SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-6594-00T3
VW CREDIT, INC.
Plaintiff-Respondent,
v.
COAST AUTOMOTIVE GROUP,
LTD., d/b/a TSE MOTOR CARS
d/b/a TSE VOLKSWAGEN, d/b/a
TSE AUDI, d/b/a TSE PORSCHE
d/b/a TSE MERCEDES-BENZ,
d/b/a TSE SAAB, SHANSAB
ENTERPRISES, INC., SHANSAB
REALTY, INC., TAMIN SHANSAB,
NASIR SHANSAB and YAMA
SHANSAB
Defendants-Respondents
and
TAMIN SHANSAB, SHANSAB
ENTERPRISES, INC.,
SHANSAB REALTY, INC.
Defendants/
Third Party Plaintiffs-
Respondents
v.
JOHN LIEPHART,
Third-Party Defendant
and
VOLKSWAGEN OF AMERICA,
AUDI OF AMERICA
Third-Party Defendants-
Appellants
and
ASPEN KNOLLS AUTOMOTIVE
GROUP, LLC, as successor
in interest to B&S LENDER,
LLC
Intervenor-Respondent.
________________________________
Argued: December 12, 2001 - Decided: January 4, 2002
Before: Judges Baime, Newman and Fall
On appeal from Superior Court of New
Jersey, Law Division, Ocean County,
OCN-L-1162-96.
William E. Reifsteck, argued the cause
for appellants (Capehart & Scatchard,
attorneys; Mary Ellen E. Schetter,
on the brief).
Geoffrey J. Hill, argued the cause for
respondents, Coast Automotive Group,
Shanshab Enterprises, Inc., Shanshab
Realty, Inc., and Tamin Shanshab (Richard
S. Mazawey attorneys; Mr. Hill on the
brief).
George R. Hirsch, argued the cause for
intervenor-respondent (Bressler, Amery
& Ross, attorneys; Mr. Hirsch on the
brief).
Respondent VW Credit, Inc. has not
submitted a brief.
The opinion of the court was delivered by
NEWMAN, J.A.D.
The primary issue in this appeal concerns the refusal of a
franchisor to consent to the franchisee's transfer of the
franchises, N.J.S.A. 56:10-6, and the consequences when that
consent is found by a court to be unreasonably withheld. We
conclude that the Franchise Practices Act, in particular N.J.S.A.
56:10-6, contemplates that the remedy of specific performance is
available to compel the transfer where a franchisor has
unreasonably withheld its consent to that transfer.
The history of this litigation is quite extensive.
Defendant, Coast Automotive Group, Ltd. d/b/a TSE Motor Cars
(Coast) is an authorized dealer of Volkswagen and Audi
automobiles pursuant to dealer agreements and dealer operating
standards with third-party defendants, Volkswagen of America,
Inc. (VWOA) and Audi of America (AOA). Coast operated its
automobile dealership on the real property owned by Shansab
Realty, Inc. located at Route 37, Toms River. In March 2001,
there was a fire at Coast's site that substantially destroyed the
dealership.
A provision of the dealer operating standards, which VWOA
and AOA contend is an integral part of the dealer agreements,
requires that Coast maintain separate wholesale lines of credit
for the purchase of the new motor vehicles from VWOA and AOA.
Coast satisfied this requirement by obtaining a wholesale line of
credit and other financing from plaintiff, VCI Credit, Inc.
(VCI), which is a wholly owned subsidiary of VWOA. Coast
defaulted in its payments to VCI. VCI filed this action against
Coast in the Law Division (Law Division action), which prompted
Coast to file for protection under a bankruptcy reorganization
plan. Coast also filed an action in the federal district court
entitled Coast Automotive Group, Ltd. v. VW Credit, Inc., et al,
Civil Action No. 97-2601 (D.N.J.).
