The Financially Distressed Dealership: Strategies for Auto Franchisors

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Seyfarth Synopsis: As OEMs confront the impact of the COVID-19 pandemic on an already changing automotive industry, one significant issue will be the inevitable financial challenges that many dealers will face.  Financially distressed or, worse, bankrupt dealers, create serious issues for manufacturers and affiliated lenders, including negative publicity, dissatisfied customers, limited or shuttered operations, out-of-trust sales, and litigation.  The following is a comprehensive guide to assist automotive franchisors in developing a comprehensive business strategy for responding to financially distressed dealers while protecting operating standards, dealer networks, and brand and marketing strategies.  This paper covers the following topics:

1. Identifying the Financially Troubled Dealers
2. Elements of a Comprehensive Bankruptcy Protocol
3. The Automatic Stay and its Implications
4. Addressing the Dealer Account
5. Ensuring Payment for Vehicles and Parts
6. Bankruptcy Events Requiring a Response
7. Communication with the Debtor
8. Enforcing or Effectuating a Termination
9. Assessing the Viability of the Dealership
10. Structuring a Potential Workout
11. Assessing Affiliated Agreements
12. Protecting Your Rights in a Proposed Reorganization or Sale
13. Implications of a Chapter 7 Liquidation
14. Preparing for Litigation

1. Identifying the Financially Troubled Dealers

An individual dealer’s severe financial distress or bankruptcy filing should not be a surprise.  There are telltale signs of financial distress:  declining sales, deficient working capital, slow pay on parts, increasing trade payables and, of course, floor-plan irregularities.  All are reflected on monthly operating reports.  OEMs need a system which monitors dealer financial health (through algorithms or individual account triggers), and proactively identifies troubled dealerships.  Early identification should trigger further analysis, increased audits, contractually required notices, and steps to address cash management and payment issues. 
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2. Elements of a Comprehensive Bankruptcy Protocol

Because a dealer bankruptcy changes the “rules of engagement” and bankruptcy laws are generally designed to protect the debtor and maximize recovery for creditors, not protect the rights of the auto franchisor or the lender, OEMs should have an established bankruptcy protocol.  OEMs need to understand the following:

• The limits imposed by the automatic stay on efforts to terminate the dealership or enforce operating standards, facility obligations or affiliated agreements;
• The special rules governing a dealer’s financial defaults and its post-petition financial transactions, including restrictions on reconciling or settling the dealer account on an ongoing basis;
• The dealer’s ability to operate post-petition even if not fully compliant with its dealer-agreement obligations, including not having floor-plan financing;
• A dealer’s ability to sell its dealership at auction, even over the manufacturer’s objection; and
• The potential appointment of a trustee to oversee and operate the dealership in bankruptcy.

At a minimum, a bankruptcy protocol should include the following:

• Immediate notification of the filing to all applicable departments, including those responsible for financial transactions with the dealer, vehicle or parts sales, and enforcement of the operating standards;
• Stopping any electronic funds transfer (“EFT”) procedures absent specific authorization, in writing, from the debtor, its counsel and the bankruptcy court;
• Analyzing the dealer’s parts account to determine monies owing, the extent of the dealer’s recurring monthly charges, and the existence of any assignments or pledges in favor of a lender;
• If permitted, implementing COD, cash-in-advance or similar procedures for parts purchases;
• Notifying all divisions, affiliates and vendors whose “charges” (as such, sign or computer leases, marketing programs, etc.) are normally paid through the dealer account;
• Analyzing affiliated agreements such as facility leases, renovations or relocation commitments or site-control agreements, to assess continuing obligations and the existence of any defaults;
• Determining how to handle vehicle sales and allocation in the absence of floor plan financing, including whether to sell vehicles to the dealer for cash and, if so, under what terms; and
• Establishing the process for implementing any contractual or statutory termination assistance in the event of a closure and liquidation.
  
