Judge says Chrysler has good case for franchise cuts

NEW YORK -- The judge overseeing Chrysler's bankruptcy case said Thursday that the automaker has a good case for terminating 789 dealer franchises as part of its restructuring.

Judge Arthur Gonzalez in Manhattan's bankruptcy court said under Chrysler's plan, those dealers, which represent about 25% of the company's dealer base, will remain with "Old Chrysler," a collection of assets that aren't slated to be sold to Italy's Fiat Group.

A group representing about 300 dealers slated to lose their franchises filed an objection, arguing that they don't cost the automaker anything and that if Gonzalez approves Chrysler's motion thousands of workers will lose their jobs.

Just under 20 Chrysler dealers were sworn in at the beginning of Thursday's hearing. In the first hour of testimony, three dealers took the stand. One broke down in tears when describing to the court how he found out that he was going to lose his franchise.

Gonzalez said once the Fiat sale closes, he did not see how the bankrupt business would need a dealer network.

"Absent a car manufacturing business, the dealerships would not seem to serve any purpose for the debtor," he said, but he said there may be a case for the dealers to pursue damages.

Chrysler filed for bankruptcy April 30 and said about two weeks later that it would shut a quarter of its dealer network. The company said it wanted the number of dealers to better match the dramatic drop in sales, which have fallen more than 40% during the recession.

In bankruptcy court hearings last week on the Fiat sale, Chrysler executives said they wanted fewer, more profitable dealerships that could invest more in their locations and compete better with rival automakers' dealers.

The executives also said they want to combine single-brand dealers under one roof offering Chrysler, Dodge and Jeep vehicles.

Late Sunday, Gonzalez issued a ruling approving the government-backed sale of most of Chrysler's assets to a group led by Fiat. The sale has been stayed pending an appeal filed by three Indiana state pension and construction funds. Arguments in that case, before the U.S. Court of Appeals for the Second Circuit, are slated for Friday afternoon.

Gonzalez had ruled that the pension funds do not have the standing to challenge the use of TARP money because they will receive their fair share of the $2 billion set aside for secured debtholders, which is more than they would have received if Chrysler had liquidated.

Under terms of the agreement, a United Auto Workers union retiree health care trust will receive a 55% stake in the new company, while Fiat will get a 20% stake that can increase to 35%. The remaining 10% of the company will be owned by the U.S. and Canadian governments.

In the days leading up to Chrysler's Chapter 11 filing, the automaker struck a deal with the majority of secured lenders to give them $2 billion in cash, or 29 cents on the dollar, to erase the $6.9 billion in debt. But some of the debtholders balked and the automaker was forced to file for bankruptcy protection on April 30.

The Indiana pension funds hold $42.5 million, or less than 1%, of Chrysler's $6.9 billion in secured debt. They bought the debt in July 2008 for 43 cents on the dollar.

"We are pleased the Court of Appeals has agreed to hear our arguments," Indiana Treasurer Richard Mourdock said. "As we have stated from the beginning, Indiana retirees and Indiana taxpayers have suffered losses because of unprecedented and illegal acts of the federal government."

Gonzalez was to hear testimony from Chrysler dealers and executives during Thursday's hearing, with legal arguments to follow on Tuesday. It's not clear when he will rule on Chrysler's motion, or if the hearing will delay Chrysler's plans to terminate the franchises effective Tuesday.

Chrysler has maintained that the deal with Fiat is its only hope of avoiding selling itself piece by piece. If the sale doesn't close by June 15, Fiat has the option of pulling out of the deal.

Production at Chrysler's manufacturing plants remains halted until the sale is final.

"We are pleased that the Court of Appeals is setting this schedule and has recognized the sense of urgency Chrysler has to preserve and protect its going concern value," Chrysler said in a statement released Wednesday afternoon. "We look forward to an expeditious conclusion to this matter and to getting back to building vehicles."

The pension funds, which include the Indiana State Police Pension Fund, the Indiana Teacher's Retirement Fund, and the state's Major Moves Construction Fund, claim that the deal as structured unfairly favors the interests of Chrysler's unsecured stakeholders ahead of those of secured debtholders such as themselves.

They also challenged the constitutionality of the U.S. Treasury Department's use of Troubled Asset Relief Program, or TARP, funds to supply Chrysler's bankruptcy protection financing.