On-the-Point

Blurred Reality

The ongoing recall saga has left dealers in a world of confusion, and new threats related to unrepaired units may be larger than they appear.

August 28, 2014

CEO Mary Barra addressed GM’s annual stockholders meeting in June. The OEM’s 2014 tally of recalled vehicles would reach 28.9 million by July 1. 
CEO Mary Barra addressed GM’s annual stockholders meeting in June. The OEM’s 2014 tally of recalled vehicles would reach 28.9 million by July 1. 
The 1990 Arnold Schwarzenegger blockbuster “Total Recall” (and its underwhelming 2012 remake) is a futuristic fantasy trip centered around Rekall, a company that sells dreams so real they become actual memories. In the original, after a virtual trip to Mars goes awry, Arnold finds himself in a world of blurred reality as a fugitive, outlaw and revolutionary fighting to overthrow the dictator of a police state. … Or is he?

Certainties have been no easier to come by in the wake of the massive recalls that continue to drag General Motors, its dealers and its beleaguered CEO, Mary Barra, down on many levels and in many dimensions. To whom does the moral stigma belong? Who knew what, and when? Who covered it up, and why? Did someone calculate liability losses and legal consequences verses estimated costs of repairs? The government, consumers, dealers and yours truly would like to know.

Meanwhile, the numbers continue to grow. As of July 1, GM had issued 54 recalls involving 28.9 million vehicles around the world. As I recently pointed out, that figure is inching ever closer to the total number of units they sold during the period of time the recalls cover. It also beats Ford’s single-OEM record of 23.3 million recall units in 2001, most of which can be attributed to the Firestone tire debacle.

Speaking of GM’s competitors, they have collectively added at least another 10 million units to this year’s total, leaving 2004’s once record 30 million-unit total in the dust.

In the early stages, I warned that massive recalls were a harbinger of doom for our industry. I was dismissed in some circles as an alarmist, and strong sales and increased service traffic appeared to prove me wrong.

“Come on, Butt-head,” my critics seemed to say. “Remember the Toyota recalls? The public forgets! We’ll get through this!”

Well, Beavis, it may be time to put another notch in my “I Told You So” belt. I started writing these columns 25 years ago, and my predictions have always gone against the grain of what every other forecaster in the industry was predicting. But I sure have been right a lot of the time. Am I that smart or are they that stupid?

Let’s save that question for another time. The other shoe just dropped and dealers are moving into a world of pain. I will explain, but please don’t blame the messenger. Predictions aside, these developments were always beyond our control. Nothing could have been done for us to avoid the consequences of our manufacturers’ missteps.

In July, 11 consumer groups submitted a false advertising complaint against CarMax with the FTC. The groups say the retailer’s 125-point quality inspection fails to identify units with open recall issues. 
In July, 11 consumer groups submitted a false advertising complaint against CarMax with the FTC. The groups say the retailer’s 125-point quality inspection fails to identify units with open recall issues. 
The People vs. CarMax
The first tremor came in July, when 11 consumer groups filed a petition with the Federal Trade Commission (FTC) alleging that CarMax’s oft-advertised 125-point safety inspection fails to determine whether there are active recalls on the cars they sell. It was big story, but it barely registered on the Richter scale. The big earthquake is going to knock all of us out of our chairs.

GM has been hit with class-action lawsuits from car buyers in Texas and, as of June, California, with both groups of plaintiffs claiming their vehicles have lost an average of $2,600 in resale value. The California case claims total damages in excess of $10 billion. Shortly after the Texas suit was filed, our friends at Carfax piled on. The vehicle history provider issued a report that stated, in part, that Texas is the No. 1 state selling cars with open, unrepaired recalls.

(Carfax could have saved you! the report seems to imply. From whom? I wonder. The evil dealers?)

Here’s where it gets tricky. For the time being, these lawsuits are targeting the OEM. The real danger is when the consumer attack attorneys turn to the dealers. You are going to get hit, no doubt. The only question is when. In most states, there are specific laws against selling a new vehicle with an open recall. Now, following the CarMax example, consumer groups are backing up and taking on the sellers of used vehicles as well.

Many dealers operating in New York State already have procedures in place for identifying used units with open recalls. The author notes that the constant stream of recalls in 2014 would test any dealer’s system. 
Many dealers operating in New York State already have procedures in place for identifying used units with open recalls. The author notes that the constant stream of recalls in 2014 would test any dealer’s system. 
Brace yourself. The winds of litigation will blow through your town next. There will be signs. First, look for hastily enacted new laws covering loopholes identified by the consumer groups. I predict that, in almost every state, it will soon be illegal to sell a pre-owned vehicle with an open recall.

Bear in mind that, for most GM dealers, a significant number of their new units are grounded due to pending recalls. Soon they will have to monitor all their pre-owned units — on- and off-brand — before they can move them. What if another manufacturer recalls a unit you have in stock? You have to freeze that unit until the guilty OEM comes up with a fix. If you’re like most dealers, hanging on to a used car that depreciates weekly on your floorplan will kill you.

Worse yet, should such a unit find its way off your lot, you could face the wrath of the consumer groups and (gasp) bureaucrats shouting dictums from their offices in Washington. Is this situation political? Have government agencies shown a tendency to punish opposition to unwelcome political agendas?

