Opinion ID: 503762
Heading Depth: 1
Heading Rank: 2

Heading: phoenix's appeal

Text: 32 In 1983 and 1984 pretrial rulings, the district court determined that the law of Ecuador would govern Phoenix's unjust enrichment claim and that, under Ecuadorian law, the claim would proceed as an action de in rem verso. The parties have not challenged either determination. An action de in rem verso consists of five elements: (1) enrichment of the defendants; (2) loss to the plaintiff; (3) lack of justification for the enrichment; (4) no other legally available remedy; and (5) absence of a law barring the action. Phoenix Canada Oil Co. Ltd. v. Texaco, Inc., No. 76-421, slip op. at 10-11 (D. Del. July 20, 1984) (unpublished) (Phoenix III ) (quoting 4 Alesandri & Somarriva, Curso de Derecho Civil p 1233 (1942), as translated by R. Medina, Chief, Hispanic Law Div., Law Library, Library of Congress). 33 To succeed on this cause of action, a plaintiff must thus prove that the defendant experienced an enrichment, and that this enrichment is unjust or illegitimate. Moreover, the defendant's increase must correspond to the plaintiff's becoming poorer: a causal relationship must exist between the defendant's enrichment and the plaintiff's loss. Id. 34 Phoenix did not advance funds for the purchase of any equipment used in the oil production; nor did it invest in inventory or other necessary materials or supplies. Phoenix's interest, therefore, was confined simply to a two-percent share of actual petroleum production. Unquestionably, Phoenix lost some of its future royalty interests when the consortium transferred a portion of their Coca Concession exploitation rights to CEPE. That fact, however, does not establish the defendants' enrichment at Phoenix's expense. 35 Phoenix does not dispute that the value the independent auditors assigned for the 1974 and 1977 transfers included no specific allowance for future production rights, nor was any value assigned to them. Phoenix argues that both conveyances used the word rights to describe the subject of the contracts and, therefore, more than mere physical assets were intended to be transferred. Phoenix maintains that CEPE purchased both physical assets and future production rights in 1974 and 1977, using the net book value figure merely as the measure of the purchase price. The district court carefully considered this argument, but rejected it as unpersuasive. 36 The fact that CEPE's acquisition prices corresponded exactly to the investments' book values militated against Phoenix's assertion. In addition, testimony given by the former Ecuadorian Natural Resources Minister and his legal advisor belie Phoenix's conclusion. These officials restated the Ecuadorian government's consistent position that the petroleum reserves belonged to the State. In their view, Ecuador did not have to pay for something that was its own property. Phoenix IV, 658 F.Supp. at 1071. It was an act of full sovereignty so that it did not pay one single cent and it had no reason to do so. Id. This testimony, considered along with the course of the government's dealings with the Texaco-Gulf consortium in the early 1970s and the State decree declaring all petroleum reserves the patrimony of the nation, is compelling evidence that Ecuador had no intention of compensating the consortium for their lost production rights. 37 Phoenix points to large profits the consortium realized over the years from its Coca Concession venture as a justification for an equitable redistribution of the proceeds from the 1974 and 1977 sales. This argument blurs the proper legal focus. The defendants' net gains are irrelevant in an unjust enrichment analysis. Profits, no matter how large, do not constitute unjust enrichment unless they equitably belong to another person. Harris v. Sentry Title Co., 715 F.2d 941, 950 (5th Cir.1983), cert. denied, 469 U.S. 1037, 105 S.Ct. 514, 83 L.Ed.2d 404 (1984). The terms of its 1965 contract entitle Phoenix to a two-percent royalty of net petroleum production--not a share in the profits. 38 Finally, Phoenix cites paragraph 2.13 of the 1977 conveyance, which provided: With respect to the obligations that Gulf may have in favor of third parties and that do not appear in its accounting records, neither the Ecuadorian State nor CEPE assume any responsibility and must be taken care of by Gulf. This provision adds nothing to Phoenix's claim for recovery under de in rem verso. 39 Phoenix errs when it looks to the 1961 Minas Concession Agreement to determine the extent of petroleum rights Ecuador had conveyed. Even if under that Agreement the concessionaires had certain exploitation rights, the Ecuadorian government later transformed those rights into a fully revokable license or permit which involved no title to the land or minerals whatsoever. By an exercise of sovereign fiat, the government--whether because of the large oil discoveries in 1971 or the accession to power of a military government in 1972--simply changed the legal dimensions of the interests under the 1961 Concession. All parties, Phoenix as well as the oil companies, lost as a consequence of this transformation. 40 The record contains support for the district court's factual findings, and Phoenix has failed to satisfy us that they were clearly erroneous. To the extent that the conclusions of the district court embody questions of law, we find no reversible error. Consequently, the judgment against Phoenix with respect to unjust enrichment must be affirmed.
