Permian Petroleum Co. v. Petroleos Mexicanos

• Decision Date: 27 June 1991
• Docket Number: Nos. 89-5694,90-5596,s. 89-5694
• Parties: 15 UCC Rep.Serv.2d 666 PERMIAN PETROLEUM COMPANY, Plaintiff-Appellant, v. PETROLEOS MEXICANOS, a/k/a Pemex, Defendant-Appellee. PERMIAN PETROLEUM COMPANY, Plaintiff-Appellant, Dallas International Bank, Intervenor-Plaintiff-Appellee, v. PETROLEOS MEXICANOS, a/k/a Pemex, Defendant-Appellant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 635

934 F.2d 635

15 UCC Rep.Serv.2d 666

PERMIAN PETROLEUM COMPANY, Plaintiff-Appellant, v. PETROLEOS MEXICANOS, a/k/a Pemex, Defendant-Appellee.

PERMIAN PETROLEUM COMPANY, Plaintiff-Appellant, Dallas International Bank, Intervenor-Plaintiff-Appellee, v. PETROLEOS MEXICANOS, a/k/a Pemex, Defendant-Appellant-Appellee.

Nos. 89-5694, 90-5596.

United States Court of Appeals Fifth Circuit.

June 27, 1991.

Rehearing Denied Aug. 12, 1991.

Douglas S. Johnston, Elaine L. Lawson, A. Randall Friday, Crady, Jewett & McCulley, Houston, Tex., for Petroleos Mexicanos.

Sidney Powell, Strasburger & Price, Dallas, Tex., for Permian Petroleum Co.

Kevin C. Nash, Douglas A. Cawley, Johnson & Gibbs, Dallas, Tex., for intervenor-plaintiff-appellee.

Appeals from the United States District Court for the Western District of Texas.

Before CLARK, Chief Judge, RONEY ^* and DUHE, Circuit Judges.

CLARK, Chief Judge:

Permian Petroleum Company (Permian) brought this action against Petroleos Mexicanos (Pemex). Permian claims that Pemex refused to pay for several deliveries of liquified petroleum gas (LPG). Pemex contends that its refusal to pay was proper because a 1983 agreement entitles it to apply a credit against obligations owed to Permian. Dallas International Bank (DIB) intervened and claims that Pemex converted collateral in which DIB allegedly retains a security interest. Texas law governs the issues in this diversity case. The district court granted DIB's motion for summary judgment on the conversion claim and eventually awarded damages. We affirm the summary judgment, vacate the award of conversion damages, and remand. After a bench trial, the district court entered a take-nothing judgment for Permian against Pemex. We vacate this judgment and remand. Both Pemex and Permian claimed attorneys' fees. The district court submitted the issue to a magistrate who ruled in favor of Pemex. Because the attorneys' fee award depends on the resolution of the merits, we also vacate this ruling and remand.

I. Background facts and proceedings below.

A. Background facts.

1) The contract claims.

Permian sued Pemex for breach of contract alleging that Pemex failed to pay for LPG delivered between December 1984 and March 1985 (the 1984-1985 deliveries). The parties stipulated that the total value of the unpaid LPG on the dates of delivery was $5,035,933.00 and that this figure was also the contract price.

The alleged breaches occurred when Permian received notice that Pemex would not pay for these deliveries. Pemex claimed the right to withhold payment because an agreement between Pemex and International Drilling and Energy Company, d/b/a Permian Petroleum Company (IDEC) dated August 12, 1983 allegedly allowed Pemex to offset the value of LPG Pemex furnished to IDEC in the fall of 1983 pursuant to the agreement against the full price of the 1984-1985 deliveries. Permian, however, argues that Pemex's attempted offset was wrongful. The history of the relationships between Permian, IDEC, and Pemex is critical to our resolution of this appeal.

Beginning in late 1979 or early 1980, IDEC began dealing with Pemex as a supplier and transporter of Pemex's LPG. From the outset of the relationship, IDEC was doing business under the name Permian Petroleum Company. Pemex wanted to deliver LPG to northern Mexico but lacked the transportation system to do so. Pemex found it more economical to either buy LPG in the United States for shipment to northern Mexico or to ship its own LPG to Houston for delivery to United States suppliers and transporters like IDEC who would in turn transport the LPG to northern Mexico. In return for their services, Pemex initially gave its supplier/transporters a "differential"--a specified amount of Pemex's LPG in lieu of cash.

In 1982, Pemex made Gas Del Oro (GDO) its distributor. In this capacity, GDO received LPG shipped by Pemex and delivered it to Pemex's United States supplier/transporters. Pemex would advise GDO by telex the amount of LPG to be delivered to each United States supplier/transporter. GDO would then deliver the designated amount of LPG and confirm the delivery by telex to Pemex.

