New York Dealer Law

Case of First Impression: The Dealer Act and Price Discrimination (Part 2)

2011-12-01T12:57:00.000-08:00

In a case of first impression, two Audi dealers obtained summary judgment against Audi holding that two incentive programs(the Keep-it-Audi Program and the CPO Purchase Bonus Program) violated the price discrimination prohibitions in New York's Dealer Act. Part 1 of this Article discusses the programs in general and the Court's ruling with respect to the the Keep-it-Audi Program. Part 2 of this article focuses on the Court's ruling with respect to the CPO Purchase Bonus Program.

Unlike the Keep-it-Audi Program, which is adminstered by AFS, the CPO Purchase Bonus Program is administered directly by the Audi. With both prgrams existing dealers have to meet off-lease purchase targets; however while new dealers were simply automatically granted the highest participation category in the Keep-it-Audi Program, in the CPO Purchase Bonus Program new dealers were given CPO sales targets. Qualifying dealers received 1.5% to 2% of MSRP on the sale of each new Audi vehicle. Audi argued that the plaintiff-dealers earned CPO Purchase Bonus Program money in almost all the quarters at issue and, therefore, could not have suffered any harm. However, the dealer-plaintiffs countered that the benefits of the CPO Purchase Bonus Program were not available to them on a proportionately equal basis as the statute requires because new dealers could obtain their pre-owned inventory at a lower cost than existing dealers as a result of the pricing advantages enjoyed by new dealers under to the Keep-it-Audi Program and because new dealers were also free to source their inventory at the wholesale auctions. As a result, the plaintiff dealers’ argued, it was cheaper and easier for new dealers to earn the incentive monies under the program. The Court agreed, holding as follows:

There is no manner in which the bonus offered on new automobiles sales under the CPO program to new automobile dealers is proportionately similar to the bonus offered existing dealers. New dealers receive their bonus, reflected in lower prices on new cars, based on their sale of certified pre-owned automobiles they are permitted to purchase. New dealers can obtain the inventory necessary to obtain lower sale prices on new vehicles through the use of their advantageous position in the Keep It Audi Program. The existing dealers' bonus under the CPO program is again totally dependent on the percentage of lease return vehicles they are able to purchase. Plaintiffs have already established that they are at a financial disadvantage with regard to the price they are charged for those vehicles because new dealers are placed in the highest bonus category without need to have any preexisting expenditures. In effect, existing dealers are required to purchase most of their pre-owned vehicles at the highest cost if they are to have any opportunity to receive the benefits of these two incentive programs, while new dealers are free to purchase their pre-owned inventory at lower prices from auction houses and thereby secure the benefits of both programs.

This case provides substantial guidance on how many manufacturer incentive programs tied to the attainment of various benchmarks may run-afoul of state price discrimination statutes, including incentive programs run by captive finance sources.

The complaint in this action alleged only New York statutory claims under the Dealer Act and not any claims under the federal price discrimination statute known as the Robinson Patman Act. An excellent article discussing this case and contrasting state and federal price dsicrimination claims is available here.

Case of First Impression: The Dealer Act and Price Discrimination (Part 1)

2011-11-28T12:34:00.000-08:00

The first reported decision addressing the price discrimination prohibitions in New York’s Dealer Act came down this past spring. In Audi of Smithtown, Inc. v. Volkswagen Group of America, Inc., Justice Emily Pines granted partial summary judgment in favor of the dealer-plaintiffs, finding that two incentive programs instituted by Volkswagen Group’s Audi division resulted in unlawful price discrimination. The author of this blog represents the plaintiffs in this action. A copy of the decision may be found here.

The benefits of both programs – the CPO Purchase Bonus Program and the Keep-it Audi Program – were tied to the number of returning off-lease vehicles purchased by each dealer from the Volkswagen Group’s wholly owned subsidiary and captive finance source,Audi Financial Services (“AFS”). The problem arose because Audi created an entirely different set of standards for new dealers that do not have an established portfolio of lease returns to purchase.

In the Keep-it-Audi Program, which is nominally administered by AFS, new dealers were automatically placed in the highest participation category which gave those dealers the lowest prices on off-lease purchases as well as the highest bonus on each certified pre-owned vehicle sold, without having to meet any program requirements. On the other hand, existing dealers’ off-lease purchase targets for the highest participation category with the best pricing advantages were almost impossible to achieve for many dealers.

Because the Keep-it-Audi Program, on its face, resulted in different pricing on off-lease vehicles for different dealers, Audi’s primary defense was that AFS, and not Audi, administered the program, owned the off-lease cars and sold them to dealers. However, the plaintiff-dealers pointed to a provision of New York’s Dealer Act that makes it unlawful for a manufacturer to use a subsidiary, including a captive finance source, to accomplish what is otherwise unlawful conduct under the act. Justice Pines agreed with the plaintiff-dealers, holding as follows:
The fact that the entity actually running the incentiveprograms is not a “franchisor” is not sufficient to avoid Summary Judgment, where the franchisor itself states that it created the program in conjunction with that entity and that the stated purpose of increasing the residual values of lease return Audi automobiles would inure to the Defendant's financial benefit. There is nothing written in the language of the law itself nor in its clear legislative history, which sought to avoid abuses occasioned by the differential economic positions of franchisor and franchisee dealer, stating that Section 463(2)(u) would only apply where the dealer was able to demonstrate some sort of intent on the part of the franchisor. It is the act of violating the statute through the captive entity, and not the intent to violate the act itself, which is made unlawful under the subject section.

