Pacific Western Oil Co. v. McDuffie, 7349.

• Citation: 69 F.2d 208
• Decision Date: 13 February 1934
• Docket Number: No. 7349.,7349.
• Parties: PACIFIC WESTERN OIL CO. v. McDUFFIE et al.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

69 F.2d 208 (1934)

PACIFIC WESTERN OIL CO. v. McDUFFIE et al.^*

No. 7349.

Circuit Court of Appeals, Ninth Circuit.

February 13, 1934.

Dockweiler & Dockweiler, L. R. Van Burgh, Paul Barksdale D'Orr, Thomas A. Reynolds, Frank H. Love, and A. L. Abrahams, all of Los Angeles, Cal., for appellant.

Henry F. Prince, Homer D. Crotty, and Norman S. Sterry, all of Los Angeles, Cal. (Gibson, Dunn & Crutcher, of Los Angeles, Cal., of counsel), for appellee McDuffie, etc.

Leo S. Chandler, of Los Angeles, Cal. (Chandler, Wright & Ward, of Los Angeles, Cal., of counsel), for appellee Creditors' Protective Committee.

Robert B. Murphey, of Los Angeles, Cal. (Call & Murphey, of Los Angeles, Cal., of counsel), for appellees Bank Creditors.

Louis W. Myers, of Los Angeles, Cal. (O'Melveny, Tuller & Myers, of Los Angeles, Cal., of counsel), for appellee trustee.

Alexander Macdonald and Robert H. Edwards, Jr., both of Los Angeles, Cal. (Bauer, Macdonald, Schultheis & Pettit, of Los Angeles, Cal., of counsel), for appellee Richfield Bondholders' Protective Committee.

Before WILBUR, SAWTELLE, and GARRECHT, Circuit Judges.

GARRECHT, Circuit Judge.

The appellant brings this appeal from an order made by the District Court denying the appellant's petition that Wm. C. McDuffie, as receiver of Richfield Oil Company of California, a corporation, be required to pay as a cost of operation of the receivership the appellant's claim of $1,070,768.43 due for oil and casing-head gasoline, which it had delivered to the corporation prior to the receivership.

For purposes of brevity we shall designate Pacific Western Oil Company as "appellant," respondent Wm. C. McDuffie, receiver of Richfield Oil Company, as "receiver," and the respondent corporation, Richfield Oil Company of California, as "Richfield."

Appellant is a Delaware corporation, and was and is engaged in the production of oil and natural gas. Richfield, also a Delaware corporation, was principally engaged in the business of refining and distilling crude oil and in distributing and selling the derivatives thereof, up to January 15, 1931, when a receiver was appointed, and the receiver since has carried on the business.

Appellant's petition alleges, and the answers admit, that under date of November 14, 1928, Richfield and appellant entered into a contract, a copy of which is attached to the petition as Exhibit A, whereby appellant agreed to sell and deliver to Richfield, the buyer, for the full term of the contract, ending at midnight on June 19, 1938, all of the crude petroleum produced and saved from the wells then owned or operated by the seller, up to an aggregate of 20,000 barrels a day. The contract also gives to the buyer the right at its option to purchase any additional oil which the seller may produce. Further, the contract provides that the oil shall be delivered from the tankage of the seller, and that the buyer shall take such oil from such tankage into its pipe lines, as produced, within forty-eight hours after it is offered for delivery, and also that the title to the oil shall pass to the buyer as and when it is received into its pipe lines or other receptacles. The price which the buyer agrees to pay the seller is the prevailing current price, at the time of each delivery, as fixed by certain of the major oil companies. There are other provisions not material here. On the same day another contract, being attached to the petition as Exhibit B, was entered into between the same parties for the sale and purchase by Richfield of all the casing-head gasoline manufactured by appellant within the state of California. Some deliveries made under this contract were unpaid for when Richfield went into receivership, but, as this contract was terminated by the parties before the receivership, it has no bearing in the controversy. These contracts provided that Richfield should pay petitioner on the 15th day of each month for the oil and casing-head gasoline delivered during the preceding month.

