691 F.

2d 1097

Thomas W. CULLEN, Jr., Plaintiff-Appellee,

v.
BMW OF NORTH AMERICA, INC., Defendant-Appellant.
No. 1141, Docket 82-7118.

United States Court of Appeals,

Second Circuit.
Argued May 27, 1982.
Decided Oct. 13, 1982.

Louis J. Castellano, Jr., Garden City, N. Y., for plaintiff-appellee.

Kevin P. Hughes, New York City (Weil, Gotshal & Manges, Salem M.
Katsh, Yvette Miller, Richard S. Taffet, Jonathan M. Hoff, New York
City, of counsel), for defendant-appellant.
Rivkin, Sherman & Levy, Washington, D. C. (Milton D. Andrews and
Lance E. Tunick, Washington, D. C., of counsel), for amicus curiae,
Automobile Importers of America, Inc.
Before LUMBARD, MOORE and OAKES, Circuit Judges.
LEONARD P. MOORE, Circuit Judge:

Defendant BMW of North America, Inc. ("BMW/NA") appeals from a

judgment of the United States District Court for the Eastern District of New
York, Honorable Edward R. Neaher, Judge, in favor of Thomas W. Cullen, Jr.,
in the amount of $18,000 plus interest, and from a judgment of that same court,
denying defendant's motion to amend the judgment. BMW/NA is the exclusive
importer and distributor in the United States of passenger cars, parts, and
products manufactured by Bayerische Motoren Werke, AG. On appeal,
BMW/NA claims that the district court erred in finding that it had breached a
duty under New York law actively to police the methods of operation of its
franchisee, Bavarian Auto Sales, Inc. ("Bavarian"), and had negligently
permitted Bavarian to continue as a BMW dealer. We agree with BMW/NA
that it did not owe a duty to supervise the operation of Bavarian and to

terminate the franchise because of its allegedly precarious financial condition.

Accordingly, we reverse the judgments of the district court.
FACTS
2

On January 24, 1979, Thomas W. Cullen, Jr., and his wife drove past the
showroom of Bavarian and decided to shop for a car. Cullen selected a new
1978 BMW, Model 530i, at a price of $18,245, and placed a deposit of $245 on
the vehicle. Although Cullen had originally been told that the car would not be
available for seven to ten days, a Bavarian salesman called Cullen five days
later, advising that the car had arrived and requesting a check for the balance of
the amount of $18,000, which was cashed by Bavarian. However, Cullen never
received the automobile or the return of his money. In fact, Hans Eichler,
Bavarian's president and owner of a 60 percent interest in the franchise, had
stolen and absconded with Cullen's money. At no time relevant to the
transaction, however, did Cullen have any contact, in person, by telephone, or
by mail, with any representative of BMW/NA.

Cullen subsequently commenced a civil suit against Bavarian in New York

State Supreme Court, Nassau County. The suit was stayed after Eichler filed a
petition in bankruptcy. Cullen also filed criminal complaints with the Queens
County District Attorney and the Attorney General of the State of New York,
but no indictments were issued.1 In addition, Cullen brought this action based
on diversity grounds against BMW/NA.

Bavarian was operating as a franchised BMW dealer, with Eichler as its

principal, when BMW/NA assumed control over the distribution of BMW
automobiles in March, 1975. It continued to operate as a franchised BMW
dealer until February 16, 1979 when the dealership ended.2

Pursuant to a standard operating agreement with BMW/NA, Bavarian was

responsible for maintaining a prearranged line of credit with a financial
institution to be used exclusively for the purchase of BMW vehicles. Bavarian,
however, permitted its line of credit to lapse. Prior to August, 1976, Bavarian
had a line of credit with the State Bank of Long Island. On August 18, 1976,
however, the bank informed BMW/NA that it had terminated its relationship
with Bavarian because Eichler had advised the bank that he had arranged to
handle Bavarian's credit requirements from personal resources. BMW/NA
experienced difficulty, however, in receiving payment for cars and parts and
placed Bavarian on a C.O.D. certified check basis, rather than open account
status, in the latter part of 1976.

In June, 1977, BMW/NA received a letter from the Israel Discount Bank
stating that effective June 16, 1977, Bavarian had established a line of credit for
$200,000. From the latter part of 1976 through August 22, 1977, the Israel
Discount Bank had paid for approximately eighty-seven vehicles purchased by
Bavarian even though no formal letter of credit was in effect for most of this
period. The bank also paid BMW/NA for another twenty-six vehicles between
September 30, 1977 and December 27, 1977. The Israel Discount Bank
continued as Bavarian's credit facility through the summer of 1978. The bank
paid BMW/NA for fifty-three automobiles between January 1, 1978 and
August 18, 1978. In the fall of 1978, however, the bank concluded that the
dealership was experiencing financial difficulty and decided not to extend
further credit. The bank's decision was in part based upon certain tax levies and
other legal actions filed against the Bavarian franchise. BMW/NA was
unaware, however, of any tax levies filed against Bavarian or the reasons
behind the Israel Discount Bank's decision to terminate Bavarian's line of
credit.

