The opinion of the court was delivered by
The primary issue in this appeal concerns the refusal of a franchisor to consent to the franchisee’s transfer of the franchises, N.J.S.A. 56:10-6, and the consequences when that consent is found by a court to be unreasonably withheld. We conclude that the Franchise Practices Act, in particular N.J.S.A. 56:10-6, contemplates that the remedy of specific performance is available to compel the transfer where a franchisor has unreasonably withheld its consent to that transfer.
The history of this litigation is quite extensive. Defendant, Coast Automotive Group, Ltd. d/b/a TSE Motor Cars (Coast) is an authorized dealer of Volkswagen and Audi automobiles pursuant to dealer agreements and dealer operating standards with third-party defendants, Volkswagen of America, Inc. (VWOA) and Audi of America (AOA). Coast operated its automobile dealership on
A provision of the dealer operating standards, which VWOA and AOA contend is an integral part of the dealer agreements, requires that Coast maintain separate wholesale lines of credit for the purchase of the new motor vehicles from VWOA and AOA. Coast satisfied this requirement by obtаining a wholesale line of credit and other financing from plaintiff, VCI Credit, Ine. (VCI), which is a wholly owned subsidiary of VWOA. Coast defaulted in its payments to VCI. VCI filed this action against Coast in the Law Division (Law Division action), which prompted Coast to file for protection under a bankruptcy reorganization plan. Coast also filed an action in the federal district court entitled Coast Automotive Group, Ltd. v. VW Credit, Inc., et al, Civil Action No. 97-2601 (D.N.J.).
Tamin Shansab (Shansab), the principal of Coast, entered into an agreement with B & S Lenders LLC, (B & S), the predecessor-in-interest to intervenor, Aspen Knolls Automotive Group, LLC (Aspen Knolls), to borrow $5,000,000 in order to salvage its franchise investment and avoid liquidation under its bankruptcy plan. The loan proceeds enabled Coast to repay its creditors, including $4,000,000 owed to VCI. As security for the loan, Coast agreed to transfer its assets to B & S or its successors—Aspen Knolls. Aspen Knolls consists of three principals. Two of the principals, Paul Reynolds and Salvatore Rutigliano, operate an Audi dealership in Bemardsville. The third principal, Robert Mazzuoccola, operates a Jeep dealership in Essex County.
Litigation between Coast and B & S ensued in the Chancery Division, Ocean County (Chancery action), which resulted in Coast’s execution and delivery to B & S of an Amended and Restated Promissory Note dated May 14, 1998, and related security documents.
In the interim, VWOA and AOA, third party defendants in the Law Division action, filed claims against Coast in that same
On August 18, 1999, B & S moved in the Chancery Division for the appointment of a receiver for Coast in accordance with N.J.S.A. 14A:14-1 et seq., as well as other relief. The parties to that action, Coast and B & S, entered into a consent order, which incorporated a certain asset sale agreement and real estate sale agreement. The agreements provided that Aspen Knolls, assignee of B & S, would acquire Coast’s Volkswagen, Audi, and Porsche dealership franchises together with the real property upon which the dealerships were located. In entering into that consent order, Aspen Knolls relied on the Law Division’s order enjoining VWOA and AOA from terminating the Volkswagen and Audi franchises.
In accordance with the consent order, the parties advised VWOA and AOA of the proposed transfer and provided the notice required by N.J.S.A. 56:10-6. That section also requires a franchisor to issue a letter of disapproval if the franchisor objects to the proposed transferee as unqualified. VWOA and AOA replied to that notice with the filing of an order to show cause for a preliminary injunction to enjoin the sale. On March 3, 2000, the Law Division granted B & S’s motion to intervene in that matter and denied the application for a preliminary injunction. On March 16, 2000, this court denied VWOA and AOA leave to file an interlocutory appeal.
On May 1, 2000, Aspen Knolls submitted applications for transfer of the Volkswagen and Audi dealer franchises. On June 29, 2000, VWOA and AOA issued letters disapproving the applications. VWOA and AOA based their disapproval on the claimed deficient application аs well as character concerns of Aspen Knolls’ majority member, Robert Mazzuoccola.
if a franchisor is entitled to reject a good faith but deficient application at the same time when it hasn’t fully disclosed its requirements for an acceptable application, then the Franchise Practices Act would have virtually no teeth because then every franchisor could circumvent the law by either creating a contentious environment or by failing to supply adequate information in order to comply with the requirements of law.
On October 3, 2000, this court denied VWOA and AOA leave to stay that order.
