Chrysler Required to Reinstate Dealership Terminated in Network Reduction

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A balancing of the economic interests of a motor vehicle franchisor (Chrysler), a terminated dealer (Fury), and the public led to the conclusion that the Lake Elmo, Minnesota dealership should be reinstated to the Chrysler motor vehicle dealer network and have its franchise agreements renewed, as prescribed by Section 747 of the Consolidated Appropriations Act of 2010, an arbitrator has determined.

The dealer had been terminated in connection with Chrysler’s reorganization in bankruptcy and sought reinstatement through the binding arbitration procedures outlined in the statute (CCH Business Franchise Guide ¶14,281) that was signed into law on December 16, 2009.

The Act required an arbitrator’s determination as to whether a dealer should be added back to a franchisor’s dealer network to result from a balancing of the economic interests of the dealer, the franchisor, and the public at large.

According to the arbitrator, the factors to be considered in such balancing included:

(1) Chrysler’s overall business plan;

(2) Fury’s profitability during 2006, 2007, 2008, and 2009;

(3) Fury’s current economic viability;

(4) Fury’s satisfaction of the performance objectives of its franchise agreement;

(5) the demographic and geographical characteristics of the dealer’s market territory;

(6) Fury’s performance in relation to the criteria used by Chrysler to terminate it; and

(7) the length of Fury’s experience.

Reinstating Fury would not result in any meaningful harm to the economic interests of Chrysler, the arbitrator decided. Based on all of Chrysler’s dealership performance criteria, Fury scored within the top 29% to 47% of all dealers in the local and national markets during the two years prior to its termination.

The public interest would not be materially affected by a decision to restore Fury to Chrysler’s network, the arbitrator reasoned. There was no material public interest associated with the convenience of having, or the inconvenience of not having, the Fury dealership in Lake Elmo, Minnesota.

There were economic harms to Fury from not being reinstated, but they were not overwhelming. Fury would not fail to survive if Chrysler did not reinstate it; however, it certainly would be more vulnerable. Moreover, Fury would suffer the stigma of being only a used car dealer with no new car franchise.

While those harms were not overwhelming, they were also not trivial and were greater than any meaningful harms to Chrysler, which were largely non-existent, the arbitrator concluded.

A detailed summary of the arbitrator’s determination (Fury Dodge, LLC v. Chrysler Group, LLC, American Arbitration Association, Case No. 65-532 000047 10, June 25, 2010) appears at CCH Business Franchise Guide ¶14,406.

Further information regarding CCH Business Franchise Guide appears here on the CCH Online Store.

Closing of GM, Chrysler Dealerships Raises Termination Issues for Bankruptcy Courts

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

With the noticed closings of so many GM and Chrysler dealerships, wrongful termination statutes have become a question before the bankruptcy courts.

Simply put: Does the right of a bankrupt undergoing reorganization to reject contracts supersede the wrongful termination statutes that afford protection to dealers under many state relationship laws?

Rather than face the issue head on, however, an accommodation was reached. On July 5, 2009, the attorneys general (AGs) of 30 states reached an agreement in principle with GM regarding protections afforded under state laws to dealers and consumers.

The agreement requires New GM, a newly formed entity created by the U.S. Treasury, to comply with state relationship laws. It was formally ratified by the U.S. Bankruptcy Court, and additional states are expected to participate.

The AGs had filed objections to GM’s plan to reduce the number of its dealerships by 2,641—from 6,246 to 3,605—by the end of 2010, contending that the plan would have permitted GM to ignore state statutes that protect dealerships from unfair terminations and other oppressive conduct by motor vehicle manufacturers.

Greater Statutory Protections

And in light of the current economic slump particularly affecting the automotive industry, state legislatures appear to be moving to provide greater protections for their in-state dealerships and distributorships.

For example, the new Alabama Heavy Equipment Dealer Act prohibits suppliers from unilaterally amending, terminating, or refusing to renew a dealer agreement without "good cause," which is limited to withdrawal by the supplier from the market and certain performance deficiencies. The law also requires suppliers to provide advance written notice and an opportunity to cure in most instances of an amendment, termination, or failure to renew a dealer agreement. (Senate Bill No. 308 was approved and became effective May 22, 2009. See CCH Business Franchise Guide ¶4105).

