Cities Service Co. v. Gulf Oil Corp.

• Decision Date: 22 June 1999
• Docket Number: No. 87,979.,87
• Parties: CITIES SERVICE COMPANY, now OXY USA Inc., Plaintiff/Appellee, v. GULF OIL CORPORATION, now Chevron USA Inc., and GOC Acquisition Corporation, Defendants/Appellants.
• Court: Oklahoma Supreme Court

980 P.2d 116

1999 OK 14

1999 OK 14

CITIES SERVICE COMPANY, now OXY USA Inc., Plaintiff/Appellee, v. GULF OIL CORPORATION, now Chevron USA Inc., and GOC Acquisition Corporation, Defendants/Appellants.

No. 87,979.

Supreme Court of Oklahoma.

March 2, 1999.

Rehearing Denied June 22, 1999.

Clyde A. Muchmore and Harvey D. Ellis, Jr., of Crowe & Dunlevy, Oklahoma City, OK; Charles R. Ragan and Craig S. Stewart of Pillsbury, Madison & Sutro LLP, San Francisco, CA; Stephen M. Shapiro, Andrew L. Frey and Philip A. Lacovara, Chicago, IL; and Bruce W. Freeman, John T. Schmidt and D. Richard Funk of Conner & Winters, Tulsa, OK, for the appellants.

Oliver S. Howard and Teresa B. Adwan of Gable Gotwals Mock Schwabe Kihle Gaberino, Tulsa, OK; W. DeVier Pierson, Knox Bemis and Peter J. Levin of Pierson Semmes and Bemis, Washington, D.C.; Sam P. Daniel, Jr. and Dallas E. Ferguson of Doerner, Saunders, Daniel & Anderson, Tulsa, OK, for the appellee.

LAVENDER, J.

¶ 1 While the appeal before us presents complex procedural questions of both state and federal character and some first-impression matters of adjective law, the case's legal issues are posed in the context of two rather straightforward queries—(1) Was Gulf Oil Corporation, now Chevron USA Inc., and GOC Acquisition Corporation collectively Gulf justified in terminating the merger agreement between itself and Cities Service Corporation, now OXY USA, Inc. Cities? and (2) If not, what then is the proper measure of damages to Cities occasioned by the breach?

I FACTS AND PROCEDURAL HISTORY

A The State Court Action

¶ 2 The protracted legal drama—the subject of this opinion—began in the summer 1982. On June 15th of that year Cities and Gulf executed a merger agreement. On August 6, 1982 Gulf unilaterally terminated the contract. What transpired during the approximately seven weeks between those two dates has been scrutinized for over fourteen years in both federal and state litigation extending from Oklahoma's courts to the federal courts in New York.

¶ 3 On August 9, 1982 Cities filed its petition seeking damages not only for breach of contract but also for malicious breach or fraud. Gulf defended its cancellation of the merger, asserting that its act was justified under the agreement's terms (1) because the Federal Trade Commission FTC sought restraint of the transaction in federal court the FTC defense¹ and (2) because Cities' overstatement of its proven oil reserves in its 1981 Securities and Exchange Commission S.E.C. filings breached the contract's warranty provisions² and caused the failure of a condition precedent to Gulf's performance the oil reserve defense.³ Cities responded that these defenses are not available to Gulf because at the time that Gulf decided to repudiate the merger agreement (1) it had not determined that Cities' overstatement of its oil reserves was material as required by the contract and (2) Gulf was precluded—on the basis of decisions reached in Cities shareholders' federal actions in New York⁴ and in an arbitration conducted ancillary to one of the federal suits—from asserting the FTC's action as a defense to the merger's completion. Cities also contended that Gulf used the FTC's action in bad faith as a pretext for terminating the merger.

¶ 4 The trial of this cause began in April 1996 and extended almost three months. During this time the trial judge made several bench rulings, the ultimate effect of which was to deny as matters of law the defenses raised by Gulf to Cities' breach-of-contract claim. Gulf's defenses to Cities' malicious breach or fraud claim otherwise remained viable when the case was submitted to the jury. The FTC defense was abrogated when preclusive effect was given to orders entered in the shareholders' action in the U.S. District Court for the Southern District of New York.⁵ Because Gulf represented in paperwork filed in an arbitration proceeding ancillary to the New York federal litigation that its board of directors had not concluded that the oil reserves differential was material before or at the time it decided to terminate the contract, the trial court ruled Gulf's failure to make the contractually-mandated determination (that Cities' oil reserve shortage was material) caused Gulf's oil-reserve-shortage defense to be legally unavailable for justification of its decision to repudiate the merger.

