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New York Trust Co. v. Island Oil & Transport Corp.

July 28, 1930


Appeal from the District Court of the United States for the Southern District of New York.

Author: Hand

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This is an appeal from an order of Judge Knox denying the petition of Irving Trust Company as receiver of Island Refining Corporation (hereafter called refining company) for leave to file its claim in the sum of $4,642,979.14, nunc pro tunc as of March 31, 1923, against the Island Oil & Transport Corporation (hereafter called transportation company).

Receivers in equity were appointed for transport company on March 20, 1922, and on January 27, 1923, an order was made directing t filing of claims against that company on or before March 31, 1923. Pursuant to this order Metropolitan Trust Company, as trustee under a mortgage executed by the refining company, filed a claim for damages in the sum of $12,375,249 arising out of an alleged breach by the transport company of a contract between it and its subsidiaries as sellers of crude oil and the refining company and its subsidiaries as buyers. The contract pursuant to a clause therein permitting assignment and pledge had been transferred by the refining company to the trust company as part of the security under its mortgage. A foreclosure of this mortgage was begun February 27, 1923, and a decree of foreclosure and sale was made whereby all existing causes of action in favor of the buyer for breaches of the contract purported to be conveyed on September 24, 1923, to the purchaser at the sale. These causes of action were transferred by mesne conveyances to Gulf Refining Company, which was thereafter placed in the hands of receivers. The Metropolita Trust Company and the receivers of the Gulf Refining Company prosecuted the claim which the former had filed against the transport company.

In New York Trust Company v. Island Oil & Transport Corporation et al. (Ex parte Tumuly & Glass) 34 F.2d 649, 651, we dismissed the claim prosecuted by the Metropolitan Trust Company and the receivers of the Gulf Refining Company, and said:

"The pledge was for the mortgagee's benefit only after it had taken over the property, when it would become a profitable incident to the operation of the refineries. The profits meanwhile were like any others which might arise from the use of its property by the mortgagor, for it is the general rule that the usufruct of mortgaged property before default and possession, at least in the absence of specific pledge, remains the property of the mortgagor. * * *

"The only remaining question is whether the claimants may press the claim in the interest of the buyer's receivers. The contract was in form assigned to the mortgagee as a whole, and later the existing causes of action were simitheless the intent of the assignment was not that before default and entry the mortgagee should receive the oil and redeliver it to the mortgagor. On the contrary, the mortgagor was directly to receive it, and it was only after entry that the mortgagee was to succeed him. * * *

"While, as nveyed all existing causes of action, unless it was meant to be limited to those only which the mortgage actually covered, it unlawfully stripped the mortgagor's creditors of their 'separate right.' We ought not to assume that it was so intended; therefore the claimants got no more, either by the assignment or the decree, than such rights as the mortgagee could press in his own interest. It f that the claim should be dismissed."

Judge Knox denied the application of Irving Trust Company as receiver of the refining company on the ground that the claims of any bondholders whom they represented were without merit and other creditors had "slept too long upon their rights." He said finally:

"I find myself unable to believe that there is sufficient substance in the claim to justify the trouble and expense incident to further osed in large measure upon another receivership estate."

The contract of March 17, 1920, was made between the transport company and subsidiaries and the refining company April, 1929, and provided that the former should sell to the latter such natural crude oil as it might require for its operations during the contract period up to a maximum of 50,000,000 barrels. The purchaser agreed to buy from the seller all the oil required for the operation of its proposed refineries in Louisiana, Mexico, and Cuba, up to the above maximum, and also such additional amounts as the operation of its plants might require if the seller was able, ready, and willing. The buyer was only to have the right to demand 450,000 barrels ble to give reasonable notice in advance of its monthly requirements. The price of the oil was to be 2 cents less than the current market price at the Mexican seaboard in any month in which delivery was due, but in no event to exceed 42 cents per barrel, and the buyer was to pay any export taxes on the oil. Delivery was to be made in Mexico at Palo Blanco on board ship or, at the election of the buyer, at the Mexican subsidiary of the buyer there. The buyer was to give ten days' notice to the seller of the probable arrival of steamers to be loaded at Palo Blanco. As part of the contract, the buyer agreed to make an advance payment to the seller of $3,000,000. At the election of the buyer 50 per cent. of the price of oil delivered by the seller could be credited against this advance which the seller agreed should be repaid in cash or by credits on account of oi delivered on or before January 1, 1923.

This advance of $3,000,000 which was made by the seller was fully repaid on August 31, 1921, sixteen months before it was due. Indeed repayments aggregating $2,000,000 were made during the summer of 1920. The only assets with which the refining company started were the proceeds of the sale of its bonds amounting to $4,831,590, from which the advance of $3,000,000 to the transport company was made. It required $3,000,000 to construct its refining plant in Louisiana and $1,000,000 to build its Mexican refinery in Palo Blanco. It is therefore apparent that without the repayment of this advance long before it was due the refining company would have been unable to get into a position where it could refine oil that it might receive, much less where it could pay for its purchases or transport the crude oil to its Louisiana refinery or from its Mexican refinery to the market. This conclusion is not based on mere a priori reasoning but inevitably follows from what occurred, for the refining company up to the time that the advance of $3,000,000 was repaid on August 31, 1921, made practically no 50 per cent. payments on account of the oil that was shipped, but simply credited its entire purchases amounting, with taxes, to $649,993.30, against the $3,000,000, advance. Moreover, for financial reasons, it was unable to procure vessels to carry even the oil that it obtained, and it relied on the transport company, or its subsidiary, Island Oil Marketing Corporation, to guarantee the charters of the ships necessary for its very existence. But as the officers of the transport practically identical and as the former owned all the stock of the latter that they could not deal at arm's length, but that the transport company owed the refining company, or its creditors who appear here through Irving Trust Company, as receiver, a duty to observe strictly the terms of the contract and at all times to supply all the oil that the plants of the refining company could use.

It may be true that the transport company could have delivered more oil than it furnished the refining company. This seems to have been true except during the months of January, February, March, April, and May, 1921, when the Mexican plants of the transport company were shut down by force majeure and the seller had on hand much less crude oil than it supplied the refining company. The 545,918.50 barrels supplied were sold at an advance price. None of this oil, however, was paid for in cash according to the terms of the contract. The transport company was forced to arrange through its own credit for vessels to transport it, and was constantly asked to finance the refining company by paying off its $3,000,000 indebtedness long in advance of maturity. In these circumstances, we cannot regard the conduct of the transport company as inequitable or its executive officers as perpetrating a fraud because as representatives of the buyer they did not give the seller notice that the buyer required oil sufficient to operate at full capacity, or because, as representatives of the seller, they did not furnish the buyer with such an amount of oil. If, during the period prior to August 31, 1921, the transport company had not made enormous advances to the refining company, the latter could not have completed its plants and would have been unable to equip itself physically to do any business whatever. Likewise, if the transport company had not arranged for the chartering of vessels by pledging its own credit, the refining company could have transported no oil to its Louisiana refinery and that plant would have at all times lain idle. During all these times the refining company was not ready or able to perform. It is therefore idle to contend that the transport company violated its obligations. If it be said that the shipments of crude oil at more than 42 cents in January, February, March, April, and May, 1921, could not properly have been made, we repeat that they were ...

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