UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
filed: February 9, 1987.
AMOCO OIL COMPANY; JOHN SLATKY, APPELLANT
Appeal from the United States District Court for the Middle District of Pennsylvania -- Scranton, D.C. Civil No. 85-1122.
Opinion OF THE COURT
Before: BECKER and MANSMANN, Circuit Judges, and TEITELBAUM, District Judge*fn*
MANSMANN, Circuit Judge.
The sole question we must decide on this appeal is whether Amoco's offer to sell its fully equipped service station to John Slatky, the present franchisee, made in conformity with Amoco's general practice for selling property, fulfills the franchisors' statutory obligation to make a "bona fide offer" under the Petroleum Marketing Practices Act ("PMPA"), 15 U.S.C. §§ 2801-2841. We hold that Amoco's offer was bona fide as a matter of law, and we will affirm the judgment of the district court.
Since September of 1977 the plaintiff, John Slatky ("Slatky"), has been operating a retail gasoline service station under a franchise relationship with the Amoco Oil Company ("Amoco"). In May, 1985, Amoco notified Slatky of its determination that it would be uneconomical to renew Slatky's lease and franchise agreement. Amoco then offered to sell the property to the franchisee. Amoco's final selling price was $256,300; plus an additional $50,000 for the pumps and underground tanks. Slatky, after obtaining an independent appraisal of the market value of the property including the pumps and underground tanks at $158,000, informed Amoco that its sale price was too high. When Amoco refused to negotiate further over the sale price, the plaintiff brought suit seeking damages and equitable relief in the form of a mandatory injunction which would force Amoco to make a bona fide offer pursuant to the PMPA, which governs the relationship between the parties. See 15 U.S.C. § 2802(b)(3)(D)(iii).
Title I of the PMPA was enacted by Congress to remedy the disparity of bargaining power which enabled a petroleum franchisor to obtain the right to terminate a franchise relationship for minor contract violations or changes in circumstances. Evidence at Congressional hearings demonstrated that franchisors used the prospect of nonrenewal to compel franchises to comply with the franchisor's marketing policies, and frustrated the reasonable renewal expectations of franchisees through arbitrary or discriminatory cancellations. See generally, S. Rep. No. 731, 95th Cong., 2d Sess. 17-19, reprinted in 1978 U.S. Code Cong. & Ad. News 873, 875-77 (hereinafter cited as "Senate Report").
IN order to strengthen the bargaining position of franchisees, Congress drafted Title I to prohibit a franchisor from terminating or failing to renew a franchise agreement except on grounds specified in the statute. The statute also requires written notice of the franchisor's intent to terminate or fail to renew. 15 U.S.C. § 2804(a).
The legislative history of the PMPA recognizes an essential legislative purpose to provide statutory grounds for termination and nonrenewal which would not be "so broad as to deny franchisees meaningful protections from arbitrary or discriminatory terminations and nonrenewals or to prevent fulfillment of the reasonable renewal expectations of the franchisees." Senate Report at 18.
A competing legislative concern was expressed for "the legitimate needs of a franchisor to be able to terminate a franchise or not renew a franchise relationship based upon certain actions of the franchisee." Id. at 19. Congress also recognized the particular importance of providing "adequate flexibility so that franchisors may initiate changes in their marketing activities to respond to changing market conditions and consumer preferences." Id.
Statutory grounds for termination or nonrenewal reflect Congress' attempt to strike a balance among these competing concerns. Permissible grounds for either termination or nonrenewal include specific courses of conduct of the franchisee, events such as fraud or bankruptcy, and agreement of the parties, or the franchisor's determination to withdraw from the geographic area. See 15 U.S.C. § 2802(b)(2)(A)-(E). Customer complaints, failure of the franchisee to operate the franchise in a safe and sanitary manner, and failure by the parties to agree to reasonable changes in the franchise agreement are also grounds for nonrenewal. See 15 U.S.C. § 2802(b)(3)(A)-(C). A franchisor may also fail to renew a franchise if he decides "in good faith" and "in the normal course of business" to convert the premises to another use, to materially alter the premises, to sell the premises, or that the franchise is uneconomical. See 15 U.S.C. § 2802(b)(3)(D). The parties agree that Amoco's determination not to renew was proper and that Slatky received the requisite notice.
We turn now to the statutory section in dispute here. The PMPA provides that once a franchisor has made an economic determination not to renew a franchise agreement in accordance with the statute and has notified the franchisee of its decision not to renew, the franchisor must make to the franchisee a "bona fide offer" to sell or otherwise transfer the franchisor's interest in the marketing premises or grant a right of first refusal of an offer made by another. 15 U.S.C. § 2802(b)(3)(D)(iii).
The parties agree that the PMPA places upon the franchisor the burden of proving its compliance with the statutory requirements including the fact that its offer was "bona fide." The parties part company over the definition of "bona fide" to be applied here.
After a bench trial, the district court rendered judgment for Amoco.*fn1 In seeking to ascertain the correct legal standard to apply, the district court relied on our decision in Robertson v. Mobil Oil Corporation, 778 F.2d 1005 (3d Cir. 1985), in finding that Amoco's offer to Slatky was bona fide. In Robertson we defined bona fide in the context of a different section of the PMPA, namely § 2802(b)(3)(B) which allows termination or nonrenewal of a franchise based on "bona fide" customer complaints. We there defined a bona fide complaint as "sincere and having a reasonable basis in fact." Id. at 1008.
The district court concluded that Amoco's offer was reached in a reasonable manner, in the normal course of business, by Amoco's employees who appraise any property Amoco intends to buy, sell, or lease and who followed procedures normally used for evaluating any of Amoco's property for sale. The court found that a request by Amoco for its real estate manager to reappraise the property resulted in a higher valuation but found no evidence that the appraiser was directed to increase the amount of the appraisal. The court relied upon these findings in concluding that the offer had a reasonable basis in fact.
