Opinion
98 Civ. 5566 (CM).
March 18, 2002.
AMENDED FINDINGS OF FACT, CONCLUSIONS OF LAW AND VERDICT
The Court, for its findings of fact, conclusions of law and verdict after bench trial:
Introduction
In April 1999, this Court denied plaintiff's motion for a preliminary injunction (sought on multiple grounds). The opinion is printed at 47 F. Supp.2d 451 (S.D.N.Y. 1999). Familiarity with that opinion is assumed. It will be referred to throughout as the "PI Opinion," or "PI Op."
A repeated motif of the PI Opinion is that plaintiff and defendant are parties to an outmoded contract that was drafted in the context of, and for the conduct of, a much less complicated commercial relationship than the one they now (I shudder to use the word) "enjoy." I urged the parties at the time the PI Opinion was issued, and have urged them repeatedly since, to renegotiate their Distributor's Agreement ("DA") in order to conform their 19th Century contractual undertakings with the realities of running a 21st Century business. To my great regret, the parties to this long-running dispute between supplier and franchised distributor have not been able to come up with a workable contract. Accordingly, we found ourselves at trial.
The trial that has just concluded was not, however, the trial that would have followed hard on the issuance of the PI Opinion. Instead of using the overly-long mediation period between April 1999 and now to construct a viable long-term working relationship, each side to this dispute has made new demands, grounded on the reasoning of the PI Opinion, all before there was any final adjudication about either: (1) the meaning of key terms of the DA; or (2) the other issues raised in the preliminary injunction motion. Had I realized that Subaru Distributors Corp. ("SDC") and Subaru of America ("SOA") were not engaged in efforts to resolve their differences amicably, I would have forced them to a quick trial. Then, at least, they could have revised their rules of engagement to conform to a final and binding opinion.
The parties did go to mediation with an outside mediator. However, given the amount of commercial maneuvering in which the parties have engaged in order to put themselves in their present, highly contorted business posture — including agreeing to a contractual provision that contemplates a court challenge — I find it impossible to believe that their hearts and minds were genuinely fixed on reexamining their relationship, redrafting their contract, and resolving this case.
On the flip side, it seems that many of the issues I adjudicated preliminarily have evaporated. Let me, then, outline what issues are being tried in this action, and deem the complaint amended to conform to the proof presented.
Old Issues that Still Remain in the Case
I. Does the 15% "default quota" provision of Article 7(3) of the DA violate either Section 1222 of the Federal Automobile Dealers' Day In Court Act ("ADDCA"), or Sections 463(1) and (2)(b) of New York's analogous statute, the Franchised Dealer's Act ("NYFDA")?
(A) Is SOA constitutionally subject to the NYFDA?
(B) Is SOA subject to the ADDCA?
(C) Are the quota provisions of the distributor agreement enforceable?
(D) Has the quota lapsed?
II. If SOA is subject to the NYFDA, does that statute (or any other statute) bar SOA from compelling SDC to order a "reasonable mix" of make and models of Subaru vehicles?
New Issues that have Arisen Since April 1999
III. The "Acceptable Letter of Credit" Issues:
(A) Is it commercially reasonable for SOA to demand the return of negotiable bills of lading ("NBOLs") delivered by SOA to SDC's bank consortium in order to obtain payment for the vehicles while in transit, so that SOA can import the vehicles as required by the DA?
(B) Should SOA be mandatorily enjoined to cooperate with SDC in obtaining a definitive ruling from the United States Customs Service concerning whether SOA can serve as the "importer of record" for the vehicles, notwithstanding the fact that SOA insisted on being paid for the vehicles while they were in transit, and thus passed title to SDC prior to actual importation?
Both of these issues hinge on the Court's final interpretation of a critical provision of the DA. The question is whether I should revise my preliminary conclusion that it is commercially reasonable for SOA to demand that SDC post letters of credit that can be drawn down while the vehicles SOA sells to SDC are in transit. This issue — which was briefed and decided on a preliminary basis in 1999 as a pure question of commercial law — now has a byzantine factual context surrounding it, as a direct result of changes the parties made in their letter of credit practices after the PI Opinion was issued. Evidence on this point was the most important at the trial, and answering these two questions is the key to disposing of the entire case.
IV. Is SDC entitled to damages for:
(A) $50,000 it expended in order to get a month's extension on the deadline for posting a new form of letter of credit acceptable to SOA in the post-PI Opinion world?
(B) damages associated with SOA's early drawdown on SDC's letters of credit issued in connection with shipments of vehicles from Japan prior to November 2001?
(C) some amount to recompense SDC for SOA's refusal to honor SDC's orders for "additional cars'" (otherwise known as non-quota cars) that were placed at the end of 1999 and early in 2000? These orders were admittedly not placed in conformity with a new system for ordering "additional cars" that SOA announced almost as soon as the ink was dry on the PI Opinion.
V. Other Contract Interpretation Issues:
(A) Under the Distributor Agreement § 9(6), is SDC entitled to designate the port of entry at which SOA is required to deliver vehicles to SDC?
(B) Can SOA prevent SDC from reselling vehicles after their delivery to SDC, even though SOA has not yet drawn down on SDC's letter of credit in payment for such vehicles?
(C) When must SOA reject orders placed by SOA and what are the consequences of rejection?
BACKGROUND FACTS:
Subaru Distributors Corp. ("SDC") is a New York corporation with its principal place of business in Orangeburg, New York. Subaru of America, Inc. ("SOA") is now a New Jersey corporation with its principal place of business in Cherry Hill, New Jersey. SOA was originally incorporated in 1968. SOA was then a Pennsylvania corporation and did not become a New Jersey corporation until 1977.
Beginning in 1976, Fuji Heavy Industries Ltd. ("Fuji") was the largest shareholder in SOA, but it did not own 50% of the outstanding common stock of SOA until 1990. On August 31, 1990, Fuji purchased all of the outstanding shares of SOA. Fuji did not control SOA's policies regarding its independent distributors, including SDC, nor determine their quotas.
SOA does not manufacture Subaru vehicles. Until late 1989 or early 1990, all Subaru vehicles were manufactured in Japan by Fuji. Beginning in late 1989 or early 1990, some Subaru vehicles were assembled in Indiana at a plant owned by Subaru-Isuzu Automotive, Inc. ("SIA") largely from components manufactured in Japan. SIA is a joint venture between Fuji and another automobile manufacturer.
In January, 1975, SOA and SDC entered into the Distributor Agreement ("DA") (DX 1). SDC made no payment to SOA for the right to become SOA's exclusive distributor in New York and northern New Jersey.
SOA currently has two distinct distribution channels. The first channel consists of SOA's two independent distributors, SDC and Subaru of New England, Inc ("SNE"). In those areas of the country where SOA has an independent distributor, SOA sells vehicles to the independent distributor that, in turn, resells the vehicles to authorized Subaru retail dealers located in its territory. The second channel consists of SOA's "regions." The regions, unincorporated divisions of SOA, perform much of the same general functions as the independent distributors, but in different areas of the country.
The Distributor Agreement
The DA is a contract that anticipates that there will be multiple and repeated occasions for performance by both SOA and SDC. SDC orders cars on a monthly basis and cars are delivered to SDC by SOA on multiple occasions during any particular month. Insofar as is immediately relevant, the DA (DX 1), as amended, provides as follows:
(a) According to Article 12(1), the Agreement "shall continue in effect for one year and shall thereafter automatically be renewed for a perpetual number of one year terms. . ."
(b) Article 2, subject to the exclusive rights of SOA in Article 3, provides that SOA "will not grant any wholesale distributorship to any other party nor will it sell directly to any retail dealer who is located in the Territory without Distributor's consent. . ."
(c) The "Territory" is defined as New York State and northern New Jersey.
(d) Under Article 4(2), SDC "assumes the responsibility for the promotion, sale and service of [Subaru] Products within the Territory."
(e) Article 5(3) provides that there shall be no change in the beneficial ownership or executive power or responsibility of the designated owners and officers of SDC without SOA's prior written consent, which is not to be unreasonably withheld.
(f) Article 7(3) provides that "in each contract year Distributor shall purchase the minimum number of Cars set forth on Exhibit `B' hereof." Exhibit B established the quota for the first five years as well as providing the mechanism for establishing future quotas:
Additional yearly quotas for the years after the fifth year shall be negotiated by the parties hereto three months prior to the end of the then current year. In the absence of an agreement between the parties hereto at the end of the fifth year, the quota shall automatically increase by Fifteen (15) percent of the last year's quota, and shall continue to do so for such yearly quotas as may follow.
(g) Article 7(3) also provides that SDC shall each month of the year place an order equal to 1/12 of its quota, each order to "be accompanied by a domestic irrevocable Letter of Credit acceptable to Importer, in favor of Importer." Prior to 1996, SDC sought SOA's approval each time that it wished to change the form of the letter of credit then being used. (DX 13, 15, 60, 79.)
(h) According to Article 7(3), the next quota order is due "within seven days after each Letter of Credit becomes an acceptance. . ." The parties dispute the meaning of the word "acceptance." None of the letters of credit posted by SDC during the 26 years of its relationship with SOA have provided for any form of banker's acceptance financing, but instead all of those letters of credit have called for payment at sight.
(i) Article 9(1) provides, in part, that SOA "shall sell [Subaru] Products to Distributor at such prices and upon such terms as may be established from time to time by Importer."
(j) Article 9(2) deals generally with the ordering procedure and, in particular, when vehicles are to be delivered and orders to be accepted or rejected:
Distributor shall furnish its orders for [Subaru] Products to Importer on the form supplied by Importer from time to time. Such orders shall be for delivery to Distributor during such period or periods as Importer may from time to time indicate, and all such orders may be accepted by Importer in whole or in part . . . Except as otherwise expressly provided in paragraph 1 of this Article 9 [which deals with increases in price], all orders of Distributor shall be binding upon it unless and until they are rejected in writing by Importer, provided, however, that in the event of a partial acceptance by Importer, Distributor shall no longer be bound with respect to the parts of the order not accepted. Article 9(4) governs when payment is to be made on all orders other than
(k) orders for quota cars:
For all purchases made in addition to those made pursuant to Article 7, paragraph 3 of this Agreement, payment of the full purchase price in actual cash or by delivery of approved check, irrevocable Letter of Credit or any acceptable floor planning guarantee shall be made by Distributor at the time Distributor places its order for [Subaru] Products with Importer. The Distributor Agreement contains no provision requiring that SOA
(l) extend credit to SDC. According to the September 1981 amendment to paragraph 5 of Article 9
(m) (DX 19):
Title to the [Subaru] Products shall remain with Importer and Importer shall have the right to retake and resell the [Subaru] Products sold until Importer shall invoice the [Subaru] Products to Distributor and shall have received good collected funds in payment of the full purchase price thereof. According to Article 9, paragraph 7, risk of loss passes from SOA to SDC
(n) "from the time of . . . delivery to Distributor, Distributor's agent, warehouse or carrier, at the port of entry designated by Importer . . ."
The initial place of delivery is specified in Article 9(6), which also deals
(o) with transportation costs, customs duties and excise taxes:
The port of entry shall be BALTIMORE, or any other port location which is approved in writing by Distributor. Importer shall [be] responsible for all costs incurred to transport [Subaru] Products to said port including customs duties and excise taxes. . .
SDC has approved Boston as the port of entry.
(p) Article 9, paragraph 13, absolves SOA from "any liability whatsoever to Distributor for failure to deliver under, or for delay in making delivery pursuant to, orders of Distributor accepted by Importer" unless that failure is the result of SOA's "willful misconduct."
(q) According to Article 15, paragraph 2, the Distributor Agreement is an integrated contract:
This instrument contains the entire agreement between the parties. No representations or statements other than those expressly set forth herein were made or relied upon in entering into this Agreement. Article 15, paragraph 9, contains the following waiver language:
(r) The waiver by either party of any breach or violation of or default under any provision of this Agreement shall not be a waiver of such provision or any subsequent breach or violation thereof or default thereunder.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
I. The 15% "default quota" provision of Article 7(3) of the DA does not violate either Section 1222 of the Federal Automobile Dealers' Day In Court Act, (ADDCA), or Sections 463(1) and (2)(b) of New York's analogous statute, the Franchised Dealer's Act.
A. SOA is Constitutionally Subject to the New York Franchised Dealers' Act, because there have been material amendments to the DA since that statute was enacted.
SDC is, and at all relevant times has been, a registered dealer under § 415 of the New York Vehicle and Traffic Law. (PX 310.) SDC is, and at all relevant times has been, a "franchised motor vehicle dealer" under the provisions of the New York Dealer Act. N Y Veh. Traf. Law § 462(7).
SOA is, and at all relevant times has been, a "franchisor" under the provisions of the New York Dealer Act. N.Y. Veh. Traf. Law § 462(8).
The Distributor Agreement is a "franchise" under the New York Dealer Act, which applies to the relationship between SDC and SOA thereunder. N.Y. Vehicle and Traffic Law § 462(6).
In late 1989, SOA began selling to the retail Subaru dealers in its wholly-owned wholesale territories Subaru-brand vehicles that were assembled in a plant located in Lafayette, Indiana that was owned 51% by Fuji and 49% by Isuzu, another Japanese vehicle manufacturer, through an entity known as SIA ("SIA vehicles"). (Stipulated Facts ¶ 9.) The SIA vehicles were assembled from components manufactured by Fuji and shipped from Japan to the plant in Indiana.
The DA as originally drafted defined the terms "Cars" as "Subaru vehicles." It described SOA as the "Importer." Prior to October 1989, SOA contended that SIA-produced vehicles were not covered by the Distributor Agreement, even though they bore the Subaru brand name, because they were not "imported." Beginning in late 1989 or early 1990, SOA refused to sell SIA vehicles to SDC unless and until the Distributor Agreement was specifically amended to include SIA vehicles. SOA withheld SIA vehicles from SDC until October 1990. (Butler Stmt ¶¶ 81-82, 85, 90.) SOA also withheld SIA vehicles from SNE during the same time on the same basis. (PX 113.)
SDC disputed SOA's contention that SIA vehicles were not covered by the DA's definition of the term "Car." However, Robert Butler, the Chairman of SDC, was troubled by SOA's position and feared that a hyper-technical reading of the term "Car" in the DA might be used against SDC's interests in the future. Therefore, after SOA tendered to SDC proposed amendments to the Distributor Agreement that covered SIA vehicles, SDC proposed a different form of amendment, which covered not only SIA vehicles, but all Subaru brand vehicles and even non-Subaru brand vehicles that were distributed by SOA through authorized retail Subaru dealers — whether manufactured by Fuji, SIA or any other manufacturer or source. (Butler Stmt. ¶ 85.)
By letter dated July 9, 1990 from SOA's Chairman, Harvey Lamm, to SDC's Chairman, Robert T. Butler, Mr. Lamm stated that the scope of SDC's proposed amendment was "material" and therefore required Fuji's approval. (PX 126; PX 127.)
By a document titled "Memorandum of Understanding" and dated September 14, 1990 ("the 1990 Amendment"), embodying SDC's essential proposal, SOA agreed to sell to SDC, and authorized SDC to distribute to its authorized Subaru dealers, not only SIA vehicles but all Subaru brand vehicles and non-Subaru brand vehicles distributed by SOA, whether manufactured by Fuji, SIA or any other manufacturer or source, through authorized retail Subaru dealers. (Butler Stmt. ¶¶ 80, 90; Gibson Dep. at 146:6-21; PX 130.) In paragraph 6 of this document, the parties clarified that the MOU constituted an "amendment" to the DA.
SDC did not receive its first shipment of SIA vehicles until October 19, 1990, which was after the MOU was signed.
Had the original DA covered SIA-produced vehicles, SOA could not lawfully have withheld those vehicles from SDC prior to the signing of the MOU. Thus, SOA's conduct prior to the signing of the MOU is consistent with Lamm's statement to Butler that the scope of SDC's proposed amendment was "material."
Assuming arguendo that SDC was correct back in 1989 and 1990 that SIA- produced vehicles bearing the Subaru name were "Subaru vehicles," the MOU expanded the term "Cars" to cover cars that did not carry the Subaru brand name, as long as they were distributed through Subaru channels via SOA. This constituted a material amendment to the definition of the word "Cars" as used in the DA.
Shortly after the MOU was signed, SIA became the sole source of Subaru Legacy vehicles for distribution by SOA in the United States and today remains the sole source of such vehicles, including the popular Outback model. For many years, SIA vehicles have constituted between 50% and 60% of the total number of vehicles delivered by SOA to SDC and sold by SOA in the United States. (PX134; PX 140; PX 143; PX 145.)
Hence, the 1990 Amendment constituted a material amendment to the Distributor Agreement after the effective date of the New York Dealer Act. SDC, 47 F. Supp.2d at 459 n. 3.
