Shelton v. Exxon Corp.

Decision Date27 April 1988
Docket Number87-6049,Nos. 87-6021,s. 87-6021
Citation843 F.2d 212
PartiesRobert R. SHELTON, et al., Plaintiffs-Appellees Cross-Appellants, v. EXXON CORPORATION, Defendant-Cross Defendant Appellant Cross-Appellee. v. KING RANCH, INC., et al., Defendants-Cross-Plaintiffs Appellees Cross-Appellants. In re Robert R. SHELTON, et al., Petitioners.
CourtU.S. Court of Appeals — Fifth Circuit

Joseph D. Jamail, Jr., Jamail, Kolius & Mithoff, Frank M. Staggs, Joe H. Foy, Mary Katherine Kennedy, Sarah B. Pierce, Houston, Tex., for Shelton, et al.

Alfred H. Ebert, Jr., Andrews & Kurth, Houston, Tex., for King Ranch, et al.

Joe H. Foy, Bracewell & Patterson, Sarah B. Pierce, Reynolds, Shannon, Miller, Blinn, White & Cook, Joe H. Reynolds, Houston, Tex., for Shelton Ranches, Inc., et al.

McGinnis, Lochridge & Kilgore, Barry L. Wertz, Austin, Tex., Frank G. Harmon, Michael Graham, Baker & Botts, William N. Blanton, III, Exxon Corp., Houston, Tex., for Exxon Corp.

Appeals from the United States District Court for the Southern District of Texas.

On Petition for Writ of Mandamus to the United States District Court for the Southern District of Texas.

Before RUBIN, JOLLY and DAVIS, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

Appellant Exxon Corporation challenges the dismissal of a lawsuit between Exxon as defendant and Robert Shelton and King Ranch as plaintiffs. The case was dismissed by the district court for lack of diversity jurisdiction when the district court realigned King Ranch as a third-party defendant in the suit. Because we find that King Ranch is not an indispensable party to the suit, we reverse the district court's decision and remand it for further proceedings.

I

This case, involving underpayment of royalties, is made far more complicated by the confusion of who is on whose side. Although the fundamental facts of the lawsuit are not difficult to follow, they are eclipsed by procedural circumstances that surround the present controversy: whether King Ranch is a plaintiff in the suit or is actually an indispensable third-party defendant, thereby destroying federal diversity jurisdiction. We outline only those elements that are ultimately relevant to understanding our decision here.

Robert Shelton and his various corporate entities ("Shelton") own a royalty interest in the minerals of King Ranch, Inc., and King Ranch Oil & Gas ("King Ranch") through dividends and conveyances. King Ranch and Shelton are both Texas corporations. King Ranch leased these mineral interests to Exxon Corporation, a Delaware corporation with its principal place of business in New Jersey. In 1977 King Ranch and Shelton discovered that Exxon was not paying King Ranch the full amount required by the lease for natural gas royalties.

After numerous unsuccessful attempts to persuade King Ranch to collect full value for the royalties, in 1979 Shelton filed suit in state court against both Exxon (for underpayment of royalties) and King Ranch (for its failure to enforce the agreement). At some point King Ranch initiated its own action against Exxon, in a separate proceeding, which was settled on June 5, 1980 as to all gas produced up to September 1, 1980.

Shelton objected to that settlement, claiming that under its royalty agreement King Ranch did not have the right to negotiate for Shelton. Both Exxon and King Ranch maintain that Shelton is bound by the settlement agreement because King Ranch holds the exclusive right to enforce mineral leases, based upon clauses in three documents between Shelton and King Ranch: a 1957 mineral conveyance, a 1977 mineral distribution agreement, and 1978 assignment of claims. Both King Ranch and Exxon argue, therefore, that Shelton lacks standing to sue.

After settling its lawsuit with Exxon, King Ranch, exercising its discretion under Texas law, petitioned to have Shelton's lawsuit removed to the county of King's residence. Seeking to avoid that result, Shelton, on February 9, 1983, entered voluntary nonsuit against King Ranch in order to proceed against Exxon, the primary defendant in the case. On March 1, 1983, Exxon removed the case to federal court on grounds of diversity jurisdiction and then moved under Fed.R.Civ.Proc. Rule 19 to join King Ranch in the suit. Exxon based this joinder upon its affirmative defense that Shelton lacked legal capacity to sue Exxon because King Ranch had exclusive enforcement rights under the agreement. King Ranch counterclaimed for underpaid royalties from Exxon for the period from 1980-1987. The district court granted the joinder of King Ranch as a party defendant on November 28, 1983. At that time, the court requested briefs on the proper alignment of King Ranch. In these briefs, all three parties agreed that King Ranch should be joined as a plaintiff. For some reason, however, the district court did not formally realign King Ranch until October 16, 1985.

