Chrysler Chapter 11 email to Texas Bankruptcy Bar

The following is an email I sent to the Bankruptcy Section of the Texas Bar on May 14, 2009.

Dear Readers:

All of us who know a little about how bankruptcy really works have been amused and/or bemused by the whole notion that Chrysler would go through a “surgical bankruptcy” that would be completed within 60 to 90 days. The asset sale to Fiat may be completed within 60 days, but mopping up the blood may take a little longer.

One issue which has not received a great deal of press is Chrysler’s ability to reject franchise/dealer agreements as executory contracts under Chapter 11. Franchise agreements for car dealers are generally controlled by state law and many states have laws which are VERY protective of their auto dealers. (Some car dealers make or made a LOT of money and they know and contribute to their elected state officials. Some of you may have heard of Red McCombs.) Some states, for instance, have laws which force the car companies to renew franchises at the end of the contract term, whether the car manufacturers want to or not. The result has been that there are a lot of car dealers (many in small towns or in towns close to each other [think Northeast]) which may be profitable for the dealer, but not for the manufacturer.

Today Chrysler released its list of franchises which will be rejected effective June 1. That list includes 789 dealers. Having a law firm to run, I don’t actually have time to do a state by state analysis, but by my count, there are 50 in Texas. For comparison, Florida has 34 and New Jersey appears to be one of the hardest hit with 30. (I realize that 50 in Texas is more than 30 in New Jersey, but there are some counties in Texas bigger that the whole state of New Jersey.) The Midwest seems to be particularly hard hit with large numbers in several Rust Belt states. (Ohio, Michigan, Illinois, and Iowa.)

I practice in Austin, which did not lose a single dealer. (Good for Austin, but as a bankruptcy lawyer, I fell a bit left out.

Although Austin didn’t lose any, the Central Texas region did not do so well. We lost FIVE in Waco proper, and one each in Clifton, Hillsboro, and Gatesville. Closer to Austin, we lost one each in Fredericksburg, Lockhart, Giddings, Seguin and San Marcos.

San Antonio only lost one.

The Archer family lost four in Houston. (Ouch.) Baytown and Alvin each lost one.

In the Dallas/Fort Worth area there are ten with one each in Dallas and Fort Worth, two each in Denton and Waxahachie, and one each in Arlington, Richardson, McKinney and Mineral Wells.

The Valley lost two in Harlingen and one each in McAllen and Brownsville.

Doing some basic internet research, a new car dealership typically employs between 100 and 200 people depending on its size. 789 dealerships times 150 employees equals 118,350 people that won’t have a place to work June 1. I realize it is really not that simple. Some of these franchises are two that operate together (i.e., a Chrysler franchise and a Dodge franchise on the same lot.) There will be some consolidation in the industry, so some of these people will find jobs at other that dealers that survive and will theoretically sell more cars now that there is less competition. (Of course, new car sales for Chrysler are down 48% from a year ago.) The fallout extends far beyond the dealers. Some of the auto dealer employees used to make pretty good money. (And in some cases, very good money.) I’m talking about the sales guys/girls and the finance guys. The car washers maybe not so much. BUT all of these people spent money in their local communities at restaurants and stores and the local Starbucks. How is losing its Chrysler dealer going to effect Aransas Pass, or George West, or Hughes Springs, or Crockett, or Denver City?

These are the numbers for Chrysler. When GM files at the end of May, their list of franchises to be rejected is rumored to be almost 3,000 dealers.

In case anyone was interested.

Michael Baumer

Law Office of Michael Baumer

FYI, the next day Chrysler announced that the expected layoffs from the dealerships would “only” be about 40,000 people. GM has since announced that they will “only” be terminating about 2200 dealerships. These are smaller dealerships and only employ 50 people or less, so the actual number of people who will lose their jobs at the GM dealerships should be under 100,000. And that’s the “good” news.

Comments are closed.

by Michael Baumer