Appendix — Cullen v. BMW of North America, Inc.

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APPENDIX A.

Decision and Order of United States Court of Appeals,

Dated October 13, 1982.

UNITED STATES COURT OF APPEALS,

FOR THE SECOND CIRCUIT.

No. 1141 August Term, 1982

Argued May 27, 1982 Decided October 13, 1982

Docket No. 82-7118

THOMAS W. CULLEN, Jr.,

Plaintiff-A ppellee,

against

BMW OF NORTH AMERICA, Inc.,

Defendant-Appellant.

Before:

LUMBARD, MOORE, OAKES, Circuit Judges.

Appeal from a judgment of the United States District

Court for the Eastern District of New York, Honorable

Edward R. Neaher, Judge, in favor of plaintiff-appellee

2a

Thomas W. Cullen, Jr., in the amount of $18,000 plus in-

terest, and from a judgment denying defendant’s motion

to amend the judgment.

Reversed.

Louis J. Castellano, Jr., Garden City, New Jersey, for

Plaintiff-Appellee.

Kevin P. Hughes, New York, New York (Weil, Gotshal

& Manges, Salem M. Katsh, Yvette Miller, Richard S.

Taffet, Jonathan M. Hoff, of counsel), for Defendant-

Appellant.

Rivkin Sherman and Levy, Washington, D.C. (Milton

D. Andrews, Esq. and Lance E. Tunick, Esq., of counsel)

for Amicus Curiae, Automobile Importers of America,

Inc.

MOORE, Circuit Judge:

Defendant BMW of North America, Inc.

(‘‘BMW/NA’’) appeals from a judgment of the United

States District Court for the Eastern District of New York,

Honorable Edward R. Neaher, Judge, in favor of Thomas

W. Cullen, Jr., in the amount of $18,000 plus interest, and

from a judgment of that same court, denying defendant’s

motion to amend the judgment. BMW/NA is the exclusive

importer and distributor in the United States of passenger

cars, parts, and products manufactured by Bayerische

Motoren Werke, AG. On appeal, BMW/NA claims that

the district court erred in finding that it had breached a

duty under New York law actively to police the methods of

operation of its franchisee, Bavarian Auto Sales, Inc.

(‘‘Bavarian’’), and had negligently permitted Bavarian to

continue as a BMW dealer. We agree with BMW/NA that

it did not owe a duty to supervise the operation of

Bavarian and to terminate the franchise because of its

allegedly precarious financial condition. Accordingly, we

reverse the judgments of the district court.

3a

FACTS

On January 24, 1979, Thomas W. Cullen, Jr., and his

wife drove past the showroom of Bavarian and decided to

shop for a car. Cullen selected a new 1978 BMW, Model

530i, at a price of $18,245, and placed a deposit of $245 on

the vehicle. Although Cullen had originally been told that

the car would not be available for seven to ten days, a

Bavarian salesman called Cullen five days later, advising

that the car had arrived and requesting a check for the

balance of the purchase price. Cullen promptly remitted a

check in the amount of $18,000, which was cashed by

Bavarian. However, Cullen never received the automobile

or the return of his money. In fact, Hans Eichler,

Bavarian’s president and owner of a 60 percent interest in

the franchise, had stolen and absconded with Cullen’s

money. At no time relevant to the transaction, however,

did Cullen have any contact, in person, by telephone, or

by mail, with any representative of BMW/NA.

Cullen subsequently commenced a civil suit against

Bavarian in New York State Supreme Court, Nassau

County. The suit was stayed after Eichler filed a petition

in bankruptcy. Cullen also filed criminal complaints with

the Queens County District Attorney and the Attorney

General of the State of New York, but no indictments

were issued.' In addition, Cullen brought this action based

on diversity grounds against BMW/NA.

Bavarian was operating as a franchised BMW dealer,

with Eichler as its principal, when BMW/NA assumed

control over the distribution of BMW automobiles in

March, 1975. It continued to operate as a franchised

BMW dealer until February 16, 1979 when the dealership

ended.’

Pursuant to a standard operating agreement with

BMW/NA, Bavarian was responsible for maintaining a

4a

prearranged line of credit with a financial institution to be

used exclusively for the purchase of BMW vehicles.

Bavarian, however, permitted its line of credit to lapse.

Prior to August, 1976, Bavarian had a line of credit with

the State Bank of Long Island. On August 18, 1976,

however, the bank informed BMW/NA that it had ter-

minated its relationship with Bavarian because Eichler had

advised the bank that he had arranged to handle

Bavarian’s credit requirements from personal resources.

BMW/NA experienced difficulty, however, in receiving

payment for cars and parts and placed Bavarian on a

C.O.D. certified check basis, rather than open account

status, in the latter part of 1976.

In June, 1977, BMW/NA received a letter from the

Israel Discount Bank stating that effective June 16, 1977,

Bavarian had established a line of credit for $200,000.

From the latter part of 1976 through August 22, 1977, the

Israel Discount Bank had paid for approximately eighty-

seven vehicles purchased by Bavarian even though no

formal letter of credit was in effect for most of this period.

The bank also paid BMW/NA for another twenty-six

vehicles between September 30, 1977 and December 27,

1977. The Israel Discount Bank continued as Bavarian’s

credit facility through the summer of 1978. The bank paid

BMW/NA for fifty-three automobiles between January 1,

1978 and August 18, 1978. In the fall of 1978, however,

the bank concluded that the dealership was experiencing

financial difficulty and decided not to extend further

credit. The bank’s decision was in part based upon certain

tax levies and other legal actions filed against the Bavarian

franchise. BMW/NA was unaware, however, of any tax

levies filed against Bavarian or the reasons behind the

Israel Discount Bank’s decision to terminate Bavarian’s

line of credit.

Sa

At approximately the time at which Bavarian lost its line

of credit, BMW/NA began receiving an inceased number

of customer complaints concerning the Bavarian fran-

chise. These complaints ranged from the issuance of

checks on accounts with insufficient funds to alleged

delays in return of customer deposits. Although an in-

vestigaton by BMW/NA revealed that all complaints had

been satisfactorily resolved and all checks were covered on

re-presentation, BMW/NA remained disturbed by

Bavarian’s continued failure to satisfy certain re-

quirements of its contract with BMW/NA, such as sub-

mitting monthly financial statements,’ and the increased

number of checks which Bavarian had issued on accounts

with insufficient funds.‘

Eichler attempted to reassure BMW/NA of Bavarian’s

financial viability, indicating that he was actively

negotiating with a variety of financial institutions to ob-

tain a line of credit. By mid-September, however,

Bavarian still had not been able to secure credit funds, and

BMW/NA met with Eicher to discuss the future of the

franchise. After reviewing the dealership’s file. BMW/NA

concluded that it would be difficult to terminate the

Bavarian franchise at that time, without adquate written

documentation certifying the dealer’s deficiencies and

without providing Bavarian an opportunity to correct

those deficiencies. Accordingly, BMW/NA_ granted

Bavarian sixty days to cure all deficiencies, and BMW/NA

personnel closely monitored the franchise during this

period. BMW/NA continued to operate as a BMW dealer

and service facility and maintained the minimum number

of vehicles required by its contract with BMW/NA.

At Bavarian’s request, the original sixty-day period was

extended until November 14, 1978. On the following day,

Eichler informed BMW/NA that he had verbal approval

6a

from Citibank for credit and that he was awaiting confir-

mation. Although the Citibank commitment did not

materialize, the Lloyd Capital Corporation (‘‘Lloyd’’) ad-

vised BMW/NA, by letter dated December 7, 1978, that

Bavarian had established a line of credit for $400,000 ex-

clusively for BMW _ automobiles. Lloyd informed

BMW/NA that the letter of credit had been withdrawn. *

The seven vehicles were then removed from Bavarian and

were reallocated to a nearby BMW dealer. Moreover,

Friedrich Hanau, vice-president of BMW/NA, im-

mediately wrote to Eichler, setting forth the company’s

position that unless Bavarian corrected its continuing defi-

ciencies within an additional sixty days, BMW/NA would

serve a notice of intent to terminate the franchise. Eichler

responded on December 28, 1978, indicating that he was

accelerating his efforts to obtain a line of credit, and ex-

pressing his desire to continue as a BMW dealer. In early

January, 1979, however, Eichler advised BMW/NA that

he desired to sell his franchise to another automobile

dealer. This prospective purchaser submitted an applica-

tion which BMW/NA, in early February, rejected for fail-

ing to satisfy BMW/NA’s established standards for a new

dealership.

