Opinion
C.A. No. 18854.
Submitted: May 8, 2003.
Decided: August 22, 2003.
Ronald A. Brown, Jr., Esquire, PRICKETT, JONES ELLIOTT, P.A., Wilmington, Delaware; Brady L. Green, Esquire, Stephanie A. Graboyes, Esquire, MORGAN LEWIS BOCKIUS, LLP, Philadelphia, Pennsylvania, Attorneys for Plaintiff.
Lawrence C. Ashby, Esquire, Richard D. Hems, Esquire, ASHBY GEDDES, Wilmington, Delaware; Gerard G. Pecht, Esquire, David J. Van Susteren, Esquire, Joy M. Soloway, Esquire, FULBRIGHT JAWORSKI, L.L.P., Houston, Texas, Attorneys for Defendant.
MEMORANDUM OPINION
I.
Fourteen years ago, the defendant sold an entity it owned that was engaged in the liquefied petroleum gas business. Since the corporation being sold had, over the years, owned other corporations engaged in other lines of business, the seller agreed to indemnify the buyer for liabilities that were unrelated to the operations of the liquefied petroleum gas business being sold. Some years later, the buyer began to receive notices of claims relating to a corporation the acquired entity had owned for a period of years during the 1970s. The seller rejected a claim made under the indemnity contract and the buyer's remote successor in interest sued to enforce the agreement to indemnify.
The issue presented is somewhat more complicated than it should be for two reasons. First, the plaintiff has the same name as the entity that its remote predecessor in interest acquired in 1989. Second, the contract language found in the indemnity agreement is expressed in the negative, making it harder than it should be to clearly articulate the issues involved. Nevertheless, what remains to be decided in this case is basically a question of fact, i. e., was the business of the entity that gave rise to the liabilities at issue "related to" or "part of' the liquefied petroleum gas business of the entity that was sold? If so, the seller owes no indemnification since those liabilities passed to the purchaser. If not, the seller must provide indemnity since it clearly and unmistakably obligated itself to indemnify the purchaser for all liabilities that did not bear such a relationship to the liquefied petroleum gas business it sold.
In this post-trial opinion, the court concludes that the plaintiff, who is seeking indemnification, has not satisfied its burden of proof. Rather, viewing the trial record as a whole, the court concludes that the business of the entity that gave rise to the liabilities at issue bore a sufficient relationship to the liquefied petroleum gas business to place those liabilities outside the scope of the indemnification contract at issue.
II.
Petrolane Incorporated began as a liquefied petroleum gas ("LP-Gas") company in the 1920s and expanded through acquisitions. By 1983, Petrolane had over one hundred separate subsidiaries that were, for many years, organized into three operating divisions: the LP-Gas Division, the Petroleum Services Division, and the Consumer Products Division.
A. Texas Eastern Acquires Petrolane
In 1984, Texas Eastern Corporation acquired Petrolane. In early 1989, Texas Eastern was itself acquired by Panhandle Eastern Corporation. Panhandle Eastern planned to divest certain assets owned by Texas Eastern, including Petrolane. In May 1989, Texas Eastern distributed an Offering Memorandum to prospective bidders, advertising Petrolane for sale. The Offering Memorandum described the business for sale as an LP-Gas business involved in "the purchase, transportation, storage, distribution and marketing of LP-Gas" and "the transportation of LP-Gas and other petroleum products for third parties." The Offering Memorandum also stated that Texas Eastern would not indemnify for liabilities relating to Petrolane's LP-Gas business.
Before that acquisition, Petrolane had divested itself of its Consumer Products Division subsidiaries. In 1987, Petrolane and a number of its significant LP-Gas Division subsidiaries participated in forming Petrolane Partners, L.P., a Delaware master limited partnership. Petrolane transferred substantially all of its domestic LP-Gas business to an operating partnership that was 99% owned by the master limited partnership. As a result of the divestitures and the formation of the master limited partnership, by the end of 1988, Petrolane had become, in virtually all respects, exclusively a liquefied petroleum gas sales and marketing company.
Def. Ex. 15 at TEC 002453.
Id. at TEC 002460.
B. QFB Partners Acquires Petrolane
Quantum Chemical, the parent company of Suburban Propane, the second largest LP-Gas distributor in the country, formed QFB Partners ("QFB") with First Boston Investments, Inc. to pursue the acquisition of Petrolane. QFB and Texas Eastern executed a Stock Purchase Agreement dated May 27, 1989 whereby QFB acquired all of Petrolane's issued and outstanding stock. The Stock Purchase Agreement contained the following indemnity clause:
Suburban Propane, like Petrolane, had grown through acquisitions. Trial Tr. at 72.
