March 31 (Bloomberg) -- Auto-parts supplier Delphi Corp. asked a U.S. judge to void its labor contracts as part of a plan to exit bankruptcy that includes selling or closing most U.S. plants, eliminating 8,500 salaried jobs and rewriting contracts with General Motors Corp.

Delphi Chief Executive Officer Steve Miller's request to cancel labor pacts escalates a confrontation with the United Auto Workers that may lead to a strike and drag GM itself into bankruptcy. Delphi, GM's biggest auto-parts supplier, is a former unit of GM.

GM said it was ``disappointed'' in Delphi's bid to overhaul parts contracts, and the UAW called the court filing a ``misuse of the bankruptcy procedure.'' The move will increase pressure on all sides to agree to wage and benefit cuts before a U.S. bankruptcy judge rules on the request as early as June. Miller said he intends to continue negotiating with GM and the UAW in the hopes of reaching an out-of-court agreement.

``It's a bigger game of chicken ideally designed to get everyone at the negotiating table,'' said Joseph Balestrino, senior portfolio manager at Federated Investors in Pittsburgh, where he oversees $8 billion of bonds, including GM.

As part of the court filing, Miller asked permission to renegotiate the terms on more than 400 unprofitable GM parts contracts. In addition, Miller said Delphi will stop making brakes and steering systems and other parts to focus on higher- technology products such as in-vehicle entertainment systems. He plans to close 21 of his 29 U.S. production sites by the end of next year.

25 Percent Solution

As many as 8,500 people, or 25 percent of the company's global salaried workforce, would be cut through firings or attrition. Delphi said it will freeze pensions beginning this year and reduce its corporate officer ranks by as much as 40 percent.

GM shares rose 21 cents, or 1 percent, to $21.27 at 4:16 p.m. in New York Stock Exchange composite trading. The shares have risen 9.5 percent since the start of the year.

Resolution of the conflict is vital to GM, as the UAW has pledged to strike Delphi plants if its contracts are thrown out. A strike would force GM to shut auto-assembly plants within 48 hours, according to Sean McAlinden, an analyst with the Center for Automotive Research in Ann Arbor, Michigan.

Through the first 60 days of a strike, GM ``would hemorrhage $7 billion to $8 billion of cash,'' Merrill Lynch analyst John Murphy said in a report. A three-month UAW strike could bankrupt GM, Sanford C. Bernstein analyst Brian Johnson has said.

``Emergence from the Chapter 11 process in the U.S. requires that we make difficult, yet necessary, decisions,'' Miller said in a statement. ``These actions will result in a stronger company with future global growth opportunities.''

Latest Offer

Miller, 64, said he will stick with his latest offer of giving workers a $50,000 bonus in exchange for an initial wage reduction from $27.50 an hour to $22 followed by a drop to $16.50 by Sept. 3, 2007. That offer is contingent on the United Auto Workers' consent and financial contributions from GM. Without that, Miller says he will cut wages to $12.50.

Delphi says its total labor costs, including benefits, is about $78.63 an hour, more than three times that of its competitors. It said that if its labor and benefit payouts aren't reduced, it will lose as much as $13 billion over the next five years. The company hasn't had an annual profit since 2003 and posted a net loss of $2.8 billion last year.

Miller said while the court filings are necessary steps, ``we are singularly focused on reaching a consensual resolution with all of our unions and GM before any court hearing is necessary.''

U.S. Bankruptcy Judge Robert Drain is scheduled to begin hearing arguments on May 9.

Court Scenario

A bankrupt company can impose pay cuts should a judge fail to issue a ruling within 30 days of the start of a hearing on the matter. If the hearings begin May 9, the sides would have until June 8 to reach an out-of-court settlement before Drain is required to rule.

``Judge Drain is a moderating influence on divisive parties,'' said Anthony Sabino, a professor of law and business at St. John's University in New York who has argued cases before Drain. ``My bet is he will adjust deadlines, hold off on making a decision and try to get the parties to reach an accord on their own.''

Bankruptcy law doesn't allow a judge to grant only part of a company's request, meaning either Delphi gets everything it is asking for or nothing.

`Ratcheting Up the Pressure'

``Moving to throw out the contracts provides Delphi with a way of ratcheting up the pressure,'' said John Novak, a Morningstar Inc. analyst in Chicago. ``Since it's really in no one's interest to strike, I think the parties will ultimately reach a deal.''

Miller said Delphi, of Troy, Michigan, can no longer continue to fill GM's unprofitable product contracts. Delphi intends to ask Judge Drain for permission to reject an undisclosed number of GM contracts on May 12, Miller said. Delphi sent Detroit-based GM a letter today saying it wanted to change the terms and conditions for more than 400 commercial agreements that expired in the last six months.

``We simply can't continue selling our products at a loss,'' Miller said.

Delphi said it will focus on producing technology products for use in cars and other industries, such as medical. In addition to entertainment systems, Delphi intends to keep building powertrain products, safety systems and temperature controls.

The company will also stop making chassis, catalysts, cockpits, door modules, instrument panels and wheel bearings and steering systems.

Survivors

Delphi will keep its sites in Brookhaven and Clinton, Mississippi; Grand Rapids, Michigan; Lockport and Rochester, New York: Kokomo, Indiana; and Warren and Vandalia, Ohio.

Hourly U.S. pensions will also be frozen effective Oct. 1, 2006, and salaried pensions will be frozen Jan. 1, 2007, Delphi said. The pension freezes won't result in a loss of accrued benefits for any current employee or retiree participating in the pension plans.

Pensions will also be replaced with defined-contribution plans for hourly employees who are more than seven years from retirement and not covered by the GM benefit guarantee and salaried workers.

Pension Relief

The company said it will also need to obtain relief from the U.S. Pension Benefit Guaranty Corp., Internal Revenue Service, and Department of Labor in order to amortize funding contributions over a longer period than may have previously occurred. Congressional action may also be necessary, Delphi said.

UAW President Ron Gettelfinger and Vice President Richard Shoemaker said Miller's filing is ``another indication that Delphi has never been serious about finding a solution to its current problems through the collective bargaining process.''

Said GM Chief Executive Rick Wagoner: ``We disagree with Delphi's approach, but we anticipated this step might be taken. GM expects Delphi to honor its public commitments to avoid a disruption.''

To contact the reporter on this story: Jeff Bennett in Southfield, Michigan, at jbennett17@bloomberg.net

Last Updated: March 31, 2006 16:30 EST