Mustang Marketing, Inc. v. Chevron Products

• Decision Date: 29 April 2005
• Docket Number: No. 03-56516.,03-56516.
• Citation: 406 F.3d 600
• Parties: MUSTANG MARKETING, INC., a California corporation, Plaintiff-Appellant, v. CHEVRON PRODUCTS COMPANY, a division of Chevron U.S.A. Inc., a California corporation; and Chevron Texaco Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

406 F.3d 600

MUSTANG MARKETING, INC., a California corporation, Plaintiff-Appellant, v. CHEVRON PRODUCTS COMPANY, a division of Chevron U.S.A. Inc., a California corporation; and Chevron Texaco Corporation, Defendants-Appellees.

No. 03-56516.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 18, 2005.

Filed April 29, 2005.

Stephen Thomas Erb, Esq., San Diego, CA, for the plaintiff-appellant.

Michael L. Armstrong, Esq., Morgan, Lewis & Bockius LLP, Los Angeles, CA, for the defendants-appellees.

Appeal from the United States District Court for the Central District of California, David O. Carter, District Judge, Presiding. D.C. No. CV-02-00485-DOC.

Before: TASHIMA, WARDLAW, Circuit Judges, and COLLINS,^* District Judge.

COLLINS, District Judge:

Mustang Marketing, Inc. ("Mustang") brought this suit against Chevron Products Company ("Chevron") alleging a violation of the Petroleum Marketing Practices Act ("PMPA"), 15 U.S.C. § 2801 et seq., with respect to a gas station (the "Service Station") that Chevron had leased from Macerich and then franchised to Mustang. Mustang alleges that Chevron failed to comply with a provision of the PMPA requiring Chevron to assign to Mustang any option it possessed for an extension of the underlying lease after the underlying lease had expired. Additionally, Mustang alleges that Chevron violated the PMPA by entering into a subsequent lease with Macerich after ending Mustang's franchise through expiration of the original underlying lease and lock Mustang out of the deal.

The district court granted summary judgment in favor of Chevron on all counts. Mustang brings this appeal on the questions of: (1) Whether Chevron relying upon PMPA § 2802(c)(4) can refuse to assign Mustang the option to extend the underlying lease; (2) Whether Chevron may end its franchise relationship with Mustang based upon expiration of its underlying lease with Macerich and subsequently negotiate a new underlying lease with Macerich and locking Mustang out of the deal; (3) Whether, if any of these allegations are true, any exemplary damages may be awarded to Mustang; (4) Whether the proposal sent by Chevron to Mustang in April constitutes a breach of contract in California; and (5) Whether this case, if remanded, should be reassigned to a different district judge?

I. BACKGROUND

On April 28, 1971, Chevron's predecessor in interest, Standard Oil Company of California, entered into the underlying lease (Ground Lease) for the Service Station for a term expiring May 31, 1992, with two options to extend with Macerich's predecessor in interest. Chevron then took over the lease and exercised the five-year and four-year options extending its tenancy through May 31, 2001. Meanwhile, Macerich succeeded to the lessor's interest under the underlying lease. Throughout the entire term of the underlying lease, Chevron subleased the premises to independent service station operators licensed to sell Chevron-branded motor fuel.

The underlying lease granted Chevron, as lessee, the following right for extending its tenancy:

7. Lessee, while in possession, shall have the prior right to lease the whole or any part of the leased premises or any larger parcel which includes the leased premises, if Lessor receives from a third party an acceptable bona fide offer, or if Lessor offers, to lease such property for a term commencing on or after the expiration of the term hereof or any extension thereof ...

Taking language from Section 7 itself, therefore, Mustang refers to this right as the "Prior Right to Lease."¹ Chevron says that this section merely gave Chevron the right to match: (1) an offer for a new underlying lease received by Macerich; (2) during Chevron's tenancy; (3) that Macerich wanted to accept.

In December 1998, Mustang purchased the previous franchisee's equipment, goodwill, and PMPA franchise rights. Although aware that the underlying lease expired on May 31, 2001, Mustang's principal, Robert Lintz ("Lintz"), correctly predicted that Chevron would be very interested in extending its underlying tenancy.² However, even if Chevron elected to depart, Lintz assumed Mustang would be well-positioned to obtain its own direct lease from Macerich.

Approximately one year before the underlying lease expired, Chevron evaluated the Service Station. Chevron concluded that the Service Station's location was attractive but that the Service Station itself (particularly the service bays) no longer met Chevron's image requirements. Based on this conclusion, Chevron decided that it would attempt to keep its brand at the site, but only if the Service Station could be demolished and rebuilt with modern improvements.