The New York Dealer Act may be constitutionally so applied notwithstanding any prohibitions or requirements of the Contract Clause (Article 1, Section 10, Clause 1) and the Commerce Clause (Article 1, Section 8, Clause 3) of the United States Constitution. Id.
B. SOA is Subject to the Federal Automobile Dealers' Day in Court Act
The parties do not dispute that SOA is subject to the ADDCA. Therefore, I make the following findings: SDC is, and at all relevant times has been, an "automobile dealer" under the provisions of the Dealer's Day In Court Act (the "Federal Dealer Act"). 15 U.S.C. § 1221(c).
SOA is, and at all relevant times has been, an "automobile manufacturer" under the provisions of the Federal Dealer Act, because it acts for and is under the control of the statutory manufacturer of Subaru vehicles, Fuji, in connection with the distribution of those vehicles. 15 U.S.C. § 1221(a).
The DA is a "franchise" under the Federal Dealer Act. 15 U.S.C. § 1221(b).
C. The Quota Provisions Of The Distributor Agreement Are Enforceable
(1) What is the Quota?
The cornerstone of the Distributor Agreement is SOA's grant to SDC of a perpetual exclusive distributorship of Subaru vehicles in New York and northern New Jersey in exchange for SDC's obligation to agree to an annual purchase commitment — or quota — of Subaru vehicles.
A ommercially reasonable annual quota is consistent with the UCC and the Federal and New York Dealer Acts. Carroll Kenworth Truck Sales, Inc. v. Kenworth Truck Co., 781 F.2d 1520 (11th Cir. 1986); Clifford Jacobs Motors, Inc. v. Chrysler Corp., 357 F. Supp. 564, 574 (S.D.Ohio 1973); Victory Motors v. Chrysler Motors Corp., 357 F.2d 429 (5th Cir. 1966). Moreover, there is no requirement that a quota be mutually agreed upon. Indeed, both Carroll Kenworth Truck Sales and Victory Motors involved unilaterally determined quotas.
At times, the quota described in Article 7(3) of the DA has been characterized as a "15% quota." This is something of a misnomer. Article 7(3) of the DA provides that "in each contract year Distributor shall purchase the minimum number of Cars set forth on Exhibit `B' hereof." Exhibit B states that "[a]dditional yearly quotas for the fifth year shall be negotiated by the parties hereto three months prior to the end of the then current agreement. In the absence of an agreement between the parties . . . the quota shall automatically increase by Fifteen (15) percent of the last year's quota . . . ." (emphasis added).
Thus, as set forth in the four corners of the document, the quota shall be negotiated by the parties. It is only in those circumstances where the parties fail to agree that the quota in effect "self-perpetuates" by increasing by 15% (which makes it a 115% quota). The 15% provision is a contingency only if the required good faith negotiations fail to result in an agreement.
(2) Procedure for Determining the Quota and the Parties' Respective Obligations
SOA's right to propose an annual quota is circumscribed by standards of commercial reasonableness and good faith. U.C.C. §§ 1-201(19) and 1-203. See also, Designers North Carpet, Inc. v. Mohawk Indus., Inc., 153 F. Supp.2d 193, 196 (E.D.N.Y. 2001). Once SOA has proposed an annual quota, SDC has a corresponding obligation to respond in good faith. If SDC challenges the quota proposed by SOA, it bears the burden of proving that the proposed quota is unreasonable. Milos v. Ford Motor Co., 317 F.2d 712, 718 (3d Cir.), cert. denied, 375 U.S. 896 (1963).
In any given year, a wide variety of factors can be taken into account by SOA in determining a commercially reasonable quota. See, e.g., Carroll Kenworth Truck Sales, Inc. v. Kenworth Truck Co., 781 F.2d 1520 (11th Cir. 1986) (holding that quota was reasonable where manufacturer considered various industry projections for the nation, historical sales in the dealer's territory, dealer's market penetration); Clifford Jacobs Motors, Inc. v. Chrysler Corp., 357 F. Supp. 564, 574 (S.D.Ohio 1973) (finding quota reasonable where Chrysler adjusted the quota figure to take into account the local conditions of the sales area); Victory Motors of Savannah, Inc. v. Chrysler Motors Corp., 357 F.2d 429, 431-32 (5th Cir. 1966) (holding that manufacturer's quota requirements were not coercive where they were self-adjusting to take account of economic conditions).
Assuming that SOA has complied with its good faith obligations, SDC is equally obliged to abide by the UCC's standards of good faith and commercial reasonableness. If SOA offers a commercially reasonable quota and SDC responds in kind, but a quota agreement does not result, then the DA establishes the quota at 115% of the previous year's quota.
(3) The Quota is of the Essence of the Distributor Agreement
The structure of the quota system was demanded by SOA as a condition for granting to SDC (and the other distributors who signed similar agreements) a perpetual and exclusive distributorship. I find that SOA would not have entered into the DA without the entirety of the quota provision's being accepted by SDC, including the default quota provision. Tarbert Trading, Ltd. v. Cometals, Inc., 663 F. Supp. 561, 569 (S.D.N.Y. 1987) (the test for essentiality is whether the contract would have been entered into without the provision). This was communicated to Robert Butler, who negotiated the DA on behalf of SDC, prior to the signing of the DA. (Sanyour.)
Absent a default mechanism that insures an annual quota requirement, SDC's obligation under Article 7(1) of the DA would lack any practical meaning. Under Article 7(1), SDC must utilize its best efforts to promote the entire Subaru vehicle line. Given that SOA is, as a practical matter, precluded from marketing Subaru vehicles in New York and northern New Jersey because of SDC's exclusivity rights, it is the DA's annual quota that ensures SOA that SDC will abide by its contractual obligation to utilize its best efforts to promote the entire Subaru vehicle line. Thus, the quota, including the default provision, is of the essence of the agreement.
(4) The Quota is not Invalid on its Face
a. There is No Punitive Result
SDC contends that the 15% default provision must be stricken because it could create a punitive result (i.e. it would create a geometric progression in the size of the quota, until it would not be economically possible for SDC to pay for or dispose of the number of cars required).
SDC cites Madsen v. Chrysler Corp., 261 F. Supp. 488 (N.D.Ill. 1967), vacated as moot, 375 F.2d 773 (7th Cir. 1967), in support of its argument. In that case, the franchised dealer of Plymouth automobiles had a minimum sales responsibility ("MSR") based on Plymouth's market share in the region. The MSR was essentially a promise to maintain the percentage of Plymouth sales out of the total new car sales in the region. Since the figure was an average of all of the sales in the dealer's region, at any given time, some dealers would be selling more cars than the average and some would be selling fewer. Hence, at all times, a substantial number of dealers were technically in default. The Madsen court found the MSR to be arbitrary, coercive and unfair because it was calculated without reference to factors other than the sales of other dealers in the region. 261 F. Supp. at 506.
Many other courts, however, have found MSR requirements similar to the one in Madsen to be fair and reasonable. See e.g., Victory Motors of Savannah, Inc. v. Chrysler Motors Corp., 357 F.2d 429 (5th Cir. 1966); Sam Goldfarb Plymouth, Inc. v. Chrysler Corp., 214 F. Supp. 600 (D.C. Mich. 1962); Milos v. Ford Motor Co., 206 F. Supp. 86 (D.C. Pa. 1962); Leach v. Ford Motor Co., 189 F. Supp. 349 (D.C. Cal. 1960). Furthermore, SDC's quota requirement is quite different from the MSR requirements, in that it is designed to be negotiated by the parties rather than dictated by the franchisor. The parties are obligated to negotiate this contract in good faith, and the evidence suggests that SOA has always abided by that requirement — even to the point of substantially reducing the quota in hard economic times. The 115% quota is a default only if those negotiations fail. The duty to negotiate an annual quota in good faith offers SDC protection against a geometric increase in the minimum number of cars it is obligated to purchase from SOA each year. Thus, this Court is not persuaded by SDC's citation to Madsen, and finds that the 15% default provision is not punitive.
b. The Quota Is Not Inherently Coercive or Unreasonable
SDC does not challenge directly SOA's right to have a DA with an annual quota commitment. However, SDC maintains that the 15% self-perpetuating mechanism is inherently coercive or otherwise unreasonable.
The inclusion and enforcement of the 15% default provision in the DA does not constitute a per se violation of either the ADDCA or the NYFDA. 15 U.S.C. § 1222-1225; N.Y. Veh. Traf. Law § 463(1). Both Dealer Acts were enacted to protect dealers from post-contractual opportunism on the part of the automobile manufacturers. That is, historically, once the parties had entered into a dealership agreement, and the dealer had invested significant amounts of capital, the manufacturer possessed a certain amount of "power" over the dealer, and often used this power to extract (i.e., coerce) concessions from the dealer that were not agreed to or anticipated in the parties' agreement. Indeed, the legislative history of the New York Dealer Act explains:
In reality, the motor vehicle dealer who frequently has millions of dollars invested in dealership real property, equipment and good will can do nothing to oppose the will of the manufacturer without jeopardizing this substantial investment. This bill seeks to provide certain basic protections for the dealer in areas where such protection is deemed necessary.
New York State Assembly, Memorandum in Support of Legislation, Senate Bill 5399-A, 1983.
The effort to protect dealers or other types of franchisees from the perceived threat of post-contractual opportunism on the part of manufacturer/franchisors is not new. Indeed, a line of antitrust cases dealing with franchise relationships has sought to protect franchisees from the exercise of post-contractual "market power" (an antitrust equivalent of coercion) by the franchisor once the franchisee has invested significant capital into the franchise. See Benjamin Klein, Market Power in Franchise Cases in the Wake of Kodak: Applying Post-Contract Hold-Up Analysis to Vertical Relationships, 67 Antitrust L.J. 283 (1999).
For example, in Queen City Pizza v. Domino's Pizza, 124 F.3d 430 (3d Cir. 1997), cert. denied, 523 U.S. 1059 (1998), the franchisees claimed that franchisor Domino's coerced them into buying pizza ingredients from certain suppliers by conditioning such sales upon the purchase of Domino's pizza dough. However, Domino's franchisee purchasing requirements were expressly set forth in the franchise agreement that all of the franchisees signed. Id. at 440. The franchisees entered into their agreements with Domino's at their own free will — Domino's did not have any power to "coerce" the franchisees into entering into the franchise agreement and did not change the terms after execution of the agreements. Id. at 441.
As found previously, SDC founder and attorney Robert Butler was specifically aware of the DA's quota clause and its default 15% provision and nonetheless executed the Agreement. SDC had not invested any money in its Subaru distributorship prior to entering into the DA. If SDC did not like the terms, it simply could have walked away. It did not. Mr. Butler was not coerced or intimidated into executing the agreement — in fact, years later, Mr. Butler inquired into acquiring another Subaru distributorship. (DX 26.)
Accordingly, SDC cannot now complain that SOA's exercise of this express and unchanged provision is "coercive," or lacking in "good faith."
c. Striking the Quota Provision would be Fatal to the Contract
SDC argues that striking the 15% default quota provision would not be fatal to the contract, despite the Court's finding that the contract would not have been entered into in the absence of that provision. SDC contends that striking the 15% default provision would not go to the essence of the contract because Article 7(3) of the DA authorizes SOA to set a reasonable quota without reference to Exhibit B of the DA (which contains the 15% default provision) pursuant to May Metropolitan, 290 N.Y. 260, 49 N.E.2d 13 (N.Y. 1943).
This court disagrees.
First, there is no language in Article 7(3) that expressly authorizes SOA to set — unilaterally — a reasonable quota in that reference to Exhibit B of the DA. Indeed, the concept of the "annual minimum" (which is the quota) never appears in Article 7(3) except in connection with a reference to Exhibit B.
Second, May Metropolitan is inapposite here. May Metropolitan stands for the proposition that a contract which obliges parties to negotiate a new quota each year is more than an "agreement to agree." 290 N Y at 264-65. It does not follow, however, that the contract in this case would stand without the 15% default quota provision.
In May Metropolitan, plaintiff was a distributor of defendants' oil burning heating equipment. The 1929 franchise agreement between the parties specified that the:
Dealer shall have the privilege of renewing this agreement from year to year, provided he has lived up to all terms of his agreement. If the Company and the Dealer cannot agree as to the quota for subsequent years, a third party may be called in to decide what this quota shall be, with the understanding however, that the quota shall not be for a lesser amount than previously contracted for from year to year.
Id. at 263. For several years the parties were able to agree on a quota. However, in 1937, plaintiff asked that the year's quota increase from 100 oil burners to 150. Defendant insisted on increasing the quota to 250 units. Id. at 260. Plaintiff found this request to be unreasonable and did not consent, whereupon defendant did not seek third party resolution of the issue, it simply refused to renew their agreement. Id. at 260-61.
The lower courts issued judgment for defendant on the pleadings, because it viewed the automatic renewal clause as an unenforceable "agreement to agree." Id. at 264. The Court of Appeals, however, found that the contract was more than an "agreement to agree," and that plaintiff had stated a claim for breach of contract. Plaintiff pled that the usage and custom of the parties was that there should be an annual quota increase of no more than ten percent, and that the defendant could not impose an unreasonable increase in quota as a condition of renewal. Id. at 265-66. "In other words, the contracts as written do not negative an implication of reasonableness and good faith. If proof is available from which a standard of reasonableness can be worked out, such proof should be taken." Id. at 266 (citing Stern v. Premier Shirt Corp., 260 N.Y. 201, 183 N.E. 363 (1932)).
May Metropolitan concludes that a contract which contains a provision for negotiating quotas and a method for resolving impasses is valid and enforceable. The DA requires SOA and SDC to negotiate quotas and provides a method for resolving impasses. The only difference between the two contracts is the nature of the impasse resolution mechanism: there a third party arbitrator, here a default quota. May Metropolitan never addresses the propriety of the method used to break deadlocks and cannot be read to suggest that the one employed in this case is invalid.
To summarize: Article 7(3) provides, "In each contract year the Distributor shall purchase the minimum number of Cars set forth on Exhibit "B" hereof." The term "minimum" or "annual minimum" as used elsewhere in Article 7(3) at all times refers to the minimum number of Cars set forth in Exhibit B, and to no other minimum. The word "quota" appears nowhere in Article 7(3); it appears only in Exhibit B to the DA, to which reference in made in Article 7(3). If SOA proposes a commercially reasonable quota and negotiates with SDC in good faith, but does not reach a quota agreement with SDC, then the quota for the year under discussion should be 115% of the current year's quota, as provided by the DA.
Given that the Court has found that the quota provision goes to the essence of the contract SDC's argument that striking the 15% default provision would not be fatal to the contract, is not persuasive.
(5) The Quota is not Invalid as Applied
The ADDCA authorizes an automobile dealer or distributor to bring a cause of action against a manufacturer for failure to act in "good faith" in performing or complying with any of the terms or provisions of the franchise agreement, or in terminating, canceling, or not renewing the franchise with the dealer. 15 U.S.C. § 1222-1225. Lack of good faith does not mean simply unfairness or even breach of a franchise agreement; rather, it requires coercion or intimidation. If the manufacturer has an objectively valid reason for its actions, the plaintiff cannot prevail without evidence of an ulterior motive. Coffee v. General Motors Acceptance Corp., 5 F. Supp.2d 1365, 1380 (S.D.Ga. 1998); see also, American Honda Motor Co. Dealerships Relation, Litig., 941 F. Supp. 528, 566 (D.Md. 1996) (holding that lack of good faith must involve a wrongful demand which will result in sanctions if not complied with); McDaniel v. General Motors Corp, 480 F. Supp. 666, 676 (E.D.N.Y. 1979).
The NYFDA also provides an automobile distributor or dealer with a cause of action against an automobile manufacturer for its failure to act in "good faith" in performing 16 under the parties' agreement. N.Y. Vehicle and Traffic Law, § 463 et seq. The NYFDA and the ADDCA adopt the same standards for proving coercion and lack of good faith — actual coercion or intimidation. SDC, 47 F. Supp.2d at 465 n. 9; KH Kawasaki, Inc. v. Yamaha Motor Corp., 1998 WL 236204 at *2 (N.D.N.Y. May 7, 1998). Coercion under either statute requires: (1) a wrongful demand coupled with (2) the threat of or actual imposition of sanctions if the dealer does not comply with the demand. A demand requesting an action to which the dealer previously has agreed can in no sense be wrongful. Clifford Jacobs Motors, Inc. v. Chrysler Corp., 357 F. Supp. 564, 574 (S.D.Ohio 1973). The coercion or intimidation must be "actual;" that is, the mere feeling of coercion or intimidation on the part of the dealer is not sufficient. Empire Volkswagen, Inc. v. World-Wide Volkswagen Corp., 814 F.2d 90, 95 (2d Cir. 1987). Hard bargaining in franchise negotiations does not subject the manufacturer to liability under the ADDCA or the NYFDA, nor is a manufacturer prohibited from enforcing just and reasonable contract provisions, even though they may be burdensome to dealers. SDC, 47 F. Supp.2d at 465; General Motors Corp. v. MAC Co., 247 F. Supp. 723, 726 (D.Colo. 1965).
