Dealers Fight Chrysler Franchise Cuts in Court

NEW YORK, June 4 -- Eldon Palmer was preparing for a grand opening of his upgraded Chrysler dealership -- a $3.2 million project he pursued at the automaker's urging -- when the letter came.

In formal language that seemed to belie their 52-year business relationship, Chrysler informed Palmer that his Indiana dealership, along with another he runs, would be among the 789 dropped as the automaker seeks to emerge from bankruptcy as a new leaner, healthier company.

"We were ready to roll," said Palmer, recounting the millions he has spent over the past two years expanding his Chrysler brands and putting them under one roof in a new facility. He had done so, Palmer added, at the request of Chrysler, which was trying to establish a more efficient dealership network.

One after another, Chrysler dealers slated for closure took the witness stand Thursday in a federal bankruptcy courthouse in Lower Manhattan. Some openly wept.

Chrysler, which plans to emerge from bankruptcy as a new company led by Italian automaker Fiat, is seeking court approval to terminate agreements with roughly a quarter of its dealerships. Thursday's hearing is to be followed by oral arguments Tuesday, after which U.S. Bankruptcy Judge Arthur J. Gonzalez will rule.

Chrysler executives have said that whittling down a bloated dealer network was necessary to be more competitive with foreign manufacturers. The executives said the company used business criteria such as sales productivity and customer service satisfaction to determine which dealers to cut. Chrysler also wants to bring its three product lines -- Chrysler, Dodge and Jeep -- under one dealership roof.

During cross-examination by a Chrysler attorney, Palmer acknowledged that his dealership met a mere 37 percent of its sales target for 2008. "It was embarrassing," Palmer said, in part blaming the poor showing on the condition of the building he purchased, which he has since renovated. "It is a beautiful facility now.

Larry Crain, a dealer in Little Rock, told a similar story, saying he invested in expanding his product offering at the encouragement of Chrysler. And like many others, Robert Melvin, a Nevada dealer, testified that he bought more cars from the company in recent months at the request of executives as Chrysler, faced with plunging sales, tottered on the brink of bankruptcy with insufficient cash flow.

He received a rejection letter last month. To his dismay, Melvin added, he received a shipment of more cars from Chrysler last week.

Despite the dealers' pleas, bankruptcy experts said the dealers have an uphill legal battle. In bankruptcy proceedings, companies have more leverage to ignore state franchise laws that protect dealers. And even if the dealers succeed in preserving their dealership agreements, the nature of the Chrysler case complicates the dealers' battle.

Chrysler is seeking to sell most of its assets to a new company led by Fiat, but the dealer contracts are with the "old" Chrysler that is being liquidated.

"It's a long shot," said Scott Van Meter, managing director of LECG, a consulting firm.

Furthermore, in an opinion approving the sale this week, Judge Gonzalez noted that the underlying argument of many opposing the transaction is the desire to have the government protect every stakeholder from economic loss -- not just those that the government perceives as being essential to the survival of a successful new Chrysler.

"For example, any dealership rejection that is approved will cause hardship to the particular dealership involved but may well be necessary if New Chrysler is to survive," Gonzalez wrote.