The district court made no finding of fact regarding whether the offer approached the fair market value of the marketing premises as determined by an independent appraisal, but the court found the offer to be sincere in that the property was offered at what Amoco believed was the fair market value. The court rejected the argument of the plaintiff that in order for the franchisor to meet its statutory obligation of proving a bona fide offer under the PMPA, the franchisor must demonstrate that its offer equals or approaches a fair market value as determined by an independent appraiser.
On appeal, the plaintiff argues that the district court erred first in finding that Amoco's valuation procedures were reasonable, and second, in applying a legal standard which did not require an independent consideration of the fair market value of the marketing premises.
Our review in cases of statutory construction is plenary. Chrysler Credit Corporation v. First National Bank Trust Company of Washington, 746 F.2d 200, 202 (3d Cir. 1984); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981). Findings of fact should stand unless clearly erroneous. See Leeper v. United States, 756 F.2d 300, 308 (3d Cir. 1985).
Neither the statute itself nor the legislative history of the PMPA provides us with an explicit definition of "bona fide." In Robertson we arrived at a definition of bona fide suited to the particular statutory purposes of the PMPA -- namely, that Congress intended by "bona fide" to mean "sincere and having a reasonable basis in fact." Robertson, 778 F.2d at 1008. Our present task is to determine precisely what out Robertson definition requires in the context of offers to sell leased marketing premises pursuant to § 2802(b)(3)(D)(iii) of the PMPA.
The avowed purpose of Title I of the PMPA "is the establishment of minimum Federal standards governing the termination and nonrenewal of franchise relationships for the sale of motor fuel by the franchisor or supplier of such fuel." Senate Report at 15. Congress implemented its objective primarily by clearly delineating the grounds on which franchisors may terminate or refuse renewal of an existing franchise. See 15 U.S.C. § 2802. As we discussed above, the remedial scheme of the statute attempts to balance the franchisee's relative lack of bargaining power and reasonable renewal expectations against the legitimate property rights and economic interests of the franchisor. See Senate Report at 18-19.
The position of § 2802(b)(3)(D)(iii) in the statutory remedial scheme suggests that the franchisor's decision as to an offering price should be subject to a standard of intent similar to that which governs economic determinations which may support a decision not to renew a franchise. Under the PMPA, the requirement to offer the property for sale is triggered by the franchisor's reliance upon grounds for nonrenewal set forth in § 2802(b)(3)(D), which involve economic decisions regarding marketing strategy or recommitment of resources.*fn2 There is nothing in the statute to indicate that compliance with § 2802(b)(3)(D)(iii) demands anything more than what is required for compliance with the sections which trigger its applicability. Under this section, the purely economic interests of the franchisor are determinative of his nonrenewal rights under the PMPA. See § 2802(b)(3)(D)(I)-(IV). The standard governing those economic decisions is that they be made "in good faith and in the normal course of business." Id.
Moreover, the provision in § 2802(b)(3)(D)(iii)(II) -- that the franchisor must "offer the franchise a right of first refusal . . . of an offer, made by another, to purchase such franchisor's interest in such premises" -- contemplates that the franchisor might actively solicit bids or offer the marketing premises at a given price to the public at large. It is clear that the franchisor would accept an offer from someone other than its franchisee only if that offer translated into a value which exceeded the return the franchisor expected to obtain from the alternative uses to which it might put the property.
It is likewise clear that potential purchasers, particularly comparatively small independent operators like Slatky, might not be able to derive a return on investment comparable to that of a large franchisor by virtue of the franchisor's ability to exploit economies of scale and other synergistic effects which might emanate from vertically integrated enterprises like Amoco.
In short, we find nothing in the PMPA which requires the franchisor to offer its interest in the marketing premises to a current franchisee at a price which is any less than the franchisor would demand from a third party purchaser. So long as the franchisor arrives at a selling price through the procedures it would normally employ in contemplating a sale of its property, the franchisor satisfies our Robertson requirements of a sincere offer reasonably based in fact.
The legislative history of the PMPA clearly indicates that the drafters considered and rejected the suggestion that the standard governing economic decisions on nonrenewal should be one of objective reasonableness:
At this point it is appropriate to note that considerable debate has focused upon recognition of so-called "reasonable business judgments" of the franchisor as grounds for termination or non-renewal. This standard has not been adopted by the committee. Instead, a two-fold test has been utilized to judge certain specified determinations including that of market withdrawal.
One test is whether the determination was made "in good faith". This good faith test is meant to preclude sham determinations from being used as an artifice for termination or non-renewal. The second test is whether the determination was made "in the normal course of business". Under this test, the determination must have been the result of the franchisor's normal decisionmaking process. These tests provide adequate protection of franchisees from arbitrary or discriminatory termination or non-renewal, yet avoid judicial scrutiny of the business judgment itself. Thus, it is not necessary for the courts to determine whether a particular marketing strategy, such as a market withdrawal, or the conversion of leased marketing premises to a use other than the sale or distribution of motor fuel, is a wise business decision.
Senate Report at 37.
Congress clearly intended that in considering the economics of renewal, the franchisor will consider profitability in the broad sense of return on investment. Id. When Congress desired that the franchisor be influenced by interests other than his own, it clearly so provided. For example, the statute makes clear that a franchisor may not consider the alternative of retail operation for its own account when considering the economics of termination or nonrenewal. See 15 U.S.C. §§ 2802(b)(2)(E)(ii) and (b)(3)(D)(ii). These provisions address the concern expressed by the co-sponsor of the House bill that the desire of the major oil refiners to operate the stations as retail outlets resulted in their pressuring their franchisees to sell out or face stiff increases in their rent. See 123 Cong. Rec. H10,385 (daily ed. Apr. 5, 1977) (statement of Rep. Conte).
