Post-Dealer Arbitration Act Litigation Nearing An End

In the aftermath of the Chrysler and GM bankruptcies, Congress enacted section 747 of the Consolidated Appropriations Act of 2010 (“Dealer Arbitration Act”), which created an arbitration process by which Chrysler dealers could challenge their rejection and GM dealers could challenge their being wound down. Under the Dealer Arbitration Act, a successful dealer could obtain the following relief: “continuation, or reinstatement of a franchise agreement, or to be added as a franchisee to the dealer network of the covered manufacturer in the geographical area where the covered dealership was located when its franchise agreement was terminated, not assigned, not renewed, or not continued.” In other words, a successful dealer could be continued, reinstated, or added. In such event, the manufacturer was required to “provide the dealer a customary and usual letter of intent to enter into a sales and service agreement.”

Now, disfavored dealers were treated differently in the Chrysler and GM bankruptcies. In the Chrysler bankruptcy, the franchise agreements of disfavored dealers were formally “rejected” under section 363 of the Bankruptcy Code. On the other hand, in the GM bankruptcy, the franchise agreements of disfavored dealers were actually assumed, but subject to wind-down agreements executed during the bankruptcy. Under these wind-down agreements, GM’s disfavored dealers received a modest payment and were given time to sell off their remaining inventory and close down operations in an orderly manner. In other words, rejected Chrysler dealers were left behind in the bankruptcy whereas GM’s wind-down dealers continued on post-bankruptcy for a time with so-called New GM. That difference – outright rejection in the Chrysler bankruptcy versus assumption and wind-down in the GM bankruptcy - would prove critical in the arbitration process to come.

Following the arbitrations, successful rejected Chrysler dealers were presented with letters of intent that many of them argued violated the Dealer Arbitration Act because they did not simply reinstate those dealers but rather imposed all sorts of conditions and limitations, such as facility upgrades. In addition, a conundrum was created in instances where New Chrysler had inserted a new dealer into the territory previously assigned to the rejected dealer and that new dealer had territorial rights under their state’s automobile franchise act.

Several lawsuits were commenced around the country and the consistent result was that, although GM’s wind-down dealers could be “continued” or “reinstated,” rejected Chrysler dealers could only be “added.” This is because wind-down GM dealers were operating under existing franchise agreements with New GM, whereas rejected Chrysler dealers had no legal relationship with New Chrysler. Thus, they could only be “added” to New Chrysler’s dealer network and all they were entitled to was a “customary and usual letter of intent to enter into” a franchise agreement. From this ruling, courts also consistently held that the Dealer Arbitration Act did not pre-empt state automobile franchise laws, meaning that existing New Chrysler dealers could challenge the addition of a successful rejected dealer under a state dealer act’s relevant market area provision.

These issues are playing out in United States District Court for the Eastern District of New York in Eagle Auto Mall Corp. v. Chrysler Group LLC, Case No. 10-cv-3875 (Wexler, J.). By order dated December 23, 2011, Judge Wexler held that the plaintiff dealers were only entitled to be “added” to New Chrysler’s subject to “a customary and usual letter of intent.” Judge Wexler “interpreted this to mean that Plaintiffs were entitled to an offer under terms that were usual and customary at the time of the offer, and not those governing Plaintiffs’ pre-bankruptcy dealership agreements.” However, Judge Wexler went on to hold that whether the letters of intent offered by New Chrysler were usual and customary was a question of fact for trial and denied summary judgment. New Chrysler’s motion for reconsideration was also denied.

After close of discovery, New Chrysler again moved for summary judgment, based on the decision of the court in Los Feliz Ford, Inc. v. Chrysler Group LLC, 10-cv-6077 (C.D. Ca. April 9, 2012), which held that no issues of fact existed as to whether the letter of intent at issue there was “customary and usual”. However, by order dated September 28, 2012, Judge Wexler disagreed and adhered once again to his prior holding that issues of fact remained:

…the issue is whether the letters of intent offered to Plaintiffs here were substantially the same as those offered to dealers who were given the opportunity to be added as new franchisees to the dealer network during the same period. The court has reviews the parties submissions and cannot hold, based upon those papers alone, whether such terms were offered to the Plaintiffs here.

Eagle Auto Mall proceeded to a bench trial of December 3, 2012 and is awaiting decision following the submission of post-trial briefs.