There seems to be a great deal of confusion concerning the status of new car dealers’ rights under Virginia franchise laws. Part of this confusion stems from the aggressiveness of franchisors that are using the unconscionable treatment of dealers during the recent bankruptcies to intimidate their franchisees. Even the manufacturers who were not involved in the bankruptcies are implying a sort of “who knows who could be next” argument.
Clearly, dealers have reason to be concerned. Too many dealers were crushed during the GM and Chrysler bankruptcies. Those proceedings were used as an excuse for an unnecessary, and in some cases, punitive pillaging of the dealer community.
Having said that, however, we must recognize these events for what they were – unusual circumstances that became possible as the result of the unthinkable bankruptcies of Chrysler and GM. Let’s discuss some of the issues that may concern you.
I am a GM dealer. The bankruptcy removed my right to challenge GM’s actions and programs that violate state law.
False. New GM bought certain operating assets of Old GM so that it could continue the Chevrolet, Cadillac, Buick and GMC brands. In doing so, New GM assumed and chose to continue the dealer agreements of those dealers who were given participation agreements (later amended). If you are a dealer operating under a wind-down agreement or deferred termination agreement, your rights may in fact be limited. However, unless New GM itself declares bankruptcy, a dealer going forward with New GM under a dealer agreement amended by a participation agreement has all rights under state law with limited exceptions.
In assuming the dealer sales and service agreements, New GM chose to proceed with its obligations under those agreements, as amended by the participation agreement which was itself amended. As a result, there are several things that are clear.
- New GM is bound by state law.
- The only dealer waivers of state law rights under the amended dealer agreement are the waiver of protest right for establishment of a new dealer greater than six miles from the existing dealer’s location, and the agreement to facility exclusivity terms to be negotiated.
- All other rights under the GM franchise agreements, as amended by the participation agreements, are intact and can be enforced by actions in state court or before the DMV.
I am a Chrysler dealer. The bankruptcy eliminated my rights under state laws if I have a dispute with New Chrysler.
False. New Chrysler assumed the dealer agreements of Chrysler/Dodge/Jeep dealers it did not reject. Under those agreements, the actions of New Chrysler are governed by Virginia law. Chrysler dealers enjoy all of their rights under state franchise laws as long as New Chrysler does not declare bankruptcy.
The only real question is in what forum will a dispute between a dealer and New Chrysler be decided? In the documentation permitting New Chrysler’s acceptance and assumption of the non-rejected dealer agreements, there is no explicit language concerning where a dispute between New Chrysler and a dealer may be heard – in bankruptcy court or using state processes like a court or the DMV. And, New Chrysler showed recently that it is prepared to ask a bankruptcy court to block a challenge to the effectiveness of the bankruptcy court’s orders that may be raised in a state court or agency, as we will discuss below. However, if a dispute between a dealer and a manufacturer has nothing to do with the effectiveness of the bankruptcy court’s orders, it is questionable that the bankruptcy court will take jurisdiction of the case. It is much more likely that a state court or DMV will have jurisdiction to hear the dispute. This means that if New Chrysler violates Virginia franchise laws going forward, a dealer will probably be in a position to challenge that in a state court or before the DMV. But whether the dispute is heard by the bankruptcy court or in a state forum, Virginia franchise laws will apply.
I am an import nameplate dealer. My manufacturer is being incredibly aggressive. My rep is telling me that I need to stay on their good side and that I should look at GM and Chrysler dealers to see what can happen to dealers who challenge the factory...
Nonsense. A bankruptcy by an import nameplate distributor is an extremely risky strategy for the import manufacturer. The primary reason that the Chrysler and GM bankruptcies went so smoothly is that the acquiring companies in the sales (known in bankruptcy parlance as 363 sales) were backed by the United States government using United States government funds.