Jt. Pre-Trial Order at paragraph 8.
Limited Indemnity by Seller. If the Closing occurs, [Texas Eastern] shall indemnify [QFB] against, and shall protect, save and hold [QFB] harmless from, all costs, claims, liabilities and damages, and all reasonable expenses in connection therewith (including, without limitation, attorneys' and accountants' fees and disbursements) arising out of the matter described on Schedule 9.02 hereto.
Jt. Ex. 1 at TEC 000048.
The second paragraph of Schedule 9.02, at the center of the current dispute, provides that Texas Eastern will indemnify QFB as follows:
Schedule 9.02 contains five numbered paragraphs listing specific indemnity provisions. The first paragraph contains 51 subparts and lists specific guarantees of lease agreements concerning recently divested subsidiaries. Paragraphs 3 and 4 provide indemnification for pension plans and a divested international business, and paragraph 5 limits indemnification in situations when a third party indemnity exists.
In addition to the liabilities listed in paragraph 1 above, all liabilities . . . of the Entities arising out of the conduct of businesses (including, without limitation, the automotive services, grocery and hospital businesses) that do not relate to and are not part of the liquefied petroleum gas business or any other business being conducted by the Entities as of the Closing Date.
Jt. Ex. 1 at TEC 000128.
As defined in the Stock Purchase Agreement, "Entities" includes Petrolane. Between the signing of the Stock Purchase Agreement and the closing on August 1, 1989, the parties continued to negotiate certain terms of the transaction, but the indemnity language did not change.
Id. at TEC 000029.
In 1993, QFB filed a voluntary bankruptcy petition in the United States Bankruptcy Court for the Southern District of New York. During the course of that proceeding, the Bankruptcy Court approved a Stipulation and Order signed by Texas Eastern and QFB among others. This stipulation provided that Texas Eastern would indemnify Petrolane against liabilities arising out of or resulting from Discontinued Operations. However, by its express terms, the stipulation was merely intended to clarify the parties' existing obligations.
Pl. Ex. 14 at TEC 000149.
Id.
Id.
III.
In 1971, thirteen years before Texas Eastern bought Petrolane, Petrolane acquired all of the issued and outstanding stock of Academy Tankers, Inc., a Delaware corporation that owned and operated three oil tankers. Petrolane operated Academy Tankers as a wholly owned subsidiary until the early 1980s. At issue in this case is whether liabilities arising out of the operations of Academy Tankers are — or are not — covered by the indemnity found in the 1989 Stock Purchase Agreement. Essentially, this inquiry calls upon the court to decide whether the business of Academy Tankers, during the time it was owned by Petrolane, was "relate[d] to" or "a part of" the LP-Gas business.Petrolane's acquisition of Academy Tankers was motivated by Petrolane's ultimately unrealized ambition to expand into ocean transportation of LP-Gas. In May 1971, Petrolane issued a press release announcing the acquisition of Academy Tankers, stating that the three tankers "would form the nucleus of an organization for the ultimate ocean transportation of LP-Gas." In its 1972 Annual Report, Petrolane stated that its "acquisition of Academy Tankers in 1971 was influenced by the desire to develop its own fleet of LP-Gas tankers." Petrolane also reported that the first ship was being readied for conversion to an LP-Gas carrier and was expected to be complete in 1974. According to its 1972 Report on Form 10-K, Petrolane planned, "as a material adjunct to its LPGas business, to develop its own fleet of LP-Gas tankers for fuel transportation." Petrolane also announced, in an internal office memorandum dated June 5, 1972, that it had hired Wayne Christensen to oversee the conversion of one or more tankers into LP-Gas carriers.
Def. Ex. 1. However, it is worth noting that in a February 1, 1971 memorandum, Petrolane indicated that it was interested in acquiring Academy Tankers because of Academy Tankers's profitability in the petroleum transportation business. Pl. Ex. 5. Petrolane also contacted Congress to inquire about the likelihood of continued subsidies for U.S. flag petroleum carriers, which would help ensure Academy Tankers's profitability as a petroleum carrier. Pl. Ex. 7.
Def. Ex. 4 at TEC 003848.
Id.
Jt. Ex. 3 at TEC 003875. The 10-K also reiterated the statement in the Annual Report that Petrolane intended to convert one of the Academy Tankers ships into an LP-Gas tanker.
Def. Ex. 5.
