Smith v. Chrysler Group LLC

Filing 29

ORDER that Defendant Chrysler Group, LLC's Motion to Dismiss (Doc. 21 ) will be granted in part and denied in part. FURTHER ORDERED that Plaintiff Alfonzo Smith's claims for tortious interference with contract and business expectancy (Count VI) and for breach of the express contract terms (Count VII, in part) from his First Amended Complaint (Doc. 19 ) are dismissed with prejudice. See order for complete details. Signed by Judge Neil V. Wake on 4/18/14. (NKS)

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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Alfonzo Smith, No. CV-13-01732-PHX-NVW Plaintiff, 10 11 v. 12 ORDER Chrysler Group LLC, 13 Defendant. 14 Before the Court is Defendant Chrysler Group, LLC’s Motion to Dismiss 15 (Doc. 21), Plaintiff Alfonzo Smith’s Response (Doc. 22), and the Reply (Doc. 23). For 16 the following reasons, Chrysler Group’s Motion to Dismiss (Doc. 21) will be denied in 17 part and granted in part. 18 I. 19 FACTS For the purpose of this Motion to Dismiss under Rule 12(b)(6), all allegations of 20 material fact are assumed to be true and construed in the light most favorable to the non- 21 moving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). In 1999, 22 Plaintiff Alfonzo Smith voluntarily sold his ownership interest in a Virginia-based 23 Chrysler dealership as part of a Chrysler plan to consolidate dealerships. In exchange for 24 selling his ownership interest in the Virginia dealership, Smith was given a first right of 25 refusal on purchasing a new dealership. He exercised that right by entering into a 26 contract purchase the Superstition Springs Chrysler Dealership (the “Dealership”) that 27 Chrysler was constructing in Superstition Springs, Arizona. To finance his purchase, 28 Smith opted into Chrysler’s Marketing Investment Program which allowed him to 1 finance the purchase of the dealership with minimal initial capital outlay. 2 In 2001, the Dealership submitted an application to transact business in Arizona to 3 the Arizona Corporation Commission. The Dealership’s application was approved, but 4 Smith was not listed as a director or officer. The application listed all officers and 5 directors as located at “1000 Chrysler Drive, Auburn Hills, MI 48326.” (Doc. 21, 6 Exb. A). 7 Dealership executed a Sales and Service Agreement which outlined Chrysler’s 8 requirements of the franchise Dealership, including the minimum working capital. 9 (Doc. 21, Exb. B). The agreement listed Smith as the Dealership’s General Manager and 10 awarded him 100% of the Dealership’s non-voting stock. Chrysler’s predecessor is listed 11 as owning 100% of the voting stock, and Richard Bridenstine is listed as the Dealership’s 12 president. Chrysler asserts the Sales and Service Agreement was executed by Bridenstine 13 on behalf of the dealership, but Smith asserts he was the one to sign on behalf of the 14 dealership. The signature on the document filed with this Motion suggests Smith may 15 have signed the agreement because although the signature is illegible, the title of the 16 17 18 19 20 21 22 23 24 25 26 27 28 After gaining approval to transact business in Arizona, Chrysler and the signee is described as “Director/GM,” which suggests it was signed by the General Manager, Smith. A second Sales and Service Agreement was executed in 2009 with what appears to be the same signature. (Doc. 21, Exb. E). In 2003, Smith and Chrysler executed the Stock Agreement which outlined the terms under which Smith and Chrysler could purchase and sell their respective stock holdings. Under the agreement, Smith owned 100% of the Dealership’s common, nonvoting stock while Chrysler owned 100% of the preferred, voting stock. It was contemplated that Smith would eventually purchase all of Chrysler’s preferred stock and obtain complete ownership of the Dealership. The Stock Agreement gave Smith the right to ask the Dealership’s Directors to redeem all shares of preferred stock, but Chrysler was permitted to decline the request if the Dealership lacked the minimum working capital outlined in the Dealership’s Sales and Service Agreement. The Stock Agreement also provided that until Smith had purchased all of the preferred, voting stock, Chrysler owed all shares of voting stock and could use that voting power to remove Smith as Director or -2- 1 General Manager. 2 At the same time he executed the Stock Agreement, Smith entered into a Bonus 3 Agreement with the Dealership which provided that, in addition to his salary, the 4 Dealership would pay him a bonus of 25% of the operating profit, at least half of which 5 Smith was required to use to purchase preferred stock from Chrysler. In the Bonus 6 Agreement, Smith signed his initials next to the paragraph describing how he was an at- 7 will employee, subject to the absolute right of the Dealership or Chrysler to remove him. 8 (Doc. 21, Exb. C). If Smith ceased to be General Manager before acquiring all of 9 Chrysler’s preferred stock, Smith would be forced to surrender his stock to Chrysler at a 10 value determined by the Dealership’s auditor. (Id.). 11 In his role as General Manager, Smith undertook many of the responsibilities of 12 any other franchised dealer, including negotiating financing arrangements with lenders to 13 stock the Dealership and abiding by Chrysler’s franchise terms and conditions. 