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Coast Automotive Group, Ltd. v. VW Credit, Inc.

119 Fed. Appx. 419 (3rd Cir. 2005)

FRANCHISE AGREEMENTS—Where a franchisee fails to substantially adhere to its obligations under its franchise agreement, the franchiser need not perform its duties and is permitted to advance its own interests and urge adherence by its franchisee to those obligations.

A franchised car dealership claimed that after it filed for bankruptcy, its franchiser began to supply it with cars that were not salable, and this ultimately forced it to sell its dealership. The franchiser defended its conduct by claiming that the franchisee did not substantially adhere to its franchise agreement.

According to the franchiser, its franchisee breached the franchise agreement in two respects: 1) by failing to keep an adequate floor plan to sell the cars; and 2) by misrepresenting its financial status on its application to transfer the franchise – where the franchisee claimed that it personally owned over a million dollars in funds that in reality came from overseas investors. The franchiser argued that both of these breaches amounted to a failure to substantially adhere to the franchise agreement. The Court agreed that the franchisee’s failure to retain an adequate floor plan to sell the cars was a breach of the franchise agreement, but the Court’s ultimate finding was that the misrepresentation of financial capability on the dealership application was a significant breach of the franchise agreement and this provided adequate support for the franchiser’s substantial adherence defense.

Finally, the Court held that the franchiser’s conduct was neither coercive nor in bad faith since a franchiser is allowed to advance its interests and urge adherence to franchisee obligations.

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