Volkswagen sues Philly dealership for alleged breach of contract

By Jim Boyle | Sep 8, 2014

A Philadelphia car dealership did not follow through on its agreement to construct a 16,000 square-foot facility in exchange for $500,000, according to a federal lawsuit filed by Volkswagen of America in the U.S. District Court for the Eastern District of Pennsylvania.

Representatives from Volkswagen seek full restitution from Chapman Volkswagen, located on the Roosevelt Boulevard in Philadelphia, saying the dealership missed multiple agreed upon deadlines for the proposed construction project. They also seek a declaratory statement ruling that the company had the right to recover the funds through off-setting the amount in Chapman's open parts account.

On May 23, 2011, Chapman acquired the dealership from Northeast Auto Outlet and entered into a Transaction Assistance Agreement that had Volkswagen paying Chapman $500,000 in exchange for the construction of a new, $4.3 million showroom facility that met the auto manufacturer's company standards.

The agreement scheduled construction on the facility to begin no later than Nov. 16, 2011, with the project completed by Dec.31, 2012. The contract also states that if the dealer fails to meet the obligations, Volkswagen has the right to recover funds based on a 10-year depreciation schedule that reduced the amount by $50,000 annually. Finally, the agreement stated that the recovery could be made by first off-setting against debts already owed by Chapman, such as the open parts account.

By September 2012, construction had not begun on the new facility, and Chapman requested an extension on the December 2012 deadline and to reduce the proposed size from 19,000 square-feet to 16,000 square-feet. Volkswagen agreed to the reduction but not the extra time.

The denial was inconsequential, according to the complaint, because by May 2013 construction had still not started. In January, Chapman requested again for a size reduction down to 7,736 square-feet, which Volkswagen denied because it was well short of the standard facility size of 16,000 square-feet.

In May, Volkswagen submitted a notice of default to Chapman and would exercise its recovery rights if the dealership failed to cure the default. The contract cited a 15-day period between notice and cure, but Volkswagen gave Chapman until September.

Finally, on Sept. 9, 2013 and with no construction started, Volkswagen informed Chapman that it expected repayment of $450,000 by Sept. 20 or the company would use the open parts account to reacquire its money.

On Oct. 17, before Volkswagen used the offset option, Chapman filed an administrative protest against the car company at the Pennsylvania State Board of Motor Vehicle Manufacturers, Dealers and Salespersons, claiming that Volkswagen's attempts to recover its payment violated the Pennsylvania Board of Vehicles Act.

According to the protest, Chapman accused Volkswagen of submitting unreasonable standards for sales goals that would make it impossible for the dealership to participate in the variable bonus program. It also said that Volkswagen's threat to use the open parts account was not supported by the contract and violated the agreement. Volkswagen also threatened to completely terminate the sales relationship if Chapman did not begin construction, according to the protest.

A mediation meeting did not resolve the dispute, and Volkswagen says it still has not recovered the funds.

The plaintiffs are represented by attorneys from Pepper Hamilton in Philadelphia.

The federal case ID number is 2:14-cv-05106-JCJ.

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