Chrysler bankruptcy creates lemon law turmoil

Buyers of defective cars see settlement checks bounce and complaints stymied. To get their refunds, Bankruptcy Court must approve. Chrysler says it's not a priority.

By Martin Zimmerman

May 9, 2009

Chrysler's bankruptcy is throwing a wrench into California's lemon law, which is intended to make it easier for consumers to get refunds for defective vehicles. As the automaker's bankruptcy grinds away, settlement checks from Chrysler to unhappy car buyers are bouncing and complaints are stymied in and out of court.

Consumer advocates say the situation could erode public confidence in buying new cars at precisely the time the automakers need customers in their showrooms. And Chrysler says it has yet to do anything to resolve the issue.

"Lemon law claims are in limbo and there's a lot of uncertainty and confusion," said Rosemary Shahan, president of the Sacramento advocacy group Consumers for Auto Reliability and Safety.

"They're saying we need people to have confidence and get out there and buy cars. We couldn't agree more, but you can't ignore the problems people are experiencing."

State lemon laws, such as the one passed by California in the early 1980s, make it easier for consumers to get refunds for defective vehicles that are still covered by a manufacturer's warranty.

Under the California law, new or used vehicles that have a defect that can't be repaired after four attempts -- or two, in the case of life-threatening defects -- or that have been out of service for 30 days during the warranty period may be designated "lemons." That triggers an obligation for the manufacturer to either pay the owner a cash settlement or buy back the vehicle.

Lemon law complaints are often settled through negotiation between the buyer and the automaker. If that fails, the buyer can sue.

Since Chrysler filed for Chapter 11 bankruptcy protection April 30, financial claims incurred before the filing can be paid only if approved by the bankruptcy judge. Chrysler has not asked for permission to make payments on lemon law complaints -- and that is causing headaches for some of its customers.

Alex Simanovsky, an Atlanta attorney whose firm handles lemon law cases in California and other states, said he had "a stack of six or seven checks in my drawer right now from Chrysler that have bounced." The amounts range from $2,000 to $3,000 for clients who were accepting cash payments to as much as $40,000 in cases where Chrysler agreed to repurchase the vehicle.

"There has been no determination if these accounts are going to be unfrozen [by the Bankruptcy Court] and the checks will be good," Simanovsky said. "My feeling is they will not be."

San Diego attorney Ellen Turnage represents a client who reached a settlement with Chrysler over a 2006 Dodge Magnum with a bad suspension. The car has been returned to Chrysler, but the automaker's check bounced.

"Now he's got no car and no money, so he can't go buy a new one," Turnage said of her client. "He's stuck. We're hanging on to a glimmer of hope that at some point this will all be resolved."

Attorneys who handle lemon law cases typically work on a contingency fee basis, so they aren't getting paid either.

Chrysler said it was aware of the lemon law logjam but wouldn't say how many of its customers were affected.

The company said it had no plans at this point to ask the bankruptcy judge to approve payments to settle lemon law complaints.

"This is a complex process and there are a lot of issues being discussed," said Chrysler spokesman Mike Palese. "This could be one of those issues that comes up in the course of the bankruptcy, but I can't say that we have any plans to present it at this time."

Chrysler advises customers with pending lemon law complaints to file a proof of claim form with the Bankruptcy Court and join the ranks of the automaker's unsecured creditors.

"In that case, you'll be lucky to get pennies on the dollar," Simanovsky said.

Representatives of consumer groups met with the Obama administration's auto task force this week to discuss lemon law problems and other issues stemming from the Chrysler bankruptcy and the restructuring of General Motors Corp., which also could wind up in Bankruptcy Court.

"They were open to listening to us, but I do think that the consumer is not a focus of the auto task force at this point," said Linda Sherry of Consumer Action, a San Francisco-based consumer advocacy group. "The task force was put in place to do other things."