DE Dealer Statute Only Covers New Equipment

Facts

Southern Track, a Florida-based equipment dealership that sells and leases construction equipment, entered into a distributorship agreement with Terex Corporation (Terex), a Delaware corporation that manufactures construction equipment. Pursuant to a distributorship agreement governed by Delaware law, Southern Track purchased from Terex approximately $4 million worth of equipment (about 40 pieces in total) and $50,000 worth of parts. Southern Track financed its purchase through an arrangement with GE Commercial Distribution Finance Company (GE). The financing was secured by the equipment Southern Track purchased from Terex, using funds provided by GE.

Due to marketing difficulties, Southern Track's loan obligations to GE became too onerous and Southern Track decided to terminate the distributorship agreement. In its termination letter, Southern Track indicated that it wanted to keep some equipment, but it wanted Terex to repurchase everything else because Southern Track assumed that the Dealer Statute's repurchase obligation would force Terex to repurchase all of the unwanted inventory. Terex, of course, disagreed, contending that the Dealer Statute required a supplier to repurchase only new and unused equipment and because most of the equipment Terex sold to Southern Track had entered Southern Track's rental fleet, the equipment was now used.

Consequently, Terex asked Southern Track to compile a list of the new and unused equipment Southern Track had in its inventory. Instead of complying with this request, Southern Track sent Terex a letter indentifying 17 pieces of equipment that it wanted Terex “to come and pick up.” Over half of those items had been in operational use for 175 to 300 hours. Yet Southern Track insisted that Terex was required to purchase the equipment at brand new prices.

Terex offered to repurchase nine of the 17 pieces of equipment and offered to pay market value for the equipment, but reserved the right to take a deduction for any parts or repair services “required to return any of the repurchased equipment to good running and operating condition.”

Southern Track, under increasing pressure from GE to make past-due payments or risk losing possession of the equipment, filed a declaratory judgment action against Terex in the Delaware Superior Court. One day later ' and one month before the expiration of the Dealer Statute's 90-day repurchase period ' GE took possession of all of the equipment Southern Track had purchased from Terex. GE later sold most of this equipment at auction.

The District Court

Terex removed the lawsuit to the United States District Court for the District of Delaware. In Southern Track's second amended complaint, it alleged that Terex had violated the Dealer Statute when it failed to repurchase “all inventory previously purchased [from it] ' that remain[ed] unsold on the date of the termination of the agreement.” As a result of the alleged breach, Southern Track claimed that it was entitled to the relief prescribed by ' 2727(a) of the Dealer Statute, namely, that Terex was “civilly liable for 100% of the 'current net price' of the inventory” plus other associated costs and fees.

The parties filed cross-motions for summary judgment in the district court. The issue before the court was whether a supplier's repurchase obligation under ' 2723(a) extends to all inventory in a dealer's possession that remains unsold, or only applies to inventory that remains in new and unused condition.

The court held that ' 2723(a) required suppliers to repurchase all ' not just new and unused ' inventory. The court ruled that Terex's actions ran afoul of the Dealer Statute because Terex offered to repurchase only the new and unused equipment. The district court granted Southern Track's motion for summary judgment, and ordered Terex to pay the full price of all inventory it had sold to Southern Track that remained unsold on the date of the termination of the distributorship agreement (which amounted to approximately $4.35 million).

Terex appealed the district court's judgment to the The U.S. Court of Appeals for the Third Circuit, which certified the issue.

The DE Supreme Court's Ruling

The Delaware Supreme Court disagreed in an opinion by Justice Karen L. Valihura. The court found that the district court had judicially filled a statutory gap by creating the negotiated-price formula with no support from the legislation.

“We conclude that a supplier's repurchase obligation under the dealer statute is limited to new, unused, undamaged and complete inventory, consistent with the statutory scheme, the canon of avoiding unnecessary statutory gap-filling, and our preference to avoid interpretations that could invite constitutional entanglements,” Valihura said.

She noted in her opinion that the dealer statute was designed to level the uneven playing field between suppliers of equipment and the dealers or distributors of that equipment. As a result of superior bargaining power, suppliers typically require a minimum purchase obligation, putting dealers in a tough spot of having a lot of inventory in sometimes difficult business climates, Valihura said.

