Smith v. Chrysler Group LLC

Filing 186

ORDER that Plaintiff's Motion for Summary Judgment on Liability (Doc. 165) is granted in that (1) Smith was an "automobile dealer" for purposes of 15 U.S.C. § 1222 and a "dealer" for purposes of A.R.S. § 28-4307 and (2) Chrysler is liable to Smith for whatever damages he incurred as a result of Chrysler's violations of A.R.S. §§ 28-4453 and 28-4460. The Motion is otherwise denied. FURTHER ORDERED that Defendant's Motion for Summary Judgment (Doc. 134 ) is denied. See order for complete details. Signed by Judge Neil V. Wake on 3/24/16. (NKS)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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No. CV-13-01732-PHX-NVW

Alfonzo Smith,
Plaintiff / Counter-Defendant,

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v.

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ORDER

FCA US LLC,

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Defendant / Counter-Plaintiff.

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TABLE OF CONTENTS

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I.

INTRODUCTION…………………………………………………..…….

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II.

LEGAL STANDARD………………………….…………….……..…….

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III.

MATERIAL FACTS………………………………...……………...…....

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A. Smith’s Relationship with Chrysler Before Arizona…………………

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B. Smith’s Relationship with Chrysler in Arizona: Contracts and
Policies…………………………………………………….……….…

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1. Contract between Chrysler and the Arizona dealership….…….

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2. Contract between the Arizona dealership and Smith…….…….

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3. Contract between Chrysler and Smith…………………….……

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4. Managerial policies……………………………………….…….

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C. Smith’s Relationship with Chrysler in Arizona: the Circumstances..… 6

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D. Smith’s Response to Termination……………………………………..

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IV.

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ANALYSIS………………………………………………..…….….….....

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A. Dealer or No Dealer……………………………………….………....

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1. Determination of dealer status is not formalistic….……..……

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2. The touchstone inquiry here is whether Smith was deemed
essential to the dealership’s operation…………………..….....

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a. Smith applied for the dealership as an individual……...

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b. Chrysler entered into the arrangement with the
dealership in reliance on Smith’s role………………….

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c. At termination, Smith was a long-time manager and
majority shareholder………………………………….…

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d. Without Smith, Chrysler’s arrangement with the
dealership would have been illegal…………….………..

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B. Duty of Good Faith Under the Federal Dealers’ Act…..………….…

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C. Requirements Under the Arizona Statutes……………………………

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1. Notice and ensuing procedural rights……………………….…

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2. Chrysler’s ownership interest in the dealership……………..…

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D. Common-Law Duty of Good Faith and Fair Dealing………….….…

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E. Declaratory Judgment……………………………………………..….

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‐ ii ‐ 

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Before the Court are Plaintiff’s Motion for Summary Judgment on Liability (Doc.

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165), Defendant’s Motion for Summary Judgment (Doc. 134), and the parties’

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accompanying statements of facts and briefs.1 For the reasons that follow, Plaintiff’s

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motion will be granted in part and denied in part, and Defendant’s motion will be denied.

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I.

INTRODUCTION

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In 2002, Alfonzo Smith became general manager and part owner of a Chrysler-

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brand dealership. Chrysler owned the rest of the dealership’s stock. Smith and Chrysler

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agreed that Smith would gradually purchase the remaining stock from Chrysler, so that he

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could become the dealership’s full owner. Chrysler retained all voting rights in the

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dealership until Smith purchased all the stock.
In 2012, Chrysler terminated Smith’s involvement in the dealership. Smith had

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acquired most, but not all, of the dealership’s stock.

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Smith claims Chrysler’s termination violated the common-law duty of good faith

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and fair dealing as well as federal and state statutes protecting automobile dealers.2

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Chrysler claims there was no bad faith and that the statutes protecting automobile dealers

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do not apply to Smith. Both parties seek summary judgment.

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II.

LEGAL STANDARD

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A motion for summary judgment tests whether the opposing party has sufficient

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evidence to merit a trial. Summary judgment should be granted if the evidence reveals no

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genuine dispute about any material fact and the moving party is entitled to judgment as a

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matter of law. Fed. R. Civ. P. 56(a). A material fact is one that might affect the outcome of

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the suit under the governing law, and a factual dispute is genuine “if the evidence is such that

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Many documents in this case, including Plaintiff’s Motion, have been filed under
seal to protect confidential information.
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After Smith filed this action, Defendant changed its name from Chrysler Group
LLC to FCA US LLC. (Doc. 70.) Because all relevant events occurred before this name
change, Defendant will be referred to as “Chrysler” throughout this order.

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a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty

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Lobby, Inc., 477 U.S. 242, 248 (1986).

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The movant has the burden of showing the absence of genuine disputes of material

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fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). However, once the movant shows

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an absence of evidence to support the nonmoving party’s case, the burden shifts to the party

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resisting the motion. The party opposing summary judgment must then “set forth specific

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facts showing that there is a genuine issue for trial” and may not rest upon the pleadings.

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Anderson, 477 U.S. at 256. To carry this burden, the nonmoving party must do more than

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simply show there is “some metaphysical doubt as to the material facts.” Matsushita Elec.

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Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).

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In deciding a motion for summary judgment, the Court must view the evidence in the

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light most favorable to the nonmoving party, must not weigh the evidence or assess its

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credibility, and must draw all justifiable inferences in favor of the nonmoving party. Reeves

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v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000); Anderson, 477 U.S. at 255.

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Where the record, taken as a whole, could not lead a rational trier of fact to find for the

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nonmoving party, there is no genuine issue for trial. Matsushita, 475 U.S. at 587.

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III.

MATERIAL FACTS

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The following facts are drawn from Plaintiff’s Statement of Facts and exhibits

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(Doc. 166), Defendant’s Statement of Facts and exhibits (Docs. 135, 150, 151, 152), and

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the parties’ pleadings (Docs. 19, 48, 50.).

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otherwise noted.

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A.

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In 1981, Smith acquired a Chrysler-brand dealership in Virginia. (Doc. 135 at

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¶ 9.) He paid for the acquisition himself, after borrowing money and selling personal

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assets. (Id. at ¶ 10.) He was the dealership’s sole owner. (Id. at ¶ 13.)