Part 2 of this post will discuss Justice Pines' ruling on the CPO Purchase Bonus Program.

And Now...the Rest of the Story

2011-11-15T06:47:00.000-08:00

As radio personality Paul Harvey was known to say: “in a minute, you’re going to hear…the rest of the story. Late this summer, in Gray v. Toyota Motor Sales, U.S.A., Inc., Case No. 10-CV-3081 (E.D.N.Y. August 25,2011), Toyota prevailed on a motion to dismiss a complaint based on Toyota’s refusal to approve two proposed sales of the dealership to other existing Toyota dealers. If the decision itself was bad for the dealer, the aftermath only got worse. The action was commenced in federal court in the Eastern District of New York and assigned to District Judge Joanna Seybert.

In 2006, Toyota first refused to approve the dealer’s sale, for over $32 million, of its franchise, facility and other assets to Group 1 Automotive, on the ground that Group 1 had an unsatisfactory CSI rating. In 2007, Toyota refused to approve another sale, for $31 million, to an individual, also on the ground that the proposed purchaser had a poor CSI rating. Finally, in 2008, Toyota approved the sale of the dealership to yet another individual, but for only $24 million. However, the selling dealer only commenced an action challenging Toyota’s two prior refusals in 2010. The complaint alleged common law claims (breach of contract, tortious interference with contract and prospective economic advantage, negligence and fraud) and violations of New York’s Franchised Motor Vehicle Dealer Act and the Federal Automobile Dealer’s Day in Court Act.

The dealer’s common law claims were premised on the arguments that Toyota’s decisions to reject the buy-sells based on the purchasers’ CSI ratings were either (1) per se unreasonable; or (2) a pretext for some other ulterior motive.

Judge Seybert rejected the ‘unreasonable per se’ argument outright, noting that “[c]ustomer good will is critical to any business, and it is logical for [Toyota] to be concerned about its dealers’ ability to satisfy their customers….This is particularly true because car dealers are often the face of a manufacturer, responsible for the ongoing integrity of the brand.” The Court more broadly rejected the dealer’s assertions that Toyota’s rejections were unreasonable in fact, a pretext for some other motive or fraudulent because the factual allegations in the complaint were conclusory and lacking in detail.

Judge Seybert also dismissed all of the claims based on New York’s Dealer Act. The dealer alleged that Toyota’s refusals violated section 463(2)(k) of the Dealer Act that makes it unlawful for a manufacturer to “unreasonably withhold consent to the sale or transfer” of a franchised dealership. Critically, section 463(2)(k) requires that a dealer commence an action or proceeding within 120 days after receiving notice of the manufacturer’s withholding of its consent to the proposed sale. Here, the dealer did not do so within 120 days of either of Toyota’s refusals and the section 463(2)(k) claim was dismissed.

The plaintiff dealer also alleged a violation of section 466 of the Dealer Act, which prohibits a manufacturer from imposing unreasonable restrictions on the sale or transfer of motor vehicle franchise. Here, the Court found that a 3-year statute of limitations period applied to a section 466 claim. That would appear to preclude an action based on the rejected Group 1 buy-sell but would not preclude an action based on the second rejected buy-sell. Nevertheless, Judge Seybert ultimately dismissed the section 466 claims for the same reasons she dismissed the common law claims: that “they are too conclusory to be credited.”

Finally, the Court dismissed the federal dealer’s day in court claim finding that the complaint failed to allege coercive, intimidating or threatening conduct as required by the statute.

However, Judge Seybert granted the plaintiff dealer leave to file an amended complaint within 30 days but the dealer elected not to do so. Then, without objection, Toyota obtained entry of a final judgment in its favor dismissing the action in its entirety.

And now, as Paul Harvey says…the rest of the story.

With judgment in hand, Toyota filed a motion pursuant to section 469 of the Dealer Act for attorney’s fees and costs in excess of $300,000 as the prevailing party in the action. That motion is now fully briefed and pending decision.

The Gray case contains a lot of lessons in terms acting promptly in commencing actions based on New York’s Dealer Act, properly pleading common law and statutory claims against manufacturers and exiting a case without creating additional unintended liability.

NY Dealer Act Amended

2011-09-28T08:43:00.000-07:00

New York's Dealer Act has been amended to prohibit manufacturers from requiring dealers to monetarily contribule to programs and promotions absent each dealer's written consent. This amendment takes effect on January 1, 2012

New York Regulates Brokers

2011-09-27T07:12:00.000-07:00

On September 23, 2011, the Governor signed legislation amending Article 35-B of the General Business Law that strengthens regulation of automobile brokers. Article 35-B first became law in 1989 and this new legislation represents the first and only amendment in over 20 years.

Article 35-B prohibits advance fees; sets standards for brokerage contracts including a right of rescission; requires that advance payments be held in escrow; and prohibits certain deceptive trade practices.

The 2011 amendment requires that the brokerage contract disclose the dealer from which the motor vehicle was purchased, all fees and commissions paid by the dealer to the broker in connection with the transaction. The amendment also requires brokers to obtain a surety bond in teh amount of $75,000. Finally, the amendment imposes requirements that all broker advertising discloses that the broker is not a licensed motor vehicle dealer, whether any fees may be imposed by the broker and that no warranty repair services will be provided by the broker.

The amendment takes effect on December 22, 2011.

