UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA
July 21, 2008
HOUTAN PETROLEUM, INC., PLAINTIFF,
CONOCOPHILLIPS COMPANY, A TEXAS CORPORATION AND DOES 1 THROUGH 10, INCLUSIVE, DEFENDANTS.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARYJUDGMENT
This matter comes before the Court on the Motion for Summary Judgment ("Motion") filed by the defendant Conocophillips Company ("Defendant" or "Conoco"). Docket No. 94. The plaintiff Houtan Petroleum, Inc. ("Plaintiff" or "Houtan") submitted an Opposition and Conoco filed a Reply.*fn1 Docket Nos. 97, 100. For the following reasons, Conoco's Motion is GRANTED in part and DENIED in part.
The following facts are not in dispute. Houtan operated a Union 76 gas station ("the Station") as a Conoco franchisee at the same location for approximately 10 years. Compl., Docket No. 1, at 1; Haddad Decl. ¶ 3.*fn3 Conoco did not own the Station property but instead leased it from a third-party, V.O. Limited Partners ("V.O. Limited").*fn4 Mathews Decl. ¶ 3.*fn5 Conoco owns the structures, equipment and improvements at the Station. Id. The previous franchise agreement between Houtan and Conoco was set to expire on August 31, 2007.*fn6 Pellegrino Decl. ¶ 3.*fn7 The Master Lease between Conoco and V.O. Limited was set to expire on October 31. Id. On July 6, Houtan and Conoco executed a new franchise agreement ("the Franchise Agreement") that would begin September 1. Supp. Haddad Decl., Docket No. 32, Ex. A.*fn8 The Franchise Agreement was to be for a term of three years, expiring on August 31, 2010. Resp. to Order to Show Cause, Docket No. 11, at 3. The Franchise Agreement was executed, however, with the understanding by both Houtan and Conoco that Conoco's Master Lease for the Station property was set to expire on October 31, just two months after the new Franchise Agreement was set to begin. Id. at 2. Thus, if Conoco was unable to renew the Master Lease with V.O. Limited, the Franchise Agreement would terminate, as Conoco would lose any right to occupy or sublease the Station.
Pellegrino Decl. ¶ 3. As Pellegrino stated: "In the event ConcoPhillips was unable to renew its underlying lease [the Master Lease] of the Station property, there was obviously no way it would be able to continue to sublease the Station to Houtan Petroleum. ConocoPhillips had no further right to renew or extend the underlying property lease." Id. Not only did Conoco explain this situation to Houtan as early as May, but the Agreement itself, which was executed on July 6, contained express language putting Houtan on notice that Conoco's inability to renew the Master Lease with V.O. Limited would necessarily result in termination of the Agreement. The Agreement states, in part:
There is a possibility that the term of the underlying lease [the Master Lease] to the Station might expire and not be renewed upon the underlying lease's expiration date. DEALER [Houtan] hereby acknowledges CONOCOPHILLIPS' disclosure to DEALER that this Agreement and the Station herein are subject to all terms and conditions of an underlying lease held by CONOCOPHILLIPS in the property and premises, which underlying lease expires on October 31, 2007 and that such underlying lease may expire and may not be renewed during the Term of this Agreement. Thereby, the DEALER [Houtan] is hereby on notice that this Agreement is hereby terminated on the date the underlying lease expires . . . . Supp. Haddad Decl. Ex. A at 63 (emphasis in original). Houtan acknowledged this language in the Agreement by placing initials immediately following the above-cited language. See id. In addition, Conoco, on several occasions, verbally advised Houtan of the ramifications of non-renewal of the Master Lease. See Pellegrino Decl. ¶ 4 (stating "Throughout 2007, I explained all of this to Mr. Hadad [sic] in numerous conversations during routine meetings and visits to the Station. Mr. Hadad [sic] told me that Houtan Petroleum still wanted to continue its franchise relationship with Conoco . . . ."). With this understanding, the parties executed the Franchise Agreement on July 6. Supp. Haddad Decl. Ex. A at 80.
