Bankruptcy Creates Questions for Chrysler Dealers

President Obama’s press conference today announcing Chrysler LLC’s bankruptcy and partnership with Fiat Auto Group left unanswered how the auto maker will reduce its dealership numbers.

Sources tell Ward’s Chrysler, at the urging of the president’s automotive task force, put together a list of good and bad dealers about a month ago, which the task force approved earlier this week.

The move is similar to the exercise General Motors Corp. undertook in determining what dealers will be receiving termination notices over the next several days.

Jim Arrigo, owner of Arrigo Dodge Chrysler Jeep in West Palm Beach, FL, and chairman of Chrysler’s National Dealer Council, and Chuck Eddy, owner of Bob & Chuck Eddy Chrysler Dodge Jeep in Austintown, OH, both say they have not been privy to a list of Chrysler’s 3,200 dealers it plans to retain or terminate.

“There’s no question that General Motors and possibly Chrysler have plans to reduce their number of dealers,” says Eddy, who is the Chrysler dealer representative for the National Automobile Dealers Assn. “But we’re adamantly opposed to it. The problem is not the dealer network.”

Chrysler President Jim Press tells dealers on a conference call today the auto maker does not have a set number of how many dealers will be targeted.

“We are committed to not including a substantial number of dealers,” in the restructuring, Press says. “We want to make sure the list is as small as it can be.”

“Bankruptcy must not be used to drastically reduce dealer numbers,” NADA chairman says.

Chrysler will begin working with its business centers and finance organizations in the coming weeks to identify dealers who will not continue with the new Chrysler when it emerges from bankruptcy.

Chrysler has two options in reducing its dealer network, with some variations, experts say. One is to ask a bankruptcy judge to void all of its franchise agreements. Dealers then would reapply, and Chrysler would select the dealers it wants.

A second option is to follow GM’s model and inform specific dealers their franchise agreements will not be reapproved. This second method is preferable if a reduction has to happen, says Michael G. Charapp, a partner with Charapp & Weiss LLP, a law firm in McLean, VA, that represents car dealers.

“If (Chrysler) wants to do this the smart way, they will notify dealers they are contemplating rejecting select dealer agreements and proceed in that manner. This will accomplish the same result without crushing the whole dealer body.”

NADA Chairman John McEleney says in a statement responding to Chrysler’s bankruptcy, “It's important to point out Chrysler will continue to honor all warranties and that Chrysler dealers will work with all parties concerned and, most importantly, will make sure their customers are taken care of.

“Bankruptcy, however, must not be used to drastically reduce dealer numbers,” he adds. “A rapid reduction in dealer numbers would not only do absolutely nothing to improve Chrysler's viability in the short term, but it would actually work against Chrysler's stated objective to increase revenue and cut costs.”

Arrigo believes there are ways Chrysler can accomplish a reduction “without forcing dealers out of business,” such as reducing the number of models for certain brands.

Eddy admits the industry is over-dealered but says he “does not want a bankruptcy to dictate” termination. “I’d rather see it happen in a natural, dignified way, driven by free competition,” he says.

In an attempt to gain some leverage for dealers in the Chrysler bankruptcy, NADA has retained Washington law firm Arnold and Porter to represent the dealers that contribute $2,000 per store into a legal fund.

Orrick, Herrington & Sutcliffe LLP will represent GM dealers, should that auto maker file bankruptcy in a few weeks.

Meanwhile, Eddy says he is confident the new Chrysler will emerge stronger out of bankruptcy. “We’ll be fine tomorrow, Saturday, next week and next month,” he says. “I had a record first quarter and April. I’ve even ordered 200 more vehicles this month.”

In what is good news for Chrysler dealers, the government will provide sufficient debtor-in-possession financing to allow business to continue as usual. Chrysler also says it will honor warranty claims and keep the dealer body operating.

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