YOU WON'T BELIEVE THIS - OR MAYBE YOU WILL!

I wanted you to see the e-mail one of my NADC colleagues got yesterday from a small town, Missouri GM dealer that terminated his relationship with GM just the other day. The name of his town has been redacted, otherwise, this is word for word from him:

"Sam,

My termination papers were officially filed with G.M. yesterday afternoon. Today a friend of mine that owns a very small auto repair shop in his garage, behind his home here in [Small Town], came in to tell me that he had received a call from G.M. asking him if he would be willing to attend a class so that he could service G.M. vehicles. He said that they were looking for a service center in [Small Town].

Can you believe this?

I specifically asked my G.M. Zone Manager if there was a possibility of remaining a G.M. service center without being a new car dealer and he said that they were not interested at this time.

I just do not know what to think!

John"

INDIANA PENISON FUNDS SEEKS INDEPENDENT TRUSTEE IN CHRYSLER BK

The Indiana Pension Fund filed a Motion in the Chrysler Bankruptcy today asking the Court to take away Chryslers "debtor in possession" status which allows it to run the company and appoint an independent Trustee and investigator. The Pension fund is a secured lender and holds notes that are secured as a first lien on Chrysler's asssets. The Pension fund argued in its Court filing that the Debtors are being used by the United States government to improperly destroy the Indiana Pensioners’ security interests and property rights in the collateral through the implementation of a sub rosa (under the table) plan of reorganization that could never be confirmed under the Bankruptcy Code. In so doing, the Debtors and the government are not only trampling on the legal rights of Chrysler creditors, they are also in clear violation of TARP, the EESA, and the Constitution of the United States. This cannot be allowed to continue. The Court must appoint a trustee to put the Debtors back into the hands of disinterested management that will run the Debtors’ businesses for the best interest of the estates and in accordance with the Debtors’ fiduciary obligations to their creditors. In the interim, an examiner should also be appointed to investigate and report on the role of the government in these proceedings. The Court filing in its entirety will be posted on www.smithlawmt.com under the Dealer Lawyer tab first thing Thursday morning.

Chrysler Deal with Fiat Filed with Bk Court

The agreement for the Fiat transaction has been filed. As expected, it is very substantial – 80 pages with 20 exhibits/schedules. One aspect is especially interesting, and should be of additional concern to rejected dealers. Sections 2.08 and 2.09 list assumed liabilities and those not assumed. Of note are the following subsections of 2.08, as well as subsection (i) of section 2.09. In 2.08, the following are assumed:
(g) all Liabilities pursuant to product warranties, product returns and rebates on vehicles sold by Sellers prior to the Closing;
(h) all Product Liability Claims arising from the sale after the Closing of Products or Inventory manufactured by Sellers or their Subsidiaries in whole or in part prior to the Closing;

In 2.09 the following are not assumed: (i) all Product Liability Claims arising from the sale of Products or Inventory prior to the Closing;

Consequently, New Chrysler will be responsible for warranties and presumably lemon law returns. It will only be responsible for product liability claims, however, to the extent that a claim is filed for a product sold by the New Chrysler. That means that rejected dealers will have no protection from product liability claims filed against them for Chrysler vehicles that they sold. Normally, a dealer could expect Chrysler indemnification under the dealer agreement, but that is being rejected, and the indemnification will thus no longer be in effect. And with New Chrysler not responsible for product liability claims for those cars, those product liability cases will likely be primarily filed against the dealers as sellers. This is a factor that a rejected dealer must consider when continuing in business with another franchise or as an independent dealer. Either the dealer must be sure it has sufficient insurance coverage to protect it from the claims, or it must look at continuing under some other entity.

The assumed dealers should be covered since in assuming the dealer agreements, New Chrysler assumes the indemnification obligations of the dealer agreement. The issue is being given further consideration.