In another attempt to protect its auto dealers, Illinois went further, recently amending its statute to eliminate language in the motor vehicle dealer law that a manufacturer has good cause to cancel, terminate, or fail to extend or renew the franchise or selling agreement to all franchisees of a line make when the manufacturer permanently discontinues the manufacture or assembly of such line.

It also (1) makes it a violation for a manufacturer to require or coerce a motor vehicle dealer to underutilize their facilities by requiring them to cease operations for the selling or servicing of any vehicles with another manufacturer and (2) provides an itemized list of reasonable compensation for the value of a motor vehicle dealer's business and business premises. (Senate Bill No. 1417 was approved and became effective May 22, 2009. See CCH Business Franchise Guide ¶4135).

Maine too amended its motor vehicle dealer law by deleting language stating that good cause for termination exists when a manufacturer discontinues production or distribution of the franchise product. (Senate Bill No. 483 was approved and became effective June 11, 2009. See CCH Business Franchise Guide ¶4195).

Impairment Write-Downs and Loan Guarentee Ratios—A Problem?

Many venture capital firms and other buyers of franchise companies over the past decade used substantial leveraging in their acquisitions. Many of these loans have certain financial ratios that must be maintained often involving net worth. In some instances, there are also personal guarantees.

As we have written often, Financial Accounting Standards Board (FASB) 141 and 142 require purchasers of intangible property (IP)—as opposed to owners of self-created IP—to test their IP assets (including “goodwill”) at least annually for impairment. If, as in many cases, the value of purchased franchise agreements, distributorship, or dealership agreements has been reduced (“impaired”), such as Chrysler dealerships purchased within the past 10 years, prudent auditors will be asking whether franchise company management is honestly valuing their IP in light of potential loan problems that could affect them personally. Beware!

Lost Future Royalties: Must Expenses Be Proven? Is There a Mitigation Defense?

In a recent decision, a franchisor’s claim for lost future royalties was denied because it failed to submit any evidence as to its own operating expenses. (Rocky Mountain Chocolate Factory v. SDMS, DC Colo., CCH Business Franchise Guide ¶24,093)

Under Colorado law, future royalties, like all future damages, are subject to the “rule of certainty.” On that basis, a federal district court ruled that a franchisor’s claim for lost future royalties was basically a claim for lost profits and that without evidence of both revenues and expenses, the court was left to speculate about the amount.

Additionally, the court left open the possibility of a mitigation defense against a claim for lost profits based on imminent franchisee failure. The court noted that it was not clear that the franchisor would have been entitled to future damages even if it had provided evidence of expenses because the franchisee cast doubt at trial on its continued financial viability because of its persistent operating losses.
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Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

House-Passed Appropriations Bill Includes Measure to Resurrect GM, Chrysler Franchises

This posting was written by John W. Arden.

The U.S. House of Representatives yesterday passed a general financial services and appropriations bill that includes a provision attempting to restore automobile franchises terminated pursuant to the bankruptcy plans of General Motors and Chrysler Corp.

The Financial Services and General Government Appropriations Act, 2010 (H.R. 3170) cleared the House of Representatives last night by a 219 to 208 vote.

Appended to the general appropriations bill were two provisions (Sec. 245 and Sec. 246) that:

(1) Prohibit the use of any appropriated funds to obtain a financial interest in an automobile manufacturer “that deprives an automobile dealer of its economic rights under a dealer agreement” and does not assume each dealer agreement that is valid, pre-existing, and not lawfully terminated and

(2) Require bankrupt automobile manufacturers in which the federal government has an ownership interest—and their successor companies—to enter into a new dealership agreement with dealers having a valid agreement at the time of the bankruptcy filing.

White House Opposition

The dealership measure, authored by U.S. Rep. Steven C. LaTourette (R-Ohio), was left in the bill, despite strong opposition from the White House. In a July 15 statement of administrative policy, the Obama Administration supported passage of the bill, but “strongly opposes the language in the bill that attempts to restore prior Chrysler and General Motors (GM) franchise agreements.”

According to the statement, “the decision by Chrysler and GM to rationalize their dealer networks was a critical part of their overall restructuring to achieve long-term viability in order to save jobs in the long run, and to improve the prospects for the company’s repayment of the substantial taxpayer investments. Without the significant steps these automakers have taken to revamp their operations, the companies would have failed—imperiling ever GM and Chrysler dealer in the country.”

