The 2009 terminations · Reference · TFR-2026-06

Why state good-cause protections did not stop the 2009 terminations

First published 2026-08-05 · Last substantively revised 2026-08-05 · Corrected 2026-08-05

State franchise statutes exist to stop a manufacturer from ending a dealer’s franchise without good cause, without notice and without a remedy. In the spring of 2009 they did not stop it. On June 9, 2009 the bankruptcy court supervising Chrysler’s Chapter 11 authorised the rejection of 789 dealer agreements, and ten days later held the state dealer statutes preempted by section 365 of the Bankruptcy Code with respect to that rejection. One clause of state law survived: the one that measures the damages, on a claim against an estate that was selling its assets.

§1 What the state statutes do

¶There is no single American law of automobile franchising. There are state statutes, they differ, and they were written for the same reason. The Special Inspector General for the Troubled Asset Relief Program summarised the category in a sidebar to its 2010 audit: franchise laws, “which vary from state to state, are designed to protect the rights and interests of a franchise purchaser by requiring the franchisor (in this case Chrysler or General Motors) to follow specific guidelines in order to terminate the franchise agreement.”1

¶Its worked example is Delaware, where, in the audit’s description, a franchisor may not unjustly terminate, fail to renew, or refuse to deal with a franchisee of at least two years “without good cause or in bad faith.” Notice is required, and the franchisee has “a legal remedy.”1

¶The Congressional Research Service, in its January 8, 2010 report on the restructuring, put the common pattern in a sentence: typical state franchise laws can require “a manufacturer to show good cause in order to terminate a dealer agreement, provide a framework for determining fair value of the franchise terminated, and establish basic rights of succession from generation to generation.”2

¶The bankruptcy court that set these statutes aside described them accurately on its way past them. They are “nonbankruptcy statutes enacted by state legislatures to protect local automobile dealers from certain commercial conduct, including fraud, coercion, and intimidation, by automobile manufacturers.” The rights include “statutory waiting and notice periods for wind-downs and buy-back requirements for terminations with or without cause”; the remedies, “specific types of damages and commencement of legal or administrative proceedings.”3

¶The buy-back obligation and the fair-value framework describe the problem the statutes address. In a franchised dealership the capital is split: the dealer buys the site, the building, the tools and the inventory; the manufacturer owns the trademark that makes any of it saleable. What the statutes buy the dealer is process — a reason, a notice period, and a forum.

§2 The mechanism: an executory contract, rejected

¶Chrysler LLC filed for Chapter 11 in the Southern District of New York on April 30, 2009. On May 14 it moved, under sections 105 and 365 of the Bankruptcy Code and Bankruptcy Rule 6006, to reject the dealer and site-control agreements of 789 domestic dealerships.3

¶The operative words are short. Section 365(a) provides that “the trustee, subject to the court’s approval, may assume or reject any executory contract” of the debtor. A franchise agreement with performance still owed on both sides is such a contract. The section does not ask whether state law permits a termination, or what becomes of the counterparty.4

¶Rejection is also not, technically, a termination. Section 365(g) makes rejection “a breach of such contract,” deemed in the ordinary case to have occurred “immediately before the date of the filing of the petition.”4 The dealer is not released from a contract; the dealer is converted into a creditor. The court put it in one sentence: “Rejection thus benefits the estate by removing the burden of postpetition performance under these contracts and instead giving the Affected Dealers claims against the Debtors’ estates.”3

¶The dealers were heard. More than two hundred objections and responses were filed by the May 26, 2009 deadline. At an evidentiary hearing on June 4, fifteen witnesses testified live and approximately sixty-six more by proffered declaration; argument followed on June 9, the order issued that day, and the opinion on June 19.3

¶What the dealers could not get was a standard of review under which any of that would matter. Rejection is reviewed for business judgment, a standard under which, “absent a showing of bad faith, or an abuse of business discretion, the debtor’s business judgment will not be altered.” The consequence appears in a line the opinion quotes: “the effect of rejection on other entities is not a material fact to be weighed.”3

