Enron Oil Trading v. Underwriters of Lloyd's
| Decision Date | 16 April 1996 |
| Docket Number | No. CV-90-122-GF.,CV-90-122-GF. |
| Citation | 47 F.Supp.2d 1152 |
| Parties | ENRON OIL TRADING & TRANSPORTATION COMPANY, Plaintiff, v. UNDERWRITERS OF LLOYD'S OF LONDON Under Policy # 552/020129100; Sedgwick North America Limited; Employers Insurance Company of Wausau; Evanston Insurance Company; et al., Defendants. |
| Court | U.S. District Court — District of Montana |
Jean E. Faure, Glenn E. Tremper, Church, Harris, Johnson & Williams, Great Falls, MT, for EOTT Energy Operating Limited Partnership, plaintiff.
Kirk D. Evenson, Marra, Wenz, Johnson & Hopkins, PC, Great Falls, MT, for Ludgate Insurance Company, Limited, defendant.
Gregory J. Hatley, Davis, Hatley, Haffeman & Tighe, PC, Great Falls, MT, Robert M. Wattson, Zelle & Larson, Minneapolis, MN, for Employers Insurance Company of Wausau, defendant.
J. Michael Young, Ugrin, Alexander, Zadick & Higgins, PC, Great Falls, MT, Patrick R. Watt, Jardine, Stephenson, Blewett & Weaver, PC, Great Falls, MT, for EOTT Energy Operating Limited Partnership, counter-defendant.
William P. Conklin, Conklin, NYBO, LeVeque & Murphy, PC, J. Eric Elliff, Morrison & Foerster, Denver, CO, for Travelers Indemnity Company, defendant.
Steven R. Smith, Mike Satz, McCullough, Campbell & Lane, Chicago, IL, for Zurich Insurance Company, counter-claimant.
Plaintiff, Enron Oil Trading & Transportation Company ("Enron"), instituted the above-entitled action seeking, inter alia, a declaratory judgment regarding the scope of coverage under "non-marine" manuscript policies of excess insurance which were placed domestically and with the London insurance market. Enron's complaint also seeks compensatory and punitive damages from the named defendants ("excess insurers") under the following claims for relief: breach of contract, negligence and violation of Montana's Unfair Trade Practices Act, Mont.Code Ann. §§ 33-18-201 et seq. (1991).1 Presently before the court are the following motions: (1) the excess insurers' motion for judgment on the pleadings; and (2) Enron's motion for partial summary judgment, pursuant to Fed.R.Civ.P. 56. The issue dispositive of the parties' respective motions is whether or not the uncontradicted facts of record establish the excess insurers breached their duty, under the insurance agreements at issue, to indemnify Enron with respect to the costs incurred in litigating and ultimately settling a civil lawsuit instituted by Ashland Oil, Inc. ("Ashland"), Ashland Oil, Inc. v. Enron Oil Trading & Transportation Co., and Portal Pipeline Co., cause No. CV-84-197-GF ("Ashland action"). Having reviewed the record herein, together with the parties' briefs in support of their respective positions, the court is prepared to rule.
Ashland owned and operated an oil refinery in St. Paul, Minnesota, which utilized crude oil shipped via a pipeline operated by Portal Pipeline Co. ("Portal").2 In 1982, Ashland began experiencing problems at its refinery. After conducting an internal investigation, Ashland determined there was something wrong with the common stream of crude oil the refinery was receiving from the Portal pipeline. Ashland eventually determined Portal was allowing Enron and other shippers to inject a volatile high vapor pressure butane gas, hereinafter referred to as "B-G mix"3, into the pipeline, thereby altering the common stream of crude oil.
In August, 1984, Ashland instituted the underlying action, seeking compensatory and punitive damages under a wide range of theories of liability, including breach of contract, breach of express and implied warranties, breach of tariff, strict liability, negligence, fraud, constructive fraud and conspiracy.
Ashland's complaint in the underlying action alleged, inter alia, that Enron, as well as other defendants, fraudulently conspired to, and in fact did, inject B-G mix, a commodity of significantly lesser value, into the crude oil common stream of the Portal Pipeline. Ashland's complaint further alleged Enron's actions violated the Portal tariff, a contract which strictly governed the handling and operation of the crude oil pipeline4, and resulted in various economic damages, as well as property damage to Ashland's refinery.
Of pertinence to the present action are the following paragraphs taken directly from Ashland's third amended complaint:
20. In early November 1981, Portal agreed to permit UPG [the predecessor entity to Enron Oil] to inject B-G mix into the Portal Pipeline and agreed that it would not invoke any of the tariff provisions, including Item 25(a), as a basis for rejecting such materials for transportation.