Had the conversion of one or more of the tankers occurred, there is little doubt that no indemnification obligation would arise, since, in that event, there would be no question about the sufficiency of the relationship between the business of Academy Tankers and Petrolane's LP-Gas business. By 1973, however, due to various factors relating to practical and economic feasibility of the planned conversion, Petrolane abandoned the idea of using the three tankers to transport LP-Gas. Instead, for a period of years, Academy Tankers continued to enter into charters with third parties for transportation, at various times, of crude oil and wheat. Because the three tankers were never actually employed in transporting LP-Gas, the question arises whether there was a sufficient relationship between Academy Tankers and Petrolane's LP-Gas business to give rise to a duty to indemnify.
Academy Tankers's ships never transported LP-Gas and, without extensive modifications, were not able to do so. Trial Tr. 101-106.
There is some evidence in the trial record that Petrolane's interest in buying Academy Tankers stemmed, at least in part, from Academy Tankers's profitability as a petroleum transportation company and not from its potential as an adjunct to Petrolane's LP-Gas business. For example, in a February 1, 1971 memorandum discussing the potential acquisition of Academy Tankers, Petrolane noted that Academy Tankers had been a profitable business and was under several multi-year charters to transport petroleum. The memorandum makes no mention of the potential of converting the ships into LP-Gas carriers. Similarly, on April 5, 1971, Petrolane wrote to a member of Congress to inquire about the possibility of continued government subsidies for U.S. flag petroleum tankers. The letter indicated Petrolane's interest in purchasing Academy Tankers to continue operating the business in the petroleum transportation industry. Additionally, in its listing application to the New York Stock Exchange, Petrolane described its acquisition of Academy Tankers as an addition to its services offered in the petroleum industry.
Pl. Ex. 5.
Pl. Ex. 7.
Pl. Ex. 11. However, the listing application also discussed the potential for using Academy Tankers in the LP-Gas ocean transportation business.
Nevertheless, there is substantial evidence in the record to support the view that Academy Tankers was related to or a part of Petrolane's LP-Gas business. Among other things, Petrolane managed Academy Tankers through its LP-Gas Division. Between 1972 and 1977, in its filings with the Securities and Exchange Commission, Petrolane classified Academy Tankers as part of its LP-Gas Division, with Academy Tankers appearing in its own item in the LP-Gas Division section beginning in 1974. In an internal office memorandum dated January 15, 1973, Petrolane announced that "Mr. W. E. Denny, Executive Vice President, LP-Gas Division, will assume responsibility for Academy Tankers." In that same memorandum, Petrolane also stated that Academy Tankers's offices were being moved into Petrolane's headquarters. Finally, in a February 13, 1976 memorandum, Petrolane announced that Academy Tankers would be responsible for all LP-Gas Division marine operational matters. According to this document, Academy Tankers was assigned the responsibility of coordinating all LP-Gas tankers chartered by Petrolane.
Jt. Ex. 3 at 1; Jt. Exs. 4-8.
Def. Ex. 6.
Def. Ex. 9.
By 1977, Academy Tankers had sold all three of its oil tankers and ceased operations. In 1980, Petrolane executed a Written Consent of Sole Shareholder of Academy Tankers, Inc. pursuant to which Petrolane assumed all of the outstanding liabilities of Academy Tankers. In 1982, Academy Tankers filed formal dissolution papers.
Petrolane announced the sale of the last two tankers in an August 30, 1977 press release. The press release described Academy Tankers as being acquired in 1971 "to explore the feasibility of [the tankers] conversion to LP-Gas carriers but subsequent developments caused the program to be economically impractical." Def. Ex. 10.
IV.
Before acquiring Petrolane from Texas Eastern, QFB conducted a due diligence review of Petrolane. QFB obtained access to data rooms set up by Texas Eastern, where it reviewed relevant and historical information about Petrolane. QFB's corporate counsel made at least two due diligence trips to the data rooms and a trip to Texas Eastern's offices to address questions that QFB had about Petrolane. QFB's counsel noted that Texas Eastern did not seem to have very much information about Petrolane's previous operations. Neither party recalls seeing or discussing any information regarding Academy Tankers during the due diligence review, and QFB did not review Petrolane's 10-K reports from the 1970s showing Academy Tankers as part of Petrolane's LP-Gas Division.
Trial Tr. at 43.
V.
Since 1997, Petrolane has received more than one hundred complaints naming Academy Tankers as a defendant in maritime asbestos personal injury litigation. Petrolane sent notice of, and tendered, to Texas Eastern the asbestos claims filed against Academy Tankers. Texas Eastern has denied any obligation to indemnify Petrolane for those claims.
