American Arbitration Association Automobile Industry Special Binding Arbitration Program. and, AAA Case:

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1 American Arbitration Association Automobile Industry Special Binding Arbitration Program In the Matter of the Arbitration of Fitzgerald Motors, Inc. (Fitzgerald's Countryside Chrysler Jeep), Claimant/Dealership, and, AAA Case: Chrysler Group, LLC Respondent/Covered Manufacturer. / WRITTEN DETERMINATION OF ARBITRATOR I, THE UNDERSIGNED ARBITRATOR, having been designated pursuant to Section 747 of the Consolidated Appropriations Act of 2010 (Public Law ), enacted December 16, 2009 (the Act ), and having been sworn and having heard the proofs and allegations of the parties, make my Written Determination as follows. Background Section 747 (a) (2) of the Act defines a covered dealership, and provides a covered dealership the right under Section 747 (b) of the Act to seek, through binding arbitration, continuation, or reinstatement of a franchise agreement, or to be added as a franchisee to the dealer network of the covered manufacturer in the geographical area where the covered dealership [is] located... from a covered manufacturer, as defined in Section 747 (a) (1) (A) of the Act. This case was filed in accordance with the Act s provisions, and I held hearings and took evidence from May 10 th, 2010 to May 13 th, In accordance with Section 747 (d) of the Act, my written determination is set forth below. I will first examine the statutory factors.

2 Discussion I. Factors Considered A. Covered Dealership s Profitability in Years 2006 through 2009 The parties disagreed sharply over whether Fitzgerald Motors, Inc., (the Covered Dealership ) was profitable during this time period. Chrysler Group, LLC (the Manufacturer ) contends the reports provided to it by the Covered Dealership reflect a lack of profitability. Taken at face value, the reports do indeed reflect a lack of profitability. However, the reports do not take into account the Covered Dealership is a C corporation that is a subsidiary of J.J.F. Management Services, Inc., the holding company for the Fitzgerald family of automobile dealerships, and that one of the most effective method of drawing profits upstream from a subsidiary is through the methods employed by the Covered Dealership. On the other hand, a Subchapter S is a pass through tax vehicle which delivers profits to its owners without the use of expenses. By way of example, the local dealership presented by Chrysler as a highly profitable dealership is a Subchapter S, and not maintained as a subsidiary of a holding company. This accounts for the apparent lack of profitability. Chrysler additionally presented the testimony of Joseph T. Gardemal, III to reflect the Covered Dealership was not profitable. Although he is a qualified expert witness, Mr. Gardemal has never filled out a dealer financial report. This is significant because the report form doesn t appear to allow proper reporting by holding companies or an opportunity to report matters such as withdrawal of the multi-million cash management account from Chrysler Credit (which was done at Chrysler s request). Chrysler s recognition that it did not believe the dealership to be financially troubled was reflected

3 by the admission of Mr. Robert S. Broderdorf that the dealership was not required to sign certain forms that troubled dealers have to sign upon being counseled, even though it was the Manufacturer s policy the forms be signed. Based on the evidence presented, the Covered Dealership was profitable during the applicable time period and this factor weighs in favor of reinstatement. B. The Covered Manufacturer s Overall Business Plan The Manufacturer s present business plan grew out of its Genesis 2000 Project, and is best summarized as a desire to emulate Asian manufacturers by having fewer and larger dealerships which have higher throughput, i.e., number of cars sold on an annualized basis per dealership. The Manufacturer argues the Covered Dealership does not meet the criteria and objectives of the new plan. The Covered Dealership attacks the principles underlying the new plan as being a continuation of old Chrysler s 1 poor business planning, not being suited to an American manufacturer s focus on the American heartland for obtaining for its customers 2, not effective for a product that is not quality and consumer demand driven as are the Asian manufactured automobiles, and having the effect of actually decreasing sales in the locality due to lessened competition amongst Chrysler dealers. That may or may not be the case, but the plan calls for this method and the Act s wisdom (or lack thereof) is not to be challenged by a Covered Dealership. 1 Chrysler, LLC, which is still in bankruptcy and is referred to as old Chrysler, sold its assets to Chrysler Group, LLC, the entity which continues in business today as new Chrysler. The assets of Chrysler were sold in an 11 U.S.C. 363 transaction to Chrysler Group, LLC, a new entity comprised of Canada CH Investment Corp., the U.S. Treasury, Fiat North America, LLC, and VEBA Holdcos. 2 A locality is a given automobile market territory which has several defined competitors. The locality in question is arguably on the coast of the United States, but the evidence was un-refuted that a great number of the customers in this locality come from the Midwestern parts of the United States.