Rejected Chrysler Dealers Commence Takings Action against the United States

2011-02-28T09:47:00.000-08:00

On February 17, 2011, 64 former Chrysler dealers commenced a 'takings' action in the United States Court of Claims against the United States titled Alley's of Kingsport, Inc v. United States of America, Case No. 11-CV-0100. The 'takings' clause, which is found in the Fifth Amendment of the United States Constitution, provides that private property shall not be taken for public use without just compensation. A classic example of a taking occurs when the government takes private land to build a road. The takings clause of the Fifth Amendment mandates that the government pay just compensation for that land.

In this lawsuit, the former dealers assert that their automobile franchises were private property that were taken by the government for public use and, as a result, they are entitled to just compensation. The former dealers allege that Chrysler's restructuring plan did not call for the termination of dealer franchises but that the government's Automotive Task Force imposed that requirement as a condition to financing the restructuring.

Lots of Holiday Season Activity in Chrysler Bankruptcy Case (Part 2 of 3)

2010-01-05T10:25:00.000-08:00

On December 30, 2009, New and Old Chrysler jointly filed a second motion to enforce the automatic stay and the bankruptcy court’s orders approving the sale of assets to New Chrysler and the rejection of 789 dealer agreements (the “Second Enforcement Motion”). The Second Enforcement Motion is directed to several rejected dealers that filed state proceedings to enjoin the creation of new franchises in their former markets. The rejected dealers appear to have a plausible defense: they based their state law proceedings on the recent federal arbitration law that went into effect on December 16, 2009. Those dealers argued that because they may be awarded their franchises back by an arbitrator, New Chrysler should be enjoined from filling those points until the arbitration is concluded.

Of course, Old and New Chrysler were having none of it and demanded that those rejected dealers withdraw their state proceedings. The dealers refused and the Second Enforcement Motion resulted. Because the premise underlying the state proceedings is to preserve the remedy afforded the rejected by Congress in the arbitration legislation, it will be very interesting to see how this motion plays out. A copy of the Second Enforcement Motion may be found here.

Lots of Holiday Season Activity in Chrysler Bankrptcy Case (Part 1 of 3)

2010-01-01T19:50:00.000-08:00

Quite surprisingly, the Christmas and New Year’s holiday week was marked by several interesting filings in the Chrysler bankruptcy case relevant to dealers. First, on Christmas Day, a motion was filed seeking reconsideration of the bankruptcy court’s decision and order granting the Debtors’ motion to reject 789 dealer agreements. Second, on December 30, the Debtors and New Chrysler filed a second joint motion seeking injunctive relief and sanctions against certain rejected dealers that filed state law proceedings against New Chrysler. Third, on New Year’s Eve, Debtors’ and New Chrysler filed an adversary proceeding against Oregon, Maine, North Carolina and Illinois state officials seeking a declaratory judgment and injunctive relief to enjoin the enforcement of certain state statutes enacted or soon to be enacted that would have the effect of negating or impacting the effect of the termination of the rejected dealers’ franchises.

On Christmas Day, a small group of former Chrysler dealers whose franchise agreements were rejected filed a motion (the “Reconsideration Motion”) that asks Bankruptcy Judge Gonzalez to reconsider his opinion and order approving the rejection of their franchise agreements. The Reconsideration Motion can be found here. Rather remarkably (to say the least), the Reconsideration Motion accuses Judge Gonzalez of committing a fraud on the court by mischaracterizing the testimony of Fiat executive Alfredo Altavilla in his opinion approving the Debtors’ rejection motion (the “Rejection Opinion”).

In that regard, the Reconsideration Motion focuses on footnote 21 of the Rejection Opinion, which states, in pertinent part, that “Altavilla also responded affirmatively to a question regarding whether a dealership network needed to be for the Fiat Transaction to close, stating that a ‘restructuring needs to occur’” The Reconsideration Motion argues that the footnote mischaracterizes the actual hearing testimony which is quoted in full as follows:

Question: If this transaction closes without an absolute requirement of a particular number of dealers that are being terminated, would Chrysler still go through with this deal – I mean, rather, would Fiat still go through with this deal?

Answer: The answer is that a restructure needs to occur. Whether it occurs before or after the closing of the deal is not a material difference.

The Reconsideration Motion also argues that Judge Gonzalez ignored testimony by Chrysler executives that the Debtors’ estates received no value in exchange for accelerating the ‘rationalization’ of the dealer network through the use of the contract rejection power in bankruptcy.

As for a remedy, the dealers do not argue that New Chrysler could be forced to reinstate them; rather, they argues that the rejections can be reversed within the bankruptcy proceeding and the Debtors’ estates forced to assume those dealer agreements. They argue that would have the effect of converting claims under those previously-rejected franchise agreements from general unsecured claims (that have little chance of payment) into priority administrative expense claims (that stand a reasonable chance of getting paid, at least in part).

Rejected/Wind-Down Dealer Arbitration Bill Signed into Law

2009-12-17T12:37:00.000-08:00

The bill granting rejected or wind-down dealers the right to arbitrate for potential reinstatement was signed into law on December 16, 2009. The various deadlines set forth in the statute are as follows:

no later than January 15, 2010: manufacturer must provide each covered dealership with "the specific criteria pursuant to which such dealership was terminated, was not renewed, or was not assumed and assigned..."
no later than January 25, 2010: a covered dealership must elect to pursue the right to binding arbitration provided in the legislation.
no later than June 14, 2010: the case must be submitted to the arbitrator for decision

Once the matter is submitted, the arbitrator must issue a written decision within 7 business days thereafter. If the arbitrator rules that the dealership must be reinstated, the manufacturer must offer a letter of intent within 7 business days after the decision in rendered. The arbitrator has the authority to extend these deadlines for up to 30 days.

