Nassau Blvd. Shell Service Station, Inc. v. Shell Oil Co.

• Decision Date: 18 April 1989
• Docket Number: D,1011,Nos. 984,s. 984
• Citation: 875 F.2d 359
• Parties: NASSAU BOULEVARD SHELL SERVICE STATION, INC., and Bruce Mason, Plaintiffs-Appellants, Cross-Appellees, v. SHELL OIL COMPANY, Defendant-Appellee, Cross-Appellant. ockets 89-7125, 89-7159.
• Court: U.S. Court of Appeals — Second Circuit

Page 359

875 F.2d 359

57 USLW 2644

NASSAU BOULEVARD SHELL SERVICE STATION, INC., and Bruce Mason, Plaintiffs-Appellants, Cross-Appellees, v. SHELL OIL COMPANY, Defendant-Appellee, Cross-Appellant.

Nos. 984, 1011, Dockets 89-7125, 89-7159.

United States Court of Appeals Second Circuit.

Argued March 1, 1989.

Decided April 18, 1989.

Lenard Leeds, Carle Place (Leeds & Morelli, of counsel), for plaintiffs-appellants, cross-appellees.

James L. Michalak, Houston, Tex., for defendant-appellee, cross-appellant.

Before FEINBERG, TIMBERS and ALTIMARI, Circuit Judges.

ALTIMARI, Circuit Judge:

Plaintiffs-appellants Nassau Boulevard Shell Service Station, Inc. ("Nassau Blvd. Shell") and Bruce Mason, the station's owner-operator, appeal from an order of the United States District Court for the Eastern District of New York (Glasser, J.) denying their motion for a preliminary injunction. Plaintiffs sought injunctive relief barring defendant Shell Oil Company ("Shell") from terminating the franchise and lease agreement between Mason and Shell. On this appeal, plaintiffs contend that the district court erred in finding Shell's notice of termination timely pursuant to the termination provisions of the Petroleum Marketing Practices Act, 15 U.S.C. Secs. 2801-2841 (1982) ("PMPA"). Plaintiffs also argue that the district court employed the wrong legal standard in denying their request for injunctive relief.

Shell cross-appeals from the district court's order denying its motion for a preliminary

injunction to compel Mason to vacate and surrender the premises leased to Mason by Shell. On this appeal, as in the district court, Shell argues that it was "automatically entitled" to the relief it sought upon the district court's denial of the plaintiffs' motion. For the reasons set forth below, we affirm the judgment of the district court.

BACKGROUND

Mason, as a franchisee of Shell, is engaged in the business of selling motor fuel and other petroleum products bearing Shell's brand names and trademarks. The franchise agreement provides that Shell may terminate the franchise upon the occurrence of "fraud or criminal misconduct by [Mason] relevant to the operation of [his] station," and for various other reasons. In addition, the PMPA provides statutory grounds for which a franchisor may terminate the franchise. 15 U.S.C. Sec. 2802(b)(1)-(c)(12).

Sometime in December 1987 or January 1988, Thomas Papadopoulos, another Shell franchisee, informed Shell that Mason, who was known by Papadopoulos to be a Shell dealer, had purchased gasoline at Papadopoulos' Shell station using a Visa credit card issued to someone named "Brown." Since the alleged impropriety did not involve a credit card issued by Shell, Shell referred the matter to the card's sponsor--Goldome Visa. Goldome, in turn, notified the Nassau County Police Department ("the police") who conducted an investigation of the incident.

In May 1988, Mason was arrested "on suspicion of certain alleged credit card improprieties." The police notified Shell of Mason's arrest and informed them that a Visa credit card issued to Joan Brown may have been misappropriated at the Nassau Blvd. Shell Station by Mason. The police, however, did not disclose all of the details of their investigation of Mason to Shell.

After receiving the news of Mason's arrest, Shell tried to ascertain whether it had sufficient grounds to terminate Mason's franchise. Shell determined that since the mere occurrence of an arrest, without a conviction, is not an indication of criminal culpability, it would be inappropriate to terminate Mason's franchise without further inquiry. Toward that end, Shell first conducted a series of conversations with counsel for Mason during May and June. Then, on July 7, 1988, W.R. Davenport, the manager of Shell's New York Retail Marketing District ("Davenport"), met with Mason. At this meeting, Mason related that he was "embarrassed" by the credit card incident and that he was "undergoing therapy."

On October 14, 1988, Shell issued Mason a formal Notice of Termination of his franchise and lease, effective January 24, 1989. The stated grounds for termination were: (1) failure to comply with provisions of the franchise which are reasonable and materially significant to the franchise relationship, 15 U.S.C. Sec. 2802(b)(2)(A); and (2) the occurrence of a relevant event, including fraud, criminal misconduct, and knowing failure of the franchisee to comply with state laws relevant to the operation of the franchise, 15 U.S.C. Sec. 2802(b)(2)(C), (c)(1) and (c)(11).