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The facts are undisputed except where

Smith’s Relationship with Chrysler Before Arizona

In 1984 or 1985, Smith decided he wanted a larger Chrysler-brand dealership in
Virginia.

(Id. at ¶¶ 14-15.)

Rather than pay for the acquisition himself, he used
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Chrysler’s “Marketing Investment” program. (Id. at ¶¶ 16-17.) Under the program,

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Smith contributed 25% of the required capital, while Chrysler contributed the remaining

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75%. (Id. at ¶ 18.) Smith acquired common stock in the dealership, and Chrysler

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controlled the voting stock. (Id. at ¶¶ 21-22.)

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B.

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In 2002, Smith took advantage of the Marketing Investment program again, this

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time in an effort to acquire a Chrysler-brand dealership in Arizona named Superstition

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Springs Chrysler Jeep Inc. (“the Arizona dealership”). (Doc. 166 at ¶¶ 2-4.)

Smith’s Relationship with Chrysler in Arizona: Contracts and Policies

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To apply, Smith submitted an “Application for Dealer Agreement” to Chrysler on

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March 25, 2002. (Doc. 166-2.) On the application Smith provided personal information

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such as his name, education, business experience, references, financial assets and

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liabilities, and credit score. (Id. at 2-5, 8.) In response to the question of who would

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manage the proposed dealership, he wrote “I will, Alfonzo Smith.” (Id. at 5.) Upon

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receipt of Smith’s application form, Chrysler’s National Dealer Placement Manager

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requested a “Dealer Background Report” on Smith. (Id. at 28.)

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At some point Smith also sent to Chrysler a form letter asking to be employed as

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the Arizona dealership’s General Manager. (Doc. 135-14.) There is no date on the letter.

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(Id.) The parties dispute whether this letter was sent during the application process or

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after Smith had already entered the Marketing Investment program. (Compare Doc. 135

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at ¶ 32 with Doc. 168 at ¶ 32.)

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In any event, Chrysler accepted Smith’s application. (Doc. 166 at ¶ 4.) The

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resulting arrangement between Chrysler and Smith was created by three sets of contracts.

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Smith’s managerial role at the Arizona dealership was governed by more specific

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policies.

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1.

Contract between Chrysler and the Arizona dealership

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The first contract was executed by Chrysler and the Arizona dealership on June 5,

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2002. (Doc. 135-16.) It lists Chrysler and Smith as the dealership’s shareholders. (Id. at

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3, 7.) It assigns Chrysler the dealership’s voting stock and assigns Smith the dealership’s
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non-voting stock. (Id.) It ensures “there will be no change affecting more than 50% of

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the ownership interest,” nor any change in ownership interest which may affect the

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dealership’s “managerial control,” without Chrysler’s “prior written approval.” (Id.)

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The contract also lists Smith and one other employee as the dealership’s managers.

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(Id. at 2, 6.) It labels Smith “General Manager” and the other employee “President.”

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(Id.) It states Chrysler “has entered into this Agreement relying on the active, substantial

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and continuing personal participation” of these managers and prevents the dealership

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from changing management “personnel” or “the nature and extent of [their] management

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participation” without Chrysler’s “prior written approval.” (Id. at 2-3, 6-7.)

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The contract’s introduction states Chrysler “has entered into this Agreement in

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reliance upon and has placed its trust in the personal abilities, expertise, knowledge and

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integrity of [the dealership’s] principal owners and management personnel, which

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[Chrysler] anticipates will enable [the dealership] to perform the personal services

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contemplated by the Agreement.” (Id. at 2, 6.) Throughout the contract, the Arizona

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dealership is referred to as “DEALER.” (Id.)

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A newer version of the contract was executed in 2009. (Doc. 135-17.) The

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provisions are materially identical. (Compare Doc. 135-16 with Doc. 135-17.) The 2009

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version contains what appears to be a typographical error, listing Smith as owning the

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voting stock and Chrysler as owning the non-voting stock. (Doc. 135-17 at 3, 7, 11.)

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2.

Contract between the Arizona dealership and Smith

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The second contract was executed by the Arizona dealership and Smith on June

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11, 2002. (Doc. 135-18.) It provides that the dealership will pay Smith a salary, set by

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the dealership’s Board of Directors, as well as an annual bonus of 25% of the dealership’s

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annual profit. (Id. at 2-3.)

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The contract also contains an at-will employment clause. (Id. at 4.) The clause

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states that Chrysler has the “absolute right,” as the dealership’s sole voting stockholder,

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to remove Smith as a Director and employee of the dealership. (Id.) Smith signed his

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initials next to this clause and signed at the end of the contract. (Id.)
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A newer version of the contract was executed in 2003.

(Id. at 6-8.)

The

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provisions are materially identical. (Compare Doc. 135-18 at 2-4 with Doc. 135-18 at

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6-8.)

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3.

Contract between Chrysler and Smith

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The third contract was executed by Chrysler and Smith on June 11, 2002. (Doc.

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135-19.) It states Chrysler purchased 9,500 voting shares in the dealership for $950,000

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and Smith purchased 500 non-voting shares in the dealership for $50,000. (Id. at 2.)

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The contract requires Smith to spend at least half of, and no more than, his annual

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bonus each year to purchase Chrysler’s shares at a price of $100 per share. (Id. at 3.) It

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further provides that once Smith buys a share from Chrysler, the share becomes non-

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voting; thus, as long as Chrysler has any shares, it has the only voting shares. (Id. at 3,

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7.) It also prohibits Chrysler from issuing or converting additional shares. (Id. at 7.)

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The contract further provides that if Smith ceases to be General Manager for any

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reason, his rights to purchase stock will terminate and Chrysler will either (1) buy back

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Smith’s then-acquired stock at book value or (2) dissolve the dealership, liquidate its

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assets, and distribute the proceeds to the shareholders. (Id. at 3-4.) The last page of the

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contract contains a Michigan choice-of-law clause. (Id. at 10.)

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A newer version of the contract was executed on September 30, 2003. (Id. at

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11-24.) According to a letter from Chrysler to Smith dated September 18, 2003, the

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newer version was necessary because Smith had acquired 25% of the dealership’s total

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equity. (Doc. 166-3 at 2.) Thus, the 2003 version of the contract contains revised figures

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on the shares owned by the respective parties: Chrysler owned 9,583 voting shares

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because it invested $958,300, and Smith owned 3,142 non-voting shares because he

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invested $314,200. (Doc. 135-19 at 11.) The September 18 letter to Smith concluded:

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“We extend our congratulations to you for achieving this milestone and look forward to

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working with you to achieve your end objective of 100% ownership.” (Doc. 166-3 at 2.)