¶Several dealers asked for something stricter, pointing to NLRB v. Bildisco & Bildisco, where the Supreme Court required a higher showing to reject a collective-bargaining agreement, and to the federal Automobile Dealers’ Day in Court Act, 15 U.S.C. §§ 1221 et seq. Others asked the court to “balance the equities.” It declined both: “because the ADDCA does not give rise to such application of a ‘public interest standard,’ the Court applies the business judgment standard rather than a ‘public interest standard’ here.” Its own summary of the inquiry decided the case: “whether the debtor is making the best or even a good business decision is not a material issue of fact under the business judgment test.”3

¶Applying it, the court found that the debtors and the buyer had determined that rejection was “necessary and appropriate … enabling the Debtors to consummate the Fiat Transaction and transfer to New Chrysler a smaller, more effective, and more profitable dealer network without disruption.”3

§3 The holding

Consistent with the Order, the Court concludes that the Dealer Statutes are preempted by § 365 with respect to rejection of the Rejected Agreements. Of course, as with contract rejections in general, damages are still calculated according to state law.

In re Old Carco LLC, 406 B.R. 180 (Bankr. S.D.N.Y. June 19, 2009), slip op. at 22

¶The route was conventional preemption analysis. The Supremacy Clause invalidates state laws that “interfere with, or are contrary to,” federal law. Congress had said nothing express about dealer statutes, so the court worked through field preemption and conflict preemption and found them displaced so far as they would have blocked a rejection.3

¶Two footnotes carry the holding further than that sentence suggests. Some dealers argued that Chrysler’s selection metrics were themselves impermissible under particular state statutes. Footnote 34’s answer: “to the extent such metrics are impermissible under certain Dealer Statutes, they are preempted because they frustrate § 365’s purpose of allowing a debtor to exercise its business judgment.” Footnote 36 closed the other route: “to the extent any Dealer Statute provides equitable relief that impacts the Debtors’ right under § 365 to reject a contract, such law is preempted.”3

¶One distinction the parties fought over: the debtors maintained they were rejecting agreements rather than terminating them, so the dealer statutes never applied, while several dealers argued the effect was a constructive termination. The court did not resolve the label, holding instead that to the extent the statutes could prevent rejection they were preempted.3

§4 What “damages are still calculated according to state law” was worth

¶What a dealer held after June 2009 was a breach-of-contract claim against Old Carco — the estate left behind after the sale — treated by section 502(g)(1) as though it had arisen before the petition date: a general unsecured claim.5 The court left open whether any dealer might instead hold an administrative claim.3 The timing was not incidental. The audit records that Chrysler’s goal was “to close dealerships quickly and to have the terminations coincide with the effective date of the bankruptcy sale,” and that the 789 were terminated within 22 days “without providing any financial assistance to these dealerships.”1

¶The adjacent claims failed too. A Fifth Amendment takings objection was “without merit because the Rejected Agreement was a contract between the Affected Dealer and the Debtors,” a lien in estate property being the prerequisite in bankruptcy. Section 365(n) did not let a rejected dealer keep using the Chrysler marks, because trademarks are not “intellectual property” as section 101(35A) defines it. A First Amendment objection about advertising was “without merit and far afield.”3

¶The surviving clause is real, and narrow. State franchise law survived in order to measure a claim against an estate that was selling its assets, and was preempted for the purpose of stopping the termination.

