[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
RAMIFICATIONS OF AUTO INDUSTRY BANKRUPTCIES (PART III)
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JULY 22, 2009
__________
Serial No. 111-55
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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51-225 WASHINGTON : 2009
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida STEVE KING, Iowa
STEVE COHEN, Tennessee TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr., LOUIE GOHMERT, Texas
Georgia JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico TED POE, Texas
MIKE QUIGLEY, Illinois JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois TOM ROONEY, Florida
BRAD SHERMAN, California GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
Perry Apelbaum, Majority Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Commercial and Administrative Law
STEVE COHEN, Tennessee, Chairman
WILLIAM D. DELAHUNT, Massachusetts TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina JIM JORDAN, Ohio
BRAD SHERMAN, California HOWARD COBLE, North Carolina
DANIEL MAFFEI, New York DARRELL E. ISSA, California
ZOE LOFGREN, California J. RANDY FORBES, Virginia
HENRY C. ``HANK'' JOHNSON, Jr., STEVE KING, Iowa
Georgia
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
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JULY 22, 2009
Page
OPENING STATEMENTS
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Chairman, Subcommittee on Commercial
and Administrative Law......................................... 1
The Honorable Trent Franks, a Representative in Congress from the
State of Arizona, and Ranking Member, Subcommittee on
Commercial and Administrative Law.............................. 2
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and
Administrative Law............................................. 4
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Member, Subcommittee on Commercial
and Administrative Law......................................... 5
WITNESSES
Ms. Louann Van Der Wiele, Vice President and Associate General
Counsel, Chrysler Group LLC; and Kevyn D. Orr, Partner, Jones
Day
Oral Testimony................................................. 7
Joint Prepared Statement....................................... 9
Mr. Michael J. Robinson, Vice President and General Counsel of
North America, General Motors Company
Oral Testimony................................................. 20
Prepared Statement............................................. 22
Mr. Harvey R. Miller, Partner, Weil, Gotshal & Manges LLP
Prepared Statement............................................. 29
Mr. Douglas G. Baird, Harry A. Bigelow Distinguished Service
Professor of Law, University of Chicago Law School
Oral Testimony................................................. 59
Prepared Statement............................................. 61
Mr. Daniel J. Ikenson, Associate Director, Center for Trade
Policy Studies, Cato Institute
Oral Testimony................................................. 64
Prepared Statement............................................. 67
Mr. Richard E. Mourdock, Indiana Treasurer of State
Oral Testimony................................................. 80
Prepared Statement............................................. 82
Mr. Jeremy Warriner, Indianapolis, IN
Oral Testimony................................................. 120
Prepared Statement............................................. 122
Mr. John J. Fitzgerald, President, Fitzgerald Auto Malls
Oral Testimony................................................. 146
Prepared Statement............................................. 148
Mr. Jim Tarbox, President, Tarbox Motors, Inc.
Oral Testimony................................................. 160
Prepared Statement............................................. 162
Mr. Greg Williams, President, Huntington Chevrolet, Inc.
Oral Testimony................................................. 164
Prepared Statement............................................. 167
Mr. Robert G. Knapp, President, Knapp Chevrolet
Oral Testimony................................................. 176
Prepared Statement............................................. 178
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Daniel Maffei, a
Representative in Congress from the State of New York, and
Member, Subcommittee on Commercial and Administrative Law...... 6
Material submitted by the Honorable Daniel Maffei, a
Representative in Congress from the State of New York, and
Member, Subcommittee on Commercial and Administrative Law...... 48
Material submitted by the Honorable Steve King, a Representative
in Congress from the State of Iowa, and Member, Subcommittee on
Commercial and Administrative Law.............................. 201
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Chris Van Hollen, a
Representative in Congress from the State of Maryland.......... 205
Response to Post-Hearing Questions from Louann Van Der Wiele,
Vice President and Associate General Counsel, Chrysler Group
LLC............................................................ 206
Response to Post-Hearing Questions from Michael J. Robinson, Vice
President and General Counsel of North America, General Motors
Company........................................................ 222
Response to Post-Hearing Questions from Harvey R. Miller,
Partner, Weil, Gotshal & Manges LLP............................ 231
Response to Post-Hearing Questions from Douglas G. Baird, Harry
A. Bigelow Distinguished Service Professor of Law, University
of Chicago Law School.......................................... 237
Response to Post-Hearing Questions from Daniel J. Ikenson,
Associate Director, Center for Trade Policy Studies, Cato
Institute...................................................... 244
Response to Post-Hearing Questions from Richard E. Mourdock,
Indiana Treasurer of State..................................... 252
Response to Post-Hearing Questions from John J. Fitzgerald,
President, Fitzgerald Auto Malls............................... 257
Response to Post-Hearing Questions from Jim Tarbox, President,
Tarbox Motors, Inc............................................. 274
Response to Post-Hearing Questions from Greg Williams, President,
Huntington Chevrolet, Inc...................................... 276
Post-Hearing Questions submitted to Robert G. Knapp, President,
Knapp Chevrolet................................................ 279
Letter from Michael J. Robinson, Vice President and General
Counsel of North America, General Motors Company............... 280
RAMIFICATIONS OF AUTO INDUSTRY BANKRUPTCIES (PART III)
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WEDNESDAY, JULY 22, 2009
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:14 a.m., in
room 2141, Rayburn House Office Building, the Honorable Steve
Cohen (Chairman of the Subcommittee) presiding.
Present: Representatives Cohen, Conyers, Sherman, Maffei,
Johnson, Scott, Franks, Jordan, Coble, Issa, and King.
Staff Present: (Majority) James Park, Counsel; Adam
Russell, Professional Staff Member; and (Minority) Daniel
Flores, Counsel.
Mr. Cohen. This hearing of the Committee on the Judiciary,
Subcommittee on Commercial and Administrative Law, will now
come to order. Without objection, the Chair will be authorized
to declare a recess of the hearing.
I will now recognize myself for a short statement.
We continue our hearings on the ramifications of auto
industry bankruptcies and their effect on dealers and other
issues. In my opening statement yesterday, I raised concerns
about the impact of the Chrysler and General Motors
bankruptcies on automobile dealers and tort claimants. We heard
responses from Mr. Bloom and the Administration's auto task
force on these and other issues. Today, we will have the
perspectives of Chrysler and GM as well as other interested
parties.
As was noted yesterday, one issue that has raised
bipartisan concerns in Congress is the mass closure of GM and
Chrysler dealerships. The car dealers contend that GM and
Chrysler selected dealerships for termination using an
arbitrary selection process. Additionally, I am concerned about
the impact of these closures on minority dealers--and I may
qualify that when I say ``minority,'' I don't necessarily mean
women. I am speaking about it from my district African
Americans, and those statistics may be different and I
appreciate your referencing those; I feel they will suffer in a
disproportionate manner.
Yesterday, I briefly spoke about Mr. John Roy, who was the
only African American Chrysler dealer within a 300-mile radius
of Memphis, his dealership being in South Haven. He was a
dedicated and outstanding Chrysler dealer. Chrysler decided to
terminate his franchise. There were business decisions that he
had to engage in, because of that, that affected his business
and terminated it. I am very interested in what criteria were
used to determine which dealers are allowed to remain in
business and those which weren't, particularly minority
dealers.
Another issue that the Subcommittee will explore is whether
the use of section 363 sales in the Chrysler and GM cases
threatens to undermine Chapter 11. The court in both cases
approved the sale of a substantial number of assets by Chrysler
and GM to newly created entities that were to become the
``new'' Chrysler and the ``new'' GM. Notwithstanding the
court's approval of these sales, some critics have charged this
sale constituted an end-run around the Bankruptcy Code's plan
confirmation process and may have constituted improper sub-rosa
reorganization plans. I hope that our witnesses can, and I am
sure they will, shed some light on these issues and the use of
this particular procedure.
I thank our witnesses for appearing today and for adding to
our understanding of the implications of these historic
bankruptcy cases which has affected business and culture in
America in a great way.
I now recognize my colleague, Mr. Franks, the distinguished
Ranking Member of the Subcommittee, for his opening remarks.
Mr. Franks. Thank you Mr. Chairman. Good morning to you.
And good morning to you folks. Due to the kind of--the
nature of the hearing this morning, I hope you will grant me
diplomatic immunity. I appreciate all of you for just having
the courage to be here.
Mr. Chairman, many decades ago in a much younger country
some remarkable things took place. The founding of General
Motors and its repeated resurrection from hard times through
the spirit of private American enterprise was one of them. It
produced an industrial giant the likes of which the world had
never seen. Walter P. Chrysler's salvation of the first Willys-
Overland Company from bankruptcy, then the Maxwell-Chalmers
Company, which he turned into Chrysler Corporation, was
another. Walter P. Chrysler took companies from the ash heap
and then he made Chrysler strong enough to take a sustained
break from production and built the Sherman tank and the B-29
bomber engines that powered us to victory in World War II.
In America today, remarkable inspiring things still take
place, but sadly, they are not taking place through the auto
task force or the bankruptcies of General Motors and Chrysler.
In the Chrysler bankruptcy, a once-proud company confronting a
deadly credit crunch and falling sales, came to Washington for
handouts and a few months' time. And I understand that. But it
got a handout and a few months' time only. But in those few
months, Chrysler shifted from being a privately owned company
to being owned by the UAW, the U.S. Government, the Canadian
Government and an Italian auto maker.
General Motors, confronting the same credit crunch and the
same falling sales, came to Washington and got even more money
and more time, but sure enough it became a company owned almost
entirely by the UAW and the U.S. Government; and in the blink
of an eye, American icons were turned into American tragedies.
And I have got to ask the question, Why? Because their
management, unlike their companies' founders, didn't rely on
private enterprise and the time-tested American remedy for
corporate failure, that being bankruptcy and reorganization. I
know it is always easy to say that from outside the
perspective, but I believe that the axiom holds true.
And because the Obama administration, the auto task force,
saw a chance to take the limited bridge loans and the precious
few months the Bush administration had granted to companies had
extended them, they chose to turn those things into tools that
to subject into penchant for political patronage--its radical
climate and energy agenda and its broad plans to inject
government deeper than we have ever seen into the bloodstream
of the American economy.
I had many questions yesterday for the man responsible for
this at the auto task force, that being Ron Bloom. And, of
course, I have questions for GM and Chrysler today and they are
simple, and I hope and believe that they will be answered
truthfully.
But what political pressures for instance did the Obama
administration and the auto task force bring to bear upon
General Motors and Chrysler? What forced General Motors and
Chrysler to sell crown jewels of iconic American industry to
the UAW and to the U.S. Government, Canada and an Italian auto
maker? What caused GM and Chrysler to shred absolutely the
rights of their secured bondholders, that being the retired
firemen, teachers, policemen, and nurses who helped GM and
Chrysler survive, unfortunately, until the companies and the
auto task force buried them alive?
What caused General Motors and Chrysler to sign up to an
inexorable death march under UAW ownership, and this being the
same UAW whose wage demands and work rules plunged them down
the path of bankruptcy in the first place?
What caused GM and Chrysler to obliterate the thousands of
loyal dealer franchises that sold their products for decades?
If these dealerships were so ineffective, if they were so
incapable, why not just let them die a natural death? If they
were not profitable, they would have gone the way of the
dinosaur by themselves.
The loyal dealers they shed like so much confetti that no
one can explain, based on criteria that no one can identify--
other than, of course, perhaps some of the bloggers and
investigators who seem to have concurred that it was dealers
who contributed to Republicans who were shed and dealers who
gave to Democrats who were saved?
Why did GM and Chrysler leave behind their storied pasts
and shrink into the minions and pawns of the Obama
administration's climate change program, energy program, union
patronage and Socialist dreams?
And finally, for anyone who loves America and American
business, I ask, why did General Motors' and Chrysler's
management not simply follow the examples of their forebearers
and prevent this from happening the way that they did? William
Durant built General Motors from--again, beginning in a
bankruptcy, Buick's bankruptcy, which he turned into a triumph
of private enterprise.
Walter P. Chrysler left GM chafing under Durant's
leadership, rescued Willys-Overland from bankruptcy and then
rescued the Maxwell-Chalmers Company and turned it into
Chrysler. With Chrysler, he took on Ford and General Motors and
turned the Detroit Big Two into the Detroit Big Three.
Why did General Motors and Chrysler management not accept
accountability, assume responsibility and prepare for
bankruptcy when it was obviously coming in 2008? This is not a
new conclusion on my part; some of us believed at the time that
the bailout was being voted on that the bankruptcy should have
been the first approach.
If they had, they could have gone through bankruptcy as
private companies seeking private solutions. They have could
have found those solutions and emerged again, in my opinion, as
private companies. America would have been the stronger, not
the weaker, and taxpayers would have saved money they may now
never see again.
I know that we will ask many questions today and we will
hear the best answers people can give us, but I do mourn for
the spirit that once animated these great companies and pray
for the country and for the future of American free enterprise.
And with that, Mr. Chairman, I yield back.
Mr. Cohen. I thank the gentleman for his statement.
Before I recognize Mr. Conyers, the distinguished Member of
the Subcommittee and the Chairman of the full Committee, Mr.
Franks referenced the Big Two in Detroit at one time. Well, we
have the ``big two'' here, and the other of the ``big two'' is
Representative Kilpatrick, and we want to welcome her to the
Subcommittee for her attendance and appreciate her interest in
this issue.
Now I recognize the senior member of the ``big two,'' the
Chairman of the Committee, Mr. Conyers.
Mr. Conyers. Thank you very much, Chairman Cohen.
This is the second part of this hearing. And I always dare
hope that we come out of the hearing with knowing a little bit
more and feeling a little bit more congenial than the first
day. But my hopes are dashed again. My dear friend, the Ranking
Member, insists on--I don't know what the collective bargaining
movement ever did to him or his friends, but this is a vital
part of our system and after all President Gettelfinger has
suffered from very disturbed members of his union by all the
concessions that he has given up, he is now informed that he
and his crew are running two automobile companies. And,
goodness, I just want to say in his defense that that is not
exactly the case.
The auto bailout activity was created under the Bush
administration, and you were against that. Okay--well then, I
guess I should just get used to it.
But the whole idea is that this wasn't our idea. We didn't
ask the two largest automobile companies of the three to come
to us and that we wanted to give them money. They are the ones
that came and asked for help. And we have collectively agreed
to do it. The current President has agreed to do it.
And the mention of Walter P. Chrysler, my father came from
Monroe, Georgia, to Detroit and the first job he got was
working for the Chrysler Corporation on East Jefferson in
Detroit. I worked there summer during law school, and the whole
idea--he had met Chrysler; I never met him. But we know a lot
about the automobile industry in our family. My brother is the
senior minority auto dealer in the United States, past
president of the National Association of Minority Auto Dealers.
And, Mr. Chairman, here is what we are up against: We are
trying to save a noble and important industry. But what we are
also trying to do is to create as much cushion as we can as we
have to do all this downsizing.
Plant after plant is being closed in Michigan and Ohio. To
my dislike, there is plenty of outsourcing going on at the same
time. The people whose plants are closed, they not only lose
their job, they lose their health care. They lose their
pensions. And frequently they end up on the foreclosure list as
Detroit and Wayne County forecloses on an average of 147 homes
every day.
So what I think that this Committee is charged with, what I
think Carolyn Cheeks Kilpatrick's concern that brings her over
to this hearing room is that we are trying to ease what we all
know we have to do. To me, the suppliers are probably in a
little bit better shape because I think their parts, the demand
for their work is going to continue on. But the dealers, how
can we modify the pain that they are going to have to sustain?
We are not saying we can't close any dealerships. We are
just talking about perhaps a nonlegislative way to reduce this.
That is what brings us here today and I hope that in that
spirit we can work our way through these considerations.
Mr. Cohen. I thank the gentleman for his statement.
Is there any other Member that would like to make a
statement?
The gentleman from North Carolina, Mr. Coble.
Mr. Coble. Mr. Chairman, I appreciate that, and I won't use
my 5 minutes. It is good to have our witnesses with us today.
Mr. Chairman, I indicated yesterday, in communities if you
are going to categorize groups between thugs and heroes and
leaders, there are certain groups that would automatically fall
in the thug category. On the hero and leader side, with rare
exceptions, the local automobile dealer, they are the heroes
and leaders in their respective communities. They are the ones
who support Little League baseball, Boy Scouts, Girl Scouts
efforts. They are the first ones oftentimes to be at the head
of the line in supporting causes of charity and to extend a
hand to the impoverished. And now, unfortunately, many of these
dealers and their employees may end up in the impoverished
category. I hope not.
I believe, Mr. Chairman, we are going to overcome, we are
going to prevail finally. But we won't prevail today or
tomorrow, Mr. Chairman, probably not this year; and that
assurance that we will prevail may not be too comforting to the
dealer who may have lost his dealership and even to the
management of GM and Chrysler with us today. It is just not a
good time for any of us. But I do believe that ultimately we
will come out of it on top.
I look forward to the hearing today, Mr. Chairman, and I
appreciate your calling it.
And with that, I yield back my time.
Mr. Cohen. Mr. Coble, I appreciate your statement.
The other Members' opening statements will be included in
the record, without objection.
[The prepared statement of Mr. Maffei follows:]
Prepared Statement of the Honorable Daniel Maffei, a Representative in
Congress from the State of New York, and Member, Subcommittee on
Commercial and Administrative Law
Thank you, Mr. Chairman for holding continued hearings on the
ramifications of the auto industry bankruptcies. Automobile dealers are
one of the largest private sector employers in the United States,
providing tens of thousands of local jobs and contributing millions of
dollars in tax revenues to states. They are anchors in communities
throughout the country and many times ownership is passed down from
generation to generation. In addition, many auto dealerships are
minority owned and have traditionally provided strong local community
support.
As I pointed out in yesterday's hearing, there has been a lack of
transparency in the means by which Chrysler and GM have chosen to
reject dealers' franchise agreements, and I still believe there is a
lot of confusion out there as to how the closing of hundreds of
dealerships will be financially beneficial to these two auto companies.
Over time, automakers created the franchise dealer network specifically
to lower their costs, as they outsource virtually all costs associated
with selling and servicing cars.
There are some arguments that in the long run you need to have a
smaller dealer network to help make sure the prices are stabilized and
there are some expenses that auto companies have to service these
dealerships but, in the short run, we can't find anything. In my
district, we have already lost 11 dealers in the last couple of years
because of market forces, so it seems like the market is working in
some cases.
This is precisely what led me, along with my good friend from
Maryland Frank Kratovil, to introduce H.R. 2743, the ``Automobile
Dealer Economic Rights Restoration Act of 2009,'' which would require
Chrysler and GM to continue to honor their commitments to auto dealers.
Specifically, the legislation requires that auto manufacturers in which
the Federal Government has an ownership interest continue to honor
their commitment and not deprive economic rights to the dealers,
essentially protecting small business owners, workers, communities, and
jobs.
This bill has widespread bipartisan support, as there are currently
over 250 House cosponsors. We have Members signing on who are on the
left of the left, the right of the right, and everything in between.
From all over the country from rural areas to urban areas, this affects
all local communities. These are family businesses that are really part
of the fabric of our communities. I look forward to the testimony of
our witnesses.
__________
Mr. Cohen. I would like to thank all our witnesses for
their willingness to participate in today's hearing. Without
objection, your written statements will be placed into the
record, and we ask that you limit your oral remarks to 5
minutes. There is a pictured color system that shows you 5
minutes, 4 minutes, 1 minute. If you have green, you are in the
5-to-1-minute territory; yellow, you are in your last minute;
and red, you are beyond your time. And there you go.
Ms. Van Der Wiele and Mr. Orr will split the time between
the two of you, as I understand it, and you will note the
lighting system. After each witness has presented his or her
testimony, Subcommittee Members will be permitted to ask
questions subject to the 5-minute limit.
To my understanding Mr. Miller will not have oral remarks,
but will be available for questioning on behalf of General
Motors Corporation.
Mr. Cohen. I am pleased to introduce the witnesses on our
first panel for today's hearing.
Our first witness is Ms. Louann Van Der Wiele. Ms. Van Der
Wiele is Vice President and Associate General Counsel in the
Office of General Counsel of Chrysler Group in Auburn Hills,
Michigan. Her responsibilities include overseeing employment
litigation, environmental litigation, and defense of product
liability, class action, and warranty litigation involving
Chrysler, Dodge, and Jeep. She also advises the company on
other vehicle-related consumer protection matters, regulatory
affairs, and risk management issues. Ms. Van Der Wiele joined
Chrysler in 1986.
Thank you, Ms. Van Der Wiele, and I would like to ask you
to proceed with your testimony.
JOINT TESTIMONY OF LOUANN VAN DER WIELE, VICE PRESIDENT AND
ASSOCIATE GENERAL COUNSEL, CHRYSLER GROUP LLC; AND KEVYN D.
ORR, PARTNER, JONES DAY
Ms. Van Der Wiele. Thank you, Mr. Chairman.
Chairman Cohen, Ranking Member Franks, and Members of the
Subcommittee, thank you for providing this opportunity to
discuss the ramifications of the former Chrysler LLC's
bankruptcy.
I sit here today representing the new Chrysler Group LLC as
Vice President and Associate General Counsel. With me is Kevyn
Orr, representing our outside legal counsel. Kevin will outline
the bankruptcy process, and then I will discuss the
ramifications of the bankruptcy. Throughout my testimony I will
refer to the former Chrysler as Old Carco, which is a term the
bankruptcy court uses, and I will refer to the new company as
Chrysler Group.
Mr. Orr. Good morning, Mr. Chairman, Mr. Ranking Member,
and Members of the Committee.
Mr. Cohen. Mr. Orr, this is kind of unique for me to split
the testimony, but I want to recognize Kevyn Orr and introduce
you as a partner in the Jones Day firm.
Prior to that he was with the Department of Justice. In
June, 1995, he was Deputy Director of the Executive Office for
the United States Trustees; in February of 2000, he became
director of that program. He joined the litigation department
of FDIC in 1991 and transferred to the Resolution Trust
Corporation. By 1994, Mr. Orr rose to the position of Assistant
General Counsel for Complex Litigation of Bankruptcy at the
RTC.
We appreciate your testimony and you may proceed.
Mr. Orr. Thank you for the recognition, Mr. Chairman.
Mr. Cohen. You are welcome, Mr. Orr.
Mr. Orr. As Louann stated, my name is Kevyn Orr, and I am a
Partner at the law firm of Jones Day. I and my partners have
provided Old Carco with restructuring advice and, eventually,
its bankruptcy planning since last fall.
The circumstances that resulted in the bankruptcy have been
well chronicled. Last fall, Old Carco sought Federal assistance
to continue its ongoing restructuring. Old Carco received
interim funding in January and in February submitted a
viability plan to the U.S. Treasury.
On March 30, the Automotive Task Force informed Old Carco
that although it could not survive as a stand-alone entity, the
company could become viable with an appropriate strategic
partner, such as Fiat, if it obtained additional concessions
from key stakeholders.
When certain creditors would not agree to the necessary
concessions, Old Carco filed for bankruptcy. In connection with
this filing, Old Carco, Fiat, and Chrysler Group entered into
an arms-length purchase agreement under which Old Carco would
transfer the majority of its operating assets to the new
Chrysler Group in exchange for cash and Chrysler Group's
assumption of certain liabilities. The Bankruptcy Court
approved the Fiat transaction, and after several court
challenges were resolved, the transaction was consummated on
June 10, 2009.
As part of the process of putting together this package,
Old Carco decided to reject 25 percent of its dealers. Old
Carco selected dealers for rejection using a thoughtful,
rigorous and objective process. The Bankruptcy Court approved
the dealership rejections as a sound exercise of business
judgment.
Chrysler Group has worked hard to assure a soft landing for
Old Carco dealers whose contracts have not been assumed by
arranging for the redistribution of 100 percent of inventory,
parts, and special tools. Chrysler Group has helped 436
displaced dealership workers find jobs at 239 dealers.
Similarly, the new company did not assume product liability
claims out of the sale of vehicles before bankruptcy. However,
Chrysler Group has agreed to indemnify its dealers against
product liability lawsuits. As a result, in the vast majority
of product liability cases involving Old Carco vehicles sold
before the bankruptcy, Chrysler Group will defend its dealers
pursuant to its dealership agreements.