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4.

Managerial policies

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In addition to the three sets of contracts described above, Smith’s role as General

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Manager was governed by two documents: Chrysler’s Marketing Investment Financial

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and Operating Policies (Doc. 150-4) and Dealership Secretary-Treasurer’s Guide (Doc.

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150-5.)

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requiring him to manage in certain ways and prohibiting him from managing in other

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ways. (See Doc. 135 at ¶¶ 51-65.) In particular, Smith was required to report to the

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dealership’s Board of Directors periodically and to obtain approval by the Board before

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taking certain actions. (See id. at ¶¶ 56, 58, 67-72.)

These documents outlined the contours of Smith’s managerial authority,

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The parties dispute whether these policies actually limited Smith’s managerial

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authority in a meaningful way. (Compare Doc. 135 at ¶ 66 (characterizing policies as

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imposing “close oversight”) with Doc. 168 at ¶ 66 (characterizing policies as imposing

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“little oversight”).)

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C.

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Upon Chrysler’s agreement to help finance Smith’s acquisition of the Arizona

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dealership via the Marketing Investment program, Smith moved his family from Virginia

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to Arizona. (See Doc. 166 at ¶ 5.)

Smith’s Relationship with Chrysler in Arizona: the Circumstances

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For the first several years, the Arizona dealership was profitable and Smith used

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portions of his annual bonuses to buy more of Chrysler’s shares. (Doc. 166 at ¶ 16; Doc.

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173 at ¶ 16.) Starting in 2007, however, dealership sales fell dramatically. (Doc. 166 at

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¶¶ 19-20.) During this time, the dealership had difficulty obtaining a working capital

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loan. (Id. at ¶¶ 21-26.) But in 2011 and 2012, the dealership became profitable again.

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(Id. at ¶¶ 27-29.)

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On June 16, 2012, Chrysler senior manager Mitch Mitchell emailed Smith,

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requesting that he submit a plan for completing his purchase of Chrysler’s stock by

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March 31, 2013. (Doc. 166-18 at 2.) This email was the first time Smith was made

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aware of a deadline as to his stock purchases. (Doc. 166 at ¶ 32.) The email stated that

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this stock buyout option would be available only if Smith could increase dealership sales
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to meet certain Minimum Sales Requirements. (Doc. 166-18 at 2.) The email further

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stated that if Smith were to fail to purchase all of Chrysler’s stock by March 31, 2013,

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Chrysler “may exert its right to terminate [his] status as a general manager under this

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program and proceed with terminating [his] interest in the dealership.” (Id.)

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Despite this warning, Smith thought he would be able to meet the Minimum Sales

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Requirements and purchase Chrysler’s remaining stock in the dealership by the deadline.

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(Doc. 166 at ¶ 34.)

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On October 4, 2012, Mitchell sent Smith another email explaining the steps

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necessary to purchase Chrysler’s remaining stock and pointing out that Smith had so far

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achieved only 71.2% of the Minimum Sales Requirements. (Doc. 166-22 at 2.) The

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parties dispute whether Chrysler usually views Minimum Sales Requirements as general

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guidelines or strict requirements. (Compare Doc. 166 at ¶ 31 with Doc. 135 at ¶ 84.)

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On October 29, 2012, Mitchell terminated Smith as General Manager and as a

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Director of the dealership without prior written notice. (Doc. 166 at ¶ 43.) At that time

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Mitchell also gave Smith an agreement to sign, which stated he was terminated and

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purported to offer him the audited book value of his investment in the Dealership. (Doc.

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48 at ¶¶ 28-29, Doc. 50 at ¶¶ 28-29.) Smith declined to sign. (Doc. 48 at ¶ 30; Doc. 50 at

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¶ 30.)

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At the time of his termination Smith owned most of the dealership’s stock,

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although the parties dispute exact figures. (Compare Doc. 166 at ¶ 44 (asserting Smith

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owned 68.5% of the stock) with Doc. 173 at ¶ 44 (asserting Smith owned 59.7% of the

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stock).)

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Chrysler has identified several reasons why it terminated Smith in addition to his

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low sales and slow stock purchase. (See Doc. 135 at ¶¶ 88-100.) These include his

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failing to take care of cars on his lot, valuing vehicles incorrectly, and violating

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Chrysler’s conflict-of-interest policy. (See id.) Smith disputes both the genuineness and

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underlying factual accuracy of these alleged reasons. (See Doc. 166 at ¶¶ 88-100.)

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D.

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To challenge his termination, Smith first lodged a petition with the Arizona

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Department of Transportation, but the Department refused to hold a hearing because of

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an arbitration clause in the parties’ contracts. (Doc. 19 at ¶¶ 84-85.)3

Smith’s Response to Termination

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On August 21, 2013, Smith filed suit in this Court. (Doc. 1.) Smith alleges

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Chrysler violated the common-law duty of good faith and fair dealing, the federal

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Automobile Dealers’ Day in Court Act, and various Arizona statutes protecting

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automobile dealers. (Doc. 19 at 14-15, 19-21, 23-26.) In addition, Smith and Chrysler

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both seek declaratory judgment on ancillary matters. (See Doc. 19 at 16-18; Doc. 48 at

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55-56.) Smith and Chrysler have filed cross-motions for summary judgment on Smith’s

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claims. (Doc. 165; Doc. 134.)

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IV.

ANALYSIS

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Plaintiff’s claims arise from three different sources of legal protection governing

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contracts. The most familiar is the common-law duty of good faith and fair dealing,

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which Arizona law implies in every contract, Wells Fargo Bank v. Arizona Laborers,

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Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 490

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¶ 59, 38 P.3d 12, 28 (Ariz. 2002), and which Michigan law recognizes when one party to

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a contract makes its performance a matter of its own discretion, Burkhardt v. City

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National Bank of Detroit, 57 Mich. App. 649, 652, 226 N.W.2d 678, 680 (1975).

