792 F.2d 1380 (9th Cir. 1986), 84-6268, Kern Oil and Refining Co. v. Tenneco Oil Co.

Docket Nº:84-6268, 84-6367 and 84-6482.
Citation:792 F.2d 1380
Party Name:Energy Mgt. P 26,562, 5 Fed.R.Serv.3d 592, KERN OIL AND REFINING CO., Plaintiff/Counter-Defendant-Appellee, v. TENNECO OIL CO., Defendant/Counterclaimant-Appellant.
Case Date:June 24, 1986
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 1380

792 F.2d 1380 (9th Cir. 1986)

Energy Mgt. P 26,562, 5 Fed.R.Serv.3d 592,

KERN OIL AND REFINING CO., Plaintiff/Counter-Defendant-Appellee,


TENNECO OIL CO., Defendant/Counterclaimant-Appellant.

Nos. 84-6268, 84-6367 and 84-6482.

United States Court of Appeals, Ninth Circuit

June 24, 1986

Argued and Submitted Aug. 6, 1985.

Page 1381

Richard E. Sherwood, O'Melveny & Myers, Los Angeles, Cal., for plaintiff/counter-defendant-appellee.

James R. Martin, Los Angeles, Cal., for defendant/counterclaimant-appellant.

Appeal From the United States District Court for the Central District of California.

Before ANDERSON, BEEZER and BRUNETTI, Circuit Judges.

BEEZER, Circuit Judge:

Kern Oil & Refining Co. filed an action against Tenneco Oil Company, seeking restitution for payments made to Tenneco under an alleged mistake of fact. Tenneco filed various counterclaims, including a claim for lost profits arising out of Kern Oil's failure to supply crude oil to Tenneco. In No. 84-6268, Tenneco challenges the district court's judgment in favor of Kern Oil on the restitution claim. In No. 84-6482, Tenneco seeks reversal of the district court's order granting attorneys' fees to Kern Oil. In No. 84-6367, Tenneco challenges the dismissal of the lost profits counterclaim for lack of prosecution. We affirm.



Kern Oil is a general partnership doing business in California. 1 Tenneco is a Delaware corporation with its principal place of business in Texas. On May 19, 1977, Tenneco entered into a contract to sell crude oil to Kern Oil. Tenneco agreed to sell its production from twenty-four specified leases to Kern Oil. The contract contained the following terms:

Crude oil from the above leases will be balanced against crude oil sold to Tenneco by [Kern Oil] up to 3,000 barrels per day. All stripper crude oil from the above leases and the Rosecrans Field ... will be sold at the appropriate lower tier price. Each month, enough oil from the Yowlumne Field will be sold at the lower tier price to make the total stripper and Yowlumne crude oil sold at the lower tier price equal to 3,000 barrels per day. The remaining barrels produced from the Yowlumne Field will be sold at the upper tier price, and the non-stripper leases will be sold at the appropriate lower or upper tier prices.

Page 1382

(emphasis added). The primary issue in this case is the interpretation of those terms.

In the mid-1970s, the Federal Energy Administration adopted a complex system to regulate the price of domestic crude oil. The FEA divided crude oil into three classes: "old," "new," and "stripper well." 10 C.F.R. Secs. 212.54, 212.72 (1977). "Old" crude oil of a particular grade could not be sold for a price higher than the "lower tier ceiling price" for that grade. Id. Sec. 212.73(a). "New" crude oil of a particular grade could not be sold for a price higher than the "upper tier ceiling price" for that grade. Id. Sec. 212.74(a). "Stripper well" crude oil could be sold at any price. Id. Sec. 212.54(a)-(b).

By 1980, this system had become more complicated. As a part of the Carter Administration's effort to deregulate crude oil, the Department of Energy created several new classes of crude oil that could be sold at market price. One such class was "market level new" crude oil. The regulation stated:

"Market level new crude oil" means, with respect to a particular property during a particular month, the product of the market level factor for that month and the volume of new crude oil produced and sold from that property during that month. The market level factor for January 1980 shall be four and sixtenths percent (4.6%) and shall be increased by four and six-tenths percent (4.6%) in each succeeding month.

10 C.F.R. Sec. 212.72 (1980). "Market level new" crude oil is also referred to as "upper-tier released" crude oil. Under this system, all "new" crude oil would be deregulated in twenty-two months. The DOE also created two new classes of deregulated crude oil: "newly discovered" crude oil, id. Sec. 212.79, and "tertiary incentive" crude oil, id. Sec. 212.78(a)(2).

