On appeal from Superior Court of New Jersey, Law Division, Ocean County, OCN-L-1162-96.
Before: Judges Baime, Newman and Fall
The opinion of the court was delivered by: Newman, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
OPINION CORRECTED 02-27-02
Argued: December 12, 2001
The primary issue in this appeal concerns the refusal of a franchisor to consent to the franchisee's transfer of the franchises, N.J.S.A. 56:10-6, and the consequences when that consent is found by a court to be unreasonably withheld. We conclude that the Franchise Practices Act, in particular N.J.S.A. 56:10-6, contemplates that the remedy of specific performance is available to compel the transfer where a franchisor has unreasonably withheld its consent to that transfer.
The history of this litigation is quite extensive. Defendant, Coast Automotive Group, Ltd. d/b/a TSE Motor Cars (Coast) is an authorized dealer of Volkswagen and Audi automobiles pursuant to dealer agreements and dealer operating standards with third-party defendants, Volkswagen of America, Inc. (VWOA) and Audi of America (AOA). Coast operated its automobile dealership on the real property owned by Shansab Realty, Inc. located at Route 37, Toms River. In March 2001, there was a fire at Coast's site that substantially destroyed the dealership.
A provision of the dealer operating standards, which VWOA and AOA contend is an integral part of the dealer agreements, requires that Coast maintain separate wholesale lines of credit for the purchase of the new motor vehicles from VWOA and AOA. Coast satisfied this requirement by obtaining a wholesale line of credit and other financing from plaintiff, VCI Credit, Inc. (VCI), which is a wholly owned subsidiary of VWOA. Coast defaulted in its payments to VCI. VCI filed this action against Coast in the Law Division (Law Division action), which prompted Coast to file for protection under a bankruptcy reorganization plan. Coast also filed an action in the federal district court entitled Coast Automotive Group, Ltd. v. VW Credit, Inc., et al, Civil Action No. 97-2601 (D.N.J.).
Tamin Shansab (Shansab), the principal of Coast, entered into an agreement with B & S Lenders LLC, (B&S), the predecessor- in-interest to intervenor, Aspen Knolls Automotive Group, LLC (Aspen Knolls), to borrow $5,000,000 in order to salvage its franchise investment and avoid liquidation under its bankruptcy plan. The loan proceeds enabled Coast to repay its creditors, including $4,000,000 owed to VCI. As security for the loan, Coast agreed to transfer its assets to B&S or its successors - Aspen Knolls. Aspen Knolls consists of three principals. Two of the principals, Paul Reynolds and Salvatore Rutigliano, operate an Audi dealership in Bernardsville. The third principal, Robert Mazzuoccola, operates a Jeep dealership in Essex County.
Litigation between Coast and B&S ensued in the Chancery Division, Ocean County (Chancery action), which resulted in Coast's execution and delivery to B&S of an Amended and Restated Promissory Note dated May 14, 1998, and related security documents.
In the interim, VWOA and AOA, third party defendants in the Law Division action, filed claims against Coast in that same litigation to terminate Coast's Volkswagen and Audi franchises. The Law Division, after a hearing, entered an order that preliminarily enjoined proceeding with the termination of the franchises. The Law Division also granted leave to VWOA and AOA to file an amended counterclaim against Coast seeking rescission of the franchise agreements.
On August 18, 1999, B&S moved in the Chancery Division for the appointment of a receiver for Coast in accordance with N.J.S.A. 14A:14-1 et seq., as well as other relief. The parties to that action, Coast and B&S, entered into a consent order, which incorporated a certain asset sale agreement and real estate sale agreement. The agreements provided that Aspen Knolls, assignee of B&S, would acquire Coast's Volkswagen, Audi, and Porsche dealership franchises together with the real property upon which the dealerships were located. In entering into that consent order, Aspen Knolls relied on the Law Division's order enjoining VWOA and AOA from terminating the Volkswagen and Audi franchises.
In accordance with the consent order, the parties advised VWOA and AOA of the proposed transfer and provided the notice required by N.J.S.A. 56:10-6. That section also requires a franchisor to issue a letter of disapproval if the franchisor objects to the proposed transferee as unqualified. VWOA and AOA replied to that notice with the filing of an order to show cause for a preliminary injunction to enjoin the sale. On March 3, 2000, the Law Division granted B&S's motion to intervene in that matter and denied the application for a preliminary injunction. On March 16, 2000, this court denied VWOA and AOA leave to file an interlocutory appeal.
On May 1, 2000, Aspen Knolls submitted applications for transfer of the Volkswagen and Audi dealer franchises. On June 29, 2000, VWOA and AOA issued letters disapproving the applications. VWOA and AOA based their disapproval on the claimed deficient application as well as character concerns of Aspen Knolls' majority member, Robert Mazzuoccola.
Coast and Aspen Knolls, as limited intervenor, filed an order to show cause to enforce their rights under the consent order, and sought to compel the transfer of the franchises. The Law Division held a hearing on that application and on August 23, 2000, issued an order directing that the parties continue the application process, so that VWOA and AOA could advise Aspen Knolls regarding the application requirements. In this regard, the judge found that the June 29, 2000, disapproval letters were void and ineffective, because VWOA and AOA did not advise Aspen Knolls of the conditions for franchise approval. The judge stated that
if a franchisor is entitled to reject a good faith but deficient application at the same time when it hasn't fully disclosed its requirements for an acceptable application, then the Franchise Practices Act would have virtually no teeth because then every franchisor could circumvent the law by either creating a contentious environment or by failing to supply adequate information in order to comply with the requirements of law.
On October 3, 2000, this court denied VWOA and AOA leave to stay that order.
Thereafter, Aspen Knolls submitted a second set of applications that VWOA and AOA disapproved on September 22, 2000. VWOA and AOA based their disapprovals on grounds substantially similar to those of June 29, 2000. The Law Division then scheduled discovery and held a plenary hearing on May 15 and 16, 2001, to determine if the consent to the transfer of the franchises was being unreasonably withheld.
Based on the testimony and evidence presented at the hearing, Judge Marlene Lynch Ford found that VWOA and AOA did not act in good faith when they withheld approval of Aspen Knolls' applications. First, the judge determined that Aspen Knolls had standing on the limited issue of whether VWOA and AOA wrongfully withheld consent to the transfer of the franchise. The judge distinguished Tynan v. Gen. Motors Corp., 248 N.J. Super. 654 (App. Div.) certif. denied, 127 N.J. 548 (1991) rev'd in part on other grounds, 127 N.J. 269 (1992), a case where the franchisee did not challenge the franchisor's decision to disapprove of the proposed transfer. Then, considering the prior history of litigation and contractual dispute between Coast and Aspen Knolls, the judge determined that it would be inappropriate to preclude Aspen Knolls from participating in the plenary hearing on the issue of the withholding of consent to the transfer.
Judge Ford found that VWOA and AOA unreasonably withheld their approval to the proposed transfer. The judge declared the disapproval letters issued by VWOA and AOA to be ineffective and directed that Aspen Knolls' applications be deemed approved subject to the obligation of N.J.S.A. 56:10-6, which requires the proposed franchisee to agree to comply with the conditions of the existing franchise agreement. The judge's decision ...