Prudential Oil Corp. v. Phillips Petroleum Co.

• Decision Date: 01 December 1976
• Docket Number: D,No. 324,324
• Parties: PRUDENTIAL OIL CORPORATION, Plaintiff-Appellee, v. PHILLIPS PETROLEUM COMPANY, Defendant-Appellant. ocket 76-7207.
• Court: U.S. Court of Appeals — Second Circuit

Page 469

546 F.2d 469

PRUDENTIAL OIL CORPORATION, Plaintiff-Appellee, v. PHILLIPS PETROLEUM COMPANY, Defendant-Appellant.

No. 324, Docket 76-7207.

United States Court of Appeals,

Second Circuit.

Argued Nov. 1, 1976.

Decided Dec. 1, 1976.

Robert MacCrate, New York City (David B. Rigney, Richard J. Urowsky, Sullivan & Cromwell, New York City, Lloyd G. Minter, C. J. Roberts, Don Jemison, Phillips Petroleum Co., Bartlesville, Okl., of counsel), for defendant-appellant.

Thomas R. Farrell, New York City (Leonard M. Marks, Gold, Farrell & Marks, Abrams & Sassower, New York City, of counsel), for plaintiff-appellee.

Before FEINBERG, MANSFIELD and MESKILL, Circuit Judges.

MANSFIELD, Circuit Judge:

This appeal raises the question of whether federal diversity jurisdiction may be acquired through the assignment by a non-diverse parent corporation of its claim to a newly-created, 100 percent owned diverse subsidiary, which owns no other assets and is engaged solely in the prosecution of the claim. In this case the parent, Prudential Equities, a Delaware corporation ("Prudential-Delaware"), assigned its claim against appellant Phillips Petroleum Company ("Phillips"), also a Delaware corporation, to Prudential Oil Corporation ("Prudential-New York"), a New York corporation which is a wholly owned subsidiary of Prudential-Delaware and the plaintiff in the action. If the assignment was effective for federal jurisdictional purposes, the diversity of citizenship necessary under 28 U.S.C. § 1332(a) would exist; if not, the action must be dismissed. We hold that because the material undisputed facts show that the assignment served only the function of creating an appearance of diversity jurisdiction and the plaintiff failed to demonstrate a legitimate business reason for the transfer, the complaint must be dismissed for lack of federal jurisdiction pursuant to Title 28 U.S.C. § 1359, which provides:

"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."

Prudential-New York, invoking federal diversity jurisdiction, commenced the present action in the Southern District of New York on September 27, 1967, by filing a complaint alleging four claims arising out of Phillips' successful 1965 negotiation with the Department of Interior for an oil import quota which enabled Phillips to construct and operate a multi-million dollar petrochemical plant in Puerto Rico. The plaintiff alleged, inter alia, that Phillips had completed the project for its own exclusive benefit in breach of a joint venture agreement with plaintiff's predecessor in interest Following commencement of the lawsuit it lay virtually dormant for two years. On October 9, 1973, Phillips moved to strike the plaintiff's jury demand, a motion that was decided by Chief Judge Edelstein on April 5, 1975, 392 F.Supp. 1018. On June 17, 1975, Judge Charles L. Brieant, to whom the case was transferred, denied defendant's motion to dismiss the action for lack of subject matter jurisdiction pursuant to § 1359, 398 F.Supp. 233. Trial before Judge Brieant and a jury finally commenced on January 5, 1976. At the close of the plaintiff's case Judge Brieant dismissed the plaintiff's joint venture claims and those seeking equitable relief but permitted the plaintiff to amend the complaint to seek damages based on quasi-contract or an implied-in-fact agreement by Phillips to compensate plaintiff's predecessor for its business concepts and for Phillips' misappropriation and use of those concepts.

and that Phillips had also tortiously misappropriated certain of the predecessor-in-interest's business concepts. An accounting, equitable relief and damages were sought, partly on the theory that a constructive trust should be impressed upon Phillips' Puerto Rican facility in favor of the plaintiff.

On January 27, 1976, the jury rendered a verdict in favor of Prudential-New York, awarding $1,500,000 damages which, based on the jury's answers to special questions, was founded on the theory that on December 16, 1963, Phillips either had tortiously misappropriated business concepts devised by plaintiff's predecessor for use in obtaining the oil import quota or had impliedly agreed to pay for them. Judge Brieant assessed interest from December 16, 1963, bringing the total judgment to $2,690,968.70.