In late 1982 and early 1983, GDO apparently began shorting United States companies on Pemex's deliveries. Several suppliers, including IDEC, complained to Pemex that they had not received all of the LPG that they were due. Pemex's superintendent for all Pemex international LPG trade, Sergio Jauregui, investigated the complaints and determined that GDO had shorted some suppliers. Jauregui urged GDO to correct the situation, but his efforts were generally unsuccessful. GDO's president died shortly thereafter, and GDO went into bankruptcy.

IDEC claimed to Pemex that Jauregui's investigation confirmed that GDO had shorted IDEC by 4,588,537 gallons of LPG. Pemex maintained that GDO actually delivered the quantity of LPG owed to IDEC. However, Pemex contended it could not deny the truthfulness of IDEC's claim because Pemex did not have access to GDO's records due to the bankruptcy proceedings.

IDEC and Pemex settled their dispute over the GDO deliveries in an agreement dated August 12, 1983. The agreement obligated Pemex to deliver to IDEC the entire quantity of LPG in dispute. The parties have stipulated that Pemex fulfilled this obligation through deliveries to IDEC in September, October, and November 1983.

In return for the immediate delivery of the disputed LPG, Pemex bargained for a contingent double credit that could be exercised against future obligations if Pemex's subsequent investigations revealed that IDEC had actually received the disputed LPG prior to the agreement date. The agreement provides:

In the event it is found that on or before the date of this Agreement, IDEC had received from GDO or Pemex all or any part of the undelivered LPG, Pemex shall be entitled to receive as a credit against any obligations Pemex owes, or may in the future owe, to IDEC an amount equal to twice the amount of any excess LPG received by IDEC under this agreement.

Several important events occurred prior to the August 12, 1983 agreement. On March 23, 1983, IDEC's president, Willard Payne, died. At the time of Payne's death, IDEC was indebted to Ray Horton in the amount of $652,000. On May 6, 1983, Horton formed Permian. On May 26, 1983, Permian purchased the assets of IDEC's LPG division in a transaction which partially satisfied the debt owed to Horton. Permian contends that IDEC did not enter into any new transactions with Pemex after June 1, 1983.

Shortly after the August 12, 1983 IDEC/Pemex agreement, a letter from IDEC informed Jauregui that Permian was a separate company from IDEC. Pemex maintains that Permian attempted to confuse the identities of IDEC and Permian in order to take advantage of the business relationship between Pemex and IDEC. Pemex claims to have expressed a desire to continue doing business only with the same company with which it had done business in the past. It is undisputed that IDEC had been doing business under the name Permian Petroleum Company and that Horton, who was president of IDEC at the time of the asset purchase, continued to do business with Pemex as president of Permian. According to Pemex, Permian led Pemex to believe that Permian was the same company with which Pemex had dealt in the past.

After the August 12, 1983 agreement, Pemex began transacting LPG business with Permian. On March 12, 1985, Permian received notice that Pemex refused to pay for the 1984-1985 deliveries. Pemex claims that it exercised its credit option under the August 12, 1983 agreement after obtaining access to GDO's records and discovering that GDO actually delivered the LPG owed to IDEC prior to August 12, 1983. Pemex argues that its refusal to pay for the 1984-1985 deliveries was proper because a double credit for the value of the 4,588,537 gallons of LPG delivered pursuant to the settlement agreement exceeds Pemex's debt to Permian.

2) The conversion claim.

DIB made loans to Permian and took perfected security interests in Permian's inventory and accounts receivable. DIB was allowed to intervene in this litigation to assert that Pemex's refusal to pay for the 1984-1985 deliveries was a conversion of its property because DIB held a perfected security interest in Permian's LPG inventory. The parties agree that, on the date of the district court's judgment, the principal owed on Permian's debt to DIB was $3,673,396.33 and the interest owed was $2,644,775.48.

B. Proceedings below.

The district court granted DIB's motion for summary judgment on its conversion claim and entered a judgment against Pemex for $5,035,933.47 (full value of the collateral) plus prejudgment interest. Pemex appeals both the entry of summary judgment and the amount of the award.

The remaining claims were tried to the bench. The district court found that IDEC received truck deliveries from GDO prior to the August 12, 1983 agreement and that these deliveries accounted for the allegedly undelivered LPG. The district court also concluded that IDEC and Permian were "alter egos of each other." The pertinent district court finding states:

The preponderance of the evidence shows that both before and after the summer of 1983, these two companies were used interchangeably by Mr. Horton and Mr. [Arturo] Garcia, [Permian's representative for LPG trade with Pemex] to engage in gas exchange and gas purchase transactions with Pemex. The distinction between these companies was never made clear, and the preponderance of the evidence shows that a contract with one was effectively a contract with the other.

The district court held that, under the August 12, 1983 agreement, Pemex was entitled to offset twice the value of the excess LPG delivered in the fall of 1983 against Permian's contract damages. The district court also held that Pemex's exercise of its credit was a breach of contract. Based on the breach of contract ruling, Permian claims prejudgment...