Insofar as SDC contends that the default provision violates the Dealer Acts as applied, there is no evidence that SOA has ever used the quota provision — including the default 15% clause — to coerce or intimidate SDC. SOA has never threatened to terminate SDC's perpetual franchise. Neither has it enforced its quota rights in such a way as to effectively put SDC out of business, and there is no credible evidence that it is likely to do so. The history of quota negotiations during the market downturn of 1987-1993 demonstrates that during times of economic slow down and the drop in demand for Subaru products, SOA lowered — and even excused — SDC's quotas accordingly. SOA has agreed to quota reductions that were greater than 15%. Between 1987 and 1991, SDC's quota fell from 21,000 cars to 9,000 cars. (DX 27, 44, 47, 48, 53, 57, 65.) In 1988 and 1989, the quota ultimately agreed upon by the parties was less than that which SDC initially proposed. (DX 35, 44, 47, 48, 53, 55.) Between 1992 and 1996, SOA did not seek to enforce any specific quota number. (Adcock ¶¶ 17-18.)
While the parties' senior executives have no trust in each other, personnel at the operations level have somehow managed to keep the SOA-SDC relationship going. I have every confidence that the parties — who have between them identified virtually every issue that they should consider in conducting a quota negotiation — are capable of coming to terms. Indeed, I note that SOA and SDC did in fact agree to a quota for 1999 and 2001. (PX 182, PX 304.)
Should there come a time when SOA changes its heretofore unvarying pattern of behavior, and begins to use the 15% default provision as a cudgel, SDC will be free to bring an action challenging that behavior as a violation of the Dealer Acts. However, such a complaint would need to be supported with substantial evidence of bad faith and economic duress on the part of SOA — not simply evidence of failure to reach an agreement after hard bargaining, even in times of economic distress. SDC and SOA need to excise litigation from their arsenal of negotiating techniques. The invocation of the 15% default quota provision, without substantially 17 more, does not constitute coercion within the meaning of the Dealer Acts.
(6) SOA has No Unilateral Right to Set a Quota of Less than the Default Quota
The parties have agreed on how the 15% default mechanism works. By its literal terms, it sets a new quota for year X+1 at 115% of the quota for year X whenever the parties are unable to agree on a quota for year X+1. That is, SOA cannot unilaterally set a quota for some number of cars that is less than 115% of the prior year's quota consistent with the literal language of the DA.
Nonetheless, SOA urges the Court to recognize that it can "waive" its right to insist on a full 15% increase in the absence of an agreement between the parties. Indeed, it argues that SDC has recognized this right, simply making such an argument relying on May Metropolitan Corporation v. May Oil Burner Corporation, 290 N.Y. 260, 49 N.E.2d 13 (N.Y. 1943).
There is no support for SOA's reading of Article 7(3) as providing SOA with a separate and independent right to set a reasonable quota unilaterally. As discussed above (pp. 10-11), the DA automatically defaults to 115% of last year's quota if no agreement is reached. If the DA did not provide a mechanism (or an enforceable mechanism) for setting new quotas each year, May Metropolitan might (and I emphasize MIGHT, not WOULD) provide a framework for the setting of a quota by default. However, in this particular case, unlike May Metropolitan, the DA does contain an explicit quota-setting mechanism that is both reasonable and workable.
Not only does SOA's assertion of a unilateral right to set a lower quota in the absence of an agreement fly in the face of the language of the contract, it undermines the balance of power between the parties. While SDC is currently challenging the 15% default provision, it is worth noting that the provision can work to SDC's advantage. SOA's argument presumes that the default quota exists only for its benefit, and that setting a lower number will necessarily be beneficial to SDC. However, in a rising market, the promise of a 15% increase in available vehicles from one year to the next provides SDC with important protection. If SOA could unilaterally decide to sell SDC fewer than 115% of last year's vehicles in a year when SDC wanted more, not fewer, cars, SOA's incentive to negotiate a new quota in good faith would be substantially compromised, and SDC would lose key leverage in its negotiating posture. Thus, the benefits of the default quota provision run both ways. So do the burdens: in a down economy, the 15% default provision gives both parties an incentive to come to terms on a lower number.
As SOA is in no position to waive SDC's rights under the default quota provision, I decline to adopt SOA's position that it can "waive its right" under the default quota provision without SDC's consent. May Metropolitan does not stand for the proposition that one party to a contract can unilaterally override an express provision of that contract at its own instigation.
Article 7(3) of the DA provides, "In each contract year the Distributor shall purchase the minimum number of Cars set forth on Exhibit "B" hereof." The term "minimum" or "annual minimum" as used elsewhere in the Article 7(3) at all times refers to the minimum number of Cars set forth in Exhibit B, and to no other minimum. The word "quota" appears nowhere in Article 7(3); it appears only in Exhibit B to the DA, to which reference in made in Article 7(3). If SOA proposes a commercially reasonable quota and negotiates with SDC in good faith, but does not reach a quota agreement with SDC, then the quota for the year under discussion should be 115% of the current year's quota, as provided by the DA.
D. The Quota has not Lapsed
SDC contends that the 15% default provision lapsed in or around 1986 because of SOA's refusal, at and since that year, to sign quota amendments to the DA in the particular form that SDC calls the "traditional form." I disagree.
The original Exhibit B to the DA set forth the monthly and yearly minimum car orders for the first through fifth years the DA was in force. It then provided, "Additional yearly quotas for the years after the fifth year shall be negotiated by the parties hereto three months prior to the end of the then current year. In the absence of an agreement between the parties hereto at the end of the fifth year, the quota shall automatically increase by Fifteen (15) percent of the last year's quota, and shall continue to do so for such yearly quotas as may follow. In any event the said quotas shall be subject to all the terms and conditions of this Agreement."
There is nothing in either Exhibit B or elsewhere in the DA that prescribes a form for amending Exhibit B to provide for new quotas after the fifth year of the contract. The first such agreement signed by the parties proves that any form will do, as long as it recites the quota number. In 1980, after several years of bickering about the terms of the quota agreement, SDC and SOA signed a letter agreement confirming the quota for 1978 (already two years in the past) and setting the 1981 quota at 10,901 cars. (PX 31.) This number was reached by application of the 15% default provision to the agreed-upon 1978 quota. The 1980 letter, which was signed by Mr. Butler, was not in the form of Exhibit B; it makes no reference to how the quota shall be negotiated for years following 1981 or to any 15% default provision for future years. Nor did the letter follow any "traditional form" (of which there was none, there being no linguistic or formulaic tradition for quota setting), in the sense that it did not track the language of Exhibit B to 19 the DA. Nonetheless, the parties clearly did not believe that either the quota obligation or any other provision of Exhibit B — including the 15% default quota setting mechanism — had lapsed. Their subsequent behavior permits no other interpretation.
The record does not contain any written document setting quotas for 1981-1983. In 1984 and 1985, SDC and SOA signed amendments to the DA that were deemed to substitute for and to become Exhibit B to the DA. These amendments set forth the quotas for the calendar years 1984 and 1985 (PX 48, PX 54.) Each of them was substantially in the form of the original Exhibit B. And significantly, each of them said, "In the absence of an agreement by means of negotiations, the quota shall automatically increase each year by fifteen (15) per cent of the last year's quota." (PX 48, PX 54.) Thus, SDC is not correct when it says that PX 54, the last of these agreements, by its terms applies only to the year 1985, and thereafter lapses. It includes the key provision of the original Exhibit B, which is that there be a perpetual default mechanism of 15%.
Between 1987 and 1991, SDC's quota was embodied in a series of agreements, none of which tracked the language of the original Exhibit B. (DX 27, DX 44, DX 47, DX 48, DX 53, DX 57, DX 65.) Each of these agreements set forth the quota for the year. They did not explicitly state that they were amending Exhibit B, as did the forms of agreement used in 1984 and 1985 (and in no other years). But neither did they state that they were superseding or replacing Exhibit B, or that Exhibit B had ceased to be a part of the DA. They simply set a new quota number — which, for those economically troubled years, went lower and lower, not higher and higher. The parties abided by those quotas — that is, SOA supplied SDC with the number of cars specified in the letters, and SDC bought those cars.
The subjective belief by Robert Butler, SDC's Chairman (and a lawyer) that he was getting away with something by insisting on either the language of the original Exhibit B or no language at all was, in this Court's opinion, erroneous. The failure to incorporate the 15% language in post-1985 quota-setting letters did not result in the elimination, or lapse, of the default provision. The last version of Exhibit B that was signed by the parties — the one that was signed in 1985 (PX 54) — clearly stated that the 15% default proviso was still in effect. That particular amendment, which by its terms applies to all future years in which a quota is not reached by agreement, has never been superseded, except as to the minimum number of cars to be purchased. That is to say, none of the subsequent quota-setting letters (DX 44, DX 47, DX 48, DX 53, DX 57, DX 65) purports to replace altogether the 1985 version of Exhibit B. It therefore remains in full force and effect, as modified from time to time by the next year's quota number.
To eliminate so critical a provision as the default quota mechanism — one that I have found to be of the essence of the contract — the parties would have to set forth affirmatively that it was being eliminated, and that they understood that it was being eliminated. It could not be eliminated by implication or inadvertence. There is no evidence that SOA thought it was 20 relinquishing its default quota provision by signing letters that set the quota without using the language of Exhibit B, and there is no evidence that SDC ever communicated this interesting legal position to SOA. Mr. Butler's secret subjective belief that he could eliminate the 15% default provision by being cute and saying nothing suggests that he was a better car dealer than lawyer.
It is true that for certain years (notably 1992 through 1996), SOA did not seek to enforce any specific minimum purchase quota. However, the failure by SOA to enforce its rights in those years does not cause those rights to lapse — a fact that SDC recognized when it agreed to quotas for the years 1999 and 2001. (PX 182, PX 304.) The DA contains a "no waiver" provision, Article 15(9). Under New York law, where an agreement contains a "no waiver" provision, a party's failure to insist upon strict compliance is not considered a waiver of his right to demand exact compliance. DeCapua v. Dine-a-Mate, Inc., 724 N.Y.S.2d 427, 429 (N.Y.App.Div. 2001). See also Bigda v. Fischbach Corp., 898 F. Supp. 1004, 1013 (S.D.N.Y.) aff'd, 101 F.3d 108 (2d Cir. 1996); Jacket House, Inc. v. Bank Leumi Trust Co. of New York, 503 N.Y.S.2d 941, 943 (N.Y.Sup. 1986); Towers Charter Marine Corp. v. Cadillac Ins. Co., 708 F. Supp. 612 (S.D.N.Y.), aff'd, 894 F.2d 516 (2d Cir. 1990); Society Brand Hat Co. v. Felco Fabrics Corp., 92 F. Supp. 499 (S.D.N.Y. 1950); Stein v. Westinghouse Elec. Corp., 140 N.Y.S.2d 605 (N.Y.Sup. 1955). To the extent that SOA waived its right to enforce a quota minimum, and SDC acquiesced (as it did in those years), SOA's position is protected by the no waiver clause.
II. SDC Has the Right to Demand Perfect Tender of Vehicles Ordered, but has the Obligation, in Accordance with its Contractual Duty of Good Faith, to Order those Vehicles in a Commercially Reasonable Manner.
The DA § 9(2) provides the following regarding SOA's acceptance and/or rejection of Quota Orders and Additional Orders:
Distributor [SDC] shall furnish its orders for SA Products [which includes Cars covered by Article 7, paragraph 3 and Article 9, paragraph 2] to Importer [SOA] on forms supplied by Importer [SOA] from time to time. Such orders shall be for delivery to Distributor [SDC] during such period or period as Importer [SOA] may from time to time indicate, and all such orders may be accepted by Importer [SOA] in whole or part. Such acceptance shall be valid only if made by notice in writing to Distributor [SDC]. Except as otherwise expressly provided in paragraph 1 of this Article 9 [which provides SDC with a right of cancellation if SOA raises prices for its vehicles after SDC has placed its order], all orders of Distributor [SDC] shall be binding upon it unless and until they are rejected in writing by Importer [SOA], provided, however, that in the event of a partial acceptance by Importer [SOA], Distributor [SDC] shall no longer be bound with respect to the parts of the order not accepted. (PX 4) (emphasis added).
Because SOA is subject to the NYFDA, SOA cannot compel SDC to purchase and/or accept vehicles from SOA that SDC did not order pursuant to its accepted Quota Order. New York recognizes the perfect tender rule, and does not permit SOA to force cars on SDC that it did not order. SDC, 47 F. Supp.2d 451. However, SDC, as Subaru's exclusive distributor for a high-density region of the Northeastern United States, cannot hide behind this rule to avoid ordering slower-selling Subaru vehicles. As its own executives recognize (Sammons), it is obliged to include in its quota orders a mix of models and colors. It would be commercially unreasonable for SDC to behave otherwise.
Thus, under the DA §§ 7(3) and 9(2) and UCC §§ 1-203, 2-103(b) and 2-311(2), SDC is required to order in its Quota Orders a mix of model codes and colors, determined in good faith and in a commercially reasonable manner, taking into account SOA's inability to distribute its product in New York and Northern New Jersey through anyone else.
III. The "Acceptable Letter of Credit" Issues.
A. SOA's Demand for Payment Before Delivery is Commercially Unreasonable.
The critical issue at trial was whether I should revise my previous conclusion that SOA's demand for a commercial letter of credit that provides for payment prior to delivery of the vehicles to SDC in the Port of Boston is commercially reasonable and, hence, permissible under the contract.
Let me begin by reviewing the conclusions I reached on this issue in the PI Opinion:
1. Nothing in the DA gives any explicit guidance about whether SOA may demand payment prior to tendering the vehicles for delivery: nothing specifically permits it and nothing specifically prohibits it.
2. Under the relevant provisions of the Uniform Commercial Code, notably § 2-606(1), as well as the Automobile Dealer Acts, SDC has the right to inspect cars tendered for delivery by SOA and the right to reject non-conforming vehicles.
3. It does not vitiate those rights for SOA to demand payment prior to tendering delivery — notwithstanding UCC § 2-507(1) (which provides that tender of delivery is a condition precedent to a buyer's duty to pay for goods unless otherwise agreed by the parties). Assuming that a request for drawdown prior to delivery is commercially reasonable, the provision of the DA that gives SOA the right to a letter of credit "acceptable to SOA" brings any demand for early payment within the "unless otherwise agreed" language of the Code.
4. Payment before tender is commercially reasonable. Indeed, the "unless otherwise agreed" language was included in § 2-507 primarily to address cases in which a letter of credit term is included in the parties' agreement, as is the case here.
5. UCC § 2-513(3) establishes that a buyer is not entitled to inspect goods before payment when the underlying contract provides for payment against documents of title. This protects the issuer from becoming embroiled in a dispute over whether goods conform to underlying contractual obligations.
These findings were made on the basis of the information and arguments presented back in 1998 and early 1999. SDC insisted that SOA's demand was improper because payment before delivery would impair its right to inspect the cars prior to payment. The DA afforded no such right; neither did the UCC. Indeed, the UCC suggested that there was no such right. Thus, it was fairly easy for the Court to conclude that SOA had the better of the argument then presented.
My conclusions remain sound insofar as they apply to SOA and SDC's dealings concerning the SIA-produced cars, which are manufactured and shipped wholly within the United States, and which do not involve SOA in its role as "Importer" under the DA. Fortunately, it appears that SOA and SDC have a harmonious relationship where these domestic automobiles are concerned. shipping time from Indiana to Massachusetts is so short that it would apparently be too costly for SOA to tinker with the mode of payment and delivery currently in use.
"Harmonious" may be too strong a word. See Section V, infra.
Moreover, my earlier conclusions remain sound in the context of what SDC's banker, Peter Killea, called a "traditional" import letter of credit transaction. In a traditional transaction, a foreign supplier loads goods onto a boat, waves goodbye as it sails off, presents his documents to the issuer of the letter of credit, gets paid, and is never seen again (which is to say, the supplier has nothing more to do with the transaction). If SOA loaded cars onto a boat in Yokohama, waved goodbye, presented its documents to Chase (SDC's bank), got paid on its letter of credit, and had nothing more to do with those particular cars, I would have no reason to revisit my interpretation of the letter of credit provision of the DA insofar as they apply to the Cars manufactured by Fuji and shipped to SDC from Japan.