At approximately the time at which Bavarian lost its line of credit, BMW/NA
began receiving an increased number of customer complaints concerning the
Bavarian franchise. These complaints ranged from the issuance of checks on
accounts with insufficient funds to alleged delays in return of customer
deposits. Although an investigation by BMW/NA revealed that all complaints
had been satisfactorily resolved and all checks were covered on re-presentation.
BMW/NA remained disturbed by Bavarian's continued failure to satisfy certain
requirements of its contract with BMW/NA, such as submitting monthly
financial statements,3 and the increased number of checks which Bavarian had
issued on accounts with insufficient funds.4

Eichler attempted to reassure BMW/NA of Bavarian's financial viability,

indicating that he was actively negotiating with a variety of financial
institutions to obtain a line of credit. By mid-September, however, Bavarian
still had not been able to secure credit funds, and BMW/NA met with Eichler to
discuss the future of the franchise. After reviewing the dealership's file,
BMW/NA concluded that it would be difficult to terminate the Bavarian
franchise at that time, without adequate written documentation certifying the
dealer's deficiencies and without providing Bavarian an opportunity to correct
those deficiencies. Accordingly, BMW/NA granted Bavarian sixty days to cure
all deficiencies, and BMW/NA personnel closely monitored the franchise
during this period. BMW/NA continued to operate as a BMW dealer and
service facility and maintained the minimum number of vehicles required by its
contract with BMW/NA.

At Bavarian's request, the original sixty-day period was extended until

November 14, 1978. On the following day, Eichler informed BMW/NA that he
had verbal approval from Citibank for credit and that he was awaiting
confirmation. Although the Citibank commitment did not materialize, the Lloyd
Capital Corporation ("Lloyd") advised BMW/NA by letter dated December 7,
1978, that Bavarian had established a line of credit for $400,000 exclusively for
BMW automobiles. Shortly thereafter, BMW/NA allocated seven vehicles to
the Bavarian dealership and drew funds pursuant to the Lloyd letter of credit.
The cash drafts were refused, however, and Lloyd informed BMW/NA that the
letter of credit had been withdrawn.5 The seven vehicles were then removed
from Bavarian and were reallocated to a nearby BMW dealer. Moreover,
Friedrich Hanau, vice-president of BMW/NA, immediately wrote to Eichler,
setting forth the company's position that unless Bavarian corrected its
continuing deficiencies within an additional sixty days, BMW/NA would serve
a notice of intent to terminate the franchise. Eichler responded on December 28,
1978, indicating that he was accelerating his efforts to obtain a line of credit,
and expressing his desire to continue as a BMW dealer. In early January, 1979,
however, Eichler advised BMW/NA that he desired to sell his franchise to
another automobile dealer. This prospective purchaser submitted an application
which BMW/NA, in early February, rejected for failing to satisfy BMW/NA's
established standards for a new dealership.

10

On February 13, 1979, BMW/NA officials again met with Eichler to discuss
the future of the franchise. At this meeting, BMW/NA officials learned that
Eichler had accepted deposits from customers totalling approximately $100,000
and that he had used this money for his own purposes. Three days later,
BMW/NA accepted Eichler's voluntary letter of resignation.

DISCUSSION
11

Cullen alleged at trial two theories of liability: (1) that Bavarian acted as
BMW/NA's agent pursuant to principles of either actual agency or agency by
estoppel; and (2) that BMW/NA negligently permitted Bavarian to continue as
a BMW dealer because it had knowledge of Bavarian's precarious financial
condition.6 The district court rejected the first theory of liability, finding that
Cullen failed to prove the essential elements supporting a theory of agency by
estoppel.7 The court held, however, that BMW/NA was liable for damages
under the negligence theory, finding that Cullen had met his "burden of proving
facts which give rise to a legal duty on the part of BMW/NA, for the protection
of its franchisee's customers, to reasonably police the authorized use of the
BMW name and supervise the operation of its franchise." Cullen v. BMW of
North America, Inc., No. 79 C 970, slip op. at 12 (E.D.N.Y. Oct. 28, 1981). In

imposing a duty on BMW/NA, the district court found that BMW/NA "was
apprised of Bavarian's propensity for unscrupulous business transactions,"
Cullen v. BMW of North America, Inc., 531 F.Supp. 555, at 565-66
(E.D.N.Y.1982), and that as a result, "BMW/NA should have reasonably
foreseen that Bavarian might have intentionally caused some financial harm to
some BMW customer as a result of its original negligence ...." Id. The court
thus concluded that where a franchisor, such as BMW/NA, has a "reasonable
opportunity to reduce the risk of foreseeable injury" caused by its franchisee,
id., but fails to terminate its franchisee or take other appropriate action, the
franchisor is negligent and is liable for damages suffered by the ultimate
consumer.
12