Tamin Shansab (Shansab), the principal of Coast, entered
into an agreement with B & S Lenders LLC, (B&S), the predecessor-
in-interest to intervenor, Aspen Knolls Automotive Group, LLC
(Aspen Knolls), to borrow $5,000,000 in order to salvage its
franchise investment and avoid liquidation under its bankruptcy
plan. The loan proceeds enabled Coast to repay its creditors,
including $4,000,000 owed to VCI. As security for the loan,
Coast agreed to transfer its assets to B&S or its successors -
Aspen Knolls. Aspen Knolls consists of three principals. Two of
the principals, Paul Reynolds and Salvatore Rutigliano, operate
an Audi dealership in Bernardsville. The third principal, Robert
Mazzuoccola, operates a Jeep dealership in Essex County.
Litigation between Coast and B&S ensued in the Chancery
Division, Ocean County (Chancery action), which resulted in
Coast's execution and delivery to B&S of an Amended and Restated
Promissory Note dated May 14, 1998, and related security
documents.
In the interim, VWOA and AOA, third party defendants in the
Law Division action, filed claims against Coast in that same
litigation to terminate Coast's Volkswagen and Audi franchises.
The Law Division, after a hearing, entered an order that
preliminarily enjoined proceeding with the termination of the
franchises. The Law Division also granted leave to VWOA and AOA
to file an amended counterclaim against Coast seeking rescission
of the franchise agreements.
On August 18, 1999, B&S moved in the Chancery Division for
the appointment of a receiver for Coast in accordance with
N.J.S.A. 14A:14-1 et seq., as well as other relief. The parties
to that action, Coast and B&S, entered into a consent order,
which incorporated a certain asset sale agreement and real estate
sale agreement. The agreements provided that Aspen Knolls,
assignee of B&S, would acquire Coast's Volkswagen, Audi, and
Porsche dealership franchises together with the real property
upon which the dealerships were located. In entering into that
consent order, Aspen Knolls relied on the Law Division's order
enjoining VWOA and AOA from terminating the Volkswagen and Audi
franchises.
In accordance with the consent order, the parties advised
VWOA and AOA of the proposed transfer and provided the notice
required by N.J.S.A. 56:10-6. That section also requires a
franchisor to issue a letter of disapproval if the franchisor
objects to the proposed transferee as unqualified. VWOA and AOA
replied to that notice with the filing of an order to show cause
for a preliminary injunction to enjoin the sale. On March 3,
2000, the Law Division granted B&S's motion to intervene in that
matter and denied the application for a preliminary injunction.
On March 16, 2000, this court denied VWOA and AOA leave to file
an interlocutory appeal.
On May 1, 2000, Aspen Knolls submitted applications for
transfer of the Volkswagen and Audi dealer franchises. On June
29, 2000, VWOA and AOA issued letters disapproving the
applications. VWOA and AOA based their disapproval on the
claimed deficient application as well as character concerns of
Aspen Knolls' majority member, Robert Mazzuoccola.
Coast and Aspen Knolls, as limited intervenor, filed an
order to show cause to enforce their rights under the consent
order, and sought to compel the transfer of the franchises. The
Law Division held a hearing on that application and on August 23,
2000, issued an order directing that the parties continue the
application process, so that VWOA and AOA could advise Aspen
Knolls regarding the application requirements. In this regard,
the judge found that the June 29, 2000, disapproval letters were
void and ineffective, because VWOA and AOA did not advise Aspen
Knolls of the conditions for franchise approval. The judge stated
that
if a franchisor is entitled to reject a good
faith but deficient application at the same
time when it hasn't fully disclosed its
requirements for an acceptable application,
then the Franchise Practices Act would have
virtually no teeth because then every
franchisor could circumvent the law by either
creating a contentious environment or by
failing to supply adequate information in
order to comply with the requirements of law.
On October 3, 2000, this court denied VWOA and AOA leave to
stay that order.
Thereafter, Aspen Knolls submitted a second set of
applications that VWOA and AOA disapproved on September 22, 2000.
