A Potentially Momentous Taking Case Waiting in the Wings

Remember the automobile industry bankruptcies? We do. We always thought that the bankruptcy court ruling that permitted GM to default on its bonds, while giving a sweetheart deal to the UAW was an outrage. True, our thinking was colored by the fact that Uncle Sam stole GM bonds out of our retirement fund and for all practical purposes gave GM’s assets to the UAW.  But we also thought, and still do, that it was a taking of the bondholders’ property for a public use, to wit, the rescue and preservation of the American automobile industry, notably GM and Chrysler. But there was a fly in the ointment. The claim of a taking had been raised in the bankruptcy proceedings, with the bankruptcy court rejecting it. So was that the end of the story? As it turned out, maybe not.

Enter the U.S. Court of Federal Claims with its decision in Colonial Chevrolet Co. v. United States, 2012 WL 668593 (Fed.Cl.). This was a case in which a group of former car dealers sued the feds on a taking theory, arguing that when the federal government required Chrysler and GM to terminate their dealerships as a condition of receiving financial assistance under the Troubled Asset Relief Program (TARP), that was a taking of the dealers’ property in the form of franchise contracts, ongoing automobile businesses, and automobile dealer rights under state law. Oh, pish, tosh, responded the feds. Didn’t we hear those taking claims in bankruptcy court and didn’t that court reject them, thus giving rise to defense of res judicata? As it turned out, the answer is “no.”

Bankruptcy courts regularly consider [and reject] takings claims, but a close reading of their opinions makes clear that when they make such rulings, they are explicit that they do so only for the purpose of resolving bankruptcy issues, and their decisions are not binding outside the bankruptcy context. In other words, the Court of Federal Claims lacks jurisdiction to review the correctness of a bankruptcy court’s ruling, but it may properly consider takings claims against Uncle Sam, that had not been passed on as part of the bankruptcy issues — the Court of Federal Claims is the only one that has jurisdiction to consider on the merits monetary claims against Uncle Sam on a taking theory. and bankruptcy courts lack jurisdiction to pass on Fifth Amendment taking claims that are not “internal to bankruptcy proceedings.” Here, “[t]he [bankruptcy] judges’ rulings in the Chrysler and GM bankruptcies were incidental to or unrelated to the taking alleged in this court.”

“Bankruptcy court rulings  should not be used by defendant to prevent plaintiffs from  pursuing their takings claims in this court. Defendants’ alleged involvement in and control of the companies’ bankruptcy proceedings may or may not be important in or even relevant in this case. Regardless, the Government cannot use rulings issued in bankruptcy proceedings to control prospective legal and factual findings in the Court of Federal Claims in a separate proceeding involving different causes of action.”

Which brought the court to the meat of the doctrinal aspects of this controversy: though the dealers “present unusual allegations that . . . create the prima facie feel of a takings case warranting just compensation[, w]e are not aware of a takings theory that resembles the legal and factual theories offered so far . . .” What now?

For once, we were pleased to see the court invoke the three-factor test of the Penn Central case so as to provide the plaintiff-dealers with an opportunity to make their case, even though the court was not aware of “a takings theory that resembles the legal and factual theories offered so far . . .” But not to worry. In Penn Central the Supreme Court “anticipated that unique cases would arise; it wrote, ‘[o]rdinarily the Court must engage in ‘essentially ad hoc, factual inquiries.'” Bottom line: if ad hocery is sauce for the government goose, it should also be sauce for the owner-gander. Sounds right to us.

In other words, if each case is to be decided on the basis of “factual inquiries” that have to be pursued to arrive at a conclusion whether a taking did occur, an inquiry on the merits must be pursued to enable the court to decide whether considerations of fairness and justice require that the loss created in pursuit of a proper public purpose be equitably distributed on the society that benefits from it.

“Plaintiffs may discover evidence pretrial that helps to develop a previously unknown taking theory of the type the Supreme Court urged us to consider ‘ad hoc’ and apply ‘the particular circumstances [of that] case.”

Follow up. A recent Forbes article notes that, though its current financial condition is sound, General Motors continues to lose market share and another bankruptcy may be in the offing. Our thanks to Todd Zywicki of the Volokh Conspiracy for bringing this bit of news to our attention.

GM’s market share is 18%, down from the once mighty 48.3% in the bygone 1960s. And as for Uncle Sam’s shares in GM, it faces at the moment an unrealized loss of 39%. Also, GM is increasingly relying on “sub-prime” loans to buyers of its products, and these are people — as we learned from the housing bubble — who are least likely to weather any future economic storms. Obviously, don’t expect any dismal news from GM before the election, but after that, who knows?

See Todd Zywicki’s post of August 16, 2012, on the Volokh Conspiracy blog (volokh.com), entitled GM Headed for Bankruptcy Again?  It contains links to the Forbes article.

Second Follow up. Check out detroitnews.com of August  15, 2012, which reports Uncle Sam’s loss on GM stock so far as $25 billion. Uncle holds 500 million shares of GM stock, and to break even, it would have to sell that stock for $$53 each. But the price of a share of GM stock, as of early this week, was a mere $20.47.

Your tax money at work.