BUSINESS FORMATION & SALES BLOG

New York Franchised Motor Vehicle Dealer Act: When Does a Franchisor Have to Provide a 180-Day Notice of Termination of Dealership Agreement?

Compass Motors, Inc. (“Plaintiff”) was a franchised motor vehicle dealer for Volkswagen Group of America, Inc., (“Defendant”).  As a part of the dealership agreement, Plaintiff agreed to renovate its facilities pursuant to a Facility Renovation Agreement (the “Agreement”). The Agreement required Plaintiff to renovate its facilities in order to incorporate a Volkswagen-only showroom with a minimum of 1800 square feet and three offices. According to the Defendant, the Plaintiff failed to implement those required facility renovations. Id. at 284-285 As a result, the Defendant sent Plaintiff a 90-day notice of termination. The notice explained that if Plaintiff failed to cure the alleged breach within 90 days Defendant would terminate the dealership agreement between them.  Id.
Plaintiff commenced an action in the Supreme Court of New York (the “Court”), seeking a declaration that the notice of termination was invalid. Compass Motors, Inc. v. Volkswagen Group of America, Inc., 944 N.Y.S. 2d 845 (2012). Plaintiff argued that under the New York Franchised Motor Vehicle Dealer Act (the “Act”), particularly §463(2)(e)(3), Defendant was required to give it a 180-day, as oppose to a 90-day, notice to cure. In its analysis, the Court cited the relevant portions of the Act as follows:
¶463(2):

 (d) (1)  To terminate, cancel or refuse to renew the franchise of any franchised motor vehicle dealer except for due cause, regardless of the terms of the franchise. A franchisor shall notify a franchised motor vehicle dealer, in writing, of its intention to terminate, cancel or refuse to renew the franchise of such dealer at least ninety days before the effective date thereof, stating the specific grounds for such termination, cancellation or refusal to renew. In no event shall the term of any such franchise expire without the written consent of the franchised motor vehicle dealer involved prior to the expiration of at least ninety days following such written notice except as hereinafter provided.

(e) (3) The franchisor shall provide notification in writing to the dealer that the dealer has one hundred eighty days to correct dealer sales and service performance deficiencies or breaches and that the franchise is subject to termination under this section if the dealer does not correct those deficiencies or breaches. If the termination is based upon performance of the dealer in sales and services then there shall be no due cause if the dealer substantially complies with reasonable performance provisions of the franchise during such cure period and, no due cause if the failure to demonstrate such substantial compliance was due to factors which were beyond the control of such dealer.

Vehicle and Traffic Law, article 17-A §463 (emphasis added).

The Court stated that subsection (2)(e)(3) which affords a breaching party notice that he or she has 180 days to cure prior to termination of the dealership agreement, by its plain terms, applies only to notices to correct a dealer’s sales and service performance deficiencies or breaches. The Court explained that since Defendant’s notice of termination was based upon Plaintiff’s failure to properly renovate its facility in accordance with the Agreement, it had nothing to do with sales and service performance deficiencies or breaches. Therefore, the Court held that the 180-day notice requirement encompassed within §463(2)(e)(3) was not applicable. On this basis, the Court  concluded that the 90-day notice to cure was sufficient under the Act. Id. at 294-295.

Is a Loan Discharged When the Lender Releases the Liens on Collateral Prior to the Payoff Checks Clearing?

In JPMorgan Chase Bank, N.A., v. Jeffco Cinnaminson Corporation, et. al., No. A-2601-10T3
(N.J. Super. Ct. App. Div. March 27, 2012), JP Morgan Chase Bank, N.A.  (“Plaintiff”) sued Jeffco Cinnaminson Corporation (“Jeffco”) and Paul T. Andrews (“Andrews”) (collectively “Defendants”) based upon its premature disbursement of collateral held as security against two loans.

In that case, Plaintiff granted Jeffco two loans in order to acquire a Ford GT and a Ferrari (collectively the “Vehicles”). In regard to both loan agreements (collectively the “Agreements”), Andrews signed the Agreements as a cosigner which made him a
guarantor of the debt. Id. at 4.

Plaintiff disbursed the money and, in order to secure the loans, recorded liens on the Vehicles. Subsequently, Defendants entrusted the vehicles to Alfred Sciubba (“Sciubba”), who owned and operated a specialty car business named “Auto Toy Store.” He agreed to find buyers for the Vehicles.  Id. at 4.

