Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_04-cv-02344/USCOURTS-caed-2_04-cv-02344-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Account Receivable

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1 The claims at issue are: (1) breach of contract; (2) breach

of covenant of good faith and fair dealings; (3) unfair business

practices; (4) interference with contractual relations; 

(5) tortious interference with prospective business advantage; 

1

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

FORD MOTOR CREDIT COMPANY,

Plaintiff,

v. NO. CIV. S-04-2344 LKK/JFM

MICHAEL DAUGHERTY,

Defendant.

 /

AND RELATED COUNTER-CLAIM AND 

THIRD-PARTY COMPLAINT.

 /

Pending before the court is a motion for judgement on the

pleadings, brought by third party defendant, Ford Motor Company,

Lincoln Mercury Division (“Lincoln Mercury”). Lincoln Mercury

alleges that claims raised by third party plaintiffs, Daugherty

Lincoln-Mercury, Inc. (“DLMI”), and Michael Daugherty

(“Daugherty”), are barred under the doctrine of collateral

estoppel.1 Specifically, Lincoln Mercury argues that third party

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(6) Misrepresentation-deceit-fraud. 

2 These facts are adopted from the parties’ briefs.

2

plaintiffs raise the identical factual allegations in their third

amended complaint as were raised and decided in an administrative

hearing before the California New Motor Vehicle Board (“NMVB”).

Lincoln Mercury also asks that the court dismiss DLMI’s eighth and

ninth claims because this court dismissed the identical claims

against Ford Motor Credit in response to Ford Motor Credit’s motion

to dismiss.

I.

DAUGHERTY’S LINCOLN MERCURY DEALERSHIP2

In March of 1999, Michael Daugherty, owner of DLMI, executed

a buy-sell agreement for the purchase of a Lincoln Mercury

dealership to be operated in Sacramento, California. In June of

1999, DLMI was enfranchised by Lincoln Mercury as a Lincoln and

Mercury dealer under three separate franchise agreements. During

the course of operations, DLMI entered into various financing

arrangements with plaintiff and counter-defendant, Ford Motor

Credit Company ("Ford Credit"), including an agreement for a

capitalization loan and a separate agreement for wholesale flooring

for DLMI's new vehicle inventory. 

What happened next is the subject of this litigation. 

According to DLMI, on or about December 1, 2001, as a result of 

fraudulent actions of Lincoln Mercury and Ford Credit, DLMI was

forced to cease its Lincoln and Mercury sales operations. 

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3 In making the determination, the ALJ considered factors

such as the amount of business transacted by the franchisee, the

permanency of the investment, whether it is injurious to the public

for the franchise to be modified, and whether the franchisee failed

to fulfill the warranty obligations, to name a few.

3

According to Lincoln Mercury, DLMI ordered an excess number of cars

and was unable to sell all the cars ordered. DLMI’s actions caused

the dealership to fail. 

It is undisputed that on January 23, 2002, Lincoln Mercury

notified DLMI that it intended to terminate DLMI's Lincoln and

Mercury franchise agreements. DLMI then filed a protest with the

California New Motor Vehicle Board, pursuant to California Vehicle

Code Section 3060, protesting the proposed termination of its

franchise. 

II.

THE DECISION OF THE NEW MOTOR VEHICLE BOARD 

The hearing on the protest occurred before an administrative

law judge ("ALJ") for the NMVB. The ALJ heard evidence on the

termination protest on January 7 and 9, 2003. On April 24, 2003,

the NMVB adopted the proposed decision of the ALJ.

