BILLS INC v. TZUCANOW

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Court of Appeal, Fourth District, Division 1, California.

E.S. BILLS, INC., etc., Plaintiff and Respondent, v. Daniel TZUCANOW, et al., Defendants and Appellants.

Civ. 26757.

Decided: August 30, 1983

Gregg A. Johnson, Russell M. De Phillips and Milberg, Johnson, De Phillips & Lamson, San Diego, for defendants and appellants. Paul B. Wells, Richard H. Benes, Linda Cory Allen and Procopio, Cory, Hargreaves & Savitch, San Diego, for plaintiff and respondent.

Daniel and Marion Tzucanow and their son Daniel appeal the trial court's judgment in favor of Sanesco Oil Company in an unlawful detainer proceeding.

FACTS

E.S. Bills, Inc., doing business as Sanesco Oil Company, (Sanesco) is a gasoline distributor and retailer.   In April 1979 Sanesco entered into an agreement to lease a service station to Daniel and Marion Tzucanow and their son.   The agreement consisted of three integrated documents:  a lease, a gasoline storage and purchase agreement and a dealers sale and security agreement.   The lease did not require any monthly rental;  however, the gasoline storage and purchase agreement required the Tzucanows to purchase all the gasoline sold at their station from Sanesco at “Sanesco's applicable dealer purchase price.”   The Tzucanows paid for the gasoline as it was sold to the public.

By April 1981, the Tzucanows had become dissatisfied with this price.   The Tzucanows filed a lawsuit against Sanesco and two of its officers, initially in superior court, then after a voluntary dismissal, in the United States District Court for the Central District of California.   They alleged Sanesco violated antitrust laws and breached their contract by selling gasoline to them at a retail price instead of a wholesale price as the Tzucanows claimed was contemplated by the term “dealer purchase price.”

On June 8, 1981, the Tzucanows wrote Sanesco that as of June 19, 1981, they would pay Sanesco only two cents per gallon over published Arco rack 1 prices.   At this time Sanesco's delivery cost to the Tzucanows' service station exceeded two cents per gallon.   Sanesco refused to sell gasoline to the Tzucanows at that price.

After June 19, 1981, the Tzucanows refused to buy gasoline from Sanesco and on June 23, 1981, they started buying gasoline from another supplier.   The following day, Sanesco served the Tzucanows with a written 30-day notice terminating the lease.   The Tzucanows refused to vacate, and on July 29, 1981, Sanesco filed an unlawful detainer action.

In response to the unlawful detainer action, the Tzucanows claimed Sanesco did not have good cause to terminate the lease as required by Business and Professions Code section 20999.1 and termination of the lease amounted to a retaliatory eviction.   The trial court found Sanesco had good cause to terminate as defined in three of the four subsections of 20999.1 and there was no retaliatory eviction.   Accordingly, the trial court awarded possession to Sanesco, $16,917.15 in damages for the reasonable rental value of the premises from June 22, 1981, to November 15, 1981, when the Tzucanows voluntarily returned possession of the premises, and $8,017.90 in attorney fees plus costs.   The Tzucanows appeal.

DISCUSSION

The Tzucanows contend the trial court erroneously restricted them from evidencing valid affirmative defenses on the ground such defenses were not allowed in the unlawful detainer action, but rather were properly the subject of the Tzucanows' breach of contract action.

 Unlawful detainer actions are summary proceedings.  (Barela v. Superior Court, 30 Cal.3d 244, 249, 178 Cal.Rptr. 618, 636 P.2d 582.)   Generally, counter-claims, cross-complaints and affirmative defenses are not allowed since they detract from the summary nature of the proceeding.   (Knowles v. Robinson, 60 Cal.2d 620, 622, 36 Cal.Rptr. 33, 387 P.2d 833.)   However, a defense which relates directly to the issue of possession and which, if established, would result in the tenant's retention of the premises, is permitted.  (Green v. Superior Court, 10 Cal.3d 616, 633, 111 Cal.Rptr. 704, 517 P.2d 1168.)   Recognized affirmative defenses to unlawful detainer actions include:  breach of the landlord's implied warranty of habitability (ibid.);   eviction in retaliation for the tenant's exercise of statutory or constitutional rights (S.P. Growers Assn. v. Rodriguez, 17 Cal.3d 719, 724, 131 Cal.Rptr. 761, 552 P.2d 721);  and, in the case of petroleum franchises, the lack of good cause to terminate or fail to renew the lease (Code Civ.Proc., § 1174).

Business and Professions Code section 20999.1 defines what is good cause justifying the termination or nonrenewal of a retail gasoline dealer franchise.   It states, in pertinent part:

“Notwithstanding the terms of any franchise, no franchisor shall terminate, cancel or refuse to renew any existing franchise without good cause.

