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CRUDE CO. v. FERC

April 9, 1996

THE CRUDE COMPANY, Plaintiff,
v.
THE FEDERAL ENERGY REGULATORY COMMISSION and DEPARTMENT OF ENERGY, Defendants.



The opinion of the court was delivered by: SPORKIN

 At issue in this case is the validity of the defendants' decision that plaintiff must repay $ 1.2 million in small refiner bias entitlements obtained pursuant to a tripartite crude oil processing arrangement in effect from January through May of 1977. Plaintiff, The Crude Company ("TCC"), challenges the validity of the administrative proceedings held on the issue and of defendants' decision to assess $ 1.2 million in restitution plus interest, including prejudgment interest. Plaintiff has moved for summary judgment on Counts 2-18 of the complaint, and defendants have cross-moved for summary judgment on all Counts. The parties have briefed the issues, and oral argument has been heard. A trial was held on Count 1 -- in which plaintiff claims that it is entitled to benefit from an offset against a $ 14.1 million settlement that DOE received from one of the parties involved in the tripartite processing arrangement. The parties have briefed and orally argued their motions.

 I. BACKGROUND

 This case has its genesis in the oil crisis of the 1970s. Concerned about the shortages of crude oil and refined petroleum products, Congress passed the Emergency Petroleum Allocation Act of 1973 ("EPAA"), 15 U.S.C. §§ 751-760h. One of the purposes of the EPAA was to preserve and foster competition in the domestic petroleum industry, including preservation of the competitive viability of small crude oil refiners. 15 U.S.C. § 753(b)(1)(D). The regulations authorized the allocation of small refiner bias ("SRB") entitlements to small refiners of crude oil as a means of neutralizing certain advantages of large refiners and preserving the small refiners' competitive position in the market. 10 C.F.R. § 211.67(e). The amount of entitlements a small refiner received correlated directly to the amount of crude oil processed by or for the account of the small refiner. Refiners participating in the entitlements program were required to file Refiners Monthly Reports, reporting the volume and tier *fn1" of all crude oil refined at their refinery or at some other refinery pursuant to a processing agreement. 10 C.F.R. § 211.66(b).

 A. The Tripartite Processing Arrangement

 The processing agreement at issue in this case was a tripartite arrangement involving: (1) TCC, a crude oil reseller; (2) Southwestern Refining Company, Inc. ("SRCI"), a small refiner; and (3) Champlin Petroleum Company ("Champlin"), a larger refiner. On its face the processing agreement entered into by TCC and SRCI called for TCC to sell barrels of crude oil to SRCI. Champlin was to process the barrels of crude oil, ostensibly for SRCI's account. Champlin was to sell the refined product back to TCC for resale on the open market.

 The arrangement, in practice, was somewhat different. Crude oil was not physically shipped from TCC's storage tanks, to SRCI and ultimately to Champlin. TCC would acquire title to oil located close to Champlin's refinery at Corpus Christi. The crude would be delivered from the tankers or barges directly into Champlin's crude oil storage tanks. After Champlin processed the oil, it would sell the refined product to back to TCC, which in turn would resell the oil to wholesalers.

 At no point did SRCI physically receive the crude oil, either from TCC or Champlin. SRCI's only involvement in the transaction was on paper. As put by DOE's adjudicative authority, TCC, not SRCI, had the "sole authority to procure the crude oil, to administer the processing agreement with Champlin, to pay the processing fees,...to dispose of the refined products...[,] and to set prices for the purchase of the crude oil and the sale of the refined products." Southwestern Refining Co., Inc. and The Crude Co., 21 DOE (CCH) P 83,011 (1991). DOE also found that "SRCI at no time handled or directed or had an opportunity to assume possession or control of the crude oil or refined products, and the refined products at no time entered SRCI's existing distribution and marketing system." Id.

