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Examining NMAC v. Superior Automotive Group

Legal eagles deconstruct the case that changed how courts handle contract disputes between dealers and their floorplan lenders.

September 2017, F&I and Showroom - Feature

by Christian Scali and Jade Jurdi

A flooring line of credit is the lifeblood of every dealership. Unfortunately, flooring agreements are often strongly one-sided in the flooring lender’s favor.

But this doesn’t mean that a dealership is entirely at its flooring lender’s mercy when the lender decides to turn the screws. In fact, in some circumstances, overreaching by the flooring lender may provide a dealership the opening it needs to keep its flooring line in place, even if only for long enough to find an alternative lender.

Because forcing a dealership out of business can have such dire consequences — the loss of people’s livelihood and the social and emotional upheaval that results from that, to say nothing of the dealership’s economic damages — a lender who pulls a flooring line improperly can be held liable for hundreds of thousands, if not millions, of dollars. That’s what happened in Nissan Motor Acceptance Corp. (NMAC) v. Superior Automotive Group. The jury in that case required the flooring lender to pay $256 million, including more than $134 million in punitive damages, for wrongfully pulling the dealership’s flooring line.

Facts of the Case
When the economy soured in 2008, Southern California’s Superior Automotive Group, like many dealerships at the time, suffered a sudden decline in revenue. With more than 800 employees and seven rooftops, the dealership had substantial overhead and was taking heavy losses. It became unable to pay down its line of credit on the schedule that its flooring agreement with NMAC required.

At one point in 2009, Superior was $7.1 million out of trust. But several NMAC executives, and even Nissan North America’s president, assured the dealership that Nissan would do what was necessary to “get it through 2009.” All Superior had to do was sell one of its stores and use the proceeds to begin paying down its credit lines. Superior did that. The dealership’s principal even pledged his own home as collateral to ensure that the lines would be paid. Ultimately, Superior pledged $40 million in collateral and reduced its out-of-trust status across all six of its remaining stores to just $1.6 million.

Although Superior had done everything NMAC said it needed to do to maintain its flooring lines — and despite NMAC’s promise that it would “get it through 2009” if the group did all those things — NMAC pulled Superior’s line before the year was out. It filed a series of lawsuits against Superior to terminate the flooring line of credit and collect on the collateral.

Because of the parol evidence rule — a rule codified in California Civil Code § 18 1856, under which courts hearing contract disputes are required to look only at the contract itself to ascertain the parties’ rights and duties — the jury never heard about the many oral representations that NMAC made to Superior. All it heard was that NMAC had a contract under which Superior was required to make certain payments, on a certain schedule, and that Superior had fallen behind. The jury returned a verdict in NMAC’s favor, requiring the dealership to pay more than $30 million.

The Plot Thickens

This 2003 photo shows Superior Automotive Group’s Michael Kahn, standing with his wife, Tami Kahn, receiving the Nissan Global Achievement Award from Carlos Ghosn (left), chairman of Nissan Motor Co.’s board of directors, at the Palace Hotel in Tokyo. In May, an Orange County Superior County jury awarded Kahn $256.5 million in his eight-year contract dispute with floorplan lender Nissan Motor Acceptance Corp.
This 2003 photo shows Superior Automotive Group’s Michael Kahn, standing with his wife, Tami Kahn, receiving the Nissan Global Achievement Award from Carlos Ghosn (left), chairman of Nissan Motor Co.’s board of directors, at the Palace Hotel in Tokyo. In May, an Orange County Superior County jury awarded Kahn $256.5 million in his eight-year contract dispute with floorplan lender Nissan Motor Acceptance Corp.

While the case was pending, the California Supreme Court ruled that courts and juries can hear evidence outside the written contract to establish misrepresentation or fraud, and to affirm that how parties actually conduct themselves when carrying out a contract may be evidence of what the contract means. The case between Superior and NMAC thereafter went back to trial so that, consistent with the Supreme Court’s opinion, the jury could hear the extrinsic evidence of the promises and inducements made by NMAC, and the things that Superior did in reliance on them.

