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January 29, 1982;

THOMAS W. CULLEN, JR., Plaintiff,

The opinion of the court was delivered by: NEAHER


Following the Court's memorandum of decision and order dated October 28, 1981, defendant timely sought amendment of the judgment. Rules 52(b) and 59(e), F.R.Civ.P. The application has been considered, but after careful study of defendant's arguments in support of its motion, the Court adheres to its decision, revising the opinion as follows to reflect the additional authority which it believes supports the original decision.

 Plaintiff, Thomas W. Cullen, Jr., seeks to recover $ 18,000 with interest, plus punitive damages, paid to Bavarian Auto Sales, Inc. (Bavarian), a BMW dealer formerly franchised by defendant, BMW of North America, Inc. (BMW/NA). BMW/NA is "the exclusive importer and distributor in the United States of passenger cars, parts and products manufactured by Bayerische Motoren Werks, AG." Plaintiff's Exhibit 93. A Delaware corporation, BMW/NA has its principal place of business at Montvale, New Jersey. This diversity action is now before the Court subsequent to partial summary judgment in favor of defendant and trial without a jury on the remaining issues. *fn1"

 The facts established at trial follow. On January 24, 1979 Cullen entered into a sales contract with Bavarian for a new 1978 BMW, Model 530i, at a price of $ 18,245. Having paid a deposit of $ 245, Cullen received a call five days later from the salesman advising that the car had arrived and requesting a check for the balance of the purchase price. Plaintiff remitted a check for $ 18,000, which was cashed by Bavarian, but never received the car or the return of his money.

 Cullen commenced a civil action against Bavarian in New York State Supreme Court, Nassau County, which was stayed when Bavarian's president, Hans Eichler, filed a petition in bankruptcy. Cullen also filed criminal complaints with the Queens County District Attorney and the Attorney General of the State of New York, although no indictments were issued. *fn2" This action was subsequently commenced.

 Bavarian operated continuously as an authorized BMW dealer from at least June of 1976 to February 16, 1979, on which date Eichler voluntarily terminated all agreements between Bavarian and BMW/NA. Three written franchise agreements were entered into during this time: (1) from June 1 to December 31, 1976; (2) from August 12 to December 31, 1977; and (3) from January 1 to December 31, 1978. Although no written agreement was in effect from January 1 to August 12, 1977 or from January 1 to February 16, 1979, Bavarian continued to operate as a duly franchised BMW dealer during these periods. In fact, recognizing the continuation of dealerships without formal agreement is not an unusual practice for BMW/NA. Trial Transcript at 2.125-26.

 From the beginning of Bavarian's relationship with BMW/NA, the latter received indications of Bavarian's financial instability. For example, difficulty in receiving payment for cars and parts prompted BMW/NA to place Bavarian on a C.O.D. certified check basis, rather than open account status, in the latter part of 1976. Additionally, despite Bavarian's contractual obligations and BMW/NA's repeated requests, Bavarian furnished only two monthly financial statements during the several years it operated. Further, from 1976 onward, Bavarian demonstrated persistent difficulty in maintaining minimum credit lines essential to standard operation of BMW dealerships. Finally, throughout the operation of the franchise Bavarian repeatedly failed to maintain sufficient funds to enable legitimate issuance of checks to BMW/NA, other BMW dealers, and customers.

 During the latter part of 1978, Bavarian's instability escalated, and BMW/NA received intensified indications of its financial irregularities and irresponsibility. For example, from July to September 1978, BMW/NA received five customer complaints against Bavarian, each of which alleged Bavarian had taken partial payment for a car but had neither delivered the vehicle nor refunded the payment. In some of these cases, Bavarian had issued checks on insufficient funds to refund deposits made by the customers. Further, during 1978, checks aggregating some $ 40,000 were issued by Bavarian to BMW/NA upon accounts with insufficient funds.

 On October 30, 1978, BMW/NA extended an initial sixty-day period granted Bavarian to re-establish its financial viability. This period was extended to November 14, 1978, but Bavarian still failed to remedy its deficiencies by that date.

 On November 15, 1978, Bavarian represented to BMW/NA that approval of funds from the Small Business Administration and Citibank was imminent, but no such approval ensued. On December 7, 1978, BMW/NA received notice from Lloyd Capital Corporation that Bavarian had established a line of credit, but a week later BMW/NA learned that Eichler had misrepresented his intention to follow through with the credit application process, had never signed a formal agreement with Lloyd, and had never paid Lloyd the $ 1000 required by law to be submitted prior to execution of the agreement.

 In a letter dated December 18, 1978, BMW/NA notified Eichler that because of "serious and continuing deficiencies" in the dealership, BMW/NA would not offer him a 1979 dealer agreement. The deficiencies outlined in the letter were: (1) failure to observe minimum wholesale credit requirement; (2) impairment of financial reputation, including issuance of checks, later dishonored, to other BMW dealers; (3) parts accounts arrearages, including issuance of checks, later dishonored, to BMW/NA; (4) failure to observe parts inventory requirements; and (5) failure to submit year-end and monthly financial and operating statements.

