Westfield Centre Service, Inc. v. Cities Service Oil Co.

• Citation: 432 A.2d 48,86 N.J. 453
• Parties: WESTFIELD CENTRE SERVICE, INC., a Corporation of the State of New Jersey and James Galligan, Individually and as President of Westfield Centre Service, Inc., Plaintiffs-Respondents, v. CITIES SERVICE OIL COMPANY, a Delaware Corporation authorized to do business inNew Jersey, Defendant-Appellant.
• Decision Date: 29 June 1981
• Court: United States State Supreme Court (New Jersey)

Page 453

86 N.J. 453

432 A.2d 48

WESTFIELD CENTRE SERVICE, INC., a Corporation of the State of New Jersey and James Galligan, Individually and as President of Westfield Centre Service, Inc., Plaintiffs-Respondents, v. CITIES SERVICE OIL COMPANY, a Delaware Corporation authorized to do business inNew Jersey, Defendant-Appellant.

Supreme Court of New Jersey.

Argued Feb. 9, 1981.

Decided June 29, 1981.

Andrew S. Polito, Newark, for defendant-appellant (Mattson, Madden & Polito, Newark, attorneys; Andrew S. Polito and Frank D. Angelastro, Newark, of counsel and on the briefs).

Vincent K. Loughlin, Westfield, for plaintiffs-respondents (Johnstone & O'Dwyer, Westfield, attorneys.)

The opinion of the Court was delivered by

SCHREIBER, J.

In this case we are called upon to interpret sections of the Franchise Practices Act (Act), N.J.S.A. 56:10-1 et seq., relative to the termination of a franchise, N.J.S.A. 56:10-5, and the remedies, including attorneys' fees, available to a franchisee upon termination, N.J.S.A. 56:10-10. Interrelated with these interpretive questions are constitutional due process and equal protection issues.

These various problems arose out of an action instituted by Westfield Centre Service, Inc. (Westfield Centre), and James Galligan, its director, officer and sole shareholder, against Cities Service Oil Co. (Cities Service) to enjoin its sale of the property on which plaintiff's gasoline station was located, to continue its franchise arrangement with Cities Service, and to collect compensatory and punitive damages and attorneys' fees. The trial court granted a temporary injunction preventing sale of the property and termination of the franchise. While the suit was pending, the station was closed and the complaint was amended to seek additional damages for plaintiffs' having been forced out of business. The trial court, which had vacated the injunction, dismissed the plaintiffs' claims for damages but awarded plaintiffs attorneys' fees pursuant to N.J.S.A. 56:10-10. 158 N.J.Super. 455, 386 A.2d 448 (Ch.Div.1978), supp. 162 N.J.Super. 114, 392 A.2d 243 (Ch.Div.1978).

Defendant appealed, asserting inter alia that the trial court's interpretation of the termination and remedial clauses was unconstitutional. The Appellate Division accepted the trial court's holding of constitutionality and interpretation of the statutory provisions involved, but remanded the matter for a recalculation of plaintiffs' attorneys' fees. 172 N.J.Super. 196, 411 A.2d 714 (App.Div.1980). This Court granted defendant's petition for certification concerning the construction and constitutionality of the termination and remedy provisions in the Act and denied plaintiffs' cross-petition with respect to the remand for recalculation of attorneys' fees. 85 N.J. 92, 425 A.2d 259 (1980).

I

The detailed facts are set forth in the trial court's initial decision, 158 N.J.Super. 455, 386 A.2d 448 and need not be repeated here except to the extent required for an understanding of the issues raised on this appeal. The focus of this dispute is a retail gasoline service station located on land owned by Cities Service in Westfield. It operated in a traditional manner, offering gasoline, making repairs, and selling tires, batteries and accessories. James Galligan, who had worked as a part-time attendant at the station for 20 years, organized Westfield Centre to purchase the business. The seller, a corporation wholly owned by Raymond Ditzel, was a lessee-franchisee of Cities Service, marketing gasoline under the trade name of Citgo. On May 1, 1973 the sale was consummated. The purchase price totalled $35,000, of which $18,673 was allocated for accounts receivable, $5,870 for inventory, $2,457 for equipment and $8,000 for goodwill. Ditzel's salary during the two previous years had been $17,260 and $13,515 and the corporate profits had been nominal.

