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October 14, 1993


The opinion of the court was delivered by: BY THE COURT; J. CURTIS JOYNER


 October 14, 1993

 This consolidated civil action involving claims for debts arising out of a security agreement and master credit arrangement and counterclaims for bad faith, lender liability and negligence was tried before this Court without a jury between June 3 and June 9, 1993. The parties thereafter submitted their proposed findings of fact and conclusions of law in July, 1993 and the matter is now ripe for adjudication. Accordingly, pursuant to Fed.R.Civ.P. 52(a), this Court now renders the following:


 1. Chrysler Credit Corporation is a Delaware corporation with offices located at 901 Wilshire Drive, Troy, Michigan and 200 Tournement Drive, Horsham, Pennsylvania and is engaged in the business of providing wholesale financing for the acquisition of new and used motor vehicle inventory for motor vehicle dealerships. It is a subsidiary of the Chrysler Financial Corporation which is, in turn, a subsidiary of Chrysler Corporation. (N.T. 6/3/93, 47-48; 6/04/93, 4; Exhibits P-13, P-21)

 2. B.J.M., Jr., Inc. is a Pennsylvania corporation which had, at all relevent times, a principal place of business at 2431 West Main Street, Norristown, Pennsylvania and was engaged in the business of selling new and used Jeep Eagle and other motor vehicles to the general public under the name "AllStar Jeep/Eagle." (Exhibits P-13, P-27)

 3. Joseph Lashinger is an adult individual residing at 129 Stable Road, Norristown, Pennsylvania. (N.T. 6/7/93, 92)

 4. Justin and Carol Gambone are adult individuals, husband and wife, who reside at 2130 Wentz Church Road, Lansdale, Pennsylvania. (N.T. 6/8/93, 212)

 5. Prior to 1989, one-hundred percent (100%) of the stock of B.J.M., Jr., Inc. was owned by one Benjamin J. Marchese, Jr. (N.T. 6/7/93, 98-100)

 6. In October, 1989, Joseph Lashinger and Justin and Carol Gambone purchased 66 2/3 of the stock of B.J.M., Jr., Inc. for $ 850,000 from Mr. Marchese. One of the provisions of that buy-sell agreement and one of the conditions for Chrysler Credit's approval of the agreement was the understanding that the Lashingers and the Gambones would satisfy for B.J.M., Jr., Inc. a Meridian Bank loan, a Fidelity Bank auto lease and the approximately $ 209,000 sold-out-of-trust situation which the corporation then had with Chrysler Credit Corporation. (N.T. 6/3/93, 7-8; 6/7/93, 108-110; 6/9/93, 50-51).

 7. George Tallant and Edward Muscara are adult individuals who were at all times relevant hereto employed by Chrysler Credit Corporation as Branch Manager and Sales Representative respectively. (N.T. 6/3/93, 4-6; 6/4/93, 91-92)

 8. Under the Security Agreement and Master Credit Agreements which Chrysler Credit and B.J.M, Jr., Inc. entered into in May, 1988 and again in May, 1991, interest would begin to accrue upon delivery of each financed vehicle to the dealership and would continue to accrue until such time as the vehicle was paid for in full by the dealership after sale. (N.T. 6/3/93, 67; Exhibit P-13)

 9. In May, 1988, prior to Messrs. Lashinger and Gambone's acquisition of an interest in the corporation, B.J.M., Jr., Inc., through its then-principal, B.J. Marchese, Jr. and in conjunction with the execution of a Security and Master Credit Agreement, gave to Chrysler Credit a security interest in all of its "chattel paper, accounts whether or not earned by performance, contract rights, documents, instruments, general intangibles, consumer goods, equipment, fixtures, leasehold improvements, whether now owned or hereafter acquired, together with all additions and accessions thereto," all "inventory, including but not limited to all new and used motor vehicles, campers, travel trailers, mobile homes and motor homes and automotive parts and accessories, whether now owned or hereafter acquired, together with all additions and accessions thereto" and "all proceeds of the property covered by this statement . . ." This security interest, in turn, was documented by the filing of financing statements with both the Pennsylvania Department of State and the Office of the Prothonotary of Montgomery County, Pennsylvania on June 3, 1988. (N.T. 6/03/93, 5-7; Exhibits P-2, P-3, and P-4)

