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Challenging Site Control On Automobile Dealership Property

John Pico

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Background Information

The automobile industry has a great impact upon the economy of the United States and the courts have a definite interest in reviewing the use and abuse of site control.

According to a January 26, 2009 report by Reuters, approximately 50 percent of all U. S. retail sales today are from franchised operations. The number of franchises in the United States has been steadily increasing since the 1950s. Annual franchise sales now total more than $1 trillion.

With respect to the automobile industry in particular, John Engler, president of the National Association of Manufacturers (NAM) stated:

“I cannot stress enough the importance of the auto industry to our nation's economy. The auto industry represents the country's largest manufacturing base. Automobiles account for $690 billion of U. S. retail sales, or about 20 percent of the total. One out of every 10 U. S. jobs, or about 13 million jobs, is auto-related, and auto workers receive $355 billion annually in compensation. " National Association of Manufacturers, February 18, 2009, Washington, D. C. "

Almost 4 percent of U. S. gross domestic product is auto-related, representing 10 percent of U. S.industrial production by value. One in 10 U. S. jobs is connected to the automobile industry, which also provides health-care benefits to 2 million Americans and supports nearly 800,000 retirees and spouses with pension benefits.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. , has said that if Ford Motor Company or General Motors Corporation (GM) fails, as many as 2 million jobs could be lost. Washington Post, October 31, 2008. See too: Congressman Sandy Levin (D) MI, in a 2010 House Speech. “The U. S. auto industry represents almost four percent of U. S. gross domestic product and 20% of all U. S. retail sales. "

As a result importance of the auto industry, the United States Congress and all of the states have passed “Dealer's Day-in-Court Acts" which give the automobile dealer a cause of action, where none previously existed, for damages where the automobile manufacturer has failed to act in “good faith" (U. S. Code, Title 15, § 1222).

The avowed purpose of Dealer Day-in-Court Act legislation is to alleviate the imbalance of bargaining power between automobile dealers and manufacturers. See: Bateman v. Ford Motor Co. , 302 F.2d 63; 310 F.2d 805.

Many states have legislation that prohibits manufacturers from imposing site-control upon an automobile dealer without the dealer's consent and without the dealer being compensated for the same.

Other states, such as California [SB 424], have passed laws that prohibit manufacturers from requiring a dealer to establish or maintain “exclusive facilities" if the imposition of the requirement would be unreasonable in light of all existing circumstances, including economic conditions.

The California law goes on to state that in any proceeding in which “reasonableness" or capital requirements is an issue, the manufacturer shall have the burden of proof.

According to a March 22, 2010 Automotive News article by Donna Harris, there are currently forty states in which franchise legislation has been proposed in 2009 and 2010.

It is important to note, however, that it is more difficult to challenge site control if the dealer has been compensated for it by the factory - and factories will almost always claim the dealer was compensated.

See, for example, Halleen Chevrolet, Inc. v. General Motors, where the court notes:

“David Fowler, an area manager for GM's dealer network development, testified that the $350,000 paid to the dealer was for “site control, " which assures GM that a piece of real estate is used exclusively for GM operations. He specifically stated that the $350,000 payment made to [the dealer] is comparable to the amount of consideration that would be given to other GM dealers in these types of situations where GM is obtaining control of the real estate for twenty-five years. [The dealer] was not required to accept the payment for site control, and other dealers have previously refused to relinquish site control to GM and thus, received no payment. " Halleen Chevrolet, Inc. et al. , Appellants-Appellants, v. General Motors Corporation et al. , Appellees-Appellees, 2001 Ohio App. LEXIS 2862, * No. 00AP-1454. Subsequent History: [*1] Writ of certiorari denied: Halleen Chevrolet, Inc. v. GMC, 2002 U. S. LEXIS 3604 (U. S. May 20, 2002). Halleen was a relocation issue, taken up to the Court of Appeals of Ohio, Tenth Appellate District, but it cited important information regarding GM's site-control policies. "

