Subaru Distributors Corp. v. Subaru of America

• Decision Date: 05 April 1999
• Docket Number: No. 98 Civ. 5566(CM).,98 Civ. 5566(CM).
• Citation: 47 F.Supp.2d 451
• Parties: SUBARU DISTRIBUTORS CORP., Plaintiff, v. SUBARU OF AMERICA, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

47 F.Supp.2d 451

SUBARU DISTRIBUTORS CORP., Plaintiff, v. SUBARU OF AMERICA, INC., Defendant.

No. 98 Civ. 5566(CM).

United States District Court, S.D. New York.

April 5, 1999.

COPYRIGHT MATERIAL OMITTED

Dale A. Schreiber, Proskauer, Rose, Goetz & Mendelsohn, LLP, New York City, for Subaru Distributors Corp., plaintiff.

Lewis A. Noonberg, Piper & Marbury, Washington, DC, for Subaru of America, Inc., defendant.

ORDER DENYING PLAINTIFF'S MOTION FOR A PRELIMINARY INJUNCTION, DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT, AND GRANTING PARTIAL SUMMARY JUDGEMENT TO THE DEFENDANT

McMAHON, District Judge.

Underlying this application for a preliminary injunction is a dispute between Subaru Distributors Corporation ("SDC") and Subaru of America, Inc. ("SOA") over certain terms of the parties' Distributor Agreement (the "DA" or "Agreement"), entered into in January 1975. SDC is the exclusive wholesale distributor of Subaru vehicles for New York and northern New Jersey. SOA is the exclusive United States importer and national distributor of Subaru vehicles. SDC believes that SOA is about to terminate its distributorship. It therefore asks this Court to intervene.

The matter comes before the Court in an unusual posture. Ordinarily, an automobile franchisee comes to court after receiving a notice of termination (which, under New York's Franchised Motor Vehicle Dealer Act, N.Y. Veh. & Traf. Law § 463(d)(1), must provide the franchisee with 90 days notice). The franchisee seeks a declaration that the noticed termination is wrongful and an injunction preventing the franchisor from exercising its power to terminate on the basis asserted. The court decides whether the termination is consonant with the parties' contractual rights. If it is, the application for a preliminary injunction is denied; if not, the application is granted.

Here, there has been no notice of termination. Instead, SOA, the franchisor, has repeatedly threatened to terminate the franchise of SDC, one of its distributors. Under the DA, every time SDC orders its monthly quota of cars from SOA, it is required to post a domestic irrevocable letter of credit ("LC") on terms "acceptable to [SOA]." (DA, Section 7(3).) In recent months, SOA has demanded that, to be "acceptable," SDC's letters of credit must: (1) expressly permit SOA to make partial draw downs based on partial shipments of SDC's total order; (2) be payable to SOA upon issuance in an amount sufficient to cover the full cost of the cars ordered; (3) expire no sooner than the end of the fourth month after the month in which the relevant purchase order was submitted; (4) be transferable; (5) contain no term that assesses transfer charges to SOA; (6) contain no language that prevents draw down unless SOA delivers precisely the models and colors of cars ordered by SDC or that requires SDC's inspection of the vehicles as a condition precedent to draw down; (7) be payable on presentation of documents to SDC's bank, without delivery of documents to SDC or approval of draw downs by SDC; and (8) be issued by a bank acceptable to SOA (such as The Chase Manhattan Bank, which for some years has provided SDC with its financing). See July 28, 1998 Letter of Lewis A. Noonberg to Dale A. Schreiber, as amended (the "Noonberg Letter"), attached as Exh. 10 to Plaintiff's Memorandum in Support of Its Application For A Temporary Restraining Order, Preliminary Injunction and Partial Summary Judgment ("Pl.'s Br.").¹

SDC comes before this Court seeking an injunction that would require SOA to accept a letter of credit from SDC in a form acceptable to SDC. Such a letter of credit, needless to say, differs radically from the form of a letter of credit acceptable to SOA. Most significantly, SDC wants SOA to accept a letter of credit with terms: (1) ensuring that SDC has the right to inspect delivered vehicles prior to any draw down on the letters of credit, to verify that deliveries match the model codes and colors of cars ordered by SDC; (2) requiring SOA, before draw down, to deliver a written notice to SDC stating the vehicle identification number (VIN) or vehicle order number (VON) for each vehicle ordered and a commercial invoice identifying each vehicle by model code, color and price; (3) requiring SOA to present to SDC's bank, as draw down documents, vehicle title certificates, a bill of sale conveying title to each vehicle and commercial invoices identifying all vehicles by model code, color and price; (4) prohibiting the draw down of any letter of credit until the first day of the second month following its posting (i.e., if the letter of credit is posted in January, it cannot be drawn down until March 1) and providing that each letter of credit will automatically expire at the end of the second month following its posting (i.e., if posted in January, then expiring at the end of the day on March 31); and (5) allowing SDC to charge SOA for any costs SDC incurs if SOA transfers its rights as beneficiary under a letter of credit.