Petrolane began this action against Texas Eastern to obtain a declaratory judgment that Texas Eastern is contractually obligated to indemnify Petrolane for the maritime asbestos claims against Academy Tankers. Petrolane also "requests that the Court appoint a receiver, of and for Texas Eastern, to take charge of, conserve and administer the assets of Texas Eastern." Neither party has addressed the receivership issue to date in this litigation because it will be a moot point if Petrolane does not receive a judgment in its favor.
Compl. at 11.
If Texas Eastern prevails, then Petrolane will not be a creditor of Texas Eastern and receivership would be unnecessary.
Petrolane filed a motion for summary judgment, claiming that the language in the Stock Purchase Agreement read together with the language in the Bankruptcy Stipulation requires Texas Eastern to indemnify QFB for all past Petrolane operations that had been discontinued as of the date of the Stock Purchase Agreement, including those that had been related to or a part of the LPGas business. The Court denied Petrolane's motion, holding that the Bankruptcy Stipulation did not alter or amend the indemnification obligation found in the Stock Purchase Agreement and that Texas Eastern was not obliged to provide indemnification for liabilities arising out of the LP-Gas business, whether or not Petrolane continued to engage in the same business operation at the time of its acquisition by QFB. Thus, the court decided that a trial would be needed to determine whether or not the business of Academy Tankers was sufficiently related to or a part of the LP-Gas business as to preclude indemnification.
VI.
The issue before the court is whether Texas Eastern is required, under the Stock Purchase Agreement, to indemnify Petrolane for the maritime asbestos claims that have been asserted against Academy Tankers. By its terms, the Stock Purchase Agreement is an integrated contract and is governed by the laws of the State of New York. Under New York law, indemnity provisions are to be strictly construed and "[t]he promise [to indemnify] should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances." A duty to indemnify only exists where the parties manifest a "'clear and unmistakable intent' to indemnify."
Jt. Ex. 1 at TEC 000058-59.
Hooper Associates v. AGS Computers, Inc., 548 N.E.2d 903, 905 (N.Y.Ct.App. 1989).
Commander Oil Corp. v. Advanced Food Serv. Equip., 991 F.2d 49, 51 (2d Cir. 1993) (citation omitted).
It is clear and unmistakable that Texas Eastern intended to indemnify QFB for liabilities arising out of the conduct of businesses that did not relate to and were not part of Petrolane's LP-Gas business. To that extent, Petrolane has satisfied the heightened burden of proof required by New York law. What remains to be decided, however, is whether Academy Tankers was such a business. As to that issue, Texas Eastern concedes that the appropriate burden of proof is the more usual standard of a preponderance of the evidence.
See, e.g., New Broad Co. v. Bay Chester Marble Tile Co., 147 N.Y.S.2d 831, 835 (N.Y. City Ct. 1956) ("plaintiff indemnitee must prove its case by a fair preponderance of the credible evidence"); VonFelt v. Stifel Fin. Corp., 714 A.2d 79, 86 (Del. 1998) (upholding the trial court's finding that no indemnification agreement existed because the trial court found that the plaintiff provided no convincing evidence).
Petrolane argues that it is entitled to indemnification because the three Academy Tankers ships never actually transported LP-Gas and, thus, were never used in connection with the LP-Gas business. Texas Eastern responds that its duty to indemnify is more limited in scope than Petrolane's argument implies and does not extend to liabilities relating to the three tankers because the preponderance of evidence does not support a conclusion that, during the time it was owned by Petrolane, Academy Tankers was not related to Petrolane's LPGas business.
The fact that the three ships owned by Academy Tankers never actually transported LP-Gas certainly provides some support for a conclusion that a duty of indemnification is owed. But, when the evidence of record is viewed as a whole, it is clear that Petrolane has failed to carry its burden of proof on this issue. The weight of the trial record evidence shows that Petrolane acquired Academy Tankers to expand its LP-Gas business, and that Petrolane operated Academy Tankers as part of its LP-Gas Division. Thus, Academy Tankers had a sufficient connection with Petrolane's LP-Gas business to qualify as being related to and part of that business for the purpose of the Stock Purchase Agreement.
Thus, the court concludes that Academy Tankers did relate to Petrolane's LP-Gas business and, therefore, Texas Eastern is not obligated to indemnify Petrolane for the maritime asbestos claims filed against Academy Tankers.
VII.
For the reasons stated herein, Petrolane's complaint for declaratory judgment will be denied and judgment will be entered in favor of the defendant. Defendant is directed to submit an appropriate form of final judgment on notice within 10 days of the date of this opinion.