The Master Lease between Conoco and V.O. Limited for the Station property was initially for a 25 year term, beginning March 1, 1966, and expiring February 28, 1991. Mathews Decl. ¶ 4. A subsequent modification extended the expiration date to October 31, 2002, and granted Conoco an option for an additional five year term. Id. Conoco exercised that option and the Master Lease expired October 31, 2007. Id. Conoco has submitted evidence indicating that it made several attempts to renew or extend the Master Lease beyond the October 31 date. Id. ¶ 5. According to a sworn declaration submitted by Conoco, V.O. Limited never provided a substantive response to Conoco's request to extend the Master Lease and V.O. Limited eventually stopped responding to Conoco's communications. Id. On September 17, Conoco advised V.O. Limited that if V.O. did not respond by September 21 to Conoco's request to extend the Master Lease, Conoco would consider such silence a rejection. Id. V.O. Limited did not respond to this letter. Id.
On September 18, Conoco informed Houtan in writing that it would be terminating the Franchise Agreement effective October 31. Supp. Haddad Decl. Ex. B. The letter stated that the reason Conoco was terminating the Franchise Agreement was because of Conoco's inability to renew the Master Lease with V.O. Limited. Id. On October 16, Houtan entered into an agreement with V.O. Limited to lease the Station property beginning November 1, the day after Conoco's Master Lease ended. Supp. Haddad Decl. ¶ 8. On October 18, Houtan sent Conoco a letter indicating that Houtan had entered into a lease agreement with V.O. Limited for the Station property. Id. ¶ 9; Ex. D. In the same letter Houtan demanded that Conoco sell its improvements and equipment on the Station property to Houtan. Id. Ex. D. On October 22, Conoco sent a letter to Houtan stating that Conoco would sell the improvements and equipment to Houtan for $340,000 if the offer was accepted by October 29, and if Houtan paid the full amount by certified check by October 31. Supp. Haddad Decl. Ex. E. Houtan refused to make this payment, believing it to be in excess of fair market value. Id. ¶ 21. On October 31, Conoco sent bulldozers to the premises to begin removal of its equipment and improvements. Id. ¶ 12. Houtan refused to permit Conoco to enter the premises and Conoco subsequently cut off fuel to the Station. Id. ¶ 15. Houtan was able to obtain a fuel supply from another supplier. Pellegrino Decl. ¶ 7.
On November 5, Houtan filed a Complaint in this Court seeking damages, injunctive relief, equitable relief and declaratory relief pursuant to the Petroleum Marketing Practices Act ("PMPA"), 15 U.S.C. § 2801, et seq. Docket No. 1. On the same day, Houtan also filed an Ex Parte Motion for a Temporary Restraining Order and Application for Preliminary Injunction. Docket No. 3. On November 6 the Court issued a Temporary Restraining Order and enjoined Conoco from taking further action to interfere with Houtan's immediate assumption of control of the Station. See TRO, Docket No. 8. The TRO prevented Conoco from removing any equipment or improvements and compelled Conoco to resume its franchise relationship with Houtan by supplying fuel and processing credit card sales from the Station. Id. On November 16, 2007, the Court issued an Order Denying Plaintiff's Motion for Preliminary Injunction ("Preliminary Injunction Order"). Docket No. 18. From all appearances, Houtan continues to maintain control of Conoco's equipment and improvements at the Station property.
The Court now turns to the merits of Conoco's Motion for Summary Judgment. The Court notes that much of the analysis from the Preliminary Injunction Motion is directly applicable to the present Motion.*fn9
III. LEGAL STANDARD
Entry of summary judgment is proper "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). "Summary judgment should be granted where the evidence is such that it would require a directed verdict for the moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). Thus, "Rule 56(c) mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). In addition, entry of summary judgment in a party's favor is appropriate when there are no material issues of fact as to the essential elements of the party's claim. Anderson, 477 U.S. at 247-49.