See too: Douglas Bigelow Chevrolet, Inc. et al. , Appellants, v. General Motors Corporation, Appellee. No. 02AP-1156, 2003 Ohio App. LEXIS 5258; 2003 Ohio 5942, (Ohio, 10th Appellate District), November 6, 2003, Rendered SUBSEQUENT HISTORY: Appeal denied by Douglas Bigelow Chevrolet, Inc. v. GMC, 2004 Ohio LEXIS 616 (Ohio, Mar. 24, 2004), where, in affirming GM's right to relocate a dealership , the Court said: “See Report and Recommendation, at P51-53 (finding GM's payment for site control is pursuant to Chevrolet's normal business policy and same business policy is available to appellants if appellants decided to relocate and GM desired site control). "

Preparing Your Case for Challenging Site Control

Unless there is a specific law prohibiting site control even with the dealer's consent, legally, breaking the agreement will be an uphill battle.

As stated in Parmelee v. Cameron, 41 N. Y. 392, 395:

“it is not enough to induce a court of equity to interfere that a bargain is hard and unreasonable. Every man is presumed to be capable of managing his own affairs, and whether his bargains are wise or unwise, is not ordinarily a legitimate subject of inquiry in a court of either legal or equitable jurisdiction. "



Prepare your case

1. Determine your Goal. Before you talk to anyone, or do anything, determine exactly what you want to accomplish. Is your goal to dual, sell to another dealer, switch franchises, lower your rent, refinance your property, close your dealership, sell to a non-automotive party, or raise the rent to yourself? Is it a combination of the above, or is it something else? Whatever it is, write it out clearly and concisely.

2. Define your Target. Read the terms of your site control agreement. Did you grant site control in your lease, in your loan agreement, in a side agreement, through your sales and service agreement or in some other fashion? Was there a combination of agreements?

3. Be aware of your Environment. Understand what other factors affect your property. Some auto malls restrict use in the mall to new car dealerships; others also allow used car dealerships. Some allow restaurants. Most malls have CC&Rs recorded against the properties in the mall. Others have associations with restrictive by-laws; some have both. Some cities will not allow commercial used car sales without a new car dealership associated with it. Other cities have zoning uses that restrict malls to new car dealerships.

4. Organize your Exhibits. Index all of your issues and documents. Set up a separate file with the leases, CC&Rs, by-laws, side-agreements and so forth. Categorize every document you have that relates to your goals and issues

5. Prepare your Arguments. Get a qualified consultant on your team and explain your objectives. Then, together enumerate all of the reasons why the factory should grant your request. “There is plenty of property around me that the factory could get cheaply if I were not here. " Or, “I am losing money and cannot continue unless I sell to a third party. " Or, “I cannot make it without another line. " Or, “When I granted site control to GM and agreed to keep the property in the GM family I had more brands in my dealership to support the rent factor. The bargain was that I would keep my store a Buick Pontiac GMC dealership, and GM unilaterally terminated Pontiac. "

Write down as many reasons you can imagine, no matter how esoteric. You will sort out the good from the bad when you complete item 6. Sometimes something may sound sophomoric to you, but it could be the gem that wins the argument for you. Let third parties decide that.

6. Find a Sounding Board. Present your case and your objective(s) to your attorney and let him or her scrutinize and polish it.

7. Rehearse. Once you have accomplished all of the above, rehearse your pitch.


Create a Fan Base

Get as many factory and finance people on your side as you can. Start at the bottom and work up: DSM, Marketing Manager, Zone and Manager, District Manager; Regional Manager.


Find out who can make the decision and Take your case to that person

After you have created a support base, you should then present your case to the person that can make the decision for you - and that is usually not the party that holds the site control. In other words, the lender or Realty may hold the control documents, but the factory can influence them.

Always keep in mind the history and purpose of site control. Argonaut was created to support General Motors Corporation; Ford Land Development Corporation was created to support Ford Motor Company; and Chrysler Realty was created to support Chrysler Corporation.

