Eastern States Petroleum Co., Inc. v. Universal Oil Products Company

• Decision Date: 28 October 1946
• Citation: 49 A.2d 612,29 Del.Ch. 305
• Court: Court of Chancery of Delaware
• Parties: EASTERN STATES PETROLEUM CO., INC., a Delaware corporation, v. UNIVERSAL OIL PRODUCTS COMPANY, a Delaware corporation

49 A.2d 612

29 Del.Ch. 305

EASTERN STATES PETROLEUM CO., INC., a Delaware corporation, v. UNIVERSAL OIL PRODUCTS COMPANY, a Delaware corporation

Court of Chancery of Delaware, New Castle

October 28, 1946

The motion to amend is denied, and an order will be entered in accordance with this opinion.

Arthur G. Logan, of the firm of Logan & Duffy, for complainant.

Clarence A. Southerland, of the firm of Southerland, Berl & Potter and Frederick W. P. Lorenzen, of New York City (Ralph S Harris, John A. Wells and K. William Michelson, all of New York City, of counsel), for respondent.

OPINION

HARRINGTON, Chancellor.

This is a reargument of the motion of Eastern States to amend its subrogation bill after a demurrer thereto had been sustained for an apparent lack of equity. See 28 Del. Ch. 365 44 A.2d 11. After the first argument on the complainant's motion, this court concluded that the proposed amendment should be permitted on the ground that it alleged that Universal Oil Products Company had wrongfully used Eastern States' property rights to pay Universal's debt of $ 250,000 to Asiatic Petroleum Corporation. See ante p. 112, 46 A.2d 553, citing Wilson v. Todd, 217 Ind. 183, 26 N.E.2d 1003, 129 A.L.R. 192; 3 Scott on Trusts, § 513; Restat.Law of Restit. §§ 162, 207.

Both the contemplated amendment and the exhibits attached thereto are quite voluminous, and Universal Oil Products Company claims that notwithstanding the complainant's method of pleading, when the exhibits are considered it clearly appears that no decree could be entered subrogating Eastern States to the original rights of Asiatic Petroleum Corporation against Universal Oil Products Company, and that the motion to amend should be denied.

The allegations of the proposed amendment were set out in some detail in the opinion being reconsidered, but a more complete statement of the basic facts seems desirable:

(1) Universal Oil Products Company secured Eastern's execution of the license agreement of December 19, 1935 by representing in its letter of July 3, 1935 (not attached to the bill) that it had "a formidable patent structure consisting of thousands of patents and applications"; that the United States Circuit Court of Appeals in the Third Circuit had unanimously affirmed the opinion of the District Court holding that Root Refining Company had infringed Universal's patents in using the so-called Winkler-Koch Cracking Process and that Eastern's proposed use of a Winkler-Koch unit would infringe Universal's patents; and that the defendant's representation as to the affirmance of the judgment in the Root case was untrue and fraudulent.

(2) By the license agreement of December 19, 1935, Universal not only represented to Eastern that it was the "owner of the Dubbs Cracking Process (involved in the Root case) for the cracking of petroleum, tars, and other hydrocarbons, carbonaceous or carbon containing materials (hereinafter referred to as 'oil')", but also that it was the owner of, or had the right to grant licenses under, other patents of which a partial list of 456 was set forth. Paragraph 2 of the license agreement provided in part that:

"Universal grants to licensee (Eastern) a non-exclusive and non-assignable license to crack oil (not including so-called hydrogenation with or without catalysts) at Houston, Texas under all Letters Patent under which Universal now has or may hereafter have the right to grant licenses, subject however to any restrictions and limitations on Universal's right to grant licenses thereunder and subject to the other terms and conditions of this agreement."

(3) Litigation relating to the license agreement was thereafter begun by Universal and Eastern. Universal sued for royalties accruing thereunder between May, 1936 and March 1, 1937. Eastern sued for rescission of the license agreement upon the ground that Universal had fraudulently represented the yields obtainable by use of Universal's cracking process, and Universal filed a cross bill to enforce the payment for royalties due under the license agreement. The matter was referred to a Special Master by this court who on June 27th, 1940 filed a final report which recommended that Eastern's bill be dismissed and stated that the Master would determine the royalties owed by Eastern to Universal for the period from May, 1936 to the date of the decree.