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3. The Automatic Stay And Its Implications

The automatic stay under 11 U.S.C. § 362 fundamentally changes the relationship between the auto franchisor and the bankrupt dealer.  It is a “fundamental debtor protection” and gives the debtor time to structure a repayment and reorganization plan by providing temporary relief from collection and other adverse actions, including a potential termination or enforcing operational or performance obligations.  See e.g., In re Krystal Cadillac Oldsmobile GMC Truck, Inc., 142 F.3d 631, 637 (3d Cir. 1998) (franchise is an asset of the bankrupt estate and franchisor’s acts to enforce a state court post-petition termination was a violation of the automatic stay and, therefore, not binding).  Absent relief from the stay, even the issuance of a formal notice of default or a notice of termination likely constitute a violation of the automatic stay.  There is no “business as usual” after a dealer files for bankruptcy.
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4. Addressing the Dealer Account

A bankruptcy filing imposes special rules governing financial transactions.  Virtually all manufacturers have some form of dealer account for processing financial transactions such as parts purchases, sign lease charges, and the payment of warranty reimbursements and sales incentives.  Normally, these accounts are reconciled weekly or monthly and there is a payment made to or owing from the dealer, depending on whether there is a debit or a credit balance.  Especially since many accounts operate through EFTs, when a dealer files for bankruptcy, manufacturers must address the operation of the dealer account immediately, or they risk violating the automatic stay.

The rules governing whether reconciliation of dealer accounts vary, including whether seen as an exercise of set off or recoupment, by jurisdiction.  See, e.g., In re Grand Wireless, Inc., No. CIV. A. 06-40150-RWZ, 2007 WL 1557461, at *2 (D. Mass. May 29, 2007) (recoupment not allowed from debtor’s checking and savings accounts post-petition to satisfy an outstanding line of credit because the pre-petition loan was a separate transaction from the banking relationship where the debt to the bank originated).  See Bob Brest Buick, Inc. v. Nissan Motor Corp., 136 B.R. 322, 324 (Bankr. D. Mass 1991) (upholding the recoupment defense and ability to continue to “settle” or reconcile the dealer account without violating the stay); see also In re Coastal Bus & Equip. Sales, Inc., 330 B.R. 328, 334 (Bankr. D. Mass. 2005) (applying the test established in Bob Brest Buick for recoupment and finding that “the taxes and tax years at issue form[ed] a unified whole where recoupment [was] singularly appropriate.”).  Understanding the applicable rules in each jurisdiction is essential.

Addressing the dealer account at the first sign of financial distress is important.  First, if a dealer fails to pay timely charges for parts purchases and other services and accrues a debit balance, subsequent payments for such past-due amounts create the risk that payments may later be challenged as voidable preferences.  Second, because sales incentives, holdback amounts, floor-plan assistance and other similar “factory” payments represent an important source of revenue, bankrupt dealers will expect to be paid in the ordinary course, even if they owe the OEM as of the date of filing and do not make any arrangements to pay for recurring charges post-petition.  Ongoing payments of incentives and warranty reimbursements are often identified by dealers as an essential cash flow when they seek court approval of their post-petition operating budget.  Because not getting paid timely increases the likelihood of failure, OEMs will face claims that the funds are being improperly withheld.

If there is going to be any significant period of post-petition operations, OEMs should seek a court-approved agreement concerning the operation of the dealer account.  Such an agreement will avoid unnecessary disputes and allow for near-standard operation of the account providing ongoing cash flow to the dealer while protecting the manufacturer’s right to payment for ongoing charges.

