West Texas Transmission, L.P. v. Enron Corp., No. 89-5512

• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)
• Writing for the Court: Before CLARK, Chief Judge, THORNBERRY and JONES; EDITH H. JONES
• Citation: 907 F.2d 1554
• Parties: 1990-2 Trade Cases 69,137 WEST TEXAS TRANSMISSION, L.P., Plaintiff-Appellant, v. ENRON CORPORATION, et al., Defendant-Appellees.
• Decision Date: 09 August 1990
• Docket Number: No. 89-5512

Page 1554

907 F.2d 1554 1990-2 Trade Cases 69,137 WEST TEXAS TRANSMISSION, L.P., Plaintiff-Appellant,
v.
ENRON CORPORATION, et al., Defendant-Appellees. No. 89-5512. United States Court of Appeals,
Fifth Circuit. Aug. 9, 1990.
Rehearing and Rehearing En Banc Denied Sept. 17, 1990.

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Rufus Wallingford, Layne E. Kruse, Houston, Tex., Richard J. Zook, Dan Matthews, San Antonio, Tex., for plaintiff-appellant.

Richard P. Keeton, Mayor, Day & Caldwell, Houston, Tex., for TECO and NTIPC.

David T. Harvin and Karl S. Stern, Vinson & Elkins, Houston, Tex., for Enron Corp.

Wistanley F. Luke, U.S. Atty., San Antonio, Tex., David C. Shonka, Jerold D. Cummins, FTC, Washington, D.C., for F.T.C.

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

Before CLARK, Chief Judge, THORNBERRY and JONES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

West Texas Transmission, L.P. ("Valero") appeals from the district court's order denying specific performance of Valero's right of first refusal to repurchase from Enron Corporation and Northern Texas Intrastate Pipeline Company ("Enron") a one-half interest in the TransTexas Natural Gas Pipeline. After a bench trial, the district court found that, as a prerequisite to Valero's pipeline acquisition, the stock purchase

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agreement between Valero and Enron required Valero to receive FTC approval of the purchase. Further, according to the court, the FTC possessed statutory authority to implement the initial consent decree with Enron, requiring Enron to receive FTC consent for any pipeline sale, and subjecting Valero, an independent third party, to FTC authority. Valero challenges both of these rulings. We affirm. BACKGROUND

From 1969 until 1985, Valero Transmission Company, a predecessor of West Texas Transmission, L.P., constructed and operated the TransTexas Natural Gas Pipeline between Waha and New Braunfels, Texas. This pipeline carried natural gas from production areas in the Permian Basin to the region in and around New Braunfels, Valero's major market. The pipeline also merged with a network of pipelines serving the Gulf Coast.

In 1985, Valero's traditional markets vanished due to an oversupply of natural gas. To replace its diminished sales, Valero elected to increase its Gulf Coast operations. Although Valero owned pipeline facilities servicing Texas' industrial areas, Valero lacked both the capital to expand its operations, and ready access to a long-term supply of natural gas. Valero eliminated these impediments on February 28, 1985, by initiating a joint venture, the Nor-Val partnership, with NorTex, a wholly-owned subsidiary of Internorth, Inc. NorTex possessed an abundance of low-priced natural gas in the Midwest's Huken field area, but lacked a pipeline network to transport this gas to Houston. In exchange for a one-half interest in Valero's pipeline, NorTex contributed its long-term supply of natural gas and enough working capital to finance the enterprise.

The parties memorialized their arrangement in an Ownership Agreement. Under Article IX, section 9.1 of this contract, both parties retained a right of first refusal to repurchase the pipeline if either party should choose to sell its undivided half interest. The parties forwarded their agreement to the FTC as part of their Hart-Scott-Rodino filing. When the FTC took no action to inhibit the sale, the partnership began operations.

Two months later, Internorth, NorTex's parent company, merged with Houston Natural Gas to form Enron, Inc. ¹ Houston Natural Gas ("HNG"), one of Valero's principal competitors, held a 50% interest in the Oasis pipeline, which paralleled the Nor-Val pipeline route. Believing that this acquisition by Internorth violated NorTex's fiduciary duties to Valero under the Ownership Agreement, and that it raised serious antitrust concerns, Valero filed suit in federal court to block the merger. Valero also alerted the FTC to the potential anticompetitive effects of Internorth's acquisition.

Valero and Enron resolved their dispute on May 28, 1985 by signing a Settlement and Indemnity Agreement. NorTex consented to sell its one-half interest in the pipeline to an Acceptable Purchaser. Valero retained the right to disapprove of any pipeline purchaser tendered by NorTex, and reaffirmed its right of first refusal, originally secured under the Ownership Agreement. Both parties covenanted to use their best efforts to locate a prospective partner for Valero.

