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SHELL OIL v. HILLARY FARMER SERVICE STATION

June 1, 1990

SHELL OIL COMPANY, PLAINTIFF,
v.
HILLARY FARMER SERVICE STATION, INC., DEFENDANT.



The opinion of the court was delivered by: Nickerson, District Judge.

MEMORANDUM AND ORDER

Plaintiff Shell Oil Company (Shell) brought this action against defendant Hillary Farmer Service Station, Inc. (the Station), seeking, among other things, a declaration that the franchise agreement between the parties has been properly terminated and an injunction requiring the Station to return to Shell all its fixtures and personal property. The complaint asserts jurisdiction based on diversity (28 U.S.C. § 1332), and federal question jurisdiction (28 U.S.C. § 1331, 1337).

By Memorandum and Order dated December 7, 1989, familiarity with which is assumed, this court issued a preliminary injunction requiring the Station to return Shell's trademark identifications, signs, and other advertising devices. Shell now moves for summary judgment pursuant to Rule 56, Fed.R.Civ.P., declaring the franchise agreement terminated, or, in the alternative, summary judgment adjudicating specific facts.

The critical facts are for the most part not in dispute. In July 1988, Shell and the Station entered into a franchise Dealer Agreement (the Agreement) dated May 1, 1988. Shell was to provide the Station with a petroleum marketing franchise, supplying trademark identifications, signs, advertising devices, motor fuel, and other petroleum products from May 1988 until April 30, 1991.

On September 14, 1989, the Station was damaged by a fire which started in the repair bays and spread to the attached office. The Station contends that no structural damage was done to the building. Photographs show the building still to be standing, but there were signs of fire on the roof and brick work, and considerable fire damage to the interior, including the repair bays, sales office and lavatories.

On October 5, 1989, citing the terms of the Agreement, Shell purported to terminate the franchise, explaining that the Station had been destroyed in "substantial part" by the fire, the Station had failed to comply with New York environmental regulations requiring service stations to install by July 1, 1989 a Stage II Vapor Recovery System to protect surrounding property from fuel seeping from the gasoline storage tanks, and the Station had been closed for over seven days.

After the Station refused to return the trademark identifications, signs and other advertising devices, Shell moved to compel the return of these items. The Station cross-moved for an order declaring that (1) Shell, by terminating the Agreement, had violated the restrictions on termination imposed by the Petroleum Marketing Practices Act (the Act), 15 U.S.C. § 2805(a), protecting motor fuel franchisees from, among other things, arbitrary termination; (2) the franchise was still in force; and (3) Shell was required to continue to supply fuel and related products.

As noted above, the court granted Shell's motion, requiring the Station to return the advertising items. The court denied the Station's cross-motion.

I

The court may grant summary judgment under Rule 56(c), Fed.R.Civ.P., only if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, 477 U.S. 242, 247, 106 S.Ct. 2505, 2509, 91 L.Ed.2d 202 (1986). The burden rests on the movant to demonstrate the lack of a genuine issue of fact. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970). All reasonable inferences must be drawn in favor of the non-movant. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962).

Section 18.1 of the Agreement provides that "[s]ubject to any limitations imposed by law," Shell may terminate the Agreement upon notice (or advance notice if required by law) for, among other reasons, "knowing failure of Dealer to comply with federal, state, or local laws or regulations relevant to the operation of Dealer's Station" and "destruction (other than by Shell) of all or a substantial part of the Dealer's Station."

The Petroleum Marketing Practices Act (the Act), 15 U.S.C. § 2801-2806, one of the "limitations imposed by law," prohibits a franchisor engaged in the selling or distributing of motor fuel from terminating a franchise agreement before its expiration unless the particular requirements outlined by the Act have first been met. See 15 U.S.C. § 2802(a), (b).

Under 15 U.S.C. § 2802(b)(1) the franchisor may not terminate the franchise unless the notification requirements of section 2804 are met and the termination is based upon a ground described in subparagraph (2) of § 2802(b). That subparagraph provides that, among other "grounds for termination of a franchise," is the "occurrence of an event which is relevant to the franchise relationship and as a result of which termination of the franchise" is "reasonable," if "such event occurs during the period the franchise is in effect and the franchisor first acquired actual or constructive knowledge of such occurrence" "not more than 60 days prior to the date on which notification of termination is given, if less than 90 days notification is given." 15 U.S.C. § 2802(b)(2)(C).

Section 2802(c) defines such an "event" making termination of the franchise "reasonable" to include, among twelve such events, "knowing failure of the franchisee to comply with Federal, State, or local laws or regulations relevant to the operation of the marketing premises" and "destruction (other than by the franchisor) or all or a substantial part of the marketing premises." If any of the twelve events is found to exist, the termination is "conclusively presumed to be reasonable as a matter of law." Russo v. Texaco, Inc., 808 F.2d 221, 225 (2d Cir. 1986).

The court will first address whether Shell had grounds for termination and then whether it provided notice, as required by the Act.

A. Grounds for Termination under the Act

i) Failure to Comply with Environmental Regulations

The regulations of the New York State Department of Environmental Conservation (the State Department) provide, in pertinent part, that no "owner" or "operator" of a gasoline-dispensing site may allow the transfer of gasoline into a tank at gasolinedispensing sites in the New York City metropolitan area whose annual "throughput" exceeds 250,000 gallons, "unless the gasoline-dispensing site is equipped with a Stage II vapor ...


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