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Fairy-Mart v. Marathon Petroleum Company, LP

United States District Court, D. Connecticut

November 6, 2017

FAIRY-MART Plaintiffs,
v.
MARATHON PETROLEUM COMPANY, LP and PETROLEUM MARKETING GROUP, INC., Defendants.

          MEMORANDUM AND ORDER

          Michael P. Shea, U.S.D.J.

         This case requires me to decide how to enforce an individual gas station franchisee's statutory right of first refusal to purchase the real estate associated with its station when the franchisor proposes to sell that real estate to a third party as part of a package of gas station properties. In certain circumstances, Connecticut law requires a gas station franchisor, which generally owns the land on which the station is located, to offer the franchisee, or operator, of the station, “a right of first refusal of a bona fide offer made by another acceptable to the [franchisor], to purchase such [franchisor's] interest in [the premises at which the gas station is located].” Conn. Gen. Stat. § 42-133mm(c)(2) (emphasis added). The plaintiffs in this case, three Connecticut gas station franchisees, seek to enjoin portions of a transaction by which Defendant Petroleum Marketing Group, Inc. (“PMG”), proposes to purchase a total of 26 gas station premises from Defendant Marathon Petroleum Company, LP (“Marathon”), which currently leases three of those premises to the plaintiffs under franchise agreements. The plaintiffs claim that, although this proposed transaction includes an individual offer by PMG to purchase the real estate associated with each of their stations, the offer in each case is not a “bona fide offer, ” as required by the statute, because it bears no reasonable relationship to the fair market value of that real estate. They have moved for a preliminary injunction barring the transaction as to the three properties.

         After hearing evidence and argument on the issue, I agree with the plaintiffs and GRANT their motion for a preliminary injunction. The plaintiffs have shown irreparable harm because, once PMG purchases their stations, their statutory right of first refusal-whatever its proper scope-will be irretrievably lost, and money damages for that loss would be extremely difficult to calculate. The plaintiffs have also shown a likelihood of success on the merits of their claim under the Connecticut Unfair Trade Practices Act, §§ 42-110a et seq. (“CUTPA”), for violation of the public policy reflected in the right-of-first-refusal statute (and they have at least raised sufficiently serious questions going to the merits of that claim to make them fair ground for litigation, and shown that the balance of hardships tips in their favor). The evidence at the preliminary injunction hearing showed that the allocation of individual prices to the plaintiffs' stations within PMG's global offer of $30 million for the 26 stations was driven primarily by PMG's desire to defeat the plaintiffs' statutory rights of first refusal, rather than by the fair market value of each of the plaintiffs' three stations. While PMG has made a binding offer to pay each of those individual amounts, the statute requires more than a binding commitment for an offer to be “bona fide, ” at least in the context of a multi-station transaction in which it is possible to allocate prices to individual stations that bear no reasonable relationship to their fair market value without affecting the global price of the overall deal.

         The defendants are hereby enjoined from closing on the purchase and sale of each of the plaintiffs' three properties; this order does not affect the defendants' ability to close the purchase and sale of any of the other 23 stations involved in the transaction. However, because the parties have not briefed the issue of what security the Court should require the plaintiffs to post to pay any damages sustained by defendants if they are found to have been wrongfully enjoined, the Court hereby stays this order for 14 days. Within that 14-day period, the parties shall confer and shall either (1) file a joint statement setting forth their joint or respective positions as to the proper amount of a bond or other security, or (2) failing that, file separate motions with respect to the posting of security. See Fed. R. Civ. P. 65(c).

         I. BACKGROUND

         The plaintiffs filed this case in state court on July 7, 2017. (ECF No. 1-1.) On July 18, 2017, the defendants, Marathon and PMG, removed the case to federal court. (ECF No. 1.) In the removed complaint, the plaintiffs sought, among other things, declaratory relief for violation of Section 42-133mm(c) of the Connecticut Petroleum Franchise Act. The complaint, which stems from the pending sale of the real estate associated with the plaintiffs' gas stations from Marathon to PMG, alleged that the defendants failed to offer them a right of first refusal of a bona fide offer to purchase, as required by Section 42-133mm(c). The plaintiffs also filed a motion for a preliminary injunction, seeking to enjoin PMG's purchase of their stations.

