Here's the latest from the Federal Circuit, a decision involving regulatory takings, the big auto bailout, and the nature of property rights. A&D Auto Sales, Inc. v. United States, Nos. 13-5019, 13-1520 (Apr. 7, 2014)
In the TARP and the related bankruptcy cases, the federal government bailed out the two big American auto manufacturers, General Motors and Chrysler. Part of the $55 billion assistance deal required GM and Chrysler to terminate the franchises of many dealerships. Not surprisingly, those dealerships didn't care for the idea that their businesses were not "too big to fail," and objected in the Court of Federal Claims to the idea that they should be sacrificed to the greater good with a takings claim against the federal government.
Although the automakers were already reducing their dealer ranks over time and GM’s initial viability plan had included additional dealer terminations, the government determined that the current and proposed pace of terminations was too slow, and that the companies’ large dealer networks were an obstacle to viability. The government advised the companies they should expand their terminations and that they might accomplish the terminations expeditiously by opting to reject the franchise agreements in bankruptcy proceedings.....The companies eventually adopted the government’s suggestions for a bankruptcy filing, reduction of their dealer networks, and other changes.
Slip op. at 8-9. The dealers claimed their franchises were property, and that by "coercing" the auto companies to get rid of them, the federal government effected a taking without compensation. The government sought 12(b)(6) dismissal for failure to state a claim, and the CFC denied it, concluding that the complaints made out prima facie takings claims, and that "[p]laintiffs should have the opportunity to develop [their] case[s]." Id. at 11. Not convinced they needed to try the case, the government sought - and the CFC allowed - an interlocutory appeal to the Federal Circuit.
In affirming the CFC's refusal to dismiss, the Federal Circuit (Judges Newman, Taranto, with Judge Dyk authoring the panel opinion) concluded "[t]he facts of this case are unique and raise issues that have not been decided before, and the record at this stage consists of little more than the plaintiffs’ allegations," but that the case should go forward. While the Supreme Court has generally applied the categorical Lucas test for a regulatory taking to real property, and other circuits so limit the doctrine, the Federal Circuit has applied the test to personal property, and there's no reason that it categorically cannot apply to intangible property like the contract rights at issue here. Slip op. at 15.
There is no dispute that the plaintiffs’ franchise agreements are property for purposes of the Takings Clause. In general, “[v]alid contracts are proper-ty, whether the obligor be a private individual, a municipality, a state, or the United States.” Lynch v. United States, 292 U.S. 571, 579 (1934); see also U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 19 n.16 (1977) (“Contract rights are a form of property and as such may be taken for a public purpose provided that just compensation is paid.”). Franchise agreements are no exception to this general rule.The government argued, however, that all franchise agreements are always subject to being wiped out in bankruptcy. Sort of like a public trust or "background principle" thing - the franchise owners never owned the ability of a bankruptcy court to wipe them out:
The government argues that this principle of bankruptcy law “inhere[d]” in the franchise agreements, and that termination of the agreements therefore did not concern a compensable property interest of the plaintiffs.
Slip op. at 16. The court concluded that this may be true where the regulation predates the owner's acquisition of the property [barista's note: an unfortunate conclusion, but it's not critical here], but that the plaintiffs are not claiming the bankruptcy is what took their property. Rather, the franchisees claim "that the government action was requiring dealer terminations as a condition of financial assistance to the automakers." Slip op. at 17. And that action post-dated their acquisition of their franchises. In other words, it is not part-and-parcel of owning a franchise that the government might come along and decide to order your franchisor to get rid of you in bankruptcy. Thus, held the court, "[t]he plaintiffs’ franchise agreements are valid and compensable property interests." Id. at 17.
The panel then turned to the question of "whether the government is liable for a taking where it offers financing to a third party as a way of inducing or requiring action that affects or eliminates the property rights of the plaintiff." Id. at 17-18. The court held it may, and that "there is no per se rule either precluding or imposing liability when the government instigates action by a third party." True, as the Supreme Court and Federal Circuit have noted recently, there no rule against takings liability when the government causes your land to be flooded, for example. If the impact is "unintended and collateral," the government may be off the hook. But when "direct and intended," and a third party is acting as the govenrnment's agent as the plaintiffs allege here, there may be trouble.
The court concluded that the complaints did not allege a direct linkage between the terminations and the government's demand, or that "the government either by statute, regulation, or direct order required the terminations." Slip op. at 20. Thus, the court concluded that the plaintiffs on remand should be allowed a chance to amend their complaints.
The circumstances relevant to the issue of coercion include but are not limited to whether the government insisted on the terminations, whether the terminations would have occurred in any event absent government action, whether the government financing was essential to the companies, whether the government had any role in creating the economic circumstances alleged to give rise to coercion, and whether the government targeted the dealers for termination. Under these circumstances, we think it is premature at this stage in the case to address the issue of coercion and whether, if coercion existed, takings liability follows. In this context coercion is a necessary—but not sufficient—feature to establish takings liability.
Slip op. at 22. The court also rejected the government's argument that the bankruptcy proceedings collaterally estopped amendment of the complaint (it didn't, since the issues were not the same), and that this was not "proprietary" government action (where the government is acting like a private party), but was the government acting in its governmental capacity.
The court concluded by allowing the plaintiffs to amend their complaints to show the "but-for decline in value" allegedly caused by the government action, slip op. at 26, and the direct investment backed expectations they had which they claim were disrupted. Slip op. at 29. In other words, the Penn Central factors.
A&D Auto Sales, Inc. v. United States, Nos. 13-5019, 13-1520 (Fed. Cir. Apr. 7, 2014)