4 Mr. Phillip R. Langley testified that Project Genesis, which is much the same as the Manufacturer s present plan, calls for three (3) dealerships in this locality, specifically the two Dayton Andrews dealerships and Suncoast. Adding the Fitzgerald dealership is consistent with the Manufacturer s plan as there are currently only two (2) true dealerships in the locality: Suncoast and Dayton Andrews. Except for a de minimus share in one dealership apparently added to procure a new point of sale, both Dayton Andrews dealerships are owned by the same brothers, and share identity of ownership and other assets. The argument they are competitors and not the same business entity is not credible. This factor weighs in favor of reinstatement. C. The Covered Dealership s Current Economic Viability The Covered Dealership argued that it is well capitalized, solvent, and profitable. Moreover, the Dealership presented evidence that it is entitled to draw upon the cash reserves and line of credit of J.J.F. Management, Inc., its parent company, in amounts totaling over Ten Million Dollars ($10,000,000.00). Finally, the Dealership presented evidence that it has available a major lender line of credit of approximately Four Million Dollars ($4,000,000) for its floor plan facility, an amount that is sufficient to run the dealership. The Manufacturer, not surprisingly, disagreed with this assessment of the financial condition of the Covered Dealership. Specifically, the Manufacturer argued that the Covered Dealership suffered both net and operating losses, failed to meet working capital guides from December 2008 through May 2009, had no investment in the facilities from January 2006 through May 2009, had adjustments to cash that are not

5 viable, and that the Dealership has turned profitable since it lost its Chrysler franchise. Finally, the Manufacturer argued cash was being used for purposes other than working capital. However, Chrysler s expert appeared to have mere disagreement as where certain information on the financial sheets provided by Chrysler should be placed, did not know if the $4,200,000 coming off the books was the result of closing the Chrysler cash management account at Chrysler s request, and did not review the books and records of J.J.F. Management in order to determine the parent company s net worth and financial strength. Likewise, it is apparent that a C corporation subsidiary should be penalized if it structures its finances in order to avoid double taxation. On balance, the Covered Dealership is financially sound and this factor weighs in favor of reinstatement. D. Covered Dealership s Performance Under the Franchise Agreement While there was dispute whether the Dealership met the other non-financial requirements of the business plan, 3 most debate centered over whether the Dealership met the Manufacturer s sales criteria, including its M.S.R. (Minimum Sales Requirement) goals. In effect, the Manufacturer argued the Covered Dealership was a perpetual underperformer in its sales locality, and even at its peak, never sold the number of cars it was scheduled to sell. Chrysler contends this lack of performance is reflected in the various graphs, charts and demonstrations which show the Dealership hovered below the 100% M.S.R. range with one hundred percent (100%) being 3 The Dealership s facility is not state of the art, but neither is the majority of the retained dealerships as reflected by the Manufacturer s evidence that retained dealerships have spent $250,000,000 since the bankruptcy to meet Project Genesis standards. However, the facility will have to be significantly upgraded to meet the Manufacturer s present plan.

6 considered the mean for purposes of M.S.R., i.e., not an exemplary score. The Manufacturer repeatedly compared the Covered Dealership to another dealership in the sales locality, which other dealership consistently had a M.S.R. score of approximately two hundred percent (200%). However, these sophisticated arguments by the Manufacturer miss the statutory question of whether a dealership met the factors in question. Nowhere in either Project Genesis or New Chrysler s business plan is there a statement that only dealerships with M.S.R. scores well in excess of one hundred percent (100%) meet the manufacturer s criteria. Old Chrysler sought to eliminate approximately one quarter to one third of its former dealership network through bankruptcy, and by definition, an average or median scoring dealership would not be in the lower one quarter to one third of the dealerships. While the presentation by Chrysler as to M.S.R.s and the failure to meet same was very interesting, it was not persuasive that the Covered Dealership failed to meet the performance criteria under the franchise agreement. However, it is clear the Covered Dealership is not an outstanding performer. On balance, this factor is neutral. E. Demographic and Geographic Characteristics of the Territory The evidence was clear this is an affluent, growing, highly sought after market that can support multiple dealerships. The only negative with regard to the demographics of this market is that it trends toward more higher education, a market criteria which the evidence reflected dampens demand for domestic automobiles and increases demand for imported motor vehicles. However, this was and remains a