§5 What the companies told a federal auditor

¶The clearest evidence that the statutes were the obstacle is that the people going around them said so, in a federal audit. Chrysler officials told the Special Inspector General that before bankruptcy “they had a difficult time closing dealerships because of state franchise laws.” Its consolidation plan had run to 2014; in bankruptcy it eliminated 789 of 3,181 dealerships, almost 25 percent of the network, between the letters of May 14 and the effective date of June 10, 2009. The audit calls that interval 22 days and does not show the arithmetic; its own timeline gives 27. The point either way is the compression.1

¶The audit records the same calculation on the General Motors side: “bankruptcy would permit GM to accelerate the process without the restriction of state franchise laws. Bankruptcy laws supersede various state franchise laws, which could have required litigation or arbitration.” General Motors did not in the end reject its agreements in court; it sent 1,454 of its 5,591 dealerships wind-down agreements to sign, a different mechanism this publication treats separately. (1,454 is the count of complete wind-downs, not the 2,000 General Motors dealerships later made eligible for arbitration.)1

¶The government’s restructuring team saw the advantage too. The Auto Team, the audit found, “also encouraged the companies to terminate dealerships during bankruptcy proceedings, which provided the opportunity to close dealerships outside of state franchise laws, which could have made involuntary dealer closings more difficult and costly for the two companies.”1 An internal Auto Team memorandum quoted in the audit puts it in the company’s own frame:

(t)he decision to terminate such a large number of distribution points in a very short time is arguably the most challenging component of the revised plan…Despite the significant execution risk, the management team believes it is imperative that the company capitalize on this unique opportunity to reconfigure the dealer network outside the confines of restrictive state franchise law.

Internal Auto Team memorandum, quoted in SIGTARP-10-008, p. 13

¶What that is, precisely: an audit’s record of what officials said and what a memorandum said. It is not a judicial finding about anyone’s motive, and no court made one.

§6 The appeal that was wiped off the books

¶Running alongside the rejection fight was the fight over the sale. The bankruptcy court approved the sale of substantially all of Chrysler’s assets in In re Chrysler LLC, 405 B.R. 84, and the Second Circuit affirmed at 576 F.3d 108. Indiana pension funds took it to the Supreme Court, which disposed of it on December 14, 2009 on an order list:6

The petition for a writ of certiorari is granted. The judgment is vacated, and the case is remanded to the United States Court of Appeals for the Second Circuit with instructions to dismiss the appeal as moot. See United States v. Munsingwear, Inc., 340 U.S. 36 (1950).

Order List, Supreme Court of the United States, December 14, 2009, No. 09-285 (Indiana State Police Pension Trust v. Chrysler LLC), 558 U.S. 1087

¶Two points of precision, because this part is often garbled. What was vacated was the Second Circuit’s judgment in the sale appeal, not the bankruptcy court’s dealer-rejection opinion, which was a separate matter and remains on the books at 406 B.R. 180. And a Munsingwear vacatur is not a ruling that the decision below was wrong; it clears a judgment that has become unreviewable, with the effect that the appellate reasoning approving the structure carries no precedential weight. The Second Circuit issued a further opinion on the remand at 592 F.3d 370.7

§7 The double preemption

¶Six years later the same doctrine ran the other way, for a much smaller group. Congress had not restored the terminated franchises: what it enacted in section 747 of the Consolidated Appropriations Act, 2010 (P.L. 111-117, 123 Stat. 3219), signed December 16, 2009, was a right to binding arbitration. Of 2,789 eligible dealerships, 1,575 filed, 166 reached a written determination and 55 went to the dealer, per the American Arbitration Association’s November 2010 report to Congress.8 Winners then found that existing dealers could protest their return under state law, and went back to court.