No such express limitation governs the franchisor's determination to sell the property or convert it to another use. The PMPA places no other limitations on franchisors' economic decisions as to what use to make of their property. Furthermore, the legislative history makes clear that if renewal is likely to be uneconomical apart from considerations of alternative methods of operation, Congress did not intend the franchisor to be precluded from operating the premises through their own employees or agents. See Senate Report at 37.
A decision regarding the offering price for property is an economic determination not unlike those determinations which may support a decision not to renew a franchise. In fact, both decisions are governed by the same statutory section and there is nothing to indicate that the franchisor is to be given less flexibility to act in his own economic interest when determining a selling price for the franchise property than when determining in the first instance to commit the property to another use, to remodel it or to sell it. Congress gave the franchisor the virtually unrestricted right to consider only its own economic interest in determining not to renew, and these determinations are governed by a subjective good faith standard developed expressly to obviate the need for judicial scrutiny of the business judgment. Id.
The offer to sell is not required until it is already clear that the franchise relationship will not continue. At that point the principal focus of the statute, to prevent arbitrary and discriminatory terminations, is no longer relevant, and the threat of termination or nonrenewal cannot be used against the franchisee in a coercive manner. It would not be consistent with the statutory scheme to suggest that now, in arriving at an offering price, the franchisor must cease to consider its economic interest or that a court is now to determine the objective reasonableness of the business judgment as to a profitable offering price.
The fact that ordinary business procedures are not expressly required by the language of the section does not mean that a decision in the ordinary course of business may not evidence a bona fide order. We may reasonably assume that through its ordinary valuation procedures a franchisor will determine a selling price which would compensate it for the loss of the ability to commit the property to another profitable use. Even if, as Slatky complains, the franchisor does not desire to sell the premises and inflates the selling price to prevent a sale, it must be assumed that at some price the franchisor would determine it to be in its economic interest to sell. We may also assume that an offer made to any prospective buyer would contemplate negotiations to approach the same desired selling price. The absence of the express requirement of normal procedures merely suggests that other courses of conduct, e.g., the use of outside appraisers even if no the franchisor's usual practice, could evidence good faith as well.
Finally, "the common legal definition of bona fide, consistent with the non-legal definition, is '[i]n or with good faith; honestly, openly, and sincerely . . . real, actual, genuine, and not feigned.'" Robertson, 778 F.2d at 1008, quoting Black's Law Dictionary (5th ed. 1979). In a legal context, the term bona fide looks almost exclusively to subjective good faith. For example, the bona fide mortgagee or a bona fide possessor of property may be party to illegal transactions yet exempt from liability because the action was taken in subjective good faith irrespective of another's prior or superior claim of right to the property.
In accordance with the foregoing we find that the concept of a bona fide offer as utilized in § 2802(b)(3)(D)(iii) contemplates subjective good faith, i.e., is undertaken without a motive or purpose to discriminate against the franchisee. The statute, however, does not require the franchisor to consider the actual effect of the offer on the franchisee's ability or willingness to purchase the property.
We find that the purposes of the statute will be served by defining a bona fide offer to sell as an offer to sell the fully operative marketing premises, which offer is the same as that which the franchisor would make in contemplation of negotiation with any prospective buyer and based upon a valuation of the marketing premises arrived at through the normal procedures used by the franchisor in informing its decision whether and at what price to offer any of its property for sale.
The franchisor may meet its initial evidentiary burden by establishing that it arrived at its asking price through the normal procedures employed in the buying and selling of any of its property. The franchisee may then introduce evidence of any arbitrary or discriminatory variation from the franchisor's normal business practices.
The plaintiff strenuously argues that a "bona fide offer" pursuant to 15 U.S.C. § 2802(b)(3)(D)(iii) must approach fair market value as determined by an independent appraiser. This argument lacks merit because, as we discussed above, we find no basis in the PMPA for imposition of such an objective standard.*fn3 Instead, the statute requires subjective good faith compliance in arriving at an offering price in the franchisor's usual manner.
The statutory construction process must look in the first instance to the plain meaning of a statute's terms. See National Freight v. Larson, 760 F.2d 499, 503 (3d Cir.), cert. denied, U.S. , 106 S. Ct. 228 (1985). Initially, nothing in § 2802(b)(3)(D)(iii) requires a franchisor to offer to sell, transfer, or assign its interest in the leased marketing premises for a price which approximates fair market value. We must presume, accordingly, that Congress, in prescribing a bona fide offer did not necessarily intend fair market value. This conclusion fully comports with the Congressional aims expressed in the overall scheme and legislative history of the PMPA.
Slatky cites Tobias v. Shell Oil Co., 782 F.2d 1172 (4th Cir. 1986), and Brownstein v. Arco Petroleum Products Co., 604 F. Supp. 312 (E.D. Pa. 1985), as squarely holding that a "bona fide offer" must approach fair market value. The plaintiff, however, misplaces his reliance on these authorities.
In Brownstein, the plaintiff attacked the bona fides of Arco's offer to sell him the franchise premises at a price sixteen percent above the the value Arco's appraiser had assigned to the property. Since Arco could not demonstrate why it inflated its appraiser's figures, the district court held that the offer was not in conformity with the offeror's general practice for selling property, and was therefore not bona fide. Id. at 316. This result conforms to our analysis.
We note that the district court stated that:
Even had Arco demonstrated that the procedures by which it arrived at the offering price were consistent with those utilized in non-PMPA-restricted cases, I am not convinced that it would have satisfied the strictures of the Act . . . . [A] proper reading of the Act compels the conclusion that for an offer to be bona fide -- that is actual -- it must meet or very nearly approach what the offeror believes to be the fair market value of the property [footnote omitted].
Id. (Emphasis in original.) A close reading of Brownstein shows it to be consistent with Amoco's, not Slatky's, position. Even the court's dicta tested "what the offeror believes to be the fair market value of the property [footnote omitted]." Id. (Emphasis added.) The trial judge here specifically found that Amoco believed its offer to reflect fair market value. Even under the Brownstein analysis, therefore, Amoco has satisfied the PMPA.
