Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D.N.Y.: Former dealerships’ claims against Honda barred by res judicata, (Dec 3, 2015)

By Michael Menzhuber, J.D., LL.M.

Automobile dealership franchisees’ claims that arose from, among other things, their franchise agreement with American Honda Motor Co. (Honda) and Honda’s failure consider a prospective buyer for the dealerships, were barred by res judicata, according to the federal district court in Syracuse, New York. The court also dismissed claims that Honda violated the Automobile Dealers’ Day in Court Act (ADDCA) and the New York Franchised Motor Vehicle Act (NYFMVA), and that the plaintiff real estate entities lacked standing to enforce the franchise agreements (V.M. Paolozzi Imports, Inc. v. American Honda Motor Co., Inc., December 2, 2015, Scullin, F.).

Background. Philip J. Simao, acting on behalf of V. M. Paolozzi Imports, Inc. and DealMaker of Potsdam, LLC (collectively, “plaintiff dealerships), entered into franchise agreements with Honda. Simao and the plaintiff dealerships also contracted with Honda’s corporate affiliate, American Honda Finance Corp. (Honda Finance) to finance the plaintiff dealerships’ operations. Prime, LLC and Onondaga Development, LLC (collectively, “plaintiff real estate entities”) owned the land upon which the plaintiff dealerships were located.

The franchise agreements provided, among other things, that: (1) Hondo would not unreasonable withhold consent to sale of the plaintiff dealerships; and (2) Honda could terminate the franchises upon the plaintiff dealerships’ failure to maintain all required aspects of dealership operations as an ongoing business for seven consecutive days. The franchise agreement with the Potsdam dealership incorporated by reference a letter of intent identifying June 30, 2008, as the opening date.

According to the plaintiffs, despite the fact that they informed Honda in October of 2008 that their experienced manager was out on medical leave and there was ongoing recession, Honda unilaterally set a new arbitrary schedule for the Potsdam dealership and threatened to revoke its franchise if it failed to open by November 3, 2008. The plaintiffs also alleged that Honda forced V. M. Paolozzi Imports, Inc, d/b/a DealMaker Honda of Watertown, to construct a new facility in the midst of the 2008 recession, after having waited four years to notify it that it was in breach.

The plaintiffs further alleged that Honda: (1) withheld cashback incentives that they were owed and sent them notices that they were in breach of their franchise agreements for having insufficient capital; and (2) wrongfully prevented them from trying to sell their dealerships as going concerns throughout 2009 and 2010.

During the winter of 2009-2010, the plaintiff dealerships negotiated with Honda Finance to work out their debt obligations. However, Honda Finance conditioned the workout on the plaintiff dealerships’ release of any claims against Honda. The plaintiff dealerships refused and Honda Finance foreclosed on their financing. On May 26, 2010, Honda issued notices of termination to the dealerships because they had not sold any new cars since May 3, 2010.

On February 9, 2010, Honda Finance commenced a foreclosure action against, among others, the plaintiff dealerships and Simao (collectively, “finance-defendants”). The finance-defendants asserted two counterclaims: (1) breach of implied covenant of good faith and fair dealing; and (2) and an ADDCA claim that alleged that Honda Finance was Honda’s captive finance company and that it acted in bad faith in its performance of its contracts with the plaintiff dealership. The counterclaims were dismissed as lacking merit. With respect to the ADDCA claim, the court determined that Honda Finance did not act in bad faith.

The plaintiff dealerships, the plaintiff real estate entities, and Simao filed an amended complaint against Honda that alleged: (1) breach of the implied covenant of good faith and fair dealing in connection with the opening of DealMaker Potsdam; (2) breach of the implied covenant of good faith and fair dealing for preventing the plaintiff dealerships from reaching a forbearance agreement with Honda Finance; (3) tortious interference with respect to the forbearance agreement; (4) breach of contract for making false assurances to assist with selling the plaintiff dealerships; (5) violation of the ADDCA in dealing with DealMaker Honda of Watertown; (6) violation of the ADDCA in dealing with DealMaker Honda of Pottsdam; (7) breach of contract for wrongfully inducing the plaintiff dealerships to forego an opportunity to sell their franchises in 2009; and (8) violation of the NYFMVA for refusing to consider a prospective buyer after the plaintiff dealerships were subject to termination.

Standing. The court determined that the plaintiff real estate entities lacked standing to enforce the franchise agreement because there was no evidence to suggest that they were intended third-party beneficiaries of the plaintiff dealerships’ respective franchise agreements with Honda.

Res Judicata. The doctrine of res judicata precludes the relitigation of claims decided in: (1) a final judgment on the merits; (2) by a court of competent jurisdiction; (3) in a case involving the same parties or privies; and (4) involving the same cause of action. The court noted that where, in the present case, there are questions as to both sameness of claims and privity, the closer the identity of facts between the prior and present actions the more likely it is that the non-party’s interests were adequately represented in the first action.

Other factors considered in this analysis are: (1) whether the witnesses and the evidence in both cases would be substantially the same; and (2) whether the cases would make a convenient trial unit that the parties would expect to try together. The court also noted that it was enough that the facts essential to the second case were already present in the first case.

With respect to the sameness of claims, the court determined that most of the plaintiffs’ causes of action in the present case arose out of the same connected series of transactions as the finance action. Moreover, it was clear that the witnesses and the evidence with respect to the events alleged would be substantially the same.

With respect to privity, a party’s assertion of domination and control is sufficient to establish privity for res judicata purposes. The court noted that the plaintiffs alleged that Honda Finance was “wholly or partly owned and controlled” by Honda. Therefore, the court determined that the plaintiffs could have brought its claims against Honda in the finance action.

Automobile Dealers’ Day in Court Act (ADDCA). In order to make a claim under the ADDCA, a plaintiff must show: (1) that the manufacturer coerced or intimidated the plaintiff dealer; and (2) that such coercion was designed to achieve some wrongful objective. The court determined that the plaintiffs’ ADDCA claims failed because there was no evidence in the record from which a reasonable jury could conclude that Honda’s behavior was designed to achieve a wrongful objective. The court further determined that no reasonable jury could conclude that Honda acted in bad faith by demanding that plaintiff dealerships comply with the franchise agreements.

New York Franchised Motor Vehicle Act (NYFMVA). The court note that the NYFMVA’s prohibition on preventing a franchised motor dealer from obtaining the fair value of the franchise or the dealership was limited to going concerns. It further noted that: (1) it was not unreasonable to refuse a request to sell after a franchise was already subject to termination; and (2) a franchise could be terminated on fifteen days’ notice where the franchisee fails to conduct “customary sales and service operations” for seven consecutive business days.

Honda satisfied the statutory requirements for terminating the plaintiff dealerships because: (1) the plaintiff dealerships stopped selling new cars on May 3, 2010; and (2) Honda sent the notices of termination on May 26, which was sixteen business days later.

Honda was not unreasonable in refusing to consider a prospective sale in June of 2010 because each of the dealerships was subject termination as of May 26, 2010.

The case is No. 7:12-CV-1052.

Attorneys: Brian J. Butler and Stephen A. Donato (Bond, Schoeneck & King, PLLC) and Jan S. Kublick (McMahon, Kublick & Smith, P.C.) for V.M. Paolozzi Imports, Inc. John J. Sullivan (Hogan Lovells US LLP) for American Honda Motor Co., Inc.

Companies: V.M. Paolozzi Imports, Inc.; Dealmaker of Potsdam, LLC; Onondaga Development, LLC; Prime, LLC; American Honda Motor Co., Inc.

Cases: FranchisingDistribution NewYorkNews