Mobil Oil Corp. v. City of Long Beach

Decision Date24 September 1985
Docket Number84-5547,Nos. 84-5546,84-5584,84-5595 and 84-5750,84-5552,s. 84-5546
Citation772 F.2d 534
PartiesMOBIL OIL CORP., Plaintiff-Appellant, v. CITY OF LONG BEACH, Defendant-Appellee. EXXON CORP., Plaintiff-Appellant, v. CITY OF LONG BEACH, Defendant-Appellee. UNION OIL COMPANY OF CALIFORNIA, a corporation, Plaintiff-Appellant, v. The CITY OF LONG BEACH, a municipal corporation; Kenneth Cory, Leo McCarthy, Michael Franchetti and John Dever, Defendants-Appellees. SHELL OIL CO., Plaintiff-Appellant, v. CITY OF LONG BEACH, Kenneth Cory, Leo McCarthy, Michael Franchetti and John Dever, Defendants-Appellees. TEXACO, INC., a Delaware corporation, Plaintiff-Appellant, v. CITY OF LONG BEACH, a Municipal corporation, Defendant-Appellee. SHELL CALIFORNIA PRODUCTION, INC., Plaintiff-Appellee, v. CITY OF LONG BEACH, a Municipal Corporation; Kenneth Cory; Leo McCarthy; Jesse Huff; and John Dever, Defendants-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

Andrew J. Kilcarr, Vincent Tricarico, John P. Dean, Donovan, Leisure, Newton & Irvine, Washington, D.C., Thomas R. Trowbridge, III, Donovan, Leisure, Newton & Irvine, New York City, for plaintiff-appellant.

Philip K. Verleger, David A. Destino, McCutchen, Black, Verleger & Shea, Los Angeles, Cal., Robert L. Norris, Exxon Corp., Houston, Tex., for Exxon Corp.

Charles F. Rice, Donald L. Clarke, Charles B. Strauss, III, Mobil Oil Corp., New York City, for Mobil Oil Corp.

Leslie C. Randall, Mauryne S. Fennell, Tony O. Hemming, Los Angeles, Cal., Robert D. Wilson, White Plains, N.Y., for Texaco Inc.

Bruce G. Warren, Shell Oil Co., Anaheim, Cal., William Simon, P.C., John S. Kingdon, Alan M. Grimaldi, Albert O. Cornelison, Jr., Howrey & Simon, Washington, D.C., William G. Winters, Jr., Raymond V. McCord, Shell Oil Co., Houston, Tex., for Shell Oil Co.

John K. Van de Kamp, Atty. Gen., N. Gregory Taylor, Asst. Atty. Gen., Alan V. Hager, Nancy K. Chiu, Dep. Attys. Gen., Los Angeles, Cal., for Cory, McCarthy & Huff.

Robert W. Parkin, Long Beach, Cal., for City of Long Beach & Dever.

Appeals from the United States District Court for the Central District of California.

Before WALLACE and BOOCHEVER, Circuit Judges, and MacBRIDE, * District Judge.

WALLACE, Circuit Judge:

These consolidated appeals concern the interpretation of a contract between the City of Long Beach (Long Beach) and various oil companies for the production of oil on land held by Long Beach as trustee for the State of California. Mobil Oil Corporation (Mobil), Exxon Corporation (Exxon), Shell Oil Company (Shell), and Texaco Inc. (Texaco) appeal from Judge Gray's refusal to hear their diversity claims under 28 U.S.C. Sec. 1332(a) for injunctive and declaratory relief. Mobil Oil Corp. v. City of Long Beach, 578 F.Supp. 1197, 1201-03 (C.D.Cal.1984) (Mobil ). Union Oil Company of California (Union) appeals from Judge Gray's determination that Union's complaint seeking injunctive and declaratory relief presented no substantial federal question for purposes of 28 U.S.C. Sec. 1331. Id. at 1199-1200. Long Beach appeals from Judge Real's determination that Shell California Production Inc.'s (Shell California) complaint seeking similar relief did present a substantial federal question for purposes of 28 U.S.C. Sec. 1331 and from his conclusion for Shell California on the merits of its claim. See Shell California Production Inc. v. City of Long Beach, No. 83-6466 (C.D.Cal. Mar. 20, 1984) (Shell California ).

We have jurisdiction over these consolidated appeals under 28 U.S.C. Sec. 1291. We affirm Judge Gray's conclusion that Union's claim presented no substantial federal question, and we reverse Judge Real's determination that Shell California's claim did present such a question. We reverse, however, Judge Gray's rejection of diversity jurisdiction and remand the Mobil, Exxon, Shell, and Texaco claims. Because of our disposition of Shell California's claim, we do not reach Judge Real's decision on the merits in favor of Shell California.


