The Franchise Memorandum

In Ridge Chrysler Jeep, LLC v. DaimlerChrysler Financial Services Americas LLC, 2008 WL 441758 (7th Cir. Feb. 20, 2008), the United States Court of Appeals for the Seventh Circuit affirmed a district court’s dismissal of two car dealerships’ lawsuit based on the dealerships’ deceit. The lawsuit had been based on the manufacturer’s exercise of its right to require dealerships to pay up front for inventory. After Chrysler exercised its right to the up-front payment, two dealerships responded with a lawsuit under the Automobile Dealers’ Day in Court Act, accusing Chrysler of effectively ending the franchises without adequate cause.

The magistrate judge found that the CEO and principal owner of the two dealerships lied about efforts to obtain loans from sources other than Chrysler and failed to produce computer data. Further, the plaintiffs’ complaint asserted allegations of racial discrimination by Chrysler as allegedly evidenced by notes from Chrysler, but the plaintiffs were unable to produce any such notes during discovery. In addition, the CEO and principal owner of the two dealerships used the time when Chrysler was an involuntary creditor to pay himself $1 million of a loan to the dealerships that was supposed to be subordinated to Chrysler’s position. Based on the dealerships’ misconduct, the district court dismissed the action. The dealerships appealed, arguing that there is a strong presumption against dismissal as a sanction and that only “clear and convincing evidence” can support outright dismissal.

The Seventh Circuit held that the dealerships’ appellate arguments were uniformly unconvincing. The court of appeals noted that neither a statute nor the Constitution requires an elevated burden for dismissal as a sanction, when the burden in the underlying suit is the preponderance of the evidence. Regardless, the court found that the district court’s findings were sufficient under any standard. The lower court demonstrated that the CEO and principal owner of the two dealerships lied to the court, and the lawsuit entailed an abuse of the federal court’s process and the plaintiffs behaved like a “pack of weasels.”