The players and motivations became a bit hazy when GM sold General Motors Acceptance Corporation (GMAC) to Cerberus and Cerberus bought Chrysler Financial. The players and motives became even more confusing when Cerberus had GMAC become a bank and merged it with Chrysler Financial.

Ford Motor Credit, for example, is owned by Ford Motor Company and, consequently, can do what it wishes. If Motors indicates to Credit it would like to have a deal approved, the deal is usually approved. When GM sold GMAC to Cerberus, however, GMAC became independent of the manufacturer's yoke. Further, when GMAC became a true bank (Ally Financial), GMAC placed itself under the banking laws and the OCC (Office of the Comptroller of Currency). Consequently, if GM suggests to Ally they would like to see a real estate transaction approved, even if Ally wants to cooperate, the OCC rules could prohibit the transaction.

The OCC cannot have one bank playing by one set of rules and another bank operating independently of those rules. Currently, Ally is in a transition phase that will result in it being under the same rules as Key Bank, Chase, Comerica and the other automotive friendly banks.


Sue if you Must

I say “if you must" because a lawsuit is like cow dung. If you don't want your hands to smell, you don't touch it.

Forewarned is forearmed; however, if one must sue to get out of a site control restriction one feels is intolerable, there are several approaches available.

1. Federal Law. The Federal “Dealer's Day-in-Court Act" (U. S. Code, tit. 15, § 1221; see General Business Law, § 197),

“gives the automobile dealer a cause of action, where none previously existed, for damages where the automobile manufacturer has failed to act in “good faith" (U. S. Code, tit. 15, § 1222). . . . . The avowed purpose of the legislation is to alleviate the imbalance of bargaining power between automobile dealers and manufacturers. . . . Division of Triple T v. Mobil Oil Corp. , 60 Misc.2d 720 (1969), 304 N. Y. S.2d 191. "

Federal courts have not hesitated in the exercise of their equitable discretion to grant injunctions under the “Dealer's Day-in-Court Act" despite the absence of any statutory injunctive remedy specifically conferred upon the franchise. See, e. g. , Bateman v. Ford Motor Co. , 302 F.2d 63; 310 F.2d 805. The avowed purpose of the legislation is to alleviate the imbalance of bargaining power between automobile dealers and manufacturers. (Ibid at page 723. )

2. State laws. The easiest attack is to have state laws on your side and to bring yourself under them. Being cognizant of prohibitions against ex post facto laws, most legislatures make laws prospective, rather than retrospective. In one instance, however, the New Jersey assembly did pass an ex post facto bill and the governor vetoed it, sending it back with a note that stated:

“It is my recommendation that this language be amended so that the act shall not apply to any existing franchises. It is to be noted, however, that any amendment or renewal of an existing franchise after the effective date of this act would come within the provisions of the act. " Shell Oil v. Marinello, 120 N. J. Super. 357 (1972) at page 370, 294 A.2d 253. "

The idea that an amendment to a lease agreement opens the door to allow new legislation apply to existing contracts, also raises the issue of whether or not a dealer who has signed a site-control agreement with the factory, or the factory's real estate arm, can take advantage of new laws as well when the factory “amends or renews" only the existing franchise agreements, and not the lease itself.

In the Triple T v. Mobile Oil case cited above, the court states at page 728:

“. . . . plaintiff has failed to convince the court that the retail dealer contract and lease were in fact separate contractual agreements (see Tibbetts Contr. Corp. v. O & E Contr. Co. , 15 N. Y.2d 324, 338; Portfolio v. Rubin, 233 N. Y. 439; 7 Encyclopedia, New York Law of Contracts, §§ 1405-1407). "

As mentioned above, some forty states have enacted, or are in the process of enacting laws that protect dealers from various forms of site-control.