Sciubba found buyers for both vehicles. It provided pay off checks from Jeffco’s bank account to satisfy the car loans so the sale could be consummated (the buyers obviously would not want to purchase the cars with liens still recorded on the title). The problem arose when the Plaintiff bank endorsed the liens as paid before the check cleared. In fact it did this on two separate occasions, since the cars sold at different times. However, since neither check cleared due to insufficient funds in Jeffco’s bank account, Plaintiff was left with two unpaid and unsecured loans in Jeffco’s and Andrews’ names. Id. at 6-7.

As a result, Plaintiff filed suit in the Law Division of the Superior Court of New Jersey  (“Lower
Court”) against Jeffco and Andrews to recover the amounts due. Defendants argued that because Plaintiff had failed to protect the collateral, their two loans were discharged. They also filed a counterclaim which alleged that Plaintiff was negligent because it should not have endorsed both liens as paid before either of the checks had cleared. Id. at 7-8.

Subsequently, Plaintiff filed a motion for summary judgment and Defendants filed a cross motion for summary judgment. A motion for summary judgment allows a Court to determine a case without resort to a trial when there are no material issues of fact and judgment can be granted by applying
the relevant law.

Defendants’ submitted to the Court an expert report and opinion. The expert opined that Plaintiff’s release of the liens violated financial industry standards and was contrary to its policies and procedures. Further, the expert asserted that it failed to properly monitor and manage the Jeffco
loan portfolio after the first payoff check (for the Ford GT) bounced. Id. at 8-9.

The Lower Court stated that Plaintiff “implicitly knew” Sciubba was in the business of selling cars because it received a check from “Auto Toy Store.” It reasoned that because Sciubba regularly sold cars to the public, that alone was a sufficient basis for the Plaintiff to reasonably believe that the checks received from him were adequate and sufficient. Thus, it asserted that it was proper for Plaintiff to have endorsed the liens as paid before the checks had cleared. Further, the Lower Court stated that Defendants could not complain about Plaintiff’s release of the liens because they had set in motion the very facts that led to the consignment of the vehicle to the dealership.

Accordingly, the Lower Court granted Plaintiff’s motion for summary judgment against Defendants for the amounts due plus approximately $40,000.00 in attorney’s fees. Id.

Subsequently, Defendants appealed to the Superior Court of New Jersey, Appellate Division (the “Appellate Court”). In its analysis, the Appellate Court considered Plaintiff’s argument based upon Chapter Nine of the New Jersey Commercial Code (the “UCC”). It claimed that whenever an “innocent purchaser” is involved in the acquisition of an automobile, the rights of a secured lender, almost instantaneously (and inexorably), must bend to the will of the buyer.  Id. at 11-12. The Court rejected that argument.

It explained that under N.J.S,A. 12A:9-315(a)(1) and (2), a properly filed and recorded lien was not extinguished when the secured property was transferred to another, unless an exception to the UCC applied. One such exception is N.J.S.A. 12A: 9-320(a) because it automatically severs the lien so that the purchaser of the goods enjoys them with clear title; free of any liens due to their seller’s debt. Id.at 14. For example, if you purchased a new coat from a department store you will own that coat without any fear that the department store’s creditors have any rights in them. N.J.S.A. 12A: 9-320(a)
stated:

Except, as otherwise provided in this subsection (e), a buyer in the ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.  

(emphasis added) Id.

Further, the Court noted that the UCC did not require a secured lender to blindly release a lien without conducting reasonable due diligence; including ensuring that the proffered payoff is sufficient to extinguish the outstanding amount due on the loan. Id. at 13.

In its analysis, the Court explained several reasons why the Lower Court’s grant of summary judgment in favor of Plaintiff was improper. Some of those reasons were:

  • Contrary to the Lower Court’s conclusion, Plaintiff could not have implicitly known that the
    entity transmitting title to the vehicles was in the business of selling vehicles because it never received a check from the Auto Toy Store. Rather, Plaintiff received a check from Jeffco who was not an entity that was in the business of selling motor vehicles at the time Plaintiff received the checks. Id.
  • The security interests in this case were created by Jeffco and Andrews, not the Auto Toy Store.
    Since, the buyers of the Vehicles were dealing with Auto Toy Store, not Jeffco and Andrews, the provision did not apply to them. Thus, those buyers would have taken free of any security interest created by Auto Toy Store (the buyer’s seller), but not those created by Jeffco and Andrews. Therefore, that argument was immaterial.
    Id. at 15.
  • There was no requirement in the UCC that mandated a speedy release of Plaintiff’s security
    interests in the Vehicles. In light of Defendant’s expert’s opinion, it was possible that had the Plaintiff waited a few more business days, instead of robotically processing the lien releases, its discovery of the checks’ dishonor might have enabled Defendants to prevent the conversion
    of the purchase proceeds. Id.

