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Slatky v. AMOCO Oil Co.

filed: September 30, 1987.

SLATKY, JOHN, APPELLANT
v.
AMOCO OIL COMPANY, APPELLEE



On Appeal from the United States District Court for the Middle District of Pennsylvania, D.C. Civil No. 85-1122.

Becker, Mansmann, Circuit Judges and Teitelbaum, District Judge.*fn* [Sitting August 20, 1986] Reargued before Gibbons, Seitz, Weis, Higginbotham, Sloviter, Becker, Stapleton and Mansmann, Circuit Judges. [Sitting May 4, 1987]

Author: Becker

BECKER, Circuit Judge

Under Title I of the Petroleum Marketing Practices Act, ("PMPA"), 15 U.S.C. §§ 2801-06, an oil company that terminates or fails to renew a franchise for a permissible business purpose unrelated to the franchisee's misconduct must make a "bona fide offer" to sell to the franchisee the leased property used by the franchisee in his business. §§ 2802(b)(2)(E)(iii)(I); 2802(b)(3)(D)(iii)(I). This appeal from the judgment of the district court, following a bench trial, in favor of appellee Amoco Oil Company and against one of its franchisees, appellant John Slatky, requires us to decide what this "bona fide offer" provision requires the oil company (hereinafter "distributor") to do and in what manner courts should scrutinize the distributor's offer in determining its bona fides.

The district court found that Amoco sincerely believed its offer price, derived from its internal business practices, was at fair market value and that the offer had a reasonable basis in fact because its procedures were reasonable, notwithstanding that the price was substantially higher than the estimate of independent appraisers retained by Slatky and by Amoco itself. We conclude that the district court erred in failing to insist that the offer be objectively reasonable, i.e., that it approach fair market value. We therefore reverse and remand for further proceedings.

I. The Statutory Scheme

Title I of the PMPA generally regulates the relationship between distributors of motor fuel, principally oil refiners, and their franchisees, principally retail gas station operators, many of whom lease their stations from the distributors. Evidence at Congressional hearings indicated that distributors had been using the threat of termination or nonrenewal to compel franchisees to comply with the distributor's marketing policies. See S. Rep. No. 731, 95th Cong., 2d Sess. 17-19, reprinted in [1978] U.S. Code Cong. & Ad. News 873, 875-77 (hereinafter "Senate Report"). In addition, Congress found that franchisors had used their superior bargaining power and the threat of termination to gain an unfair advantage in contract disputes. Id.

In passing the PMPA, Congress determined that franchisees had a "reasonable expectation" of continuing the franchise relationship while at the same time insuring that distributors have "adequate flexibility . . . to respond to changing market conditions and consumer preferences." Senate Report at 19. To accomplish these purposes, the PMPA works principally by limiting the grounds on which distributors may terminate or fail to renew a franchise. 15 U.S.C. § 2802. The PMPA also provides various notification requirements, some of which guarantee a franchisee an opportunity to correct any improper conduct with which he has been charged. See §§ 2802, 2804.

Most of the grounds for termination or nonrenewal involve some form of franchisee misconduct. For example, a distributor may terminate for a franchisee's failure to pay sums due under the franchise agreement, see § 2802(b)(C) (incorporating § 2802(c)(8)), or for a franchisee's "fraud or criminal misconduct . . . relevant to the operation" of the property, §§ 2802(b)(2)(C) (incorporating § 2802(c)(1)). A distributor may fail to renew because of numerous "bona fide customer complaints" about the franchisee's operations of the property, see § 2802(b)(3)(B), or because of a franchisee's failure to operate a property "in a clean, safe, and healthful manner," see § 2802(b)(3)(C).

To assure distributors' market flexibility, however, the Act also permits termination or nonrenewal because of certain distributor business decisions. So long as a franchisee agreement, a distributor may terminate or fail to renew a franchise agreement if it decides "in good faith and in the normal course of business" to withdraw from the relevant geographic market area. See § 2802(b)(2)(E).*fn1

In addition, for three-year franchisees, a distributor may fail to renew the agreement of a franchisee who leases a property from the distributor if the distributor determines "in good faith and in the normal course of business:

(I) to convert the leased marketing premises to a use other than the sale or distribution of motor fuel,

(II) to materially alter, add to, or replace such premises,

(III) to sell such premises, or

(IV) that renewal of the franchise relationship is likely to be uneconomical to the franchisor [distributor] despite any reasonable changes or reasonable additions to the provisions of the franchise which may be acceptable to the franchisee."

§ 2802(b)(3)(D)(i).

Whenever a distributor terminates or fails to renew a franchise relationship for one of these business purposes, however, he must meet several other requirements. First, the distributor may not terminate or fail to renew in order to convert the property to direct management by its own employees or agents. See § 2802(b)(2)(E)(ii), 2802(b)(3)(D)(ii). Second, the distributor must either make a "bona fide offer" to sell the property or, if applicable, provide the franchisee a right to first refusal on an offer made by another. See §§ 2802(b)(2)(E)(iii)(I); 2802(b)(3)(D)(i).*fn2 The meaning of the "bona fide offer" requirement under the nonrenewal subsection, § 2802(b)(3)(D)(i), is the principal issue in this case.

II. Facts and Procedural History

For several years, Slatky was an Amoco franchisee, leasing a gasoline station in York, Pennsylvania. In May, 1985, following a year in which Slatky's sales volume started to decline, Amoco determined not to renew Slatky's franchise on the ground that renewal would be uneconomical despite any reasonable changes or additions to the franchise relationship to which Slatky might agree. Amoco gave proper notice, and because it based its nonrenewal on § 2802(b)(3)(D)(i)(IV), it proceeded, in a letter dated June 28, 1985, to offer to sell 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.