         On July 26, 2017, I held a telephonic status conference to set a schedule for discovery and briefing related to the motion for preliminary injunction. (ECF No. 20.) Although the transactions was set to close on August 16, following the call, the defendants agreed to postpone the sales of the three properties at issue in the plaintiff's complaint until I held a hearing on the motion for preliminary injunction. On August 18, 2017, the plaintiffs filed a memorandum in support of their motion for a preliminary injunction. (ECF No. 28.) Defendants' opposition was filed on August 25. (ECF No. 31.)

         On October 5, 2017, the plaintiffs filed an amended complaint. (ECF No. 43.) In their amended complaint, the plaintiffs allege seven claims: (1) declaratory relief, (2) breach of the Connecticut Petroleum Franchise Act[1], Conn. Gen. Stat. §§42-133j et seq. (“CPFA”), (3) breach of contract, (4) violation of the CUTPA, (5) breach of the implied covenant of good faith and fair dealing, (6) tortious interference with a contract, and (7) tortious interference with business relations. On October 6, 2017, I held an evidentiary hearing on the motion for a preliminary injunction. The following findings of fact and conclusions of law are based on the evidence adduced at that hearing.

         II. FINDINGS OF FACT[2]

         Plaintiffs operate Hess-branded retail gasoline stations in Connecticut. Plaintiff Fairy-Mart, LLC has operated a station in Norwich, Connecticut, since 2005; plaintiff G.S.P.C. Inc. has operated a station in Southington, Connecticut, since 2007; and plaintiff Michael Olsen has operated a station in Waterford, Connecticut, since 1972. All three stations can be described as modest: all of the stations lack a canopy cover; all have small kiosks that sell just a few items- snacks, beverages, and cigarettes; and all have dated equipment, including their storage tanks. None of the plaintiffs own or operate any other stations in Connecticut or anywhere else.

         Defendant Marathon is a Delaware limited partnership with its principal place of business in Findlay, Ohio. It is a petroleum refining, marketing, and transportation company that sells its gasoline at 5, 550 branded locations in approximately 19 states in the Midwest and Southeast United States. Defendant PMG is a wholesale distributor (or “jobber”) of petroleum products and services. It is a Maryland corporation, with a principal place of business in Woodbridge, Virginia. It owns, operates, and/or supplies more than 1, 000 retail gasoline station locations and has an annual volume of over 1 billion gallons of motor fuel.

         In 2014, Marathon purchased assets from the Hess Corporation, including Hess's interest as franchisor of, and the real estate associated with, 17 retail gas stations in Connecticut-three of which were the stations the plaintiffs operate. Prior to this transaction, Hess had been the franchisor for these stations, under a series of dealer agreements. Hess transferred its interests under these agreements to Marathon, along with its ownership, or long-term leasehold, interest in the associated real estate, which I will refer to as the “marketing premises, ” using the terminology of the CPFA. See Conn. Gen. Stat. § 42-133mm(d). Deeds for these properties show that Marathon purchased the Norwich station for $280, 000, the Southington station for $530, 000, and the Waterford station for $159, 323. Since September 2014, Marathon has operated as the franchisor to the three plaintiffs. When the plaintiffs' individual Hess dealer agreements expired, each plaintiff entered into a new dealer agreement with Marathon, under which the plaintiffs' stations continued to operate as Hess-branded locations.

         In 2016, Marathon decided to sell the Hess-branded marketing premises it owned. Marathon wrote a letter to each of the plaintiffs, dated August 8, 2016, stating that it intended to sell, transfer, or assign these assets and inviting each of the plaintiffs to submit a bid for the property on which it operated a station. Marathon wrote that it had “implemented a bid process that was for all prospective buyers . . . and that it was the intention to implement a standardized bid process so that a fair and equal opportunity for all bidders is available.” (ECF No 1-1 at 18.) Marathon further provided a timeline for the bid process, a warning that late bids would not be considered, and a list of factors other than bid amount that might affect Marathon's selection of a winning bid. Marathon indicated that the plaintiffs could gain access to a dataroom with information about their specific station (but no other station) to use to formulate a bid. Two of the plaintiffs accessed the datarooms for their stations. None of the plaintiffs submitted a bid to purchase their stations before the deadline.