But I do have reason to revisit this issue, because the SOA/SDC import arrangements do not conform to the traditional model. The DA makes SOA, not SDC, the Importer, and imposes upon SOA the obligations of an importer, including the obligation to ship the vehicles to the United States, to pay all costs of shipping and all duties, and to retain all risk of loss to the vehicles during shipment. (DA, Art. 9(6) and (7)). Once I made my (preliminary) decision that SOA could demand payment prior to delivery, the parties put flesh on that ruling by creating a byzantine commercial relationship that appears to be sui generis in the annals of automobile importation. So it is against a wholly different backdrop — one woven out of the PI Opinion — that I must now determine whether I was right in the first place. I conclude that I was wrong.
One of the more interesting things I learned at this trial is that the automobile industry has drifted away from the independent distributor arrangement that SOA has with SDC and SNE. Indeed, SOA's expert Evan Hirsch testified that SDC and SNE are two of only four independent distributors still in existence. (DX 236.) Thus, SDC is a dinosaur in its industry — and will continue to be so, since the DA runs in perpetuity. This explains at least some of the parties' difficulties.
In April 1999 — within days after the Court issued the PI Opinion — SOA presented SDC with a formal demand that it accompany its quota order for August, 1999 (to be placed in June 1999) with the letter of credit that gave it the right to present for payment prior to the arrival of the cars in Boston. Specifically, SOA demanded that each Quota Order placed by SDC be accompanied by a separate DLC conforming to the sample annexed to the April 1999 Noonberg Letters, i.e., one that was sufficient to cover the cost of all vehicles ordered and providing that SOA could draw down on that DLC "immediately after [its] submission to SOA." (PX 195.)
The April 1999 Noonberg Letters further demanded that SDC provide SOA, by June 1, 1999, with conforming DLCs to replace all outstanding letters of credit that SDC had previously provided to SOA in support of Quota Orders and non-quota orders, and that thereafter SDC must provide conforming DLCs in connection with all future orders. (PX 195.)
Immediately after receiving and reviewing SOA's demands, SDC provided copies of the April 1999 Noonberg Letters, along with SOA's proposed DLC form, to SDC's long-term lender, then known as Chase Manhattan Bank ("Chase"), and requested that Chase issue such letters of credit. (Sammons.) SDC did this because it had little choice but to comply with the Court's PI Opinion if it wished to stay in business.
In the first two weeks of May 1999, SDC had a number of conversations with Chase concerning SOA's proposed DLC form. Eventually, in or about the third week of May 1999, Chase advised SDC that it would not provide DLCs in the form demanded by SOA. Chase indicated that, given SOA's stated intention to draw down on SDC's DLCs long before the actual delivery of the vehicles covered by those DLCs (and, in many cases, while the vehicles were in transit on the high seas), Chase could only protect itself and its collateral if the DLC required SOA to make a documentary presentation upon draw down that included (a) negotiable bills of lading covering the vehicles for which payment was sought, and (b) evidence that either Chase or SDC was adequately covered as a loss payee under SOA's transit insurance policy. (Sammons Stmt. ¶ 50; Killea Test.). The proposed DLC form that SOA was demanding failed to require such documents as part of SOA's presentation upon draw down. Therefore, Chase advised SDC that it would not issue such a DLC. (Sammons Stmt. ¶ 51; Killea Test.)
By letter dated May 21, 1999 to Mr. Noonberg (the "May 21 Schreiber Letter"), Mr. Schreiber conveyed Chase's concerns and outlined, among other things, the additional terms required by Chase before Chase would issue DLCs to SDC in the form demanded by SOA, along with the commercial rationale behind Chase's position. (Sammons Stmt ¶ 52; PX 197.)
The May 21 Schreiber Letter requested, among other things, that the DLCs require that SOA's documentary presentation upon drawing down (a) reference the particular purchase order for which payment was sought, and, as Chase required, include (b) appropriate bills of lading and (c) sufficient proof of insurance coverage. (Sammons Stmt ¶ 52; PX 197.)
SDC also requested in the May 21 Schreiber Letter that, given the complexity of SOA's demanded changes to SDC's letters of credit and Chase's position with respect to those changes, the "deadline" for SDC's transitioning to SOA's new letter of credit regime be adjourned from June 1, 1999 to at least August 1, 1999. (Sammons Stmt ¶ 53; PX 197.)
SOA responded to the May 21 Schreiber Letter on or about May 25, 1999, when Jeffrey D. Herschman, Esq. wrote to Mr. Schreiber on behalf of SOA, rejecting outright all of SDC's and Chase's requests and again demanding that SDC comply with the terms set forth in the April 1999 Noonberg Letters. Mr. Herschman also reiterated SOA's June 1, 1999 deadline. SOA's rejection of Chase's request that SOA's documentary presentation include documents referencing SDC's purchase orders, bills of lading and proof of insurance coverage came without explanation. (Sammons Stmt ¶ 54; PX 198.)
SDC remained unable to comply with SOA's demands because Chase continued to find unacceptable the form of DLC demanded by SOA. Chase confirmed its position concerning its need to obtain bills of lading and proof of insurance as part of SOA's documentary 25 presentation if SOA insisted upon drawing down before delivery in a May 27, 1999 letter from Chase Vice President Peter Killea to SDC's Senior Vice President of Finance and Administration, Michael K. Lewis. (PX 199; Killea Test.; Sammons Stmt. ¶ 55.)
In light of SOA's refusal to retract or revise its demands for DLCs that did not contain the three DLC terms required by Chase, and Chase's unwillingness to issue DLCs in the form SOA had demanded, SDC was left in a position where within days it would be unable to provide a DLC in form acceptable to SOA with its next Quota Order and in substitution for letters of credit that SOA had already accepted and were still outstanding.
On May 28, 1999, SDC filed an emergency application with this Court, seeking, among other things, to enjoin SOA from persisting in its demands that SDC provided the form of DLC in the April 1999 Noonberg Letters or from terminating the DA as a consequence of SDC's inability to comply with those demands. (PX 200; Sammons Stmt ¶ 57.)
This Court conducted a hearing on that application on May 28, 1999 (the "May 1999 Hearing"). (PX 201; Sammons Stmt. ¶ 58.) At the May 1999 Hearing, the Court ruled that, if SOA wanted to draw down on SDC's DLCs while the vessels carrying the vehicles were somewhere in the Pacific Ocean, Chase would be entitled to receive bills of lading and proof of insurance coverage at the time of drawdown. (PX 201.)
The Court strongly suggested that the parties participate in mediation supervised by a third party mediator and that the parties consider totally revising and updating their contract. SOA agreed to suspend its demands during the mediation. (Sammons Stmt. ¶ 59; PX 201.) In consequence, Chase and SDC more or less stopped exploring whether there was a way to meet those demands should mediation fail.
Predictably, the mediation did fail, in early September 1999. (Sammons Stmt. ¶ 59.) SOA almost immediately renewed its demand, placing a November 1 deadline on compliance. Despite my earlier ruling, the form of Letter of Credit proposed by SOA on September 22, 1999 (PX 135) still did not provide for turnover of the NBOLs and proof of insurance to Chase.
At the May 1999 Hearing, this Court found Chase's request unremarkable, since transfer of title documents in exchange for payment was a routine part of letter of credit practice. Indeed, SOA's reluctance to comply with Chase's obvious and reasonable request was mystifying to me, because it was unthinkable that any bank would pay on a letter of credit without obtaining control of its collateral.
It turns out that the reason SOA resisted Chase's eminently reasonable demand was that SOA could not clear the cars through customs (as SOA was required to do pursuant to Art. 9(6) of the DA) without having possession of the NBOLS. In the absence of those documents, no ship's captain would release the vehicles to SOA. So turning them over to Chase at the time of payment would prevent SOA from complying with its obligation as Importer under the DA.
At this point, it is necessary to backtrack somewhat and review pertinent provisions of the DA. The DA identifies SOA as the "Importer" of the vehicles. As "Importer," SOA is responsible for "all costs incurred to transport Products to said port including customs duties and excise taxes." (DA Art. 9.6.) In addition, risk of loss on the cars remains with SOA until "the time of . . . delivery to Distributor [SDC], Distributor's agent, warehouse or carrier, at the port of entry designated by Importer." (DA Art. 9.7.) SOA asserts somewhat blithely that the literal terms of the DA make it responsible only for the cost of duties and the risk of loss — not for clearing the cars through US Customs. However, for nearly a quarter century, the parties operated under a regime in which SOA — the Importer — did in fact bring cars into the United States and clear them through Customs. SOA's arrangement with SNE, its other independent distributor, is identical, as were SOA's arrangement with the other independent distributors before they sold out to SOA in the 1980s. Therefore, I conclude that the DA, interpreted in light of the parties' commercial practice, obligated SOA, not only to pay duties and taxes, but to clear the vehicles prior to delivering them to SDC. This SOA could not do without having the NBOLS. Chase wanted them, too. Hence, the impasse.
All of this is consistent with SOA's retaining title to the cars until such time as it delivers them to SDC — far more consistent, in fact, than with SOA's relinquishing title while the cars are on the high seas.
But, there was an even more fundamental problem with SOA's demand for payment in transit. Under the 1981 Amendment to the DA, title to the vehicles automatically passed from SOA to SDC upon payment. (PX 35.) However, unbeknownst to Chase, SDC, and this Court, SOA could not pass title during transit because SOA did not own the cars while they were being transported to the United States! The cars were owned by Marubeni America Corp, a subsidiary of the Japanese bank that, since 1993, had been financing the sale of Fuji-manufactured vehicles that were being shipped to SOA in the United States. (PX 135, PX 136, PX 137, PX 138.) Those agreements were later expanded to include additional parties, and to cover the vehicles that were assembled by SIA in Indiana and shipped to SDC. Pursuant to the agreements between and among SOA, two Marubeni subsidiaries and Fuji, Marubeni provided SOA with trade financing in exchange for, inter alia, title to the cars while they were in transit. Under the Marubeni Agreements, SOA could not take title to the vehicles from Marubeni until the cars had been off-loaded in Boston and (in the case of the cars shipped from Japan) had passed through U.S. Customs. (Scharff; Tr at. 725-26.) At that point, SOA would take title, so that it could pass same to SDC upon receipt of payment for the vehicles.
SOA also had a credit facility with a group of banks in the United States, headed by Industrial Bank of Japan (IBJ). The Credit Agreement (PX 328) specified (Section 6.32) that the Marubeni Agreements had to be kept in force as a condition of SOA's U.S.-based financing. Thus, the failure of SOA to comply with the Marubeni Agreements and to keep them in force (by renewing them each year) would have placed it in default with its banks. SOA complied with its banks' requirement.
If I had been aware of the Marubeni Agreement and the bank covenants in 1999, I would not have reached the conclusion I did about the commercial reasonableness of SOA's demand for letters of credit that required payment prior to delivery for imported vehicles. There is nothing commercially reasonable about demanding a term in a letter of credit of which you cannot take advantage. And in April 1999, SOA could not have taken advantage of payment prior to delivery, because (1) it could not pass title while the vehicles were in transit consistent with the Marubeni Agreements and its Credit Agreement, and (2) it could not take possession of the cars and clear them through customs without having possession of the NBOLS.
SOA argues that the existence of the Marubeni Agreement and the bank covenants are irrelevant because (1) the covenants could be waived, and (2) the Marubeni Agreements could be cancelled at any time. However, SOA's protest that it would and could have obtained waivers from Marubeni and its bank syndicate, so as to permit it to take and pass title early, ring hollow in the absence of any evidence that it ever approached either Marubeni or IBJ to see if such waivers would be forthcoming. Similarly, SOA's assertion that it was planning to let the Marubeni Agreements lapse when it demanded payment prior to delivery is contradicted by a plethora of documentary evidence, all of which establishes that SOA was giving serious consideration to retaining at least a modified form of that financing until in or about December 1999. (PX 221; PX 227; PX 233; PX 239.) Indeed, in April 1999, when the PI Opinion came down, SOA had just renewed the Marubeni Agreements for another year. (PX 191; PX 192.) Only when it became clear that maintenance of the Marubeni facility was fatally inconsistent with SOA's demand for early payment from SDC, did SOA stop trying to play on both sides and cancel the Marubeni facility. (PX 245.)
SOA's lack of candor with this Court (there is no other way to put it) led to an uninformed judicial decision, on the basis of which the parties utterly transformed their manner of doing business, in ways that have profoundly affected the course of this lawsuit.
This is NOT an invitation for SDC to file some sort of sanctions motion. The Court would not look kindly on such a motion.
Nonetheless, the parties did alter their business arrangements on the basis of the PI Opinion. I must therefore examine their current practice to see if SOA's ongoing demand for payment prior to delivery of imported cars is commercially reasonable.
At the same time SDC was grappling with the aftereffects of the PI Opinion, it was trying to increase its line of credit. SDC's constant sense was that SOA — which was well aware of the inadequacy of SDC's existing credit facility — was making demands in order to put SDC in a position where it would bump up against that limit and be unable to post letters of credit along with its quota orders. Chase agreed to try to syndicate a larger facility for SDC ($150 million, as opposed to $90 million), but indicated that SDC's continuing disputes with SOA, and the commercial uncertainties bred thereby, were impediments to closing a new facility. (Tr. at 344-51; PX 199.) Because Chase wanted the credit, it attempted to accommodate SDC's letter of credit needs. During the autumn of 1999, its letter of credit and legal departments worked in conjunction with the client relations team headed by Peter Killea to try to work out something that would be acceptable to both Chase and SOA. (Tr. at 352-53.)
On October 22, 1999, about a month after the mediation effort broke down, Chase sent SDC and SOA a proposed form of letter of credit that it was willing to issue. (PX 212.) I conclude that this was reasonable turnaround time for so complex a transaction.
In transmitting this document to SDC and SOA, Chase noted what it called "an anomaly" concerning the presentation of documents — the fact that its insistence on presentation of negotiable bills of lading (NBOLS) and certificates of insurance prior to payment would make it impossible for SOA to act as Importer when the vehicles arrived at the Port of Boston. Chase's letter appeared to alert SDC to this issue for the first time. (PX 212.) At least one representative of SOA, Joseph Scharff, was aware of a potential problem, but claimed to be comfortable that it could be worked out — though no one had ever discussed the issue with SDC, the party most affected, or with Marubeni or IBJ. (Tr. at 726-29.)
The parties were at this point at loggerheads (which, of course, was nothing new). SOA was demanding payment prior to delivery — an unprecedented demand, one that was inconsistent, not only with the parties' settled way of doing business at the Port of Boston, but with SOA's dealings with every other current and former U.S. distributor. SDC's bank would not issue letters of credit conforming to that demand unless it could obtain the bills of lading in exchange for payment. And SOA could not part with the bills of lading unless Chase agreed to them back — another unprecedented demand — so that SOA could comply with its contractual obligation to act as Importer of the cars and clear them through Customs. Chase was (understandably) reluctant to give the NBOLS back to SOA because then SOA would have both the cars (or at least the right to retrieve them from the shipper) and the money, while Chase — which was supposed to be protected at all times in a straight letter of credit deal — had nothing at all. And SOA could not comply with the contractual requirement that it pass title to SDC as long as the Marubeni Agreements were in force — which they were at the time. The entire situation was patently unreasonable. However, because of the PI Opinion (which contemplated absolutely none of these facts), the parties were apparently under the impression that I would find it to be otherwise.
So the parties and their clever lawyers negotiated a truly byzantine document, known as the NBOL Agreement. (DX 180.) The NBOL Agreement provided, in substance, that Chase would take the NBOLS when SOA drew down on the letters of credit. Chase would then tender back the NBOLS to SOA, and SOA, acting as Chase's bailee, would present the NBOLS to Customs and the shipper in order to clear the cars and get them off the ship and into SDC's hands. (DX 180.)
Everything about the NBOL Agreement runs counter to the premises underlying traditional letter of credit transactions. It keeps the supplier in the deal after payment; it draws the bank into the underlying deal; and creates a commercial relationship between the issuer and the beneficiary, as opposed to the issuer and its customer. Worst of all, it contains the seeds of its own destruction: the NBOL Agreement contains a provision that recognizes SDC's right to challenge the arrangement as commercially unreasonable! (DX 180 at 2.)
The NBOL Agreement appears to be wholly unprecedented. Sandra Stern, an eminently qualified expert in letter of credit matters, testified that she had never seen anything like it before, and that neither the Uniform Customs and Practice for Documentary Credits ("UCP") nor the Revised UCC Articles 5 and 9 — on whose drafting committees she was a member — has any provision covering, or even contemplating, such an arrangement. (Stern Stmt. at 8-10.) The absence of any consideration of such a contingency in so codified an area of business practice is some evidence that it does not fall in the realm of standard commercial practice. More evidence is found in the testimony of Peter Killea of Chase, who confirmed Stern's view of the unorthodox nature of the arrangement. (Tr. at 374-78.)
