American Arbitration Association Automobile Industry ...

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: 33 532 00026 10

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 111-117),

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 10th, 2010 to May 13th, 2010. In accordance with Section 747 (d) of the Act, my written determination is set

forth below. I will first examine the statutory factors.

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

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's1 poor business planning, not being suited to an American manufacturer's focus on the American heartland for obtaining for its customers2, 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.

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

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.

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