Louann.
Ms. Van Der Wiele. While difficult and painful, the
bankruptcy and subsequent sale of assets to Chrysler Group were
vastly preferable to the only other alternative, the complete
liquidation of Old Carco.
Customers benefit because Chrysler Group is now able to
provide them with a quality sales and service experience.
Employees benefit because Chrysler Group will continue to
employ more than 30,000 people in the United States and, to a
large extent, maintain retiree benefits.
Suppliers benefit because Chrysler Group intends to move
forward with approximately 1,100 production suppliers that
employ thousands of people throughout the country. Dealers
benefit because 75 percent have become Chrysler Group dealers
and the remainder have the benefit of the soft landing that
Chrysler Group has agreed to provide. Taxpayers benefit because
Chrysler Group is well positioned to become a viable company
that will fully repay its debt to the taxpayers.
None of these benefits would have accrued if Old Carco had
liquidated. Customers would have lost access to warranty
coverage, service, and parts. Tens of thousands of employees
would have lost their jobs and retirees, their benefits. Almost
3,200 dealerships would have closed. Taxpayers would have had
to pick up significant costs for unemployment support, health
care, and pensions that would default to the Pension Benefit
Guaranty Corporation.
We appreciate the opportunity to testify before the
Subcommittee today and look forward to answering your
questions.
Mr. Cohen. Thank each of you for your testimony.
[The joint statement of Ms. Van Der Wiele and Mr. Orr
follows:]
Joint Prepared Statement of Louann Van Der Wiele and Kevyn D. Orr
__________
Mr. Cohen. Our final witness to give oral testimony is Mr.
Michael Robinson. Mr. Robinson is Vice President and General
Counsel of North America for General Motors and formerly held
the same position for the old General Motors, the one your
grandfather knew.
Mr. Robinson joined General Motors in 1984 and has held a
number of positions on the legal staff for GM. Before assuming
the North America General Counsel role in 2008, he served as
Practice Area Manager and Managing Attorney, and prior to that
he was Corporate Compliance Officer.
In the 1990's, he provided counsel to General Motors
leadership on matters involving lobbying and government ethics
issues.
I think that may be an oxymoron, but maybe not.
Mr. Robinson, you may proceed with your testimony.
TESTIMONY OF MICHAEL J. ROBINSON, VICE PRESIDENT AND GENERAL
COUNSEL OF NORTH AMERICA, GENERAL MOTORS COMPANY, ACCOMPANIED
BY HARVEY R. MILLER, PARTNER, WEIL, GOTSHAL & MANGES LLP
Mr. Robinson. Good morning, and thank you, Chairman Cohen
and Ranking Member Franks. I am Michael Robinson, General
Counsel for North America's GM operations. I have with me and I
appreciate your recognizing, Mr. Chairman, Harvey Miller from
the Weil, Gotshal law firm. Mr. Miller is not making
introductory remarks this morning, but he is here, we hope, to
assist the Subcommittee in answering any questions that they
may have that relate to bankruptcy, especially the intricacies
of bankruptcy.
Mr. Miller represented General Motors in the filing on June
1. He represented us through the asset sale that took place and
is a renowned expert in the bankruptcy field. So we look
forward to your questions this morning.
Upon the day we emerged from bankruptcy as a new car
company, our President and CEO, Fritz Henderson, said business
at usual at GM is over. The last 100 days have shown everyone,
including us, that a company not known for quick action can, in
fact, move rather fast.
There are many who contributed to our moving through the
bankruptcy process as quickly as we did. First, the American
public. I know this has been controversial within a political
context, but without our Nation's support, we would not have
this precious second chance. We understand our responsibility
to the taxpayer, and we will repay that investment.
Secondly, there are many who have been called upon to make
sacrifices to create a new GM, one that competes, wins, and is
profitable for the long run. Behind each action we are taking
to reinvent GM, there is a human story; we recognize that.
As those familiar with bankruptcy law know all too well,
this is a painful process that spares no particular group. This
collective sacrifice was necessary to put GM on a brighter path
to long-term viability and success: to deliver and reduce debt,
to operate under competitive labor agreements, to have
manufacturing capacity and dealer networks that match today's
market realities, and most importantly to continue to design
and build winning cars and trucks with leading technologies.
Let me briefly touch upon a couple of groups that I know
are of particular interest to this Committee and how our
restructuring affects them. With respect to GM dealers, we
cannot go through this sweeping transformation without a
comparable effort to reshape our retail dealer network, one
which was, frankly, created during the 1950's and 1960's before
we had the infrastructure of interstate highways.
We worked very hard to restructure GM's dealer network as
carefully, responsibly and objectively as we could. It is
important to note that of our approximately 6,000 dealerships
in GM's network, we were able to retain 4,100 of those
dealerships. We also expect another 600 or so dealerships will
stay in business as Saturn, Hummer or Saab dealerships if the
sale of those brands to new ownership closes, as we hope it
will.
This left us with the hard choice to send wind-down
agreements to about 1,300 dealerships. From the start, we
wanted to help these dealerships wind down their dealerships in
an orderly fashion with a structured financial assistance
package that was very beneficial to them compared to their
alternative, that is, where most contracts in bankruptcy are
typically rejected with no assistance whatsoever.
GM is providing, in aggregate, nearly $600 million in
available assistance to these dealers, with the first
installments, by the way, having already been paid to these
dealers just this past Monday.
With normal dealership attrition factored in, we are
building a profitable business plan for GM, having between
3,600 and 3,800 U.S. GM dealers by the end of year 2010, which,
with a retail sales market of just over 10 million cars and
trucks and a conservative market share assumption, means that
the number of units sold per dealership should nearly double.
For dealers, this translates into greater return on investment,
ability to have the best locations and facilities and the best
sales personnel to take care of customers, all of this is to
attract new customers.
Second, a concentrated and highly profitable dealer network
will reduce costs for GM at a time when every dollar really
counts. These cost savings come in two categories. About $2
billion in cost is in direct dealer support programs, or
subsidies that have been incorporated and accumulated over time
to help support the weaker parts of our dealer network. These
are costs, by the way, that Toyota does not have. Another $415
million or so in gross fixed cost savings is the potential
here. These cost burdens are just not sustainable as we go
forward.
However, even with these changes, GM will have the largest
dealer network in the country, more than any of our
competitors, in our case, 3,800 versus Toyota's 1,200. This
would include an extensive rural and small town network of
1,500 dealers nationally in markets where we hold, on average,
a 10 percent market share advantage.
The restructured dealer network, the right number of
dealers in the right locations with the right brands is key to
our success. These dealers are helping to create a viable GM
that will preserve over 200,000 jobs at GM and hundreds of
thousands of jobs beyond that with our direct manufacturing and
supplier networks.
In closing, we developed a restructuring plan that meets
the high standards of the President's auto task force and was
approved by the U.S. Bankruptcy Court that permits us to roll
up our sleeves and get back to work. Now we can place a
singular focus on customers, cars, and the changes we need to
make to our culture to succeed. We want to repay the taxpayer
as quickly as we can, and this plan gives us the best chance to
do that.
We remain grateful for the government's support during this
critical time and we promise to continue to be open and
transparent in everything we do every step of the way.
Thank you, Mr. Chairman. I look forward to the questions of
the Committee.
[The prepared statement of Mr. Robinson follows:]
Prepared Statement of Michael J. Robinson
__________
Mr. Cohen. Thank you for your testimony, Mr. Robinson.
And you did recognize Mr. Miller, whom we have had before
our Committee before. But Mr. Miller is always kind of
different in his testimony. The last time, because of
airplanes, he wasn't able to be here; so we had his picture and
his voice. Now we have had him in person, but not testifying--
but his great gray matter with us, so we appreciate that.
Mr. Miller. Thank you, Mr. Chairman.
[The prepared statement of Mr. Miller follows:]
Prepared Statement of Harvey R. Miller
__________
Mr. Cohen. Thank you. A great reputation in the bankruptcy
litigation area.
I will now recognize myself for questioning, and we will be
limited to the 5-minute rule as well. I would first like to ask
Mr. Robinson.
There were some questions in the opening statement by the
Ranking Member about bankruptcy and how this came about and all
the capitalism, socialism, et cetera.
Why did General Motors come to the United States
Government, President Bush at the time, and say, Please help
us? What were the causes in the economy that caused General
Motors to come to this position?
Mr. Robinson. First of all, Mr. Chairman, I don't mean to
argue with Mr. Franks, but we are capitalists. I can assure you
of that.
Secondly, we--as the facts have been revealed through
various processes, hearings in front of Congress and, of
course, in the bankruptcy court itself, there were no other
options. The capital markets had dried up. We had no other
opportunities----
Mr. Cohen. The capital markets dried up. You couldn't get
borrowed money?
Mr. Robinson. There was no way to borrow money.
Mr. Cohen. Something happened during the previous
Administration where they didn't have regulations or something,
and the country was about to go kerflooey?
Mr. Robinson. I don't think of it in terms of
Administrations; I think of it in terms of the financial
markets. But, yes, during the 2008 economic crisis, the
financial market crisis, the housing crisis, there were
sufficient reasons for the market to have done what it did; but
the practical fact of the matter is, there was no capital from
which we could sustain the business.
Mr. Cohen. And these conditions also affected dealerships,
right? Certain dealerships would have had problems because they
couldn't access to capital and financing?
Mr. Robinson. It affected everybody.
Mr. Cohen. Ms. Van Der Wiele and Mr. Orr, with Chrysler, we
have a situation in the mid-South area, greater Memphis area,
with a minority dealer. They had financial problems because
they couldn't get financing, et cetera.
I spoke to you yesterday and asked you about minorities
that are affected. While I am concerned, indeed, about all
minorities, in the particular situation in my jurisdiction, as
an African American dealer, is there a different effect among
African American dealers than there was with either Latino men
or women in terms of Chrysler?
Mr. Orr. Mr. Chairman, there was no effect in terms of any
of the traditional minority categories with regard to our
rejection decision for minority dealers. In fact, it is exactly
the same whether you are a minority dealer or a mainstream
dealer.
Mr. Cohen. So you are saying the percentages are exactly
the same?
Mr. Orr. The percentages are exactly the same. Seventy-five
percent of our dealers were saved; 25 percent of our dealers,
unfortunately, we had to reject. The exact percentages
regarding those numbers are the same for minorities.
Mr. Cohen. The same for African Americans?
Mr. Orr. The same for African Americans.
Mr. Cohen. Okay.
Mr. Robinson, is it the same thing for you?
Mr. Robinson. Pretty much, Mr. Chairman. Our ratios are a
little bit different. Actually, in an incremental way, the
minority population of our dealerships actually fared better
than the general population of our dealerships. I think the
percentage was--80 percent, I think, of our minority dealer
population will remain after the 1,300 or so dealers get the
wind-downs completed, and I think 76 percent of our overall
dealer population survives that process.
Mr. Cohen. Mr. Miller, welcome. The issue of tort liability
is one that is before this Committee and one that we will be
hearing about. GM, separate from Chrysler, is accepting certain
liability, but only for post-petition tort claims.
Why not pre-petition tort claims?
Mr. Miller. The question, Mr. Chairman, related to the
assumed liabilities that the purchaser would undertake as part
of the asset sale. There was a substantial negotiation with the
U.S. Treasury representatives and the auto task force in
connection with the product liability claims. And as you must
know, during the course of the hearings before the Bankruptcy
Court, there was a compromise agreed to in which the assumption
of product liability claims was greatly increased.
It was a question of survivability of the successor
corporation or business.
Mr. Cohen. You think that that would have been in jeopardy
if they would have accepted the pre-petitioned tort claims? Is
it that great of a potential----
Mr. Miller. Mr. Chairman, it is a question of how many
liabilities does the purchaser assume without going into that
dangerous area of being not feasible as a business operation.
As pointed out by my colleague, my learned friend Professor
Baird, in his statement, there is no assurance of feasibility
or success, even now after this sale; and you are on a very
difficult path. As Mr. Robinson said, bankruptcy is painful and
you have to draw the line at some place.
Mr. Cohen. Professor Baird also suggested that tort claims,
if I quote him, are among those that should be protected with a
super-priority lien.
Mr. Miller. I understand that, Mr. Chairman. And the
problem with creating super-priority liens is when do you stop
doing that? And if you create enough super-priority liens,
there can never be a bankruptcy reorganization, because you
will never be able to sustain the cost of that restructuring
process.
Mr. Cohen. Let me give myself a few extra seconds here to
ask you this.
In your long experience, in most cases where there are
large bankruptcies like this--and there is a question about
civil--doesn't most of the liability still attach or is the
liability extinguished for tort claims?
Mr. Miller. In most cases, the liability for tort claimants
is extinguished; it remains with the old company in the context
of a section 363 sale.
If it is a traditional Chapter 11 in which there is a plan
of reorganization and it is a negotiation over a long process,
it may be different because of the bargaining. You have to take
into account the assets you are dealing with.
In the context of GM and, I assume, Chrysler you are
dealing with a wasting asset. If you compare, for example--if I
can refer to the Delphi case, which is about to enter its
fourth year of bankruptcy if it doesn't come out, you had a
company that went into Chapter 11. At the time it went in,
there was a substantial basis to think that that company was
solvent. During the course of the bankruptcy, it has turned
into an insolvent company--in fact, administratively insolvent.
So that a traditional Chapter 11 in the context of the
economic circumstances we are in today is not feasible for a
large company.
Mr. Cohen. Thank you, Mr. Miller.
I now recognize the Ranking Member of the Subcommittee for
5 minutes, Mr. Franks.
Mr. Franks. Thank you, Mr. Chairman.
Ms. Van Der Wiele, I might go ahead and address this both
to you and Mr. Orr. As I understand it, there was a significant
effort on the part of the Chrysler earlier on, when they began
to see some of the dealers have--tell the dealers that they
were going to have to be terminated, that you tried to use some
of the Treasury money to assist them and that there was some
resistance on the part of Treasury to that end; is that
correct?
Mr. Orr. Mr. Franks, I am not exactly sure to what you are
referring. You are talking about the early stages of the
bankruptcy?
Mr. Franks. Yes. From the Treasury itself, that there was a
resistance in the bankruptcy process where you tried to--in the
process that you tried to help some of your dealers, much the
same way as Mr. Robinson has said, where General Motors made
some efforts to assist them, that you also tried to do the same
thing and that there was resistance on the part of the
Treasury; is that correct?
Mr. Orr. I think I know to what you are referring, Mr.
Franks.
Actually, we received support of Treasury in trying to help
our dealers. In the case we recognized that some of our dealers
were going to have problems obviously with bankruptcy filing
and our financier, where two-thirds of our dealers--Chrysler
Financial announced on the date that we filed, April 30, that
they would no longer be providing wholesale financing to our
dealers. We had begun on April 23 to go back and seek
alternative wholesale financing--ironically, through GMAC--to
benefit our dealers for wholesale flooring; and we also put in
place in the case a structure, a reallocation program, that
assisted our dealers with reallocating the inventory, the
vehicles that they had on their lots, to other dealers that
were going forward.
The reality is that Treasury was somewhat supportive in our
efforts to do that and recognizing that it was for the benefit
of both the dealers that were rejected and the dealers that
would be--75 percent going forward that would be assumed.
Mr. Franks. If the airline companies came to you now and
asked you, what were the worst things and the most political
things to which the President and the auto task force subjected
Chrysler since it became involved--I know it is a very loaded
question, but I hope you will be as candid as you can.
What would you try to redirect the airlines' focus on? What
would you warn them about? What would you say, be careful here,
be careful there?
Mr. Orr. Well, honestly, Mr. Chairman, my role as counsel
to the company was focus on the legal doctrine, the law and the
case law.
The political aspects, I will leave to--another day to
someone else.
Mr. Franks. Let me shift gears.
Mr. Robinson, if the airlines came to you and asked what
things the Administration and the auto task force had done that
most harmed your ability to raise private capital or attract
private ownership, going forward, what would you tell them?
Mr. Robinson. Well, I wouldn't--I wouldn't get into a
political discussion, quite frankly. I think the reality for us
is that there was a benefit to us, quite frankly, in some of
the objectivity with which the task force took the task of
evaluating our business plan and forcing us to take harder
looks at some things that we needed to do to be successful in
the long term.
So, to the contrary, I didn't view this--my exposure to it,
anyway--as not a political process so much as it was an
objectivity exercise with some soul searching from the outside.
Mr. Franks. So your perspective is that the government's--
of the things that they pressured you or didn't pressure you to
do, is all objective; and it all worked out perfectly for you?
Mr. Robinson. I think we made the business decisions we had
to make without any political interference.
Mr. Franks. Does that include firing of Mr. Wagoner and the
purging of your board? Do you think that was a good thing?
Mr. Robinson. I didn't have anything to do with it. I will
tell you I heard the testimony yesterday and I accept it for
what it is.
Mr. Wagoner is somebody I know personally. I know what kind
of person he is.
But I also heard the criticism that we didn't move fast
enough, far enough and aggressively enough; and I accept the
criticism of the Treasury for what it was.
Mr. Franks. As a capitalist, does it concern you that
government can come in and fire your CEO and purge your board?
Does that not concern you some?
Mr. Robinson. Well, we--we don't intend to be in the
business of being run by the government. I think the government
has made it clear they want us to be successful so they can get
out of the car business as an investor. So we want to oblige
them as soon as we can.
Mr. Franks. I don't want to be too insistent, but I mean, I
believe you when you say you want to be a capitalist. I really
do.
But obviously this has put you in a compromised position.
And I am sorry that it has, because I do think that the gas
prices and some of the pressure in capital markets made
impossible circumstances for a lot of you.
But the fact remains that our government has come in and
seized a lot of power there. If we can't come to that
conclusion together, we are on a different planet. And I am
sure that it has to concern you some that capitalism is
challenged here in this way for government, as in other
socialist environments, has tried to exert force over the
economic mechanisms.
Does that not concern you as a capitalist?
Mr. Robinson. Going to the government for a loan was not
our first choice. We were in the position we were in because
there were no other capital markets available to us. And having
been through this process, I think we have made most of the
opportunity that has been given to us.
It is what it is, sir.
Mr. Franks. Thank you, Mr. Robinson.
I yield back, Mr. Chairman.
Mr. Cohen. Thank you, Mr. Franks.
I would now like to recognize the gentleman from Michigan,
the distinguished Chairman of this Committee, Mr. Conyers.
Mr. Conyers. Thanks, Chairman Cohen.
The interesting thing about these hearings is that you get
testimony all over the spectrum. We get it. I just hope that
you leaders here in the first panel can just stay quietly
around to listen to some of the other testimony.
The dealers are going to be hollering their heads off about
this. I want you to examine with us some of the unfairness and
some things that may be able to be rectified. So I don't want
you to, you know, leave the room and go to your commercial
flights, but that you stick around with us and let's wade
through this hearing today. I think it is pretty important.
I notice that my colleague, Carolyn Cheeks Kilpatrick, is
here. I am sorry that she can't ask any questions. She knows
how strict the rules are in Judiciary.
Ms. Kilpatrick. I accept them.
Mr. Conyers. And, of course, Sheila Jackson Lee is always
around, and under these circumstances, she can't even say
anything.
So here is what I am trying to do. Here is what I am trying
to get out of these two excellent hearings that have been held.
Is there any way we can cushion some of the problems of the
accident victims, of the dealers themselves, of the suppliers?
Are there some strategies that we can consider that are not
legislative? We are not trying to pass some more laws in this.
How open are you to--all four of you on this panel, to that
kind of a concept?
Mr. Cohen. Can we get a witness?
Ms. Van Der Wiele. Mr. Chairman, I think that certainly--as
it respects the dealers, I think that there is a good
possibility to have discussions in a nonlegislative context. I
believe that Mr. Press, who has testified here before, has
initiated some of those discussions; and we support continuing
those discussions.
Mr. Robinson. Mr. Chairman, General Motors--as accelerated
as all this timing has been for all of us, General Motors has
engaged the dealers as Chrysler has, through the NADA in
particular. We think there are a lot of possibilities available
to us. We have been very interested in having those discussions
move forward.
We have got a number of ideas to do things in addition to
the things we have already been done, which is, quite frankly,
a lot beyond what normal bankruptcy would allow us to do; and
we are certainly interested in sitting at the table with the
representatives of NADA and talking, in addition, with any
individual dealers that have an individual point of view about
their circumstances.
We have had an appeals process to address some of the
concerns that Chairman Conyers has mentioned. We have attempted
to soften the blow with wind-down dealers, with a substantial
financial package, some of which they have already received;
and others have asked if they can accelerate that process.
We have actually had a few dealers in the last couple of
weeks ask if they can get the wind-down package although they
were offered continuation agreements. I think we have had nine
or ten of those that have come to my attention.
So we are trying to work with the dealers. We will do that
and continue to do that, but we have to work through a
mechanism that allows us to deal with the entire dealer
population; and we prefer that to be NADA.
Thank you, sir.
Mr. Conyers. Mr. Orr, Chrysler has taken a little harder
line in the kind of discussion that I am outlining. You folks
have terminated your dealers, period, and up here on the panel
we are beginning to distinguish--and this is not unusual, but
even after Trent Franks went into this great soliloquy about
Chrysler, you guys are toeing a tougher line.
Can you look at this with us? And maybe as you listen to
some of the other discussion from the scholars and the dealers,
maybe we can loosen up a little bit.
Mr. Orr. Mr. Chairman, on behalf of Old Carco, our approach
was necessitated by a little bit of a difference in terms of
both the structure of our dealer relationship--Chrysler had
legacy perpetuity agreements; that is, they did not terminate
on a certain date, they went on and on and on. The only time to
reject those agreements was in the course of the bankruptcy
pursuant to section 365 of the Bankruptcy Code.
In addition, our purchase was with a ancillary third-party
purchaser, Fiat Group, now New Chrysler. We don't even own the
name anymore; we are called Old Carco. So under the terms of
our purchase agreement, our purchaser had the right to select
which assets, including those assets in the dealer network it
chose to purchase.
So the structure of our deal was a little bit different,
and perhaps that results somewhat in the perception that we are
taking a little bit harder line. Our requirements in both the
naming of our purchaser and the nature of our transaction were
different.
However, to the extent Ms. Van Der Wiele has spoken on
behalf of the new company, I think there is some commonality in
terms of an expression going forward with the new company. It
would not benefit dealers to talk to me. We are Old Carco. We
do not manufacture cars. They are rejected dealers on my
behalf.
Mr. Conyers. Well, so you were legally forced to take what
appears to be a little bit tougher stance than this wind-down.
I hope you are right. I hope the discussion bears up the
position that you are sharing with us today.
Mr. Orr. Well, respectfully, Mr. Chairman, I believe the
case law, both Lionel and Bildisco, regarding rejection and the
obligation of the debtor to exercise its fiduciary duty
regarding burdensome contracts, was substantiated both by the
Bankruptcy Court, the Second Circuit Court of Appeals, and
implied by the U.S. Supreme Court's implicit rejection issue of
stay into our transaction.
In fact, of the 789 dealers that Old Carco rejected, only
one dealer has taken an appeal of the rejection order opinion,
and that appeal is pending.
Mr. Conyers. I know that, but citing all of these
authorities that you had to be tough doesn't change my position
at all.
Mr. Orr. I understand. I understand.
Ms. Van Der Wiele. Mr. Chairman, if I could point out,
Chrysler Group, the new company, has made an effort to provide
a soft landing to the rejected dealers. It has taken its
promise to redistribute all of the vehicle inventory, parts,
and special tools; and as I said before, it is willing to
discuss some type of nonlegislative solution, and it has
already offered to dealers the opportunity to provide total
transparency in the dealer selection process for that
individual dealer. And in addition to that, it is willing to
consider a dealer for further business opportunities with
Chrysler Group.
Mr. Conyers. Mr. Chairman, just concluding, if you pulled
us all in a back room after these hearings--and we have all
heard each other in the way that this is going on--and you
brought in coffee and locked the door, I think we could work
something out that is considerably more favorable to the people
that are going to have to feel this pain.
And I just want all of you to know that that is where we
are all coming from. We would include Kilpatrick and Jackson
Lee and everybody--and Coble and, of course, Trent Franks, by
all means--and we could probably get somewhere, maybe
sandwiches later on after the coffee runs out.