 What SRCI did was to file reports necessary to "qualify for, obtain, sell and collect for all 'entitlements' that will inure to it . . . as a result of . . . causing crude oil to be so processed for the account of SRCI by [Champlin]." TCC was appointed the exclusive sales representative in the sale of entitlements received by SRCI, which assigned all of the proceeds from the sale of the entitlements to TCC. In return, TCC agreed to pay SRCI 25 cents per barrel of crude oil processed under the tripartite arrangement. A total of 613,270 barrels were processed under the tripartite arrangement, which was in effect from January through May of 1977. In return for processing the crude oil, Champlin received $ 1.82 per barrel of crude refined and was allowed to retain 10 percent of the refined product.

 While there is little dispute among the parties about how the arrangement was structured, there is a difference of opinion regarding how the transaction originated. TCC claims that SRCI instigated and orchestrated the tripartite arrangement as a way to greatly increase its economic activity by having additional barrels refined for its account. According to TCC, SRCI lacked the capital needed to purchase the crude oil directly and so sought credit from TCC, offering to sell the refined product back to TCC as security for the credit it received. The government contends that the tripartite arrangement was merely a series of sham paper transactions designed solely to obtain SRB benefits, and that TCC was the "animating force" behind the transactions.

 B. The Regulatory Framework

 At the time of the transactions at issue, DOE regulations granting SRB entitlements generally included crude oil processed pursuant to a processing agreement at another refinery for the account of a small refiner. See 10 C.F.R. § 211.62 and § 211.67(d)(1). Where a non-refiner owned the processed crude oil, that oil was to be included in the entitlements obligations of the processing refiner. 10 C.F.R.. §§ 211.62 and 211.67(d)(1).

 In May 1976, in response to pervasive abuse of the entitlements program through paper transactions designed solely to obtain SRB entitlements, the DOE revised its regulations. Under the revision, no entitlements would be allowed for oil processed for the account of a small refiner by another refiner under a processing agreement where the small refiner purchased the crude oil from and sold, either directly or indirectly, the refined products produced under the processing agreement to the other refiner. 10 C.F.R. § 211.67(e)(2) (1976) (codifying 41 Fed. Reg. 20,392 (1976)). The rule was "intended to prevent refiners from entering into processing agreements to process crude oil for a small refiner for no valid business purpose other than obtaining a portion of the benefits of the small refiner bias." 41 Fed. Reg. 9391, 9393 (1976). It was this 1976 regulation that was in effect at the time of the processing transactions at issue here.

 Continued abuses of the entitlements program eventually prompted adoption of a blanket prohibition on receipt of entitlements pursuant to all processing agreements. In February 1977, DOE issued a Notice of Proposed Rulemaking, in which it proposed to completely eliminate any SRB benefits for crude oil processed under a processing agreement. 42 Fed. Reg. 9394 (1977). The proposal was adopted on April 26, 1977, at 42 Fed. Reg. 21,269 (1977), but did not become effective until June 1, 1977, in order to allow small refiners who had "legitimate" processing agreements to make other arrangements. Id. After May 1977, SRCI reported no further barrels as being processed for its account.

 C. The Administrative Proceedings

 In August, 1979, DOE began an investigation into Champlin's participation in oil processing agreements with four small refiners, including SRCI. On July 20, 1982, DOE and Champlin executed a Consent Order and a side letter agreement, which constituted a comprehensive or global settlement of DOE's claims and potential claims against Champlin for alleged violations of petroleum price and allocation regulations for the period January 1, 1973, through January 27, 1981.

 On December 15, 1986, after conducting audits of SRCI and TCC, DOE issued a Proposed Remedial Order ("PRO") to SRCI and TCC. The PRO alleged that SRCI had erroneously reported 613,270 barrels of crude oil as having been refined by Champlin for the account of SRCI, when in fact SRCI did not own or retain title to the oil. The PRO also alleged that TCC and SRCI engaged in practices which resulted in circumvention and contravention of the entitlements regulations and in the issuance of excess SRB entitlements worth $ 1,202,143. TCC filed a Statement of Objections, and an administrative proceeding was commenced before the Office of Hearings and Appeals ("OHA").