14 (Docs. 22). By 2012, Smith was a majority owner in the Dealership, holding 68.5% of 15 the outstanding stock. (Doc. 19, ¶ 52). Financials as of August 2012 suggest Smith 16 17 18 19 20 21 22 23 24 25 26 27 28 would have been able to use his year end bonus to purchase Chrysler’s remaining preferred stock. (Id. at ¶ 66). In September 2012, a Chrysler Area Sales Manager visited Smith at the Dealership to go over the June 2012 sales numbers, specifically the Minimum Sales Responsibility, a metric designed by Chrysler to establish threshold sales quotas for dealerships. (Doc. 19, ¶¶ 54-56). The Dealership was meeting the Minimum Sales Responsibility for certain vehicles but falling below the Minimum Sales Responsibility on others. (Id. at ¶ 54). A “Dealer Minimum Sales Responsibility Action Plan” was developed to address various ways Chrysler and Smith could improve the Minimum Sales Responsibility metric. (Id. at ¶ 55). Less than a month later, a Chrysler employee, Mitch Mitchel emailed Smith a spreadsheet covering the Dealership’s August 2012 financials. (Id. at ¶ 56). Mr. Mitchell stated that because the dealership was only at 71.2% of the Minimum Sales Responsibility, and needed to be at 100% Minimum Sales Responsibility for Smith to complete his acquisition of the Dealership, it seemed unlikely Chrysler would allow -3- 1 Smith to purchase all outstanding stock by the March 2013 deadline. (Id. at ¶¶ 57-58). 2 Up until that point, Smith was unaware of any preferred stock acquisition deadline, but he 3 was unconcerned because it was his understanding that Chrysler rarely took adverse 4 action against dealerships that fell behind the Minimum Sales Responsibility, and he was 5 confident he would be able to purchase the outstanding stock by that date. (Id., Doc. 22). 6 On October 29, 2012, Smith was terminated as General Manager and as a member 7 of the Dealership’s Board of Directors. (Doc. 19, ¶ 62). Chrysler notified neither Smith 8 nor the Director of the Arizona Department of Transportation of its actions. (Id. at ¶ 63). 9 Smith asserts that Mr. Mitchell informed him that the reason for his termination was that 10 one of his employees may have had a conflict of interest with an outside company the 11 Dealership did business with. (Id.). Smith now asserts that Chrysler has either 12 terminated or is about to terminate the Dealership franchise in bad faith and has moved 13 forward with its plan by registering the trade name “Superstition Springs Chrysler Jeep 14 Dodge Ram,” which is owned by Superstition Springs Mid LLC, a Chrysler-controlled 15 entity. (Doc. 22). 16 17 18 19 20 21 22 23 24 25 26 27 28 Chrysler asserts it was entitled to fire Smith because he was an at-will employee of the Dealership, as defined in the Bonus Agreement. (Doc. 21, Exb. D). Smith, however, argues he was a Chrysler franchisee and his termination was in violation of federal laws which require a franchisor to act in good faith when terminating a dealership, 15 U.S.C. § 1222, and in violation of Arizona law, which requires a franchisor to provide notice to the Arizona Department of Transportation and show good cause for terminating the franchise, A.R.S. §§ 28-4453(D); 28-4457. To challenge his termination, Smith first lodged a petition with the Arizona Department of Transportation, entitled “Petition to Enforce Dealer Franchise Laws and Request for Hearing.” (Doc. 21, Exb. G). The Arizona Department of Transportation responded by saying it lacked authority to preside over an administrative hearing in the matter. (Doc. 21, Exb. H). Smith next submitted a petition for reconsideration, which was denied, as the Administrative Law Judge concluded the dispute appeared “to be a wrongful termination suit as opposed to [one for] franchise or dealer violations” and that -4- 1 the Arizona Department of Transportation did not have jurisdiction over Smith’s claims. 2 (Doc. 21, Exb. J). Smith then filed this action. 3 In his First Amended Complaint (Doc. 19), Smith alleges Chrysler violated the 4 Automobile Dealers’ Day in Court Act (Count I), he is entitled to seek a declaratory 5 judgment as to his franchisee status under Arizona and federal law (Count II), he is 6 entitled to seek a declaratory judgment that he was a person in a “bona fide relationship” 7 with Chrysler under Arizona law (Count III), he is owed civil damages pursuant to A.R.S. 8 § 28-4307 due to Chrysler’s alleged illegal ownership interest in the Dealership (Count 9 IV), he is owed civil damages pursuant to A.R.S. § 28-4307 for Chrysler’s failure to 10 provide notice and show good cause for his terminations (Count V), Chrysler tortuously 11 interfered with his contract and business expectancy with the Dealership (Count VI), and 12 Chrysler committed breach of contract and breach of the implied covenant of good faith 13 and fair dealing (Count VII). Chrysler moves to dismiss Counts I, II, III, IV, VI, and VII 14 under Rule 12(b)(6), Federal Rules of Civil Procedure. (Doc. 21). 15 II. 16 17 18 19 20 21 22 23 24 25 26 27 28 RULE 12(b)(6), FEDERAL RULES OF CIVIL PROCEDURE A motion to dismiss challenges the legal sufficiency of the plaintiff’s pleadings. Dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure can be based on “the lack of a cognizable legal theory” or “the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t., 901 F.2d 696, 699 (9th Cir. 1990). To avoid dismissal, a complaint need include “only enough facts to state a claim for relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). On a motion to dismiss under Rule 12(b)(6), all allegations of material fact are assumed to be true and construed in the light most favorable to the non-moving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 566 U.S. 662, 678 (2009). Id. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. “The plausibility standard is -5- 1 not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a 2 defendant has acted unlawfully.” Id. To show that the plaintiff is entitled to relief, the 3 complaint must permit the court to infer more than the mere possibility of misconduct. 4 Id. If the plaintiff’s pleadings fall short of this standard, dismissal is appropriate. 5 III. COUNTS I, II, IV, AND VI: SMITH’S STATUS AS A FRANCHISEE 6 Defendant Chrysler Group LLC contends Counts I, II, IV, and V of Smith’s 7 Amended Complaint (Doc. 19) must be dismissed because Plaintiff is not an “automobile 8 dealer” or “franchisee” as defined under federal or Arizona law and therefore lacks 9 standing. Smith responds that the intertwining of stock acquisitions by Smith from 10 Chrysler with bonuses paid from the Dealership to Smith and the Sales and Service 11 Agreement executed by Smith on behalf of the dealership created a web of integrated 12 agreements that, taken together, establish a franchise between Smith and Chrysler. 13 (Doc. 19, ¶ 36). 14 A. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Smith’s Status as a Dealer under Federal Law The Automobile Dealers' Day in Court Act (“ADDCA”), 15 U.S.C. §§ 1221– 1225, “is a remedial statute enacted to redress the economic imbalance and unequal bargaining power between large automobile manufacturers and local dealerships, protecting dealers from unfair termination and other retaliatory and coercive practices.” Maschio v. Prestige Motors, 37 F.3d 908, 910 (3d Cir. 1994). It permits automobile dealers to sue manufacturers for their failure “to act in good faith in performing or complying with any of the terms or provisions of the franchise, or in terminating, canceling, or not renewing the franchise with said dealer.” 15 U.S.C. § 1222. Under the statute, an automobile dealer is defined as “any person, partnership, corporation, association, or other form of business enterprise . . . operating under the terms of a franchise and engaged in the sale or distribution of passenger cars, trucks, or station wagons.” 15 U.S.C. § 1221(c). A franchise is “the written agreement or contract between any automobile manufacturer engaged in commerce and any automobile dealer which purports to fix the legal rights and liabilities of the parties to such agreement or -6- 1 contract.” Id. at (b). 2 To have standing to sue Chrysler under the ADDCA, Smith must be an automobile 3 dealer. To be an automobile dealer, Smith must have been “operating under the terms of 4 a franchise.” 15 U.S.C. § 1221(c). According to Chrysler, the franchise agreement in 5 this action was the Sales and Service Agreement, which was executed by the Dealership 6 and not by Smith. It follows, Chrysler argues, that only the Dealership, or someone suing 7 on behalf of the Dealership, is eligible to bring suit under the ADDCA, meaning Smith 8 has no right to bring this suit as an individual. Smith, however, asserts that although he 9 may not be a direct party to what Chrysler labels the franchise agreement, taken as a 10 whole, his relationship with Chrysler constituted a franchise. To support his claim, he 11 points to a more expansive reading of the ADDCA that grants standing to plaintiffs who, 12 like him, have no ability to sue on behalf of the franchised dealership but whose 13 financing and management arrangements with the manufacturer combine to resemble a 14 franchise in substance. 15 Smith is correct in his assertion that some courts have granted standing under the 16 ADDCA to individuals party to agreements that amount to a franchise in substance, if not 17 form. 18 operation of the dealership, but party to financing agreements that prevented them from 19 suing on behalf of the franchised dealership, to bring suit on behalf of themselves. See, 20 e.g., Kavanaugh v. Ford Motor Co., 353 F.2d 710, 716-17 (7th Cir. 1965) (granting 21 standing to an individual shareholder in a dealership who was deemed essential to its 22 operation but had no power to sue on behalf of the dealership); see also Lewis v. Chrysler 23 Motors Corp., 456 F.2d 605, 607 (8th Cir. 1972) (noting that “the term automobile dealer 24 is to be given the construction that best serves the congressional purpose of 25 supplementing the antitrust laws, and balancing the power heavily weighted in favor of 26 automobile manufacturers”) (internal quotations and citations omitted). These courts have permitted individuals who were deemed essential to the 27 Other courts, however, have rejected the idea that individuals who have an 28 ownership interest in the dealership, but who are not party to the franchise agreement, -7- 1 have standing under the ADDCA. See, e.g., Bronx Chrysler Plymouth, Inc. v. Chrysler 2 Corp., 212 F. Supp. 2d 233, 243 (S.D.N.Y. 2002) (noting that the Second Circuit “firmly 3 rejected individual standing, at least where . . . the individual shareholder sues only in his 4 own behalf, and not, as in York Chrysler–Plymouth, alongside the corporate franchisee 5 itself”); Pearson v. Ford Motor Co., 68 F.3d 1301, 1303 (11th Cir. 1995) (finding that a 6 plaintiff with a minority stock interest in a dealership who was not “inextricably woven 7 into the franchise agreement” had no standing to sue under the ADDCA). 