Northwest Central Pipeline Corp. v. Mesa Petroleum Co.

• Decision Date: 30 December 1983
• Docket Number: Civ. A. No. 83-282 MMS.
• Parties: NORTHWEST CENTRAL PIPELINE CORPORATION, a Delaware corporation, Plaintiff, v. MESA PETROLEUM CO., a Delaware corporation, and Tenneco Oil Company, a Delaware corporation, Defendants.
• Court: U.S. District Court — District of Delaware

576 F. Supp. 1495

NORTHWEST CENTRAL PIPELINE CORPORATION, a Delaware corporation, Plaintiff, v. MESA PETROLEUM CO., a Delaware corporation, and Tenneco Oil Company, a Delaware corporation, Defendants.

Civ. A. No. 83-282 MMS.

United States District Court, D. Delaware.

December 30, 1983.

William O. LaMotte, III, Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for plaintiff; David K. Watkiss, Watkiss & Campbell, Salt Lake City, Utah, of counsel.

R. Franklin Balotti, and Stephen E. Herrmann, Richards, Layton & Finger, Wilmington, Del., for defendants; Stanley L. Cunningham, and John N. Hermes, McAfee & Taft, Oklahoma City, Okl., of counsel.

OPINION

MURRAY M. SCHWARTZ, District Judge.

The parties in this action disagree over the meaning and effect of a natural gas sales contract. When the dispute arose, plaintiff filed this action in Delaware Chancery Court. Defendants countered by filing the counterpart of this action in the United States District Court for the Western District of Oklahoma, by removing plaintiff's Chancery Court action to this Court, and by moving to transfer this action to the Western District of Oklahoma. Plaintiff responded by filing a motion to remand this action to the Chancery Court.

Briefing and oral argument were held on defendants' transfer motion and on plaintiff's motion to remand. Because this case was improperly removed, discussion will be limited to plaintiff's motion to remand.

I. Background

Plaintiff Northwest Central Pipeline Corp. ("Northwest"), a Delaware corporation, is a purchaser, transporter and seller of natural gas. Defendants Mesa Petroleum Co. ("Mesa") and Tenneco Oil Co. ("Tenneco"), also Delaware corporations, produce and sell natural gas. Mesa and Tenneco each own a one-half interest in Tema Oil Co. ("Tema"), a partnership organized under the laws of Texas. Northwest and Tema are successors in interest to a natural gas sales contract entered into in 1948 between Cities Service Gas Co. ("Cities Service"), as buyer, and United Producing Co., Inc. ("United"), as seller.

Two clauses in that 1948 sales contract are important in this litigation — the "take-or-pay" clause and the "withdrawal" clause. Both come into effect if the buyer fails to purchase in one contract year¹ the minimum quantity of natural gas set forth in the contract. In the event of such a shortfall, the buyer has two options. First, under the take-or-pay clause, it may within sixty days of the close of the contract year pay for the deficiency in its purchases and accept delivery of the gas during the succeeding contract year. Second, it may choose not to pay for the deficiency within sixty days, and provide the seller the right under the withdrawal clause to remove dedicated acreage from the sales contract in proportion to the buyer's deficiency in purchases.

An historical perspective is essential to understand the reason for the current controversy. In 1963 and 1964 Cities Service failed to take or pay for the contractual minimum of gas. Ashland Oil & Refining Co. ("Ashland"), one of Tema's predecessors in interest to the contract,² sought to remove dedicated acreage under the withdrawal provision of the contract. The Federal Power Commission, however, refused Ashland permission to withdraw acreage from dedication. Federal Power Commission approval was necessary because in 1954 the Supreme Court held in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 (1954), that independent natural gas producers selling gas to interstate pipeline companies are subject to Federal Power Commission regulation. Ashland then sued Cities Service for breach of contract. The trial court granted summary judgment in favor of Cities Service but the Tenth Circuit Court of Appeals reversed. In Ashland Oil & Refining Co. v. Cities Service Gas Co., 462 F.2d 204 (10th Cir.1972), the Court of Appeals held that the withdrawal provision was effectively removed from the 1948 contract because performance under it was rendered impossible by the intervening Supreme Court decision in Phillips Petroleum.

In 1978 Congress enacted the Natural Gas Policy Act ("N.G.P.A."), 15 U.S.C. §§ 3301 et seq. This Act establishes certain statutory ceilings on first sales of natural gas. Northwest contends that one effect of these price ceilings may be to render the parties' take-or-pay clause invalid. Gas paid for but not taken in one contract year and which is not accepted for delivery in the next contract year, Northwest contends, would result in a price exceeding the maximum lawful price under the N.G.P.A.

