Cary Oil Co., Inc. v. Mg Refining and Marketing

• Decision Date: 30 March 2000
• Docket Number: No. 99 CIV. 1725 LAK.,99 CIV. 1725 LAK.
• Citation: 90 F.Supp.2d 401
• Parties: CARY OIL CO., INC., et al., Plaintiffs, v. MG REFINING AND MARKETING, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

90 F.Supp.2d 401

CARY OIL CO., INC., et al., Plaintiffs, v. MG REFINING AND MARKETING, INC., et al., Defendants.

No. 99 CIV. 1725 LAK.

United States District Court, S.D. New York.

March 30, 2000.

COPYRIGHT MATERIAL OMITTED

William H. Bode, Bode & Beckman, LLP, Washington, DC, Richard G. Tashjian, Tashjian & Padian, New York City, for Plaintiffs.

Michael Blechman, Robert B. Bernstein, Michael Pomerantz, Kaye, Scholer, Fierman, Hays & Handler, LLP, New York City, for Metallgesellschaft Defendants.

William Spiegelberger, Jeffrey Barist, Milbank, Tweed, Hadley & McCloy LLP, New York City, for Deutsche Bank Defendants.

MEMORANDUM OPINION

KAPLAN, District Judge.

This case comes in the aftermath of the near collapse of the German metals and engineering conglomerate, Metallgesellschaft AG ("MGAG"), in late 1993. Reportedly faced with crippling trading losses from over-exposure in the oil futures market, MGAG nearly was forced into bankruptcy before its creditors, including Deutsche Bank AG, stepped in with an emergency loan and rescue package. Although this bail out averted financial disaster, the fallout continues and includes this case.

I Parties

Plaintiffs in this case are seventeen corporations engaged in the business of marketing and/or distributing petroleum products in the United States. Defendants MG Marketing and Refining, Inc. ("MGRM"), Metallgesellschaft Corp. ("MG Corp.") and MGAG (collectively the "MG Group") are in the business, among others, of selling petroleum products. MGAG is the sole shareholder of MG Corp., which in turn is the sole shareholder of MGRM. Defendant Deutsche Bank AG was a major shareholder of MGAG at all relevant times. Defendant Deutsche Bank North America is a subsidiary of Deutsche Bank AG, and defendant Deutsche Bank New York is a subsidiary of Deutsche Bank North America.¹

The Contracts

Plaintiffs here allege breach of certain long-term petroleum supply contracts, entered into between January and September of 1993,² each of which provided that MGRM would sell, and the relevant plaintiff would buy, a fixed amount of a specified petroleum product over a period of time, usually five or ten years, at a fixed price.³ The contracts were known as "flexies," so titled because they permitted plaintiffs flexibly to schedule delivery of the product on 45 days' notice, rather than obliging them to take delivery on fixed dates.

The contracts were flexible in another respect — they included a cash out, or "blow out," option exercisable by the customer which provided in relevant part as follows:⁴

"(a) At any time during the Term of this Agreement that the Fixed Cash Price is less than the bid price for the applicable NYMEX Futures Contract, as defined in subparagraph (d) below, Purchaser may, in lieu of accepting all or part (in lots of 42,000 gallons) of the remaining deliveries of Product, accept cash payments from Seller based on the average of bid prices obtained by Seller in totally or partially liquidating its long hedge positions for this Agreement (the `Average Bid Price') in the applicable NYMEX Futures Contract. The cash payment to be received by the Purchaser shall be an amount equal to the product of the number of gallons represented by the long hedge positions to be liquidated multiplied by the difference between the Average Bid Price for the applicable NYMEX Futures Contract and the Fixed Cash Price. At any time that Purchaser exercises this option, Seller shall, as soon as practicable after receipt of telephonic notice of such election liquidate the long hedge positions to the extent of the number of contract units that is equivalent to the number of gallons with respect to which the Purchaser has exercised the option. Purchaser shall promptly provide written confirmation of its telephone notice of such election. Seller does not guarantee that it can liquidate such positions at the bid prices existing at the time Purchaser gives notice that it is exercising this option or even that it can liquidate its positions above the Fixed Cash Price. Upon Purchaser's receipt of cash payments from Seller representing all of the remaining deliveries of Product, Seller shall have no obligation to deliver any further Product under this Agreement and this Agreement shall terminate."

* * * * * *

"(d) For the purpose of this paragraph, the applicable `NYMEX Futures Contract' shall mean the futures contract for the underlying Product as traded on the NYMEX with a delivery month for which the last NYMEX Trading Day falls no earlier than forty-five (45) days and no later than seventy-five (75) days from the date of exercise of the option."