In conjunction with the purchase, plaintiff entered into several agreements with Cities Service. An equipment lease covered tanks, pumps and other related personalty. A credit card agreement provided for the handling of Citgo credit cards. A products agreement involved the sale of Cities Service gas and oil and a periodic payment plan and security agreement governed the terms of payment for gasoline and rent. Lastly, there was a station lease of the property and improvements. The lease term was 12 months commencing May 1, 1973, automatically renewable annually thereafter unless, at least 90 days prior to April 30, either party gave notice of termination. The time periods of all other agreements were coordinated with the lease.

New agreements in substantially the same form were executed for the year beginning May 1, 1975. The one significant difference was the addition of a provision that stated in part that

(i)f the station premises covered by this Lease are sold by Lessor, or if Lessor shall elect to remove and/or reconstruct substantially all the buildings and improvements now located on the station premises in accordance with plans it has developed therefor, then in any such event, Lessor shall have the option to terminate this Lease upon thirty (30) days' prior written notice of such termination delivered to Lessee.

On June 25, 1975, Cities Service notified Westfield Centre by letter that Cities Service proposed to offer to sell the station property for $259,000. The letter further stated:

Please advise if you are interested in purchasing the property. If we do not hear from you within 30 (thirty) days, we will consider that you have no interest in purchasing the property and it will be placed for sale on the open market.

Plaintiffs objected to the proposed sale. On January 22, 1976, Cities Service advised plaintiffs that the lease and other agreements, all expiring by their terms on April 30, 1976, would not be renewed.

Plaintiffs commenced suit in April 1976 in the Superior Court, Chancery Division, for an order enjoining defendant from proceeding with the sale and from interfering with plaintiffs' use of the property and for an order directing defendant to renew the lease and pay compensatory and punitive damages and attorneys' fees. Defendant thereupon removed the case to the United States District Court. In May 1976, the district court granted defendant's motion for summary judgment, noting that the suit was based on a superseded 1973 lease and that in any event abstention was appropriate to enable the state courts to interpret the statute.

Following institution of this action on May 26, 1976, the trial court granted an interlocutory injunction restraining Cities Service from interfering with plaintiff's tenancy and from disposing of its ownership interest in the leased premises and directing defendant to continue to supply products to Westfield Centre. On July 31, 1977, Westfield Centre went out of business and the restraints were dissolved shortly thereafter. The demise of the business had been foreshadowed for some time, gasoline sales having declined sharply commencing in 1975 until the station closed in July 1977.

The evidence presented at trial disclosed that when he purchased the business, Galligan invested $10,000 of his own funds, and borrowed $20,000 from a bank and $5,000 from the seller. The loans were repaid from the business. In the fiscal year ending April 30, 1974, his first year of operation, Galligan drew a salary of $23,000 and the corporation earned a net profit of $11,326. In subsequent periods as the business declined, Galligan advanced additional funds to Westfield Centre. Westfield Centre's accountant testified that Galligan would have recouped his investment if the corporation had ceased operating and liquidated as of April 30, 1976. Utilizing a formula devised by the Internal Revenue Service, the accountant calculated that on the basis of Westfield Centre's operations, it had no goodwill as of the date it ceased functioning.

At the close of plaintiffs' case defendant moved for involuntary dismissal. The trial court found that plaintiff Galligan had recouped his initial $35,000 investment and there was no evidence of a causal relationship between defendant's attempts to sell the land and the station's closing. The court accordingly dismissed plaintiffs' claim for compensatory damages and damages based on unjust enrichment, leaving plaintiffs' claim for punitive damages and attorneys' fees. The claim for injunctive relief was dismissed as moot.

Most of the evidence presented in defendant's case concerned its reasons for deciding to sell the station property. In 1972, after experiencing two negative earnings years in its retail gasoline division, Cities Service analyzed its position and concluded that it was overinvested in real estate. As a result of this analysis the company launched pilot programs in states other than New Jersey to sell some stations and convert others to gasoline-only stations or gasoline with a small convenience store. The projects were successful and in 1974 the decision was made to implement the concept in New Jersey. In October 1974 an evaluation committee visited all Cities Service-owned stations in New Jersey and classified them as "keep," "dispose" or "keep-dispose," the latter classification occurring where the recommendation was not unanimous. Plaintiffs' station was classified "dispose" because a gasoline station at that location was not economically feasible. The committee's recommendation was accepted in February 1974 and was implemented by attempts to sell the property.

The trial court held that defendant had violated the Franchise Practices Act since good faith business reasons were not "good cause" justifying termination under N.J.S.A. 56:10-5. However, the court interpreted this provision to permit nonrenewal, by a franchisor choosing to dispose of its property, so long as the franchisor compensated the franchisee for the reasonable value of the franchisee's business as of the date the franchisor sought...