Most dealers would soon go out of business if they lost their flooring line. And flooring agreements are often strongly one-sided in the flooring lender’s favor. But this doesn’t mean that a dealership is entirely at its flooring lender’s mercy when the lender decides to turn the screws. In fact, in some circumstances, over-reaching by the flooring lender may provide a dealership the opening it needs to keep its flooring line in place, even if only for long enough to find an alternative lender.
Because forcing a dealership out of business can have such dire consequences—the loss of people’s livelihood and the social and emotional upheaval that results from that, to say nothing of the economic damages—a lender who pulls a flooring line improperly can be held liable for hundreds of thousands, if not millions, of dollars. That’s what happened in Nissan Motor Acceptance Corporation v. Superior Automotive Group. The jury in that case required a flooring lender to pay $256 million, including over $134 million in punitive damages, for wrongfully pulling a dealerships flooring line. 
When the economy soured in 2008, Southern California’s Superior Automotive Group, like many dealerships at the time, suffered a sudden decline in revenue. With over 800 employees and seven rooftops, the dealership had substantial overhead and was taking heavy losses. It became unable to pay down its line of credit on the schedule that its flooring agreement with Nissan Motor Acceptance Corporation (NMAC) required. At one point in 2009, Superior was $7.1 million out of trust. But several NMAC executives, and even Nissan North America’s president, assured the dealership that Nissan would do what was necessary to “get it through 2009.” All Superior had to do was sell one of its stores and use the proceeds to begin paying down its credit lines. Superior did that. The dealership’s principal even pledged his own home as collateral to ensure that the lines would be paid. Ultimately, Superior pledged $40 million in collateral and reduced its out-of-trust status across all six of its remaining stores to just $1.6 million.
Although Superior had done everything that NMAC said it needed to do to maintain its flooring lines—and despite NMAC’s promise that, if the dealership did those things, it would “get it through 2009,” NMAC pulled Superior’s line before the year was out. It filed a series of lawsuits against the dealership to terminate the flooring line of credit and collect on the collateral.
Because of the parol evidence rule—a rule codified in Civil Code § 1865, under which courts hearing contract disputes are required to look only at the contract itself to ascertain the parties’ rights and duties—the jury never heard about the many oral representations that NMAC made to Superior. All it heard was that NMAC had a contract under which Superior was required to make certain payments, on a certain schedule, and that Superior had fallen behind. The jury returned a verdict in NMAC’ favor, requiring the dealership to pay more than $30 million.
But while the case was pending, the California Supreme Court ruled that courts and juries can hear evidence outside the written contract to establish misrepresentation or fraud, and affirming that how parties actually conduct themselves when carrying out a contract may be evidence of what the contract means. The case between Superior and NMAC went back to trial so that, consistent with the Supreme Court’s opinion, the jury could hear the extrinsic evidence of the promises and inducements made by NMAC, and the things that Superior did in reliance on them. The result this time was radically different. As noted above, the jury ruled in the dealership’s favor, to the tune of more than a quarter billion dollars.
NMAC has appealed the jury award. But for now, a lender would be wise not to pull a dealership’s flooring line precipitously—certainly not if doing so would pull the rug out from under a dealership that, regardless of the terms of its written flooring contract, has complied with the lender’s stated wishes.
But this caution doesn’t apply only in extreme cases like the one involving Superior and NNAC. Dealers place their orders with manufacturers well in advance of actual delivery, and flooring lenders know this. Lenders also know that dealers are dependent on their flooring lines to pay manufacturers for the vehicles that they’ve ordered, until the vehicles are sold to consumers and those sales are funded. So the lender is, arguably, representing to a dealer that it will continue to extend credit to pay for those vehicles until sales to the end users are funded. This argument is especially persuasive in the case of a captive lender. A dealer whose lender pulls its flooring line because the dealership is out of trust should seek to introduce evidence that it had been out of trust before with no consequences (if that’s the case), and would not have purchased the vehicles from the manufacturer had the flooring lender not misrepresented that it would fund their purchase.
And lenders who pull a dealer’s flooring or refuse to continue to fund certain deals, i.e., fleet, or remove what they call “privileges,” for much less egregious defaults, e.g., failure to comply with financial covenants or failure to permit inspection or disclosure of financial records, are even more exposed to this argument.
At a minimum, bearing in mind the potential for a substantial adverse damages award of the kind that occurred in NMAC v. Superior, the lender should keep the flooring in place and without potentially door-closing penalties or restrictions until all orders that have already been placed with the manufacturer are received by the dealer, sold to consumers, and the purchases are funded, thereby giving the dealership time to find another lender. Otherwise, the dealer may seek and obtain a temporary restraining order and an injunction to prevent the flooring from being pulled – or require the flooring lender to continue to lend without onerous restrictions, as the dealer did in Colonial Ford, Inc. v. Ford Motor Co., 1975 U.S. Dist. Lexis 16357 at 16. In that case, the Court weighed the relative harm and decided that it favored the dealership because “between 70 and 73 employees and their families who would be immediately affected if the dealership were not able to continue operations.” Id. at 11.
As these cases make clear, the degree to which a dealer has leverage to stop, or delay, the pulling of its flooring depends on the facts. For this reason it is imperative that a dealer involve counsel at the first suggestion by its lender that it is out of compliance with the terms of its flooring contract. Counsel may determine that what the flooring lender is complaining about is not a material term of the agreement, cannot provide the justification for the flooring to be pulled, and then attempt to work out a compromise with the lender. Counsel involved earlier in the dispute can also identify the facts that form the basis for a claim against the flooring lender, and when the time is right to play hardball, Counsel will be ready to present the facts and law to the lender. Being prepared to, and making such a show of force can be the difference between the dealer that survives a dispute with its flooring lender, and the dealer that does not. While any dealer would feel vindicated by securing a $256 million judgment—if at all possible, most would rather avoid 8 years of litigation and losing the businesses they worked so hard to build.
 http://www.latimes.com/business/la-fi-nissan-verdict-20170523-story.html (last visited Jun 12, 2017).
 Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., 55 Cal. 4th 1169 (2013); Cal. Code of Civ. Proc. § 1856, subd. c.