January 15, 2026|Franchise Frontlines
January 15, 2026 | United States District Court for the District of New Jersey | 2026 WL 114751 (D.N.J. Jan. 15, 2026) (Not for Publication)
Executive Summary
In a franchise termination dispute involving 17 gasoline stations, Judge Georgette Castner of the United States District Court for the District of New Jersey granted summary judgment in favor of the franchisor under the Petroleum Marketing Practices Act (“PMPA”), 15 U.S.C. § 2801 et seq., holding that termination was lawful where the franchisee failed to pay rent and failed to provide acceptable security. The franchisee argued that termination was unreasonable because the franchisor had withheld credit card proceeds that could have covered rent and because the franchisor did not properly demand a replacement letter of credit. The court rejected those arguments, holding that the “without setoff” rent provisions were reasonable and material, that the franchisee’s nonpayment was not beyond its reasonable control, and that termination was objectively reasonable under both 15 U.S.C. § 2802(b)(2)(A) and § 2802(b)(2)(C). Universal Prop. Servs., Inc. v. Lehigh Gas Wholesale Servs., Inc., 2026 WL 114751, at *8–13 (D.N.J. Jan. 15, 2026). The decision reinforces that rent payment obligations and security requirements are core franchise provisions and that financial distress—standing alone—does not excuse noncompliance under the PMPA.
Relevant Background
Circle K Stores, Inc., a franchisor of gas stations and convenience stores, entered into a series of franchise agreements with Universal Property Services, Inc. (“UPS”) covering 17 Florida locations. 2026 WL 114751, at *1. Each franchise package included both a lease and a fuel supply agreement. Shortly after execution, Circle K assigned the agreements to Lehigh Gas Wholesale Services, Inc., which became the franchisor. Id.
The agreements required UPS to provide security acceptable to the franchisor, including letters of credit. Id. at *2. UPS supplied letters of credit issued by Soleil Chartered Bank. However, the record developed during discovery revealed significant concerns regarding those instruments. Soleil’s representative testified that the bank would not honor a draw request unless UPS first paid Soleil under a related indemnity agreement, and that Soleil had no independent funds backing the letters. Id. at *2–3. In addition, a later attempt to provide a replacement letter of credit purportedly from Barclays Bank was unsupported by any confirmation from Barclays that it had issued such an instrument. Id. at *4.
Separately, UPS failed to pay rent beginning in November 2019 and continued to miss rent payments through February 2020, accumulating more than $700,000 in arrears. Id. at *4–5. During this period, Lehigh Gas withheld credit card proceeds from the stations, relying on contract provisions granting it a security interest in “all proceeds” of UPS’s operations. Id. at *5. UPS argued that the withheld proceeds could have satisfied rent and that termination was therefore unreasonable.
On February 6, 2020, Lehigh Gas issued a termination notice citing failure to pay rent, failure to pay for fuel, and failure to provide acceptable security. Id. at *1–2. UPS challenged termination under the PMPA.
Decision
The PMPA permits termination upon “failure by the franchisee to comply with any provision of the franchise, which provision is both reasonable and of material significance to the franchise relationship.” 15 U.S.C. § 2802(b)(2)(A). It also permits termination upon “[t]he occurrence of an event which is relevant to the franchise relationship and as a result of which termination … is reasonable,” including failure “to pay … in a timely manner when due all sums to which the franchisor is legally entitled.” 15 U.S.C. §§ 2802(b)(2)(C), 2802(c)(8).
The court first addressed termination under § 2802(b)(2)(A). The leases required rent to be paid “without setoff.” 2026 WL 114751, at *9. It was undisputed that UPS failed to pay rent for four consecutive months. Id. at *9–10. The court held that the rent payment provision was both material and reasonable. Payment of rent, the court noted, is central to the franchise relationship, and UPS had expressly agreed that the lease provisions were reasonable and materially significant. Id. at *10.
UPS argued that it could not pay rent because Lehigh Gas withheld credit card proceeds. The court rejected that argument. Judge Wolfson had previously held at the pleadings stage that the agreements authorized Lehigh Gas to retain both fuel and non-fuel proceeds as security. Id. at *11. On summary judgment, the court reaffirmed that the “without setoff” clause barred UPS from withholding rent based on alleged counterclaims. Id. at *9–10. The court further emphasized that a franchisee’s lack of funds does not constitute a circumstance “beyond the reasonable control of the franchisee” under the PMPA. Id. at *10–11 (citing Hillmen, Inc. v. Lukoil N. Am., LLC, 2015 WL 3947960 (E.D. Pa. June 26, 2015)). The record showed that UPS had transferred significant sums to affiliated entities during the same period it failed to pay rent. Id. at *10. Accordingly, termination was permitted under § 2802(b)(2)(A).
The court also held that termination was independently permissible under § 2802(b)(2)(C). Although Third Circuit precedent requires an objective reasonableness inquiry rather than a per se rule, the court found that Lehigh Gas’s decision was reasonable “from the perspective of a reasonable business person charged with making such decision.” Id. at *12 (quoting Patel v. Sun Co., 141 F.3d 447, 456 n.5 (3d Cir. 1998)). Lehigh Gas had legitimate concerns regarding the validity of the letters of credit and UPS’s mounting arrears. Id. at *12. Discovery confirmed that the Soleil letters lacked independent backing and that the Barclays instrument was unsupported. Id. at *12–13. Under those circumstances, withholding proceeds as security and terminating for nonpayment were objectively reasonable. Id. at *12–13.
The court therefore granted summary judgment in favor of the franchisor on the PMPA claim. Id. at *13. It also granted summary judgment as to liability on the franchisor’s lease and guaranty counterclaims, though damages remained to be determined. Id. at *13–14.
Looking Forward
This decision provides a clear and practical roadmap for franchisors operating under the PMPA. First, it reinforces that rent payment provisions—particularly those requiring payment “without setoff”—are core, material components of the franchise relationship. Courts may be reluctant to allow franchisees to use withheld funds or unrelated disputes as a basis to excuse nonpayment, especially where the agreements expressly allocate risk and security rights. Second, the opinion underscores that security instruments must provide meaningful protection. Where letters of credit are illusory or lack independent backing, a franchisor’s insistence on acceptable replacement security may support termination if the franchisee fails to comply. Third, the court’s analysis of objective reasonableness confirms that termination decisions are evaluated from the standpoint of a prudent business operator, not through hindsight or sympathy for financial distress. While the PMPA was enacted to prevent arbitrary terminations, it does not insulate franchisees from the consequences of material nonpayment or failure to provide contractually required security.
Franchisors would nevertheless be well advised to document payment defaults carefully, confirm compliance with PMPA notice requirements, and maintain clear records regarding requests for replacement security or other remedial steps. A well-developed record—particularly at the summary judgment stage—can be decisive.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
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