Cue the U.S. House of Representatives, which is now also shifting into high gear with legislation that would reverse the court-sanctioned rejection of dealership franchise agreements. The measure is an amendment to H.R. 3170, a financial services appropriations bill. The proposed legislation provides that "no automobile manufacturer in which the Federal Government has an ownership interest may deprive an automobile dealer of its economic rights as they existed prior to the commencement of a bankruptcy case by the manufacturer, including its rights to recourse under State law." As one would expect, GM and Chrysler oppose the legislation. The Obama administration said on July 15 that it "strongly opposes" the legislation as well. Despite manufacturer and White House opposition, the bill is gaining momentum and widespread support in the House and Senate. We'll soon see where this uphill road leads.
If the bill somehow passes in the House and the Senate prior to the summer recess and the president signs a bill that is contrary to the goals of his own task force, can Congress actually undo what the bankruptcy court hath wrought? As my bankruptcy partner, Larry Katz is fond of saying, "Section 363 of the Bankruptcy Code [which permits the sale of assets free and clear of all rejected obligations] reigns supreme." Translation: No. The court already approved the asset sales of GM and Chrysler pursuant to Section 363. Fiat already bought Chrysler - we will be driving Fiats before this bill can become law. Rejected dealers will be long gone.
Another steep, uphill litigation battle is in store for the dealers in the unlikely event that the political process is successful. The newly proposed legislation may be unlawful. While there is no blanket prohibition against civil ex post facto laws, the Supreme Court has recognized that retroactive laws do present real problems of fairness. See, e.g. General Motors Corp. v. Romein, 503 U.S. 181 (1992). In that case, Justice Sandra Day O'Connor identified the unfairness of retroactive legislation: "Retroactive legislation presents problems of unfairness that are more serious than those posed by prospective legislation, because it can deprive citizens of legitimate expectations and upset settled transactions." For this reason, "the retroactive aspects of economic legislation must meet the test of due process - a legitimate legislative purpose furthered by rational means." The proposed legislation is not likely to pass the "due process" test in the face of a bankruptcy court's ruling pursuant to well-settled principles of bankruptcy law.
California is taking a different approach, related more broadly to franchise termination and avoiding the concept of reversing the bankruptcy's rejection process. California's S.B. 424, if passed, will confirm by statute what is generally required under dealer franchise agreements upon termination of the franchise relationship. This bill will ensure that dealers are properly indemnified for their significant investment in the millions of dollars for actions of manufacturers or distributors beyond their control. The proposed Senate bill sets out detailed procedures and responsibilities of manufacturers and distributors in repurchasing and reimbursing dealers for their vehicle inventories and other items that are returned when a franchise is terminated. Further, the bill updates California law to be more in line with the statutory requirements of other states. Texas and Colorado, for example, both have statutes in place regarding payment to franchised dealers following the termination of a franchise.
The proposed California Senate bill, the more practical approach, is long overdue and may help to preserve the business investment of many dealers in California. Preserving the dealers' business investment means preserving jobs in our state as well as enormous sales tax revenue for California.
Aaron Jacoby is a partner with Venable in Los Angeles and chair of its auto industry practice.
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