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Consumer Groups Appeal Chrysler's Lemon Law Reprieve

Chapter 11 bankruptcy leaves car owners out in the cold

June 3, 2009

• GM Offers Money-Back Guarantee • GM's Newest California Showroom: eBay • GM, Chrysler Personal Injury Victims Left Stranded • 'New GM" Exits Bankruptcy • Judge Greenlights GM Bankruptcy Plan • Obama Set to Sign 'Cash for Clunkers' Bill • States Challenge GM Sale • Supreme Court Okays Sale of Chrysler to Fiat • Supreme Court Blocks Chrysler Sale • GM To Scrap Medium-Duty Trucks • Penske Hopes to Drive Saturn Off GM's Lot • New Chrysler Agrees To Honor Old Lemon Law • Consumer Groups Appeal Chrysler's Lemon Law Reprieve • Dumped GM, Chrysler Dealers Not Going Away Quietly • The Hummer Lives to Fight Another Day • GM Files for Bankruptcy; Chrysler Gets Court Approval • Chrysler Sours on Lemon Law Obligations • UAW, GM Agree On New Contract • Consumer Groups Challenge Chrysler Bankruptcy • GM Notifying 1,100 Dealers They're Being Dumped • GM, Chrysler May Close 3,000 Dealers • GM Moves Up Saturn Execution, Plans to Drop 2,600 Dealers • GM Prepares to Scrap Pontiac • U.S. Carmakers Getting More Federal Aid • GM Cuts More Jobs, Eyes China --- • Consumer Complaints about GM • Consumer Complaints about Chrysler

Leading national consumer groups late Tuesday appealed the decision of the federal bankruptcy court overseeing the Chrysler bankruptcy proceeding, asking the court to preserve consumer protection laws and the rights of victims injured by vehicle design flaws and defects to seek compensation from Chrysler.

With the stroke of a pen, the bankruptcy court exempted the new Chrysler/Fiat company that will emerge from bankruptcy proceedings from accountability to consumers who have suffered or will suffer injury or loss caused by defects.

Today’s appeal was filed on behalf of the Center for Auto Safety, Consumer Action, Consumers for Auto Reliability and Safety (CARS), National Association of Consumer Advocates (NACA) and Public Citizen.

"Even in the event of bankruptcy, consumers must be able to hold corporations like Chrysler accountable,” said Adina H. Rosenbaum of Public Citizen, lead counsel for the consumer groups.

Added Clarence Ditlow, director of the Center for Auto Safety, “The bankruptcy court is eliminating key provisions in 25 state lemon laws that consumer groups have worked for 30 years to get on the books. These crucial protections went out the door with the stroke of a pen in the Chrysler bankruptcy order.”

If the bankruptcy court decision for Chrysler is any indication of how General Motors’ bankruptcy will play out, more than a third of all vehicles on the road covered by lemon laws will lose protection, said Ditlow.

If the ruling is allowed to stand, the new Chrysler will not be responsible for any of its vehicles on the road today after it emerges from bankruptcy.

There will be zero liability for the new company for consumers who suffer injury or death due to egregious defects, nor will those with pending claims have any legal recourse against the new company.

Long-lasting consequences

The decision also will have long-lasting consequences for lemon laws throughout the country.

Owners of Chrysler vehicles who seek refunds under state lemon laws will be left with severely limited remedies; the Chrysler/Fiat sales order approved by the judge contains language that would exclude it from certain civil penalties and other liabilities for defective vehicles.

“Consumers must be confident enough in the Chrysler brand to purchase their vehicles if the company expects to survive,” said Rosemary Shahan, president of CARS, a nonprofit consumer group based in Sacramento, Calif. “If Chrysler gets away with this, there is no guarantee that the new Chrysler/Fiat won’t do the same thing to anyone buying their cars in the future.”

Linda Sherry, director of national priorities at Consumer Action, added, “Consumer Action is committed to fighting this lemon of a decision, which could result in real tragedy around the country.”

“Starting off by avoiding accountability is no way to begin rebuilding consumer confidence in the new Chrysler,” said Ira Rheingold, director of NACA.

The groups’ appeal was filed jointly with three individuals who have cases pending against Chrysler for injuries and deaths caused by Chrysler vehicles. The individual objectors are represented by the law firms Lieff Cabraser Heimann & Bernstein in San Francisco, and Stichter, Riedel, Blain & Prosser in Tampa, Fla.

Lemon laws

Lemon laws provide reimbursement or replacement vehicles for owners of defective cars. Every state has a lemon law, although the terms and conditions vary by jurisdiction. In California, the manufacturer must either repurchase the vehicle or provide compensation after four unsuccessful repair attempts — or two, if the defect threatens death or serious injury — or if the car is out of service for 30 days for repair during the warranty period.

Chrysler filed for Chapter 11 bankruptcy on April 30. Lemon law obligations are technically part of the warranty between the purchaser and the seller. When an entity declares bankruptcy, it has the option of either honoring unfinished contracts or rejecting them; its decision usually depends on whether it considers the contract favorable or unfavorable. Since existing warranties are technically unfinished contracts, a bankrupt organization can choose to reject these warranties.

It isn't just that Chrysler is refusing to honor its lemon law obligations prospectively; many consumers have received checks from the automaker only to have them bounce. Some of these checks are for as much as $40,000, in cases where Chrysler agreed to repurchase consumers' defective vehicles. Atlanta attorney Alex Simanovsky told the Los Angeles Times that the bankruptcy court is not likely to unfreeze the checks, meaning that consumers are essentially out of luck.

Chrysler certainly isn't planning to do anything to help customers get rid of the $40,000 worth of junk sitting in their driveways. Chrysler spokesman Mike Palese bluntly said that he "can't say that we have any plans to present it at this time."

Chrysler suggests that affected consumers file a proof of claim with the Bankruptcy Court, which would bring them into the fold of Chrysler's unsecured creditors. However, such creditors are typically at the bottom of the totem pole during a bankruptcy filing, and only receive whatever is left over after secured and preferential creditors take their share.

Bankruptcy often wreaks unexpected havoc on consumers. Fortunoff, once a dominant retailer, filed for Chapter 11 bankruptcy in February and subsequently stopped honoring existing gift cards. Infuriated consumers were left holding worthless $500 pieces of plastic, and gift-givers were refused a refund.

The problem could repeat itself as other car companies collapse. It is looking increasingly likely that General Motors will declare bankruptcy as well; the largest U.S. automaker will probably make that announcement within a week. Whether they will honor lemon law claims remains to be seen. One thing is certain: troubled American automakers need all the goodwill they can get, and refusing to reimburse consumers for faulty cars isn't going to get them very far.

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