for GM's law firm and an unsworn, signed statement by Kain be admitted under Rule 804. The deposition contains the investigator's testimony concerning oral statements made by Kain and relating to the falsification of the warranty claims. Of particular relevance to this proceeding are the statements of Kain pertaining to the lack of knowledge and involvement of the Ormsby's. The unsworn statement by Kain contains references to his own involvement in falsifying the warranty claims as well as statements that the Ormsbys had no knowledge of or involvement in the falsification of warranties.
Initially, for any statement to be admissible under Rule 804, the declarant must be unavailable. Kain meets that initial criteria because of his invocation of his Fifth Amendment right. See United States v. Garcia, 986 F.2d 1135, 1139 (7th Cir. 1993); United States v. Moore, 936 F.2d 1508, 1517 (7th Cir. 1991).
Next, the only possible applicable exceptions under Rule 804 are the statement-against-interest exception, see Fed. R. Evid. 804(b)(3), and the other-exceptions exception, see 804 (b)(5). To qualify a statement under Rule 804(b)(3), a declarant must be unavailable as a witness, the statement must be against the declarant's interest and there must be corroborating circumstances that clearly indicate the trustworthiness of the statement. United States v. Groce, 999 F.2d 1189, 1191 (7th Cir. 1993); United States v. Moore, 936 F.2d 1508, 1516 (7th Cir. 1991). As to Rule 804(b)(5), a hearsay statement is admissible if the declarant is unavailable and the statement contains circumstantial guarantees of trustworthiness equivalent to those inherent in the more specific exceptions provided under Rule 804(b)(1)-(4). Moore, 936 F.2d at 1517.
While plaintiff seeks to admit the investigator's deposition and Kain's statement in their entirety under Rule 804, the court considers it appropriate to examine the various statements of Kain referred to or contained within each. Other courts have similarly separated out statements under Rule 804 for the purpose of determining which portions satisfy Rule 804 and which do not. See United States v. Porter, 881 F.2d 878, 882 (10th Cir. 1989); United States v. Lilley, 581 F.2d 182, 188 (8th Cir. 1978); see also McCormick's Handbook of the Law of Evidence § 279, at 677 (E. Cleary 2d ed. 1972); but cf. United States v. Curry, 977 F.2d 1042, 1055-56 (7th Cir. 1992) (inculpatory portion of statement as to coconspirator A need not be redacted from remainder of statement where remainder qualifies as declaration against interest as to coconspirator B, the declarant, and both statements are closely related). The separation approach is most consistent with the purposes of Rule 804 as it insures that only those hearsay statements with the specific guarantee of trustworthiness embodied by the Rule will be admitted. See Porter, 881 F.2d at 883.
In this case, Kain's statements that the Ormsbys did not know of or were not involved in the falsification of the warranty claims are easily severable from Kain's statements that he was involved. They are not so closely related to Kain's inculpatory statements regarding himself as to be incapable of standing on their own. Thus, the court must determine whether Kain's exculpatory statements regarding the Ormsby's are admissible under either Rule 804(b)(3) or 804(b)(5). See Porter, 881 F.2d at 883.
They do not qualify under Rule 804(b)(3) because they are not statements against Kain's (the declarant) interest. In fact, they are not statements against anyone's interest. Therefore, they are not admissible on that basis.
They also are not admissible under Rule 804(b)(5) because they lack circumstantial guarantees of trustworthiness equivalent to those inherent under Rules 804(b)(1)-(4). In that regard, the Seventh Circuit has recently enumerated seven factors that should be considered in determining whether hearsay testimony before a court has sufficient guarantees of trustworthiness under Rule 804(b)(5). United States v. Seavoy, 995 F.2d 1414, 1418 (7th Cir. 1993). While some of these factors seem to apply only to testimony rather than an out-of-court statement, they have been referred to in the context of a non-testimonial statement, see Moore, 936 F.2d at 1517, and will thus be applied here to the extent applicable. Having considered the trustworthiness factors set forth in Seavoy in their entirety, the court finds those factors to weigh against admitting Kain's statements pertaining to the Ormsbys under Rule 804(b)(5).
Furthermore, Rule 804(b)(5) requires the court to consider whether the statement is offered as evidence of a material fact, whether the statement is more probative on the issue for which it is offered than any other evidence which the proponent can reasonably procure and whether the general purposes of the rules and the interest of justice will be best served by admitting the statement. These additional considerations also do not favor admissibility under Rule 804(b)(5). Accordingly, Kain's statements pertaining to the Ormsbys' lack of knowledge or involvement are not admissible under Rule 804(b)(5).