OEMs should also consider invoking a temporary administrative freeze at the outset to give it time to assess its rights and negotiate a dealer account stipulation.  Note, however, that some courts have held that an administrative freeze violates the stay because “absent court approval, private contractual agreements [that provide that a bankruptcy filing constitutes an event of default] may not over-ride an express provision of the Federal Bankruptcy Code.”  See e.g., In re Flynn, 143 B.R. 798, 799 (Bankr. D.R.I. 1992) (debtor’s credit union violated the automatic stay with an administrative freeze, even though done pursuant to the union’s loan default policy); see also In re Wicks, 176 B.R. 695, 697 (Bankr. E.D.N.Y. 1995), aff'd sub nom. Town of Hempstead Employees Fed. Credit Union v. Wicks, 215 B.R. 316 (E.D.N.Y. 1997) (because the funds in the accounts become property of the estate, an administrative freeze deprives the debtors of control over their funds).  Others hold that a freeze does not violate the automatic stay - such courts reason that because a “freeze” (especially a temporary freeze) does not “go the extra step of applying the deposited funds to the indebtedness [owed to] the bank, no setoff has taken place and, therefore, the automatic stay has not been violated.”  In re Flynn, 143 B.R. 798, 800 (Bankr. D.R.I. 1992); In re Lord, 284 B.R. 179, 180 (Bankr. D. Mass. 2002) (MetLife’s withholding of the debtor’s post-petition disability benefits did not violate the automatic stay because MetLife’s right to recover overpayments constituted recoupment).  All of this is reason why it is essential to address dealer accounts immediately.
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5. Ensuring Payment for Vehicles and Parts

By permitting dealers to continue to purchase parts or other products and services through the dealer account, an OEM, in effect, is providing an unsecured loan with significant risk of non-payment.  While potential treatment as an 11 U.S.C. §503 administrative expense (priority over any unsecured claims) provides some protection, if permitted under applicable dealer agreement(s), OEMs should immediately place dealers on COD or implement cash-in-advance procedures for parts and other products.

Most dealer bankruptcies are precipitated by a revocation or suspension of the dealer’s floor plan creating significant business and operational issues.  Not only is the lack of a floor plan a material default and thus, good cause for termination, but it also means the dealer cannot order vehicles through standard allocation systems.  While floor-plan arrangements usually have a grace period for cars in the delivery pipeline, it is best to avoid payment disputes with lenders by immediately stopping all deliveries upon receipt of a floor plan suspension or revocation notice.  If cars are delivered and are not paid for (regardless of the reason), OEMs should demand a return of the vehicles and immediately take steps to perfect its state-law reclamation rights.

If the OEM’s strategy is not to seek immediate termination, it could consider selling vehicles, especially those already earmarked for the dealer or pre-built vehicles in stock, pursuant to an agreed-upon cash-in-advance payment procedure.  If so, OEMs should negotiate as part of the cash collateral order process a stipulation that allows for, but does not obligate, the sale of vehicles for “cash.”  Such an agreement, if allowed by the bankruptcy court, would help the OEM wholesale vehicles, provide the dealer with more inventory and thus an opportunity to generate post-petition revenue, while still protecting the integrity of the manufacturer’s allocation and vehicle-ordering system.  The floor-plan lender of course may not agree.
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6. Bankruptcy Events Requiring a Response

Failing to respond to certain events in a bankruptcy case will result in a waiver or loss of rights.  These events include:  motions for use of cash collateral (discussed below), which define the scope of the post-petition operations; motions to assume executory contracts; motions to sell assets; motions to establish sale procedures; court orders establishing bar dates; and motions by other creditors to dismiss the case or convert it to Chapter 7.  OEMs should ensure a notice of appearance is filed in each case and the docket is actively monitored for these and other events.
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7. Communication with the Debtor

Active involvement from the outset of a dealer bankruptcy can help avoid unnecessary disputes and increase the likelihood of operational agreements with the dealer.  Bankruptcy courts are courts of equity, and rarely does a party achieve all desired goals through motions or other litigation.  While the automatic stay prohibits certain actions, the OEMs’ interaction with the dealer should actually increase after a bankruptcy filing.  Field personnel should continue to assess a dealership’s operations and document deficiencies while being careful not to make unauthorized demands.  Regular contact with the debtor-dealer regarding sales, warranty service and parts operations, floor plan audits, etc., provides the up-to-date operational information essential to strategic decision-making.  Early contact with debtor’s counsel also provides an important opportunity to understand whether the debtor is seeking to reorganize, sell the dealership, or simply trying to stop adverse collection action.  Early communication also allows for OEM to address operational issues and the dealer’s ongoing obligations under the dealer agreement, loan documents or affiliated agreements.  Because bankrupt or financially distressed dealers do not want to expend limited resources litigating, early communication allows an OEM to ascertain the dealer’s objectives and willingness to resolve disputes.
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8. Enforcing or Effectuating a Termination