Mr. Issa. I will do the sandwiches.
Mr. Cohen. Thank you, Mr. Chairman. I appreciate the
suggestion.
I would like--before I recognize Mr. Jordan who, I think,
will be next on the questioning, I would like it if the four of
you would be kind enough to stay, if you can, after your panel
to hear the next panel, and possibly come--because Starbucks is
being ordered. But if you could stay, it might be very helpful
to hear the testimony, et cetera.
Mr. Jordan, you are recognized for 5 minutes.
Mr. Jordan. Thank you, Mr. Chairman. I want to thank the
witnesses for being here today and thank you for the role your
respective companies have played in the United States of
America.
My dad, a 30-year worker at General Motors in Dayton, Ohio,
put three kids through college working for that company, so we
do appreciate that.
But I want to go, Mr. Robinson, back to where my colleague,
Mr. Franks, was with his questioning, this interaction between
the task force and General Motors.
Mr. Bloom went to great lengths yesterday to describe that,
to say that General Motors makes decisions about how the
company operates, not the auto task force, even though--as Mr.
Franks pointed out, even though the former CEO was told to take
a hike by the government, even though the government is the
majority owner of the company, even though the government
controls the board, even though Fritz Henderson said 2 weeks
ago in an interview that he is on a, quote, ``short leash'' in
running the company and has to deal with the task force on a
regular basis.
You seemed to indicate that you agreed with Mr. Bloom's
depiction of how that interaction takes place. Give me your
thoughts on how that works out, because I think a lot of
Americans, a lot of taxpayers, who now own the company, would
look at the facts and say, it looks like these 10 guys on the
auto task force, who have no experience in the auto dealer
business, no experience in the auto manufacturing business, are
actually running the company.
Mr. Robinson. Well, the best way I could answer that,
Congressman, is that in my experience--and I am not in every
conversation, by any means; I certainly am not. But my
understanding from the people that are in a lot of the
conversations that have taken place over time is that the
description he gave you is a very accurate description of the
way I understand it has worked.
Mr. Jordan. Isn't it true that the auto task force had to
sign off on the restructuring plan, so in the end they gave the
thumbs up or thumbs down to the plan that included which
dealerships would be closed, which dealerships would remain
open, and just as importantly which manufacturing facilities
would be closed and which ones would remain open?
Mr. Robinson. Well, you have asked a couple of questions
that contradict each other in terms of what the answer would be
that I give you.
They absolutely reviewed the restructuring plan in the
aggregate. There is no question about that. To my knowledge,
they did not review individual dealerships. They did not review
individual plants.
Mr. Jordan. But that is my point. Same difference. If they
are going to sign off on the whole plan, which includes which
facilities are going to close on the manufacturing side and
which dealerships are going to close, which are going to stay
open, they, in effect, made a decision on the final
restructuring plan. Is that right?
Mr. Robinson. They looked at aggregate numbers as far as I
can tell. I don't think they say individual----
Mr. Jordan. Let me ask you this question. Were there
previous plans submitted to the task force?
Mr. Robinson. I believe so, yes. We had a February 17
mandate to provide a plan to the task force----
Mr. Jordan. How many plans were before the task force?
Mr. Robinson. At least two, one on February 17 and then one
subsequent to the President's comments on March 30, that was
provided to the task force consistent with the President's
direction.
Mr. Jordan. So the first plan that comes before the auto
task force, they said, We don't like this?
Mr. Robinson. Correct.
Mr. Jordan. And there could have been dealerships in that
plan, manufacturing facilities in that plan that were slated to
stay open that in the subsequent plan, the final plan, the one
adopted that are now closed?
Mr. Robinson. That is mathematically true.
Mr. Jordan. Is there--can the public have access to that
first restructuring plan? Is that public knowledge?
Mr. Robinson. No it is not. It is confidential business
information.
Mr. Jordan. So the taxpayers who are now paying for the
company, we may have had, in fact--and this is back to the
point. If GM is running the affairs, the first plan that was
submitted to the task force could, in fact, have included for
example the GM manufacturing facility in the Fourth District of
Ohio in Mansfield, it could have said that facility should stay
open and the auto task force says, We are saying no to that
plan?
Mr. Robinson. I don't know whether it did or it didn't. But
it could have. I don't know.
Mr. Jordan. Do you think that is some information that the
taxpayers of the country would like to see and should have a
right to see?
Mr. Robinson. I can't answer that, but I can tell you----
Mr. Jordan. I know there are a lot of people in Mansfield,
Ohio, a lot of people I have the privilege of representing, who
would like to see that.
Mr. Robinson. I can certainly understand that, sir. But I
can tell you this: that our own management, confronted with the
rejection of that initial plan, came to the conclusion the
government was right in forcing us to take another hard look--
--
Mr. Jordan. Of course they are right. They are paying the
bill. You had to come to that conclusion. It is the same
conclusion that Kent Lewis came to when Ben Bernanke and Hank
Paulson told him, You either go through with the Merrill Lynch
acquisition or you are gone and your board is gone.
You have to come to that conclusion. That is why it is
important for the public to be able see what took place, what
was in that first restructuring plan--a great example of the
fact that the auto task force is running the company; it is not
GM who is running the company.
Mr. Robinson. I would have to disagree with you, sir, on
that. I understand your point----
Mr. Jordan. But the facts, I think, support my conclusion.
Mr. Robinson. Well, the fact is that they provided a level
of objectivity in reviewing a plan that we thought was
adequate, and they pointed out the inadequacy of it which----
Mr. Jordan. A level of objectivity from 10 guys who had
never been in auto manufacturing, had never been in the auto
dealership business.
This is the problem when you start down this road where you
have this kind of unprecedented involvement of the government
in the private sector, back to Mr. Franks' important point that
he made in his opening statement.
Mr. Cohen. Mr. Miller, do you seek recognition to respond?
Mr. Miller. If I might, Mr. Chairman, I would like to add
some perspective to the concept of capitalism and private
capital. Mr. Franks referred to Mr. Wagoner's departure.
You have to remember the government was a creditor for, I
believe, about $19.4 billion as a secured creditor. The
government acted in the same manner as any secured creditor in
a distressed situation; and it is not unusual in those
situations for the secured creditor in that situation to say,
we have lost confidence in the CEO. And in many of those
situations what happens is, either the CEO is retired or a
chief restructuring officer is appointed at the suggestion of
the secured creditor. And that is just normal debtor/creditor
relationships, and it is the secured creditor who has largest
economic stake.
And when you look at a company like GM, which had $19.4
billion of outstanding secured debt, the ability to get any
kind of additional capital--nobody would lend money unless it
could prime the government. And putting aside the fact that
there was no private capital, since Lehman went down, from
September 15 on through the balance of the year and into 2009,
what was being done was not the government acting as this great
1,800-pound gorilla, or whatever you want to call it; it was a
secured creditor trying to protect its economic investment in
this company.
Thank you, Mr. Chairman.
Mr. Johnson. Would the gentleman yield?
Mr. Cohen. The Chairman always recognizes the distinguished
gentleman from Georgia.
Mr. Johnson. Thank you, Mr. Chairman. And again I
appreciate your holding this hearing.
I wanted to ask you, sir, do you believe that the auto
manufacturers had to be bailed out by the taxpayers of the
United States of America? Was that a good decision or was it a
bad decision?
Mr. Jordan. If you are asking if I supported the bailout, I
did not. I did not vote for the initial $700 billion bailout
which--the funds were taken from that to give that, so I did
not support that.
Mr. Johnson. Let me ask you about the auto bailout, auto
manufacturers' bailout. Do you think, in retrospect, that that
was a worthwhile endeavor for the taxpayers?
Mr. Jordan. Again, I did not support that legislation
either.
Mr. Johnson. All right. So you would have supported just
letting our manufacturing base in this country, the auto
makers, just simply go out of business----
Mr. Issa. Mr. Chairman, could I have regular order, please.
Mr. Cohen. I think that is probably a pretty good idea at
this point. We should take advantage of our witnesses.
Thank you, Mr. Johnson.
Mr. Johnson. I would yield back
Mr. Cohen. I would now like to recognize Mr. Maffei from
the great State of New York for 5 minutes.
Mr. Maffei. Thank you, Mr. Chairman. And as one of the lead
sponsors of one of the proposals addressing the auto dealers'
concerns, H.R. 2743, the Automobile Dealer Restoration Rights
Act, I want to thank you again, and the Chairman of the full
Committee and the Ranking Member, as well, for being willing to
hold these hearings. And I want to thank the witnesses
especially for coming.
Yesterday it was quite interesting with Mr. Bloom. He
mentioned a number of things. One thing he did was he did at
one point characterize where the National Automobile Dealers
Association was on one issue that they take issue with, and I
did want to, by unanimous consent, submit to the record just a
news release they have, just stating their view on that
particular comment.
Mr. Chairman, I submit the statement into the record.
Mr. Cohen. Without objection.
[The information referred to follows:]
__________
Mr. Maffei. Thank you.
On the question of the auto companies, we asked him,
several Members asked him about what the rationale was for
needing to do the reductions. I asked him whether it was the
policy of the Administration that the dealer cuts needed to be
done; and if they had not been done, then the companies would
not have been viable. He did not directly answer that question;
he simply said it was a part of the whole package.
I do believe, as I pointed out in yesterday's hearing, that
there has been a lack of transparency and a lack of
consultation with the dealers in the means by which Chrysler
and GM have chosen to decide which franchise agreements to
reject. And I still believe there is a lot of confusion as to
how the closing of these dealerships, hundreds across the
country, will be financially beneficial to the two auto
companies.
It seems to me that although there might be some long-run
cost savings that the automobile companies provided these
dealer networks over time in a way to lower their costs. And
most of the costs, as I mentioned yesterday, the employees, the
rent or the mortgage, a lot of--the equipment is all dealt
with--the dealers all do that.
So I do want to ask our witnesses, both Ms. Van Der Wiele
and Mr. Robinson, and I will start with Mr. Robinson. Can you
describe in terms that Members of Congress can understand, and
their constituents, how reducing these dealer networks this
substantially makes General Motors more viable?
Mr. Robinson. Mr. Maffei, I would break it down into two
categories. And I know from your comments about Mr. Bloom's
remarks yesterday, you are not interested in hearing a lot of
detail about financial analysis. But I will tell you as a
matter of fact over time, because of the inefficiencies in the
network and a host of reasons, there are a bunch of built-in
costs that have accumulated over time for General Motors that
one of our competitors, Toyota, doesn't have.
Mr. Maffei. Actually, on the contrary, Mr. Robinson. At
least some example; I would be happy to hear actually some real
specific examples.
Mr. Robinson. Let me give you an example. In terms of the
brand equity that we are trying to protect and develop here--
and that is really what drives this, because without successful
brands we are not going to be successful with this second
chance we have been given. So the driving force is to build
brand equity and be successful that way.
One of the symptoms of a weak brand is subsidizing at the
distribution network. Now, we have done it in various forms and
we can provide you with an overall breakout of basic categories
of expense. But, for instance, we have a 1 percent program with
our dealers where, essentially, for all the revenue we receive
on the sale of cars, the dealers get back 1 percent because the
weaknesses in the network have required that over time. We
provide dealers with other subsidy supports on advertising and
various programs that, quite frankly, Toyota doesn't have to
engage in.
From my perspective--and I am not an expert on marketing, I
am a lawyer. But from my perspective, this falls in much the
same category as the things we had to do with our labor
agreements, for instance, to get our costs comparable to Toyota
to be competitive.
But let me give you another example that is more concrete
than talking about numbers. The City of Cleveland is an example
that comes to mind. We sell the same number of vehicles, more
or less, than Toyota in that marketplace, about 9,000. For
Chevrolet 9,000, the same for Toyota. They have 5 dealers, we
have 14 dealers. The weaknesses that that generates in our
dealer distribution network are profound and need to be fixed.
We have other weaknesses in rural markets, as well, with
dealers that aren't meeting standards. And we have tried to
help these dealers with, as you know, these wind-down
agreements.
But from my perspective as a lawyer in dealing with the
folks that are trying to fix the business, it is a brand issue,
and the dealers are a symptom. The weaknesses in the dealer
network are really a symptom of the brand issue.
Mr. Maffei. Thank you, Mr. Robinson. I would point out that
UAW, in terms of labor agreements and indeed the creditors,
were included in discussions that the dealer networks never
were, at least not until recently.
I ask the Committee's indulgence that I just let Ms. Van
Der Wiele to just address my question.
Ms. Van Der Wiele. Thank you, Mr. Congressman. Going
forward, the new Chrysler Group LLC will reduce the number of
overlapping products. We are moving forward from 27 nameplates
covering 13 product segments in the 2007 calendar year, to a
target 20 nameplates covering 17 segments by the 2013 calendar
year. Fewer nameplates with better product and customer market
coverage will help improve the overall return on our product
capital investment. This means that dealers need to have all
three of our brands under one roof in order to offer a full
range of products and to optimize their profit potential.
I have some examples here of lost revenue and costs
associated with discontinued dealers: product engineering and
development for sister vehicles.
Mr. Maffei. Ms. Van Der Wiele, I am already out of time.
Why don't we just submit that? We can submit that to the
record.
But I would caution you that that doesn't really answer my
question in a way that I can explain to any of my constituents.
And that is part of the problem here.
Anyway, I yield back the time that I have already used up.
Mr. Cohen. Thank you.
Mr. Coble from North Carolina, you are recognized for 5
minutes, sir.
Mr. Coble. Thank you, Mr. Chairman.
Witnesses, thank you all for being here with us today. I
had to momentarily leave, so this may have already been
covered, but let me put a two-part question to Mr. Robinson
and/or Mr. Miller.
If you would, Mr. Robinson, explain the significant
distinctions between the Chrysler plan and the GM plan on the
one hand.
And, secondly, I have cosponsored H.R. 2743 and 2794, which
were introduced by Representatives Maffei and LaTourette. Both
bills came to me strong, with a strong endorsement of the Auto
Dealers Association in North Carolina.
Explain, if you will, to me the dealership wind-down
process, including in your bankruptcy plan; and also, if either
of these two bills is enacted, how that would affect the
dealerships that participate in the process.
Mr. Robinson. Congressman Coble, I will answer the second
question first, if that is okay, because I have some concerns
about that.
I mentioned earlier in my testimony that General Motors has
a plan to allow for a soft landing for these wind-down dealers.
The first installment on that wind-down plan--by the way, 99
percent of the dealers that were given the notification that
they had this opportunity signed up for it. That was approved
by the bankruptcy court. The bankruptcy court concluded these
are not coercion contracts. That is in the language of the sale
order.
And, by the way, just so you know, there were originally
some objections by 45 State attorneys general in the process of
looking at the sale process. They withdrew their objection, and
they accepted the fact that these wind-down agreements are not
coercive as part of the language of the sale order.
I can't talk to Chrysler's program. I can only tell you
about ours. I have concerns about the legislation in this
respect. We could have a nice constitutional argument,
constitutional law argument about a lot of the issues that it
raises, but a practical issue for me is this: We have already
started making payments to dealers, according to the terms of
the wind-down, to this point in the neighborhood of $150
million. Dealers are coming to us now saying: ``Can you
accelerate the process? I have sold down my inventory. I would
like to get out of this business and terminate my dealership.
You didn't terminate me, but I would like to terminate my
dealership arrangement with you. Can you provide the rest of
the money?''
And we want to honor those requests. We have had probably
25 or so to this point. I don't know as I sit here what the
consequences will be for dealers, for us, if Congress passes a
law that says we have to take these dealers back. We will
obviously comply with whatever the ultimate ruling on the law
is, but I am confused as to what this is going to do to a lot
of people that have received a lot of money from us at this
point.
Mr. Coble. And how about the first question?
Mr. Robinson. The first question on the difference is I can
talk about our program of wind-down. And the dealers basically,
for any new car in inventory, if they have gotten a wind-down
agreement from us for any franchise, it is $1,000 per vehicle.
Plus, if it is a complete wind-down of their operation, 8
months of rent coverage, whatever they say it is based on their
financial statements. We are not quibbling with them about the
rent factor.
Mr. Coble. I thank you for that, Mr. Robinson.
Ms. Van Der Wiele and/or Mr. Orr, let's shift to your
situation. Why did not you all at Chrysler include a dealership
wind-down similar to the GM proposal? Obviously there was a
good reason; I would just like to know what it is.
Mr. Orr. Mr. Coble, the nature, as I mentioned before, the
nature of the dealership agreements at Chrysler were
essentially perpetuity agreements that went on and on. We did
not have term agreements that would expire, and it was
necessary for us and our debtor, pursuant to our master
transaction agreement, our purchase and sale agreement, to make
a determination about what assets we would reject and pass on
to our purchaser. That necessarily included a reduction in
dealer network.
In fact, the testimony in the court below, both by the
purchaser, was that the analyses--the dealer network needed to
be downsized. Three of the dealer witnesses in the case below
testified that there were too many dealers at Chrysler. They
testified that there are economies of scale and efficiencies
for consolidation of our dealer networks. These are the
witnesses of the dealers objecting to our sale. And they also
testified that there would be increased sales to the remaining
dealers through winding down the network.
So the decision made economic sense, both increasing the
probability of gaining market share and what the industry calls
through-put, which is basically sale of cars, that was required
by our purchase and sale agreement. And frankly, Mr.
Congressman, we did not have the cash on hand to institute the
type of program that would require wind-down and payout of
certain benefits to our dealers.
Mr. Coble. Thank you, sir.
Mr. Robinson, in your testimony you indicated there were
certain costs that were not borne by Toyota. What were those
costs?
Mr. Robinson. Well, part of it, sir, is an arrangement we
have created with the dealers where we flow money back to the
dealerships for advertising purposes and things like that. And
that is quite a sum of money. It is probably half--I haven't
got the figures in front of me, but it is probably half of the
$2 billion or so associated with that. There are other fixed
costs associated with the size of this dealer network to the
tune of another $400 or so million. The total cost that is
associated with this series of accumulated subsidies is about
$2.5 billion.
Mr. Coble. I thank you. I see my time has expired. Thank
you, gentlemen, for being with us. Mr. Chairman, I yield back.
Mr. Cohen. I thank the gentleman for his questions. I now
recognize the gentleman from Georgia, the Subcommittee
Chairman, Mr. Hank Johnson.
Mr. Johnson. Thank you, Mr. Chairman.
You know, the taxpayers have spent--and some would say
invested--$60 billion in bailout money for the automobile
manufacturers. And I myself think that was a much better way to
go than to allow our manufacturing base to wither away. Doom
was impending.
And so it is understandable that you would take your last
resort, which is to go to the government and ask for money. And
that was the practical reality of things. What would we do?
Would we just do nothing? We certainly couldn't do that.
So with this $60 billion investment in the companies, the
American people deserve aggressive protection as to how that
money would be spent and the effects of corporate decisions,
including things like corporate bonuses. And if there is
someone at the company who is not equipped to lead the
companies into the future, then they certainly need to come
out.
And taxpayers are the ones that are represented by the
government, and the government thus has a role to play in
overseeing the $60 billion investment. You know, it is not
meddling in the affairs of the companies, it is just wise and
pursuant business decisions being made by, he government which
never desired to be an automobile business.
And so I will ask, though, from the representatives from GM
and Chrysler, the amount of cars sold by Chrysler, Ford, and GM
has decreased over time. And, now, about 3 years ago Ford, I
guess, saw things coming; they mortgaged the company to the
tune of, I believe, about $18 billion, and they have been able
to avoid asking for any taxpayer bailout money.
GM, which had the most market share, did not escape that
fate, and neither did Chrysler, who is coming back for the,
actually, I think second time over the last 30 years or so for
a bailout.
And so meanwhile, the domestic automobile manufacturers are
victims of a declining market, and Ford has been able to
weather the storm. In fact, Chrysler and GM went bankrupt. Ford
never did go bankrupt.
Now, Ford does not have a program of closing dealerships,
but GM and Chrysler do. Now, is that difference a result of
basic mismanagement, wrong decision-making by the folks at GM
and Chrysler? I mean, how could we account for it?
Mr. Cohen. Mr. Johnson asked: Did Ford have a better idea?
Can anybody tell us?
Mr. Robinson. I will try to answer your question,
Congressman, this way. I can't speak for why Ford did what it
did when they did it. I do know, from what I can read in the
trade publications, that they did have an extensive dealership
network program that preceded where we are today. Their dealer
count is going to be in the neighborhood of where we are, when
we are done with our program.
Why didn't we do what they did 3 years ago? I can't answer
that question. I don't think anybody foresaw 3 years ago the
environment that we would be in at the end of 2008, quite
frankly. If they did what they did to monetize their assets at
a time when they did it, I am sure they had good reasons for
it. I am not sure they saw the economic tsunami any more
clearly than anybody else, but they must have had good business
reasons for doing what they did.
Ms. Van Der Wiele. Yes, Mr. Congressman. I also can't speak
to Ford's decision-making, but what I can do is put the
dealership issue in perspective. And that is, between 1990 and
2007, the average number of new vehicles sold in the United
States was 16 million. This year, they are projecting no more
than 10.1 million.
So, obviously, all the auto companies, particularly those
that have--the Big Three that have the legacy dealerships had
to reduce the size in order to cope with the drastically
lowered sales volume.
Mr. Johnson. Is it true that Ford sales has a lower market
share than GM or Chrysler? Is that true or is that false? And
if it does, then isn't it a fact, then, that GM going down to
the number of Ford dealerships, the number of dealerships that
Ford relies upon, wouldn't that cancel out that argument that
we are just simply going down to the number of dealerships that
Ford has?
And I appreciate the Chairman's allowing me to just exceed
the time, and this will be my last question.
Mr. Robinson. Congressman, we will still have more
dealerships, I believe, than Ford. If you look at the
difference in our market share, I don't think it is
proportional to the difference in the number of dealers we have
or have had up to this point time, where we have had over 6,000
versus the difference in our market share. Again, that is a
lawyer's reaction to a market analysis question, so bear with
me.
Mr. Cohen. Thank you, sir.
Mr. Issa from California is recognized for 5 minutes--or
even a few seconds further.
Mr. Issa. Perhaps. Thank you, Mr. Chairman.
Mr. Miller, you had an analysis earlier about what an
ordinary creditor would do; right?
Mr. Miller. An ordinary secured creditor, sir.
Mr. Issa. So for going $3.8 plus-or-minus billion of DIP
financing in Chrysler, that wouldn't be routine, would it?
Mr. Miller. The amount is very substantial. The question
is, if you have an outstanding secured creditor, the ability to
get DIP financing--as we call it--nobody would do it unless you
could prime the existing secured creditor. So that eliminates
the possibility of getting DIP financing. And also, the
amount----
Mr. Issa. No. In the case of Chrysler, the Federal
Government has simply walked away from a portion of the money
it loaned in the transaction at the time of sale.
Mr. Miller. I wouldn't say that they walked away. They took
an equity interest. And that is exactly almost the same thing
that has been done in GM. The new GM----
Mr. Issa. Why take equity and forgive debt? Why not keep
the debt and forget the equity?
Mr. Miller. Because the new company, the successor, the
purchaser, whatever you want to call it, cannot service that
debt. That is the recognition that you had to--you have a
smaller company. Its ability to service its leverage ratio has
to be consistent with what the market will appreciate. The hope
is that someday these companies will be able to go into the
private market and get financing. And so you can't be
overleveraged.
That is why debtors--in many situations, including the
automobile companies, secured creditors will exchange debt for
equity in the hope that the successor company will be viable
and profitable.
Mr. Issa. Well, I appreciate that. But Chrysler reeks of
the government deciding what they wanted to do without much
consideration to their original charter under the TARP, the
money they used.
Mr. Robinson, is General Motors as committed as Chrysler,
the new Chrysler Corporation, seems to be in her statements
that they will provide, if you will, somewhat of a first--and
correct me if I am wrong, ma'am--a right of first refusal to
those displaced dealers in future considerations? I heard it
pretty profoundly that you wanted to make business
opportunities available to them.
Ms. Van Der Wiele. Yes. I don't think I used the term
``right of first refusal.''
Mr. Issa. Right. I realize it was less than that.
Is General Motors committed to recognize that the dealers
who lost their dealerships lost them to dealers that got the
value that was once theirs delivered to the dealer across town?
