler also will not buy back any unsold inventory, but did agree to arrange for sale of these vehicles to dealers within the "New" Chrysler's network.

Some had wondered whether the Supreme Court's pausing of the Chrysler-Fiat deal yesterday would affect the dealer closings. Yesterday, the Supreme Court put the Chrysler deal on hold in a challenge by two Indiana pension funds owning Chrysler bonds. As for why the Supreme Court paused the deal, we cannot say. The order was issue by Justice Ginsburg without explanation of why or what will happen next.

Unfortunately for the dealers, however, trouble with Chrysler's plan has not prevented the rejection of their contracts.

So, why can pension funds owning a fraction of Chrysler's debt cause a time-out in Chrysler's restructuring plan, but hundreds of affected franchisees can't do anything?

In short, it's all about the dealers (and any franchisees) holding only "executory" contracts. As discussed here, executory contracts can be rejected in bankruptcy if the rejection is a "sound business decision" by the bankrupt company, made in good faith for commercial reasons. Today the bankruptcy court decided this was a sound business decision by Chrysler.

The two Indiana pension funds holding 1% of Chrysler's bonds, on the other hand, are secured creditors, who are the creditors paid first when a bankrupt company (or portions thereof) is purchased. They want to stop the Chrysler Fiat deal because they do not like the reported 29 cents on the dollar they were offered to go along. They argue that TARP money, meant for financial system restoration was misused to finance Chrysler's automotive makeover.

In addition, the Indiana pension funds argue that by giving a big chunk of Chrysler to the United Auto Workers (a large unsecured creditor of Chrysler), the deal treats secured creditors worse than unsecured creditors.

Getting back to those unsecured creditors of Chrysler: where does this leave the dumped dealers? Free to file claims against Chrysler (which have about as much chance of bringing money as after Chrysler's secured creditors get paid).

• Map of Closing Chrysler Dealers (NY Times)
• Chrysler sale raises tough legal questions (CNN Money)
• Chrysler Dealer Laments 73 Year Old Dealership's Closing (NPR)
• Commercial Bankruptcy Overview (provided by The Great Lakes Bankruptcy Center, PLLC)
• Chapter 11 Bankruptcy (provided by the Grand Law Firm)