Sometimes termination and liquidation are the best and most appropriate strategies.  Pre-bankruptcy, an OEM may terminate the dealership pursuant to the terms of the dealership agreement and applicable state law.  Even though many state dealer laws now stay a noticed termination pending adjudication of a dealer challenge, a valid pre-bankruptcy termination notice can still be strategically beneficial by identifying operational deficiencies and defining required post-petition operations.

To terminate a dealer post-bankruptcy, OEMs must show both good cause to terminate the dealer agreement and good cause for relief from the automatic stay.  The mere fact that the dealer has filed for bankruptcy or is experiencing financial difficulties is not enough.  Indeed, the Bankruptcy Code invalidates ipso facto termination clauses, prohibiting termination based solely on the commencement of a bankruptcy case or insolvency.  See 11 U.S.C. §  365(e)(1); In re Ernie Haire Ford, Inc., 403 B.R. 750, 758 (Bankr. M.D. Fla. 2009) (ipso facto termination clauses “frequently hamper rehabilitation efforts”).

A bankruptcy filing does not mean a dealer can simply ignore its operational and performance obligations.  See, e.g., In re Lee W. Enterprises, Inc., 179 B.R. 204 (Bankr. C.D. Cal. 1995) (finding that the default was not “based upon the [d]ebtor’s financial condition or the filing of bankruptcy, but rather on the closure of the dealerships’ operations.”).  OEMs often face a scenario where the dealer has no floor plan, limited or no vehicle inventory, and virtually no staff to conduct any semblance of customary operations.  Each day, the dealer simply unlocks the door and turns on the lights because the dealer knows a closure is an incurable default under state law and justification for expedited termination.  More is required.  See, e.g., Chic Miller's Chevrolet, Inc. v. General Motors Corp., 352 F. Supp. 2d. 251, 259-60 (D. Conn. 2005) (one newspaper advertisement and one car sale “is insufficient to show the conduct of regular, customary sales and service operations”); In re Downtown Automotive Group, LLC, Case No. 06-10228 (Bankr. W.D. Wash. Mar. 28, 2006); see generally  S. Shore Imported Cars, Inc. v. Volkswagen of Am., Inc., No. CIV. A. 09-11570, 2010 WL 1137558, at *4 (D. Mass. Mar. 22, 2010), aff'd, 439 F. App'x 7 (1st Cir. 2011) (citing Chic Miller and finding that “without access to floor plan financing, South Shore was unable to maintain an inventory of new Volkswagen vehicles, causing its sales to collapse.”).  Evaluating and documenting the sufficiency of post-petition operations is critical.

To terminate a dealer agreement post-petition, OEMs must establish:  (i) there is a material default of the dealer’s contractual sales and service obligations; (ii) the post-petition operations by the dealer will harm the manufacturer; and (iii) a reorganization is not likely.  Effectively, the OEM needs to be able to demonstrate the debtor’s existing financial conditions adversely affect a dealer’s ability to operate and otherwise meet its contractual obligations.  Thus, historical information about sales, vehicle purchases, the brand’s performance in the marketplace and declining customer satisfaction scores as well as other issues affecting consumers (e.g., not paying off liens on trade-in vehicles or delays in warranty and other repair services) are all essential.  OEMs should also consider conducting an audit of reported sales, incentive programs and warranty claims because fraud or other mismanagement is powerful evidence of good cause to terminate and whether the current dealer management should remain in place.
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9. Assessing the Viability of the Dealership

At the outset of a bankruptcy, the OEM should assess the “viability” of the dealership (and its market), including whether the market can be served effectively by other surrounding dealers.  Given the potential adverse network implications if an important market goes dark, evaluating the dealer’s proposed post-petition operations is important to ensure compliance with critical dealer-agreement obligations and determines the likelihood of a reorganization or sale and the potential for a workout.

