Date: 01-25-2002

Case Style: Citgo Petroleum Corp. v. Occidential Petroleum Corp.

Case Number: 01-5022

Judge: Paul J. Kelly, Jr.

Court: United States Court of Appeals for the Tenth Circuit

Plaintiff's Attorney: Unknown

Defendant's Attorney: Unknown

Description: In 1983, Cities Service Company ("Cities") sold its CITGO stock to The Southland Corporation ("Southland"). As part of the consideration to Southland, Cities, along with Cities Service Oil and Gas Corporation ("CSOG"), executed a Petrochemical Plant Site Right of First Refusal Agreement ("ROFR") pursuant to which CITGO would have a preferential right to purchase certain petrochemical plant properties in the event Cities received an offer to purchase them from another party. Under the terms of the ROFR, the preemptive right is not triggered by a lease of five years or less, or by a transfer to an entity in which OPC retains at least a 50 percent interest. One of the properties subject to the ROFR is a facility in Lake Charles, Louisiana ("Lake Charles Facility), which is the property at issue in this case. OxyChem, a subsidiary of Occidental Petroleum Corporation ("OPC") and successor in interest to CSOG, eventually assumed all the rights and obligations that Cities and CSOG had under the ROFR. This case involves OPC's attempt to transfer the property without triggering CITGO's right of first refusal to purchase it.

On March 19, 1998, OPC proposed a Master Transaction Agreement ("March MTA") with Equistar Chemicals, L.P. ("Equistar") and other business entities (collectively, with Equistar, "the Partnership"). Under this proposed arrangement, three subsidiaries of OPC would join Equistar and receive a 29.5% ownership interest in the partnership. In addition to the partnership interest, the OPC subsidiaries were also to receive a $420 million cash payment and the Partnership would assume $205 million of the OPC subsidiaries' debt. In exchange, the OPC subsidiaries would either contribute or cause to be contributed certain petrochemical manufacturing facilities to the Partnership, including the Lake Charles Facility. Both parties concede that had the March MTA gone into effect, the transfer of the Lake Charles Facility to Equistar would have triggered CITGO's right of first refusal.

But the March MTA never went into effect. After discovering the existence of the ROFR, which had initially been overlooked, and after OxyChem failed to obtain a waiver of its provisions from CITGO, the parties entered into a new Master Transaction Agreement ("May MTA"). The May MTA involved a number of steps to achieve its goal. First, OxyChem would contribute or cause to be contributed certain assets (essentially the same assets as in the March MTA, only excluding the Lake Charles Facility) to Occidental Petrochem Partner 1 (OPP 1), a wholly-owned subsidiary of OxyChem. 2 Aplt. App. at 407. Upon effecting a five-year lease of the Lake Charles Facility (with OxyChem as lessor and OPP 1 as lessee), OPP 1 would assign its interest in that lease to Equistar. Id. In addition, OxyChem agreed to guarantee $419,700,000 of Equistar's debt. Id. In exchange for the contribution of assets, the lease interest, and the debt guarantee, the OCP subsidiaries would receive, similar to the March MTA, a 29.5% interest in Equistar, a $419,700,000 cash payment, and the assumption of $205,000,000 of indebtedness by Equistar. Id. at 407, 461.

The second step of this transaction was set to occur upon the end of the five-year lease term. At that time, the Equistar partnership units held by the OCP subsidiaries would be reduced by approximately 4%. Id. at 510. Equistar and OPP 1 would form a partnership called the Lake Charles Partnership ("LC Partnership") with OPP 1 having an equity interest of 50.1% and Equistar having an interest of 49.9%. Id. OPP 1 would then cause the Lake Charles Facility to be contributed to the LC Partnership. Id. The LC Partnership would then enter into an operating agreement with Equistar under which Equistar would, with certain exceptions, have the right and obligation to make all day-to-day decisions of the LC Partnership. Id. at 510­11. One of these exceptions applies to the disposition of assets having a fair market value exceeding $30,000,000, which would include the Lake Charles Facility. Id. at 477. Any decision related to such a disposition requires the mutual agreement of both OPP 1 and Equistar. Id. at 510. Thus, in form at least, OPP 1, a wholly-owned affiliate of OxyChem, would continue to own a 50.1% interest in the Lake Charles Facility by virtue of its interest in the LC Partnership. CITGO, convinced that this corporate maneuvering represents a failed effort to evade its rights under the ROFR, brought this suit against OxyChem, charging breach of contract and tortious breach of the covenant of good faith and fair dealing. The district court dismissed the tortious breach claim pursuant to Fed. R. Civ. P. 12(b)(6); CITGO has not appealed that order which leaves remaining only the breach of contract claim. We thus proceed to the district court's disposition of the cross motions for summary judgment.

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Click the case caption above for the full text of the Court's opinion.

Outcome: The district court correctly granted OxyChem's motion for summary judgment and denied CITGO's cross-motion.

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: E-mail suggested corrections, comments and/or corrections to: Kent Morlan

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