The opinion of the Court of Appeals for the Fourth Circuit in Tobias offers little help to us here. In Tobias the fair market value of the premises was undisputed and, in fact, the franchisor's sale price approached fair market value. See Tobias, 782 F.2d at 1174. The court was not faced with the problem we have here. Id.
In sum, we find that neither the express language nor the legislative history of § 2802(b)(3)(D) requires a franchisor's "bona fide offer" to approach fair market value as determined by an independent appraiser. We conclude that the PMPA's requirement of a "bona fide offer" contemplates, at a minimum, that the franchisor follow its general practice for selling property. The franchisor, of course, may demonstrate its good faith by means of an independent appraisal of fair market value if it so wishes; but nothing in the Act or its history requires such a course.
Applying the legal standard enunciated above to the facts as found by the district court, we find that Amoco's offer to sell the premises was "bona fide."
In this case, the district court found that Amoco's general procedure for determining the offering price of property is to conduct an initial appraisal of the land and real estate improvements by its own employees. That appraisal is then reviewed by a real estate manager and project team director. If the review raises questions, the property is reappraised or the appraisal is otherwise corrected. A selling price is then determined by Amoco's capital asset manager.
The district court specifically found that the outlined procedures are those followed by Amoco in the valuation of any property Amoco intends to buy, sell or lease. In addition, the court found that in this case Amoco did follow its customary business procedures in arriving at an offering price to Slatky. These findings of fact are not clearly erroneous. Based upon our definition of a bona fide offer to sell, no further findings are necessary to support the conclusion that the offer was bona fide. Therefore the burden shifted to the franchisee to introduce evidence of Amoco's subjective bad faith.
The plaintiff has presented no such evidence. Rather, the plaintiff challenged the reasonableness of the defendant's business practices in arriving at an offering price. Specifically, the plaintiff challenged the defendant's normal valuation procedures as inherently flawed and biased in favor of the defendant, therefore yielding a "non-bona fide offer."
We need not address this challenge to the district court's finding that the procedures used by Amoco were reasonable. In a conscientious effort to comply with existing precedent, the district court used the Robertson definition of bona fide. We find, in light of the language and purposes of the PMPA, that the district court properly found that the franchisor followed its customary business procedures in setting a sale price and thereby satisfied both the PMPA's requirement of a bona fide offer and our decision in Robertson. Amoco's adherence to its customary business practices ensured that its offer to Slatky was arrived at sincerely and had a reasonable basis in fact.
Nor do we find any error in the district court's failure to make a finding regarding the fair market value of the premises. An independent appraisal of fair market value is not required in determining that an offer is "bona fide." Slatky raises no challenge to the finding that the defendant's standard valuation practices were indeed followed in this case. Furthermore, Slatky has presented no evidence of Amoco's subjective bad faith in reaching its offering price, e.g., that the offer was meant to single out Slatky for discriminatory treatment. Despite the application of a more stringent test, the district court entered judgment for the defendant Amoco. Obviously, the result is the same under the test enunciated today.
We hold that the definition of bona fide -- which we set forth in Robertson to mean "sincere and having a reasonable basis in fact" -- requires, in the context of an offer to sell leased marketing premises pursuant to § 2802(b)(3)(D)(iii), that the franchisor at a minimum should arrive at a selling price by means of its normal procedures used in determining at what price to offer any of its property for sale.
The PMPA affords a franchisee significant procedural protection against an arbitrary and discrimination termination of its franchise. Indeed, the prevention of such wrongful terminations is the PMPA's avowed purpose. The Act, however, additionally gives the franchisee a right of first refusal with respect to an acceptable offer by a third party for the franchisor's interest. The franchisee also has the right to purchase the franchisor's property at a price determined through the franchisor's property at a price determined through the franchisor's normal valuation process. Thus, § 2802(b)(3)(D)(iii) recognizes that, following a termination, the marketing premises will belong to whoever values it most. If the current franchisee will not meet the offer of a third party, that fact proves that the market placed a higher value on the property than the franchisee was willing to pay. Absent a third party offer, the franchisee's inability to buy the premises from the franchisor demonstrates simply that the franchisor more highly valued the property. We find nothing in the PMPA which would divest the franchisor of its property in such a case. Nor is there any basis in fact to assume that an independent appraiser could value franchise property more accurately than could its present owner.
The facts found by the district court support the decision that Amoco has fulfilled its statutory obligation to make a bona fide offer to sell the marketing premises to Slatky. Therefore, we will affirm the judgment of the district court.
BECKER, Circuit Judge, dissenting.
The majority has concluded that the "bona fide" offer provision of 15 U.S.C. § 2802(b)(3)(D)(iii) obligates the franchisor only to make an offer with "subjective good faith" and finds the good faith demonstrated by Amoco's compliance with its normal business procedures. I disagree.
In my view, the majority's definition of bona fide is at odds with out recent decision in Robertson v. Mobil Oil Corp., 778 F.2d 1005, 1008 (3d Cir. 1985), which interpreted bona fide in a PMPA context as requiring no less rigorous a standard than "sincere and having a reasonable basis in fact." I believe that the majority also fails satisfactorily to explain what intent or belief a franchisor must genuinely have in setting an offer price, thereby depriving its "subjective good faith" standard of content. In addition, I believe that the majority misreads the structure of the statute, incorrectly considers the bona fide offer provision to place no restriction on the franchisor's economic self-interest, and implicitly assumes that there is no reason for this provision's existence. As I see it, the overall impact of the majority's interpretation is to deny franchisees the statutory protection Congress intended to provide by failing to remedy the unequal bargaining position of franchisors and franchisees.
