Prudential Oil Corp. v. Phillips Petroleum Co.

• Decision Date: 17 June 1975
• Docket Number: No. 67 Civ. 3748-CLB.,67 Civ. 3748-CLB.
• Parties: PRUDENTIAL OIL CORPORATION, Plaintiff, v. PHILLIPS PETROLEUM COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

398 F. Supp. 233

PRUDENTIAL OIL CORPORATION, Plaintiff, v. PHILLIPS PETROLEUM COMPANY, Defendant.

No. 67 Civ. 3748-CLB.

United States District Court, S. D. New York.

June 17, 1975.

Gold, Farrell & Marks by Thomas R. Farrell, Leonard M. Marks, New York City, for plaintiff.

Sullivan & Cromwell by Robert MacCrate, David B. Rigney, Richard J. Urowsky, New York City, for defendant.

MEMORANDUM DECISION

BRIEANT, District Judge.

By its complaint, filed on September 27, 1967, more than seven and one-half years ago, plaintiff, a New York corporation, sued defendant, a Delaware corporation having its principal place of business in Oklahoma, for relief upon four separate claims or causes of action. Most of the facts relied on occurred during the period 1961 to 1963.

All claims pleaded seek equitable relief and/or damages under New York law. As successor by a chain of assignments, hereinafter mentioned, from Prudential Oil Corporation, a Connecticut corporation, hereinafter "Prudential Connecticut", plaintiff seeks to enforce its rights under a claimed joint venture for the establishment of an oil refinery and petro-chemical facility in Puerto Rico. It alleges that its assignor, Prudential Connecticut, disclosed confidential proprietary information to defendant, and took and forebore from taking a variety of actions, in reliance on the alleged joint venture, and thereafter defendant appropriated the benefits of the joint venture for its own account. The legal theory of the claims pleaded has been stated variously as an equitable action to impress a trust, or for an accounting, or an action for damages as a result of an intentional tort arising out of misappropriation by defendant for its own use of details, specifications, ideas, concepts, innovations, information contacts, engineering data and designs furnished to defendant in trust and confidence, to be used solely in furtherance of the joint interests of the parties, or all of the above.

The relief requested includes (1) an accounting of the joint venture and division of the respective rights and interests of the parties; (2) impressing a trust on defendant's property; and (3) a judgment directing payment over to plaintiff of its rights in the venture.

No federal claims are pleaded, and the sole basis for jurisdiction is diversity of citizenship between the parties pursuant to 28 U.S.C. § 1332(a).

For a more detailed factual exposition of the issues in this litigation, reference should be had to the memorandum decision dated April 4, 1975 filed herein by Chief Judge Edelstein, denying defendant's motion to strike plaintiff's jury demand. 392 F.Supp. 1018.

As noted, plaintiff shows (Complaint, ¶ 1) that it

"brings this action as assignee of all the right, title and interest to the claims asserted herein of Prudential Equities Corp., a Delaware corporation, which in turn was a successor in interest and assignee of the entire business, assets and properties of Prudential Oil Corporation, a Connecticut corporation."

The answer, filed October 20, 1967, pleads as a second affirmative defense, that "the court has no jurisdiction over the subject matter of the action pursuant to 28 U.S.C. § 1359."

At our hearing held May 2, 1975, the taking of evidence on the issues raised by the motion was waived. The facts pertaining to subject matter jurisdiction are not in dispute, although there is substantial controversy with respect to the inferences to be drawn from those undisputed facts.

Defendant contends that the present plaintiff, referred to for convenience as "Prudential New York," "had been collusively made (sic) a party to this suit," and that consequently subject mater jurisdiction was wanting under the provisions of 28 U.S.C. § 1359. That latter statute provides as follows:

"A district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court."

The parties prior to July 1974 had developed a "Statement and issue concerning jurisdiction" for a proposed pre-trial order. It is clear that Prudential Oil Corporation, a Connecticut corporation, was incorporated in that State in 1959 and until October 1962, maintained its principal place of business at Greenwich, Connecticut. Thereafter, Prudential Connecticut had its principal place of business in New York.

Prudential Connecticut had been formed by Edward J. Willey and Nathan M. Shippee "for the purpose of offering for sale participations in administered oil and gas drilling exploration and development programs." (¶ 9, Affidavit of Nathan M. Shippee, filed April 29, 1975).