3. Constructive Termination. See Saturn of Denville New Jersey v. General Motors Corporation, Civil Action No. 08-CV 5734 (DMC) 2009. In July 2008, GM's newly appointed General Sales Manager, Mr. Sterling Wesley called a meeting of all Saturn retailers in the New York District marketing area, including Plaintiffs. During this meeting, Mr. Wesley advised the retailers in attendance that GM was “out of money" and instructed them that they were on their own and should “do what they had to do" to survive. In reaction to this meeting, Plaintiffs submitted an application to obtain a KIA franchise with the intention of combining the Saturn facility with a KIA dealership. Plaintiffs argued that GM's actions amounted to a constructive termination of their franchise agreement.

Plaintiffs also asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, intention interference with a prospective business advantage and equitable estoppel. GM argued that “plaintiffs signed a contract and a downturn in the economy cannot operate to transform a valid contractual provision into a violation of the NJFPA, the ADDCA or into grounds for Plaintiffs other claims.

In ruling for the plaintiffs, the court found: “Simply stated, as pleaded by Plaintiffs, GM's conduct over the last few years in conjunction with its refusal to allow Plaintiffs to dual their dealership appears to place unreasonable requirements on Plaintiffs.

For challenging exclusivity provisions, see too: GMC v. New A. C. Chevrolet, 263 F.3d 296 (3d Cir. 2001).

4. Doctrine of Commercial Frustration.

The impracticability doctrine became known as the doctrine of frustration and requires that performance would be so economically burdensome that it would be wasteful for the obligations to be performed.

The doctrine of commercial impracticability was first expressed in the U. the case of Mineral Park Land Co. v. Howard, 156 P. 458 (1916) where the Supreme Court of California stated that “a thing is impossible in legal contemplation when it is not practicable. " Force Majeure and the Performance Excuse: A Review of the English Doctrine of Frustration and Article 2-615 of the Uniform Commercial Code, Babatunde Osadare

The Doctrine of Impracticability was codified in Article 2-615 of the Uniform Commercial Code (1969), which provides:

“Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance: (a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not in breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was the basic assumption on which the contract was made or by compliance in good faith with any foreign or domestic governmental regulation or order whether or not it later proves to be invalid. "

The U. S. Restatement (Second) of Contracts (1969) also makes provision for the doctrine of excused performance.39 The provision is akin to Article 2 of the UCC save that it was designed to expressly protect both the buyer and the seller.

In 1981, the court in Asphalt International v. Enterprise Shipping SA, 667 F. 2d 261 excused the defendant of its duty to repair a ship because the cost of repair far outweighed its economic value.

The courts, however, have routinely denied the benefit of the Doctrine of Impracticability because of economic downturns or spikes in the costs of goods. See: In Maple Farms Inc. v. City School District of Elmira, 352 N. Y. S. 2d 4784 (1974) and Neal Cooper Grain Co. v. Texas Sulphur Co. , 508 F. 2d. 208 (1974).

See too: Lloyd v. Murphy 153 P. 2d. 47 (1944) where the California Supreme Court held that the fact that performing an obligation becomes more difficult or even unprofitable is not of itself sufficient to excuse performance if the causes can be reasonably anticipated.

5. Doctrine of Impossibility.

If uncontrollable circumstances render performance impossible, a party may be released from a contract under the doctrine of impossibility. The definition of impossibility has been expanded to mean “impractical. " In other words, the contract could only be completed only at an excessive and unreasonable cost.

In order for the doctrine to be invoked something unexpected must have occurred (perhaps Pontiac being terminated, Saturn going out of existence, or Hummer being abandoned) and the risk of that occurrence had not been accounted for either by custom or agreement. The doctrine can only be invoked if those three requirements are met. See: Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D. C. Cir. 1966). In short, the event must have been both unexpected and uncontrollable by the party seeking the relief and unforeseeable.

For a history of site control see:A History of Automobile Dealership Site Control"

For a discussion of site control in the 21st Century, see: “Site Control for Automobile Dealerships in the 21st Century "


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