Motion Filed in Chrysler Bk for Affected Dealers

The law firm of SQUIRE, SANDERS & DEMPSEY, L.L.P. filed a 62 page motion in Bankruptcy Court yesterday seeking relief for Chrysler Dealers whose sales and service contracts were rejected last week. The Motion objects to Chrysler's plan to sell substantially all its assets and asks the court for an extension of time for the hearing on approval of the sale. Counsel argue that approval of the sale would: (1) destroy several hundred independent businesses across the United States; (2) ruin the livelihoods of the owners of these businesses, many of whom have operated their dealerships for decades, if not generations; (3) cause the immediate loss of thousands of jobs at the Affected Dealers and quickly reverberate in countless additional job losses at the vendors, suppliers and financiers of the Affected Dealers; (4) precipitate inevitable personal and business bankruptcies flowing from the closing of the Affected Dealers; (5) reduce tax revenues by millions of dollars annually in the states and communities where the Affected Dealers are located; (6) eliminate the significant civic and charitable support that the Affected Dealers contribute to their neighborhoods and communities; and (7) limit competition among the car-buying public, thereby harming consumers. It is impossible to overstate the irreparable harm and suffering that will be inflicted on the Affected Dealers, their thousands of employees, and their employees’ families by Chrysler’s requested relief. The Motion can be reviewed or downloaded at the Chrysler link on smithlawmt.com at the DealerLaw link.

Demise of a Great Industry - Ed Kugler

The following was written by Ed Kugler a retired U. S. Marine and former corporate executive for a fortune 50 company. He lives near Big Arm. The link to Ed's Blog where this is posted was forwarded to us by Mission Valley Auto. It says it all.

At 62 years old and as a former corporate executive and consultant, I look at the demise of the auto industry full of emotion. Let’s take General Motors for instance. They once employed nearly 400,000 auto workers in this country. When the latest round of leadership and the vaunted government ‘auto task force’ gets done, they’ll be employing less than 40,000 auto workers. How could this be? Let’s take a look and see what it means to America.
The first problem is leadership arrogance. I remember back in the seventies, under the leadership of Roger Smith, GM suffered from an arrogance that was unequalled at the time. They were on top, led the world with a market share over 50% and were convinced they were invincible. The Japanese made junk and were not a problem.

At the time, my wife and I were living in Akron, Ohio. We’d get up every morning and walk out of the apartment to the aroma of fresh rubber, the smell of jobs for most of Akron. They too suffered from the same leadership arrogance that has led us to our current state of demise in this country. Here we have a problem of the leaders own arrogance blinding them to the reality of the marketplace. The auto industry and the rubber industry are two peas in a bad pod. And always remember, the problems we see here, in Congress and the White House are all leadership problems.The second problem is the unions. Detroit was fat dumb and happy and since they were riding on top of the world, when all was well and everyone was happy, they made deals no one could be expected to deliver on long term. In Akron, a guy I knew who worked for Goodyear, a once proud company like GM, was twenty-five years old and worked in the factory since high school. He used to take six months off every year, a ‘voluntary layoff’ they called it, and receive 90% of his pay for that time of ‘not working’. It doesn’t take a rocket scientist to figure out that rocket is going to run out of fuel. Here we have a leadership problem in the unions … they priced themselves out of the market.

The third problem is that over time, as corporate America in the late eighties and nineties became enamored with education over experience, Detroit lost touch with the fact that, dealerships, the feet on the street, sell cars. Fancy brochures, car shows and goony advertisements don’t do it. To the average car buyer, you and me, who is General Motors or Chrysler or Ford? GM to me is my local dealer who talks to me when I stop by, who takes care of problems when they happen, and who makes the donations to the Little League my kid plays on. It is not Roger Smith, Rick Waggoner or the Auto Czar now chairing a committee in Washington.As I write this Chrysler announced the massive closing of dealerships and GM is expected to do the same and for what? Dealerships sell cars and that is Detroit’s problem selling cars. Are the dealerships actually a cash drain on corporate? No! They are independently owned businesses making their own payroll, paying all the floor plan interest to the finance companies that gouge them and they are being shut down. I’ve heard it said to reduce inventory of automobiles. Well ask a dealer if they ‘order’ the cars in inventory. The answer is no, the auto companies set exactly how much inventory they must hold and they’ve been pushing it down their throats for years. Remember, it is always a leadership problem.

The fourth problem is that you have to face your problems to change them. As a recovering alcoholic, I learned I couldn’t stop drinking and destroying my life until I looked in the mirror and said ‘I am a drunk’. The leaders of our once great industries in Detroit and Akron have failed to do that to this day. They don’t get it. Flying to DC for Congressional hearings during an economic meltdown the likes of which we haven’t seen since the Great Depression on private jets. Why are we surprised at our current problems? They still think it is all about them, those few at the top.

