May 27, 2009
Chrysler's bankruptcy is causing consumers even more problems than they could have foreseen. Owners of defective Chrysler vehicles are now finding themselves unable to collect reimbursement under California's lemon laws, essentially leaving them without a remedy for a useless car.
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 is curious, however, that Chrysler would choose to ignore its obligations to consumers, given the long-term ramifications for the company. Chapter 11 bankruptcy allows a company to reorganize — as opposed to Chapter 7, which is used for organizations that want to liquidate — so the company isn't going anywhere, at least in the short term. It's hard to see how consumers will have any faith in the already-endangered automaker in the future.
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 told the Times 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.
Chrysler's hopes for recovery hinge on its recently-announced merger with Fiat, a leading Italian automaker. Consumers aren't the only ones hurt by the bankruptcy filing; 3,300 dealerships selling Chrysler, Jeep, and Dodge automobiles are also on the short end of the stick.
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.