On February 13, 1979, BMW/NA officials again met

with Eichler to discuss the future of the franchise. At this

meeting, BMW/NA officials learned that Eichler had ac-

cepted deposits from customers totalling approximately

$100,000 and that he had used this money for his own pur-

poses. Three days later, BMW/NA accepted Eichler’s

voluntary letter of resignation.

DISCUSSION

Cullen alleged at trial two theories of liability: (1) that

Bavarian acted as BMW/NA’s agent pursuant to prin-

ciples of either actual agency or agency by estoppel; and

7a

(2) that BMW/NA negligently permitted Bavarian to con-

tinue as a BMW dealer because it had knowledge of

Bavarian’s precarious financial condition.* The district

court rejected the first theory of liability, finding that

Cullen failed to prove the essential elements supporting a

theory of agency by estoppel.’ The court held, however,

that BMW/NA was liable for damages under the

negligence theory, finding that Cullen had met his

‘**burden of proving facts which give rise to a legal duty on

the part of BMW/NA, for the protection of its

franchisee’s customers, to reasonably police the author-

ized use of the BMW name and supervise the operation of

its franchise.’’ Cullen v. BMW of North America, Inc.,

No. 79 C 970, slip op. at 12 (E.D.N.Y. Oct. 28, 1981). In

imposing a duty on BMW/NA, the district court found

that BMW/NA ‘‘was apprised of Bavarian’s propensity

for unscrupulous business transactions,’’ Cullen v. BMW

of North America, Inc., No. 79 C 970, slip op. at 25

(E.D.N.Y. Jan. 29, 1982), and that as a result,

‘‘BMW/NA should have reasonably foreseen that

Bavarian might have intentionally caused some financial

harm to some BMW custome as a result of its original

negligence... .”’ Jd. The court thus concluded that where

a franchisor, such as BMW/NA, has a ‘‘reasonable op-

portunity to reduce the risk of foreseeable injury’? caused

by its franchisee, id., but fails to terminate its franchisee

or take other appropriate action, the -franchisor is

negligent and is liable for damages suffered by the

ultimate consumer.

We conclude, however, that the district court im-

properly determined that Cullen’s injury was reasonably

foreseeable, and thus erred in finding BMW/NA liable for

negligent failure to police the methods of operation of its

independent franchisee and to terminate the franchise

because of Bavarian’s precarious financial condition.

8a

‘‘The law does not undertake to hold a person who is

chargeable with a breach of duty toward another, with all

the possible consequences of his wrongful act.’’ Lowery v.

Western Union Telegraph Co., 60 N.Y. 198, 201 (1875). It

is thus a well-established principle that foreseeablity of in-

jury is an indispensable requisite of negligence, and that

negligence exists only when there is a reasonable likelihood

of danger as the result of the act complained of. Ward v.

State of New York, 81 Misc.2d 583, 366 N.Y.S.2d 800

(N.Y. Ct. Cl. 1975). Accordingly, an intervening act, tor-

tious or criminal, will ordinarily insulate a negligent

defendant from liability when the subsequent act could

not have been reasonably anticipted by the defendant.

Tirado v. Lubarsky, 49 Misc.2d 543, 268 N.Y.S.2d 54

(N.Y. Civ. Ct.), aff'd, 52 Misc.2d 527, 276 N.Y.S.2d 128

(N.Y. App. Div. 1966).

Applying these principles to the instant action, we

decline to hold BMW/NA negligent and liable for

damages since it could not reasonably have anticipated the

crimes committed by Bavarian’s principal, Eichler.

Although BMW/NA may have been aware of Bavarian’s

shaky financial condition, that knowledge alone gave

BMW/NA no cause reasonably to anticipate that Eichler

would either engage in any criminal activity or that he

would abscond with customer funds. In fact, no amount

of supervision by BMW/NA would have enabled it to

foresee Eichler’s thievery. Moreover, even though

BMW/NA had notice that Bavarian had been the subject

of customer complaints, most complaints were resolved,

and the record does not demonstrate that there was any

dishonesty or criminal intent associated with these in-

cidents. Furthermore, we note that the district court’s

finding that Bavarian was an independently owned and

operated dealership is sufficient to eliminate any question

9a

of control by BMW/NA. BMW/NA had no financial in-

terest in Bavarian, did not participate in the hiring or fir-

ing of its officers or employees, or dictate its sales prac-

tices. Accordingly, we conclude that BMW/NA, even

though it had knowledge of Bavarian’s precarious finan-

cial condition, was not liable to Cullen for his damages

under a negligence theory since it could not have

reasonably foreseen Eichler’s criminal activity.

Reversed.

OAKES, Circuit Judge (dissenting):

I dissent because I believe, as did the trial judge, that the

injury suffered by Cullen was foreseeable; I also believe

that the majority fails to give the experienced trial judge’s

finding to that effect the deference to which it is entitled.

In this diversity case we are of course required to turn to

New York law, and one cannot discuss the questions of

duty and foreseeability without reference to Palsgraf v.

Long Island Railroad, 248 N.Y. 339, 344, 162 N.E. 99,

100 (1928), where Cardozo stated that ‘‘[t]he risk

reasonably to be perceived defines the duty to be obeyed,

and risk imports relation; it is risk to another or to others

within the range of apprehension.’’ See also MacPherson

v. Buick Motor Co., 217 N.Y. 382, 394, 111 N.E. 1050,

1054 (1916) (‘‘foresight of the consequences involves the

creation of a duty’’). Although the New York Court of

Appeals was to say in Pulka v. Edelman, 40 N.Y.2d 781,

785, 358 N.E.2d 1019, 1022, 390 N.Y.S.2d 393, 396 (1976)

(parking garage not liable for pedestrian injury caused by

exiting car), that ‘‘[f]oreseeability should not be confused

with duty,’’ four years later it stated in Havas v. Victory

Stock Paper Co., 49 N.Y.2d 381, 402 N.E.2d 1136, 426

N.Y.S.2d 233 (1980) (independent trucker’s employee

10a

could recover for injuries sustained while helping defend-

ant’s employee load waste paper onto truck), that

‘*whether [the defendant] owed a duty to the plaintiff and,

if it did, whether, in the face of it, [the defendant] failed to

act in a reasonably prudent manner—turn largely on

foreseeability.’’ 49 N.Y.2d at 385, 402 N.E.2d at 1138, 426

N.Y.S.2d at 236. Palsgraf, quoted immediately thereafter

by the Havas court, lives.

The majority opinion concludes that BMW of North

America, Inc., should not be held liable for its dealer’s

defalcation of Cullen’s money because that defalcation

was ‘‘an intervening act, tortious or criminal.’’ In other

words, ‘‘no amount of supervision by BMW/NA would

have enabled it to foresee [the dealer’s] thievery.’’ But

New York law provides, as the common law of England

before it provided, that ‘‘the criminal conduct of a third

person [does] not preclude a finding of ‘proximate cause’

if the intervening agency was itself a foreseeable hazard.’’

Nallan v. Helmsley-Spear, Inc., 50 N. Y. 2d 507, 520-21,

407 N. E. 2d 451, 459, 429 N. Y. S. 2d 606, 614 (1980);

Scott v. Shepherd, 96 Eng. Rep. 525, 526 (C.P. 1773)

(‘‘The intermediate acts of Willis and Ryal will not purge

the original tort in the defendant. But he who does the first

wrong is answerable for all the consequential damages.’’).

BMW/NA sells its vehicles to the public only through

dealerships. It was well aware of this dealer’s habit of

passing worthless checks and its inability to obtain regular

financing through established commercial channels.

BMW/NA protected itself by demanding and receiving

only certified checks for any goods ordered by its dealer.

But consumers were left to fend for themselves, while the

BMW/NA dealer, armed with all the indicia of an ongoing

BMW dealer from order pads to location, sign, vehicles,

and parts, continued to solicit orders and accept deposits

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from customers. The dealer’s ‘‘thievery’’ was sufficiently

foreseeable to BMW/NA that it insisted upon certified

checks before delivery. Why was such thievery not equally

foreseeable insofar as BMW customers were concerned?

Moreover, as the New York Court of Appeals has so

cogently indicated, liability concepts have broadened to

reflect economic, social, and political developments. See,

e.g., Micallef v. Miehle Co., 39 N. Y. 2d 376, 385, 348 N.

E, 2d 571, 577, 384. N. Y. S. 2d 115, 121 (1976); Codling v.

Paglia, 32 N. Y. 2d 330, 340, 298 N. E. 2d 622, 627, 345 N.