Because of a series of bank mergers, the institution we refer to as "Chase" includes Manufacturers Hanover Trust (SDC's long-time bank), and Chemical Bank, and now J.P. Morgan, all of which have merged since the early 1990s.
SOA proffered two experts who testified that they saw nothing commercially unreasonable about a supplier's demanding a letter of credit that provided for payment prior to delivery. This is an unremarkable proposition in view of UCC § 2-513(3). However, neither of them saw the NBOL Agreement prior to offering his opinion, and neither was asked to opine whether that agreement was commercially reasonable, or even whether they had ever seen anything like it before. (Tr. at 767-68; 772-73.) Thus, Stern's and Killea's highly persuasive testimony stands unrebutted. At oral argument, SOA's counsel admitted that the contract was unprecedented.
Nonetheless, SOA argues that the NBOL Agreement (and the demand upon which it is predicated) must be commercially reasonable, because SDC's banks agreed to it. While ordinarily I would be inclined to give that factor at least some weight in my analysis, the argument is less than compelling since the agreement on its face provides that its reasonableness shall be challenged in a court of law. I credit the testimony of Peter Killea that the banks are not happy about the NBOL Agreement, and that they conditioned their acceptance of the SDC Credit Facility on SDC's willingness to go to the mat on this issue. (Tr. at 378.) Accordingly, I do not find that the banks' decision to sign on to the NBOL Agreement favors SOA's side of the argument.
SOA also argues that the NBOL Agreement must be commercially reasonable because it works. The Agreement makes SOA a bailee for Chase upon return of the documents of title, which, according to defendant, renders it impossible for SOA to resell the cars and puts them beyond the reach of its creditors. The only risk to Chase, SOA maintains, is of outright fraud on its part — a risk that has not materialized in a year and a half of dealings under the NBOL Agreement.
However, even SOA admits that returning the NBOL to the beneficiary after payment under a letter of credit is an "anomaly." And this particular anomaly carries with it some extraordinary risks for everyone but SOA.
First, once Chase gives up the NBOLS, its only rights against SOA (which has both the money and the cars) are contractual — in essence, Chase is left with a lawsuit. That it is a winnable lawsuit is of no moment, since the whole point of dealing in letters of credit is to keep things simple and uncomplicated (which is to say, out of court). By giving back the NBOLS, Chase loses custody of the documents that give it a perfected security interest in the cars for which payment has already been made.
Second, SDC's Financing Agreement provides that any breach of the NBOL Agreement by SOA constitutes an Event of Default by SDC! (PX 287 at Art. VII(s).) Thus, if SOA violates the NBOL Agreement, SDC's access to credit may be cut off. Since lenders will often not extend credit to a borrower who is in default under an existing loan agreement, misconduct by SOA could result in a death-blow to SDC.
Third, if for any reason (including the loss of the vessel carrying the cars), SOA fails to deliver the vehicles to SDC, and neither SDC nor Chase is able to recover the cars or their proceeds, SOA may fail or refuse to reimburse SDC promptly, or may not be sufficiently solvent to make SDC whole for the loss, despite its legal obligation to bear the risk of loss. If SOA owns the vehicles until they are delivered, and SDC has not yet paid for them, this particular problem can never arise. I conclude, in the face of these extraordinary, potentially catastrophic consequences, that SOA's demand for a letter of credit that provides for payment prior to delivery of the cars — viewed in light of SOA's contractual obligations as Importer of the cars — is commercially unreasonable. SOA's demand for a premature passage of title — made in reliance on an opinion of this Court that was both preliminary and flawed owing to certain matters were not brought to my attention — has been effectuated, but only by a transaction that, while creative, flouts all the rules of letter of credit practice. This arrangement is "commercially reasonable" only if that term can be equated with "commercially possible." I conclude that the two things are not the same. The fact that clever lawyers can find ways to make things happen does not automatically make them commercially reasonable.
It should be noted that the parties did not contemplate all of these problems back in 1998 when they were briefing whether SOA was entitled to make such a demand. The Court has gone back and reviewed those briefs. SDC, as noted above, hung its hat on the argument that its (non-existent) right to inspect the cars prior to payment was impinged by payment prior to delivery. SOA responded in kind, by invoking the UCC. If SOA's counsel were aware of the Marubeni agreements or the interplay between taking payment (and passing title) on the high seas and SOAs responsibilities under Article 9(6) and (7) of the DA, they kept this information to themselves. Moreover, it seems clear from the record that the full ramifications flowing from this demand revealed themselves gradually and were not known by the parties until well after the PI Opinion came down. There is no question in my mind that these matters would have been brought to the Court's attention if SDC's counsel had been aware of them.
I further find that neither SDC nor SOA contemplated, either back in 1975 or at the time of the 1981 Amendment, that SOA would ever use its letter of credit approval power to demand and obtain payment prior to delivery of the vehicles to SDC. Rather, the entire course of dealing between the parties — until their relationship deteriorated to a new low in 1998 — demonstrates that the parties always intended for SOA to retain title to the cars until it had completed its contractual duty as Importer by transporting the cars to the United States and clearing them through Customs.
Finally, I find that SOA's demand for this letter of credit term was made in bad faith. While as a rule I believe that SDC is unduly suspicious of SOA (and vice versa), this particular demand, in the context in which it was made, can only be interpreted as an effort by SOA to deal unfairly with SDC.
Of course, for a decade and a half SDC used stand-by letters of credit to secure its orders — notwithstanding the DA, which provided for the use of documentary letters of credit — and neither party contemplated that SDC would one day insist on standing by the letter of the contract, even though it was far less cumbersome to use stand-by letters of credit. It is from that decision, made by SDC in order to obtain some long-forgotten strategic advantage, that this entire lawsuit flows. While SDC was legally entitled to stand on the letter of the DA, I concluded long ago that this maneuver on its part was as devoid of good faith as any step taken by SOA.
First, the demand was made at a time when SOA would have been unable to take advantage of the provision, even if SDC had been able to produce such a letter of credit on the spot. While it is true that the Marubeni Agreements have now been repudiated, so there is no longer any impediment to SOA's passing title to the cars while they are on the high seas, that was not the case when SOA made its demand, and it would not have been the case at any point prior to March 1, 2000 — which was well past the various deadlines set by SOA for compliance with this particular letter of credit term. While SOA's witnesses Doll and Scharff testified that they believed they would be able to obtain a waiver from Marubeni to permit title to pass in transit (tr. at 550-51; 728-29; 741-42), there is no evidence that SOA ever took the risk of asking Marubeni or IBJ whether such a waiver would be forthcoming. Common sense — not to mention the amount of time it takes these parties to accomplish anything where banks are concerned — suggests that such a waiver could not have been obtained overnight. Yet SOA made no effort to set in motion the process of obtaining the necessary approvals from Marubeni and IBJ. That alone is sufficient to support a finding of bad faith. Moreover, I find that SOA did not finally decide to terminate the Marubeni Agreement until sometime in January 2000, which is well after every deadline it imposed for the introduction of the new form of letter of credit. The record reflects that negotiations with Marubeni for a substantial trade financing facility (albeit in a lower amount than was previously the case) were ongoing until January 12, 2000. (PX 191; PX 192; PX 221; PX 227; PX 233; PX 239; PX 245.) It was only at that point that SOA finally demanded, by letter dated January 20, 2000 (PX 250), that Chase become a party to the agreement that eventually became the NBOL Agreement, and that the Marubeni Agreements were allowed to expire. (Naito Dep.; Jonassen) That, too, is evidence of bad faith.
Conclusions
SOA may not, consistent with its obligations under the DA, demand that SDC post a letter of credit providing for payment before delivery as a condition of placing an order for Subaru vehicles. As long as SOA must act as Importer of Subaru vehicles, payment before delivery is not authorized under Article 9(1) of the DA.
The NBOL agreement is commercially unreasonable. SDC may terminate it without violating the DA.
B. The Customs Issue
While I have found otherwise, let me assume arguendo that the NBOL Agreement is commercially reasonable. Should that be so, SDC is entitled to an injunction mandating that SOA cooperate with SDC in obtaining a definitive ruling from the United States Customs Service.
Under the DA § 9(6), SOA is responsible for all costs incurred importing vehicles from Japan, clearing them through United States Customs, and delivering them to SDC at the Port of Boston. (PX 4.) SOA's responsibilities include paying all customs duties and excise taxes associated with importing the vehicles into the United States. In order to import vehicles into the United States, merchandise must be "entered" with the Customs Service.
The importer of record is responsible for making entry with the Customs Service. The importer of record must use "reasonable care" in conducting its business with Customs, including "filing with the Customs Service the declared value, classification and rate of duty applicable to the merchandise, and such other documentation . . . as is necessary to enable the Customs Service to . . . properly assess duties on the merchandise." 19 U.S.C. § 1484(a)(1)(B). Customs may assess penalties against an importer who fails to use reasonable care in classifying and valuing the merchandise. 19 U.S.C. § 1592.
In Customs Ruling 224574, dated November 18, 1993, the Customs Service considered the question of what party could serve as an importer of record during the period that Marubeni provided trade financing to SOA under the Marubeni Agreements. SOA requested this ruling at the time the Marubeni Agreements were becoming effective, presumably because they changed the state of play that had existed with respect to the importation of the cars. Prior to the Marubeni Agreements, SOA held title to the vehicles while they were in transit to the United States and when they were imported. Under the Marubeni Agreements, Marubeni America Corp, not SOA, purchased the vehicles in Japan from Fuji, and owned them during and after the time of their importation into the United States, including the time that the importing vessel arrived 34 within the limits of the designated U.S. port with the intent to unlade. Of course, Marubeni America Corp was not a party to the DA and did not have any obligation to act as Importer of the vehicles. Customs Ruling 224574 determined that SOA could serve as importer of record with respect to the vehicles sold by Fuji to SOA and shipped from Japan, even though SOA took title to the vehicles, not from Fuji, but from MAC shortly before the cars were offloaded in the United States.
The 1993 Customs Ruling also found that the price SOA paid Fuji for the cars was an acceptable basis for appraisement, even though SOA was a wholly-owned subsidiary of Fuji. Transactions between related parties may serve as the appraisal price only where the importer demonstrates that the relationship between the parties did not influence the price. 19 U.S.C. § 1401a; VWP of America, Inc. v. United States, 175 F.3d 1327, 1334 (Fed. Cir. 1999). In 1993, Customs obviously concluded, under "the circumstances of the sale" test, as required for related party transactions under 19 U.S.C. § 1401a(b)(2)(B), that the prices paid by SOA to Fuji were arrived at in an arm's length transaction. (Leahy Test. at 11 ¶ 29.) Thus, for many years, SOA has paid customs duties based on the price that Fuji charges SOA for the vehicles. (PX 312.)
Today's circumstances are far different than those on which Ruling 224574 was based. Marubeni America Corp is no longer a party to the transaction in any capacity, and SOA no longer owns the vehicles at the time they are imported into the United States — SDC does. (Leahy Stmt. ¶ 19, 20, 21.) Indeed, under the NBOL agreement, SOA warrants that it will not assert any financial interest in the cars once it is paid and the title passes.
In light of the parties' changed operations, SDC asked its customs counsel, Stephen J. Leahy, Esq., to render his opinion regarding: (1) who was the importer of record for the transaction; (2) what actions SDC should take in order to act with reasonable care under 19 U.S.C. § 1484(a); and (3) the proper basis under 19 U.S.C. § 1401(a) for determining the "transaction value" of the vehicles — SOA's price to SDC or the lower price charged by Fuji to SOA. Leahy opined that SDC should seek a binding ruling from the Customs Service on these issues. (Leahy Stmt ¶ 27-28.) Based on Leahy's advice, SDC asked SOA to join it in obtaining a binding ruling on these issues.
SOA had already made some inquiries on this subject. On November 24, 1999, SOA's Customs lawyer, William J. Phelan, sent a letter to the Port Director of Customs for the Port of Boston, Mr. Yokell. In that letter, SOA sought guidance regarding the propriety of SOA's proposed importation and appraisement practices in light of its anticipated receipt of payment from SDC prior to the entry of the vehicles into the United States. (DX 145). The Port Director did not respond to this letter, so, Phelan telephoned him on December 7, 1999. In that call, Mr. Yokell said that, in his opinion, (a) SOA could act as the importer of record, and (b) the appraisement value should be the price paid by SOA to Fuji. Phelan then memorialized this 35 conversation in a letter dated December 8, 1999 (DX 150). Because Mr. Yokell never responded to this letter, Mr. Phelan assumed that it was an accurate summary of their phone conversation.
SDC took little comfort from the oral opinion from the Boston Port Director, because the regulations clearly state that informal oral opinions of Customs personnel are not binding on the Customs Service. 19 C.F.R. § 177.1(b). Nonetheless, SOA refused to participate in a formal ruling request, and asserted that it had acted with reasonable care as required by the regulations.
This contrasts markedly with SOA's behavior in 1993, when the Marubeni Agreements went into effect. At that time, it asked for and received a binding formal opinion from Customs.
On July 10, 2000, SDC's customs counsel, Leahy, submitted a request for a ruling to the Customs Service in Washington. The request asked the Service to determine whether SOA could legally act as the importer of record for vehicles shipped from Japan to SDC at the Port of Boston if SOA had previously transferred title to SDC, and, if SOA could not legally do so, what price would serve as the basis for appraisement. (Sammons Stmt ¶ 140; PX 298.)
On August 25, 2000, Phelan sent a letter to the Customs Service, asking that it "reject and return to SDC" its ruling request, since SOA had already obtained an opinion from the Port Director of Customs in Boston. (PX 345.) Phelan's letter asserted that this was the proper procedure under Customs Regulation § 177.1 for what he described as "a pending Customs transaction." The letter then went on to describe the parties' dealings and argued that SOA could act as the importer of record, and that the proper appraisal price was the one charged to SOA by Fuji. (PX 345.)
The Customs Service in a letter dated November 20, 2000, declined to rule whether or not SOA could legally act as the importer of record. It refused to rule because SOA had not joined in the ruling request. (Sammons Stmt ¶ 142; PX 303.) Customs specifically said:
It would be improper for us to answer your first question [may SOA properly serve as importer of record] because it asks us to determine whether an entity that is not a party to the ruling request can make entry. We decline to rule on the legal status of one party based on facts provided by another. Certainly we would be pleased to entertain a ruling request that asks for an opinion on SDC's right to make entry based on information provided jointly by SDC and SOA. (PX 303) (emphasis added).
On January 2, 2001, SDC's counsel, Mr. Schreiber, sent SOA a copy of the Custom Service's response to SDC's ruling request. (Sammons Stmt ¶ 143; Px 305.)
SOA's customs counsel, Phelan, appears never to have seen Customs' decision, since Phelan testified that he was not aware that Customs had refused to rule on SDC's request simply because SOA was not a party to that request. (Tr. at 643-45.) Mr. Phelan also did not know that Customs had invited the parties to submit a joint ruling request. And he seemed surprised that Customs did not combine the information contained in SDC's July 10, 2000 submission and his August 25, 2000 letter, even though he believed that the two letters, taken together, would appear to contain all the information necessary for Customs to issue a ruling.
In order to resolve these issues once and for all, SDC asks this Court to issue an injunction mandating SOA to join it in a ruling request to the Customs Service. SDC's concerns are not insignificant. While the DA obligates SOA to serve as Importer, and imposes numerous obligations on it in connection with that duty, the United States is not bound by the parties' agreement. As a purely legal matter, SDC now holds title to the vehicles when they enter the United States. SDC fears that, as the actual owner of the cars, SDC, not SOA, is obligated, under the Tariff Act of 1930, as amended ("the Tariff Act"), to use reasonable care in seeing that customs obligations are met. (Leahy Stmt. ¶¶ 15, 16-22, 23-28.) Moreover, if SDC, as owner of the vehicles at the time of entry, is determined the "importer of record" under § 484 of the Tariff Act ( 19 U.S.C. § 1484), then as far as the United States Government is concerned, it, not SOA, would be liable for the duties incurred during importation, and for determining the correct classification and appraisement of the imported merchandise under 19 C.F.R. § 141.1. Finally, SDC is concerned that, should it be the importer of record, the "transaction value" for purposes of determining the amount of customs duties owed on the vehicles under the Tariff Act would likely be SOA's price to SDC rather than the materially lower price charged by Fuji to SOA. SDC fears that it may be found directly liable to pay such duties, including any difference between the amount owed and past payments made by SOA, as well as related interest, fines and penalties. (Sammons Stmt. ¶ 125; Leahy Stmt. ¶¶ 15, 29-33)
SOA's position is that the new payment and title passage arrangement does not prevent SOA from being the importer of record for these vehicles, even though it no longer owns them. And SOA argues that, as long as Ruling 224574 is on the books, the dutiable price is the price paid by Fuji to SOA, and there is no evasion of duty with respect to the new importation arrangement.
