In a recent case decided by Judge R. Barclay Surrick, the U.S. District Court for the Eastern District of Pennsylvania was called upon to decide the ticklish issue of whether motive or intent is relevant in examining the termination of a franchise. In Atlantis Petroleum LLC v. Getty Petroleum Marketing Inc., the court articulated a bright-line test to decide when to look for the motive of the franchisor in terminating a franchise agreement.
Atlantis Petroleum LLC is a gasoline distributor that provides fuel to dealers in the Northeast and Mid-Atlantic states. Atlantis also took over operation of 75 service stations under a distributor agreement, operating three itself and subleased 72 others to local dealers. Because of a sudden drop in fuel prices, Surrick wrote in the opinion, Atlantis was forced to sell diesel fuel at a substantial loss and was indebted to Getty for more than $10 million. Getty advised Atlantis that it intended to terminate the distributor agreement, but the termination was avoided by the signing of a forbearance agreement and a cash management agreement.
These agreements permitted Getty to control certain aspects of the operations and required Atlantis to deposit its revenues into an account accessible by Getty. Atlantis also acknowledged the existence of defaults under the distribution agreement for failure to pay its overdue balance for fuel purchases, but Getty agreed to a temporary forbearance of its right to terminate the franchise relationship. At the end of 2010, the debt had been reduced to $6.5 million, which was the new credit limit extended by Getty, the opinion said.
In late 2010 or January 2011, Getty representatives informed Atlantis to find an alternative fuel supplier and credit card processor. In February, the opinion said, the outstanding balance had increased to over $7.1 million, at which point Getty advised fuel would no longer be supplied but that rent to Getty as prime landlord should continue. Atlantis found a new fuel supplier in a few days and reprogrammed its credit card processing equipment to prevent Getty from collecting the proceeds. In March, the parties attempted negotiations where Atlantis offered to pay a reduced amount with the balance being forgiven, and Getty countered with an offer of complete forgiveness if Atlantis surrendered the subleases and Getty were to retake control of the 75 dealer outlets. Atlantis rejected this offer and Getty sent a notice of termination asserting a default under the distributor agreement for failure to pay the outstanding debt. Getty filed suit in New York to enjoin operation and Atlantis filed suit in Pennsylvania to enjoin termination. Atlantis’ motion was granted and the case proceeded in Pennsylvania, according to the opinion.
Getty filed a motion for summary judgment seeking to dismiss Atlantis’ claim that the Petroleum Marketing Practices Act (PMPA) had been violated, and also sought summary judgment on its own claims for breach of the distributor agreement for failure to pay the outstanding balance and to terminate the subleases under a cross default provision. The PMPA limits the circumstances under which a franchisor may terminate a franchise and prohibits arbitrary or discriminatory terminations or non-renewals.
The court found that Getty did have sufficient grounds under the PMPA to terminate the distributor agreement because the statute expressly allows termination for “failure of a franchisee to comply with any provision of the franchise, which provision is both reasonable and of material significance.” An additional ground was satisfied under the statute where a “franchisee fails to pay the franchisor in a timely manner.” The court rejected Atlantis’ argument that the parties engaged in a course of conduct which permitted the balance to increase over time and that at the time of termination, the balance was within a tolerable range. The court held that Getty had in fact provided notice that it would not tolerate late payments, which eliminated the argument that accepting late payments was Getty’s prevailing trade practice. The court similarly held that the subleases could be terminated under the cross default provision as such a provision was reasonable and material to the franchise agreement because it permits Getty to totally end the franchise relationship upon a material default of the distributor agreement. The court held that Getty established permissible grounds upon which to terminate the sublease.
Atlantis then argued that the legitimate ground of untimely payments was a mere pretext and that the true reason for termination was the opportunistic usurping of the operation of Atlantis’ service stations, which is not a basis for terminating a franchise under the PMPA. The court acknowledged that, under the PMPA, a franchisee is free to rebut the franchisor’s case by producing evidence that the termination was in fact based on an illegitimate reason. The court nevertheless rejected Atlantis’ invitation to consider Getty’s motive. The court relied on several cases that addressed the issue and found that “assertions as to motive or bad faith by the franchisor to be irrelevant in evaluating the propriety of termination or non-renewal where the termination or non-renewal is based on conduct by the franchisee.” The court held that where an express right to terminate is articulated and satisfied, a court should not “consider reasons for the decision to exercise that right.” Although the PMPA does contain events that justify examining the motive of the franchisor, such as market withdrawal, nonpayment is not one of those instances. Because the court found Getty had established a ground for termination found in the PMPA based on the conduct of Atlantis, the court declined to evaluate Getty’s subjective intentions.
The court concluded that Getty was entitled to terminate the distributor agreement, was awarded money damages and was awarded possession of the 75 subleased locations. But the case is not concluded. Getty may have jumped the gun in withholding fuel deliveries for nonpayment. An issue of fact exists whether Getty’s cessation of fuel delivery was a mere suspension of service under the distributor agreement or a termination in violation of the PMPA without sufficient notice. The court denied summary judgment on this aspect of Atlantis’ complaint and Getty may be liable for premature termination of the distributor agreement.
The case has several lessons for negotiation and enforcement of forbearance agreements, as well as issues under the PMPA and the course of dealings. The case will be cited in the continuing struggle to find the proper role of motive in the enforcement of contracts.