Dealer Group In Talks With Chrysler Concerning Franchises

Dealer group says it's in talks with Chrysler to lessen dealer franchise terminations

A group representing Chrysler dealers said Monday it is in talks with the automaker in hopes of getting it to scale back plans to terminate the franchise agreements of about a quarter of its dealers. Michael Bernstein, an attorney for the Chrysler National Dealer Council, said that while it's unlikely that Chrysler LLC will change its mind about eliminating dealer franchises, he's optimistic that the company will at least agree to end fewer than the 789 originally listed in its court motion.

In addition, he said the group wants to ensure that the dealers whose franchise agreements ultimately are terminated get the help they need from Chrysler for a smooth transition.

"Certainly the dealers have an interest in a successful restructuring of Chrysler and the National Dealer Council doesn't want to do anything that would interfere with Chrysler's ongoing viability," Bernstein said. "But we're hopeful we can reach an agreement on terms that will allow it to have as little adverse impact as possible on the dealers."

The talks also include representatives from Fiat Group SpA, which is leading a group attempting to buy the majority of Chrysler's assets, along with Chrysler's creditors committee, Bernstein said.

On Thursday, Auburn Hills, Mich.-based Chrysler asked a New York bankruptcy court to end its franchise agreements with 789 dealers, as part of its plan to restructure into a new company with a leaner network of about 2,400 showrooms.

The need to pare down its dealer ranks was one reason Chrysler ended up filing for Chapter 11. Dealers are protected by strict state laws that make it tough for automakers to rescind franchise agreements, but once a company files for bankruptcy protection, the judge overseeing its case can decide that those laws no longer apply.

General Motors Corp., which faces a June 1 deadline to restructure itself or file for Chapter 11, also is trying to slash its dealer ranks. On Friday, the Detroit-based automaker notified 1,100 of its 6,000 dealers that would not renew their franchise agreements when they end late next year.

Bernstein said a big part of what his group is hoping to achieve is a way for the dealers that lose their franchises to either sell their vehicles back to Chrysler or transfer them to other dealers without having to hold "fire sales" that could result in steep losses.

Chrysler has said that it expects its remaining dealers to need to take the cars and trucks because all of Chrysler's manufacturing plants have been shut down since it entered bankruptcy on April 30 and May vehicle sales have been stronger than expected.

Dealers losing their franchises will get Chrysler warranty reimbursement and sales incentives such as rebates and low-interest financing until June 9. But after that, they won't be reimbursed for either. That means the dealers have a big reason to get rid of the cars before their franchise agreements end. Without incentives they won't be able to compete with the remaining dealers.

Chrysler spokeswoman Carrie McElwee declined comment on the talks, saying that the issues would be addressed through the bankruptcy process.

Bernstein said the dealer group hasn't decided whether to file an objection if a deal cannot be reached, but added that some of the dealers slated to lose their franchise agreements may decide to mount their own legal fights.

A hearing on Chrysler's motion to terminate the dealer franchise agreements will be held on June 3 in front of U.S. Judge Arthur Gonzalez. Objections are due May 26.

Mike Boudreau, a director at O'Keefe & Associates, a Bloomfield Hills, Mich.-based turnaround firm, said the dealers would have a tough fight on their hands if they decided to object to the franchise terminations in court.

Boudreau said the dealers can argue that they cover their own costs and have the ability to ride out tough times, but the fact is the dealerships Chrysler put on its list were already struggling and losing money.

"The dealers are saying 'hey, we'll figure this out,' but hope isn't a strategy," Boudreau said. "It stands to reason that as Chrysler shrinks, its suppliers and dealers will shrink too."