 On June 30, 1989, the OHA granted a request by DOE to amend the PRO in order to allow DOE to proceed against TCC under an "animating force" claim of liability. Specifically, DOE charged that TCC should be held jointly and severally liable with SRCI as the "animating force" in SRCI's alleged reporting violations on its Monthly Refiners Reports. *fn2"

 On October 7, 1991, OHA issued a Remedial Order ("RO") which held that SRCI had filed erroneous reports with DOE, and that the tripartite arrangement illegally used SRCI's small refiner status to reap unwarranted SRB benefits and perpetrate a fraud on the entitlements program. Southwestern Refining Co. and the Crude Co., 21 DOE (CCH) P 83,011 (1991). OHA also found that TCC was an "animating force" behind the violations and therefore was jointly and severally liable with SRCI and was required to refund to the government the approximately $ 1.2 million in illicit benefits, plus interest from the date of the violation.

 TCC appealed the RO to the Federal Energy Regulatory Commission ("FERC"). Hearings were conducted before an ALJ, who issued a Decision and Proposed Order on March 12, 1993. See The Crude Co., 62 FERC (CCH) P 63,026 (1993). The decision affirmed the RO in all respects except that it imposed interest only from the date of the RO, not from the date of the violation.

 On November 10, 1993, FERC issued its final decision. See The Crude Company, 65 FERC P 61,214 (1993). FERC affirmed the RO in all respects, including reinstating interest from the dates of the violative conduct. In short, FERC held that, as a result of erroneously claimed SRB entitlements, TCC was jointly and severally liable with SRCI for $ 1,202,143.07, plus interest from the date of the transactions. *fn3" TCC then instituted this appeal.

 II. ANALYSIS AND DECISION

 A. The Trial on TCC's Claim of Right to Offset Against the Champlin Judgment

 TCC claims that the amount which DOE recovered in its $ 14.1 million settlement with Champlin must be offset against DOE's claim against TCC because the claims released under the Consent Order and this action relate to common damages. To deny an offset, TCC contends, would be to allow DOE to obtain a double recovery for the same injury. *fn4" TCC argues that, because the government did not specifically earmark the proceeds of the settlement among the various claims against Champlin, TCC is entitled to credit for the amount of the Champlin settlement. Such a credit would extinguish the government's $ 1.2 million claim against TCC, and obviate the government's claim for interest on the damages.

 An evidentiary hearing was held on the offset issue. The Court heard testimony from numerous witnesses concerning the Champlin settlement. The specific issues addressed were: (1) the scope of the Champlin Consent Order; (2) whether the Champlin settlement and the current action relate to common damages; and (3) whether the proceeds from the Champlin settlement fully compensated the government for the total damages applicable to the tripartite transaction. *fn5"

 Although the testimony indicates Champlin's negotiators considered the Consent Order to be a global settlement, it is clear from the face of the document that certain areas of potential liability were carved out from the agreement. It is undisputed that the Consent Order did not release Champlin from potential criminal liability based on certain pending "special investigations" which DOE was conducting, and that such "special investigations" included an investigation into Champlin's processing agreements with SRCI. *fn6" With regard to extinguishing civil liability, TCC claims that the Champlin Consent Order clearly settled all DOE's actual and potential civil claims against Champlin regarding the tripartite transaction. DOE counters that the Consent Order did not release Champlin from civil liability for the processing transactions since the Consent Order expressly excluded certain special investigations. The term "special investigation" is not defined within the Consent Order, but is defined in a separate side letter. *fn7"

 This Court need not definitively address whether the Consent Order encompassed Champlin's civil liability for matters arising out of its processing arrangements with TCC and SRCI. Even if the settlement did release Champlin from such civil liability, there is nothing to indicate that the Champlin Consent Order released TCC from liability or that any part of the settlement proceeds were specifically allocated to the claims at issue here.

