Back in 2008/2009 during the Global Financial Crisis (GFC), two of the Big Three were close to failure. General Motors recreated itself and left its bad debts with the older entity whilst Chrysler, having left the DaimlerChrysler group in 2007 was struggling with its new owners Cerebus Capital Management.
The timing of that transaction probably saved Daimler Benz during the GFC. Chrysler LLC as it was then called, filed for Chapter 11 bankruptcy protection, participated in the Government controlled Troubled Asset Relief Program and then emerged with its ownership split between the US and Canadian Governments, the United Auto Workers Union and FIAT SpA. As part of that restructuring, 789 Chrysler dealerships were terminated in June of 2009, which accounted for about a quarter of the dealer network in the US at that time.
The Treasury stated at the time that the reduction in dealerships was necessary to help Chrysler LLC to recover from the bankruptcy protection, however many of the dealers had spent millions of dollars in the preceding years to help the company sell their vehicles – to no avail when the franchise cancellation notice arrived. However, when those notices arrived, so did a property seizure notice that pretty much covered the whole of the dealers’ businesses: property, vehicles and other assets. The lawyers estimated that it amounted to $12.5Bn in total from all the dealers.
In February 2011, 64 ex Chrysler dealers sued the US Treasury for $130m. The lawsuit, filed in the U.S. Court of Federal Claims, alleged that the Government violated the Constitution when they removed the franchises and some of their State based legal rights without providing enough compensation. The filing suggested that the Administration violated the Fifth Amendment, which says private property shall not be taken for public use “without just compensation.”
In 2016, a New York Judge ruled that the dealers could indeed sue the Government with respect to the Fifth Amendment and that the entities that controlled the dealers should have received some compensation from the Government.
Now, this year – in fact in April, those dealers have finally got their case before a judge in Washington D.C. which is a full decade after having their franchises cancelled and eight years since starting down this legal avenue. The case is expected to take several months to work its way through the courts and many ex General Motors dealers who were also dropped from that network around the same time, are looking at it closely. If the Chrysler dealers win, then expect a second case with GM in the cross-hairs.
After ten years, we wonder whether the action was worth it – certainly the dealers are still out of pocket, however it might prevent similar future actions by the Government. That in turn could prevent a company from escaping bankruptcy protection which could cause far greater issues for the workers and local economies. As always, the only winners are the lawyers.