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«Case 1:09-cv-11570-RGS Document 63 Filed 03/22/10 Page 1 of 14 UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS CIVIL ACTION NO. 09-11570 SOUTH ...»

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Case 1:09-cv-11570-RGS Document 63 Filed 03/22/10 Page 1 of 14

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

CIVIL ACTION NO. 09-11570

SOUTH SHORE IMPORTED CARS, INC.

D/B/A SOUTH SHORE VOLKSWAGEN

v.

VOLKSWAGEN OF AMERICA, INC.,

AN OPERATING UNIT OF

VOLKSWAGEN GROUP OF AMERICA

MEMORANDUM AND ORDER ON

CROSS-MOTIONS FOR SUMMARY JUDGMENT

March 22, 2010 STEARNS, D.J.

Plaintiff South Shore Imported Cars, Inc., d/b/a South Shore Volkswagen (“South Shore”) is a party to a Dealer Agreement with defendant Volkswagen of America, Inc.

(“VWoA”). The Agreement authorizes South Shore to operate a Volkswagen dealership in Hanover, Massachusetts. On July 7, 2009, VWoA served South Shore with a notice of its intent to terminate the Agreement. In its Amended Complaint, South Shore alleges that VWoA: (1) acted without good cause and in an arbitrary or unconscionable manner in violation of Mass. Gen. Laws ch. 93B, § 5(a); (2) violated Mass. Gen. Laws ch. 93B, § 4(c)(8), by failing to promptly mail a dealership application to a successor-transferee nominated by South Shore; and (3) violated the common law implied covenant of good faith and fair dealing. The parties have filed cross-motions for summary judgment. The court heard oral argument on the motions on March 12, 2010.

BACKGROUND Case 1:09-cv-11570-RGS Document 63 Filed 03/22/10 Page 2 of 14 South Shore opened as an Authorized Volkswagen Retailer in Hanover in October of 1990. On April 28, 2000, South Shore and VWoA entered into the Dealer Agreement that is in dispute. The Agreement requires South Shore, among other things, to maintain an open and unrestricted wholesale line of credit, or “floor plan,” to finance the purchase of a revolving inventory of new Volkswagen vehicles.1 Dealers are not permitted to purchase vehicles from Volkswagen except through an approved floor plan.

Prior to December of 2008, South Shore maintained an unrestricted floor plan with Sovereign Bank (“Sovereign”), through which it purchased vehicles from Volkswagen and other manufacturers.2 That month, however, South Shore began to experience “extreme financial difficulties.” South Shore fell nearly one million dollars “out of trust” with Ford Motor Credit and approximately $600,000 behind in its payments to Sovereign. In early December of 2008, Sovereign placed a hold on South Shore’s floor plan. Sovereign notified VWoA of the hold in a letter mailed to VWoA on December 2, 2008.

Paragraph 2 of the Dealer Agreement incorporates certain documents, including the Volkswagen Dealer Agreement Standard Provisions and the Volkswagen Dealer

Operating Standards. Volkswagen Operating Standard 3 requires that:

[a]n open and unrestricted wholesale line of credit dedicated solely toward the purchase of new Volkswagen vehicles shall be maintained with a reputable financial institution reasonably acceptable to VWoA. The minimum amount of this wholesale line of credit shall be in an amount determined by VWoA. VWoA shall determine this amount by dividing Dealer’s Annual Planning Volume by six, resulting in Dealer’s average 60day supply, and multiplying that number of units by the average invoice of a new Volkswagen vehicle.

The Sovereign floor plan financed the purchase of vehicles from Volkswagen, Chrysler, Jeep, and Dodge. A second floor plan established by South Shore with Ford Motor Credit financed the purchase of Volvo vehicles.

Case 1:09-cv-11570-RGS Document 63 Filed 03/22/10 Page 3 of 14 On December 8, 2008, VWoA sent South Shore a letter declaring a breach of the Dealer Agreement and demanding that South Shore submit a plan to restore its unrestricted line of credit.3 VWoA also wrote to Rose Bokavich, South Shore’s Chief Operating Officer, reminding her of the floor plan requirement and asking about the status of South Shore’s relationship with Sovereign. Bokavich assured VWoA that the hold would be “lifted momentarily” and that she was negotiating with several other lenders to obtain additional financing. Neither eventuality bore fruit. Despite the default and a shrinking inventory of new vehicles,4 VWoA permitted South Shore to continue operating interim as an Authorized Volkswagen Dealer.5 In the meantime, South Shore began searching for a buyer-successor to the dealership. On March 10, 2009, South Shore executed an Assist to Sell Letter authorizing VWoA to help with the sale of its dealership assets. In June of 2009, Michael McKean, South Shore’s business broker, informed VWoA that he was negotiating the sale of South Shore’s assets to Gerald and Timothy Good (“Good Brothers”), subject to VWoA’s South Shore argues that VWoA’s response deviated from the procedure it usually followed when one of its dealers lost its floor plan financing. According to South Shore, VWoA typically sends a letter giving the dealer thirty days to cure the default. If the dealer fails to do so, VWoA sends a second letter notifying the dealer that its Dealer Agreement will be terminated if the line of credit is not restored within the next fifteen days. Only if a dealer misses this second deadline is a Termination Notice sent.