What has just been said is largely academic, however, as even if Kain's statements pertaining to the Ormsbys' lack of knowledge or involvement were admissible, it is only cumulative of the undisputed testimony of the Ormsbys that they had no knowledge of Kain's false warranty claims.
The Seventh Circuit has most recently articulated the analysis applicable to a motion for a preliminary injunction in Storck USA, LP v. Farley Candy Co., 821 F. Supp. 524, slip op. at 5-10 (7th Cir. 1994). A preliminary injunction is warranted if the movant can make a threshold showing that: (1) the movant has some likelihood of success on the merits; (2) no adequate remedy at law exists; and (3) the movant will suffer irreparable harm if the injunction is not granted. Farley Candy, slip op. at 5. If all three conditions are met, the court must then balance the harm to the movant if the injunction is not issued against the harm to the defendant if it is. Farley Candy, slip op. at 5. Furthermore, the greater the movant's chance of succeeding on the merits, the less strong a showing it must make that the balance of harms is in its favor. Farley Candy, slip op. at 5. Additionally, the court must consider the public interest in whether the injunction is or is not to be granted. Farley Candy, slip op. at 5-6.
I. Success On The Merits
To succeed on the merits of its claim, OMI must demonstrate that GM's decision to terminate the franchise agreement was not proper. In that regard, OMI has taken a two-pronged course. First, it contends that, the termination was not authorized under the terms of the franchise agreement itself. Second, it maintains that the termination was not done with good cause under the Illinois Motor Vehicle Franchise Act, 815 ILCS 710/4(d)(6) (1993) (Act).
A. Franchise Agreement
The section of the franchise agreement relied upon by GM for its termination is section 14.5.5 which states that GM may terminate the agreement if a dealer submits false applications or claims for any payment, credit, discount or allowance. It is undisputed that false claims for warranty work were submitted to GM and that OMI's open account was credited for those claims. What is disputed is whether OMI should be held responsible under the franchise agreement for those false claims where the OMI owners/officers deny knowledge or involvement in the making or submission of those false claims.
A case of particular instruction on this issue is The Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273 (7th Cir. 1992). In that case, the franchisees, who sought to enjoin termination of a franchise agreement, argued that the violations giving rise to the termination were committed by their manager and were not their fault. River Valley Cookies, 970 F.2d at 279. Judge Posner rejected the argument, characterizing it as irrelevant. River Valley Cookies, 970 F.2d at 279. Liability for breach of contract is strict and does not require proof of inexcusable neglect or deliberate wrongdoing. River Valley Cookies, 970 F.2d at 279. Even if such proof was required, the franchisee would lose if the misconduct of the manager is within the scope of his employment as his misconduct would be attributable to the owner. River Valley Cookies, 970 F.2d at 279. Thus, such a case must be treated as if the franchisee had managed the store in person. River Valley Cookies, 970 F.2d at 279; see also Beermart, Inc. v. Stroh Brewery Co., 804 F.2d 409, 412 (7th Cir. 1986).
Under the analysis of River Valley Cookies, OMI cannot escape responsibility for the actions of its warranty claims administrator even where, as here, the undisputed evidence shows no knowledge or involvement by OMI officers in his misconduct. Moreover, the facts here are even more compelling because, unlike in River Valley Cookies, the franchisees here were on location and were in a much better position to monitor Kain. Kain did a portion of his work on location and had a desk in the president's office. Under these circumstances, OMI cannot avoid responsibility under the franchise agreement for the false warranty claims submitted on its behalf by Kain.