VWOA and AOA based their disapprovals on grounds substantially
similar to those of June 29, 2000. The Law Division then
scheduled discovery and held a plenary hearing on May 15 and 16,
2001, to determine if the consent to the transfer of the
franchises was being unreasonably withheld.
Based on the testimony and evidence presented at the
hearing, Judge Marlene Lynch Ford found that VWOA and AOA did not
act in good faith when they withheld approval of Aspen Knolls'
applications. First, the judge determined that Aspen Knolls had
standing on the limited issue of whether VWOA and AOA wrongfully
withheld consent to the transfer of the franchise. The judge
distinguished Tynan v. Gen. Motors Corp., 248 N.J. Super. 654
(App. Div.) certif. denied, 127 N.J. 548 (1991) rev'd in part on
other grounds, 127 N.J. 269 (1992), a case where the franchisee
did not challenge the franchisor's decision to disapprove of the
proposed transfer. Then, considering the prior history of
litigation and contractual dispute between Coast and Aspen
Knolls, the judge determined that it would be inappropriate to
preclude Aspen Knolls from participating in the plenary hearing
on the issue of the withholding of consent to the transfer.
Judge Ford found that VWOA and AOA unreasonably withheld
their approval to the proposed transfer. The judge declared the
disapproval letters issued by VWOA and AOA to be ineffective and
directed that Aspen Knolls' applications be deemed approved
subject to the obligation of N.J.S.A. 56:10-6, which requires the
proposed franchisee to agree to comply with the conditions of the
existing franchise agreement. The judge's decision was reflected
in a written order entered on June 28, 2001, which she certified
as final pursuant to R. 4:42-2.
Aspen Knolls has standing to proceed in this action to compel transfer under N.J.S.A. 56:10-6 as an indispensable intervening party. R. 4:33-1 requires the applicant claim "an interest" relating to the property or transaction that is the subject of the action. Here, Aspen Knolls, the holder of the $5,000,000 promissory note executed by Coast and purchaser under the asset purchase agreement and real estate sales agreement, has a substantial interest in the transfer of the Volkswagen and Audi franchises. The trial judge properly distinguished Tynan, supra, and noted, based upon the litigious history between Coast and Aspen Knolls, that Coast could not adequately represent the interests of Aspen Knolls.
We are persuaded that Judge Ford properly exercised her discretion and will not disturb the trial court's limited grant to Aspen Knolls to intervene. State v. Lanza, 39 N.J. 595, 600 (1963), cert. denied, 375 U.S. 451, 84 S.Ct. 525, 11 L.Ed.2d 477 (1964)(grant of permission to intervene in an action is committed in the first instance to discretion of trial court, and ordinarily such applications are treated liberally).
A franchisor's termination of a franchise agreement without good cause constitutes a violation of the Act, N.J.S.A. 56:10-5, and the franchisee may seek injunctive relief, N.J.S.A. 56:10- 10. In her written decision, following a hearing held on August 3, 1999, Judge Ford concluded that Coast demonstrated a reasonable probability of eventual success on the merits of its claim that VWOA and AOA lacked good cause to terminate the franchises and that Coast would suffer irreparable injury if relief was not granted. She therefore enjoined VWOA and AOA from terminating the franchises during the pendency of this action.
VWOA and AOA have not provided this court with a record to evaluate the circumstances surrounding that injunction, and we could affirm on that ground alone. Keehn v. Laubach, 133 N.J.L. 227, 229 (Sup. Ct. 1945). However, despite their failure, at the hearing held before Judge Ford on March 3, 2000, upon the motion of VWOA and AOA to restrain the proposed transfer between Coast and Aspen Knolls, the judge referenced the order she entered restraining the termination of the franchises.