On December 12, 1983, Shelton filed his fourth amended complaint in which he alleged an alternative claim against King Ranch. Specifically, Shelton claimed that if the settlement between King Ranch and Exxon was binding, then Shelton was entitled to relief from King Ranch for breach of fiduciary duty. 1

The case was then reassigned to another district judge. On July 28, 1987, just prior to a pretrial conference, King Ranch and Exxon entered a settlement (from which Shelton was expressly excluded) for royalties from September 1980 until the date of trial. A stipulation agreement, signed by all three parties, was filed in district court after the execution of the settlement. It stated that (1) King Ranch and Exxon agreed to settle all royalty claims from September 1, 1980 through June 30, 1987 except as to Shelton; (2) King Ranch and Exxon continued to assert that Shelton lacks standing to sue; (3) Shelton agreed to dismiss any claim of any kind against King Ranch arising out of Exxon's counterclaim against Shelton for overpayment of royalties; (4) King Ranch and Exxon would not contest Shelton's standing to sue with respect to any royalties owed for oil produced between September 1, 1980 and June 30, 1987. At the pretrial conference, therefore, the court reexamined the alignment of the King Ranch entities and determined, sua sponte, that King Ranch should be realigned as a defendant in the case, that King Ranch was an indispensable party to the suit and that as a result of its realignment, the court lacked subject matter jurisdiction because there was no longer complete diversity (since King Ranch and Shelton are both Texas corporations). The district court relied on Owen v. Kroger, 437 U.S. 365, 98 S.Ct. 2396, 98 S.Ct. 2396, 57 L.Ed.2d 274 (1978), to dismiss the suit rather than remand the case to the state court.

II

All three parties now appeal the decision of the district court. Exxon, the appellant before this court and King Ranch on cross-appeal, argue that the district court erred in not retaining jurisdiction because King Ranch was properly aligned as a plaintiff or, in the alternative, King Ranch is not an indispensable party to the action and therefore it should have been dismissed as a party so as to preserve diversity jurisdiction. Shelton does not object to the court's finding of lack of subject matter jurisdiction, but on cross-appeal (and on petition for a writ of mandamus) urges this court to require the district court to remand, rather than dismiss, the case.

When Exxon removed the case from state court and joined King Ranch, the only claim involved was made by Shelton as plaintiff, against Exxon, for underpayment of royalties. Since that time, the many claims, counterclaims and defenses that have been raised, dismissed, dropped and raised again in this three-ring event are too numerous to describe, nor is it necessary to do so. At the next relevant point, however, that is when the case was dismissed, it is clear that four claims remained in the suit: (1) Shelton's claim against Exxon for underpaid royalties; (2) Exxon's counterclaim against Shelton for overpaid royalties; (3) Shelton's alternative counterclaim against King Ranch for allegedly breaching its fiduciary duty when, over Shelton's objections, it settled for too little with Exxon; and (4) King Ranch's claim for contribution against Exxon if held to be liable to Shelton. Since all claims between Exxon and King Ranch had been settled, it is only these four claims that are relevant in our analysis of this appeal.

Because it is not necessary to decide, we will merely assume that the district court did not err when it realigned King Ranch as a defendant. Nevertheless, we reverse the district court's dismissal and remand the case, because we find that at the time of dismissal King Ranch was not an indispensable party under Rule 19. We need not address Shelton's petition for writ of mandamus, therefore, or other issues on appeal and cross-appeal as they are rendered moot.

III

Exxon's first argument is that the district court erred when it realigned King Ranch as a defendant. Admittedly we have some doubts about the correctness of the district court's holding--even in the light of the confusing and frustrating history of this case--when, at a very late stage in the proceedings, the court realigned King Ranch as a defendant despite the fact that the primary focus of the lawsuit is recovery of royalties from Exxon for both King Ranch and Shelton. Nevertheless, Shelton presents persuasive evidence that the interests of King Ranch and Exxon were aligned, and we therefore assume, because it is not necessary to decide, that Shelton's argument is well-taken and the district court did not err. We therefore turn to address whether King Ranch was an indispensable party to the lawsuit under Rule 19.

IV

Exxon argues that the trial court erred when it held that King Ranch is an indispensable party, but instead should have found King Ranch only a necessary party and dismissed it and retained diversity jurisdiction over the case.

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