Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDCal: Gasoline Station Franchisor Entitled to Breach of Contract Damages and Declaration that Termination of Dealer Complied with PMPA, (Mar 13, 2013)

By Peter Reap, J.D., LLM

Gasoline station franchisor Equilon Enterprises, LLC, was entitled to summary judgment on its counterclaim for breach of contract against a terminated dealer, Youstine, Inc., and damages in the amount of $161,774, because Youstine failed to demonstrate that a genuine dispute of material fact existed with respect to the claim, the federal district court in Oakland has decided (BSD, Inc. v. Equilon Enterprises, LLC, March 11, 2013, Armstrong, S.). In addition, Equilon was entitled to a declaration that its two notices of termination sent to Youstine complied with the Petroleum Marketing Practices Act (PMPA), however, Equilon was not entitled to a declaration that it properly terminated Youstine’s statutory Right of First Refusal offer (ROFR) for the station premises.

Breach of contract. The standard elements of a claim for breach of contract are: (1) the contract; (2) plaintiff's performance or excuse for nonperformance; (3) defendant's breach; and (4) damage to plaintiff therefrom. Equilon argued that summary judgment was appropriate with respect to its breach of contract counterclaim because the parties entered into valid contracts, the Retail Facility Lease and a Retail Sales Agreement (the “Franchise Agreements”), it performed all of its obligations under the terms of the agreements, and Youstine breached the terms of the agreements by failing to pay Equilon money due and owing thereunder in the amount of $167,774. Equilon submitted the declaration of Robert Schaeffer as well as a spreadsheet providing data regarding Youstine's account.

In response, Youstine does not assert that a genuine dispute of material fact exists as to the first three elements of Equilon's breach of contract counterclaim, the court noted. Further, Youstine admits that it has breached the terms of the Franchise Agreements by failing to pay amounts owing. According to Youstine, "[i]t is undisputed that Youstine owes some debt to Equilon. The amount of that debt, however, is in dispute here."

Youstine did not show that there was evidence before the court that "calls into question" Equilon's claim for damages in the amount of $167,774.33, the court determined. Youstine presented no evidence showing that Equilon erred in calculating the amount owed by Youstine.

Youstine contended that a genuine dispute of material facts existed on the issue of damages because Equilon's damages calculation failed to take into account Youstine's $42,500 ROFR deposit. However, evidence submitted by Equilon showed that Youstine made its ROFR deposit check payable to First American Title, the court observed.

According to Equilon, Youstine's ROFR deposit remained in escrow with First American Title Insurance Company because the escrow for the sale of the station remained open due to the pendency of this lawsuit. Youstine, for its part, did not cited any affirmative evidence showing that Equilon has improperly retained Youstine's ROFR deposit without applying this amount towards Youstine's outstanding account balance. Accordingly, Youstine failed to sustain its burden to demonstrate that a genuine dispute of material fact existed.

Youstine also argued that a genuine dispute of material fact existed on the issue of damages because Equilon failed to credit Youstine's account in the amount of $18,102.76 for certain credit card sales in 2010. Yet, the evidence submitted by Youstine was insufficient to create a genuine dispute of material fact on the issue of damages. Indeed, Youstine's less than one-page conclusory argument in this regard failed to establish that a genuine dispute of material fact existed for trial, according to the court.

The only evidence Youstine cited to substantiate its claim was a 24-page spreadsheet. Youstine, however, failed to direct the court to specific portions of the spreadsheet that supported its position. Moreover, a review of the spreadsheet did not reveal on its face that Equilon failed to credit Youstine for credit card sales on the dates and in the amounts identified by Youstine.

Declaratory Judgment

Equilon's third counterclaim sought a declaration that the notices of termination concerning the franchise and Youstine's ROFR were "appropriate" and in accordance with §2802 and §2804 of the PMPA.