7 desirable market which can support multiple dealerships. This factor weighs in favor of reinstatement. F. The Covered Dealership s Performance Related to Termination Criteria Many of the points set forth in the Manufacturer s termination letter to the Covered Dealership are issues covered in other sections of the Act. Some of the significant points not discussed in the statutory factors include brand affiliations, closing facilities before termination, whether the dealer was a non-designated point, and whether the dealer could block a potential Project Genesis point. Location is also a consideration. It is undisputed that the Covered Dealership has only two of the three Chrysler products the manufacturer seeks to bundle so this does not weigh in favor of reinstatement. However, the dealership did not voluntarily close its doors prior to the Chrysler bankruptcy. Moreover, the other dealerships in the sales locality are already bundled with the Jeep-Chrysler-Dodge products, and there was no evidence the Covered Dealership was slated for being a non-designated point, i.e., one the Manufacturer had no intention of replacing had the Covered Dealership voluntarily surrendered its franchise. These competing factors cancel each other out the key issue in this list of factors is the location. While not explicitly stated during the proceedings, it became apparent that location was the key issue in the manufacturer s termination decision in that a very strong dealership to the south of the Covered Dealership desires to decrease

8 competition in the sales locality. 4 While certainly understandable from the competing dealership s perspective, seeking to decrease competition within the sales locality is not one of the statutory factors in the Act, and cannot be elevated to a statutory factor by making it a point it in a dealership termination letter. Thus, this factor weighs in favor of reinstatement. G. Length of Experience of the Covered Dealership This factor was neutral for both parties in that some of the other dealers in the sales locality had family histories of fifty (50) years in the industry. While the Covered Dealership has been present at its location for over twenty (20) years, the principal of the parent corporation himself personally has fifty (50) years in the industry, and the corporate management team of the Covered Dealership had numerous years of experience in the industry. On balance, this factor is neutral and does not weigh either in favor of reinstatement or non-reinstatement. H. Additional Factors Considered The only additional non-statutory factor considered was the statement and representation by the Covered Dealership that it would comply with the Project Genesis requirements were it to be offered a franchise. The arbitrator took this representation to mean the Covered Dealership has read the Project Genesis requirements and responsibilities, has no objection to same, and would fully and completely fulfill those responsibilities should it be awarded a franchise. The arbitrator considers this 4 This dealership had previously contested the establishment of a different sale point within its sales locality, and testified at Final Hearing that its sales volume and profits had increased since the

9 representation, whether express or implied, to be a condition precedent to a dealership maintaining an action for reinstatement under the Act. The parties did not raise additional factors, and the arbitrator does not consider any other factors to be of import in rendering the Written Determination. Of note, however, was the absence of argument or evidence regarding the earlier position of the Manufacturer that the Act was unconstitutional or unenforceable with regard to directing New Chrysler to issue new franchises or the arbitrability of such determinations. II. Balance of Economic Interests It is apparent the Covered Dealership has a significant investment in the former franchise, and the principal of the holding company likewise has a large economic interest in the franchise and the Manufacturer s brand, having purchased his first dealership through Chrysler. This is a well taken position. The Manufacturer likewise has an economic interest in streamlining and improving its dealer network. As succinctly stated by one of its officers during the Final Hearing, New Chrysler recognizes that adding one dealership back into a dealer network of several thousand dealer amounts to a figurative paper cut and will not mean the imminent collapse of New Chrysler. However, New Chrysler is also aware that it runs the risk of death from a thousand paper cuts if too many dealers are added back into the network, and accordingly feels consistency with its business plan, Project Genesis, is necessary for the profitability of New Chrysler going forward. This is also a well taken position. termination of the Fitzgerald s franchise.

10 The interests of the Dealership and the Manufacturer are in equipoise, subject only to the interests of the public. On balance, however, the interests of the public favor the reinstatement of a franchise agreement with the Covered Dealership in that the sales locality contains only two other competing dealerships, service work for the northern Pinellas County section of the sales locality where the Covered Dealership is located will be decreased if the Covered Dealership is not a part of the dealer network, and the marketplace favors a consumer advocate such as the Covered Dealership being in the sales locality. Having made the representation it would comply with the business plan of the Manufacturer, the Covered Dealership is judicially estopped from asserting it cannot or will not comply with the plan s provisions and that it will continue to serve the public.

11 DECISION III. Written Determination The Covered Dealership described in Section I shall be reinstated by the extension of a franchise agreement or, more appropriately, shall be offered a franchise agreement by New Chrysler, and therefore shall be assumed by the Covered Manufacturer in the manner provided for and in accordance with the terms and conditions of the Act. IV. Costs In accordance with the statute, the administrative fees and expenses, and the arbitrator s fees and expenses shall be borne equally. THIS WRITTEN DETERMINATION is in full settlement of all claims, defenses, actions or other matters that could have been brought pursuant to the Act, and all other claims, defenses, actions or other matters not specifically dealt with in this Written Determination are overruled, waived, rejected or denied as MOOT. DATED THIS 2 nd day of June, Copies Furnished: All Counsel of Record Manuel Farach, Arbitrator

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) APPLICATION

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