The specific issue pending before the Board was “whether

Lincoln Mercury has good cause for the termination of Daugherty’s

Lincoln and Mercury Franchises.” NMVB decision at 5. Pursuant to

section 3066(b) of the California Vehicle Code, Lincoln Mercury had

the burden to establish good cause for the termination of the

franchise.3 

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4

The ALJ made two important findings of fact relevant to this

litigation. First, the ALJ determined that Daugherty did in fact

order the additional cars to sell, a fact that third party

plaintiffs contest in this litigation. Specifically, the ALJ

found that “there is no doubt that Daugherty was aware that these

vehicles were being ordered to be built and delivered and that

Daugherty not only desired them but required them in order to stay

operational.” NMVB decision at 24. Second, the ALJ concluded that

Lincoln Mercury had “established that Daugherty was not and is not

conducting an adequate amount of business as compared to the

business available to it.” Id. at 26. The ALJ concluded that “the

cessation of business by Daugherty was not caused by conduct of

representatives of Lincoln Mercury.” Id at 27. 

Upon the Board’s conclusion that good cause had been

established for the termination of the DLMI franchise, DLMI

petitioned the Sacramento County Superior Court for a writ of

administrative mandamus pursuant to Cal. Civ. Proc. Code § 1094.5.

The writ was denied by the court. 

III.

THE THIRD AMENDED COUNTERCLAIM BY THIRD PARTY PLAINTIFFS

On June 16, 2005 third party plaintiffs filed a third amended

counterclaim against Ford Credit and Lincoln Mercury. The

counterclaim asserted twelve claims: breach of contract (1st claim;

breach of covenant of good faith and fair dealing (2nd claim);

unfair business practices (3rd claim); interference with

contractual relations (4th claim); tortious interference with

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prospective business advantage (5th claim); misrepresentationdeceit-fraud (6th claim); negligent misrepresentation (7th claim);

Violation of California Vehicle Code section 11713.2 against

Lincoln Mercury only (8th claim); Daugherty’s separate claim of

violation of California Vehicle Code section 1173.2 against Lincoln

Mercury (9th claim); Daugherty’s separate claim against Ford Credit

for fraud as a release from guaranty (10th claim); Daugherty’s

separate claim against Ford Credit for violation of continuing

guarantees (11th claim). 

Lincoln Mercury brings this motion for judgment on the

pleadings in response to the third amended complaint. This motion

only concerns claims one through six and claims eight and nine.

IV.

STANDARDS

A motion for judgment on the pleadings may be brought "[a]fter

the pleadings are closed but within such time as to not delay the

trial." Fed. R. Civ. P. 12(c). All allegations of fact by the

party opposing a motion for judgment on the pleadings are accepted

as true. Doleman v. Meiji Mut. Life Ins. Co., 727 F.2d 1480, 1482

(9th Cir. 1984). A "dismissal on the pleadings for failure to

state a claim is proper only if 'the movant clearly establishes

that no material issue of fact remains to be resolved and that he

is entitled to judgment as a matter of law.'" Id. (quoting 5 C.

Wright & A. Miller, Federal Practice and Procedure: Civil § 1368,

at 690 (1969)); see also McGlinchy v. Shell Chemical Co., 845 F.2d

802, 810 (9th Cir. 1988). 

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6

When a Rule 12(c) motion is used to raise the defense of

failure to state a claim, the motion is subject to the same test

as a motion under Rule 12(b)(6). McGlinchy, 845 F.2d at 810;

Aldabe v. Aldabe, 616 F.2d 1089, 1093 (9th Cir. 1989). Thus, the

motion will be granted only if the movant establishes that "no

relief could be granted under any set of facts that could be proven

consistent with the allegations." Hishon v. King & Spalding, 467

U.S. 69, 73 (1984); see also Conley v. Gibson, 355 U.S. 41, 45-46

(1957); Newman v. Universal Pictures, 813 F.2d 1519, 1521-22 (9th

Cir. 1987). The court must accept all material allegations of the

complaint as true and all doubts must be resolved in the light most

favorable to the plaintiff. N.L. Indus. Inc. v. Kaplan, 792 F.2d

896, 898 (9th Cir. 1986). 

However, "[i]f, on a motion for judgment on the pleadings,

matters outside the pleadings are presented to and not excluded by

the court, the motion shall be treated as one for summary judgment

and disposed of as provided in Rule 56, and all parties shall be

given reasonable opportunity to present all material made pertinent

to such a motion by Rule 56." Fed. R. Civ. P. 12(c). 