Why are we surprised at our current problems? They still think it is all about them, those few at the top. I once heard Dr. Stephen Covey say, "You cannot talk yourself out of a problem you behaved your way into." The leaders in the auto industry have been trying to use smoke and mirrors to fix this problem for the past few decades. That leadership includes the unions too. And who suffers? All of us really, but especially workers who are now entrenched in behaviors and lifestyles leaders gave them and now want to take away. It is sad we live in the greatest nation the world has ever seen and we’re saddled with leaders who have forgotten what got us here, blinded by their arrogance and success which has fueled their destructive greed.

The fifth problem we have is our government. And this isn’t a problem of Republicans or Democrats; they’re both equally inept at this point. It is a problem of leaders suffering from the same disease they blame on the unions … the disease of me. We are led today by a group of people who are so far removed from the everyday, up and down the street American, they don’t have a clue how we live or what we are going through every day.

There is no possible way our founding fathers intended for us to have professional politicians. There is no way they intended our Congressional leadership to have separate retirement programs from the rest of us, to vote in their own pay raises and sit in judgment of others while leading morally bankrupt lives and keep their seat as public servants. Yet we are led by these people who are taking us down a rat hole our once great nation will not return from.
The last problem I will mention is a current one as well. The Auto Task Force established by our new leader in DC to fix this mess. The task force itself deserves its own diatribe but for now understand it is chaired by Timothy Geithner, the Treasury Secretary who was unable by his own admission to operate Turbo Tax, and, who is a known tax evader who was somehow approved for office anyway. The co-chair with him is Lawrence Summers, an economic advisor … and what does any of this have to do with turning around an auto company?

If you think that this is only impacting the auto industry, think again. The same leadership has infected all of corporate America today. It is sad indeed that we sit here in the rubble of what was once America. It will be even sadder if we continue to play in the rubble and do nothing as every day Americans to get ourselves out of it and stop the nonsense that is literally destroying our way of life … for our children.

GM Letters are out

Contrary to second hand information we had yesterday that GM was going to defer sending termination letters for a couple of weeks, the letters are out. A sample is posted on the DealerLaw page below this Blog link at www.smithlawmt.com. Letters are being delivered by FedEx this morning on the east coast, so those Montana dealers affected will be getting word shortly. As the day progresses, we will post commentary and insight from knowledgeable sources around the country on this Blog.

May 14 Date for Acceptance or Rejection of Dealer Agreements

The Bankrupty Judge has signed the proposed order of sale of Chryslers assets for May 27th, Docket # 492. May 14th appears to be judgment day:

Section 19(a) provides:

(a) Initial Contract Designations. Not fewer than 13 days prior to the Sale
Hearing, the Debtors shall file with this Court and shall serve on each non-debtor
counterparty to an executory contract or unexpired lease with any of the Debtors (each, a
"Non-Debtor Counterparty") that the Debtors may assume and assign to the Purchaser
(the "Initial Designated Agreements"), by overnight delivery service, a notice of
assumption and assignment of executory contracts and unexpired leases in substantially
the form of the Assignment Notice attached hereto as Exhibit D. The Debtors shall attach
to the Assignment Notice a list identifying the Non-Debtor Counterparties to the Initial
Designated Agreements and the corresponding Cure Costs under the Initial Designated
Agreements as of April 30, 2009; provided that such Assignment Notice shall in no way
limit such Non-Debtor Counterparty’s entitlement to Cure Costs accruing during the
period after April 30, 2009. In addition, the Debtors shall serve a copy of the Assignment
Notice on a Non-Debtor Counterparty's counsel of record in these chapter 11 cases as of
the date of the Assignment Notice ("Counsel of Record").


Paragraph 19(f) of the Order states:

Direct Dealer Agreements. Certain executory dealer agreements will be
identified as Designated Agreements to be assumed and assigned. Although most U.S.
dealers have entered into standard uniform dealership agreements in the form of the
Chrysler Corporation Sales and Service Agreement (the "Sales and Service Agreement"),
some dealers are party to older agreements in the form of the Chrysler Direct Dealer
Agreement (each, a "Direct Dealer Agreement"). If a Direct Dealer Agreement is
identified as a Designated Agreement pursuant to the procedures above, then such Direct
Dealer Agreement will only be assumed and assigned to the Purchaser if the counterparty
to the Direct Dealer Agreement first agrees to modify such Direct Dealer Agreement and
restate it in the form of the Sales and Service Agreement (each such modified Direct
Dealer Agreement and Sales and Service Agreement, a "Dealer Agreement"). If the
counterparty and the Debtors do not so modify and restate such Direct Dealer Agreement
in the form of the Sales and Service Agreement, then notwithstanding any other
provisions of these Contract Procedures, such Direct Dealer Agreement will not be
assumed and assigned pursuant to these Contract Procedures.