In the alternative, SDC asserts that SOA should be enjoined from insisting on the LC terms proposed in the Noonberg Letter, and from terminating SDC's franchise if it refuses to include such terms in the letters of credit it posts, because SOA's proposed terms conflict with the requirements of the DA.

The parties are also fighting about most of the other aspects of their mutually profitable but always acrimonious relationship. As long as it is here, SDC also asks the Court to enjoin SOA from doing a number of other things, including:

(1) compelling SDC to accept delivery of, or pay for, any vehicle that does not conform to SDC's accepted monthly quota purchase order;

(2) demanding that SDC submit its next purchase order before the oldest outstanding letter of credit in favor of SOA has either been completely drawn down or has expired by its terms;

(3) refusing to accept or reject an SDC purchase order later than four days before the date on which SDC must submit its next quota purchase order; and

(4) demanding that SDC order any cars under its annual quota during the months of October, November and December each year, or prior to the later of January 7 of the following year or the date upon which any quota for the subsequent calendar year has been determined.

SDC also prays for an injunction that would prevent SOA from actually terminating SDC's exclusive distributorship based on SDC's failure to comply with any of the above letter of credit or other demands. Finally, SDC seeks partial summary judgment declaring that it is not required to order vehicles during the fourth quarter of each calendar year.

What has happened here is quite clear. After dealing with each other for 24 years, under a contract that provides for an exclusive franchise in perpetuity, SDC and SOA are at loggerheads over almost every aspect of their relationship. The DA— which both sides agree was inartfully drawn many years ago in contemplation of a much simpler commercial relationship— has very little to do with how the parties have done business for the better part of two decades. However, as relations have deteriorated, SDC has begun to insist that the parties conduct their affairs by the letter of the DA (and, perhaps, by some letters that do not actually appear in the DA). This has led SOA to advance its own, utterly inconsistent reading of the relevant provisions of the DA—many of which the parties prudently jettisoned fifteen or twenty years ago.

The result is predictable: in a situation where a mutually rewarding commercial relationship demands a certain amount of "wiggle room," the parties have come to this Court and in effect asked that I explain to them the legal parameters of their relationship. Both sides have been warned that this course might well eliminate the "wiggle room" that has allowed them to deal with each other for the past two decades against the backdrop of an admittedly inadequate and out-of-date contract. Regrettably, neither side has blinked. Therefore, it appears that I must rule on SDC's application for a preliminary injunction.

Background

1. The DA

SOA, a New Jersey corporation, is a wholly-owned subsidiary of Fuji Heavy Industries Ltd. of Japan, the manufacturer of Subaru automotive products. SOA is the exclusive United States importer and national distributor for Subaru. For many years, it conducted its affairs by maintaining franchise agreements with a group of thirteen regionally-based distributors. These agreements offered each regional distributor an exclusive franchise in perpetuity, assuming the franchisee complied with the terms of its Distributor Agreement. At present, there are only two remaining regional distributorships, SOA having taken over the rest.²

In January 1975, SOA awarded one of its regional distributorships to Plaintiff SDC, a New York corporation with its principal place of business in Orangeburg, New York. SDC sells Subaru vehicles through a network of 65 authorized retail dealers located throughout the New York and northern New Jersey region.

The DA is the contract between SOA and SDC pursuant to which SDC was licensed to sell Subaru vehicles. It contains the following key terms:

a) The Agreement runs from year to year and is automatically renewed, subject to termination by SOA only for "cause." (DA, Article 12(1).)

b) In each contract year, SDC is required to purchase a minimum number of cars (the "quota"). (DA, Article 7(3).) Exhibit B to the DA, as amended from time to time, sets forth the quota of cars for each year. Each succeeding year's quota is to be negotiated three months prior to the end of the then current calendar year; absent a negotiated agreement, the quota automatically increases by fifteen percent over the prior year's number. (DA, Exh. B.) Over time, and despite the fact that there have been years when no quota was set or enforced, the number of vehicles SDC is required to purchase under the quota has grown from...