Kavanaugh v. Ford Motor Company

• Decision Date: 18 November 1965
• Docket Number: No. 15003.,15003.
• Citation: 353 F.2d 710
• Parties: Daniel F. KAVANAUGH, also known as Dan Kavanaugh, Plaintiff-Appellee, v. FORD MOTOR COMPANY, a corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

353 F.2d 710 (1965)

Daniel F. KAVANAUGH, also known as Dan Kavanaugh, Plaintiff-Appellee, v. FORD MOTOR COMPANY, a corporation, Defendant-Appellant.

No. 15003.

United States Court of Appeals Seventh Circuit.

November 18, 1965.

Harvey S. Kronfeld, Dearborn, Mich., W. Donald McSweeney, Chicago, Ill., William A. Montgomery, Schiff, Hardin, Waite, Dorschel & Britton, Chicago, Ill., Richard B. Darragh, Dearborn, Mich., of counsel, for appellant.

John J. Kelly, Jr., Francis B. Stine, Chicago, Ill., for appellee.

Before SCHNACKENBERG, KILEY, and SWYGERT, Circuit Judges.

SWYGERT, Circuit Judge.

This is an interlocutory appeal presenting a controlling question of law within the meaning of section 1292(b) of the Judicial Code, 28 U.S.C. § 1292 (b) (1958). The question is whether plaintiff Daniel F. Kavanaugh is an "automobile dealer" and thereby entitled to sue under the Automobile Dealers' Franchise Act (commonly known as the Dealers' Day in Court Act), 15 U.S.C. §§ 1221-1225 (1956).

The Automobile Dealers' Franchise Act creates a cause of action in favor of an "automobile dealer" against an automobile manufacturer "by reason of the failure of the automobile manufacturer * * * to act in good faith in performing or complying with any of the terms or provisions of the franchise, or in terminating, canceling, or not renewing the franchise with the dealer * * *." An "automobile dealer" is defined as "any person, partnership, corporation, association, or other form of business enterprise * * * operating under the terms of a franchise and engaged in the sale or distribution of passenger cars, trucks, or station wagons." A "franchise" is defined as "the written agreement or contract between any automobile manufacturer * * * and any automobile dealer which purports to fix the legal rights and liabilities of the parties to such agreement or contract."

Daniel F. Kavanaugh, as an individual, brought the instant action for damages in the district court under this statute against the Ford Motor Company.¹ A motion by Ford for summary judgment was originally denied, but was reconsidered upon a further motion which specifically raised the question of Kavanaugh's standing to sue. After reconsideration, the district court refused to vacate its order denying Ford's motion for summary judgment, but agreed to certify the question of Kavanaugh's standing to sue under the act as one involving a controlling question of law as to which substantial ground for a difference of opinion exists. This court concurred with the district court's estimation of the legal question and granted Ford's petition for leave to appeal pursuant to 28 U.S.C. § 1292(b).

I. The Ford-Kavanaugh Contractual Relationship

The written agreements encompassing the association between Ford and Kavanaugh are contained in three distinct but necessarily related documents drafted by Ford: the "Dealer Development Contract"; the "Ford Sales Agreement"; and the "Management Contract." Each of these contracts will be outlined briefly.

1. The Dealer Development Contract.

The parties to this agreement, executed on October 3, 1958, are the Ford Motor Company and Daniel F. Kavanaugh. Kavanaugh is designated in the agreement as the "operator." The contract provides for the formation of a corporation to carry on the business of an "automobile dealership" and describes the interests to be acquired therein and the general method of operation.²

The agreement provides that 1500 shares of voting eight per cent cumulative, $100 par value preferred stock are to be authorized, redeemable at 110 per cent of par; Ford agrees to purchase 1200 shares, an investment of $120,000. 1500 shares of non-voting, $100 par value common stock are also to be authorized; Kavanaugh agrees to purchase 300 shares, an investment of $30,000.

An important feature of the plan for the dealership corporation envisioned by the contract is the provision for gradual transfer of the interest in the corporation from Ford to the "operator," Kavanaugh. A portion of the annual corporate profit is to be set aside for the retirement of Ford's preferred stock. Provision is also made for the gradual conversion of other preferred stock to common stock, and for its simultaneous purchase by Kavanaugh from the yearly bonus to which he is to be entitled as "operator." In general, however, although Kavanaugh's equity in the dealership corporation is designed to grow in such a gradual manner under the dealer development contract, he could not expect to acquire any voting rights at all until Ford's preferred stock is either converted or retired, that is, until Ford's equity in the corporation is reduced to zero.³

The contract also provides for the execution of a "management contract" between the dealership corporation and the "operator." It indicates that the parties contemplate Kavanaugh's appointment as president and a director of the corporation, but cautions that Ford is under no obligation to see that this is accomplished.