Thereafter, Aspen Knolls submitted a second set of applications that VWOA and AOA disapproved on September 22, 2000. VWOA and AOA based their disapprovals on grounds substantially similar to those of June 29, 2000. The Law Division then scheduled discovery and held a plenary hearing on May 15 and 16, 2001, to determine if the consent to the transfer of the franchises was being unreasonably withheld.
Based on the testimony and evidence presented at the hearing, Judge Marlene Lynch Ford found that VWOA and AOA did not act in good faith when they withheld approval of Aspen Knolls’ applications. First, the judge determined that Aspen Knolls had standing on the limited issue of whether VWOA and AOA wrongfully withheld consent to the transfer of the franchise. The judge distinguished Tynan v. Gen. Motors Corp., 248 N.J.Super. 654, 591A.2d 1024 (App.Div.) certif. denied, 127 N.J. 548,
Judge Ford found that VWOA and AOA unreasonably withheld their approval to the proposed transfer. The judge declared the disapproval letters issued by VWOA and AOA to be ineffective and directed that Aspen Knolls’ applications be deemed approved subject to the obligation of N.J.S.A. 56:10-6, which requires the proposed franchisee to agree to comply with the conditions of the existing franchise agreement. The judge’s decision was reflected in a written order entered on June 28, 2001, which she certified as final pursuant to R. 4:42-2.
I.
On appeal, VWOA and AOA contend that Aspen Knolls did not have enforceable rights against the franchisee or franchisor and therefore lacked standing.
Aspen Knolls has standing to proceed in this action to compel transfer under N.J.S.A. 56:10-6 as an indispensable intervening party. R. 4:33-1 requires the applicant claim “an interest” relating to the property or transaction that is the subject of the action. Here, Aspen Knolls, the holder of the $5,000,000 promissory note executed by Coast and purchaser under the asset purchase agreement and real estate sales agreement, has a substantial interest in the transfer of the Volkswagen and Audi franchises. The trial judge properly distinguished Tynan, supra, and noted, based upon the litigious history between Coast and Aspen Knolls, that Coast could not adequately represent the interests of Aspen Knolls.
We are persuaded that Judge Ford properly exercised her discretion and will not disturb the trial court’s limited grant to Aspen Knolls to intervene. State v. Lanza, 39 N.J. 595, 600, 190
II.
Although not set forth in a separate' point heading as required by B. 2:6-2(a)(5), VWOA and AOA contend that the trial court abused its discretion in entering the preliminary injunction enjoining a proceeding to terminate the franchises.
A franchisor’s termination of a franchise agreement without good cause constitutes a violation of the Act, N.J.S.A. 56:10-5, and the franchisee may seek injunctive relief, N.J.S.A. 56:10-10. In her written decision, following a hearing held on August 3, 1999, Judge Ford concluded that Coast demonstrated a reasonable probability of eventual success on the merits of its claim that VWOA and AOA lacked good cause to terminate the franchises and that Coast would suffer irreparable injury if relief was not granted. She therefore enjoined VWOA and AOA from terminating the franchises during the pendency of this action.
VWOA and AOA have not provided this court with a record to evaluate the circumstances surrounding that injunction, and we could affirm on that ground alone. Keehn v. Laubach, 133 N.J.L. 227, 229,
There, the judge stated that the parties should exchange discovery and proceed on the merits and then, after the parties had an opportunity to be heard, she would determine whether the franchises were effectively terminated or whether they should be rescinded. In refusing to enjoin the sale, the judge noted that Coast was attempting to avoid substantial economic losses by
Judge Ford chose to enter the preliminary injunction to maintain the status quo and afford Coast an opportunity to limit its economic losses and complete the transfer to Aspen Knolls. According to the record, Coast, while it did not have the appropriate wholesale line of credit in place, was not in default in payments to VWOA or AOA, as it had been paying for any current deliveries C.O.D. This is not a case where a franchisee was in substantial breach of its obligations under the franchise agreements, which would prohibit a preliminary injunction against termination. See Simmons v. Gen. Motors Corp., 180 N.J.Super. 522, 543,
Under the circumstances, the preliminary injunction entered was apрropriate, reasonable, and within the authority of the court to issue. Westfield Ctr. Serv., Inc. v. Cities Serv. Oil Co., 86 N.J. 453, 466-67,
The termination having been enjoined, Coast remained the franchisee with all of its rights governed by the Act, including the right to transfer under section six of the Act.
III.
VWOA and AOA assert that the Act does not authorize the relief granted by the trial court. VWOA and AOA argue that the court erred in determining that the consent was unreasonably withheld and, even if it was, the court was limited to awarding damages under N.J.S.A. 56:10-10 for a violation of the Act, and only to a franchisee, not to a potential transferee who is not covered by the Act. In the alternative, VWOA and AOA assert that the trial court’s judgment amounts to an unconstitutional taking.