8 In general, the inquiry into whether an individual not party to the ostensible 9 franchise agreement has standing requires a fact-intensive examination of the entire 10 transaction. In the leading Seventh Circuit case, Kavanaugh, a contract between the 11 plaintiff Kavanaugh and Ford Motors provided for the formation of a corporation to carry 12 out the business of the automobile dealership, with Kavanaugh designated as the 13 dealership’s operator. Kavanaugh, 353 F.2d. at 712. The dealership was financed such 14 that Ford retained all voting stock. Id. Kavanaugh was required to purchase dealership 15 stock from Ford with a percentage of his annual bonus but could not acquire voting rights 16 in the corporation until Ford had relinquished all of its preferred stock ownership. Id. 17 The stock agreement also called for a management contract to be executed between 18 Kavanaugh and the dealership and a sales contract to be executed by Ford and the 19 dealership. Id. at 713. The contract was terminable at-will by either party, and when 20 sales at the dealership began to decline, Ford terminated the contract, determined 21 Kavanaugh’s stock was worthless, and paid him one dollar for his ownership interest in 22 the dealership. Id. at 715. 23 As in this action, Kavanaugh brought suit under the ADDCA and the 24 manufacturer, Ford, countered that Kavanaugh had no standing under the Act because he 25 was not a party to the franchise agreement, which Ford asserted was the sales agreement 26 between itself and the dealership. Id. at 713. The Seventh Circuit determined that the 27 formation, sales, and management contracts should be read together as an integrated 28 agreement between Kavanaugh and Ford, holding that if “other written agreements are so -8- 1 interwoven with the document ostensibly designated as the franchise as to affect 2 materially the legal significance of the latter, they must be regarded as part of the 3 franchise agreement.” Id. at 715. The court went on to conclude that Kavanaugh had 4 applied to Ford for a dealership as an individual, not on behalf of a corporation, that the 5 agreement between Ford and Kavanaugh emphasized Kavanaugh’s importance to the 6 transaction, and that it was obvious from the contracts that “Kavanaugh was deemed 7 essential to the operation of the dealership.” Id. at 716. Furthermore, with Ford retaining 8 all voting stock in the corporation, there was no way for the dealership to bring suit under 9 the act, as Ford was unlikely to sue itself. Id. at 717. The court examined the history and 10 purpose of the ADDCA and noted that: 11 12 13 14 15 16 17 18 19 The position of the dealer had been such that his “franchise” agreement with the manufacturer was little short of illusory. . . . It is settled doctrine that the fiction of corporate entity will be disregarded whenever it has been adopted or used to evade the provisions of a statute. Schenley Distillers Corp. v. United States, 326 U.S. 432, 437 (1946); United States v. Lehigh Valley R.R. Co., 220 U.S. 257, 272 (1911); Metropolitan Holding Co. v. Snyder, 79 F.2d 263, 266 (8th Cir. 1935). . . . For the reasons we have demonstrated, the Dealers' Day in Court Act would be subverted in the instant case if the corporate format adopted by the parties were given recognition. Hence, we must ‘pierce the veil’ of the corporate entity and look to the substance and reality of the situation. In the interest of justice, the corporate fiction must be ignored. 20 21 22 23 24 25 26 27 28 Kavanaugh, 353 F.2d at 717. The court went on to conclude that Kavanaugh was an automobile dealer operating under the terms of a franchise agreement within the meaning of the ADDCA. Id. at 718. Chrysler suggests the leading Ninth Circuit case interpreting standing under the ADDCA, Sherman v. British Leyland Motors, Ltd., 601 F.2d 429 (9th Cir. 1979), expressly rejects Kavanaugh. But Sherman did not reject Kavanaugh, it found Kavanaugh inapplicable on its facts. In Sherman, the plaintiff brought suit under the ADDCA on behalf of himself and the corporation dealership, of which he was president and sole shareholder. 601 F.2d at 435. Only the dealership was party to the actual -9- 1 franchise agreement. Id. The Ninth Circuit held that the plaintiff could not sue under the 2 ADDCA on behalf of himself because, even though the franchisor “recognized the 3 importance of [the plaintiff’s] services and those of his wife to the corporation,” it was 4 not enough to “warrant departure from the general rule of separation of identities, nor 5 afford Sherman standing to bring suit in his individual capacity as a shareholder or 6 creditor on any of the claims asserted [under the ADDCA].” Id. at 439-40. The Sherman 7 court noted, in a footnote, that it found Kavanaugh’s analysis inapplicable because its 8 facts were distinguishable. Id. at 440 n.11. 9 Sherman did, however, expressly disagree with a Fifth Circuit case granting 10 standing to an individual not party to a franchise agreement. 601 F.2d at 440 n.11 (citing 11 York Chrysler-Plymouth, Inc. v. Chrysler Credit Corp., 447 F.2d 786 (5th Cir. 1971)). In 12 York Chrysler-Plymouth, the Fifth Circuit granted standing to the individual owners of a 13 dealership, in addition to the dealership, finding that the individual owners “were made 14 essential to the operation of the dealership by agreement with Chrysler Motors.” Id. at 15 790. York, however, provides little explanation or analysis of the contracts entered into 16 17 18 19 20 21 22 23 24 25 26 27 28 by the individual owners and the dealership and concluded the individual owners were entitled to sue under the ADDCA because Chrysler has vested the individual owners with “personal responsibility for keeping the franchise viable.” Id. at 791. Sherman disagreed with the holding in York, noting the provision “that