Judge to consider Chrysler franchise terminations

[June 04, 2009]  NEW YORK (AP) -- Chrysler heads back to bankruptcy court Thursday to ask the judge overseeing its case to allow it to terminate the franchise agreements of 789 of its dealers, despite the protests of many dealers who say the move could shutter their businesses for good.

U.S. Judge Arthur Gonzalez is expected to hear testimony from Chrysler LLC executives and dealers during what's expected to be a lengthy hearing. The proceedings start at 8 a.m. EDT.

Auburn Hills, Mich.-based Chrysler maintains that it needs to reduce its dealer base by about 25 percent to a leaner network of about 2,400 dealers in order to emerge from Chapter 11 bankruptcy protection as a stronger company.

But the dealers argue that they don't cost the automaker anything. They say that if Gonzalez approves Chrysler's motion it will result in the shuttering of hundreds of dealerships and thousands of workers will lose their jobs.

A group representing about 300 of the dealers slated to lose their franchises have filed an objection. They also earlier objected to Chrysler's motion to sell the bulk of its assets to a group led by Italy's Fiat Group SpA, because it was tied to the plan to eliminate the dealerships.

Thursday's hearing comes a day ahead of Chrysler's appearance in front of the U.S. Court of Appeals for the Second Circuit in New York.

Late Tuesday, that court halted Chrysler's sale of most of its assets to Fiat pending an appeal by a trio of Indiana state pension and construction funds. Arguments are scheduled for Friday afternoon.

"We are pleased the Court of Appeals has agreed to hear our arguments," Indiana Treasurer Richard Mourdock said in a statement. "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."

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

In addition, production at Chrysler's manufacturing plants remains halted pending the sale's closing.

"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 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.

Late Sunday, U.S. Judge Arthur Gonzalez, the bankruptcy judge overseeing Chrysler's case, issued a ruling approving the sale following three marathon days of testimony and arguments. Gonzalez also ruled that the 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 the terms of the agreement, a United Auto Workers union retiree health care trust will receive a 55 percent stake in the new company, while Fiat will get a 20 percent stake that can increase to 35 percent. The remaining 10 percent 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 funds hold $42.5 million, or less than 1 percent, of Chrysler's total $6.9 billion in secured debt. They bought the debt in July 2008 for 43 cents on the dollar.

[Associated Press; By BREE FOWLER]

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.