Lawletter No. 158

Court rules Mobil's offer wasn't bona fide

A federal appeals court has held that Mobil's offer to sell a dealer his station for $581,000 was not "bona fide" as required by the Petroleum Marketing Practices Act in the recent case of Ellis v. Mobil Oil Corp. (9th Cir. July 7, 1992) 92 Daily Journal D.A.R. 9422. The ruling illustrates that dealers should carefully analyze and investigate such offers, and take action where appropriate.

Facts: Richard Ellis leased a Mobil station in Wilcox, Arizona. Mobil negotiated a deal with Union Oil Company of California ("Unocal") for the exchange of six Unocal stations in Florida for seven of Mobil's California stations plus the Arizona station operated by Ellis.

Based on its divestment of the station, Mobil notified Ellis that it would not renew his franchise. Mobil offered to sell him the station for $581,000. The offering price was the value that Unocal internally placed on the Arizona station for purposes of the exchange agreement.

The PMPA required Mobil to either grant the dealer a right-of-first refusal or to make a "bona fide offer" to sell him the property. The trial court held that Mobil could not offer Ellis a valid first refusal right in a multiple-property swap situation.

Mobil leased the land on which three of the exchanged stations were located. Prior to reaching agreement, Unocal obtained appraisals which collectively valued the three leased stations at $419,230. Mobil estimated the properties to be worth $400,000 and carried a book value for the stations of $155,968.

For the purposes of the exchange agreement, however, Unocal valued each of the leased exchange stations at zero, claiming that they had no economic worth due to environmental and other problems.

Unocal contended that the leased stations were actually a liability. However, Unocal admitted that Mobil would not be willing to simply give the stations away. Furthermore, the exchange agreement between Unocal and Mobil did not treat the stations as having a negative value.

The dealer sued Mobil and Unocal. The trial court dismissed the dealer's suit, however, on the grounds that he had failed to introduce evidence of the value of the station as a going concern.

Both Mobil and the dealer appealed.

Ruling: The appeals court ruled in the dealer's favor and against Mobil and Unocal on all counts. More specifically, the court held that:

(1) In an exchange of multiple properties, it is not possible to grant the dealer a valid right-of-first-refusal.

(2) Therefore, Mobil had to make a bona fide offer to sell the station property to the dealer. The PMPA requires a bona fide offer to approximate the fair market value of the property.

(3) The values that Mobil and Unocal assigned the properties for purposes of the exchange agreement are artificial and arbitrary. Undervaluing the three leased stations significantly and artificially inflated the value of the other stations. Unocal and Mobil cannot ignore their own appraisals and accounting valuation of the properties.

(4) "Goodwill value" is not to be included in determining the fair market value of the property. Such values as Mobil's accumulated advertising and trademark recognition are not being offered for sale.

Recommended procedures: We suggest the following in this area:

(1) Initial analysis: If your franchisor notifies you that it plans to divest your station, either as part of a market withdrawal or otherwise, do not automatically assume that the oil company's offer is legally valid and nonnegotiable. For reports on various aspects of this subject, see Lawletter Nos. 134, 136, 144, 146, 150.151 and 152.

(2) Appraisals: If the offer looks too high, you will want to get an appraisal right away. You will also want good legal advice in analyzing the offer.

(3) Contaminated property: Note Unocal's contention that a contaminated station is actually a liability. For a detailed analysis of how contamination can affect a dealer's PMPA rights, see Lawletter No. 150 .