Congress Approves Dealer Arbitration Procedure

2009-12-14T11:33:00.000-08:00

The House and Senate passed a bill that would give arbitration rights to the 789 Chrysler, Dodge and Jeep dealers whose sales and service agreements were rejected in the Chrysler bankruptcy and to the Chevrolet, Buick, Cadillac and GMC dealers who signed deferred termination agreements in the GM bankruptcy. The legislation does not benefit those dealers whose brand is disappearing, such as Saturn, Pontiac and, likely, Saab.

Basically, a covered dealership shall have the right to seek, through binding arbitration, the restatement of its franchise or the award of a new franchise in the same geographical area.

The legislation provides for a series of deadlines measured from the date of enactment (the "DoE") of the legislation. Within 30 days of the DoE, the manufacturer must provide each covered dealership with "the specific criteria pursuant to which such dealership was terminated, was not renewed, or was not assumed and assigned..." Within 40 days of the DoE, a covered dealership must elect to pursue the right to binding arbitration provided in the legislation. Within 180 days of the DoE, the case must be submitted to the arbitrator for decision and the arbitrator must issue a written decision within 7 business days thereafter. If the arbitrator rules in favor of the dealership, the manufacturer must provide a letter of intent within an additional 7 business days thereafter. The arbitrator may extend the arbitration deadlines for up to 30 days.

The legislation provides that the arbitrator shall balance the economic interests of the dealership, the manufacturer and the public at large. The factors to be considered include: 1) the dealership's profitability from 2006 through 2009; 2) the manufacturer's overall business plan; 3) the dealership's current economic viability; 4) the dealership's satisfaction of performance objectives as found in the franchise agreement; 5) the demographic and geographic characteristics of the relevant market territory; 6) the dealership's satisfaction of the criteria used by the manufacturer to select the dealer for termination; and 7) the length of experience of the dealership.

The arbitration shall be conducted in the state where the dealership is located and the arbitrator shall be selected from regional lists maintained by the American Arbitration Association. If the factory and dealer cannot agree, the AAA will select the arbitrator. There will be no depositions and only limited discovery. If both parties agree, the arbitration may be conducted electronically or telephonically. Each party shall be responsible for their own costs and expenses, including the fees for the arbitration. No money damages may be awarded.

Class for Clunkers Class Action Settled

2009-12-03T15:20:00.000-08:00

Attorneys for the parties in the Cash for Clunker class action, Allegretti v. Penske Automotive Group, Inc., informed the Judge that the parties have agreed to a settlement in principle. Details of the settlement are not available and will likely remain confidential.

FTC Delays Red Flags Enforcement Yet Again

2009-10-30T19:59:00.000-07:00

Set to begin enforcement on November 1, 2009, the Federal Trade Commission once again has delayed enforcement of the Red Flags Rule. Enforcement will now begin June 1, 2010.

As stated in the FTC press release announcing the enforcement delay, the Red Flags Rule "was promulgated under the Fair and Accurate Credit Transactions Act, in which Congress directed the Commission and other agencies to develop regulations requiring “creditors” and “financial institutions” to address the risk of identity theft. The resulting Red Flags Rule requires all such entities that have “covered accounts” to develop and implement written identity theft prevention programs to help identify, detect, and respond to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft." The FTC's press release may be found here.

Cars for Cluker Class Action Commenced

2009-10-12T15:18:00.000-07:00

A class action complaint was filed against the Penske Automotive Group on October 8, 2009 in the United States District Court for the Eastern District of New York based on allegation that the Penske dealerships unlawfully retained the entire scrappage value of vehicles traded in under the Cash for Clunkers Program. The case is captioned Allegretti v. Penske Automotive Group, Inc. and was assigned Case no. 09-cv-4316.

The action is based on the dealer certifications required under the Cash for Clunkers program that the dealer: i) has retained no more than $50.00 of the scrappage value as payment for any of the dealer’s administrative costs in connection with the Cash for Clunkers transaction; and ii) has not charged the purchaser any additional fees for participating in a Cash for Clunkers transaction.

The plaintiff alleges that Penske dealerships unlawfully retained scrappage proceeds in excess of the $50.00 limit specified in the certification. The complaint alleges claims for unjust enrichment and violations various state consumer protection laws, including section 349 of New York’s General Business Law.

Old and New Chrysler File Contempt Joint Motion Against Rejected Dealers That Commenced State Actions

2009-08-13T19:31:00.000-07:00

On August 13, 2009, Old and New Chrysler took the gloves off and filed a joint motion accusing 11 rejected dealers of violating the automatic stay by filing state actions or proceedings after the closing of the sale against New Chrysler. The targeted dealers include 8 from Wisconsin and one each from Arkansas, Ohio and Utah. The Motion seeks not only a cease and desist order but also the award of the attorneys fees incurred by both New and Old Chrysler in bringing motion and in defending the underlying actions and proceedings. A copy of the motion may be found here.

38 Dealers to be Rejected By GM

2009-07-07T12:20:00.000-07:00

GM filed a motion to reject the franchise agreements of 38 dealers that refused to sign a Wind-Down Agreement. The rejection motion covers 70 individual franchise agreements. The motion can be found here.

