The Franchise Memorandum

In Estes Automotive Group, Inc. v. Hyundai Motor America, 2011 U.S. Dist. LEXIS 32525 (C.D. Cal. Mar. 25, 2011), a California federal district court granted Hyundai’s motion for summary judgment against a dealer who alleged that Hyundai constructively terminated its dealership in violation of the federal Automobile Dealers Day in Court Act (ADDCA). The dealer sued for damages after it defaulted on a construction loan and a floor plan financing agreement with Hyundai’s credit subsidiary, Hyundai Capital America. To succeed under the ADDCA on a claim for termination without good faith, a dealer must show that its franchise was terminated because it resisted “coercion or intimidation” by the automobile manufacturer.

As an initial matter, the court found that Hyundai’s credit subsidiary could be liable under the ADDCA despite not being a manufacturer or a party to the franchise agreement because the credit subsidiary was wholly-owned by Hyundai and acted exclusively to facilitate the distribution of Hyundai automobiles. The court then noted that the Ninth Circuit had yet to address whether a dealer may sue for constructive termination under the ADDCA. Even assuming the ADDCA applied to the dealer’s claim, however, the dealer failed to offer any evidence of coercive or intimidating conduct by Hyundai. The court rejected the dealer’s claim that Hyundai diverted and withheld money owed to the dealership, finding that Hyundai transferred funds to its credit subsidiary (as permitted under an assignment agreement) to offset funds that the dealer owed to Hyundai, not to coerce or intimidate the dealer. The court also found no evidence that Hyundai pressured the dealer to sell to Hyundai’s preferred candidate or that Hyundai refused to consider the dealer’s preferred candidate. In so doing, the court determined that an email from Hyundai to the dealer setting forth criteria for evaluating potential franchisees was reasonable and did not constitute coercion or intimidation. As to alleged misrepresentations that Hyundai would provide financial support to the dealer, the court concluded that “oral representations or promises that are not part of the franchise agreement are not actionable under the ADDCA.”