Reyes v. Atlantic Richfield Co.

• Decision Date: 08 December 1993
• Docket Number: No. 91-56106,91-56106
• Citation: 12 F.3d 1464
• Parties: Wilfredo REYES and Bernardita Reyes, Plaintiffs-Appellants, v. ATLANTIC RICHFIELD COMPANY, ARCO Petroleum Products Co., Terry Firestone, Edward Loza, T.R. Murphy, Nancy Dicks, Cynthia Weston, and Does 1 through 200, inclusive, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1464

12 F.3d 1464

Wilfredo REYES and Bernardita Reyes, Plaintiffs-Appellants, v. ATLANTIC RICHFIELD COMPANY, ARCO Petroleum Products Co. Terry Firestone, Edward Loza, T.R. Murphy, Nancy Dicks, Cynthia Weston, and Does 1 through 200, inclusive Defendants-Appellees.

No. 91-56106.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 6, 1992.

Decided Dec. 8, 1993.

Cheryl Shensa and Louis E. Goebel (argued), Goebel & Shensa, San Diego, CA, for plaintiffs-appellants.

Katharine C. Sheehan and Diann H. Kim (argued), Tuttle & Taylor, Los Angeles, CA, for defendants-appellees.

Appeal from the United States District Court for the Southern District of California.

Before: D.W. NELSON, and REINHARDT, Circuit Judges, and CALLISTER, District Judge. ^*

CALLISTER, Senior District Judge:

Franchisees of an Atlantic Richfield Company (ARCO) gas station and convenience store sued ARCO when their franchise was not renewed. ¹ The District Court granted summary judgment to ARCO, and the franchisees appealed. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

In 1986, the appellants, Wilfredo Reyes, and his wife, Bernardita, wanted to purchase a franchise for an existing ARCO gas station and convenience store from Mohammad Attiyeh. The appellants agreed to pay $305,000.00, consisting of $270,000.00 for assignment of Attiyeh's franchise with ARCO, and $35,000.00 for inventory.

The assignment of Attiyeh's franchise agreement to the appellants was contingent on ARCO's approval of the appellants as franchisees. Wilfredo Reyes enrolled in an ARCO dealer's school and completed his training in July 1986. He passed even though he displayed no aptitude for bookkeeping. The school instructors warned ARCO's sales representative that Reyes would need help with bookkeeping.

On August 18, 1986, ARCO gave its permission for the appellants to assume the franchise. The next day, the appellants, Attiyeh, and ARCO's district manager Terry Firestone, met to close the transaction. Before escrow closed, Firestone advised the appellants that ARCO had purchased a chain of gas stations, including one across the street from Attiyeh's station, and planned to convert the chain to ARCO gas stations and convenience stores. He offered to let the appellants back out of the deal. After discussing the matter in private, the appellants decided to go ahead with the purchase, and the deal then proceeded to close.

About a month later, in mid-September 1986, ARCO sales representative Edward Loza found that the appellants had not done any accounting over the preceding month. There is no dispute that the franchise agreement required that the appellants keep the books accurate and up-to-date.

The appellants do not dispute that they received notices, some by certified mail, almost every month between September 1986 and May 1987, warning them that their bookkeeping was inadequate and constituted a violation of the terms of the franchise agreement. ARCO conducted two audits between September 1986 and February 1987 which revealed that the books were not accurate and were not in conformance with ARCO's requirements.

On May 15, 1987, ARCO sent a certified letter to the appellants notifying them that a third audit would be held on the appellants' premises on May 21, 1987, and warned the appellants that "if your books and records are not complete and accurate and in conformance with ARCO's requirements, steps will be taken to terminate or non-renew your franchise, as appropriate."

The May 21, 1987, audit could not be performed because the books were not complete and were not on the premises. By letter dated June 9, 1987, ARCO notified the appellants that their franchise would not be renewed when it expired September 11, 1987.

In July 1987, after the appellants had been notified of the non-renewal, they submitted to ARCO a request to transfer their franchise to Kevin Tapia. There were only six weeks remaining on the appellants' franchise, and ARCO consented to Tapia taking over for that six-week period only if he acknowledged in writing that the franchise agreement would expire on September 11, 1987. ARCO would not make any further commitment at that time to renew the franchise for the appellants or to give prospective franchisee Tapia any additional time. Nothing further was done by Tapia or the appellants.

