The “rationalization”—read, reduction—of Chrysler and GM’s dealership networks has taken center stage in their respective government-led restructurings. In total, just under 800 Chrysler dealers have had their franchise and related agreements formally rejected under bankruptcy law, while approximately 2,000 GM dealers have either experienced a similar fate or they have entered into “wind-down” agreements allowing them to continue operating through October 2010.
According to the manufacturers, these rejections were absolutely essential to their financial rehabilitation. They argue, among other things, that there were too many dealerships in a time of reduced market share and that certain dealerships were no longer located in prime locations or they were “partial line” dealers—i.e., they didn’t carry all of the manufacturer’s brands under one roof. In Chrysler’s case, the stated objectives of dealership rationalization included brand consolidation and reducing and reconfiguring the networks to achieve the goal of having smaller and stronger networks, with the best dealers, in the best locations, and with the best facilities. As a result, the remaining dealers would become more profitable, generate greater capital to reinvest in the business, improve customer amenities and satisfaction, and enjoy increased sales over time. Absent these dealership reductions, the manufacturers argue that they would have faced the prospect of immediate liquidation.
The dealers, on the other hand, find this hard to swallow. They know that they comprise one of the largest customer bases for auto manufacturers, bear all of the investment risk and cost the manufacturers nothing. By design, dealerships pay for everything: inventory, parts and equipment, real estate, and salaries and benefits. As such, they argue that dealership rationalization will not translate into immediate cost savings on the balance sheets of Chrysler and GM. To the contrary, it would seem to result in immediate customer loss and fewer channels of distribution to the car-buying public. Why then does dealer rationalization make any sense as a restructuring strategy? How will thinning the ranks of some of Chrysler and GM’s biggest customers contribute to their financial rehabilitation?
Adding salt to the wounds, because the rejections occurred under Federal bankruptcy law, Chrysler and GM were not required to comply with certain protections afforded to dealers under state “dealer laws.” These laws, enacted in all 50 states, are designed to protect dealers in the event a manufacturer seeks to terminate their franchise agreements. For instance, Chrysler gave its rejected dealers less than 30 days’ notice of their termination (typically, dealer laws require 60 to 90 days’ notice) and was not required to comply with dealer law requirements to repurchase inventory, spare parts and specialized tooling. Even assuming that dealer rationalization was a necessary evil, the dealers are still deserving of their statutory protections. Feeling abused and disenfranchised (literally!) by the bankruptcy process, the rejected dealers have taken their cause to Capitol Hill.
On July 16, 2009, the House passed an annual Financial Services spending bill, H.R. 3170, by a vote of 219-208. The bill included language by Rep. Steven C. LaTourette (Ohio, 14th) aimed at restoring the dealer franchise agreements that were rejected by Chrysler and GM by requiring “New Chrysler” and “New GM” to enter into new agreements with these rejected dealers on the same terms as existed prior to the bankruptcy filings. Specifically, §745 of the bill provides as follows:
Sec. 745. (a) None of the funds made available in this or any other Act may be used to obtain a financial or ownership interest (or right to acquire such an interest) in an automobile manufacturer that deprives an automobile dealer of its economic rights under a dealer agreement and does not assume (or assign to a successor in interest) each dealer agreement which is valid and in existence (and has not been lawfully terminated under applicable State law) before the date of the commencement of a case under title 11, United States Code, by such automobile manufacturer.
(b) Any automobile manufacturer with respect to which the Federal Government has a financial or ownership interest (or right to acquire such an interest) shall, to the extent that a valid dealer agreement existing immediately before the date of the commencement of a case under title 11, United States Code, by such automobile manufacturer is not assumed by or assigned to another automobile manufacturer, require any new entity created in such case to enter into a new dealer agreement with the dealer whose agreement was not so assumed or assigned, and on the same terms as existed immediately before such date.
If signed into law, the bill would serve to overrule Chrysler’s and GM’s business judgment and require the post-facto assumption and assignment of these franchise agreements. Under bankruptcy law, however, much deference is given to a debtor’s business judgment when it comes to rejecting contracts. By taking away Chrysler’s and GM’s code-given power to decide which contracts it wants to assume or reject, the bill is, in essence, serving as a very limited amendment to §365 of the Bankruptcy Code—admittedly relevant only to the rare circumstances involving automobile manufacturers in which Uncle Sam has a financial or ownership interest.
The bill was received in the Senate on July 20, 2009, and has been placed on the Senate Legislative Calendar under General Orders, Calendar No. 115. On Aug. 6, 2009, 100 House members (led by Rep. LaTourette) sent a bipartisan letter in support of the legislation to certain key senators, including Majority Leader Harry Reid, Minority Leader Mitch McConnell and certain members of the Senate Appropriations Committee. It has been reported, however, that helping dealers is not at the top of the agenda for the Senate, and even if legislation is passed, the legislation’s provisions regarding dealer relief face strong opposition from the Obama administration. Additionally, at least one Chrysler representative has warned that if the legislation passes, Chrysler could again be faced with complete liquidation.
To date, three other bills—two in the House and one in the Senate—have been introduced seeking substantially similar relief: (1) H.R. 2743, introduced on June 8 by Rep. Daniel B. Maffei; (2) H.R. 2796, introduced on June 10 by Rep. LaTourette; and (3) S. 1304, introduced by Senator Chuck Grassley. Each of these bills is entitled the “Automobile Dealer Economic Rights Restoration Act of 2009.” The two House bills have been referred to the House Committee on Financial Services for review, while the Senate bill has been referred to the Senate Committee on the Judiciary. Rather than requiring new contracts with rejected dealers, however, these bills seek to restore the previously rejected contracts and specifically require that “New Chrysler” and “New GM” take assignment of these agreements.
The rejection of these franchise agreements have caused a “perfect storm,” pitting bankruptcy policies of “fresh start” and those underlying a debtor’s power to choose which contracts it will keep against a body of law aimed at protecting automobile dealers from the exposure they have to automobile manufacturers. Who is more worthy of protection—a debtor or a dealer? If the reinstatement of these franchise agreements will really result in the complete liquidation of Chrysler and GM, then these dealers will be in the same position as they find themselves currently: without a manufacturer. Thus, rejecting these agreements may very well have been the lesser of two evils. However, whether immediate liquidation will in fact be a fait accompli is questionable. Perhaps it would be in everyone’s best interests to come to the negotiating table so that a proper balance can be struck that would provide for additional protection for the dealers without threatening the future viability of the manufacturer. There must be a middle road.