"How Might a Big 3 Bankruptcy Case Affect Me?"

SLADA teamed up with Larson Allen and Stinson Morrison Hecker to present a panel discussion on "How Might a Big 3 Bankruptcy Case Affect Me?"

While everyone hopes for the best outcome during these tough economic times, it is still helpful to be prepared for every scenario possible. A real scenario that dealers should take time to learn about and prepare for is the possibility that one of the Big 3 auto manufacturers might file for bankruptcy.

Many companies file bankruptcy and maintain "business as usual" with customers, dealers and suppliers. Many other big and small companies file bankruptcy and liquidate. A Big 3 bankruptcy case probably will be in between - initially "business as usual" to calm fears, followed by dramatic downsizing and restructuring.

A Big 3 Bankruptcy will affect local dealers in a variety of ways, but the largest way that all Big 3 dealers should be prepared for is the possible strategic downsizing of the dealer network that may take place. Once a Big 3 manufacturer files for bankruptcy, they have the immediate ability to reject any executory contracts and leases that they have with other entities - this includes the dealer agreement. There a real possibility that dealers could receive a letter and court pleadings in the mail from their manufacturer that states that they are asking the court to reject their dealer agreement. Under bankruptcy law, the dealer would have only 20 days to fight such action. Unfortunately, if dealers are not prepared ahead of time for this possibility, there might be little they can do in 20 days to protect themselves, and their dealership will face a termination of the relationship with the Big 3 manufacturer. This could lead to the dealer having to close its doors. That is why the most important thing dealers can do right now is PLAN, PLAN, PLAN. To make this planning as beneficial as possible, prepare the following three main elements.

The first part of this plan isn't a plan for the future, but a plan for current dealership business. The best way to avoid being one of the dealerships that is on the downsizing chopping block is to maximize the current success of ones' dealership. Dealers need to do everything they can in the present moment to be as successful and profitable as they can be, even in tough economic times, so that if the moment comes where one of the Big 3 is looking at which of their dealers is successful and which ones are not, they are the positive side of that equation.

The second thing that dealers should do is to organize themselves by manufacturer through whatever dealer groups they are part of (again, especially if they feel they might be at risk). There should be organization on the national, state, and local levels. It is much easier to mount the fight to protect dealer agreements from bankrupt manufacturer rejection with the help of other dealers who are all in the same position, facing the same threat. Most importantly, if dealers can organize on the state level, they may be able to utilize state franchise laws to defend their dealer agreements. Furthermore, dealers need to ensure that they are fully represented as a group within the bankruptcy case. Once a manufacturer files bankruptcy, there likely will be committees formed to help settle the case. Dealers certainly need to make sure that they have their own committee functioning in the bankruptcy case.

The last thing that dealers should do is to establish a Plan B. Dealers first should maximize the amount of cash on hand, as that is their most valuable asset. Cash from a bankrupt manufacturer might be unavailable for some time. Dealers also need to take stock NOW of all their assets, personal and business, in order to possibly protect what needs protecting. Dealers should do so by consulting their attorneys, accountants, estate planning advisers and financial planners to consider what they can do while planning for a possible Big 3 bankruptcy. Finally, as part of this Pan B analysis, it may be necessary and worthwhile for dealers to look into the possibility of filing their own bankruptcy, if they truly feel that their dealer agreement and the dealer viability is in jeopardy. It might provide them with some needed protection and maximize their position against a Big 3 bankruptcy filing.

In conclusion, bankruptcy is something that all companies, big and small, hope to never have to face. However, it is a reality of our economy, especially in times like these. The toughest part about bankruptcy is that everyone involved is affected and usually in ways that are difficult for some time. In the case of the Big 3, the key for dealers is to make sure that their dealership is affected less negatively. The best way to do that is to proactively plan now for the possibility of a Big 3 bankruptcy. Dealers that are dedicated to planning and preparing ahead of time are the ones that will likely weather the storm best. If a Big 3 manufacturer does declare bankruptcy, the reorganized manufacturer and the dealerships that survive will likely be much better off once all is said and done, and they will all be on the road to successful and profitable times.

This information is presented by Paul Hoffmann and John Young, partners of Stinson, Morrison, Hecker in a Q&A format led by Dave Wiggins, a partner at LarsenAllen. It is designed to give general information only and is not intended to be a comprehensive summary or to threat exhaustively the subjects and matters covered. Comments and information presented in this article do not constitute legal advice or opinions. Such advice and opinions are provided only upon engagement with respect to specific factual situations. Nothing considered herein shall be considered as an admission in any matter or controversy.