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Car Dealers Press Case Against U.S. Over Bailout, Citing Constitution

Thursday, April 26, 2012 | By Emily Maltby and Angus Loten, Wall Street Journal

U.S. government bailouts of General Motors and Chrysler became a constitutional battleground when they were pushed through bankruptcy court in 2009.

Turns out the battle isn't over just yet.

More than 220 former car dealers are pressing their case that the Obama administration violated the U.S. Constitution when the car makers terminated franchise agreements while in bankruptcy restructuring.

More than 220 car dealers are alleging the Obama administration violated the Constitution when their franchises were terminated during the government-brokered bankruptcies of General Motors and Chrysler. Among those dealers is Herb Adcox of Chattanooga, Tenn., shown here.

They are seeking compensatory damages ranging from $500,000 to more than $5 million apiece.
Two claims, initially filed in October 2010 and February 2011, cleared the government's motions to dismiss in February and are now heading into the pre-trial discovery phase. The dealers' lawyers are seeking government documents that they hope will show that auto makers had to eliminate some dealerships as a condition of receiving funds from the government's Troubled Asset Relief Program.

The cases are believed to be the first to test the constitutionality of the federal government's $80 billion bailout of the auto industry under the Bush and Obama administrations.

Supporters say the actions saved hundreds of thousands of jobs, while critics say they artificially propped up two failing companies, however large.

Herb Adcox of Chattanooga, Tenn., says he just wants a fair price for his car lot, which he valued at some $3 million in June 2009, including property and an inventory of 150 vehicles and parts worth $250,000 when GM terminated its relationship with him. Without new GM vehicles to sell, Mr. Adcox turned to selling used cars and repairs. His sales dropped to 25 vehicles a month from more than 100 a month earlier in the year.

"I lost money in 2009," he said, declining to provide specific dollar losses.

Mr. Adcox is party to one of two lawsuits now winding their way through the U.S. Court of Federal Claims in Washington, D.C. His case is seeking class-action status, and the plaintiff lawyers behind that case say they hope to include the claims of all Chrysler or GM dealerships that were hurt by the rejections.

The plaintiffs say that the Obama administration violated what's known as the "takings" clause of the Fifth Amendment.

Originally written to protect citizens from uncompensated government seizure, the takings clause has long been invoked to resist government seizure of private property for large infrastructure projects.

The dealers' claims may be a long shot because government lawyers are expected to argue that the U.S. didn't take anyone's property, and it was GM and Chrysler that legally terminated business relationships with these dealers.

The judge warned in February that "the theory under which plaintiffs hope to recover does not fit neatly" into a normal takings-clause case. The government has until Friday to respond to the complaints.

Some of the dealers also were involved in earlier challenges to the car maker's bankruptcy proceedings. Government lawyers might argue that the lawsuits are essentially a second bite at the apple for those dealers.

The plaintiffs are arguing that the U.S. government's involvement, loaning taxpayer money and overseeing GM and Chrysler's restructuring, perverted the natural course of bankruptcy. U.S. Treasury was not just a lender, but a government actor, they say. Leonard Bellavia, a partner at Bellavia Gentile & Associates LLP in Mineola, N.Y., who is representing 125 former Chrysler dealers, aims to show that terminating the dealership contracts was "a condition of receiving funds" from Treasury.

"When the government decides to intervene in the economy and targets industries for whatever reasons, under the Fifth Amendment it must pay compensation for what it takes or destroys," says Richard Faulkner, partner at Blume, Faulkner, Skeen & Northam, PLLC, Richardson, Texas, who is representing a group of former dealers.

Franchises, such as the Chrysler and GM dealerships, generally don't face termination by a franchiser because they are protected by state laws. But those state laws were trumped by federal laws when the auto manufacturers filed for bankruptcy. Federal bankruptcy law gives companies wide latitude to reject undesirable contracts. Some dealers attempted to fight their rejections during the bankruptcies but they didn't prevail.

Carl Tobias, who teaches constitutional law at the University of Richmond, said he sees the case as a difficult one. He said he doesn't expect the government to settle because "the stakes are too high." Apart from the cost to even partially reimburse hundreds of closed dealerships, Mr. Tobias says the government "wouldn't want to have a precedent that this type of action is unconstitutional."

GM spokesman Greg Martin said of 6,375 GM dealers in the U.S. at the end of 2008, only 57% were profitable. The company has since reduced that number to 4,407, of which 90% are profitable, a level the company hasn't seen in its dealers since the 1970s, he said. "We're not looking back," he added.

"Chrysler Group's optimized dealer network is contributing to improved vehicle sales and customer service and will continue to be a vital part of the company's success," said Michael Palese, a Chrysler spokesman. "Plans to place all of our brands under one roof, in well-located facilities, also have resulted in enhanced dealer profitability, and greater investment by existing dealerships."
Many who lost their franchises were able to sell for other new-car manufacturers, sell used cars, open muffler shops or rental car agencies. Some say they have been struggling since 2009, even if they were able to keep their doors open by selling used cars.

They claim they fell into debt when they lost profit from the vehicles and parts they had on their lots. Many depended on those profits to cover overhead expenses like their dealership mortgages and payroll.

Jim Koehler, owner of Scotia Motors in Scotia, N.Y., and a plaintiff in the Chrysler suit, said he lost about $2 million when his Dodge franchise, started by his father in 1946, was revoked. Mr. Koehler, 67, now runs a used-car sales and service shop with his wife and daughter, but he says the business is not profitable. "I hope we are all made whole," he says. "This has been the three worst years of my life."

Rob Engel, 59, and his brother, Richard owned a Chrysler-Jeep dealership in Tenafly, N.J., and a Chrysler dealership in Wyckoff, N.J. They lost their franchises in 2009. The Wyckoff location also had a wholesale parts warehouse.
He entered into arbitration with Chrysler in 2010. Neither dealership was reinstated even though both were profitable, Mr. Engel says, adding that he never found out why his locations were selected.

Mr. Engel estimates he had more than $1.5 million in parts between the warehouse and the two retail locations. "We cashed out our life insurance policies to sustain mortgage payments on both buildings," he says.

Today, Mr. Engel has a Kia Motors dealership in Tenafly and is renting the Wyckoff property to an auto body shop.

Dave Smith, 58, president of Colonial Chevrolet Company Inc., in Woodsville, Miss., says that in May 2009, GM offered $7,950 to close operations within 18 months. He refused to sign the agreement and his dealership contract was terminated.
"We're losing money now," he says.

New car sales used to account for 65% of annual profits, with the rest coming from parts and repairs. The business today is focused on repairs and a few used car sales, he says.

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