¶The Sixth Circuit held that “Michigan’s and Nevada’s state dealer protest laws, in particular, frustrate Congress’s purpose in enacting § 747 because they permit state officials to delay and possibly nullify the effect of federal arbitration,” and were preempted. It held in the same opinion that section 747 “does not entitle prevailing dealers to unconditional ‘reinstatement,’ but requires only that Chrysler issue the typical letter of intent, legally enforceable as a contract entered into in good faith.”9

¶That opinion also contains the clearest appellate summary of 2009: in authorising the rejections the bankruptcy court “applied the business judgment standard, opting not to employ a higher standard despite the presence of state and federal statutes that protected auto dealerships from being terminated without good cause.”9

¶State dealer-protection law therefore lost twice in this story, on the same obstacle-preemption reasoning, to opposite effect: in 2009 preempted by section 365 so that 789 franchises could end, in 2015 preempted by section 747 so that a far smaller number of dealers could get back in. Section 747(g) reads: “Notwithstanding the requirements of this provision, nothing herein shall prevent a covered manufacturer from lawfully terminating a covered dealership in accordance with applicable State law.”10

§8 Considerations

¶What the 2009 decision settled. Inside a Chapter 11 case a franchise agreement is an executory contract, the decision to reject it is reviewed for business judgment, and a state statute requiring good cause, notice or a hearing first is preempted to that extent. The dealer’s remedy is a claim.

¶What it did not settle. Nothing about the ordinary case; outside bankruptcy the state statutes operate as written, which is why Congress wrote section 747(g) as it did. Note also what kind of authority this is: In re Old Carco is a bankruptcy court opinion, not an appellate holding; no decision reversing it on the preemption point has been located, and the Sixth Circuit described it in 2015 without disturbing it.

¶What a deferential standard is and is not. The court found the rejections a rational exercise of business judgment: a finding that they were not made in bad faith or by whim, not a finding that they were right.3 Whether the closings were justified is a different question, and the auditors answered it differently. The Special Inspector General concluded that “it is not at all clear that the greatly accelerated pace of the dealership closings during one of the most severe economic downturns in our Nation’s history was either necessary for the sake of the companies’ economic survival or prudent for the sake of the Nation’s economic recovery.”1 A court applying section 365 was never asked that question.

§9 Still open

¶Nothing in the 2009 decision has been undone; section 365 reads today as it read then. The section 747 program is closed: the window to elect arbitration ran 40 days from December 16, 2009 and expired on January 25, 2010, and no live federal mechanism exists through which a 2009 termination can now be revisited.10

¶What would have to be true for it to happen again is in the opinion: a manufacturer in Chapter 11, executory franchise agreements, a buyer that does not take them, and a record on which rejection benefits the estate. Absent a bankruptcy, the state statutes are still the operative constraint, which is where the current disputes are fought. The live question in 2026 is not whether a manufacturer may end a franchise but whether it may sell around one, and the suits testing it are brought under state franchise statutes — California’s among them, which bars a licensee from doing “directly or indirectly through an affiliate” what it may not do itself. That affiliate wording is not new: a federal court in San Diego records it as having been in the section since 2012, and what Assembly Bill 473 changed, effective January 1, 2024, was the competition clause it governs, which no longer turns on the same line-make or the same market area.11 As of 2026-08-05 those cases are pending and none has produced a ruling on the merits; they are followed in this publication’s page on the 2026 direct-sales fights.

¶One loose end from 2009 is still loose. The Second Circuit’s approval of the sale structure was vacated as moot rather than affirmed or reversed, leaving the question it addressed — how far a section 363 sale may reorder the rights of a debtor’s counterparties — unresolved in that case.

