Kia suit claims Calif. dealership was improperly sold

When Rally Auto Group sought to sell the assets of its Palmdale, Calif., Kia dealership last fall, Kia America said no — twice citing the omission from the prospective buyer's application of his "previous unsatisfactory ownership" of another Kia store.

Nonetheless, Rally and the would-be purchasers, Alam Khan and his Dalia Auto Group, closed on the deal in December, according to Kia. Dalia also owns Diamond Chevrolet-Buick-GMC in Banning, Calif.

Then last month, Rally Kia's co-owner and sole director, William Penn, signed a consulting agreement with Khan "to support Rally's operation and management" of the store while Khan submits more material to Kia America.

Now, in a lawsuit filed Jan. 24 in federal court in California against Rally Auto Group, Khan and two of his companies, Kia alleges there was an improper "transfer and/or sale of an interest in, and management control" of the dealership. Kia wants an injunction and damages for breach of contract, unfair competition, trademark infringement and related claims.

Phone calls from Automotive News to the number on the Rally Kia website were answered "Diamond Auto." The receptionist said the dealership had been "bought by another company in December."

Khan and Rally Auto Group have not yet answered Kia's complaint in court, and they didn't return voicemails and emails seeking comment by press time. Their lawyers were not listed in the court file as of press time. The lawyer who handled the August 2021 registration of one of Khan's companies with the California Secretary of State declined to comment on the case.

It's highly unusual for an automaker to initiate a franchise-related suit against its dealers, said Irvine, Calif., franchise lawyer James Mulcahy, who has represented automakers and isn't involved in the Kia case.

"Rarely is the manufacturer suing the dealer," Mulcahy said. "It is most often, if not almost every time, that the dealer is seeking to sue the manufacturer for refusing to consent" to a change in ownership or management.

As an example in one such case, a federal judge ruled Jan. 26 that ex-shareholders in a Hollister, Calif., Ford store have a right to a trial on their claim that Ford Motor Co. wrongfully withheld consent to the sale of their interests in the dealership, then named Tiffany Ford.

In the suit, Kia America said Rally Auto violated a provision in its dealer agreement that prohibited any "direct or indirect change in the identity of any owner" for 5 percent or more of the dealership without the automaker's prior written consent.

"Although the consulting agreement provides that Penn is to remain dealer-operator, the reality is that the Dahlia defendants are responsible for providing all capital, paying all expenses, making personnel and business operations decisions and bearing all financial risk, and entitled to all financial benefit, from Rally Kia's operation," the suit alleges.

"As such, the responsibility of the dealer-operator have effectively been delegated to Dalia Auto and Khan" in what Kia labeled a "de facto transfer of ownership," it said.

Mulcahy, the franchise law expert, said, "Under no circumstances can you operate without approval of the manufacturer just because you think the refusal was unreasonable. Whether or not it's a de facto sale, [the consulting agreement] calls into question whether Kia's contractual right to approve the general manager was violated."

"Kia will be in the catbird seat," Mulcahy said, citing federal and state court cases in which his then-client, American Isuzu Motors, won damages from a franchisee who sold a dealership to an affiliated company despite the automaker's denial of consent. That buyer continued selling and servicing vehicles until Isuzu discovered the deception.

As for infringement, the suit contends that Kia didn't authorize Rally to sublicense its trademarks and didn't authorize the Dalia defendants "to hold themselves out as authorized Kia dealers."

Kia America spokesman James Bell said the company doesn't comment on litigation and referred a reporter to the complaint filed in court.