21. Portal's agreement with UPG [Enron] contemplated that the B-G mix would be placed in the North Dakota Sweet Stream rather than the North Dakota Sour Stream,5 because the North Dakota Sweet crude oil with which the B-G mix would be commingled was more valuable than the North Dakota Sour crude oil carried in the North Dakota Sour Stream.
22. The aforesaid agreement between Portal and UPG [Enron] also contemplated that the B-G mix would be marketed as North Dakota Sweet crude oil so that substantial profits could be reaped by charging the applicable posted price for North Dakota Sweet crude oil (plus in many cases a large premium) rather than the much lower market price for B-G mix.
* * * * * *
25. Having secured Portal's agreement to accept the tariff-nonconforming B-G mix, in late November 1981, UPG [Enron] began injecting substantial volumes of B-G mix into the North Dakota Sweet Stream at the request of and for the account of Conoco, Inc. ("Conoco"), which in turn transferred those materials to Ashland pursuant to (and in violation of) a crude oil exchange agreement. At all time, UPG [Enron] was aware that the crude oil exchange agreement called for the delivery of North Dakota Sweet crude oil and that Ashland was instead receiving B-G mix in violation of that agreement.
26. Recognizing the tremendous profitability of marketing B-G mix as crude oil, in December 1981, UPG [Enron] met with Portal to explore the possibility of increasing deliveries of B-G mix and establishing additional injection sites. At that meeting, Portal agreed to allow UPG [Enron] to inject a total of 4,000 BPD of B-G mix into the line and recommended Reserve, Montana, as the injection site. At UPG's [Enron's] request, Portal identified Ashland as a potential customer for such tariff-nonconforming materials.
27. Subsequently, in or about May 1982, Portal agreed (a) to permit UPG [Enron] to inject into the North Dakota Sweet Stream approximately 1,000 to 2,000 BPD of B-G mix and North Dakota Sweet crude oil, and (b) to lease to UPG [Enron] a tract of land near Reserve, Montana, to serve as the injection site for such materials. This agreement contemplated that most of the material injected by UPG [Enron] at Reserve, Montana, would consist of B-G mix.
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30. The UPG [Enron] representatives who negotiated the Reserve Contract understood that it called for the delivery of North Dakota Sweet crude oil, and not B-G mix. Nevertheless, UPG [Enron] intended at the outset to violate the Reserve Contract by delivering to Ashland substantial volumes of B-G mix that neither conformed to the applicable Portal tariff nor qualified as North Dakota Sweet crude oil.
31. To lull Ashland into a false sense of security, during the first two months of the Reserve Contract (i.e., September and October 1982), UPG [Enron] delivered only North Dakota Sweet crude oil into the pipeline for Ashland's account.
32. However, beginning from November 1982 until March 1984, UPG [Enron] breached the Reserve Contract by injecting substantial volumes of B-G mix in lieu of the North Dakota Sweet crude oil expressly called for in the Reserve Contract. UPG [Enron] falsely represented that those shipments contained only tariff-conforming North Dakota Sweet crude oil.
33. As contemplated by the aforesaid agreement between Portal and UPG [Enron], during the period from November 1981 through March 1984, UPG [Enron] injected into the North Dakota Sweet Stream substantial volumes of B-G mix for the accounts of shippers/consignees other than Ashland. Often, UPG [Enron] tendered those volumes of B-G mix pursuant to (and in violation of) contractual arrangements which called for the delivery of North Dakota Sweet crude oil.
34. At all times, each of the defendants knew the true nature and quality of the B-G mix introduced into the Portal Pipeline. In injecting and/or transporting said B-G mix in the pipeline, each of the defendants knowingly violated the applicable Portal tariffs. From March 1980 through March 1984, Portal accepted from UPG [Enron] and others in excess of 2,900,000 barrels of B-G mix.
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46. Ashland's St. Paul Park Refinery cannot process without severe disruptions to its refinery operations crude oil contaminated with substantial quantities of B-G mix. Consequently, in attempting to refine the aforesaid contaminated shipments, Ashland not only lost the benefit of its bargain, but also incurred serious losses and damages, including loss of production, loss of profits, expenses incurred in correcting the contamination and ensuing consequences, and damages to its refinery and its oil.
47. As soon as Ashland experienced abnormally high vapor pressure levels at its St. Paul Park Refinery, Ashland immediately commenced a comprehensive investigation to ascertain the cause of this problem.
48. Despite the diligent and thorough manner in which this investigation was conducted, Ashland did not discover the B-G mix injections until early 1984.
49. Ashland did not uncover defendants' fraudulent scheme any earlier because of defendants' conspiracy to conceal their misconduct from Ashland and other Portal Pipeline shippers/consignees.
50. Defendants' fraudulent efforts to conceal their misconduct from Ashland include but are not limited to the...
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