In contrast, I believe that the statutory provision requires the franchisor to set an offer price as if it truly wished to sell the property, namely, at fair market value. I also believe that Robertson compels us to ask whether the franchisor sincerely believed its offer was at fair market value and whether the franchisor's appraisal had an objectively reasonable basis in facts and analysis. I respectfully dissent.
The majority provides only the barest outline of the facts regarding Amoco's formulation of its offer price. Because these facts illuminate the difficulties with the majority's legal approach, I set them forth in greater detail.
As the majority explains, Amoco's general procedure for determining the offering price of property is to have its employees conduct an initial appraisal of the land and real estate value. That appraisal is then reviewed by the real estate manager and project team director. If the officials raise questions, the property is reappraised or the appraisal is corrected. The final offering price is then determined by the capital asset manager with the participation of the district manager for the area, apparently acting in their total discretion.
Amoco informed Slatky of its decision not to renew his lease on May 29, 1985 and proceeded in a letter dated June 28, 1985 to offer Slatky the station for $306,300.00 without the underground tanks and pumps. The testimony reveals that Amoco arrived at this price through a two-step process.
The first component was the appraisal of Melvin O'Dell, who evaluated the land alone in early May, 1985. O'Dell based his appraisal on three allegedly comparably properties, which had been sold several years before. He testified that he made no effort to verify the information he had regarding these "comparables" or to find other reports on other properties. O'Dell further testified that his best comparable was a property that he later found had been understated in land area by 40% and that was not suitable as a basis of comparison because of its location.*fn1 Based on this analysis, O'Dell appraised the value of the land at $155,000.
Following the land appraisal, a Mr. Bogdanowicz performed an initial appraisal of the property improvements. Bogdanowicz had no formal appraisal experience but had built stations for Amoco in several parts of Pennsylvania. Although he lacked experience in the York, Pennsylvania area where Slatky's station was located, Bogdanowicz testified that he made no effort to determine local costs. He estimated the replacement cost of the improvements, including tanks and lines, to be $121,300.
Based on these two estimates, Amoco's real estate manager, Eugene O'Brien, recommended a price of $276,300 to the district manager, Lemuel Warfield. Without disagreeing with any of the conclusions used to come up with the appraisal, Warfield sent a note back to O'Brien stating, "costs as they are today and the improvements that we have on the property, I would believe the appraisal would be more reasonable at $350,000, less tanks and lines." Warfield asked O'Brien to review the figure, and O'Brien passed this request to O'Dell.
O'Dell then reviewed his appraisal and came up with a land value $30,000 higher. In a letter to Warfield, O'Brien stated that this new figure was "about as far as we think it should go." Warfield then offered to sell that station to Slatky for $306,300, explicitly stating that this figure did not cover the tanks and pumps. After this litigation began, Warfield sent a letter to Slatky explaining that the exclusion of the tanks and pumps was mistaken and offering the property for $256,300 with an additional demand of $50,000 for the tanks and pumps.
In sharp contrast to Amoco's figures, two certified appraisers hired by Slatky valued the property at $158,200 and $145,000 respectively. An independent appraisal eventually commissioned by Amoco appraised the property at $221,000.
The majority interprets "bona fide" to mean only "subjective good faith" and rejects the relevance of fair market value essentially because it equates the "bona fide" standard governing offers after nonrenewal of the franchise with the "in good faith and in the normal course of business" standard applicable to the nonrenewal decision itself. The majority offers four reasons for its position. First, it states that this conclusion follows from the positioning of the two standards in the statute. Second, it states that the similarity of standards follows from the recognition of both nonrenewal and offer decisions as basic business decisions in which the company may follow pure, economic self-interest. Third, it suggests that because the primary interests of the PMPA are satisfied by compliance with the nonrenewal provisions, there is no reason to apply a different standard to the bona fide offer provisions. Finally, the majority states that its interpretation follows from the "common legal definition" of the term "bona fide" and achieves equality between the position of the franchisee and the typical purchaser. I disagree with each of these contentions.
First, the majority argues that the position of the "bona fide offer" provision as part of § 2802(b)(3)(D) suggests that Congress meant it to resemble the requirement that the decision be "in good faith and in the normal course of business." Typescript at 9-10.
The full text of § 2802(b)(3)(D) is reproduced in the margin.*fn2 Although the two standards are near to one another in the statutory text, they are distinct. The majority itself states that "ordinary business procedures" are not required by the statute when the franchisor makes a "bona fide offer," if some other indication of good faith is present. Typescript at 12-13. Thus, while the majority infers from the proximity of these two phrases that they have essentially the same meaning, their proximity to one another suggests the contrary. If Congress had intended to impose the same standard in both places, it would have used the same words in both places. Instead, Congress explicitly chose to use two different standards.
More significantly, the requirement that nonrenewal decisions be "in good faith and in the normal course of business" serves as a procedural test for insuring that the franchisor makes a nonrenewal decision on the basis of one of the specified, permissible motives. For example, a franchisor may cancel a franchise if it determines in good faith and in the normal course of business that it wishes to withdraw from a territory. In contrast, the requirement that an offer be bona fide has no substantive predicate: the phrase "bona fide" itself occupies the position in the statute of other substantive requirements. By equating "bona fide" with the good faith and normal course of business requirements, the majority thus not only equates different standards but also different kinds of restrictions.
Next, the majority interprets "bona fide" to mean only subjective good faith because it considers the determination of an offering price to be "not unlike" those basic economic "determinations which may support a decision not to renew a franchise." Typescript at 12. The majority argues that the nonrenewal provisions of the PMPA as a whole permit the franchisor "the virtually unrestricted right to consider only its own economic interest". Typescript at 13. The majority also notes that a requirement that an offer approach fair market value would sometimes obligate the franchisor to sell a property for less than the property's value to the company if not sold. Typescript at 10. Finding no reason to distinguish the bona fide offer provision from the other portions of the non-renewal section, the majority argues that the same "subjective good faith standard developed expressly to obviate the need for judicial scrutiny of the [nonrenewal] business judgment" should apply. Typescript at 13.
