Monday, July 25, 2011

Franchisor Not Required to Consider “Eleventh Hour” Dealership Purchaser

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A motor vehicle franchisor did not violate the Massachusetts motor vehicle dealer law or breach its agreement with a dealer by failing to consider the application of a prospective purchaser of the dealership made only one week before the termination date of the parties’ agreement, the U.S. Court of Appeals in Boston has decided.

Both by statute and the parties’ agreement, the franchisor had the right to a longer period to make due diligence enquiries about the buyer than the remaining period of the franchise. Thus, a federal district court's ruling (CCH Business Franchise Guide ¶14,360), granting summary judgment to the franchisor on the dealer’s breach of contract and statutory claims, was affirmed.

The dealer law gave the franchisor at least 30 days and up to 60 days to decide whether to approve the prospective purchaser’s application to purchase the dealership. The parties’ franchise agreement allowed the manufacturer 45 days, the court noted.

The court rejected the dealer’s contention that the franchisor must exercise due diligence and come to a decision on the prospective purchase (or be bound by a default approval under the dealer law) beyond the remaining effective period of the parties’ agreement.

One week prior to the scheduled termination date of the dealer’s franchise, the dealer sent a purchase-sale agreement to the franchisor for its approval. The dealer requested that the franchisor send the prospective purchaser an application form in accordance with the franchise terms, but the franchisor declined, and the dealer filed suit.

The parties then executed a "stand-still" agreement, requiring the franchisor to continue to do business with the dealer during litigation, but expressly saving the franchisor’s rights and claims.

On appeal, the dealer argued that the district court erred in concluding that the dealer’s diminished franchise right negated the franchisor's obligation to consider a franchise application from the buyer. However, a reasonable reading of the agreement was that the franchisor must consider a dealer’s proposed successor only when the remaining duration of the franchise agreement included sufficient time for the period of enquiry by the franchisor that the statute and the agreement allowed, the court held.

The decision in South Shore Imported Cars, Inc. v. Volkswagen of America, Inc. appears at CCH Business Franchise Guide ¶14,635.

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