Is General Motors equally committed to finding innovative ways
to accomplish that for dealers who could meet criteria in the
future for whatever opportunities become available?
Mr. Robinson. Congressman, I would put that specific
proposal on the list of things that we would be prepared to sit
down across the table and work out with the NADA and their
membership. Our intent is not to go back into places that we
have had to exercise--go through this wind-down process.
I hope we have that problem 2, 3, 4 years from now, that
things turn around, the markets are stronger, the opportunities
are greater. But I think on behalf of the company, I can commit
that we are very interested in having that conversation with
the authorized representatives of the dealer body.
Mr. Issa. And Ms. Van Der Wiele and Mr. Robinson.
Mr. Robinson. And I would call it a right of first
proposal.
Mr. Issa. That is fine.
The second point I want to make sure that both of you are
willing to commit to is the dealers that lost their
dealerships, by and large, no matter what you say on the wind-
down, they got screwed. They got less in the wind-down than the
value of their dealerships before your bankruptcies caused them
to lose their dealership. Is there any argument there here
today?
You don't have to use my particular parochial term, but
they got less than the fair value in an ordinary market. Isn't
that true?
Ms. Van Der Wiele. I don't know specifics. But I can say
that the dealers, like all other stakeholders, had to accept
less than they would have anticipated but for the bankruptcy
situation. But it wasn't just the dealers.
Mr. Issa. Let's make sure we are clear here. They were
protected by State franchise. They had an asset which they had
purchased; in many cases, they had purchased the right--the
exclusive right in an area to sell a Chrysler, a Dodge, a Jeep,
to sell a Chevy, a Pontiac, some of them.
Mr. Robinson. Oldsmobiles, too.
Mr. Issa. But they had purchased that. And that was
diminished to zero, other than whatever compensation you gave
them. Is that a fair statement, that that purchase right was
eliminated?
Mr. Robinson. Well, I would agree, Congressman. They
couldn't sell a franchise at the point they received the wind-
down agreement and signed up for the program. In some cases the
dealers, quite frankly, may be doing better with the wind-down
agreement than they would have if they otherwise didn't get the
wind-down.
Mr. Issa. That would be a rare case, I suspect.
Let me ask one or two quick follow-ups. In the case of a
dealer who purchased a dealership and has a loan from one of
your finance arms, particularly in the case of General Motors,
so they have a liability that is offsetting the asset they
purchased.
Why in the world shouldn't we envision here on the dais
that they can essentially default without personal guarantees?
Because one taking from one part of your company to another is,
in fact, a fair offset, even though technically under
bankruptcy it isn't.
When we are sitting up here looking at a flaw in the
bankruptcy system, if I have a dealer who owes 4.5 or 5.5 or
6.5 million to GMAC and they have taken the dealership, and the
wind-down is not 4.5 million, it is not offsetting, why
shouldn't they be able to say: ``Here's my building. It is your
problem,'' and be able to say ``You can't go after my personal
guarantee, because in fact an arm of the very entity took it?''
Now, there are not a lot of those, but there are some where
it is literally two parts of your company.
Mr. Robinson. Mr. Miller may be closer to this than I am at
this point, but, quite frankly, GMAC was once upon a time a
wholly owned subsidiary of General Motors. It is not, and we
own less than 10 percent.
Mr. Issa. I appreciate all of that. But taxpayer money went
into turning around both of your companies and forgiven for
stock. My question is: Shouldn't we on the dais find a solution
for those dealers who essentially have been screwed by the
bankruptcy system? And I apologize for using that word twice,
but I don't know a more accurate term than when billions of
dollars go to taking care of making sure that your entities are
going concerns, and in a sense they get no better, perhaps
worse, of a deal than they would otherwise.
I am looking at car deals around the country--I am sure
there are many more examples than I presently know about--who
are going to lose their homes because the asset they had was
wiped out in bankruptcy and their liability is to the very
group that said, ``Buy the dealership, we will carry back this
loan.''
And you may say it is only 10 percent today, but you had an
effective control at the time the deal was made. That is why
the relationship was created, why they didn't go to some other
bank. General Motors--to a lesser extent Chrysler--was in the
business of if you wanted a dealer, you helped him with the
financing.
I am only asking, Do you think that we should consider;
not, Do you have the power to do it?
Mr. Robinson. That is a policy consideration that I would
think the Subcommittee would want to take a look at; but I
can't answer the question any differently than that, sir.
Mr. Cohen. The gentleman's time has expired.
Does Mr. Sherman seek recognition? You are recognized for 5
minutes.
Mr. Sherman. First--and other questioners may have done
this. I guess I will address this to the vice president of
Chrysler. Why is it thought to be in the automobile company's
interest to have fewer sellers charging a higher margin for
your product when those in other businesses seem to want the
smallest possible gap between what the manufacturer gets paid
and what the consumer pays?
Ms. Van Der Wiele. Mr. Congressman, I can answer that in a
general fashion, although with your permission I think my
colleague could provide more specificity than I can.
Mr. Orr. Mr. Sherman, if I may. Much has been made about
why don't we have more dealers, ``Why would you want to reduce
your dealer network? It seems to me you are reducing the
outlets for selling your product. It doesn't make sense.''
Automobiles are not Starbucks, which, by the way, is
reducing its profile, and automobiles are not yogurt.
Mr. Sherman. Starbucks is reducing because they have to pay
the people behind the counter. You had this dealer network at
no cost.
Mr. Orr. But understandably, Congressman, respectfully, the
efficiencies involved in having too many outlets actually at
some level can reduce your ability to sell cars. The analysis
for us, meaning Chrysler, in terms of making its decision, was
that in order for the company to go forward, saving 75 percent
of its dealer network and reducing 25 percent of its dealer
network would yield greater efficiencies to the dealers, allow
those dealers to sell more car themselves, and thereby increase
their capital profile and survivability, and allow the company
to sell more cars through those dealers because of overarching
marketing concerns in specific marketing pools.
Mr. Sherman. What particularly concerns me is the
statements made, if not by Chrysler then by GM, is that one of
the things you are seeking is a larger margin, a bigger gap
between the manufacturer's price and what the consumer pays.
And it is quite possible that if consumers pay an extra 100 or
200 bucks, because they can't play one dealer off against
another, that that will be to the benefit of the manufacturer
of--maybe it works better, but it does mean that people in my
district and all our districts are paying a few hundred bucks
more for a car because you can't pit one dealer off against
another.
Shifting to the legal issue, though. It is my understanding
that in bankruptcy the claims of general creditors can be wiped
out and the claim of these dealers to a franchise was just such
a general claim. And, that in fact it would have been legal in
bankruptcy for you to have voided all the franchises, and
then--I don't know who would have paid for them, but then you
could have sold them again. I don't know who would have paid
you for them.
But would that have been legal under bankruptcy, instead of
just voiding some franchises, voiding them all?
Mr. Orr. Mr. Sherman, section 365 of the Bankruptcy Code
does allow you to terminate burdensome contract leases. It is a
requirement of that code that in exercising that judgment,
there is a benefit to the debtor. In exercising the judgment--
--
Mr. Sherman. Well, clearly, there are some good franchises.
If you could have canceled the one on Van Nuys Boulevard and
then sold it, you would have made some money.
Mr. Orr. Well, perhaps, Mr. Sherman. But we made the
decision not to cancel all the franchises; 75 percent,
comprising almost 85 percent of our sales, we retained,
recognizing that we needed our dealerships under the existing
agreements.
The concept is you have to balance the potential benefit to
the debtor against the potential--not the harm to the dealer,
but the potential harm to the debtor. We don't sell our
franchise agreements. That is somewhat of a misperception.
Dealers are awarded contracts and they capitalize their
businesses, but we do not sell franchises.
Mr. Sherman. So you just awarded franchises to those you
thought could do a good job, and they didn't write you a check
as part of that award?
Mr. Orr. They do not write the company a check, but they do
have to capitalize the business. They have marketing, they have
finance, so on and so forth.
Mr. Sherman. Needless to say, good to explore the law with
you, was once a summer associate with your firm. But the idea--
--
Mr. Orr. Glad you remember us, Congressman.
Mr. Sherman. But the idea of canceling dealer franchises
was more an exploration of what the law is or could be, not any
business advice for you. I yield back.
Mr. Cohen. Thank you. We are almost at the slosh and
cutoff. But before we get there, we are going to give the
Ranking Member a minute for mea culpas.
Mr. Franks. I just wanted to point out, Mr. Chairman, I
have been pretty hard on these guys here today. And while I
believe everything I have said, I think it is important to
realize that there were two giant things that caused the
bankruptcies to occur. One was an increase in the gasoline
prices that had an impact on your markets, and of course the
dry-up of the capital market. You would essentially agree with
that; correct? That was the big things that impacted? And those
things weren't your fault. Those things I believe were
catalyzed ultimately by government policy. I won't get into the
details.
But I just wanted to say that to you, even though in my
criticisms here I have been sincere. I do know that these
things have happened, and I think that ultimately government is
to blame here more than you are.
So, with that, I yield back. Thank you, Mr. Chairman.
Mr. Cohen. Thank you, Mr. Ranking Member. And implicit
within that, it wasn't the UAW's fault either.
We are now at a time when we are going to be taking some
votes. The votes should take approximately 45 minutes, and then
we will resume with the second panel. We have concluded this
first panel.
I would reiterate the Chairmanof the full Committee's
suggestion--and mine, also--that if you can stay, we would
appreciate it. The four of you, can you all stay to listen to
the next panel and possibly have a cup of coffee? It seems
reasonable. I am sure you are on the clock. This is part of the
stimulus package.
So thank you, and I appreciate it. Mr. Chrisie is the only
person who hasn't accepted that offer, and he is on television
about not staying, so you don't want to leave. So we accept
that.
We will be back in about 50 minutes, and in the interim we
are in recess.
[Recess.]
Mr. Cohen. This hearing of the Committee on the Judiciary,
Subcommittee of Commercial and Administrative Law will now come
to order. Without objection, the Chair will be authorized to
declare a recess of the hearing.
I am now pleased to introduce our witnesses. Our first
witness is Douglas Baird, whose name was mentioned earlier. Mr.
Baird is the Harry Bigelow Distinguished Service Professor of
Law at the University of Chicago. His research and teaching
interests focus on corporate reorganizations and contracts. He
served as dean of the law school from 1994 to 1999. Before
joining the faculty in 1980, he was a law clerk for the Court
of Appeals for the Ninth Circuit.
Professor Baird, will you please proceed with your
testimony? We welcome you.
TESTIMONY OF DOUGLAS G. BAIRD, HARRY A. BIGELOW DISTINGUISHED
SERVICE PROFESSOR OF LAW, UNIVERSITY OF CHICAGO LAW SCHOOL
Mr. Baird. Mr. Chairman, Ranking Member Franks, Members of
the Committee, I want to thank you for the chance to speak to
you today about the recent automobile bankruptcies.
The willingness of the Federal Government to contribute
substantial resources was a necessary but not sufficient
condition to the survival of General Motors and Chrysler.
Without Chapter 11 or some similar process, General Motors and
Chrysler would likely have gone out of business. In this
respect, these cases show the good that modern bankruptcy
judges and lawyers are able to do, especially in troubled
economic times.
Bankruptcy law, however, provides no panacea. The
challenges General Motors and Chrysler face are far from over.
There is no guarantee either will survive. Much depends upon
whether domestic automobile consumption rebounds significantly
over the next several years, and whether these companies can
transform their corporate culture quickly enough in a highly
competitive marketplace.
These two cases also underscore the limitations of
bankruptcy law in another way. Companies that are insolvent--
and Chrysler and General Motors were hopelessly insolvent--are
unable to meet all their obligations. Bankruptcy law can do
nothing to change this. No matter what bankruptcy provides,
many worthy stakeholders, tort victims, unpaid suppliers,
pension funds, dealers, workers, will not be paid in full or
will not be paid at all.
One can try to protect some stakeholders by favoring one
group, but favoring one group necessarily comes at the expense
of another. Moreover, there are sharp limits on the ability of
bankruptcy law to do even this.
First, most firms that fail never file bankruptcy
petitions. Indeed, fewer than 1 percent of all financially
distressed firms file for Chapter 11; and those that do are
typically encumbered by liens that at the time of the
bankruptcy filing have the status of constitutionally protected
property interests.
If you decide to protect some stakeholders of failed
firms--which you can do--such as tort victims, the best way to
do this is by giving a super priority lien to those
stakeholders. But it has to be a lien that is good both inside
of bankruptcy and outside of bankruptcy. And that is possible.
Some environmental claims have this feature, but it comes at a
cost.
Now, in my own view, tort claims are among those that
should be protected with a super priority lien. But I should
emphasize that this view is both controversial and not in the
first instance a question of bankruptcy policy. Again, only a
law that trumps liens and applies generally, regardless of
whether the assets are sold and regardless of whether the firm
is in bankruptcy, will work in this environment.
Next, I want to focus on the particular lessons we can draw
from the bankruptcies of General Motors and Chrysler. The
active participation of the Federal Government dramatically
altered the dynamics of these bankruptcy cases, and not always
for the better. The most striking feature of these Chapter 11s
was their speed, particularly in the use of section 363 to sell
these firms as going concerns. Now, going concern sales are
very common in large Chapter 11 cases. Perhaps half or more of
all Chapter 11 cases now are now sales.
Now, in principle, the ability to sell a firm as a going
concern and take advantage of the marketplace is a salutary
development. In principle it is a good thing. The stakeholders
get the maximum value and the company gets the best shot at
reinventing itself and competing in the marketplace. But we
need to ensure the sales process is conducted in such a way
that the firm is in fact sold for top dollar. Without
appropriate procedures, there is a risk that too many 363 sales
and other going concern sales are firesales. These firesales
work to the advantage of those in control, not the stakeholders
as a group. Over this dimension, the sales in Chrysler and GM
may have been conducted too quickly.
There is another danger to which attention needs to be
given. The sale itself should not dictate the way in which the
proceeds of the sale are distributed. The sales that were
conducted in Chrysler and General Motors were troubling over
this dimension as well. In both Chrysler and General Motors,
the bankruptcy judge approved sales procedures that narrowly
limited the form of the bid. It insisted that everyone who bid,
not just the Federal Government, pay specified amounts to
specified claimants. The sales procedures approved by the
bankruptcy judge effectively dictated the distribution of
assets. The bankruptcy courts in these cases may have tolerated
these highly unusual and highly restrictive sales procedures in
large part because they thought it wouldn't make a difference.
It seemed to them unlikely another bidder would merge, even if
more time were taken or different or better rules were put in
place.
The conditions of the companies, the illiquidity of the
current markets, and the strong desire of the Federal
Government to dictate the outcome were sufficient to chill
competing bids regardless of the procedures.
Nevertheless, the question of whether other bidders might
appear and provide different alternatives is one the
marketplace is supposed to answer. The judges could have done
more to test the waters, and there may have been little cost in
opening up the process more, as for example the bankruptcy
judge in the Delphi bankruptcy has done. When process is
neglected, as it was in these cases, rights of stakeholders are
inevitably compromised, as is their ability to sit at the
negotiating table and be heard.
Now, the special circumstance to the automobile cases may
mean that these circumstances are not likely to be repeated and
no special legislation is required. But the procedures followed
in these cases should not become the norm, and legislative
reform would be appropriate if they did. But reform should be
limited. It would be a mistake, again, to limit the ability of
bankruptcy judges to conduct sales and thereby give buyers
clean title.
In summary, the bankruptcies of General Motors and Chrysler
raise a number of problems. At the same time, however, it
should be recognized they arose because of the large role the
government played. And this may not have been inappropriate, as
the government acted in this way only because of its
perception--of correct, in my view--that aggressive use of the
bankruptcy process was necessary to save these companies.
Thank you, Mr. Chairman.
Mr. Cohen. Thank you, Professor Baird.
[The prepared statement of Mr. Baird follows:]
Prepared Statement of Douglas G. Baird
I am the Harry A. Bigelow Distinguished Service Professor at the
University of Chicago Law School where I teach bankruptcy law. I joined
its faculty in 1980 and was its Dean from 1994 to 1999. I have also
been a visiting professor at Stanford, Harvard, and Yale. I am a fellow
of the American Academy of Arts and Sciences, I have served as the Vice
Chair of the National Bankruptcy Conference, and I am currently the
scholar-in-residence at the American College of Bankruptcy. I have
written several dozen articles on bankruptcy and related subjects, and
my one-volume overview of U.S. bankruptcy law, Elements of Bankruptcy,
is now in its fourth edition. I appear at your invitation today to try
to draw some general lessons from the recent automobile bankruptcies. I
speak as a scholar committed to the effective operation of our
bankruptcy system and not on behalf of any individual or group.
The General Motors and Chrysler bankruptcies provide powerful
illustrations of how Chapter 11 can give financially distressed
companies a second chance. Without Chapter 11 or some similar process,
General Motors and Chrysler would likely have gone out of business. The
willingness of the federal government to contribute substantial
resources was necessary, but not sufficient. In this respect, these
cases show the good that modern bankruptcy judges and lawyers are able
to do, especially in troubled economic times. Bankruptcy law, however,
provides no panacea, only a fighting chance.
Even with a substantially reduced debt burden, the challenges
General Motors and Chrysler face are far from over. They have been
mismanaged for decades and find themselves in an industry in which
there is massive overcapacity. There is no guarantee that either will
survive. Much depends on whether domestic automobile consumption
rebounds significantly over the next several years and whether these
two companies can transform their corporate culture quickly enough in a
highly competitive marketplace.
These two cases also underscore the limitations of bankruptcy law
in another way. Companies that are insolvent--and General Motors and
Chrysler were hopelessly insolvent--cannot meet all of their existing
obligations. Bankruptcy can do nothing to change this. No matter what
bankruptcy provides, many worthy stakeholders--tort victims, unpaid
suppliers, pension funds, dealers, workers--will not be paid in full or
at all.
One can try to protect some stakeholders, but this is not without
major consequences. Favoring one group necessarily comes at the expense
of another, and legitimate questions can be raised about when it is
justified to favor one group over another. Moreover, there are sharp
limits on the ability of bankruptcy law to do even this. Most of the
firms that fail never file bankruptcy petitions. Indeed, fewer than one
percent of financially distressed businesses end up in Chapter 11. Even
for companies reorganizing in Chapter 11, merely giving a priority
claim is likely to be ineffective. Businesses today have multiple
layers of secured debt. The secured creditor enjoys a nonbankruptcy
property right that has to be paid first. For these reasons, the best
way to protect particular stakeholders is to give them a superpriority
lien over other existing stakeholders across the board, inside of
bankruptcy and out. Some environmental claims have this feature.
In my own view, tort claims are among those that should be
protected with a superpriority lien, but I should emphasize that this
view is both controversial and not in the first instance a question of
bankruptcy policy. Again, only a law that applies generally whenever
the question of priority arises will work. Alternatively, a law, again
of general applicability, could require companies to carry sufficient
insurance.
Another problem arises with respect to the obligations of a
reorganized company to those who suffer harm in the future as a result
of products the company made before bankruptcy. On the one hand, it is
important to give companies a fresh start, but on the other, tort
victims need to have their day in court. These problems have arisen in
cases involving everything from asbestos to airplanes. They have been
carefully studied and there are sensible, concrete proposals for the
treatment of future tort victims that have been put forward by the
National Bankruptcy Conference and others. These provide a sensible
starting place for legislative reform.
In the balance of my testimony, I want to focus on the particular
lessons we can draw from the bankruptcies of General Motors and
Chrysler. One must recognize that only massive intervention by the
federal government made it possible for the bankruptcy process to give
these companies another chance. Both General Motors and Chrysler were
experiencing massive and ongoing operating losses. When companies are
hemorrhaging cash to this extent, it is generally too late for Chapter
11 to save them in the absence of an extraordinary infusion of outside
capital and it is only rarely available. The active participation of
the government fundamentally altered the dynamics of these bankruptcy
cases--and not always for the better.
The most striking feature of these Chapter 11s was their speed.
Section 363 of the Bankruptcy Code allows the judge to approve the sale
of a business's assets outside of the ordinary course of business. In
General Motors and Chrysler, this mechanism was used to sell the
businesses as going concerns to a new entity created by, or, in the
case of Chrysler, with the cooperation of, the federal government
within the course of a few weeks.
Going-concern sales are common in large Chapter 11 cases. Over half
of all large Chapter 11 cases now involve sales of one kind or another.
In principle, this is a salutary development. A sale often converts an
unwieldy and illiquid asset into cash that can be readily divided among
the various stakeholders according to their legal entitlements. A sale
can provide the best way to maximize the value of the assets. Even when
a reorganization provides a better alternative, the possibility of a
sale improves the process as it tends to keep everyone honest. A cash
bid of a company for $100 makes it impossible for one of the competing
claimants to argue that it is worth less.
But we need to ensure that the sale process is conducted in such a
way that ensures that the firm is sold for top dollar. Companies that
are put up for sale are often in severe financial distress. They are
melting ice cubes, and those in control of the process assert that they
are willing to pump new money into the company to keep it alive only if
the sale is done quickly to a buyer they have already identified. The
danger that the business will not have enough cash to stay open puts
enormous pressure on the judge to move the case quickly.
Without appropriate procedures, there is a risk that too many
Sec. 363 sales are fire sales that work to the advantage of those in
control, not to the stakeholders as a group. The Bankruptcy Code itself
offers no guidelines beyond a general requirement of notice and a
hearing. Courts have begun to develop procedures. These, in conjunction
with the rule-making process, might be sufficient to create procedures
that ensure that these sales do in fact yield top dollar. If they do
not, it may make sense for Congress to revisit this issue and ask
whether procedures and protections for going concern sales should be
explicitly addressed in the Bankruptcy Code.
There is another danger to which attention needs to be given. The
sale itself should not dictate the distribution of the proceeds of the
sale. The distribution of proceeds should recognize the existing rights
of the various stakeholders. The procedures for the confirmation of a
Chapter 11 plan of reorganization set out in Sec. 1129 are designed to
do this. The sale should not short-circuit them. The sales that were
conducted in both Chrysler and General Motors, however, were troubling
over this dimension.
The newly created entities that bid on the assets of Chrysler and
General Motors agreed to take on some obligations of the old company.
This itself seems unobjectionable in theory. If a new buyer decides to
pay some obligations and not others, it should be free to do so. As a
buyer, the assets belong to it, and it should be free to do whatever it
wants with them. All that matters is that this buyer has produced the
top bid after the company has been fully marketed. But the plan of a
buyer to pay existing obligations becomes problematic if, at the same
time, the freedom of action of other bidders is limited. For this
reason, a buyer's decision to continue the debtor's relationship with
some stakeholders, but not with others, has always been treated with
suspicion.
In both Chrysler and General Motors, the bankruptcy judge approved
sale procedures that narrowly limited the form of the bid. They
required that the bidder agree to assume the same burdens the
government-created entity was willing to assume.\1\ By insisting that
each bidder commit to pay specified claimants specified amounts, the
sale procedures effectively dictated the distribution of assets. A
buyer who takes a $10 company free and clear will bid $10 for it. But a
buyer of the same company who is required to assume $6 in obligations
will bid only $4. If the $6 goes to a different stakeholder, then the
process not merely converts the assets into cash, but also dictates how
the cash is distributed. It becomes both a sale and a sub rosa plan.
Those who lose out (those forced to share in proceeds of $4 instead of
$10) enjoy none of the protections of Chapter 11 plan process.
---------------------------------------------------------------------------
\1\ In Chrysler, the court did provide that the debtor could deem
other bids qualified after consultation with the UAW, but the debtor
had neither the obligation nor the incentive to do so.
---------------------------------------------------------------------------
In both the Chrysler and General Motors bankruptcies, the courts
tolerated highly restrictive sales procedures in large part because
they did not think it made a difference. It seemed to them unlikely
another bidder would emerge even if different rules were in place. The
sorry condition of the companies, the illiquidity of the current credit
markets, and the strong desire of the federal government to dictate the
outcome were sufficient to chill competing bids, regardless of the
procedures. Importantly, the judges found that, in the absence of the
proposed sale, a liquidation was inevitable and objecting creditors
would do worse in a liquidation than they were doing in connection with
the proposed sale.
