Ex-dealers’ suit vs Chrysler allowed to be heard by appeals court

Article by Andrew Christian, on April 17, 2014

The United States Court of Appeals for the Federal Circuit has ordered the US Court of Federal Claims to hear a case wherein 148 former Chrysler dealers want the government to compensate them for ordering the carmaker to reduce its number of dealers. If dealers win the case, the Treasury could be ordered to compensate them with millions of dollars – and serve as precedent for former General Motors dealers.

Leonard Bellavia, a New York lawyer and lead counsel of the team representing the former Chrysler dealers, remarked that the order marks first step toward a total vindication. The case stems from actions of the White House's automotive task force that ordered Chrysler to trim the number of its franchises as a condition of a bailout.

It was thought that Chrysler was "overdealered," cutting profits as it was harder to compete. Chrysler had to close 789 of its 3,200 dealerships as part of its bankruptcy reorganization in 2009. The terminated dealers filed a lawsuit in 2011, claiming that the condition was a "taking," a violation of constitutional law that says the federal government cannot take property without payment.

In its ruling, the appeals court compared the lawsuit to a 15-year-old case stemming from Congress' decision to offer grants to states that prevented minors from buying cigarettes. To avail of the grant, the state of California passed a law in 1994 that bans establishments open to minors from having cigarette machines.

This prompted a vending machine operator to file a case, claiming that the Congress' action was a "taking." The court, however, disagreed with the vendor, ruling that Congress may have provided the bait, but California decided to bite. To win the case, Chrysler’s former dealers must show that the government didn't just provide bait but also pressured the carmaker into terminating franchises.

The dealers should also show that the franchises would have had value had the carmaker underwent an ordinary bankruptcy. Lawyers for the terminated dealers say that even sans government's action, assets would have been bought and the franchises would have retained value.

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