41 Phoenix objects to the pretrial dismissal of its quasi-contract and breach of fiduciary duty claims. Neither of these claims had been fully briefed or vigorously pursued below. Phoenix never specified the elements of the claims under Ecuadorian law, nor did it explain how its allegations conformed to those elements. As the party seeking to recover under a foreign nation's cause of action, Phoenix bore the burden of proving its entitlement to that relief. Cuba R.R. v. Crosby, 222 U.S. 473, 479, 32 S.Ct. 132, 133, 56 L.Ed. 274 (1912). 42 For ten years, the district court wrestled with this case, battling a seemingly never-ending barrage of paper. In Phoenix II, the court characterized the pretrial condition of the case as a hopelessly confused morass. Phoenix Canada Oil Co. Ltd. v. Texaco, Inc., 560 F.Supp. 1372, 1390 (D. Del. 1983) (Phoenix II ). By that time, seven years after the suit was filed, the court justifiably could expect Phoenix to have clarified its position and finally have settled on its legal theory. The court struggled toward narrowing the issues for trial and deserved the litigants' cooperation. 43 In the 1983 pretrial wrap-up the court ruled that the three-year statute of limitations barred recovery for all tortious acts occurring before November 26, 1973. At that stage in the litigation, Phoenix was alleging that the defendants had tortiously engaged in a continuing scheme to destroy it. However, most of the alleged activity occurred outside the statute of limitations, and was thus time-barred. As to the remaining allegations, the court determined that the facts charged as tortious sounded in contract rather than tort. 44 At a pretrial conference following the 1983 ruling, the parties presented the court with a 184-page proposed pretrial order, which the court declined to accept. The parties subsequently filed additional briefing on Ecuadorian law and further argument followed. Most efforts during this period were devoted to exploring Ecuadorian law on unjust enrichment. As the court noted, only two issues not previously decided were raised: the parameters of an unjust enrichment theory in Ecuador and that relating to a contract dispute over the three quarters of royalty payments. Phoenix III, slip op. at 5. 45 In deciding how to proceed on Phoenix's unjust enrichment claim, the court reviewed the three principal quasi-contract theories enumerated in the Ecuadorian Civil Code: the unsolicited agency, the payment of something not owed, and the community. Phoenix III, slip op. at 9 (citing Civil Code art. 2212 (Ecuador)). The court stated that ambiguities in those provisions of the Code might well lead to a statutory basis behind plaintiff's claim. Nevertheless, the court concluded that Phoenix's inability to fit its allegations squarely into one of these three civil code sections would not preclude a recovery under a general theory of unjust enrichment. Id. 46 After further study, the court announced that Phoenix could proceed to trial on the unjust enrichment de in rem verso theory. The court observed also that Phoenix might have a few lingering contract claims of minor pecuniary significance relating to the three quarters of 1973 and 1974. If plaintiff so desires, those claims, too, will proceed to trial. The court then directed the parties to submit a manageable proposed pretrial order. Phoenix III, slip op. at 18. 47 Phoenix later attempted to resurrect its defunct tort cause of action, this time as a claim for breach of fiduciary duty. The court permitted this count--added seven years after the original complaint was filed--to be briefed, and argued during the final pretrial conference on February 18, 1986. After consideration, the district judge directed that the trial proceed only as to the two theories outlined in the 1983 order: unjust enrichment and breach of contract. As to the belated breach of fiduciary duty claim, the judge stated: It would appear to me that the plaintiff is saying we acknowledge the validity of the decrees of the Ecuadorian government but the plaintiffs are entitled to go through the back door to attack the defendants for permitting the decrees to have been made. 48 After our examination of the lengthy history of this case, we think it appropriate to commend the district judges for their tireless efforts to narrow the issues to manageable proportions. Having carefully monitored the pretrial developments for nearly a decade, the district court's preclusion of an issue raised at the twenty-third hour, it seems to us, was within the court's proper discretion. In any event, though not determinative, our review leads us to conclude that Phoenix had little likelihood of success on either its quasi-contract or breach of fiduciary duty theory. 49 In Phoenix II, Judge Schwartz observed that the concept of unjust enrichment--basically an equitable premise--structurally forms the basis for theories of quasi contract. Phoenix II, 560 F.Supp. at 1384. See Kovacic, A Proposal to Simplify Quantum Meruit Litigation, 35 Am. U.L.Rev. 547, 554 (1986). Phoenix's own legal expert, Rene Bustamente Munoz, has explained that the same is true under the law of Ecuador: We also consider that unjust enrichment or enrichment without cause is the foundation of all the quasi contracts mentioned by Arts. 1480, 2211 and 2212 of the Civil Code as one of the sources of obligations. (App. 804) As a result, our determination that the district court correctly rejected Phoenix's unjust enrichment claim similarly dooms its claims under quasi-contract. 50 There is no reversible error here.