Nevertheless, the question of whether other bidders might appear
and provide different alternatives is one that the marketplace is
supposed to answer. The judges could have done more to test the waters
and there would have been little cost in opening up the process more,
as the judge in Delphi has been willing to do. When process is
neglected, rights of stakeholders are inevitably compromised, as is
their ability to a sit at the negotiating table and be heard. The
special circumstances of the automobile cases may mean that these
circumstances are not likely to be repeated and no special legislation
is required, but the procedures followed in these cases should not
become the norm. Reform of Section 363 is appropriate should such
practices persist.
In thinking about legislation affecting going-concern sales,
however, it is important to distinguish between the procedures designed
to maximize asset value and restrictions on the ability of firms in
bankruptcy to give buyers good title. Granting a buyer clean title is
the principal virtue of having the sale in the first place, and it is
the device that ensures that the company is sold for top dollar. Those
who buy in bankruptcy auctions will not pay for the same asset twice.
If a firm is worth $10 when sold free and clear, it will bring the
creditors as a group $10 only if the proper procedures are in place. If
the law were changed to require that the buyer assume a $3 obligation,
then the sale proceeds will be only $7. The effect of imposing limits
on the title that can be conveyed is not to benefit the creditors as a
group, but merely to alter the way in which the value of the underlying
assets is divided among them. Allocating the sale proceeds is utterly
different from ensuring that they are as large as possible. One should
not confuse the size of the slices with the size of the pie.
Limiting the ability of the debtor to convey good title will also
make sales relatively less attractive and hence less likely. The effect
in the end may not even be to alter priorities, but simply to leave
everyone with less.
By the conventional understanding, debtors in bankruptcy can reject
franchise agreements just as they can reject other executory contracts.
The effect is to put dealers in the same position as other
stakeholders--such as investors, tort victims, and suppliers. This rule
likely works to the advantage of the debtor going forward. To compete
in any market, manufacturers must have an effective way of distributing
their products. Regardless of whether a manufacturer distributes a
product itself or outsources distribution to a third party, the less
efficient the distribution system, the harder it will be for the
manufacturer to compete. If a distributor is located in the wrong
place, is the wrong size, or provides an inferior package of services,
the manufacturer's position in the marketplace suffers. It does not
matter whether the manufacturer pays the distributor or the distributor
pays the manufacturer.
The distribution system in place for the automobile industry has
remained essentially unchanged for decades. Even if it made sense in
the 1950s when the industry was far less competitive and these firms
enjoyed far larger market shares, it would be surprising if it still
made sense today.
One can argue, however, that this understanding of the law
governing franchisees is wrong as a matter of bankruptcy policy. Unlike
other claimants, auto dealers are protected by specific state and
federal laws. These make their rights different from those who enter
ordinary contracts with the debtor. That these laws came into being in
an utterly different and far less competitive market is, under this
view, irrelevant. These dealership laws must be obeyed until they are
changed. In principle, bankruptcy should provide no special break from
government regulations, no matter how ill-advised they might be or how
much they undermine a company's ability to survive as a going concern.
Under this argument, debtors in bankruptcy must play by the same rules
as everyone else.
Whether this argument justifies a fundamental shift in the
treatment of executory contracts under the Bankruptcy Code outside the
context of these cases is best left to another day. The involvement of
the federal government in these two cases alters the dynamic
significantly. While providing special protection for the dealers will
likely decrease somewhat the chances that the companies will survive,
its principal effect is merely to reduce the value of the government's
stake in the companies as restructured. Put differently, a law
protecting automobile dealers in these cases is, in the main, an
indirect subsidy of the dealers by the federal government. It may or
may not be a good idea, but it is quite different from what goes on in
other bankruptcies.
In summary, these two cases raise a number of problems, most
arising by virtue of the role the government played. One can fault the
particulars and one must ensure that the infirmities that existed in
these cases--principally the procedures used in conducting the Sec. 363
sale--are not replicated elsewhere. At the same time, however, it
should be recognized that the large role that the government played was
the result of its perception--correct in my view--that only aggressive
use of the bankruptcy process on its part would allow either of these
companies to survive in a form that would minimize the cost to the U.S.
taxpayer of keeping them alive.
__________
Mr. Cohen. Our second witness is Mr. Dan Ikenson, Associate
Director of the Cato Center for Trade Policy Studies focusing
on WTO disputes, other trade agreements, U.S.-China issues,
steel and textile trade issues, antidumping reform, and
capitalism in general.
Before joining Cato in 2000, Mr. Ikenson was Director of
International Trade Planning for an international accounting
and business advisory firm, co-founded the Library of
International Trade Resources.
And we welcome him today. And you may begin your testimony.
TESTIMONY OF DANIEL J. IKENSON, ASSOCIATE DIRECTOR, CENTER FOR
TRADE POLICY STUDIES, CATO INSTITUTE
Mr. Ikenson. Thank you, Chairman Cohen, Ranking Member
Franks, and Members of the Subcommittee. I am Dan Ikenson from
the Cato Institute. Today I would like to share some general
concerns about the ramifications of the auto industry
bankruptcies.
I have been analyzing closely developments in the auto
industry since last November when Detroit's public relations
blitz took form and the companies sought a Federal bailout.
Eight months later, the emergence of Chrysler and then General
Motors from bankruptcy marked the end of the first chapter of
what is a cautionary tale about the triumph of politics over
markets and the rule of law. As the next chapter unfolds, we
are likely to witness the consequences of what were extremely
politicized bankruptcy prophecies.
Bankruptcy was always the best option for both of these
companies; indeed, both should have been in bankruptcy before
last November, long before President Bush circumvented the
wishes of Congress and lent Chrysler and GM $13.4 billion from
the Troubled Assets Relief Program; long before President Obama
had the chance to provide billions more and assume a larger
role for the U.S. Government in Chrysler's and GM's
restructuring operations; long before President Obama created a
huge moral hazard by strong-arming Chrysler's and GM's
preferred lenders into pennies on their dollars, while giving
preference to claimants of lesser priority.
Instead, on account of the so-called prepackaged surgical
bankruptcies, taxpayers are now majority shareholders in a
company whose success depends on stewardship from 536 CEOs with
disparate ideas of GM's mission.
Meanwhile, the United Auto Workers, typically more
concerned about how corporate profits are carved up rather than
how they attained, is majority owner of Chrysler. Perhaps most
troubling, particularly in the case of GM, is the fundamental
conflict inherent when operating and regulating a company falls
to one entity.
The pursuit of profits and political objectives often work
at cross purposes. The dealerships issue is a case in point.
Notwithstanding the possibility that the choice of dealership
closings was made arbitrarily if not politically, the fact
remains that the companies must cut costs to survive.
Excessive dealership networks are an area that is ripe for
cutting. The plan in effect as of this moment could save GM
hundreds of millions of dollars per year according to Fritz
Henderson. That the companies might be forced to abandon the
plan because a majority of its 536 CEOs have political reasons
for opposing it doesn't inspire much confidence that GM will be
allowed to succeed. Successful companies are not run through
referendum.
The dealership issue elevates doubts that politics will not
infect operational decisions at GM in particular, and it
portends highly erratic management as the President and
Congress wrestle for primacy in formulating policy of this
majority taxpayer-owned entity.
There are many other potential conflicts. For instance, has
the President been endorsing people for key executive positions
who are best qualified to run a profitable enterprise or who
might be more amenable to the Administration's plans for
converting the economy from a carbon-based to a renewables-
based one? Has he decided that had GM won't supplement its
fleets with cars produced at its plants in Mexico and China
because it is bad for the bottom line or because it bothers the
UAW? And how does Congress feel? Where does this Committee
stand? Where does that caucus stand on this operational issue
or that one?
Returning GM to profitability will require higher revenues
and lower costs, neither of which was made easier by imposing
more rigid CAFE standards on the automakers GM will be forced
to sell fewer high-profit vehicles, its trucks, SUVs, muscle
cars and luxury cars, and more low-profit or no-profit vehicles
of small cars to achieve a 35.5 mile per gallon fleet average,
all at a time when demand for small cars is falling.
Forcing automakers to produce vehicles that Americans
demand only when fuel prices are in the $4 range might appease
the Sierra Club, but it won't help GM or Chrysler.
Between the congressional pushback over the dealerships
issue and the insistence on higher fuel efficiency standards,
we see the objectives of two broad groups of policymakers:
those who want green production and treat the costs of that
goal as immaterial, and those who want the auto industry to
remain a jobs program regardless of the imperative of shedding
workers to become more competitive.
Let us not lose sight of the fact that $65 billion in
taxpayer funds have been directed to GM and Chrysler over the
past 8 months. In the case of GM, for taxpayers to get back
their investment, the company would have to be worth about $83
billion. At its historic high value in 2000, GM's worth, based
on its market capitalization, stood at $60 billion. Thus the
company's value must increase by about 38 percent from its
historic high achieved in the year 2000, when Americans were
purchasing 16 million vehicles per year, just to return
principal to the taxpayer. But U.S. demand projections for the
next few years come in really at around 10 million.
So as the Administration seeks to justify its wisdom in
intervening and taking ownership of GM, I worry it will be
tempted to use public policy and the Tax Code to tip the scales
further in GM's favor, increasing the likelihood that the
public outlay will grow larger, and dimming prospects that
taxpayers will ever be made whole on their $50 billion coerced
investment.
So what will happen to Ford if lawmakers and the
Administration have a favored horse in the race? Ford is
relatively healthy now, but continued support for GM and
Chrysler could well drive Ford to the trough, too, presenting
the specter of another taxpayer bailout to the tune of tens of
billions of dollars and another government-run auto company.
In closing, I would like to make one last point. The recent
misfortune to Chrysler and GM and the government's assumption
of responsibility for their rehabilitation occasioned a direct
appeal from President Obama to American economic patriotism a
few months ago. The President said: If you are considering
buying a car, I hope it will be an American car.
But even if one were inclined to buy an American car, the
tricky question remains: What constitutes an American car?
In 2008, the Big Three accounted for roughly 55 percent of
the U.S. fleet vehicle production and 50 percent of sales. To
speak of the U.S. auto industry these days, one must include
Honda, Toyota, Nissan, Kia, Hyundai, BMW, and other foreign-
nameplate producers who manufacture vehicles in the U.S. They
are the other half of the auto industry. They employ Americans,
they pay U.S. Taxes, support other U.S. businesses, contribute
to local charities, have genuine stakes in their local
communities, and face the same difficult economy as do GM,
Chrysler, and Ford.
In a properly functioning market economy, the better firms,
the ones that are more innovative, more efficient, more popular
among consumers, gain market share or increase profits while
the lesser firms contract. Efforts to pick winners disrupt that
process and can only weaken the entire lot.
Thank you for your time and attention.
Mr. Cohen. Thank you, Mr. Ikenson.
[The prepared statement of Mr. Ikenson follows:]
Prepared Statement of Daniel J. Ikenson
__________
Mr. Cohen. Our third witness is Mr. Richard Mourdock,
Indiana State Treasurer, elected as 53rd Treasurer of the State
of Indiana in November 2006, who is the chief investment
officer for the State of Indiana, and, in that capacity, seeks
to maximize a return of the State's investment portfolio. He
serves on 13 boards or commissions in his official capacity.
Recently, he was in the center of the national automobile
industry bailout as he pursued a case all the way to the United
States Supreme Court on behalf of Indiana pensioners and
taxpayers. I presume you know Steve Adams?
Mr. Mourdock. No, sir, I do not.
Mr. Cohen. All right. Prior to his appointment, he served
two terms as county commissioner of Vandenberg County.
Mr. Mourdock, please proceed with your testimony.
TESTIMONY OF RICHARD E. MOURDOCK,
INDIANA TREASURER OF STATE
Mr. Mourdock. Thank you, Chairman Cohen, Mr. Franks,
honorable Members of the Committee. Let me first say that it is
a true honor to be before you today. I have always had great
reverence for our government and its systems, and frankly never
imagined that I would be testifying to a congressional
committee. I truly do consider this an honor to be invited.
Mr. Cohen. I never thought I would ever be the Chairman of
the Committee. So we are both here.
Mr. Mourdock. I understand.
In being here today, I guess I am the only person who is a
witness in either this panel or the previous panel who, like
the Members of the Committee, has a political constituency. As
you just stated, I represent a number of different funds
including pension funds for Indiana State Police Officers, the
Teachers Retirement Fund of Indiana, and also an infrastructure
fund called the Major Moves Construction Funds.
Those three funds a year ago this month bought the secured
debt of Chrysler Corporation. We bought that debt at a
discount, and we did that for two reasons:
Number one, because it was secured debt. We saw it as a
good investment. We bought it at 43 cents on the dollar.
And secondarily--and this is not an unimportant point.
Secondarily, we purchased it because Chrysler Corporation has a
very large footprint in the State of Indiana, as we have some
6,000 employees for Chrysler that work in the area of Kokomo.
When we made that investment decision, we never imagined
that as secured creditors, the pension funds that I have
mentioned would be ripped off and see their values greatly
diminished, in what is an unprecedented act, through the
bankruptcy process.
I come here today to tell you that I have been asked dozens
of times: You took this case all the way to the United States
Supreme Court, Richard. What was this about? Was it about the
money? Was it about the law? Was it about the principle? Was it
about the precedent?
And the answer is yes, it was about all those things
because they are truly indivisible. They are indivisible when
we consider the fact of law and the precedents that we have
seen now set for our financial markets.
I will not rehash the entire case for you. I will simply
say that as a fiduciary of those funds, it is my utmost
responsibility to not leave any stone unturned in trying to
find the remuneration that our pensioners are due. I will
continue to do that, hopefully, back to the United States
Supreme Court.
We realize, even as I say that, that we cannot unring the
bell. The sale of Chrysler will not be undone. The rights of
all the other secured creditors have been vaporized by that
sale. However, because the Supreme Court did choose to hear our
case briefly, issued us a short stay, we have 90 days to go
back to the Court to again seek redress. We are considering how
we might best do that.
Questions that we could put before that Court, and I expect
we will, are about the valuation of Chrysler. Clearly there is
item after item that shows the valuation method that was done
on a liquidation basis was not appropriate. It was said here
this morning that liquidation was the only option. We do not
agree. Once the United States Government agreed to partner up
with Chrysler, it might have found some other partners and
might have found a more reasoned and historically precedented
decision and basis upon which a bankruptcy could have occurred.
The reason that didn't happen was, along with it, came the date
that this deal had to be done by June 15th. The big question
became: Where did that date come from?
Ultimately, even the president of Fiat, upon whom it was
continually said he would walk away from the deal if it didn't
happen by June 15, on the day the sale took place he said,
``No, that was never my date. I don't know where that date came
from.'' In fact, that date also was derived by the government
in making the sale happen very quickly.
There are a whole series of questions I might ask rather
than answer here today. One of those questions is if the word
``secured'' creditor no longer has meaning, we need in the
world of finance new definitions. Do the words ``good faith and
credit of the United States Government'' still have meaning? Do
the letters FDIC still have meaning?
Those are government entities. We need to make sure the
bond market is secure.
You know, in June of this year, Secretary of the Treasury
Timothy Geithner went to China, tried to convince the Chinese
to keep buying our bonds. And let's all hope they do so. When
he completed his official business, he spoke at the University
of Beijing to a group of business students. He told them the
American dollar was sound because of the sound and consistent
practices of the American government and Administration. The
room erupted in laughter. Chinese business students understand
we must have consistency in the financial markets.
I could not agree more with the Obama administration on the
point that we need more investment in American manufacturing if
we again hope to be globally competitive. I hope we all see
that. But this act, in stripping away the rights of secured
creditors, is antithetical to good investing.
Investors, institutional investors especially, are changing
the way they look at the world, and that is because of
Chrysler. That is not a good precedent that we have before us.
I look forward to any questions you have to ask. I come
here not as a lawyer. I am actually a geologist by training, as
I was sharing with Mr. Franks, but I learned in 30 years of
business a lot about the business world, and I know in that
world there must be consistency if you hope to succeed. And
that is what we have lost here in this process.
Mr. Cohen. Thank you, Mr. Mourdock. The man I was
referencing was a State treasurer, but way before you were
elected. So I missed your year in Tennessee.
[The prepared statement of Mr. Mourdock follows:]
Prepared Statement of Richard E. Mourdock
ATTACHMENT
__________
Mr. Cohen. Our fourth witness is Jeremy Warriner. Mr.
Warriner has brought a claim against Chrysler regarding an
accident he was involved in driving a Jeep Wrangler that he
owned. As a result of injuries suffered during the accident,
Mr. Warriner spent over a year in and out of hospitals and has
had 38 surgeries since the accident. His medical bills are over
$1 million. His case against Chrysler was scheduled for
mediation on May 5, but it was canceled due to Chrysler filing
for bankruptcy on April 30.
Mr. Warriner, we ask you to begin your testimony. We
appreciate your coming here.
TESTIMONY OF JEREMY WARRINER, INDIANAPOLIS, IN
Mr. Warriner. Thank you. Thank you, Mr. Chairman and
Members of the Committee, for giving me the opportunity to
speak today.
As you listen to my testimony, I ask that you think about
your friends, your family, your loved ones, your constituents,
and yourselves. Please understand that the safety risks created
by the auto industry bankruptcies have the potential to affect
all of us.
In October of 2005 I was in a car accident. The damage left
me trapped, pinned between the dash and the seat, and suspended
in my 2005 Jeep Wrangler Unlimited which had rolled onto its
passenger side. I had several severe injuries, all of which
would have healed. Then, a fire ignited in the engine
compartment that burned through the firewall into the passenger
compartment.
Somehow I was rescued. But when you look at the wreckage,
which is pictured in my written statement, the fact that I am
here alive to speak to you today is unbelievable.
Five and a half weeks later, I awoke from a medically
induced coma to learn that my legs had been amputated from
above each knee. My lower legs had sustained fourth-degree
burns. The burns had caused my body to become deathly ill from
infection. My kidneys failed, my lungs failed, and the only
chance that the doctors had to save my life was to amputate
both of my legs. My parents had to make that decision without
being able to speak with me, without knowing what my wishes
were.
Expert engineers determined that a plastic reservoir that
held my Jeep's brake fluid shattered during the accident and
caused the fire. The reservoir was not protected from impact,
and Chrysler had used a safer metal reservoir in prior Jeep
Wrangler models. I believe that this was a defective design.
In July of 2006 I filed a lawsuit against Chrysler. In
November of 2008 Chrysler delayed the court-ordered mediation,
based on its financial instability, until May 5th. And then
they declared bankruptcy on April 30th.
Through the bankruptcy process, Chrysler was relieved of
responsibility for approximately 300 pending claims, including
my own, and any future claims resulting from vehicle defects in
any of the approximately 10 million pre-bankruptcy vehicles on
the road today.
GM was relieved of responsibility for approximately 1,000
pending claims, as well as any injuries or deaths caused by GM
vehicles before or during the bankruptcy process that have not
been filed yet.
Each of the approximately 1,300 pending claims against
these auto manufacturers represent potential defects that could
lead to immediate safety recalls. If these cases are not heard
in court, these defects will not get tracked by the National
Highway Traffic Safety Administration, Chrysler and GM will not
admit these defects exist, recalls will not be issued, and more
injuries and deaths will occur. Ignoring the pending claims and
the safety data from over 10 million pre-bankruptcy Chrysler
vehicles will lead to tens of thousands of needless disabling
injuries or deaths. I have submitted a study published by
Safety Research Strategies to support that statement.
In an effort to stabilize these companies, our tax dollars
have been used in a manner that prevents injured taxpayers from
exercising their right to hold these companies accountable. In
the case of Chrysler consumers, that right has been taken away
from any taxpayer who was injured by a pre-bankruptcy vehicle
in the future as well.
The fact that we are stabilizing these companies with our
tax dollars should require them to have greater responsibility
to the taxpayers, not less.
If our laws allow that, then the laws must be changed and
new ones must be written. Legislation must be passed that holds
Chrysler to the same level of accountability that every other
automobile manufacturer in this country has.
The pending cases of current victims of Chrysler and GM
must also be heard. As I said, they represent dozens of
dangerous defects that need to be tracked by the NHTSA to
determine if and when recalls need to be issued which will make
our roads and our future vehicles safer.
I also want to lend my support to the effort by the auto
dealers to have their original franchise agreements restored.
Under those agreements, Chrysler and GM agreed to indemnify
auto dealers for product liability lawsuits, which would help a
lot of people against Chrysler and GM get compensated.
Settlements in these cases would benefit our economy by
allowing many of the victims to, once again, become functional
taxpaying members of society. Settlements would also provide
immediate financial relief to the government by allowing
victims like me to stop relying on Social Security Disability,
Medicare, and other government-funded assistance programs.
Congressman Carson's bill, H.R. 3088, the Jeremy Warriner
Consumer Protection Act, addresses these issues and will
provide these benefits.
At the end of the day, the sanctity of human life, our
safety and the safety of our loved ones must come first, before
anything else. There is not a single person in this room who
wouldn't drop what they were doing and rush to the hospital if
they learned that their loved one had been injured and was
laying in the hospital bed in the state that I was. There is
not a single person in this room who would not hold the
manufacturer accountable if they learned that it was because of
a defect that they were injured or one of their loved ones lost
their life.
A defective vehicle does not care whether you are a
Democrat or a Republican, if you are a member of the UAW, if
you work for Chrysler or GM, or where your money comes from.
I trust the Members of this Committee to act quickly,
because doing nothing increases the risk that you, your loved
ones, and your constituents will be severely injured or killed
by a defective vehicle. After you have experienced something
like I have, you learn that the theory of ``It won't happen to
me'' doesn't really protect you or those you love. You also
learn to see what can't be changed and what can. I can never
regain my legs or the subsequent loss that has come from that,
but we can regain our right to hold Chrysler and GM accountable
in court for the injuries caused by their vehicles.
It is time for Congress to take action to restore that
right and to ensure our safety. This is a tremendous
opportunity for the Members of Congress and for our President.
By taking action to right this wrong, our government can
clearly prove that it is still a government for the people.
Thank you.
Mr. Cohen. Thank you, Mr. Warriner.
[The prepared statement of Mr. Warriner follows:]
Prepared Statement of Jeremy K. Warriner
ATTACHMENT
__________
Mr. Cohen. Our fifth witness is Mr. Jack Fitzgerald. His
automobile businesses started with Bethesda Dodge dealerships
some years ago, and had grown into 9 locations and 35
franchises before the recent attenuation of those there in the
States of Maryland, Florida, and Pennsylvania. He has been a
member of the Maryland New Car and Truck Dealers Association,
the Washington Area New Automobile Dealers Association, and the
National Automobile Dealers Association since 1967. He served
on different councils and committees as an officer and director
for WANADA, an organization called WANADA. I think you have a
fish called Wanda. It's close.
Mr. Fitzgerald, would you begin your testimony.
TESTIMONY OF JOHN J. FITZGERALD, PRESIDENT, FITZGERALD AUTO
MALLS
Mr. Fitzgerald. You have a great sense of humor. And thank
you very much for allowing me to be here. I agree it is the
highest honor for a citizen to be allowed to appear before
Congress. You know, I was born on North Capitol Street and I
have always lived in the shadow of the Capitol. When I was
young, I lived in the shadow of the Capitol. I never thought I
would be in here talking to you, though.
I represent the Committee to Restore Dealer Rights, CRDR.
We are the dealers that got dumped. We are the losers. There
are 169,000 jobs that you could recreate by just passing our
bill; 169,000. Plus, you would give all of your constituents
better service than they are going to get.
And I see you walked in. I would love to have a cup of
coffee with Chairman Conyers. We are all here. We will go in
the back room, and the two of you can work us over. We are here
and we are ready.
We have not been able to talk to anybody. But our cause is
just. And the reason we have so much support here on the Hill
is because, you know, Americans fundamentally want to do what
is right. They are going to want to do what is right for Mr.
Warriner too. It is the right thing to do. That is what our
country is all about. That is what we are all about. You know,
you do the right thing. Do the honorable thing. It is the
American way. Now, we have coined the phrase--we coined the
phrase. We copied the phrase ``the big lie.''
