Chrysler Hit by Lawsuits; Is Bankruptcy A Way to Cope?
February 10, 2009
By Michelle Krebs
Chrysler has been socked by two lawsuits in as many days, prompting at least one expert to wonder if more lawsuits can be expected and force Chrysler into official bankruptcy proceedings.
French-based Faurecia has sued Chrysler, claiming the automaker owes the supplier $110 million for engineering and research costs as well as handing its research over to the Chinese.
Another lawsuit filed in Delaware charges Chrysler is automatically denying workers' compensation claims over a spinal-cord treatment for employees injured on the job. The suit seeks class-action status.
Meantime, a bankruptcy lawyer in Detroit suggests a flurry of lawsuits is often a reason for companies to file for bankruptcy.
Bankruptcy Consolidates Suits
Michael Fleming, a partner with the Detroit-based law firm of Plunkett Cooney who specializes in bankruptcy, told a media briefing to watch for lawsuits particularly like those filed by supplier Faurecia against Chrysler. In that suit, Faurecia, Europe's largest supplier of interior components, charges Chrysler with breach of contract and seeks more than $100 million in damages for Chrysler's failure to reimburse the supplier for engineering and R&D costs.
"One lawsuit by itself is not notable. But this one is for a lot of money and is from a big company," Fleming told reporters. "Watch in the next few days or weeks if a trend starts where suppliers start filing lawsuits as they get more and more nervous about the ability to collect on business with Chrysler -- or General Motors -- for that matter."
Fleming said one strong reason any company files for Chapter 11 bankruptcy protection is to consolidate mounting lawsuits. "They get hit with lawsuits, and they can't deal with them outside of bankruptcy court because they are spending all their time litigating claims in courts across the country," he said. "It becomes too much of a burden and is one of the very strong reasons companies file bankruptcy because state court lawsuits are staid and all are funneled into bankruptcy court."
Faurecia Sues, Reports Deepening Losses
In its lawsuit filed in Oakland County (Mich.) Circuit Court Monday and reported on by the Detroit Free Press, Faurecia said R&D costs originally were included in the price of each component. But that provision was dependent on Chrysler achieving certain volume projections.
When Chrysler did not meet volume projections, it refused to reimburse the R&D fee for each component as Faurecia claims it was promised. The supplier further claims Chrysler repeatedly confirmed it had no intention of compensating Faurecia.
Faurecia makes seats, doors, exhaust systems and other parts. The expenses relate to interior parts for the Chrysler PT Cruiser and Sebring, Dodge Avenger and Nitro and Jeep Liberty.
In 2008, production of the Chrysler PT Cruiser, for which Faurecia provides parts, was 70 percent lower than projections in the companies' contract. Sales of the PT Cruiser fell to the point that Chrysler dropped the convertible version and has since decided to end PT Cruiser production altogether. Similarly, Chrysler has reduced production of the other models involved as well.
"Chrysler's unilateral volume reductions have caused correspondingly dramatic shortfalls in Chrysler's payment of the amounts owed," Faurecia said in its suit, which also charges Chrysler of giving the supplier's research to a Chinese company.
The day after filing its lawsuit against Chrysler, Faurecia, based in Nanterre, France, and in which PSA Peugeot Citroen owns a 71-percent stake, reported its second-half loss widened to $716 million compared with a profit a year earlier. The company blamed its deepening losses on global and industry-wide reductions in vehicle production. The company has responded by eliminating 1,215 jobs in France, closing plants and generally slashing costs. Faurecia's only bright spot was in increased revenue from Volkswagen's Audi division.
Suppliers: The Domino Effect
Faurecia's lawsuit against Chrysler isn't the first against the automaker by a supplier. Dearborn, Mich.-based Plastech Engineered Products Inc., filed for bankruptcy after Chrysler canceled its contracts. The two were embroiled in a bitter dispute over who owned the tooling for the plastic parts the company provided to Chrysler. Five months later, Plastech sold all of its businesses.
Plunkett Cooney's Fleming says this is only the beginning of the supplier fallout. Already, suppliers are struggling with falling production volumes compounded by pressures by automakers for price cuts and ponying up development expenses.
"We think the domino effect could be staggering," he said. "If GM, Chrysler or Ford end up in bankruptcy, we'll see a great number of suppliers go out of business or file their own Chapter 11 bankruptcies," he said. Most, he added, will not be able to withstand the demands for price discounts required by automakers or the massive reduction in volume.
"Suppliers will liquidate, shut their doors or be forced into bankruptcy and do the same cost cutting and job and salary cuts as the automakers," he said. "How far the ripple effect goes - well, it's enormous. This is a very real and dangerous prospect."
Injured Employee Sues
In the Delaware lawsuit, reported on by Bloomberg News Tuesday, former Chrysler autoworker Nancy Nichols claims she suffered back, neck, leg and pelvic injuries in February 2005 after she was pinned between a Dodge Durango and a pole at Chrysler's now-closed Newark, Del., plant. Chrysler automatically rejected her workers' compensation claim because she was treated for her chronic pain by having a spinal-cord stimulator implanted. The lawsuit claims Chrysler automatically rejects all workers' compensation claims tied to such stimulators.
"As a result of Chrysler's corporate policy of automatic denials, every one of Chrysler's U.S. employees who would otherwise be protected by workers' compensation laws now enjoys less than the full benefit of those protections," Nichols said in the lawsuit.
Chrysler has refused comment on both lawsuits.
Photo by Chrysler
Faurecia supplies interior components to the Chrysler PT Cruiser.
Posted by Michelle Krebs at 1:14 PM under Analysis , Chrysler , Commentary , Featured | Comments (0) | digg this | Seed Newsvine
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