Court Holds That Submitting An Appraisal To a Lender To Obtain Financing Renders the Contents of the Appraisal Admissible

In Transbay Auto Service, Inc. (“Transbay”) v. Chevron USA, Inc. (“Chevron”), Transbay entered into a service station franchise relationship with Chevron, whereby Transbay paid rent to Chevron for the right to operate a service station located at 301 Claremont Boulevard, San Francisco, California (“Property”), under the Chevron brand. After several years, Chevron decided to sell the Property, and made what it deemed to be a “bona fide offer” to sell the Property to Transbay, in accordance with the Petroleum Marketing Practices Act (“PMPA”). A “bona fide offer” under the PMPA is measured by an objective market standard. To be objectively reasonable, the offer must approach fair market value.

To determine the Property’s fair market value, Chevron employed Deloitte Financial Advisory Services (“Deloitte”) to conduct an appraisal of the Property. Deloitte deemed the Property worth $1.5 million, if it continued to be operated as a service station (“Deloitte Appraisal”). Regardless, Chevron offered to sell the Property to Transbay as a branded service station for $2.386 million, or as an unbranded station for $2.375 million. Under protest, Transbay accepted the unbranded offer. In pursuing financing, Transbay obtained an appraisal of the Property by Property Sciences Group, which valued the Property at $2.52 million, if it continued to be operated as a service station (“PSG Appraisal”). Transbay provided the PSG Appraisal to California Pacific Bank (“CPB”), which granted Transbay the financing it sought to purchase the Property. Transbay then entered into a new partnership with Valero to re-brand the service station.

Transbay then sued Chevron for violating the PMPA. At trial, Transbay objected to the PSG Appraisal as constituting inadmissible hearsay. Chevron argued that it was admissible as an adoptive admission. The District Court agreed with Transbay, ruling that the PSG Appraisal was inadmissible hearsay, and did not constitute an adoptive admission because the owner of Transbay testified that he did not read the PSG Appraisal before closing the transaction with Chevron. Precluded from considering the PSG Appraisal, the jury found for Transbay in the amount of $495,000. Chevron subsequently moved for a new trial based on the District Court’s exclusion of the PSG Appraisal. The District Court denied the motion and reiterated its bench order, finding that no evidence “indicated that [the owner] actually read the contents of the PSG Appraisal.” Chevron appealed.

The Ninth Circuit Court of Appeals reversed the District Court’s ruling, finding that when a party acts in conformity with the contents of a document, such as by giving an independent appraisal to a third-party lender to secure a loan, such an action constitutes an adoption of the statements contained therein, even if the party never reviewed the document’s contents. Moreover, such an action constitutes an adoption even if the third-party lender never itself used or relied on the document.

Nick D. Fine, Associate, ndf@sbj-law.com