Here again, I disagree. Contrary to the views of the majority, Congress did choose to curtail the franchisor's economic self-interest.*fn3 As the majority notes, the statute explicitly prohibits the franchisor from terminating or not renewing a franchise because it considers direct management by its own retail agents likely to be more profitable. 15 U.S.C. §§ 2802(b)(2)(E)(ii), (b)(3)(D)(ii). In part, as the majority recognizes, Congress was concerned that even the possibility of direct management would translate into higher rents. Typescript at 12. Obviously, this restriction represents the Congressional judgment that potential franchisor profits must give way to the interest of preventing franchisee dislocation.
Despite that fact, the majority's rule will allow the franchisor to set a price for the property equal to the capitalized value of the stream of income the franchisor would have received from direct retail management. Such a price may dislocate franchises as effectively as a straightforward transition to direct management. It is inconceivable that Congress would allow the economic interest of franchisors to dislocate franchisees through an above market-value offer price although it prevents franchisors from taking advantage of the identical business opportunity in making the decision not to renew.*fn4 Although I agree that a fair market value requirement might force a franchisor to sell a property for less than its value to the franchisor, I find such a result not only consistent but mandated by the statutory scheme.
Furthermore, the majority misapprehends Congress's reasons for making the good faith standard applicable to decisions not to renew a franchise. Although the non-renewal criteria limit the franchisor's self-interest, they do so by omission; the constraint lies in the prohibition on nonrenewals for any reason not listed in the statute. A nonrenewal determination on the basis of a permissible reason is a business judgment in the true sense of the term because the franchisor would make the same decision as part of its normal operations even if there were no statute. So long as a franchisor makes a permissible business decision not to renew sincerely, the franchisor has complied with the economic constraint imposed by Congress. Congress has no concern whether the business decision itself is a good one.
In contrast, the requirement that an offer be "bona fide" is itself a restraint on the business judgment. For example, a franchisor might fail to renew a franchise because it wished "to materially alter, add to, or replace the leased premises," 15 U.S.C. § 2802(b)(3)(D)(ii), or because it wished to convert the premises to a shopping center, § 2802(b)(3)(D)(i). Alternatively, after nonrenewal, a franchisor might believe that direct management would return high profits, or the franchisor might believe that maintaining its brand name in the relevant locale is necessary for proper exposure. In all these situations, the franchisor's self-interested business judgment might be not to sell the property at all. Despite this desire to retain the property, the bona fide offer provision would still require the franchisor to offer the property for sale.
"Bona fide offers" in these situations hardly represent business judgments because companies do not, in the normal course of business, make offers to sell property they do not wish to sell. Instead, these offers represent something we may call "compliance judgments," decisions about how best to protect the company's interests while complying with the statute. The majority's lengthy quotations from the legislative history indicating Congress' desire to avoid scrutiny of business judgments are therefore irrelevant to determining the standard applicable to "bona fide offers." The proper standard must incorporate the restraint Congress wished to impose and must provide a standard of scrutiny relevant to judging the extent of a company's compliance with a standard against its own self-interest.
The lack of protection provided by the normal course of business standard is well illustrated by the facts of this case. Evidence indicated that Amoco did not wish to sell the property. The district manager, who indicated in testimony that he wished either not to sell the property at all or to value it at $500,000, rejected the initial appraisal of $226,000 based on no evidence other than his own hunch. Under pressure, the land appraiser raised his estimate of the land's value by $30,000.*fn5 Although he apparently accepted this final appraisal, the district manager at first forwarded an offer that was $50,000 higher still because it excluded tanks and lines. Only after Slatky initiated suit did the district manager correct that figure, so that the price of $306,000 included tanks and lines. But under the normal business procedures, which the majority believes should be a franchisee's sole protection, the district manager had no obligation to accept the appraisal of Amoco's experts.
Amoco's procedures are obviously not designed to produce an offer that accommodates what potential buyers might pay. Rather, the steps Amoco follows in setting an offer price for property are intended to advance Amoco's self-interest as that interest is understood by the district manager. If it is in Amoco's interest to sell the property, the procedures followed here enable Amoco to set a price that will enable it to accomplish that goal with as much profit as possible. Where, however, as in this case, Amoco does not want to sell the property, Amoco's procedures permit an offer at prices nowhere near fair market value: such an offer will effectively prevent a sale. If the district manager had indeed set an offer price of $500,000 -- more than double that eventually recommended by Amoco's own independent appraiser -- that offer still would have been made "in the normal course of business" and would pass muster under the majority's analysis. I cannot believe that Congress wished its requirement for a "bona fide" offer to mean so little.
The third reason offered by the majority for its holding seems to be that a standard related to fair market value would extend relief to the franchisee, and interfere with the franchisor, in ways unsupported by the purposes of the PMPA. The majority notes that "[t]he offer to sell is not required until it is already clear that the franchise relationship will not continue," at which point, "the principal focus of the statute, to prevent arbitrary and discriminatory terminations, is no longer relevant . . . ." Typescript at 13. The majority appears to reason that because the franchisor may rely on its economic self-interest alone when the principal focus of the statute is relevant, the franchisor may follow its self-interest when complying with the bona fide offer portion of the statute, a portion the majority considers not relevant to the statute's principal purpose.
The majority's analysis is incomplete. Once the majority observes that Congress cannot have intended the offer provision to prevent arbitrary and discriminatory nonrenewals, the majority strangely stops: having shown that the offer provisions lack one purpose, the majority does not offer any alternative purpose.*fn6 Consistently, having assumed that this provision has no purpose, the majority interprets it to have no effect.