Bankruptcy Court Grants GM's 363 Sale Motion

2009-07-06T12:31:00.000-07:00

Not unexpectedly, Judge Gerber granted GM's motion to sell substantially all of its assets to "New GM," an entity majority owned and controlled by the United States Treatury. A copy of the decision is found here and a copy of the final order is found here.

Chrysler's Rejection Motion Granted

2009-06-09T20:07:00.000-07:00

Closing arguments took place today in connection with Chrysler's motion to reject 789 dealer agreements. Later this afternoon the Bankruptcy Court granted the rejection motion, effective immediately. Although Chrysler accomplished a major milestone, the order ultimately entered by the Bankruptcy Court was significantly watered down compared to the order originally proposed by Chrysler. The final Order may be found here. A blackline comparison showing changes between Chrysler's originally submitted order and its final submitted order may be found here at Annex 2.

Of particular note, Chrysler agreed to reject all site control agreements related to rejected franchise agreements. Site control agreements take many forms; however, a typical site control agreement took the form of an option agreement. In a typical option arrangement, in exchange for Chrysler's participation in costs to upgrade a facility, the dealer would grant Chrysler an option to purchase or lease the dealership facilty for a below market price in the event the dealer terminated operations. Other forms of site control might involve a lease-and-lease-back arrangement. Through such site control agreements, Chrysler could effectively control the facility and property at which a rejected dealership operated.

It its original filings, Chrysler sought to maintain in place for itself such site control agreements, notwithstanding the fact that it was Chrysler itself that was causing the dealer to cease dealership operations by rejecting such dealer's franchise agreements. Apparently realizing it sought to conquer a 'bridge too far,' Chrysler ultimately agreed that if it rejected a franchise agreement, it would also reject any site control agreement related thereto.

GM Files First Day Motion Affecting Dealers

2009-06-01T19:42:00.000-07:00

Among GM's First Day Motions in its Chapter 11 bankruptcy proceeding is its motionfor an order authorizing GM to honor prepetition obligations to customers and dealers and to continue warranty, customer and dealer programs in the ordinary course of business. That motion is found here. The order was signed the same day and is found here.

GM seeks the authority to, in its sole discretion, honor, perform, replace, renew, amend or terminate its Customer Programs (defined to include warranty programs, recall programs, sales incentive programs, dealer support programs, and customer rebates and allowances). The warranty programs include both customer warranties and dealer reimbursement for warranty parts and labor. Sales incentive programs include both consumer and dealer focused programs. Dealer support programs include payments of hold-backs, floor plan assistance, regional marketing support, vehicle delivery and handling, etc.

GM Files Chapter 11 Bankruptcy

2009-06-01T19:32:00.001-07:00

In a one-two punch, on the same day that Chrysler's 363 Motion was granted, General Motors Corporation (together with its affiliates Saturn, LLC and Saturn Distribution Corporation filed a proceeding seeking reorganization under Chapter 11 of the Bankruptcy Code. General Motors' petition is found here.

Chrysler's 363 Sale Motion Granted

2009-06-01T18:53:00.000-07:00

As expected, Bankruptcy Judge Authur Gonzalez issued an order granting Chrysler's motion, pursuant to section 363 of the Bankruptcy Code, seeking authorization sell substantially all of its operating assets to the entity affectionately known as New Chrysler. New Chrysler will be owned by Fiat S.p.A., the United Auto Workers Voluntary Employee Benefits Association and the American and Canadian governments. Notably absent from the assets Chrysler is selling to New Chrysler are franchise agreements with 789 Chrysler, Dodge and Jeep dealers. Those agreements are the subject of Chrysler's motion to reject which is set for a hearing to begin on June 3.

Dealers Object to Chrysler's Section 363 Sale Motion

2009-05-19T19:00:00.000-07:00

Chrysler dealers that were designated for rejection in Chrysler's May 14 motion have wasted no time intervening in the bankruptcy proceeding. Although objections to Chrysler's Rejection Motion are not due until May 26, several groups of dealers filed their objections on May 19 to Chrysler's earlier Section 363 Sale Motion, which is set for a hearing on May 27. Dealer opposition is led by the Ohio-based firm of Squire Sanders & Dempsey LLP, representing the "Committee of Chrysler Affected Dealers." Squires Sanders was retained under the auspices of the National Automobile Dealers Association and the Chrysler National Dealers Council to represent the collective interests of those dealers designated for rejection in Chrysler's May 14 Rejection Motion. As of May 19, the Committee of Chrysler Affected Dealers is comprised of 284 dealers designated for rejection in the Rejection Motion. Here is a link to the Objection filed by Squire Sanders.

Attorneys for smaller groups of dealers and individual dealers also filed objections to the Section 363 Sale Motion (including, in the interest of full disclosure, Robinson Brog Leinwand Greene Genovese & Gluck, P.C.). Here is a link to the Objection Filed by Robinson Brog and its co-counsel Myers & Fuller P.A. Here is link to another notable objection filed by the firm of Bellavia Gentile & Associates and its special counsel, Siller Wilk LLP.

Chrysler Files Motion to Reject 789 Dealer Agreements

2009-05-14T18:50:00.000-07:00

On May 14, Chrysler file its long awaited motion seeking an order "pursuant to Sections 105, 365 and 525 of the Bankruptcy Code and Bankruptcy Rule 6006 authorizing the rejection of executory contracts and unexpired leases with certain domestic dealers." In plain English, the motion seeks to reject the dealer franchise agreements of approximately one-quarter of Chrysler's dealer network. Opposition is due May 26 and a hearing is set for June 3.