There, the judge stated that the parties should exchange discovery and proceed on the merits and then, after the parties had an opportunity to be heard, she would determine whether the franchises were effectively terminated or whether they should be rescinded. In refusing to enjoin the sale, the judge noted that Coast was attempting to avoid substantial economic losses by entering into a transaction to resolve the problems presented in the case and moot the issues of termination and rescission. She stated that the laws surrounding commercial transactions protect and encourage the obligation of a party to mitigate its damages. The judge noted that N.J.S.A. 56:10-6 provides a channel for the franchisee to fulfill its obligation through a sale of the franchise subject to franchisor approval. Consequently, she denied VWOA and AOA's application to enjoin the sale, allowed the matter to proceed on the issue of the validity of the refusal to consent to transfer, and continued the restraint on proceeding with the issues of termination or rescission of the franchises.
Judge Ford chose to enter the preliminary injunction to maintain the status quo and afford Coast an opportunity to limit its economic losses and complete the transfer to Aspen Knolls. According to the record, Coast, while it did not have the appropriate wholesale line of credit in place, was not in default in payments to VWOA or AOA, as it had been paying for any current deliveries C.O.D. This is not a case where a franchisee was in substantial breach of its obligations under the franchise agreements, which would prohibit a preliminary injunction against termination. See Simmons v. Gen. Motors Corp., 180 N.J. Super. 522, 543 (App. Div.), certif. denied, 88 N.J. 498 (1981) (trial judge erred in enjoining termination of franchise where franchisee was in substantial breach of the franchise and had transferred ownership without complying with N.J.S.A. 56:10-6); Dunkin Donuts v. Middletown Donut Corp., 100 N.J. 166, 182 (1985) (court should not grant equitable relief to franchisee whose own knowingly fraudulent conduct is the cause of the termination).
Under the circumstances, the preliminary injunction entered was appropriate, reasonable, and within the authority of the court to issue. Westfield Ctr. Serv., Inc. v. Cities Serv. Oil Co., 86 N.J. 453, 466-67 (1981) (trial court may issue temporary injunctive relief or restraints (1) to maintain the status quo during litigation, (2) to provide a franchisee with some additional time to wind up or move its business, or (3) for any other equitable purpose).
The termination having been enjoined, Coast remained the franchisee with all of its rights governed by the Act, including the right to transfer under section six of the Act.
It shall be a violation of this act for any franchisee to transfer, assign or sell a franchise or interest therein to another person unless the franchisee shall first notify the franchisor of such intention by written notice setting forth in the notice of intent the prospective transferee's name, address, statement of financial qualification and business experience during the previous 5 years. The franchisor shall within 60 days after receipt of such notice either approve in writing to the franchisee such sale to proposed transferee or by written notice advise the franchisee of the unacceptability of the proposed transferee setting forth material reasons relating to the character, financial ability or business experience of the proposed transferee. If the franchisor does not reply within the specified 60 days, his approval is deemed granted. No such transfer, assignment or sale hereunder shall be valid unless the transferee agrees in writing to comply with all the requirements of the franchise then in effect.
We have previously interpreted N.J.S.A. 56:10-6 to impose a requirement of reasonableness on a franchisor's decision to disapprove a transfer. Simmons, supra, 180 N.J. Super. at 539. The standard of review to determine the reasonableness of withholding consent to transfer of a franchise is an objective test that requires that the decision be supported by substantial evidence showing that the proposed franchisee is materially deficient. In re Van Ness Auto Plaza, Inc. 120 B.R. 545, 549 (Bankr. N.D. Cal. 1990). The burden of presenting credible reasons for the refusal to consent rests on the franchisor. Ibid. We agree with the trial judge that VWOA and AOA did not meet this burden.
In support of their determination to withhold consent, VWOA and AOA asserted that Aspen Knolls submitted a deficient application and that there were concerns related to the character of Mazzuoccola, the majority member of Aspen Knolls. The trial court made the following findings regarding the reasons asserted by VWOA and AOA for withholding consent to assignment of the franchise.