V.

ANALYSIS 

A. THE APPLICABILITY OF COLLATERAL ESTOPPEL TO CLAIMS ONE

THROUGH SIX

Lincoln Mercury argues that the determination of the NMVB

precludes third party plaintiffs from bringing claims one through

six. To prevail, Lincoln Mercury must establish that the NMVB

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7

decision satisfies the requirements for the application of

collateral estoppel. Lucido v. Superior Court, 51 Cal.3d 335, 337

(1990)(“The party asserting collateral estoppel bears the burden

of establishing these requirements.”) For the reasons set forth

below, Lincoln Mercury succeeds in establishing that collateral

estoppel should apply.

1. Overview of Applicable Law

Collateral estoppel, also known as issue preclusion, precludes

relitigation of issues argued and decided in prior proceedings.

Lucido, 51 Cal.3d at 341. Pursuant to 28 U.S.C. § 1738 and Supreme

Court decisions, federal courts apply the preclusion law of the

state in which the judgment was rendered. Marrese v. American

Academy of Orthopaedic Surgeons, 470 U.S. 373 (1985); see also

Kremer v. Chemical Construction Corp., 456 U.S. 461, 466-67 & n.

6 (1982); Allen v. McCurry, 449 U.S. 90, 96 (1980). 

Under California law, Lincoln Mercury faces a three part test.

First, Lincoln Mercury must demonstrate that the NMVB proceeding

was adjudicatory in nature. Vandenberg v. Superior Court, 21

Cal.4th 815 (1999)(stating criteria). Second, it must establish

the essential elements of collateral estoppel, see § IV A3 infra.

Finally, even if the all the basic requirements are satisfied, the

court must consider the public policies underlying the doctrine

before concluding that collateral estoppel should apply. Id.

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4 Compare to Jacobs v. CBS Broadcasting, 291 F.3d 1173, 1179

(9th Cir. 2002) (collateral estoppel not applied when the

determination was made after an informal investigation and there

was no testimony but rather informal discussion between the

8

2. Administrative Hearing as a Substitute for Judicial

Proceeding

It is well established that collateral estoppel may apply to

decisions made by administrative agencies “[w]hen an administrative

agency is acting in a judicial capacity and resolves disputed

issues of fact properly before it which the parties have had an

adequate opportunity to litigate . . . .” United States v. Utah

Constr. Co., 384 U.S. 394, 422 (1966). 

As the California Supreme Court explains: 

Whether collateral estoppel is fair and consistent with

public policy in a particular case depends in part upon the

character of the forum that first decided the issue later

sought to be foreclosed. In this regard, courts consider the

judicial nature of the prior forum, i.e., its legal

formality, the scope of its jurisdiction, and its procedural

safeguards, particularly including the opportunity for

judicial review of adverse rulings. 

Vandenberg, 21 Cal.4th 815, 830. 

As applied to the case at bar, the character of the NMVB

hearing is similar to that of a judicial proceeding. As is

evidenced by the administrative record and transcript, the hearing

took place over several days, both sides were represented by

counsel and were permitted to testify, call witnesses, cross

examine witnesses and engage in discovery. Moreover, DLMI had the

opportunity for judicial review and did in fact appeal the decision

to Superior Court.4 See, e.g., Plaine v. McCabe, 797 F.2d 713, 720

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26 parties). 

9

(9th Cir. 1986) (giving administrative proceeding collateral

estoppel effect because “[t]he fairness hearing was conducted

similarly to a court proceeding. It was an adversary proceeding

in which opposing parties were present and represented by counsel

and were allowed to call, examine, cross-examine and subpoena

witnesses . . .”). 