Assessing the dealership’s viability is also important because, unless the dealer’s intent is to shut down and liquidate, the dealer will immediately seek authority to use the lender’s “cash collateral,” a process that requires the dealer to outline its proposed post-petition operations.  If the dealer cannot operate profitably post-petition (with the benefit of the automatic stay and other significant bankruptcy protections), that likely means a successful reorganization is not possible.  Also, because the dealer’s proposed cash-collateral budget reflects what the Bankruptcy Court will approve as the contemplated post-petition operations, assessing whether those operations provide adequate representation in the marketplace is critical.  An acceptable level of operations that protects customers and the brand’s good will in the market should be required.  Because “financing” drives a case, the lender needs to evaluate collateral value and the dealer’s projected cash flows to determine the need for economic controls (e.g., adequate protection payments, budgetary controls and cash-management systems) and other protections (e.g., monitoring and reporting requirements, tight bankruptcy timelines, defaults, and remedies).  Unless the dealer can propose a viable post-petition operating plan, termination, repossession or liquidation may be justified.  Because the cash collateral budget effectively defines post-petition operations, OEMs need to be involved in the proposed cash-collateral process.
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10. Structuring a Potential Workout

Unless the strategy for a particular market area is dealer consolidation or reduction, and assuming the dealership can otherwise be viable, OEMs may want to consider cooperative assistance as opposed to termination.  Also, in important market areas, simply standing by while the dealership fails not only can lead to significant short-term losses but also long-term competitive harm.  Negotiating a forbearance agreement or an operating stipulation that provides a struggling dealership an opportunity to reorganize or facilitate a sale may be a viable strategy.  Doing so allows the dealer to work through its financial distress; it delays or avoids potential litigation; and it maintains representation in the marketplace with a dealer that is continuing to buy products and service customers.  For lenders, minimizing the risk of additional losses while continuing to provide credit is more challenging.

If an agreement with proposed accommodations is part of the strategy, such an agreement needs to include an acknowledgement of dealer distress; the legal consequences if the dealership fails to achieve agreed-upon operational benchmarks (i.e., exit strategy); and, obviously, a release of any claims against the manufacturer (or lender).  The dealer cannot, and should not, expect to receive assistance and sue afterwards if it doesn’t work out.

While the nature of potential accommodations depends on the particular circumstances, relevant issues to be addressed as part of a workout include:  (i) a stipulation governing the ongoing operation of the dealership’s parts account that provides the dealer access to operating revenue from incentives, warranty reimbursements, etc., while protecting the OEM’s rights; (ii) addressing whether the dealer can purchase new vehicles for “cash”; (iii) strategies for improved operations; (iv) delayed enforcement of required facility renovations, relocations or  exclusivity requirements; and, (v) where the OEM is also the facility lessor, extending the time to assume or reject the lease, possible reduced rental payments, etc.  Of course, OEMs must be mindful of price discrimination laws that prohibit helping a distressed dealer in ways that give it a competitive price advantage over other area dealers.

OEMs should require a pro forma business plan outlining the dealer’s current and projected sales operations, anticipated revenues and expenses, and how the dealer can achieve sustainable profitability.  It should outline needed operational changes, potential accommodations, and appropriate benchmarks that can assess compliance and continuing support.  The dealer must make difficult decisions concerning expenses, employees, operations and infusion of additional capital.  If the prospect of a going-concern sale is unlikely (except for the most valuable brands in important markets), a voluntary termination agreement (with enhanced terms) may be a viable option.
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11. Assessing Affiliated Agreements