if certain stockholders did not continue as principals in the business the dealership could be terminated by the franchisor, was for the benefit of the latter only and did not expand the parties to the agreement.” Sherman, 601 F.2d at 440 n.11. The Sherman court concluded that claiming an individual is integral to a franchise agreement is not, on its own, enough to grant standing under the ADDCA. Id. at 441. But Sherman did not foreclose on the possibility that certain facts may warrant a departure from the general rule that only parties to the franchise agreement have standing under the ADDCA. Instead, the court found that Sherman’s role as president and sole shareholder, as well as the franchisor’s recognition of Sherman’s importance to the dealership, was not enough to warrant blending the individual and corporate identities. - 10 - 1 Sherman, 601 F.2d at 440. A key distinction between Sherman and this action is that the 2 plaintiff in Sherman was the sole shareholder of the dealership, meaning he was able to 3 assert claims under the ADDCA on behalf of the dealership. He was not a party to an 4 investment contract that stripped him of voting power. 5 Here, Smith’s claims are more akin to Kavanaugh, as Smith is unable to bring a 6 claim on behalf of the Dealership because Chrysler controls all of the Dealership’s voting 7 stock. No precedent in the Ninth Circuit limits our inquiry into Smith’s franchisee status 8 to the four corners of the contract Chrysler asserts is the franchise agreement. 9 Accordingly, to decide whether Smith is a franchisee for the purposes of the ADDCA, we 10 must look not only at the language in all the relevant contracts but also at the economic 11 substance of the entire transaction to determine whether the separate agreements are so 12 inexorably linked that, together, they establish a franchise between Chrysler and Smith. 13 On the pleadings, Smith has alleged sufficient facts to suggest that the contracts 14 between Smith and Chrysler, Chrysler and the Dealership, and the Dealership and Smith 15 are interrelated and can be read in combination as forming a franchise between Smith and 16 17 18 19 20 21 22 23 24 25 26 27 28 Chrysler. The Bonus Agreement, for example, was executed by Smith and the Dealership but gives Chrysler the right to terminate Smith. (Doc. 21, Exb. D). The Sales and Service Agreements recognize that Smith is an integral part of the franchise whose “abilities, expertise, knowledge and integrity” are material to Chrysler and acknowledge Chrysler’s reliance on Smith’s “substantial continuing personal participation in the management of” the Dealership. (Doc. 21, Exb. E). Smith also alleges facts which suggest that, in his role as General Manager, he undertook many of the responsibilities of a franchised dealer, including negotiating financing arrangements with lenders to stock the Dealership and abiding by Chrysler’s franchise terms and conditions. Finally, Smith alleges that Chrysler partially owns, and completely controls, the Dealership and that Chrysler cannot or will not assert a claim against itself on behalf of the Dealership. Determining whether Smith is an automobile dealer for the purposes of the ADDCA will require a fact-intensive inquiry that is not amenable to resolution on the pleadings. For now, Smith has alleged facts sufficient to - 11 - 1 survive a motion to dismiss. Chrysler’s Motion to Dismiss Count I on the grounds that 2 Smith lacks standing under the ADDCA will be denied. 3 B. 4 Chrysler next moves to dismiss Smith’s claims under the Arizona statute 5 governing automobile franchises, arguing that Smith is not a franchisee as defined by 6 Arizona law. Smith asserts that, with there being no cases interpreting who qualifies as a 7 franchisee under Arizona’s law, the same analysis applied to the federal law should be 8 applied to infer that he is a franchisee under the Arizona statute. Count II - Smith’s Status under Arizona Law 9 Arizona regulates the termination of automobile dealer franchises by requiring a 10 franchisor to notify the franchisee and the director of the Arizona Department of 11 Transportation of its intention to terminate a franchise. A.R.S. § 28-4453(D). Arizona 12 also requires a franchisor to show “good cause” for termination or nonrenewal of a 13 franchise, A.R.S. § 28-4452(A), and provides for a hearing with Arizona Department of 14 Transportation on the issue, A.R.S. § 28-4456. Chrysler did not notify Smith or the 15 Arizona Department of Transportation of its intention to terminate Smith, so when Smith 16 17 18 19 20 21 22 23 24 discovered he had been terminated, he petitioned Arizona Department of Transportation for a hearing. Arizona Department of Transportation labeled Smith “a franchisee for Superstition Springs Chrysler Jeep Dodge,” but denied Smith’s request for a hearing on the grounds that it appeared to reflect a wrongful termination suit as opposed to a suit involving franchise or dealer operations. (Doc. 21, Exb. J). Chrysler argues this Court should adhere to the Arizona Department of Transportation’s determination that Smith’s claims do not involve violations of Arizona’s automobile dealer franchise laws. But this action is not an appeal from an administrative determination and no deference is owed to the Arizona Department of Transportation’s findings. Furthermore, the Arizona Department of Transportation’s ruling focused on an arbitration clause, 25 26 27 28 - 12 - 1 which neither party seeks to enforce,1 and provided little discussion as to why it 2 concluded that Smith was protesting the termination of his employment rather than the 3 termination of the franchise. (Doc. 21, Exb. J). 