Oxy Resources Cal. LLC v. Superior Court

• Decision Date: 11 February 2004
• Docket Number: No. A101632.,No. A101512.,A101512.,A101632.
• Citation: Oxy Resources Cal. LLC v. Superior Court, 9 Cal.Rptr.3d 621, 115 Cal.App.4th 874 (Cal. App. 2004)
• Court: California Court of Appeals
• Parties: OXY RESOURCES CALIFORNIA LLC, Petitioner, v. The SUPERIOR COURT of Solano County, Respondent; Calpine Natural Gas LP, Real Party in Interest. Calpine Natural Gas LP, Petitioner, v. The Superior Court of Solano County, Respondent; EOG Resources, Inc., et al., Real Parties in Interest.

9 Cal.Rptr.3d 621

115 Cal.App.4th 874

OXY RESOURCES CALIFORNIA LLC, Petitioner, v. The SUPERIOR COURT of Solano County, Respondent;

Calpine Natural Gas LP, Real Party in Interest.

Calpine Natural Gas LP, Petitioner, v. The Superior Court of Solano County, Respondent;

EOG Resources, Inc., et al., Real Parties in Interest.

No. A101512.

No. A101632.

Court of Appeal, First District, Division 3.

February 11, 2004.

As Modified March 4, 2004.

Mitchell Silberberg & Knupp, Elia Weinbach, Evan Goldstein, Douglas Bordewieck, Los Angeles, Counsel for Petitioner Oxy Resources California LLC.

No appearance for Respondent.

David S. MacCuish, Los Angeles, Nana Nakano, Deborah Y. Jones, Weston, Benshoof, Rochefort, Rubalcava & MacCuish, Los Angeles, Counsel for Real Party in Interest and for Petitioner Calpine Natural Gas LP.

Clement L. Glynn, Andrew T. Mortl, Glynn & Finley, Walnut Creek, Counsel for Real Parties in Interest, EOG Resources, Inc., et al.

PARRILLI, J.

May parties negotiating a business transaction rely on a "joint defense agreement" as the basis for refusing to produce privileged documents exchanged long before they are actually sued by a third party? Ordinarily, a joint defense agreement protects privileged information shared by defendants after a lawsuit has been filed, including defense strategies. Here, the parties entered into a joint defense agreement before they finalized their negotiations, anticipating they might be sued. They now seek to protect from disclosure communications made during the course of the transaction that gives rise to the lawsuit they anticipated. We conclude in camera inspection of the material must occur before determining whether disclosure is compelled.

At issue are 202 documents reflecting communications between OXY Resources California LLC (OXY) and EOG Resources, Inc. (EOG). OXY and EOG entered into a complex transaction in which they exchanged interests in a number of oil and gas producing properties, including a property subject to a preferential purchase right held by Calpine Natural Gas LP (Calpine). Calpine sued OXY and EOG, contending it was denied the opportunity to exercise its contractual right of first refusal to purchase EOG's interest in the disputed property. Calpine moved to compel after OXY and EOG withheld documents reflecting communications that took place between OXY and EOG both before and after they finalized their transaction, but before Calpine filed its lawsuit. OXY opposed Calpine's motion to compel, asserting that all 202 withheld documents are protected from disclosure based on the attorney-client privilege or the work product doctrine, as well as on the basis of a joint defense agreement entered into by OXY and EOG before the close of the transaction.

The trial court granted Calpine's motion in part, ordering OXY to produce 172 postacquisition documents. The trial court denied the motion as to the remaining 30 documents, which reflect preacquisition communications. In case No. A101512, OXY challenges the order granting in part the motion to compel, and in case No. A101632, Calpine challenges the order denying in part the motion to compel. We ordered the two writ petitions consolidated. We conclude that extraordinary relief is warranted and direct the trial court to conduct further proceedings as outlined below.

FACTUAL AND PROCEDURAL BACKGROUND

1. Calpine's Preferential Purchase Right

Calpine seeks to enforce a preferential right to purchase EOG's former interest in the Elkhorn Slough, a valuable natural gas producing property in Solano County. As of late 1999, Calpine and EOG were parties to a series of agreements concerning their interests in the production of natural gas from the Elkhorn Slough, with EOG acting as operator of the joint business. Under the agreements, each party was obligated to give written notice of any proposed sale of its interests and provide the other party with an opportunity to purchase those interests on the same terms and conditions.

