Okay. It appears that the Non-TARP lenders have been "convinced" to accept their losses and that the Administration's plan to rush Chrysler through Chapter 11 might actually succeed.
If I understood correctly, the "urgency" that justified a rushed 363(b) sale instead of a normal Chapter 11 process was that consumers wouldn't purchase cars made by a company in bankruptcy.
Imagine my surprise then upon reading this item from the Los Angeles Times. What particularly intrigued me was this part of the article:
My initial reaction was amazement. After all, Chrysler retained Jones Day in November and filed for bankruptcy at the end of April. They may have started planning for a possible bankruptcy prior to hiring Jones Day, but they've been considering the possibility for at least five months.Chrysler said it is aware of the lemon law logjam, but won't say how many of its customers are affected. The company said it had no plans at this point to ask the bankruptcy judge to approve payments to settle lemon law complaints.
"This is a complex process and there are a lot of issues being discussed," Chrysler spokesman Mike Palese said. "This could be one of those issues that comes up in the course of the bankruptcy, but I can't say that we have any plans to present it at this time."
I thought to myself "despite the time for planning; despite their concern about how consumers would react to Chrysler's bankruptcy; NOBODY THOUGHT ABOUT HOW TO DEAL WITH CONSUMERS WHO WERE SOLD DEFECTIVE CARS!"
I wondered whether they actually planned to have these checks bounce? I wouldn't think so given their anxiety about being in Chapter 11. I expected that they would have done everything and anything to prevent consumers from being effected by the bankruptcy process.
Then I went to the docket and now I'm just confused.
Chrysler filed motions to run their cash management system and to provide for their customers (Docket numbers 28 and 27, respectively). Furthermore, Judge Gonzalez provided interim orders agreeing to the use of the cash
On May 1st, Judge Gonzalez signed an interim order "authorizing debtors to honor or pay certain prepetition obligations with respect to warranty and extended service programs, and for related relief" (Docket number 209) and an interim order "approving the debtors continued use of their cash management system, bank accounts and business forms; granting approval of investment and deposit guidelines; authorizing banks participating in the debtors cash management system to honor certain transfers and charge certain fees and other amounts; permitting continued intercompany transactions and recognizing administrative expense status to postpetition intercompany claims; and preserving and permitting the exercise of intercompany setoff rights" (Docket number 211).
On May 4th, Judge Gonzalez signed an interim order "authorizing debtors to use cash collateral, granting adequate protection to prepetition secured parties and scheduling a final hearing" (Docket number 280).
On May 5th, Judge Gonzalez signed an interim order "authorizing debtors and debtors in possession to honor or pay certain prepetition obligations to or for the benefit of their dealers and other customers, and for related relief" (Docket number 361).
In fact, the order related to the warranty programs (Docket number 209) states, in part:
If I understand those orders correctly, the lawyers did exactly what they should have to provide for these people. Perhaps I can understand those checks bouncing if they were submitted during the interim period between the filing of the bankruptcy and the issuance of the orders, but Judge Gonzalez was very quick in dealing with these issues.IT IS HEREBY ORDERED THAT:
1. The Motion is GRANTED on an interim basis to the extent set forth herein.
2. Pursuant to sections 105(a) and 363(c) of the Bankruptcy Code, the Debtors are authorized, in their sole discretion, to continue their Warranty Programs and Extended Service Programs and to perform all obligations related thereto in the ordinary course of business and without further order of the Court, including pursuant to setoff against amounts owed by individual dealerships to the Debtors, in accordance with ordinary business practices, pursuant to section 553 of the Bankruptcy Code or otherwise.
3. The Debtors' banks and financial institutions (collectively, the "Banks") are authorized and directed, when requested by the Debtors in the Debtors' sole discretion, to receive, process, honor and pay all checks presented for payment of, and to honor all fund transfer requests made by the Debtors related to, Warranty Programs or Extended Service Programs, whether such checks were presented or fund transfer requests were submitted prior to, on or after the Petition Date, provided that funds are available in the Debtors' accounts to cover such checks and fund transfers. The Banks are authorized to rely on the Debtors' designation of any particular check or fund transfer as approved by this Interim Order.
4. Nothing in the Motion or this Interim Order, nor the Debtors' payment of claims pursuant to this Interim Order, shall be deemed or construed as: (a) an admission as to the amount, validity or priority of any claim against the Debtors; (b) a waiver of the Debtors' rights to dispute any claim on any grounds; (c) a promise to pay any claim; (d) an implication or admission that any particular claim would constitute a Customer Obligation; or (e) a request to assume any executory contract or unexpired lease, pursuant to section 365 of the Bankruptcy Code.
So, now my question is: aren't these checks authorized for payment, despite the bankruptcy? If they are, who spoke to the LA Times leading them to say that "Chrysler advises customers with pending lemon law complaints to file a proof of claim form with the Bankruptcy Court and join ranks of the auto-maker's unsecured creditors?"
Am I misinterpreting the meaning of those orders? Is California's lemon law outside the scope of these orders?
Did the reporter misunderstand what he was told?
Did Mr. Palese misspeak?
Given the situation, my guess is that the spokesman misspoke. There may have been a miscommunication internally, but I believe that the attorneys and the corporate officials involved in preparing the bankruptcy prepared for this specific contingency. Somehow this information didn't make it to the Mr. Palese.