Meanwhile, the FTC elected to investigate the Internorth/HNG merger under both Section 7 of the Clayton Act (15 U.S.C. Sec. 18) and Section 5 of the Federal Trade Commission Act (15 U.S.C. Sec. 45). In re InterNorth, Inc., 106 F.T.C. 312, 317 (1985). Determining that the affiliation raised concerns under the antitrust laws, the FTC formulated a consent decree with Internorth and HNG permitting the merger to proceed if the parties divested themselves of certain assets and dissolved particular contracts. The decree listed "[t]he fifty percent (50%) undivided interest in the TransTexas Pipeline that was acquired pursuant to the Purchase Agreement, dated as of February 28, 1985" among Internorth's

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assets to be sold. In re InterNorth, Inc., 106 F.T.C. at 323, Schedule A.

The order also provided that Internorth could divest itself of the itemized assets "only to an acquirer or acquirers, and only in a manner that receives the prior approval of the Federal Trade Commission." In re InterNorth, Inc., 106 F.T.C. at 319. See "Analysis to Aid Public Comment", 50 Fed.Reg. 25235, 25258 (to be codified at 16 C.F.R. pt. 13) (proposed June 18, 1985). The FTC retained this approval power to guarantee that any divestiture would effectuate the purposes underlying the decree: "to ensure the continuation of the assets as ongoing, viable enterprises engaged in the same business in which the Properties are presently employed and to remedy the lessening of competition resulting from the Acquisition as alleged in the Commission's complaint." In re InterNorth, Inc., 106 F.T.C. at 319.

Despite the mandatory divestiture and approval provisions of the consent decree, the FTC's order did not mention Valero's right of first refusal over the pipeline. The FTC knew that Valero received this right from Internorth under the Ownership Agreement. Further, Valero first brought the antitrust ramifications of the Internorth/HNG merger to the FTC's attention. Nevertheless, the FTC did not invite Valero to participate in the negotiations underlying the document, or make Valero a party to the final decree.

Before issuing its final order, the FTC published the proposed consent decree in the Federal Register, and instituted a 60-day notice and comment period. 50 Fed.Reg. 25235, 25258 (to be codified at 16 C.F.R. pt. 13) (proposed June 18, 1985). The FTC also widely disseminated press releases delineating the contents of the decree and inviting interested parties to submit criticisms. Valero received actual notice of the consent decree's divestiture and approval requirements. However, Valero elected not to oppose the terms of the order, to propose revisions, or to seek an exemption from the FTC approval process. Upon receiving no response to these publications, the FTC issued its formal complaint and decision on September 30, 1985, permitting the merger contingent upon the requisite divestitures. In re InterNorth, Inc., 106 F.T.C. at 312. Enron began to solicit prospective purchasers for its assets.

In the meantime, Valero sought to reorganize and refinance its internal operations by assigning its own pipeline interest to Valero Natural Gas Partners, L.P., a related entity. Enron threatened to block this assignment by exercising its right of first refusal. On March 24, 1987, the parties executed the TransTexas Settlement Agreement to resolve this and other continuing pipeline disputes. Modifying the 1985 Settlement and Indemnity Agreement, this contract eliminated Valero's veto rights over any pipeline purchaser tendered by NorTex. It also restructured Valero's right of first refusal, allowing Valero to repurchase the pipeline only if the prospective independent purchaser offered less than forty million dollars.

This settlement agreement permitted Valero to proceed with its reorganization. Although Valero Natural Gas Partners, L.P. initially received the right of first refusal, it reassigned the right to Valero NorTex L.P., another Valero affiliate, in September, 1987. Eight months later, Valero NorTex L.P. changed its name to West Texas Transmission, L.P., the plaintiff in this suit.

During Valero's reorganization period, Enron negotiated to sell 100% of its NorTex stock, including its pipeline interest, to TECO Pipeline Company. The parties executed informal letter agreements on July 15, 1987, and signed the Stock Purchase Agreement on July 30, 1987. The agreement expressly conditioned consummation of the sale on FTC approval under the consent order, and on Valero's decision not to exercise its first refusal rights. If the FTC failed to act in a timely fashion, the agreement would expire by its own terms on October 15, 1987. Enron formally requested the FTC to approve TECO's acquisition on July 23, 1987.

Enron also promptly informed Valero about the terms and conditions of the proposed sale to TECO. By letter dated September 8, 1987, Valero elected to exercise

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its right of first refusal to repurchase the pipeline "under the same terms and conditions as agreed to by TECO and Enron." On September 11, 1987, Enron and Valero executed the same Stock Purchase Agreement that TECO had signed, replacing TECO's name with Valero's, applying relevant provisions to Valero rather than to TECO, and advancing the involuntary termination date to November 27, 1987. Valero's agreement also contained the FTC approval requirement as a condition precedent to consummation of the deal. Valero never objected to this prerequisite. On...