Wrongful Refusal to Consent to the Sale of the “Terminated” Dealer’s Assets


Lawfully “Terminated” Motorcycle Dealer Retains Right to Recover Damages

By James Mulcahy on December 11, 2013

Very often, bad facts produce judicial pronouncements that ostensibly appear logically tortured, but which, upon closer observation, reflect the Court’s attempt to exercise its perception of good judgment and fundamental fairness. On November 26, 2013, a California appellate court provided an example of this phenomenon. In Powerhouse Motorsports Group, Inc. v. Yamaha Motor Corporation, U.S.A., 2013 Cal. App. LEXIS 949 (Cal. App. 2nd Dist. 2013), the California Court of Appeal affirmed a $1,336,080 judgment in favor of a motorcycle dealer and against its distributor, concluding that the lawfully “terminated” dealer nevertheless was rightfully entitled to sue for – and recover from the distributor – compensatory and punitive damages resulting from the distributor’s wrongful refusal to consent to the sale of the “terminated” dealer’s assets and franchise agreement to another dealer. Powerhouse suggests that, when presented with disturbing facts, the law can emphasize practicality over legal construct.

California’s Vehicle Code

In California, the franchise relationship between vehicle manufacturers (and their distributors) and their motor vehicle dealers is regulated under the California Vehicle Code.[1] The stated purpose of this statutory scheme is “to avoid undue control of the independent new motor vehicle dealer by the vehicle manufacturer or distributor and to insure that dealers fulfill their obligations under their franchises and provide adequate and sufficient service to consumers generally.”[2] Two types of disputes which often come into play are these: (a) dealer terminations; and (b) dealer transfers.

Dealer Terminations: Section 3060.

In the event that a manufacturer/distributor wishes to terminate a dealer agreement, it must comply with the requirements of section 3060. This section of the Vehicle Code requires that, before a manufacturer/distributor can terminate any dealer agreement, it must prepare and deliver to the affected dealer a written termination notice that (a) identifies the specific grounds for the termination; and (b) notifies the dealer that it has the right to challenge – or “protest” – the anticipated termination. If the dealer timely files a “protest’ with the California New Motor Vehicle Board (the “Board”), then the manufacturer/distributor cannot terminate the dealer’s agreement unless and until it proceeds to an evidentiary hearing before the Board, and the Board thereafter makes findings which conclude that the manufacturer/distributor has made a sufficient showing that there exists “good cause” for the termination.[3] If, however, the dealer does not file a timely protest, then the dealership agreement automatically terminates.

For example, under section 3060, a manufacturer/distributor may terminate a dealer agreement when a motor vehicle dealer has failed to conduct its sales and service obligations for seven consecutive business days, provided that the circumstances give rise to a good faith belief that the dealer is actually going out of business. Under these circumstances, section 3060 requires that the manufacturer/distributor’s written termination notice explicitly notify the dealer that: (i) it has “the right to file a protest with the [Board] in Sacramento and [to] have a hearing in which [the dealer] may ‘protest’ the termination of [its] franchise under [the] California Vehicle Code;” and, (ii) the dealer must file its “protest” with the Board within 10 calendar days following its receipt of the written notice of termination. If the dealer fails to file its protest within the 10-day period, then it forfeits its right to contest the termination before the Board.

If however, the dealer does in fact timely file its protest, then the Board notifies the manufacturer/distributor that it may not terminate the dealer agreement until after an evidentiary hearing before the Board on the issues related to the Board’s determination whether the proposed termination is valid and enforceable.[4]

Dealer Transfers: Section 1171.3.

Section 1171.3 makes it unlawful for a manufacturer or distributor “to prevent . . . or attempt to prevent . . . any dealer from selling or otherwise transferring its interest in a dealership franchise to another person.” Under section 1171.3, a manufacturer/distributor may require its approval of a franchise sale, but such approval “shall not be unreasonably withheld.”[5] In general, it may be said that it is not unreasonable for a manufacturer/distributor to withhold consent to a proposed transfer of a dealer’s franchise when: (a) the dealer is in material default under the dealer agreement; or (b) the dealer agreement previously has been terminated by the manufacturer/distributor. In the event of a dispute involving the reasonableness of a manufacturer/distributor’s refusal to commit to a sale or transfer, then the dealer must “initiate an action directly in any court of competent jurisdiction.”[6] In other words, the Board has no jurisdiction and the dispute must be resolved in court.

Jurisdiction of The California New Motor Vehicle Board.

Section 3050 delegates to the authorized state administrative agency – i.e., the New Motor Vehicle Board (“Board”) – certain responsibilities and powers. The Board’s jurisdiction, however, is not all encompassing; instead, the power granted to the Board by the California state legislature is qualified and incomplete.