Y. S. 2d 461, 467-68 (1973). Allowing a defendant to

shield itself from liability by conducting operations ex-

clusively through ‘‘independent’’ franchisees ignores the

clear ‘‘trend of the law . . . to expand the liability of an

enterprise to . . . third persons injured because of activities

carried on in behalf of the enterprise.’’ Hetherington,

Trends in Enterprise Liability: Law and the Unauthorized

Agent, 19 Stan. L. Rev. 76, 76 (1966). See also Stone, The

Place of Enterprise Liability in the Control of Corporate

Conduct, 90 Yale L. J. 1, 76-77 (1980). Moreover,

BMW/NA was in a much better position than was Cullen

to determine the financial bona fides of the dealer; indeed,

the only real evidence the consumer has of an automobile

dealer’s financial integrity is the imprimatur given the

dealer by the automobile company itself—logos,

trademarks, advertising layouts, cars (though here the

dealer bought cars from other dealers), and parts, and,

most important of all, the continuation of the dealership.

Automobile company advertising customarily emphasizes

the service, reliability, and intergrity of the company’s

dealers. Liability here can also fairly be defended as in-

volving a measure of risk-spreading, it seemingly being

fairer to saddle the franchisor with the ‘‘cost’’ of distribu-

tion involved in an occasional dealer’s failure than to sad-

dle the unfortunate consumer who relied upon the very ex-

istence of the franchise to put down his good money.

12a

Thus I agree with Judge Neaher that the dealer’s

thievery was foreseeable and that though it was an in-

tervening act it nevertheless did not absolve BMW/NA of

responsibility; in Scott v. Shepherd terms, the very ex-

istence of the dealership was a squib in a crowded market.

But foreseeability is also peculiarly a question of fact.

As the New York Court of Appeals said in Havas, 49 N.

Y. 2d at 388, 402 N. E. 2d at 1139, 426 N. Y. S. 2d at 237,

**[i}t [is] particularly appropriate to leave this issue’’ to the

finder of fact. See also 2 F. Harper & F. James, The Law

of Torts §18.8, at 1059 (1956) (‘‘Reasonable foreseeability

of harm is the very prototype of the question the jury must

pass upon in particularizing the standard of conduct in the

case before it.’’). I had supposed that the reason we have

Fed. R. Civ. P. 52(a), which tells us that a district court’s

findings should withstand appellate review unless clearly

erroneous, is to give the district court as trier of fact the

same range of determination as we give a jury. Interest-

ingly, only last April the Supreme Court not very gently

reminded the courts of appeals that Rule 52 ‘‘does not

make exceptions or purport to exclude certain categories

of factual findings from the obligation of a Court of Ap-

peals to accept a district court’s findings unless clearly er-

roneous. .. . [I]n particular, it does not divide findings of

fact into . . . ‘ultimate’ and . . . ‘subsidiary’ facts.’’

Pullman-Standard v. Swint, 50 U.S.L.W. 4425, 4429 (U.

S. Apr. 27, 1982) (No. 80-1190). Thus because I do not

think that the district court’s finding of foreseeability was

clearly erroneous, I would affirm even if I had some doubt

on the foreseeability question. But in light of the ap-

plicable New York cases, I do not have even such a doubt.

And if the entire issue were restated in terms of duty

rather than in terms of foreseeability, as the New York

Court of Appeals in Pulka v. Edelman, supra, suggested

may be a separate and distinct question (sed quaere), |

13a

would refer only to Hendrickson v. Hodkin, 276 N. Y.

252, 11 N. E. 2d 899 (1937) (holding a hospital liable for

permitting a quack doctor to treat a patient on its

premises); De Ryss v. New York Central Railroad Co.,

275 N. Y. 85, 9 N. E. 2d 788 (1937) (landowner who per-

mits a third person to hunt under circumstances indicating

to a reasonably prudent man that it is dangerous to do so

is liable to others injured as a result); and Note, Liability

of a Franchisor for Acts of the Franchisee, 41 S. Cal. L.

Rev. 143 (1968). Here BMW/NA clearly could have ter-

minated the dealership and indeed had a duty to do so in

light of the dealer’s instability and unscrupulousness,

before the dealer took Cullen’s deposit.'

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FOOTNOTES

‘Eichler and Bavarian were indicted, however, for three counts of

grand larceny in the second degree based on Eichler’s conduct toward

customers other than Cullen. On February 5, 1981, Eichler pleaded

guilty to attempted grand larceny in the second degree.

*Bavarian and BMW/NA entered into three written franchise

agreements from June, 1976 to February 16, 1979: (1) from June | to

December 31, 1976; (2) from August 12 to December 31, 1977; and (3)

from January | to December 31, 1978. Although no written agreement

was in effect from January | to August 12, 1977 or from January | to

February 16, 1979, Bavarian continued to operate as a duly franchised

BMW dealer during these periods.

* Bavarian furnished only two monthly financial statements dur-

ing the several years it operated.

‘During 1978, checks totalling $40,000 were issued by Bavarian

to BMW/NA upon accounts with insufficient funds.

‘Bavarian had never signed a formal agreement with Lloyd and

have never paid Lloyd the $1,000 required by law to be submitted

prior to the execution of the agreement.

*Cullen’s amended complaint alleged four separate theories of

liability: (1) that Bavarian was acting as agent for BMW/NA pursuant

to principles of either actual agency or agency by estoppel; (2) that

BMW/NA was negligent in permitting Bavarian to continue as a

dealer because it had knowledge of Bavarian’s allegedly precarious

financial condition; (3) that BMW/NA entered into a conspiracy with

Eichler, and in fact did, defraud customers into doing business with

Eichler; and (4) that BMW/NA’s conduct constituted a prima facie

tort. At the conclusion of discovery, BMW/NA moved for summary

judgment dismissing each of Cullen’s claims for relief. The district

court concluded that an actual agency relationship did not exist be-

tween BMW/NA and Bavarian. It also found no evidence to support

Cullen’s causes of action for conspiracy to commit fraud and prima

facie tort, and dismissed those claims as well. Accordingly, only the

issues of negligence and agency by estoppel remained to be tried.

’The court specifically pointed to Cullen’s failure ‘‘to prove his

reliance on Bavarian’s authority to act for BMW/NA.”’ Cullen v.

BMW of North America, Inc., No. 79 C 970, slip op. at 8 (E.D.N.Y.

Oct. 28, 1981) (emphasis in original). Cullen’s cross-appeal from the

dismissal of this claim for relief was withdrawn pursuant to a stipula-

tion dated March 11, 1982 and filed on March 26, 1982. Accordingly,

we need not address this issue on appeal.

15a

Cullen v. BMW of North America 82-7118

I concur.

J.E.L.

9/2/82

Cullen v. BMW of North America, Inc.—-Docket No.

82-7118

James L. Oaks dissents with opinion.

Oct. 5, 1982

'I would agree with the district court that there would be no

violation of the Automobile Dealers’ Day in Court Act, 15 U.S.C.

§§ 1221-1225 (1976), by termination in this case. David R. McGeorge

Car Co. v. Leyland Motor Sales, Inc., 504 F. 2d 52 (4th Cir. 1974),

cert. denied, 420 U. S. 992 (1975). It may not be amiss to say that I am

extremely confident that the author of the majority opinion would not

disagree with this conclusion either. See Pierce Ford Sales, Inc. v.

Ford Motor Co., 299 F. 2d 425 (2d Cir.), cert. denied, 371 U. S. 829

(1962).

Ib

APPENDIX B.

Order of United States Court of Appeals, Dated

December 6, 1982.

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT.

At a stated term of the United States Court of

Appeals, in and for the Second Circuit, held

at the United States Courthouse, in the City

of New York, on the sixth day of December,

one thousand nine hundred and eighty-two.

THOMAS W. CULLEN, Jr.,

Plaintiff-Appellee,

v.

BMW OF NORTH AMERICA, Inc.,

Defendant-Appellant.

No. 82-7118

A petition for rehearing containing a suggestion that the

action be reheard in banc having been filed herein by

counsel for the plaintiff-appellee, Thomas W. Cullen, Jr.,

2b

Upon consideration by the panel that heard the appeal,

it is

ORDERED that said petition for rehearing is DENIED,

Judge Oakes dissenting.

It is further noted that the suggestion for hearing in

banc has been transmitted to the judges of the court in

regular active service and to any other judge on the panel

that heard the appeal and that no such judge has requested

that a vote be taken thereon.

A. DANIEL FUSARO

Clerk

by: FRANCIS X, GINDHART

Chief Deputy Clerk

Ic

APPENDIX C.

Decision and Order of Neaher, U. S. D. J., Dated

January 29, 1982.

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

THOMAS W. CULLEN, Jr.,

Plaintiff,

against

BMW OF NORTH AMERICA, Inc.,

Defendant.

No. 79 C 970

®

Appearances:

Louis J. Castellano, Jr., Esq., Garden City, New York,

Attorney for Plaintiff.