The dealer statute requires that the seller repurchase the dealer's inventory within 90 days from the date that a distribution contract agreement is terminated unless the dealer chooses to keep the inventory, according to the opinion. The court acknowledged, however, that “all inventory” in Section 2723(a) of the statute can be read in two ways. Southern Track & Pump said “all” means “all” in looking for a declaratory judgment that Terex had to repurchase all of the $4 million in inventory Southern Track & Pump purchased from Terex. Southern Track & Pump said any other reading would render the word “all” superfluous.

But Terex looked to Section 2723(b), which states that the supplier shall pay the dealer 100% of the cost of all “'new, unused, undamaged and complete inventory,'” and 85% of the current net price of new repair parts.

Valihura pointed to the detail the legislature put into the statute, suggesting it was intentionally silent on used inventory.

“A requirement that used equipment must also be repurchased would be a matter of fundamental significance in this statutory scheme,” Valihura said. “It is inconsistent with the statute's overall level of detail to infer by the legislature's silence that it intended to require the repurchase of used equipment.”

The Third Circuit characterized Delaware's dealer statute as unique from those in other states, Valihura said. Other states expressly address a price formula for repurchasing used equipment, she said.

As for the meaning of the term “all” before inventory, Valihura said that term meant the supplier had to repurchase all of the inventory that was statutorily required to be repurchased and not just a subset of that. So a supplier must repurchase all of the new, unused equipment, not just some of it.

Valihura said that the Supreme Court's ruling avoids having to reach the question of whether the statute is punitive or presents an unconstitutional taking. Terex had argued that it would be an unconstitutional taking for it to be required to repurchase used products at like-new prices, she said. The statute's only penalty for the supplier, aside from some costs, is repayment at current value if the inventory is not repurchased within the 90 days.

Adam J. Schlagman is Editor-in-Chief of this newsletter. This article is an updated and expanded version of one written by Gina Passarella that appeared in the Delaware Law Weekly, an ALM sister publication of this newsletter.

Suppliers only have to repurchase new, unused equipment from dealers under Delaware's Equipment Dealer Contracts Statute, the state Supreme Court has ruled in answering a question certified from the Third Circuit.

The en banc court's decision in Terex v. Southern Track & Pump, No. 13-4279 (June 16), ruled that the statute's silence on the suppliers' obligations to repurchase used equipment when a distributor agreement was terminated meant there was no obligation to repurchase the used inventory.

The conflict arose from two seemingly contradictory portions of the statute, with distributor Southern Track & Pump (Southern Track) arguing that the statute provided for the repurchase of “all inventory,” while Terex highlighted the fact that the statute's subsequent pricing formulas for repurchase only referenced unused equipment.

Facts

Southern Track, a Florida-based equipment dealership that sells and leases construction equipment, entered into a distributorship agreement with Terex Corporation (Terex), a Delaware corporation that manufactures construction equipment. Pursuant to a distributorship agreement governed by Delaware law, Southern Track purchased from Terex approximately $4 million worth of equipment (about 40 pieces in total) and $50,000 worth of parts. Southern Track financed its purchase through an arrangement with GE Commercial Distribution Finance Company (GE). The financing was secured by the equipment Southern Track purchased from Terex, using funds provided by GE.

Due to marketing difficulties, Southern Track's loan obligations to GE became too onerous and Southern Track decided to terminate the distributorship agreement. In its termination letter, Southern Track indicated that it wanted to keep some equipment, but it wanted Terex to repurchase everything else because Southern Track assumed that the Dealer Statute's repurchase obligation would force Terex to repurchase all of the unwanted inventory. Terex, of course, disagreed, contending that the Dealer Statute required a supplier to repurchase only new and unused equipment and because most of the equipment Terex sold to Southern Track had entered Southern Track's rental fleet, the equipment was now used.

Consequently, Terex asked Southern Track to compile a list of the new and unused equipment Southern Track had in its inventory. Instead of complying with this request, Southern Track sent Terex a letter indentifying 17 pieces of equipment that it wanted Terex “to come and pick up.” Over half of those items had been in operational use for 175 to 300 hours. Yet Southern Track insisted that Terex was required to purchase the equipment at brand new prices.

Terex offered to repurchase nine of the 17 pieces of equipment and offered to pay market value for the equipment, but reserved the right to take a deduction for any parts or repair services “required to return any of the repurchased equipment to good running and operating condition.”