4 Arizona law defines a franchisee as “a person who both: (a) Receives new motor 5 vehicles from the franchisor under a franchise [and] (b) Offers and sells to and services 6 new motor vehicles for the general public.” A.R.S. § 28-4301(13). Smith must be a 7 franchisee to have standing under Arizona’s dealership statutes. A.R.S. § 28-4307. 8 Arizona’s automobile dealer franchise law differs from its federal analog in that it 9 anticipates financing arrangements like the Stock Agreement entered into by Smith and 10 Chrysler. Although manufacturers are generally prohibited from owning dealerships in 11 Arizona, manufacturers are permitted to own a dealership if they are in a bona fide 12 relationship with a qualified person who makes “a substantial unencumbered bona fide 13 initial investment in the dealership that is reasonable and consistent with standard 14 business practices.” 15 opportunity to acquire “substantial portions of the factory's remaining ownership interest 16 17 18 19 20 21 22 23 24 A.R.S. § 28-4460(B)(1)(b). That person must be given the in substantial regular periodic payments throughout the acquisition period.” Id. Chrysler suggests that, under this statute, Smith is somehow prohibited from being both a franchisee and a “qualified person in a bona fide relationship” with Chrysler. Nothing in the statutory scheme supports this reading. The statute is designed to prevent a manufacturer from unfairly competing with its dealers and outlines the few circumstances under which it is acceptable for a manufacturer to hold an ownership interest in its own franchise. Id. at (A), (B). Although the statute contemplates that the manufacturer may hold an ownership interest in a dealership and provides for some protections to a person in a “bona fide relationship” with the owner-manufacturer, it does 25 1 26 27 28 The Sales and Service Agreement executed by the Dealership and Chrysler contains a binding arbitration clause. Both Arizona and federal law invalidate binding arbitration provisions in automobile dealer franchise agreements. See A.R.S. § 28-4453 (requiring that arbitration must be voluntarily submitted to by the franchisee according to a “plan established by the franchisor”); 15 U.S.C. § 1226(a)(2) (requiring separate consent in writing to arbitrate after a dispute arises, notwithstanding any arbitration clause in a franchise agreement). - 13 - 1 not limit the ability of the person in a bona fide relationship to become a franchisee as he 2 or she acquires ownership in the dealership. 3 relationship is a franchisee depends on the nature of the relationship as defined by the 4 contracts between the parties. Whether the person in a bona fide 5 Because no cases interpret the definition of a franchisee under Arizona’s 6 dealership franchise statute and the definition of a franchisee under Arizona law is 7 substantially similar to the ADDCA, we rely on cases interpreting the ADDCA guide the 8 determination of Smith rights under Arizona law. See Sell v. Gama, 231 Ariz. 327, 327 ¶ 9 18, 295 P.3d 421, 425 (2013) (holding that Arizona will defer to federal case law 10 construing a parallel federal statute unless there is a good reason to depart from the 11 federal decisions). Smith has alleged facts sufficient to survive a motion to dismiss 12 challenging his status and right to sue as an automobile dealer under federal law. See 13 Section III.A, supra. It follows that, at this stage in the pleadings, Smith has alleged facts 14 sufficient to support a plausible claim that he has standing under Arizona’s dealership 15 franchise statute. Chrysler’s Motion to Dismiss Count I will be denied. 16 17 18 19 20 21 22 23 24 25 26 27 28 IV. COUNTS II AND III – DECLARATORY JUDGMENT Under Counts II and III, Smith seeks a declaratory judgment that he is an automobile dealer under federal and Arizona law and that he is person in a bona fide relationship with Chrysler under Arizona law. Chrysler moves to dismiss these Counts, arguing Smith is not entitled to seek a declaratory judgment because his “claims as to his alleged franchisee status are based on circumstances that no longer exist, namely, his position as the Dealership’s General Manager, and his rights under the Bonus and Stock Agreements,” which have been terminated. (Doc. 21, Pg. 13). Smith asserts that declaratory relief is necessary and proper because if he is a franchisee or person in a “bona fide relationship” with Chrysler under Arizona law, then Arizona law trumps the at-will employment clause in his contract and prohibits Chrysler from terminating his ownership interest in the dealership without good cause. See A.R.S. § 28-4457 (“Notwithstanding the terms, provisions or conditions of an agreement or franchise,” a franchisor may not terminate a franchise absent “good cause”); cf. A.R.S. § 28- 14 - 1 4460(B)(1)(b)(vi) (“The qualified person can expect to acquire and retain full and 2 complete ownership of the dealership within a reasonable period of time that is not longer 3 than ten years and on reasonable terms and conditions that are consistent with standard 4 business practices.”). Under federal law, if Smith is a franchisee, Chrysler was required 5 to act in good faith when terminating his franchise. 15 U.S.C. § 1222. 6 A party whose “rights, status, or other legal relations” are impacted by a statute or 7 contract may petition the courts for declaratory judgment. A.R.S. § 12-1832. Arizona’s 8 declaratory judgment act is “remedial; its purpose is to settle and to afford relief from 9 uncertainty and insecurity with respect to rights, status and other legal relations; and is to 10 be liberally construed and administered.” 