United States District Court, S.D. New York
November 10, 2005.
ANTHONY L. ARCINIAGA, Plaintiff,
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.
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
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).
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
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
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 court
articulated the need to consider these documents together.
Each dovetails into the other. Each constitutes an
inseparable part of the mutual understanding between
Kavanaugh and Ford. We do not think the word
"franchise" as used in the [ADDCA] need be restricted
to a single document. If other written agreements are
so interwoven with the document ostensibly designated
as the franchise as to affect materially the legal
significance of the latter, they must be regarded as
part of the franchise agreement.
Kavanaugh, 353 F.2d at 715. Although Kavanaugh was decided
prior to the enactment of 15 U.S.C. § 1226, the same policy
considerations apply. The amendment was added to further benefit
the automobile dealer and not to place restrictions on the
already-existing principles under the ADDCA. Here, the Dealer
Sales and Service Agreement, the Shareholders Agreement, and other documents (the promissory note
and the personal service contract) together made up the
understanding between Arciniaga and GM. Collectively, these
agreements made it possible for Arciniaga to become an automobile
dealer and thus, all of the agreements should be viewed together
to constitute a "motor vehicle franchise contract."
GM relies on decisions from other courts that have interpreted
the ADDCA too narrowly. The court in Pride v. Ford Motor Co.,
341 F. Supp. 2d 617 (N.D. Miss. 2004), held that a similar set of
agreements between the individual shareholder and the automobile
manufacturer did not comprise a franchise arrangement. This view
of the statute ignores its purpose and the policy behind the law,
i.e. to protect individuals from large automobile corporations,
and allows industry leaders to create a corporate structure that
evades the rule. GM, and its actions in this case, is for me a
little reminiscent of that great line form a well-known baseball
team manager to the effect that some people are born on third
base and think they've hit a triple.
B. The Contract was Validly Altered or Modified After § 1226
Came into Effect
The statute specifies that 15 U.S.C. § 1226(a) would apply only
to disputes that arose under dealership franchise contracts
"entered into, amended, altered, modified, renewed, or
extended after the date of the enactment of this Act," November
2, 2002. Id. at § 1226(b) (emphasis added).
The Stockholders Agreement was last amended on October 20, 1999
to incorporate the arbitration provision, but GM altered and
modified the Dealer Agreement in 2002, after the effective date
of the statute. On November 20, 2002, Arciniaga received a letter
from the Zone Manager of GM Dealer Contractual Group that stated
that as of December 31, 2002, GM would reconfigure and revise
each Area of Primary Responsibility ("APR") for all GM dealers.
This change in APR re-defined both the geographic area in which
the Plaintiff could sell GM products, and his bottom line.
The APR modification on December 31, 2002 altered and modified
the original Dealer Sales and Service Agreement. GM argues that
this is not a significant amendment and does not trigger the
protections of the ADDCA. I disagree. Courts have held that less important events than this constituted an amendment to the
franchise agreement. For example, in DaimlerChrysler Vans LLC v.
Freightliner of New Hampshire, Inc., No. 03-304, 2004 U.S. Dist.
LEXIS 316, at *2, *4-*5 (D.N.H. Jan. 8, 2004), the court
determined that the Target Agreements that proposed an annual
sales objective, and thus would be used to determine the
franchisee's eligibility for bonuses, were considered amendments
to the original contract for purposes of 12 U.S.C. § 1226(b).
See id. at *5. Similarly, the modification made to the Dealer
Sales and Service Agreement in this case affects the sales
projections and profits of the dealership. Even if the Addendum
is not considered an amendment to the agreement, it is beyond
peradventure an alteration or modification and would trigger the
protections afforded by the statute.
C. Arciniaga Can Bring Suit Under the ADDCA as an Individual
Under the provisions of the ADDCA, an "automobile dealer" is
permitted to bring suit against a manufacturer who has failed to
act in good faith in regard to a written franchise agreement.
15 U.S.C. §§ 1221-1225 (2005). The statute states that "`automobile
dealer' shall mean any person, partnership, corporation,
association, or other form of business enterprise . . . operating
under the terms of a franchise and engaged in the sale or
distribution of passenger cars, trucks, or station wagons." Id.
at § 1221(c). GM argues that under this definition, Bay Chevrolet
would be considered the "automobile dealer," and not Arciniaga.
But Arciniaga should also be considered a dealer for purposes of
As a general rule, individual shareholders cannot bring suit in
their own names for an injury suffered by the corporation where
the individuals' only harm is solely through depreciation in the
value of their shares of stock. See Vincel v. White Motor
Corp., 521 F.2d 1113, 1120 (2d Cir. 1975). Although the Second
Circuit declined to allow individual shareholders to bring a
claim under the ADDCA in Vincel, the court acknowledged that
there were exceptions to that rule, for example: 1) a duty is
created from the special relationship between the shareholder and
the defendant; 2) an action by the corporation provided no remedy
to an injured shareholder; and 3) other situations that depended
on the nature of the wrong alleged. See id. at 1118-19. The
Second Circuit also pointed with approval to Kavanaugh v. Ford Motor Co.,
353 F.2d 710 (7th Cir. 1965), where the circumstances were so
compelling that the corporate entity needed to be disregarded
entirely. See Vincel, 521 F.2d at 1120.
In Kavanaugh, an individual shareholder was entitled to sue
Ford Motor Co. ("Ford") after it was determined that denying this
right would negate the protective features of the ADDCA. The
court held that it was necessary to look at the facts and
circumstances of the situation to decide if the corporate veil
should be pierced. See Kavanaugh, 353 F.2d at 717. There,
because Ford owned all of the voting stock of the dealership and
retained complete control of the dealership, Ford essentially was
insulated from liability because Ford would never sue itself.
See id. Kavanaugh was essential to the operation of the
dealership and therefore was entitled to the protections of the
act in his individual capacity.
Similarly here, GM retained a controlling voting interest in
Bay Chevrolet and also drafted the Shareholders Agreement to
prohibit the corporate entity from initiating or taking part in
any actions on behalf of Bay Chevrolet against GM. Having thus
shielded itself from any claim by the corporate entity until
Arciniaga could acquire a controlling interest, GM cannot also
shield itself from any claim by Arciniaga asserting his rights as
an individual shareholder. Arciniaga was an essential part of the
dealership and, therefore, the fiction of the corporate entity
will be set aside and Arciniaga may sue in his individual
capacity. IV. CONCLUSION
For the foregoing reasons, Arciniaga's motion to stay
arbitration is GRANTED and Defendant's motion is DENIED. A
Pre-Trial Conference will be held on Monday, November 21, 2005 at
3:30 P.M. The parties are instructed to consult with each other
prior to the Pre-Trial Conference and, if possible, agree on a
Pre-Trial Scheduling Order in advance of the Conference. The
Clerk of the Court is instructed to close these motions and
remove them from my docket.
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