Some have speculated that an import manufacturer could cause the bankruptcy of its US distributor to orchestrate a sale of assets to an affiliate to strip dealers of rights through rejection in bankruptcy. However, even if it were to do so, there is no guarantee that a bankruptcy court would look at that as a legitimate 363 sale. Even in the Chrysler and GM bankruptcies, there was some question whether the so-called “sales” were in fact de facto reorganizations. If they were de facto reorganizations, then the rapid sales could not have been possible. In a situation where a foreign nameplate manufacturer is using the bankruptcy process to reorganize its distributor so that it can reject some dealers, there is little chance that such transactions will be as smooth or as easily permitted as the 363 sales were in the Chrysler and GM cases where political winds were powering those proceedings. And where it appears that the bankruptcy is a simply a sham to destroy the rights of dealers and other creditors, a bankruptcy court may even deny the remedies sought. A bankruptcy of an import nameplate distributor will be terribly damaging to the nameplate’s image, will be very costly, and where used to simply destroy dealer rights may be unsuccessful. This is a very risky strategy for an import nameplate manufacturer.
VADA must seek changes in state law to prevent rejection of dealers and to give rejected dealers the opportunity to assert rights under their dealer agreements against acquiring companies in future bankruptcies.
Such state laws will probably have no impact. The U.S. bankruptcy code gives a franchisor that is legitimately bankrupt the right to reject executory contracts – including dealer agreements. The bankruptcy court has the authority to permit a bankrupt debtor to terminate all of its obligations under rejected contracts and to order that the company acquiring the assets of the bankrupt debtor will own those assets completely free of claims of rejected contract holders. And a recent decision of the court hearing the Chrysler bankruptcy shows that a court will protect the bankrupt debtor’s right to escape all obligations under rejected dealer agreements. The court recently ordered dealers in four states who had challenged the termination of their Chrysler dealer agreements through state proceedings to stop pursuing those proceedings and ordered that they will be fined $10,000 per day if they do not. In very broad language, the court noted that it has the power to block any attempt to assert rights derived from a rejected dealer agreement. This reasoning will apply to any state law designed to prevent rejection or that gives a rejected dealer the opportunity to assert rights that derive from a rejected dealer agreement against the acquiring company.
There seems to be a great deal of confusion concerning the status of new car dealers’ rights under Virginia franchise laws. Part of this confusion stems from the aggressiveness of franchisors that are using the unconscionable treatment of dealers during the recent bankruptcies to intimidate their franchisees. Even the manufacturers who were not involved in the bankruptcies are implying a sort of “who knows who could be next” argument.
Clearly, dealers have reason to be concerned. Too many dealers were crushed during the GM and Chrysler bankruptcies. Those proceedings were used as an excuse for an unnecessary, and in some cases, punitive pillaging of the dealer community.
Having said that, however, we must recognize these events for what they were – unusual circumstances that became possible as the result of the unthinkable bankruptcies of Chrysler and GM. Let’s discuss some of the issues that may concern you.
I am a GM dealer. The bankruptcy removed my right to challenge GM’s actions and programs that violate state law.
False. New GM bought certain operating assets of Old GM so that it could continue the Chevrolet, Cadillac, Buick and GMC brands. In doing so, New GM assumed and chose to continue the dealer agreements of those dealers who were given participation agreements (later amended). If you are a dealer operating under a wind-down agreement or deferred termination agreement, your rights may in fact be limited. However, unless New GM itself declares bankruptcy, a dealer going forward with New GM under a dealer agreement amended by a participation agreement has all rights under state law with limited exceptions.
In assuming the dealer sales and service agreements, New GM chose to proceed with its obligations under those agreements, as amended by the participation agreement which was itself amended. As a result, there are several things that are clear.
- New GM is bound by state law.
- The only dealer waivers of state law rights under the amended dealer agreement are the waiver of protest right for establishment of a new dealer greater than six miles from the existing dealer’s location, and the agreement to facility exclusivity terms to be negotiated.
- All other rights under the GM franchise agreements, as amended by the participation agreements, are intact and can be enforced by actions in state court or before the DMV.
I am a Chrysler dealer. The bankruptcy eliminated my rights under state laws if I have a dispute with New Chrysler.