Both sides in this litigation made motions to the district court seeking preliminary injunctions. Mason sought to prevent the termination; Shell sought vacation and surrender of the leased premises. Judge Mishler granted Mason's motion pending a hearing. The hearing was held on February 3, 1989, and at that time Judge Glasser denied both motions. On February 10, 1989, upon an emergency motion made by Mason, we granted a stay and expedited this appeal. Nassau Boulevard Shell Station, Inc. v. Shell Oil Co., 869 F.2d 23 (2d Cir.1989). At oral argument on March 1, 1989, we vacated the stay.

DISCUSSION

A. Denial of Nassau Blvd. Shell and Mason's Motion.

1. Timeliness of the termination.

Under the PMPA, "[a] failure by the franchisee to comply with any provision of the franchise, which provision is both reasonable and of material significance to the Plaintiffs contend that the district court erred in finding that the 120-day period began on July 7, 1988. Specifically, they argue that the statutory termination period began, as a matter of law, in December 1987 or January 1988 when Shell first heard allegations concerning Mason's misuse of a credit card. We disagree.

                franchise relationship," is a ground for termination of the franchise.  15 U.S.C. Sec. 2802(b)(2)(A).  The PMPA also allows a franchisor to terminate a franchise upon the occurrence of certain specified events, including "fraud or criminal misconduct by the franchisee relevant to the operation of the marketing premises."    15 U.S.C. Sec. 2802(b)(2)(C) and (c)(1).  In order to effect a termination under these provisions, however, the franchisor must have "first acquired actual or constructive knowledge [of the grounds for termination] not more than 120 days prior to the date on which notification of termination or nonrenewal is given."    15 U.S.C. Sec. 2802(b)(2)(A) and (b)(2)(C)
                

The plaintiffs' assertion that the 120 days begin to run as soon as a franchisor hears an allegation against a franchisee is at odds with the congressional intent in promulgating the PMPA. The "overriding purpose" of the PMPA is to establish "protection for franchisees from arbitrary and discriminatory terminations or nonrenewals." Darling v. Mobil Oil Corp., 864 F.2d 981, 983 (2d Cir.1989) (quoting S.Rep. No. 731, 95th Cong., 2d Sess. 15, reprinted in 1978 U.S.Code Cong. & Admin. News 873, 874 ("Senate Report ")). The 120-day statutory period for effecting terminations established by section 2802(b)(2)(A) and (b)(2)(C) was imposed "to preclude a franchisor from basing termination or non-renewal upon old and long forgotten events." Senate Report at 892. Without such a time limitation, franchisors could transform their knowledge of past incidents into credible threats of termination used to gain unfair advantage in negotiations and disputes. Cf. id. at 876-77. Thus, Congress acted to curb franchisors' abuse of their ability to terminate franchises. See id.

As the 120-day termination period was enacted to protect franchisees, it would be ironic if section 2802 subjected franchisees to unfair terminations. Yet, under plaintiffs' construction, franchisors would be forced to terminate within 120 days of hearing a rumor about a franchisee. Cf. Rhea & Judy Little Brentwood Service, Inc. v. Shell Oil Co., 697 F.Supp. 958, 961 (M.D.Tenn.1988). An interpretation of section 2802 which fosters termination based on rumor or suspicion surely does not afford the protection from arbitrary and discriminatory terminations that Congress intended.

The district court found that Shell first became aware of the grounds for terminating Mason's franchise at the July 7, 1988 meeting between Mason and Davenport. During this meeting, Shell confronted Mason about the allegations concerning his misuse of a credit card. Rather than deny the allegations, Mason related that he was embarrassed by them and that he was seeking help. We agree that Shell first acquired the knowledge contemplated by section 2802(b)(2)(A) and (b)(2)(C) as a result of this conversation.

As the district court noted, Shell acted "with great discretion[,] restraint and prudence in attempting to assure itself that there was some basis for [the allegations] against Mr. Mason." In passing the PMPA, Congress intended to promote, if not mandate, this type of careful approach to termination by franchisors. The practice of such discretion, restraint, and prudence goes a long way toward the prevention of arbitrary terminations by eliminating terminations based on idle rumors and baseless allegations.

Prior to the July 7 meeting, Shell had reason to harbor suspicions about Mason. Mere suspicions, however, do not provide a franchisor with a basis for termination despite section 2802's contemplation of "constructive knowledge." By January 1988, the only information conveyed to Shell concerning a fraud by Mason was an allegation by Mason's competitor that Mason used a credit card issued in the name "Brown" at the competitor's station. Furthermore Consistent with the legislative intent of the PMPA, we encourage prudence and patience in approaching franchise terminations. We believe that Shell took the proper course by trying to confirm its suspicions before effecting a termination. Accordingly, we agree with the district court's finding that the notice of termination issued by Shell was timely.

Mason's arrest in May 1988 did not ripen Shell's...