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In franchise contracts between automobile dealers and manufacturers, there are

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additional statutory protections. These additional protections are aimed at equalizing “the

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gross disparity in bargaining power between the large automobile manufacturers and their

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As explained in a previous order, neither party seeks to enforce this arbitration
clause, and in any event it is invalid under Arizona and federal law. Smith v. Chrysler
Grp. LLC, No. CV-13-01732-PHX-NVW, 2014 WL 1577515, at *8 & n.1 (D. Ariz. Apr.
19, 2014).
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many relatively small, retail dealers.” Marquis v. Chrysler Corp., 577 F.2d 624, 635 n.21

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(9th Cir. 1978).

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At the federal level is the Automobile Dealers’ Day in Court Act (“Federal

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Dealers’ Act”). 15 U.S.C. §§ 1221 et seq. The statute authorizes an automobile dealer to

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sue an automobile manufacturer in federal court for damages caused by the

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manufacturer’s failure to act in “good faith” in complying with the parties’ franchise

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agreement or in terminating the dealer’s franchise. 15 U.S.C. § 1222. This statutory duty

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of “good faith” is narrower than the common-law duty. Whereas common law prohibits

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“doing anything to prevent other parties to the contract from receiving the benefits and

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entitlements of the agreement,” Wells Fargo, 201 Ariz. at 490 ¶ 59, 38 P.3d at 28, the

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statute merely prohibits “coercion, intimidation, or threats of coercion or intimidation,”

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see 15 U.S.C. § 1221(e). Thus, the statute gives a federal cause of action for some of the

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bad faith conduct that is actionable at common law.

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Arizona statutes afford broader protection. Title 28, Chapter 10, Section 4307 of

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the Arizona Revised Statutes authorizes an automobile dealer to sue an automobile

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manufacturer for damages caused by “a violation of this chapter.” A.R.S. § 28-4307.

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Because “this chapter”—Chapter 10 of Title 28—contains a multitude of specific rules,

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the resulting duty imposed on manufacturers extends well beyond the common-law duty

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of good faith. Importantly, Chapter 10 sets forth procedures governing a manufacturer’s

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ability to terminate a dealer’s franchise. The manufacturer must first give written notice

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of its intention to terminate, along with its reasons for termination, to both the dealer and

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the Arizona Department of Transportation. A.R.S. § 28-4453(D). The dealer may then

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demand an administrative hearing at which the manufacturer must prove good cause for

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termination. A.R.S. §§ 28-4454(A), 28-4456(A), (C). In some cases, good cause is

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established if, among other things, the manufacturer has given the dealer 180 days to cure

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alleged deficiencies. See A.R.S. § 28-4457(D)(3).

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These federal and state causes of action, by their terms, are available only to

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automobile “dealers.” 15 U.S.C. § 1222; A.R.S. § 28-4307. Therefore the threshold
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question regarding Smith’s statutory claims is whether he was a “dealer.” On this

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question both parties seek summary judgment.

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A.

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The Federal Dealers’ Act defines “automobile dealer” as “any person, partnership,

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corporation, association, or other form of business enterprise . . . operating under the

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terms of a franchise and engaged in the sale or distribution of passenger cars, trucks, or

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station wagons.” 15 U.S.C. § 1221(c). The Act defines “franchise” as “the written

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agreement or contract between any automobile manufacturer engaged in commerce and

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any automobile dealer which purports to fix the legal rights and liabilities of the parties to

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Dealer or No Dealer

such agreement or contract.” 15 U.S.C. § 1221(b).

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The Arizona definitions are structurally different but substantively similar. The

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statute defines “motor vehicle dealer” by listing types: “new motor vehicle dealer,” “used

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motor vehicle dealer,” etc. A.R.S. § 28-4301(22). Those types are then defined further.

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See, e.g., A.R.S. § 28-4301(25) (defining “new motor vehicle dealer”). The statute

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defines “franchise” as “a contract between two or more persons” where (a) a commercial

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relationship is involved, (b) the franchisee has the right to sell new motor vehicles

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manufactured or distributed by the franchisor, (c) the franchisee, as a separate business, is

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part of the franchisor’s distribution system, (d) the operation of the franchisee’s business

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is substantially associated with the franchisor’s trade name, and (e) the franchisee’s

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business substantially relies on the franchisor to supply new motor vehicles. See A.R.S.

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§ 28-4301(12).

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The parties do not cite any case interpreting the word “dealer” as used in the

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Arizona statutes, nor does the Court know of any. In contrast, courts have interpreted the

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word “dealer” under the Federal Dealers’ Act in a variety of factual contexts. These

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cases guide the determination of whether Smith is a “dealer” under Arizona law as well

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as federal law. See Sell v. Gama, 231 Ariz. 327, 327 ¶ 18, 295 P.3d 421, 425 (2013)

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(stating Arizona will defer to federal case law construing parallel federal statute unless

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there is good reason to depart from federal decisions).
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In Kavanaugh v. Ford Motor Co., the Seventh Circuit was presented with facts

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remarkably similar to the present case. 353 F.2d 710 (7th Cir. 1965). Three contracts

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jointly created a relationship among an automobile manufacturer (Ford), an individual

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(Kavanaugh), and a dealership (Dan Kavanaugh Ford, Inc.). Id. at 712-14. Kavanaugh

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was made an employee and shareholder of the dealership. Id. As an employee he was

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the dealership’s “general manager” and “president” but only one of four “directors,” the

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rest of whom represented Ford. Id. at 714-15 & n.7. As a shareholder he invested

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$30,000 in exchange for 300 shares of the dealership’s common stock, while Ford

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invested $120,000 in exchange for 1200 shares of preferred stock. Id. at 712. At the end

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of each year, Kavanaugh was to buy some of Ford’s remaining shares using his yearly

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employee bonus. Id. However, Ford was to retain all voting rights until Kavanaugh

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bought all remaining shares. Id. This relationship held for about four years, at the end of

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which the dealership’s directors terminated Kavanaugh’s employment and Ford canceled

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the shareholder arrangement. Id. at 714-15.

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On those facts the Seventh Circuit held that “in legal contemplation [Kavanaugh]

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was an automobile dealer ‘operating under the terms of a franchise’ within the meaning

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of” the Federal Dealers’ Act. Id. at 717-18. Given the factual similarities between that

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case and this one, the Seventh Circuit’s reasoning is highly persuasive here and worth

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tracing in detail.4

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1.