I want to tell you about the big lie. The big lie involves
there are too many dealers. Well, when I started selling cars,
there were 40,000 car dealers that just sold domestic cars, and
there were only 50 million cars on the road. Now you have got
150 million cars on the road, and last year, there were only
13,000 domestic dealers left. When GM and Chrysler get finished
with us, there will be about 9,600, 9,400, I guess, left. So 50
million cars, 40,000 dealers; 150 million cars; 9,600, 9,400
dealers. It doesn't compute.
There are 10,000 import dealers and they have only got 87
million on the road. The problem is the task force looked at
Toyota and said that is a great company, let's copy what they
are doing. Well, for your information, General Motors was a
great company before Toyota ever got here. General Motors was
one of the truly great companies of all time and Chrysler too.
And I agree with the President, they can rise again. Their
problem is they have had some bad managers for the last 28
years or the early '80's is when this began, when the finance
guys got ahold of both those companies. And for your
information, UAW builds cars, or UAW workers build cars, in
California, and they build Corollas there. Ever heard of a bad
Corolla? I haven't. I am a Toyota dealer. I will confess to
that. That is a little commercial maybe.
But those are UAW workers in California building Toyotas
under Toyota management. The difference is the management. The
difference in all business is the management. The difference is
always the management.
Now, I am not going to say the UAW hasn't been twisted arms
and beating on them and work rules and a lot of bad things. But
management is responsible. When you diss your employees, they
have got a right to take it out on you, and they do. This is
America. That is the American way. We don't get pushed around.
Nobody treads on us. That is not the way we are. And that is
why we dealers are here. We are getting ripped off.
But the consumer is suffering even more. If you do the math
and think about the numbers, there are too few dealers and
there is going to be a lot too few. These dealers that were
cancelled were profitable, sustaining businesses. They were
employing people, paying taxes, doing the right thing, and they
don't get any money from the government or the manufacturers.
We pay them--if we never sell a single car we have got to pay
them at least 40 grand a year, $40,000 in my smallest store,
which sells 100 new cars a year, 100 new cars a year, sells
about 400 or 500 used.
And that is another thing. We didn't talk about used cars.
I will get back to that. We pay $40,000 plus in that small
store. Now I have got stores, I have got one that sells 6,000 a
years. Does it make me wonderful? No. Part of them were
Toyotas. That is why I am so wonderful. When Jim Press was
selling Toyotas, he was pretty wonderful, wasn't he? He hasn't
done so well at Chrysler. Failed at Chrysler. Chrysler
management failed. General Motors management failed. And yet
they are in place getting paid bonuses to stay and I am here
talking to you. What is wrong with that picture? It makes no
sense, does it?
Management should be held accountable. Management must
manage. That is the oldest rule in the book. And they didn't
manage; so they shouldn't keep their jobs. They should not be
there. But they are expert on handling outside directors, and
they handled the task force like they have always handled
outside directors: They manipulated them. The guys on the task
force told you yesterday they had never run a business. They
don't run businesses. They buy and sell them. So they didn't
know the difference. And I think that is really what happened
to the task force. We haven't heard consumer reports mentioned
once in this room, and yet GM and Chrysler, if it weren't for
Chrysler, GM would be dead last in Consumer Reports' rankings.
That is what your customers think of you. That is what
really matters. It doesn't matter what Wall Street thinks; it
matters what the consumers think because that is who writes the
check to buy the car. And I have got 43 years of data at
Consumer Reports and I can show you when Chrysler and GM made
the best cars in the world, the best cars in the world, and
they also made a lot of money, and they put a lot of people to
work. The union was three times, four times, five times the
size it is now. We could put the people in the Midwest back to
work. We could put the whole country back to work. There were
55 million cars sold last year around the world. We should be
getting a piece of that. We are the best industrial country in
the world. We have four or five generations of people that know
how to build cars. In my lifetime I sold those cars. I know
what they can do, before the finance guys came along and took
over those companies and ruined them.
This is America and we should be building American cars the
American way in Detroit and every place else. We can put those
people back to work. But you have got a board of directors on
these two new companies, none of them ever built a car before.
There is not one experienced manufacturer--car manufacturer on
that board and there is nobody running one. The guy who used to
make telephones is running one of them and another guy who used
to make batteries. Now, how is that going to get us a great car
again? We need our car manufacturing to go hire some of the
Toyota--retired Toyota executives. They are available.
Mr. Cohen. You have gone a little over the----
Mr. Fitzgerald. Oh, I am sorry.
Mr. Cohen. That is all right.
Mr. Fitzgerald. Maybe you can ask me some questions.
Mr. Cohen. Thank you, Mr. Fitzgerald.
[The prepared statement of Mr. Fitzgerald follows:]
Prepared Statement of John J. Fitzgerald
ATTACHMENT
__________
Mr. Cohen. Our sixth witness is Mr. Jim Tarbox. He is a
native of Rhode Island car dealership owner and operator. As
part of the Chrysler bankruptcy and restructuring, he has spent
much of his personal time in D.C. representing many
independently owned dealerships along with NADA. Born and
raised in North Kingstown, Mr. Tarbox studied management and
automotive marketing at Northwood University in Michigan. The
closing of his two dealerships will have a significant impact
on his family and potentially cause his personal bankruptcy as
well as that of his business.
Mr. Tarbox we appreciate your coming to testify and will
you proceed with your testimony.
TESTIMONY OF JIM TARBOX, PRESIDENT,
TARBOX MOTORS, INC.
Mr. Tarbox. Good morning, Mr. Chairman and Members of the
Committee. My name is Jim Tarbox and I am a former Chrysler new
car dealer from North Kingstown, Rhode Island. Thank you for
the opportunity to testify before you today on legislation that
could change the course of my life and the lives of many other
dealers across the Nation.
I introduced myself as a former Chrysler dealer because
just over a month ago, my two dealerships were taken from me. I
was stripped of my right to operate under this car maker.
Despite my franchise agreement, I was told there would be no
more new cars to sell, no more parts to ship, no more inventory
to keep or sales goals to meet and beat. I was told I was
closing. I was not given any justification for my selection,
and worst of all, I had less than a month to make it happen.
All I had worked for, all I built, all I had achieved was gone
within a few seconds.
When I read the letter, my first thoughts were not about
the property I would lose, the cars still on my lot, or the
hundreds of thousands of dollars in machines I had purchased
for car repairs. All that came later. My first thought and
those that plague me as I sit here today were about my
employees, their families, and as you might expect, my family.
How do you tell your employees they are headed for the
unemployment line and how do you tell your wife that all you
worked for may be gone, especially when your success was well
known? It is not easy. I am 42 years old. I have a wife, Kim,
who is here with me today, and I have three young girls.
If my dealership is not restored, we will lose everything,
including college savings for my children and my home. I am at
a loss as to how a small business person like me found myself
in this position. If it weren't for some damaging testimony at
the Chrysler bankruptcy hearing, I might have never known.
During that hearing, a witness had read out loud some e-mail
exchanges. Chrysler executives said in an e-mail discussing
closures that I was a belligerent and combative dealer. Why
would they say this? They said this because I opposed, and was
able to stop, the allowance of another Jeep dealership within
miles of my facility. I knew after hearing this that Chrysler
targeted me for closure.
To give you some background, due to my success with
Chrysler, they urged me to purchase another dealership in
neighboring Massachusetts in 2007. They made promises of
getting me Dodge and were negotiating site control. Once I
closed, they attempted to use their promises as leverage. They
tried to put another Jeep franchise in my market in Rhode
Island. I protested under State franchise laws. They withdrew
their intent and went bankrupt. They chose to reject both my
dealerships because of the protest. This protest put me in
their line of fire for closure. Chrysler executives wrote in
the e-mail, This is going to be a tough one. His dealerships
are performing fine with good score cards. And the reply was
from Phil Scroggins, the northeast business center director:
``He is a belligerent, combative dealer to litigates and
protests any new Jeep franchise in Providence, Rhode Island.
Management made decision to cut him. He has not operated in
good faith.''
There is no criteria, no data-driven criteria here. This e-
mail makes it quite evident that the selection process was
arbitrary, unfair, and inappropriate. I was targeted. I am sure
many others were randomly selected as well. Everything I have
worked for, all my success, my businesses, and my rights gone
in seconds and, even worse, given to the competitor up the
road. And despite their claim I was closed because I was a
stand-alone Jeep dealer. Forty-four stand-alone Jeep dealers
and more than 100 stand-alone Dodge dealers remain in business.
There is no criteria and I would request that Congress look
closely at this issue and work to save our businesses, restore
them, and restore our rights.
My family has been in the car business for three
generations. My dealership was founded in 1935. And as in the
case with many dealers, my family name Tarbox is well known and
respected in my home State and beyond. This is the industry I
grew up in, the industry I know, and the industry I love. I am
proud to say I helped build a well-regarded and high-performing
Jeep dealership in Rhode Island. I was one of the highest
volume Jeep dealers in the northeast. I have maintained a
volume of 450 percent planning potential. I have sold 750 new
Jeeps a year, and I am in the top 10 percent nationally with
Chrysler. My dealership exceeded sales goals and performed
above and beyond any expectation set by Chrysler. They have
indicated that they value high-performance top-notch employees
and those dedicated to aggressive marketing their product.
Including the millions I have spent branding Tarbox with Jeep,
we are on top in all categories. But Chrysler is refusing to
release their specific criteria. It certainly begs the
question, if not for performance, what was the criteria for
closure?
In fact, it seems closure was decided based on personality
and relationships, not performance. This is not fair and sound
business practice. This is not in the best interest of the
taxpayer, who suddenly has a stake. This company is playing
with our lives.
As you have seen likely right in your districts, there are
dealers or should I say former dealers suffering. These
closures may result in the bankruptcy of many productive small
businesses, foreclosures of their homes and filling up the
unemployment rolls when our country is experiencing the highest
unemployment rate in decades. In fact, my State boasts the
second highest rate in the Nation at 12.4 percent. My employee
count alone has dwindled from 60 to 15. In my case, my
businesses will go bankrupt and I may have to go personally
bankrupt as well. There is no fallback plan. This dealership
was my plan. It is my livelihood.
As dealers, our property rights have been violated. Our
contractual rights have been violated. And our faith and trust
in the system of good business practice have been violated. We
have invested in everything and they are leaving us with
nothing. As entrepreneurs, as successful business operators, as
employers, and as Americans, we deserve to retain our rights
and protections.
I ask you on behalf of dealers across the country and our
communities to support this legislation, support the
restoration of our dealerships and our rights. Thank you.
Mr. Cohen. Thank you for your testimony, Mr. Tarbox.
[The prepared statement of Mr. Tarbox follows:]
Prepared Statement of Jim Tarbox
Good morning, Mr. Chairman and esteemed members of the committee.
My name is Jim Tarbox and I am a former Chrysler new car dealer
from North Kingstown, Rhode Island. I thank you for the opportunity to
testify before you here today on legislation that could change the
course of my life and the lives of many other dealers across the
nation.
I introduced myself as a former Chrysler dealer because, just over
a month ago, my two dealerships were taken from me. I was stripped of
my right to operate under this carmaker. Despite my franchise
agreement, I was told there would be no more new cars to sell. No more
parts to ship. No more inventory to keep, or sales goals to meet and
beat.
I was told I was closing. I was not given any justification for my
selection and best of all, I had less than a month to make it happen.
All I worked for. All I had built. All I had achieved was gone
within the few seconds it took me to open a letter from the Chrysler
home office.
When I read this letter my first thoughts were not about the
property I would lose, the cars still on my lot or the hundreds of
thousands in machines I had purchased for car repairs . . . all that
came later. My first thoughts, and those that plague me as I sit here
today, were about my employees, their families and as you might expect,
my family.
How do you tell your employees they're headed for the unemployment
line? And how do you tell your wife all you've worked for may be gone?
Especially when your success was well-known?
I'll tell you: It's not easy.
I am 42 years old and my wife, Kim--who is here with me today--and
I have three young girls.
If my dealership is not restored, we will lose everything--
including college savings for my children and my home.
I am at a loss as to how a small businessperson like me found
himself in this position. If it weren't for some damaging testimony at
the Chrysler bankruptcy hearing, we might never know. But, during that
hearing, a witness had to read out loud some e-mail exchanges. . . .
Chrysler executives said in an e-mail discussing closures that I
was a ``belligerent'' and ``combative dealer.''
Why would they say this?
They said this because I opposed, and was able to stop, the
allowance of another Jeep dealership within miles of my facility.
I knew after seeing this, that Chrysler targeted me for closure.
To give you some background: due to my success, Chrysler had urged
me to purchase a dealership in neighboring Mass. They made promises of
getting me Dodge and were negotiating site control.
Once I closed, they attempted to use their promises as leverage.
They tried to put another Jeep franchise in my market in RI.
I protested under state franchise laws. They withdrew their intent
and went bankrupt.
They chose to reject BOTH my dealerships because of the protest.
This protest put me in their line of fire for closure.
Chrysler executives wrote in the e-mail: ``This is going to be a
tough one--His dealerships are performing fine with good scorecards.''
And the reply from Phil Scroggins--the northeast business center
director? ``He's a belligerent, combative dealer who litigates &
protests any new Jeep franchise in the Providence, RI area . . .
Management made decision to cut him--He has not operated in good
faith.''
There is NO data driven criteria here.
This e-mail makes it quite evident that the selection process was
arbitrary. It is arbitrary, unfair and inappropriate. I was targeted
and I am sure many others were randomly selected as well.
Everything I have worked for, all my success, my businesses and my
rights--gone in seconds. And even worse--given to my competitors on a
silver platter.
And despite their claim I was closed because I was a stand alone
Jeep dealer, 44 stand alone Jeep dealers and more than 100 stand alone
Chrysler dealers remain in business. There was no criteria and I
request that Congress look closely at this issue and work to save our
businesses. Restore them and restore our rights.
My family has been in the car business for three generations. My
dealership was founded in 1935. And, as is the case with many dealers,
my family name, Tarbox, is well-known and respected in my home state
and beyond.
This is the industry I grew up in, the industry I know and the
industry I love.
I am proud to say, I helped build a well-regarded and high-
performing Jeep dealership in Rhode Island. We:
Are one of the highest volume Jeep dealers in the
northeast
Have maintained a sales volume at 450 percent of
planning potential
Have sold over 750 new jeeps a year
and, are in the top 10 percent nationally with
Chrysler
My dealership has exceeded sales goals and performed above and
beyond any expectations set by Chrysler.
They have indicated they value high performance, top-notch
employees and those dedicated to aggressively marketing their product.
Including the millions I have spent branding Tarbox with Jeep, we are
top in all categories. But Chrysler is refusing to release their
specific criteria.
It certainly begs the question, if not for performance, what was
the criteria for closure?
In fact, it seems closure was decided based on personality and
relationships, not performance. This is not a fair or sound business
practice. This is not in the best interest of the taxpayer who suddenly
has a stake. And this company is playing with our lives.
As you have seen, likely right in your districts, there are
dealers--or I should say former dealers--suffering. Sure there are
those dealers who own dozens of dealerships or more and maybe these
closures, although having an impact, will not put them out of business.
But let me be clear in saying, for small dealers with one or two
dealerships--the dealers I represent here today--this action by
Chrysler and the Task Force will produce grave consequences.
These closures may result in the bankruptcy of many productive
small businesses, foreclosures of their homes, and filling of the
unemployment rolls when our country is experiencing the highest
unemployment rate in decades. In my state in fact, we boast the second
highest rate in the nation at 12.4 percent.
My employee count alone has dwindled from 60 to 15.
In my case, my businesses will go bankrupt and I may have to go
bankrupt personally as well. There is no fall back plan--this
dealership was my plan. It is my livelihood.
As dealers, our property rights have been violated. Our contractual
rights have been violated. And our faith and trust is the system of
good business practice and good faith have been violated.
We have invested in everything and they are leaving us with
nothing: not even answers to back up their closures.
As entrepreneurs. As successful business operators. As employers.
And as Americans. We deserve to retain our protections. And I ask you,
on behalf of dealers across the country, and our communities, to
support this legislation. Support the restoration of our dealerships
and our rights. It WILL change the lives of so many.
Thank you.
__________
Mr. Cohen. Our seventh witness is Gregory Williams. Mr.
Williams is the former President of Huntington Chevrolet
located in Huntington Station, New York. A veteran of the
automotive business industry for more than 30 years, he has
appeared on the Black Enterprise list every year since 1979. A
founding member of both General Motors Minority Dealers
Association and the General Motors Minority Dealer Advisory
Council, elected two times chairman of the Minority Dealer
Advisory Council and held board seats with both organizations
and was recently a board member of the National Association of
Minority Automobile Dealers and the GM Northeast and GMC
central dealer councils.
Mr. Williams, will you proceed with your testimony.
TESTIMONY OF GREG WILLIAMS, PRESIDENT,
HUNTINGTON CHEVROLET, INC.
Mr. Williams. Thank you, Mr. Chairman. I would like to
thank the Chairman and the Members of the Committee for
inviting me here to speak. My name is Gregory Williams, and I
have worked for over 30 years as a dedicated and faithful GM
dealer. I am a former dealer at Huntington Chevrolet. While I
am here today representing the numerous minority GM and
Chrysler terminated and rejected dealers, I would like to share
my personal and tragic story with you regarding the disparate
treatment that I suffered at the hands of GM and GMAC.
In 1999, GM asked me to go to Long Island and investigate
the purchase of Huntington Chevrolet. After performing due
diligence on the store, I told GM that the potential was there
but the location was wrong and the facility was too outdated.
GM informed me that they would take care of these problems and
find a new location and build a new facility. Based on these
assurances, I purchased the dealership, paying the former
dealer $1.3 million in goodwill. I put in $500,000 of my own
and the remaining $2.75 million went into investment with
Motors Holding Division of General Motors. From the date of the
purchase to 2005, the dealership was profitable. All the
profits went toward paying dividends and purchasing stock from
General Motors. During this period, over $1.5 million was paid
to them. At the same time, we were still looking to relocate
the dealership.
In 2003, as a result of hard work and the dealership's
performance, I was presented with GM's most prestigious award,
the GM Dealer of the Year. This award is presented annually to
the top 100 performing dealers out of 7,000 dealers nationwide.
It is one of the accomplishments that I am most proud of. In
2005, I, along with most of the Motors Holding dealers were
asked if we would consider an early buyout from Motors Holding.
GM needed to raise additional capital at this time. I was
informed by Motors Holding that I owed $1.9 million to buy them
out and that they had spoken to GMAC and that GMAC would take
care of making the loans with us. I contacted GMAC and got
approval for loan but was told by Motors Holding that I could
not buy them out for $1.9 million because they would miss the
dividends that I had been paying. So they told me I would have
to pay $2.5 million to buy the store out. In effect, GM got a
$600,000 goodwill from me when I bought them out of my store.
During the financing process, I was told by GMAC that I had
to personally guarantee the loan and also personally guarantee
the floor plan line of credit. This had never been asked of me
before and, you know, I went with it. GM gave me a note of
$20,000 a month and increased my expenses by that much.
The dealership struggled over the next few years as GM lost
market share year after year. We made a little and we lost a
little, but we were profitable for most of the time. And
through the month--through the year of 2008 we were profitable
until October when the bottom fell out. It was, at this time,
stated that both GM and GMAC stated that they would need
bailout money to survive and GM was openly questioning whether
they would make it to December without the immediate infusion
of cash. Needless to say, business was terrible. At the end of
November I received a notice from GMAC that stated that I did
not have enough cash in the business largely due to the drastic
drop in business at the end of 2008. They stated that I must
infuse $1.5 million into the business or lose my floor plan
loan with them.
On May 17, I received a letter from GM stating that my
location would be closed and I would not be moving forward as a
GM dealer. It should be noted that there are 19 Chevrolet
dealers on the Long Island metro New York City area and for the
year 2008 my dealership was number three in retail sales and
number one in customer satisfaction. On May 24 GMAC notified me
that I no longer qualified for a floor plan loan with them
because I was not able to invest $1.5 million in additional
capital.
Feeling that I had no options, I sent a voluntary
termination letter to General Motors on May 25 because based on
voluntary termination with the New York State franchise law, GM
would be required to repurchase my inventory and the parts.
That would have amounted to approximately $6.6 million. GMAC
would have gotten that $6.6 million and the only thing I would
have to negotiate with them on is what was left on my loan to
pay off General Motors. GMAC gave me 90 days to find another
floor plan and to comply with a number of unreasonable demands,
including signing a confession of judgment for $8.1 million.
This confession of judgment was basically the total of my
inventory along with the $1.4 million that I still had left of
the loan that I paid General Motors. These demands were both
unreasonable and impossible and GMAC's demand that I find a
floor plan in 90 days was equally impossible.
On June 1 when GM filed for bankruptcy, I was advised that
they also decided not to honor my voluntary termination letter.
GM ultimately determined in 2005 when I was buying them out
that the dealership was worth well over $2.5 million in
addition to the $1.5 million that I had already paid. Now they
have unilaterally determined that the dealership is worthless,
making it impossible to sell or repay this massive debt. On
June 2, I received GM's wind-down agreement. The agreement
provided a deadline date of June 11 to sign the agreement or be
rejected in the bankruptcy proceeding. I reluctantly signed the
agreement, although I strongly objected to the terms of the
agreement and felt enormous pressure to sign it knowing that if
I did not, I would lose the right to receive the proposed wind-
down payment, which is the only form of financial support that
I was to receive from GM.
It should be noted that the debt I owed to GM and GMAC far
exceeded the amount of the proposed wind-down payment, and yet
I am being held personally liable of the entire debt because of
the personal guarantees.
Huntington Chevrolet was my only dealership. I have no
other source of income as I used most of my life savings to
reinvest in the dealership. I have no health insurance. I had
to lay off all my employees and walk away from a business that
I owned for 11 years and an industry that I have had for over
30 years--that I had been in for over 30 years. All of this
occurred while I was still paying for the loan to buy out
General Motors. I now owe $1.4 million, and without the
dealership, I have no way to pay it.
The only people who made money off my dealership was GM and
GMAC. GM received all of its investment that they had in the
dealership including a healthy profit, a minimum of 15 percent
dividends plus $600,000 goodwill at their buyout. GMAC also
made millions of dollars on my inventory floor plan over the 11
years that I owned and operated the dealership. GMAC has now
confiscated my entire inventory of vehicles along with all the
parts and company assets and they have said that they will
liquidate the inventory, parts, and assets, and will come after
me personally for any shortfall since I signed the personal
guarantee for the inventory and the loan.
Mr. Cohen. Mr. Williams, if you could start to wrap up, we
are a little bit--2, 2\1/2\ minutes over.
Mr. Williams. Okay. I will go to the final page here.
We need your help not only to walk away from this
tremendous debt that we have acquired while attempting to play
by the rules, but to leave with financial stability to restart
our lives all over again. At 60 years old, I am forced to face
the reality that my employment future is limited. I was always
of the opinion that my investment was my retirement and that
when I decided to retire, I would sell my business and live off
the proceeds. I had no idea that at this stage of my life, GM
and GMAC would wreck my world as I knew it.
Thank you for the opportunity to share my personal story
with you today. I plead for this Committee and all the Members
of Congress who are listening to my testimony to please help
us. We need your help to ensure that the auto manufacturers are
required to treat us fairly and equitably as we watch our lives
disappear without fairness, transparency, or due process of
law. Thank you.
Mr. Cohen. Thank you, Mr. Williams.
[The prepared statement of Mr. Williams follows:]
Prepared Statement of Gregory Williams
__________
Mr. Cohen. Our final witness will be Mr. Knapp, and he will
be introduced by agreement with the lead Member here on the
minority side by our distinguished Member from Houston, Texas,
Ms. Sheila Jackson Lee. Ms. Jackson Lee, a Member of this
Committee but not the Subcommittee, is recognized for the
purpose of introduction.
Ms. Jackson Lee. Let me thank Chairman Cohen and Ranking
Member Franks for their courtesies extended, and let me also
thank them for allowing me to introduce Mr. Knapp and as well
thank them for allowing the National Association of Minority
Automobile Dealers to be present here because I believe these
are the tragic stories that we need to hear.
Mr. Knapp is symbolic of many Americans, and he is an heir,
if you will, of hard work. Some people might say of money. He
is of hard work. Born in Harlingen, Texas where he attended
Harlingen High School and graduated in 1976. That means he is
from the valley, from South Texas, and he is proud of it. He
married in 1979 to Debbie Knapp, graduated from Texas A&M
University in 1980, and the rest of the State won't hold that
against him, with a degree in finance and moved to Houston,
Texas, where he immediately went to work for Knapp Chevrolet.