11 declaratory judgment acts to obtain a judgment which is advisory only or which merely 12 answers a moot or abstract question.” Ariz. State Bd. of Directors v. Phoenix Union High 13 Sch. Dist., 102 Ariz. 69, 73, 424 P.2d 819, 823 (1967). Federal law also recognizes that 14 the “question in each case is whether the facts alleged, under all the circumstances, show 15 that there is a substantial controversy, between parties having adverse legal interests, of 16 17 18 21 22 23 24 25 “No proceeding will lie under the sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 126 (2007) (internal quotations and citations omitted). Smith seeks to have his status declared under Arizona law, federal law, and a 19 20 Id. contract. The controversy is not moot, as Chrysler suggests, because if Smith is a franchisee, Smith’s termination may have violated his statutory rights. Smith has alleged facts sufficient to show that his status as a franchisee is an existing controversy that significantly impacts his legal rights. Chrysler’s Motion to Dismiss Counts II and III will be denied. V. COUNT VI: TORTIOUS INTERFERNCE WITH CONTRACT AND BUSINESS EXPECTANCY 26 27 28 Chrysler argues Smith’s tortious interference with contract claim, which alleges that Chrysler tortuously interfered with the Bonus Agreement and with Smith’s business - 15 - 1 expectancy of acquiring full ownership of the Dealership, is legally deficient. 2 Specifically, Chrysler asserts it cannot be held liable for tortious interference because, as 3 a general rule, a party cannot be held liable for tortious interference with its own contract 4 or business relationship. Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement 5 Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 493 n.19, 38 P.3d 12, 31 n.19 6 (2002). 7 Chrysler is not a stranger to Smith’s business relationship with the Dealership. 8 Chrysler owns all voting stock in the Dealership and has a strong interest in Dealership’s 9 success. An entity that is directly interested or involved in a business relationship is not 10 generally liable for any harm resulting from its pursuing its own interests. See Marin Tug 11 & Barge, Inc. v. Westport Petroleum, Inc., 271 F.3d 825, 832 (9th Cir. 2001) (noting that 12 under California law, which largely parallels Arizona law on tortious interference, “the 13 core of intentional interference with business torts is interference with an economic 14 relationship by a third-party stranger to that relationship, so that an entity with a direct 15 interest or involvement in that relationship is not usually liable for harm caused by 16 pursuit of its interests”). Because Chrysler is an integral part of both Smith and the 17 Dealership’s business, it cannot be liable for tortious interference with Smith’s business 18 expectancy in the Dealership. Chrysler’s Motion to Dismiss Smith’s tortious interference 19 with business expectancy claim will be granted. 20 Chrysler, however, is not a party to the Bonus Agreement. Although the Bonus 21 Agreement gave Chrysler the right to exercise rights as a Dealership stockholder and 22 remove Smith as a director and employee, Chrysler did not execute the agreement and is, 23 at most, a third-party beneficiary of the contract. Arizona does not insulate third-party 24 beneficiaries from liability for tortious interference with contract. See Wells Fargo Bank, 25 201 Ariz. at 493 n.19, 38 P.3d at 31 n.19 (holding that a tortious interference with 26 contract claim could proceed against a defendant who was a third-party beneficiary of the 27 contract). 28 - 16 - 1 Having established Chrysler is not a party to the Bonus Agreement, to prevail on 2 his tortious interference claim, Smith must allege facts that plausibly establish “the 3 existence of a valid contractual relationship or business expectancy; the interferer's 4 knowledge of the relationship or expectancy; intentional interference inducing or causing 5 a breach or termination of the relationship or expectancy; and resultant damage to the 6 party whose relationship or expectancy has been disrupted. . . . In addition, the 7 interference must be improper as to motive or means before liability will attach.” 8 Wallace v. Casa Grande Union High Sch. Dist. No. 82 Bd. of Governors, 184 Ariz. 419, 9 427, 909 P.2d 486, 494 (Ct. App. 1995). 10 Smith has successfully shown the existence of a contractual relationship with the 11 Dealership (the Bonus Agreement), and Chrysler has admitted in its Motion to Dismiss 12 that it had knowledge of the agreement. Smith argues that Chrysler tortuously interfered 13 with his contract by terminating him his relationship with the Dealership under the Bonus 14 Agreement in violation of both federal and Arizona law. But Chrysler fired Smith in 15 accordance with the terms of the Bonus Agreement. Although Chrysler intentionally 16 17 18 19 20 21 22 caused the termination of Smith’s contractual relationship with the Dealership, it cannot be said that Chrysler tortuously interfered with the contract when it exercised a power expressly granted to it by the contract. Even if the termination provision is unenforceable under federal and Arizona law, an action does not lie for tortious interference with contract. Chrysler’s Motion to Dismiss Count VI will be granted. VI. COUNT VII - BREACH OF CONTRACT AND THE IMPLIED COVENANT 23 Chrysler moves to dismiss Smith’s claims for breach of contract and breach of 24 the implied covenant of good faith and fair dealing arising out of the Stock Agreement. 