Weil, Gotshal & Manges, New York, N.Y., Attorneys

for Defendant. By Kevin P. Hughes, Esq., Yvette Miller,

Esq., Joseph Allerhand, Esq.

NEAHER, District Judge.

2c

Following the Court’s memorandum of decision and

order dated October 28, 1981, defendant timely sought

amendment of the judgment. Rules 52(b) and 59(e),

F.R.Civ.P. The application has been considered, but after

careful study of defendant’s arguments in support of its

motion, the Court adheres to its decision, revising the

opinion as follows to reflect the additional authority

which it believes supports the original decision.

Plaintiff, Thomas W. Cullen, Jr., seeks to recover

$18,000 with interest, plus punitive damages, paid to

Bavarian Auto Sales, Inc. (Bavarian), a BMW dealer

formerly franchised by defendant, BMW of North

America, Inc. (BMW/NA). BMW/NA is ‘‘the exclusive

importer and distributor in the United States of passenger

cars, parts and products manufactured by Bayerische

Motoren Werks, AG.”’ Plaintiff’s Exhibit 93. A Delaware

corporation, BMW/NA has its principal place of business

at Montvale, New Jersey. This diversity action is now

before the Court subsequent to partial summary judgment

in favor of defendant and trial without a jury on the re-

maining issues.'

The facts established at trial follow. On January 24,

1979 Cullen entered into a sales contract with Bavarian for

a new 1978 BMW, Model 530i, at a price of $18,245. Hav-

ing paid a deposit of $245, Collen received a call five days

later from the salesman advising that the car had arrived

and requesting a check for the balance of the purchase

price. Plaintiff remitted a check for $18,000, which was

cashed by Bavarian, but never received the car or the

return of his money.

Cullen commenced a civil action against Bavarian in

New York State Supreme Court, Nassau Couniy, which

was stayed when Bavarian’s president, Hans Eichler, filed

a petition in bankruptcy. Cullen also filed criminal com-

plaints with the Queens County District Attorney and the

3c

Attorney General of the State of New York, although no

indictments were issued.’ This action was subsequently

commenced.

Bavarian operated continuously as an authorized BMW

dealer from at least June of 1976 to February 16, 1979, on

which date Eichler voluntarily terminated all agreements

between Bavarian and BMW/NA. Three written franchise

agreements were entered into during this time: (1) from

June 1 to December 31, 1976; (2) from August 12 to

December 31, 1977; and (3) from January 1 to December

31, 1978. Although no written agreement was in effect

from January 1 to August 12, 1977 or from January | to

February 16, 1979, Bavarian continued to operate as a

duly franchised BMW dealer during these periods. In fact,

recognizing the continuation of dealerships without for-

mal agreement is not an unusual practice for BMW/NA.

Trial Transcript at 2.125-26.

From the beginning of Bavarian’s relationship with

BMW/NA, the latter received indications of Bavarian’s

financial instability. For example, difficulty in receiving

payment for cars and parts prompted BMW/NA to place

Bavarian on a C.O.D. certified check basis, rather than

open account status, in the latter part of 1976. Addition-

ally, despite Bavarian’s contractual obligations and

BMW/NA’s repeated requests, Bavarian furnished only

two monthly financial statements during the several years

it operated. Further, from 1976 onward, Bavarian

demonstrated persistent difficulty in maintaining mini-

mum credit lines essential to standard operation of BMW

dealerships. Finally, throughout the operation of the fran-

chise Bavarian repeatedly failed to maintain sufficient

funds to enable legitimate issuance of checks to

BMW/NA, other BMW dealers, and customers.

During the latter part of 1978, Bavarian’s instability

escalated, and BMW/NA received intensified indications

4c

of its financial irregularities and irresponsibility. For ex-

ample, from July to September 1978, BMW/NA received

five customer complaints against Bavarian, each of which

alleged Bavarian had taken partial payment for a car but

had neither delivered the vehicle nor refunded the pay-

ment. In some of these cases, Bavarian had issued checks

on insufficient funds to refund deposits made by the

customers. Further, during 1978, checks aggregating some

$40,000 were issued by Bavarian to BMW/NA upon ac-

counts with insufficient funds.

On October 30, 1978, BMW/NA extended an initial

sixty-day period granted Bavarian to re-establish its finan-

cial viability. This period was extended to November 14,

1978, but Bavarian still failed to remedy its deficiencies by

that date.

On November 15, 1978, Bavarian represented to

BMW/NA that approval of funds from the Small Business

Administration and Citibank was imminent, but no such

approval ensued. On December 7, 1978, BMW/NA re-

ceived notice from Lloyd Capital Corporation that

Bavarian had established a line of credit, but a week later

BMW/NA learned that Eichler had misrepresented his in-

tention to follow through with the credit application proc-

ess, had never signed a formal agreement with Lloyd, and

had never paid Lloyd the $1000 required by law to be sub-

mitted prior to execution of the agreement.

In a letter dated December 18, 1978, BMW/NA notified

Eichler that because of ‘‘serious and continuing deficien-

cies’ in the dealership, BMW/NA would not offer him a

1979 dealer agreement. The deficiencies outlined in the let-

ter were: (1) failure to observe minimum wholesale credit

requirement; (2) impairment of financial reputation, in-

cluding issuance of checks, later dishonored, to other

BMW dealers; (3) parts accounts arrearages, including is-

suance of checks, later dishonored, to BMW/NA; (4)

5c

failure to observe parts inventory requirements; and (5)

failure to submit year-end and monthly financial and

operating statements.

Although Eichler responded to the above letter on

December 29, 1978, expressing his desire to continue the

dealership, BMW/NA did not reply to confirm either

termination or extension of the franchise. The next con-

tact evidences BMW/NA’s recognition of the continued

operation of the Bavarian franchise: it refused to

authorize Eichler’s proposed sale of Bavarian to an ex-

isting dealer. Had BMW/NA asserted its rights under the

dealer agreement, which had expired by its own terms on

December 31, 1978, it could have insisted that Bavarian

remove at its own expense all BMW signs displayed pub-

licly, refrain from using BMW trademarks, destroy all

printed material bearing BMW trademarks, and cease to

hold itself out as an authorized BMW dealer. Plaintiff’s

Exhibit 103. Further, BMW/NA could have required

Bavarian to sell and deliver to BMW/NA all new BMW

vehicles, parts and tools purchased by Bavarian from

BMW/NA. Instead, BMW/NA allowed Eichler to con-

tinue holding out Bavarian as an authorized dealership, as

evidenced by the BMW logo publicly displayed on the out-

side of the showroom and the use of printed materials

bearing BMW trademarks.

It should be noted that August 1978 was the last time

BMW/NA received payment for any cars allocated to

Bavarian. Further, in December 1978 BMW/NA removed

all cars it had delivered to Bavarian for failure to maintain

a minimum credit structure. Yet, during January and

February of 1979, the showroom contained several new

BMW vehicles borrowed from other dealers, thus giving

Bavarian the appearance of a viable ongoing business.

On February 13, 1979, a meeting was held to discuss the

future of Bavarian. This meeting was approximately two

6c

weeks after Cullen had been denied delivery of the car,

and although Cullen had not contacted BMW/NA, at the

meeting BMW/NA was apprised of information that

Eichler had accepted deposits from seven customers total-

ling $100,000 and had used the money for other purposes.

Still, BMW/NA made no definitive response, and three

days later Eichler voluntarily resigned the franchise. Only

at that point did BMW/NA pursue its rights subsequent to

termination outlined above.

The record is clear that Bavarian was an independently

owned and operated dealership, but plaintiff seeks to hold

BMW/NA liable under the doctrine of agency by estoppel.

This theory must fall for lack of proof of its essential

elements. It is well settled that agency by estoppel arises

only when the party charged as principal intentionally or

carelessly causes the belief that the putative agent is

authorized to bind that party. Karavos Compania Naviera

S.A v. Atlantica Export Corp., 588 F.2d 1, 11 (2d Cir.

1978); Restatement of Agency 2d §8B; 2 N.Y.Jur., Agency

§§25, 87. Moreover, under New York law,

‘‘apparent or ostensible authority, or agency by

estoppel is created only by acts or neglects of the

person sought to be charged as principal, and the

person dealing with the ostensible agent must have

known of and relied upon such acts or omissions,

and such reliance must be in good faith and in the

exercise of reasonble prudence.’’ Perry v. New

York Life Ins. Co., 22 N.Y¥.S.2d 696, 701-02 (Sup.

Ct. 1940).

