Lots of Holiday Season Activity in Chrysler Bankruptcy Case (Part 2 of 3)

On December 30, 2009, New and Old Chrysler jointly filed a second motion to enforce the automatic stay and the bankruptcy court’s orders approving the sale of assets to New Chrysler and the rejection of 789 dealer agreements (the “Second Enforcement Motion”). The Second Enforcement Motion is directed to several rejected dealers that filed state proceedings to enjoin the creation of new franchises in their former markets. The rejected dealers appear to have a plausible defense: they based their state law proceedings on the recent federal arbitration law that went into effect on December 16, 2009. Those dealers argued that because they may be awarded their franchises back by an arbitrator, New Chrysler should be enjoined from filling those points until the arbitration is concluded.

Of course, Old and New Chrysler were having none of it and demanded that those rejected dealers withdraw their state proceedings. The dealers refused and the Second Enforcement Motion resulted. Because the premise underlying the state proceedings is to preserve the remedy afforded the rejected by Congress in the arbitration legislation, it will be very interesting to see how this motion plays out. A copy of the Second Enforcement Motion may be found here.

Lots of Holiday Season Activity in Chrysler Bankrptcy Case (Part 1 of 3)

Quite surprisingly, the Christmas and New Year’s holiday week was marked by several interesting filings in the Chrysler bankruptcy case relevant to dealers. First, on Christmas Day, a motion was filed seeking reconsideration of the bankruptcy court’s decision and order granting the Debtors’ motion to reject 789 dealer agreements. Second, on December 30, the Debtors and New Chrysler filed a second joint motion seeking injunctive relief and sanctions against certain rejected dealers that filed state law proceedings against New Chrysler. Third, on New Year’s Eve, Debtors’ and New Chrysler filed an adversary proceeding against Oregon, Maine, North Carolina and Illinois state officials seeking a declaratory judgment and injunctive relief to enjoin the enforcement of certain state statutes enacted or soon to be enacted that would have the effect of negating or impacting the effect of the termination of the rejected dealers’ franchises.

On Christmas Day, a small group of former Chrysler dealers whose franchise agreements were rejected filed a motion (the “Reconsideration Motion”) that asks Bankruptcy Judge Gonzalez to reconsider his opinion and order approving the rejection of their franchise agreements. The Reconsideration Motion can be found here. Rather remarkably (to say the least), the Reconsideration Motion accuses Judge Gonzalez of committing a fraud on the court by mischaracterizing the testimony of Fiat executive Alfredo Altavilla in his opinion approving the Debtors’ rejection motion (the “Rejection Opinion”).

In that regard, the Reconsideration Motion focuses on footnote 21 of the Rejection Opinion, which states, in pertinent part, that “Altavilla also responded affirmatively to a question regarding whether a dealership network needed to be for the Fiat Transaction to close, stating that a ‘restructuring needs to occur’” The Reconsideration Motion argues that the footnote mischaracterizes the actual hearing testimony which is quoted in full as follows:

Question: If this transaction closes without an absolute requirement of a particular number of dealers that are being terminated, would Chrysler still go through with this deal – I mean, rather, would Fiat still go through with this deal?

Answer: The answer is that a restructure needs to occur. Whether it occurs before or after the closing of the deal is not a material difference.

The Reconsideration Motion also argues that Judge Gonzalez ignored testimony by Chrysler executives that the Debtors’ estates received no value in exchange for accelerating the ‘rationalization’ of the dealer network through the use of the contract rejection power in bankruptcy.

As for a remedy, the dealers do not argue that New Chrysler could be forced to reinstate them; rather, they argues that the rejections can be reversed within the bankruptcy proceeding and the Debtors’ estates forced to assume those dealer agreements. They argue that would have the effect of converting claims under those previously-rejected franchise agreements from general unsecured claims (that have little chance of payment) into priority administrative expense claims (that stand a reasonable chance of getting paid, at least in part).

Rejected/Wind-Down Dealer Arbitration Bill Signed into Law

The bill granting rejected or wind-down dealers the right to arbitrate for potential reinstatement was signed into law on December 16, 2009. The various deadlines set forth in the statute are as follows:

• no later than January 15, 2010: manufacturer must provide each covered dealership with "the specific criteria pursuant to which such dealership was terminated, was not renewed, or was not assumed and assigned..."
• no later than January 25, 2010: a covered dealership must elect to pursue the right to binding arbitration provided in the legislation.
• no later than June 14, 2010: the case must be submitted to the arbitrator for decision

Once the matter is submitted, the arbitrator must issue a written decision within 7 business days thereafter. If the arbitrator rules that the dealership must be reinstated, the manufacturer must offer a letter of intent within 7 business days after the decision in rendered. The arbitrator has the authority to extend these deadlines for up to 30 days.

