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

• Decision Date: 06 March 1978
• Citation: 158 N.J.Super. 455,386 A.2d 448
• 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, v. CITIES SERVICE OIL COMPANY, a Delaware corporation authorized to do business inNew Jersey, Defendant.
• Court: New Jersey Superior Court

Page 455

158 N.J.Super. 455

386 A.2d 448

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, v. CITIES SERVICE OIL COMPANY, a Delaware corporation authorized to do business inNew Jersey, Defendant.

Superior Court of New Jersey,Chancery Division.

March 6, 1978.

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

Andrew S. Polito, Newark, for defendant (Mattson, Madden & Polito, Newark, attorneys).

ACKERMAN, J. S. C.

This case requires the court, among other things, to construe the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 et seq., and to rule on the act's constitutionality. After a plenary hearing I find the facts as follows:

Plaintiff James L. Galligan purchased the Cities Service franchise at 131-145 Elm Street, Westfield, New Jersey, in April 1973. The franchise was a so-called "traditional gasoline station," providing gasoline and repairs as well as tires, batteries and accessories ("TBAs"). Galligan purchased the franchise for $35,000 from one Raymond Ditzel through plaintiff corporation Westfield Centre Service, Inc. (Westfield), of which Galligan was the sole officer, director and shareholder. Galligan had previously worked part-time at the station for 20 years. The $35,000 purchase price included $8,000 for goodwill.

The property on which the franchise was located was owned by defendant Cities Service. Plaintiff was therefore both a franchisee and a lessee.

Galligan originally sought a two-year lease from defendant's then territory supervisor, one Raymond Katalenas. Katalenas told Galligan that only one-year leases could be granted, and further informed him that Cities Service would not permit any changes in the lease whatsoever. Galligan and Katalenas both testified, however, that Katalenas assured Galligan that as long as he did a good job and sold the product for the company, he would never have any trouble. Katalenas further testified that Galligan was expected to sell between 22,000 and 32,000 gallons of gasoline a month. The lease was signed on April 17, 1973 for a one-year term from May 1, 1973 to April 30, 1974. The lease was automatically renewed in April 1974, at which time Galligan formally assigned all his rights under the lease agreement to Westfield, with Galligan remaining personally liable for the corporation's debts to defendant.

I further find that Katalenas informed Galligan sometime in 1974 that defendant intended to sell the station and therefore would not renew the lease in 1975. Galligan told Katalenas about the $35,000 that he had paid for the business, and Katalenas relayed this information to his superiors; as a result, defendant agreed to renew the lease for one more year. The 1975 lease differed from previous leases in that it included a rider which provided in part:

If 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 determination delivered to lessee.

On June 25, 1975 defendant sent Westfield a letter stating that defendant intended to sell the station for $259,000 and that if Westfield desired to purchase the station for that price, it should notify defendant within 30 days. Plaintiffs' attorneys responded in a letter dated July 10, 1975, objecting to the proposed sale and demanding that if defendant intended to sell the premises, plaintiffs should be relocated to another franchised service station. Defendants did not offer plaintiffs a new leasehold facility, but instead offered only stations for sale. Plaintiffs then demanded that defendant buy them out, reimbursing Galligan for his investment in both time and money. Defendant refused to do so, offering only to refund Galligan's security deposit and to buy back the gasoline which Westfield then had on hand. On January 22, 1976 defendant notified plaintiffs that the 1975 agreement would not be renewed and would be allowed to terminate on April 30, 1976. Plaintiffs commenced suit in this court on April 13, 1976 to restrain termination of the lease and to continue Westfield's tenancy under the same terms as prior to the 1975 lease and rider. Defendant represented to this court at that time that it would voluntarily refrain from terminating the tenancy or ceasing to supply Westfield with products until the return date of the order to show cause for preliminary restraints on May 3, 1976.