Bear in mind that in April of this year, the Obama Administration proposed legislation banning the sale of pre-owned vehicles nationwide with unrepaired open recalls. I first got wind of it in a Detroit News article, then The New York Times and the national publications picked it off the newswires. On July 30, New York’s Department of Consumer Affairs commissioner, Julie Menin, issued 200 subpoenas to New York City-area dealers to provide records and documents on the sale of pre-owned vehicles and what measures were taken to ensure the customers were notified about any open recalls.

Leonard Bellavia is a New York-based attorney who has argued on behalf of dealers in several high-profile cases. 
Leonard Bellavia is a New York-based attorney who has argued on behalf of dealers in several high-profile cases. 
This is going to be huge. Of course, I see it as another government agency grandstanding and politicizing a situation to make headlines and make a grab at some undeserved revenue. They’ve got 800 dealers under the microscope and they’re making them jump through the hoops like circus animals. 

No dealer I know would deliberately sell an open-recall vehicle without full disclosure. Most would accommodate the replacement of an offending part in advance of sale. The New York dealers I know have strict written policies requiring their employees to be sure all open recalls are repaired and cars are in safe, saleable condition. The problem is that these recalls are coming at us so frequently and so fast, it is not inconceivable that a unit we had cleared a week ago might be on a recall notice this week. In the case of some of these GM vehicles and probably others, the repair and the parts are not even available yet. That’s why so many GM cars are grounded at the dealerships. Of course, the consumer lawsuits against the dealers cannot be far behind.

Who Ya Gonna Call?
This issue brings to mind the legal struggles faced by dealers and groups of dealers in the past. You may be surprised to learn one man has been at the center of many of them. Leonard Bellavia is a New York attorney and a dealer advocate. When GM and Chrysler filed for bankruptcy protection in 2009, one of their first priorities was to aggressively reduce the number of franchised dealerships. With little warning, it was open season on anybody on their short list.

As both corporations began rabidly disenfranchising and eliminating dealerships, it seemed as though the targeted dealers had very little recourse. To many it seemed the selection criteria were malicious, unevenly biased and more about payback than business or logic. In some markets, dealer was pitted against dealer. The NADA was caught in the middle. The state associations were powerless.

Len Bellavia stepped up in defense of many of the 789 disenfranchised Chrysler dealers. With the help of dealers such as Tammy Darvish and Jack Fitzgerald, he filed suit against the U.S. Treasury. The suit is ongoing, but Bellavia scored a victory when the Court of Appeals struck down the government’s attempt to dismiss the suit. He has been adding to his group of litigants ever since.

You also may remember Bellavia as the lead counsel for 162 Saab dealers when that OEM went down. Or maybe you recognize his name from the ongoing $50 million mass-action lawsuit against Carfax, which he filed on behalf of 530 dealers. He has already won major concessions on several points in the courts and, like the Chrysler suit, new dealers continue to sign on.

It’s nice to have a pit bull on your side, and Bellavia is no pup. In fact, as I learned in our last conversation, he is a dealer’s son who grew up in and around the business. He chose to focus his legal career on automotive franchise laws and has represented dealers’ interests in hundreds of cases involving settlements with the manufacturers, buy-sell, and warranty and parts reimbursement payments. He’s one of us.

Most states require dealers to check new vehicles for open recalls. The recent complaint against CarMax could lead them to institute a similar requirement for used vehicles, including your off-brand units. 
Most states require dealers to check new vehicles for open recalls. The recent complaint against CarMax could lead them to institute a similar requirement for used vehicles, including your off-brand units. 
I mention Bellavia to remind you, dear readers, that as the retail automobile business moves deeper into the new millennium, dealers are facing new and greater dangers, threats and pitfalls. In recent years, those threats have been overwhelming. But that is no reason to give up hope.

Staying out of the way of the regulators, attorneys general, the FTC and your state’s Department of Motor Vehicles is like maneuvering through a minefield. There are many franchise issues, truth-in-lending issues, truth-in-advertising crackdowns and other potential crises looming on the horizon. Dealers are going to be facing some severe tests in coming months and it is no time to back down. Many are anticipating a showdown as outside companies make moves to tear down franchise protection rights and put dealers out of business. Some rogue vendors are making a thinly veiled effort to take your business away from you.

When new threats arise, I tell my readers to “circle the wagons.” I’m talking about rounding up a posse of your fellow dealers and leaders at the state and national organizations — and when the situation calls for it, legal assistance. You may have heard that “attack attorneys” are running ads in Texas, trying to round up consumers to sue dealers over recall units. As always, you are an easy target for political grandstanding and windy press releases. Bureaucrats are taking turns counting the tax revenue you generate and examining every profit center in our industry. They’re looking for ways to politicize that and ultimately turn it into revenue for themselves.

The storms are brewing, so don’t wait too long to act. There are resources available for those who are willing to defend their way of life.

Keep those calls, emails and comments coming, and look for me at Industry Summit in Las Vegas in the second week of September. I love hearing from you and I can’t wait to meet you in person.

Jim Ziegler is president of Ziegler SuperSystems Inc. and one of the industry’s most recognizable experts, trainers and speakers.
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