It’s not too often an attorney from a tiny firm battles a company like Shell Oil on behalf of a single plaintiff and walks away with a $50 million jury verdict.
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This looks like a gas station, but note no pumps. Atallah had to rent his defunct station to Smog Busters, which tests to ensure cars meet California emission control standards. PHOTO: Mike Valdez.TAAN |
“Elias Atallah personifies an optimistic and entrepreneurial spirit, everything America stands for,” said Gwire of Atallah, a Christian Lebanese immigrant who was seventeen when his family fled Lebanon for the United States during the Lebanese civil war. “He’s an absolute believer in the American system, and the quintessential little guy fighting for his rights. The jury loved him and loved what he stood for.
“In over 30 years of practice, having gone up against some of the biggest and best firms in the country, I have never seen a company throw resources against a party like Equilon threw against us,” says Gwire, who would have been content early on for his client to walk away with a settlement in the mid-six figures, although numerous attempts to try and negotiate a settlement over the years went nowhere.
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Attorney William Gwire |
The suit alleged that Equilon Enterprises, a subsidiary of Shell Oil Products USA, had knowingly concealed crucial information when selling Atallah a gas station in Riverside County, California in 2003. Atallah had no clue that the station was about to become the target of costly and potentially insurmountable environmental protection demands by state agencies. Shell, as Gwire showed, was well aware of that fact. At the first Los Angeles Superior Court jury trial, Shell was found guilty of intentional fraud and concealment and the jury awarded $1.65 million to Atallah in compensatory damages. After two more years of litigation, on March 8th, 2010, a new Los Angeles Superior Court jury returned a $50 million verdict for punitive damages. The trial judge is expected to review the verdict within 45 days.
The case began with the sale by Equilon to Atallah of a Texaco gas station located in Riverside that Atallah had previously operated under a lease for about 10 years; Atallah paid $759,575 for the gas station. After protracted and complex discussions between various public entities and Equilon over the problem of groundwater contamination, which overlapped the negotiation of the sale of the station to Atallah, the gas station, which had been closed down pending the sale, never reopened.
Atallah operated the gas station in question, located on Magnolia Avenue in Riverside, first as an authorized franchisee of Texaco and, after its merger with Shell, as a franchisee of Equilon. Directly across the street from Atallah’s gas station was a Shell station owned by Equilon. There were five wells situated along and below Magnolia Avenue that provided water to a treatment facility known as the Arlington Desalter facility. The well nearest to Atallah’s gas station was well No. 5, located approximately 960 feet downgradient from the station. The water in these wells was not potable, i.e., it was not fit for human consumption. Following a study of the profitability of its gas stations in Equilon’s western region, Equilon decided to sell the station operated by Atallah and to keep the other station. Equilon also notified Atallah that it was terminating his franchise. Equilon claims that in January 2002 it gave Atallah the right of first refusal to buy the gas station for the amount offered by a third party.
According to Atallah, however, Equilon failed to comply with the Petroleum Marketing Practices Act (PMPA) by refusing to sell the station to Atallah. In March 2002 Atallah filed an action in federal court under the PMPA. In October 2002, discussions began to settle the federal action between Equilon and Atallah. Most of the settlement terms were agreed upon by February or March 2003. On April 14, 2003, Atallah signed the settlement agreement that provided that Equilon would sell the gas station to Atallah for $759,575 and would also pay Atallah $90,000 for the early termination of his franchise agreement. The agreement also called for Equilon to remove the underground storage tanks (USTs). Escrow was to close on or before August 29, 2003. In accordance with the settlement agreement, Atallah closed the gas station down on April 14, 2003, in order to allow Equilon to remove the existing USTs, which was done in May 2003, and to allow Atallah to install in their stead new, state-of-the-art USTs.
Water concerns emerge
The Santa Ana Watershed Project Authority (SAWPA) oversees the quality and quantity of water in the so-called Santa Ana Watershed, which covers the area where Atallah’s gas station was located. In mid-2002, SAWPA decided to convert the five wells under Magnolia Avenue to produce potable water. In August 2002, the Department of Environmental Health for the County of Riverside notified Equilon that these wells would be converted to produce potable water, that Equilon needed to clean up USTs and that corrective action needed to be taken to prevent groundwater contamination.