Link to Bankruptcy Court Filings

For those intersted in looking at Chrysler's Bankruptcy Court file first-hand, check here http://www.chryslerrestructuring.com/

Chrysler Payments for Incentives, Etc

Wall Street Journal, May 6, 2009: “Chrysler has asked the U.S. Bankruptcy Court in Manhattan for clearance to pay $753 million owed to dealers for sales incentives. In court documents, it said it only intends to pay dealers it hopes to keep in its network” These dealer obligations include Warranty Programs, Extended Service Programs, Sales Incentives (allowances, discounts, holdbacks, etc), Dealer Credits (overbillings, reconciliations, damaged parts, vehicle damage, etc.), and Dealer Support Programs and Promotional Allowances (joint advertising and marketing programs). Chrysler requested authority from the Bankruptcy Court to treat these as ordinary course of business payments and to continue to make them and reconcile them on the Parts Statement.

The first day motion seeks to give Chrysler sole discretion to pay or not. They can pull the plug at any time and pay some, but not all dealers.. On Sales Incentives, the motion states “The Debtors are working to balance the competing considerations of conserving estate resources against the need to provide financial support to those dealers critical to their network, and thus, to the going concern value of their assets, brands and businesses. Accordingly, the Debtors intend to exercise their discretion to honor and pay Sales Incentives carefully, taking into account such factors as a dealer’s financial need, credit risk and any objective market factors. The Debtors expect that they will pay no more than 75% of the total accrued but unpaid obligations for Sales Incentives as of the Petition Date.”

“given the proposed assumption of the majority of the Debtors’ dealer agreements and assignment of these agreements to the Purchaser [Good Chrysler]…approval of the payment of such obligations at this time generally will not alter the ultimate amount paid to such dealers, but simply will alter the timing of such payments.”

Proposed Order Approving Bidding Procedures, May 3, 2009

As late as 90 days following the Closing date of the 363 sale, New Chrysler “may, in its sole discretion, exclude any of the Designated Agreements [e.g. franchise agreements Old Chrysler designated for assumption and assignment]…[and those executory contracts] shall no longer be considered Designated Agreements; shall not be deemed to be, or to have been , assumed or assigned; and shall remain subject to assumption, rejection or assignment by [Old Chrysler].”

Preliminary DIP (means "debtor is possession") Budget – 9 Weeks – Assuming a 363 Sale,”
Exhibit A to Supplemental Declaration of Robert Manzo dated May 3, 2009 “The DIP Budget assumes that incentive payments to 25% of the Company’s dealers are not made as the Company look to reorganize its dealer network. The DIP Budget also assume that incentives…are reduced a further 50% from June 1st – July 5th.” And “Incentives – assumes that the Company will only pay incentives to those dealers that they believe will have value to the acquiring company. Assumes that such payments represent 75% of the 13-week Cash Forecast amounts. Assumes that incentives are further reduced 50% for June 1st – July 5th.”

AutoNews.com May 4, 2009:

“The company also said in U.S. Bankruptcy Court here it won't make incentive payments to all of its dealers. In filings today, Chrysler said it will "only pay incentives to those dealers that they believe have value to the acquiring company," to be controlled by Italy's Fiat S.p.A. Chrysler hasn't said how it will measure that value” and “In supporting documents, Chrysler said its post-bankruptcy budget assumes that 25 percent of its dealers won't get the incentive payments "as the company looks to reorganize its dealer network." Kathy Graham, a Chrysler spokeswoman, said she could not immediately clarify what that means.”
And
“Chrysler adviser Robert Manzo said Chrysler had sought $1 billion for dealer incentive payments but scaled that back to $753 million after discussions with the U.S. Treasury. That amounts to a 25 percent cut.
Chrysler has not said how it will decide which dealers will continue with the new company and which ones will not. Chrysler co-President Jim Press last week asked dealers to be patient while it put together a list.
As of March 31, Chrysler had 3,215 dealers. If it cuts out payments to 25 percent of its dealers, that means more than 800 dealers won't receive the payments. In its filings, the company also said its overall incentive spend would be reduced 50 percent from June 1 to July 5, which would be the second month of a possible 60-day reorganization.”