“As used in this sectin good cause is limited to the following:

“(a) The gasoline dealer or petroleum distributor failed to comply with essential and reasonable requirements of the franchise agreement;

“(b) The gasoline dealer or petroleum distributor failed to act in good faith in carrying out the terms of the franchise;  or

“․

“(d) For other legitimate business reasons (except that a termination, or cancellation of a franchise for the purpose of enabling the petroleum distributor or manufacturer to assume operation of the distributor's or gasoline dealer's business shall not be considered to be a legitimate business reason unless the gasoline dealer or distributor is paid reasonable compensation for the value of his franchise, including a reasonable amount for good will)”.

The trial court here recognized lack of good cause to terminate (including retaliatory eviction) was a defense to Sanesco's unlawful detainer action.   At issue was the question of what was a reasonable requirement of the franchise agreement, i.e., whether Sanesco was selling to the Tzucanows at the dealer purchase price or charging more in order to force them out of business.   If the latter were the case, the court reasoned that would not be a reasonable requirement of the franchise agreement.   Presumably, Sanesco would then lack good cause to terminate since the Tzucanows otherwise fulfilled “the essential and reasonable requirements of the franchise agreement” (Bus. & Prof.Code, § 20999.1, subd. (a)), acted “in good faith in carrying out the terms of the franchise” (Bus. & Prof.Code, § 20999.1, subd. (b)), and there would exist no “other legitimate business reasons” for terminating the agreement (Bus. & Prof.Code, § 20999.1, subd. (d)).

To this end, the trial court permitted the Tzucanows to put on evidence of the price charged as Sanesco's “dealer purchase price,” the reason for this price and the prices charged by Sanesco to similar dealers.   The trial court excluded evidence of consumer gasoline prices at Sanesco's company operated stations, profit margins of Sanesco and other distributors and published refinery prices.

The Tzucanows contend this excluded evidence would have established Sanesco was charging an excessive price (retail versus wholesale) and the Tzucanows made a good faith attempt to pursue their rights to a fair price under the commercial code;  this in turn would have established an affirmative defense since the Tzucanows argue their duty to purchase gasoline from Sanesco was dependent on Sanesco's fulfilling its obligation to supply gasoline at a reasonable price.   The Tzucanows claim they offered Sanesco a reasonable price (determined by the Tzucanows to be two cents over Arco's published rack price), but Sanesco refused to supply gasoline at the reasonable price.   The termination which followed was unjustified and in retaliation for the Tzucanows asserting their right to a fair price.

The starting points of the Tzucanows' argument are the covenant of good faith and fair dealing implied in every contract (Universal Sales Corp. v. Cal. etc. Mfg. Co., 20 Cal.2d 751, 771, 128 P.2d 665;  Vale v. Union Bank, 88 Cal.App.3d 330, 336, 151 Cal.Rptr. 784) and the requirement a “price to be fixed by the seller ․ means a price for him [or her] to fix in good faith.”   (Comm.Code, § 2305, subd. (2);  italics added.)   From these covenants the Tzucanows assert when the seller breaches by refusing the buyers' demand for a reasonable price, the buyers obtain a unilateral right to fix the price.   The Tzucanows cite no authority to support the proposition buyers (instead of the courts) have the right to determine what is meant by reasonable.

 The Tzucanows are entitled to a reasonable price because Sanesco is obligated to set its dealer purchase price in good faith.   However, the Tzucanows are not entitled to treat the contract as breached, unilaterally determine a “reasonable” price and remain in possession.   First, the agreement between the parties gives the Tzucanows no right to set the “dealer purchase price” when they believe Sanesco is charging an excessive amount.

Second, the law gives the Tzucanows a remedy for Sanesco's alleged refusal to meet its obligation of good faith and fair dealing in a breach of contract action for damages.   It is for the courts, not the Tzucanows, to determine what is a reasonable price once negotiations between the parties have failed.   That it is for the courts to determine a reasonable price in such a conflict is obvious by the facts here.   The Tzucanows' “reasonable price” did not even cover Sanesco's transportation costs, let alone overhead and other expenses.   Indeed, the Tzucanows recognize a breach of contract action is a proper remedy and they have a suit pending against Sanesco.

Third, Sanesco's alleged breach of its obligation to set the “dealer purchase price” in good faith does not authorize nor excuse the Tzucanows' breach of their obligation to purchase gasoline from Sanesco.   This is especially true because Sanesco did not charge rent for the station.   The only consideration for the Tzucanows' tenancy was the promise to purchase all gasoline sold at the station from Sanesco.   Sanesco bore any risk of loss because payment was due on the gasoline only as it was sold to the public.

Finally, assuming, arguendo, the Tzucanows had a valid affirmative defense to Sanesco's unlawful detainer action based upon Sanesco's breach of its obligation of good faith and fair dealing, the right to put on an affirmative defense based upon the franchise agreement in an unlawful detainer action is not unlimited.2  (Green v. Superior Court, supra, 10 Cal.3d 616, 633–634, 111 Cal.Rptr. 704, 517 P.2d 1168.)

