Texas Challenges GM Dealership Cuts

The Lone Star state has declared legal war on General Motors Corp., alleging in a court filing that the bankrupt auto maker is violating state franchise laws and threatening the existence of its 415 Texas dealers.

The state of Texas statement filed with the U.S. Bankruptcy Court in New York City, which is overseeing GM's division into an “old GM” and “new GM,” and which Texas Attorney General Greg Abbott asserts could be letting the corporation “gut Texas statutes that regulate our dealers and flout U.S. Supreme Court precedent that upholds our state-based dealership structure.”

In its 14-page broadside, Texas also assails a new “participation” agreement being presented to surviving GM dealers and challenges the legal presumption that the bankruptcy court's rulings take precedence in dealer matters over the franchise laws in the 50 states.

Under the new agreement, says the Texas statement, GM is seeking to do the following:

A GM spokesman says the auto maker would comply with the orders of Bankruptcy Court Judge Robert E. Gerber, referring to the commonly held doctrine that federal law trumps state law.

However, Abbott's statement reiterates the U.S. Supreme Court's 1978 opinion in the celebrated case of the California New Motor Vehicle Board vs. Orrin W. Fox, written by the late U.S. Chief Justice William Rehnquist.

That opinion, under which all state franchise laws have been formulated, states that states are empowered to subordinate the franchise rights of auto makers to prevent unfair or oppressive trade practices.

The Texas brief declares that GM is asking a bankruptcy court “to hurriedly approve a plan that would let it … be the sole exception to these well-established state laws.”

The Orrin Fox case, the Texas declaration goes on, upheld the franchise laws at that time of 25 states. But GM now, according to the declaration, is asking dealers as part of their contract to “agree to waive numerous protections in Texas law.”

The statement notes that among other states with dealer franchise law, Louisiana's regulating board has been asked to revoke GM's license to do business in that state because of similar issues.

The Texas attorney general asks Judge Gerber to disapprove GM's “strong arm tactics” and “affirm that the relationship between GM and its Texas dealers is governed by Texas law.” Abbott asks the judge to rule that any provision of the amended franchise agreement “that is contrary to Texas law is invalid and unenforceable.”

The Texas declaration cites another U.S. Supreme Court opinion and three other case precedents supporting its position on the inviolability of state laws in bankruptcy situations.

It then repeats its fear that the new GM franchise agreement threatens to undermine dealer businesses if dealers refuse to sign a clause stating that they acknowledge that GM's decisions are “entirely voluntary and free from any duress.”

Supporting the Texas stand on the new participation agreement are the National Automobile Dealers Assn., GM's National Dealer Council and the Texas Automobile Dealers Assn.

GM has amended certain parts of the agreement, but the Texas legal brief says it “failed to address the many important state law protections afforded GM's dealers.”