A number of going-forward GM dealers recently received an unexpected “welcome letter” from New GM.  The welcome letter did not include words of encouragement or a thank you for hanging in there through GM’s bankruptcy mess.  Instead, New GM’s version of a hardy welcome was a letter notifying dealers that the SFE incentive chargebacks that were pending by Old GM prior to the bankruptcy proceedings would be levied against the dealer’s open account by New GM.  These chargebacks ranged from $200,000 to a crippling $900,000.  With dealers struggling to stay in the black while New GM has taken months to initiate its new marketing strategy and ramp up production of vehicles, the resurrection of these Old GM chargebacks is a real kick in the gut!

To make matters worse, New GM announced that it was not offering these dealers any right to challenge the chargeback.  New GM simply said on a certain date it will levy the chargeback or the dealer could choose a payment plan.  New GM’s rigid position was made all the more egregious by the fact that these same dealers had sought and were granted the right to mediate the chargeback with Old GM.  Unfortunately, Old GM’s bankruptcy proceedings occurred before the mediations could take place.

New GM’s position is that the going-forward dealers waived any right they had to challenge the chargeback as provided under the Dealer Agreement or state franchise laws when they signed their Participation Agreements which granted the dealers the right to go forward with New GM.  The attorneys at our firm do not believe GM’s interpretation of the Participation Agreement or the state franchise laws is correct.

Dealers who are subject to the resurrection of these SFE chargebacks have two strong arguments.  First, it is not at all clear that New GM assumed the right to seek these chargebacks as part of its purchase of major assets from Old GM.  In a 363 Sale of Major Assets, the bankrupt entity’s outstanding claims typically remain an asset of the bankruptcy estate.  Second, many state franchise laws will apply to allow a protest of the chargeback regardless of the terms of the broad release contained in the Participation Agreement.  Although their dealer agreements are not in the usual format but instead in the form of the Participation Agreement, the going-forward dealers meet the definition of a dealer/franchisee under state franchise laws and therefore should enjoy all the protections that dealers with a customary Sales and Service Agreement enjoy.

Dealers of all brands should never assume your manufacturer representatives are properly informed when they tell you your state franchise laws don’t apply to a certain situation.

Manufacturers, in this case New GM, neither understand the breadth of state franchise laws nor want those laws to interfere with their ability to strong-arm dealers.

Toyota continues to hold dealer agreements hostage:

We continue to receive calls from dealers who are being told by Toyota Motor Sales that their soon to expire Dealer Agreement will not be renewed for the standard six-year term unless the dealer commits to construction of the Image II facility.

Dealers having the renewal of their Dealer Agreement held hostage by TMS should immediately turn to their state franchise laws for help.  Almost all state franchise laws specifically require a manufacturer to renew a Dealer Agreement unless there exists “good cause” to nonrenew the Agreement.  Some states go further and specifically prohibit the manufacturers from non-renewing a Dealer Agreement as a result of a dealer’s failure to upgrade the dealership facility.  In either case, if the dealer feels comfortable that the requested upgrades are not reasonable under the dealer’s circumstances then the manufacturer has violated the state franchise law by not providing the dealer with a full term Dealer Agreement.

Update on GM and Chrysler arbitration proceedings:

As I write this column (May 5), BSM is in the midst of conducting its first reinstatement arbitration and, beginning next week, we will have more than one arbitration each week through the second week of June. 

We expect these arbitrations to take an average three days.  On the dealership side, the dealership principal, general manager, CFO or accountant and an expert on sales performance will provide testimony.  On the manufacturer side, the regional or district representative, dealer network development representative and a sales performance expert will provide testimony.  GM has also submitted affidavits of senior managers in lieu of their live testimony.  We are, of course, objecting to this tactic in that we do not have the opportunity to cross-examine these individuals live in front of the arbitrator.

Both GM and Chrysler have refused to produce documents related to its business plan for the terminated dealer’s market and specific to the performance of any other dealer in the market.  GM and Chrysler have taken this position despite the fact that in most of these cases GM and Chrysler are claiming poor sales performance on the part of the terminated dealer.

GM’s Retail Sales Index and Chrysler’s Minimum Sales Responsibility are based upon the performance of all same brand dealers in the state.  Furthermore, in situations where GM and Chrysler are not simply reducing the number of franchises within the market but have handed the terminated franchises to another dealer within the market, the performance of that other dealer is entirely relevant.  We have made these arguments to the arbitrators in seeking to compel additional documents with mixed results.

The vast majority of these arbitrations appear to be coming down to the terminated dealer’s sales performance.  In preparing for the reinstatement arbitration, dealers with poor sales performance must identify circumstances within their market that are different than other markets within the state and which are out of the dealer’s control.

Through this process, we have discovered that some dealers have had their market territories improperly drawn causing them to be responsible for a larger sales territory than what is reasonable.  In one case, we discovered that GM had not redrawn a dealer’s territory after GM had added a same linemake dealer to the market.  This was a double whammy for the arbitrating dealer’s sales performance in that he was responsible for a larger territory than he could reasonable penetrate while having a new dealer selling right outside his backdoor.

What we have discovered in preparing these cases for arbitration should be a reminder to all dealers to review your assigned areas of responsibility closely and make sure adjustments are made when there is a change in the dealer network within your market.  Ask questions and hold your manufacturer accountable to a proper assignment of territory.

Unlike Chrysler which has maintained a hard line on reinstating dealers through settlement, GM has continued to reinstate dealers.  In addition to the first wave of reinstatements of primarily Cadillac dealers, GM has continued to reinstate arbitrating dealers of all brands by way of a settlement agreement containing certain performance standards.  We started off with 75 GM and Chrysler arbitration matters.  Through settlements, reinstatements and a few dealers withdrawing their arbitration claim, we now have approximately 15 pending arbitration hearings.

Although these settlements are a positive development, GM’s actions in continuing to reinstate dealers causes their business plan argument to lose all credibility.  Keep in mind that GM is going to great length to convince these arbitrators that it must reduce its dealer count and combine certain franchises under one roof in order to be competitive going forward.  This position is difficult to maintain considering the large number of reinstatements to date.

By the time this column hits the printer, we will have much more information related to how arbitrators are ruling on reinstatement of GM and Chrysler dealers which, to the extent permitted by confidentiality agreements, I will share in my next column.