         On October, 14, 2016, PMG submitted an initial bid for 33 of Marathon's Hess-branded locations, including the marketing premises of the three stations the plaintiffs operate. PMG was one of the jobbers to which Marathon had extended its offer to submit a bid. Hossein Ejtemai controls PMG and also operates several of the Washington, D.C. stations in the group that PMG offered to purchase. PMG offered $18, 985, 000 for these locations, included an offer to commit to rebrand other locations for which PMG was a supplier, and proposed to purchase an additional 10 million gallons of motor fuel from Marathon. As part of this bid, PMG allocated the $18, 985, 000 purchase price among the specific stations. For the plaintiffs' stations, PMG offered: (1) $250, 000 for the Norwich station, (2) $550, 000 for the Southington station, and (3) $175, 000 for the Waterford station. After it realized there had been a miscalculation-the first bid had not accounted for the value of a vacant residential lot adjacent to one of the Washington, D.C. stations in the package-PMG submitted a “corrected first bid.” (ECF No. 48 at 67.) In this revised bid, the allocations for the plaintiffs' stations were: (1) $750, 000 for the Norwich station, (2) $850, 000 for the Southington station, and (3) $650, 000 for the Waterford station.

         After receiving PMG's bid, Marathon indicated that it was interested in negotiating for a sale of 26 of the 33 stations included in the original offer to bid. Marathon told PMG that it would accept $30 million for this set of 26 locations in Connecticut, New York, New Jersey, Pennsylvania, Maryland, Virginia, and the District of Columbia. The plaintiffs' three stations were included in this set of 26. Marathon again stated that PMG would need to allocate purchase prices-totaling to $30 million-for each of the stations and then sign individual offers to purchase for each location. PMG agreed to offer a total of $30 million for these locations and agreed to formulate an allocation of 26 individual purchase prices. PMG also agreed to enter into a long-term supply agreement, obligating itself to purchase a set volume of Marathon-branded motor fuel for distribution to certain retail locations.

         Jeff Bucaro, PMG's director of assets, testified about the process of developing the final station-specific allocations. He stated that Marathon had no involvement in this process, and no evidence was offered to rebut that statement. Bucaro created a spreadsheet to formulate the allocations. Within the spreadsheet, Bucaro inserted two columns specifying the allocations that PMG previously had assigned to the 26 locations as part of its initial and revised initial bids (when it was bidding on the group of 33 stations). He also included a column showing for each station the estimated earnings before interest, tax, depreciation, and amortization (“EBITDA”)-which is a way to evaluate a business's performance without considering financing, accounting, or tax issues and which Bucaro testified is a common basis for valuing gas stations in purchase transactions. (ECF No. 48 at 61.) He testified that although some of these data came from the Marathon data room and were “hard numbers, ” other entries-like the gas margins numbers- were just his own guesses that he was using as placeholders while he was formulating the allocations. (ECF No. 48 at 105-06.) He sent an email to Ejtemai on January 2, 2017, with a draft allocation of the $30 million over the 26 sites and reviewed the specific allocations with Ejtemai. He sent the final allocation to Marathon on February 16, 2017. Marathon accepted these allocations. The final prices allocated to the plaintiffs' stations were: (1) $1, 000, 000 for the Norwich station, (2) $1, 750, 000 for the Southington station, and (3) $1, 000, 000 for the Waterford station.

         Bucaro testified that he did not receive any new information about the properties between January 2 (when he sent the list of revised offers to Ejtemai) and February 16, 2017 (when he sent the final allocation list to Marathon) that would have altered the value he assigned to each. Nonetheless, the allocated prices for the marketing premises associated with the plaintiffs' stations increased between the draft Bucaro sent to Ejtemai on January 2 and the final proposal PMG sent to Marathon on February 16. And they were not the only ones. Between the draft allocation and the final allocation, the allocated prices for all stations in states with statutory rights of first refusal (namely, New Jersey, Virginia, and Connecticut) increased, and thus comprised a larger share of the overall $30 million purchase price, while the allocated prices for all stations in states without rights of first refusal decreased or remained constant, and thus comprised a smaller share of the $30 million purchase price. Bucaro admitted that PMG increased the purchase price for stations in states with rights of first refusal to make it less likely that those rights would be exercised and more likely that PMG would be able to acquire all of the stations.[3] He further admitted that “the reason [for] moving the allocations around is because of the right of first refusal.” (ECF No. 48 at 116.) Bucaro averred that PMG highly valued the opportunity to buy all twenty-six stations as a package deal and that that was why PMG increased the prices allocated to certain stations-but he admitted that discouraging the exercise of rights of first refusal was a primary concern.[4] Indeed, he admitted that the only reason PMG allocated the overall purchase price of $30 million to individual stations-as opposed to simply offering $30 million for the 26 stations-was that some of the stations, including the plaintiffs', were located in states with rights of first refusal, leading Marathon to demand that any global offer be broken into pieces corresponding to each station. (ECF No. 48 at 115.) In fact, PMG would have preferred to do a single contract with one price for the package of 26 states. (Id. at 114.)