¶ 5 In an effort to identify the outward boundaries of any damages which might be awarded Cities, both parties proffered evidence during trial concerning the value of Cities' stock which was repurchased from Mesa Petroleum Corporation Mesa in June 1982.⁶ Cities argued that the reacquired (treasury) shares held no value at the time of the merger's failure because (a) Cities already possessed an amount of treasury shares before purchasing the stock from Mesa which far exceeded its needs and (b) the merger's failure destroyed both Cities' ability to continue as an independent corporate entity as well as its earlier-avowed corporate objectives related to maintenance of that status. Gulf asserted that (1) the elimination of Mesa as a corporate raider, (2) settlement of the litigation relative to the tender offers between Cities and Mesa, and (3) the repurchased treasury shares all possessed offsetting value to the damages claimed by Cities which survive the failure of the Gulf/Cities merger. It was Gulf's position that (a) Cities has the burden of proving monetarily quantifying its reliance damages and (b) the burden's placement exonerated Gulf from having to adduce an evidentiary basis by which a jury could value the reduction to damages which it suggested during trial. The trial judge limited the time frame for computing damages to a period ending on August 13, 1982, i.e., one week after Gulf terminated the merger agreement. She reasoned the temporal constraint was appropriate because damages should be confined to a period of time close to the date of breach and selection of a cut-off was critical to the trial's manageability. The ruling prevented Gulf from introducing at trial evidence of Cities' merger with Oxy in the latter half of 1982. After all evidence was presented, the trial judge removed the question of the proper measure of Cities' damage from the jury's consideration. Her ruling was predicated upon the conclusion that in light of the then-adduced evidence a jury would have had to engage in speculation to calculate damages.⁷ She instructed the jury that if it found the stock bought from Mesa was acquired in reliance on the merger agreement, damages on the breach-of-contract claim would equal the sum of (a) the repurchase-price paid by Cities and (b) the legal fees Cities expended in reliance on the merger agreement.

¶ 6 On July 19, 1996 the jury returned (a) a split 9 to 3 verdict which exonerated Gulf from liability for fraud or malicious breach of the merger agreement and (b) an unanimous verdict finding that Cities' June 1982 repurchase of its own stock from Mesa was in reliance on the Gulf/Cities merger contract. Judgment was entered for Cities in the amount of $229,621,400 plus that quantum of interest which is allowed under Delaware law.⁸ Gulf then brought its appeal, over which we retained jurisdiction.

B The Federal Court Actions

¶ 7 As a result of the merger's failure, several of Cities' shareholders who had offered their shares to Gulf pursuant to a tender offer circular (issued ancillary to the merger agreement), as well as persons who had purchased shares or options during the tender period, brought suit against Gulf and various of its officers and directors in the U.S. District Court for the Southern District of New York. The action was brought as a class complaint with one group of investors the Jones group opting not to participate in the class and proceeding separately. Both actions nonetheless were consolidated for trial.

¶ 8 Gulf moved for summary judgment in the federal suits alleging that the FTC's challenge of the merger excused its non-performance under the tender offer's explicit terms.⁹ The federal trial judge Judge Mukasey ruled that until such time as the FTC required a divestiture, Gulf had no contractual obligation to negotiate in good faith with the FTC and in fact could use the agreement's "litigation out" clause¹⁰ to justify the merger's repudiation. Nonetheless, he also ruled that once the FTC requested divestiture of a Cities' asset—here the Lake Charles refinery—the terms of tender offer circular ¶ 15(d)(1) the "litigation out" clause standing alone were not legally sufficient to justify unilateral withdrawal from the agreement. The federal trial court found that the FTC-required divestiture implicated the provisions of ¶ 15(d)(ii) & (iii) of the tender offer. These provisions require—as a legal predicate to withdrawal from the merger—Gulf's good-faith determination that the particular asset (for which divestiture is sought) represents a "material" portion of Cities' business, "taken as a whole."¹¹ The federal court reasoned that Gulf's requested construction of the "(d)(1)" provision the "litigation out" clause would have rendered the "(d)(2)" term meaningless. Hence, Judge Mukasey concluded that determination of materiality presented an unresolved issue of fact and denied Gulf summary adjudication.¹²

¶ 9 After Judge Mukasey denied summary judgment, Gulf settled with the shareholders class. Their suit was dismissed with prejudice by a May 21, 1992 order. While Gulf achieved settlement with the shareholder class, it could not agree with the Jones plaintiffs on certain issues of liability and damages. The non-settling parties agreed to submit the remaining issues¹³ to final, binding, non-appealable arbitration. A retired chief judge of the U.S. Court of Appeals for the Second Circuit Judge John Gibbons was chosen as arbitrator. After a three week proceeding, he handed down an 84 page decision with findings of fact and conclusions of law.¹⁴ After applying Judge...