 Although Eichler responded to the above letter on December 29, 1978, expressing his desire to continue the dealership, BMW/NA did not reply to confirm either termination or extension of the franchise. The next contact evidences BMW/NA's recognition of the continued operation of the Bavarian franchise: it refused to authorize Eichler's proposed sale of Bavarian to an existing dealer. Had BMW/NA asserted its rights under the dealer agreement, which had expired by its own terms on December 31, 1978, it could have insisted that Bavarian remove at its own expense all BMW signs displayed publicly, refrain from using BMW trademarks, destroy all printed material bearing BMW trademarks, and cease to hold itself out as an authorized BMW dealer. Plaintiff's Exhibit 103. Further, BMW/NA could have required Bavarian to sell and deliver to BMW/NA all new BMW vehicles, parts and tools purchased by Bavarian from BMW/NA. Instead, BMW/NA allowed Eichler to continue holding out Bavarian as an authorized dealership, as evidenced by the BMW logo publicly displayed on the outside of the showroom and the use of printed materials bearing BMW trademarks.

 It should be noted that August 1978 was the last time BMW/NA received payment for any cars allocated to Bavarian. Further, in December 1978 BMW/NA removed all cars it had delivered to Bavarian for failure to maintain a minimum credit structure. Yet, during January and February of 1979, the showroom contained several new BMW vehicles borrowed from other dealers, thus giving Bavarian the appearance of a viable ongoing business.

 On February 13, 1979, a meeting was held to discuss the future of Bavarian. This meeting was approximately two weeks after Cullen had been denied delivery of the car, and although Cullen had not contacted BMW/NA, at the meeting BMW/NA was apprised of information that Eichler had accepted deposits from seven customers totalling $ 100,000 and had used the money for other purposes. Still, BMW/NA made no definitive response, and three days later Eichler voluntarily resigned the franchise. Only at that point did BMW/NA pursue its rights subsequent to termination outlined above.

 The record is clear that Bavarian was an independently owned and operated dealership, but plaintiff seeks to hold BMW/NA liable under the doctrine of agency by estoppel. This theory must fall for lack of proof of its essential elements. It is well settled that agency by estoppel arises only when the party charged as principal intentionally or carelessly causes the belief that the putative agent is authorized to bind that party. Karavos Compania Naviera S.A. v. Atlantica Export Corp., 588 F.2d 1, 11 (2d Cir. 1978); Restatement of Agency 2d § 8B; 2 N.Y.Jur., Agency §§ 25, 87. Moreover, under New York law,

"apparent or ostensible authority, or agency by estoppel, is created only by acts or neglects of the person sought to be charged as principal, and the person dealing with the ostensible agent must have known of and relied upon such acts or omissions, and such reliance must be in good faith and in the exercise of reasonable prudence." Perry v. New York Life Ins. Co., 22 N.Y.S.2d 696, 701-02 (Sup.Ct.1940).

 Although plaintiff offered into evidence various public manifestations of a relationship between Bavarian and BMW/NA, he failed to prove his reliance on Bavarian's authority to act for BMW/NA. Similarly, there is no evidence of Cullen's belief that the transaction was entered into by or for BMW/NA. On the contrary, plaintiff's own testimony shows there was an absence of reliance on advertisements, on the similarity between the corporate names of Bavarian and BMW/NA (Bavarian Motor Works), or on the BMW logo appearing on the sales slip.

 Plaintiff did testify as to his reliance on the BMW logo appearing on the outside of Bavarian's premises, but the question remains to what his reliance was directed. The testimony shows not a belief that Bavarian had authority to act for BMW/NA, but that the BMW logo represented a particular quality of cars sold at Bavarian. Since this testimony indicates, at most, Cullen's reliance on Bavarian's authority to sell BMW automobiles, plaintiff failed to carry its burden of proving the belief essential to agency by estoppel.

 Turning to plaintiff's negligence theory, the evidence adduced at trial shows that BMW/NA unreasonably permitted Bavarian to continue holding itself out to the public as an authorized BMW dealer, and to purport to sell Cullen a car, during a period in which defendant had ample knowledge of Bavarian's precarious financial condition and history of questionable business practices. Yet, proving the unreasonableness of defendant's conduct does not establish actionable negligence. To accomplish the latter plaintiff must first sustain his burden of proving the breach of a legal duty owing by defendant to plaintiff, a violation of plaintiff's rights. Palsgraf v. Long Island R. R., 248 N.Y. 339, 162 N.E. 99 (1928).

 Defendant argues that BMW/NA owed Cullen no duty to enforce the provisions of its agreement with Bavarian, based on plaintiff's inability to claim as a third-party beneficiary under that contract. The argument is correct as far as it goes, for it is true that the parties to the agreement, in establishing their distributor/dealer relationship, expressed no intent to confer a direct benefit on ultimate consumers. In the absence of such expression, plaintiff assumes the status of an incidental beneficiary, unable to enforce contractual rights or recover for failure to perform contractual duties. Bernal v. Pinkerton's, Inc., 52 App.Div.2d 760, 382 N.Y.S.2d 769 (1st Dept. 1976), aff'd, 41 N.Y.2d 938, 363 N.E.2d 362, 394 N.Y.S.2d 638 (1977); Beck v. FMC Corp., 53 App.Div.2d 118, 385 N.Y.S.2d 956 (4th Dept. 1976), aff'd, 42 N.Y.2d 1027, 369 N.E.2d 10, 398 N.Y.S.2d 1011 (1977).

 Nevertheless, the question remains whether BMW/NA owes the ultimate consumer a duty beyond its contractual obligations. Because neither the State judiciary nor legislature has addressed this precise question, the requirement that this Court, sitting in diversity, apply the substantive law of New York, Erie R. R. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938), leads to a perplexing problem. However, both the Supreme Court ...

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