51 In its 1983 pretrial ruling, the district court granted summary judgment against Phoenix on its claim that the consortium improperly had excluded CEPE's 25% interest when computing the two-percent royalty payments. Yielding to the model contracts the government had decreed for all oil companies in 1973, the consortium reluctantly transferred 25% of its interest in the Coca Concession to CEPE. Following this transfer, the consortium reduced by CEPE's 25% the volume base on which it calculated Phoenix and Norsul's two-percent royalty. In the district court, Phoenix contended that this reduction constituted a breach of its 1965 contract. 52 The district court decided that the Ecuadorian government had addressed directly the amount of oil production which legally could be subjected to the two-percent royalty. Resolution 11927 provided that there shall be excluded, in order to carry out the assessment of the 2%[,] the percentage of CEPE in the net production. The court accorded this decree and its affirming Sentencia presumptive validity which Phoenix failed to overcome. The court rejected Phoenix's argument that the Resolution could not adjudicate private rights and that it was intended only to apply to the calculation of the government's 86% royalty tax. 53 Two years later, Phoenix sought reconsideration based on additional documents and the depositions of former Ecuadorian ministers. Phoenix argued that Ministry calculation sheets for 1975 revealed that the government had computed the two-percent royalty on the full 100% volume base and only then taxed at the 86% rate 75% of the volume base. After the depositions were taken and following argument by the parties, the district court denied the motion to reconsider. The court found the newly submitted calculation sheets unenlightening and concluded that the particular mathematics the government used did not change the legal basis on which summary judgment had been entered. Nor did the new evidence create any issue of material fact. 54 We find no reversible error in the district court's initial entry of summary judgment or its subsequent refusal to alter the ruling in light of the new evidence. Resolution 11927's whereas clauses stated expressly that the decree was designed to terminate the disagreements arising out of the assessment and payment of two percent of the net production established in Clause Sixth of the private agreement signed on July 16, 1965, and also to establish with certainty the taxable base which generates the income tax. 55 The taxation-only interpretation Phoenix encourages us to give Resolution 11927 ignores the government's purpose, stated in the document's first whereas clause, to resolve the disagreements between the parties. Certainly, this goal would not be accomplished if the Resolution's provisions did not apply to the untaxed, distributed portion of the royalty--that part actually in dispute among the parties. Moreover, the Resolution contains numerous provisions that clearly apply to the entire two-percent royalty, rather than to just the taxed portion. 56 Read as Phoenix would advocate, the Resolution would require royalty payments on the entire 100% volume base yet only 75% of the royalty payments would be subject to the government's 86% royalty tax. The government, in effect, would be foregoing its 86% tax on a quarter of all royalties paid. The obvious hostility with which the government viewed these royalty payments suggests strongly that it would not have enacted such a provision. 57 The deposition evidence supports the district court's entry of summary judgment on this claim. The Natural Resources Minister testified that neither CEPE nor any third party was obligated to pay the two-percent royalty on oil that belongs to the State. The Minister's legal advisor was even more specific, stating that under Resolution 11927 the consortium had the duty to pay the two-percent royalties only after deducting from the production amounts that portion belonging to CEPE.