When the legality of the reason for the eviction is an affirmative defense, the court must balance the summary nature of the proceeding against the public policies furthered by protecting the tenant from eviction under the alleged offense.  (S.P. Growers Assn. v. Rodriguez, supra, 17 Cal.3d 719, 724, 131 Cal.Rptr. 761, 552 P.2d 721;  Mobil Oil Corp. v. Handley, 76 Cal.App.3d 956, 963, 143 Cal.Rptr. 321.)   The trial court may refuse to hear the tenant's affirmative defense when the tenant has an adequate remedy at law and/or when trial of the alleged defense would be lengthy and difficult.   Further, the California Supreme Court is less inclined to allow retaliatory eviction claims by commercial tenants since the commercial tenant can vindicate business rights by a separate suit, an alternative not practically available to a residential tenant.  (S.P. Growers Assn. v. Rodriguez, supra, 17 Cal.3d 719, 730, 131 Cal.Rptr. 761, 552 P.2d 721;  Mobil Oil Corp. v. Handley, supra, 76 Cal.App.3d 956, 966, 143 Cal.Rptr. 321.)

The Tzucanows argue Business and Professions Code sections 20999.1 et seq. present a strong public policy which should tip the balance in favor of allowing their excluded evidence and defenses.   The legislation was enacted to correct certain abuses the Legislature perceived to exist in franchise arrangements between petroleum distributors and retail gasoline dealers.   By correcting the perceived abuses, the Legislature hoped to insure the continued availability of a vital energy source at prices which reflected competitive and nondiscriminatory practices.  (Union Oil v. Moesch, supra, 88 Cal.App.3d 72, 76, 151 Cal.Rptr. 517;  stats. 1975, ch. 640, § 2, p. 1390.)   One of the abuses which the Legislature wished to correct was the arbitrary termination of retail gasoline dealer franchises and leases.   To this end, the Legislature enacted Business and Professions Code section 20999.1 and Code of Civil Procedure, section 1174 which prevent the termination of such franchises and leases without good cause.

Presumably the trial court weighed this public policy when deciding whether to allow the defense.   The trial court specifically permitted evidence on the issue of good cause.   Not permitting all the alleged defenses was not a failure to properly weigh competing factors.   The defenses alleged here would be lengthy and difficult.   The petroleum market is very complicated and it is difficult to compare one distributor to another and one retail petroleum dealer to another because of the variances in the terms of their agreements, variances in the refineries with whom they deal (e.g., how much does the refinery pay for its crude, how much does it have to expend to refine it?) and variances in the retail dealer locations and facilities.   Finally, the Tzucanows are commercial tenants who can and are vindicating their business rights through a separate suit for breach of contract.   The trial court could exclude the evidence in the unlawful detainer action because it properly belonged in the Tzucanows' breach of contract action.

 The trial court's determination there was good cause to terminate the Tzucanows' lease is correct since the Tzucanows' failure to purchase gasoline from Sanesco as required by their agreement resulted in a failure “to comply with essential and reasonable requirements of the franchise agreement” (Bus. & Prof.Code, § 20999.1, subd. (a)), a failure “to act in good faith in carrying out the terms of the franchise” (Bus. & Prof.Code, § 20999.1, subd. (b)), and gave Sanesco a “legitimate business reason” for terminating the agreement (Bus. & Prof.Code, § 20999.1(d)).

The Tzucanows did not establish Sanesco was charging them anything other than the “applicable dealer purchase price.”   Nor did they establish Sanesco's termination was in retaliation for the Tzucanows' lawsuit.   The vice president of Sanesco specifically denied the Tzucanows' lawsuit motivated the decision to terminate the lease.   This testimony was found true by the trial court and we must accept its determination on appeal.

Pursuant to the agreement between the parties, Sanesco is entitled to attorney fees.

The judgment is affirmed.

FOOTNOTES

1.   “Rack” price is the price charged by refiners, usually major oil companies, to distributors, brokers and others who purchase tanker loads (usually 8,700 gallons) of gasoline at the refiner or pipeline loading terminal, i.e., the “rack.”

2.   Union Oil v. Moesch, 88 Cal.App.3d 72, 151 Cal.Rptr. 517, cited by the Tzucanows, does not stand for the proposition all breaches of a franchise agreement are proper defenses to an unlawful detainer action brought by a petroleum distributor against a retail gasoline dealer.   Moesch dealt only with the issue of whether Business and Professions Code section 20999.1 could be applied to a holdover tenancy which arose after the effective date of the statute.  Moesch did not abandon the rule;  defenses in an unlawful detainer action must relate to the issue of possession.   Nor did Moesch decide the rule of balancing the summary nature of an unlawful detainer action against the public policies underlying the asserted defense does not apply to petroleum franchises.

STANIFORTH, Associate Justice.

COLOGNE, Acting P.J., and LEWIS, J.,* concur.

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