The preferential purchase right provides in relevant part as follows: "Should any party desire to sell all or any part of its interests under this agreement or its rights and interests in the Contract Area, it shall promptly give written notice to the other parties, with full information concerning its proposed sale.... The other parties shall then have an optional prior right, for a period of ten (10) days after receipt of the notice, to purchase on the same terms and conditions the interest which the other party proposes to sell.... However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage its interests, or to dispose of its interests by merger, reorganization, consolidation, or sale of all or substantially all of its assets to a subsidiary or parent company or to a subsidiary of a parent company, or to any company in which any one party owns a majority of the stock."

2. The 1999 Transaction Between EOG and OXY, and the "Joint Defense Agreement"

On December 30, 1999, EOG transferred all its rights in the Elkhorn Slough to a newly created affiliate, EOG Resources California, LLC. The following day, on December 31, 1999, EOG and OXY USA, Inc., an affiliate of Occidental Petroleum Corporation (Occidental),¹ closed a tax-free transaction in which EOG and OXY USA, Inc., swapped membership interests in limited liability companies that own oil and gas properties and interests in the states of Texas and California. In the transaction, OXY USA, Inc., acquired all of the membership interests in EOG Resources California, LLC, which it subsequently renamed OXY Resources California LLC (OXY).² Accordingly, at the conclusion of the transaction, OXY held the rights to the Elkhorn Slough previously owned by EOG. The Elkhorn Slough represents a small fraction of the value of all properties exchanged in the transaction.

Before finalizing their transaction, EOG entered into a "Joint Defense Agreement" with Occidental on November 15, 1999.³ The Joint Defense Agreement recites that EOG and Occidental propose to exchange certain assets of EOG and OXY USA, Inc., and it states that Occidental and EOG "anticipate that the past and future ownership and operation of [assets exchanged by the parties] will present various legal and factual issues common to Occidental and [EOG], and the Parties, as anticipated potential defendants, acknowledge that they share a common interest in defending against Claims by Third Parties, and they may wish to make joint efforts in preparation against any defense of anticipated actions or proceedings." The parties expressed their "intention and understanding that (a) the fact that particular communications have been made between the Parties to this Agreement, (b) the information communicated, and (c) any documents exchanged as part of such communications, shall remain privileged or otherwise exempt from discovery by any Third Party, by reason of each Party's attorney-client communication privilege, each Party's and their counsel's work product doctrine immunity, the joint defense doctrine, the environmental audit privilege, the self-critical analysis privilege and any other privilege or exemption recognized under applicable law. No sharing of information under this [Joint Defense Agreement] between the Parties and/or their Representatives shall be deemed a waiver of any otherwise applicable privilege or other exemption from discovery or disclosure."

3. Calpine's Response to the 1999 Transaction Between EOG and OXY

EOG and OXY announced their transaction in a January 3, 2000 press release. In response to the press release, Calpine sent a letter to EOG on January 11, 2000, advising EOG of its preferential right to purchase EOG's interest in the Elkhorn Slough. In the letter, Calpine informed EOG that "[w]e have recently read of [EOG's] exchange of certain assets in the Sacramento Basin to [OXY]. In the event that the exchange includes the Elkhorn Slough area in Solano County, California, this is to advise that a preferential right to purchase exists as to that property.... [¶] It was unclear in your press release what stage of the transaction you were involved in, so our notice might be a bit premature. However, we respectfully request that notice under the above referenced letter agreement be delivered to [Calpine's] office in Houston to my attention." Calpine sent EOG a follow-up letter on February 4, 2000, again advising EOG of its preferential purchase right. According to Calpine, EOG did not respond to Calpine's inquiries.

EOG eventually informed Calpine that, as a consequence of the manner in which the transaction was structured, the preferential purchase right did not apply.⁴ Calpine formally notified EOG on November 7, 2000, that Calpine would enforce its preferential purchase right.

Calpine filed this action against EOG and OXY on May 22, 2001.⁵ Calpine thereafter filed a first amended complaint on April 26, 2002, alleging causes of action against EOG and OXY for declaratory relief, specific performance, and an accounting. In addition, Calpine alleged causes of action against EOG for breach of contract and breach of the covenant of good faith and fair dealing, and against OXY for unjust enrichment and intentional interference with a contractual relationship.⁶ The causes of action in the first amended complaint are all premised on Calpine's contractual preferential right to purchase EOG's interests in the Elkhorn Slough. Calpine alleges that OXY was aware of the preferential purchase right affecting the Elkhorn Slough and that OXY and EOG developed and implemented a scheme to avoid the exercise of the preferential purchase rights. Calpine also contends it would have purchased EOG's interests in the Elkhorn Slough if it had been notified of the pending sale to OXY.

4. Calpine's Motion to Compel

In response to document requests served by Calpine, OXY and EOG withheld certain documents and provided Calpine...