"The PMPA is intended to protect gas station franchise owners from arbitrary termination or non-renewal of their franchises with 4 large oil corporations and gasoline distributors . . . ." 5 DuFresne's Auto Serv., Inc. v. Shell Oil Co., 992 F.2d 920, 925 6 (9th Cir. 1993). The PMPA states that if "a franchisor fails to 7 comply with the requirements of section 2802, 2803, or 2807 of 8 this title, the franchisee may maintain a civil action against 9 such franchisor." 15 U.S.C. § 2805. 10 Houtan, in its Complaint, alleges that Conoco violated PMPA in three respects: (1) terminating the Franchise Agreement without good faith or in the normal course of business, as required by § 3 2802; (2) failing to give 90 days notice before terminating the franchise, as required by § 2804(a)(2); and (3) failing to make a bona fide offer to sell the equipment and improvements of the Station to Houtan, as required by § 2802(c)(4)(C)(i). See Compl. Conoco moves for summary judgment on all three claims. The Court addresses each in turn.
A. Termination of Agreement
Houtan alleges that Conoco has "wrongfully terminated the Plaintiff's Franchise Agreement and that said termination was not made in good faith and/or in the normal course of business." Compl. ¶ 27. "Section 2802(b)(2) of the PMPA provides several permissible grounds for termination or non-renewal of a franchise." Hifai v. Shell Oil Co., 704 F.2d 1425, 1428 (9th Cir. 1983). Section 2802 states that "the following are grounds for termination of a franchise or non-renewal of a franchise: . . .(C)
[t]he occurrence of an event which is relevant to the franchise relationship and as a result of which termination of the franchise or non-renewal of the franchise relationship is reasonable . . . ." 15 U.S.C. § 2802(b)(2)(C). "Section 2802(c)(4) provides that the term 'event' as used in section 2802(b)(2)(C) includes 'loss of the franchisor's right to grant possession of the leased marketing premises through expiration of an underlying lease.'" Hifai, 704 F.2d at 1428 (citing 15 U.S.C. § 2802(c)(4)). In light of the evidence submitted by the parties, the Court concludes that there are no issues of triable fact regarding whether Conoco's termination of the Franchise Agreement was in good faith. Indeed, the evidence demonstrates that the primary reason Conoco terminated the Franchise Agreement was Conoco's inability to renew the Master Lease with V.O. Limited for the Station property. The Franchise Agreement, while providing Houtan with a limited license to use Union 76 trademarks, was primarily a sublease of the Station property by Conoco to Houtan. Because the Master Lease expired, Conoco could not continue to sublease the property to Houtan and there was no way that Conoco could still perform under the Franchise Agreement in the absence of the Master Lease. Thus, there can be no dispute that the termination of the Master Lease was a valid reason for the termination of the Franchise Agreement. See 15 U.S.C. § 2802(c)(4) (stating "termination of the franchise . . . is reasonable . . . [due to] loss of the franchisor's right to grant possession of the leased marketing premises through expiration of an underlying lease . . ."). This does not end the inquiry, however.
If the franchisor seeks to terminate the franchise based on the loss of the underlying lease, the franchisor must still adhere to certain statutory requirements. "A franchisor can rely on section 2802(c)(4) to justify non-renewal only if: [T]he franchisee was notified in writing, prior to the commencement of the term of 6 the then existing franchise-
(A) of the duration of the underlying lease, and
(B) of the fact that such underlying lease might expire and not be renewed during the term of such franchise (in the case of termination) or at the end of the term (in case of non-renewal)."
Hutchens v. Eli Roberts Oil Co., 838 F.2d 1138, 1142-43 (11th Cir. 1988) (citing 15 U.S.C. § 2802(c)(4)). In the present case, Conoco has satisfied both of these requirements. As noted above, the Franchise Agreement signed by both parties on July 6 contains the following language:
There is a possibility that the term of the underlying lease [the Master Lease] to the Station might expire and not be renewed upon the underlying lease's expiration date. DEALER [Houtan] hereby acknowledges CONOCOPHILLIPS' disclosure 19 to DEALER that this Agreement and the Station herein are subject to all terms and conditions of an underlying lease held by CONOCOPHILLIPS in the property and premises, which underlying lease expires on October 31, 2007 and that such underlying lease may expire and may not be renewed during the Term of this Agreement. Thereby, the DEALER [Houtan] is hereby on notice that this Agreement is hereby terminated on the date the underlying lease expires . . . .