3. The Elements of the Collateral Estoppel Doctrine

The application of issue preclusion is a fact-based inquiry

and must be decided according to the particular evidence and

circumstances of each case. Bell v. Wells Fargo Bank, N.A., 62

Cal.App.4th 1382 (1st Dist. 1998). Ford must establish that: (1)

the issue sought to be precluded from relitigation is identical to

that decided in the former proceeding; (2) the issue must have been

actually litigated in the prior proceeding; (3) the issue was

necessarily decided in the proceeding; (4) there was a final

judgment on the merits; and (5) the party against whom preclusion

is sought must be the same as, or in privity with, the party to the

former proceeding. Lucido, 51 Cal.3d at 341. 

The court quickly disposes of the last three elements. These

elements are clearly established: there was final judgment on the

merits in the NMVB proceeding, the parties are in privity with the

prior proceeding, and the issues were necessarily decided by the

NMVB. The court also concludes that the issues are identical and

that the issues sought to be precluded were actually decided in the

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NMVB proceeding. 

Third party plaintiffs argue that the NMVB hearing on the

protest pertained solely to the issue of whether there was good

cause for the termination of Daugherty’s Lincoln Mercury franchise,

and did not address the issues raised in the third amended

complaint. Third party plaintiffs also argue that the issues in

the third amended complaint are identical in nature to the issues

raised in a petition that was never heard by the NMVB. The court

is not persuaded. 

The NMVB made clear factual findings. Specifically, the NMVB

concluded that Daugherty ordered the extra cars, that he was aware

he ordered the extra cars and that the termination of the franchise

was not caused by the conduct of Lincoln Mercury. 

The ‘identical issues’ requirement addresses “whether

‘identical factual allegations’ are at stake in the two

proceedings, not whether the ultimate issues or dispositions are

the same.” Lucido, 51 Cal.3d at 342. Here, there are identical

factual allegations at stake in the two proceedings. 

Each of the six claims that are at issue in this motion rely

on the allegation that Lincoln Mercury and Ford Credit secretly

arranged for ordering and shipping an excess number of cars and

that it was those actions of Lincoln Mercury and Ford Credit that

caused the DLMI franchise to fail. The NMVB, however, determined

to the contrary that DLMI ordered and desired the excess cars and

the termination of the franchise was not due to Lincoln Mercury’s

actions. In essence, there appears to be no way that third party

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5 For example, in the breach of contract claim, third party

plaintiffs claim that Lincoln Mercury “materially breached its

existing contract with DLMI by shipping DLMI unordered vehicles,

leaving DLMI with substantially more vehicles than it could sell

to consumers in a reasonable amount of time.” DLMI Third Amen.

Compl. at 12:19.

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plaintiffs can assert the current claims without implicating and

contradicting the facts determined by the NMVB. 

Moreover, the argument that the claims raise new issues in

that they pertain to contract disputes, breach of good faith and

fraud, to name a few, is unavailing. These claims still rest on

the factual allegations determined by the NMVB.5 The fact that the

factual issues appear within the context of new legal theories is

immaterial. See Sutphin v. Speik, 99 P.2d 652, 656 (Cal. 1940)

(collateral estoppel is a bar to party presenting a new theory with

respect to the same issue previously litigated). 

For these reasons, the court finds that the issues pending

before the NMVB and the issues stated in the six claims contained

in the third amended complaint are identical. 

The court also concludes the issues were actually litigated

in the NMVB proceeding, thus establishing the last element required

for the application of collateral estoppel. Lucido, 51 Cal.3d at

341. It is clear that central to the NMVB’s decision was the

factual determination that DLMI ordered the excess cars itself and

that Lincoln Mercury was not responsible for the failure of the

franchise. 

Based on the forgoing reasons, the court concludes that

Lincoln Mercury has established that the issues are identical and

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that the issues were actually litigated before the NMVB. 

4. Public Policy Considerations

Although the basic requirements for the application of

collateral estoppel are met, the public policies underlying the

doctrine must be examined before concluding that collateral

estoppel should apply. Lucido, 51 Cal.3d at 342-43. These

considerations include the “preservation of the integrity of the

judicial system, promotion of judicial economy, and protection of

litigants from harassment by vexatious litigation.” Id. 