Phillips attacks the judgment on three grounds: (1) that Prudential-Delaware's assignment of the claims to Prudential-New York violated 28 U.S.C. § 1359, (2) that the verdict was excessive and unsupported by competent evidence, and (3) that the calculation of pre-judgment interest from December 16, 1963, which amounted to some $1,200,000, was contrary to New York law. Since we find that the action must be dismissed on the first of these grounds it becomes unnecessary to consider the other two. Accordingly we focus our attention principally on those facts pertaining to the question of whether the assignment of the claims in issue violated § 1359.

Beginning in 1961 the Commonwealth of Puerto Rico, which had no oil sources of its own, made it known that it desired to expand its economy by obtaining from the U.S. Department of Interior, which then administered the United States' oil import program, an oil import quota that would enable Puerto Rico to build a third oil refinery for use in expansion of industry in the territory, particularly the manufacture of petrochemicals. Various promoters became interested, including Jack P. Coan of Omega Management, Inc., his consulting firm; Oscar L. Chapman, former Secretary of the Interior; Bruce K. Brown, an oil executive; Nathan M. Shippee and Edward J. Wiley, Chairman and President, respectively, of Prudential Oil Corporation, then a Connecticut company engaged in selling oil drilling operations; and Robert B. Anderson, former Secretary of the Treasury.

In the early years, Coan and Chapman, working with Shippee and Anderson, sought to interest Phillips in a project that would form the basis for obtaining the oil import quota, with Phillips acting as a supplier of oil to a proposed refinery in Puerto Rico and as a purchaser of refined petroleum produced by the plant that would not be used in Puerto Rican petrochemical operations. In 1963 Phillips indicated willingness to participate in and to provide advice for the construction of the project, but by March 1963 the promoters were advised by the Economic Development Administration of Puerto Rico ("EDA") that the project was disapproved. In April 1963 Phillips informed Prudential-Connecticut that it would not participate unless Prudential succeeded in obtaining an oil import quota. Prudential's efforts were further frustrated when, on July 2, 1963, Shippee, its Chairman, was involved in an airplane accident Beginning in August 1963 Chapman and Coan reactivated Phillips' interest, this time on the basis that Phillips would directly sponsor a Puerto Rican refinery designed to stimulate petrochemical production in Puerto Rico. Toward the end of 1963 they submitted a new proposal to EDA for a petrochemical-oriented plant and in January 1964, Chapman, acting for Phillips, and with the support of EDA, applied to the Department of the Interior for an oil import quota. Over the opposition of competing oil companies and after a public hearing, an agreement was negotiated in the spring of 1965 with the Commonwealth of Puerto Rico for the project, which resulted in the grant of the necessary oil import quota allocation by the Department of the Interior in December 1965.

which rendered him unable to continue his promotional efforts.

In the meantime on March 1, 1965, Prudential-Delaware was organized. On June 30, 1965, it took over the assets, liabilities and business operations of Prudential-Connecticut, which was thereupon dissolved. Beginning in December 1965, Prudential-Delaware, acting through Shippee and Anderson, sought to reach an agreement with Phillips for the joint operation of the Puerto Rican project but Phillips denied any obligation to share the venture with Prudential-Delaware. In the course of these negotiations Shippee at a May 1966 meeting exhibited to Phillips' representatives a draft of a state court complaint on behalf of Prudential-Delaware against Phillips, also a Delaware corporation, bearing the caption "Supreme Court of the State of New York, New York County" and containing allegations similar to those later set forth in the complaint in the present federal court action, including the claim that Prudential-Delaware had an equity interest in Phillips' Puerto Rican project. By letter dated June 9, 1966, Phillips, rejecting Prudential-Delaware's claim, denied that it had any obligations to Prudential-Delaware and terminated the negotiations.

Within a few weeks after termination of the negotiations Prudential-Delaware, which had already formed two subsidiaries in the spring of 1966, America House, Inc., a Spanish corporation, for the development of a shopping and building complex in Spain and Prudential Polymer Co., a Puerto Rican company, to engage in petrochemical-related activities in Puerto Rico, further reorganized itself, obtaining the approval of its directors on June 29, 1966, and of its stockholders on July 13, 1966. It changed its name to Prudential Equities Corp. and distributed its assets to two newly-created, wholly owned subsidiaries: Prudential Funds, Inc., a Delaware corporation formed to hold assets relating to its oil and gas drilling ventures with a view to the making of a public offering and Prudential Land Company, Inc., a New York subsidiary, formed to hold title to its lease holdings and operate in the field of real estate management and acquisitions.

After this reorganization the sole remaining asset held by Prudential-Delaware was its claim against Phillips, which had been the subject of the state court complaint...