The majority reasons that its interpretation of the bona fide offer position protects the franchisee sufficiently because "even if . . . the franchisor does not desire to sell the premises and inflates the selling price to prevent a sale, it must be assumed that at some price the franchisor would determine it to be in its economic interest to sell." Typescript at 14. At the price at which the franchisor determines it is in its interest to sell, however, no statute is necessary to produce an offer; the franchisor will readily make such an offer on its own or accept a similar offer by the franchisee. Congress had no need to insist on such a meaningless requirement. At the least, Congress had no need to insist that the offer be "bona fide" if "bona fide" requires only that the company act in its own self-interest. The majority's interpretation does nothing to address the problem of unequal bargaining power or to protect the reasonable renewal expectations that lay at the root of Congress' concern.
Although the majority cannot find a purpose for the bona fide offer provision, I suggest that the statute's purpose is the same as that underlying the rest of the PMPA: to protect the franchisee's "reasonable expectation" that he will continue to earn a livelihood with this property. Senate Report at 876.
To prevent dislocation of franchisees, Congress provided two kinds of protection. First, the PMPA's termination and nonrenewal provisions protect the franchisee's expectation of a continuing relationship with the franchisor. Only a limited amount of protection could be imposed in that context, however, because Congress wanted to allow franchisors "adequate flexibility . . . to respond to changing market conditions and consumer preferences." Senate Report at 19.
Yet if that protection failed, Congress still sought to prevent the physical dislocation of franchisees by enabling them to buy their stations from their former franchisors. This second -- and distinct -- line of defense is effectuated only by the bona fide offer provision. Unfortunately, by permitting the franchisor to offer the property at any price justifiable under "normal course of business" rubric, the majority enables the franchisor to circumvent this second defense at will.
Finally, the majority finds support for its holding in the common legal definition of the term "bona fide." The common legal definition, says the majority, "looks almost exclusively to subjective good faith." Typescript at 14. In this case, the majority translates that meaning into "is undertaken without a motive or purpose to discriminate against the franchisee." Typescript at 15. Such an offer should be "the same as that which the franchisor would make in contemplation of negotiation with any prospective buyer and based upon a valuation of the marketing premises arrived at through the normal procedures used by the franchisor in informing its decision whether and at what price to offer any of its property for sale." Id. In essence, the majority argues that "bona fide" requires the franchisor to treat its franchisee as it would any potential purchaser.
1. The majority's reasoning contains a variety of flaws. First, although the majority correctly notes the common definitions of the term "bona fide," it fails to recognize that a requirement of subjective good faith generally means that a person or entity must have a genuine intent to do some thing or a sincere belief in some fact. A bona fide purchaser, to take the majority's example, must genuinely believe that the seller had the right to sell the article purchased. In the context of a nonrenewal decision, the franchisor must have the genuine intent to withdraw from a territory or must have the sincere belief that continued operation by the franchisee will not provide an economic rate of return.
The majority utterly fails, however, to state what the franchisor must sincerely believe or what it must genuinely intend in setting the offer price. According to the majority, the franchisor must have only some kind of floating goodwill. Because it is so ephemeral, a franchisee will virtually never be able to show its absence. Moreover, I have difficulty understanding how this goodwill is supposed to help the franchisee.*fn7
2. The second problem with the majority's definition of bona fide is that it is at odds with this court's holding in Robertson v. Mobil Oil Corp., 778 F.2d 1005 (3d Cir. 1985). In Robertson, although we were dealing specifically with the provision for termination or nonrenewal of a franchise based on "bona fide customer complaints," we explicitly held "that something more than the common definition of bona fide" was required by the PMPA. 778 F.2d at 1008. "Otherwise, inaccurate though sincere complaints would justify non-renewal and PMPA's purpose of protecting franchisees from unfair termination or non-renewal would be defeated." Id. (citation omitted). Accordingly, we held, "A definition of 'bona fide' in PMPA that accommodates common usage and is fair to all parties is 'sincere and having a reasonable basis in fact.'" Id.
Although the majority understands its task to be determining "precisely what our Robertson definition requires" in the context of the sales offer, typescript at 8, the majority never pursues this task. Specifically, the majority ignores Robertson 's admonition that something more than the common definition of bona fide is required to protect franchisees from unfair treatment. The majority offers no reason that "bona fide" should have a meaning in the context of a sale offer that is different from its meaning in the context of customer complaints, i.e., possessing an objective component.
3. In addition to the flaws with the majority's "common legal definition" of the term "bona fide," I cannot agree with the majority's view that the PMPA intends only that the franchisor treat the franchisee as it would any potential purchaser. If that were all Congress intended, this provision would not have been necessary. Although the majority's standard of bona fide is consistent with this vision of the statute because it reduces this provision almost to irrelevancy, I believe differently: Congress intended this provision to equate the position of the franchisee with that of the typical, potential purchaser not by inaction but by compensating for the franchisee's unequal bargaining relationship.
Unlike a typical prospective buyer, a franchisee may have made specific personal investments premised upon his "reasonable expectation of continuity." The franchisee will lose that investment, however, if he is unable to continue to operate the property. He may have purchased a nearby house, and, with his family, have built up a local circle of friends. He may have invested in the property itself, customizing it to his personal desires or perhaps also increasing the property's value to others. He may have worked hard to provide good service and thereby built up a loyal clientele, increasing the property's goodwill. Thus, the franchisee cannot simply turn away from an unfair offer or from an offer evidencing the franchisor's true desire not to sell without losing significant, personal investments. The franchisee's investment in his station, which the typical potential purchaser lacks, gives the franchisor extra bargaining power over the franchisee.
