Pauley Petroleum, Inc. v. Continental Oil Co.

• Citation: 43 Del.Ch. 366,231 A.2d 450
• Parties: PAULEY PETROLEUM, INC., Pauley Pan American Petroleum Company, and American Independent Oil Company de Mexico, S.A. de C.V., Plaintiffs, v. CONTINENTAL OIL COMPANY, Defendant.
• Decision Date: 23 June 1967
• Court: Court of Chancery of Delaware

Page 450

231 A.2d 450

43 Del.Ch. 366

PAULEY PETROLEUM, INC., Pauley Pan American Petroleum

Company, and American Independent Oil Company de

Mexico, S.A. de C.V., Plaintiffs, v. CONTINENTAL OIL COMPANY, Defendant.

Court of Chancery of Delaware, New Castle County.

June 23, 1967.

H. Albert Young, H. James Conaway, Jr., and Ben T. Castle, of Young, Conaway, Stargatt & Taylor, Wilmington, for plaintiffs.

James M. Tunnell, Jr., and Andrew B. Kirkpatrick, Jr., of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendant.

DUFFY, Chancellor:

In this case Pauley Petroleum Inc., a Delaware corporation, Pauley Pan American Petroleum Company, a Delaware corporation, and American Independent Oil Company de Mexico, S.A. de C.V., a corporation of the Republic of Mexico (collectively referred to as 'Pauley') seek an injunction restraining Continental Oil Company, a Delaware corporation ('Continental'), its agents and others associated with it, from prosecuting two civil lawsuits now pending in Mexico. A temporary restraining order was issued and this is the decision on the application for a preliminary injunction after extensive discovery and argument by the parties.

I

On January 31, 1967 Pauley filed suit in the Delaware Superior Court against Continental and Mexofina, S.A. de C.V., a Mexican corporation ('Mexofina'). Except for qualifying shares, Mexofina is entirely owned by Continental. Personal service was obtained upon Continental and jurisdiction over Mexofina was sought through a writ of foreign attachment (directed to Continental as a garnishee). After the temporary restraining order was issued by this Court, and after argument on the application for a preliminary injunction, the Superior Court announced a decision quashing the writ of foreign attachment.

Pauley's action at law is based on one or more contracts by which Continental, directly or through a subsidiary, acquired oil interests in Mexico from Pauley. Prior thereto, Pauley 'owned' Mexofina and all of its stock was transferred to Continental as part of the sale. Specifically, Pauley seeks a judgment of more than $619,000 upon a guaranty contract in which Continental made certain promises with respect to the performance by Mexofina of its obligations under one or more of the other contracts in the series.

On March 6, 1967, Mexofina filed two civil suits (sometimes hereafter referred to in the singular) in Mexico, one against Pauley Pan American Petroleum Company ('Pauley Pan Am'), the other against American Independent Oil Company de Mexico, S.A. de C.V. ('Aminoil'); both of those companies are plaintiffs here. Pauley contends that the claims in the Delaware and Mexican lawsuits are substantially identical and both concern the contracts under which Pauley's interests were sold to Continental. On the other hand, Continental denies that the issues are the same in the Mexican and Delaware Courts.

Speaking broadly, the dispute between the 'Pauley people' on the one side and the 'Continental people' on the other side centers around their respective rights and duties under Paragraph 5(d) of a Purchase Agreement of May 1, 1962, one of the contracts in the series. That paragraph deals with the so-called 'Carried Period' during which Mexofina has exclusive authority to determine the amount and nature of certain expenses to be incurred and the investments to be made in connection with exploration, drilling and development.

After the suits were begun in Mexico, Pauley filed this action and, in view of the limited time available to it under Mexican procedure, and to preserve the status of affairs, this Court issued the temporary order to which I have referred. Thus Pauley's action is here not for adjudication of the merits of the controversy between sides, but for the purpose of establishing an order of precedence in the two other Courts where the sides are litigating. This arises as a result of the Delaware dichotomy which divides jurisdiction at the general trial level into law (Superior) and equity (Chancery) Courts.

II

Pauley contends that Continental dominates and controls Mexofina, its wholly-owned (for present purposes) subsidiary and uses it as a mere instrumentality for the doing of business in Mexico under the oil contracts. Pauley argues that such domination and control of Mexofina generally and, more specifically Continental's management of the dispute between the parties, make it appropriate for this Court to enjoin it from prosecution of the Mexican suit.