Without the floor plan in place, South Shore’s sales of new Volkswagen vehicles declined from the 200-300 range in 2007 and 2008, to just 40 in 2009.

The forbearance permitted South Shore to, among other things, continue to service and repair customer vehicles remaining under warranty.

Case 1:09-cv-11570-RGS Document 63 Filed 03/22/10 Page 4 of 14 approval.6 On June 17, 2009, Thomas Murphy, VWoA’s Franchisor Representative, handdelivered a letter to South Shore notifying it that it had fifteen days to cure the default.

Murphy met the same day with Rose Bokavich and Richard Bokavich, South Shore’s President. They discussed the possible sale of the dealership to the Good Brothers, Frederick Shaw, or Daniel Quirk, as well as a “last ditch” effort to obtain new floor plan financing through GMAC.7 The fifteen-day grace period expired without the obtaining of new financing or a firm offer from a willing buyer.

On July 7, 2009, VWoA, pursuant to Mass. Gen. Laws ch. 93B, § 5(h), served a sixty-day Notice of Termination on South Shore, citing its failure to maintain an open and unrestricted floor plan. The termination was to take effect on September 8, 2009.

On July 27, 2009, South Shore signed a letter of intent to sell the dealership to the Good Brothers. Rose Bokavich telephoned Michael Rueckert, VWoA’s Regional Network Manager, informing him of the status of the negotiations. Rueckert told Bokavich that VWoA would need to review an executed Asset Purchase Agreement. On August 28, 2009, the Good Brothers and South Shore executed a Purchase and Sale Agreement and Asset Purchase Agreement covering the dealership’s real estate and other assets.

Between January of 2009 and July of 2009, South Shore approached several other potential buyers without success.

Gerald and Timothy Good have over nineteen years of experience as automobile dealers, having owned and operated a Ford dealership in Randolph, Massachusetts, and a Dodge dealership in Weymouth. Frederick Shaw owns a Saab dealership in Hingham, Massachusetts. Daniel Quirk is the owner of the largest Volkswagen dealership in New England.

Case 1:09-cv-11570-RGS Document 63 Filed 03/22/10 Page 5 of 14 Rose Bokavich contacted Rueckert the following business day, informing him of the Agreements and requesting that he forward a dealership application to the Good Brothers.

Bokavich emailed the Agreements to Rueckert on August 31, 2009. On September 4, 2009, despite earlier positive indications, VWoA decided against sending a dealership application to the Good Brothers. Numerous telephone calls and emails from Bokavich and McKean to Rueckert between August 31, 2009, and September 8, 2009, went unanswered.

South Shore filed the original Complaint in Plymouth County Superior Court on September 8, 2009, seeking, among other relief, to enjoin the termination of the Dealer Agreement. See Mass. Gen. Laws ch. 93B, § 5(f). VWoA removed the case to the federal court on September 21, 2009, on diversity grounds. South Shore filed the Amended Complaint in the district court on November 6, 2009. On December 9, 2009, the parties entered into a standstill agreement pending this court’s ruling on the cross-motions for summary judgment.

–  –  –

A district court grants summary judgment “if the pleadings, discovery and the disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R.

Civ. P. 56(c). A party seeking summary judgment bears the initial burden of demonstrating that there is no genuine issue as to a material fact. See Celotex Corp. v. Catrett, 477 U.S.

317, 325 (1986). The nonmovant in turn bears “the burden of producing specific facts sufficient to deflect the swing of the summary judgment scythe.” Mulvihill v. Top-Flite Golf Case 1:09-cv-11570-RGS Document 63 Filed 03/22/10 Page 6 of 14 Co., 335 F.3d 15, 19 (1st Cir. 2003). “The mere existence of a scintilla of evidence is insufficient to defeat a properly supported motion for summary judgment.” Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Consequently, “a party opposing summary judgment must present definite, competent evidence to rebut the motion.” Torres v. E.I.