Additionally, there is further evidence to support a conclusion that OMI should be held responsible for Kain's illicit activities. Only about five years prior to OMI rehiring Kain as an independent contractor Kain had been dismissed by OMI for falsifying warranty claims unrelated to OMI with a GM official. Nevertheless, Kain was subsequently placed by OMI in charge of warranty claims and left completely unsupervised. He was given free access to the facility and was allowed to work at night. Also, prior to the audit in August 1993, OMI had received numerous monthly reports from GM regarding higher-than-average warranty claims and had also received correspondence from GM alerting them to the excessive warranty claims and the possibility of an audit. Furthermore, Beatty, the district service manager, had several personal contacts with the Ormsbys where he discussed the warranty claims problems and emphasized the seriousness of the matter. Apparently, and amazingly, nothing was done by OMI to investigate the warranty claims process or to deter the further submission of false or inflated claims. Lastly, even after the audit, OMI took no immediate action nor offered any explanation to GM regarding the false warranty claims. In fact, OMI did not terminate Kain until over a month after the audit results were released. Even then, OMI characterized Kain as merely a "warranty clerk." These additional facts make it evident that OMI not only placed Kain in the unsupervised position of preparing warranty claims when it knew of his past improprieties but it also allowed him to remain in that position after being made aware of the recent warranty claim irregularities. Consequently, OMI has simply failed to demonstrate any likelihood of succeeding on the merits of its claim that it is not responsible for the breach of the franchise agreement.
B. Illinois Motor Vehicle Franchise Act
Section 710/4(d)(6) of the Act provides, in relevant part: "It shall be deemed a violation for a . . . distributor . . . (6) to cancel or terminate the franchise or selling agreement of a motor vehicle dealer without good cause . . .." Good cause exists for terminating the franchise where a franchisee fails to substantially comply with the franchise agreement or where the franchisee commits a breach of contract that affects the franchisor's ability to market its product. David Glen, Inc. v. Saab Cars USA, Inc., 837 F. Supp. 888, 1993 U.S. Dist. LEXIS 15092 (N.D. Ill. 1993) (citing Kawasaki Shop of Aurora v. Kawasaki Motors Corp., 188 Ill. App. 3d 664, 544 N.E.2d 457, 463-64, 136 Ill. Dec. 4 (2d Dist. 1989)).
Here, as discussed earlier, the evidence overwhelmingly shows that OMI breached a material term of the franchise agreement that gave GM the right to terminate the agreement. Such a breach as occurred here constitutes a failure to substantially comply with the franchise agreement; hence, good cause is shown. This is especially true where, as here, the violations occurred repeatedly and over a substantial period of time. Furthermore, while arguably an isolated incident by a "rogue employee" might in some circumstances not provide good cause for termination of a franchise agreement, here the evidence demonstrates that what occurred was more than an isolated incident and that OMI officials took no corrective action even after repeated reports by GM of claims problems. See David Glen, No. 93 C 6346, 1993 U.S. Dist. LEXIS 15092, at *9, Thus, OMI has failed to demonstrate any likelihood of succeeding on the merits of its argument that the termination of the franchise agreement was without good cause under the Act.
II. Adequacy of Legal Remedy/Irreparable Harm
Because the court has concluded that OMI has not shown any likelihood of succeeding on the merits of its claims, the court need not determine whether OMI has shown inadequacy of a legal remedy and irreparable harm and may deny the motion on that basis alone. See Farley Candy, slip op. at 5. Nevertheless, the court further finds that OMI has not demonstrated that it will be irreparably harmed if an injunction does not issue or that any harm it will suffer cannot be legally remedied. Its harm here will be loss of business and lost profits during the time it is not operating as a dealership. That type of damage is one capable of measure and subject to monetary compensation. There is no other suggestion by OMI as to how it will be damaged in any other way or how such damage is legally incompensable.
III. Balance of Harm
Again, the court notes that it need not consider the balance of harms here as OMI has failed to make a threshold showing of some likelihood of success on the merits. The court does find, however, that the balance of harms weighs slightly in GM's favor. While OMI will lose money if the preliminary injunction is not issued, so will GM as it will be without a dealer in that franchise area. Moreover, if the preliminary injunction is issued, GM will be forced to continue to deal with OMI. This is a real and substantial harm. See River Valley Cookies, 970 F.2d at 277. The evidence established that the relationship between GM and its franchise dealers depends on trust. For example, GM maintains an open account with OMI for financial transactions, including warranty claims and payments. That system allows for claims without documentation to be made and provides for reimbursement for those claims without any further information provided to GM. Of course, OMI must keep records in the event of an audit. It is apparent that the trust relationship necessary to such financial transactions and operating procedures has been severely damaged here. GM cannot be expected to continue to operate under such conditions at this point in the litigation. Accordingly, the balance of harms, while arguably close, favors the denial of the motion for preliminary injunction especially as no likelihood of success on the merits has been shown.
For the foregoing reasons, OMI's motion for a preliminary injunction is denied.
PHILIP G. REINHARD, JUDGE
UNITED STATES DISTRICT COURT
DATED: January 26, 1994