Determination of dealer status is not formalistic.

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In Kavanaugh, Ford took the position that the “dealer” for purposes of the Federal

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Dealers’ Act was the dealership itself, not Kavanaugh individually. Id. at 715. In

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support of this position, Ford made two arguments. First, Ford argued that the relevant

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“franchise” for statutory purposes was the contract between Ford and the dealership, not

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Admittedly, Kavanaugh involved a different procedural posture. There the
Seventh Circuit affirmed the district court’s denial of summary judgment for the
defendant, id. at 718, whereas here summary judgment on this issue will be granted for
the plaintiff. But the procedural posture in Kavanaugh did not seem to affect the court’s
reasoning, which is what is persuasive here in light of undisputed facts.
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the contract between Ford and Kavanaugh or the contract between the dealership and

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Kavanaugh. Id. Second, Ford argued that the dealership was a corporate entity separate

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from both Ford and Kavanaugh, whose separateness should be recognized. Id. at 717.

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The Seventh Circuit rejected both arguments.

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As to Ford’s first argument, the Seventh Circuit found that the statutory term

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“franchise” could include more than “the document ostensibly designated as the

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franchise” by the parties. Id. Thus, to ascertain “the actual relationship of the parties,”

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the court examined all three of the contracts relevant to the transaction because each

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constituted “an inseparable part of the mutual understanding” between the parties. Id.

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The court further noted that “the circumstances attending the execution of the agreements

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and the post-execution behavior of the parties are relevant considerations.” Id. at 715-16.

12

In other words, the court, unsatisfied with formal labels, inquired as to the underlying

13

substance of the parties’ relationship.

14

This focus on substance is necessary to effectuate the Federal Dealers’ Act. The

15

whole point of giving automobile dealers statutory protection in addition to common-law

16

protection is to combat the “gross disparity in bargaining power” between dealers and

17

manufacturers.

18

agreements might become one-sided and include terms solely for the manufacturer’s

19

benefit. Id. To determine “dealer” status solely by reference to labels in contracts over

20

which manufacturers have dominant influence would allow manufacturers to contract

21

around the statute. Congress did not intend that result. It passed the Federal Dealers’ Act

22

to provide federal review “irrespective of contractual provisions.”

23

(quoting H.R.Rep., No. 2850, 84th Cong., 2d Sess. (1956), reprinted in [1956] U.S.Code

24

Cong. & Admin.News, at 4596).

Marquis, 577 F.2d at 635 n.21.

Absent such protection, franchise

Id. at 633 n.15

25

For similar reasons, Kavanaugh’s focus on substance over form is even more

26

appropriate when determining “dealer” status under the Arizona statutes. The Arizona

27

legislature chose to provide automobile dealers with more robust protection than

28

Congress did. This protection includes procedural rights to notice, a good cause hearing,
- 12  

1

and possibly an opportunity to cure, when faced with franchise termination. See A.R.S.

2

§§ 28-4453 et seq. These rights evince a stronger legislative intent to guard against

3

manufacturers’ disproportionate bargaining power. Accordingly, contractual labels are

4

even less useful when determining “dealer” status for purposes of the Arizona statutes.

5

As to Ford’s second argument in Kavanaugh, the Seventh Circuit rejected Ford’s

6

characterization of the dealership as a distinct corporate entity in light of the “settled

7

doctrine that the fiction of corporate entity will be disregarded whenever it has been

8

adopted or used to evade the provisions of a statute.” 353 F.2d at 717. The court found

9

that treating the dealership as the “dealer” for purposes of the Federal Dealers’ Act would

10

effectively insulate Ford from liability under the statute because Ford controlled the

11

dealership and would not sue itself. Id.

12

These same considerations apply here. Even though Smith was part owner and

13

general manager of the dealership, Chrysler owned all the dealership’s voting stock and

14

controlled the majority of the dealership’s Board of Directors. Thus, as a practical

15

matter, the dealership would sue Chrysler only if Chrysler wanted it to. To treat the

16

dealership as the “dealer” in these circumstances would insulate Chrysler from liability

17

under both the Federal Dealers’ Act and the Arizona statutes, since Chrysler acting as

18

“dealer” would not sue itself acting as “manufacturer”.

19

Therefore, Chrysler’s contentions that the Arizona dealership was the “dealer” by

20

virtue of the parties’ contractual labels and the dealership’s corporate separateness are

21

unpersuasive.

22
23
24
25
26
27
28

Given Kavanaugh’s rejection of formalistic labels, the question becomes: How
does one determine whether Smith was a “dealer”?
2.

The touchstone inquiry here is whether Smith was deemed
“essential” to the dealership’s operation.

In Kavanaugh, after examining the substance of the parties’ relationship, the
Seventh Circuit concluded that Kavanaugh was not merely regarded as “someone who
desired to invest in a business enterprise” or “someone being employed to manage the
- 13  

1

dealership,” but was “deemed essential to the operation of the dealership.” 353 F.2d at

2

716. In reaching this conclusion the court noted several factors, most of which are

3

present in this case too. Other factors in this case also support the conclusion that Smith

4

was essential to the dealership’s operation.

5

a.

Smith applied for the dealership as an individual.

6

The Seventh Circuit noted that Kavanuagh applied to Ford for a dealership as an

7

individual, and that Ford treated him “as an individual applicant, not as someone

8

applying on behalf of a corporation.” Id.

9

So too here. In Smith’s “Application for Dealer Agreement,” he applied as an

10

individual. He provided personal information such as his name, education, business

11

experience, references, financial assets and liabilities, and credit score. In response to the

12

question of who would manage the proposed dealership, he wrote “I will, Alfonzo

13

Smith.” Upon receipt of Smith’s application, Chrysler’s National Dealer Placement

14

Manager requested a “Dealer Background Report” on Smith. Chrysler thus viewed

15

Smith as an individual applicant.

16

On this point, Chrysler attempts to distinguish Kavanaugh by pointing out that

17

Smith sent a letter asking to be employed as the dealership’s General Manager. But that

18

is not a distinction because Kavanaugh was general manager too. 353 F.2d at 714.

19

Moreover, at oral argument Chrysler conceded that the letter sent by Smith had been

20

drafted by Chrysler.

21

b.