 10. The Master Credit Agreement and Security Agreement entered into by B.J.M., Jr., Inc. and Chrysler Credit Corporation in May, 1988 was lost and could not be located in Chrysler Credit's files. That agreement, however, had the same terms and conditions as did the Master Credit Agreement and Security Agreement which the parties executed in May, 1991. (N.T. 6/03/93, 12-13; Exhibit P-10)

 11. A sold-out-of-trust situation arises when an automotive dealership sells and receives payment for a vehicle which they have financed but fails to remit payment for that vehicle to the wholesale (or retail) credit source. (N.T. 6/3/93, 8-9)

 12. After the November, 1989 buy-out, Justin Gambone assumed the position of President and general manager of B.J.M., Jr., Inc., trading as All-Star Jeep/Eagle. Joseph Lashinger became the Vice President of the corporation. (N.T. 6/8/93, 218; Exhibit P-5)

 13. In November, 1989 and again in November, 1990, B.J.M., Jr., Inc., on these occasions through its principals Lashinger and Gambone, gave security interests to Madison Bank in "all of the debtor's property and assets whether existing or hereafter acquired or created, including all of . . . [B.J.M.'s] chattel paper, fixtures, accounts, instruments, money, inventories, equipment and all accessories, substitutions and appurtenances thereto, documents, general intangibles, records, insurance policies and all cash and non-cash collateral and the proceeds and products of the foregoing . . ." to secure loans in the amounts of $ 250,000 and $ 100,000, respectively. On November 16, 1990, that security interest was recorded and filed in the office of the Prothonotary of Montgomery County, Pennsylvania. (N.T. 6/03/93, 86-91; 6/04/93, 71-78; Exhibit P-39)

 14. Justin Gambone holds a Bachelor's degree in Business Administration from Temple University and has partially completed graduate work at Temple toward an advanced business degree. Since his graduation from college in 1974, Mr. Gambone has been employed primarily in the automotive sales industry in the capacity of accountant, office manager, controller and general manager and for a time was also self-employed as a tax preparer/accountant and small business planner. From 1978 to 1989, he was employed as the general manager of Marchese Honda. (N.T. 6/8/93, 212-217; Exhibit D-54)

 16. Prior to creating and executing the November, 1989 buy-sell agreement, Messrs. Lashinger and Gambone did some due diligence and, together with one of Mr. Lashinger's law partners examined the dealership's and the corporation's debt structure, operations and expenses and spoke with Chrysler Motors' representatives about what products would be available for sale in the coming year. (N.T. 6/7/93, 100-101)

 17. At the time that the Lashingers and Gambones were negotiating with Mr. Marchese for the sale of 66 2/3 of the stock of B.J.M., Jr., Inc., the All-Star dealership was sold-out-of-trust in the amount of $ 226,000. The dealership had been placed. on finance hold by Chrysler Credit Corporation since March of 1989 with the effect that it hadn't been able to acquire new or used vehicles for its inventory since that time. (N.T. 6/3/93, 26-27; 6/7/93, 101-102)

 18. Although Chrysler Credit did not then declare B.J.M., Jr., Inc. in default under its Security/Credit Agreements as a result of the out-of-trust situation in early November, 1989, Mr. Tallant did threaten to "padlock the doors" of the dealership if settlement with Lashinger and Gambone could not be immediately consummated. (N.T. 6/7/93, 102-103)

 19. At the time of their acquisition of 66 2/3 of the B.J.M., Jr., Inc. stock and as a further condition of Chrysler Credit's approval of the buy-sell agreement, the Lashingers and the Gambones executed continuing personal guarantees of the debts of B.J.M., Jr., Inc. in favor of Chrysler Credit Corporation. (N.T. 6/3/93, 7-8; Exhibits P-6, P-7)

 20. As of May 6, 1988, the All-Star Jeep/Eagle dealership had a line of credit with Chrysler Credit Corporation of $ 2.2 million. (N.T. 6/3/93, 5-6, 55-59; Exhibit P-1)