Supp. Haddad Decl. Ex. A at 63 (emphasis in original). In addition, Conoco has submitted evidence indicating that it repeatedly attempted to renew the Master Lease with V.O. Limited. See Mathews Decl. ¶ 5. Furthermore, as Conoco was attempting to renew the Master Lease, Houtan was in contact with V.O. Limited and eventually negotiated a direct lease for the Station property. See, e.g., Eldredge Decl., Docket No. 96, Ex. A (letter from Houtan's president seeking a lease for the Station property, dated April 19, 2007).*fn10
For the foregoing reasons, the Court finds no triable issues of material fact regarding Houtan's claim that termination of the Agreement was not made in good faith.
Conoco's Motion for Summary Judgment on this claim is therefore GRANTED.
B. 90-Day Notice of Termination Under § 2804(a)
Conoco also moves for summary judgment on Houtan's claim that the notice provided by Conoco was defective under § 2804(a). Section 2804(a) states, in part: Prior to termination of any franchise or non-renewal of any franchise relationship, the franchisor shall furnish notification of such termination or non-renewal to the franchisee . . . not less than 90 days prior to the date on which such termination or non-renewal takes effect. 15 U.S.C. § 2804(a). Houtan argues that because Conoco informed Houtan in writing on September 18 that it would be terminating the franchise Agreement on October 31, Conoco failed to provide the requisite 90-day notice of termination. This argument ignores the fact that Houtan was aware, as early as July 6, that the Franchise Agreement would be terminated in the event that Conoco was unable to secure a renewal of the Master Lease. More importantly, however, Houtan's argument that the notice did not comply with the 90-day notice requirement of § 2804(a) is essentially irrelevant in light of § 2804(b). Section 2804(b) provides: In circumstances in which it would not be reasonable for the franchisor to furnish notification, not less than 90 days prior to the date on which termination . . . takes effect, as required by subsection (a)(2) of this section, such franchisor shall furnish notification to the franchisee . . . on the earliest date . . . such notification is reasonably practicable.
15 U.S.C. § 2804(b)(1). In the present case, Conoco was unable to renew the Master Lease. On September 18, Conoco sent notice to Houtan indicating that the Franchise Agreement would not be renewed. This qualifies as "the earliest date on which furnishing of such notification is reasonably practicable." Id. Thus, the notice was in compliance with § 2804(b) and was therefore permissible. Such a conclusion is supported by decisions of other courts. See, e.g., Harara v. ConocoPhillips Co., 377 F. Supp. 2d 779, 792 (N.D. Cal. April 29, 2005) (finding that "defendant was justified in terminating the franchise with ten days notice"); Murphy Oil USA, Inc. v. Brooks Hauser, 820 F. Supp. 447, 443 (D. Minn. 1993) (stating "14 days notice of termination is not an unreasonable amount of time" given that plaintiff had failed to pay for gasoline and rent); Smoot v. Mobil Oil Corp., 722 F. Supp. 849, 855 (D. Mass. 1989) (holding that four weeks was reasonable notice for termination). For these reasons, the Court finds that there are no triable issues of material fact relating to Houtan's claim that Conoco failed to give the requisite notice for termination of the franchise agreement. Summary judgment is therefore GRANTED in favor of Conoco on this claim.
C. Bona Fide Offer Under § 2802(c)(4)(C)(i)
The heart of Houtan's Complaint is that Conoco did not make a bona fide offer to sell Conoco's equipment and improvements on the Station property to Houtan. "When a franchisor decides for legitimate business reasons not to renew a franchise relationship, the franchisor must give the franchisee a bona fide offer to purchase the station." Ellis v. Mobil Oil, 969 F.2d 784, 788 (9th Cir. 1992). Section 2802 of the PMPA states: In a situation in which the franchisee acquires possession of the leased marketing premises effective immediately after the loss of the right of the franchisor to grant possession . . . the franchisor (if requested in writing by the franchisee not later than 30 days after notification was given pursuant to section 2804 of this title) . . . [shall make] a bona fide offer to sell, transfer, or assign to the franchisee the interest of the franchisor in any improvements or equipment located on the premises . . . .