Although plaintiff offered into evidence various public

manifestations of a relationship between Bavarian and

BMW/NA, he failed to prove his reliance on Bavarian’s

authority to act for BMW/NA. Similarly, there is no

7c

evidence of Cullen’s belief that the transaction was entered

into by or for BMW/NA. On the contrary, plaintiff’s own

testimony shows there was an absence of reliance on

advertisements, on the similarity between the corporate

names of Bavarian and BMW/NA (Bavarian Motor

Works), or on the BMW logo appearing on the sales slip.

Plaintiff did testify as to his reliance on the BMW logo

appearing on the outside of Bavarian’s premises, but the

question remains to what his reliance was directed. The

testimony shows not a belief that Bavarian had authority

to act for BMW/NA, but that the BMW logo represented

a particular quality of cars sold at Bavarian. Since this

testimony indicates, at most, Cullen’s reliance on

Bavarian’s authority to sell BMW automobiles, plaintiff

failed to carry its burden of proving the belief essential to

agency by estoppel.

Turning to plaintiff’s negligence theory, the evidence

adduced at trial shows that BMW/NA unreasonably per-

mitted Bavarian to continue holding itself out to the public

as an authorized BMW dealer, and to purport to sell

Cullen a car, during a period in which defendant had

ample knowledge of Bavarian’s precarious financial con-

dition and history of questionable business practices. Yet,

proving the unreasonableness of defendant’s conduct does

not establish actionable negligence. To accomplish the lat-

ter plaintiff must first sustain his burden of proving the

breach of a legal duty owing by defendant to plaintiff, a

violation of plaintiff’s rights. Palsgraf v. Long Island

R.R., 248 N.Y. 339, 162 N.E. 99 (1928).

Defendant argues that BMW/NA owed Cullen no duty

to enforce the provisions of its agreement with Bavarian,

based on plaintiff’s inability to claim as a third-party

beneficiary under that contract. The argument is correct as

far as it goes, for it is true that the parties to the agree-

ment, in establishing their distributer/dealer relationship,

8c

expressed no intent to confer a direct benefit on ultimate

consumers. In the absence of such expression, plaintiff

assumes the status of an incidental beneficiary, unable to

enforce contractual rights or recover for failure to per-

form contractual duties. Bernal v. Pinkerton’s, Inc., 52

App. Div. 2d 760, 382 N.Y.S.2d 769 (Ist Dept. 1976),

aff'd, 41 N.Y.2d 938, 363 N.E.2d 362, 394 N.Y.S.2d 638

(1977); Beck v. FMC Corp., 53 App. Div. 2d 118, 385

N.Y.S.2d 956 (4th Dept. 1976), aff'd, 42 N.Y.2d 1027, 369

N.E.2d 10, 398 N.Y.S.2d 1011 (1977).

Nevertheless, the question remains whether BMW/NA

owes the ultimate consumer a duty beyond its contractual

obligations. Because neither the State judiciary nor

legislature has addressed this precise question, the require-

ment that this Court, sitting in diversity, apply the

substantive law of New York, Erie R.R. v. Tompkins, 304

U.S. 64 (1938), leads to a perplexing problem. However,

both the Supreme Court and the Second Circuit have pro-

vided guidance for federal courts faced with the absence of

applicable State law.

In Bernhardt v. Polygraphic Co., 350 U.S. 198 (1956),

the majority of the Court held that the issues presented

regarding a contractual arbitration provision concerned a

matter of substantive law; therefore, Erie mandated ap-

plication of State law to the agreement. Justice

Frankfurter, concurring in the result, commented on the

Erie doctrine as follows:

“One of the difficulties, of course, resulting

from Erie R. Co. v. Tompkins, is that it is not

always easy and sometimes difficult to ascertain

what the governing state law is. The essence of the

doctrine of that case is that the difficulties of ascer-

taining state law are fraught with less mischief than

disregard of the basic nature of diversity jurisdic-

tion, namely, the enforcement of state-created

9c

rights and state policies going to the heart of those

rights. . . As long as there is diversity jurisdiction,

‘estimates’ are necessarily often all that federal

courts can make in ascertaining what the state court

would rule to be its law.”’

Id. at 208-09 (Frankfurter, J., concurring) (footnote

omitted). See also King v. Order of Travelers, 333 U.S.

153, 160-61 (1948).

Similarly, in Commissioner v. Estate of Bosch, 387 U.S.

456 (1967), the majority of the Court held that where no

decision by a State’s highest court exists with respect to

characterization of a property interest for purposes of

estate tax liability, federal courts must apply ‘‘what they

find to be the state law’’:

‘*This is but an application of the rule of Eric R.

Co. v. Tompkins, supra, where state law as an-

nounced by the highest court of the State is to be

followed. This is not a diversity case but the same

principle may be applied for the same reasons, viz.,

the underlying substantive rule involved is based on

state law and the State’s highest court is the best

authority on its own law. If there be no decision by

that court then federal authorities must apply what

they find to be the state law after giving ‘proper

regard’ to relevant rulings of other courts of the

State. In this respect, it may be said to be, in effect,

sitting as a state court. Bernhardt v. Polygraphic

Co., 350 U.S. 198 (1956).’”’ Id. at 465.

In the Second Circuit, the Court of Appeals has ex-

pressed its ‘‘established position’’ as follows:

10c

‘*(Wjhen a federal court must determine state

law, it should not slavishly follow lower or even up-

per court decisions but ought to consider all the

data the highest court of the state would use. See

Corbin, The Laws of the Several States, 50 Yale

L.J. 762 (1941). Such is the established position of

this court.”’

Roginsky v. Richardson-Merrell, Inc., 378 F.2d 832, 851

(2d Cir. 1967) (on petition for rehearing) (per curiam).

More recently, the Court of Appeals has reaffirmed the

principle explained in Roginsky:

‘*When there is an absence of state authority on

an issue presented to a federal court sitting in diver-

sity, as has occurred here, the federal court must

make an estimate of what the state’s highest court

would rule to be its law.’’

Cunninghame v. Equitable Life Assurance Society, 652

F.2d 306, 308 (2d Cir. 1981). Accord, Huie v. White

Motor Corp., 565 F.2d 104 (7th Cir. 1977); Orfield v. In-

ternational Harvester Co., 535 F.2d 959 (6th Cir. 1976).

In light of the foregoing authorities, the Court is faced

with the difficult task of predicting the manner in which

the New York Court of Appeals would respond to iden-

tical circumstances. Since it appears no New York decision

addresses the issue of negligent supervision in the context

of franchise or distributor operations, we must look to ap-

plicable principles of tort liability as perceived by the New

York Court of Appeals.

The question of duty turns on ‘‘whether the defendant is

under any obligation for the benefit of the particular

plaintiff.’’ Prosser, Law of Torts §53, at 324 (4th ed.

1971). In the word of then Chief Judge Cardozo, such a

llc

relation between the parties can be founded upon the

foreseeability of harm:

‘*The risk reasonably to be perceived defines the

duty to be obeyed, and risk imports relation; it is

risk to another or to others within the range of ap-

prehension.’’

Palsgraf v. Long Island R.R., supra at 344, 162 N.E. at

100.

Two recent New York decisions, Havas v. Victory

Paper Stock Co., 49 N.Y.2d 381, 402 N.E.2d 1136, 426

N.Y.S.2d 233 (1980), and Pulka v. Edelman, 40 N.Y.2d

781, 358 N.E.2d 1019, 390 N.Y.S.2d 393 (1976), are in-

structive in that they appear to set bounds on the recogni-

tion of duty based on foreseesability.

In Havas, plaintiff, an employee of Morgan Guaranty

Trust Co., was injured while assisting other trust company

employees in loading bales of waste paper on a truck

owned and operated by defendant, a paper stock com-

pany. Plaintiff sued the paper company on a negligence

theory, and defendant impleaded plaintiff’s employer.

The duty of the trust company toward its employees was

not at issue; rather, the Appellate Division overturned the

jury verdict for plaintiff on the ground that no relation ex-

isted between the defendant paper company and plaintiff

from which a duty of care could arise:

**Given the undisputed factual pattern recited

above we cannot perceive any duty or obligation

running from defendant Victory to plaintiff Havas

. . . « The loading operation was carried out by

Morgan employees under the supervision of plain-

tiff, himself a Morgan employee. The ramp be-

longed to Morgan and Morgan gave the order or

12c

direction to plaintiff to use the same despite the lat-

ter’s judgment that he should not. Victory’s driver

made no decisions as to how the bales should be

loaded nor did he participate in the method of

loading.’”’

Havas v. Victory Paper Stock Co., 66 App. Div. 2d 953,

954, 411 N.Y.S.2d 452, 453 (3rd Dept. 1978).