Endnotes

1. Office of the Special Inspector General for the Troubled Asset Relief Program, Factors Affecting the Decisions of General Motors and Chrysler to Reduce Their Dealership Networks, SIGTARP-10-008, July 19, 2010. Franchise-law sidebar and the General Motors quotation, p. 18; Chrysler officials on state franchise laws and the 789 of 3,181 figure, p. 15; the Auto Team’s encouragement to terminate in bankruptcy, p. 7; the internal Auto Team memorandum, p. 13; the 22 days and the absence of financial assistance, p. 21; the 1,454 of 5,591 wind-downs, p. 12; the conclusion on the accelerated pace, p. 28. sigtarp.gov is offline; this publication cites the archived copy. Audit (PDF, Internet Archive)
2. Congressional Research Service, U.S. Motor Vehicle Industry Restructuring and Dealership Terminations, R40712, updated January 8, 2010. The quoted description appears in the report’s discussion of state franchise law, where CRS attributes the formulation to a source in its own footnotes. Report text (EveryCRSReport mirror of the CRS report)
3. In re Old Carco LLC, 406 B.R. 180 (Bankr. S.D.N.Y. June 19, 2009), Case No. 09-50002 (AJG), ECF Doc. 4145. Pin cites on this page are to the pagination of the court’s filed PDF: procedural history and the hearing, at 1–2; the business judgment standard and “the effect of rejection on other entities,” at 3–4; the refusal of a public-interest standard and the discussion of the Automobile Dealers’ Day in Court Act, at 6–8; “whether the debtor is making the best or even a good business decision,” at 11; the Fiat Transaction finding, at 15; rejection as giving dealers claims against the estates, at 17; the description of the Dealer Statutes, at 21; the preemption holding, at 22; footnotes 34 and 36, at 32; the objection deadline, at 34; the Takings Clause, section 365(n) and First Amendment objections, at 40. Opinion (PDF, govinfo)
4. 11 U.S.C. § 365 (assumption and rejection of executory contracts); subsections (a) and (g). Section 365 (Office of the Law Revision Counsel)
5. 11 U.S.C. § 502(g)(1) (treatment of a claim arising from the rejection of an executory contract). Section 502 (Office of the Law Revision Counsel)
6. Supreme Court of the United States, Order List, December 14, 2009, No. 09-285, Indiana State Police Pension Trust v. Chrysler LLC, reported at 558 U.S. 1087. Order List (PDF, supremecourt.gov)
7. In re Chrysler LLC, 405 B.R. 84 (Bankr. S.D.N.Y. 2009) (approving the sale); aff’d, 576 F.3d 108 (2d Cir. 2009); vacated as moot, 558 U.S. 1087 (2009); see also 592 F.3d 370 (2d Cir. 2010).
8. American Arbitration Association, A Report to Congress on the Automobile Industry Special Binding Arbitration Program, November 2010, for the 2,789 eligible dealerships, 1,575 filings, 166 arbitral determinations and 55 determinations for the dealer. Report (PDF, ICDR)
9. Chrysler Group LLC v. Fox Hills Motor Sales, Inc., 776 F.3d 411 (6th Cir. 2015), Nos. 13-2117/2118/2119, decided January 16, 2015; cert. denied sub nom. FCA US LLC v. Fox Hills Motor Sales, Inc., 135 S. Ct. 2860 (June 22, 2015). Opinion (PDF, U.S. Court of Appeals for the Sixth Circuit)
10. Section 747 of the Consolidated Appropriations Act, 2010, Public Law 111-117, 123 Stat. 3219–3222, signed December 16, 2009. Subsection (d) sets the 40-day election period; subsection (c) is the separate 30-day duty on the manufacturer to state the criteria on which it had cut each dealership; subsection (g) is quoted in full above. Public Law 111-117 (govinfo)
11. Cal. Veh. Code § 11713.3, whose opening line reaches anything a licensee does “directly or indirectly through an affiliate,” and subdivision (o)(1), which since A.B. 473 (2023–2024 Reg. Sess.), effective January 1, 2024, bars competing “with their franchisees in the sale, lease, or warranty service of new motor vehicles” — where the pre-2024 clause reached only competition with a dealer “in the same line-make … in the relevant market area.” On the affiliate phrase predating that amendment, see the order of March 30, 2026 in CNCDA v. Volkswagen of America, Inc., No. 3:25-cv-01316-BAS-DEB (S.D. Cal.), ECF No. 66, which records the language as “consistently used in the statute since 2012” and the current version as the broader one. The 2026 litigation is covered at the 2026 direct-sales fights. Section 11713.3 (California Legislative Information) · A.B. 473 (California Legislative Information)

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