(1) Issuance of a Mandatory Injunction
This Court has the power to issue a mandatory injunction compelling SOA to 37 participate with SDC in a ruling request to the United States Customs Service because the Customs issue is crucial to determining the reasonableness of the current dealings of these parties.
Again, this discussion of the Customs issue presumes that the Court is wrong in holding that the NBOL Agreement is commercially unreasonable and in ruling that payment before delivery is not consistent with the DA.
An injunction issued after a court has already decided a claim on the merits is a permanent injunction. The prerequisites for the issuance of a permanent injunction are irreparable injury and inadequacy of legal remedies. Weinberger v. Romero-Barcelo, 456 U.S. 305, 312, 102 S.Ct. 1798, 72 L.Ed.2d 91 (1982); New York State Nat'l Org. for Women v. Terry, 886 F.2d 1339, 1362 (2d Cir. 1989). The district court has broad discretion in determining whether an equitable remedy is appropriate. Lemon v. Kurtzman, 411 U.S. 192, 200, 93 S.Ct. 1463, 1469, 36 L.Ed.2d 151 (1973); Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 68 (2d Cir. 1999). However, an injunction is an extraordinary remedy and is not to be routinely granted. Weinberger, 456 U.S. at 312. The district court must balance the interests of the parties who might be affected by the court's decision. Id.; Ticor Title Ins. Co., 173 F.3d at 68.
An injunction is classified as a mandatory, or affirmative, one when it commands a positive act. See Phillip v. Fairfield Univ, 118 F.3d 131, 133-34 (2d Cir. 1997) (citing Tom Doherty Assocs., Inc. v. Saban Entertainment, Inc., 60 F.3d 27, 34 (2d Cir. 1995)). The standard for an affirmative injunction is a higher one than for a prohibitory injunction (one that maintains the status quo), requiring that the movant demonstrate that "extreme or very serious damage will result." Id. at 133 (citing Malkentzos v. DeBuono, 102 F.3d 50, 54 (2d Cir. 1996).
I conclude that the hardship to SDC if I do not issue an injunction ordering SOA to join it in a ruling request to the Customs Service rises to the level of very serious damage. In contrast, the injunction will place no perceptible burden on SOA. Moreover, legal remedies are not adequate in the circumstances.
(2) Duty of Reasonable Care
19 U.S.C. § 1484 requires that an importer of record use "reasonable care" to make entry for imported merchandise. The "reasonable care" requirement was added to this statute by section 637 of the North American Free Trade Agreement Implementation Act, Pub.L. No. 103-182, Sect. 621, 107 Stat. 2057 (1993). The legislative history of the provision states:
The requirement that importers use reasonable care in making entry establishes a `shared responsibility' between Customs and the trade community and allows Customs to rely on the accuracy of the information submitted by importers and, in turn, streamline entry procedures . . . . In the view of the Committee, it is essential that this "shared responsibility" assure that, at a minimum, "reasonable care" is used in discharging those activities for which the importer has responsibility. These include, but are not limited to: furnishing of information sufficient to allow Customs to fix the final classification and appraisal of merchandise; taking measures that will lead to and assure the preparation of accurate documentation and providing sufficient pricing and financial information to permit proper valuation of merchandise.
H. Rep. No. 103-361, at 136, 1993 U.S.C.C.A.N. 2686 (1993) (emphasis added). There are varying levels of penalties for parties who fail to exercise reasonable care, based upon the level of culpability — fraud, gross negligence, or negligence. 19 U.S.C. § 1592(c).
The drafting committee suggested several steps that an importer could take in order to fulfill its burden:
In meeting the "reasonable care" standard, the Committee believes that an importer should consider utilization of one or more of the following aids to establish evidence of proper compliance: seeking guidance from the Customs Service through the pre-importation or formal ruling program; consulting with a customs broker, a customs consultant, or a public accountant or an attorney; or using in-house employees such as counsel, a customs administrator, or if valuation is an issue, a corporate controller, who have experience and knowledge of customs laws, regulations and procedures . . . .
In seeking advice for a valuation question, the Committee expects an importer to consult with an attorney or a public accountant, and as appropriate, personnel within the company knowledgeable regarding the import's accounting system and how cost elements are booked.
H. Rep. No. 103-361 at 120, 1993 U.S.C.C.A.N. 2670 (1993).
SDC argues that SOA's refusal to join it in a joint application to the Customs Service for a formal ruling on the importer of record and basis for appraisement questions did not meet the "reasonable care" standard. Assuming that the parties continue to operate under the NBOL Agreement, it seeks an injunction requiring SOA to participate in obtaining such a formal and binding ruling. SOA argues that it used "reasonable care" to make entry for Subaru vehicles that it imports into the Port of Boston, and that no such injunction is warranted. I conclude that SDC is correct.
(3) Importer of Record Findings
SDC's customs counsel, Mr. Leahy, advised SDC that if the Customs Service determined that SDC, as owner of the vehicles at the time of entry, was the "importer of record" under § 484 of the Tariff Act ( 19 U.S.C. § 1484), then the "transaction value" for purposes of determining the amount of customs duties owed on the vehicles under § 401a of the Tariff Act ( 19 U.S.C. § 1401a) would likely be SOA's price to SDC rather than the materially lower price charged by Fuji to SOA. Leahy also advised SDC that it would be liable to pay such duties, including interest, fines and penalties. (Sammons Stmt. ¶ 125; Leahy Stmt. ¶¶ 15, 29-33.)
19 U.S.C. § 1484(a)(2)(B) provides that the importer of record, the entity authorized to make entry with the Customs Service, includes the owner or purchaser of the merchandise or a licensed customs broker appropriately designated by the owner, purchaser or consignee of the merchandise. This section provides:
When an entry of merchandise is made under this section, the required documentation or information shall be filed or electronically transmitted either by the owner or purchaser of the merchandise or, when appropriately designated by the owner, purchaser, or consignee of the merchandise, a person holding a valid license under section 1641 of this title.
Customs Directive 3530-02, dated November 6, 1984, defines "owner" and "purchaser" as any party who has a "financial interest" in the transaction:
The terms "owner" or "purchaser" would be any party with a financial interest in a transaction, including, but not limited to, the actual owner of the goods, the actual purchaser of the goods, a buying or selling agent, a person or firm who imports on consignment, a person or firm who imports under a loan or a lease, a person or firm who imports for exhibition at a trade fair, a person or firm who imports goods for repair or alteration or further fabrication, etc. Any such owner or purchaser may make entry on his own behalf or may designate a licensed customhouse broker to make entry on his behalf and may be shown as the importer of record on the CF 7501. The terms "owner" or "purchaser" would not include a "nominal consignee" who effectively, possesses no other right, title, or interest in the goods except as he possessed under a bill of lading, airway bill, or other shipping document.
Examples of nominal consignees not authorized to file Customs entries are courier services, freight consolidators . . ., and customhouse brokers who are not licensed to transact Customs business in Customs districts where a shipment is being entered.
According to ¶ 2(a) of the NBOL agreement, once title to the cars passes, SOA acts as bailee for SDC and the bank, retaining authority to use the NBOLs solely for the limited purposes of "enabling SOA to obtain release of the vehicles from the vessel at the Port of Boston, to offload them from the vessel there, to clear them through United States customs in accordance with applicable laws and regulations, and to deliver them to the Bank . . . ." Paragraph 4 of the agreement states that:
SOA covenants and agrees that (a) it shall not assert or otherwise claim that it or anyone else (except for the Bank) has any title, security interest, lien or other interest in or right to possession, ownership or control of any NBOL Collateral (including any vehicle for which the Bank or SDC has made full payment) or any right or interest consisting of or arising out of any NBOL Collateral relating to a DLC or any vehicle for which the Bank or SDC has made full payment and that SOA shall not take any action that could cause SOA or anyone else (except for the Bank) to have any title, security interest, lien or other interest in or right to possession, ownership or control of any NBOL Collateral . . . . (PX 286, ¶ 4.) (emphasis added).
SOA has little choice but to admit that it has disclaimed any financial interest in the goods that are the subject of the transaction once it has been paid. However, it argues that it nonetheless retains a financial interest in "the transaction" because, under §§ 9(6) and 9(7) of the DA, SOA is required to bear all responsibilities for, and risks and expenses of, importing vehicles from Japan, clearing them through the United States Customs and delivering them to SDC at the port of entry designated by SDC, currently the Port of Boston. (PX 4; Sammons Stmt. ¶ 116.) SOA further argues that it has a substantial interest in the transaction because it is involved in the "procurement, marketing, distribution, sale and after-sale service of Subaru vehicles sold to SDC." (¶ 49 of SOA Concl. of Law.) Because of these obligations, which carry financial implications, SOA argues that it is not a nominal consignee, but a financially interested party, and can thus serve as importer of record. And if SOA can be importer of record, the fair thrust of prior Customs rulings is that the price it paid Fuji for the cars is the price that should serve as the basis for levying duty.
We have found no precedent to help determine whether SOA can be considered the importer of record. But it is far from clear whether Customs would agree with SOA that a party having no financial interest in the underlying goods can nonetheless have a financial interest in the transaction, simply because of collateral matters unrelated to ownership. Customs has ruled that shippers, for example, do not have any financial interest in the transaction relating to goods they ship, because they are at most nominal consignees. Customs Directive 3530-02, dated Nov. 6 1984. Yet shippers undeniably have a financial interest in the importation of the goods in their vessels; they are paid to transport the goods, they can be held liable if the goods are damaged, lost, stolen or even delayed, and they may (depending on the parties' arrangements) be required to 41 insure the cargo. Thus, it seems clear that not every commercial interest in a venture will qualify as a "financial interest in the transaction" so as to bring a party within the importer of record rule.
Moreover, shippers are often considered bailees. See Leather's Best, Inc. v. S.S. Mormaclynx, 451 F.2d 800, 811 (2d Cir. 1971); Seanto Exports v. United Arab Agencies, 137 F. Supp.2d 445, 448 (S.D.N.Y. 2001); Brocsonic Co. Ltd. v. M/V Mathilde Maersk, 120 F. Supp.2d 372, 380 (S.D.N.Y. 2000); R.B.K. Argentina S.A. v. M/V Dr. Juan B. Alberdi, 935 F. Supp. 358, 370-71 (S.D.N Y 1996)). This is precisely the term used in the NBOL Agreement to define SOA's interest in the transaction from and after the moment it takes payment and transfers title. It thus appears that SOA's continuing duties under the DA and the NBOL, while having financial consequences, may not suffice to bring it under the umbrella of importer of record.
As discussed earlier, the arrangement that SOA and SDC put together was not a standard importation arrangement. And the question of whether SDC is the importer of record is a close one. It is also an issue fraught with serious consequences, since the importer of record has significant responsibility to the Customs Service. As described in C.F.R. § 141.1, the importer is personally liable for duties incurred by reason of importation and is responsible for determining the correct classification and appraisement of merchandise.
In view of the significant change in the parties' import arrangements wrought by the NBOL Agreement, SDC had every right to be concerned about possible Customs' violations. In light of all of these concerns, SOA's actions did not amount to reasonable care.
(4) Appraisement Finding
SDC also worried that, if Customs declared it to be the importer of record, the appraisement basis for levying duty would be the price SDC had paid SOA for the vehicles, not the significantly lower price SOA paid Fuji. Moreover, if SDC were the importer of record, it would be liable to the United States for the duty on the correct amount, plus interest and penalties — a significant sum.
SOA argues that Customs has been using, and should continue to use, the "transaction value" method of appraising the Subaru vehicles. Under Section 402 of the Tariff Act, 19 U.S.C. § 1401a, the "transaction value" is "the price actually paid or payable for the merchandise when sold for exportation to the United States." 19 U.S.C. § 1401a(b); VWP of America, Inc., 175 F.3d at 1330; United States Customs Service, Treasury Decision 96-87, January 2, 1997. In other words, transaction value is the price paid by an importer of goods to an exporter. Since SOA is Fuji's United States distributor, and is the "Importer" pursuant to the 42 terms of the DA, SOA contends that the price it pays Fuji sets the transaction value, whether or not it is the importer of record for Customs purposes.
There appears to be support for SOA's argument. While, SOA is a wholly-owned subsidiary of Fuji, and is thus a "related party" within the meaning of 19 U.S.C. § 1401a(g)(1)(F), the fact that the buyer and seller are related does not automatically mean that the transaction value is an unacceptable method of valuing imported merchandise. However, the presumption is otherwise:
The transaction value between a related buyer and seller is acceptable . . . if an examination of the circumstances of the sale of the imported merchandise indicates that the relationship between such buyer and seller did not influence the price actually paid or payable; or if the transaction value of the imported merchandise closely approximates — (i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or (ii) the deductive value or computed value for identical merchandise or similar merchandise; but only if each value referred to in clause (i) or (ii) that is used for comparison relates to merchandise that was exported to the United States at or about the same time as the imported merchandise. 19 U.S.C. § 1401a(b)(2)(B).
See S. Rep. No. 96-249, at 120-121, 1979 U.S.C.C.A.N. at 506-07; VWP of America, Inc., 175 F.3d at 1334.
These rules are designed to "insure that a particular transaction is bona fide and "at arm's length' before the transaction value standard will apply." S. Rep. No. 96-249, at 115, 1979 U.S.C.C.A.N. at 501; HQ 546357 (Aug. 26, 1997); Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992). "The importer has an obligation to ensure to the greatest extent possible that the price is not influenced" by the relationship between the parties. Custom's Ruling "Transfer Pricing; Related Party Transactions" dated Jan. 21, 1993.
Whether a bona fide sale exists must be determined on a case-by-case basis. E.C. McAfee Co. v. United States, 842 F.2d 314, 319 (Fed. Cir. 1988). The transaction must be viewed in its entirety. Customs Ruling 545902, dated June 18, 1997. Factors indicating whether a bona fide sale exists between Fuji and SOA include whether SOA has assumed the risk of loss and acquired title to the imported merchandise, whether SOA paid for the goods, and whether the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. Customs Ruling 545902 (citing HRL 545105, November 9, 1993; HRL 544775, April 3, 1992; HRL 545571, April 28, 1995). In Customs Ruling 545902, the Court decided that there was a bona fide sale between related parties because the manufacturer issued an invoice for the purchase of the merchandise and there was an "application for payment order" from a bank 43 showing the buyer as sender of money and the manufacturer as the beneficiary of those funds.
It is undisputed that the vehicles sold from Fuji to SOA are sold for export to the United States within the meaning of 1401a(b)(1). Indeed, that is the basis of the Fuji-SOA relationship — SOA is Fuji's United States distributor. The open issue is whether the price paid by SOA to Fuji is sufficiently arm's length to rebut the presumption. While SDC contends that the transaction between Fuji and SOA is not an arm's length transaction, offers no evidence to support that contention. The prices that SOA pays for the vehicles from Fuji are not insignificant, suggesting to this Court that the transaction is an arm's length one (PX 310). No evidence in the record indicates that the Fuji-SOA price structure has changed since Customs determined that it was an arm's length price back in 1993.
Nonetheless, SDC's Customs' counsel has opined that if SDC is deemed the "importer of record" under § 484 of the Tariff Act ( 19 U.S.C. § 1484), then the "transaction value" for purposes of determining the amount of customs duties owed on the vehicles under § 401a of the Tariff Act ( 19 U.S.C. § 1401a) will likely be SOA's price to SDC, so the matter is not free from doubt. (Sammons Stmt. ¶ 125; Leahy Stmt. ¶¶ 15, 29-33.) This certainly suggests that the determination, which is fraught with peril for SDC, ought to be made by Customs in the first instance.
Indeed, as between Customs and the parties to this litigation, this Court has no jurisdiction either to resolve administrative issues or even to hear an appeal from agency determinations of those questions. Under 28 U.S.C.A. § 1581, the Court of International Trade has exclusive jurisdiction to review those decisions. However, SDC has alleged that SOA's refusal to seek a formal ruling from Customs is commercially unreasonable. I clearly have jurisdiction to adjudicate that issue, and to decide any questions necessary to that adjudication. 28 U.S.C. § 1331, 1132, 1337.
SOA clearly took some steps to create a record with Customs after the PI Opinion came down. However, SOA's steps fell short of the requirement of reasonable care imposed on the importer of record.