Dupont De Nemours & Co., 219 F.3d 13, 18 (1st Cir. 2000) (internal quotations and citations omitted). On cross-motions for summary judgment, “the court must consider each motion separately, drawing inferences against each movant in turn.” Reich v. John Alden Life Ins. Co., 126 F.3d 1, 6 (1st Cir. 1997).

In 1970, the Massachusetts Legislature enacted a set of rules regulating business practices between vehicle manufacturers and dealers, codified as Mass. Gen. Laws ch.

93B. The “Dealer’s Bill of Rights,” as it is colloquially known, defines a motor vehicle “dealer” as “any person who, in the ordinary course of its business, is engaged in the business of selling new motor vehicles to consumers or other end users pursuant to a franchise agreement,” while a manufacturer is defined as “any person engaged in the business of manufacturing or assembling new and unused motor vehicles.” Mass. Gen.

Laws ch. 93B, § 1. A “franchise” is “an oral or written arrangement for a definite or indefinite period in which a manufacturer or distributor grants to a motor vehicle dealer a license to use a trade name, service mark, or related characteristic, and in which there is a community of interest in the marketing of new motor vehicles or services related thereto at wholesale, retail, leasing, or otherwise.” Id. There is no dispute that South Shore is a dealer, that VWoA is a vehicle manufacturer, and that their relationship is one of franchisor-franchisee. Consequently, the court will turn first to Chapter 93B for guidance.

Case 1:09-cv-11570-RGS Document 63 Filed 03/22/10 Page 7 of 14 Termination of the Dealer Agreement Under Massachusetts law, [i]t shall be a violation of subsection (a) of section 3 for a manufacturer, distributor or franchisor representative without good cause, in bad faith or in an arbitrary or unconscionable manner: (1) to terminate the franchise agreement of a motor vehicle dealer; (2) to fail or refuse to extend or renew the franchise agreement of a motor vehicle dealer upon its expiration; (3) to offer a renewal, replacement or succeeding franchise agreement containing terms and conditions the effect of which is to substantially change the sales and service obligations, capital requirements or facilities requirements of a motor vehicle dealer; or (4) to amend, add or delete any other material term or condition set forth in a motor vehicle dealer’s franchise agreement.

Mass. Gen. Laws ch. 93B, § 5(a).

“Good cause” for termination of a franchise agreement is found to exist:

if the motor vehicle dealer failed to comply with or observe a provision of the franchise agreement that is material to the franchise relationship, including without limitation, reasonable sales and service performance criteria and capital, personnel, and facility requirements, which were communicated in writing to the motor vehicle dealer within a reasonable period before the effective date of the termination or nonrenewal, such that a reasonable opportunity to cure was afforded.

Mass. Gen. Laws ch. 93B, § 5(h).

The parties do not dispute that the Dealer Agreement incorporates Operating Standard 3, which requires South Shore to maintain “[a]n open and unrestricted wholesale line of credit dedicated solely toward the purchase of new Volkswagen vehicles.” Also undisputed is that South Shore’s failure to maintain an open and unrestricted floor plan constituted a breach of the Dealer Agreement. The only dispute is whether that breach was material.

A term is material to an agreement when it involves “an essential and inducing Case 1:09-cv-11570-RGS Document 63 Filed 03/22/10 Page 8 of 14 feature.” Buchholz v. Green Bros. Co., 272 Mass. 49, 52 (1930). Whether a term in a Dealer Agreement requiring a dealer to maintain a floor plan to finance the purchase of its inventory of vehicles is material has not been addressed by the Massachusetts appellate courts. Nonetheless, the issue is not one of first instance. In 2002, the Maryland District Court granted summary judgment for a defendant manufacturer after a dealer lost its floor plan financing where the Dealer Agreement provided “that [the manufacturer] may terminate the agreement upon the ‘[l]oss of an adequate wholesale credit line without implementing a satisfactory substitute within thirty (30) days.’” Hale Trucks of Maryland, LLC v. Volvo Trucks N. Am., Inc., 224 F. Supp. 2d 1010, 1020 (D. Md. 2002). Three years later, the Connecticut District Court held that a manufacturer had “good cause” under the Connecticut Franchise Act to terminate a franchise after the dealer had failed to maintain floor plan financing. See Chic Miller’s Chevrolet, Inc. v. Gen. Motors Corp., 352 F. Supp.



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