Latest news on the Chrysler Bankruptcy Front. We hear that Chrysler told the court in a filing yesterday that they will be making decisions in the next two weeks about which dealers it is taking and those it is rejecting. Fiat will then have two weeks to agree to assume those contracts. An order to that effect is supposed to be in the court docket later today. The Wall Street Journal is also reporting there was a meeting between Chrysler and the national dealer council yesterday in which the determination as to who is in and who is out was discussed, though presumably not in much detail. The WSJ article only says, “…Chrysler executives said the auto maker is reviewing each dealership’s location, the condition of its facility, finances and sales to determine which are the strongest and most desirable, according to dealers with knowledge of the meeting.”

Dealer Franchise Law Change

MONTANA’S AUTOMOBILE FRANCHISE LAW HAS CHANGED
The Montana Automobile Dealers Association is pleased to announced HB 567, a major revision of Montana’s Automobile Franchise Law, has become law and is effective immediately. This is the first major revision of the franchise law in over 10 years. MADA would like to thank all the dealers whose time and efforts in preparing the bill and testifying were critical in its passage. MADA particularly thanks Representative Jon Sonju for all his hard work in getting this bill passed.

Montana’s revised automobile dealer franchise law now provides:

- Claims for warranty and incentives must be paid within 30 days.

- Manufacturers may not deny claims for warranty or incentives based solely on a dealers incidental failure to comply with administrative technicalities.

- There is a rebuttable presumption a dealer does not know a vehicle would be shipped out of country if that vehicle was purchased in person at a dealership and licensed in the US.

- Manufacturers are prohibited from limiting allocation, charging back, withholding payments, preventing a dealer from participating in a program based on an out of country sale, if the customer was present and the dealer could not have reasonably known the vehicle would be shipped to another country. See rebuttable presumption above.

- Manufacturers may not seek to impose a sur-charge to recover any of its costs, including warranty reimbursement and incentives.

- Dealers have 60 days to resubmit a claim if the claim was denied for a dealer’s incidental failure to comply with administrative technicalities.

- A dealers has 90 days after the expiration of an incentive program, or longer if provided by the service and sales agreement, to submit a claim for payment on incentives.
Manufacturer has one year from payment of a claim, or one year from the end of a program to charge back a dealer or audit a dealers records.

- If a line make is terminated the manufacturer must pay the dealership the actual loss or highest fair market value on the following dates: date of termination, one year prior to date of termination, one day prior to termination announcement.

- If manufacturer changes distributors, the new distributer must use the existing dealer network.

- Good cause for termination was amended to permit the department to consider the dealers sales in relation to the market, not just the amount of business conducted; the department may also consider the reasonableness of the manufacturer terms and the parties’ relative bargaining power in determining good cause for termination.

- When an objection is made to a termination proposal the manufacturer may not enter into a new franchise agreement with anyone until exhaustion of all appellate remedies.

- A manufacturer may not terminate for failure of a dealer to change locations, make substantial alterations to dealership premises or facilities, or change the number or amount of franchises.

- A manufacturer may not terminate a franchise based on a desire for market penetration.

- Expands the manufacturer prohibitions to a purchaser of a new motor vehicle dealership as well as the existing dealer.

- Prohibits a manufacturer from requiring exclusive facilities to keep a dealership or participation in any program, discount, credit, rebate or incentive program.

- Prohibits a manufacturer from asking a dealer or new purchaser to refrain from participation in investment of other like makes as long as the dealer has a reasonable line of credit for each franchise and is in compliance with facilities requirements. Facility requirements may not include exclusive facilities for each line make.

- Prohibits a manufacturer from considering a dealers performance relating to the sale of new motor vehicles or ability to satisfy any minimum sales or market share quota in determining eligibility to purchase program, certified or other used vehicles; to determine the volume, type, or model of program, certified, or other used motor vehicles the dealer is eligible to purchase; the price or prices of any program, certified, or other used motor vehicles that the dealer is eligible to purchase; or the availability or amount of any discount, credit, rebate, or sales incentive that the new motor vehicle dealer is eligible to receive for the purchase of any program, certified, or other used motor vehicles.

- Expands the penalties of treble damages and attorney fees for violations of franchise law to new purchasers of dealerships.

-IS EFFECTIVE IMMEDIATELY

A link to the bill is at http://data.opi.mt.gov/bills/2009/billpdf/HB0567.pdf

Welcome

Welcome to Smith Law Firm P.C.'s new blog dedicated to Dealer issues. Jim Sewell and Bruce Spencer intend to update this with information relevent to Dealer concerns. Please feel free to call us at (406) 442-2980 if you have any questions.