In support of these arguments, Pauley relies on Equitable Trust Company v. Gallagher, 34 Del.Ch. 76, 99 A.2d 490 (1953), and Martin v. D. B. Martin Co., 10 Del.Ch. 211, 88 A. 612 (1896), and refers to many holdings in other jurisdictions in which Courts have 'overlooked corporate formalities' under a variety of circumstances. 1 Fletcher Cyclopedia of Corporations (Perm. Ed.) § 41.

A.

The circumstances under which a Delaware Court will disregard the corporate entity have been, generally if not precisely, laid down in a number of our decisions. In Buechner v. Farbenfabriken Bayer Aktiengesellschaft, 38 Del.Ch. 490, 154 A.2d 684 (1959), for example, the Supreme Court said that 'the corporate fiction may be disregarded to prevent fraud, and a wholly-owned subsidiary may sometimes be treated as an instrumentality of the parent.' And, more recently, this Court said in Stauffer v. Standard Brands Incorporated, 40 Del.Ch. 202, 178 A.2d 311 (1962); aff'd 187 A.2d 78 (1962), 'In the absence of fraud, the separate entity of a corporation is to be recognized. This principle has been enunciated by all of the courts of this state.'

Fraud does not necessarily exhaust the field as is indicated by the quoted language from Buechner. Use of a related or controlled corporation to evade a judicial decree, as Pauley argues, is another circumstance in which the form of the matter has been disregarded by the court. Babee-Tenda Corp. v. Scharco Manufacturing Co., D.C., 156 F.Supp. 582 (1957). But the short of it is that neither fraud nor evasion of a judicial decree nor like conduct is here involved. This leaves for consideration as to 'general' domination the 'instrumentality' test. And a look at Pauley's cases is of first importance.

As to Gallagher, that case, as I read it, turned upon defendant's conduct in making No distinction between himself and the corporation. Indeed he so testified. The result that the Court reached, obviously, was necessary to do justice in the dispute and prevent a serious inequity which would otherwise follow.

In Martin the Court reviewed many of the general principles applicable to a corporation as a distinct legal entity and the circumstances under which that entity will be disregarded. It is difficult to identify with certainty the fundamental reason which persuaded the Court to finally decide as it did, but I note the many references to fraud and also to an 'indirect consolidation' of the companies. I view Martin as a case in which the Court was influenced by a desire to prevent fraud which it apparently regarded as a possibility arising out of the close identity of interests of the corporations and the way in which they were operated. On the facts before it, the Court found 'agency' or 'instrumentality' in the corporate relationships, but the suspicion of fraud seems to have guideposted the finding.

Circumstances determine when, in the cautionary words of Buechner, the Court will 'sometimes' treat a wholly-owned subsidiary as an instrumentality of the parent. Here, extended discussion is not necessary to show that on this record Mexofina is not the mere instrumentality (in a legal sense) of Continental. It is undisputed, for example, that it is an organized, existing and active corporation which holds oil development contracts with the appropriate Mexican governmental agency (Pemex) and it is an actual operator under some or all of those contracts. Mexofina has its own directors, officers and records. It has some $30 million in invested capital with separate liabilities and bank accounts. At various times it has had up to 550 of its own employees and never fewer than about 86. And it has its own independent auditing agents.

There are some officers and personnel in common between Continental and Mexofina, and there are other areas in which the two corporations are closely identified; but when all of this is said and done, the conclusion forcefully follows that, measured by all of the criteria reasonably applicable under our law, Mexofina is not the mere instrumentality of Continental. In brief, this case on its record facts is not governed by Gallagher or Martin. ¹ Compare Owl Fumigating Corporation v. California Cyanide Co., 24 F.2d 718 (D.C.1928), affirmed 30 F.2d 812 (3 Cir.1929).

B.

Pauley's contention as to domination and control of Mexofina by Continental is also refined, as I understand it, to the proposition that the 'only strictly relevant domination and control issues are those that concern the dispute between these parties.' The main thrust of this argument is that Continental has complete charge of the dispute with Pauley and, by this test, Mexofina is completely subject to Continental's domination and control.

I assume for present purposes that Mexofina is responsive to Continental's wishes and/or discipline in the way and for the purpose for which Pauley argues. And yet I conclude that injunctive relief based upon this contention must be denied.

We begin with the fact already established that Mexofina is an organized and operating corporation and it is not in Delaware. It is in Mexico. The only way this Court can reach it, as Pauley argues, is to order Continental, which is here, to apply its stock control for that purpose. If the Court were to adopt that rationale, it would have to disregard the Continental corporate complex and it would do so not for reasons of fraud nor the abandonment by Continental of the corporate structure. It would do so...