We conclude, however, that the district court improperly determined that

Cullen's injury was reasonably foreseeable, and thus erred in finding BMW/NA
liable for negligent failure to police the methods of operation of its independent
franchisee and to terminate the franchise because of Bavarian's precarious
financial condition. "The law does not undertake to hold a person who is
chargeable with a breach of duty toward another, with all the possible
consequences of his wrongful act." Lowery v. Western Union Telegraph Co.,
60 N.Y. 198, 201 (1875). It is thus a well-established principle that
foreseeability of injury is an indispensable requisite of negligence, and that
negligence exists only when there is a reasonable likelihood of danger as the
result of the act complained of. Ward v. State of New York, 81 Misc.2d 583,
366 N.Y.S.2d 800 (N.Y.Ct.Cl.1975). Accordingly, an intervening act, tortious
or criminal, will ordinarily insulate a negligent defendant from liability when
the subsequent act could not have been reasonably anticipated by the defendant.
Tirado v. Lubarsky, 49 Misc.2d 543, 268 N.Y.S.2d 54 (N.Y.Civ.Ct.), aff'd, 52
Misc.2d 527, 276 N.Y.S.2d 128 (N.Y.App.Div.1966).

13

Applying these principles to the instant action, we decline to hold BMW/NA

negligent and liable for damages since it could not reasonably have anticipated
the crimes committed by Bavarian's principal, Eichler. Although BMW/NA
may have been aware of Bavarian's shaky financial condition, that knowledge
alone gave BMW/NA no cause reasonably to anticipate that Eichler would
either engage in any criminal activity or that he would abscond with customer
funds. In fact, no amount of supervision by BMW/NA would have enabled it to
foresee Eichler's thievery. Moreover, even though BMW/NA had notice that
Bavarian had been the subject of customer complaints, most complaints were
resolved, and the record does not demonstrate that there was any dishonesty or
criminal intent associated with these incidents. Furthermore, we note that the
district court's finding that Bavarian was an independently owned and operated
dealership is sufficient to eliminate any question of control by BMW/NA.

BMW/NA had no financial interest in Bavarian, did not participate in the hiring
or firing of its officers or employees, or dictate its sales practices. Accordingly,
we conclude that BMW/NA, even though it had knowledge of Bavarian's
precarious financial condition, was not liable to Cullen for his damages under a
negligence theory since it could not have reasonably foreseen Eichler's criminal
activity.
14

Reversed.
OAKES, Circuit Judge (dissenting):

15

I dissent because I believe, as did the trial judge, that the injury suffered by
Cullen was foreseeable; I also believe that the majority fails to give the
experienced trial judge's finding to that effect the deference to which it is
entitled.

16

In this diversity case we are of course required to turn to New York law, and
one cannot discuss the questions of duty and foreseeability without reference to
Palsgraf v. Long Island Railroad, 248 N.Y. 339, 344, 162 N.E. 99, 100 (1928),
where Cardozo stated that "[t]he risk reasonably to be perceived defines the
duty to be obeyed, and risk imports relation; it is risk to another or to others
within the range of apprehension." See also Macpherson v. Buick Motor Co.,
217 N.Y. 382, 394, 111 N.E. 1050, 1054 (1916) ("foresight of the
consequences involves the creation of a duty"). Although the New York Court
of Appeals was to say in Pulka v. Edelman, 40 N.Y.2d 781, 785, 358 N.E.2d
1019, 1022, 390 N.Y.S.2d 393, 396 (1976) (parking garage not liable for
pedestrian injury caused by exiting car), that "[f]oreseeability should not be
confused with duty," four years later it stated in Havas v. Victory Stock Paper
Co., 49 N.Y.2d 381, 402 N.E.2d 1136, 426 N.Y.S.2d 233 (1980) (independent
trucker's employee could recover for injuries sustained while helping
defendant's employee load waste paper onto truck), that "whether [the
defendant] owed a duty to the plaintiff and, if it did, whether, in the face of it,
[the defendant] failed to act in a reasonably prudent manner--turn largely on
foreseeability." 49 N.Y.2d at 385, 402 N.E.2d at 1138, 426 N.Y.S.2d at 236.
Palsgraf, quoted immediately thereafter by the Havas court, lives.