Equilon, represented by hydrogeologist Brad Boschetto; SAWPA, represented by Eldon Horst; and the Regional Water Quality Control Board (RWQCB), represented by its UST section chief, Kenneth Williams, met seven times in 2003 and once on February 10, 2004. These meetings began in February 2003 while the settlement discussions between Equilon and Atallah of the federal action were still pending. In these meetings, SAWPA stated that if the groundwater became contaminated, it would require Equilon to treat and remove the contamination. Both SAWPA and RWQCB focused particularly on well No. 5 and wanted Equilon to present plans concerning groundwater monitoring, action plans in the event of contamination and a guaranty that Equilon would implement and finance remediation if that should become necessary.
At trial, Equilon stipulated that it never told Atallah about its meetings in 2003/2004 with SAWPA and RWQCB. Nor did Equilon ever tell Atallah that it was discussing groundwater contamination at the site of the gas station with SAWPA and RWQCB, that it was being asked to come up with an expensive contingency plan and that, as it had been informed, a spill might result in a liability of millions of dollars. Atallah was not advised to hire an environmental consultant.
Equilon retained Miller-Brooks, an environmental consultant, to conduct an assessment of the area in which Atallah’s gas station was located. In 2001 and 2002, Miller-Brooks prepared four reports that noted the presence of a well approximately 700 feet from the station (well No. 5) and stated that there was no evidence of groundwater contamination and no further action was warranted. A report issued in 2002 stated that contamination had been detected around the USTs some 17 years previously and that this had been fully remediated. Atallah was given these reports in April 2003 and read them. In April 2003, Miller-Brooks prepared yet another report in which it noted SAWPA’s operation of the Arlington Desalter, the existence of well No. 5 and the fully remediated contamination 17 years previously. There is no reference in this report to the interest and concern that SAWPA and RWQCB were showing in the matter of groundwater contamination, nor of the demands that these agencies were making on Equilon.
Faced with SAWPA’s request that Equilon enter into an indemnification agreement, in late May 2003 Equilon’s Boschetto made some calculations that yielded disturbing results. He concluded that it would cost between $300,000 and $500,000 to install a containment system, that it would take $40,000 a year to maintain the system and that, given the rapid groundwater velocity at the site, a spill could result in a liability between $20 million and $50 million. These calculations were never released to anyone outside Equilon. One result of these calculations was that Equilon decided to sell the Shell station across the road from Atallah’s station. Given the proximity of well No. 5, Equilon would not even sell gasoline to the new owner of the Shell station. In fact, when the Shell station was sold, a deed restriction prevented the sale of gasoline from the site. Atallah remained ignorant of the circumstances of this sale. Equilon’s general manager for its western region, David Burrow, testified that he never told Atallah about the groundwater problem, the cost of remediation and the reason that Equilon decided to sell the Shell station. Burrow conceded at trial that if he could go back in time, he would have provided Atallah with this information.
While Boschetto testified that he did not specifically recall that he told SAWPA that Equilon was removing the USTs from Atallah’s gas station, he stated that “[i]t makes sense” that he did so; he did not recall telling SAWPA that the station would again open as a gas station. In fact, SAWPA’s Horst testified that by mid-2003, the site of Atallah’s gas station was no longer of concern to SAWPA because he believed the station had been closed permanently. (Atallah had in fact shut the station down in April 2003 under his sale agreement with Equilon in order to allow Equilon to remove the old USTs; Atallah intended to install new USTs.) RWQCB was not treated any differently than SAWPA and, like SAWPA, it was not told that the plan was to sell the station to a party who would operate it as a gas station.
