Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D.N.C.: Encumbrance did not excuse supplier’s obligation to repurchase dealer inventory, (Jul 18, 2014)

By Edward L. Puzzo, J.D.

In determining a supplier’s obligation under North Carolina law to repurchase a dealer’s inventory upon termination of their distributorship agreement, the existence of an encumbrance upon the inventory at the time of the termination notice did not excuse the supplier’s repurchase obligation, the federal district court in Statesville, North Carolina has ruled (Interstate Equipment Company v. ESCO Corporation, July 17, 2014, Voorhees, R.).

ESCO Corporation was an Oregon-based manufacturer of industrial heavy equipment and replacement parts used in mining, dredging, rock-crushing and the like. Interstate Equipment Company (IEC) was a North Carolina dealer of such equipment and parts. They had a supplier-dealer relationship governed by the North Carolina Farm Machinery Franchise Act (Act). On August 18, 2010, ESCO notified IEC that it was terminating the distribution agreement, effective December 1, 2010.

Under the distributorship agreement entered into between the parties in October 2000, dealer IEC was required to maintain an adequate inventory of replacement parts necessary to provide customers replacement parts in a timely manner. Upon termination of the distribution agreement, a dispute arose as to the extent to which ESCO was obligated to repurchase inventory from IEC under both the distribution agreement and North Carolina law. The court stated that the distribution agreement was only partly consistent with the Act, so in the case of conflict between the two, the Act governed because its provisions could not be waived.

The Act, the court explained, required the supplier to repurchase inventory within 90 days of termination at 90 percent of the current net price of all new, unused and undamaged repair and superseded parts. The agreement called for a lesser percentage of reimbursement, but the statutory requirement governed, the court stated.

Encumbrance of inventory. The Act did not require the repurchase of inventory that is encumbered by liens, the court stated. In this case, the inventory was encumbered by a lien held by Frank Eller, IEC’s President and sole shareholder. Eller’s representative told the court that the encumbrance would be cancelled and extinguished at the close of the repurchase transaction with ESCO.

While the statute does not expressly address timing for satisfaction of the free and clear title condition, the court stated, it would be nonsensical to interpret the statute in such a way as to hold that only property free and clear as of the time of the filing the dealer’s complaint could be considered eligible for repurchase. The proper focus should be that the inventory be free of liens at the time of closing of the repurchase transaction, the court determined. Therefore, the existence of an encumbrance was not determinative of ESCO’s repurchase obligation. The court ruled that ESCO’s statutory obligation to repurchase IEC’s inventory remained, but was conditioned on proof of the extinguishment of Eller’s lien at the time of the closing of the repurchase transaction.

Time limit for repurchase. The Act also required the supplier to repurchase the terminated dealer’s unsold inventory within 90 days or else become liable to repurchase at 100 percent of the current net price.

Because ESCO’s termination letter proposed to pay less for parts available for repurchase than the statutorily required percentage—75 percent in the termination letter versus the statutory 90 percent—IEC had no legal obligation to return parts to ESCO on such terms, the court determined. Neither party, the court noted, acted with conscientious regard for the statutory time lines for repurchase and inspection. No physical inventory or inspection ever took place. Neither party, therefore, was positioned to benefit from the other’s shortcomings with respect to time lines, the court held. The respective statutory limitations on the time to accomplish repurchase-related tasks were therefore tolled and/or waived during the pendency of this litigation. The court ruled that both parties would be required to compile a final accounting of the repurchase transaction for court approval, taking into account IEC’s outstanding obligation at the time of the termination notice, and the value of the inventory, adjusted by costs incurred by ESCO for refurbishing the parts.

The case is Civil Action No. 5:11CV51-RLV.

Attorneys: Douglas G. Eisele (Eisele, Ashburn, Greene & Chapman, PA) for Interstate Equipment Company. Natalma M. McKnew (Smith Moore Leatherwood LLP) for ESCO Corporation.

Companies: Interstate Equipment Company; ESCO Corporation.

Cases: FranchisingDistribution NorthCarolinaNews