Termination of the franchise under the PMPA. Under the PMPA, a franchise could be properly terminated if the franchisee fails "to comply with any provision of the franchise, which provision is both reasonable and of material significance to the franchise relationship, if the franchisor first acquired actual or constructive knowledge of such failure[:] (i) not more than 120 days prior to the date on which notification of termination or nonrenewal is given, if notification is given pursuant to section 2804(a) of this title; or (ii) not more than 60 days prior to the date on which notification of termination or nonrenewal is given, if less than 90 days notification is given pursuant to section 2804(b)(1) of this title." 15 U.S.C. §2802(b)(2)(A).

A franchise could also be terminated under the statute upon "[t]he occurrence of an event which is relevant to the franchise relationship and as a result of which termination of the franchise or nonrenewal of the franchise relationship is reasonable, if such event occurs during the period the franchise is in effect and the franchisor first acquired actual or constructive knowledge of such occurrence[:] (i) not more than 120 days prior to the date on which notification of termination or nonrenewal is given, if notification is given pursuant to section 2804(a) of this title; or (ii) not more than 60 days prior to the date on which notification of termination or nonrenewal is given, if less than 90 days notification is given pursuant to section 2804(b)(1) of this title." 15 U.S.C. §2802(b)(2)(C).

Further, Section 2802(c) of the PMPA sets forth a nonexhaustive list of "occurrences" which qualify as "events relevant to the franchise" upon which termination is "reasonable" under section 2802(b)(2)(C), including the "failure by the franchisee to pay to the franchisor in a timely manner when due all sums to which the franchisor is legally entitled." 15 U.S.C. §2802(c)(8). It was undisputed that Youstine failed to timely pay Equilon all sums to which Equilon was legally entitled under the terms of the Franchise Agreements. It was also undisputed that Equilon sent Youstine a Notice of Termination on April 28, 2011, which informed Youstine that it intended on terminating the Franchise Agreements effective July 31, 2011 based on Youstine's "continuing failure to pay Equilon in a timely manner when due all sums to which Equilon is legally entitled, for which termination of the franchise is permitted under . . . §§2802(b)(2)(C) and 2802(c)(8)."

Additionally, it was undisputed that Equilon sent Youstine a Supplemental Notice of Termination on June 9, 2011, which informed Youstine that the purpose of the supplemental notice was to advise Youstine that it intended on terminating the Franchise Agreements effective June 30, 2011 rather than July 31, 2011 based on Youstine's continuing inability to pay rent in a timely manner.

Youstine contended that a factual dispute existed as to whether the Notice of Termination and Supplemental Notice of Termination were defective under the PMPA. First, Youstine argued that Equilon was not entitled to terminate its franchise because it knew or should have known of Youstine's failure to pay monthly rent for more than 120 days prior to giving notification of the termination in violation of §2802(b)(2)(C)(i) of the PMPA. Second, Youstine argued that Equilon's termination of its franchise was unlawful because the Notice of Termination was defective insofar as it stated that termination was based on the total outstanding debt, most of which was more than 120 days old. According to Youstine, Equilon was only entitled to demand that Youstine pay the debt which accrued within 120 days from the date of the Notice of Termination. The court rejected these arguments.

Equilon discovered in early February 2011 that Youstine had not paid rent from July 2010 to February 2011. Youstine did not cite any evidence supporting its contention that Equilon had any earlier actual or constructive notice of Youstine's failure to pay rent, according to the court. Nor was Youstine's bald assertion in this regard sufficient to create a genuine dispute of material fact for trial.

Further, it was undisputed that on or about April 28, 2011, Equilon sent Youstine a Notice of Termination due to a continuing "failure to pay Equilon in a timely manner when due all sums to which Equilon is legally entitled." Thus, contrary to Youstine's contention, the Notice of Termination complied with the PMPA's 120-day rule. It was sent to Youstine within 120 days from when Equilon acquired knowledge of an occurrence that justifies termination, i.e., Youstine's failure to pay all sums to which Equilon was entitled, including rent payments for July 2010 through April 2011.

