CHICAGO (CN) – A Chicago-area British Petroleum service station owner does not have to close his franchise while fighting the franchisor’s termination decision for repeated failed payments, the 7th Circuit ruled.
Emmanuel Joseph purchased the BP franchise from the previous franchisee in May 2006 for $400,000 and entered into a Dealer Lease and Supply Agreement.
Sasafrasnet, a Wisconsin company, later purchased the BP’s interest in the land and assumed its franchisor obligations, delivering BP-branded motor fuels to the retail location.
Under the agreement, Sasafrasnet could terminate Joseph’s franchise if he failed to make payment “causing a draft to be dishonored for nonsufficient [NSF] or uncollected funds” more than once per year.
Within the first year of his relationship with Sasafrasnet, seven of Joseph’s payments were returned NSF.
Joseph acknowledged the problem, explaining that he had “cross-collateralized” a few of his businesses, resulting in the overdrafts.
Sasafrasnet subsequently decided that Joseph would need to prepay for fuel, but changed its mind, instead requiring him to pay a $2,500 penalty every time a payment was denied for insufficient funds.
Joseph was also notified that he would be returned to prepayment status if he incurred two more NSFs.
On July 8, 2010, Joseph informed Sasafrasnet that he was changing banks and provided the new account info. He did not provide sufficient notice, however, resulting in two more NSFs. Sasafrasnet allowed Joseph to rectify the NSFs by paying the total amount in person, which he did.
“By this time, Mr. Joseph had incurred ten NSFs. All but one of the NSFs were for amounts over $20,000, and three were for amounts over $45,000,” Judge Kenneth Ripple summarized.
On July 30, 2010, Sasafrasnet gave Joseph 90 days’ notice of termination, but later determined that the notification did not comply with Petroleum Marketing Practices Act (PMPA), a statute designed to protect gas franchisees, and withdrew it.
In November, 2010, another notice was sent, listing the July NSFs and failing score on a mystery shopper inspection as grounds for termination.
Joseph filed suit claiming PMPA violations, requesting a preliminary injunction against termination, which the district court denied. U.S. District Judge Harry Leinenweber did enter an injunction pending appeal conditioned on Joseph’s payment of a $100,000 appeal bond and a $40,000 fuel security to Sasafrasnet. Joseph continues to operate the station.
On appeal, the 7th Circuit evaluated the extent of judicial scrutiny required by PMPA. Sasafrasnet contended that terminations based on events listed in the statute, which include late payments, are assumed to be reasonable. Joseph claimed that PMPA requires judicial review.
A minor circuit split exists over the issue. The 1st, 2nd, 3rd, 4th, 9th, and 11th circuits have determined that termination based on a listed event is per se reasonable. Only the 6th Circuit has found otherwise.
“Today, we make clear that the occurrence of an event listed in § 2802(c) justifies, as a matter of law, a franchisor’s decision to terminate a franchise under § 2802(b)(2)(C). In our view, the plain language of the PMPA ‘unambiguously permits termination of a petroleum franchise agreement upon failure of the franchisee to timely adhere to payment obligations,'” Ripple wrote.
But this determination alone is not enough to defeat Joseph’s claims. Under PMPA, late payments are not actionable if they are “only technical or unimportant to the franchise relationship” or are “for a cause beyond the reasonable control of the franchisee.”
The district court must make this determination, the three-judge panel determined. A preliminary injunction is thus necessary in the interim to preserve Joseph’s $400,000 investment in the franchise while the case is pending.