In July 1987, the appellants ceased stocking the store with new merchandise. They allowed the required insurance on the store to expire for non-payment of premiums effective August 11, 1987. Wilfredo Reyes himself returned to his former employment, but alleges that he kept family members operating the store. By letter dated August 11, 1987, ARCO told the appellants that they had effectively abandoned the store, and that the termination date was therefore advanced to August 11, 1987.

The appellants responded by filing this suit containing the following causes of action: (1) fraud; (2) negligent misrepresentation; (3) violation of the California Franchise Investment Act; (4) violation of California's Unruh Act; (5) negligent interference with economic advantage; (6) intentional interference with economic advantage; (7) negligent infliction of emotional distress; (8) intentional infliction of emotional distress; and (9) violation of the Petroleum Marketing Practices Act. The District Court granted summary judgment on all claims. The appellants appeal.

STANDARD OF REVIEW

The grant of summary judgment is reviewed de novo. Retseig Corp. v. ARCO Petroleum Products Co., 870 F.2d 1495 (9th Cir.1989). In assessing the evidence in the record, we must view the facts in a light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

ANALYSIS

To determine if the grant of summary judgment was appropriate, we will examine each of the nine causes of action dismissed by the District Court.

Petroleum Marketing Practices Act:

Congress passed the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. Secs. 2801-2841, in 1978 to protect gasoline industry franchisees from "arbitrary or discriminatory termination or non-renewal of their franchise." S.Rep. No. 731, 95th Cong., 2d Sess. 15 (1978), reprinted in 1978 U.S.C.C.A.N. 873, 874. To accomplish this goal, the PMPA limits the reasons for which a franchisee could lose his franchise. 15 U.S.C. Sec. 2803(a). The PMPA approves three main circumstances where non-renewal or termination is justified. First, the franchisee could lose his or her franchise for failing "to comply with any provision of the franchise, which provision is both reasonable and of material significance to the franchise relationship." 15 U.S.C. Sec. 2802(b)(2)(A). Second, termination or non-renewal is justified if the franchisee fails to make a good-faith effort to carry out any provision of the contract "without consideration of the reasonableness of the term as long as the franchisee is given an opportunity to comply with the term in question." O'Shea v. Amoco, 886 F.2d 584, 595; See 15 U.S.C. Sec. 2802(b)(2)(B). Finally, the termination or non-renewal is also justified upon "the occurrence of an event which is relevant to the franchise relationship and as a result of which termination of the franchise or non-renewal of the franchise relationship is reasonable." 15 U.S.C. Sec. 2802(b)(2)(C). The PMPA provides a non-exhaustive list of examples of such occurrences under sub-section (C) including fraud or criminal conduct by the franchisee, and failure by the franchisee to make timely payments of sums owing to the franchisor. 15 U.S.C. Secs. 2802(c)(1), 2802(c)(8).

It is undisputed in this case that the franchise agreement required the appellants to keep accurate and up-to-date financial records, and that these terms were "reasonable" and "material" as required by section 2802(b)(2)(A). For almost a year, ARCO sent monthly warnings to the appellants advising them that their bookkeeping was inadequate and needed to be improved. The appellants have not come forward with any evidence disputing ARCO's assertion that the appellants did not maintain the books at all during the first month of operation of the store, and thereafter maintained the books in such an inadequate manner that all three audits found serious inaccuracies in accounting and violations of ARCO bookkeeping requirements. ² In addition, the appellants do The appellants argue, however, that racial discrimination was the real reason their franchise was not renewed. They point to three instances that reveal--they argue--the racial bias of ARCO.

not dispute that they ceased stocking the store with new merchandise in July 1987 and allowed the required insurance on the store to lapse, thereby effectively "abandoning" the store under the terms of the franchise agreement. These breaches gave ARCO the right to not renew appellants' franchise under section 2802(b)(2)(A).

The first instance concerns alleged statements by ARCO representatives that the appellants should replace their Filipino cashiers and accountants. The second instance concerns deposition testimony of Edward Loza, ARCO's sales representative, wherein he stated that ARCO was attempting to "build a file" on the appellants to justify their termination. The third instance involves the conduct of an ARCO representative who--while engaged in a heated argument with the appellants--pointed his finger at the appellants and "poked" his fist down on a cabinet.

The appellants argue that if the franchisor establishes that there was a legitimate reason under section 2802(b)(2)(A) for terminating a franchise, the franchisee is allowed to argue that the real reason for the termination was illegitimate. The appellants couch this issue in terms of ARCO's bad faith; that is, the appellants seek to impose a requirement on ARCO that it act in good faith, and argue further that the three items of evidence just discussed create issues of fact concerning whether...