The result this time was radically different. As noted above, the jury ruled in the dealership’s favor, to the tune of more than a quarter billion dollars.

Nissan’s captive has appealed the jury award. But for now, a lender ought to consider the Superior case before deciding to terminate a dealership’s flooring line precipitously. It should be especially careful if pulling the flooring line would pull the rug out from under a dealership that, regardless of the terms of its written flooring contract, has acted in reliance on the lender’s oral representations and requests.

But the lesson to be learned by flooring lenders doesn’t apply only in extreme cases like the one involving Superior and NMAC. Dealers place their orders with manufacturers well in advance of actual delivery, and flooring lenders know this. Lenders also know that dealers are dependent on their flooring lines to pay manufacturers for the vehicles they’ve ordered, until the vehicles are sold to consumers and those sales are funded.

The lender is, arguably, representing to a dealer that it will continue to extend credit to pay for those vehicles until sales to the end users are funded. This argument is especially persuasive in the case of a captive lender.

A dealer whose lender terminates or threatens to terminate its flooring line because the dealership is out of trust — or has allegedly breached other obligations in the flooring contract — should immediately seek the assistance of experienced legal counsel to assess the claims and defenses available to the dealer and, in line with that, bring the Superior Nissan decision to the lender’s prompt attention.

Privileges Lost
And lenders who terminate a dealer’s flooring or refuse to continue to fund certain deals or remove what they call “privileges,” for much less egregious defaults, such as failure to comply with financial covenants or failure to permit inspection or disclosure of financial records, are even more exposed to this argument.

At a minimum, bearing in mind the potential for a substantial adverse damages award of the kind that occurred in NMAC v. Superior, the lender should keep the flooring in place and without potentially door-closing penalties or restrictions until all orders that have already been placed with the manufacturer are received by the dealer, sold to consumers, and the purchases are funded, thereby giving the dealership time to find another lender.

When the economy soured in 2008, Superior Automotive Group suffered a sudden decline in revenue and was unable to pay its line of credit on the schedule its flooring agreement with NMAC required. At one point in 2009, Superior was $7.1 million out of trust.
When the economy soured in 2008, Superior Automotive Group suffered a sudden decline in revenue and was unable to pay its line of credit on the schedule its flooring agreement with NMAC required. At one point in 2009, Superior was $7.1 million out of trust.

Otherwise, the dealer may seek to obtain a temporary restraining order and an injunction to prevent the flooring from being pulled — or require the flooring lender to continue to lend without onerous restrictions, as the dealer did in Colonial Ford Inc. v. Ford Motor Co. (1975). In that case, the court weighed the relative harm and decided that it favored the dealership because “between 70 and 73 employees and their families would be immediately affected if the dealership was not able to continue operations.” 

As these cases make clear, the degree to which a dealer has leverage to stop or delay the termination of its flooring depends on the facts of each case. For this reason, it is imperative that a dealer involve counsel at the first suggestion by its lender that it is out of compliance with the terms of its flooring contract.

Counsel may determine that what the flooring lender is complaining about is not a material term of the agreement and does not justify termination of flooring, and then attempt to work out a compromise with the lender. Counsel involved earlier in the dispute can also identify the facts that form the basis for a claim against the flooring lender. And when the time is right to play hardball, counsel will be ready to present the facts and law to the lender.

Being prepared for such a show of force can be the difference between the dealer that survives a dispute with its flooring lender, and the dealer that does not. While any dealer would feel vindicated by securing a $250 million judgment, if at all possible, most would rather avoid several years of litigation and losing the businesses they worked so hard to build.

Author Christian Scali and Jade Jurdi are attorneys with the Scali Law Firm, recognized by the Daily Journal as California’s top boutique automotive law firm. Contact them at christian.scali@bobit.com and jade.jurdi@bobit.com.

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