As previously reported, GM plans to reduce the number of its dealerships by 2,641—from 6,246 to 3,655—by the end of 2010. The U.S. Bankruptcy Court for the Southern District of New York ruled on June 9, 2009, that Chrysler could immediately terminate 789 Chrysler, Dodge, and Jeep franchises—about a quarter of its dealership base.

Job Losses

In a July 16 news release, Rep. LaTourette criticized President Obama’s Auto Task Force for encouraging automobile companies to terminate dealers, stating that the closure of GM and Chysler dealership would cause the loss of approximately 200,000 jobs.

“Under these policies the only jobs that will be stimulated will be clerks at the unemployment offices in the country,” said LaTourette.

The representative cast doubt on the financial necessity of closing dealerships. “The auto companies have never been able to demonstrate that the dealers are a drag on their bottom line,” he remarked. “I think many agree that the tramping of state franchise laws is wrong and many have no stomach for the way these dealers were treated.”

Further details regarding H.R. 3170 appear here at the Library of Commerce’s Thomas web site.

Agreement with State Attorneys General

In a related matter, the attorneys general of 30 states reached an agreement with GM regarding protections afforded under state laws to dealers and consumers. The attorneys general had filed an objection to the GM’s termination of 2,641 dealers in U.S. Bankruptcy Court for the Southern District of New York, contending that the bankruptcy plan would permit GM to ignore state motor vehicle anti-termination statutes.

The agreement, which was formally ratified by the bankruptcy court on July 5, required New GM to comply with state franchise and dealership laws going forward, honor warranties and comply with state lemon laws, and honor product liability claims for acceding involving cars sold before the bankruptcy. (See Trade Regulation Talk, July 8, 2009).

Bankruptcy Court Allows Chrysler to Terminate 789 Franchises

This posting was written by John W. Arden.

A bankruptcy court ruled yesterday that auto maker Chrysler LLC could immediately terminate 789 Chrysler, Dodge, and Jeep franchises in accordance with its plan to cut costs and quickly emerge from bankruptcy, according to an Associated Press report.

In an oral ruling late Tuesday afternoon, Judge Arthur J. Gonzalez of the U.S. Bankruptcy Court for the Southern District of New York allowed Chrysler to terminate approximately one-quarter of its dealership base.

More than 25 attorneys, representing hundreds of franchisees across the country, had argued that termination of the franchises was unnecessary and would not result in substantial savings.

A written decision on the ruling is forthcoming

Further information regarding the Chapter 11 bankruptcy case—In re Chrysler LLC, Case No. 09 B 50002 (AJG)—appears on the court website.

Bill Requires Bankrupt Auto Makers to Reimburse Dealers from Federal Funds

This posting was written by John W. Arden.

A bill to require bankrupt automobile manufacturers that receive funds from the federal government to use such funds to fully reimburse dealers for inventory of vehicles and parts has been proposed in House Bill No. 1256.

The measure—proposed as the Auto Dealers Assistance Amendment (#1270)—would require manufacturers to use any funding received from the U.S. Treasury while in bankruptcy to:

(1) Fully reimburse dealers rejected in bankruptcy for the cost of all parts and inventory in the dealer’s possession on the date of the bankruptcy and all other obligations owed under franchise and dealership agreements, and

(2) Provide dealers rejected in bankruptcy with at least 180 days to shut down their businesses and sell off their inventories through a “wind down period.”

The amendment further specifies that a bankruptcy court may not allow a bankrupt dealer to obtain access to debtor-in-possession funding unless the credit agreements expressly provide for reimbursement and wind-down as provided by the measure.

U.S. Senator Bob Corker (R-Tenn.) introduced the amendment on June 4.

“We continue to receive assurances from Chrysler and GM that their dealers across Tennessee and across the country will be treated fairly,” said Corker. “We understand that a bankruptcy is inherently painful and our efforts aren’t to interfere.

“We filed this amendment to apply pressure on the automakers to keep their word to rejected dealerships and fully reimburse them for their inventories of vehicles and parts,” he continued. “We hope Chrysler and GM will take these appropriate actions and make this amendment unnecessary.”

A statement by Senator Corker and text of the amendment appear on the Senator’s website.