United States v. Continental Oil Company

• Decision Date: 18 July 1966
• Docket Number: No. 8228.,8228.
• Citation: 364 F.2d 516
• Parties: UNITED STATES of America, Appellant, v. CONTINENTAL OIL COMPANY, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

364 F.2d 516 (1966)

UNITED STATES of America, Appellant, v. CONTINENTAL OIL COMPANY, Appellee.

No. 8228.

United States Court of Appeals Tenth Circuit.

July 18, 1966.

Robert V. Zener, Atty., Dept. of Justice (John W. Douglas, Asst. Atty. Gen., B. Andrew Potter, U. S. Atty., and Alan S. Rosenthal, Atty., Dept. of Justice, on the brief), for appellant.

Granville Tomerlin, Oklahoma City, Okl. (L. David Trapnell, Ponca City, Okl., Tomerlin & High, Oklahoma City, Okl., Roy C. Hackley, Jr., New York, N. Y., and Joseph C. Kotarski, Ponca City, Okl., of counsel, on the brief), for appellee.

Before MURRAH, Chief Judge, and PHILLIPS and PICKETT, Circuit Judges.

ORIE L. PHILLIPS, Circuit Judge.

The primary question presented in this action is the construction of a provision in a quitclaim deed from the Reconstruction Finance Corporation,¹ an agency of the United States, to Continental Oil Company,² reading as follows:

"Grantee covenants and agrees that in the event Grantee uses the facilities of the said Plancor 882 for extracting toluene from hydroformate within a period of eight (8) years from and after June 1, 1948, Grantee shall and will pay an additional sum of Two Thousand Six Hundred Sixty-five Dollars ($2,665.00) per month for each month or part thereof that the facilities are used for that purpose, until the end of a period of eight (8) years from and after June 1, 1948."

Specifically, it involves the determination of the meaning of the phrase "for extracting toluene from hydroformate." Certain background will aid in arriving at the answer to that question. In the latter part of 1941, and immediately prior to its entry into World War II, the United States was engaged in a rearmament program, including the establishment of additional productive capacity for "nitration grade toluene," a product used in the manufacture of TNT and also a component of aviation gasoline. Defense Plant Corporation,³ a subsidiary of RFC, was authorized to assist the rearmament program by acquiring or constructing production facilities and leasing such facilities to qualified operators.

Shortly after April 27, 1942, Continental conveyed a 4.78-acre tract of land, located near its petroleum refining and processing facilities at Ponca City, Oklahoma, to DPC. In the latter part of 1940, Continental had installed as one of its refinery units at Ponca City a hydroformer designed, when operated under a process patent owned by M. W. Kellogg Company, to convert certain portions of naphthalenic feedstocks derived from other refinery operations into a complex chemical mixture known as "hydroformate," containing various percentages of aromatics, such as toluene, benzine and xylene. DPC caused to be constructed on such tract of land a plant known as Plancor 882, by which toluene of 99 per cent purity could be extracted from hydroformate, a feedstock, under a process patent owned by Shell Development Company. It was originally contemplated that such toluene should be used in the manufacture of TNT.

On April 27, 1942, DPC, as lessor, entered into a written lease with Continental, as lessee, by which DPC leased for a stipulated rental Plancor 882 to Continental, to be operated by Continental when completed for the extraction from hydroformate of toluene for the United States.

On May 6, 1942, the United States and Continental entered into a supply contract, under which Continental agreed to furnish to the United States not less than 2,000,000 or more than 2,500,000 gallons of nitration grade toluene at a unit price of 28¼ cents per gallon, in strict accordance with specifications and drawings which required the toluene to be not less than 99 per cent pure.

On May 1, 1942, the Defense Supplies Corporation,⁴ a Government agency, and Continental entered into a contract whereby the latter undertook to sell and DSC agreed to purchase the output of aviation gasoline from that part of Continental's Ponca City refinery known as Plancor 1042. The Government specification for aviation gasoline at that time and up to the time the quitclaim deed referred to above was executed and delivered required that it should contain toluene of 98 per cent or greater purity. At the time of the delivery of the quitclaim deed, toluene of less than 96 per cent purity had never been used as a component of aviation gasoline.

During the period Plancor 882 was under construction, the United States decided that the production of toluene therefrom should be used as a component of aviation gasoline, rather than for the manufacture of TNT.

The construction of Plancor 882 was completed in September, 1943. During the first few months Plancor 882 was operated, the toluene produced therefrom was of 99 per cent purity. Thereafter, until operation of the plant was closed down, following the termination of World War II in August, 1945, the toluene produced therefrom was of 98 per cent purity.

Upon the termination of World War II, Plancor 882 was no longer needed and it lay idle until November of 1946. From the latter date until the sale thereof to Continental, referred to hereinafter, two of its distilling towers, being only a part of the device, were operated by Continental, under a lease from the United States, for distillation purposes.

In 1947, the United States decided to sell Plancor 882 and on September 4, 1947, the War Assets Administration⁵ invited bids therefor.

Continental obtained two estimates of the salvage value of Plancor 882. It took the average thereof, which was $77,000, added one-third of that amount thereto and an amount for value of the land, being the amount Continental received from the United States therefor, and thus arrived at a round figure of $104,000 and submitted a bid in that amount. At the time of the submission of such offer, Continental contemplated moving Plancor 882, in the event it acquired the same, to another location and using it for other purposes than the extraction of toluene.

WAA believed the plant might still be used for toluene extraction and on December 31, 1947, made a counteroffer of $264,000. Such counteroffer also stipulated that the following provision should be included in the deed of conveyance:

"Should Continental Oil Company use any part of this plant on-site for the production or extraction of any quantity of toluene whatsoever within 8 years from the date of acceptance of the Letter of Intent, Continental Oil Company shall so notify this Administration or its assignee of such use and shall pay to War Assets Administration or its assignee the additional sum of $1,728 per calendar month for the use thereof. Such sum to be in addition to any other monies paid for the purchase of said property."

On March 24, 1948, Continental submitted a new offer of $127,289 and proposed the incorporation in the deed of a provision reading as follows:

"Should the facilities be used for extracting toluene from hydroformate within 8 years from the date of letter of intent to purchase Plancor 882, to pay an additional $1,728 a month for each month or part thereof that the facilities are used for this purpose or until eight years have elapsed."

On May 14, 1948, Continental increased its cash offer to $175,000 and again proposed the incorporation in the deed of the provision set out in the preceding paragraph, except that the stipulated rent was increased to $2,665 per month.

That offer was accepted and WAA conveyed Plancor 882 to Continental by a quitclaim deed, which contained the covenant of the grantee set forth above in the first paragraph of this opinion.

The Korean War created a new need for aviation gasoline. To meet this need, Continental again operated Plancor 882 for the extraction of toluene of 98 per cent or greater purity. That operation continued from November, 1950, until August, 1952, and during that period Continental paid the United...