58 At the conclusion of the month-long bench trial, Phoenix submitted its Proposed Findings of Fact and Conclusions of Law. Included in the submission was a request for consequential damages (attorney's fees), though such a claim did not appear in the pretrial order. The district court rejected this damage claim as belatedly raised. This claim was not included in the Pre-Trial Order and we will not permit it to be raised now in this untimely manner. Phoenix IV, 658 F.Supp. at 1082. 59 The pretrial procedures adopted for the federal courts were formulated with the express goal of facilitating scheduling and case management. Fed.R.Civ.P. 16(a) advisory committee's note. Particularly important in complex civil cases such as this, pretrial procedures provide the district courts with a useful tool to harness unwieldy litigation by simplifying the dispute and narrowing the issues for trial. For this reason, pretrial orders bind the parties unless modified by the court to prevent manifest injustice. Fed.R.Civ.P. 16(e). After a decade managing this enormous dispute, the district court acted within its discretion to reject a claim for consequential damages asserted after trial but not in the pretrial order. See Trujillo v. Uniroyal Corp., 608 F.2d 815, 817 (10th Cir.1979); Moore v. Sylvania Elec. Prods., Inc., 454 F.2d 81, 84 (3d Cir.1972).
60 The district court entered judgment in favor of Phoenix on its breach of contract claim for undercalculated royalties for the final quarter of 1973 and the first two quarters of 1974. Phoenix also had sought to extend that liability to the parent corporations, Texaco, Inc. and Gulf Oil Corporation. The district court denied this request. 61 Proceeding only on the basis of an agency theory of parental liability, the district court ruled that the parent corporations would not be liable for the actions of their subsidiaries. The court found that the parents and the subsidiaries here shared several common officers and directors, though their boards otherwise were separate. The parents also participated in the substantial financial dealings of the subsidiaries, who were required to secure approval from their parent corporations for large investments and acquisitions or disposals of major assets. 62 On the other hand, the subsidiaries kept separate books and records, maintained their own bank accounts, paid their own taxes, and were responsible for their own day-to-day operations in Ecuador, including drilling oil wells and constructing the pipeline. Relying on Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil, Inc., 456 F.Supp. 831 (D.Del.1978), the district court concluded that it can hardly be said that the facts presented to the court in this case show complete domination or control by Texaco and Gulf over their subsidiaries. Phoenix IV, 658 F.Supp. at 1085. 63 The relationship between parent and subsidiary corporations has been a fruitful source of litigation and although the case law on the subject is extensive, it is neither uniform nor clear. Some decisions apply an agency theory to assess parental liability, others focus on an alter ego basis, and some speak in terms of piercing the corporate veil. Much of the confusion stems from a failure to distinguish between subsidiaries treated as independent entities and those in fact not independent, but considered part of the parent corporations. 64 Courts most often pierce the corporate veil where fraud would result if the corporate structure were allowed to shield shareholders from liability. Thus, in DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 685-87 (4th Cir.1976), the court noted that independent corporate status may be disregarded when such factors as gross undercapitalization, fraud, failure to observe corporate formalities, non-functioning of officers and directors, or similar circumstances indicate that the subsidiary is merely the shadow of the parent. If, as in this case, the shareholder happens to be another corporation, piercing the corporate veil results in disregard for the separate existence of parent and subsidiary. 65 In determining whether two corporations are truly separate, significant factors to consider include adequacy of capitalization, overlapping directorates and officers, separate record keeping, payment of taxes and filing of consolidated returns, maintenance of separate bank accounts, level of parental financing and control over the subsidiary, and subsidiary authority over day-to-day operations. See 1 Fletcher, Cyclopedia of the Law of Private Corporations Sec. 43, at 194 (cum. supp. 1987). In that context, the concept of complete domination by the parent is decisive. See Craig v. Lake Asbestos of Quebec, Ltd., 843 F.2d 145 (3d Cir.1988). The activities bearing on the issue of corporate independence need not have any particular relationship to the cause of action being asserted. 66 There is a second theory under which a parent may be held liable for the activities of its subsidiary: an application of general agency principles. One corporation whose shares are owned by a second corporation does not, by that fact alone, become the agent of the second company. However, one corporation--completely independent of a second corporation--may assume the role of the second corporation's agent in the course of one or more specific transactions. This restricted agency relationship may develop whether the two separate corporations are parent and subsidiary or are completely unrelated outside the limited agency setting. See Restatement (Second) of Agency Sec. 14M, comment (a) (1958). Under this second theory, total domination or general alter ego criteria need not be proven. 