 21. B.J.M., Jr., Inc./All-Star did not have to finance its wholesale purchases of vehicles through Chrysler Credit Corporation. Although not many banks or financing companies offer wholesale business financing, B.J.M. could have gone to any bank or finance company that offered such financing to finance its inventory. (N.T. 6/9/93, 113-114) Chrysler Credit did offer an incentive to dealerships to finance through them in the form of their dealer reserve program whereby they would pay a small amount in give monies to the dealer for all vehicles financed. (N.T. 6/8/93, 26-27)

 22. Upon the Lashingers' and the Gambones' purchase of the B.J.M. stock in November, 1989, Chrysler Credit Corporation revised the dealership's line of credit for the purchase of new vehicles to $ 1 million and to $ 60,000 for the purchase of used vehicles. (N.T. 6/3/93, 61; 6/8/93, 18)

 23. Notwithstanding that the dealership's line of credit had been reduced to $ 1,060,000 upon the partial buy-out in November, 1989, Chrysler Credit took no action with respect to reducing B.J.M's then-existing inventory of new and used vehicles. (N.T. 6/7/93, 116-119)

 24. Chrysler Credit Corporation received notice every time the factory (Chrysler Motors) sent new vehicles to the AllStar Jeep/Eagle dealership and thus knew how much of its credit line the dealership was using at any given time. (N.T. 6/3/93, 67)

 25. Chrysler Credit Corporation and George Tallant, as Branch Manager for the Horsham, Pennsylvania office of Chrysler Credit Corporation were responsible for ensuring that B.J.M., Jr., Inc. did not over-extend its line of credit. (N.T. 6/3/93, 64)

 26. If a dealership's line of credit gets too high and the dealership gets too many financed vehicles, it runs the risk of being unable to pay the interest on those vehicles and the dealership could be "strangled." (N.T. 6/3/93, 63)

 27. At some point between November, 1989 and November, 1991, George Tallant and Chrysler Credit Corporation allowed B.J.M., Jr., Inc. trading as All-Star Jeep Eagle to over-extend its $ 1,060,000 credit limit to nearly $ 2 million. (N.T. 6/3/93, 64)

 28. In January of 1991, B.J.M. was again found to be sold out-of-trust to Chrysler Credit in the approximate amount of $ 200,000. (N.T. 6/3/93, 9; 6/8/93, 46-47)

 29. On January 25, 1991, Chrysler Credit declared the dealership to be in default of the financing/security and master credit agreements and notified B.J.M. and its principals (Lashinger and Gambone) that it was accelerating the balance due under the agreements. However, as an "accomodation" to the dealership, Chrysler Credit would keep the dealership on its "finance hold" status and would "withhold taking further action until February 28, 1991, in order to permit the dealership time to pay off the debt in full through other financing or other means." (N.T. 6/8/93, 47; Exhibits P-41a, P-41b, P-41c)

 30. Although B.J.M. was able to continue to operate the business with its existing inventory, it could not acquire any additional new or used cars until it satisfied the sold out-of-trust condition. (N.T. 6/8/93, 47-48)

 31. In February, 1991, Messrs. Lashinger and Gambone met with Mr. Tallant in an effort to agree on the means to satisfy the out-of-trust situation. At that time, there were three options potentially available to cure the dealership's problems: recapitalization and refinancing of the company, consolidation of B.J.M.'s Jeep/Eagle franchise with the local Chrysler/Plymouth franchise and a direct sale of the franchise to another entity. (N.T. 6/8/93, 48-53)

 32. Shortly thereafter, Mr. Lashinger and Mr. Gambone began separate negotiations for both a consolidation and an outright sale of the franchise with the local Chrysler/Plymouth franchise and with the principals of Norco Jeep/Eagle and Murray Dodge. At that time, however, Chrysler Motors Corporation would not allow consolidation because of existing company policy to not permit such a merger in major metropolitan areas and no agreement could be reached for the sale of the franchise. That policy, however, was changed in or about July, 1991. (N.T. 6/8/93, 48-55; Exhibit D-39)