And I think it is important to note his grandfather organized
and built that company and started it in 1939.
He is a third-generation dealer in the heart of Houston,
and he has been active in so many local community activities
such as his good friends to his left, I believe, and he too has
supported high schools, been active in his church, served as a
civic leader, as a board member of the Greater Heights Area
Chamber of Commerce, which I remember seeing him as we
interacted as community and business and we worked together. He
also has his district, has his particular dealership in the
heart of the fourth largest city in the Nation, which has been
known to be call a ``little United Nations.'' Robert Knapp has
reflected that by 43 percent plus of his employees being
diverse, representing many families in my constituency. Bob
Knapp is in appeal. He is one of the 900 appeals for GM, unlike
Chrysler, which was recorded to have one because they have no
administrative appeal, they only have bankruptcy. He is only
symbolic of the pain, as he told me in my office, of so many
who are suffering like him.
So I am hopeful that as he proceeds, he will be able to
tell us how urgent it is for us to move forward. He will be
able to tell us that the action is necessary now, that GM and
Chrysler and the new CEOs that feel good and can be out on
their patios or be at the beach right now because they are out
of bankruptcy, how they can do this together with the
Administration, together with Congress, and I hope that he will
tell us how lost dealerships--because that means my community,
for 50 miles around, will not have a dealership. My city of
Houston will not have a dealership to buy discounted vehicles,
how this will impact the competitive nature of our American
automobile dealers by these dealerships being cut down or shut
down. I would like to say cut down because they are. He will be
able to share those thoughts with us.
Mr. Chairman, I am very pleased to introduce a gentleman
who is symbolically representative of the true grit of America,
raising himself up by his bootstraps and working hard every
day, and this is Robert Knapp of Knapp Chevrolet in Houston,
Texas.
TESTIMONY OF ROBERT G. KNAPP, PRESIDENT,
KNAPP CHEVROLET
Mr. Knapp. Thank you for your kind words.
Mr. Chairman and Members of the Committee, my name is Bobby
Knapp, and I am president of Knapp Chevrolet in Houston, Texas.
Thank you very much for giving me this opportunity to testify
at this hearing. I would also like to take the opportunity to
give a special thanks to my congresswoman, the Honorable Sheila
Jackson Lee of the 18th District of Texas for her support in
facilitating my testimony here today.
The focus of my testimony is GM's decision to terminate
Knapp Chevy franchise. The testimony regarding my dealership
will relate to circumstances regarding other dealerships
throughout the country.
Fact: Knapp Chevrolet sold over 1,000 new units in 2008.
Fact: In Houston, the loss of Chevy dealers results in the loss
of GM market share. Terminating Knapp will cause GM to lose
more Houston market share than it has already lost. I included
a graph in my package that kind of highlights this, but let me
just go over some numbers.
Our district--at the beginning of 2008 our district in
Houston contained 12 dealers. The first 8 months of the year
those dealers sold an average of just over 1,200 units a month.
At that time three dealers, including two very large ones in
Houston, went out of business. The last 3 months of 2008, those
dealers that were left sold an average of just over 500 units a
month. That trend has continued through 2009. It shows that
closing dealerships in our market will reduce market share.
Fact: Looking at the last 12 months including June, Knapp
Chevy was operating at a profit in 11 months. The only down
month being last September when we were without electrical
power for 15 days due to Hurricane Ike. Fact: By terminating
Knapp, GM is a abandoning areas in and around downtown Houston.
GM has documented the growth and potential of this market. I
included a map that GM created showing our market share and
neighborhood and the increase in households. In our actual
neighborhood and not necessarily our whole market area but in
our neighborhood, the increase in households is astounding. Why
GM would want to abandon this market is beyond me.
Fact: GM is forcing us to take an agreement that
essentially gives all rights to GM and all obligations to
Knapp. Fact: GM references termination assistance as part of
the wind-down process, but this proposal does not cover Knapp's
losses associated with the forced closing. What GM is offering
will not satisfy our third-party contractual obligations which
total over 600,000 from things like computers and phone systems
and other things. Although the termination process would not be
complete until October 2010, GM is strangling our business by
preventing us from ordering new vehicles thus eliminating one
of our primary income strains.
Fact: At the time we received notice that GM would not
renew our franchise agreement, we had over 40 sold orders on
order including a number of ambulances for the City of Houston.
At that time, we were told by GM that these orders would not be
honored.
Fact: Knapp moved into its facility December 6, 1941, 1 day
before the bombing of Pearl Harbor and over the past 10 years,
we have invested 3.75 million in these historic facilities and
equipment upgrades.
Fact: The estimated job loss in the State of Texas with
these proposed closed dealerships is over 10,000. Eighty-two of
these hardworking people are Knapp employees whom we consider
family. We offer substantially better benefit packages than
others in the industry and our average employee tenure is 7
years with many employees having been with us for over 10
years. All will lose their jobs and livelihoods because of GM's
termination. Since receiving GM's May 15 termination notice, we
have been frustrated at every turn and trying to get a fair and
just resolution of this matter. But because the government is
now so deeply involved in keeping GM going, we feel we had no
option but to appeal to you, our elected representatives to
intervene. We have been very thankful for the support we have
received from Congresswoman Sheila Jackson Lee and other
members of the Houston delegation, in particular, Gene Green in
the House, as well as Mr. Maffei of this Committee, who
introduced H.R. 2743.
We--it is very important to say that we need action now.
Dealers, thousands of them, are hanging by a thread. We need to
pursue this legislation, but we also need to pursue an
administrative solution to this situation, which is very
possible. GM and the White House, along with Congress and
dealers, need to sit down and work for an administrative
solution to the matter, and I stress time is of the essence,
because every day, guys like these are going out of business
and when they are gone there is no way to bring them back. A
few things I would like to share at the end of this is that in
our----
Mr. Cohen. We need to wind up.
Mr. Knapp. Okay. In our market--people buy their cars where
they live and they service them where they work. The population
of our area is experiencing phenomenal growth and GM needs to
retain that. Almost 200,000 people work in the downtown area.
GM needs to satisfy the service needs of the market created by
this downtown group. The retention of Knapp Chevrolet in
downtown Houston will allow GM to continue and increase their
market share and their growing and vibrant downtown area. Since
the government is bailing out GM, Members of Congress have the
right to intervene to avoid destruction of viable dealerships.
There are two things Congress can do: Force GM to negotiate
fairly or if that doesn't work, it can attain final enactment
of the Automobile Dealers Economic Rights Restoration Act of
2009 which by statute will preserve dealers' rights. I urge you
to choose one of those two options. To take the third option
would change the current crisis into a permanent disaster.
I will be pleased to answer your questions and just
appreciate the chance to be here. Thank you.
Mr. Cohen. Thank you, Mr. Knapp.
[The prepared statement of Mr. Knapp follows:]
Prepared Statement of Robert G. Knapp
__________
Mr. Cohen. We have included in our panel--it is a large
panel, but we have taken two and made it into one. I appreciate
your testimony and I will first recognize myself for questions.
Each Member will have 5 minutes to ask questions.
Mr. Warriner, let me ask you this: Your case against
Chrysler how much were you seeking or are you seeking in
damages from Chrysler?
Mr. Warriner. We are seeking damages. Honestly, I don't
have a total, but I can tell you that the amount of liens
against any kind of settlement at this point are well over a
million, which means that I would see not a dime. And the costs
of my prosthetics, which insurance did not want to cover--it
took me quite a while to fight that--was roughly over 60,000
per leg, and they are not expected to last as long as hopefully
I am, which means I will incur that expense and continued
expense throughout the course of my life.
Mr. Cohen. I presume you had discovery in litigation?
Mr. Warriner. Yes.
Mr. Cohen. Did Chrysler ever admit any liability?
Mr. Warriner. Chrysler has not admitted liability and they
have not spoken with me across the table.
Mr. Cohen. Is this the case of first impression or have
there been other cases with the same----
Mr. Warriner. I am sorry?
Mr. Cohen. Have there been other cases that you know of
where the same defect was alleged to cause the injury?
Mr. Warriner. Not that I am aware of.
Mr. Cohen. So when you got to mediation level, had they
made you an offer of any kind?
Mr. Warriner. Mediation originally was supposed to happen
on November 17 of 2008. They delayed it to May 5 and declared
bankruptcy 5 days before that.
Mr. Cohen. But they never made any offers or----
Mr. Warriner. No, never made an offer. They did contact us
and wanted to know what we were asking, and I believe at that
point, the demand was $11 million.
Mr. Cohen. Thank you.
Professor Baird, you talked about some of these super
priority liens and obviously you think this is one that should
be one?
Mr. Baird. I don't know the facts and circumstances of this
case----
Mr. Cohen. I mean tort liability.
Mr. Baird. Tort liability generally, because if tort law is
working correctly, it forces the firm to internalize all the
harm that it is causing to other people. If you give it to a
super priority over secured creditors, I am sure you will have
a bunch of banks in here saying well, wait a second, if that
happens, we are going to have to look at these firms closely
and make sure they don't do stuff like that to which the answer
is, well, that is the point. Other people may say look, it may
actually force some businesses out of business because they are
creating such dangerous products. They are posing harm on other
people that if you don't free them from tort liability, they
will go on and keep on doing these things.
Well, one of the reasons you have tort law is to make sure
that firms that are causing more harm go out of business. So
again, a super-priority lien does that, but I should emphasize
it has to exist inside of bankruptcy and outside of bankruptcy.
Mr. Cohen. Is there precedent for those----
Mr. Baird. There are some environmental laws that work this
way.
Mr. Cohen. Can you cite me some examples where the
liability has continued along with the company even though they
have gone through either a 363 or a Chapter 11?
Mr. Baird. Typically speaking, if you don't have something
like a lien that tracks the assets then when the asset is sold
in a 363 sale, it is sold free and clear of all these
liabilities, and the only recourse the tort victim has is to
the proceeds of the sale. It is a slightly different case if we
are talking about a future liability, but with respect to an
accident that has already happened, the only recourse in the
absence of a lien is to the proceeds of the sale.
Mr. Cohen. In the General Motors case they are accepting
liability for future claims. Of course there are vehicles that
may have been manufactured prior to the bankruptcy.
Mr. Baird. Yes.
Mr. Cohen. Obviously they are saving money, but what is
their argument for having that line of demarcation?
Mr. Baird. The question is if the accident hasn't happened
yet, do you treat it as a prebankruptcy claim? And there are
proposals to deal with this. The bankruptcy code doesn't deal
well with them now, but you have got two competing arguments
against each other. On the one hand, you want to make sure the
business continues free of past obligations. On the other hand,
you want to make that future accident victims have their day in
court, and they never had their day in court if the debt got
discharged before the accident took place. And so you need a
way to figure that out. But there are proposals to do that.
Mr. Cohen. It just seems like the defect is going to be the
same if it is a vehicle produced after the bankruptcy. That may
be one way to do it. But if the accident is afterward, it is
just lottery and you have got your number when it came up.
Mr. Baird. The way to think about this is to figure out a
way to estimate future liabilities and create a fund that is
going to be there available for those--for those future tort
victims. This is something that can happen in the Manville
case. There is a way of trying to navigate through these
problems. The big difficulty you have is you want to make sure
that the tort victims get as much as possible but that is only
going to happen if the assets are put to their best use. If you
liquidate the assets, then no one is going to be paid anything.
Mr. Cohen. Mr. Ikenson, in your testimony, you had concerns
and problems with the government's coming in and rescuing these
two historically large corporations with so many employees.
What would have been your suggestion if instead of having 536
CEOs, we had one and it was you? Sayonara Chrysler and General
Motors and all their employees?
Mr. Ikenson. Well, first of all, I don't think that the
situation was as bad as it was put out to be, Chairman. On
November 5, the day after election, the Center for Automotive
Research published a report which said that 3 million jobs were
at stake, and that number was taken by the media and it became
a central part of what I consider to be crisis mongering in the
situation. The premise for those 3 million job losses was that
if one of the Big Three went down the supply chain, the parts
supply chain, would be threatened and that would put too much
pressure on the other two and ultimately not only would the Big
Three go down but the foreign name plates as well, there would
be no auto production in the United States. That was never part
of the story in the media.
I think what could have happened was the companies could
have entered bankruptcy well before November, and if they could
have emerged as viable going concerns, then a bankruptcy judge
would have figured out away to do that without the process
being so politicized. One of them might have had to liquidate.
Certainly there would have been job losses, as there are under
the current circumstances. We are hearing about it right here.
But I don't think it would have been as dire. I think the
companies that stayed in business would pick up market share.
That is how the process works.
Mr. Cohen. And that would be the Japanese companies and----
Mr. Ikenson. I would say that they are American companies
in the sense they are here and they are----
Mr. Cohen. America once removed.
Mr. Ikenson. Pardon me?
Mr. Cohen. Once removed like a cousin, a shirttail cousin.
It is a southern phrase.
I now recognize the Ranking Member, Mr. Franks.
Mr. Franks. Thank you, Mr. Chairman. Mr. Chairman, I guess
I have made the point so many times here that it is probably a
little bit redundant, but I just want to reiterate that our
economy is not based just on competition; it is based on trust.
And I think that that is really if there is any central theme
that I sense here, it is that whether you are an investor,
whether you are a worker, whether you are someone who has been
hurt in an accident, you have a right to--in this country we--
our rule of law and that people have a right to rely upon that.
And when government especially does things that undermine that,
we have a great deal of ancillary effects that sometimes
snowball into absolute disasters.
And again, because of the kindness of the Chairman, I have
already mentioned that I believe that government catalyzed a
lot of this. I believe that some of our meddling in the market,
our guaranteeing of certain loans, our encouragement of--
encouraging people to buy homes that they couldn't afford,
catalyzed the subprime meltdown, which if those loans had
performed as normal loans, it probably would not have resulted
in this economic meltdown and then the dominos that fell and
hit everyone, including the automobile industry and, of course,
ultimately all of you. But I have heard some very compelling
evidence and testimony today.
And Mr. Mourdock, I would like to start with you because I
was especially moved by your testimony and Mr. Warriner's, but
as it happens, you and I have a mutual friend in the State
Treasury, Dean Martin in Arizona, who has gone through a
crushing personal tragedy in the loss of his wife and child,
and I just thought the question I would pose to you first was
that do you believe that secured creditors--now you already
answered this, but I just want you to expand on it a little
bit.
Do you believe that the secured creditors received a fair
opportunity to negotiate with the auto task force and Chrysler
over the terms of Chrysler's bankruptcy deal, and if you don't,
tell us why not? And why do you think that secured creditors--
why is that so important to me? Obviously, you and I agree on
this, but please amplify on it if you would.
Mr. Mourdock. Let me deal with the second part first, if I
may, which is kind of the macro-economic sense of how these
secured creditors are viewed. I mentioned in the first part of
my testimony, we have 6,000 Chrysler employees in the State of
Indiana, and I think I heard from every one of them as I went
through this process that ultimately took us to the United
States Supreme Court. I was constantly being asked why are you
putting my job at risk? And I understood those questions, and
yet as a fiduciary, I had to look out for the rights of our
pensioners. I have no regrets in standing up for the rule of
law. What was happening, though, was bigger than what those
Chrysler employees saw. It was bigger than Chrysler.
With all respect to those with me on the panel, it is
bigger than them. This is about our entire economic investing
system. When secured creditors no longer see their rights as
being truly secured, they will not respond the same way. You
change the rules, the players will change. What ultimately will
happen is that hundreds of billions of dollars that might be
invested in American companies will be shifted to places where
the markets are not changing, where the rules are not changing.
Like American jobs have fled overseas, those dollars will flee
overseas.
I mentioned in my testimony that institutional investors
are changing the way they are doing business. How do I know
that? Because I am one. You know, I invest up to $7 billion of
the State of Indiana's money, and as a fiduciary, I have
changed our investment policies so that--and this is hard for
me frankly to say because if you cut me, I bleed red, white and
blue, but the State of Indiana will no longer buy the secured
or any debt of American corporations that have accepted bailout
money. Why? Because it is too risky. That is not hypothetical
theory; it is demonstrated fact.
We have lost millions of dollars when we thought we were
secured creditors under the terms of that meaning for more than
200 years, and it meant nothing. After we adjusted the policy
and said we are no longer going to buy the debt of those
corporations that had taken bailout money, someone raised an
interesting question in the meeting and said, wait a minute,
what about Ford Motor Company? They haven't taken any bailout
money, should we own them? And some of us looked at each other
with puzzlement, and then they said don't you realize the same
principled creditors there are the same majority creditors that
were in the Chrysler case?
In other words, it was the same big TARP banks that
initially argued for 100 cents on the dollar who ultimately,
under pressure from the government, acquiesced to take 29 cents
on the dollar. How impossible is it for us to believe that 6
months, 8 months, a year down the road, people will look at
Ford and say, you know, they are doing okay, but GM and
Chrysler, they are not making it and maybe we ought to level
the playing field and someone from Treasury whispers in the
ears of the bankers ``level the playing field,'' and there we
go again. We cannot take that risk as investors. And so we are
looking in our office to see where might we best invest and
what other industries, American industries, American companies
ought we not invest in because we may see this same scenario
played out again.
And someone mentioned in the first session this morning the
airline industry. If anyone doesn't see parallels between
today's airline industry and you can name them company by
company with the automotive companies in this country, then you
are not really trying to connect the dots.
Mr. Franks. Thank you, Mr. Mourdock. As it happens, I was
the one that mentioned the airline industry for the same exact
reasons and I appreciate that. And the Chairman that has
granted me an additional 30 seconds and I would like to quickly
mention my question to Mr. Ikenson.
Mr. Ikenson, the Chrysler bankruptcy deal in particular
destabled contract rights and secured investment, in my
opinion, just as you have heard it eloquently stated here.
Doesn't that jeopardize our ability to recover promptly from
the current credit crisis and the recession itself?
Mr. Ikenson. Yes, I think so. I mean, I am not really the
expert on the panel. I would defer to Mr. Mourdock on that.
However, yes, we have created a bit of a moral hazard here. It
is going to take changes as Mr. Mourdock just testified. People
change their behavior. And I think there will be fewer willing
participants in the corporate bond market, which will help to
drive up the price of debt, and that will spill over into the
general economy, particularly now at a time when we are
incurring massive debts, deficit spending, and are going to be
needing sources of funding not only for corporations but for
our government's profligate ways. So yes, it concerns me that
it will have adverse implications that could be costly. Thank
you.
Mr. Franks. Thank all of you and thank you, Mr. Chairman,
for the extra time.
Mr. Cohen. Thank you for your questions.
Now I would like to recognize the distinguished Chairman of
the full Committee, Mr. Conyers.
Mr. Conyers. Thank you, sir. We welcome you and thank you
all for your views and presence here today.
Professor Baird, help me in my analysis with the Treasurer
of Indiana in terms of how we put this into perspective because
if he is right, that nobody wants to invest in companies that
accept TARP money and yet the companies come to us and ask for
help, what do we do? Leap out of the highest window in the
Rayburn Building or bring out our Ouija board or some kind of--
I mean that sounds like a pretty impossible situation. What do
you think happened in 1978?
Mr. Baird. Well, I think--I don't think things are quite as
dire as Mr. Mourdock. But in terms of protecting the rights of
the people he cares about, which is something I do care about
and I think secured creditors should be protected, what can
happen if you have effective bankruptcy law is that we have
effective procedures that give people like him the rights that
they should get.
Now, if it turns out that the Federal Government's bid of
$2 billion was top dollar for Chrysler, then that is all he
entitled to. All he is entitled to as a secured creditor is the
value of the assets. If the high bidder for the assets turns
out to be the Federal Government, it is his lucky day that the
Federal Government is there willing to bid. The problem in the
case and the concern I have is not that $2 billion wasn't the
right amount; it is that procedures weren't there to ensure
that it was the right amount. So the solution that I think is
required in terms of what happened in 1978 with the bankruptcy
code is just making sure that square corners are cut in these
situations, and I have a concern that didn't happen here. But I
also have a lot of confidence in our bankruptcy bench that it
won't happen generally. If it starts to happen generally, then
I would urge you to do something.
Mr. Conyers. Well, were there procedures in place for this
circumstance that brings us here today?
Mr. Baird. The difficulty is that when Congress enacted
section 363, they didn't contemplate section 363 being used the
way it is being used today. So if there aren't specified
procedures set out in section 363, some courts have tried to
develop rules, but section 363 just says there needs to be
notice and hearing. That may not be enough. At least it won't
be enough if we see practices like this continue.
Mr. Conyers. Again, what are we to do? I mean, look, you
trained the 44th President. Do you talk to each other anymore?
Mr. Baird. We worked together for 12 years. I didn't
portend to train him. He had the office next to me.
Mr. Conyers. Okay. Well, you were in pretty close proximity
a lot of the time. You have got to take some responsibility for
this, sir.
Mr. Baird. No. I am a great admirer of the President and I
think there is a policy decision about what you do with these
companies and whether or not the Federal Government rescues
them, and then there is the question of having the bankruptcy
process there to make sure that if these policy decisions are
made, they are implemented in a sensible way. In the main, I
think we have a very fine bankruptcy law that does allow these
things to happen. But anytime you have a major event like this
you have to reassess. You have to say wait a second, did we do
enough? Can we do it better and what is the world going to look
like going forward? I am cautiously optimistic about the
system.
Mr. Conyers. Well, the Cohen Committee in Judiciary here,
we are going to be doing plenty of assessment. Don't worry.
This will be the most active part of the Judiciary Committee
for a long time to come.
Mr. Baird. Mr. Chairman, I am more than happy to help any
way I can.
Mr. Conyers. Well, look, we had informally agreed that the
President incumbent was the smartest political person in the
United States of America. He couldn't have gotten elected
otherwise. I mean he broke the time pattern. He shattered--
look, he was in Iowa. That is where it started happening for
him, in Steve King's State, of all places. So we conceded him
that. Now there are getting to be qualifications. His soaring
popularity on some issues is not so hot, going down a little
bit. And we are not sure if he is number one anymore. And,
look, Baird, you are the one that I know that was closest to
him during his formative days, and we have to hold you
accountable in some sense.
Mr. Baird. Well, I have a great deal of----
Mr. Conyers. This business about, I was next door to him
for 12 years, but we never talked about anything----
Mr. Baird. No. I am just saying that the President has a
very strong personality and he listened very carefully and he
responds critically, and I think you should have more
confidence than you seem to have in him.
Mr. Conyers. I think you were a larger influence on him
than your modesty would allow you to admit to.
Mr. Franks. Mr. Chairman, just for the record, some of us
were a little more skeptical early on, suggesting that sky-
diving naked into a volcano was change.
Mr. Conyers. Thank you, Mr. Chairman.
Mr. Cohen. Thank you. I think what you were asking, Mr.
Ikenson spoke to it. He testified to his respect for Mr.
Obama's abilities when he suggested there were 536 CEOs, not
537, which, of course, with Mr. Cheney, you would have had 537,
but now with the Vice President it is certainly a different
situation.
Mr. King from Iowa, you are recognized for 5 minutes, sir.
Mr. King. Thank you, Mr. Chairman. I am trying to figure
out that math and perhaps if I had Professor Baird I would have
been able to do that.
Mr. Cohen. When you were not here, he testified that
General Motors had 536 CEOs. I presume he meant the Congress,
the Senate, and the President. The minority side, I don't think
they would believe they are really CEOs because that is why
they do so many 1 minutes, but maybe they are CEOs and they
don't know it.
Mr. King. Mr. Chairman, I am going to pass up that bait for
debate, and also I am going to try to take Professor Baird off
the hook because it is my information that my chief of staff
also studied under you, Professor Baird; so however the
popularity of President Obama may have diminished, my chief of
staff still stands up as a good product of the University of
Chicago. So I am happy to say that into the record, and I think
she is monitoring this conversation. I am a little worried
about that.
But I am very interested in how Mr. Mourdock might
characterize some of these questions that I have, and that is
the discussion that I had here yesterday with the new car czar
and the discussion about how the White House might divest
themselves from this massive investment in the private sector,
and he uttered a statement that I interpreted to be within the
context of perhaps in a year and a half or so, we will do a
public offering and sell some or all of these shares off again.