67 When one corporation acts as the agent of a disclosed principal corporation, the latter corporation may be liable on contracts made by the agent. See Restatement (Second) of Agency Sec. 144 (1958). Liability may attach to the principal corporation even though it is not a party named in the agreement. See Restatement (Second) of Agency Secs. 147, 149 (1958). 4 See also W. Seavey, Handbook of the Law of Agency Sec. 70 (1964); W.E. Sell, Agency Sec. 103 (1975). 68 Unlike the alter ego/piercing the corporate veil theory, when customary agency is alleged the proponent must demonstrate a relationship between the corporations and the cause of action. Not only must an arrangement exist between the two corporations so that one acts on behalf of the other and within usual agency principles, but the arrangement must be relevant to the plaintiff's claim of wrongdoing. 5 69 In reaching its decision to exonerate the parents, the district court relied heavily on Japan Petroleum. In that case, despite extensive interaction between parent and subsidiary, the court found them to be separate and, thus, held the parent not liable for the acts of its subsidiary. Apparently, the fact that the Nigerian subsidiary had powers granted by the Nigerian government that were unavailable to the parent was the decisive factor in finding the parent not liable. Cf. Fitz-Patrick v. Commonwealth Oil Co., 285 F.2d 726 (5th Cir.1960) (incorporation of foreign subsidiary to meet governmental requirement did not insulate parent from liability). 70 The 1978 holding in Japan Petroleum was not appealed to this court, and consequently we have not been called upon to examine the correctness of its analysis. Nor do we embark on a review of that case at this time. We are content with noting that the facts here are sufficiently distinguishable so that the same result would not necessarily follow. Nevertheless, because the issue is one of fact, see 1 Fletcher, supra, at Sec. 43, at 472 (rev. perm. ed. 1983), we cannot say that the district court's finding of no complete domination here is clearly erroneous. 71 However, the district court did not analyze customary agency principles as another possible source of parental liability. When using that approach, the completeness of the subsidiary's domination by a parent is not material--the focus instead centers on whether the Ecuadorian corporations, though separate and independent from the United States corporations, acted as agents for disclosed principals. 72 In conducting this review, the focus must be directed to the pertinent cause of action. Thus, only the judgment in favor of Phoenix on the undercalculation of royalties due for the three quarters in 1973 and 1974 is relevant. The evidence of relationship between the parents and subsidiaries as it bears on that breach of contract is the proper subject of our inquiry. 73 We can appreciate the difficulty which the district court confronted as a result of the parties' failure to carefully identify the affiliations of many of the actors. For example, in numerous instances individuals identified with Texaco or Gulf are not specifically classified as employees of the Ecuadorian subsidiaries, of the United States' parents, or perhaps employed by one and acting on behalf of the other. Similarly, correspondence which could prove important in assessing attribution of activity to parent or subsidiary is not definitive. 74 With these uncertainties in mind, we observe with some diffidence that several significant events may bear on the creation of, or absence of, an agency relationship between the subsidiaries and the parents in connection with the 1965 contract. 75 It appears that the parents negotiated and drafted the 1965 agreement, but it was actually executed by Compania Texaco de Petroleos del Ecuador C.A. and Gulf Ecuatorana de Petroleos S.A. In 1969 when oil was discovered, the parents issued a joint press release announcing that they each owned a fifty percent working interest in the discovered reserves, subject to a two-percent royalty. The release said: Texaco and Gulf obtained the Coca concession by assignment from Minas y Petroleos Del Ecuador .... 76 When the royalty agreement underwent renegotiation in 1972, employees of the parent corporations apparently assumed a controlling role in the process. It was the parents who recommended the use of West Texas crude as the reference price for calculating the two-percent royalties. 77 CEPE made its 1977 buyout payment for the Gulf interest to the parent, Gulf Oil Corporation, at the parent's home bank in Pittsburgh. Although that event occurred several years after the three quarters breach of contract, it nevertheless may shed some light on the nature and extent of the control exercised by the parent as principal in earlier years. See Verreries De L'Hermitage v. Hickory Furniture Co., 704 F.2d 140, 142 (4th Cir.1983). 78 Because the district court did not explore customary agency principles as a possible source of parental liability, we will remand for further inquiry and fact-finding to determine the applicability of those principles to the case at hand. We note that, under usual agency principles, complete domination by the parents in the general conduct of the subsidiaries' affairs is not a prerequisite. The parents and subsidiaries may fully maintain their separate corporate existences; yet, as any two unrelated companies, they might have entered into a limited agency relationship for a specific transaction. Whether this occurred here is a question of fact reserved to the district court.