(4) This litigation between Universal and Eastern was settled by an agreement dated as of September 1, 1940 which (a) provided for the discontinuance of the Delaware litigation; (b) recited that Universal had theretofore assigned to Asiatic Petroleum Corporation all of Universal's claims against Eastern States for unpaid royalties under the December 19, 1935 license agreement, and by which Universal agreed to cause Asiatic to release Eastern from all liabilities under that agreement up to September 1, 1940; (c) the license agreement of 1935 was to be cancelled and terminated as of September 1, 1940; (d) Eastern agreed to permit inspection of its plant by Universal's engineers and Universal and Eastern agreed to submit the question of any patent infringement by Eastern to arbitration; and it was provided that if the arbitrators found infringement Universal would license Eastern and Eastern would enter into a license agreement under which Universal would receive the lowest royalty payable to Universal by any other of its licensees; (e) Universal also agreed to grant patent licenses to Eastern under two refining processes known respectively as the "Sulfuric Acid Alkylation Process" and the "Non-selective Polymerization" process. Eastern likewise agreed to grant to Universal a fully paid up license under one letter patent. The consideration paid by Eastern for these legal rights and privileges received by it consisted of a release of its alleged rights in the anti-trust suit against Asiatic and others, which was attached to the proposed amendment. That instrument stated that it was

"In consideration of a release given simultaneously herewith by Asiatic Petroleum Corporation to Eastern States Petroleum Co., Inc., the discontinuance of a certain other action brought by Universal Oil Products Company against Eastern States Petroleum Co., Inc., in the Court of Chancery * * * and of other things of value, receipt whereof is hereby acknowledged."

(5) Eastern alleges that in the spring of 1941 it ascertained certain facts which caused it to believe that the decision in the Root Refining Company case, 78 F. 2d 991, had been obtained by Universal's fraud and that Universal was "accountable to Eastern States for the damage occasioned to Eastern States through the use made by Universal of said decision to induce Eastern States to enter into the license agreement."

(6) Eastern alleges that when it entered into the original license agreement of December 19, 1935 and the settlement agreement of September 1, 1940, and when it released its alleged cause of action against Asiatic Petroleum Corporation to Universal, it "did so in the belief that the decision" in the Root Refining Company case had been a proper and honest decision. It also alleges that it would not have taken any of these steps but for the fraud practiced upon it in 1935, with respect to the Root Refining Company decision.

Another paragraph of the proposed amendment alleges that subsequent events, including the award in the arbitration held under the September 1, 1940 settlement agreement and a decision of the United States Supreme Court, long after any of the events here complained of took place, established that Eastern was not in fact legally or morally liable to Universal for royalties or for any claims based on infringement;

(7) Eastern also alleges that, unknown to it, Universal surrendered to Asiatic Petroleum Corporation Eastern's release of the claim against Asiatic in exchange for $ 250,000 of Universal's outstanding sealed promissory notes held by Asiatic;

(8) From these facts, Eastern concludes that it "has suffered damage and Universal has profited, in that Eastern States' assets were used to pay Universal's debt."

The only substantial prayer for relief is that Eastern "be subrogated to the same position as that enjoyed by Asiatic Petroleum Corporation" with respect to the $ 250,000 of notes theretofore surrendered by Asiatic to Universal.

Subrogation is but one of the general equitable remedies for the prevention of unjust enrichment and is governed by substantially the same principles of right and justice which govern the imposition of a constructive trust on a wrongdoer. 5 Pom.Eq.Jur., (4th Ed.) 5196; Restat. Law of Restitution § 162; 28 Del. Ch. 365, 44 A.2d 11. With that principle in view, subrogation, therefore, applies to a great variety of facts. Ante p. 112, 46 A.2d 553.

The demurrer to the original bill was sustained because it appeared that Eastern States had merely paid its own debt to Universal and subrogation was not applicable, though Universal had also received other incidental benefits in a separate transaction with Asiatic Petroleum Corporation. 28 Del. Ch. 365, 33 A.2d 11; ante p. 112, 46 A.2d 553.

Some allegations of the original bill are omitted, but in opposing the motion to amend Universal claims: (1) That the exhibits attached to the proposed amendment require the same conclusion as to the complainant's lack of equity; (2) that under the guise of subrogation, Eastern States cannot in effect, seek the aid of this court to rescind the settlement agreement of September 1, 1940 and recover substantially the entire consideration paid, without alleging an offer to return the benefits received under it; (3) that, while fraud is alleged, Eastern States received substantial considerations in exchange for the release of its alleged...