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Consumer Law

What Will Takata’s Chapter 11 Bankruptcy Filing Mean for Your Dealership?

By July 5, 2017September 9th, 2021No Comments

Inside of a car with the airbags deployed and a cracked windshieldUnless you are a firm believer in ignoring industry news, you know Takata. Their exploding airbags have been in the news for the last decade (and inside knowledge of the flaw has been known for almost twice that time), and two monumental settlements were made this year: Takata agreed to pay $1 billion in fines and compensation, and four major auto manufacturers put aside a little more than half that for customers who suffered economic losses as a result of the defect.

But on Sunday, June 25, 2017, Takata filed for bankruptcy in both Japan and the U.S. The filing comes after Key Safety Systems offered to buy is factories for $1.6 billion. However, as the company’s liabilities are projected to be between $10 and $50 billion, clearly there isn’t enough money to go around. And that means auto manufacturers – and potentially dealers – will be stuck footing the bill for the cost of repairs.

The New York Times reports that Honda has already warned its shareholders “it would ‘become difficult to recover the majority of claims that the automaker holds against Takata, including the costs of the recalls.” The Wall Street Journal raised concerns about ongoing repairs: investors and auto makers must “ensure Takata’s U.S. units stay in business, at least until the bulk of the business is sold” because “it isn’t clear there is enough capacity in the air-bag industry to make up for the Japanese company’s demise.” In other words, manufacturers must keep working with Takata, because they may have nowhere else to go.

This will invariably affect automotive dealers as well. At the current pace of production, it could take up to a decade before every car with a (potentially) defective airbag is recalled and fixed. That means dealers will be scheduling and offering repairs for years. But it is the independent and used car retailers who may end up costing new car dealerships the most.

The “Used Car Rule,” and the selling of vehicles with defective parts

The Federal Trade Commission’s “Used Car Rule” states the following:

  1. It is a deceptive act or practice for any used vehicle dealer, when that dealer sells or offers for sale a used vehicle in or affecting commerce as commerce is defined in the Federal Trade Commission Act:
    1. To misrepresent the mechanical condition of a used vehicle;
    2. To misrepresent the terms of any warranty offered in connection with the sale of a used vehicle; and
    3. To represent that a used vehicle is sold with a warranty when the vehicle is sold without any warranty.
  2. It is an unfair act or practice for any used vehicle dealer, when that dealer sells or offers for sale a used vehicle in or affecting commerce as commerce is defined in the Federal Trade Commission Act:
    1. To fail to disclose, prior to sale, that a used vehicle is sold without any warranty; and
    2. To fail to make available, prior to sale, the terms of any written warranty offered in connection with the sale of a used vehicle.

You can access the full rule here. On January 27, 2017, the Used Car Rule was amended, as described by the Ohio Automobile Dealers Association, to include:

  • “revisions to the description of an As-Is Sale;
  • the addition of “Non-Dealer” Warranty Boxes;
  • the inclusion of additional major components and potential defects that can occur;
  • the addition of information on how to obtain vehicle history and open safety recall reports; and
  • a disclosure on the English version of the Buyers Guide for Spanish-speaking consumers.”

The rule and its amendments were designed to protect consumers from deceptive practices, which is all well and good. The problem arises, however, when dealerships openly advertise potential problems or recalls with their cars – and then sell them anyway, because it is perfectly legal to do so. Last year’s settlement between the FTC and GM, Jim Koons Management, and Lithia Motors Inc.:

“prohibited from claiming that their used vehicles are safe or have been subject to a rigorous inspection unless they are free of unrepaired safety recalls, or unless the companies clearly disclose the existence of the recalls in close proximity to the inspection claims. The proposed orders also would prohibit the companies from misrepresenting material facts about the safety of used cars they advertise,” per an FTC release.

What the settlement did not do is stop dealerships from selling used cars with open safety recalls. So, if John Doe buys a used Honda at ABC Used Honda Dealership, and discovers the defective airbag has not been fixed, he can bring that car to any Honda dealership for his replacement airbag. This is great for consumers and independent lots, but adds additional strain on automotive dealers who are tasked with replacing defective parts.

How will all of this play out in the end? It is clearly too soon to tell. But if you own a dealership in Ohio, you could be in for a long and costly decade when it comes to repairs.

 

Gene Friedman is a partner at Gertsburg Licata in the transactional practice group.  He may be reached at (216) 573-6000 or at [email protected].

Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.

This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.

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