How a Settlement can act as a Free Pass

Image provided by:  https://morguefile.com/

Image provided by: https://morguefile.com/

The American Legal System is based on the right to enter into legal contracts freely.  Individuals and businesses are free to contract with whomever they choice. And, so long as the contract is not unlawful, the courts will give deference to the agreement- contact.

Hence the case of  H.B. Automotive Group, Inc, d/b/a Kia of the Bronx, and Major Motors of Long Island City, Inc., d/b/a Major Kia of Long Island City [Dealership Franchisee or Kia Motors of the Bronx ] v.  Kia Motors America [Kia Motors].  Dealership Franchisee  was in violation of their dealership franchise agreement with Kia Motors.  Kia Motors could terminate the Dealership Franchisee’s franchise agreement, but settlement was entered instead.  Under the settlement, the termination was delayed in order to allow the Dealership Franchisee to transfer the franchise to another franchisee.

Franchisee presented 2 prospective buyers or transferees.  The franchisor rejected both saying that they have poor satisfaction ratings [and other things].  Dealership Franchisee presented a third, but time was up under the settlement agreement. Kia Motors terminated the Franchise Agreement.

The case is in New York.  And the court said editing the New York law:

[i]t shall be unlawful for any franchisor directly or indirectly to impose unreasonable restriction on the franchised motor vehicle dealer relative to transfer, sale … or termination of a franchise ….

But, the court goes on to explain, relaying prior cases, settlement agreements can act as a waiver.  Yes, waiver. Hence, settlements are like a- free pass.  Kia Motors did not have to be reasonable when it rejected the third transfer request, because under the settlement agreement, the time to get a transfer approved was up.  Under the settlement agreement, if transfer was not approved by September 1, 2013, the franchise agreement terminated.  The third buyer’s application was not completed till September 11, 2013.  The franchise agreement termination stands.

presentation1_page_1

As dicta, the franchise rejected all three proposed transfers on grounds that the prospective buyers  or transferees’ satisfaction ratings were substandard.  Otherwise stated the franchisor would not approve proposed transfers of the Dealership Franchisee’s franchise agreement, because the buyer [other existing dealerships] had deficient customer service scores below the average satisfaction scores of all Kia Motor dealerships in the Kia Motors System and this was sufficient reasonable grounds for   denying the transfer per the court.  So, the important dictation note from the court is that poor satisfaction rating scores of existing prospective franchisee buyers can be reasonable good cause grounds for a franchisor to deny a franchisee transfer. presentation1_page_3

Returning to the holding in the case, settlement can be a wonderful thing for both franchisors and franchisees.  What ordinarily would have been the rule, under franchise laws and statutes, can be void if there is a properly written settlement agreement.  In this case it was the obligation to approve or disapprove a transfer.  But, settlement agreements can also operate as a release of claims, when the release is forbidden by the law.  Settlement agreements can also operate as an enforceable agreement that a material default under the franchise agreement is present and termination of the franchise agreement is permissible and enforceable.  When looking at the options, know the power of the settlement.

Free Consultation no click

Leave a Reply

Your email address will not be published. Required fields are marked *

Post Navigation