Congress Approves Dealer Arbitration Procedure

The House and Senate passed a bill that would give arbitration rights to the 789 Chrysler, Dodge and Jeep dealers whose sales and service agreements were rejected in the Chrysler bankruptcy and to the Chevrolet, Buick, Cadillac and GMC dealers who signed deferred termination agreements in the GM bankruptcy. The legislation does not benefit those dealers whose brand is disappearing, such as Saturn, Pontiac and, likely, Saab.

Basically, a covered dealership shall have the right to seek, through binding arbitration, the restatement of its franchise or the award of a new franchise in the same geographical area.

The legislation provides for a series of deadlines measured from the date of enactment (the "DoE") of the legislation. Within 30 days of the DoE, the manufacturer must provide each covered dealership with "the specific criteria pursuant to which such dealership was terminated, was not renewed, or was not assumed and assigned..." Within 40 days of the DoE, a covered dealership must elect to pursue the right to binding arbitration provided in the legislation. Within 180 days of the DoE, the case must be submitted to the arbitrator for decision and the arbitrator must issue a written decision within 7 business days thereafter. If the arbitrator rules in favor of the dealership, the manufacturer must provide a letter of intent within an additional 7 business days thereafter. The arbitrator may extend the arbitration deadlines for up to 30 days.

The legislation provides that the arbitrator shall balance the economic interests of the dealership, the manufacturer and the public at large. The factors to be considered include: 1) the dealership's profitability from 2006 through 2009; 2) the manufacturer's overall business plan; 3) the dealership's current economic viability; 4) the dealership's satisfaction of performance objectives as found in the franchise agreement; 5) the demographic and geographic characteristics of the relevant market territory; 6) the dealership's satisfaction of the criteria used by the manufacturer to select the dealer for termination; and 7) the length of experience of the dealership.

The arbitration shall be conducted in the state where the dealership is located and the arbitrator shall be selected from regional lists maintained by the American Arbitration Association. If the factory and dealer cannot agree, the AAA will select the arbitrator. There will be no depositions and only limited discovery. If both parties agree, the arbitration may be conducted electronically or telephonically. Each party shall be responsible for their own costs and expenses, including the fees for the arbitration. No money damages may be awarded.

Class for Clunkers Class Action Settled

Attorneys for the parties in the Cash for Clunker class action, Allegretti v. Penske Automotive Group, Inc., informed the Judge that the parties have agreed to a settlement in principle. Details of the settlement are not available and will likely remain confidential.

FTC Delays Red Flags Enforcement Yet Again

Set to begin enforcement on November 1, 2009, the Federal Trade Commission once again has delayed enforcement of the Red Flags Rule. Enforcement will now begin June 1, 2010.

As stated in the FTC press release announcing the enforcement delay, the Red Flags Rule "was promulgated under the Fair and Accurate Credit Transactions Act, in which Congress directed the Commission and other agencies to develop regulations requiring “creditors” and “financial institutions” to address the risk of identity theft. The resulting Red Flags Rule requires all such entities that have “covered accounts” to develop and implement written identity theft prevention programs to help identify, detect, and respond to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft." The FTC's press release may be found here.

Cars for Cluker Class Action Commenced

A class action complaint was filed against the Penske Automotive Group on October 8, 2009 in the United States District Court for the Eastern District of New York based on allegation that the Penske dealerships unlawfully retained the entire scrappage value of vehicles traded in under the Cash for Clunkers Program. The case is captioned Allegretti v. Penske Automotive Group, Inc. and was assigned Case no. 09-cv-4316.

The action is based on the dealer certifications required under the Cash for Clunkers program that the dealer: i) has retained no more than $50.00 of the scrappage value as payment for any of the dealer’s administrative costs in connection with the Cash for Clunkers transaction; and ii) has not charged the purchaser any additional fees for participating in a Cash for Clunkers transaction.

The plaintiff alleges that Penske dealerships unlawfully retained scrappage proceeds in excess of the $50.00 limit specified in the certification. The complaint alleges claims for unjust enrichment and violations various state consumer protection laws, including section 349 of New York’s General Business Law.