On April 23, 1976 defendant sought to remove this litigation to the Federal District Court on diversity grounds. Plaintiffs filed an acknowledgment of service of such petition for removal on April 28, 1976 and obtained a temporary restraining order from the Federal District Court on that date. The matter was set down for preliminary hearing on May 24, 1976 by Judge Lacey. On May 24 he granted defendant's motion for summary judgment based on plaintiffs' erroneous pleading of the 1973 lease, which lease had since expired and been replaced by the 1975 extension. Judge Lacey further stated that the case involved a matter of first impression under the New Jersey Franchise Practices Act, and that the matter was more appropriately heard in the state court. The complaint was therefore dismissed without prejudice.

Plaintiff filed an amended complaint based on the 1975 lease in this court on May 26, 1976. On June 18, 1976 this court granted an interlocutory injunction enjoining defendant from terminating the tenancy of Westfield. The court further directed defendant to remove a "For Sale" sign which it had placed on the premises in question; the evidence was that the sign was posted for a total period of less than two hours.

The evidence also indicated that Westfield suffered a severe decline in sales beginning sometime in 1975. Specifically, the station sold on the average of between 27,405 and 30,390 gallons of gasoline a month during the period from 1965 through 1972 under Ditzel's management. In 1973, the first year of operation by Galligan, the station sold 348,512 gallons, or 29,042 gallons a month. In 1974 the station sold 366,638 gallons, or 30,553 gallons a month. In 1975, however, sales declined to a total of 259,927 gallons, or 21,661 gallons a month. Sales further declined in 1976 to 165,199 gallons, or 13,767 a month, and only 10,930 gallons a month for the first seven months of 1977. Westfield went out of business on July 31, 1977, and the interlocutory injunction of this court was accordingly dissolved shortly thereafter.

Defendant, for the most part, did not seriously dispute any of the factual contentions thus far enumerated. Defendant instead relied largely on the testimony of Norman D. Potter, general sales manager of the retail sales division of Cities Service since July 1, 1976, and previously regional sales manager for the area encompassing Long Island, New York City, New Jersey, Pennsylvania, Delaware, Maryland, Northern Virginia, the District of Columbia and part of West Virginia (hereinafter designated as the Philadelphia region). Potter's testimony to a large extent focused on how the decision to sell the station in question was reached and how that decision fit into defendant's overall marketing strategy. This testimony was corroborated and enlarged upon by the testimony of Robert Moore, currently Vice President of Public Affairs for defendant and previously Vice President of Marketing, in a deposition admitted into evidence. I found Potter to be an honest and impressive witness. Based largely on his testimony, as well as certain testimony by other witnesses and certain documents in evidence, I find the following events to have occurred.

At the end of World War II the country found itself with many refineries originally built to satisfy wartime needs. There was at the same time a tremendous consumer demand for new automobiles, as a result, the oil industry began in the late 1940s to construct a large number of service stations. This trend continued through the 1950s and 1960s, and to some extent into the 1970s.

As time went on, however, several new forces had entered the marketplace. Most significant were the so-called independents, who offered low price and even self-service, and eventually increased their share of the national market to 30%. In New Jersey, for example, the major companies received competition from such independent marketers as Hess, Crown, Digas, Powertest and Merit. In addition, entities such as Korvette and K-Mart began to compete with gasoline retailers in the areas of TBA's and mechanical services. Competition was also experienced from various specialty shops offering tune-ups, muffler repair and so forth. A severe price war between 1970 and 1972 further weakened defendant's position.

In 1972 Cities Service had less than 2% of the nationwide market and less than 1% of all service stations. In New Jersey Cities Service had approximately 4% of the market in 1972; that figure is now under 2%. Based on these figures, Potter contended, and I agree, that Cities Service should really be classified as a large independent rather than a major.

Cities Service began to analyze its position in 1972 and concluded that it was overinvested in real estate. Particular problems were created by the freezing of rents by the Economic Stabilization Act of 1970 and 1971, and by an Environmental Protection Agency requirement that each individual station be equipped with a two-stage vapor recovery device to reduce air pollution. Based on these findings Moore decided in 1972 that a program based on new acquisitions was self-destructive, and that different concepts should be tested.

In late 1972 a pilot...