The PMPA responds to this unequal bargaining power. In dealing with a typical potential buyer, the majority points out, a franchisor decides not only "at what price to offer" its property but also, preliminarily, "whether" to offer the property at all.*fn8 Typescript at 15. In contrast, the PMPA obligates the franchisor to make a bona fide offer to a franchisee, whether it wants to sell the property or not. Essentially, the statute obligates the franchisor to make an offer to the franchisee as if it truly wanted to sell the property (not necessarily to the franchisee but to someone). If it truly wanted to sell the property, however, the franchisor would part with it at fair market value, for that, by definition, is the highest price an informed, uncompelled buyer would pay. Such a price does not provide the franchisee a windfall but only puts the franchisee in a position equal to the typical purchaser who is under no pressure to buy the property because of personal investments in it. Congress indicated its desire to enable a franchisee to purchase property at such a price by mandating that the franchisor permit the franchisee to match the offer of any other would-be purchaser. 15 U.S.C. § 2802(b)(3)(D)(iii)(II).
Only by placing an affirmative obligation on the franchisor such as I now described could Congress enable the franchisee to make the purchase at a price that others would be willing to pay. By failing to recognize the differences between the franchisee and other prospective buyers, the majority fails truly to equate them.*fn9
In sum, I find all of the reasons supporting the majority's position flawed. The position of the bona fide offer provision in the statute demonstrates that it represents a substantive not a procedural restriction and demonstrates that Congress intended it to mean something other than "in good faith and in the normal course of business." The offer decision is not a self-interested business judgment but a compliance judgment that Congress intended as a compromise of the interests of franchisor and franchisee. To the extent that the bona fide offer provision does not prevent discriminatory terminations or nonrenewals, its proper purpose can only be the prevention of franchisee dislocation through the equalization of bargaining power, and that goal is not served by permitting the franchisor to make any offer price it desires.
Furthermore, far from giving effect to the common definition of bona fide, the majority fails to provide an intent or belief that the franchisor must genuinely have. The majority also contradicts this Court's previous definition of bona fide in the PMPA context as "sincere and having a reasonable basis in fact" without differentiating the two contexts. And even as the majority attempts to place the franchisee in an equal position to that of typical purchasers, the majority fails to respect the inherent differences between the franchisee and the typical purchaser. The bona fide offer provision reflects Congress's understanding that only through a special affirmative obligation on the franchisor could Congress equalize the bargaining positions of the parties.
I do not contend that the majority's justifications are without economic support. In its conclusion, the majority defends the discretion its result leaves to the franchisor on the grounds that the property will belong in the end "to whoever values it most." Typescript at 21. That, however, is the general result of free markets; in this case, Congress decided to interfere with the market.
As discussed above, franchisees may value a station not only because of the income it produces but also because of the stability that comes from having lived and worked in the same place for many years. Congress may have been concerned about franchisees would be unable to pay franchisors the full value of these aspects of stability. Additionally, Congress may have enacted the bona fide offer provision in recognition that much of a station's value will derive from the goodwill generated by the franchisee. To this extent, the offer provision prevents the simple unfairness of permitting franchisors to demand payment for investments made by franchisees. Whatever Congress' inspiration, I believe we must construe the ambiguities of the phrase "bona fide" in a manner that gives it meaning, not a manner that makes it irrelevant.
The proper interpretation of bona fide should start from an analysis of the substantive restriction Congress has imposed on the franchisor. My understanding of this restriction is not far from the position, at one point enunciated by the majority, that the franchisor's offer must be "the same as that which the franchisor would make in contemplation of negotiation with any prospective buyer." Typescript at 15. I would make only two subtle, but important changes to this initial position. First, I would add that the offer must be the same as that which the franchisor would make if it truly wished to sell the property. Otherwise, the statutory restriction would have no meaning, for it would only be requiring that which the franchisor would do on its own.
Second, I would omit the concept of negotiation. Even when it actually desires to sell, a seller often makes an unrealistic initial offer in contemplation of negotiation. I assume the majority leaves unsettled whether the franchisor's obligation to make an offer in good faith includes the obligation to continue to negotiate in good faith. If it does not, however, as at least one court has held, see Shell Oil Co. v. Neuenfeld, Business Franchise Guide (CCH) P 8120 (C.D. Cal. 1983), the mere requirement to make an offer that a franchisor would make in contemplation of negotiations would not place the franchisee in the position of the typical purchaser. If the statute does not obligate continuing negotiations, the franchisor must make an initial offer that it would expect some willing potential buyer to accept.
To rephrase the restriction Congress has placed on the franchisor: the franchisor must make the same kind of offer that it would make if it truly wished to sell the property at maximum realizable value without negotiation. In such a situation, the franchisor would make an offer that it considered to be at fair market value because, by definition, the fair market value of a property is the highest price a willing purchaser would pay.
Having determined the substantive restriction Congress wished to impose on the franchisor, I now must consider the test by which the courts should determine whether the franchisor complied with that restriction. However, I need not consider this question anew, for I can see no reason to differentiate this test from that set out in Robertson, albeit there in the context of bona fide customer complaints. As in Robertson, I believe our task should be to determine if the franchisor's attempt at compliance with the obligation to make an offer at fair market value is "sincere and has a reasonable basis in fact." In other words, we should not determine if the franchisor's offer is at fair market value. Rather, we should judge the bona fides of the franchisor's offer by determining whether there was a reasonable (objective) basis in facts and analysis for the franchisor's appraisal.
In contrast to my disagreement with the majority opinion, which is broad, my disagreement with the district court is narrow. The district court found that Amoco sincerely believed its offer to be at fair market value, and it found that Amoco's valuation method was "reasonable." The district court failed to find, however, that the actual appraisal "had a reasonable basis in fact." Slatky presented evidence that the land appraisal was based on out-of-date and inappropriate comparables and that the improvements appraisal did not represent local costs. Slatky also presented the testimony of independent appraisers that disagreed markedly with the evaluations by Amoco. Indeed, Amoco eventually hired an independent appraiser who also appraised the property at a value more than $31,000 less than that offered by Amoco. I believe the district court had an obligation to weigh this conflicting evidence and to determine whether there was a reasonable basis in facts and analysis for Amoco's appraisal.*fn10 I would therefore reverse the judgment of the district court and remand for such a determination.