186 B.R. 977 (C.D.Cal. 1995), 94-52638, In re Claremont Acquisition Corp., Inc.

Docket Nº:Bankruptcy Nos. LA 94-52638-KM, LA 94-52627-KM, LA 94-52635-KM, LA 94-52637-KM, LA 94-52639-KM and LA 94-52642-KM.
Citation:186 B.R. 977
Party Name:In re CLAREMONT ACQUISITION CORPORATION, INC.; Claremont Pontiac/GMC Truck, Inc.; Claremont Ford, Inc.; Claremont Cadillac, Inc.; Claremont Isuzu, Inc.; and Claremont Hyundai, Inc., Debtors. FORD MOTOR COMPANY and General Motors Corp., Appellants, v. CLAREMONT ACQUISITION CORPORATION, INC.; Claremont Pontiac/GMC Truck, Inc.; Claremont Ford, Inc.; C
Case Date:September 07, 1995
Court:United States District Courts, 9th Circuit, Central District of California
 
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Page 977

186 B.R. 977 (C.D.Cal. 1995)

In re CLAREMONT ACQUISITION CORPORATION, INC.; Claremont Pontiac/GMC Truck, Inc.; Claremont Ford, Inc.; Claremont Cadillac, Inc.; Claremont Isuzu, Inc.; and Claremont Hyundai, Inc., Debtors.

FORD MOTOR COMPANY and General Motors Corp., Appellants,

v.

CLAREMONT ACQUISITION CORPORATION, INC.; Claremont Pontiac/GMC Truck, Inc.; Claremont Ford, Inc.; Claremont Cadillac, Inc.; Claremont Isuzu, Inc.; and Claremont Hyundai, Inc.; Cal Worthington and Worthington Dodge, Inc.; and General Electric Capital Corporation, Appellees.

Nos. CV 95-3248 MRP, CV 95-3891 MRP.

Bankruptcy Nos. LA 94-52638-KM, LA 94-52627-KM, LA 94-52635-KM, LA 94-52637-KM, LA 94-52639-KM and LA 94-52642-KM.

United States District Court, C.D. California.

September 7, 1995

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[Copyrighted Material Omitted]

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Michael S. Kogan, Arter & Hadden, Los Angeles, CA, for debtors.

Wallace M. Allan, O'Melveny & Myers, Los Angeles, CA, for General Motors Corp.

Kimberly S. Winick, Mayer, Brown & Platt, Los Angeles, CA, Keith A. Langley, Dallas, TX, for Ford Motor Company.

James J. Joseph, Danning, Gill, Diamond & Kollitz, Los Angeles, CA, for Sidney G. (Jack) Head and Louis Frahm, Lessor of Acura Store.

Bruce L. Ishimatsu, Bryan Cave, Los Angeles, CA, for American Isuzu Motors, Inc.

Gregory Bray, Murphy, Weir & Butler, Los Angeles, CA, for G.E. Capital.

Adam H. Bloomenstein, Hyundai Motor America, Fountain Valley, CA, for Hyundai Motor America.

John C. Tobin, Best, Best & Krieger, Riverside, CA, for City of Claremont and City of Claremont Redevelopment Agency.

Gary E. Klausner, Robinson, Diamant, Brill & Klausner, Los Angeles, CA, for Cal Worthington and Worthington Dodge, Inc.

OPINION

PFAELZER, District Judge.

Ford Motor Company ("Ford") and General Motors Company ("GM") appeal an order of the bankruptcy court compelling GM and Ford to accept assignment of Debtors' franchise agreements to Worthington Dodge, Inc. ("Worthington Dodge") which is owned by Cal Worthington ("Worthington"). The questions presented by these appeals are: (1) whether the bankruptcy court erred in applying California Vehicle Code § 11713.3(e) to the assignment of the automobile franchise agreements; (2) whether the bankruptcy court applied the correct legal standard under Cal.Veh.Code § 11713.3(e); (3) whether the factual record supports the bankruptcy court's determination that GM and Ford's refusal to consent to the assignment to Worthington was unreasonable; and (4) whether the bankruptcy court erred in interpreting § 365(b)(2)(D) of the Bankruptcy Code, 11 U.S.C. § 365(b)(2)(D), as relieving the Debtors from the obligation of curing the default arising from their failure to operate the franchises for more than seven days prior to the bankruptcy filings. 1

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I.