As to the issue of business experience, the court found that Reynolds and Rutigliano, both of whom are principals of Aspen Knolls, began to operate an Audi Dealership in Bernardsville in 1995, and within the first year of operation, the dealership was ranked third in the nation in volume and sales. Since its inception, that dealership has maintained a high ranking among the 365 Audi dealerships in the country in terms of sales and volume. There was also testimony that the Bernardsville dealership ranked in the top ten percentiles in customer satisfaction in both the regional area and the nation. The judge also noted that Reynolds and Rutigliano had extensive prior experience as automobile dealers.
Mazzuoccola's experience was not as extensive. However, the judge noted that Mazzuoccola, a race car enthusiast who sponsored a professional racing team, did own a Jeep dealership in Essex County. The judge found that Aspen Knolls, an entity comprising Reynolds, Rutigliano, and Mazzuoccola, demonstrated an ability to operate the Coast dealership.
As to the issue of VWOA and AOA's concerns regarding Mazzuoccola's character, the judge noted that VWOA and AOA based those concerns upon certain allegations raised in an affidavit filed by Shansab in the litigation between Coast and Aspen Knolls. The affidavit, which had been withdrawn by Shansab, raised issues of whether Mazzuoccola had affiliated or associated with known organized crime figures as well as the propriety of his business practices. The underlying litigation in which the affidavit had been submitted settled, and Shansab withdrew the allegations, joining with Aspen Knolls to compel the transfer. In this regard, the judge noted that
no testimony was produced by either side to address the allegations that related to the character, allegations involving Mr. Mazzuoccola. And that Mr. Mazzuoccola, in fact, took the stand and exposed himself to the opportunity for cross examination by the... franchisor's representatives. That the issue of his involvement with any unsavory business activities, or association with undesirable individuals, or people of known criminal connections or histories or even personalities, was just not raised.
. . . .
[T]he hearing was... scheduled primarily to address these issues of character.... I continue to be fully satisfied that any purported deficiencies in terms of character have not been proved. And even if raised... [the allegations] have been effectively dispelled through the testimony of the parties.... Character, then, cannot form a basis for the rejection of the proposed franchisees under ... these circumstances.
The judge next determined the issue of financial ability, commenting as follows:
That left only the issue of financial ability
as the reason for the rejection as
transferee.... Volkswagen and Audi maintain
that Aspen Knolls had failed to provide upon
request sufficient financial information by
which an assessment of the transferee's
financial ability could be made, and thus they
argue that as a matter of law the franchisor
was justified in rejecting them upon their
application, and the application of Coast, to
approve them as a Volkswagen/Audi Franchisee.
. . . .
If the submissions were deficient I think that
it's within reasonable business practices and
the intent of the Franchise Practices Act to
direct that... Audi and Volkswagen, in effect,
provide what requirements and then allow the
opportunity for the franchisee to meet those
requirements by way of a formal commitment....
[T]he statute, itself provides that Aspen
Knolls would have to agree in writing to
comply with the requirements of the franchise
in effect.... [T]hat clearly would include not
just operational guidelines, and so forth, but
also what the obligations were in terms of
capitalizing this project.
....
[T]he letter issued by Volkswagen and Audi,
refusing to approve... did not constitute a
valid rejection of this proposed transferee.
The judge observed that Reynolds and Rutigliano were to
provide the business experience and Mazzuoccola would be the
primary source of capital. The judge found credible the proofs
and testimony submitted by Aspen Knolls that it was ready,
willing, and able in September 2000, to meet whatever
capitalization, floor plan, corporate and other financial
requirements that were required by VWOA and AOA, but that Aspen
Knolls was left to guess at what those financial requirements
were. The court found particularly instructive an approval
letter issued by AOA to Reynolds and Rutigliano in regard to the
Bernardsville Audi dealership that set forth extensively the
conditions for approval, which addressed financial
capitalization, the necessity of a line of credit obligation, and
debt equity ratio standards. VWOA and AOA did not issue similar
letters to Aspen Knolls.