The Court of Appeals reversed, finding that defendant

owed a duty to plaintiff based solely upon the foresee-

ability of the risk of harm to plaintiff and defendant’s

relation to the circumstances. The court identified the

analytical framework through which the existence of duty

must be examined notwithstanding the absence of an

independently cognizable relation between the parties:

‘*{I]n a case which raises such traditional

negligence law queries as does the one before us the

answers are still to be found in the principle so

pungently phrased by Cardozo that ‘[t]he risk

reasonably to be perceived defines the duty to be

obeyed, and risk imports relation’ (Palsgraf v. Long

Is. R. R. Co., 248 N.Y. 399, 344, 162 N.E. 99,

100). Or, as it is spelled out more precisely in the

English case that is the progenitor of the

foreseeability principle, ‘{W]henever one person is

by circumstances placed in such a position with

regard to another that every one of ordinary sense

who did think would at once recognize that if he

did not use ordinary care and skill in his own con-

duct with regard to the circumstances he would

cause danger of injury to the person or property of

the other, a duty arises to use ordinary care and

skill to avoid such danger’ (Heaven v. Prender, \\

QBD 503, 509, Britt, MR [1883]).”’

13c

Havas v. Victory Paper Stock Co., 49 N.Y.2d at 386, 402

N.E.2d at 1138, 426 N.Y.S.2d at 236.

The analysis in Havas appears to be two-fold. First, the

risk of injury to plaintiff must be reasonably foreseeable.

Second, the court must determine whether the defendant

**bore such a relation to the circumstances as to saddle it

... with a duty to avoid the danger to be anticipated.’’ Jd.

at 387, 402 N.E.2d at 1139, 426 N.Y.S.2d at 237. The

precise circumstances in Havas are wholly distinct from

the instant claim. Yet the process of analysis remains con-

stant. The central idea is that the defendant, through its

driver, ‘‘had a voice in directing the conduct’’ of the

loading operation; therefore, defendant owed a duty to

avoid subjecting plaintiff to the foreseeably hazardous

situation to which the driver ‘‘at least acquiesced.’’ Jd.

In Pulka, the court examined the same issue, viz.,

whether a duty may arise from foreseeability of harm, but

reached the opposite conclusion. Plaintiff, a pedestrian,

was struck by an automobile exiting from defendant’s

parking garage. The driver of the vehicle, not a garage

employee, indisputably owed a duty to the plaintiff. But

the question on appeal was whether the common practice

of the garage patrons of exiting without checking for

pedestrians gave rise to a duty owing pedestrians by the

defendant garage to take preventive measures.

Holding that no duty existed, the majority of the court

examined the two possible grounds upon which the duty to

control others arises:

‘‘Commentators have pointed out that the duty

to control others arises only in the following rela-

tionships: (1) ‘[t]he relationship between the

defendant and the person who threatens the harm

to the third person may be such as to require the

14c

defendant to attempt to control the other’s con-

duct’ or (2) ‘there may be a relationship between

the defendant and the person exposed to harm

which requires the defendant to afford protection

from certain dangers including the ccenduct of

others’ (Harper & Kime, Duty to Control the Con-

duct of Another, 43 Yale L.J. 886, 887-888).”’

40 N.Y.2d at 783, 358 N.E.2d at 1021, 390 N.Y.2d at 395.

Thus, according to Pulka, the relationship between the

defendant and either the third-party wrongdoer or the

plaintiff may give rise to a duty of care. On the facts, the

majority of the court found insufficient relation between

the garage and the patron-driver to impose a duty, focus-

ing on the defendant’s lack of ‘‘reasonable opportunity”’

to control the patron and prevent the risk of harm. Fur-

ther, in distinguishing the respective responsibilities of the

driver and the garage, the court again focused on the con-

cept of the defendant’s opportunity to affect the degree of

risk of harm:

**Although it is reasonable to require one person

to be responsible for the negligent conduct of

another in some instances, it is unreasonable to im-

pose the duty where the realities of every day ex-

perience show us that, regardless of the measures

taken, there is little expectation that the one made

responsible could prevent the negligent conduct.’’

Id. at 785, 358 N.E.2d at 1022, 390 N. Y.2d at 396.

Finally, the majority in Pu/ka expressed concern with

the creation of legal duty based solely upon foreseeability,

stating that foreseeabiliiy determines ‘‘the scope of duty

15c

—only after it has been determined that there is a duty.”’

Id. Taking what appears to be a different stance than the

Havas majority, the court in Pulka appears to have con-

cluded that since no relationship existed from which a duty

could attach, foreseeability alone could not provide a basis

for liability.

Yet the seeming conflict between the decisions in Havas

and Pulka can be rationally resolved. The court in Pulka

appears understandably reluctant to impose liability on a

party who had insufficient relation to the wrongdoer or

the plaintiff to prevent the harm. Mere foreseeability

without relation cannot suffice. The distinction in Havas

is the absence of a third-party wrongdoer. Without the ad-

ditional actor between plaintiff and defendant, the

analysis in Havas turns on the defendant’s relationship to

the circumstances. Liability in Havas was imposed because

defendant had a direct voice in the risk involved, whereas,

in Pulka, the absence of defendant’s reasonable oppor-

tunity to mitigate the harmful conduct of departing

motorists precluded imposition of legal duty. The essential

issue in each case is identical: Does the defendant, who is

at least partially responsible for the presence of hazardous

circumstances or conduct have the capability to affect the

degree of the risk of harm? If his relationship to either the

circumstances or the intervening wrongdoer is such that he

has reasonable opportunity to reduce the risk of fore-

seeable injury, a duty arises to do so.

Application of the foregoing principles leads this Court

to conclude that the New York Court of Appeals would

recognize a legal duty running from BMW/NA to plaintiff

to prevent the risk of harm to BMW customers which

results when dealers, whose financial instability and

unscrupulous business practices are known to BMW/NA,

are permitted to maintain the appearance of a responsible

authorized BMW dealer subsequent to termination of the

16c

dealer agreement. The instant circumstances appear well

within the bounds set by the court in Pulka. Not only did

there exist a significant relationship between BMW/NA

and Bavarian, defendant had ample opportunity to pre-

vent Bavarian from wrongfully obtaining plaintiff’s

money while holding itself out as an authorized dealer.

As the facts indicate, upon expiration of the dealer

agreement, three weeks prior to the sales contract with

plaintiff, defendant could have caused Bavarian to remove

all BMW signs, refrain from using BMW trademarks and

printed materials, and cease operating as an authorized

BMW dealer. Thus, as in Havas, defendant acquiesced to

circumstances which it should have reasonably known

presented a substantial risk of harm to plaintiff. Most im-

portantly, defendant had both opportunity and capability

to decrease or foreclose the risk of harm. Therefore, a du-

ty of care arose to avoid subjecting BMW customers to the

unreasonable exposure to financial injury.

Since plaintiff has met its initial burden of proving facts

which give rise to a legal duty on the part of BMW/NA for

the protection of its retail customers, we turn now to de-

fendant’s argument that there was no breach of that duty.

Defendant, in sum, argues that BMW/NA was pro-

hibited by law from terminating the franchise on the basis

of Bavarian’s known financial deficiencies. Citing 15

U.S.C. §§1221-25 and N.Y. Gen. Bus. Law §§195-98, de-

fendant claims that in the circumstances of this case Ba-

varian could have successfully sued to enjoin any such ter-

mination. This argument fails for several reasons. First,

the federal statute cited applies only to automobile

manufacturers, and not to distributors in the absence of

an indication of control by the manufacturers. See, e.z.,

Stansifer v. Chrysler Motors Corp., 487 F.2d 59 (9th Cir.

1973). Second, BMW/NA’s right to terminate becomes

moot in light of the expiration of the dealer agreement on

17c

December 31, 1978. Third, the prohibition in N.Y. Gen.

Bus. Law §197-a against refusal to renew automobile

dealer agreements provides a good faith exception, and de-

fendant has cited no case which enjoins such refusal under

circumstances as egregious as those outlined in

BMW/NA’s letter dated December 18, 1978, Plaintiff’s

Exhibit 43.

Stripped of its purported legal barriers to definitively

respond to Bavarian’s continued deficiencies and ques-

tionable business practices, defendant is left without

justification for failure to discharge its duty. The evidence

shows that BMW/NA unreasonably allowed Bavarian to

continue using the BMW name after expiration of the

dealership and after notice of Eichler’s propensity for

unscrupulous business dealings. The evidence further

shows that BMW/NA failed to supervise the operation of

the franchise during this period of Bavarian’s undefined

existence and increased risk to customers. Plaintiff thus

proved defendant’s breach of duty.

