The US government’s foray into restructuring the ailing US automotive industry has been widely reported in the media and represents the most substantial federal intervention in the private business sector since the Great Depression. In Chrysler’s case, the government took the unprecedented step of orchestrating a “surgical” Chapter 11 bankruptcy filing with the primary goal of utilizing the provisions of Section 363 of the US Bankruptcy Code to sell substantially all of Chrysler’s assets to “New Chrysler” in less than 30 days.
An integral component of the proposed asset sale was the continued “rationalization” – read, reduction – of Chrysler’s vast dealership network. This effort – previously dubbed Project Genesis – had been put into motion long before the bankruptcy filing, but had never been completed. As of the bankruptcy filing, Chrysler’s dealership network comprised 3,181 dealers employing more than 140,000 people. Of these dealers, 789 were slated to have their franchise and related agreements rejected under Section 365 of the Bankruptcy Code. With the assistance of the National Automobile Dealers Association, a Committee of Chrysler Affected Dealers (the Affected Dealers) was established. Squire Sanders was counsel to the committee, which represented the interests of more than 350 Affected Dealers.
While asset sales and contract rejections are common to virtually every large Chapter 11 case, Chrysler’s proposed asset sale and Affected Dealer rejections were unusual in many respects and raised numerous concerns. These included the bankruptcy process being utilized improperly to obtain relief not provided for by the Bankruptcy Code or contemplated by Congress as well as Chrysler’s not having a sufficient business justification for not assigning all of its dealer agreements to New Chrysler. Given that there had never before been a bankruptcy of a major automobile manufacturer, some of these concerns raised issues of first impression for the Bankruptcy Court.
For instance, to say that the timeline for the proposed asset sale was on a fast track would be an understatement. Chrysler’s emergency motion to approve the sale of its assets was among the first filed in the case and contemplated a sale process that would be completed from start to finish in less than 30 days (a typical Section 363 sale takes 60 to 120 days). The timeline for the sale was mandated by the government’s unwillingness both to provide necessary financing during the bankruptcy case and to consummate the transaction unless the asset sale was consummated on this expedited track.
The proposed Affected Dealer rejections were not run of the mill requests to reject executory contracts, either. Chrysler struggled to articulate a valid business purpose for its requests in light of the evidence, and much of the relief Chrysler requested was squarely contrary to numerous state dealer laws. These laws, enacted in all 50 states, are designed to protect dealers in the event a manufacturer seeks to terminate their franchise agreements. For instance, Chrysler sought to give the Affected Dealers less than 30 days’ notice of their termination (typically, dealer laws require 60 to 90 days’ notice). Chrysler also did not intend to comply with dealer law requirements to repurchase inventory, spare parts and specialized tooling. In essence, dealers were being given less than 30 days to clear their lots at prices well below cost. Additionally, Chrysler sought to predetermine the priority of any and all claims dealers would be able to assert as a result of the rejections and to prospectively enjoin dealers and states from taking numerous actions that they would otherwise be entitled to take.
Despite the complexity of the issues raised by the proposed asset sale and contract rejections, and the speed at which the process was moving, the Affected Dealers and other parties opposing the sale and/or contract rejections met the daunting challenge of conducting discovery in just four days and preparing for the expedited hearings on these issues. Chrysler produced hundreds of thousands of documents in the days leading up to the asset sale hearing, with the last round of documents being produced less than 12 hours before the start of the asset sale hearing.
Depositions of numerous representatives of Chrysler and its advisors, Fiat and other parties were taken in the days leading up to the hearing.
Ultimately, the Court approved the asset sale as the only viable option on the table and held that the rejection of the Affected Dealer agreements was in the best interests of Chrysler’s estates and creditors. In doing so, the Court overruled the more than 350 objections filed in opposition to the asset sale (including approximately 12 filed by various state attorneys general joining in the Affected Dealers’ arguments) and more than 125 objections filed in opposition to the rejection of the Affected Dealer agreements. In approving the asset sale, the Court found that, given the exigent circumstances, adequate notice of the sale was given and that the sale was not a sub rosa plan of reorganization. As for the Affected Dealer rejections, the Court held that the business judgment standard was the applicable standard (and not a higher standard applicable to certain categories of contracts) and was adequately met by Chrysler.
However, the struggle was not without its successes. As a result of the actions of the Affected Dealers and other parties, Chrysler withdrew much of its requested rejection-related relief, including (a) the prospective injunction sought under Section 525 of the Bankruptcy Code against actions by dealers and state governments, (b) the predetermination of the priority of dealer claims that may arise as a result of rejection and (c) the extent of its efforts to pre-empt state dealer laws as they relate to the effect of rejection.
The facts and circumstances of the Chrysler case were unusual to say the least. Never before has a major automobile manufacturer filed for bankruptcy. Never before has the US government taken such an active role in a bankruptcy proceeding. Never before has a sale of a business of Chrysler’s size moved as swiftly. Despite these challenges, however, through their collective efforts, the Affected Dealers achieved a measure of success and continue to pursue other avenues of relief through the political and legislative processes. There is also evidence that dealers in the ongoing General Motors bankruptcy – in which GM has pursued a more even-handed approach toward its dealer network – have benefited from the efforts of the Chrysler Affected Dealers. Indeed, although GM has more than twice as many dealers as Chrysler, only 38 dealers are slated to have their agreements formally rejected by GM (less than 5 percent of those rejected by Chrysler). The remainder of the dealers who have not been chosen as “go forward” dealers have signed wind-down agreements that allow them to operate through October 2010 in order to allow for a more orderly wind-down of their businesses.