 33. After further discussions with George Tallant and Chrysler Credit Corporation, an agreement was eventually reached in or about April, 1991 for the refinancing and recapitalization of the B.J.M. dealership. Under the terms of the recapitalization, B.J.M. borrowed $ 150,000 from Chrysler Motors Corporation and $ 100,000 from the Madison Bank; Gambone and Lashinger supplied another $ 125,000 in loans and B.J. Marchese forgave the corporation's existing debt to him in consideration for Chrysler Credit Corporation's release of his personal guaranty. (N.T. 6/3/93, 9-10; 6/8/93, 56-62; Exhibits P-36, D-32)

 34. In conjunction with the refinancing, Mr. Lashinger and Mr. and Mrs. Gambone were required to and did execute among other things, an Agreement to Reaffirm their personal guarantees of the corporation's debts, another Security Agreement and Master Credit Agreement, an Agreement to Pay Wholesale Interest Charges in Arrears, and General Releases of Claims against Chrysler Credit Corporation, Wholesale Cash Transfer Check Authorization and new UCC-1 Financing Statements. (N.T. 6/3/93, 9-14; 6/8/93, 62-64, 70-74, 129-140; Exhibits P-5, P-8, P-9, P-10, P-11, P-13, P-14, P-14a, P-15, P-16, P-33, P-34, P-35) The Wholesale Cash Transfer Check Authorization gave Chrysler Credit Corporation authority to draw Cash Transfer Checks on B.J.M.'s Madison Bank account to meet the wholesale payments due it for vehicles sold. (P-33)

 35. Despite the fact that Messrs. Gambone and Lashinger were $ 50,000 short in terms of the amount of money they were to loan the company, the parties closed on the recapitalization of the dealership and the sold-out-of-trust condition was remedied on or about May 31, 1991. (N.T. 6/8/93, 77, 151-154)

 37. On May 30 and May 31, 1993, via correspondence, Messrs. Gambone and Lashinger notified Mr. Tallant that they approved of his extension of their new and used car credit lines above the previous limits of $ 1 million and $ 60,000 respectively. (N.T. 6/3/93, 17-18; 6/8/83, 155-157; Exhibits P-29, P-30)

 38. On or about June 3, 1991, Chrysler Credit Corporation re-opened B.J.M.'s lines of credit and on June 5, 1991, removed the dealership from the direct assignment of factory monies that had been lodged against it on November 8, 1991, thus enabling B.J.M. to again receive the rebates and other receivables due it from the factory. (Exhibits P-30, P-31 and P-37; N.T. 6/3/93, 15-19)

 39. Notwithstanding that B.J.M./All-Star's credit lines were re-opened in early June, 1991, the dealership was unable to meet Chrysler Motors' April and May, 1991 "build-out" deadlines for placing factory orders for the end of the 1991 model year with the result that B.J.M. could not get additional new vehicle inventory except by dealer trading until the new year models could be delivered in August or September. (N.T. 6/8/93, 78-81)

 40. As a general rule, it is not profitable for a dealership to obtain its inventory by means of dealer trading because most dealerships in the Philadelphia area sell vehicles at invoice prices and the selling dealer usually sells the vehicle minus the factory holdback money. Since the holdback money represents the profit in the car, a dealership which is forced to dealer trade for inventory is not competitive. Factory holdback monies, in turn, will become a receivable to the dealership from the factory. (N.T. 6/8/93, 21, 23, 80-81)

 41. On October 21, 1991, Chrysler Credit Corporation conducted a car check or wholesale inventory audit at the B.J.M. dealership and discovered (1) that the dealership had, within the preceding two weeks, sold a number of vehicles for which it had failed to remit payment to Chrysler Credit Corporation; (2) that several vehicles that had been designated as demonstrator models had actually been sold; (3) and that the dealership still had in its possession several certificates of origin for vehicles that had been sold. (N.T. 6/3/93, 21-22; 6/4/93, 92-97, 153-154)

 42. Chrysler Credit followed up the October 21, 1991 car check with a full wholesale audit of All-Star on November 1, 1991. Although that audit had results which were satisfactory to Chrysler Credit, in the course of that audit, Mr. Muscara and several other Chrysler Credit representatives that were present at the dealership on that date, directed All-Star's office manager to fax into Chrysler Credit's office the serial numbers of several sold vehicles on which the final paperwork had yet to be processed and the checks deposited. (N.T. 6/3/93, 22-23, 72-75; 6/4/93, 97-99, 172-174)

