Originally published in the Journal of Commerce in April 2014.

Ever since the government’s attempts to side with the car makers against the car exporters started, a lot of people have been scratching their heads – why did the government even get involved in what is at best a civil dispute between the dealers and the car makers, and both sides have ample resources to carry on that battle? At the beginning, we heard the cars were being exported in violation of the export laws – and let’s be frank, the export values in some cases were too low.  The vehicles were being declared as used, in the face of CBP and Census having two different definitions of what constitutes a used car, so the initial cases also included claims about export violations. There was even one U.S. Attorney who stood up at a press conference and said it is illegal to export new cars unless you are a manufacturer or dealer. I guess he forgot to check – many auto exporters are licensed dealers!

A lot of those who ended up trapped in this situation were small guys with limited resources, and they generally found themselves having to settle with the Government, often on less than favorable terms. The Government’s view originally was we’ll sell the cars and keep the proceeds. Now, their tune is typically, we’ll sell the cars, split the proceeds and you, the auto exporter, can pay the storage charges! Will that tune change soon?

Originally, the Government’s reason for action was the dealers were being duped into selling cars for export and they would not knowingly do so. Of course, once confronted with the obvious communications between the dealers and the auto exporters (or their brokers), the Government changed its tune and now claims the dealers and the manufacturers are being harmed.  We can leave for another day any discussion about whether the current franchise set-up lends itself to anti-trust claims.  For now, the auto exporters finally won one!

While many others found themselves wringing their hands waiting for the government to decide how it would proceed, Automotive Consultants (ACH) fought back. It happens from time-to-time the Government starts down a path and will simply not admit it is wrong. When that happens, there is only one option – somebody has to take them to court and beat them, and that is exactly what ACH did.

The case began when seizure warrants were served tying up significant funds along with two vehicles. The basis for the seizure was the affidavit of a Secret Service agent who essentially alleged there was a trans national money laundering and auto export business going on and the seized funds and vehicles were property involved in money laundering, and mail and wire fraud. ACH responded by filing an emergency motion to dismiss the complaint, to suppress the seizure warrant and for the release of its property.  ACH also sought to have the Secret Service agent’s affidavit unsealed.

The case had something of a checkered history until April 1st, when the latest order came down. Once the funds and vehicles had been seized, ACH filed its claim for the return of the property. About the same time, the Government filed is Complaint in Forfeiture. ACH then filed the motions mentioned. The court held a hearing on the topic of unsealing the agent’s affidavit and denied the motion. However, prior to the hearing, the Government moved to amend its complaint and provided an unsealed version of the agent’s affidavit.  Thereafter the amended complaint was filed with a slightly expanded version of the unsealed affidavit.

The parties then went back and forth as to how much of a challenge the court would allow to the affidavit and whether or not the agent’s testimony would be taken. Eventually, the court held ACH had raised “a significant question whether the Government has shown probable cause to continue to hold these assets at this juncture of the case.”  At that point, with evidence from both sides before it, the court held that ACH would be permitted to cross-examine the agent. That hearing occurred on March 10 and 11, 2014.  The outcome is the court held the Government failed to establish the probable cause needed to continue to hold the seized assets.

What you have here is parties with two totally different views of the facts. The Government was convinced that receiving funds from overseas to purchase new vehicles from dealers was perpetrating a fraud on the dealers (and maybe the manufacturers), whereas ACH, quite correctly, pointed out there is nothing illegal about receiving funds via international wire transfer, and there was also nothing illegal about cooperating with dealers so the vehicles were purchased by straw buyers on behalf of ACH.

Much of the government’s position is based on the franchise agreement a manufacturer gives to his dealer and includes a limitation as to the geographic area in which the dealer may sell his vehicles. Some, but not all, car makers include a provision the dealer may not sell for export. The dealers want to sell cars, especially those which are not good sellers, so they are more than willing to work with auto brokers to sell them quantities of cars, provided each one is purchased by an individual. There is no deception. Everyone knows what is going on, but the Government was sure that was not the case. It is worth noting in particular, this is only happening with BMWs, Porsches and Mercedes vehicles. While cars from other makers may have been seized initially, they are generally getting released as these cases progress.

In the ACH case, there was lots of generalized angst expressed by the agent in terms of the dire consequences to the dealers and the car makers about the way in which the vehicles were being sold. For example, the car makers would have difficulty servicing the cars shipped out of the U.S.; the dealers would suffer charge-backs when exportation was discovered; but if not charge-backs, then at least a reduction in the quota of new vehicles the dealer would be allotted. The generalizations were rampant, but not a shred of evidence was produced to show those claims applied to either the vehicles or the funds seized, so, in the end, Judge Sandra Beckwith issued a ruling telling the Government it had not made its case to continue to hold those assets. That was the good news. The bad news was the judge also hinted there might later be enough evidence there could be criminal conduct going on so that ACH’s ultimate goal of getting the case dismissed failed.

One other interesting fact which came out is the Secret Service’s involvement began with an investigation into vehicle brokers supposedly for schemes to export luxury cars. To conduct their investigation, the agents met with luxury car dealers and introduced a straw buyer checklist (a series of red flags). This matter did not start from a complaint by a dealer that he was duped. It did not start with a car maker complaining. The start to this case was a couple of agents with an idea. Of course, that idea played into the hands of the luxury car makers who would prefer to control where their cars are sold and serviced. What got lost in the process was the dealers will sell to whomever they can, provided they are making a profit, and who wouldn’t want to sell inventory that is not otherwise a hot seller? What also got lost in the process was the fact that by taking the actions they did, the agents managed to put a lot of small business people out of work, plus took tax revenue from states and localities, commissions from salesmen and profits from dealer, to name some of the financial consequences which were caused.

While we wait to see what happens next in ACH’s case, it is worth remembering this case is another tale of two certainties. First, what likely tempted the agents to take a closer look was the values on many of the export declarations was too low, so getting your government filings correct at the outset remains an important factor. The second lesson is sometimes you really have no choice but to fight city hall!