In 1965, Long Beach entered into an agreement (the Contractors' Agreement) with Texaco, Humble Oil and Refining Co. (now Exxon), Union, Mobil, and Shell (the oil companies). Under that agreement, the oil companies hold the right to explore for and produce crude oil on land held in trust by Long Beach, and they are obligated to purchase 80% of their production. The oil companies and Long Beach share any profits from the operation of the oil field under a formula that is the subject of this dispute. Profits for purposes of the Contractors' Agreement are calculated by deducting "[a]ll sales, use and excise taxes" under article 18(b). Income or profits taxes, however, are not deductible.

In 1980, Congress enacted the Windfall Profit Tax on Domestic Crude Oil (WPT), 26 U.S.C. Secs. 4986-4998, which it designated as an excise tax. See id. Sec. 4986(a). Since the enactment of that tax, Long Beach and the oil companies have disputed the character and proper treatment of the WPT under the Contractors' Agreement. The oil companies have deducted any taxes paid under the WPT from their calculation of profits owed to Long Beach, claiming it is an excise tax deductible under article 18. Long Beach, however, has consistently asserted that it is more analogous to a tax on profits that cannot be deducted in determining Long Beach's share of profits.

In September of 1983, following three years of fruitless discussion over this issue, Long Beach informed the oil companies that it appeared litigation to resolve the dispute would be inevitable. Shortly thereafter, Mobil and Union sought declaratory relief in the form of counterclaims to an earlier action filed by Long Beach involving the same parties that was pending before Judge Gray in the Central District of California. That action was one of several consolidated as In re Coordinated Pretrial Proceedings In Petroleum Products Antitrust Litigation, MDL Docket No. 150-WPG, in which Long Beach alleges both antitrust and breach of contract claims against the oil companies under the same Contractors' Agreement. Long Beach opposed these motions, which Judge Gray denied on October 5, 1983 on the basis that Mobil's and Union's claims for relief were insufficiently related to MDL-150. At the same time, however, he indicated that should any similar claims be separately filed, he would accept assignment of them under the Central District's "low number" rule. This procedure allows subsequently filed cases involving the same subject matter to be assigned to the judge with the older, or lower filing number, action.

On October 6, 1983, Mobil filed a claim in the Central District for injunctive and declaratory relief based on its interpretation of the Contractors' Agreement, with the other oil companies following with similar claims by October 12, 1983. The Mobil, Exxon, Shell, and Texaco complaints asserted diversity jurisdiction under 28 U.S.C. Sec. 1332(a). Shell California is a wholly-owned producing subsidiary of Shell and had recently succeeded to Shell's interest in the Contractors' Agreement. Union and Shell California are California corporations and, therefore, their complaints asserted only federal question jurisdiction under 28 U.S.C. Sec. 1331. Each case was initially assigned to a different judge, but those brought by Mobil, Exxon, Shell, Texaco, and Union were later transferred to Judge Gray. Shell California's action was assigned to Judge Real, who did not transfer it.

Long Beach brought an action in state court against the oil companies on October 13, 1983, asserting claims under both the Contractors' Agreement and another production agreement. With respect to the Contractors' Agreement, that complaint sought declaratory relief and damages based on Long Beach's characterization of the contract. The oil companies removed Long Beach's state action to the district court, asserting federal question jurisdiction under 28 U.S.C. Sec. 1331 arising from the need to interpret the WPT.

In the cases before Judge Gray, the oil companies moved for summary judgment, with Long Beach moving for dismissal based on lack of federal subject matter jurisdiction and on abstention grounds. After the parties submitted briefs on an expedited schedule, oral argument was heard on December 15, 1983. In the event the court found an absence of federal question jurisdiction, the non-diverse parties agreed by affidavit to be bound by the court's decision on the merits in the diversity case. Judge Gray subsequently granted Long Beach's motion to dismiss all claims, and sua sponte remanded the state court action.

Before Judge Real, Long Beach similarly moved to dismiss Shell California's complaint on the basis of no federal question jurisdiction. That motion was denied. On cross-motions for summary judgment, Judge Real granted Shell California's motion, holding that the WPT was an excise tax properly charged against profits under the Contractors' Agreement.


Judge Gray held that federal subject matter jurisdiction over Union's claim under 28 U.S.C. Sec. 1331 was lacking because it presented "no substantial federal question." Mobil, 578 F.Supp. at 1199. That holding was based on two decisions. First, he found that Long Beach had conceded that the WPT was an excise tax, leaving only a state law question of contract interpretation. Id. Second, he concluded that Union's claim presented only a potential defense to a state breach of contract claim, which would not permit assertion of federal jurisdiction under Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 672-74, 70 S.Ct. 876, 879-80, 94 L.Ed. 1194 (1950) (Skelly Oil ). Mobil, 578 F.Supp. at 1199-1200. Judge Real held, to the contrary, that there was federal question jurisdiction over Shell California's almost identical complaint, without outlining his reasoning. The question of federal subject matter jurisdiction is reviewable de novo. Clayton v. Republic...

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