17

The majority opinion concludes that BMW of North America, Inc., should not
be held liable for its dealer's defalcation of Cullen's money because that
defalcation was "an intervening act, tortious or criminal." In other words, "no
amount of supervision by BMW/NA would have enabled it to foresee [the
dealer's] thievery." But New York law provides, as the common law of England

before it provided, that "the criminal conduct of a third person [does] not
preclude a finding of 'proximate cause' if the intervening agency was itself a
foreseeable hazard." Nallan v. Helmsley-Spear, Inc., 50 N.Y.2d 507, 520-21,
407 N.E.2d 451, 459, 429 N.Y.S.2d 606, 614 (1980); Scott v. Shepherd, 96
Eng.Rep. 525, 526 (C.P. 1773) ("The intermediate acts of Willis and Ryal will
not purge the original tort in the defendant. But he who does the first wrong is
answerable for all the consequential damages.").
18

BMW/NA sells its vehicles to the public only through dealerships. It was well
aware of this dealer's habit of passing worthless checks and its inability to
obtain regular financing through established commercial channels. BMW/NA
protected itself by demanding and receiving only certified checks for any goods
ordered by its dealer. But consumers were left to fend for themselves, while the
BMW/NA dealer, armed with all the indicia of an ongoing BMW dealer from
order pads to location, sign, vehicles, and parts, continued to solicit orders and
accept deposits from customers. The dealer's "thievery" was sufficiently
foreseeable to BMW/NA that it insisted upon certified checks before delivery.
Why was such thievery not equally foreseeable insofar as BMW customers
were concerned?

19

Moreover, as the New York Court of Appeals has so cogently indicated,

liability concepts have broadened to reflect economic, social, and political
developments. See, e.g., Micallef v. Miehle Co., 39 N.Y.2d 376, 385, 348
N.E.2d 571, 577, 384 N.Y.S.2d 115, 121 (1976); Codling v. Paglia, 32 N.Y.2d
330, 340, 298 N.E.2d 622, 627, 345 N.Y.S.2d 461, 467-68 (1973). Allowing a
defendant to shield itself from liability by conducting operations exclusively
through "independent" franchisees ignores the clear "trend of the law ... to
expand the liability of an enterprise to ... third persons injured because of
activities carried on in behalf of the enterprise." Hetherington, Trends in
Enterprise Liability: Law and the Unauthorized Agent, 19 Stan.L.Rev. 76, 76
(1966). See also Stone, The Place of Enterprise Liability in the Control of
Corporate Conduct, 90 Yale L.J. 1, 76-77 (1980). Moreover, BMW/NA was in
a much better position than was Cullen to determine the financial bona fides of
the dealer; indeed, the only real evidence the consumer has of an automobile
dealer's financial integrity is the imprimatur given the dealer by the automobile
company itself--logos, trademarks, advertising layouts, cars (though here the
dealer bought cars from other dealers), and parts, and, most important of all, the
continuation of the dealership. Automobile company advertising customarily
emphasizes the service, reliability, and integrity of the company's dealers.
Liability here can also fairly be defended as involving a measure of riskspreading, it seemingly being fairer to saddle the franchisor with the "cost" of
distribution involved in an occasional dealer's failure than to saddle the

unfortunate consumer who relied upon the very existence of the franchise to put
down his good money.
20

Thus I agree with Judge Neaher that the dealer's thievery was foreseeable and
that though it was an intervening act it nevertheless did not absolve BMW/NA
of responsibility; in Scott v. Shepherd terms, the very existence of the
dealership was a squib in a crowded market.

21

But foreseeability is also peculiarly a question of fact. As the New York Court
of Appeals said in Havas, 49 N.Y.2d at 388, 402 N.E.2d at 1139, 426 N.Y.S.2d
at 237, "[i]t [is] particularly appropriate to leave this issue" to the finder of fact.
See also 2 F. Harper & F. James, The Law of Torts Sec. 18.8, at 1059 (1956)
("Reasonable foreseeability of harm is the very prototype of the question the
jury must pass upon in particularizing the standard of conduct in the case
before it."). I had supposed that the reason we have Fed.R.Civ.P. 52(a), which
tells us that a district court's findings should withstand appellate review unless
clearly erroneous, is to give the district court as trier of fact the same range of
determination as we give a jury. Interestingly, only last April the Supreme
Court not very gently reminded the courts of appeals that Rule 52 "does not
make exceptions or purport to exclude certain categories of factual findings
from the obligation of a Court of Appeals to accept a district court's findings
unless clearly erroneous.... [I]n particular, it does not divide findings of fact into
... 'ultimate' and ... 'subsidiary' facts." Pullman-Standard v. Swint, --- U.S. ----, ---, 102 S.Ct. 1781, 1789, 72 L.Ed.2d 66 (1982). Thus because I do not think
that the district court's finding of foreseeability was clearly erroneous, I would
affirm even if I had some doubt on the foreseeability question. But in light of
the applicable New York cases, I do not have even such a doubt.