So I direct it to Mr. Mourdock. Are you going to be ready
to buy some of those shares if they offer them out in market in
a year and a half or so?
Mr. Mourdock. As a fiduciary, obviously we always look to
make investments that we can make prudently. The several
pension funds that we have that deal in equities, most of our
State investments like most States are more on the debt side
than the equity side, but we would wait to see how those would
come through. Regarding the testimony of yesterday and coming
back slightly to what Congressman Conyers was raising the issue
of what might we do, I think it pertains to that question as
well. You know, what might we do as the Congress of the United
States? It is a real simple answer. It is follow the law. It is
understand the law. Was flabbergasted in reading the statement
from yesterday's testimony in which Mr. Bloom suggested that if
Congress got involved with the dealerships, it would somehow
have impact on the credit markets. Well, pardon me. It was
already the Administration that got us in this situation that
has already impacted the credit markets. I said at the outset I
am not an attorney but I know that article I, section 8 of the
United States Constitution gives to the Congress and Congress
solely the mandate to set uniform codes of bankruptcy. When the
Administration acts in such a way to say secured creditors, it
doesn't have any meaning anymore, they just took away your
rights. They just took away the power of the Congress. They
started making the bankruptcy code and that is unacceptable.
Mr. King. Mr. Mourdock, I take it from your testimony that
your sense would be that Congress didn't assert its authority
when the White House stepped in and usurped the property rights
of the bondholder, the secured creditors.
Mr. Mourdock. That is exactly my point, yes, sir.
Mr. King. And I would agree with that point. Now I would
ask you if you could play out for us how you see it, would have
unfolded with General Motors and Chrysler, had those property
rights been preserved and protected as was understood by the
investors, how this might have gone through a bankruptcy
Chapter 11 or 7 and what we might see today?
Mr. Mourdock. Great question. And again, it was said
earlier during the panel this morning that the only option that
was out there was complete liquidation, and that would be true
if the June 15 deadline was the driving force for everything.
If you have got to get it done in a very short period of time,
guess what. That probably was the only option. But what we have
argued in our lawsuit and we will continue to argue is the
point that once the government decided to link itself at the
hip with Chrysler, that changed dramatically what the
possibilities were. And had instead of been driving to a
deadline with the mandated partner of Fiat at that point the
government said, you know what, we are going to be there at the
hip. We want to see what kind of real values can be set for
this business.
I was stunned when the bankruptcy hearings took place. One
of the assets of Chrysler Corporation is the Dodge Viper. It is
a muscle car, sort of like a Corvette. It was testified at the
bankruptcy hearing by Mr. Nardelli that that whole product line
was worth at most about $5 million. Well, that is pretty
astounding because 2 months before Chrysler we know received an
offer of $35 million for that one asset. And along with it was
a 44- page preclosing agreement and there had been significant
negotiations to get to that point. So with those kinds of
questions as to how the value was set, you can bet our secured
creditors feel very much like they have been ripped off here.
Mr. King. It might be that the Viper could have been spun
off for seven times what they valued it at.
I would like to probe this question too, and I hope I will
have an opportunity to listen to more than one witness answer
this question, but is it your sense--and again to Mr. Mourdock
specifically, and then hopefully broader. Is it your sense that
the agreement that was made on Chapter 11 dealing with either
General Motors or Chrysler--well, first, was any of the
testimony before the bankruptcy--did any of that testimony
alter the anticipated result of Chapter 11?
Mr. Mourdock. No, it did not. And I cannot speak a word to
GM. I wasn't involved with that side. But in his opening
remarks, Chairman Cohen raised the issue of the possible Sub
Rosa arguments, and that too was part of our legal suit because
throughout all that happened from the first of this year until
the bankruptcy was announced by the government, not by Chrysler
but by the government. You had the situation where one party
was negotiating, setting values, determining which creditors
would be in, which ones would be out, what they would be given,
what would be liquidated, all to be set up for an auction sale
for which there was only one bidder, the United States
Government. It was on both sides of the table simultaneously.
The impropriety of that in trying to establish value for a sale
goes beyond plausible.
Mr. King. Would anyone on the panel care to address that or
rebut that so that there is a fair opportunity because I happen
to agree with Mr. Mourdock? None on the panel? That makes a
point that I wanted to hear made today and I thank you all for
your testimony. You have been excellent witnesses, every one of
you, and I wish I had time to indulge with more of that, but
there are real human tragedies out here and a big tragedy is
what happens to property rights in the United States of
America.
Mr. Chairman, I thank you for this hearing today and I
yield back.
Mr. Cohen. If you would like another 30 seconds. Thank you,
sir. Mr. Conyers.
Mr. Conyers. Mr. Chairman, could I get 2 minutes before we
close up?
Mr. Cohen. Two minutes and 12 seconds.
Mr. Conyers. This is the claims issue here. We have got,
what, 300 claims outstanding at Chrysler, about 1,000 at GM. Is
there any way that we can resolve these without really
foreclosing any equitable relief from the claimants?
I mean, Warriner is here, but he is only one of an
amazingly not-too-large pool of people that have a cause. I
wouldn't like the idea of his claim, no matter how just it is,
going before a company being settled for pennies because, ``We
are sorry, we just went through bankruptcy, we don't have the
money.'' Too bad. If you had gotten here a little bit earlier,
there would have been a regular trial.
Professor Baird, is it asking too much for a little
fairness in these claims? All of whom, of course, are not of
the nature and seriousness that is presented here by our
witness. But, still, there may be a few that are. I would
concede that most of them probably aren't.
Mr. Baird. This is a serious deficiency in the law that we
have as it is today. I don't have any magic remedies for you,
but this is a big problem in the law as it exists today.
Mr. Conyers. I would like to urge my colleagues to study
this with me further after this hearing today. And thank you,
Mr. Chairman.
Mr. Cohen. Thank you, sir.
Mr. Williams, I would like to ask you a question. You may
not be familiar with this, or not. But I asked the Chrysler
folk and the GM folk about the proportion of dealerships in the
African American community that might have been terminated.
They said that they were all equal, everything was exactly the
same. Do you have any reason to believe that that is accurate
or inaccurate?
Mr. Williams. Well, it is inaccurate. You can do a lot of
things with percentages. He said the African American dealers
or the minority dealers, 20 percent of them were gone, as was
20 percent of the others.
If you look at the numbers, there are a lot smaller
numbers. Less than 3 percent of the dealers are African
American and minority dealers. Twenty percent of the smaller
number is devastating when you are talking about getting those
numbers done when you have a very small number of dealers. So
you can make things sound like you want it to sound.
When this thing is all over by the end of this year, there
will probably be less than 600 total minority dealers left; and
General Motors, there will be less than 20 African American
dealers left.
Mr. Cohen. In the entire country?
Mr. Williams. Yes, sir.
Mr. Cohen. Pretty devastating.
Mr. Knapp, what is your experience? Your testimony was
really riveting to me. You seem like you have been there, your
company, for 70 years. You are right in the heart of Houston.
You are selling all these vehicles. What did you say, a
thousand?
Mr. Knapp. Over a thousand.
Mr. Cohen. That is pretty strong. Did they come to you and
tell you that that wasn't a good number; You should have been
producing more? What was your problem?
Mr. Knapp. You know, we are a unique dealer. We are a
downtown dealer in a metro market. And I don't know that there
are any other than us in the whole country. And over the years
they have always--we are not on a freeway; we are kind of in a
neighborhood, and we just have a little different take than
most.
And they have always told me, ``Don't worry about--you
know, we want a downtown dealer. We want the representation.''
And it was--obviously, it was a surprise to me, as to
everybody, why they would want to terminate us.
But in our case, I think we make a very good anchor in
downtown Houston. We are a servicing dealer for every
dealership in Houston, because the people that buy there
service their cars downtown. And when they lose that, when they
lose us, I believe it is going to force these people or make
them go to other makes and models.
Another thing that is not really talked about is GM assumes
that the loyalty is to GM and not their dealer. And no doubt
people are loyal to their Camero or their Caprice or their
pickup, but they are also loyal to the dealer. And when their
dealers get knocked out or when dealers say no, they are going
to have a bad taste in their mouth and may look to another
manufacturer and another model to go to.
Mr. Cohen. General Motors has an appeal process, I think
they said. Have you participated in that?
Mr. Knapp. Yes, sir, I have. Right out of the chute, we got
the letter, and they said you have to appeal--it was 2 weeks,
so--and with some very vague criteria. You know, we scrambled
and got some people to help, and I believe we came up with a
very good package and a very good set of reasons why we should
stay around.
Well, apparently they rejected every one of those appeals.
Then they came back and said--and we never really got a
notification from them. But we found out we could submit
another appeal, which we did. It was denied.
I found out, because we had talked to our Congresswoman,
that we could have a third appeal by telephone. We called them
on the phone and I gave him a long list of reasons why we
should remain, and that appeal was denied.
So lastly, I got a call from the Texas Auto Dealer
Association. They had talked to the Texas Attorney General, and
for whatever reason, the Texas dealers were going to be given a
fourth appeal. And that was almost 3 weeks ago that we
submitted it, and I talked to the man at GM that I had done the
phone appeal with and he said, ``Go ahead and put it in
writing. It is a lot easier for me to explain it to people, the
powers that be.''
So I did. I came up with what I believe is a top-notch,
first-rate appeal. I have not heard, hopeful that that is a
good sign that they are really looking hard.
Mr. Cohen. Thank you.
Mr. Williams, you were nodding. You filed your appeal, too,
and they rejected it summarily?
Mr. Williams. I filed an appeal. They rejected. You can't
get anyone to speak to you, so you don't know what they use,
what criteria they used. They just rejected it.
Mr. Cohen. Mr. Fitzgerald, Mr. Tarbox, do you also have
similar experiences with your appeals?
Mr. Tarbox. There was no appeal with Chrysler, and I
appealed through the U.S. Bankruptcy Court.
Mr. Cohen. Mr. Fitzgerald?
Mr. Fitzgerald. There was no appeal with Chrysler, and
General Motors rejected my appeal.
Mr. Cohen. Was there some figure they put out; they thought
they could save like $2 billion with GM?
Mr. Fitzgerald. That is the big lie. I talked too much and
I didn't finish telling you about the big lie.
Mr. Cohen. I will give you the opportunity to finish.
Mr. Fitzgerald. Thank you.
Mr. Cohen. You liked my humor. I am giving you a chance to
say.
Mr. Fitzgerald. I was. I was intrigued by it.
Mr. Cohen. You get an extra 30 seconds. Keep going.
Mr. Fitzgerald. Okay, I am going.
It costs them nothing for a dealer. All of that nonsense is
contrived. If you look at the price label, that is why I sent
you--I put two price labels with factory invoices with them in
the package I submitted. We pay almost sticker for the car when
we buy it. We used to when--that sticker is on the car by
Federal mandate, Monroney label. It was named after Senator
Monroney from Oklahoma, his Committee. And at the time, all of
us received a 25 percent discount, I was a Ford salesman then,
25 percent discount.
Over the years the manufacturers have found lots of reasons
to change the discount, which increases their share of the
transaction price. It has evolved to the point today where we
receive somewhere between a 1 and 5 percent discount from
sticker.
And all of those things that Mr. Henderson recited for you,
the costs that they were going to save, for example, filling
the gas tank; I am not sure how he makes that story stick, but
I haven't even seen the media pick up on that. But he actually
said this with a straight face, that they would save a lot of
money, in the hundreds of thousands or maybe millions of
dollars by not putting gasoline in the car for the customer.
That hasn't got anything to do with the cost to the dealer.
The same thing is true with PDI: Prep it and deliver it.
The manufacturers pay an allowance for prepping cars. I think
they worked that out with the Department of Transportation some
years ago why they had to do it that way. So that was an excuse
to raise the price to us, and then they pay us to prep the car.
Again, that is related to the car itself.
The 1 percent marketing allowance that somebody said
something about that today. That is directly related to the car
and it has to do with advertising. You have certain strings
attached to that.
Oh, the incentives. One of the most significant things are
incentives. If you read The Washington Post, there was a story
there, Troy Clark, president of General Motors, talked about
how the new Malibu brings $20,000 whereas the old Malibu only
brought 16.5. The difference is they don't have to pay as many
incentives to sell it. Incentives change the price of the car.
If your car is not for example, like most of the GM cars,
if you not recommended in Consumer Reports, the GM--if it
weren't for Chrysler, GM would be in last place in Consumer
Reports, and they have been there for many years. That is one
of the reasons I was terminated; I keep waving this thing at
them, because this is what my customers say.
My customers read this. You go ask your young staffers if
they don't read this. And that may be why none of them drive
American cars, because we are always at the bottom of that
list.
So the incentives change the price of the car. It is a
price change. If they don't have to pay the incentive to sell
the car, they keep it. I don't get it; they get it. So it is
all related to the price of the car.
There is not a single shred of truth in all of that
sophistry that was painted for you concerning the savings on
dealers. There is no such thing. And if we get in the back room
with the coffee, I have got my numbers and I have got my
factory invoice and I have got my MSRP numbers and I will show
it to you.
Mr. Cohen. When they said--Mr. Robinson, I think he said
that the reason that the automobile industry got in such
trouble is because of the finance problems in the country and
the gasoline prices. You would submit that being ranked last in
Consumer Reports might have contributed to it, too.
Mr. Fitzgerald. Well, everybody had the gasoline price to
deal with and everybody had the finance problems to deal with.
But General Motors and Chrysler had the overwhelming problem of
Consumer Reports to deal with. And they have been dealing with
it for 28 years and ignoring it.
One of the reasons I am terminated is because I made a
crusade out of that. And I can show you letters from Rick
Wagoner all the way back to 2000 promising that he is going to
do something about it. And they did; they got rid of me. Now
they don't have to listen to that.
Mr. Cohen. Thank you, sir.
Mr. King, you are recognized.
Mr. King. Thank you, Mr. Chairman. Mr. Chairman, you raised
an issue that caught my attention, and the question is to Mr.
Williams.
And in your testimony, Mr. Williams--I am going from memory
here--you have been in the car business about 30 years--or been
in the business 30 years; 11 years as a dealership. Out of 90
competing dealers, you were ranked third in sales and number
one in customer satisfaction. Is that all correct?
Mr. Williams. Yeah. I have been a dealer for 30 years. I
have been in this location for 11 years. And I have 19
competitors, and we are number three in sales and number one in
customer satisfaction.
Mr. King. Nineteen competitors. I misheard that number and
also I misheard that you were in the dealership that long. And
that is the reason I asked the question, to some degree,
because to build up that much capital, to find yourself in this
much liability, that is a good hustle to get there in 11. In 30
years, I can see how you could get there.
It is interesting to me, the issue of race was raised by
Mr. Cohen. And I just want to ask this as--I am not a lawyer,
so I can ask a question I don't know the answer to. And that
is, honestly, do you believe--and I am very sincere in my
inquiry here--do you believe that race was a factor in the
termination of your franchise?
Mr. Williams. You know, I don't know that somebody
specifically said, hey, we are going to get rid of the
minorities. But when I gave you the number, out of a thousand
dealers that bit the dust last year, 200 of them were
minorities. If we could have had that percentage of them
putting in dealers, we wouldn't be making a lot of noise. We
are less than 3 percent of the dealers. But 20 percent can go
out? You can't stay with 20 percent go out and less than 3
percent are coming in.
Mr. King. It is about seven times the rate.
Mr. Williams. They know how to take us out. They don't know
how to put us in, I guess.
Mr. King. And I appreciate the reemphasis of this end of
the record. And one of the things that I admire about free
enterprise is that you have to compete in the marketplace. And
it doesn't matter what color you are or what gender you are or
what ethnicity you might be. If you have got cars on the lot,
people will drive by or stop in, and if they like doing
business with you they are going to do business. If they don't,
they are going to move on to somebody else.
And you have made a living for 30 years in a free market
system that doesn't have an affirmative action program except
the one that you apply with your own energy and your own
ingenuity and personality.
Mr. Williams. We would still be around if they didn't
decide to give me the door.
Mr. King. And I support the idea of doing all we can to
keep you all around. And I brought this up because I wanted to
flesh that out a little bit more. With a President today that I
think is testimonial to the ability to be upwardly mobile in
this society--and I think you are a testimonial to that as
well, Mr. Williams, and I thank you for being here. I thank
everybody for your testimony.
And I wanted to go back to Mr. Tarbox. And I know there was
more within you that I didn't hear, but the frustration of
leading your field and dominating the market in your area. And
we are down to you have no recourse, I understand. But what do
you believe was the motive, other than the fact that you were
insistent and resistant about the idea? Are you just too
outspoken and you are punished for being outspoken? I hope that
is not coming my way.
Mr. Tarbox. Their reason was the protest that I had the
year before on their intent to establish a Jeep dealer in Rhode
Island. And it was evident on the e-mail that is on record with
the U.S. Bankruptcy Court.
Mr. King. And what do you have to say to the testimony of
Mr. Mourdock about how property rights have been set aside here
with regard to these bankruptcy cases? And what do you have to
say about what appears to be fait accompli that was negotiated
perhaps before the bankruptcy hearings?
Mr. Tarbox. I am not sure if I understood the second part
of the question, but I certainly agree with the property right
issue. I mean, it is evident in the fact that they are taking
what I have and giving it to the dealer up the road. They claim
that they set certain criteria, and I called the dealer up the
road, and the dealer up the road specifically told me that she
was surprised that she wasn't rejected as a dealer.
So it is not based on performance and criteria. Their
decisions were based on spite and the fact that I protested
that intent.
Now, in discussing different things with dealers that are
in the same boat that I am, I wouldn't be surprised if they--
when they made their decisions to reject dealers, that they
didn't contact their legal departments and say: Hey, who has
litigated or protested with us in the last 3 to 5 years? I want
a list of those dealers.
And I wouldn't be surprised that you might find the
majority of those dealers were in fact rejected.
Mr. King. It would seem to me--and I thank all the
witnesses. It would seem to me that in the United States of
America, if you own something that I think we all on this panel
would describe as a property right, that there should be some
recourse to protecting your property rights through the
litigation process. And it looks to me like that is what has
been set aside here in this race to a public/private model that
may not have a lot of value in the private sector a year and a
half or 5 or 10 years from now.
I thank all the witnesses. Again, this has been a good
hearing.
Mr. Fitzgerald has a voice--if the Chair has enough
patience, I would remind us that he said there is not a single
shred of truth in all of that sophistry. I think that is a
remarkable statement.
And I would be happy to hear from the gentleman. Mr.
Fitzgerald.
Mr. Fitzgerald. Well, I do have the data. Now, of course,
we believe that Mr. Warriner and people in his position should
be addressed, too. It is the American way. But from the
dealers' point of view, we are not asking for any money. Our
property was taken from us. Just taken. You know, I have got 43
years of good will invested in Chrysler, and over 30 years in
General Motors. That was taken without any compensation
whatsoever.
Now, I can get real angry about it, but I don't have as
much--what has been done to him is a travesty. He is 42 years
old. I am almost 75. I mean, it is--I am okay financially. But
what I have heard from dealers around the country, you would
not believe the human suffering that is being caused by this
reckless abuse of the bankruptcy laws. You just would not
believe it. It is indescribable the things that I have heard,
and it is just not the American way.
And that is why we have 260 votes and cosponsors, I mean in
our bill, and we have 30 Senators. And that is because when
people hear this story and they look at the facts and they look
at my price labels and they see the real thing, H.R. 2743 and
Senate bill 1304, it is easy to sign on when you see that
injustice, when we don't cost any money. You know, this can be
fixed with no money. And Congress writes the bankruptcy laws.
Mr. King. I thank you, Mr. Fitzgerald.
Mr. Chairman, I have a couple documents that I would ask
unanimous consent to introduce into the record that I am a
little belated on. They are just simply related to dealerships
within my district.
Mr. Cohen. No press releases of mine?
Mr. King. Not this time, Mr. Chairman.
Mr. Cohen. Without objection.
Mr. King. I thank you.
[The information referred to follows:]
__________
Mr. King. I thank you for this hearing. I sincerely thank
all of the witnesses. Some of you have paid a very high price.
And I yield back the balance of my time.
Mr. Cohen. I do have a press release of the minimum wage
going up Friday.
Mr. King. We will check that out.
Mr. Cohen. Mr. Scott from Virginia is recognized.
Mr. Scott. Thank you very much, Mr. Chairman. And thank you
for holding the hearing because what has happened to these
dealers is certainly tragic.
I served in the State legislature before I came to
Congress, and most States have laws involving franchises and
what parent companies can do and can't do to their franchisees.
What has happened to these dealers is obviously what is
protected by State law, because obviously when you have had
people in business for generations being given a couple weeks'
notice that they are out of business, everybody knows that that
is just not fair.
So I thank you for holding the hearing, and we are going to
do the best we can to get some fairness for the dealers,
because this just isn't right. I yield back.
Mr. Cohen. Well, we ended with eloquence and brevity. Thank
you, Mr. Scott. I don't believe we have any other questions.
I want to thank all the witnesses for their testimony
today. I think that this has been an opportunity for General
Motors and Chrysler to hear some of your testimony, and I think
they heard it through different channels.
Without objection, Members will have 5 legislative days to
submit any additional written questions, which we will forward
to the witnesses and ask you to answer as promptly as you can
to be made part of the record. Without objection, the record
will remain open for 5 legislative days for the submission of
any other additional materials.
Again, I thank everyone for their time and their patience.
This hearing is adjourned.
[Whereupon, at 3 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Prepared Statement of the Honorable Chris Van Hollen, a Representative
in Congress from the State of Maryland
I thank Chairman Cohen and Ranking Member Franks for holding
today's hearing. I would also like to thank Congressmen Maffei and
Kratovil for introducing the Automobile Dealers Economic Rights
Restoration Act and for their leadership on this issue.
This important legislation was motivated by a bi-partisan desire
here in congress to come assist profitable auto dealers who have been
unfairly treated by auto makers. The indiscriminate closing of many
healthy, profitable auto dealerships is unfair and has put thousands of
American jobs at risk at a time when our country can ill-afford to shed
more jobs.
Further, the decision by automakers to close dealerships overlooks
the fact that dealerships are one of the auto industry's key sources of
strength and can be the source of their successful navigation out of
these difficult economic times. Dealerships, and their more than 1
million employees, form personal relationships with customers that
contribute to brand loyalty and will be key to the recovery of the auto
industry.
Auto dealerships are also a cornerstone of our communities and
deserve our support; they employ hundreds of thousands of Americans,
ensure that quality American cars are sold and serviced.
As we move forward with legislative fixes to this flawed process, I
am pleased that we have begun constructive and meaningful discussions
with the auto manufacturers, the auto task force and with the auto
dealers. I believe that we have an opportunity to save the auto
industry and protect the rights of auto dealers in the process. They
should not--and must not--be mutually exclusive goals.
Response to Post-Hearing Questions from Louann Van Der Wiele, Vice
President and Associate General Counsel, Chrysler Group LLC
Response to Post-Hearing Questions from Michael J. Robinson, Vice
President and General Counsel of North America, General Motors Company
Response to Post-Hearing Questions from Harvey R. Miller,
Partner, Weil, Gotshal & Manges LLP
Response to Post-Hearing Questions from Douglas G. Baird, Harry A.
Bigelow Distinguished Service Professor of Law, University of Chicago
Law School
Response to Post-Hearing Questions from Daniel J. Ikenson, Associate
Director, Center for Trade Policy Studies, Cato Institute
Response to Post-Hearing Questions from Richard E. Mourdock,
Indiana Treasurer of State
Response to Post-Hearing Questions from John J. Fitzgerald, President,
Fitzgerald Auto Malls
Response to Post-Hearing Questions from Jim Tarbox, President,
Tarbox Motors, Inc.
Response to Post-Hearing Questions from Greg Williams, President,
Huntington Chevrolet, Inc.
Post-Hearing Questions submitted to Robert G. Knapp,
President, Knapp Chevrolet*
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*The Subcommittee did not receive a response to their post-hearing
questions from this witness before the printing of this hearing.
Letter from Michael J. Robinson, Vice President and
General Counsel of North America, General Motors Company