Equilon's Notification of Termination was given on April 28, 2011, which was within 120 days from when Equilon discovered in early February 2011 that Youstine had not paid rent from July 2010 to February 2011. It was also sent within 120 days from when Equilon discovered that Youstine had not paid rent for March and April 2011.

Additionally, to the extent the 60-day rule applied because Equilon shortened the notice period to less than 90 days in its June 9, 2011 Supplemental Notice of Termination, Equilon complied with the 60-day rule because Equilon acted on an occurrence that justified termination within 60 days of actual or constructive knowledge of the occurrence, the court held.

To the extent Youstine argued that the notices of termination were defective because they were based on the entire past-due debt instead of the debt that accrued within the applicable notice period, that argument was without merit, the court ruled. While the notices mentioned the entire past due balance as of the date of the respective notices, they did not state that termination was based on the failure to pay the entire past due debt. Instead, the notices specifically stated that termination was based upon Youstine's "continuing failure to pay Equilon in a timely manner when due all sums to which Equilon is legally entitled." Moreover, even assuming the notices of termination could be construed as being based on the entire past due debt, Youstine did not cite any authority holding that this was improper.

There was nothing in the PMPA that prohibited a franchisor from terminating a franchise based on the franchisee's failure to pay all sums due and owing, including sums that accrued both inside and outside the applicable notice period.

Youstine also argued that Equilon violated the PMPA's notice requirements by shortening the termination date to less than 90 days. According to Youstine, there was no evidence that it was reasonable or necessary for Equilon to reduce the timing for termination from July 31, 2011 to June 30, 2011.

While the PMPA generally required 90 days notice, it was reasonable for Equilon to provide less than 90 days notice in light of the circumstances of this case, the court decided. After several months of unsuccessfully trying to collect the amount owed by Youstine, Equilon notified Youstine in a letter dated April 28, 2011 that its franchise would be terminated on July 31, 2011 (i.e., 94 days notice), when Youstine's account balance had increased to $169,218.65. Following Youstine's receipt of the Notice of Termination, Youstine paid rent for May 2011 but did not pay its account balance.

In mid-May 2011, Youstine sent Equilon a check in the amount of $28,914, which was returned in late-May marked "Non-Sufficient Funds." Youstine also failed to pay monthly rent for June 2011. Thus, in order to avoid "increased exposure for additional lost rent," Equilon notified Youstine in a letter dated June 9, 2011 that it was terminating the franchise relationship effective June 30, 2011.

Youstine's continued failure to timely pay all sums to which Equilon was legally entitled to, despite numerous demands for payment over several months, was a serious default of the Franchise Agreements that justified accelerating the notice of termination in order to avoid additional deficiencies, the court held. To the extent Youstine argued that Equilon's termination of its franchise was not made in good faith and in the normal course of business in violation of the PMPA because the termination was a pretext to deprive Youstine of its statutory right to exercise its ROFR, that argument was rejected. To the contrary, the evidence established that Equilon terminated Youstine's franchise for its failure to timely pay Equilon all sums due.

Termination of Youstine’s ROFR. Equilon contended that it properly terminated Youstine's ROFR as a matter of law because Youstine failed to satisfy all past due debts as required by Article 4(a) of the ROFR contract. However, by failing to submit the ROFR in connection with its moving papers, Equilon failed to sustain its burden to show that there was no genuine dispute as to any material fact, the court found. Thus, Equilon's motion for summary judgment as to this aspect of its declaratory relief claim was denied.

The case is No. C 10-05223 SBA.

Attorneys: Thomas P. Bleau (Bleau Fox) for BSD, Inc. Hubert Kim (Wilson Turner Kosmo LLP) for Equilon Enterprises, LLC.

Companies: BSD, Inc.; Equilon Enterprises, LLC.; Youstine, Inc.

Cases: FranchisingDistribution CaliforniaNews