The Board has the power to hear and decide, within the limitations and in accordance with the procedural requirements set forth in the Vehicle Code, motor vehicle dealer challenges to manufacture’s/distributor’s proposed terminations of dealer/franchise agreements. Section 3050, however, does not empower the Board to hear or decide common law or certain other Vehicle Code statutory claims asserted by dealers against manufacturer/distributors. For example, the Board does not have jurisdiction over claims by dealers that the manufacturer/distributor unlawfully prevented the dealer’s sale or transfer of its franchise – or unreasonably withheld consent to the sale or transfer – in violation of section 11713.3.[7]

Question:

So then, what happens when the Board allows a manufacturer/distributor to terminate its dealer’s motor vehicle franchise agreement – because the dealer did not timely contest the validity of the termination – but, after having been terminated, the dealer sues the manufacturer/distributor in Court for unreasonably withholding its consent to the sale of the franchise?

Answer: Although logically counterintuitive upon initial observation – e.g., if the dealer agreement lawfully has been terminated, then the dealer, ipso facto, has no agreement to transfer and the manufacturer/distributor, ipso facto, has no legitimate transaction that it must consent to – the Board’s validation of the termination does not preclude the dealer’s right to seek and recover compensatory and punitive damages from the manufacturer/distributor in Court for its unlawful refusal to approve the sale of the “terminated” dealer’s franchise.

The Powerhouse v. Yamaha Facts.

Very often, bad facts produce judicial pronouncements that ostensibly appear logically tortured, but which, upon closer observation, nevertheless reflect the Court’s attempt to exercise fundamental good judgment and fundamental fairness. The opinion of the California Court of Appeal in the Powerhouse case may be the most recent example of this phenomenon. Here are the facts:

  • 1998: Timothy Pilg (“Pilg”) becomes a Yamaha motorcycle vehicle dealer pursuant to a written franchise agreement.
  • 2007: Pilg incorporates Powerhouse Motorsports Group, Inc. (“Powerhouse”) and Yamaha consents to the assignment of Pilg’s franchise agreement to Powerhouse.
  • June 16, 2008: As a result of the severe economic conditions, Powerhouse voluntarily closed the Yamaha motorcycle dealership, which never reopened again.
  • This was a material violation of the Yamaha franchise agreement and grounds for termination by Yamaha under section 3060.
  • June 19, 2008: Pilg contacted Yamaha’s division manager (“DM”), and asked whether Powerhouse could sell its franchise to another existing Yamaha motorcycle dealer (“MDK”). Pursuant to section 1173.3 of the California Vehicle Code, it is unlawful for a manufacturer or distributor “to prevent . . . any dealer from selling or otherwise transferring its interest in a dealership franchise to another person.” Thus, although Yamaha could require Pilg (Powerhouse) to obtain its consent and approval of a franchise sale, it could not unreasonably withhold such consent. Yamaha’s DM told Pilg that the sale was possible even though Powerhouse had closed and was in violation of its franchise agreement.
  • June 21, 2008: Powerhouse and MDK orally agreed to the sale of Powerhouse’s dealership assets and the transfer of its franchise agreement to MDK, subject to Yamaha’s consent to the transaction (the “Proposed Transfer Agreement”).
  • June 25, 2008: Pilg notified Yamaha’s district sales manager (“DSM”) that Powerhouse and MDK had entered into the Proposed Transfer Agreement. Yamaha’s DSM informed Yamaha’s regional sales manager (“RSM”) that the parties had entered into the Proposed Transfer Agreement, and Yamaha thereafter began the process of approving MDK as Powerhouse’s successor authorized Yamaha franchisee. Yamaha’s DM then notified Powerhouse that it remained a Yamaha dealer in good standing, and that Yamaha was evaluating the Proposed Transfer Agreement for the purpose of consenting to the transaction.
  • July 10, 2008: Yamaha’s DSM, Powerhouse and MDK met to discuss and expedite Yamaha’s consent to the Proposed Transfer Agreement.
  • July 11, 2008: Despite the fact that Yamaha had told Powerhouse that it would process its Proposed Transfer Agreement (even though Powerhouse had closed its Yamaha dealership in violation of its franchise agreement), Yamaha’s RSM approved the termination of Powerhouse’s franchise agreement and issued to Powerhouse a written notice of termination pursuant to section 3060 of the California Vehicle Code, predicated upon its failure to keep the dealership open for business (the notice was inadvertently sent to the wrong address).
  • July 18, 2008: Yamaha’s DM told Powerhouse that, because MDK was an existing authorized Yamaha franchisee at another location, Yamaha would expedite the approval process even though the Powerhouse dealership had not been open since June 16, 2008.
  • July 24, 2008: Yamaha issued to Powerhouse a second written notice of termination, pursuant to section 3060 of the California Vehicle Code based upon Powerhouse’s closure of its Yamaha motorcycle dealership in violation of its franchise agreement.
  • July 26, 2008: Powerhouse received Yamaha’s written notice of termination. The notice triggered Powerhouse’s obligation to file a section 3060 protest with the Board within 10 days following its receipt of Yamaha’s termination notice – i.e., August 2, 2008.
  • July 28, 2008: Pilg (Powerhouse) spoke with one of Yamaha’s in-house attorneys, explaining that the Proposed Transfer Agreement was the subject of Yamaha’s consent and approval process, and that Yamaha had told him both (a) that he was a dealer in good standing despite having closed his dealership more than 6 weeks ago; and (b) that Yamaha was in the process of consenting to the transfer of his franchise to MDK. Yamaha’s in-house lawyer declined to discuss the matter with Powerhouse, explaining that he was not aware of the Proposed Transfer Agreement.
  • August 2, 2008: Powerhouse was required to file with the Board its protest of Yamaha’s termination notice on or before August 2, 2008. Powerhouse failed to do so. Had Powerhouse done so, then Yamaha would have been required to convince the Board that it had good cause for the termination. Because Powerhouse failed to file the protest by this date, Yamaha’s termination of the franchise agreement automatically became effective on August 2, 2008.
  • August 8, 2008: Pilg (Powerhouse) explained to Yamaha that he had been told that he would be permitted to transfer his franchise to MDK, and that his request was in the process of being approved by Yamaha. Nevertheless, Yamaha told Powerhouse that the submission of the Proposed Transfer Agreement for Yamaha’s consent and approval did not prevent Yamaha’s termination of Powerhouse’s franchise agreement.
  • August 9, 2008: Yamaha notified Powerhouse that the termination of its franchise agreement became effective because Powerhouse had failed to file a section 3060 protest within the ten-day period following Powerhouse’s July 26, 2008 receipt of the formal notice of termination. Thus, according to Yamaha, it had no obligation to process or approve the Proposed Transfer Agreement.
  • August 15, 2008: Powerhouse filed a formal protest of Yamaha’s July 24, 2008 formal notice of termination with the Board. Yamaha moved to dismiss the protest as untimely – i.e., because the notice of protest had not been filed within the statutorily required ten day period. The Board granted Yamaha’s motion to dismiss the protest as untimely, and found that the franchise agreement was therefore terminated.
  • March, 2009: Powerhouse filed a lawsuit against Yamaha in the Superior Court of San Luis Obispo County alleging, among other things, that Yamaha unreasonably withheld its consent to the Proposed Transfer Agreement in violation of section 11713.3. In response, Yamaha said that, because the Board dismissed Powerhouse’s protest of the termination as untimely (and found that the franchise agreement therefore was properly terminated), Powerhouse “had nothing to sell to MDK and Yamaha had nothing to approve.” Therefore, according to Yamaha, it could not have violated its obligation under section 1173 to not unreasonably withhold its consent to Powerhouse’s proposed transfer of the franchise.

Following a jury trial, the trial court entered judgment in favor of Powerhouse and Pilg against Yamaha in the amount of $1,336,080 in compensatory and punitive damages. Yamaha appealed. The California appellate court affirmed the judgment of the trial court. It held that:

Powerhouses’ right to seek and recover damages for Yamaha’s unreasonable refusal to approve the sale of Powerhouse’s dealership and franchise is not affected by Powerhouse’s failure to comply with the section 3060 procedure for challenging Yamaha’s termination…nor by the Board’s decision regarding the timeliness of Powerhouse’s protest to the notice of termination.[8]

Powerhouse teaches that the law can be practical in the face of perceived inequity. Participants in the legal arena too must demonstrate good communication skills and judgment, as well as practicality themselves.

Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.




[1] Veh. Code §§ 3060 – 3079. All statutory references are to California’s Vehicle Code.
[2] See Historical and Statutory Notes, 65B West’s Ann. Veh. Code (2000 ed.) foll. § 3000, p. 371.
[3] See Section 3066.
[4] The hearing is conducted pursuant to section 3066.
[5] Section 1171.3(d)(1).
[6] Section 3050(e).
[7] Section 3050(e).
[8] Powerhouse Motorsports Group, Inc. v. Yamaha Motor Corporation, U.S.A., 2013 Cal. App. LEXIS 949, *3 (Cal. App. 2nd. Dist. 2013).

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