Turning to the issue of causation, defendant contends

that plaintiff’s injury was not a reasonably foreseeable

result of BMW/NA’s negligence. Citing law ‘‘long

established in New York,’’ defendant argues that Eichler’s

conduct constitutes an intervening criminal act and hence

necessarily breaks the causal chain, insulating defendant

from liability. See, e.g., Lowery v. Western Union

Telegraph Co., 60 N.Y. 198 (1875).

Such a rule is by no means established in New York.

Determination of proximate cause ultimately turns ‘‘upon

the precise factual pattern of each individual case.’’ Hog-

gard v. Otis Elevator Co., 52 Misc. 2d 704, 707, 276

N.Y.S.2d 681, 686 (Sup. Ct. 1966), aff’d mem., 28 App.

Div. 2d 1207, 285 N.Y.S.2d 262 (Ist Dept. 1967). See also

O’Neill v. City of Port Jervis, 253 N.Y. 423, 433, 171 N.E.

18c

694, 697 (1930). Moreover, an intervening act, tortious or

criminal, will insulate a negligent defendant from liability

only when the subsequent act could not have been rea-

sonably anticipated by the first actor. Lillie v. Thompson,

332 U.S. 459 (1947); Sherman v. Concourse Realty Corp.,

47 App. Div. 2d 134, 365 N.Y.S.2d 239 (2nd Dept. 1975);

Restatement of Torts 2d §§302B, 448-49.

The New York Court of Appeals has stated the rule as

follows:

‘*In this regard, it was plaintiffs’ burden to show

that defendants’ conduct was a_ substantial

causative factor in the sequence of events that led

to [the] injury (see Restatement, Torts 2d §430;

Prosser, Torts [4th ed.], §42). Of course, the fact

that the ‘instrumentality’ which produced the in-

jury was the criminal conduct of a third person

would not preclude a finding of ‘proximate cause’

if the intervening agency was itself a foreseeable

hazard (see Restatement, Torts 2d, §§302B, 449;

Prosser, Torts [4th ed.], at pp. 271-272).”’

Nallan v. Helmsley-Spear, Inc., 50 N.Y .2d 507, 520-2i,

407 N.E.2d 451, 459, 429 N. Y.S.2d 606, 614 (1980).

Thus, the first step of analysis is to ascertain whether

defendant’s conduct was a substantial factor in bringing

about plaintiff’s harm. In other words, the Court must

determine whether a reasonable person would regard

BMW/NA’s negligence a cause of Cullen’s harm in the

sense that it was ‘‘responsible’’ for the injury. Hoggard v.

Otis Elevator Co., supra, 52 Misc. 2d at 707, 276

N.Y.S.2d at 686; Restatement of Torts 2d §433, Comment

(a), at 429.

19¢

Here, the evidence shows that BMW/NA created a

situation which afforded Bavarian the opportunity to

defraud or steal from customers relying on the good

reputation of BMW. Cullen walked into the showroom

specifically relying on the publicly displayed BMW logo as

representing a particular level of quality product. The

situation here was such as to give him no notice of any

deficiency in the franchise or Bavarian’s relationship with

BMW. BMW/NA, on the other hand, was well aware of

Bavarian’s impairment of BMW’s reputation through

various acts enumerated in the letter of December 18,

1978, yet it failed to take the available steps to prevent the

further misuse of the BMW name and the misrepresenta-

tion that Bavarian continued to be an authorized BMW

dealer. Moreover, knowing Bavarian’s tenuous situation

after expiration of the dealer agreement on December 31,

1978, BMW/NA failed to supervise its business dealings,

thereby allowing Cullen to transact business with a

‘*paper’” BMW dealership lacking any tie with BMW

whatsoever. These facts show that BMW/NA’s conduct

constituted a ‘‘substantial causative factor’’ in plaintiff’s

harm.

The second step under Nallan v. Helmsley-Spear, Inc.,

supra, requires the Court to determine whether Bavarian’s

intervening act was itself a foreseeable risk of BMW/NA’s

negligence. Stated differently,

‘**a wrongdoer must answer for all the consequences

that may ensue in the ordinary course of events,

even though such consequences are immediately

and directly brought about by an intervening cause,

if such intervening cause was set in motion by the

original wrongdoer, or was in reality only a condi-

tion on or through which the negligent act operated

20c

to produce the injurious result. The type of in-

tervening cause which relieved all original wrong-

doings is a cause which interrupts the natural se-

quence of events, so as decide their course, prevents

the natural and probable result of the original act

or omission, and produces a different result that

could not have been reasonably anticipated.”’

Hoggard v. Otis Elevator Co., supra, 52 Misc. 2d at 708,

276 N.Y.S.2d at 687-88 (citations omitted).

The facts in evidence show that BMW/NA had

knowledge of at least five recent incidents prior to Cullen’s

in which Bavarian had received partial payment for

automobiles and had not delivered the cars. In some of

these cases, Bavarian had issued checks on insufficient

funds to refund the payments. Although the customer

complaints were subsequently resolved, BMW/NA was

apprised of Bavarian’s propensity for unscrupulous

business transactions. In this light, Eichler’s conduct

perpetuated rather than interrupted the ‘‘natural sequence

of events’’ stemming from defendant’s negligence.

Moreover, ‘‘the exact occurrence or the precise injury’’

need not be foreseen. Horstein v. General Motors Corp.,

391 F. Supp. 1274, 1277 (S.D.N.Y. 1975). BMW/NA

should have reasonably foreseen that Bavarian might have

intentionally caused some financial harm to some BMW

customer as a result of its original negligence, and this is

sufficient.

According to the foregoing, judgment is entered for

plaintiff in the amount of $18,000 plus interest thereon at

the rate of 12% from April 13, 1979. Based on the

evidence adduced at trial, punitive damages do not seem

appropriate.

So Ordered.

2Ic

The Clerk of the Court is directed to enter judgment for

plaintiff and to forward copies of this memorandum of

decision on reargument and order to counsel for the par-

ties.

Dated: Brooklyn, New York

January 29, 1982

EDWARD R. NEAHER

U.S.D.J.

22¢

FOOTNOTES

‘In Cullen v. BMW of North America, Inc., 490 F. Supp. 246

(E.D.N.Y. 1980), we granted in part defendant’s motion for summary

judgment, leaving for further development of facts the issues of agency

by estoppel and negligence discussed herein.

Eichler and Bavarian were indicted for three counts of grand

larceny in the second degree, the record of which was filed in the New

York Supreme Court, Queens County, on March 6, 1980. Plaintiff's

Exhibit 4. But apparently the indictments refer to conduct by the ac-

cused toward individuals other than Cullen. On February 5, 1981,

Eichler pleaded guilty to attempted grand larceny in the second

degree.

Id

APPENDIX D.

Letter of BMW of North America, Inc., to Bavarian Auto

Sales, Inc., Dated December 18, 1978.

BMW OF NORTH AMERICA, INC.

December 18, 1978

Bavarian Auto Sales, Inc.

51-17 Queens Boulevard

Woodside, N.Y. 11377

Attention: Mr. Hans W. Eichler, President

Dear Mr. Eichler:

BMW of North America, Inc. is presently distributing

its new 1979 Dealer Agreement to all dealers who meet its

minimum operating and financial standards. As you have

been previously informed, your dealership has serious and

continuing deficiencies, as a result of which you do not

meet the minimum standards for a BMW dealership. Ac-

cordingly, we are unable to offer you a 1979 Dealer Agree-

ment.

We are indicating below the deficiencies in your dealer-

ship which will have to be corrected for you to continue as

a BMW dealer:

1. Failure to Observe Minimum Wholesale Credit Re-

quirement—Section 1 (b) of your 1978 Dealer

Operating Requirements Agreement.

As you are no doubt aware, pursuant to your 1978

Dealer Operating Requirements Agreement, which is a

part of your 1978 Dealer Agreement, you undertook to

2d

maintain a minimum wholesale credit line of $130,000 ex-

clusively for the purchase of BMW vehicles. We have been

advised by your bank, Israel Discount Bank Ltd., that on

several occasions during 1978, most recently on November

21, 1978, your wholesale credit line could not accom-

modate the purchase of additional BMW vehicles.

However, during this period the aggregate purchase price

of BMW vehicles purchased by you from us during any

calendar month was below the amount of your minimum

wholesale credit line.

Our records also indicate that although a total of 90

BMW vehicles has been made available to you during the

period from January 1, 1978 to November 2, 1978, you

have purchased only 50 BMW vehicles from us. Of the 40

BMW vehicles refused, seven constituted your full alloca-

tion of 1979 model-year BMW vehicles. Consequently, it

appears that you have used your minimum wholesale

credit line, which was to be used only for the purchase of

BMW vehicles, for other purposes.