 43. On November 1, 1991, the same date as the wholesale audit, Chrysler Credit drew a check payable to itself in the amount of $ 65,857.30 on B.J.M.'s account in payment of the wholesale vehicles which it had floor-planned. It subsequently drew two additional checks payable to itself on the B.J.M. account on November 4 and November 6, 1991 in the amounts of $ 45,803.79 and $ 20,929.97, respectively. (N.T. 6/3/93, 24, 75; 6/4/93, 174)

 44. On November 7, 1991, George Tallant was informed by Chrysler Credit's bank that the three checks had been returned for non-sufficient funds. Mr. Tallant then contacted Mr. Gambone and requested that the returned checks immediately be certified. Mr. Gambone, however, could not have the checks certified because the funds were not then available in or to B.J.M's Madison Bank account. (N.T. 6/3/93, 24-25; Exhibit P-17)

 46. On November 8, 1991, Judge Bechtle issued a temporary restraining order against B.J.M., Jr., Inc. preventing it from further disposing of its new or used car inventory pending a full hearing on the merits which was then scheduled for November 18, 1991. (N.T. 6/8/93, 82-83)

 47. Although Chrysler Credit was asked to re-deposit the checks that had been returned for payment, it declined to do so. (N.T. 6/3/93, 119; 6/4/93, 65-69; 6/9/93, 14-16)

 48. On or about the same date as the temporary restraining order was obtained, Chrysler Credit Corporation's credit committee declared B.J.M., Jr., Inc. to again be in default of the financing/security and credit agreement. Unlike the January, 1991 declaration of default, however, no formal written notice of default was ever issued to B.J.M., Jr., Inc. or its principals. (N.T. 6/3/93, 76-80, 120)

 49. Paragraph 9.0 of the Security Agreement and Master Credit Agreement executed by the parties on May 20, 1991 states that "Any notice given hereunder shall be in writing and given by personal delivery or shall be sent by United States Mail, postage prepaid, addressed to the party to be charged with such notice at the respective address set forth below . . ." (Exhibit P-17)

 50. Between 1989 and 1991, Chrysler Motors promoted many of its Jeep/Eagle products through the use of rebate programs. Because most customers elect to take their rebates off the price of the vehicle they are buying, it is the dealer (not the customer) which must wait to receive the rebate from Chrysler Motors and rebates therefore become receivables for a dealership. (N.T. 6/8/93, 22-24)

 51. It was not uncommon for the All-Star Jeep/Eagle dealership to wait anywhere between two and six weeks to receive a rebate check from Chrysler Motors Corporation. (N.T. 6/8/93, 25)

 52. Irrespective of the fact that All-Star often had to wait up to six weeks to receive a rebate, Chrysler Credit demanded and expected payment in full for any and all vehicles sold within seven days of the sale of the vehicle. Although the factory did not pay interest on the rebate money, interest would continue to be charged by Chrysler Credit until the vehicle(s) sold were paid for in full. (N.T. 6/3/93, 121-123; 6/4/93, 93-94; 6/8/93, 25-26)

 53. At the time that Chrysler Credit orally declared B.J.M. All-Star to be in default in November, 1991, Chrysler Motors owed the dealership some $ 140,000 from rebates and other promotional and advertising programs. Those receivables were assigned to and paid directly to Chrysler Credit after the default was declared. (N.T. 6/8/93, 29, 229-231; 6/3/93, 154-157, 165-166; Exhibit D-1A)

 54. As of November 26, 1991, the All-Star dealership's sold-out-of-trust condition totalled $ 240,865.20. (N.T. 6/3/93, 28; Exhibit P-18)

 55. On November 27, 1991, Chrysler Credit Corporation's motion for writ of seizure and preliminary injunctive relief against B.J.M., Jr., Inc., Lashinger and Gambone was heard before Judge Bechtle. B.J.M. was permitted to continue its operations and to retain ...

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