Chrysler entered into the arrangement
dealership in reliance on Smith’s role.

with

the

22

The Seventh Circuit also noted that the contract between Ford and the dealership

23

emphasized Kavanaugh’s importance in several ways. The contract was executed in

24

express reliance on the representation that Kavanaugh would be part owner of the

25

dealership and would have “full managerial authority and responsibility for the operating

26

management” of the dealership. Id. at 716. Indeed, the contract gave Ford the right to

27

back out if Kavanaugh were to lose his ownership interest or management position. Id.

28

The contract’s preamble also praised “individual businessmen” as best able to sell
- 14  

1

automobiles. Id. And the contract gave the dealership the name “Dan Kavanaugh Ford,

2

Inc.” Id.

3

Here, the contract between Chrysler and the Arizona dealership similarly

4

emphasizes Smith’s importance.

5

dealership shareholders and warrants “there will be no change affecting more than 50%

6

of the ownership interest,” nor any change in ownership interest which may affect the

7

dealership’s “managerial control,” without Chrysler’s “prior written approval.”

8

contract also lists Smith and one other employee as the only dealership managers, states

9

Chrysler “has entered into this Agreement relying on the active, substantial and

10

continuing personal participation” of these managers, and prevents the dealership from

11

changing management “personnel” or “the nature and extent of [their] management

12

participation” without Chrysler’s “prior written approval.” The contract’s introduction

13

summarizes the point well: “[Chrysler] has entered into this Agreement in reliance upon

14

and has placed its trust in the personal abilities, expertise, knowledge and integrity of [the

15

dealership’s] principal owners and management personnel, which [Chrysler] anticipates

16

will enable [the dealership] to perform the personal services contemplated by the

17

Agreement.” The contract stops short of naming the dealership after Smith, however.

The contract lists Smith and Chrysler as the only

The

18

Chrysler attempts to downplay the importance of Smith’s role in this contractual

19

arrangement by identifying limits on his managerial authority. To that end, Chrysler cites

20

its Marketing Investment Financial and Operating Policies and Secretary-Treasurer’s

21

Guide, which required Smith to manage in certain ways and prohibited him from

22

managing in other ways. Chrysler also identifies instances where Smith needed approval

23

by the dealership’s Board of Directors before taking action, because he was only a part

24

owner and had not bought the dealership via private capitalization.

25

As an initial matter, it is not clear how these limits on Smith’s managerial

26

authority distinguish this case from Kavanaugh.

27

discuss the limits on Kavanaugh’s managerial authority. Even so, one can infer there

28

were some limits. The contract between Kavanaugh and Ford set forth the dealership’s
- 15  

The Kavanaugh opinion does not

1

“general method of operation.” 353 F.2d at 712. Kavanaugh must have been subject to

2

Board approval because the Board fired him. Id. at 715. And Kavanaugh, like Smith,

3

owned only part of the dealership. Id. at 712.

4

More fundamentally, the limits on Smith’s authority do not change the fact that

5

Chrysler entered into this contractual arrangement in express reliance on Smith’s

6

continuing role as manager and increasing role as shareholder. The whole arrangement

7

was basically a financing device by which Smith could become the dealership’s full

8

owner. Chrysler’s limits on Smith’s managerial authority do not change the nature of the

9

transaction. Indeed, such limits are to be expected where, as here, the individual plays

10

such an important role in the underlying contractual arrangement that the manufacturer

11

expressly relies on that role when entering the arrangement with the dealership.
c.

12
13
14
15
16
17
18
19
20
21

In deciding that Kavanaugh was “essential” to the dealership, the Seventh Circuit
did not assign any weight to the length of his tenure as general manager or the percentage
of dealership shares he had acquired. Perhaps that is because neither factor carried much
weight in that case. At termination, Kavanaugh had been at the dealership less than four
years and had not acquired even 25% of the total shares. 353 F.2d at 712, 714-15.
By contrast, Smith was terminated after serving as dealership general manager for
approximately ten years and after acquiring a clear majority of the dealership’s shares.5
Thus, if anyone at the dealership was “essential” to the dealership’s operation at the time
of Smith’s termination, it was Smith.

22

d.

23
24
25
26
27
28

At termination, Smith was a long-time manager and
majority shareholder.

Without Smith, Chrysler’s arrangement
dealership would have been illegal.

with

the

Arizona law generally prohibits an automobile manufacturer from “having an
ownership interest” in a dealership,6 but provides an exception for manufacturers that
5

However, because Chrysler still owned some stock, Smith had no voting stock.

6

The statutory prohibition refers to ownership interests in a new or used “dealer,”
whereas the statutory exception refers to owning a “dealership.” Compare A.R.S. § 28- 16  

1

“temporarily” own a dealership while in a bona fide relationship with a “qualified

2

person.” A.R.S. §§ 28-4460(A), (B)(1), (B)(1)(b). For this exception to apply, the

3

“qualified person” must make a substantial “initial investment” in the dealership, must

4

buy the manufacturer’s remaining ownership interest in “regular periodic payments,” and

5

must be able to “expect to acquire and retain full and complete ownership of the

6

dealership” within a reasonable period of time. A.R.S. § 28-4460(B)(1)(b)(i)-(v).

7

In the arrangement between Smith and Chrysler, Smith was supposed to play the

8

role of the “qualified person.” He made a substantial initial investment in the dealership,

9

he regularly bought portions of Chrysler’s ownership interest, and he hoped to acquire

10

full ownership. Smith’s intended role as a “qualified person” was essential because it

11

was necessary to prevent Chrysler’s ownership interest in the dealership from violating

12

Arizona law.

13

For all these reasons, even viewing the evidence in the light most favorable to

14

Chrysler, Smith played an essential role in the dealership’s operation and was a “dealer”

15

operating under a “franchise” with Chrysler for purposes of the Federal Dealers’ Act and

16

the Arizona statutes.

17

B.

18

The Federal Dealers’ Act authorizes an automobile dealer, such as Smith, to sue a

19

manufacturer for failing to act in “good faith.” 15 U.S.C. § 1222. The statute defines

20

“good faith” as each party’s duty to “act in a fair and equitable manner toward each other

21

so as to guarantee the one party freedom from coercion, intimidation, or threats of

22

coercion or intimidation from the other party.” 15 U.S.C. § 1221(e).