Chrysler Not Assuming Certain Liabilities to Dealers Whose Franchise Agreements are not Assumed

2009-05-13T08:18:00.001-07:00

The Company Disclosure Letter (the "Letter") annexed to the Master Purchase Agreement filed with the Bankruptcy Court on May 12, identifies liabilities under dealer and consumer incentive programs and liabiltiies under dealer support programs as Assumed Liabilities. However, explicitly excluded from the category of Assumed Liabilities are incentive program payments and dealer support program payments to dealers whose franchise agreements are not being assumed themselves.

Chrysler Identifies Certain Dealership Leases and Marketing Investment Program Contracts as Excluded Assets

2009-05-13T07:30:00.000-07:00

Pursuant to the Bankruptcy Court's May 8 Bidding Procedures Order, on May 12 Chrysler filed are more complete copy of the Master Purchase Agreement among Old Chrysler, New Chrysler and Fiat S.p.A. Included is a redacted version of the Company Disclosure Letter (the "Letter"). The Company Disclosure Letter is the document where Old Chrysler identifies the assets that are to be excluded from the sale to New Chrysler ("Excluded Assets"). The Letter will be updated over time as the case progresses.

Of interest to dealers, the initial version of the Company Disclosure Letter filed on May 12 identifies 8 leases of dealership properties owned by Chrysler Realty Company LLC as Excluded Assets. The Letter also identifies the equity interests in 9 Marketing Investment Program Dealerships as Excluded Assets. Finally, the Letter identifies the equity interests in 8 Marketing Investment Program dealerships as being subject to transfer to New Chrysler, if agreed to by New Chrysler.

Order Sets Procedures and Scheduling for Assumption and Rejection of Dealer Agreements

2009-05-09T17:00:00.000-07:00

On May 7, Judge Gonzalez signed the order approving the bidding procedures and scheduling the final hearing for the sale of substantially all of Old Chrysler’s assets to New Chrysler for May 27. Of interest to dealers, certain procedures were adopted to govern the assumption and assignment of dealer agreements in connection with the sale:

No later than May 14, Old Chrysler must file the initial list of the dealer agreements that it intends to assume and assign over to New Chrysler.

With the consent or at the request of New Chrysler, Old Chrysler may designate additional dealer agreements for assumption and assignment as late as 30 days after the closing of the sale transaction.

New Chrysler has discretion whether to accept dealer agreements designated by Old Chrysler for assignment. No later than June 12, New Chrysler must file its initial list of those dealer agreements it has decided to accept and New Chrysler has up to 30 days after the closing to accept assignment of the rest of the designated dealer agreements.

Any dealer agreement not affirmatively accepted by New Chrysler is not deemed assumed and assigned and will remain with Old Chrysler and probably be rejected.

This multi-step process of assumption, assignment and acceptance of dealer agreements provides only some glimmer of hope for dealers not on the initial list of designated dealer agreements. Borderline dealerships may be able to convince New or Old Chrysler to have them added to the list of dealer agreements designated for assumption and assignment for up to 30 days after the closing. Conversely however, New Chrysler can refuse to accept any dealer agreement designated by Old Chrysler for assignment for that same 30-day post closing period. As Yogi Berra famously said, “it ain’t over till it’s over.”

Although the initial list of dealer agreements designated for assumption and assignment is probably already set in stone, one can easily foresee New and Old Chrysler using the later stages of this process to extract concessions from dealers desperate to have their dealer agreements placed on the list designated for assumption and assignment by Old Chrysler and to have their agreements ultimately accepted by New Chrysler. In fact one such strong-arm tactic is written directly into the May 7 Order. The Order specifically states that no old-style Direct Dealer Agreements will be assigned to and assumed by New Chrysler. Dealers holding such agreements must agree to enter into the new Sales and Service Agreement in order to be assumed and assigned.

The time frame for such horse-trading may be very short. As set forth above, Old Chrysler must file its initial list of dealer agreements designated for assignment and assumption by May 14 (but may continue to designate additional dealer agreements until 30 days after closing). New Chrysler must then file its initial list of designated dealer agreements that it accepts for assignment by June 12 (but may continue to accept assignment of dealer agreement until 30 days after the closing). However, the Master Transaction Agreement among Old Chrysler, New Chrysler and Fiat contains a provision under which that contract may automatically terminate if not closed on or before June 15. If that date holds, the 30-day post closing window will close on July 14. Only then will it be over.

More Detail Emerges on Chrysler Dealer Cuts

2009-05-04T16:47:00.000-07:00

A filing by Chrysler on May 3 has provided more detail on the scope of the intended dealer cuts. In a Chapter 11 reorganization, Chrysler is what is called the "Debtor in Possession," or DIP for short. In a Chapter 11 reorganization, the DIP is authorized to continue to operate the bankrupt company's business subject to control and oversight by the Bankrupcty Judge. Part of that oversight is a requirement that the DIP submit a budget showing how it intends to operate during the bankruptcy proceeding.

On May 3, Chrysler filed its DIP Budget for the 9 week period following its bankruptcy filing. The budget assumes the sale of substantially all of Chrysler's assets to New Chrysler is consumated.

Of interest to the dealer body are the following quotes from the DIP Budget:

“The DIP Budget assumes that incentive payments to 25% of the Company’s dealers are not made as the Company look to reorganize its dealer network. The DIP Budget also assume that incentives…are reduced a further 50% from June 1st – July 5th.”