First, the request to Yokell did not contain all the information he needed in order to make a determination. On January 2, 1997, the United States Customs Service issued a Treasury Decision, T.D. 96-87, "Determining Transaction Value in Multi-Tiered Transactions" seeking to clarify the customs process, and setting forth the documentation and information that must accompany a ruling request to the Customs Service in these complicated situations. The decision states that "all future ruling requests that in a multi-tiered arrangement transaction value is properly based on a sale not involving the importer must be supported by the evidence discussed this notice." Parties seeking a ruling request in connection with such transactions must provide the Customs Service with detailed descriptions of the roles of all of the parties involved in the exportation of the merchandise to the United States. Information about each possible sale for exportation should be provided. The notice lists the relevant documents as including: purchase orders, invoices, proof of payment, contracts and any additional documents (e.g. correspondence) which describe how the parties deal with one another. The notice says that what the Service is looking for is "a complete paper trail of the imported merchandise showing the structure of the entire transaction." In order to determine whether the transaction is at arm's length when the parties are related, it is necessary to provide customs with information showing that the relationship between the parties did not influence the price or that the transaction value closely approximates certain test values.
Phelan's letter to Yokell contained none of that information. Indeed, Phelan testified that his November, 1999 letter did not give Yokell all of the information that he would have given to Customs had this been SOA's first contact with that agency. (Tr. at 635-37.) Phelan assumed that because Customs had conducted a compliance assessment review in 1997, based on 1995 prices, the Boston office would access information from previous years in order to respond to his request. (PX 220.) Phelan did not send Mr. Yokel documentation regarding the prices paid to Fuji by SOA, or the prices paid to SOA by SDC. Customs was only told that there were two different prices. (Phelan Test.)
More importantly, Phelan testified that he did not advise Yokell about ¶ 4 of the NBOL Agreement, in which SOA disclaims any right, title, or interest in the vehicles following transfer of title — nor could he have, since that agreement did not go into effect until April 2000. Since the NBOL Agreement had yet to be negotiated, it appears that the parties were not even aware of all the permutations and dangers of their arrangement when this exchange of correspondence took place. For example, Phelan could not have told Yokell in November 1999 that SOA would change its status from owner of record to mere bailee prior to importation, because that issue had not even come up yet!
Thus, Phelan made a request and Yokell gave him an answer. But Yokell was not fully informed when he gave his answer (much as this Court was not fully informed when I issued the PI Opinion), and Phelan's request was premature.
Second, SOA appears to have gone to the wrong party by addressing Yokell. SOA claims it asked for a ruling in the only way that was proper — by going to the Director of the Port of Boston, rather than going to Washington, as SDC did. SOA argues that under 19 C.F.R. § 177.1, the issue should have been resolved at the Port of Boston, and that if that office was not able to resolve the issue then it was up to the office to forward the question to Headquarters.
Section 177.1 does state that "generally, a ruling [from Washington] may be requested . . . only with respect to prospective transactions — that is, transactions which are not already pending before a Customs Service office by reason of arrival, entry or otherwise." 19 C.F.R. § 177.1 (emphasis added). However, the language of this ruling does not preclude requesting a binding ruling from the Customs Service. SDC and SOA import cars every month. Their future imports can fairly be said to be prospective transactions, so a request to Washington is appropriate under § 177.1. Customs Service Ruling, "Transfer Pricing; Related Party Transactions," Jan. 21, 1993, 58 F.R. 5445, 5447, indicates that appealing to Washington for a formal ruling is an acceptable way of dealing with questions concerning the basis for appraisement, and Section 177.1(b) makes it clear that the only way to obtain a binding ruling is to go to Washington.
Defendant's counsel is correct that the reasonable care standard does not require seeking a binding ruling in all cases. However, an informal opinion from the field office is only as good as the information available to the field office. In a situation like this one, where a transaction is novel and consultation with experienced counsel led to vastly different opinions, the wiser course of action would have been to seek a formal, binding ruling regarding the parties' obligations.
(5) Irreparable Injury
SOA also contends that it recognizes its contractual obligations under the DA and that it has obligated itself, in the NBOL Agreement, to indemnify SDC and its banks from any customs duties, penalties or interest that might be assessed as a result of SOA's demand for payment before delivery. (PX 292; Sammons Stmt. ¶ 136.) Indeed, SOA asserts that it has posted $3,000,000 as a bond with Customs against such claims. (SOA Concl. of Law ¶ 60.)
The existence of SOA's indemnity does not preclude a finding of irreparable injury. For one thing, as SDC points out, that $3 million bond covers all of SOA's imports into the United States, not just those intended for SDC. SDC buys tens of millions of dollars of cars from SOA each month, so a $3 million bond gives it only minimal comfort. Furthermore, it is the potential alteration of SDC's status — from a party that was unquestionably NOT liable to the United States for duty to a party that MAY WELL BE liable for those duties — that creates the prejudice to SDC. In the past, there was no concrete danger that the Government would make SDC a party to any proceeding, or seek to hold it liable for any duty. If SDC is in fact the importer of record, its status changes dramatically. One can safely assume that Customs will look to SDC and let SDC look to SOA. This denies SDC the benefit of its bargain that SOA would be the Importer with all that that implies. Such an injury is not compensable.
Finally, assuming that SOA would honor its contractual obligations and bear all the costs incurred by SDC in resolving matters with the Government (including, of course, legal costs and business disruption costs), it would contradict the DA for SDC to be in the position of importer of record. And in light of past performance, this Court believes it likely that the issue of Customs indemnity would end up as a weapon in the long-running War Between the Subarus. The clear intent of the DA was to keep SDC from having any liability for or dealings with U.S. Customs; it should not have to bear any risk that its status will be altered.
(6) Conclusion
In light of all of the circumstances, SOA's obligations of good faith and fair dealing under the DA, and further obligations under UCC §§ 1-203 and 2-103(b) to act in good faith and in a commercially reasonable manner, SOA should have cooperated with SDC by joining in a ruling request to the Customs Service to determine (a) whether or not SOA could act as the importer of record after SOA has transferred title to SDC for the vehicles, and (b) if SOA could not legally act as the importer of record, the proper basis for appraisement of the vehicles imported into the United States. Assuming arguendo that the NBOL Agreement were valid, and given its extremely unusual (not to say unique) terms, I would enjoin SOA to participate in obtaining a formal ruling from the Customs Service.
SOA may have put SDC in a position where it faces significant exposure to U.S. Customs, where under the DA, it was intended to have none. I conclude that this exposure rises to the level of "extreme or very serious damage," and that it is irreparable. The burden on SOA of seeking a ruling from Customs would be minimal.
IV. Damages
A. Damages for benefits associated with drawdown before delivery
As I have concluded that SOA's insistence on a letter of credit that provided for drawdown before delivery was unreasonable in the context of the DA, SDC is entitled to damages for its lost use of the funds that were prematurely transferred to SOA. PX 302 and 309 correctly calculate such damages through October 2001. That amount is $715,667. SDC is also entitled to damages for the period from November 2001 through the date of entry of judgment, as well as interest on the entire sum at the statutory rate. When the Final Judgment is submitted for signing, SDC shall submit an updated damages calculation to the Court, using the same methodology employed in PX 302 and 309, together with an interest calculation.
B. The $50,000 payment
SDC seeks the return of a $50,000 fee that it paid to SOA as a condition of obtaining a month's postponement of the implementation of the new system for ordering additional vehicles. SOA rationalizes the $50,000 payment by relying on the one year delay in the implementation of its "valuable right to obtain payment before delivery." (SOA Proposed Concl. of Law 138). Regrettably, I have now found that SOA had no such right. Thus, SOA's rationale for demanding this penalty disappears. Moreover, the reason for the delay was the failure of SDC to close on its new and expanded credit facility by March 31, 2000. That, in turn, was caused solely by the parties' inability to finalize the NBOL Agreement. As I have found the NBOL Agreement to be commercially unreasonable, I conclude that SDC should not have had to buy extra time in order to have enough time to finish drafting it. And if it was commercially reasonable, I do not think it could have been finalized any sooner (see infra). Thus, SDC is entitled to a refund of the $50,000, with interest at the statutory rate from April 1, 2000.
C. Damages for failure to supply
SDC with additional cars Finally, SDC seeks $2,147,534 in damages due to SOA's failure to supply it with additional vehicles (over and above the quota) during the period January, 2000 through May, 2000.
SOA responds by reminding me of a comment I made during a hearing in May 1999. At that time, I observed that the sale (by SOA) or purchase (by SDC) of additional cars was purely discretionary, in that the DA imposed no explicit obligation on either side to buy or sell more cars than the monthly quota amount. SOA's principal rejoinder to SDC's claim is that it cannot be obligated to pay SDC damages for cars that it had no obligation to sell to SDC.
SDC begs to differ. It points out (correctly) that the DA contemplates that SDC will be able to purchase additional vehicles over and above the monthly quota amount, which is simply a floor, or minimum, purchase obligation. The fair implication of Article 9(4) of the DA, which provides for purchases "made in addition to those made pursuant to Article 7, paragraph 3 of this Agreement," — as well as the fair implication of the use of the word "minimum" in describing the quota obligation in Exhibit B to the DA — is that SDC will be able to purchase additional cars if additional cars are available.
Thus, the absence of a contractual provision expressly obligating SOA to provide SDC with additional vehicles over and above the quota cannot mean that SOA could refuse to supply SDC with more than its quota minimum of cars if such vehicles were available. To the contrary: since the DA contemplates that such sales will be made, U.C.C. § 2-615 requires that SOA maintain a fair and reasonable allocation system among its customers if there is less product than the customers would like to have. If Fuji were willing to sell SOA additional cars over and above the minimum purchase obligations of SDC and SNE and the number desired by SOA's regional sales offices, it would be patently unreasonable for SOA to refuse to allocate any of those remaining cars to SDC. UCC § 2-615; see also Intermar Inc. v. Atlantic Richfield, 364 F. Supp. 82, 99 (E.D.Pa. 1973); North Penn Oil and Tire Co. v. Phillips Petroleum Co., 358 F. Supp. 908, 922 (E.D.Pa. 1973).
UCC § 2-615 provides: Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:
(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.
Therefore, my off-handed comment at the hearing in May of 1999 was overly simplistic. SOA could not unilaterally refuse to sell any cars to SDC over and above the quota minimum, while providing such cars to SNE and the regional sales offices.
But, of course, SOA has never refused to sell SDC additional cars. Instead, following the issuance of the PI Opinion, it changed the rules for SDC's placement of additional car orders. SDC contends that this was done unreasonably, and thus operated as a de facto refusal to provide SDC with additional cars, as contemplated by Article 9(4) of the DA. SOA responds that these changes were made for a reasonable purpose and in a commercially reasonable way. Again, I side with SDC.
A review of the pertinent facts is in order. In April 1999 — shortly after the PI Opinion came down — SOA sent SDC a letter outlining a new system for the placement of orders for additional cars. (DX 121, 122.) The net effect of the new system was that SDC would have to order any additional cars five months prior to delivery — before Fuji even began manufacturing the vehicles — and would have to post a letter of credit to cover the order at that time. The form of letter of credit was to be the same as the proposed form of letter of credit discussed above — that is, it would provide for payment before delivery (i.e., the form of letter or credit that Chase would not issue). This new system was to go into effect June 1, 1999.
At the time this new demand was made, SDC's $90 million credit facility was strained to its limit, and SDC had opened discussions with Chase, its principal banker, concerning an expanded facility, as well as the form of letter of credit it would provide for use in purchasing cars from SOA. (Sammons)
The June 1999 changeover date for both implementation of a new form of letter of credit and the five-month-lead-time ordering system was postponed when the parties entered into mediation. (Muller; Sammons.) When mediation failed, SOA renewed its demand for a change in the ordering system for additional cars, this time setting a compliance date of November 1, 1999 (DX 136) — later changed to November 23, 1999 (DX 146). SOA demanded that SDC place its orders for additional vehicles "on or before the first day of the month that is four months before the Expected Delivery Month" — which meant five months before the expected delivery month for those vehicles and two months before the quota order for that month was placed. SOA further demanded that each additional order be binding on SDC (that is, SDC would have to purchase all conforming cars that were delivered), and that it "be accompanied by a separate letter of credit. . . issued by a bank satisfactory to SOA and in a form satisfactory to SOA . . . . of sufficient value to cover the cost of all vehicles ordered." SOA reserved the right not to fill an order for additional cars in its entirety. The letter of credit form demanded by SOA was, of course, the same form of letter of credit that Chase had previously refused to issue — the one that would eventually be modified as a result of the negotiation of the NBOL Agreement. (Sammons Stmt ¶¶ 147-148, PX 206.)
SDC argues that it was unable to comply with SOA's new rules for ordering additional vehicles by November 23, 1999, or at any time prior to May 1, 2000. Its inability, it contends, arose from SOA's insistence on letters of credit providing for payment before delivery, which complicated SDC's negotiation of a new credit facility and prevented that facility from being closed until late April, 2000. Without the new $150 million credit facility in place, SDC did not have enough credit to post letters of credit (regardless of their form) for both additional cars and for quota cars ordered for the same period. As far as SDC is concerned, SOA's demand — made with full knowledge that SDC needed additional credit in order to post all the letters of credit being demanded of it — was made in bad faith and for the purpose of forcing it to choose between ordering additional cars or defaulting on its monthly quota obligations.
SOA says not so. It asserts that its reason for changing the system for ordering additional vehicles was rooted in its relationship with Fuji and in SDC's belligerent insistence on exercising its right to reject any vehicle that did not comply with the perfect tender rule.
Prior to the issuance of the PI Opinion, SDC would "forecast" how many additional cars it expected to order approximately three months before the expected delivery month. It would not place an actual order for cars during that month and would not post a letter of credit at that time. These forecasts arrived after SOA had placed firm production orders with Fuji, and thus could not affect what vehicles Fuji would manufacture for delivery during the relevant period. SOA would then advise SDC about what cars would actually be available — information it would obtain from Fuji in or about the first week of the month immediately prior to the expected delivery month. SDC's firm order for additional cars (accompanied by a letter of credit) would be received approximately 2 to 3 weeks before the expected delivery month. (Muller ¶¶ 33, Lee ¶¶ 22-27; Scharff ¶ 26, DX 96, 101, 102. 104, 118.)
This system suited SDC's needs very well. It did not, however, suit SOA's. Because SDC did not finalize its order for additional cars until long after SOA had placed a firm order with Fuji for that time period, SOA did not know, at the time it ordered cars from Fuji, whether SDC would want any additional cars, how many it might want, or whether the particular vehicles SOA was ordering from Fuji were the ones SDC might like to have. (Muller ¶ 34, Adcock, ¶¶ 35-36.) SOA thus risked having cars on its hands that its own regional sales offices (which had forecast their needs for a particular delivery month prior to Fuji's production date for that month, see Noonberg letter to the Court dated 1/11/02) did not need and could not use. SOA also bore the risk that SDC would change its mind between announcing its forecast of cars to be ordered and the placing of a firm order, and would take delivery of fewer cars, or none at all — again leaving SOA with more cars than its own dealers needed or wanted. And, indeed, that is precisely what happened in some months. (DX 137, 147, 148, 166.) Even though SDC's quota orders far exceeded its additional car orders, the financial downside for SOA was obvious. As early as December 1998, (DX 108), SOA had notified SDC that this process could not continue past March 1, 1999. The demand letters served in April and September merely extended that deadline date — and, of course, added the new wrinkle of payment prior to delivery.
SOA's regional sales offices did not have to place firm orders five months in advance. They merely made projections of what would likely be desired. However, as SOA's counsel pointed out, the regional sales offices were SOA, and the risk that SOA would overpredict the number of cars it could sell five months hence was endemic to its business. That risk differed qualitatively, however, from the risk that a third party (SDC) would change its mind after predicting how many cars it would order. In the case of its regional sales offices, SOA was betting its own money.
In a post-trial letter (which I treat as an extension of the closing argument) counsel for SDC asserted that quota orders exceeded additional car orders by a ratio of 4 to 1. (Schreiber letter of 1/16/02.)
The new ordering system announced by SOA for additional vehicles solved SOA's problem by forcing SDC to commit to ordering a particular number of particular kinds of vehicles before SOA had to order additional cars from Fuji. This eliminated the risk that SOA would be left with cars on its hands either because (1) SDC didn't want the particular cars SOA had ordered from Fuji, or (2) SDC changed its mind between forecasting how many cars it wanted and actually ordering them. It created problems for SDC, however, because SDC's credit facility was insufficient to permit it to post letters of credit for additional cars so far in advance of delivery and still have enough credit left to meet its quota obligations.
SOA admittedly rejected SDC's orders for additional cars for delivery in the months of January through May, 2000. It rejected those orders on two grounds: the orders, placed between December 1999 and March 2000, were untimely under the new system, and the orders were not accompanied by a letter of credit conforming to SOA's terms. SDC contends that this was wrongful on SOA's part, and that it was deprived of $2,147,534 in profits that it would have earned had SOA sold SDC the additional cars it wanted for those months.
