Opinion ID: 740578
Heading Depth: 2
Heading Rank: 1

Heading: Assignment of the GM Dealer Agreements

Text: 10 California law restricts an automobile franchisee's ability to assign the franchise without the consent of the manufacturer. Section 11713.3 of the California Vehicle Code provides: 11 It is unlawful and a violation of this code for any manufacturer, manufacturer branch, distributor, or distributor branch licensed under this code to do any of the following: 12 ... 13 (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. 14 Cal.Veh.Code § 11713.3. 15 The bankruptcy court held that § 11713.3(e) applied to the assignment of the GM Dealer Agreements to Worthington. 1 On appeal, Worthington argues that the bankruptcy court erred in applying this statute because § 365(f)(1) of the Code does not permit courts to look to state laws prohibiting the assignment of executory contracts. 11 U.S.C. § 365(f)(1). Worthington argues that the bankruptcy court should not have inquired whether GM's refusal to consent was reasonable under California law, but should have instead inquired whether Worthington had given GM adequate assurance of future performance as required by § 365(f)(2)(B). 11 U.S.C. § 365(f)(2)(B). 2 16 Federal courts have struggled with interpreting the Bankruptcy Code provisions governing the assignment of executory contracts. Section 365(f)(1) of the Code provides a general rule which permits a trustee in bankruptcy to assign an executory contract: 17 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 under paragraph (2) of this subsection [requiring adequate assurance of future performance]. 18 11 U.S.C. § 365(f)(1). Subsection (c) of § 365 contains an important exception to this assignability rule: 19 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-- 20 (1)(A) applicable law excuses a party, other than the debtor, to such 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. 21 11 U.S.C. § 365(c)(1)(A). 22 Section 365(f)(1) appears to authorize a trustee to assign an executory contract, notwithstanding any contrary provision in the contract or in applicable law, provided that adequate assurance of future performance by the assignee is provided. Section 365(f)(1), explicitly states, however, that it applies except as provided in subsection (c) of § 365. Subsection (c), in turn, prohibits an assignment of an executory contract if applicable law excuses the non-debtor party from accepting performance from the assignee. What § 365(f)(1) appears to give, § 365(c)(1)(A) seems to take away. 23 Recently, in In re CFLC, 89 F.3d 673 (9th Cir.1996), this court recognized the apparent conflict between subsections (f) and (c), and noted that this conflict has lead to two different constructions of § 365 and the meaning of the phrase applicable law in both subsections. Id. at 676-77 (comparing In re Pioneer Ford Sales, 729 F.2d 27, 29 (1st Cir.1984), with Rieser v. Dayton Country Club Co. (In re Magness), 972 F.2d 689, 695 (6th Cir.1992)). The CFLC court did not find it necessary to resolve this conflict, however, because assignment of the patent at issue in that case was barred under either construction of the statute. Likewise, in the instant case, we find it unnecessary to address this matter because resolution of the conflict will not result in the assignment of the GM Dealer Agreements. Instead, we find that the issue raised by GM's cross-appeal, regarding the proper interpretation of § 365(b)(2)(D), is dispositive of this appeal. IV GENERAL MOTORS' CROSS-APPEAL A. Background 24 On or about November 7, 1994, Debtors ceased operating their automobile dealerships. The bankruptcy cases were not filed until November 20, 1994. The GM Dealer Agreements provided that GM may terminate the franchise for the failure to operate the business for seven consecutive business days. 3 Debtors' failure to operate the dealership for two weeks preceding the bankruptcy filing constituted a nonmonetary default. Moreover, this default is a historical fact and, by definition, cannot be cured. See Lee West Enterprises, 179 B.R. 204, 208 (Bankr.C.D.Cal.1995). 25 In general, a debtor must cure all defaults, both monetary and nonmonetary, prior to the assumption and assignment of an executory contract. 11 U.S.C. § 365(b)(1). However, § 365(b)(2) sets forth an exclusive list of the monetary and nonmonetary breaches that a debtor need not cure before assuming and assigning a contract. 11 U.S.C. § 365(b)(2)(A)-(D). Worthington argued below that, pursuant to subsection (D) of § 365(b)(2), its default does not preclude assignment of the GM Dealer Agreements. The bankruptcy court agreed with Worthington and held that § 365(b)(2)(D) relieved Debtors of their obligation to cure their default. In its cross-appeal, GM contends that subsection (D) does not apply to this case, and that Debtors' incurable nonmonetary default-the failure to operate the dealerships-precludes assignment of the GM Dealer Agreements.