Court Authorizes City Subsidy to Car Dealer Two Years After Dealer Relocates to City

February 10, 2014 | Bulletin No. 1080794.1

Juan Lou Gonzales ("Gonzales") owned a Saturn dealership in Palmdale. During the recent recession, General Motors ("GM") stopped making Saturn cars.  As a result, Gonzales sought and was conditionally awarded a Chevrolet franchise from GM.  GM’s conditions required that Gonzales open his new dealership on a short deadline within a specific geographic area.  (City of Palmdale v. City of Lancaster (February 6, 2014 (B243802) --- Cal.Rptr.3d ----, Cal.App. 2 Dist.).

Gonzales tried in good faith to lease or buy a lot from the City of Palmdale ("Palmdale") in the Palmdale auto mall.  However, Palmdale opted the site to another dealer instead.  While attempting to negotiate with Palmdale, Gonzales entered into negotiations with the City of Lancaster ("Lancaster") to obtain a lot in the Lancaster auto mall, which was the only other location that satisfied GM’s conditions.  During negotiations, the Lancaster City Council authorized $604,000 in financial incentives to help Gonzales move his car dealership to Lancaster.

Palmdale filed a complaint against Lancaster in August 2010, alleging that Lancaster’s subsidy violated Government Code section 53084 and Health and Safety Code section 33426.7, which prohibit local agencies from providing subsidies to vehicle dealers that relocate from the territorial jurisdiction of one local agency to another local agency within the same market area.  The trial court agreed and voided Lancaster’s subsidy and told Lancaster that it could not provide Gonzales’ dealership with any subsidy for two years after the opening of Gonzales’ Lancaster dealership.  Gonzales relocated to Lancaster anyway because negotiations with Palmdale were not fruitful.

After two years, Lancaster paid $300,000 to Gonzales in exchange for Gonzales promising to operate his dealership only in the Lancaster Auto Mall for ten years.  Palmdale again filed suit, alleging that the trial court’s 2010 decision placing a two-year limit on any subsidy was in error.  Palmdale argued that Government Code section 53084 and Health and Safety Code section 33426.7 permanently restrict a local agency from subsidizing a dealership that relocates within the same market area.  Palmdale also sought to disgorge Lancaster’s sales tax revenue from Gonzales’ dealership.

The Second District Court of Appeal ruled against Palmdale on both counts.  First, the court held that “Palmdale’s interpretation of a never-ending ban on all financial assistance is unnecessary to achieve the Legislature’s purpose of stopping a city from luring an auto dealer from a neighboring city.”  Thus, the court of appeal upheld the trial court’s two-year limit on public subsidy.

Second, the court of appeal found that Gonzales’ move and Palmdale’s loss of tax revenue was a “self-inflicted wound” because Palmdale would not work with Gonzales.  Indeed, Gonzales moved to Lancaster even after Lancaster’s original $604,000 in financial assistance was invalidated.  Therefore, the court rejected Palmdale’s claim for disgorgement.

Questions

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Mona G. Ebrahimi or Maggie W. Stern | 916.321.4500