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ARCINIAGA v. GENERAL MOTORS CORPORATION

November 10, 2005.

ANTHONY L. ARCINIAGA, Plaintiff,
v.
GENERAL MOTORS CORPORATION, Defendant.



The opinion of the court was delivered by: HAROLD BAER JR., District Judge[fn*] [fn*] Anna Fontana, a fall 2005 intern in my Chambers, and currently a third-year law student at St. John's University School of Law, provided substantial assistance in the research and drafting of this Opinion.

OPINION & ORDER

Before the Court are cross motions. Plaintiff Anthony L. Arciniaga ("Arciniaga") seeks an order to stay arbitration and Defendant General Motors Corporation ("GM") seeks an order to compel arbitration and stay this action. For the following reasons, Arciniaga's motion to stay arbitration is GRANTED.

I. BACKGROUND

  In 1995, Arciniaga and GM, an automobile manufacturer, entered into an agreement to jointly invest in Douglaston Chevrolet-Geo, Inc. d/b/a Bay Chevrolet ("Bay Chevrolet"), a Delaware corporation operating a Chevrolet dealership in Douglaston, New York. The parties contemplated two main contracts to comprise the corporate structure. Under the first, a Stockholders Agreement, GM provided most of the necessary capital for the business and received 11,900 shares of preferred stock while Arciniaga contributed the remaining amount in exchange for 2,100 shares of common stock and assumed responsibility as President of the dealership in charge of the day-to-day operations. As the dealership became more profitable, Arciniaga could redeem the preferred shares of stock held by GM until he became the sole owner of the dealership. However, GM retained the right to purchase Arciniaga's common stock if the dealership suffered a loss of 20% of its original franchise capital. The second agreement, the GM Dealer Sales and Service Agreement ("Dealer Agreement"), was a standard contract between GM and the dealership, Bay Chevrolet. In 1999, GM and Arciniaga initiated an "Action by Board of Directors and Stockholders for Plan of Reorganization by Written Consent" to facilitate Arciniaga's immediate redemption of 4,000 shares of preferred stock. At that time, GM and Arciniaga amended the Stockholders Agreement to allow GM to buy Arciniaga's common stock if the dealership suffered losses in excess of $200,000, and to include a mandatory arbitration agreement covering all aspects of the investment relationship and operation of the dealership.

  As of February 28, 2005, Bay Chevrolet reported losses in the amount of $293,236. This triggered GM's right to call the balance of Plaintiff's stock under the Stockholders Agreement, and on March 14, 2005, GM did just that. Arciniaga was also removed from his position as President of Bay Chevrolet. This obliterated any paternalism the Plaintiff may have been counting on and on July 15, 2005, Arciniaga filed a complaint in this Court asserting claims relating to the Stockholders Agreement for discrimination, breach of express and implied contract rights, and fraud, pursuant to the Automobile Dealers' Day in Court Act ("ADDCA"), 15 U.S.C. §§ 1221-26 (2005).

  II. DISCUSSION

  The Defendant seeks to stay and proceed to arbitration. To determine if arbitration is mandated, the court must look at: 1) whether there was an agreement between the parties to arbitrate, 2) whether the agreement covered this particular dispute, and 3) whether Congress has enacted a federal statute to prohibit arbitration under the facts of this lawsuit. See Genesco, Inc. v. T. Kakiuci & Co., 815 F.2d 840, 844 (2d Cir. 1987).

  An agreement to arbitrate was signed by the parties in 1999 when the Stockholders Agreement was amended. That agreement is broad enough to encompass the dispute now at issue. The question then requires a determination as to whether the limitation on arbitration in the ADDCA is applicable here. The ADDCA provides that whenever arbitration is contemplated in a motor vehicle franchise contract both parties must consent to arbitration after the dispute arises. See 15 U.S.C. § 1226(a)(2) ("whenever a motor vehicle franchise contract provides for the use of arbitration to resolve a controversy arising out of or relating to such contract, arbitration may be used to settle such controversy only if after such controversy arises all parties to such controversy consent in writing to use arbitration to settle such controversy"). Here, there was no consent by both parties thus the parties are not required to submit to arbitration.

  A. The Stockholder Agreement Between Investors Constitutes a "Motor Vehicle Franchise Contract"

  GM argues that the ADDCA is not applicable to this case because Arciniaga only raises claims with regard to the Stockholders Agreement and not the franchise arrangement, which according to GM is only comprised of the Dealer Agreement made between Bay Chevrolet and GM. But situations like these are precisely what Congress contemplated when it enacted the ADDCA as a remedy to redress the disparity in economic power between automobile manufacturers and franchise dealers. Automobile Dealers' Day in Court Act, ch. 1038, 70 Stat. 1125 (1956) (codified as amended at 15 U.S.C. §§ 1221-1225 (2005). It is undisputed that the law was passed in an effort to remedy the unequal bargaining power that plagued the industry when contracts were made between individuals who wanted to own dealerships and large manufacturers who sought to retain power and control over the business. The ADDCA was intended to protect automobile dealers from unfair and coercive practices. See also Maschio v. Prestige Motors, 37 F.3d 908, 910 (3d Cir. 1994) (The ADDCA was passed 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.").

  Section 1226(a)(1)(B) of the Act states that a "`motor vehicle franchise contract' means a contract under which a motor vehicle manufacturer, importer, or distributor sells motor vehicles to any other person for resale to an ultimate purchaser and authorizes such other person to repair and service the manufacturer's motor vehicles." Nowhere in the ADDCA is a franchise contract limited to one piece of paper. Taking into account the policy behind the ADDCA and the fact that this is a remedial statute that should be construed broadly, Congress did not intend to limit the definition of motor vehicle franchise contract so as to exclude instances like this where the corporate structure is not strictly a franchise agreement in form but closely resembles one in substance.

  The ADDCA, as it stood prior to the addition of the Motor Vehicle Franchise Contract Arbitration Fairness Act, 15 U.S.C. § 1226, failed to address the power of the manufacturers' bargaining power when dealing with the motor vehicle franchise contract itself. See The Motor Vehicle Franchise Contract Arbitration Fairness Act Report, S. REP. NO. 107-266 (2002) (Comm. on the Judiciary). The Committee Report shows that Congress sought to cover situations like this.

 
Today, almost every major motor vehicle manufacturer uses mandatory binding arbitration either in the dealer franchise contract or in side contracts with certain dealers. Manufacturers increasingly are inserting mandatory binding arbitration clauses in non-negotiated side contracts with dealers, such as those governing dealer finance disputes and incentive disputes.
Id. Congress was concerned about manufacturers using these side agreements to sidestep the ADDCA and, therefore, intended to capture them within the purview of the statute.

  Other courts have recognized that multiple documents can create a franchise agreement under the ADDCA. For example, in Kavanaugh v. Ford Motor Co., 353 F.2d 710 (7th Cir. 1965), the ...


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