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TWO WHEEL CORP. v. AMERICAN HONDA CORP.

March 19, 1980

TWO WHEEL CORP. d/b/a Honda of Mineola, Plaintiff,
v.
AMERICAN HONDA CORPORATION, Defendant



The opinion of the court was delivered by: BRAMWELL

DECISION AND ORDER

When a national distributor of goods entrusts the local sale of such goods to a small dealer, the distributor must accept the economic reality that it cannot completely control the activity of the independent local outlet. The extent of the dealer's independence, therefore, may become a source of friction between the contracting parties. This case evolves from the plaintiff Honda of Mineola's claim that this friction has manifested itself in the termination of its Honda dealership.

 Being of the belief that the defendant lacked a valid basis for terminating its dealership, the plaintiff filed the instant action which attacks both the motive behind, and the grounds for, the defendant's discontinuance of its status as a Honda dealer. This Decision and Order concerns the plaintiff's motion for a preliminary injunction in that action.

 On December 3, 1979, the plaintiff asked this Court to temporarily restrain the termination of its dealership. After hearing oral argument by representatives of the parties, the Court acceded to the plaintiff's request. The parties then set forth their positions with respect to the instant motion in detail during a six (6) day hearing held on December 13, 17, 18, 19, 20 and 21 of 1979. Pursuant to Fed.R.Civ.P. 52(a), the Court's evaluation of the evidence elicited at this lengthy hearing, and its disposition of the instant motion, will be rendered in the form of Findings of Fact and Conclusions of Law.

 FINDINGS OF FACT

 I. The Parties

 1. The plaintiff Two Wheel Corp. d/b/a Honda of Mineola is a New York corporation (Complaint, par. 4).

 2. The defendant American Honda Corporation is a California corporation with its principal place of business in Gardena, California (Complaint, par. 6).

 3. The defendant is the exclusive United States distributor of motorcycles manufactured in Japan by its parent corporation Honda Motor Corp. Ltd. (Complaint, par. 6).

 4. These motorcycles are distributed by the defendant in the United States through a network of approximately 1750 dealers (Complaint, par. 6).

 II. The Evolution of Honda of Mineola

 5. In 1965, the plaintiff, through its president and principal stockholder Morris Zegarek, entered into a written agreement with the defendant pursuant to which the plaintiff became a dealer for the sale, servicing and assembly of Honda motorcycles (15).* No provision in this agreement forbids a Honda dealer from selling non-Honda parts and accessories (See Pl. Ex. 2).

 6. The plaintiff established its original facility at 529 Jericho Turnpike, Mineola, N. Y. (88).

 7. In 1970 or 1971, the plaintiff moved its facility to 336 Jericho Turnpike, Mineola, N. Y. (88).

 8. Until September 20, 1979, the plaintiff conducted a "full service-sales motorcycle operation" at 336 Jericho Turnpike (88).

 9. Over the last 15 years, this operation has constituted Mr. Zegarek's sole business activity and has been the sole source of support for his family (14).

 10. Mr. Zegarek presently is 58 years of age (12).

 11. During the course of the contractual relationship between the plaintiff and the defendant, the plaintiff established an excellent financial record, while maintaining in good standing a $ 700,000 line of credit at a local bank (178).

 12. In 1977, 1978 and 1979, the plaintiff ranked number one in sales of Honda motorcycles in the region comprising New York, New Jersey, Connecticut, Vermont, Pennsylvania, Rhode Island, Maine, and Massachusetts. (70-72, Pl. Ex. 6, 7).**

 13. Pursuant to a lease dated July 7, 1971 (Pl. Ex. 11), the plaintiff, from 1971 on, began to operate a facet of its business at 344 Jericho Turnpike, Mineola, N. Y. (91). 344 Jericho Turnpike is located across the street from 336 Jericho Turnpike (88).

 14. The lease agreement entered into between the plaintiff and the lessor of 344 Jericho Turnpike contains the following provision:

 
Tenant shall use and occupy premises for selling storing and servicing of automobiles, motorcycles and accessories.

 (94, Pl. Ex. 11).

 15. This activity at 344 Jericho Turnpike included servicing and assembly of motorcycles (94), and motorcycle storage (318).

 16. Although disputed by the testimony of a former employee of the plaintiff (527), and by a representative of the defendant (805), Mr. Zegarek testified that some motorcycle display (323), and a few motorcycle sales took place at 344 Jericho Turnpike between July 7, 1971 and September 20, 1979. *fn1"

 17. No written document evidences the extent of the plaintiff's use of 344 Jericho Turnpike before September 20, 1979 (351).

 18. Mr. Zegarek testified that the defendant was aware of the plaintiff's use of 344 Jericho Turnpike because:

 
(a) Between July 7, 1971 and September 20, 1979, the defendant delivered merchandise to the 344 Jericho Turnpike location (95).
 