Duty of Good Faith Under the Federal Dealers’ Act

23

The “failure to exercise good faith within the meaning of the Act has a limited and

24

restricted meaning. . . . It does not mean ‘good faith’ in a hazy or general way, nor does it

25

mean unfairness. The existence or nonexistence of ‘good faith’ must be determined in

26
27
28

4460(B)(1) with A.R.S. § 28-4460(B)(1)(b). The statute then defines both words—
“dealer” and “dealership”—as meaning the same thing: a “new motor vehicle dealer or
franchisee.” A.R.S. § 28-4460(E)(2).
- 17  

1

the context of actual or threatened coercion or intimidation.” Autohaus Brugger, Inc. v.

2

Saab Motors, Inc., 567 F.2d 901, 911 (9th Cir. 1978) (citation omitted). “Coercion or

3

intimidation must include a wrongful demand which will result in sanctions if not

4

complied with, and it is necessary to consider not only whether the manufacturer brought

5

pressure to bear on the dealer, but also his reason for doing so.” Id. (citation omitted).

6

When a termination of a franchise is involved, “there must be a ‘causal connection’

7

between the dealer’s resistance to the coercive conduct and the termination.” Id. “The

8

existence of coercion or intimidation depends upon the circumstances arising from each

9

particular case.” Id.

10

Here, Smith claims Chrysler unlawfully “coerced or intimidated” him by (1)

11

wrongfully demanding that he increase his sales numbers to a certain minimum and

12

purchase the outstanding stock in the dealership by a certain deadline or else he would be

13

subject to termination and (2) then terminating his employment and ownership interest

14

before that deadline for failing to meet the minimum sales requirement and failing to

15

purchase the outstanding stock. On Smith’s view, this one-two punch violated the

16

Federal Dealers’ Act because Chrysler “set[] an unrealistic goal” and then “selectively

17

terminate[d] one dealer for failing to meet that goal.”

18

(generally noting such conduct may violate Federal Dealers’ Act); see also Marquis v.

19

Chrysler Corp., 577 F.2d 624, 635 (9th Cir. 1978) (holding evidence supported verdict of

20

bad faith under Federal Dealers’ Act where Chrysler selectively enforced minimum sales

21

requirement).

Autohaus, 567 F.2d at 912

22

Chrysler denies both prongs of Smith’s theory. First, Chrysler argues that its

23

demand of higher sales and faster stock purchases was realistic and reasonable in light of

24

its contracts with Smith. Second, Chrysler argues that even if this demand was coercive,

25

there was no “causal connection” between the demand and Smith’s termination because

26

Smith was terminated for other reasons.

27
28
- 18  

1

There is evidence in the record supporting each party’s theory. Therefore, whether

2

Chrysler violated the “good faith” duty of the Federal Dealers’ Act is an issue of fact that

3

cannot be resolved on summary judgment.

4

C.

5

The Arizona statutes authorize an automobile dealer, such as Smith, to sue a

6

manufacturer for violating Chapter 10 of Title 28, Arizona Revised Statutes, if the

7

violation causes the dealer to suffer “pecuniary loss” or to be “otherwise adversely

8

affected.” A.R.S. § 28-4307. Smith seeks summary judgment with respect to violations

9

of two separate sections of Chapter 10: A.R.S. §§ 28-4453 and 28-4460.

10

Requirements Under the Arizona Statutes

1.

Notice and ensuing procedural rights

11

Chapter 10 sets forth procedures governing a manufacturer’s ability to terminate a

12

dealer’s franchise. The manufacturer must first give written notice of its intention to

13

terminate, along with its reasons for termination, to both the dealer and the Arizona

14

Department of Transportation. A.R.S. § 28-4453(D). The dealer may then demand an

15

administrative hearing at which the manufacturer must prove good cause for termination.

16

A.R.S. §§ 28-4454(A), 28-4456(A), (C). In some cases, good cause is established if,

17

among other things, the manufacturer has given the dealer 180 days to cure alleged

18

deficiencies. See A.R.S. § 28-4457(D)(3).

19

It is undisputed that Chrysler did not give notice of its intention to terminate its

20

franchise as described in A.R.S. § 28-4453(D) and that therefore Smith was unable to

21

exercise his ensuing procedural rights, such as a demand for a good cause hearing.

22

Therefore summary judgment will be granted in favor of Smith as to his claim that

23

Chrysler violated A.R.S. § 28-4453.

24

2.

Chrysler’s ownership interest in the dealership

25

Chapter 10 generally prohibits an automobile manufacturer from “having an

26

ownership interest” in a dealership, but provides an exception for manufacturers that

27

“temporarily” own a dealership while in a bona fide relationship with a “qualified

28

person.” A.R.S. §§ 28-4460(A), (B)(1), (B)(1)(b). For this exception to apply, the
- 19  

1

“qualified person” must make a substantial “initial investment” in the dealership, must

2

buy the manufacturer’s remaining ownership interest in “regular periodic payments,” and

3

must be able to “expect to acquire and retain full and complete ownership of the

4

dealership” within a reasonable period of time. A.R.S. § 28-4460(B)(1)(b)(i)-(v).

5

In the arrangement between Smith and Chrysler, Smith was supposed to play the

6

role of the “qualified person.” He made a substantial initial investment in the dealership,

7

he regularly bought portions of Chrysler’s ownership interest, and he hoped to acquire

8

full ownership.

9

In reality, Smith was not a “qualified person” because he was not able to “expect”

10

to acquire full ownership of the dealership.

11

contained an at-will employment clause that purported to give Chrysler, as the

12

dealership’s sole voting stockholder, the “absolute right” to remove Smith as a Director

13

and employee. Chrysler used this at-will clause to terminate Smith’s employment and

14

ownership interest in the dealership. Indeed, Chrysler has stressed the importance of this

15

at-will clause throughout its summary judgment motion. (See, e.g., Doc. 134 at 1, 2, 4, 5,

16

8, 12, 13, 14, 15, 16, 17.). If, as Chrysler contends, this clause actually rendered Smith’s

17

employment and ownership interest terminable at the will of the entity that controlled the

18

dealership’s voting, Smith could not have “expected” to acquire full ownership, in which

19

case he was not a “qualified person,” in which case Chrysler’s ownership interest in the

20

dealership violated A.R.S. § 28-4460. Thus, Chrysler’s exercise of the at-will clause

21

removes Chrysler from the “qualified person” safe harbor that its contracts were

22

otherwise designed to invoke.