First, Amoco's employee Melvin O'Dell evaluated the land alone in early May, 1985. O'Dell based his appraisal on three allegedly comparable properties, which had been sold several years before. He testified, however, that he made no effort to verify his information about 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.*fn3 Based on this analysis, O'Dell appraised the value of the land at $155,000.

Following the land appraisal, another Amoco employee, Charles 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. 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. Although he did not disagree 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 his request to O'Dell.*fn4

O'Dell then reviewed his appraisal and came up with a land value of $185,000, $30,000 higher than the first estimate. 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 the station to Slatky for $306,300 ($185,000 for the land plus $121,300 for the improvements), explicitly stating that this figure did not cover the tanks and pumps. After Slatky filed his complaint in this case, Warfield sent Slatky a letter explaining that the exclusion of the tanks and pumps was mistaken and offering the property for $256,300 plus $50,000 for the tanks and pumps.

Slatky's suit seeks damages and injunction ordering Amoco to sell the property to him at fair market value. He did not challenge the grounds for nonrenewal but claimed that Amoco's offer of $306,300 was not a bona fide offer because it was not at fair market value. Two certified appraisers hired by Slatky valued the property respectively at $158,200 (including pumps and tanks) and $145,000 (not including pumps and tanks). An independent appraisal eventually commissioned by Amoco for this litigation appraised the property at $221,000 also including pumps and tanks.

After a bench trial, the district court held that Amoco had fulfilled its obligation to make a bona fide offer. The court accepted as a general standard the requirement that the offer be "sincere and have a reasonable basis in fact."*fn5 The court found the sincerity standard met because Amoco had followed its "general" procedure for determining the selling price of property and because it believed its offer price to be at fair market value. The court also found that Amoco's offer had a reasonable basis in fact because, although its appraiser had not followed formal appraisal techniques, "the procedures used by them were reasonable" and hence the "offer was not arbitrarily made." The district court made no finding whether the offer actually approached fair market value, as Slatky claimed the statute required, or whether the offer was a reasonable estimate of fair market value. This appeal followed.

III. Amoco's Subjective Good Faith Standard

A.

Amoco's principal contention is that we should interpret the term "bona fide" to require that a distributor make its offer only in subjective good faith. Amoco grounds this argument on an analogy between the distributor's determination of an offer price and its original determination not to renew a franchise because of a business reason permitted under § 2802(b)(3)(D). The statute requires only that the latter decision be made "in good faith and in the normal course of business." Id. The Senate Report states:

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 court 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 of distribution of motor fuel, is a wise business decision.

Senate Report at 37. Contending that the decision about an offer price is essentially the same kind of business judgment as a decision not to renew the franchise, Amoco claims that the same good faith standard designed to prevent second-guessing of a distributor's business judgment should apply.

We reject Amoco's suggestion for several reasons. First and fundamentally, we disagree with Amoco's basin analogy between a nonrenewal decision on the one hand and the determination of a bona fide offer price on the other. We have noted that Congress wished distributors to have the flexibility to respond to changing market conditions: when making a nonrenewal decision under § 2802(b)(3)(D), distributors make such a marketing decision. So long as nonrenewal was truly based on such a marketing decision, Congress precluded courts from examining its merits. Congress did not, however, preclude courts from scrutinizing the merits of termination or nonrenewal decisions that result from a franchisee's misconduct. Whether a franchisee has truly created health or safety violations or violated a term of the franchise agreement is a question the courts may examine freely. Congress thereby distinguished between decisions involving general business matters and decisions turning on a right created by the PMPA.

Like a termination or nonrenewal decision for franchisee misconduct, the determination of an offer price is not a business decision. It is not a decision that the distributor decides on its own to make. Rather, the distributor sets a bona fide price only because the statute requires it to do so. Indeed, when a distributor fails to renew a franchise because of a decision to convert a property to a different use, or alter the premises, see § 2802(b)(3)(D)(i)(I)(II), selling the property will interfere with its business plans. The determination of an offer price therefore represents something we may call a "compliance judgment," a judgment about how best to protect the company's interests while complying with the statute. Congress did not instruct the courts to defer to such decisions.

The legislative history reveals this distinction. Under H.R. 1300 (94th Cong), the predecessor to Title I of the PMPA, a franchisee could not obtain injunctive relief if the franchisor failed to renew on the basis of "a determination made by the franchisor in good faith and in the normal course of business" even if such nonrenewal was prohibited under the bill. H.R. 1300 § 105(e)(1)(A). But such nonrenewal decisions were remediable with money damages, which would have compensated the franchisee for the loss of its reasonable expectation of renewal. Id. § 105 (e)(2).

Under H.R. 1300, the distributor could mitigate damages by making a bona fide offer. Responding to the pleas of the major oil companies, see, e.g., Hearings on H.R. 130, Senate Subcomm. on Energy Conservation and Regulation of the Energy and Natural Resources Committee, Publ. No. 95-61, 250 (95th Cong., 1st Sess.) (statement of Duval Pickey, Vice President of Marketing for Exxon), the next Congress made a bona fide offer a surrogate for damages, H.R. 130 (95th Cong.), and that provision became law. Under either bill, however, Congress treated the bona fide offer requirement not as a statutory recognition of a business judgment bus as a form of compensation to the franchisee for the harm resulting from the distributor's valid business judgment. We would misread that legislative history and permit distributors ...


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