Opinion ID: 764207
Heading Depth: 2
Heading Rank: 2

Heading: The Transfer of The Premises; The Synthetic Lease

Text: 32 The Simmons Group, the Raether Group and the Hindi Group all claim that Union Oil violated the PMPA because the premises of one or more members of their groups were not transferred to Tosco itself, but were transferred to the Clover Trust. See 15 U.S.C. § 2802(b)(2)(E)(iii)(II). The claim of the Raether Group can be rejected at once because none of its members held premises which were transferred to the Clover Trust. The other two groups are a different matter, and their claims must be resolved on the merits, but we are satisfied that the district court did not err. 33 When a franchisor terminates or nonrenews existing franchises or franchise relationships 6 as part of a market withdrawal, § 2802(b)(2)(E)(iii) provides that the franchisor can either (I) grant the franchisee a chance to match a bona fide offer to purchase the premises or (II) sell, assign, or transfer the franchisor's interest in the premises to another person who will offer a nondiscriminatory franchise to the franchisee. Subsection II requires that the old and new franchisors act in a manner consistent with the overriding purpose of ... the PMPA ... to protect the franchisee's reasonable expectation of continuing the franchise relationship. See Ellis, 969 F.2d at 788. The franchisees argue that the terms of subsection II have not been met, nor can they be, because Clover Trust, the holder of title to the premises, is not a franchisor 7 capable of offering nondiscriminatory franchises to the former Union Oil franchisees. That argument is far too simplistic. 34 All agree that Clover Trust is not a franchisor, and cannot authorize anyone to use a trademark in connection with fuel sales. It has not even entered into any contractual relationship with the franchisees. That, however, does not mean that the requirements of subsection II have not been met, and that subsection I should have been applied. As Union Oil and Tosco point out, the synthetic lease arrangement involving Clover Trust should not be considered a violation of subsection II, because Clover Trust is part of a special purpose financing arrangement whereby Tosco, in effect, purchased the property, and Tosco was capable of offering nondiscriminatory franchises to the former Union Oil franchisees. 35 Nothing in either the logic and purposes of the PMPA, or specifically of subsection II, precludes a person to whom the franchisor's interest in the premises is transferred from financing the purchase and securing that financing with the premises themselves. It would be most peculiar if the PMPA did preclude financing arrangements. It is true that the terms of the PMPA are to be liberally construed to protect the franchisees. See Humboldt Oil Co., Inc. v. Exxon Co., 695 F.2d 386, 389 (9th Cir.1982). On the other hand, the use of secured financing can facilitate large transactions like the one at hand, without adding any untoward instability to franchise arrangements. In that regard, as we have already noted, in enacting the PMPA Congress did not wish to unduly interfere with the interests of the franchisor, who is, after all, the owner of the property involved. See May-Som Gulf, 869 F.2d at 921; Valentine v. Mobil Oil Corp., 789 F.2d 1388, 1391-92 (9th Cir.1986). Union Oil had an interest in capitalizing on the investments it had made in the corporate identity and goodwill of 76 Products, and it could fully recover that investment if it could sell a going concern, including trademarks, franchise operations, and service station premises. If, as appears here, the particular details of the financing of the sale transaction had no untoward impact on the interests of the franchisees, there is no reason to find a PMPA violation. 36 The PMPA does not contain any internal definition of ownership, although it is rather expansive in its definition of leased marketing premises, which it defines as premises owned, leased, or in any way controlled by the franchisor. 15 U.S.C. § 2801(9); see also Fresher v. Shell Oil Co., 846 F.2d 45, 46-47 (9th Cir.1988). Tosco's control of the premises was always quite real. Indeed, general law treats synthetic lease arrangements as transparent for tax and other purposes. 8 The entire point of a synthetic lease is that it is treated as an operating lease for accounting purposes, but is otherwise regarded by virtually all concerned, including the government, as a secured loan. 37 Despite the fact that a synthetic lease arrangement could formalistically be parsed into individual arrangements which would include a purchase by Clover Trust for the benefit of SBCC with a lease to Tosco, we need not, and do not, ignore the fact that the cumulative arrangements resulted in a single transaction whereby Tosco took over the ownership role formerly held by Union Oil. See Sun Oil Co. v. C.I.R., 562 F.2d 258, 268-69 (3d Cir.1977). In other words, there is no reason to hold that an arrangement which is seen as a transparent financing arrangement with true ownership in a Tosco entity for other legal purposes should become opaque when we look at it through a PMPA lens. 38 In addition, to allay any franchisee concerns, Tosco included in the Addendum to the franchise agreement a statement that it will purchase the property from Clover Trust if the lease ends before the termination of the franchise agreement. The Addendum also guarantees the franchisees a right of first refusal pursuant to the terms of the PMPA in case of non-renewal or termination. Thus, Tosco is contractually bound in its franchise agreement to protect the franchisees' expectations of an ongoing franchise relationship. That, again, underscores Tosco's understanding that in reality its obligations and rights are the same as they would be under a more conventional mortgage. Tosco could breach its contract, default, and lose the property. But the PMPA does not require us to assume that it will, and it is more reasonable to assume, instead, that [t]hings happen according to the ordinary course of nature and the ordinary habits of life. Cal. Civ.Code § 3546. Barring financial collapse, it is highly unlikely that Tosco will forego its option to purchase at the end of the synthetic lease term because the effective financial penalties would be very steep. From Tosco's standpoint, its acquisition of fee title is, as it puts it, a forgone conclusion. 39 Moreover, the franchisees have not shown any interests put at risk by the method used to sell the premises to Tosco. They are operating under the same franchise terms, and their reasonable expectations of a continuing franchise relationship have not been thwarted by the use of the synthetic lease. The franchisees are all exactly where they reasonably could have expected to be under the franchise agreements they made as retailers of 76 Products had a more conventional financing arrangement been used. Life goes on as before, and they are receiving precisely the benefit of the franchise relationship that they bargained for. 40 The synthetic lease should, therefore, be treated as the financing vehicle it is, and for PMPA purposes Tosco should be looked upon as the transferee. Subsection II was not violated by its use.