We were informed on December 8, 1978 that you

established a wholesale line of credit with the Lloyd

Capital Corp. in the amount of $400,000. You assured us

that this line of credit would be used exclusively for the

purchase of BMW vehicles and, accordingly, you would

be able to purchase and maintain an appropriate model

range consistent with your current Dealer Operating Re-

quirements Agreement.

On the strength of the Lloyd floor plan committment

letter dated December 7, 1978, we allocated 28 new BMW

vehicles to your dealership. Between December 13 and 14,

nine of these vehicles were delivered to your dealership.

On December 15, we were contacted by Mr. Ken Block of

Lloyd Capital who called to inform us that the line of

credit issued to Bavarian had been in response to Mr.

Eichler’s request that such a letter be provided to

3d

BMWNA. It was clear from Mr. Block’s comment that he

had not anticipated that the line of credit would be drawn

upon immediately. In that same conversation Mr. Block

advised that your line of credit with his institution had

been cancelled and that we would receive confirmation of

this in writing. Today we received a mail-gram from Mr.

Block confirming cancellation of the line. Based on this in-

formation, we had no alternative but to arrange for the

pickup of these nine cars on Friday. Obviously this

resulted in a significant inconveneince and additional cost

to our company.

The cancellation of this line together with the inade-

quacy of the Israel Discount Bank line of credit effectively

prohibits your dealership from meeting its obligations

under your current BMW Operating Requirements Agree-

ment.

2. Impairment of Financial Reputation—Paragraph

3(b) of Dealer Standard Provisions.

We are aware, of course, that you have chosen from

time to time to supplement your inventory of new BMW

vehicles through direct purchases from other authorized

BMW dealers. Although we have no objections to this

practice, we have been advised by four of these selling

dealers that your checks to these dealers have been

dishonored by your bank due to insufficient funds.

Moreover, when you failed to make payment after

repeated requests, these dealers requested that we assist

them in the collection of the monies owed to them.

Despite our efforts to resolve this situation, including

conversations and meetings with you dating from

September 26, 1977, you have continued to ‘‘bounce’’

checks to other BMW dealers in connection with the pur-

chase of BMW vehicles, most recently in September 1978.

4d

We wish to inform you that any checks ‘‘bounced”’ in the

future will not be tolerated.

3. Parts Account Arrearages—(Articles 7(s) and 8(b) of

the Dealer Standard Provisions).

Although payment for your purchases of BMW parts

must be made promptly, you have frequently permitted

your parts account to become overdue and in a number of

instances have made payment by checks which were

dishonored by your bank due to insufficient funds. We

have discussed this situation with you a number of times

and have advised you by Mr. Scelsi’s letter of July 7, 1977

and by Mr. Pokorny’s letter of April 11, 1978 of your

delinquent status and of the necessity of complying with

Our payment requirements. Moreover, in an attempt to

assist you in resolving this situation, we have even ex-

tended, at your request and as an accommodation to you,

the time for payment of your parts account balance during

the summer of 1978.

Your history of arrearages has caused us to suspend

your open account privileges from time to time and to re-

quire that your purchases be made on a C.O.D. basis.

Most recently, on September 26, 1978, your continued late

payments and dishonored checks and our ignorance with

respect to your financial condition (as discussed in point 5

below) again caused us to place your parts account on a

C.O.D. basis.

On Friday, December 15, we were advised by our bank

that a check you had presented to our Parts Department

the previous week, in payment of a C.O.D. parts pickup,

was dishonored due to an uncertified check at this time

while you were on certified check, C.O.D. basis. This was

not meant to reflect a change in our requirements for your

dealership, but was yet another accommodation to you.

Sd

The inadequacy of the check presented is yet another

demonstration of your failure to comply not only with the

terms and conditions of the BMW Dealer Agreement but

with the spirit of our agreement as well.

4. Failure to Observe Parts Inventory Requirements—

(Paragraphs 6(b) and 8(g) of the Dealer Standard

Provisions and Article V(c) of your 1978 Dealer

Operating Requirements Agreement).

Pursuant to your 1978 Dealer Operating Requirements

Agreement, you agreed to maintain an inventory of BMW

parts in adequate quantity and assortment to meet

customers’ requirements. On November 29, 1978, we were

contacted by a customer whose BMW vehicle had been in

your service department for approximately six weeks

pending installation of a new transmission. You informed

us that this delay was due to your lack of the necessary

parts as a result of your inability to accept a C.O.D.

delivery of such parts or to pay for such parts by certified

check. To assist this customer, we were obligated to ship

the parts to you on an open accouiit basis notwithstanding

the current C.O.D. status of your parts account.

Clearly, you are unable to fulfill the obligations of a

BMW dealer to provide prompt service for owners of

BMW vehicles if you cannot maintain an adequate inven-

tory of BMW parts as a result of your inability to make

payments for such parts.

5. Submission of Financial and Operating State-

ments—(Parégraph 10(b) (1) of the Dealer Standard

Provisions).

Pursuant to the abovementioned Paragraph of the

Dealer Standard Provisions, you have undertaken to pro-

vide us with both monthly and certified year-end financial

6d

and operating statements. You have failed to comply with

the requirement to submit certified year-end financial and

operating statements since 1975 and have frequently been

delinquent in supplying monthly financial and operating

statements. Moreover, even when you have provided us

with monthly financial and operating statements, such

statements have not appeared to accurately reflect your

true financial condition, especially in light of the status of

your parts account and the frequency of dishonored

checks. Accordingly, we have been unable to develop

operating statistics for your BMW operations or to assess

your financial status and the adequacy of your financial

management. This situation also has precluded us from

offering concrete suggestions and assistance with respect

to your current operations as well as with respect to future

planning.

Various BMW personnel have met with you on a

number of occasions to discuss the deficiencies cited above

and the actions which would have to be taken by you to

rectify these deficiencies. To date, our efforts have not

resulted in the satisfactory correction of your deficiencies.

However, if you are interested in continuing as a BMW

dealer, please contact us by January 5, 1979 to discuss

with you in greater detail the deficiencies cited above and

the action which would have to be taken by you in order to

rectify such deficiencies. If we can reach a satisfactory un-

derstanding with respect to these matters, we will send you

a written confirmation of our intention to offer you a 1979

dealer agreement, which confirmation will set forth in

detail the deficiencies to be rectified, the corrected

measures to be taken and the time period in which this

may be accomplished.

Should we fail to hear from you by the Sth of January,

please be advised that we shall consider your failure to re-

spond as a voluntary termination to our relationship.

7d

In the event of such termination, we wish to inform you

that we are prepared to fulfill our repurchase obligation in

accordance with Paragraph 13 of the Dealers Standard

Provision.

If you have any questions, please do not hesitate to con-

tact us.

Very truly yours,

BMW OF NORTH AMERICA, INC.

FRIEDRICH HANAU,

Vice President

Automotive Operations

FH:mw

Certified Mail

Return Receipt Requested

No. 657561

le

APPENDIX E.

Inter-Branch Memo, J. G. Trontell to R. T. Cronin,

Dated September 1, 1978.

BMW Inter-Branch Memo T. SCELSI

To: R.T.Cronin Date: September 1, 1978

From: J.G.Trontell Re: Bavarian Auto Sales—Wood-

side, NY

On August 30, 1978, Andy Pokorny, Tony Scelsi, and I

conducted a joint visit with Hans Eichler, President of

Bavarian Auto Sales.

The purpose of this visit was to discuss the proper con-

duct of business relationships at Bavarian Auto Sales, with

particular emphasis focused on their relevance to BMW of

North America, Inc.

Specific topics of discussion were:

1) The increase of available floor plan funds to ensure a

free and unencumbered $400,000 line. (sixty-day

deadline)

2) Realignment with the banking institution of

Bavarian’s choice to achieve the desired floor line.

(Marine Midland or First National City)

3) Relocation and consolidation of the split facility.

(sixty-day deadline)

4) Strict compliance with policies and procedures as

delineated in the BMW of North America, Inc., con-

tract provisions. (immediate)

2e

5) Reconciliation of delinquent accounts with members

of the BMW dealer body, and its vendors, which

would adversely affect, or involve, BMW of North

America, Inc. (immediate)

The intent of this discussion was to ensure that in the en-

suing sixty day period following the meeting, Bavarian

Auto Sales would once again become a viable point in the

BMW dealer network.

Should these topics not be reconciled in the specified

period, BMW of North America would review the viability

and potential longevity of Bavarian Auto Sales in the

dealer body.

JOHN G. TRONTELL