Smith’s contract with the dealership

23

The parties dispute whether this violation of A.R.S. § 28-4460 harmed Smith but

24

do not adequately brief the issue. Chrysler says Smith was not harmed because the

25

statute by its terms is aimed at preventing a manufacturer from “compet[ing] with or

26

unfairly discriminat[ing] among its dealers.” A.R.S. § 28-4460(A). On Chrysler’s view,

27

the statute prohibits a manufacturer from owning a dealership in order to protect dealers

28

in other dealerships.

But Smith was a Chrysler dealer too, and Chrysler arguably
- 20  

1

“competed” with him in the extreme by exercising the at-will clause in a way that

2

forfeited his dealership. On this record and in view of the cursory briefing on the issue, it

3

is debatable whether Chrysler’s violation of A.R.S. § 28-4460 caused or contributed to

4

Smith’s injury. That causation question must be left for trial.

5

D.

6

Arizona law implies a duty of good faith and fair dealing in every contract, Wells

7

Fargo Bank v. Arizona Laborers, Teamsters & Cement Masons Local No. 395 Pension

8

Trust Fund, 201 Ariz. 474, 490 ¶ 59, 38 P.3d 12, 28 (Ariz. 2002), and Michigan law

9

recognizes the duty when one party to a contract makes its performance a matter of its

10

own discretion, Burkhardt v. City National Bank of Detroit, 57 Mich. App. 649, 652, 226

11

N.W.2d 678, 680 (1975).

Common-Law Duty of Good Faith and Fair Dealing

12

One of the contracts at issue here—namely, the contract between Chrysler and

13

Smith—contains a Michigan choice-of-law clause. The parties dispute whether Michigan

14

law or Arizona law supplies the common-law duty of good faith and fair dealing that

15

governed their relationship. 7

16

The Court need not decide which law governs here because neither would permit

17

summary judgment. As stated above in Part IV.B, Smith and Chrysler have advanced

18

different theories as to why Smith was terminated, and there is evidence in the record

19

supporting each party’s theory.

20
21
22
23
24
25
26
27
28

7

This is a complex question. The Michigan choice-of-law clause was present in
only one of several contracts that formed the arrangement between Chrysler and Smith.
Thus, a threshold issue is whether, or to what extent, Smith’s bad faith claims arise out of
the contract that the choice-of-law clause purports to govern. Further, even to the extent
Smith’s claims arise out of that contract, Arizona law on good faith and fair dealing may
apply despite the choice-of-law clause if (1) the particular issue is not “one which the
parties could have resolved by an explicit provision in their agreement” and (2)
application of Michigan law would be contrary to Arizona’s “fundamental policy.” See
Swanson v. Image Bank, Inc., 206 Ariz. 264, 267, 77 P.3d 439, 442 (2003) (quoting
Restatement (Second) of Conflict of Laws § 187 (1971)).
- 21  

1

Chrysler misconstrues White v. AKDHC, LLC, 664 F. Supp. 2d 1054 (D. Ariz.

2

2009). Chrysler quotes the case for the broad proposition that “a termination without

3

cause does not breach the implied covenant of good faith and fair dealing.” Id. at 1065.

4

The court’s actual statement was expressly limited to the context of a “pure at-will

5

employment contract”:

6

In the context of a pure at-will employment contract with no
agreed-to benefits and no promise of continued employment
or tenure, a termination without cause does not breach the
implied covenant of good faith and fair dealing.

7
8
9

Id.

Moreover, the court immediately clarified that, even in the context of at-will

10

employment contracts, conduct other than termination could violate good faith and fair

11

dealing:

12

However, a viable claim for breach of the implied covenant
may lie if a plaintiff is alleging that conduct other than the
termination itself breached the covenant.

13
14
15
16
17
18
19
20
21
22
23
24
25
26

Id.
This case involves more than a “pure at-will employment contract” because Smith
was not just the dealership’s employee but also a part owner contractually obliged to buy
dealership stock until becoming full owner. Accordingly, Smith claims not only that he
was fired unlawfully but also that he was deprived of his reasonable expectation of
acquiring full ownership. (Doc. 19 at ¶ 140.) White does not preclude Smith’s claim.
Therefore, whether Chrysler violated the common-law duty of good faith and fair
dealing is an issue of fact that cannot be resolved on summary judgment.
E.

Declaratory Judgment

Smith’s claims for declaratory judgment (Doc. 19 at ¶¶ 78-97) and Chrysler’s
counterclaims for declaratory judgment (Doc. 48 at ¶¶ 31-43) are largely misplaced. The
purpose of declaratory judgment is to adjudicate rights or obligations in cases where the
dispute “has not reached the stage at which either party may seek a coercive remedy” or

27
28
- 22  

1

where “a party who could sue for coercive relief has not yet done so.” 10B Charles Alan

2

Wright, Arthur R. Miller, et al., Federal Practice and Procedure § 2751 (3d ed. 1998).

3

Here, Smith seeks damages for claims arising under federal and state statutes and

4

common law. Many of the parties’ requests for declaratory judgment are unnecessary in

5

light of the Court’s rulings in this order, and the other requests will probably be rendered

6

unnecessary by a resolution of Smith’s remaining claims on the merits. Any unresolved

7

requests for declaratory judgment can be addressed at trial. Thus, there is no benefit to

8

granting or denying declaratory judgment at this stage.

9

IT IS THEREFORE ORDERED that Plaintiff’s Motion for Summary Judgment on

10

Liability (Doc. 165) is granted in that (1) Smith was an “automobile dealer” for purposes

11

of 15 U.S.C. § 1222 and a “dealer” for purposes of A.R.S. § 28-4307 and (2) Chrysler is

12

liable to Smith for whatever damages he incurred as a result of Chrysler’s violations of

13

A.R.S. §§ 28-4453 and 28-4460. The Motion is otherwise denied.

14
15
16

IT IS FURTHER ORDERED that Defendant’s Motion for Summary Judgment
(Doc. 134) is denied.
Dated this 24th day of March, 2016.

17
18
19

Neil V. Wake
United States District Judge

20
21
22
23
24
25
26
27
28
- 23