 TCC states that the government's failure to include as part of the settlement any allocation of the $ 14.1 million towards the SRCI claim requires that TCC be given a credit for the full amount of the alleged violation (i.e. $ 1.2 million). In support of its position, TCC cites several cases where courts have held that a non-settling defendant is entitled to an offset based on another party's non-specific settlement on the basis that plaintiff would receive a double recovery by not allocating the proceeds of its settlement. See, e.g., Hess Oil Virgin Islands Corp. v. UOP, Inc., 861 F.2d 1197 (10th Cir. 1988) (where plaintiff brought suit against several defendants claiming damages arising out of an oil refinery fire); In re Lendvest Mortgage, Inc., 123 Bankr. 623 (Bankr. N.D. Cal. 1991) (involving a bankruptcy trustee's attempt to recover a preferential transfer from one party after settling with another party regarding the same preferential transfer); Gulfstream III Assoc., Inc. v. Gulfstream Aerospace Corp., 995 F.2d 425 (3d Cir. 1993) (involving a suit asserting three claims against seven defendants).

 The cited cases are factually distinguishable from the instant case. They involved limited injuries and allegations by the plaintiff that defendants were jointly liable. They did not address allocation in the case of a global settlement where a variety of divergent claims were settled. The Champlin Consent Order involved such a global settlement. It settled numerous claims arising out of many different transactions. The settlement proceeds were not allocated to any specific claim.

 The total amount of the claims charged by the government far exceeded the amount of the settlement. As often happens in a global settlement, the government settled for much less than the value it placed on the claims it was asserting. Here, some $ 500 million of claims was settled for $ 14.1 million. At no time has DOE specifically charged Champlin with the violations it has alleged against SRCI and TCC. Champlin is not a party to the SRCI-TCC proceeding. As such, there is no basis to hold Champlin jointly liable with SRCI and TCC.

 Much more factually on point, and binding on this Court, is United States v. Exxon Corp., 773 F.2d 1240 (Temp. Ct. Emer. App. 1985), cert. denied, 474 U.S. 1105, 88 L. Ed. 2d 926, 106 S. Ct. 892, 106 S. Ct. 893 (1986). There, the Court found that rights under certain global consent orders "accrued solely to the settling parties." Id. at 1276. The Exxon case involved a claim by DOE that Exxon, an operator of a unitized oil field, was liable under the "animating force" theory for certain overcharges. Several of the other parties, who had received a share of the overcharges from Exxon, entered into global consent orders with DOE wherein the government released certain claims it had against the settling parties. Exxon, like TCC in this case, asserted that DOE was seeking a double recovery and that its liability should be reduced by the amount DOE received in settlements from the other parties involved in the transaction.

 The Court of Emergency Appeals (TECA) rejected Exxon's claim that it was entitled to an adjustment in its liability on account of the settlements made between the government and others who were not parties to the case. Id. at 1277. TECA based its conclusion in part on certain factual considerations, nearly all of which are present in this case. They included the following: (1) Exxon was not a party to the settlement; (2) Exxon did not pay any sum of money to the government for release of any Exxon liability under the settlements; (3) Exxon was not mentioned in the consent order; (4) the consent orders did not mention the particular unitized field at issue in the litigation or the litigation itself, which was pending at the time the consent orders were executed; (5) the consent orders did not purport to release the settling parties from suits by private parties or for their liability to other parties for contribution, indemnification, unjust enrichment or other relief; (6) none of the settling parties sought to intervene in the Exxon case; (7) there was no finding that the settling parties authorized Exxon to assert rights on their behalf; (8) Exxon had been found to be the "animating force" responsible for the crude oil pricing violations; and (9) Exxon's liability was not dependent on the finding of "joint liability" on the part of third parties who were not defendants in the action, or upon proof of Exxon's right to contribution or indemnity from those third parties. Id. at 1276-77.

 As in the Exxon case, TCC was not a party to the Champlin settlement and did not pay any money to either Champlin or DOE under the settlement. *fn9" TCC was not mentioned in the Consent Order, and it did not release TCC from liability. Champlin has not sought to intervene in this action, nor has Champlin authorized TCC to assert Champlin's rights on its behalf. TCC's liability under the "animating force" concept is not dependent on a finding of joint liability with Champlin, or upon ...


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