Section 365 of the Bankruptcy Code Preempts Florida Dealer Statutes

By: Andrew Ziemianski

St. Johns Law Student

American Bankruptcy Institute Staff

In In re American Suzuki Motor Corp., the United States Bankruptcy Court for the Central District of California recently held that Florida’s dealer statute’s provisions providing a method for measuring damages after the rejection of a car dealership agreement, passed to protect local car dealerships, were impliedly preempted by section 365 of the Bankruptcy Code.[1] The debtor, a wholesaler of Suzuki cars, filed for chapter 11 bankruptcy in order to restructure its automotive division.[2] During the course of the bankruptcy case, the debtor rejected a dealership agreement it had with a Florida dealership.[3] The dealership then filed a rejection damages claim alleging damages that were calculated under the Florida Motor Vehicle Licenses Act,[4] which provided for statutory damages that were greater than the dealership’s damages would have been under common law contract damages principles, as well as treble damages and attorney’s fees.[5] The debtor objected to the dealership’s claim, arguing, among other things, that the Florida law was preempted by the Bankruptcy Code.[6] The court opined that the assessment of damages provided for in the Florida Motor Vehicle Licenses Act ran contrary to the policy of section 365, which allows debtors to reject a burdensome executory contract.[7] As such, the court held that Florida law was preempted.  Therefore, the court refused to calculate the dealership’s damages under the Florida law and instead applied common law contract damage principles when determining the amount of the dealership’s claim.[8]

Section 365 provides that a debtor may reject an executory contract,[9] giving rise to a prepetition unsecured claim for breach of contract damages as opposed to a post-petition breach, which would give rise to a priority administrative expense.[10] This section is meant to, among other things, permit the debtor to receive the economic benefits necessary for reorganization,[11] as well as to avoid additional expenses from burdensome contracts for the ultimate benefit of the estate.[12] Courts have found that buy-back requirements and methods for calculating damages from rejected executory contracts imposed by many dealer statutes frustrate that purpose.[13] Accordingly, a court will likely hold that such a state statute is preempted if the statute frustrates the benefits to the debtor from the rejection process in favor of the economic benefit of the dealers[14] because such a shift would run counter to the goals and policy of the bankruptcy law.[15] Indeed, American Suzuki is not alone in its holding on preemption.  American Suzuki joined a growing consensus among the bankruptcy courts that section 365 will preempt over-burdening state dealer statutes.[16] For example, the United States Bankruptcy Court for the Southern District of New York has held multiple times[17] that section 365 impliedly preempted state statutes that would impose significant burdens on the debtor and thereby make the rejection of the executory contracts less beneficial to the debtor.[18]

A federal court will likely hold that a state statute is implicitly preempted by federal law under the Supremacy Clause,[19] where there is a conflict between the state statute and the federal law. In the bankruptcy context, the holding of American Suzuki demonstrates that a bankruptcy court will likely hold that section 365 implicitly preempts a state dealership statute that seeks to impose significant burdens on the debtor following the rejection of a dealership agreement.  Effectively, this means that a bankruptcy court will not allow a state legislature to circumvent section 365 in order to protect dealerships in that state. As a result, if a bankruptcy court follows American Suzuki the dealership’s rejection damages claim will be less than it would have under the dealership statute.[20] This decrease will in turn benefit the debtor, its estates and the debtor’s other creditors, while the dealership will receive a smaller distribution on account of the decreased claim.  Dealerships should take notice of the American Suzuki decision because it dictates that a dealership who is a counterparty to a rejected dealership agreement must calculate its damages claim using the methods provided by common law.   Ultimately, the American Suzuki decision is important because it held that any state statute that “undercut[s] the core purpose of rejection” provided for in section 365, will most likely be preempted.

[20] Since the Dealer statutes, such as the one used in American Suzuki, skew the cost of rejection for the economic benefit of the dealers, to remove those measurements would lose those added economic benefits. In re American Suzuki Motor Corp., 494 B.R. 466, 476 (Bankr. C.D. Cal. 2013).