“Incentives – assumes that the Company will only pay incentives to those dealers that they believe will have value to the acquiring company. Assumes that such payments represent 75% of the 13-week Cash Forecast amounts. Assumes that incentives are further reduced 50% for June 1st – July 5th.”

This confirms that Chrysler intends to pay incentives only to those dealers whose franchise agreements it plans to assume and assign over to New Chrysler. The DIP Budget assumes that 25% of the current dealer body will not receive incentive payments and that this will initially translate to a 25% reduction in the incentive payments that will be paid to dealers. And, a bit forbodingly, the DIP Budget assumes that incentive payments to dealers will be reduced by an additional 50% during the last 5 weeks of the budget period. It is not clear from the face of the DIP budget what this portends for dealer body cuts.

Details of the Sale to New Chrysler

2009-05-04T09:17:00.000-07:00

On May 3, Chrysler filed a Motion for an Order (A) Approving Bidding Procedures and Bidder Protections for the Sale of Substantially All of the Debtors Assets and (B) Scheduling a Final Sale Hearing and Approving the Form and Manner of Notice Thereof; and for an Order (A) Authorizing the Sale of Substantially All of the Debtors Assets, Free and Clear of Liens, Claims, Interests and Encumbrances, (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in Connection Therewith and Related Procedures.

The proposed deal is this: "Old Chrysler" will sell substantially all of its assets to "New Chrysler" free and clear of pre-petition liens, claims, interests and other encumbrances for $2 billion. Among the assets New Chrysler is purchasing are most of Old Chrysler's franchise agreements with its dealers. In addition, New Chrysler will assume certain liabilites of Old Chrylser. The assumed liabilties include certain union liabilities; warranty and product liability claims; and liabilities related to the contracts New Chrysler is taking as part of the deal.

Dealer franchise agreements will be subject to two rounds of culling under this plan. First, Old Chrysler will designate most of its franchise agreements for sale to New Chrysler. The rest will be rejected by Old Chrysler, leaving those dealers with an unsecured claim for contractual and statutory damages, which may be worth little or nothing. However, that is not the end. Old Chrysler has up to 90 days after the closing to designate additional franchise agreements for sale to New Chrysler. Conversely however, New Chrysler has up to 90 days after the closing of the sale transaction to identify dealer franchise agreements they do not wish to purchase. Those agreements will be turned back to Old Chrysler and rejected. The decision will ultimately rest with New Chrysler.

In short, while it is certainly a good sign that a dealer makes it past the first hurdle, New Chrysler will have a full 90 days after the closing to return unwanted dealers to Old Chrysler back in the bankrupcty proceeding. One might expect New Chrylser to use this power to force concessions on dealers who thought they were in the clear.

Red Flags Enforcement Delayed Again

2009-05-01T14:39:00.000-07:00

The Federal Trade Commission announced that it will, again, delay enforcement of the Red Flags Rule - this time until August 1, 2009 - "to give creditors and financial institutions more time to develop and implement written identity theft prevention programs."

According to FTC Chairman Jon Leibowitz, “Given the ongoing debate about whether Congress wrote this provision too broadly, delaying enforcement of the Red Flags Rule will allow industries and associations to share guidance with their members, provide low-risk entities an opportunity to use the template in developing their programs, and give Congress time to consider the issue further.”

"The Fair and Accurate Credit Transactions Act of 2003 (FACTA) directed financial regulatory agencies, including the FTC, to promulgate rules requiring “creditors” and “financial institutions” with covered accounts to implement programs to identify, detect, and respond to patterns, practices, or specific activities that could indicate identity theft. " The result was the Red Flags Rule.

The FTC originally slated enforcement to commence November 1, 2008. That was pushed off to May 1, 2009. And now, enforcement has been pushed off again to August 1, 2009.

Chrysler's First day Motion Related to Dealers

2009-04-30T17:07:00.000-07:00

Among Chrysler's First Day Motions is a motion to authorize Chrysler to honor or pay certain pre-petition obligations to its dealers. These obligations include Warranty Programs, Extended Service Programs, Sales Incentives (allowances, discounts, holdbacks, etc), Dealer Credits (overbillings, reconciliations, damaged parts, vehicle damage, etc.), and Dealer Support Programs and Promotional Allowances (joint advertising and marketing programs). Chrysler requested the authority to treat these as ordinary course payments and to continue to make them and reconcile them post- petition on the Parts Statement.

All is not good however. The motion seeks to give Chrysler sole discretion to continue or discontinue these programs and to pay its dealers or not. In other words, Chrysler could pull the plug at any time and pay some, but not all dealers.

On Sales Incentives, the motion states “The Debtors are working to balance the competing considerations of conserving estate resources against the need to provide financial support to those dealers critical to their network, and thus, to the going concern value of their assets, brands and businesses. Accordingly, the Debtors intend to exercise their discretion to honor and pay Sales Incentives carefully, taking into account such factors as a dealer’s financial need, credit risk and any objective market factors. The Debtors expect that they will pay no more than 75% of the total accrued but unpaid obligations for Sales Incentives as of the Petition Date.”

