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ORMSBY MOTORS, INC. v. GMC

January 26, 1994

ORMSBY MOTORS, INC., Plaintiff,
v.
GENERAL MOTORS CORPORATION, Defendant.



The opinion of the court was delivered by: PHILIP G. REINHARD

 INTRODUCTION

 Plaintiff, Ormsby Motors, Inc. (OMI), filed a complaint in the circuit court of McHenry County, Illinois against defendant General Motors, Inc. (GM), seeking a declaration that GM's notice of termination of OMI's franchise to sell Pontiac automobiles and GMC trucks was in violation of the franchise agreements and the Illinois Motor Vehicle Franchise Act, 815 ILCS 710/4(d), and also seeking an injunction to prevent GM from terminating the franchise. GM removed the case to this court pursuant to 28 U.S.C. §§ 1441 and 1332 as OMI is an Illinois corporation with its principal place of business in McHenry County, Illinois, GM is a Delaware corporation with its principal place of business in Michigan and the amount in controversy exceeds $ 50,000. OMI moved for a preliminary injunction seeking to enjoin GM from terminating the franchise agreement, and the court conducted a hearing thereon. *fn1" Having heard the testimony of witnesses, received exhibits into evidence and considered the stipulations submitted by the parties, the court enters its findings of fact and conclusions of law.

 FACTS

 OMI is a GM franchise vehicle dealership authorized to sell Pontiac automobiles and GMC trucks. It has been a Pontiac and GMC dealer since 1948 and holds a franchise for each from GM pursuant to a "Dealer Sales and Service Agreement" (franchise agreement). Article 14 of the franchise agreements contains various provisions related to termination of the agreement. Of particular relevance to this litigation is section 14.5.5 which sets forth one basis for termination and states, in pertinent part: "Submission by Dealer of false applications or claims for any payment, credit, discount, or allowance, including false applications in connection with incentive activities, where the false information was submitted to generate a payment to Dealer for a claim which would not otherwise have qualified for payment." GM seeks to terminate the franchise agreements based on this provision due to OMI's submission of false warranty claims.

 It is undisputed that the false warranty claims at issue were prepared and submitted by Larry Kain. *fn2" Kain, a long-time OMI employee, had originally been employed by OMI on a full-time basis as a service manager and warranty claims administrator. OMI terminated his employment in 1987 when OMI learned from GM that Kain and a GM employee were involved in falsifying warranty claims unrelated to OMI's dealership. In the spring of 1990, Kain was hired back by OMI as an independent contractor on an hourly basis because several other persons did not work out in that position. In this new capacity, he was responsible for processing all warranty claims for OMI which were submitted to GM. According to Dwight Ormsby, former owner of OMI, Kain worked at night processing warranty claims. No other OMI employees worked with Kain or supervised him.

 Richard Ormsby, president of OMI, testified that Kain performed the same warranty claim duties in 1992 and 1993 as he did before he was terminated in 1987. Kain's desk was in Richard Ormsby's office, and he had his own set of keys to the building. Kain was in charge of making all warranty coding and claims decisions at OMI in 1992 and 1993. The warranty claims decisions were made by Kain at least, in part, on OMI's premises.

 Dwight Ormsby, Richard Ormsby, and Thomas Ormsby, vice-president of OMI, all denied having any knowledge of or involvement in Kain's 1992-93 falsification of warranty claims. Stacy Ormsby, whose duties included submitting warranty claims to GM via a computer system, denied any knowledge of any false warranty claims being submitted by anyone at OMI. She never discussed warranty claims with Kain. Dwight Ormsby was aware that Kain had been involved in submitting false warranty claims back in 1987 when he was told such by GM. Richard Ormsby admitted that he also knew that Kain had previously been involved in warranty claim fraud because he had been told that by a GM employee.

