What's next for GM?

By Marie Price | The Journal Record

[ JUNE 2, 2009 - OKLAHOMA CITY, OK ]- GM’s bankruptcy reorganization filing Monday raises the issue of whether the Detroit automobile giant will seek to terminate dealer contracts sooner than next year, an Oklahoma City attorney said Monday.

“I think it does change things,” said Eric Johnson. “With the bankruptcy filing, there’s a question whether GM would seek to terminate those agreements immediately, much like Chrysler did.”

As part of the federal government’s plan for its survival, GM filed the largest auto-company bankruptcy in history Monday, following Chrysler by about a month. GM also filed Chapter 11 for its Saturn brand.

Johnson, with Phillips Murrah, said GM has indicated its intention to honor an 18-month grace period for terminated dealers.

“But, all’s fair in love and bankruptcy,” he said. “They could seek to terminate those just like Chrysler did. In addition, they could seek to terminate more dealers through the bankruptcy filings, just like Chrysler did. So, it changes the landscape quite a bit.”

In an affidavit accompanying its bankruptcy petition, GM CEO Frederick Henderson said that as of April 30, the company had 6,099 dealers in the U.S., and wants to be able to assign franchise agreements of about 4,100 dealerships to the “New GM” that is anticipated as part of the restructuring.

Johnson said that GM’s sale motion indicates that dealers whose contracts are being assumed will need to sign a modified franchise agreement, and those who are not being assumed will be able to sign a voluntary termination agreement allowing them to operate until expiration of their current dealer agreement. He said dealers who choose not to sign a modified agreement will be able to enter into a deferred termination agreement or will be considered rejected.

Johnson said dealers can try to raise the issue of state law protections for their franchises, as some Chrysler dealers attempted in a court proceeding that ended last week.

“The judge heard the testimony, but ruled in favor of the sale to Fiat today,” he said. “They could certainly try to challenge it, but I don’t think they would be successful.”

Johnson said he would expect federal bankruptcy law to trump state law in the GM case, as it did with Chrysler.

Unlike Chrysler, GM did not release a list of dealers who are losing their franchises by 2010, but some have acknowledged receiving termination letters.

In a statement, P. Mark Moore, president and CEO of Bob Moore Auto Group, confirmed that Bob Moore Cadillac of Norman has received notice from GM that its contractual relationship will end by October 2010.

“The Bob Moore Auto Group exemplifies the highest standards, and we feel we have strong grounds to pursue a reversal of GM’s decision,” Moore said. “While we respect the dire situation that GM faces and know their reorganization process is difficult at best, we respectfully disagree with their notification.”

GM filed a motion for what is called a “363 transaction” that would allow the sale of its assets to the new company, which GM officials said must be approved by July 10.

In his affidavit, Henderson said the U.S. Department of Treasury has made clear that it will sponsor New GM as purchaser and fund the Chapter 11 cases only if the transaction is approved by that date.

“Any delay will result in irretrievable perishability and loss of market share to the detriment of all economic interests,” Henderson told the court. “It will exacerbate and entrench consumer resistance to General Motors’ products. There is no other alternative.”

Attorney Stephen Moriarty said the bankruptcy filing puts GM dealers in the same position as those of Chrysler.

“GM is able to reject those dealership agreements under the bankruptcy code,” said Moriarty, with Fellers Snider.

He said that could affect between one-quarter and one-third of GM dealers, from numbers he has seen.

Moriarty said he believes there is no intention to continue the Saturn line, which could mean the end of the line for that brand unless someone is willing to buy it during the bankruptcy proceeding.

“I think the game plan in the GM case is to pare back to a much smaller, leaner operation, to identify profitable assets, profitable plants, and to carve those out into what they refer to as the New GM, which would emerge from bankruptcy with all of the non-income-producing and nonprofitable assets left there to be liquidated or sold and reduced to cash,” he said.

Moriarty said a “363 transaction” is an expedited process available under the Bankruptcy Code under which certain assets are identified for sale to a third party. He said sometimes a price is fixed on the front end, as it was in the Chrysler case, in which Fiat offered to pay $2 billion for identified assets. Other times, he said, a bidding process is established by the court.

Moriarty said the 363 process helps unprofitable companies avoid going all the way through the bankruptcy process, which can take years, before completing a plan and being able to sell off assets.

“In these cases, where you’re losing money, from the debtor’s perspective, it’s the sooner always the better,” he said. “You’ve got to balance that against making sure that the assets are made available to third parties in the marketplace and that you actually obtain a fair price for what you’re selling.”

Moriarty said GM’s assets are fairly well known, so its 363 process should be accomplished fairly expeditiously, but early July might be a stretch.

“That probably is a little bit aggressive of a timeline,” he said.

Moriarty said there is probably not much for dealers to do except to watch how things play out in the reorganization process.

“It’s not like they’re going to be held out for six months or 12 months before they know where they stand,” he said. “I think in fairly short order, you’ll know whether there is somebody interested in acquiring all of the assets of GM or maybe a number of people acquiring different brands or product lines. That should play out fairly quickly. Then it’s probably just figuring out where you fit in with that person’s strategy and game plan.”

Moriarty said the GM situation is unusual in the extent of the federal government’s involvement, from effectively owning a strong majority of the company to supplying up to $30 billion in debtor-in-possession financing.

“These are, in some ways, very scary times,” he said. “A lot of this, people are working with blank slates, because nobody has ever had to deal with these problems before.”