For some financially distressed or bankrupt dealers, there are other agreements and obligations to consider.  In some markets, manufacturers (or affiliates) own or control the dealership facilities and act as the dealer’s landlord.  Even if they are not the actual landlord, affiliated lenders may hold the mortgage.  There are also site-control agreements, whereby dealers have agreed that facilities may only be used exclusively for certain operations.  These other agreements raise several issues, including:  (i) whether the dealer agreement and the other agreement constitute a single integrated agreement that preclude a proposed sale of the dealer agreement unless all agreements and defaults are cured; (ii) how and when to enforce lease terms or defaults; (iii) whether the manufacturer can use warranty and sales incentive payments to offset, for example, past-due rent obligations; and (iv) an expedited timeline for assuming or rejecting non-residential leases, or how to deal with a “stub rent” period before the first post-petition rent payment is due.  Where other agreements are in play, early evaluation and a comprehensive strategy is critical.
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12. Protecting Your Rights in a Proposed Reorganization or Sale

While auto franchisors are afforded substantial rights in a proposed bankruptcy sale, they must act decisively to protect those rights.  Besides liquidation, a bankrupt dealer essentially has two options:  (i) reorganize and stay in business; or (ii) sell the dealership as a going concern.  If the dealer is achieving sufficient post-petition sales to meet its ongoing obligations and there are no other events of default or circumstances justifying a termination, most bankruptcy courts will give the dealer time to see if a going-concern sale is possible.  If, however, the dealer cannot operate at least on a break-even basis, the lender undoubtedly will seek to shut down the dealership and repossess its collateral.  Because there is often no creditors’ committee, where the post-petition operations are deficient, engaging the U.S. Trustee’s office is a useful strategy as the U.S. Trustee seeks to protect creditors, employees and others potentially affected if a dealer cannot meet its post-petition obligations.

When the dealer proposes a plan of reorganization, the OEM needs to analyze the proposed plan carefully, especially the proposed post-confirmation operations, including whether the plan seeks to modify any of the dealer’s obligations under its dealer agreement or any affiliated agreements.  Because dealer agreements are generally considered executory contracts, any reorganization plan or proposed sale requires the dealer first to “assume” or ratify the dealer agreement pursuant to § 365 of the Bankruptcy Code.  While there are a host of legal and strategic issues involved in any proposed §365 assumption, significantly a dealer assuming a dealer agreement must (i) cure any existing defaults (or provide adequate assurance of a prompt cure); (ii) pay any pecuniary losses suffered by the OEM; (iii) assume all terms; and (iv) provide adequate assurance that the dealer (or a proposed assignee) will be able to perform in the future.  If there is a sizeable past-due dealer-account balance or past-due lease obligations, the dealer’s ability to cure existing defaults may present a substantial hurdle.  The need to provide adequate assurance of future performance means that the dealer needs to establish its ability to comply with working capital, floor-plan financing and other similar operating standards.

There are also market representation and dealer-network issues to consider.  A proposed sale may be to a less-than-desirable buyer, it may involve the relocation to an undesirable location or facility, or it may call for the combination of operations with other vehicle lines.  Also, virtually every proposed sale will be subject to an auction-type proceeding where the debtor solicits higher or better offers.

Because the sale of a dealership is often seen as just a routine sale of assets, the proposed sale procedures do not preserve the OEM’s approval rights or provide sufficient time for the normal application process.  It is not enough that the purchase agreement requires manufacturer approval as those terms can always be waived or modified.  Also, while a 60-day period to evaluate a proposed buyer is the contractual and statutory norm, that is an eternity for a dealership losing money.  There will be incredible pressure to accelerate the approval process.  Thus, OEMs must act to ensure that any proposed sale procedures recognize contractual and statutory approval rights and allow sufficient time to conduct the necessary review.  This is where negotiation is important.  Offering some flexibility in the review process is usually sufficient to avoid contentious motion practice.