         At the hearing, the plaintiffs' expert, Kenneth Currier, testified about his own determination of the fair market value of plaintiffs' stations and the methods he used to arrive at those valuations. Mr. Currier is an “MAI real estate appraiser. [He] own[s] and operate[s] a company[, called] Atlantic Valuation Consultants. [It] specialize[s] in appraising gas stations and convenience stores.” (Id. at 128.) Mr. Currier's qualifications and substantial experience in appraising gas station properties were not contested. He appraised the plaintiffs' stations as follows: he valued the real estate associated with the Norwich station at $225, 000, the Southington property at $800, 000, and the Waterford property at $125, 000. These numbers were based on his assessment of each station's sales data, locations, set-up, equipment, and related factors. He also testified that EBITDA is the “primary multiple that people use when they're considering purchasing a [gas station], ” (ECF No. 48 at 129) and that a buyer's offer is likely to reflect some multiple of EBITDA. “[T]ypically a buyer will review the historic financial information and look at the historic EBITDAs and everything that goes into that which would be margins and gallons and operating expenses.” (Id.) Currier stated that, usually in the industry, he will see transaction prices reflecting EBITDA multiples around 5, “maybe as high as 10 or 11.” (Id. at 131.) Similarly, Bucaro testified “four to the low teens” was the range of EBITDA multiples he had seen. (Id. at 64.) Currier testified that he had never seen a gas station sold at a price with an EBIDTA multiple of 15 or higher. In PMG's offer, however, he determined that the EBIDTA multiple for the Norwich store was 102.53. More generally, he stated that the allocated values for all three of the plaintiffs' locations were vastly greater than the fair market value of those properties. Finally, Currier testified about the difference between fair market value and investment value-and how the investment value of a property can be either higher or lower than the fair market value for a particular prospective buyer, as it includes features of importance to a particular buyer but not to the market in general, such as whether a transaction will yield economies of scale for the buyer.[5]

         PMG sent its final allocation to Marathon on February 16, 2017. Marathon accepted this allocation, without negotiation.

         On May 22, 2017, Marathon sent each of the plaintiffs notice of their right of first refusal. The notice informed the plaintiffs that they had forty-five days to exercise that right. The notice stated: “If you choose to exercise the right of first refusal, [Marathon] expects you will execute the offer to purchase and deposit the Earnest Money as defined in the offer to purchase. The right of first refusal will not be accepted unless and until [Marathon] receives the executed offer to purchase and the Earnest Money.” (ECF No. 1-1 at 24-25.) Marathon sent, along with this notice, an “offer to purchase and a mutual cancellation agreement form.” (Id. at 25.) The offer to purchase contained several deed restrictions that would encumber significantly the plaintiffs' ability to resell the marketing premises. The mutual cancellation form indicated that, if the plaintiffs had signed the offers to purchase and submitted the money to Marathon, their franchise relationship with Marathon would have been terminated-requiring them to find a new gas supplier. The offer to purchase sent to each plaintiff was largely identical to PMG's individual offer for each of the plaintiffs' stations, except that PMG's offer included provisions regarding assignment of each dealer agreement to PMG and provisions allowing Marathon to delay the closing in the event of litigation related to the transaction (such as this lawsuit).

         None of the plaintiffs returned a signed offer to purchase or any earnest money before the deadline on July 7, 2017. Instead, plaintiffs brought this lawsuit.

         III.CONCLUSIONS OF LAW

         A. Legal Standard

         To obtain a preliminary injunction, the plaintiffs must demonstrate: “(1) irreparable harm; (2) either (a) a likelihood of success on the merits, or (b) sufficiently serious questions going to the merits of its claims to make them fair ground for litigation, plus a balance of the hardships tipping decidedly in favor of the moving party; and (3) that a preliminary injunction is in the public interest.” New York ex rel. Schneiderman v. Actavis PLC, 787 F.3d 638, 650 (2d Cir.), cert. dismissed sub nom. Allergan PLC v. New York ex. rel. Schneiderman, 136 S.Ct. 581 (2015) (internal quotation marks and citation omitted).

