When a dealership files for bankruptcy, a manufacturer will be faced with critical decisions regarding the proposed restructuring and the treatment of its dealer agreement. The bankruptcy code provides debtors with certain rights in order to maximize the recovery for creditors. Manufacturers must be cognizant of these rights in any dealer bankruptcy.

  1. State Dealer Laws. Most states have enacted laws protecting the rights of dealers. These laws may limit a manufacturers’ ability to terminate a dealer agreement or oppose the sale to a third party. In an ordinary franchise bankruptcy, the franchisor typically has significant rights to oppose any assignment of the right to use its trademarks due to provisions of the Lanham Act which create a default rule prohibiting such assignment. However, because this is only the default rule, parties are allowed to contract around the presumption against assignment. State dealer laws often require that manufacturers consent to an assignment of a dealer agreement under certain circumstances. This may provide a dealer debtor with additional leverage in any proposed sale of its dealership rights.
  2. Rights of First Refusal. Many dealer agreements allow a manufacture a right of first refusal or matching right with respect to any proposed sale. Sometimes these contractual provisions require a period of time for the manufacturer to consider any proposed sale and determine whether to exercise such rights. Bankruptcy courts are generally wary about enforcing rights of first refusal, particularly when the exercise of such rights might chill bidding at an otherwise open auction for a debtor’s assets. However, the particular language of any matching right and the timing of the proposed exercise of the right is likely to impact whether it will be enforceable in bankruptcy. Manufacturers are wise to seek experienced bankruptcy counsel well in advance of any proposed sale so as to make an informed decision as to whether to attempt to exercise such rights.
  3. Cure v. Termination. In the event of a sale of dealership, a manufacturer may need to decide whether it prefers an assumption and assignment of the existing dealer agreement or the termination of the existing dealer agreement and the issuance of a new dealer agreement. In sales outside of bankruptcy, manufacturers often opt for termination and the issuance of a new agreement. However, inside of bankruptcy it may be preferable for the agreement to be assumed and assigned. Assumption of a contract requires that the debtor cure any existing defaults. Thus, if a debtor is in monetary default under its dealer agreement, those amounts would have to be paid in real dollars (as opposed to bankruptcy claim dollars) in order to effectuate the sale of the contract to a third party. In certain circumstances, it may benefit the manufacture to insist on assumption and assignment in any bankruptcy sale.

Manufacturers should keep these issues in mind when a dealership files for bankruptcy protection. Experienced bankruptcy counsel can help navigate these complex matters and ensure that one’s rights are protected in bankruptcy.