Dealers Object to Chrysler's Section 363 Sale Motion

Chrysler dealers that were designated for rejection in Chrysler's May 14 motion have wasted no time intervening in the bankruptcy proceeding. Although objections to Chrysler's Rejection Motion are not due until May 26, several groups of dealers filed their objections on May 19 to Chrysler's earlier Section 363 Sale Motion, which is set for a hearing on May 27. Dealer opposition is led by the Ohio-based firm of Squire Sanders & Dempsey LLP, representing the "Committee of Chrysler Affected Dealers." Squires Sanders was retained under the auspices of the National Automobile Dealers Association and the Chrysler National Dealers Council to represent the collective interests of those dealers designated for rejection in Chrysler's May 14 Rejection Motion. As of May 19, the Committee of Chrysler Affected Dealers is comprised of 284 dealers designated for rejection in the Rejection Motion. Here is a link to the Objection filed by Squire Sanders.

Attorneys for smaller groups of dealers and individual dealers also filed objections to the Section 363 Sale Motion (including, in the interest of full disclosure, Robinson Brog Leinwand Greene Genovese & Gluck, P.C.). Here is a link to the Objection Filed by Robinson Brog and its co-counsel Myers & Fuller P.A. Here is link to another notable objection filed by the firm of Bellavia Gentile & Associates and its special counsel, Siller Wilk LLP.

Chrysler Files Motion to Reject 789 Dealer Agreements

On May 14, Chrysler file its long awaited motion seeking an order "pursuant to Sections 105, 365 and 525 of the Bankruptcy Code and Bankruptcy Rule 6006 authorizing the rejection of executory contracts and unexpired leases with certain domestic dealers." In plain English, the motion seeks to reject the dealer franchise agreements of approximately one-quarter of Chrysler's dealer network. Opposition is due May 26 and a hearing is set for June 3.

Chrysler Not Assuming Certain Liabilities to Dealers Whose Franchise Agreements are not Assumed

The Company Disclosure Letter (the "Letter") annexed to the Master Purchase Agreement filed with the Bankruptcy Court on May 12, identifies liabilities under dealer and consumer incentive programs and liabiltiies under dealer support programs as Assumed Liabilities. However, explicitly excluded from the category of Assumed Liabilities are incentive program payments and dealer support program payments to dealers whose franchise agreements are not being assumed themselves.

Chrysler Identifies Certain Dealership Leases and Marketing Investment Program Contracts as Excluded Assets

Pursuant to the Bankruptcy Court's May 8 Bidding Procedures Order, on May 12 Chrysler filed are more complete copy of the Master Purchase Agreement among Old Chrysler, New Chrysler and Fiat S.p.A. Included is a redacted version of the Company Disclosure Letter (the "Letter"). The Company Disclosure Letter is the document where Old Chrysler identifies the assets that are to be excluded from the sale to New Chrysler ("Excluded Assets"). The Letter will be updated over time as the case progresses.

Of interest to dealers, the initial version of the Company Disclosure Letter filed on May 12 identifies 8 leases of dealership properties owned by Chrysler Realty Company LLC as Excluded Assets. The Letter also identifies the equity interests in 9 Marketing Investment Program Dealerships as Excluded Assets. Finally, the Letter identifies the equity interests in 8 Marketing Investment Program dealerships as being subject to transfer to New Chrysler, if agreed to by New Chrysler.

Order Sets Procedures and Scheduling for Assumption and Rejection of Dealer Agreements

On May 7, Judge Gonzalez signed the order approving the bidding procedures and scheduling the final hearing for the sale of substantially all of Old Chrysler’s assets to New Chrysler for May 27. Of interest to dealers, certain procedures were adopted to govern the assumption and assignment of dealer agreements in connection with the sale:

• No later than May 14, Old Chrysler must file the initial list of the dealer agreements that it intends to assume and assign over to New Chrysler.

• With the consent or at the request of New Chrysler, Old Chrysler may designate additional dealer agreements for assumption and assignment as late as 30 days after the closing of the sale transaction.

• New Chrysler has discretion whether to accept dealer agreements designated by Old Chrysler for assignment. No later than June 12, New Chrysler must file its initial list of those dealer agreements it has decided to accept and New Chrysler has up to 30 days after the closing to accept assignment of the rest of the designated dealer agreements.

• Any dealer agreement not affirmatively accepted by New Chrysler is not deemed assumed and assigned and will remain with Old Chrysler and probably be rejected.

This multi-step process of assumption, assignment and acceptance of dealer agreements provides only some glimmer of hope for dealers not on the initial list of designated dealer agreements. Borderline dealerships may be able to convince New or Old Chrysler to have them added to the list of dealer agreements designated for assumption and assignment for up to 30 days after the closing. Conversely however, New Chrysler can refuse to accept any dealer agreement designated by Old Chrysler for assignment for that same 30-day post closing period. As Yogi Berra famously said, “it ain’t over till it’s over.”

