In February 2011, a group of approximately 148 former owners of Chrysler dealerships filed suit in the United States Court of Federal Claims alleging that the government violated their Fifth Amendment rights by effectuating an uncompensated taking of their property by requiring Chrysler to terminate their franchise agreements as a condition of obtaining financial assistance under the Troubled Asset Relief Program (“TARP”). The dealers’ property rights allegedly taken by the government were franchise contracts, ongoing automobile businesses, and automobile dealership rights under various state laws.
The Takings Clause of the Fifth Amendment guarantees just compensation whenever private property is “taken” for public use. The underlying issue in the lawsuit is whether or not the government effectuated a regulatory taking of the plaintiffs’ property by coercing Chrysler to terminate the plaintiffs’ franchise agreements as a condition to receiving financial assistance under TARP.
Chrysler filed bankruptcy during the recession and credit crisis of 2008-2009. Chrysler was experiencing significant liquidity issues as loans to automobile dealers and consumers had come to an abrupt halt and sales plummeted. In late 2008, executives of General Motors and Chrysler appeared before Congress to ask for emergency financial assistance in the form of loans and lines of credit. Shortly thereafter, the Department of Treasury created the Automotive Industry Financing Program through which the Department of Treasury made loans and other investments in the automakers using government funds. The Automotive Industry Financing Program was created as part of TARP. Chrysler was required to submit a viability plan as one of the conditions to receiving financial assistance. The government rejected Chrysler’s initial viability plan and members of the executive branch in charge of the financial assistance program suggested that Chrysler should significantly reduce the number of dealers within its franchise network. The government also advised Chrysler that it might accomplish the terminations expeditiously by opting to reject the franchise agreements as part of Chrysler’s bankruptcy proceedings. Ultimately, Chrysler terminated approximately 25% of its dealerships (789 of its 3,200 dealerships) through applicable law under the Bankruptcy Code.
The government filed a motion to dismiss the plaintiffs’ complaint asserting that Chrysler was entitled to reject the dealers’ franchise agreements under the Bankruptcy Code, and, therefore, no taking could have occurred. The government further asserted that the bankruptcy court’s ruling was binding on the Court of Federal Claims. Plaintiffs asserted that the government used TARP assistance to force its vision for the Chrysler restructuring prior to and outside of Chrysler’s bankruptcy proceedings, and that the bankruptcy proceedings were separate and apart from the issues asserted against the government in their complaint.
On December 27, 2012, Judge Robert H. Hodges, Jr., denied the government’s motion to dismiss. The government appealed the decision in the U.S. Court of Appeals for the Federal Circuit. On April 7, 2014, the U.S. Court of Appeals for the Federal Circuit agreed with Judge Hodges’ ruling and declined to dismiss the plaintiffs’ complaint. On September 15, 2014, an amended complaint was filed in the United States Court of Federal Claims adding an additional twenty plaintiffs, raising the number of plaintiffs to 168.
McDonald Hopkins will continue to monitor this case of first impression and will update you as the case progresses in the Court of Federal Claims.