Am I wrong? Sphere: Related Content
4 comments:
I am a lawyer, but have never handled a lemon law case. I think the discrepancy here might be that lemon laws provide a remedy above and beyond the warranty. Warranties generally create an obligation to repair. Lemon laws step in when the repair needs are so constant, that state consumer protection laws require the manufacturer to replace or refund the purchase. Lemon laws in some states also authorize an award of attorney's fees (something a bankruptcy court might not pay if special awards will prevent later buyers from getting basic awards).
In short, a warranty claim stems from the manufacturer's promise, while a Lemon Law claim stems from statute. (The settled case stems from a third source: the settlement agreement) All I've seen the government say is that it will honor warranty claims and maybe that makes sense from the perspective of providing minimal relief. The cost will be a public perception that normal rules somehow don't apply to Chrysler (and G.M.) and that there are unknown risks associated with buying them.
PD Shaw:
Thank you for your comment.
I believe that you are correct that the fact that the lemon law arises from statute does differentiate it from normal warranty programs.
The INTERIM ORDER, PURSUANT TO SECTIONS 105(a) AND 363(c) OF THE BANKRUPTCY CODE, AUTHORIZING DEBTORS AND DEBTORS IN POSSESSION TO HONOR OR PAY CERTAIN PREPETITION OBLIGATIONS TO OR FOR THE BENEFIT OF THEIR DEALERS AND OTHER CUSTOMERS, AND FOR RELATED RELIEF (Docket number 361), however, states, in part:
3. Pursuant to sections 105(a) and 363(c) of the Bankruptcy Code, the Debtors are authorized, in their sole discretion, to (a) continue, renew, replace, modify or terminate those Customer Programs for which such authorization was not previously granted pursuant to the Interim Warranty Order (collectively, the "Remaining Customer Programs"), (b) implement other new customer programs, in the ordinary course of business and (c) pay any postpetition obligations arising under the Remaining Customer Programs in the ordinary course of business, all without further order of the Court
4. The Debtors are authorized to honor and pay, in their sole discretion, all Customer Obligations related to the Remaining Customer Programs (collectively, the "Remaining Customer Obligations") in the ordinary course of business and without further order of the Court, including pursuant to setoff against amounts owed by individual dealerships and distributorships to the Debtors, in accordance with ordinary business practices, pursuant to section 553 of the Bankruptcy Code or otherwise. Without limiting the foregoing, the Debtors are authorized to honor and pay, in their sole discretion, such Remaining Customer Obligations as may be owing to Overseas Military Sales Corporation.
5. The Debtors' banks and financial institutions (collectively, the "Banks") are authorized and directed, when requested by the Debtors in the Debtors' sole discretion, to receive, process, honor and pay all checks presented for payment of, and to honor all fund transfer requests made by the Debtors related to, Remaining Customer Obligations, whether such checks were presented or fund transfer requests were submitted prior to, on or after the Petition Date, provided that funds are available in the Debtors' accounts to cover such checks and fund transfers. The Banks are authorized to rely on the Debtors' designation of any particular check or fund transfer as approved by this Order.
6. Nothing in the Motion or this Order, nor the Debtors' payment of claims pursuant to this Order, shall be deemed or construed as: (a) an admission as to the amount, validity or priority of any claim against the Debtors; (b) a waiver of the Debtors' rights to dispute any claim on any grounds; (c) a promise to pay any claim; (d) an implication or admission that any particular claim would constitute a Remaining Customer Obligation; or (e) a request to assume any executory contract or unexpired lease, pursuant to section 365 of the Bankruptcy Code.Wouldn't the lemon law payments be covered under at least one of the two orders since, while hopefully not a normal occurrence, these are obligations to customers and/or dealers that arise in the ordinary course of business?
Otherwise, such payments would, I believe, have to individually (or together) be dealt with through a separate application to the Court under Section 363(b).
I have a hard time believing that the Dollar amounts involved would justify treatment of lemon law claims outside of the ordinary course of business, let alone a 363(b) application to the Court.
Does that seem reasonable?
Certainly reasonable.
I think the ordinary course of business issue might depend on whether a lawsuit has been filed, or maybe even a threat letter received from a lawyer. Like I said, I've never handled a lemon law case, but I've seen a lot of corporate policies that direct the local branch to disengage and forward legal complaints to corporate counsel. At least from a lawyer's perspective, I don't think you want companies to treat legal complaints as ordinary, but make sure that simple issues don't turn into complex ones.
Another question though. Most successful lemon law claims result in trading the car for a similar model. Obviously its cheaper for the car company to produce a car than reimburse the FMV of a replacement. Is that option even available here, where the liability is with old Chrysler and the inventory going to new Chrysler?
Anyway, the importance of lemon laws to customer satisfaction is too important to have been ignored, or for the newspaper's source to bungle. And I don't expect lawyers in that practice area to be quiet if the reporting was accurate.
By the way, I've enjoyed your posting on this issue.
PD Shaw:
Thank you.
I would think that it would be in the interest of both old Chrysler and NewChrysler to deal expeditiously with customer dissatisfaction.
As you may remember from law school, any suits would be subject to the automatic stay.
I certainly haven't had any exposure to the lemon laws, but I got the impression that there wasn't much of a contest on the issues (there might be some effort to mediate, but I can't see a full-blown lawsuit - it would cost too much).
The amounts are such that, I would think, they would be considered in the ordinary course.
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