In this case, these factors weigh in favor of applying

collateral estoppel. If the court were to hear the claims as

currently stated, there is a possibility that this court could make

a finding of fact contrary to the NMVB, an outcome that would

surely undermine the integrity of the judicial system. Id. at 347

(“Public confidence in the integrity of the judicial system is

threatened whenever two tribunals render inconsistent verdicts.”)

Judicial economy is also served by applying collateral

estoppel. The re-litigation of factual questions that were already

conclusively determined by the NMVB does not promote judicial

economy; rather, it frustrates judicial economy. Finally,

applying collateral estoppel also serves the policy of protecting

parties from vexatious litigation. To not apply collateral

estoppel would mean subjecting Lincoln Mercury to litigating issues

that they already litigated before the NMVB. 

In sum, because the elements of collateral estoppel are

established and because the public policy considerations favor

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6 The court stated in its order that "nowhere in defendant's

119-paragraph counterclaim do defendants allege coercion - 'threat

of physical harm or economic compulsion' - which would require them

to take the undesired action - in this case, to accept delivery of

excess Lincoln Mercury vehicles."

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application of the doctrine, third party plaintiffs are precluded

from relitigating the issue of (1) whether DLMI ordered the excess

cars; and (2) whether the termination of the franchise was caused

by the conduct of representatives of Lincoln Mercury.

The court, therefore, will grant the motion for judgment on

the pleading but with leave to amend. The third party plaintiffs

may re-file their complaint if they assert claims that do not

implicate, depend on, or contradict the factual allegations already

determined by the NMVB. 

VI.

CLAIMS EIGHT AND NINE 

Lincoln Mercury also argues that claims eight and nine should

be barred. Claim eight is raised by DLMI against Lincoln Mercury

and claim nine is raised by Daugherty against Lincoln Mercury.

Both claims allege a violation of California Vehicle Code Section

11713.2. 

Lincoln Mercury avers that on May 27, 2005, this court

dismissed the identical claims against Ford Motor Credit Company.6

Since no new allegations of coercion were alleged in the third

amended complaint, the new claim against Lincoln Mercury should

also be dismissed. DLMI did not address this in their opposition

to Lincoln Mercury’s motion or at oral argument. The court agrees

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with Lincoln Mercury with respect to these claims. 

The claims raised against Lincoln Mercury in the third amended

complaint are in fact identical to the claims raised against Ford

Credit in the second amended complaint, and as Lincoln Mercury

points out, the court did dismiss these claims against Ford Credit.

In comparing the third amended complaint with the second

amended complaint, it appears that DLMI raises no new factual

allegations with respect to these claims. The court notes that

during oral argument on Ford Credit’s motion to dismiss, counsel

for DLMI claimed that they would conduct additionally discovery as

to whether coercion (an element of the claim) existed on the part

of Ford Credit or Lincoln Mercury. The court has not been

presented with any new facts to support claims eight and nine in

the third amended complaint and thus the court adopts the same

reasoning from its prior decision. To avoid being repetitive, the

court directs both parties to its order dated May 27, 2005. 

Accordingly, third party defendant’s motion for judgment on

the pleadings is GRANTED as follows: 

1. Claims one through six are DISMISSED without prejudice

and with leave to amend. Third party plaintiffs are granted

twenty (20) days from the date of the hearing (October 24, 2005)

by which to file an amended complaint that does not implicate, rely

on or contradict the factual determination made by the NMVB. Third

party defendants are granted twenty (20) days from the date of

filing of the new complaint to respond by answer or motion.

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2. Claims eight and nine are DISMISSED with prejudice. 

IT IS SO ORDERED. 

DATED: October 31, 2005.

/s/Lawrence K. Karlton 

LAWRENCE K. KARLTON

SENIOR JUDGE

UNITED STATES DISTRICT COURT

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