Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ga.: Dealership sale agreement would have conflicted with prior settlement with GM, (Mar 13, 2014)

By John W. Arden, J.D. LL.M.

General Motors’ refusal to approve an asset sale agreement between its franchisee Canton Motor Sales, Inc. and third-party Shottenkirk Automotive, Inc.—for conflicting with a prior settlement agreement reached during GM’s restructuring in bankruptcy—was proper, according to the federal district court in Atlanta (General Motors LLC v. Canton Motor Sales, Inc., March 7, 2014, Carnes, J.). Claims that the refusal violated the Georgia Motor Vehicle Franchise Practices Act were rejected by the court.

In 2008, General Motors sought and received assistance from the United States government because of a severe liquidity crisis that threatened its operation—and consequently its suppliers. The crisis had potential ripple effects across the entire domestic automotive industry, the court said. GM filed for bankruptcy on June 1, 2009, in order to complete a Treasury-sponsored sale of its assets. As part of the bankruptcy plan, GM was permitted to restructure its dealer network in order to make itself more competitive.

During this restructuring, GM identified Canton as an underperforming dealership. Rather than terminating the franchise outright, GM offered a wind-down agreement, which Canton accepted. The bankruptcy court found GM’s wind-down agreements with dealers to be valid and enforceable contracts. However, Congress intervened on behalf of the dealerships that were being “wound down” by passing the Consolidated Appropriations Act. This legislation granted dealerships that had accepted wind-down agreements the right to seek reinstatement in GM’s franchise network through binding arbitration.

Canton initially elected to arbitrate its claim for reinstatement. Prior to arbitration, it entered into an “Option Agreement to Resolve Pending Arbitration,” which reinstated the franchise, but imposed performance terms, including the achievement of an aggregate retail sales index of 85 for the period of January 1, 2011 through December 31, 2011. Failure to achieve that score constituted breach of the settlement agreement.

GM and Canton had operated under this agreement for more than a year, when Canton contemplated selling its franchise. Canton’s owners met with GM representatives to discuss a franchise transfer. The franchisee found a potential transferee in Shottenkirk Automotive, Inc. Canton and Shottenkirk entered into a proposed asset sale agreement, under which Shottenkirk agreed to purchase Canton’s assets, goodwill, and contracts for $3.2 million. Canton’s owners sent a copy of the purchase agreement to GM for consent to the transfer, as required by their agreement. When an owner had not heard from GM for several weeks, he contacted the company. GM representatives met with Canton on June 5, 2012. At that time, GM presented Canton with a letter stating that it was terminating the parties’ agreement based on Canton’s failure to meet performance standards of the settlement agreement and exercising its option to purchase Canton’s assets.

Three days after the meeting, GM filed suit against Canton and Shottenkirk, seeking enforcement of the settlement agreement and recovery for tortious interference with a contract and business opportunity. Shottenkirk brought an action against both Canton and GM to enforce its agreement with Canton. GM removed Shottenkirk’s action to federal court. Both GM and Shottenkirk moved for summary judgment on their claims. GM had brought a claim against Canton for breach of contract and a claim against Shottenkirk for tortious interference. Shottenkirk requested declaratory judgment permitting it to consummate the purchase of the assets of the Canton dealership.

Enforceability of the Settlement Agreement

The dispositive question in this case was whether the settlement agreement was enforceable, in the district court’s view. If it was enforceable, GM’s refusal to allow the asset sale was proper. The settlement agreement clearly provided that Canton’s failure to meet its performance goals would empower GM to reject any proposed dealership transfer and to exercise its own option to purchase dealership assets. Since Canton did not dispute its failure to meet the performance requirements, the settlement agreement allowed GM to disapprove of the transfer.

The wrinkle in the case was the Georgia Motor Vehicle Franchise Practices Act, which Shottenkirk said restrained GM from withholding consent to the transfer, notwithstanding the settlement agreement. The Act prohibits a franchisor from arbitrarily refusing to agree to a proposed transfer or sale, except where it can prove that the refusal is not arbitrary and that the transferee is unfit or unqualified to be a dealer. If the Georgia law governed, GM would lose because Shottenkirk was eminently qualified to take over the dealership, the court held. However, there was a question of whether the Georgia statute trumped the settlement agreement.

Choice of law. There were three sources of law that could potentially affect the resolution of the issues in this case: (1) Michigan law, as provided in the settlement agreement; (2) federal law, since the wind-down agreement was executed pursuant to GM’s restructuring; and (3) Georgia law, since the action was filed in Georgia and Canton and Shottenkirk relied on a Georgia statute.

GM assumed that federal law preempted any contrary Georgia law. As a general matter, federal law can preempt state law under three circumstances: (1) when Congress expressly states that it is doing so; (2) when Congress has preempted the field at issue by comprehensively legislating in the area; and (3) when there is a conflict between state and federal regulations such that compliance with both is a physical impossibility and/or state law stands as an obstacle to the accomplishment of the full objectives of Congress. GM appeared to rely on the third basis for federal preemption, but did not identify which federal law was in conflict with the Georgia Motor Vehicle Franchise Practices Act. Presumably, it was arguing that the bankruptcy court’s order permitting the wind-down agreement superseded state laws that might not allow such agreements, the court observed.

Analyzing the choice of law between Michigan and Georgia, the court found that Michigan—which had a substantial relationship to the parties and the transaction at issue—would apply unless it contravened Georgia public policy. Because the court concluded that the settlement agreement did not violate the Georgia Motor Vehicle Franchise Practice Act, it did not have to reach the question of whether enforcement of the settlement agreement would contravene Georgia public policy.

Violation of Georgia Motor Vehicle Law. Shottenkirk focused exclusively on one section of the Georgia statute, which requires a franchisor to approve a dealer’s request to transfer ownership of a dealership to another entity, unless the transferee would not be qualified to run a dealership. However, another section of the statute was dispositive, in GM’s favor, the court held. Section 10-1-627 provides that a franchisor cannot nullify any of the provisions of the Act by written agreement, but goes on to note that this section does not prohibit a dealer from voluntarily entering into a valid release agreement “to resolve a specific claim, dispute, or action” between the franchisor and dealer. Similar release language appears in Section 10-1-623 (d) and Section 10-1-662(a)(6).

“In short, the Georgia statute upon which Shottenkirk’s claims are founded permits a dealer to voluntarily enter into a release agreement to settle a dispute with the franchisor,” the court found. “Under Georgia law, a ‘release or settlement agreement is a contract subject to construction by the court.’” The settlement agreement at issue was clear and unambiguous and served to resolve on ongoing dispute between the parties. The parties agreed that it—along with the wind-down agreement and the subsequent amendment—represented their complete understanding, according to the court.

Since the settlement agreement did not violate the Georgia Motor Vehicle Franchise Practices Act, Georgia law required enforcement of the agreement, the court concluded.

The case is No. 1:12-cv-01994-JEC.

Attorneys: J. Todd Kennard (Jones Day) for General Motors, LLC. Jonathan Andrew Pope (Hasty Pope, LLP) for Canton Motor Sales, Inc. Ashby K. Fox (Burr & Forman, LLP) for Shottenkirk Automotive, Inc.

Companies: General Motors, LLC; Canton Motor Sales, Inc.; Shottenkirk Automotive, Inc.

Cases: FranchisingDistribution GeorgiaNews