Regardless, unless the submissions were relevant to Aspen
Knolls' character, financial ability, or business experience,
they were not relevant to the "acceptability" of Aspen Knolls as
a franchisee. Horn v. Mazda Motor of Am., Inc., 265 N.J. Super.
47, 58 (App. Div.), certif. denied, 134 N.J. 483 (1993). In
Horn, this court noted that section six draws a distinction
between a franchisor's determining that "proposed transferees are
acceptable as franchisees and its accepting them in that
capacity." Ibid. There, we commented that a franchisor could
reasonably refuse to execute a franchise agreement with the
proposed transferee until certain documents were submitted,
regardless of whether the submissions affected the prospective
transferee's "acceptability." Id. at 59. However, the
submissions would be material to "acceptability" only if they
were relevant to the transferee's "character, financial ability
or business experience." Ibid. (referring to N.J.S.A. 56:10-6).
Here, Judge Ford found that the alleged deficient submissions
were not relevant to these issues.
We are satisfied that Judge Ford's findings that VWOA and
AOA unreasonably withheld their consent to the proposed transfer
are supported by adequate, substantial, and credible evidence.
Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J.
474, 484 (1974).
VWOA and AOA's contention that the relief granted by the
trial court is not authorized, amounts to a claim that under
N.J.S.A. 56:10-6, the franchisor has a right to reject a proposed
transferee and once it does, regardless of the reasonableness of
its disapproval, the remedy of specific performance is
unavailable. We disagree.
The Supreme Court has interpreted the requirements of
section six as a restriction on the additional powers the Act
affords a franchisee. Westfield Ctr., supra, 86 N.J. at 471.
Section six entitles a franchisee to specific performance if the
franchisor fails to approve or disapprove of the transfer, in
writing, within the sixty day period. N.J.S.A. 56:10-6. That
section restricts a franchisee's ability to assign a franchise
without the franchisor's consent. Westfield Ctr., supra, 86 N.J.
at 471. Section six also restricts a franchisor's ability to
reject a proposed transferee. Ibid.
When a franchisor receives notice that a franchisee intends
to transfer a franchise, section six mandates that the franchisor
shall, in writing, inform the franchisee either of its approval
of the transfer or "of the unacceptability of the proposed
transferee, setting forth the material reasons relating to the
character, financial ability or business experience of the
proposed transferee" to support the rejection. N.J.S.A. 56:10-6.
Thus, the franchisor's rejection must be based on a bona fide
business decision. In addition, if the franchisor chooses to not
respond to the notice within sixty days of that notice, the
franchisor's "approval is deemed granted" and the franchise
agreement between the franchisee and the franchisor is
automatically deemed amended to incorporate such transfer. Ibid.
The provisions, read together, evidence that the statute
contemplates the remedy of specific performance where the
franchisor severs the franchise relationship without good cause,
subject to the proposed transferee's written assurance that it
will comply with the existing franchise agreement. In other
words, if a franchisor unreasonably withholds consent to a
transfer, the franchise transfers to the proposed transferee by
operation of law. This is so because the franchisee should not
be forced to choose between losing his investment and remaining
in the relationship with the franchisor when it has provided a
reasonable alternate franchisee. Larese v. Creamland Dairies,
Inc., 767 F.2d 716, 717-18, (10th Cir. 1985). The Legislature
afforded the franchisor the sixty-day time period, not as an
absolute right for the franchisor to reject the proposed
transferee, but so that the franchisor could determine whether
the proposed transferee was a qualified alternate franchisee.
Horn, supra, 265 N.J. Super. at 58.
The franchisor should not be able to circumvent the
automatic approval contemplated by the Legislature by giving
notice of disapproval within the time period and facially
complying with section six. We agree with the trial judge that
it would be nonsensical for the Legislature to allow for specific
performance if the franchisor did nothing, but if the franchisor
timely rejected the proposed transfer in bad faith, the
franchisee is limited to damages. If such was the case, a
franchisor could avoid the requirements of the statute by sending
a letter that automatically rejected all transferees. VWOA and
AOA cannot sidestep the limits the Act places on their ability to
reject a proposed transferee by merely giving lip service to the
notice provisions of section six.
