I agree that they should have known. I know it sounds presumptions, but I do not presume they actually knew. The owners and management have a duty to know, but they generally delegate things to sales and service people who themselves often do things that jeopardize a company's standing.
Whether the "dealership" knew or not, they had a duty to know and to supervise the process; controls needed to be in place. Hence you do, in my opinion, have a cause of action to pursue in court.
The issue is what will you be suing for? what are your damages?
It is illegal to drive a car in TENN that does not have a catalytic converter if it is manufactured after 1996; or is otherwise original equipment.
So for example, damages are:
1. The cost of purchasing and installing a converter. (you can sue them to force them to provide and install the converter, or to pay you to get it done, for example).
2. If you received traffic situations and fines for driving without one, the it is reasonable that a common person may not know about catalytic converters, and there for you could recover in some instance fines and penalties including a converter and installation.
3. You can sue them to void the sales contract and force them to take the car back and reimburse your money.
4. Since this is a violation of the law, you can turn them in to the EPA who will investigate and if called for, fine them.
You asked why or how. This is a question most people ask but are unwilling to hear the answer.
I am not making exucses for the dealership. AGAIN, as I already related, many people, including dealerships are confused about the law. IN one part of the law, it states they can not reinstall a catalytic converter. In another part of the law it says there are circumstances where they are allowed to. I am not making the argument that they are excused.
If you sue them, the court will want to know if you gave them an opportunity to fix it. So you should at least make one attempt to get them to put a converter on it.