Further, the contract calls for the execution of a "sales agreement" between Ford and the dealership corporation, and adds:

Anything to the contrary herein notwithstanding, the provisions of such Sales Agreement shall be determinative of the rights of the parties thereto and neither Dealership nor Operator by virtue of this contract shall acquire any rights with respect to termination of the Sales Agreement or otherwise in addition to those provided in said Sales Agreement.

Finally, inter alia, the contract provides that it is terminable at the will of either party or at such time as all of Ford's preferred stock has been retired. If the termination is at will, and the business of the dealership corporation is to be continued, provision is made for the forced sale of Kavanaugh's stock to the corporation, the value of the stock to be determined by auditors appointed by the corporation. In the event the stock proves worthless, Ford agrees to pay Kavanaugh one dollar.

2. The Ford Sales Agreement.

This agreement, of indefinite duration, bears the date October 8, 1958. It states that it was executed by "Dan Kavanaugh Ford, Inc." (the name given to the dealership corporation) and the Ford Motor Company.⁴

A preamble to the agreement contains a lengthy statement inserted to "facilitate an understanding of some of the provisions. * * *" This statement is deemed to be of special interest, and for that reason portions of it appear in a footnote below.⁵

The sales agreement establishes the corporation as an "authorized dealer" at retail in Ford products. All of the standard provisions relating to the operation of a Ford agency are attached to and included in the agreement.

In addition, the following recitation appears:

This agreement has been entered into by the Company with the Dealer in reliance (i) upon the representation and agreement that the following person(s) substantially participate(s) in the ownership of the Dealer:

                                                               Percentage of
                    Name                      Address             Interest   
                  Daniel F. Kavanaugh ............................. 20%
                  Ford Motor Company .............................. 80%
                

and (ii) upon the representation and agreement that the following person(s) shall have full managerial authority and responsibility for the operating management of the Dealer in the performance of this agreement:

                         Name                    Address                   Title  
                  Daniel F. Kavanaugh ................................... President
                

Later in the agreement, Ford is given the power to terminate it, effective immediately, should a material change occur in stock ownership, in Kavanaugh's contemplated managerial position, or in the event of Kavanaugh's death as a "principal owner."⁶

3. The Management Contract.

The third contract was executed on October 15, 1958 between "Dan Kavanaugh Ford, Inc." and Kavanaugh himself as "operator." By its terms, Kavanaugh is employed by the corporation as its "general manager" at a salary of $1200 per month plus 25 per cent of the corporate profit. The contract, also indefinite in duration, is terminable at will by either party upon 30 days' notice.

Factual Context of the Ford-Kavanaugh Relationship.

To provide a clearer perspective of the Ford-Kavanaugh agreements themselves, the circumstances surrounding their execution may also be recited briefly.

For several years prior to 1958, Kavanaugh was a highly successful sales and fleet manager for the Hartigan Chevrolet dealership in Chicago. In April, 1958, he terminated his employment with Hartigan in an attempt to secure a dealership for himself. Although he was primarily interested in becoming a Chevrolet dealer, Kavanaugh was ultimately persuaded by Ford representatives to make application with Ford.

In Kavanaugh's application, he stated that he was applying for a "Ford Dealership," and included a financial statement. In answer to the printed question "How much are you prepared to invest in the company for which application is submitted?", Kavanaugh inserted "$30,000." The "District Interviewer's Comments" submitted in connection with the application made further reference to Kavanaugh's outstanding "dealer" potential.

The ensuing negotiations culminated in the execution of the documents described above in October, 1958.

The original dealership objective was the operation of a Ford agency on Ogden Avenue in Chicago. This operation met with some success during the remainder of 1958 and in 1959. Kavanaugh's equity in the dealership corporation increased to 360 shares during this period, while approximately 170 shares of Ford's preferred stock were retired. A sharp decline in income occurred early in 1960, however, and in August of that year the dealership corporation was relocated in suburban Chicago through the purchase of the assets of the Park Ridge Ford agency. Kavanaugh continued to direct the activities of the dealership corporation until ...