It is both a more logical and consistent interpretation of
the statutory remedy to authorize the approval, as the judge did
here, subject to compliance with the requirements that are deemed
a part of the existing franchise agreement. This scheme comports
with the distinction drawn in section six, discussed supra,
between an "acceptable" transferee and the "acceptability" of a
transferee. Horn, supra, 265 N.J. Super. at 58. It also
justifies the Legislature's inclusion of relief within section
six itself, apart from the general relief of section ten. See
N.J.S.A. 56:10-6; N.J.S.A. 56:10-10.
Section six contemplates the continuation of the franchise,
Westfield Ctr., supra, 86 N.J. at 471, thus specific performance
is required to accomplish that expectation. Merin v. Maglaki,
126 N.J. 430, 435 (1992) (legislation should be interpreted to
fulfill the intent of the legislature "in light of the language
used and the objects sought to be achieved"). The principles of
statutory construction dictate that when two statutes conflict,
the more specific controls over the more general. See New Jersey
Transit Corp. v. Borough of Somerville, 139 N.J. 582, 591 (1995);
Meadowlands Basketball Assoc. v. Dir., Div. of Taxation, 340 N.J.
Super. 76, 81 (2001). Thus, the particular statutory provisions
of section six, requiring specific performance for a violation of
that section, trump the general provisions of damages available
under section ten. This is so, because section six contemplates
the transfer and continuation of the franchise. A damage award
would not accomplish that objective.
This relief is beneficial to both the franchisor and
franchisee. Hearing on Assembly Bill No. 2063 (Franchise
Practices Act) before the New Jersey Legislature Assembly
Judiciary Committee, at 38-41 (March 29, 1971). The franchisee
who invested time and money in the franchise could minimize its
losses and recoup its investment and the franchisor would benefit
from the continued operation of its franchise by an able and
competent alternate franchisee. The benefits are readily
apparent where, as here, the franchisee is in financial straits
and in default under the franchise agreements, the dealership has
been substantially damaged by fire, and the franchisee has
provided a willing and capable transferee who is in position to
rebuild the dealership. Accord Mercedes-Benz of N. Am., Inc. v.
Dept. of Motor Vehicles of Florida, 455 So.2d 404 (Fla. Dist. Ct.
App. 1984), petition for review denied, 462 So.2d 1107 (Fla. Jan
24, 1985)(interpreting New Jersey Franchise Practices Act to
conclude that franchisor should welcome a change from a
franchisee that the franchisor considers a dealer in substantial
breach of its franchise agreement when that franchisee provided a
willing and capable transferee).
Other courts have also recognized these benefits and granted
the remedy of specific performance to franchisees and proposed
transferees. Bayview Buick-GMC Truck, Inc. v. Gen. Motors Corp.,
597 So.2d 887 (Fla. Dist. Ct. App. 1992)(holding refusal to
consent presumptively unreasonable where proposed transferee is
already a franchisee of the franchisor); Culligan Soft Water
Serv. of Inglewood, Inc. v. Culligan Int'l Co., 288 N.W.2d 213
(Minn. 1979)(holding refusal to consent unreasonable where
proposed transferee is qualified to assume franchise); DeBauge
Bros., Inc. v. Whitsitt, 212 Kan. 758, 512 P.2d 487
(1973)(contract for the sale or transfer of franchise, along with
real property necessary to operate the business, is a proper
subject for specific performance); and Bidwell v. Long, 218
N.Y.S.2d 108 (App. Div. 1961)(specific performance granted where
the franchise was the prime consideration for the sale,
notwithstanding the parent corporation's lack of approval as
required by the agreement).