Chrysler has given notice that it only intends to honor dealer obligations to those dealers it intends to keep

NY Dealer Act Amended to Create Adminstrative Tribunals

2008-12-29T19:40:00.000-08:00

Effective February 11, 2008, New York’s Franchised Motor Vehicle Dealer Act was amended to institute a Department of Motor Vehicle administrative procedure for the resolution of disputes between dealers and factories arising under the Dealer Act. (Vehicle & Traffic Law 471-a). In doing so, New York joins many of its sister states in providing an administrative tribunal as an option short of full-scale litigation for dealers in their disputes with the factory. This law contemplates an initial short (i.e. 21 days) attempt at mediation but this does not appear to be a pre-requisite to commencing a DMV administrative proceeding.

In order to commence an administrative proceeding, a dealer must file DMV Form AA-71 Request for Adjudicatory Proceeding with the DMV. The Request must contain a short and plain statement of the facts and should also be accompanied by copies of relevant correspondence and other supporting documents. The filing fee is $2,000.00.

A hearing will then be scheduled. The factory has the right to submit a written response containing its own version of the facts and documents and correspondence that supports its position. The dealer, in turn, may submit a supplemental reply package. Where the facts are not at issue, either party can request that the administrative hearing officer proceed without a hearing. The decision whether to hold a formal hearing or proceed on the papers alone is in the administrative hearing officer’s discretion. The administrative hearing officer then has 90 days after the hearing (or after the grant of the request to proceed without a hearing) to issue a decision.

In contrast to a formal lawsuit in which damages and attorneys fees may be awarded to an aggrieved dealer, in the new administrative proceedings, each side pays their own litigation costs attorney’s fees and money damages may not be awarded. Therefore, the only remedy in an administrative proceeding would appear to be an injunction directing the cessation of any conduct by the factory found to be in violation of the Dealer Act.

The new DMV administrative proceedings are a complement to, rather than a replacement for, traditional court actions. The administrative tribunals appear to be most useful in less complex disputes involving less substantial money damages or where significant money damages have not yet accrued. Administrative proceedings would also probably tend to be less contentious than court actions and have a less negative impact on the overall factory-dealer relationship. Traditional court actions are probably still the best choice in complex disputes and where the money damages are significant.

BMW Lowers Warranty Reimbursement

2008-11-19T20:36:00.000-08:00

BMW has, or soon will, revise its policy for warranty reimbursement, including both labor and parts reimbursement. With respect to labor, BMW currently pays on the basis of 8 Flat Rate Units ("FRUs") per hour. The new FRU will be 10 per hour. Therefore, a repair that books for 10 FRU's will be paid for 75 minutes under the old system, but only for 60 minutes under the new system. This affects not only the dealership but also negatively impacts technician pay.

On the parts side, BMW is/will be paying only 30% above cost for parts used in warranty repairs – significantly lower than the retail price for those parts.

The relevant section of New York's Franchised Motor Vehicle Dealer Act provides as follows:

§ 465. Procedures relating to warranties. 1. Every franchisor shall properly fulfill any warranty agreement and/or franchisor's service contract and shall compensate each of its franchised motor vehicle dealers for warranty parts and labor in amounts which reflect fair and reasonable compensation for such work...For parts...and labor reimbursement, fair and reasonable compensation shall not be less than the price and rate charged by the franchised motor vehicle dealers in the community or marketing area for like services to non-warranty and/or non-service contract customers, provided such price and rate are reasonable.

The Dealer Act requires factories to give dealers "fair and reasonable compensation" for warranty work. "Fair and reasonable compensation" is further defined as the price or rate charged by the dealers in the same community for the same services provided to non-warranty customers. In short, BMW must pay its dealers for warranty work at the going local retail rate for labor and the going local retail price for parts.

Effective January 1, 2009, this provision of the Dealer Act will be amended to provide a more specific mechanism for determining fair and reasonable compensation for warranty parts and labor:

For purposes of this section, the price and rate charged by the franchised motor vehicle dealer for parts may be established by submitting to the franchisor one hundred sequential nonwarranty customer-paid service repair orders or the number of sequential nonwarranty customer-paid service repair orders written within a ninety day period, whichever is less, covering repairs made no more than one hundred eighty days before the submission, and declaring the price and rate, including average markup for the franchised motor vehicle dealer as its reimbursement rate. The reimbursement rate so declared shall go into effect thirty days following the declaration and shall be presumed to be fair and reasonable, however a franchisor may rebut such presumption by showing that such rate so established is unfair and unreasonable in light of the practices of all other franchised motor vehicle dealers in the vicinity offering the same line make. The franchised motor vehicle dealer shall not request a change in the reimbursement rate more often than twice in each calendar year. In establishing the labor reimbursement rate, the franchisor shall not require a franchised motor vehicle dealer to establish said rate by a methodology, or by requiring information, that is unduly burdensome or time consuming to provide, including, but not limited to, a transaction by transaction calculation.

Thus, starting January 1, 2009, dealers can establish their own warranty labor rates and parts prices by submitting a given number of nonwarranty customer-paid service repair orders and declaring the price and rate and average markup. Rates and prices established by the dealer in the this manner are presumed to be “fair and reasonable” however the factory can attempt to rebut by showing such rates and prices are unfair compared to the practices of other dealers of the same line make in the area. Dealers can use this process no more than twice per year to “self-change” their prices and rates.

In short, New York’s current statute provides significant protections for the dealers – dealers must be paid fair and reasonable compensation for warranty work and such compensation is pegged to the prices and rates changed by dealers in the same area or market. The amendments to the Dealer Act taking effect in January 2009 give dealers another tool that effectively allows them to set their own reimbursement rates and policies by submitting nonwarranty customer-paid service repair orders and declaring their rate, prices and markup.