 During 1992 and 1993, GM notified OMI that OMI had above-average warranty claims. Dave Beatty, the GM district service manager for the OMI dealership from June 1992 to June 1993, testified that part of his duties was to prepare "PICS reviews" *fn3" whenever a dealership is showing excessive warranty expense. A PICS review is completed and communicated to a dealership any time a dealership is above a certain percentage of warranty expense. In the case of OMI, Beatty first completed a PICS review in April 1993. He personally discussed the information regarding excessive warranty expense with Richard Ormsby and OMI's service manager. Both Ormsby and the service manager signed the PICS review, indicating they understood its meaning. Beatty also told Richard Ormsby that OMI was considered a project dealer, that is, a dealer that has exceeded warranty expense for three months. Additionally, as part of the PICS program, the Pontiac zone manager sends a letter to the dealership explaining that they are a project dealership, that Beatty will be working with the dealership to correct the warranty expense discrepancies and that the dealership is a potential audit candidate.

 On April 21, 1993, R.L. Ackels, zone manager for the Pontiac division of GM, wrote Richard Ormsby and advised him that "over the last three months, warranty and frequency data tabulated for your dealership indicates that certain out-of-line conditions exist in the area of warranty administration when compared to national average." The letter further states that Pontiac district service manager, David Beatty, would be assigned to assist OMI management in correcting the deficiencies and that if there was no significant change after ninety days the dealership would be considered as a possible warranty audit candidate.

 Following the letter, Beatty visited OMI and discussed with Richard and Thomas Ormsby the seriousness of the letter, the seriousness of being a project dealer and the possibility of a future audit. On May 4, 1993, Beatty visited OMI after noticing that OMI had a very high frequency of paint repairs of vehicles in stock with less than one hundred miles. Upon Beatty examining the files pertinent to those claims, it was revealed that there were no sublet receipts *fn4" for the paint repairs in the files. According to Beatty, Dwight Ormsby explained that the reason the sublet receipts were missing was because they were being completed by Richard Ormsby outside the dealership. At that point, Beatty advised one of the Ormsbys' that sublet receipts are to be completed by the vendor and not by anyone at the dealership. Beatty filled out another PICS review for OMI on May 14, 1993 because OMI remained in excess of warranty expense and because of Beatty's concern about the sublet receipts. Beatty again discussed his concerns about excess paint repairs with Richard Ormsby and the continued possibility of OMI being audited. Beatty had one more contact with Richard and Thomas Ormsby in late May or early June 1993 in which he discussed the continuing warranty claims problems and the possibility of an audit.

 GM's dealer audit section conducted an audit of OMI's warranty claims between August 9, 1993 and August 19, 1993. The audit uncovered over eighty claims made to GM during that period for paint repair work that was never done. Additionally, the audit revealed over twenty claims made to GM in the past year for paint repair work in amounts that exceeded the amounts OMI was actually billed by the sublet repair facilities. *fn5"

 On August 19, 1993, the auditors sat down with Richard Ormsby and informed him of the results of the audit and, in particular, the fact that many claims were made for warranty paint work that was never done. Ormsby offered no explanation for the false claims. When asked how the false claims could have happened, Ormsby shrugged his shoulders and gave no explanations. Between August 19 and October 13, 1993, the day the notice of termination was delivered, neither Richard or Thomas Ormsby offered any explanation for the false claims or audit results.

 On October 13, 1993, Ackels wrote a letter to Richard Ormsby stating that the audit "uncovered that [OMI] had submitted false applications and claims to GM for payment and had in fact been paid for these claims." The letter further states that during the course of the audit the details of the false applications and claims were reviewed with Richard Ormsby or members of OMI's management and that representatives of Pontiac and GMC truck reviewed with Richard Ormsby a number of the false applications and claims as well as the overall results of the audit. According to Ackels' letter, Richard Ormsby had not disputed the false claims or offered any explanation as of October 13, 1993. The letter further notes that Ormsby had been given an opportunity to respond or explain following the August 19 meeting but he specifically chose not to. Lastly, the ...


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