BACKGROUND

The Debtors operated Cadillac, Pontiac/GMC Truck, Ford, Isuzu and Hyundai dealerships at the Claremont Auto Center in Claremont, California. On or about November 7, 1994, Debtors ceased operating the automobile dealerships. On November 20, 1994, the Debtors filed individual Voluntary Petitions for Relief under Chapter 11 of the Bankruptcy Code. Each of the Debtors has been operating as a debtor in possession since that time and the individual cases are being jointly administered. On March 31, 1995, the bankruptcy court approved Worthington as purchaser of the Debtors' assets, including the dealer franchises, for $1,700,000. Applying Cal.Veh.Code § 11713.3(e), which prohibits transfer of automobile franchise agreements without the consent of the manufacturer whose consent may not be unreasonably withheld, the bankruptcy court required the consent of the automobile manufacturers prior to ordering assignment of the franchise agreements. Isuzu, Ford and GM refused to consent to the assignment of the franchise agreements to Worthington. On April 18, 1995, the Debtors sought an order compelling the assignment of the franchises over the objections of the manufacturers. On May 3 and 17, 1995, the bankruptcy court held hearings on Debtors' motion. On June 1, the bankruptcy court entered a Consolidated Order Authorizing Debtors to Assume and Assign Automobile Dealership Franchise Agreements and Consolidated Findings of Fact and Conclusions of Law Regarding Debtors' Motion to Assume and Assign Automobile Dealership Franchise Agreements ("Findings and Conclusions") finding that GM and Ford had been unreasonable in refusing to consent to the assignment.

Ford and GM appeal the order compelling assignment of the franchise agreements. On June 8, 1995, this Court granted Ford and GM's request for an emergency stay pending appeal.

II.

STANDARD OF REVIEW

This Court reviews the bankruptcy court's interpretation of applicable law de novo, and the findings of fact for clear error. In re Tucker, 989 F.2d 328, 330 (9th Cir.1993).

III.

DISCUSSION

A. Applicability of California Vehicle Code Section 11713.3(e)

California law restricts an automobile franchisee's ability to assign the franchise without the consent of the manufacturer.

It is unlawful and a violation of this code for any manufacturer, manufacturer branch, distributor, distributor branch licensed under this code to do any of the following:

....

(e) To prevent, or attempt to prevent, a dealer from receiving fair and reasonable compensation for the value of the franchised business. There shall be no transfer or assignment of the dealer's franchise without the consent of the manufacturer or distributor, which consent shall not be unreasonably withheld.

Cal. Veh.Code § 11713.3 (emphasis added). The bankruptcy court held that this statute applied to the assignment of Debtors' automobile franchise agreements and inquired into the reasonableness of GM and Ford's refusal to consent to the assignment of the franchises to Worthington. Worthington now argues on appeal that it was error to apply this statute. Worthington contends that § 365(f)(1) of the Bankruptcy Code does not permit courts to look to state laws prohibiting the assignment of executory contracts. Worthington argues that the Court should not inquire whether the refusal to consent was "reasonable" under California law, but should inquire instead whether the proposed assignee has given the manufacturers "adequate assurances of future performance." 11 U.S.C. § 365(f)(2)(B).

The Bankruptcy Code provisions governing the assignment of executory contracts have caused considerable confusion. Section 365(f)(1) provides:

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Except as provided in subsection (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease....

Subsection (c), the exception to this assignability rule, provides:

The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if--

(1)(A) applicable law excuses a party, other than the debtor, to such a contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties....

11 U.S.C. § 365(c)(1)(A).

The First Circuit in In re Pioneer Ford Sales, Inc., 729 F.2d 27 (1st Cir.1984) held that a Rhode Island law which prohibited assignment of automobile franchises without the consent of the manufacturer was "applicable law" excusing the manufacturer from accepting performance from an assignee. GM and Ford argue that Pioneer Ford was correctly decided and urge this Court to follow that decision. In Pioneer Ford, Justice Breyer read the Bankruptcy Code in a manner which avoids conflict between the two provisions. He interpreted (f)(1) to apply to those state laws which enforce contractual anti-assignment provisions, and (c)(1)(A) to apply to those state laws which prohibit assignment regardless of whether the contract contains an anti-assignment provision. 2 Id. at 29. Under this analysis, (f)(1) prohibits the enforcement of contractual anti-assignment provisions in a bankruptcy proceeding, regardless of state laws validating those provisions. However, (c)(1)(A) requires the bankruptcy court to enforce those state laws which specifically prohibit the assignment of certain types of agreements. Accord In re CFLC, Inc., 174 B.R. 119, 121 (N.D.Cal.1994) ("[S]ubsection (f) operates to delete a nonassignability clause from a contract and render it 'silent' regarding assignment, but subsection 365(c) restores the nonassignability if applicable law holds such 'silent' contracts to be nonassignable"); In re Van Ness Auto Plaza, Inc., 120 B.R. 545 (Bankr.N.D.Cal.1990) (following Pioneer Ford and applying Cal. Veh.Code § 11713.3); In re Nitec Paper Corp., 43 B.R. 492, 498 (S.D.N.Y.1984) ( "[Subsection (f) ] allows a trustee to assign a contract even when the contract bars such an assignment, and even if 'applicable law' in the state gives legal force to contractual provisions barring assignment. It does not allow a trustee to assign a contract in violation of a specific federal or state statutory mandate forbidding assignment.")

Other courts have been critical of the approach to §§ 365(f)(1) and (c)(1)(A) taken in Pioneer Ford. In In re Magness, 972 F.2d 689 (6th Cir.1992), the Sixth Circuit found the Pioneer Ford statutory construction unpersuasive: "There is simply nothing in the language of § 365(f) which supports the limitation read into it by that court [that (f)(1)...

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