Although the initial list of dealer agreements designated for assumption and assignment is probably already set in stone, one can easily foresee New and Old Chrysler using the later stages of this process to extract concessions from dealers desperate to have their dealer agreements placed on the list designated for assumption and assignment by Old Chrysler and to have their agreements ultimately accepted by New Chrysler. In fact one such strong-arm tactic is written directly into the May 7 Order. The Order specifically states that no old-style Direct Dealer Agreements will be assigned to and assumed by New Chrysler. Dealers holding such agreements must agree to enter into the new Sales and Service Agreement in order to be assumed and assigned.

The time frame for such horse-trading may be very short. As set forth above, Old Chrysler must file its initial list of dealer agreements designated for assignment and assumption by May 14 (but may continue to designate additional dealer agreements until 30 days after closing). New Chrysler must then file its initial list of designated dealer agreements that it accepts for assignment by June 12 (but may continue to accept assignment of dealer agreement until 30 days after the closing). However, the Master Transaction Agreement among Old Chrysler, New Chrysler and Fiat contains a provision under which that contract may automatically terminate if not closed on or before June 15. If that date holds, the 30-day post closing window will close on July 14. Only then will it be over.

More Detail Emerges on Chrysler Dealer Cuts

A filing by Chrysler on May 3 has provided more detail on the scope of the intended dealer cuts. In a Chapter 11 reorganization, Chrysler is what is called the "Debtor in Possession," or DIP for short. In a Chapter 11 reorganization, the DIP is authorized to continue to operate the bankrupt company's business subject to control and oversight by the Bankrupcty Judge. Part of that oversight is a requirement that the DIP submit a budget showing how it intends to operate during the bankruptcy proceeding.

On May 3, Chrysler filed its DIP Budget for the 9 week period following its bankruptcy filing. The budget assumes the sale of substantially all of Chrysler's assets to New Chrysler is consumated.

Of interest to the dealer body are the following quotes from the DIP Budget:

• “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.”

• “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.”

This confirms that Chrysler intends to pay incentives only to those dealers whose franchise agreements it plans to assume and assign over to New Chrysler. The DIP Budget assumes that 25% of the current dealer body will not receive incentive payments and that this will initially translate to a 25% reduction in the incentive payments that will be paid to dealers. And, a bit forbodingly, the DIP Budget assumes that incentive payments to dealers will be reduced by an additional 50% during the last 5 weeks of the budget period. It is not clear from the face of the DIP budget what this portends for dealer body cuts.

Details of the Sale to New Chrysler

On May 3, Chrysler filed a Motion for an Order (A) Approving Bidding Procedures and Bidder Protections for the Sale of Substantially All of the Debtors Assets and (B) Scheduling a Final Sale Hearing and Approving the Form and Manner of Notice Thereof; and for an Order (A) Authorizing the Sale of Substantially All of the Debtors Assets, Free and Clear of Liens, Claims, Interests and Encumbrances, (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in Connection Therewith and Related Procedures.

The proposed deal is this: "Old Chrysler" will sell substantially all of its assets to "New Chrysler" free and clear of pre-petition liens, claims, interests and other encumbrances for $2 billion. Among the assets New Chrysler is purchasing are most of Old Chrysler's franchise agreements with its dealers. In addition, New Chrysler will assume certain liabilites of Old Chrylser. The assumed liabilties include certain union liabilities; warranty and product liability claims; and liabilities related to the contracts New Chrysler is taking as part of the deal.

Dealer franchise agreements will be subject to two rounds of culling under this plan. First, Old Chrysler will designate most of its franchise agreements for sale to New Chrysler. The rest will be rejected by Old Chrysler, leaving those dealers with an unsecured claim for contractual and statutory damages, which may be worth little or nothing. However, that is not the end. Old Chrysler has up to 90 days after the closing to designate additional franchise agreements for sale to New Chrysler. Conversely however, New Chrysler has up to 90 days after the closing of the sale transaction to identify dealer franchise agreements they do not wish to purchase. Those agreements will be turned back to Old Chrysler and rejected. The decision will ultimately rest with New Chrysler.

In short, while it is certainly a good sign that a dealer makes it past the first hurdle, New Chrysler will have a full 90 days after the closing to return unwanted dealers to Old Chrysler back in the bankrupcty proceeding. One might expect New Chrylser to use this power to force concessions on dealers who thought they were in the clear.

Red Flags Enforcement Delayed Again

The Federal Trade Commission announced that it will, again, delay enforcement of the Red Flags Rule - this time until August 1, 2009 - "to give creditors and financial institutions more time to develop and implement written identity theft prevention programs."

According to FTC Chairman Jon Leibowitz, “Given the ongoing debate about whether Congress wrote this provision too broadly, delaying enforcement of the Red Flags Rule will allow industries and associations to share guidance with their members, provide low-risk entities an opportunity to use the template in developing their programs, and give Congress time to consider the issue further.”

"The Fair and Accurate Credit Transactions Act of 2003 (FACTA) directed financial regulatory agencies, including the FTC, to promulgate rules requiring “creditors” and “financial institutions” with covered accounts to implement programs to identify, detect, and respond to patterns, practices, or specific activities that could indicate identity theft. " The result was the Red Flags Rule.

The FTC originally slated enforcement to commence November 1, 2008. That was pushed off to May 1, 2009. And now, enforcement has been pushed off again to August 1, 2009.