15 U.S.C. § 2802(c)(4)(C)(i) (emphasis added). In the present case, it is undisputed that Conoco made an offer to sell the equipment and improvements of the Station to Houtan. Houtan argues, however, that the offer was not bona fide because the price that Conoco asked was too high and because Houtan was given only 7 days to accept the offer and only 9 days to make full payment. Conoco, in its Motion, counters by arguing that it was not required to make a bona fide offer in the first place. The Court addresses Conoco's argument first.
1. Whether Conoco Was Obligated to Make Bona Fide Offer
Conoco asserts that it was not required to make a bona fide offer to sell Houtan the equipment and improvements on the Station property because Houtan did not request the offer within 30 days of receiving notice that the Franchise Agreement would not be renewed. Conoco argues that the operative date for notice of termination was July 6, not September 18, and that, pursuant to § 2802(c)(4)(C)(i), Houtan did not request an offer from Conoco for the equipment and improvements within 30 days of July 6. Conoco's argument is undercut by the language of the July 6 Agreement, which merely stated that there was a "possibility that the term of the underlying lease [the Master Lease] to the Station might expire and not be renewed upon the underlying lease's expiration date." Supp. Haddad Decl. Ex. A at 63 (emphasis added). This language did not put Houtan on notice that the Franchise Agreement would necessarily terminate. Rather, it outlined a condition precedent, the occurrence of which would require termination of the Franchise Agreement. At the time the July 6 Agreement was executed, and for the following 30 days, that condition (the termination of the underlying lease) did not occur. It was entirely possible that, up until September 18, a new underlying lease might have been negotiated between Conoco and V.O. Limited, in which case the Franchise Agreement would not have terminated. Until September 18, therefore, Conoco had not provided Houtan with notice that the Franchise Agreement would be, rather than eventually might be, terminated. Moreover, the language Conoco used in both its Notice of Termination and its Offer to Sell Improvements indicates that Conoco was aware of its obligations under the PMPA, including that of making a bona fide offer. The September 18 Notice of Termination sent to Houtan stated: Dear Dealer [Houtan]: Conoco . . ., pursuant to the requirements of the Petroleum Marketing Practices Act ("PMPA") provides you with this written notice that your franchise relationship with Conoco and the above referenced Agreement shall terminate at 12:00 noon on October 31, 2007.
The reason for the termination is that the Station you operate is leased to Conoco by a third party, and said lease shall expire on October 31, 2007. The existence of an underlying lease was fully disclosed to you. Supp. Haddad Decl. Ex. B. Conoco's Offer to Sell Improvements, sent to Houtan on October 22 in response to Houtan's written letter seeking to buy the improvements, states: Dear Dealer: By hand delivered letter on September 18, 2007, you were notified of the Notice of Termination ("Notice") of the Union 76 Dealer Station Lease and Motor Fuel Supply Agreement . . . . The reason for the termination is that, despite [Conoco's] efforts to get additional tenancy at the Station you operate, the underlying ground lease between [Conoco] and the third party landlord shall expire on October 31, 2007. . . . You have informed [Conoco] on October 18, 2007[,] that you have obtained a lease with the third party landlord for the station and have requested from [Conoco] a bona fide offer to purchase the improvements and equipment at the Station.
In accordance with the provisions of the Petroleum Marketing Practices Act, 15 U.S.C. Section 2801 et seq., [Conoco] offers to sell you our interest in the improvements and equipment located on the marketing premises. Id. Ex. E. It is clear from these letters that Conoco itself believed that September 18 was the operative date for the notice of termination and that Conoco believed that it was required to make a bona fide offer on the equipment and improvements. Although Conoco's belief about its obligations under the PMPA at the time the letters were sent is not dispositive to the legal issues now before the Court, it nonetheless provides further evidence that September 18 was in fact the date understood by both parties on which notice of termination was given and that both parties were operating under the assumption that Conoco was required by the PMPA to make a bona fide offer to sell the equipment and improvements to Houtan. It is therefore clear that on September 18, Conoco provided notice of termination for purposes of Houtan's ability to solicit a bona fide offer to sell. It is also clear that on October 18, Houtan made a written request that Conoco make a bona fide offer to sell Houtan the equipment and improvements on the Station property. As this request was made within the 30-day statutory period of § 2802(c)(4)(C)(i), Conoco was required to make a bona fide offer. For the reasons stated above, the Court finds that Conoco was required to make a bona fide offer to sell the equipment and improvements to Houtan. Conoco's Motion for Summary Judgment on this issue is DENIED.
