Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Va.: Issues of fact existed in repurchase of inventory dispute, (Sep 10, 2013)

By Peter Reap, J.D., LL.M.

In an action brought by a terminated buggy dealer, James River Companies, LLC, against BB Buggies, Inc. and its parent, Textron, Inc., genuine disputes of material fact precluded the grant of summary judgment requested by BB Buggies, Inc., based on exceptions to the inventory repurchase requirement of the Virginia Equipment Dealers Protection Act, the federal district court in Danville, Virginia, has decided (James River Companies, LLC v. BB Buggies, Inc., September 6, 2013, Kiser, J.). However, Textron was entitled to summary judgment because there was no evidence suggesting that it entered into a dealer agreement with James River.

Background. The parties’ business relationship began in 2006 when the dealer entered into an oral dealer agreement with Bad Boy Enterprises, LLC. Pursuant to their agreement, the dealer purchased several Bad Boy Buggy vehicles. In October 2010, Bad Boy Enterprises sold its assets to BB Buggies, the current defendant.

After terminating the parties’ relationship, the dealer instituted this suit under the Virginia Equipment Dealers Protection Act. The dealer alleged that the defendants’ failure to repurchase ten XT model buggies and two Classic model buggies entitled the dealer to $124,081 for repurchase of the vehicles; $22,500 for storage fees; $4,095 for loan interest; $2,615.30 for transit fees; and $18,390.26 for judgment interest.

The Virginia Equipment Dealers Protection Act

When a dealer agreement is terminated by either party, the Act provides that “[t]he supplier shall repurchase from the dealer within ninety days after termination of the agreement all inventory previously purchased from the supplier that remains unsold on the date of termination of the agreement,” the court noted. The supplier was required to repurchase all “new, unused, unsold, undamaged and complete farm, construction, utility, and industrial equipment” at the full current net price. If a supplier did not repurchase inventory it was required to repurchase, then the supplier was “liable for one hundred percent of the current net price of the inventory, any freight charges paid by the dealer, the dealer’s reasonable attorney’s fee and court costs, and interest on the current net price of the inventory.”

Relevant to this case, the Act excluded from repurchase: (1) equipment that is not a “current model”; (2) equipment “purchased more than thirty-six months prior to notice of termination of the agreement”; (3) “inventory for which the dealer does not have title free of all claims, liens, and encumbrances other than those of the supplier”; and (4) equipment that is “not in new, unused, undamaged, complete condition.” As discussed below, however, genuine disputes of material fact precluded the grant of summary judgment based on any of these exceptions, the court ruled.

“Current model” exception and the 36-month exception. Under the Act, the “current model” exception excluded from repurchase items that were no longer “listed in the wholesaler’s, manufacturer’s or distributor’s current sales manual or any supplements” at the time of the termination of the dealer agreement. Here, the defendants argued that 10 of the 12 buggies in dispute, the XT models, were not “current models” when the dealer provided its termination notice in November 2011, and thus not subject to repurchase. The defendants made a similar argument with respect to the 36-month exception, which excluded from repurchase vehicles “purchased more than thirty-six months prior to notice of termination of the agreement.” Specifically, the defendants argued that the dealer purchased the two Classic model buggies in November 2007 and July 2008, both of which were purchased more than 36 months prior to the November 2011 termination notice.

It was clear that the applicability of either exception hinged on when the parties’ dealer relationship ended, the court observed. After reviewing the evidence from both parties, determining when the parties ended their relationship presented a genuine issue of material fact that precluded summary judgment, the court determined.

On the one hand, the defendants provided support for their position that the relationship continued until the dealer sent its official notice of termination in November 2011. On the other hand, there was evidence to support the dealer’s position that the defendants ended the dealer relationship in October 2010 by non-continuance when BB Buggies failed to honor the dealer’s previous oral dealer agreement with Bad Boy Enterprises. BB Buggies admitted that, after acquiring Bad Boy Enterprises’ product line, BB Buggies did not consider Bad Boy Enterprises’ non-written contractual relationships—like the oral agreement with James River—to have survived the asset transfer.

As it presented a genuine dispute of material fact, the issue of when the parties terminated their relationship was a question for a jury. Since the applicability of either exception rested on this determination, the defendants could not rely on these two exceptions to support summary judgment.

