Jettisoned Chrysler dealers challenge U.S. in court

Almost 300 of the Chrysler dealers whose franchises were terminated in the 2009 bailout plan to continue their fight in Washington next week, nine years after they sued the U.S. Treasury.

The trial is to begin April 8 in the Court of Federal Claims and is expected to last six to eight weeks. If the dealers succeed, the court could order the Treasury to pay as much as $850 million to terminated dealers. The trial could act as a harbinger for terminated General Motors dealers, who filed a separate but similar lawsuit in 2010.

The court will decide whether the government coerced Chrysler to terminate 789 of its franchises — a quarter of its dealer network — as a condition of the bailout or whether Chrysler made the decision on its own. Dealers are asking the court for the fair value of their stores on the day the franchises were terminated. Damages range from $524,000 to $8.8 million per rooftop among the seven model plaintiffs represented by Bellavia Blatt & Crossett in Mineola, N.Y., said Len Bellavia, founding partner.

The trial will include testimonies from high-profile witnesses, such as Steven Rattner and Ron Bloom, who were senior members of the U.S. Department of the Treasury's auto team; Bob Nardelli, who was CEO of Chrysler; Peter Grady, who was Chrysler's director of dealer operations; current and former dealers; and industry analyst Maryann Keller.

In 2008 and 2009, the financial crisis and ensuing plunge in vehicle sales put the future of Chrysler and GM in jeopardy. The companies were insolvent, and in December 2008, the Bush administration approved a preliminary bailout plan, under which the automakers obtained loans from the Treasury to help them operate as they restructured. The loans required the automakers to submit plans for cost reduction and viability, which became the basis for the Obama administration's shepherding of the companies through bankruptcy proceedings.

The government feared that GM's or Chrysler's downfall "would cause a systemic failure throughout the domestic automotive industry and significantly harm the overall United States economy," according to the government's motion to dismiss the suit, filed in 2011. Through the Treasury and the Presidential Task Force on the Auto Industry, the government — under both presidents — sought to prevent the collapse of the industry at large, the motion said.

Chrysler filed for bankruptcy April 30, 2009, and GM followed June 1 that year. On May 23, Chrysler told the terminated dealers that they must close their doors by June 9.

According to the government, the dealers suffered no greater harm than they would have if the Treasury hadn't served as "the lender of last resort."

The only alternative, the government said in the motion, was immediate liquidation of Chrysler, which could include canceling all franchise agreements. "Plaintiffs cannot plausibly allege that they suffered any harm from the Government's election to provide financing where none other was forthcoming."

The U.S. Justice Department, which is representing the Treasury in the matter, declined Automotive News' request for comment last week. Fiat Chrysler Automobiles also declined to comment.

The plaintiff dealers argue that without pressure from the government, Chrysler wouldn't have terminated the dealerships. Rather, the automaker would have continued to promote Project Genesis, an initiative in which dealerships that did not sell all three of Chrysler's brands at the time — Chrysler, Dodge and Jeep — were encouraged to merge into locations selling all three.

The mergers were voluntary and would reduce Chrysler's dealer network over four to five years without involuntary terminations, according to the plaintiffs' proposed findings of fact and conclusions of law, filed March 26 this year. "The goal was consolidation — not termination," the court document said.

If the government wasn't involved and Chrysler went bankrupt, there would have been an "orderly liquidation," said Bellavia. That means other automakers, or even new entrants, may have bought Chrysler's brands and kept many of the dealerships in business.

"We have to show the court that while it's true the government bailed out Chrysler, it doesn't mean it was the only solution here, and therefore, had our clients not been rejected … they would have still been able to survive by virtue of a sale of the Chrysler assets to another automotive entity," Bellavia said.

Under the Fifth Amendment's Takings Clause, added Bellavia, the government can't take property without fair compensation, which means Chrysler dealers are entitled to the fair value of their dealerships on the day their franchises were terminated.

The dealers didn't have their rooftops taken from them, but the franchises themselves should be considered property, said Marquette Wolf, an attorney at Ted B. Lyon & Associates in Mesquite, Texas, who is representing dealers in the Chrysler and GM cases. The franchise agreement comes with a suite of benefits that boosts the value of a new-vehicle dealership, compared with an independent, he said.

Valuation experts will testify on the value of the dealerships based on their tangible and intangible assets and their cash-flow projections, Bellavia said.

Nearly 300 plaintiff dealers have been waiting for their trial for nearly a decade, but some who were committed to the cause won't be there to witness its resolution. The Painter family has been in the auto retail business since 1945. James Painter, son of one of the founders, began working at the store when he was 14.

In 2009, when Chrysler told then-79-year-old James Painter that he had to close his two Chrysler stores in St. George and Nephi, Utah, "He tried to keep a stiff upper lip, but it tore his heart out," said his son Patrick Painter.

"He and his dad started the business after World War II. That was all he had ever done. They smoked the American Dream."

James Painter died in 2016. His wife, Zoma Painter, who helped run the stores, died in January. "She promised me she would stick around to go to the trial," said Patrick Painter. "I'm absolutely certain it had a devastating effect on my father. Everything he had worked for was taken away by the federal government."

Today, the Painters have a Mitsubishi store and a Chevrolet-Buick store, both in Utah.

Nearly 500 terminated dealers chose not to participate in the lawsuit, Bellavia said. Some are focusing on their other franchises; others were afraid to sue the government. But most were financially devastated and couldn't afford the cost over the last nine years, about $15,000, Bellavia said.

About 120 terminated Chrysler dealers applied for reinstatement; about 50 of those requests were granted. GM reinstated 660 of the more than 1,100 dealer franchises it terminated.

The GM dealers' case has not advanced as quickly as the Chrysler case. No trial date has been scheduled. Like the Chrysler dealers, GM's terminated dealers will fight for just compensation of the dealerships they lost, with the Chrysler case serving as a bellwether, Wolf said.

Still, it's unlikely that the upcoming Chrysler trial will close the case, he said. Parsing through the Takings Clause will be nuanced and difficult, said Wolf.

"These cases have a very long tail still to go, which will involve appeals to the Federal Circuit and probably to the United States Supreme Court because it is just something so different and extraordinary," he said. "It's just unprecedented."

Vince Bond Jr. and Larry P. Vellequette contributed to this report.