SOA, for its part, claims that it gave SDC more than reasonable notice of the changes it was making in the procedure for ordering additional vehicles; that SOA's reasons for changing the rules were well within the bounds of commercial reasonableness; and that it offered to accept a modified form of letter of credit — one that did not require payment before delivery — during the period while the details of the payment before delivery issues were worked out. It also contends that SDC acted unreasonably in suspending its negotiations over an extended credit facility during the mediation period, thus creating its own dilemma when those negotiations fell apart, and that SDC could have obtained additional vehicles during the months between January and May 2000 — even without having a new credit facility in place — by paying cash (of which it allegedly had an ample amount on hand) for the cars.
Other than by refusing to honor SDC's orders for delivery of additional cars during this five month period, there is no claim that SOA has misallocated or malallocated cars.
I conclude as follows:
1. SDC did not act unreasonably by suspending negotiations with its banks during the mediation period. The negotiation of the credit facility that was ultimately put into place demonstrates this. Because of the parties' contentiousness, the banks in SDC's credit facility wanted some certainty about how the parties were going to conduct their affairs before they would finalize the new facility. With the Court pressuring SDC and SOA to renegotiate their contract, no such certainty was possible. Thus, negotiations over a new credit facility while mediation was ongoing would have been foolish.
2. SOA's reason for wanting SDC to order additional cars at an earlier date — to give it greater certainty in its dealings with Fuji — is objectively reasonable. Moving the order date for a particular delivery month back to a date prior to Fuji's production date for that month conformed SDC's practice to that of SOA's regional offices, which projected their vehicle needs five months in advance of delivery. SOA was subjected to an unreasonable degree of risk when SDC merely "predicted" what it would want to order, reserving the right to change its mind and not placing a final order until shortly before the vehicles were due — in some cases, after the cars had been shipped. That arrangement did not allow SOA sufficient flexibility to deal with SNE and its own regional offices in a commercially reasonable manner.
No inference adverse to SOA can be drawn from its failure to impose a five month lead time requirement on SNE, its other independent distributor. SNE's DA was amended in 1980 in ways that made it radically different from SDC's in terms of its ordering and payment obligations. (PX 30.) SDC was offered the same amendment but refused it (Tr. at 33-34.)
3. The DA gave SOA control over the procedures for ordering additional vehicles, and contemplated that those procedures could change from time to time. (Article 9(2)). SOA did not waive its right to alter or modify the system for ordering additional cars either by permitting SDC to follow the "projection" method until 1999, or by repeatedly acquiescing in the extensions of the deadline for beginning the five-month-lead-time system it announced in April 1999.
4. Article 9(4) of the DA required SDC either to pay cash for the vehicles or to post letters of credit — in either event at the time it placed orders for additional cars.
5. During the relevant months, SDC was ordering approximately $9 million to $10 million worth of additional cars for delivery in a given month. (DX 147, 160, 166, PX 302, 309) Securing orders with cash five months in advance would have quickly depleted any cash reserves available to SDC. SDC had cash on hand in November 1999 of $36,562,000. Placing orders for the months of January, February and March 2000 on November 23, 1999, as demanded by SOA, and securing those orders with full cash payment, would have left SDC with insufficient cash to meet its minimum cash reserve requirement as imposed by its banks (Tr. at 254-55) and would have left it without any money to pay bills in due course or to meet unanticipated expenses (such as would occur if SOA attempted to deliver vehicles early) (Tr. at 255-56). Placing an order in December secured by cash for April delivery would only have made matters worse. SDC could not, and could not reasonably have been expected to, tie up all or even most of its available cash by posting sums in the tens of millions of dollars in order to secure firm orders for five months' worth of additional vehicles.
6. SOA knew the size of SDC's credit facility and was aware that its new ordering system for additional cars would give rise to significant problems for SDC, at least until SDC could increase its already strained $90 million credit facility. SOA was also aware that its unorthodox demand for a letter of credit that provided for draw down prior to delivery was complicating SDC's dealings with Chase, its lead lender. And at least Joseph Scharff at SOA was aware that SOA's obligation to serve as Importer (under the DA), including bringing the cars into the country and paying duty on them, added another layer of complication to the letter of credit process. (Tr. at 732-33.) Accordingly, SOA was required, under its duty of good faith and fair dealing, to give SDC a commercially reasonable period to complete its credit negotiations and get its new facility in place before implementing the new ordering system as demanded by SOA in the Noonberg letter of September 24, 1999.
7. SDC and Chase arranged for the new credit facility within a commercially reasonable time under the circumstances. Within one month of receiving SOA's renewed demand for compliance with the new ordering system — and prior to the November 1 compliance date set forth in Lewis Noonberg's letter of September 24, 1999 — Chase had agreed to issue a letter of credit that provided for payment before delivery. (PX 212) Given that there were no standard forms for this unorthodox transaction, this was more than reasonable turnaround time. In connection with its agreement to issue such a letter of credit, announced on October 22, 1999, Chase identified the "anomaly" that payment before delivery would give rise to — an inability on SOA's part to bring clear the cars through Customs, since it would no longer have possession of the bills of lading and insurance documents. (PX 212) Immediately, two things happened. First, SDC demanded that SOA not implement the new ordering system for additional cars until this "anomaly" could be worked out. Second, SOA announced that it would not require SDC to post letters of credit providing for payment before delivery to secure additional car orders placed in November and December 1999 (for delivery in January, February, March and April 2000). Instead it sent SDC a new and wholly different letter of credit — one that did not conform either to the form of letter of credit theretofore used in SDC/SOA transactions or to the form of letter of credit that Chase had just laboriously approved! (Tr. at 363-365, PX 215) This was done because SOA was not yet ready to accept letters of credit creating an "anomaly," since (unbeknownst to SDC and Chase) it was still subject to the Marubeni Agreements and could not pass title to the vehicles if drawdown occurred during transit. In order to kick-start the new ordering system, SOA could have opted to use the form of letter of credit posted by SDC in prior months, or it could have told Chase to issue the newly-approved form of letter of credit and simply not drawn it down prior to delivery of the cars. It did neither. By tossing into the mix yet another form of letter of credit, SOA put the parties back at square one five days before the deadline for implementing the new ordering system. Having elected that course, SOA cannot be heard to complain that Chase had some problems with its latest letter of credit and reopened negotiations.
8. Negotiations over the interim form of letter of credit took two months to complete. I have no basis to conclude that it could have been concluded faster. As all my sympathies in this matter are with poor, beleaguered Chase, and as there is no evidence in the record that it was responsible for any unreasonable delay, I conclude that the negotiation period for the interim letter of credit was reasonable.
9. Chase approved an interim form of letter of credit as an accommodation to SDC on January 4, 2000. It issued the first such letter of credit on January 7, 2000 (DX 158). Nonetheless, SDC did not place an order in early January for delivery in May 2000. It justifies this by asserting that the deadline for placing such orders was January 1, and asserts that an order for additional cars placed on January 7 would have been rejected.
10. It was commercially reasonable for SOA to demand that SDC move to a five month lead time ordering system for additional cars. Moreover, SDC had commercially reasonable notice of that change. SOA had indicated as early as December 1998 that it wanted to move to a different ordering system, and it first notified SDC of the five month requirement in April 1999. By November 23, 1999, SDC had been given ample notice of this change. To the extent that SOA's continued postponement of the effective date for this change, and its acceptance of orders on less than five months' notice, could be deemed a waiver, SOA gave SDC reasonable notice that it was retracting the waiver when it so stated in April and again in September 1999. UCC § 2-209(5)
11. Given its cash situation as described above, SDC did not have an obligation to mitigate damages by paying cash for vehicles when it placed its orders.
12. SDC did have an obligation to mitigate its damages if it could do so in ways other than by paying cash. When SOA rejected as untimely SDC's December 1999 firm order for delivery of additional cars in January 2000, SDC was on notice that the five month lead time requirement had been imposed, whether SDC liked it or not. It was, therefore, obligated to place an order for delivery five months hence as soon as it could post some form of letter of credit acceptable to SOA. It was able to do that on January 4, 2000. SDC therefore had an obligation to mitigate its damages by immediately ordering cars for delivery in May 2000. While it is possible that SOA would have rejected the order as untimely, SDC had to place the order in order to mitigate. It did not do so.
If I understand the record correctly, SDC did not place orders in February, March and April 2000 for delivery in June, July and August, respectively. It placed orders for delivery in those months after the NBOL Agreement was signed and the new credit facility was finalized. However, SOA delivered vehicles to SDC during the summer months of 2000. SDC attributes this to SOA's realization that it could no longer force SDC into default, due to the increase in SDC's credit facility. One can, however, derive from these facts the inference that SOA would have accepted an order from SDC that arrived an inconsequential number of days after it was due. That is the inference I choose to draw.
13. However, when SOA rejected SDC's first order (placed in December 1999) as untimely, it was already too late for SDC to order additional vehicles for the months of January, February, March and April in compliance with SOA's new regimen. Furthermore, SDC could not have posted a letter of credit for additional vehicles "acceptable to SOA" prior to Chase's accommodation in January 2000. Therefore, it was commercially unreasonable for SOA to refuse to deliver cars to SDC in those months on the ground that SDC had not complied with the new ordering procedure.
14. SDC shall recover from SOA the sum of $1,697,263, plus interest at the statutory rate from time to time, as a result of SOA's failure to deliver additional cars during the months of January through April 2000 in a commercially reasonable manner.
V. Other Contract Interpretation Issues
As to all other issues of DA interpretation, I adhere to the determinations made in the PI Opinion.
The parties have asked that I specifically address the issue of who designates the port of entry for SDC's cars. I found in 1999 that SDC had that right, and I see no reason to change that holding. While SOA is correct that Article 9(7) refers to the port of entry "designated by Importer" (i.e., SOA), Article 9(6) of the DA entitled "Port of Entry" is the provision that controls this issue. It provides "the port of entry shall be Baltimore or any other port location which is approved in writing by SDC." SOA is not mentioned in Article 9(6) as having any role at all in selecting the port of entry. SDC thus has ultimate control over designations of the port.
It is undoubtedly the case that the drafters of the DA contemplated a cooperative venture between the parties, extending to the designation of a port of entry. Indeed, that may account for Article 9(7)'s otherwise mystifying reference to the port of entry "designated by Importer." However, since it is clear that these parties cannot or will not cooperate with each other, SDC's absolute right of approval in Article 9(6) trumps any passing (and possibly erroneous) reference to SOA in other provisions of the DA.
This result make eminent sense, since it is SDC that must obtain facilities in which to offload, store and prep the vehicles prior to transporting them to its dealers. If SOA were able to force SDC to accept its designated port — or block the use of a port in which SDC was able to locate a reception facility — it could frustrate SDC's ability to comply with its contractual obligations to both SOA and its dealers.
The parties have also asked that I determine when SDC can begin prepping and reselling vehicles it purchases from SOA, consistent with the DA and the UCC. At present, this particular dispute has to do with the vehicles manufactured and sold to SDC in the United States, not the imported vehicles. However, in view of my ruling on the reasonableness of the NBOL Agreement and the payment before delivery arrangement, it may well become the next bone of contention over imported cars.
Chase noted, in the "anomaly" letter of October 22, 1999 (PX 212), that a provision in its letter of credit permitting SOA to present documentation as late as 28 days after shipment meant that in some cases vehicles would arrive in the United States before Chase was able to complete inspection of the documents presented. In such instances, the cars could be delivered prior to payment.
Once SDC takes title to the cars, it is free to do whatever it wishes with them, subject only to whatever security interest Chase or any other party retains in the goods. The question is: when does SDC take title?
Under the DA, as originally drafted, SOA held title "until Importer shall have invoiced the SA Products to Distributor [i.e., until SOA billed SDC] at which time title shall pass to Distributor [SDC]" (DA, Article 9(5)). That provision explicitly identified the exact moment when title passed.
In 1981, the DA was amended, and Article 9(5) was rewritten to provide that title to the cars "shall remain with Importer [SOA]. . . . . . . .until Importer shall have invoiced the SA Products to Distributor and shall have received good collected funds in payment of the full purchase price thereof." (DX 19) The words "at which time title shall pass" were eliminated. The question is whether this change fundamentally transformed Article 9(5).
Under the UCC § 2-401, title to goods passes upon delivery, with the seller's rights limited to a reservation of a security interest. However, § 2-401, like almost all of the UCC, is an "unless otherwise agreed" provision. As long as the parties to a contract explicitly agree that title shall pass at some other time, it does. Contrary to SDC's assertion (made in Mr. Schreiber's letter of January 17, 2001), the parties are free to agree that title passes prior to or subsequent to delivery, and nothing in Hong Kong Shanghai Banking Corp. v. HFH USA Corp., 805 F. Supp. 133, 142 (W.D.N Y 1992) makes an agreement that title shall pass after delivery contrary to law. However, any such agreement must be explicit. Otherwise, the Code, by operation of law, transforms a retention or reservation by the seller of title in goods shipped or delivered to the buyer into a reservation of a security interest.
Under the original Article 9(5), the parties explicitly agreed that title would pass at the moment of invoicing. That provision clearly falls under § 2-401(2)'s "unless otherwise agreed" language. When this provision was amended, however, the language expressly identifying the moment that title passed was deleted, and was replaced with language that can only be interpreted as retention of title language ("Title to the SA Products sold shall remain with Importer") The language that follows, which recognizes SOA's right to retake and resell the goods until time of payment, is as consistent with a security interest as with having title.
In the PI Opinion, this Court opined that title to the goods passed upon payment. That remains true as long as payment precedes delivery. However, if delivery precedes payment, given the parties' choice of verbiage back in 1981, title passes upon delivery. If SOA wishes to prevent SDC from prepping and reselling vehicles until after it has been paid, it will have to obtain payment prior to delivery.
The parties have also asked that I make explicit findings (and rather detailed ones) concerning the rejection of orders, or part thereof, and the consequences of so doing. Accordingly:
(1) Under the DA § 9(2) and UCC §§ 1-203, 2-103(b), 2-206(2) and 2-311(2), SOA must accept or reject in writing Quota Orders and/or Additional Orders for specific quantities of model codes and colors, in whole or in part, within a reasonable time after the placement of the order, and in good faith and in a commercially reasonable manner.
(2) With respect to those vehicles in the Quota Orders and/or Additional Orders that have not been so accepted or have been so rejected by SOA, SDC is no longer bound by such Quota Orders and/or Additional Orders, SDC may revoke such orders and SOA must promptly authorize a corresponding reduction to the amount of the accompanying DLC promptly following 57 such rejection and/or revocation.
(3) After SOA knows that it will not accept SDC's Quota Orders and/or Additional Orders for particular vehicles, SOA must reject in writing the portion of such orders covering those vehicles within a commercially reasonable time, and promptly thereafter authorize a reduction of SDC's DLCs.
(4) Under the DA § 9(2), to the extent that SOA partially accepts SDC's Quota Orders and/or Additional Orders, SDC is no longer bound by the balance of such orders and SOA shall promptly authorize a corresponding reduction in the amount of DLCs covering such orders.
(5) Under the DA § 9(2) and UCC §§ 2-601 and 2-602, when SDC timely and properly rejects vehicles for which SOA has been paid by drawing on SDC's DLCs or otherwise, SOA is required to refund promptly to SDC any payment made by SDC for such vehicles and to pay SDC's other related costs, together with interest at the applicable statutory rate.
(6) Promptly after the acceptance and/or rejection of all or any part of a Quota Order or Additional Order by SOA, SDC is required to participate, in good faith and in a commercially reasonable manner, in a "dicker" process to see whether vehicles that do not conform precisely to its order would be acceptable substitutes. Failure by SDC to participate in such process is commercially unreasonable and a breach of SDC's duty of good faith and fair dealing under the DA.
Settlement of Judgment
This constitutes the Court's findings of fact, conclusions of law, and verdict after trial.
The parties have ten (10) days within which to settle a form of judgment. Please do not try to insert anything into the proposed judgment that has not been dealt with explicitly above. Anything that is not discussed above, but that is subsumed under the statement that "all other holdings in the PI Opinion are affirmed," shall not be separately set forth in the judgment, but the judgment should contain a statement to that effect.
The proposed judgment should be accompanied by an updated damages calculation for the use of money paid before delivery under the NBOL Agreement, and including all pre-judgment interest calculations, computed through the tenth day following submission of the proposed judgment (set forth on a day-by-day basis, as I cannot promise when judgment will be entered).
The parties should know now that I do not intend to stay enforcement of the judgment pending appeal.
The parties should make arrangements with chambers to retrieve the papers and exhibits that were used during the trial.