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JIM FORNO'S CONTINENTAL MOTORS, INC. v. SUBARU DIS

December 11, 1986

JIM FORNO'S CONTINENTAL MOTORS, INC., Plaintiff,
v.
SUBARU DISTRIBUTORS CORP., GOLDSTEIN MOTORS, INC., TRICE-JURON FORD, INC., and SUBARU OF AMERICA, INC., Defendants



The opinion of the court was delivered by: MCCURN

NEAL P. McCURN, D.J.

MEMORANDUM-DECISION & ORDER

NEAL P. McCURN, D.J.

 Pending before the court are various motions to dismiss the complaint in the instant action. In determining whether to dismiss the complaint, this court is required to read the complaint as a whole, accept its material allegations, and draw all inferences in the plaintiff's favor. Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 558 (2d Cir. 1985). Such a reading of the complaint yields the following summary.

 Plaintiff, Jim Forno Continental Motors, Inc. (Forno), is an automobile dealer incorporated in New York and doing business in Endicott, New York. Forno was a Subaru Franchisee between 1971 and 1984. Defendant, Subaru Distributors Corporation (SDC), is a New York corporation having its principal place of business in Orangeburg, New York. SDC is, and was at the times relevant to this action, one of fifteen regional distributors of Subaru vehicles. Defendant Subaru of America (SOA) is, and was at the times relevant to this action, the exclusive American importer of Subaru vehicles. Defendants, Goldstein Motors, Inc. (Goldstein), and Trice-Juron Ford, Inc. (Trice-Juron) are, and were at the times relevant to this action, Subaru franchisees. Goldstein and Trice-Juron are New York corporations having their principal places of business in New York.

 SOA imported Subarus into the United States during the relevant times. SOA delivered vehicles to its regional distributors, including SDC. SDC in turn delivered Subarus to Forno, Goldstein, Trice-Juron and at least 50 other local dealers. SDC's delivery to the local dealers was governed by contract.

 The American consumers' demand for Subarus far exceeded the supply at times relevant to the case at hand. This shortage resulted in part from the consumers' desire to purchase fuel efficient vehicles from Japan, and in part from Japanese manufacturers' voluntary restriction of exports to the United States. Because of the shortage, SOA promulgated a policy for determining allocations among the regional distributors. The policy, called the "earned share system", provided that vehicles would first be allocated to distributors who had dealers with unfilled customer sales agreements. Vehicles were then allocated to distributors based on their respective dealers' "travel rate" or "day's supply". The "travel rate" or "day's supply" was a function of inventory and sales potential. For example, if a dealer sold ten cars per day on the average, and he had a one hundred car inventory, he had a ten day "travel rate" or ten "day's supply". The distributors with lower "travel rates" or "day's supply" were allocated more vehicles than other distributors.

 SDC determined to allocate vehicles to its dealers using an allocation system to that imposed by SOA. SDC's allocation system is alleged, however, to have been "informal and subject to abuse". (See Complaint P41.) It is the "abuse" of the SDC "earned share system" which forms the basis for all of the plaintiff's claims.

 The system was allegedly abused in that SDC solicited dealers, including Forno, Trice-Juron and Goldstein to falsely report sales. (See Complaint P45.) The false reporting of sales was designed to lower the inventory and thereby lower the "day's supply" of the dealers and SDC, consequently entitling SDC and the dealers to an allocation level from SOA that would otherwise have not been available. Forno allegedly declined SDC's invitation to falsify sales, while Goldstein and Trice-Juron allegedly did submit such false sales reports. Such abuse occurred on a regular basis over a five year period despite SOA's knowledge. Forno asserts that SOA and SDC did nothing to curb the submission of false reports. Rather, they allegedly "engaged in lulling activities promising to . . . clean up the system," with no intention of doing so. (See Complaint P56, 66 & 113.)

 Forno asserts that the abuse resulted in an increase in the vehicles available from SOA to SDC and dealers like Trice-Juron and Goldstein, who falsified sales at SDC's encouragement, and a decrease of vehicles available to dealers like Forno, who did not falsify sales. The decrease in vehicles available allegedly hurt Forno to the extent that it had to sell its franchise.

 Forno claims that seven causes of action arise from the foregoing facts. Count I claims that SDC breached its dealer agreement with Forno to "fairly and equitably allocate vehicles to Forno". Count II asserts a tort of "unfair competition" against SDC. Count III alleges a civil RICO claim under 18 U.S.C. §§ 1964 and 1962(c) against SDC, Goldstein and Trice-Juron. Count IV avers that the conduct of SDC, Goldstein and Trice-Juron constituted a contract, combination or conspiracy in restraint of trade in violation of section one of the Sherman Act, 15 U.S.C. § 1. Forno claims in Count V that Goldstein and Trice-Juron tortiously interfered with Forno's contract with SDC. Count VI avers a claim of "enterprise liability" against SOA. Finally, Count VII asserts a state law fraud claim against SOA and SDC.

 The case initiated by Forno's complaint has generated several motions by defendants and plaintiff alike. Several of these motions were disposed by this court at oral argument. Count VI was dismissed because the court determined that New York law did not recognize the claim of "enterprise liability" as asserted by the plaintiff. Count VII avers that SDC and SOA represented to Forno that they would prevent the kind of abuse of the "earned share system" complained of in this action. The court dismissed this count because it asserts a breach of contract claim, if anything. Although one who makes a contractual promise with the undisclosed intention to breach it can be held liable for fraud, Soper v. Simmons International Ltd., 632 F. Supp. 244, 249 (S.D.N.Y. 1986), a purely conclusory allegation, such as the one here, that defendants never intended to perform cannot convert a claim for breach of contract into one for fraud. Federal Deposit Insurance Corp. v. Borne, 599 F. Supp. 891 (E.D.N.Y. 1984). *fn1"

 Discovery was stayed pending the resolution of the issues currently before the court, except that Trice-Juron, which had not complied with any discovery requests of the plaintiff, was ordered to comply with such requests. SDC's motion for Rule 11 sanctions was denied. The court reserved on the motions to dismiss plaintiff's federal claims contained in Counts III and IV, and to dismiss the pendent state claims in Counts I, II and V. The court has considered these motions and determines as follows.

 A. RICO

 Plaintiff's Count III is based on 18 U.S.C. § 1964 which provides a civil remedy for, among other things, a violation of 18 U.S.C. § 1962(c). *fn2" 18 U.S.C. § 1962(c) provides:

 (c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

 Defendants SDC and Goldstein have moved to dismiss this portion of the complaint on several grounds. For the reasons discussed below, this court determines that each of these grounds is without merit. ...


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