Early in 1965, Prudential Connecticut was reorganized as a Delaware corporation, also under the name of Prudential Oil Corporation (hereinafter "Prudential Delaware"). By the terms of the reorganization, Prudential Connecticut was dissolved, all of its assets, liabilities and goodwill were assigned to or assumed by Prudential Delaware, and Prudential Connecticut's shareholders received one share of Prudential Delaware stock for each share of Prudential Connecticut previously owned.

In the spring of 1966, the board of directors of Prudential Delaware approved the formation of two subsidiaries: America House, Inc., a Spanish corporation, the purpose of which was to develop a shopping center and office building complex in Madrid, Spain; and Prudential Polymer Co., a Puerto Rican corporation, for the "purpose of engaging in activities in connection with the Phillips petrochemical plant complex being constructed in Puerto Rico." (¶ 16, Shippee Affidavit, ibid).

In May of 1966, a draft of an unfiled, proposed complaint entitled in the Supreme Court of New York, New York County (Defendant's Pre-Trial Exhibit 221), was shown to one of defendant's officers. The draft complaint sought an accounting and damages for breach of fiduciary duties based on claimed wrongful acts of the defendant with respect to the Puerto Rican venture. This complaint was never served or filed, but was employed in discussions with defendant looking towards obtaining performance of the claimed joint venture agreement by Phillips, or a settlement.

In the summer of 1966, Prudential Delaware engaged in further corporate reorganization. On June 29, 1966 Prudential Delaware transferred to its wholly owned Delaware subsidiary, Prudential Drilling Funds, Inc. ("Prudential Funds"), all of its assets relating to its business in the management of oil and gas drilling ventures. It was contemplated that Prudential Funds would make a public offering of unit participations in oil and gas exploration and drilling programs and that the public offering could be accomplished more readily if the offeror had a clean balance sheet, separated from any of Prudential Delaware's other ventures. Prudential Funds had been incorporated on December 21, 1965, but did not begin business until the transfer. On July 13, 1966, effective July 15, 1966, Prudential Delaware changed its name to Prudential Equities Corp., supposedly to reflect more accurately the passive, holding company quality of its post-reorganization operations.

As part of the same 1966 reorganization, plaintiff here, Prudential Oil Corporation, a New York corporation ("Prudential New York"), was incorporated on July 12, 1966 as a wholly-owned subsidiary of Prudential Equities Corp. On July 13, 1966, Nathan M. Shippee, Chairman of the Board of Prudential Delaware and incorporator of Prudential New York, elected himself and Patricia Morel, his secretary, as directors of Prudential New York. The directors elected Shippee to be President and Treasurer and Morel as Vice President and Secretary of the New York subsidiary. Also on July 13, 1966, Shippee, acting on behalf of Prudential Delaware, conveyed and assigned to Prudential New York the use of the name "Prudential Oil Corporation", and Prudential Delaware's interest in the joint venture with Phillips in the petrochemical complex in Puerto Rico, together with any "claims, rights or causes of action accruing or arising from any of the foregoing." Shippee, acting on behalf of Prudential New York, executed an instrument assuming the liabilities and obligations of the Delaware corporation in connection with the Puerto Rican venture.

At a meeting of the board of directors of Prudential Equities Corp., (Delaware) on September 11, 1967, Shippee reported to the board that efforts to settle the dispute with Phillips regarding the Puerto Rican venture had failed and that Prudential New York had no alternative but to commence suit against Phillips. The board of Prudential Equities authorized the officers of Prudential New York to retain counsel to work with counsel for Prudential Equities to prosecute an action against Phillips. (Minutes of the Meeting of the Executive Committee of the Board of Directors of Prudential Equities Corp., September 11, 1967, Exhibit 2 to Affidavit of Robert MacCrate, Esq., sworn to April 3, 1975).

Section 1359 of Title 28 was enacted to prevent the contrivance of federal diversity jurisdiction by means of assignment and bars federal jurisdiction in any "civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court." 28 U.S.C. § 1359. In particular, under § 1359, "a corporation cannot get into federal court merely by transferring its claim to a subsidiary, incorporated in some other state chosen with diversity in mind. . . ." C. Wright, Federal Courts § 31, at 102 (1970).

Kramer v. Caribbean Mills, Inc., 394 U.S. 823, 89 S.Ct. 1487, 23 L.Ed.2d 9 (1969), holds that a federal district court lacked subject matter jurisdiction by reason of § 1359 where a Panamanian corporation assigned its interest in a contract with a Haitian corporation to an American attorney for purposes of collection. The Court found that the assignment was "improperly or collusively...