The immediate facts giving rise to the present suit are alleged by plaintiff as follows. In the 1982 contract year Cities Service, and then Northwest which became its successor as of November 12, 1982, failed to take the required minimum volume of gas. On February 16, 1983, Northwest informed Mesa (on behalf of Tema) that it would pay $4,556,780.00 for its deficiency under the take-or-pay clause but, because of its concerns about the lawfulness of that clause, would make the payment under protest, "reserving the right to recover the payment, or a portion thereof, should it ultimately be determined to be unlawful." (Doc. 1, Ex. "A" at ¶ 22). Mesa responded by letter on February 17, 1983, that it would not accept a restrictive endorsement or conditional tender. Northwest attempted a second tender, on February 18, 1983, this time drafting an unrestricted check, "in full payment and satisfaction of Northwest Central's take-or-pay deficiency," (Id. at ¶ 24) but accompanied by a voucher stating that the tender was subject to Northwest's right to recover payment if the clause is determined to be unlawful. The sixty-day take-or-pay period expired on February 20, 1983. Two days later, Mesa wrote that it considered Northwest in complete default. On February 24, 1983, Northwest removed any condition from its February 18, 1983, tender. Northwest, however, determined that it had miscalculated the amount of its deficiency and on February 25, mailed Tema a check for an extra $2,111,463.38 to reflect the deficiency. On March 2, 1983, Mesa returned both the February 18 and February 25 checks. Northwest tendered a new check for $6,668,243.38 on March 4th, and this check was rejected by Mesa on March 7. Settlement discussions then took place but no agreement was reached. Finally, on March 24, 1983, Mesa notified Northwest that it would remove approximately fifty-seven percent of dedicated acreage from the sales contract pursuant to the contract's withdrawal clause.

Northwest filed its Delaware Chancery Court action on April 14, 1983. On the next day, Tema filed its federal suit in the Western District of Oklahoma. Defendants Mesa and Tenneco removed the Chancery Court action to this Court pursuant to 28 U.S.C. § 1446 on May 13, 1983. They simultaneously moved to transfer. On August 11, 1983, Judge West of the United States District Court for the Western District of Oklahoma dismissed in its entirety Tema's action in that court.³

II. The Complaint

Northwest's complaint filed in the Delaware Chancery Court asks for declaratory and injunctive relief. It alleges three "claims" and requests various specific forms of relief. The first claim asserts that Northwest's tender was valid under the contract despite any alleged conditions or restrictions placed on it and despite Northwest's initial payment of an incorrect amount. In addition, Northwest argues in claim one that Tema is estopped from objecting to the timeliness of the tender. Tema's unlawful refusal to accept Northwest's tender, Northwest asserts, is not ground for withdrawal of acreage. In claim two Northwest contends that defendants are bound by the Ashland decision and may not enforce provisions of the contract held impossible to perform in that case. Claim three presents Northwest's contention that if it were required to pay for gas under the take-or-pay clause which it did not use in contract year 1982 and which it could not take in contract year 1983, its purchase price would exceed the maximum lawful price for gas in violation of section 504(a) of the N.G.P.A.

Northwest requested the Chancery Court to render the following judgment:

(1) that Northwest Central has fulfilled all its obligations under the contract;

(2) that Northwest Central's tender of February 18, 1983 was valid;

(3) that defendant's refusal to accept Northwest Central's tender of February 18, 1983, or its subsequent tenders, violated the terms of the contract;

(4) that defendants ... are enjoined and prohibited from withdrawing acreage from dedication and from taking any action to further such withdrawal;

(5) that defendants ... are enjoined and prohibited from causing Tema to withdraw acreage from dedication and from taking any action to further such withdrawal;

(6) that the provision of the contract permitting withdrawal of acreage for Northwest Central's failure to pay for deficiencies below contract year minimum volumes is unenforceable;

(7) that defendants ... are bound by the Tenth Circuit's decision in Ashland Oil; and

(8) that the take-or-pay provision of the contract is unenforceable because its effect is to require Northwest Central to pay a price in excess of the applicable NGPA maximum lawful ceiling price.

(Doc. 1, ex. A at 13-14).

III. Motion to Remand

An action brought in state court may be removed to federal district court only if the district court has original jurisdiction over a claim raised in the complaint. 28 U.S.C. § 1441. If a case has been improperly removed because it was not within the district court's original jurisdiction, the district court must remand it to the state court from which it was removed. 28 U.S.C. § 1447(c). Because the present controversy lacks diversity of citizenship between the parties, this Court may retain jurisdiction only if the claims present a federal question. The precise question the Court must answer is whether Northwest's lawsuit,...