Thus, the option gave the customer the right to elect to receive a cash payment in lieu of further deliveries if the New York Mercantile Exchange ("NYMEX") bid price of the relevant futures contract for the specified petroleum product exceeded the flexie contract price. The payment was to be equal to the difference between the contract price and the average bid price obtained by MGRM in liquidating its long hedge positions in the applicable NYMEX futures contract multiplied by the number of gallons of the product not yet delivered under the contract. The purpose of this option allegedly was to protect the parties from the risk of supply shortages and short-term price spikes.⁵

As is readily apparent, the option clauses in the flexie contracts presupposed, not unreasonably, that MGRM would maintain long hedge positions — positions giving it the right to buy the product it was obliged to deliver to its customers at or near the prices at which it was obliged to sell — in order to avoid the risk of literally open-ended losses that otherwise could have been sustained by MGRM if market prices rose above the contract prices.⁶ Nevertheless, the flexie contracts did not expressly require MGRM to maintain such hedge positions.

The MG Group Crisis

Soon after these contracts went into effect, the MG Group began to experience financial difficulty.⁷ In order to reduce its exposure under the flexie contracts and others, MGRM had hedged by purchasing oil futures contracts on the NYMEX and off-exchange derivatives. When oil prices dropped sharply in late 1993, MGRM faced huge margin calls and suffered other short-term losses, plunging the entire conglomerate into a severe liquidity crisis and pushing it to the brink of insolvency. At the last minute, MGAG's creditors, including Deutsche Bank, stepped in and orchestrated a reorganization and bail out.⁸ This involved, among other things, financial and managerial restructuring, new lines of credit and, most important for purposes of this motion, liquidation of MG's hedge positions in the exchange traded and off-exchange derivatives.

The CFTC Settlement

Although MGAG survived the crisis, the legal and regulatory fallout has been substantial. In addition to facing numerous law suits, MGRM apparently became the target of a Commodity Futures Trading Commission ("CFTC") inquiry. Prior to the institution of any enforcement action, the MGRM submitted an offer of settlement that was accepted by the Commission and resulted in the issuance of a consent order. The uncontested recitals that preceded the decretal portion of the order set forth the Commission's findings that the contracts here at issue were "illegal off-exchange futures contracts."⁹ The decretal portion of the order, to which MGRM explicitly agreed, provided in relevant part that MGRM would cease offering the contracts and promptly notify all purchasers of the contracts that the Commission had found the contracts to be "illegal and void."¹⁰ The order thus arguably relieved MGRM of its obligations under the contracts. And that is the heart of plaintiffs' grievance. They contend that the MG Group breached its duties to plaintiffs by proposing and entering into a settlement with the CFTC for the express purpose of obtaining a statement that the contracts were void in order to eliminate its exposure to the plaintiffs.

II

Plaintiffs assert the following claims:

• Count I asserts that MGRM breached its duty under the flexie contracts to maintain readiness to deliver the specified products and pay plaintiffs upon exercise of their options by agreeing to the CFTC order declaring the flexies illegal. It seeks to hold MG Corp. and MGAG liable on theories of respondeat superior and alter ego liability and by piercing MGRM's corporate veil.

• Count II alleges that MGRM breached the duty of good faith and fair dealing inherent in the flexie contracts by procuring and agreeing to the CFTC order on the theory, inter alia, that MGRM proposed language to the CFTC supporting a finding that the flexies were illegal. It asserts this claim against MG Corp. and MGAG also on the theories of liability listed in Count I.

• Count IV¹¹ charges Deutsche Bank with lender liability for the breaches of the flexie contracts on the grounds that Deutsche Bank or its agents (1) ousted members of the management of MGAG, MG Corp. and MGRM with whom it had conflicts, (2) took control of the MG Group's energy business in the United States, (3) directed that the hedge positions for the flexie contracts be liquidated, (4) directed that the flexies be terminated, and (5) falsely portrayed the flexies as illegal off-exchange futures contracts in communications to the CFTC.

• Count V seeks to hold Deutsche Bank liable for MGRM's breach of contract on respondeat superior, corporate veil piercing and alter ego liability theories.

• Count VI alleges that Deutsche Bank breached the duty of good faith and fair dealing inherent in the flexie contracts on the theories of liability listed in Count V.

• Count VII charges Deutsche Bank with tortiously interfering with plaintiffs' contracts with MGRM by engaging in the acts set forth in Count IV.

Defendants move to dismiss as follows:

The MG Group seeks dismissal of Counts I and II on the ground that the contract claims are time barred. MGAG and MG...