Ky.'s attempt to protect rejected dealers fails
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Kentucky's attempt to protect dealers rejected as a result of an automaker's bankruptcy has slammed into a barrier: the U.S. Constitution.
The state's amended dealer statute conflicts with federal bankruptcy law, U.S. District Judge P. Kevin Castel in New York City has ruled.
Old Carco [the remnants of bankrupt Chrysler], its liquidation trust and Chrysler Group sued to overturn the Kentucky law and a similar one in Colorado. In a separate case, they won a court order blocking lawsuits by rejected dealers in Arkansas, Ohio and Wisconsin for the same reason: U.S. bankruptcy law trumps state legislation.
The Kentucky legislature had amended its franchise law to benefit rejected dealers in situations in which a manufacturer, after bankruptcy, wants to contract with a new or different dealer in a rejected dealer's market area. In Chrysler's case, for example, the law would give Chrysler Group the alternative of not opening new points within 10 miles of a rejected dealer for 10 years or first offering the new point to a rejected dealer on similar terms.
Castel said that law "purports to revive the rejected dealer rights that were specifically extinguished" in bankruptcy proceedings and "renders full enforcement of the orders of the [U.S.] Bankruptcy Court impossible."
A lawyer for the Kentucky Motor Vehicle Commission, Trevor Earl in Louisville, said he doesn't expect to appeal if Castel approves a final order acceptable to all parties.
Castel referred to a dispute about Chrysler Group's plan to award a Louisville-area franchise without offering it first to a rejected dealer, but Chrysler spokesman Mike Palese said the parties "amicably" resolved the matter in a confidential settlement.
Castel also said it is premature to decide the challenge to Colorado's law. The law prohibits successor manufacturers from establishing new dealerships or replacing existing ones within a 5 to 10 mile radius of a rejected dealer for five years without offering it first to the rejected dealer on the same terms. Alternatively, the rejected dealer could receive the fair market value of his or her dealership's goodwill.
Palese said Chrysler believes both states' laws are "unconstitutional attempts to circumvent the final orders of the Bankruptcy Court and the Bankruptcy Code" and that action to reduce the dealer network was necessary for Chrysler's "viability and essential to the interim U.S. government financing" and the partnership with Fiat S.p.A., now Chrysler's majority owner.
Where it stands: U.S. district judge says yes; the state likely won't appeal if the final order is acceptable, its lawyer says.
You can reach Eric Freedman at freedma5@msu.edu.
