States, Dealers Fight General Motors Reorganization

(MoneyWatch)  General Motors may not enjoy quite the smooth sailing through U.S. Bankruptcy Court that Chrysler enjoyed, relatively speaking.

A growing number of states don't want to let GM off the hook for product liability suits. At the same time, several state auto dealer associations and big dealer groups are objecting to GM dismissing more than 1,000 dealerships.

"GM is attempting to take advantage of its bankruptcy filing to force dealers to enter into agreements that violate Texas law," said the Texas Automobile Dealers Association, in a June 19 Bankruptcy Court memorandum that was echoed by dealers in other states.

The heart of both matters is whether GM's bankruptcy allows the so-called New GM to tear up the contracts and obligations of the Old GM. GM, of course, argues that it does. The states and the dealer groups say it doesn't.

GM anticipates reducing its U.S. dealer count from 6,246 in 2008 to 3,605 by the end of 2010, a reduction of 42 percent. Chrysler just cut its dealer network by about 25 percent, from 3,181 to 2,392.

So far, it appears that the court has allowed Chrysler to stick to its dealer terminations, which took effect immediately, when the bankruptcy court approved Chrysler's sale to Fiat earlier this month. GM has given its dealers to be terminated until October 2010 to wind down their businesses. The unintended consequence is that the GM dealers have more time than the Chrysler dealers, to crank up their legal and political arguments against termination.

Congress appears to be interested in defending the dealers. Product-liability plaintiffs could be an irresistible political draw, too, especially in the current anti-big-corporation political climate.

On the other hand, some big dealer groups that are "haves," like AutoNation, are not interested in saving dealers who are "have-nots," like most of those Chrysler and GM are dumping. Plus, GM's bankruptcy plan has the powerful backing of the Obama Administration. In Chrysler's case, that was more than enough to keep Chrysler's reorganization sailing.