22

And if the entire issue were restated in terms of duty rather than in terms of
foreseeability, as the New York Court of Appeals in Pulka v. Edelman, supra,
suggested may be a separate and distinct question (sed quaere), I would refer
only to Hendrickson v. Hodkin, 276 N.Y. 252, 11 N.E.2d 899 (1937) (holding a
hospital liable for permitting a quack doctor to treat a patient on its premises);
De Ryss v. New York Central Railroad Co., 275 N.Y. 85, 9 N.E.2d 788 (1937)
(landowner who permits a third person to hunt under circumstances indicating
to a reasonably prudent man that it is dangerous to do so is liable to others
injured as a result); and Note, Liability of a Franchisor for Acts of the
Franchisee, 41 S.Cal.L.Rev. 143 (1968). Here BMW/NA clearly could have
terminated the dealership and indeed had a duty to do so in light of the dealer's
instability and unscrupulousness, before the dealer took Cullen's deposit.1

Eichler and Bavarian were indicted, however, for three counts of grand larceny
in the second degree based on Eichler's conduct toward customers other than
Cullen. On February 5, 1981, Eichler pleaded guilty to attempted grand larceny
in the second degree

Bavarian and BMW/NA entered into three written franchise agreements from
June, 1976 to February 16, 1979: (1) from June 1 to December 31, 1976; (2)
from August 12 to December 31, 1977; and (3) from January 1 to December 31,
1978. Although no written agreement was in effect from January 1 to August
12, 1977 or from January 1 to February 16, 1979, Bavarian continued to operate
as a duly franchised BMW dealer during these periods

Bavarian furnished only two monthly financial statements during the several
years it operated

During 1978, checks totalling $40,000 were issued by Bavarian to BMW/NA

upon accounts with insufficient funds

Bavarian had never signed a formal agreement with Lloyd and had never paid
Lloyd the $1,000 required by law to be submitted prior to the execution of the
agreement

Cullen's amended complaint alleged four separate theories of liability: (1) that
Bavarian was acting as agent for BMW/NA pursuant to principles of either
actual agency or agency by estoppel; (2) that BMW/NA was negligent in
permitting Bavarian to continue as a dealer because it had knowledge of
Bavarian's allegedly precarious financial condition; (3) that BMW/NA entered
into a conspiracy with Eichler, and in fact did, defraud customers into doing
business with Eichler; and (4) that BMW/NA's conduct constituted a prima
facie tort. At the conclusion of discovery, BMW/NA moved for summary
judgment dismissing each of Cullen's claims for relief. The district court
concluded that an actual agency relationship did not exist between BMW/NA
and Bavarian. It also found no evidence to support Cullen's causes of action for
conspiracy to commit fraud and prima facie tort, and dismissed those claims as
well. Accordingly, only the issues of negligence and agency by estoppel
remained to be tried

The court specifically pointed to Cullen's failure "to prove his reliance on
Bavarian's authority to act for BMW/NA." Cullen v. BMW of North America,
Inc., No. 79 C 970, slip op. at 8 (E.D.N.Y. Oct. 28, 1981) (emphasis in
original). Cullen's cross-appeal from the dismissal of this claim for relief was

withdrawn pursuant to a stipulation dated March 11, 1982 and filed on March
26, 1982. Accordingly, we need not address this issue on appeal
1

I would agree with the district court that there would be no violation of the
Automobile Dealers' Day in Court Act, 15 U.S.C. Secs. 1221-1225 (1976), by
termination in this case. David R. McGeorge Car Co. v. Leyland Motor Sales,
Inc., 504 F.2d 52 (4th Cir. 1974), cert. denied, 420 U.S. 992, 95 S.Ct. 1430, 43
L.Ed.2d 674 (1975). It may not be amiss to say that I am extremely confident
that the author of the majority opinion would not disagree with this conclusion
either. See Pierce Ford Sales, Inc. v. Ford Motor Co., 299 F.2d 425 (2d Cir.),
cert. denied, 371 U.S. 829, 83 S.Ct. 24, 9 L.Ed.2d 66 (1962)