25 Per the contract’s choice of law provision, the Stock Agreement is governed by Michigan 26 law. (Doc. 21, Exb. C). 27 Smith alleges Chrysler breached the express terms of the Stock Agreement and the 28 implied covenant of good faith and fair dealing when Chrysler relied on illegal and - 17 - 1 unenforceable contract provisions to remove him from the Board of Directors and 2 terminate him as General Manager. (Doc. 19, ¶ 137-138). Smith asserts that he had a 3 valid expectation that the Stock Agreement would be executed in a manner that complied 4 with state and federal law, meaning Chrysler would give him notice and a chance to be 5 heard before terminating him. (Doc. 22). He also argues that the “provision of the Bonus 6 Agreement and the Stock Agreement permitting Chrysler unfettered discretion to remove 7 [him] as General Manager and terminate [his] franchise are unenforceable because they 8 are unconscionable and they violate [his] reasonable expectations.” (Doc. 19, ¶ 131). 9 At the outset, it must be determined whether Arizona law permits a franchisee to 10 waive his statutory right to be terminated only for good cause. See Swanson v. Image 11 Bank, Inc., 206 Ariz. 264, 267 ¶ 10, 77 P.3d 439, 442 (2003) (holding that “whether the 12 disputed issue is one which the parties could have resolved by an explicit provision in 13 their agreement” is a question for the forum state). A.R.S. § 28-4452(A) provides, 14 “Notwithstanding the terms, provisions or conditions of an agreement or franchise, a 15 franchisor shall not cancel, terminate or refuse to renew a franchise unless the franchisor 16 has good cause for termination or nonrenewal.” A.R.S. § 28-4452(A). If Smith is a 17 franchisee, the parties were not permitted to contract for termination at-will. 18 Smith’s remedy, however, does not lie in an action for breach of the express 19 contract terms. Under the Stock Agreement, Chrysler was entitled to use its “voting 20 power to remove [Smith] as Director and to cause his remove as General Manger of [the 21 Dealership].” (Doc. 19, ¶ 133). In removing Smith, Chrysler exercised the power it was 22 granted in the contract. To the extent that Chrysler executed on an invalid or illegal 23 contract provision, the contract would be void not breached. Cf. E & S Insulation Co. of 24 Ariz., Inc. v. E. L. Jones Const. Co., 121 Ariz. 468, 470, 591 P.2d 560, 562 (Ct. App. 25 1979) (noting that a contract which cannot be performed without violating applicable law 26 is illegal and void). Smith may be correct that portions of the agreement violated federal 27 or Arizona law, but that gives rise to a statutory remedy and not to a claim that Chrysler 28 violated the express terms of the contract. Chrysler’s Motion to Dismiss Smith’s claims - 18 - 1 for breach of the express terms of the contract will be granted, but Smith’s claims that the 2 contract, or portions of it, is void will be preserved. 3 Smith’s independent claim for breach of the implied covenant of good faith and 4 fair dealing, however, will survive. Chrysler argues no action can lie for the breach of 5 the implied covenant of good faith and fair dealing because Michigan law does not 6 recognize a separate cause of action for the breach of that implied covenant. Fodale v. 7 Waste Management of Mich., Inc., 271 Mich.App. 11, 35, 718 N.W.2d 827, 841 (2006). 8 But “Michigan recognizes that an enforceable implied covenant of good faith and fair 9 dealing arises when one party to a contract makes its performance a matter of its own 10 discretion.” Bd. of Trustees of City of Birmingham Employees' Ret. Sys. v. Comerica 11 Bank, 767 F. Supp. 2d 793, 805 (E.D. Mich. 2011) (citing Stephenson v. Allstate Ins. Co., 12 328 F.3d 822, 826 (6th Cir.2003) (applying Michigan law)); Burkhardt v. City Nat'l. 13 Bank of Detroit, 57 Mich.App. 649, 652, 226 N.W.2d 678, 680 (1975). 14 the unfettered right to terminate Smith, Chrysler made its performance a matter of its own 15 discretion and triggered the protections implied covenant under Michigan law. By giving itself 16 Even if Michigan did not recognize a cause of action for breach of the implied 17 covenant of good faith and fair dealing in this case, Arizona would. “Arizona law 18 implies a covenant of good faith and fair dealing in every contract.” Wells Fargo Bank v. 19 Ariz. Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 20 201 Ariz. 474, 490 ¶ 59, 38 P.3d 12, 28 (Ariz. 2002). Arizona, as the forum state, has a 21 strong interest in ensuring parties who enter into contracts in Arizona receive the benefits 22 of the implied covenant. The Court need not decide at this time whether Arizona law 23 would govern in place of the Michigan choice of law clause. Chrysler’s Motion to 24 Dismiss Smith’s claims for breach of the implied covenant of good faith and fair dealing 25 will be denied. 26 27 IT IS THEREFORE ORDERED that Defendant Chrysler Group, LLC’s Motion to Dismiss (Doc. 21) will be granted in part and denied in part. 28 - 19 - 1 IT IS FURTHER ORDERED that Plaintiff Alfonzo Smith’s claims for tortious 2 interference with contract and business expectancy (Count VI) and for breach of the 3 express contract terms (Count VII, in part) from his First Amended Complaint (Doc. 19) 4 are dismissed with prejudice. 5 Dated this 18th day of April, 2014. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 20 -

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