Claims, liens, and encumbrances exception. Specifically, the Act excluded from repurchase “[a]ny item of inventory for which the dealer does not have title free of all claims, liens, and encumbrances other than those of the supplier.” The defendants contended that the exception applied because the dealer did not clear all liens and encumbrances until April 2012.

According to a former credit manager for BB Buggies, research revealed that the dealer’s inventory could be encumbered and could not be transferred until a free and clear title status had been received. On December 19, 2011, BB Buggies sent a letter to the dealer’s counsel requesting that it provide some information “as to how [the dealer] will provide BBB with clear title to these vehicles if and when they are repurchased.” Over four months later, on April 16, 2012, the dealer, through its attorney, responded that the vehicles were free from any encumbrances. As such, the defendants argued that, “[b]y the time that James River was able to provide all vehicles for repurchase free of any liens or encumbrances, the XT was no longer a current model and the Classics had been purchased more than 36 months earlier.”

The defendants’ purported use of the exception, however, relied on an unfair reading of the statute, the court reasoned. Specifically, the defendants’ argument conflated three statutory exceptions. The Act clearly excluded from repurchase encumbered vehicles and/or vehicles purchased more than 36 months prior to the notice of termination and/or vehicles that were not “current models.” These exceptions could not be combined, as the defendants suggested, to create a new exception. The fact that the dealer waited four months to respond to the defendants’ letter was immaterial in determining whether the vehicles were, in fact, encumbered and thus not subject to repurchase, according to the court.

Answering the question of whether the vehicles were encumbered, however, would require that the court resolve a genuine issue of material fact. There was a question of whether the dealer’s “floor plan” credit system with Bank of America constituted a lien or encumbrance under the Act. If James River could sell any buggy without the consent of the bank, and pass title free and clear of any security interest, then the buggies could have been “encumbered,” but they could have been transferred free of any security interest. Whether the vehicles were in fact encumbered was thus a point of dispute, and summary judgment was inappropriate with respect to the claims, liens, and encumbrances exception to the Act.

“New, unused, and undamaged condition” exception. The defendants also argued that they were not required to repurchase the 2008 Classic model and one of the XT model buggies because these buggies were not in “new, unused and undamaged condition” as required under the Act. Because this issue was largely factual, it was difficult at this time to determine the amount of damage to the vehicles, and whether that damage rose to the level envisioned by the Act. Accordingly, summary judgment with respect to the “new, unused, and undamaged condition” exception was inappropriate, the court held.

Textron was not liable under the Act. The Act defined “agreement” as a contract or agreement between a dealer and a wholesaler, manufacturer, or distributor. In the absence of an “agreement,” there was no liability under the Act. Here, there was no evidence to suggest that the dealer entered into a dealer agreement with Textron. In fact, James River admitted in its corporate deposition that it had no formal or informal agreement with Textron apart from its relationship with BB Buggies. Despite its best efforts, James River failed to provide any evidence to the contrary.

The dealer argued that Textron was liable under the Act because BB Buggies lacked the authority to transact business in Virginia, and BB Buggies had to rely on Textron’s authority to conduct its business. This fact alone, however, was insufficient to subject Textron to liability under the Act, the court decided. In the alternative, the dealer argued that Textron was liable under the Act because all of BB Buggies’ sales have to “go through” E-Z-Go, a division of Textron. This fact established, at most, that the dealer had some dealings with Textron. It did not establish that the dealer and Textron entered into a dealer agreement as defined by the Act.

The only real connection between the dealer and Textron was the fact that BB Buggies was a wholly owned subsidiary of Textron. Finding liability on that basis, however, failed to comport with the terms of the Act and conflicted with the well-established legal principle that parent companies were not liable for the acts of a subsidiary. As such, summary judgment was granted to Textron.

The case is No. 4:13-cv-00004.

Attorneys: Rachael Adrienne Sanford (Clement & Wheatley PC) for James River Companies, Llc. Grant Edward Kronenberg (Morris & Morris, P.C.) for BB Buggies, Inc.

Companies: James River Companies, Llc.; BB Buggies, Inc.; Textron, Inc.

Cases: FranchisingDistribution VirginiaNews