Southern Track, under increasing pressure from GE to make past-due payments or risk losing possession of the equipment, filed a declaratory judgment action against Terex in the Delaware Superior Court. One day later ' and one month before the expiration of the Dealer Statute's 90-day repurchase period ' GE took possession of all of the equipment Southern Track had purchased from Terex. GE later sold most of this equipment at auction.

The District Court

Terex removed the lawsuit to the United States District Court for the District of Delaware. In Southern Track's second amended complaint, it alleged that Terex had violated the Dealer Statute when it failed to repurchase “all inventory previously purchased [from it] ' that remain[ed] unsold on the date of the termination of the agreement.” As a result of the alleged breach, Southern Track claimed that it was entitled to the relief prescribed by ' 2727(a) of the Dealer Statute, namely, that Terex was “civilly liable for 100% of the 'current net price' of the inventory” plus other associated costs and fees.

The parties filed cross-motions for summary judgment in the district court. The issue before the court was whether a supplier's repurchase obligation under ' 2723(a) extends to all inventory in a dealer's possession that remains unsold, or only applies to inventory that remains in new and unused condition.

The court held that ' 2723(a) required suppliers to repurchase all ' not just new and unused ' inventory. The court ruled that Terex's actions ran afoul of the Dealer Statute because Terex offered to repurchase only the new and unused equipment. The district court granted Southern Track's motion for summary judgment, and ordered Terex to pay the full price of all inventory it had sold to Southern Track that remained unsold on the date of the termination of the distributorship agreement (which amounted to approximately $4.35 million).

Terex appealed the district court's judgment to the The U.S. Court of Appeals for the Third Circuit, which certified the issue.

The DE Supreme Court's Ruling

The Delaware Supreme Court disagreed in an opinion by Justice Karen L. Valihura. The court found that the district court had judicially filled a statutory gap by creating the negotiated-price formula with no support from the legislation.

“We conclude that a supplier's repurchase obligation under the dealer statute is limited to new, unused, undamaged and complete inventory, consistent with the statutory scheme, the canon of avoiding unnecessary statutory gap-filling, and our preference to avoid interpretations that could invite constitutional entanglements,” Valihura said.

She noted in her opinion that the dealer statute was designed to level the uneven playing field between suppliers of equipment and the dealers or distributors of that equipment. As a result of superior bargaining power, suppliers typically require a minimum purchase obligation, putting dealers in a tough spot of having a lot of inventory in sometimes difficult business climates, Valihura said.

The dealer statute requires that the seller repurchase the dealer's inventory within 90 days from the date that a distribution contract agreement is terminated unless the dealer chooses to keep the inventory, according to the opinion. The court acknowledged, however, that “all inventory” in Section 2723(a) of the statute can be read in two ways. Southern Track & Pump said “all” means “all” in looking for a declaratory judgment that Terex had to repurchase all of the $4 million in inventory Southern Track & Pump purchased from Terex. Southern Track & Pump said any other reading would render the word “all” superfluous.

But Terex looked to Section 2723(b), which states that the supplier shall pay the dealer 100% of the cost of all “'new, unused, undamaged and complete inventory,'” and 85% of the current net price of new repair parts.

Valihura pointed to the detail the legislature put into the statute, suggesting it was intentionally silent on used inventory.

“A requirement that used equipment must also be repurchased would be a matter of fundamental significance in this statutory scheme,” Valihura said. “It is inconsistent with the statute's overall level of detail to infer by the legislature's silence that it intended to require the repurchase of used equipment.”

The Third Circuit characterized Delaware's dealer statute as unique from those in other states, Valihura said. Other states expressly address a price formula for repurchasing used equipment, she said.

As for the meaning of the term “all” before inventory, Valihura said that term meant the supplier had to repurchase all of the inventory that was statutorily required to be repurchased and not just a subset of that. So a supplier must repurchase all of the new, unused equipment, not just some of it.

Valihura said that the Supreme Court's ruling avoids having to reach the question of whether the statute is punitive or presents an unconstitutional taking. Terex had argued that it would be an unconstitutional taking for it to be required to repurchase used products at like-new prices, she said. The statute's only penalty for the supplier, aside from some costs, is repayment at current value if the inventory is not repurchased within the 90 days.

Adam J. Schlagman is Editor-in-Chief of this newsletter. This article is an updated and expanded version of one written by Gina Passarella that appeared in the Delaware Law Weekly, an ALM sister publication of this newsletter.