In considering the relationship of the parties, it may be important to note that Mr. McDuffie was and is an oil operator of very wide experience. At the time of the execution of these contracts, he was president of the appellant, and remained such until February 9, 1932, at which time he became chairman of appellant's board of directors, continuing as such to March 16, 1933. He was very heavily interested financially in the appellant, and at the time of the hearing in the District Court still retained all of his financial interests. On the 29th day of December, 1930, at the instance and request of the directors of appellant and a number of large unsecured creditors of Richfield, he was elected president of Richfield. On the 15th day of January, 1931, he was appointed receiver of Richfield. Prior to and at the time of his appointment the court was fully advised of his connection with, and interest in, appellant. He also offered to resign as president of appellant, but at the earnest request of its directors did not press his resignation.

Thus Mr. McDuffie was prevailed upon to accept a position where some of his official acts were in conflict with his own personal interests. On account of his very large ownership in the stock of the petitioner, it would be to his personal advantage if appellant prevailed in its contention, but it should be said that the receiver, in disregard of his own personal interest, has opposed the claim of appellant throughout. Nevertheless, it is the contention of appellees that this conflicting relationship of itself would avoid any implied adoption of the contract as contended for by appellant, a result for which the receiver would in no wise be responsible.

Richfield also had contracts with a great number of other persons, firms, and corporations similar to the one with petitioner, which is involved in this suit.

At the time of the appointment of the receiver, and for a long time before, the posted field price for oil was in excess of what could be realized from the sale of the refined product, which resulted in an artificial market for crude oil. Richfield was purchasing under these contracts a very large percentage of the oil which it used in the manufacture of the gasoline which it sold, and, as a result of purchasing oil at a price in excess of what it could realize from the refined product, Richfield was sustaining a daily loss due to market conditions.

For a considerable time prior to the receivership, Richfield had been failing to meet promptly the payments due appellant on the due date each month, for the oil and gasoline delivered the preceding month. These delinquencies had become so large as to cause discussion among the directors of appellant concerning the advisability of canceling the contract then still in force, and prior to the receivership Mr. McDuffie, as president of appellant, obtained an option from Richfield to cancel the contract at any time on thirty days' notice. Thereupon he endeavored, without success, to make sale of appellant's product elsewhere, but found no purchasers therefor. This situation was brought to the attention of all of the other directors of appellant, and it was the consensus of opinion that, in view of the fact that there was at the time no other outlet for its oil, it was best to continue with the delivery of the oil to Richfield and take chances on payment.

On January 15, 1931, when the receiver was appointed, Richfield was indebted to appellant in the sum of $1,070,768.43 for oil and casing-head gasoline delivered on its contracts prior to the receivership.

The receiver by the order of appointment was authorized "to the extent that the Receiver may determine that it is for the best interest of the receivership estate so to do, to perform and fulfill the contracts and obligations of the defendant," and the receiver was given power and authority to carry on Richfield's business fully and without restriction. The order contained this further provision: "The Receiver is hereby given a period of six (6) months from the date hereof within which to arrive at a determination as to what contracts including leases of the defendant the Receiver should affirm or disaffirm and within that time to make his election in that respect; the court reserves the right if so advised from time to time to extend or diminish the time so granted to the Receiver within which to make such election." This six-month period was extended by order of court duly made for a further period of two months, to and including the 15th day of September, 1931.

On February 11, 1931, the court made an order in the receivership proceedings, requiring creditors to file proof of their claims against Richfield with the receiver on or before April 1, 1931, and, on March 25, 1931, appellant, as required by said order, filed proof of claim based upon the aforesaid amount of $1,070,768.43, due for oil and casing-head gasoline delivered prior to the receivership.

The concluding paragraphs of said claim are as follows:

"That there are no offsets or counterclaims to said debt; no notes or other evidences of indebtedness have been taken or received; no judgment has been rendered for such indebtedness or any part thereof; and no claim for preference in payment from the receivership is made.

"The claimant holds no security for said indebtedness.

"Claimant hereby demands payment of the amount of its said claim, and also demands the performance by said receiver of the said agreement dated November 14, 1928, relating to crude petroleum oil, and of the said agreement dated November 14, 1928, relating to the sale of casinghead gasoline subject only to the modifications of the crude petroleum oil agreement hereinbefore referred to in this claim and attached hereto as exhibits. Claimant further refers to all obligations under said agreement, contingent or which will become due hereafter and, subject only to the aforesaid modifications, demands the allowance...