Under constant pressure from SAWPA, Equilon directed Miller-Brooks to prepare a contingency plan to identify the risks posed by well No. 5. Miller-Brooks did so and concluded that the velocity of groundwater seepage was a fast 32 to 40 feet per day; this posed a substantial problem. Boschetto testified that he could have but did not inform Atallah of this report. At this point in time, the scheduled closing of the escrow was four months away. This is significant because Atallah testified that if he had learned of the environmental problems in the summer of 2003, he would have hired the appropriate experts and would have been able to open the gas station for business by mid-October 2003.
Originally, escrow was to close on or before August 29, 2003. In July 2003, Wells Fargo requested a tank closure report from Atallah. Because Equilon had broken the well monitor when it removed the USTs in May 2003, the process of obtaining the report was delayed, which in turn delayed Wells Fargo. His attorney requested and obtained an extension of the escrow to October 10, 2003. Although Atallah met this deadline, Equilon did not, which resulted in yet another extension of the escrow to October 31, 2003. The last extension of the escrow to October 31, 2003, was to prove fateful.
In July 2003, Wells Fargo, the lender financing the purchase of the gas station, notified Atallah that it required an environmental report. Atallah retained Property Consultant, whose employee, James McElroy, contacted Boschetto and another outside environmental consultant retained by Equilon. Even though by this time Boschetto had attended meetings with SAWPA and RWQCB in February, March, May and June 2003 during which he had listened to the agencies’ concerns, he made no mention of the meetings or of the concerns voiced in those meetings. Nor did he tell McElroy of the cost calculations that he had performed that had yielded results bad enough to cause Equilon to sell the Shell station. Instead, he told McElroy that he, Boschetto, was happy with the groundwater monitoring and that he expected RWQCB to issue a “closure” or “no further action” required letter after the next quarterly testing. Not surprisingly, McElroy’s eventual report made no mention of any groundwater problems nor of the agencies’ concerns about those problems.
Unbeknownst to Atallah, the conditional use permit (CUP) for the gas station lapsed six months after the gas station was closed, i.e., on October 14, 2003. The rule is that a CUP terminates automatically and without notice if there is no continuous use of the property for six months. Equilon’s Burrow acknowledged that he knew of this rule. Atallah, on the other hand, did not even know that there was a CUP covering the property. The termination of the CUP was a fateful development. If Atallah had known of this, he would have come up with cash to buy the gas station since he had assets of approximately $4 million composed of cash and realty with equity that he could refinance.
In December 2003, after escrow had closed, Equilon gave Atallah a report discussing the groundwater testing that Equilon had done while escrow was pending. This was the first time that Atallah learned of the problems posed by well No. 5. It was not until the contractor who was to install new USTs learned in March 2004 that the CUP had lapsed that Atallah became aware of the existence and importance of the CUP. Although Atallah immediately applied in person for the CUP, he did not yet know that SAWPA had gone on record requesting to be informed if anyone applied for a CUP for the gas station. As Atallah was about to learn, SAWPA adamantly opposed the issuance of a CUP for the gas station. Although the Riverside planning commission initially approved reissuance of the CUP, SAWPA appealed this decision to the city council and there vigorously opposed the issuance of a CUP.
It was now that Atallah hired an expert urban planner, Douglas Shakelton, to help him through these growing difficulties. There was testimony that if Shakelton had been consulted in May or June 2003, and if Shakelton had known of SAWPA’s opposition to the gas station, Shakelton would have advised Atallah to reopen the gas station before the CUP lapsed on October 14, 2003. According to Shakelton, the opposition of an organization like SAWPA to the issuance of a CUP creates a great risk. While the city council approved the issuance of a CUP with many environmental safeguards, SAWPA was not satisfied. SAWPA filed an action against the city and Atallah, contending that the environmental review (CEQA) was in error and that a new CEQA was required. After the court had issued a preliminary injunction stopping Atallah from opening the gas station, the court eventually ruled that a new CEQA had to be prepared. This would have cost Atallah between $100,000 and $200,000 and would have taken up to two years. At the time of the trial of this case, the regional water district had commenced an eminent domain proceeding against the property on which the gas station is located.