2. Whether Offer Was Bona Fide
"It is settled law that a bona fide offer under PMPA is measured by an objective market standard." Ellis, 969 F.2d at 787. "To be objectively reasonable, an offer must approach fair market value." Id. (internal quotation marks and alterations omitted). Nonetheless, "Congress' decision not actually to use the term 'fair market value' but instead the term bona fide . . . suggests some degree of deference." Slatky v. Amoco Oil Co., 830 F.2d 476, 485 (9th Cir. 1987). Thus, in deciding "what manner courts should scrutinize the distributor's offer to determine whether it complies with the requirement . . . [Congress's] choice indicates . . . a recognition that the word 'value' almost always involves a conjecture, a guess, a prediction, a prophesy." Id. (internal quotation marks and citations omitted). Accordingly, "[t]he facts of each case will set the terms of what constitutes a bona fide offer." Ellis, 969 F.2d at 788. In the present case, Conoco has offered to sell its equipment and improvements to Houtan for $340,000. Supp. Haddad Decl. Ex. E. This price was based on an independent, third-party appraisal prepared by a licensed appraiser. Mathews Decl. ¶ 7; Ex. E. Houtan claims that this amount vastly exceeds fair market value. Houtan's president states that the equipment and improvements are worth no more than $120,000. Supp. Haddad Decl. ¶ 22. Houtan also submitted a sworn affidavit from a professional real estate appraiser who appraised the value of the equipment and improvements to be $145,000. Plaine Decl. ¶ 5. The Court cannot conclude from the evidence before it whether the price contained in the offer by Conoco was bona fide.
3. Time of Offer
Houtan also argues that the offer was not bona fide because the time period given by Conoco to accept the offer was unreasonably short. Conoco sent a letter on September 18 to Houtan stating that the Franchise Agreement would terminate on October 31 because of Conoco's inability to renew the Master Lease. Supp. Haddad Decl. ¶ 6; Ex. B. On October 16, Houtan entered into an agreement with V.O. Limited to lease the Station property beginning November 1. Id. ¶ 8; Ex. C. On October 18, Houtan sent Conoco a letter indicating that Houtan had entered into this lease agreement and demanding that Conoco sell its improvements and equipment on the Station property to Houtan. Id. ¶ 9; Ex. D. According to these facts, Houtan had notice on September 18 that the Franchise Agreement would not be renewed but waited until October 18 to demand an offer for the equipment and improvements.*fn11
Although unclear, it appears that Houtan waited these 30 days because Houtan was negotiating with V.O. Limited to assume the Master Lease of the Station property. Thus, the fact that Houtan had only 7 days to accept Conoco's offer is, in part, Houtan's doing.*fn12
In addition, Conoco had compelling reasons why it needed to complete the sale of the equipment and improvements before November 1. The Master Lease Conoco has with V.O. Limited was set to expire October 31. In the event that Houtan did not buy the equipment and improvements, Conoco wanted the opportunity to remove its improvements and equipment from the Station before the Master Lease expired. For these reasons the Court finds that, under the circumstances of the case, the timing of the offer had no bearing on whether or not the offer was bona fide.
For the foregoing reasons, Defendant's Motion for Summary Judgment is GRANTED in part and DENIED in part. The only issue remaining in this case is whether the price at which Conoco offered to sell the equipment and improvements to Houtan was bona fide. Depending on whether the offer was bona fide, Houtan may be liable to Conoco for damages resulting from Houtan's continued use of Conoco's equipment and improvements. These issues have not been briefed and are not before the Court at this time.
IT IS SO ORDERED.