(b) In May or June of 1979, Tony Ferente, a representative of the defendant's lawn mower division, visited the 344 Jericho Turnpike location with an eye toward sanctioning a Honda lawn mower showroom at that site (102-03).
 
(c) The 344 Jericho Turnpike location periodically has been visited by representatives of the defendant since 1971 (96, 347, 380).

 19. On September 20, 1979, the plaintiff's facility at 336 Jericho Turnpike burned to the ground, apparently as a result of arson (90). Mr. Zegarek had procured fire insurance on the 336 Jericho Turnpike location (374).

 20. After the September 20, 1979 fire, the plaintiff transferred its entire operation to the 344 Jericho Turnpike location (90).

 21. At a cost of over $ 80,000, the plaintiff has made extensive improvements to the 344 Jericho Turnpike location in an attempt to conform it to the defendant's facility requirements (97).

 22. In its renovated condition, the 344 Jericho Turnpike facility contains over 2000 square feet of showroom area in total and 1600 square feet of service area (98-100). *fn2"

 23. Mr. Zegarek testified that the 344 Jericho Turnpike is comparable to, or larger than, the facilities employed by other Long Island Honda dealers (98-101, Pl. Ex. 12; see also Def. Ex. I).***

 24. On October 5, 1979, the defendant refused to accept further motorcycle orders from the plaintiff (105-07).

 25. Mr. Zegarek's inquiries with respect to this situation disclosed that the plaintiff had been placed on "Code 1" status as a result of the move to 344 Jericho Turnpike (107).

 26. Mr. Zegarek testified that representatives of the defendant assured him that the problems would be straightened out after a technical computer alteration (107).

 27. Five days later, Winston Farrington, the defendant's sales representative (801) visited the 344 Jericho Turnpike facility (109, 03).

 28. Mr. Zegarek testified that, during the course of his visit, Mr. Farrington gave a "verbal approval" for the use of 344 Jericho Turnpike as a Honda facility. This apparently occurred after Mr. Farrington heard Mr. Zegarek's renovation plans for the building (109, 477, 480, Pl. Ex. 30, Def. Ex. J).

 29. Mr. Farrington, however, testified that he did not officially recommend to the defendant that the use of 344 Jericho Turnpike be approved (804). A report written by Mr. Farrington supports this testimony (Def. Ex. AI, AK).

 30. Steven Sabatini, defendant's District Service Manager (818) also testified that he did not approve the 344 Jericho Turnpike facility as an authorized Honda location after the fire (821).

 31. Between September 20, 1979 and November 21, 1979, the plaintiff did not receive motorcycles, "special factory tools, special engine tools, special parts, service manuals" and other necessary manuals from the defendant (151-66).

 32. Between September 20, 1978 and December 17, 1978, the plaintiff sold 100-150 motorcycles; between September 20, 1979 and December 17, 1979, the plaintiff sold 15 motorcycles (165).

 33. As a result of the defendant's failure to respond to the plaintiff's requests for motorcycles and parts, customers of the plaintiff cancelled numerous orders (132-46, Pl. Ex. 13, 14, 15, 16, 17).

 34. Citing the plaintiff for operating out of an unauthorized location, for submitting false claims, for disregarding local law and for poor set up of motorcycles, the defendant terminated the plaintiff's dealership status on November 21, 1979 (Pl. Ex. 1).

 III. The False Claims Issue

 35. Pursuant to the Honda Dealer's Agreement, claims by a Dealer for damage to shipped motorcycles occurring during shipment to the dealer are honored by American Honda (774).

 36. Similarly, when a crate containing a motorcycle does not evidence damage, but the motorcycle within the crate is damaged upon reaching the dealer, American Honda honors a dealer's claim for concealed shipping damage (775).

 37. The dealer, however, possesses responsibility for damage to motorcycles arising out of incidents that occur at the dealer's facility (944).

 38. Michael Karlin, service manager at Honda of Mineola from September or October of 1977 until March or April of 1978 (506), testified that Mr. Zegarek authorized him to record the plaintiff's in house damage as concealed shipping damage so that the defendant would pay for the loss (504, 515). Mr. Karlin also testified that the plaintiff submitted duplicate shipping claims to American Honda (513, 515).

 39. Mr. Karlin testified that the overcrowded nature of 336 Jericho Turnpike's storage facilities (502, 510, 520) and the transportation by forklift of motorcycles from 336 to 344 Jericho Turnpike (520) caused numerous motorcycles to fall and to be damaged on the plaintiff's premises.

 40. Mr. Karlin, however, testified to only one specific submission of an allegedly false shipping claim (509).

 41. Prior to his employment by the plaintiff, Mr. Karlin worked at a Volvo dealer for 3 years (536). After having words with his employer, he ...


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