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Houtan Petroleum, Inc. v. Conocophillips Co.

July 21, 2008




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


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 ...

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