The pivotal provision of the Act in terms of the transfer or sale of a franchise is N.J.S.A. 56:10-6, which provides:
It shall be a violation of this act for any franchisee to transfer, assign or sell a franchise or interest therein to another person unless the franchisee shall first notify the franchisor of such intention by written notice setting forth in the notice of intent the prospective transferee’s name, address, statement of financial qualification and business exрerience during the previous 5 years. The franchisor shall within 60 days after receipt of such notice either approve in writing to the franchisee such sale to proposed transferee or by written notice advise the franchisee of the unacceptability of the proposed transferee setting forth material reasons relating to the character, financial ability or business experience of the proposed transferee. If the franchisor does not reply within the specified 60 days, his approval is deemed granted. No such transfer, assignment or sale hereunder shall be valid unless the transferee agrees in writing to сomply with all the requirements of the franchise then in effect.
We have previously interpreted N.J.S.A. 56:10-6 to impose a requirement of reasonableness on a franchisor’s decision to disapprove a transfer. Simmons, supra, 180 N.J.Super. at 539,
In support of their determination to withhold consent, VWOA and AOA asserted that Aspen Knolls submitted a deficient application and that there were concerns related to the character of Mazzuoccola, the majority member of Aspen Knolls. The trial court made the following findings regarding the reasons asserted by VWOA and AOA for withholding consent to assignment of the franchise.
As to the issue of business experience, the court found that Reynolds and Rutigliano, both of whom are principals of Aspen Knolls, began to operate an Audi Dealership in Bernardsville in 1995, and within the first year of operation, the dealership was ranked third in the nation in volume and sales. Since its inception, that dealershiр has maintained a high ranking among the 365 Audi dealerships in the country in terms of sales and volume. There was also testimony that the Bernardsville dealership ranked in the top ten percentiles in customer satisfaction in both the regional area and the nation. The judge also noted that Reynolds and Rutigliano had extensive prior experience as automobile dealers.
Mazzuoccola’s experience was not as extensive. However, the judge noted that Mazzuoccola, a race car enthusiast who sponsored a professional racing team, did own a Jeep dealership in Essex County. The judge found that Aspen Knolls, an entity comprising Reynolds, Rutigliano, and Mazzuoccola, demonstrated an ability to operate the Coast dealership.
As to the issue of VWOA and AOA’s concerns regarding Mazzuoccola’s character, the judge noted that VWOA and AOA based those concerns upon certain allegations raised in an affidavit filed
no testimony was produced by either side to address the allegations that related to the character, allegations involving Mr. Mazzuoccola. And that Mr. Mazzuoccola, in fact, took the stand and exposed himself to the opportunity for cross examination by the ... franchisor’s representatives. That the issue of his involvement with any unsavory business activities, or association with undesirable individuals, or people of known criminal connections or histories or even personalities, was just not raised.
[T]he hearing was ... scheduled primarily to address these issues of chаracter____ I continue to be fully satisfied that any purported deficiencies in terms of character have not been proved. And even if raised ... [the allegations] have been effectively dispelled through the testimony of the parties____ Character, then, cannot form a basis for the rejection of the proposed franchisees under ... these circumstances.
The judge next determined the issue of financial ability, commenting as follows:
That left only the issue of financial ability as the reason for the rejection as transferee----Volkswagen and Audi maintain that Aspen Knolls had failed to provide upon request sufficient financial information by which an assessment of the transferee’s financial ability could be made, and thus they argue that as a matter of law the franchisor was justified in rejecting them upon their application, and the application of Coast, to approve them as a Volkswagen/Audi Franchisee.
If the submissions were deficient I think that it’s within reasonable business practices and the intent of the Franchise Practices Act to direct that ... Audi and Volkswagen, in effect, provide what requirements and then allow the opportunity for the franchisee to meet those requirements by way of a formal commitment____
[T]he statute, itself provides that Aspen Knolls would have to agrеe in writing to comply with the requirements of the franchise in effect____[T]hat clearly would include not just operational guidelines, and so forth, but also what the obligations were in terms of capitalizing this project.
[T]he letter issued by Volkswagen and Audi, refusing to approve ... did not constitute a valid rejection of this proposed transferee.
Regardless, unless the submissions were relevant to Aspen Knolls’ character, financial ability, or business experience, they werе not relevant to the “acceptability” of Aspen Knolls as a franchisee. Horn v. Mazda Motor of Am., Inc., 265 N.J.Super. 47, 58,
We are satisfied that Judge Ford’s findings that VWOA and AOA unreasonably withheld their consent to the proposed transfer are supported by adequate, substantial, and credible evidence.
