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No Cure Opportunity Required Where Auto Dealer's Breach is Incurable

Publisher: Day Pitney Franchise Case Note
May 17, 2013
Day Pitney Author(s) Dennis R. LaFiura

Giuffre Hyundai, LTD v. Hyundai Motor America, No. 13-cv-0520, 2013 U.S. Dist. LEXIS 67795 (May 10, 2013)

Many state motor vehicle dealer statutes require that franchisors provide dealers with an opportunity to cure contractual breaches prior to implementing terminations. The question of whether such a statutorily-mandated cure provision required a motor vehicle franchisor to provide a dealer with an opportunity to cure a breach that, absent the statute, would be incurable was recently decided by the United States District Court for the Eastern District of New York in Giuffre Hyundai, LTD v. Hyundai Motor America, No. 13-cv-0520, 2013 U.S. Dist. LEXIS 67795, at *4-5 (May 2, 2013). The New York Franchised Motor Vehicle Act (the "Dealer Act") requires that a franchisor provide a dealer with a "reasonable time" to cure a material breach of contract that forms the basis for a termination. N.Y. Veh. & Traf. Law § 463(2)(e)(2). The Dealer Act does not, however, expressly address the interplay of the statutory cure period with common law principles applicable to incurable breaches. In Giuffre, the court concluded that the Dealer Act does not require a motor vehicle franchisor to provide a dealer with an opportunity to cure breaches that were incurable under New York common law.

Termination of the Franchise and the Prior Lawsuit

Hyundai Motor America ("Hyundai") and Giuffre Hyundai, LTD (the "Dealer") had a longstanding franchise relationship. The parties' franchise agreement contained a termination provision that permitted Hyundai to terminate the Dealer upon a finding by any court or government agency that the Dealer engaged in, among other bad acts, any misrepresentations or unfair or deceptive trade practices. In a prior civil lawsuit brought by the Attorney General of the State of New York against the Dealer, a state trial court found that the Dealer had engaged in widespread deceptive business practices that violated several state and federal consumer protection laws. Relying on this finding, Hyundai terminated the Dealer's franchise for "material and incurable breach of its obligations" under the franchise agreement. Hyundai provided the Dealer with the statutorily-mandated ninety days written notice of termination, but did not provide the Dealer an opportunity to cure the breach.

The Dealer filed an action against Hyundai seeking reinstatement of its dealership. On cross-motions for summary judgment, the Dealer challenged Hyundai's notice of termination, contending, among other things, that Hyundai failed to provide the Dealer with an opportunity to cure the breach in violation of Section 463(2)(e)(2) of the Dealer Act. Hyundai contended that no opportunity to cure was required because the breach was incurable.

New York Common Law Principles Relating to Incurable Breaches Are Not Modified by Statutory Opportunity to Cure

Under the Dealer Act, "due cause" is required before a franchisor may terminate a dealer, regardless of the terms of the franchise agreement. N.Y. Veh. & Traf. Law § 463(2)(d)(1). A franchisor terminating under this provision must give the dealer ninety days written notice of its intent to terminate. Id. At issue in this case was Section 463(2)(e)(2) of the Dealer Act, which mandates that such written notice of termination must be issued with "due cause" and in "good faith." N.Y. Veh. & Traf. Law § 463(2)(e)(2). This provision provides that "due cause" exists when there is "a material breach by a new motor vehicle dealer of a reasonable and necessary provision of the franchise if the breach is not cured within a reasonable time after written notice of the breach has been received . . ." Id. (emphasis added).

The court found that a provision of the franchise agreement explicitly required the Dealer to "maintain a high standard of ethical care in the operation of the franchise," and concluded that the Dealer's widespread deceptive business practices were "egregious violation[s]" of that provision. Id. at *10. The court concluded that the breach was material and incurable because it went to the essence of the franchise agreement and "fundamentally damaged the parties' business relationship." Id. at 10. The "reputational poisoning" of the public's trust in Hyundai caused by the Dealer's breach and bad conduct, the court reasoned, could not be cured without "turning back the clock." Id. at *10-11.

The court recognized that Section 463(2)(e)(2) of the Dealer Act prescribes a cure period, but rejected the Dealer's argument that Hyundai was required to provide the Dealer with a right to cure its breach. The Dealer Act, the court concluded, does not abrogate the New York common law principle that a party to a contract commits a material breach when it violates a provision that goes to the "root of the agreement" between the parties. Id. at *7-8. New York law permits a party to "terminate an agreement immediately and without notice and an opportunity to cure when the misfeasance is incurable and when the cure is unfeasible." Id. at *9-10. The court found that Hyundai had ample basis for terminating the Dealer and did so with due cause and in good faith, as the statute required. Id. at *12. Finding that no opportunity to cure was required, the court granted summary judgment in favor of Hyundai and dismissed the case.

Ordinarily, where statutory law conflicts with a common law principle or claim, the statutory law controls. See, e.g., Israel v. Chabra, 537 F.3d 86, 100 (2d Cir. 2008). However, under New York common law, there is a presumption that statutory law does not override the common law unless "a clear and specific legislative intent" is found. Id. (citing Hechter v. N.Y. Life Ins. Co., 46 N.Y.2d 34, 39 (1978)). Although the court in Giuffre did not perform a "clear and specific legislative intent" analysis, it appeared to apply this presumption when it found that the Dealer Act did not modify common law concepts applicable to incurable breaches. See Giuffre, 2013 U.S. Dist. LEXIS, at *10.

This decision highlights a potentially useful argument for motor vehicle franchisors when addressing the cure periods that are frequently mandated by state motor vehicle dealer statutes. Such statutes rarely, if ever, expressly address whether a right to cure is required for breaches that are incurable. Indeed, given the prevalence of special statutory provisions providing for immediate or expedited terminations for certain forms of inherently incurable breaches, such as convictions of felonies that impact on the franchised business or insolvency, see, e.g., N.Y. Veh. & Traf. Law § 463(2)(d)(3), motor vehicle franchisors can argue that the legislatures in most states have recognized that not all breaches are capable of being cured. In Giuffe, the court took that analysis one step further by recognizing that the Dealer Act does not require a right to cure where the breach is incurable as a matter of common law.