Since many questions of fact remained open for the trier of fact to determine, the Appellate Court reversed the grant of summary judgment in favor of Plaintiff, vacated the reallocation of attorney’s fees without prejudice, and remanded back to the Lower Court. Id. at 21.

Will an Operating Agreement’s Disability Provision Be Upheld Under New Jersey Law?

In Zavodnick, Perlmutter & Boccia L.L.C., v. Zavodnick, No. A-1242-11T1 (App. Div. August 2, 2012), the Superior Court of New Jersey, Appellate Division, upheld an arbitrator’s decision to allow a law firm to buyout a disabled member. Id. at 8.  In so doing, the Court refused to limit the scope of the arbitrator’s authority to determine issues relating to the disability.

In that case, the members of the law firm, Zavodnick, Perlmutter & Boccia L.L.C (“law firm”), had signed an operating agreement that provided of resolution of any disputes concerning the withdrawal of a disabled member.  That resolution was to be handled by the parties themselves, if possible.  If not, the exclusive remedy would be arbitration under the rules of the American Arbitration Association (“AAA”).  An AAA arbitration was instituted in regard to the members’ decision to require one of the attorneys, Allen Zavodnick, Esq. withdraw due to his disability.

Zavodnick challenged the arbitrator’s ruling upholding the decision to have him removed.  In that
regard, Zavodnick filed a lawsuit in the Superior Court of New Jersey, Chancery Division, Hudson County.  The Court upheld the arbitrator’s decision. Zavodnick appealed to the Appellate Division. 

The Appellate Division also upheld the decision.  In its opinion, it stated in part “[b]ecause the request for arbitration  . . . clearly encompassed the issue of whether defendant’s disability or his
cessation of professional service constituted a withdrawal event, and because the operating agreements plain terms required arbitration of that issue, we find defendant’s arguments to be of insufficient merit to warrant discussion in a written opinion.” Id. at 8.

This case highlights the importance of paying particular attention to the disability provision of an operating agreement before entering into one.  Very few of us ever expect to become disabled; however, it is best to account for the unlikely event that such a provision might need to be invoked.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

What Will Square’s Partnership with Starbucks Mean for New Jersey Businesses?

On August 8, 2012, Square, the mobile payment device start-up, announced its decision to join forces with Starbucks.  The two entities will unite at thousands of Starbucks locations across the United States to allow customers the option of paying for their purchases through the Square mobile phone application.  The joint venture has left many asking what this will mean for the retail payment industry.

Customers will have the option of making on-site payment through the mobile payment application. The venture will also process debit and credit card transactions. The aim is to streamline the payment process and strengthen the industry-wide initiative to eliminate money.

Starbucks will process customers’ orders through Square software installed on Starbucks’ existing registers. In the alternative, customers can instead use the Square-created “dongle.”  The dongle attaches to a mobile phone or iPad and transforms that product into a debit or credit card processor. 

The mobile payment sector is becoming a very significant part of how customers transact business, and Square’s may have just put itself at the forefront of this booming enterprise. Square’s product is so attractive to merchants because of its ease of use. If mobile payment continues to make such an immense impact on how we make purchases, the plan to eradicate cash just might materialize.

While Square has designed its own products and patented some of its technology, its model is not completely novel.  Square has managed to combine and make use of existing products, such as the iPad, with existing ideas that other mobile payment operators make use of, and throw a twist on it to make an innovative product.  It will be interesting to see if any intellectual property disputes arise from Square’s use of an old but revised idea.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

May a Car Manufacturer Increase Wholesale Prices In Order to Avoid Incurring the Cost of a Statute Meant to Protect Dealerships?

Should courts interpret a statute that was meant to protect car dealerships in such a way that it does very little protecting? Should car manufacturers be able to circumvent statutes implemented to protect dealerships by simply increasing wholesale prices?

These questions underlay a case heard in the United States Court of Appeals for the Third Circuit. Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 676 F.3d 318 (3d. Cir. 2012).  Ford Motor Co., concerned the fact that Ford provided warranties to buyers of new Ford cars. These buyers were allowed to take their car to any dealership for repair or replacement of defective parts, regardless of where the buyers purchased the vehicle. Prior to the enactment of the New Jersey Franchise Protection Act (“NJFPA”), Ford would reimburse its dealers 40% more than the cost of making the parts for vehicle repairs under warranty. However, since the enactment of the NJFPA Ford was required to pay their dealers the retail price of the parts, which resulted in higher costs to Ford.

