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CALIFORNIA PETROLEUM DISTRIBS. v. CHEVRON U.S.A. I

May 31, 1984

CALIFORNIA PETROLEUM DISTRIBUTORS INC., Plaintiff,
v.
CHEVRON U.S.A. INC., Defendant



The opinion of the court was delivered by: WEXLER

MEMORANDUM AND ORDER

LEONARD D. WEXLER, UNITED STATES DISTRICT JUDGE

 Plaintiff brings this action pursuant to the franchise protection provisions of the Petroleum Marketing Practices Act (PMPA or the Act), 15 U.S.C. Sections 1281 to 2806. Plaintiff California Petroleum Distributors, Inc. (California Petroleum) seeks to enjoin defendant Chevron U.S.A., Inc. (Chevron) from terminating their franchise contract, alleging that Chevron failed to give the notice required under the PMPA.

 I.

 California Petroleum is termed a motor fuels jobber by its contract with Chevron. Under the PMPA it is a distributor franchisee, purchasing Chevron branded petroleum products and distributing them in Kings, Queens, Nassau and Suffolk counties. 15 U.S.C. Section 2801(4) and (6). Plaintiff sells the Chevron brand products directly to the public through its own retail outlets and sells to independent retailers authorized to resell under the Chevron brand. California Petroleum also distributes other branded and unbranded petroleum products and is not the exclusive distributor of Chevron products in the area.

 Chevron is a major refiner of petroleum products. It is a wholly-owned subsidiary of Standard Oil Company of California and under the PMPA it is a refiner and distributor franchisor, 15 U.S.C. Section 2801(3) and (5). Chevron and California Petroleum have had a franchise relationship for thirty-six years. The Byrnes family has owned California Petroleum for the last twenty-five years. The current franchise contract runs from April 1, 1983 to March 31, 1986.

 From mid-1982 to July 26, 1983 Chevron's terms of credit to California Petroleum were 1% ten days, the net due eleven days from the billing date with a $ 1.2 million line of credit, or limit to California Petroleum's indebtedness. This altered the previous terms of 1% ten days, net due in thirty days. In July 1983 Chevron received and reviewed California Petroleum's 1982 financial statement. That statement showed a marked weakening of California Petroleum's financial standing, with a $ 1.03 million loss, cash on hand falling more than 75% to $ 233,000.00, working capital falling to a deficit of almost $ 1 million, and net worth slipping from $ 1.7 million to $ 1.1 million at the end of 1982. This prompted Chevron to meet with California Petroleum and reduce its credit line by half. Thus began a downward spiral of financial assessments followed by cuts in California Petroleum's credit line and demands for reduced indebtedness by Chevron. In October 1983 California Petroleum's first two quarters of 1983 showed continuing deterioration and the credit line was halved again.

 As California Petroleum then owed Chevron about $ 640,000.00, this reduction put it some $ 340,000.00 over its line of credit. No arrangement could be reached to increase the credit or reduce the debt and at the end of October 1983 Chevron required that plaintiff pay cash before delivery of any products. Thereafter, plaintiff and defendant met a number of times to discuss paying off the balance owed by California Petroleum. Chevron asked for personal guarantees from the Byrnes family in order to restore credit. The Byrnes demmured for reasons that are unclear. A schedule for repayment was discussed, also apparently without firm agreement. Meanwhile California Petroleum made payments that brought the debt down to somewhere between $ 250,000.00 and $ 350,000.00 at the end of February 1984. *fn1"

 At a meeting at the end of February it became clear to Chevron that it was not going to get the payment schedule, the debt guarantees, or security it wanted. California Petroleum was making payments either by oral agreement or on its own initiative at a rate or $ 20,000.00 plus interest per month. In any case, by this time at least $ 250,000.00 was due and owing since October 1983 (Affidavit of Carl Levine in Support of Plaintiff's Motion, para.34). At this juncture California Petroleum's third quarter 1983 financial statement came to Chevron's hands. It showed a further worsening of California Petroleum's financial position.

 On March 12, 1984 Chevron gave written notice that it was terminating California Petroleum's franchise effective March 28, 1984, unless full payment of the outstanding debt was made in ten days. Chevron's letter asserted that there were defaults on the franchise agreement for non-payment of $ 290,000.00 and trademark violations. Chevron clarified its position a few days later by letter, stating that termination was based solely on payment default. On March 27, 1984, plaintiff commenced this action, asking for injunctive relief.

 In their first appearance before this Court the parties agreed to continue under the terms of the franchise agreement and entered into negotiation on payment of the approximately $ 250,000.00 still owed to Chevron, including a payment schedule and guarantees or security. Proceedings on plaintiff's motion were stayed. After a month of negotiation it became clear that plaintiff could not offer to Chevron enough in unencumbered assets or available personal guarantees to substantially secure the outstanding debt. On April 26, 1984 both parties asked the Court to proceed and render a decision on plaintiff's motion for a preliminary in junction. The Court notes that no substantial evidence has been presented on trademark violation. In view of the fact that Chevron based its termination solely on the payment default and the dispute in the proceedings before the Court has only addressed the debt issue, the Court does not consider the allegations of trademark violation to be at issue.

 II.

 The PMPA has as its benign purpose "the protection of franchised distributors and retailers of motor fuels." S.Rep.No. 95-731, 95th Cong., 2d Sess.1, reprinted in 1978 U.S. Code Cong. & Ad. News 873. The Act particularly prohibits discriminatory or arbitrary termination of a petroleum franchise. Id. at 15, reprinted at 874. Of notable concern to Congress was the imbalance of power in favor of refiners and franchisors in the making, modifying, renewal and termination of contracts with franchisees. Id. at 17-18, reprinted at 875-76. Congress chose to remedy the inequality by setting out certain requirements for termination or nonrenewal of a franchise, among which were time requirements. 15 U.S.C. Section 2802.

 In keeping with the purposes of the PMPA the Congress enacted an enforcement section that provided for the grant of a preliminary injunction by the federal courts on a somewhat lesser showing of cause than is usual for such equitable relief. 15 U.S.C. Section 2805(b)(2). Specifically, the franchisee need only show termination of his franchise and "sufficiently serious questions going to the merits to make such questions a fair ground for litigation." 15 U.S.C. Section 2806(b)(2)(a)(i) and (ii). In addition, the Court must determine that the balance of hardships caused by granting the injunction weighs less heavily on the franchisor than denial would weigh on the franchisee. 15 U.S.C. Section 2805(b)(2)(B).

 Nevertheless, the PMPA does not entirely forbid termination or nonrenewal of a franchise agreement. In fact, the grounds for termination or nonrenewal provided in Section 2802 are wide ranging. Rather, the PMPA seeks to make termination and nonrenewal less arbitrary and allow time in which to act to preserve the franchise by imposing certain notice and time requirements on termination or nonrenewal. Specifically, the statute provides in relevant part:

 (a) Prior to termination of any franchise or nonrenewal of any franchise relationship, the franchisor shall furnish notification of such termination or such nonrenewal to the franchisee who is a party to such franchise or such franchise relationship-

 (1) in the manner described in subsection (c) of this section; and

 (2) except as provided in subsection (b) of this section, not less than 90 days prior to the date on which such ...


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