The claim that went to trial was the cause of action for intentional misrepresentation. In essence, this cause of action alleged that SAWPA was opposed to the operation of the gas station and that Equilon, who knew of this opposition, intentionally concealed this fact from Atallah. The cause of action alleged that if Atallah had known of SAWPA’s opposition, he would not have bought the gas station. The jury found that Equilon had a duty to disclose to Atallah the facts “arising out of” Equilon’s meetings with SAWPA, including the fact that the meetings took place, and that Equilon also had to disclose what Equilon itself had “discovered relating to environmental activities or conditions that affected the Texaco station site.” The jury found that Equilon intentionally concealed from Atallah “important facts” about the property and that Atallah neither knew nor reasonably could have discovered these facts. The jury concluded that Equilon intended to deceive Atallah, that Atallah reasonably relied on Equilon’s concealment of these facts and that the concealment was a substantial factor in causing harm to Atallah. The jury also found that Equilon had acted with oppression, malice or fraud toward Atallah
Why is the trial judge going to review the verdict? Gwire says “over the course of the last 10-15 years, the highest courts in the country have become increasingly concerned about ‘runaway’ juries awarding staggering amounts for punitive damages.” He says that given the incredible wealth of Equilon, he thinks the jury let them off cheap.
But “there has also been a lot of pressure put on the judiciary by business and conservative groups to get punitive damage verdicts down. The pressure has worked. Starting about 7-8 years ago, courts starting dictating that jury awards of punitives could not exceed a certain ratio compared to the compensatory damage award. That ratio, originally stated as 9 to 1, has been further eroded and now it’s looking like the higher range (5 to 1 and higher) is only for the most extraordinary and exceptional cases. In California, the ratio may even be lower. Elias was awarded $1.65 million by the first jury, back in 2006, so a multiple of 4 to 1 would mean about a $6.5 million dollar punitive award.
“There is no question that the judge in this case will reduce the punitive verdict by a very large amount. Even if he wanted to let it stand at $50 million, he is prohibited from doing so by the decisions of the California Supreme Court. How much he will reduce it to is unknown, but it will definitely be into a low ratio. I want to emphasize, and this is important, the reduction has nothing to do with the merits of Elias’ case, or reprehensibility of Equilon/Shell’s conduct. When the reduction comes down, and we know it will, I don’t want Equilon/Shell crowing about how they have been vindicated. It’s no vindication…the judge HAS to do it.”
And Gwire says he has good reason for not wanting Shell to claim vindication. He says the company does not have a good reputation. According to the BBC, in 2003 the oil giant intentionally overstated its oil reserves by 20%, then admitted having done so, an unheard of situation. Investors were stunned, and when the company admitted the fraud, share price fell and £3bn was wiped out of people’s investments. Before it was over, three downgrades of the reserves were announced. Analysts were “Shell shocked.”
Gwire says Shell/Equilon is getting out of the ownership of retail gasoline stations and is in the process of selling them to jobbers, who are sort of middlemen. “I am told they are redirecting their direction as a company to what they call “upstream” efforts, that is the exploration, refining and production of oil and oil products.” He says they have a reputation for not treating their dealers well and that prospective station buyers might want to be extra careful when dealing with Shell/Equilon.
Shell spokesperson Ted Rolfvondenbaum said Shell would not comment on the trial attorney’s opinions about Shell given that the situation was ongoing. He confirmed that the company was more focused on oil exploration and development. As for the jury’s verdict? “We are disappointed in the verdict, it was inconsistent with the evidence,” he said. “We are examining our post-trial options.”
When the judge reviews the verdict in this case and a decrease is made in the punitive damages, either side can appeal. Gwire says Shell will appeal if Atallah’s punitive damages award is more than twice his $1.65 million in compensatory damages. He says “I’m not sure what we would do…it would depend on what the judge does.”
As for Atallah, who says he has received image awards from Shell for his gas stations in southern California?
“I think the jury was misled, because they were not told there would be a verdict review.”
He says he has spent over a million dollars and eight and a half years on the case..”I do believe in justice ….” he says and he just might pursue it further.
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