Antitrust Law Daily Wrap Up, RICO—N.D. Cal.: RICO and unfair competition claims fail over alleged forced sale of GM dealerships, (Jul 25, 2013)

By Tobias J. Gillett, J.D., LL.M.

Former car dealerships failed to assert RICO and California Unfair Competition Law (UCL) claims against General Motors, Ally Financial Inc., a California GM franchise holder, and several individual defendants over alleged coercion the defendants applied to the dealerships’ owners to get them to sell their dealerships to franchise holder or to go out of business, the federal district court in San Francisco has ruled (Groth-Hill Land Company, LLC v. General Motors LLC, July 23, 2013, Henderson, T.).

Crown Brothers Chevrolet was a San Francisco Bay-area General Motors automobile dealership. According to the complaint, in 2008, Ally, Crown’s floorplan lender (the lender that provides the dealer’s inventory financing), began “pressur[ing]” Crown’s owner, Pat Costello, to make payments on Crown’s debt to Ally. In September 2008, GM employee Randy Parker called Costello to ask how he was planning to address the dealership’s financial problems. Parker agreed with Costello that he should sell Crown’s Cadillac dealership, but informed him that Inder Dosanjh, operator of California Automotive Retailing Group, Inc. (CARG), was the only buyer GM would approve.

However, following the sale Ally claimed it violated Crown’s financing agreement and demanded payment of $1.75 million it claimed Costello received from the sale, even though the sale only raised $300,000. Crown was forced to sell its Chevrolet franchise to Dosanjh, as Parker again claimed he would be the only buyer GM would approve.

Groth Brothers Chevrolet (GBC) was another San Francisco Bay-area General Motors automobile dealership. According to the complaint, in 2007, Groth-Hill Land Company, LLC purchased land for a new GBC location, and Ally and GM agreed to provide financial assistance. Instead, GM and Ally did not provide that assistance, and Ally began pressuring GBC until GBC breached its financing agreement. Ally then coerced GBC’s owners into personal guarantees of its debt, and they forced to sell the property for half the price they paid for it, to pay their debt to Ally and preserve GBC’s financing. GBC alleged that Dosanjh was “involved in orchestrating these financial pressures” on GBC, in collaboration with Ally’s Director of Sales, Kevin Wrate.

In April 2010, Ally filed suit, seeking to seize GBC’s inventory, but the court found GBC was not in default. GM and Dosanjh allegedly made several more attempts to pressure GBC’s owners to give up control, before Ally terminated GBC financing. GBC filed for bankruptcy, and the bankruptcy court eventually granted the trustee’s motion for sale of GBC’s assets to a company controlled by Dosanjh, including all legal claims. GBC alleged that this purchase was made just “to buy out the dealership’s legal claims,” and that the company sold the assets, apart from the legal claims, one month later for a quarter of the price paid.

On February 25, 2013, GBC’s owners filed their first amended complaint against Ally, General Motors LLC, CARG, Wrate, Dosanjh, and GM employees Parker and James Gentry, and Crown later joined. The plaintiffs alleged a conspiracy among Ally, GM, and CARG defendants to coerce the dealerships to sell to Dosanjh, in return for which Dosanjh would make illegal kickbacks to GM managers. They asserted claims for violation of the RICO Act and the UCL, among other claims. The defendants filed a motion to dismiss.

GM bankruptcy. The court initially determined that GM’s 2009 bankruptcy did not shield Parker and Gentry, because the bankruptcy sale order, and the purpose behind it, did not purport “to shield individuals from individual judgments stemming from their tortious activity.”

RICO statute of limitations. However, the court determined that the RICO Act’s four-year statute of limitations barred Crown’s claims. The court explained that “[t]he Ninth Circuit follows the ‘injury discovery’ rule for determining when a RICO cause of action accrues,” under which “the limitations period begins to run when a plaintiff knows or should know of the injury which is the basis for the action,” rather than when the plaintiff “discover[s] all of the elements of her RICO cause of action.”

Here, Crown’s alleged RICO injury was the sale of its dealerships at a loss in September and October of 2008. Therefore, the cause of action accrued on or before October 2008.

The court rejected Crown’s claim that the statute of limitations should be tolled based on the defendants’ fraudulent concealment of the cause of action. The court observed that “[p]laintiffs seeking tolling based on fraudulent concealment must plead with particularity the facts giving rise to the fraudulent concealment claim.” Here, Crown failed to allege any affirmative conduct by the defendants that had misled Crown about its potential cause of action between 2008 and 2012. A mere failure to admit to the alleged conspiracy following the sales of the dealerships was “plainly insufficient to support tolling based on fraudulent concealment.” The court therefore dismissed Crown’s RICO claims without prejudice.

UCL claim. The court observed that Crown had brought its UCL claims under the UCL’s unlawful prong, which “borrows violations of other laws and treats them as unlawful practices that the UCL makes independently actionable." Since Crown’s other claims were barred by the statute of limitations, its UCL claim was therefore also barred.

RICO standing. The court also dismissed the RICO claims of GBC’s owners, but for lack of standing and with prejudice. The court explained that “[a] plaintiff lacks standing to bring an action under RICO if its injury is derivative of the injury to another entity, such as a corporation.”

GBC’s owners contended that an exception to this rule applied that would permit their claims—“that a shareholder may establish an individual injury sufficient to confer standing by showing either an injury distinct from that to other shareholders or a special duty between the defendants and the plaintiff.” The owners argued that Ally’s conduct in directly inducing them to provide personal guarantees for GBC’s debts caused “direct and individual, rather than derivative,” injury.

However, “case law holding that a guarantor of a corporate debt lacks standing to sue the corporation’s creditor when the guarantor is forced to pay” foreclosed the owners’ argument, according to the court. “Whether Plaintiffs liquidated the security (the property) and paid the money to Ally because GBC defaulted or because they chose to do so voluntarily as a business decision, they paid the money in satisfaction of GBC’s debt obligation,” the court found. Therefore, the court dismissed the owners’ RICO claims with prejudice, finding amendment would be futile.

The court also rejected their claims for injunctive relief under the UCL, finding that “injunctive relief has no application to wrongs which have been completed, absent a showing that past violations will probably recur.”

The case is No. C13-1362 TEH.

Attorneys: Jonathan A. Michaels (Michaels Law Group, APLC) for Groth-Hill Land Company, LLC. Gregory Richard Oxford (Isaacs Clouse Crose & Oxford LLP) for General Motors, LLC. Duane M. Geck (Severson & Werson, APC) for Ally Financial Inc. David C. Lee (Fitzgerald Abbott & Beardsley LLP) for Inderjit Dosanjh.

Companies: Groth-Hill Land Company, LLC; General Motors LLC; Ally Financial Inc.; Crown Brothers Chevrolet; California Automotive Retailing Group, Inc.

Cases: RICO StateUnfairTradePractices CaliforniaNews