False. New Chrysler assumed the dealer agreements of Chrysler/Dodge/Jeep dealers it did not reject. Under those agreements, the actions of New Chrysler are governed by Virginia law. Chrysler dealers enjoy all of their rights under state franchise laws as long as New Chrysler does not declare bankruptcy.
The only real question is in what forum will a dispute between a dealer and New Chrysler be decided? In the documentation permitting New Chrysler’s acceptance and assumption of the non-rejected dealer agreements, there is no explicit language concerning where a dispute between New Chrysler and a dealer may be heard – in bankruptcy court or using state processes like a court or the DMV. And, New Chrysler showed recently that it is prepared to ask a bankruptcy court to block a challenge to the effectiveness of the bankruptcy court’s orders that may be raised in a state court or agency, as we will discuss below. However, if a dispute between a dealer and a manufacturer has nothing to do with the effectiveness of the bankruptcy court’s orders, it is questionable that the bankruptcy court will take jurisdiction of the case. It is much more likely that a state court or DMV will have jurisdiction to hear the dispute. This means that if New Chrysler violates Virginia franchise laws going forward, a dealer will probably be in a position to challenge that in a state court or before the DMV. But whether the dispute is heard by the bankruptcy court or in a state forum, Virginia franchise laws will apply.
I am an import nameplate dealer. My manufacturer is being incredibly aggressive. My rep is telling me that I need to stay on their good side and that I should look at GM and Chrysler dealers to see what can happen to dealers who challenge the factory...
Nonsense. A bankruptcy by an import nameplate distributor is an extremely risky strategy for the import manufacturer. The primary reason that the Chrysler and GM bankruptcies went so smoothly is that the acquiring companies in the sales (known in bankruptcy parlance as 363 sales) were backed by the United States government using United States government funds.
Some have speculated that an import manufacturer could cause the bankruptcy of its US distributor to orchestrate a sale of assets to an affiliate to strip dealers of rights through rejection in bankruptcy. However, even if it were to do so, there is no guarantee that a bankruptcy court would look at that as a legitimate 363 sale. Even in the Chrysler and GM bankruptcies, there was some question whether the so-called “sales” were in fact de facto reorganizations. If they were de facto reorganizations, then the rapid sales could not have been possible. In a situation where a foreign nameplate manufacturer is using the bankruptcy process to reorganize its distributor so that it can reject some dealers, there is little chance that such transactions will be as smooth or as easily permitted as the 363 sales were in the Chrysler and GM cases where political winds were powering those proceedings. And where it appears that the bankruptcy is a simply a sham to destroy the rights of dealers and other creditors, a bankruptcy court may even deny the remedies sought. A bankruptcy of an import nameplate distributor will be terribly damaging to the nameplate’s image, will be very costly, and where used to simply destroy dealer rights may be unsuccessful. This is a very risky strategy for an import nameplate manufacturer.
VADA must seek changes in state law to prevent rejection of dealers and to give rejected dealers the opportunity to assert rights under their dealer agreements against acquiring companies in future bankruptcies.
Such state laws will probably have no impact. The U.S. bankruptcy code gives a franchisor that is legitimately bankrupt the right to reject executory contracts – including dealer agreements. The bankruptcy court has the authority to permit a bankrupt debtor to terminate all of its obligations under rejected contracts and to order that the company acquiring the assets of the bankrupt debtor will own those assets completely free of claims of rejected contract holders. And a recent decision of the court hearing the Chrysler bankruptcy shows that a court will protect the bankrupt debtor’s right to escape all obligations under rejected dealer agreements. The court recently ordered dealers in four states who had challenged the termination of their Chrysler dealer agreements through state proceedings to stop pursuing those proceedings and ordered that they will be fined $10,000 per day if they do not. In very broad language, the court noted that it has the power to block any attempt to assert rights derived from a rejected dealer agreement. This reasoning will apply to any state law designed to prevent rejection or that gives a rejected dealer the opportunity to assert rights that derive from a rejected dealer agreement against the acquiring company.