In an attempt to recoup that increased cost, Ford came up with a Dealer Parity Surcharge (“DPS”). The amount of the surcharge varied among dealers; the more warranty work a dealer performed, the higher the surcharge amount. The dealers filed suit against Ford based upon the wrongful implementation of DPS.

The District Court determined that DPS violated the NJFPA. In affirming the decision, the Third Circuit noted that NJFPA “did not preclude cost-recovery systems effected through wholesale vehicle price increases.” The Court nevertheless, “rejected Ford’s contention that the DPS constituted such a system.” Id. at 322.

Subsequently, Ford utilized a new protocol for surcharges called the New Jersey Cost Surcharge (“NJCS”). NJCS is based upon the total cost of Ford to comply with the NJFPA across New Jersey. Unlike DPS, this resulted in across the board (rather than individualized) increases in the wholesale price of vehicles. The result of the NJFPA is a flat surcharge for every dealer which increased according to the number of vehicles the dealer purchased, rather than how many warranty repairs the dealer submitted.

Thereafter, the dealers brought another suit against Ford, claiming that the NJCS was unlawful because it violated the NJFPA. Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 676 F.3d 318 (3d. Cir. 2012).  The Third Circuit held that NJCS does not violate NJFPA and thus was not unlawful.

The NJFPA provides that:

“The motor vehicle  franchisor shall reimburse each motor vehicle franchisee for such [warranty] services as are rendered and for such parts as are supplied, in an amount equal to the prevailing retail price charged by such motor vehicle franchisee for such services and parts in circumstances where such services are rendered or such parts supplied other than pursuant to warranty; provided that such motor vehicle franchisee’s prevailing retail price is not unreasonable when compared with that of the holders of motor vehicle franchises from the same motor vehicle franchisor for the identical merchandise or services in the geographic area in which the motor vehicle franchisee is engaged in business.”

In holding that the NJCS did not violate the NJFPA, the Court examined the ruling by a Maine court  interpreting a similar statute. Acadia Motors, Inc. v. Ford Motor Co. (Acadia), 44 F.3d 1050 (1st Cir.1995). In Acadia, the Court held a flat surcharge imposed on all wholesale vehicle prices was lawful. The Court reasoned that, since the statute said nothing about wholesale or retail prices, it appeared to
leave the manufacturer free to increase wholesale prices, resulting in a corresponding increase in retail prices.

Similarly, in Ford Motor Co, the Court held that the New Jersey statute was enforceable because it did not directly address the increase of wholesale or retail prices. Thus, although the NJFPA regulated warranty reimbursements, it does not regulate wholesale price increases nor did it regulate retail price increases. 

Therefore, the Court, in Ford Motor Co held that the DPA was unlawful but the NJCS was lawful. While the NJCS was a bona fide wholesale price increase, the DPA surcharge was unlawful because it was based
on how many warranty reimbursements individual dealers submitted. The NJCS was lawful because it was a flat surcharge assessed on all wholesale vehicles sold
within the State.

In the end, NJFPA did not protect dealers against Ford increasing its wholesale prices, nor did it protect consumers against dealerships increasing the dealerships’ retail prices. Thus, it is highly questionable as to whether the public interest was served by this decision.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

Family Limited Partnerships: Important Alternative for Keeping a Business in the Family

Family Limited Partnerships are an important tool when a family wants to transfer a business from one generation to the next.  Essentially, it serves two purposes: it transfers the ownership without going through probate (because the older generation is still alive), and it leaves management authority with the older generation.

In essence, a Family Limited Partnership is nothing more than a limited partnership in which some or most of the ownership interest is transferred to the Next generation by way of a limited partnership interest.  The older generation may even maintain a minority interest, but remain as the general partner(s).

There are many variations on the foregoing approach, but the key point is that limited partners do not manage the affairs of the partnership; that is only done by general partners.  There can be complex variations on this approach that take into account particular estate planning objectives.  However, the basic idea is to establish a way of transferring a family business before those in control have passed away.  This is aimed at providing a better chance for the business to avoid disruption, and possibly outright destruction, if it were to be sudden transferred without adequate preparation, upon the death of the owner(s). It can also be a very effective planning tool to avoid excessive taxation relating to the transfer.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

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