Chevron says that its evaluation meant that the Service Station could no longer be operated as a dealer-leased site. Chevron states that the significant costs of constructing a new station (estimated at $1,300,000) mandated that the Service Station be converted either to a company-owned site or a dealer-owned site (depending on who financed the improvements). However, there was uncertainty as to the outcome since everything depended on Macerich's approval of a new lease.

On April 18, 2000, Mustang's franchise agreements were renewed through May 31, 2001.³

In March 2000, Chevron Property Specialist Jeffery Cole ("Cole") wrote to Mary Klein-Paquin ("Paquin") at Macerich stating that Chevron "clearly prefers" to obtain a long-term lease for the Service Station property upon expiration of Chevron's current underlying lease. Meanwhile, Chevron's Retail Account Manager Julie Humphreys ("Humphreys") and her supervisor, Scott Lystad, approached Lintz with an offer to buy Mustang's Service Station interests for $750,000. Mustang did not wish to sell especially at the price Chevron offered. Lintz proposed a price of $775,000, but only on the condition that Chevron agree to sell to Mustang Chevron's interest in two other service stations.

Humphreys wrote to Lintz on May 8, 2000, setting forth Chevron's proposal to pay $775,000. In the preamble to the Chevron-provided letter was the following statement:

This letter sets forth only a proposal for your consideration. Neither you nor Chevron will be bound or have any obligations with respect to this proposal unless and until the following conditions have been satisfied.

The sale would be subject to four conditions: (1) Chevron's ability to secure extended tenancy from Macerich beyond May 31, 2001; (2) Chevron's ability to obtain permits to remodel the facility; (3) approval by Chevron's management; and (4) the parties' execution of an "Agreement for Mutual Termination of Dealer Lease," substantially in a form purportedly attached to the May 8th letter.

Humphreys' letter also did not mention the two service stations Lintz desired to purchase from Chevron. Lintz therefore handwrote those additional terms on Humphreys' letter, signed in Chevron's signature block: "ACCEPTED AND AGREED TO," and returned the letter to Humphreys. Humphreys telephoned Lintz to explain that she could not add language to Chevron's letter, then wrote "Void due to Bob putting conditions" on her file copy.

At around the same time Chevron and Mustang attempted to negotiate a new lease with Macerich. Given the significant investment required to rebuild the Service Station, Chevron says that both it and Mustang insisted that Macerich agree to an initial lease term of at least twenty years. However, Macerich refused to accept such a lengthy term and insisted on a term of five years (according to Chevron). Chevron also states that the rent that Macerich was seeking was unacceptable.

Chevron made a second written offer to Mustang for $775,000 on June 22, 2000. Mustang still did not wish to sell. On February 21, 2001, Chevron employees Cole, Humphreys and Michael O'Neal ("O'Neal"), told Lintz in a meeting at Chevron's offices that if Mustang was not willing to sell its Service Station interests to Chevron, then Chevron would not extend its underlying lease. Lintz protested Chevron's negotiating tactics and insisted the business was worth more than $775,000.

Apparently all the parties were also aware that Macerich wanted to convert the property to a fast-food restaurant as soon as Chevron's underlying lease expired.

Chevron then hand-delivered to Lintz its February 21, 2001, written notice of non-renewal of the franchise relationship ("Non-renewal Notice"), relying solely upon expiration of Chevron's underlying lease on May 31, 2001. Mustang claims that Chevron never offered to assign to Mustang the Prior Right to Lease as required by § 2802(c)(4)(B) of the PMPA. Both orally and in letters dated February 22, March 5, and June 4, 2001, Lintz insisted that the PMPA required Chevron assign to Mustang its Prior Right to Lease, which Chevron refused to do. With the Non-renewal Notice now pending, on March 2, 2001, Chevron offered to pay Mustang $700,000 for its Service Station interests.

In letters dated March 2, April 3, and April 26, 2001, Chevron told Lintz that Chevron would not renew its underlying lease with Macerich unless and until Chevron had reached a "mutually satisfactory agreement" for the purchase of Mustang's interests. On April 16, 2001, Chevron offered Mustang $775,000. On April 23, 2001, Chevron offered $850,000.

Unknown to Lintz, Macerich was finding that Chevron's intent to exercise the Prior Right to Lease was dissuading all other prospective tenants from offering to lease the Service Station property. In fact, aside from offers by Mustang and Chevron, Macerich received no other offers.

During March through May 1, 2001, Chevron and Macerich exchanged written lease proposals. In each proposal, Chevron requested an initial base term of only two years, to be followed by multiple five-year options exercisable in Chevron's discretion. Macerich's Mark Strain ("Strain") testified that such short initial base terms were generally unacceptable to Macerich, as were...