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GM and Chrysler Dealers' Takings Claims Survive Dismissal

You may remember back on 2008 when George W. Bush released a statement of the Government's intention to assist automakers in the midst of the economic downturn. As a result of the government assistance, two groups of former General Motors Corporation ("GM") and Chrysler LLC ("Chrysler") car dealers, whose franchises were terminated as a result of the bankruptcies, sued the Government alleging regulatory takings.

The Government's Financial Assistance

The franchise dealers have state and federal laws to protect them from terminations that are not available to them in bankruptcy proceedings. In reviewing GM and Chrysler's viability proposals, the Government specifically noted that the dealer terminations were not happening fast enough to maintain viability, and suggested bankruptcy, which the companies accepted.

The Government's assistance to the automakers involved a plan for GM and Chrysler to file for Chapter 11 Bankruptcy, and the old companies sold most of their assets to new companies ("New GM" and "New Chrysler"), with the Government gaining a 60.8% ownership interest in the new companies. The plaintiffs allege that the Government required GM and Chrysler to terminate the dealer franchise agreements as a condition to receiving financial assistance.

Court of Claims

Two sets of franchise dealers brought suit against the United States claiming that the conditioning financial assistance to the automakers, on dealer closures, consisted of a regulatory taking under the Takings Clause of the Fifth Amendment. Both cases were assigned to the same judge, and the Government moved to dismiss for failure to state a claim in both cases. The Court of Claims released two identical orders, denying the Government's motion, and the Government moved for interlocutory appeal.

Takings Analysis

First, the court determined that there existed a compensable property interest. The Government argued that bankruptcy law, enacted long before the franchise agreements, inhered to the dealers' property interests, but the court disagreed. The court noted that was not the government action at issue; instead, the action was the financial assistance deal which conditioned loans on termination of franchise dealers, and as a result the dealers had a compensable property interest.

Next, the court had to determine whether the government's action constituted a taking. The analysis includes looking at whether the financial consequences are "merely collateral or unintended" or "direct and intended", and whether the government's actions were coercive. Because the only factual record before the court were the dealers' allegations in the complaint, the court found it was too premature to make a determination on this issue.

Finally, the court found that the plaintiffs did not allege specific economic loss, but also found that denying the claims at this point was premature. Instead, the court remanded to the Court of Claims, with directions to grant the dealers "leave to amend their complaints."

This case is an interesting one to watch because there is not much case law on regulatory takings, especially where economic loss results from alleged coercion. Considering the economic fallout and unprecedented government assistance resulting from the 2008 downturn, this case may result in some interesting precedents.

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