After Kern Oil and Tenneco entered into the contract, Tenneco consistently charged Kern Oil the posted upper tier price for "new" crude oil. At times, the posted upper tier price was less than the upper tier ceiling price. Accordingly, much of the crude oil was sold at prices below the ceiling price.

Beginning with the invoices for oil delivered in January 1980, Tenneco charged Kern Oil uncontrolled prices for a portion of the oil delivered pursuant to the contract. Tenneco's invoices described this crude oil as "newly discovered" or "upper-tier released." Kern Oil's accounting staff was not aware of the price limitation in the contract and thus paid the invoices without question. Kern Oil's management did not learn of the discrepancy until December 1980.

On December 30, 1980, Kern Oil notified Tenneco of the alleged overpayments and informed Tenneco that Kern Oil would withhold payment on outstanding Tenneco invoices to offset the overpayments. On February 13, 1981, Kern's attorneys sent a letter to Tenneco demanding reimbursement for the alleged overpayments. Kern Oil subsequently filed the present action to obtain restitution of the alleged overpayments. 2 Tenneco's answer contained six counterclaims, two of which were settled before trial.

  1. Nos. 84-6268 and 84-6482

    The case was initially set before Judge Marshall. On March 20, 1984, Judge Marshall transferred the case to Judge Real for trial. The case was tried in June 1984. On July 31, 1984, Judge Real entered judgment for Kern Oil. Kern Oil received damages in the sum of $1,901,430.72, plus interest, costs, and attorneys' fees. On October 4, 1984, the attorneys' fee award was fixed at $516,863.13.

    Page 1383

  2. No. 84-6367

    Tenneco's fourth counterclaim ("Count IV") sought damages for lost profits. On February 16, 1984, Judge Marshall granted Kern Oil's motion for a partial summary judgment and dismissed Count IV. On March 16, 1984, Tenneco filed a motion for reconsideration. After the rest of the case had been transferred to Judge Real, Tenneco filed a motion for voluntary dismissal without prejudice. Tenneco sought the voluntary dismissal so that it could pursue its claim in a related action before Judge Waters. While Judge Marshall considered these motions, the rest of the case was tried before Judge Real.

    On June 14, 1984, Judge Marshall granted the motion for reconsideration and vacated the summary judgment. The parties did not become aware of that decision until late June. On August 3, Judge Marshall denied the motion for voluntary dismissal. Judge Real set a trial date of August 20. On August 13, Tenneco renewed its motion for voluntary dismissal without prejudice. On August 20, Judge Real denied the motion and stated that the trial would commence on August 22. Tenneco then unsuccessfully sought an emergency stay from this court.

    On the morning of August 22, the parties appeared before Judge Real. After again denying Tenneco's request for a voluntary dismissal without prejudice, Judge Real requested Tenneco's attorney to proceed with his opening statement. When the attorney refused to proceed, Judge Real dismissed Count IV with prejudice under Fed.R.Civ.P. 41(b).


    The Interpretation of the Contract

  3. Standard of Review

    We have stated the appropriate standard of review for the interpretation of a contract as follows:

    When an appellate court restricts its review of the trial court's interpretation of a contract to an analysis of the language used in the contract, the issue of interpretation is a matter of law and freely reviewable.... When the interpretation includes a review of factual circumstances surrounding the contract, the principles of contract interpretation applied to those facts present issues of law which this court can freely review. When the inquiry extends beyond the words of the contract and focuses on related facts, however, the trial court's consideration of extrinsic evidence is entitled to great deference and its interpretation of the contract will not be reversed unless it is clearly erroneous.

    In re U.S. Financial Securities Litigation, 729 F.2d 628, 631-32 (9th Cir.1984) (citations omitted). We review the district court's decisions regarding the admissibility of evidence for an abuse of discretion. Mitchell v. Keith, 752 F.2d 385, 392 (9th Cir.), cert. denied, --- U.S. ----, 105 S.Ct. 3502, 87 L.Ed.2d 633 (1985).

  4. The Meaning of "Upper Tier Price"

    Contrary to Tenneco's assertions, the record reveals that the meaning of the term "upper tier price" was virtually undisputed. The "upper tier price" was the price charged for crude oil that was subject to the upper tier ceiling price. The upper tier price was less than or equal to the upper tier ceiling price, depending on market conditions. Crude oil that was not subject to the upper tier ceiling price was sold at the "lower tier price" or the "uncontrolled price," depending on the type of oil. "New" crude oil that was not subject to the upper tier ceiling price was sold at the "uncontrolled price." Crude oil from a particular field would normally have two or three different prices because the oil...

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