Moreover, in those instances where the remedy of specific
performance was denied, the courts found that the franchisor's
refusal to consent to transfer was reasonable. Westfield Ctr.,
supra, 86 N.J. 453, 467 (holding permanent injunctions not
available where a franchisor bases its decision to terminate a
franchise on bona fide business reasons); Horn, supra, 265 N.J.
Super. at 47 (App. Div. 1993) (reversing final judgment decreeing
proposed transferee entitled to automobile franchises because
proposed transferee was indicted for narcotics offenses);
Simmons, supra, 180 N.J. Super. at 522 (franchisor justifiably
and timely rejected the proposed transferee where the franchisee
and proposed transferee secretly concluded the sale, and
misrepresented their activities upon being discovered by the
franchisor); Simonds Chevrolet, Inc. v. Gen. Motors Corp., 564
F. Supp. 151, 153 (D. Mass. 1983)(holding franchisor properly
withheld its consent to a proposed transfer of an automobile
dealership to a prospective purchaser where proposed purchasers
did not evidence a willingness or ability to provide adequate
working capital, showed substandard sales performance, and wished
to overlap two different lines of franchisor's cars); Van Ness,
supra, 120 B.R. at 545 (automobile manufacturer reasonably
withheld consent to transfer of franchise from a bankruptcy
debtor to a proposed new dealer, where substantial evidence
supported manufacturer's concerns about proposed dealer's
location, consumer satisfaction rating, and service facilities).
Accordingly we hold that specific performance is an
appropriate remedy under section six of the Act where a
franchisor unreasonably withholds consent to a transfer. We note
for completeness, that while the relief granted by the trial
judge benefitted Aspen Knolls, the court did not grant relief to
Aspen Knolls. Instead, Judge Ford granted relief to the
franchisee, Coast. The fact that enforcement of section six
results in benefits to a proposed transferee does not render the
relief inappropriate.
Lastly, VWOA and AOA argue that the order of the trial judge
declaring that Aspen Knolls is entitled to the franchise, subject
to the terms of the existing franchise agreement, amounts to an
unconstitutional taking. VWOA and AOA rely on the Supreme
Court's decision in Westfield Ctr., supra, to support their
position.
In Westfield Ctr., the defendant who was the franchisor and
owner of the real property upon which the franchise was located,
contended that the use of injunctive relief compelling the
indefinite extension of a franchise arrangement into the future
is constitutionally impermissible. Westfield Ctr., supra, 86
N.J. at 466. Although our Supreme Court recognized that the
issuance of a permanent injunction against termination,
cancellation or non-renewal would raise constitutional questions
of due process, and in the case of franchisor owned real
property, taking of property for public use without just
compensation, the Court limited that recognition to cases where
the franchisor had bona fide reasons and refused, in good faith,
to approve of the transfer or renewal. Id. at 467. As previously
pointed out, VWOA and AOA acted unreasonably in withholding
consent to the transfer. The protections afforded under Westfield
Ctr. would be inapplicable.
Moreover, while both the federal and state constitutions
protect the possession, use, and disposition of property, the
Court also recognized that this right is subject to a reasonable
exercise of the government's police power. Id. at 468. (citing
Shelley v. Kraemer, 334 U.S. 1, 10, 68 S.Ct. 836, 841, 92 L.Ed.2d
1161, 1179 (1948); Jones v. Haridor Realty Corp., 37 N.J. 384,
391 (1962); and Hutton Park Gardens v. West Orange Town Council,
68 N.J. 543 (1975)). The requirement that a franchisor act
reasonably in withholding its consent to a transfer of the
franchise is an appropriate exercise of the government's police
power and not an excessive infringement on the franchisor's
rights. Larese, supra, 757 F.2d at 717-18.
The availability of injunctive relief under section six of
the Act is constitutionally permissible.
The order approving Aspen Knolls as the franchise transferee
of Coast's Volkswagen and Audi franchises is affirmed. Because
this issue was certified as final pursuant to R. 4:42-2, the
pending claims for termination and rescission are moot and shall,
on remand, be dismissed by the trial court.