VWOA and AOA’s contention that the relief granted by the trial court is not authorized, amounts to a claim that under N.J.S.A. 56:10-6, the franchisor has a right to reject a proposed transferee and once it does, regardless of the reasonableness of its disapproval, the remedy of specific performance is unavailable. We disagree.
The Suprеme Court has interpreted the requirements of section six as a restriction on the additional powers the Act affords a franchisee. Westfield Ctr., supra, 86 N.J. at 471,
When a franchisor receives notice that a franchisee intends to transfer a franchise, section six mandates that the franchisor shall, in writing, infоrm the franchisee either of its approval of the transfer or “of the unaeceptability of the proposed transferee, setting forth the material reasons relating to the character, financial ability or business experience of the proposed transferee” to support the rejection. N.J.S.A. 56:10-6. Thus, the franchisor’s rejection must be based on a bona fide business decision. In addition, if the franchisor chooses to not respond to the notice within sixty days of that notice, the franchisor’s “approval is deemed granted” and the franchise agreement between the franchisee and the franchisor is automatically deemed amended to incorporate such transfer. Ibid.
The provisions, read together, evidence that the statute contemplates the remedy of specific performance where the franchisor severs the franchise relationship without good cause,
The franchisor should not be able to circumvent the automatic approval contemplated by the Legislature by giving notice of disapproval within the time period and facially complying with section six. We agree with the trial judge that it would bе nonsensical for the Legislature to allow for specific performance if the franchisor did nothing, but if the franchisor timely rejected the proposed transfer in bad faith, the franchisee is limited to damages. If such was the case, a franchisor could avoid the requirements of the statute by sending a letter that automatically rejected all transferees. VWOA and AOA cannot sidestep the limits the Act places on their ability to reject a proposed transferee by merely giving lip service to the notice provisions of section six.
It is both a more logical and consistent interpretation of the statutory remedy to authorize the аpproval, as the judge did here, subject to compliance with the requirements that are deemed a part of the existing franchise agreement. This scheme comports with the distinction drawn in section six, discussed supra, between an “acceptable” transferee and the “acceptability” of a transferee. Horn, supra, 265 N.J.Super. at 58,
This relief is beneficial to both the franchisor and franchisee. Hearing on Assembly Bill No.2063 (Franchise Practices Act) befоre the New Jersey Legislature Assembly Judiciary Committee, at 38-41 (March 29, 1971). The franchisee who invested time and money in the franchise could minimize its losses and recoup its investment and the franchisor would benefit from the continued operation of its franchise by an able and competent alternate franchisee. The benefits are readily apparent where, as here, the franchisee is in financial straits and in default under the franchise agreements, the dealership has been substantially damaged by fire, and the franchisee has provided a willing and capable transferee who is in position to rebuild the dealership. Accord Mercedes-Benz of N. Am., Inc. v. Dept. of Motor Vehicles of Florida, 455 -So.2d 404 (Fla.Dist.Ct.App.1984), petition for review denied,
Moreover, in those instances where the remedy of specific performance was denied, the courts found that the franchisor’s refusal to consent to transfer was reasonable. Westfield Ctr., supra, 86 N.J. 453, 467,
Accordingly we hold that specific performance is an appropriate remedy under section six of the Act where a franchisor unreasonably withholds consent to a transfer. We note for completeness, that while the relief granted by the trial judge benefitted Aspen Knolls, the court did not grant relief to Aspen Knolls. Instead, Judge Ford granted relief to the franchisee, Coast. The fact that enforcement of section six results in benefits to a proposed transferee does not render the relief inappropriate.
Lastly, VWOA and AOA argue that the order of the trial judge declaring that Aspen Knolls is entitled to the franchise, subject to the terms of the existing franchise agreement, amounts to an unconstitutional taking. VWOA and AOA rely on the Supreme Court’s decision in Westfield Ctr., supra, to support their position.
In Westfield Ctr., the defendant who was the franchisor and owner of the real property upon which the franchise was located, contended that the use of injunctive relief compelling the indefinite extension of a franchise arrangement into the future is constitutionally impermissible. Westfield Ctr, supra, 86 N.J. at 466,
The availability of injunctive relief under section six of the Act is constitutionally permissible.
The order approving Aspen Knolls as the franchise transferee of Coast’s Volkswagen and Audi franchises is affirmed. Because this issue was certified as final pursuant to R. 4:42-2, the pending claims for termination and rescission are moot and shall, on remand, be dismissed by the trial court.