Further, because there will likely be no recovery for creditors without a sale, virtually every constituency will be urging court approval of the sale, regardless of the buyer’s qualifications, the terms of the actual proposal or the impact on the manufacturer’s dealer network.  Thus, at the beginning of the sale process, the OEM should take steps to establish the scope of its review, the relevant considerations, and confirm that its decision should not be subject to de novo review by the bankruptcy court.  See e.g., In re Van Ness Auto Plaza, Inc., 120 B.R. 545, 546 (Bankr. N.D. Cal. 1990) (court looks at whether the manufacturer’s decision is “based on factors related to the proposed assignee’s performance as a dealer and is supported by substantial objective evidence.”).  If the OEM is not likely to approve the proposed transaction (because, for example, there would be an unauthorized dual with another brand or a relocation to an unacceptable facility or location), it is best to object immediately.  Waiting until the end plays into the debtor’s likely claim that the OEM is only trying to shut down the dealership.

If the OEM is going to approve the sale, the form of the approval is critical.  At a minimum, it should be contingent upon (i) the debtor curing all material defaults (paying for cars, parts and any pecuniary losses suffered as a result of debtor’s default); (ii) the buyer assuming all obligations under the dealer agreement and any affiliated agreements (lease, site control and right of first refusal, etc.); (iii) the buyer agreeing to satisfy the conditions essential to future operations (sufficient working capital, floor-plan financing and other conditions normally required as part of an approval); and (iv) the entry of a final non-appealable order approving the sale.  Because the OEM often has a basis to seek a termination and not even consider a sale, or there may be a compromise on the dealer’s § 365 cure obligations, there should also be an agreed-to termination of the prior dealer agreement with a release of claims, by both the dealer and its principals.  If subsequent dealer-account charges are likely, a portion of the sale proceeds may need to be set aside so that all charges are paid from the sale proceeds.  All of this will be the subject of negotiation.
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13. Implications of a Chapter 7 Liquidation

When a dealer files a Chapter 7 liquidation or a Chapter 11 case is converted, it means that the dealership must cease operations.  The manufacturer should immediately document the closure because the failure to conduct normal operations should preclude a Chapter 7 trustee from seeking to auction off the dealership rights later.  The OEM should then seek relief from the stay to initiate or complete a state-law termination or, where appropriate, negotiate a voluntary termination.  A voluntary termination agreement can be beneficial because it provides the OEM an expedited termination without the need to seek relief from the stay, and provides the dealer  increased or expedited termination assistance and potentially reduced guaranty liability through an accelerated liquidation of a lender’s collateral.

Other important considerations in a liquidation include dealer agreement and state-dealer laws repurchase obligations, collecting any dealer-account balances, stopping any continuing use or display of signs or trademarks, and ceasing the operation of dealership websites and social media accounts.  Addressing signage and other trademark use (including social media accounts) is especially important because it is much easier to deal with these issues at the time of closure rather than six months later when the sign is still standing on a vacant lot or the property has been sold.
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14. Preparing for Litigation

Finally, a bankruptcy liquidation or a dealership failure likely means substantial losses for shareholders, investors and creditors.  Lost investments and potential guaranty liability mean litigation, especially where dealers have recently established or acquired dealerships, have built or upgraded facilities, have relocated operations, or have not been able to meet new operating standards or qualify for incentive programs.  Individuals facing personal guaranty liability generally have little choice but to sue or assert counterclaims.  If the lender is an affiliated finance company, the manufacturer needs to anticipate being dragged into the fray.

Assessing the potential for litigation is an important part of an overall strategy for any financially distressed dealer, but especially one in bankruptcy.  Even where dealer claims have little or no merit, litigation is expensive.  Compromising on payment claims, offering additional termination assistance, agreeing to consider or facilitate a sale even after the dealership has been closed and, for the affiliated lender, considering compromises on collection claims based on the cost and likelihood of recovery can be part of a strategy which secures a release for the OEM and affiliated lender.  While capitulation at the first hint of a dealer claim is not advisable and, in fact, can actually foster claims, recognizing the potential for litigation and taking steps to avoid or reduce it should be part of every business strategy.

Obviously, there are other issues and considerations that can arise with distressed dealerships.  Some can be more straightforward while others involve complex financial, operational and network-related issues.  Having a comprehensive business strategy can help navigate those issues.
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