         B. Irreparable Harm

         The plaintiffs have demonstrated that failing to grant a preliminary injunction would expose them to irreparable harm. “Irreparable harm is injury that is neither remote nor speculative, but actual and imminent and that cannot be remedied by an award of monetary damages.” Schneiderman, 787 F.3d at 660 (internal quotation marks omitted). The Second Circuit has held that both the “termination of [a] franchise”, which would “obliterate [a] dealership, ” and the “harm from [the] loss of an ongoing business representing may years of effort and . . . livelihood” are examples of irreparable harm. Tom Doherty Assoc., Inc. v. Saban Entertainment, Inc., 60 F.3d 27, 37 (2d Cir. 1995) (internal quotation marks and citations omitted).

         Without a preliminary injunction, the plaintiffs would suffer an irretrievable loss of their right to purchase the marketing premises for their stations. Denying the motion for a preliminary injunction and allowing Marathon to close the sale of their locations to PMG-without first determining whether Marathon offered them a right of first refusal of a “bona fide offer” as required by law-would forever deprive the plaintiffs of the opportunity to purchase these stations from Marathon. If these transactions were to proceed, and I were then to find after a full determination on the merits that Marathon failed to comply with the statute because PMG's offers were not “bona fide, ” the plaintiffs' stations would have been sold without an opportunity to exercise their rights of first refusal.

         Further, assigning a dollar value to the missed opportunity to match a bona fide offer would be highly complicated and uncertain. Calculating the damages that might result from a violation of the plaintiffs' statutory right of first refusal would involve (1) predicting what the plaintiffs would have done had PMG made a bona fide offer, and (2) had it done so and had they exercised their rights of first refusal, predicting how their businesses might have fared had they become owners, rather than just renters, of the marketing premises. These would be highly uncertain-and probably speculative-inquiries. So the loss of plaintiffs' statutory right of first refusal is not “compensable and readily quantifiable.” See Schneiderman, 787 F.3d at 661. Therefore, this is the type of harm that is suitable for injunctive relief.[6]

         C. Success on the Merits

         On a motion for a preliminary injunction, the plaintiffs can prevail if they can show either: (1) “a likelihood of success on the merits”; or (2) “sufficiently serious questions going to the merits of [their] claims to make them fair ground for litigation, plus a balance of the hardships tipping decidedly in [their] favor[.]” Otoe-Missouria Tribe of Indians v. New York State Dep't of Fin. Servs., 769 F.3d 105, 110 (2d Cir. 2014) (citation and internal quotation marks omitted)). I conclude that the plaintiffs have satisfied both standards.

         1. Claims in the Amended Complaint

         Although several of the plaintiffs' claims were not supported by the evidence at the hearing, the plaintiffs have shown a likelihood of success on at least the CUTPA claim.

         a. Plaintiffs' Common Law and CPFA Claims

         The plaintiffs' breach of contract and implied covenant of good faith and fair dealing claims were not supported by the evidence at the hearing. The plaintiffs argue that Marathon's actions surrounding the proposed sale of their stations to PMG was a breach of their dealer agreements because of Marathon's conditioning the plaintiffs' exercise of their rights of first refusal on entering into a mutual cancellation agreement that would terminate the dealer agreements. But the plaintiffs fail to explain how Marathon breached the dealer agreements by proposing their termination if the plaintiffs chose to exercise their rights of first refusal, which, to date, they have not done. The evidence at the hearing did not suggest that the plaintiffs' breach of contract claim will succeed on the merits. And, to the extent the plaintiffs rely on this same theory to support their breach of implied covenant claim, it also was unsupported by the evidence.

         The plaintiffs' tortious interference claims are also not supported by the evidence presented at the hearing. The plaintiffs argued that PMG's allocations, skewed as they were to stations in states with rights of first refusal, caused Marathon to accept its overall offer and therefore would cause the termination of Marathon's dealer agreements with PMG. However, the evidence at the hearing showed that under the terms of the PMG-Marathon transaction, PMG would assume Marathon's obligations under the dealer agreements, not terminate them. Therefore, the plaintiffs have not shown a likelihood of success on these claims either.

         The plaintiffs further assert a claim directly under Conn. Gen. Stat. Section 42-133mm(c), but this provision does not provide for a private right of action. The CPFA separately provides a cause of action to enforce several of its provisions, Conn. Gen. Stat. Section 42-133n (stating that “[a]ny franchisee may bring an action for violation of sections 42-133l or 42-133m in the Superior Court to recover damages sustained by reason of such violation . . . and, where appropriate, may apply for injunctive relief”), but it does not provide a cause of action for ...


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