US-DIST-CT, FRANCHISE-GUIDE ¶10,435, State Oil Co. v. Barkat (Bob) U. Khan., (May 12, 1993)

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U.S. District Court, Northern District of Illinois. No. 93 C 1372. Dated May 12, 1993.

Relationship/Termination--Gasoline Dealers--Notice of Termination--Less than Ninety Days’ Notice--Failure to Pay Rent.--Termination of a gasoline station franchisee upon five days’ notice was improper under the Petroleum Marketing Practices Act, since at least 90 days’ written notice of termination is required unless such a requirement would be unreasonable under the circumstances. In this case, the franchisee’s failure to pay one month’s rent and one installment on a promissory note did not justify the five-day notice.

Norgle, D.J.: According to the undisputed material facts, defendant Barkat (Bob) U. Khan ("Khan") was obligated to pay rent to plaintiff State Oil Company ("State Oil") on the first day of each month pursuant to a franchise agreement. The rent amount was reduced from the initial amount to $6,500 per month during 1992 and $6,800 per month for the first six months of 1993. On or about January 20, 1992, Khan executed and delivered to State Oil his principal promissory note in the amount of $105,336.31. State Oil has not established the amount Khan was required to pay monthly on this note. Khan, however, failed to make the rental payment for January 1, 1993 as well as the payment on the note due January 1, 1993. Khan has stated that he was unable to make either payment because he lacked the funds. As a consequence, State Oil sent a notice of termination to Khan on January 27, 1993 stating that the franchise agreement would be terminated effective February 2, 1993, and sent a "Landlord’s Five Day Notice."

A franchisee’s failure to pay, in a timely manner, all sums to which a franchisor is legally entitled when those sums are due constitutes a sufficient ground for the termination of a service station franchise pursuant to the Petroleum Marketing Practices Act. 15 U.S.C. §2802(c)(8); Baker v. Amoco Oil Co., 956 F.2d 639, 641 (7th Cir. 1992). Nonetheless, to successfully terminate a franchise, the franchisor must generally give ninety days written notice. 15 U.S.C. §2804. Less than ninety days notice is permissible if, under the circumstances, ninety days would not be reasonable. Id. at §2804(b)(1); California Petroleum Distr., Inc. v. Chevron U.S.A., Inc., 589 F.Supp. 282, 289 (E.D. N.Y. 1984).

State Oil has failed to convince the court that ninety days notice would not have been reasonable. Under the circumstances of this case, the failure to pay one month’s rent of $6,800 and failure to pay one payment of unknown amount on the promissory note does not constitute a sufficient ground as a matter of law to justify the five day notice. The Petroleum Marketing Practices Act seeks to protect franchisees from arbitrary terminations while still allowing franchisors some measure of business judgment in the operation of their business. Brach v. Amoco Oil Co., 677 F.2d 1213, 1220 (7th Cir. 1982). In accordance with this principle, courts must construe the provisions of this Act narrowly and consistent with its overriding purpose to protect franchisees. Id. at 1221. Cases allowing less than ninety days notice when rents were not paid involved more imminent concerns for the franchisor than those apparent in the present case and are therefore distinguishable. See Murphy Oil USA, Inc. v. Hauser, 1993 WL 138300 at *6 (D. Minn. Feb. 17, 1993) (failure to pay five months rent; ninety days notice originally sent when $33,176.42 was due, fourteen days notice justified when that amount increased to $41,376.42 in four weeks); California Petroleum Distributors, 589 F.Supp. at 289 (sixteen days notice was reasonable following four months of demands for payment and negotiations; a quarter of a million dollars was owed); Loomis v. Gulf Oil Corp. 567 F.Supp. 591, 597 (M.D. Fla. 1983) (eight days notice justified when franchisee developed deficiency of $56,233.52 in thirty to sixty days).

Accordingly, State Oil’s motion for summary judgment is denied.