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PANAMA PROCESSES, S.A. v. CITIES SERV. CO.

November 6, 1980

PANAMA PROCESSES, S.A., Plaintiff,
v.
CITIES SERVICE COMPANY, Defendant



The opinion of the court was delivered by: HAIGHT

MEMORANDUM OPINION AND ORDER

Defendant Cities Service Company ("Cities") moves to dismiss the complaint of plaintiff Panama Processes, S.A. ("Panama") on the ground of forum non conveniens, and for failure to join an indispensable party as required by Rule 19, F.R.Civ.P.

The complaint contains two counts. The first sounds in contract, and the second in tort, for breach of a majority shareholder's fiduciary duty to a minority shareholder. The contract underlying the first count was the subject matter of prior litigation in this Court. Panama Processes S.A. v. Cities Service Company, 362 F. Supp. 735 (S.D.N.Y.1973), aff'd 496 F.2d 533 (2d Cir. 1974). The decision of District Judge Gurfein (as he then was) details the circumstances giving rise to the contract, a letter agreement dated September 7, 1965 between Panama and Cities' predecessor, Columbian Carbon, Inc. ("Columbian").

 Familiarity with Judge Gurfein's opinion is assumed. Briefly stated, Panama exacted the letter agreement from Columbian as a condition of accepting a restructuring of a Brazilian corporation, Companhia Petroquimica Brasileira-Copebras ("Copebras"). A contemplated purchase by Copebras of its shares previously held by the Celanese Corporation of America ("Celanese") would reduce the number of Copebras shareholders from three to two, Columbian and Panama, and elevate Columbian to the status of majority shareholder. Panama was concerned about the dividend policy Columbian might thereafter adopt.

 The letter agreement of September 7, 1965, addressed by Columbian to Panama and endorsed by the latter, provides in pertinent part as follows:

 
"In the event Columbian Carbon Company, (Columbian) attains a majority position in the stock interest of Companhia Petroquimica Brasileira (Copebras), you as a minority shareholder have expressed your concern as to the dividend policy Columbian would adopt.
 
"It must be recognized that future policy of this kind may be affected by the industrial, fiscal, and political situation in Brazil, and that the corporate objectives and competitive position of Copebras may change from time to time.
 
"It is definitely the intention of Columbian after due consideration of the above factors to cause Copebras to declare dividends, insofar as it may legally do so, to the extent of at least 50% of each year's net income after taxes.
 
"Any declaration or omission of dividend will be voted only after full consultation and, if possible, agreement with all minority shareholders.
 
"Columbian will not cause Copebras or its subsidiaries to undertake any further expansion of its productive capacities beyond what has already been approved as of this date, unless dividends to the extent of at least 50% of each year's net income after taxes, cumulative starting with the calendar year 1964, have been paid, unless such expansion has been approved by Panama Processes and such cumulative dividends have been waived. The provision of this paragraph shall not be applicable to carbon black corporations to the extent of $ 1,500,000 in the event a competitive carbon black plant is not in operation by December 31, 1967.
 
"At such time when Celanese Corporation of America (Celanese) ceases to have representation on Copebras' Consultative Board, Panama Processes will be permitted to designate one additional individual to have representation on Copebras' Consultative Board. Further, Panama Processes shall have the right at the next stockholders' meeting of Copebras, with the approval of Celanese, to designate one additional individual to have representation on Copebras' Board of Directors.
 
"Columbian will not transfer its stock in Copebras unless the transferee thereof agrees to assume all the obligations of the transferor under this Agreement. The obligations of Columbian under this letter will terminate in the event Panama Processes' interest in Copebras becomes less than 15%."

 Thereafter Copebras acquired the Celanese shares, Columbian became the majority stockholder, and Panama the minority stockholder. Columbian, a wholly owned subsidiary of Cities, was merged into its corporate parent in 1970.

 Copebras produces carbon black, a petrochemical used in tire manufacture, and other petrochemicals. In 1973, eight years after execution of the letter agreement, Panama sued Cities in this Court. This was the case assigned to Judge Gurfein. At some time prior to January, 1973, Copebras announced its intention to borrow money under a loan agreement which, until repayment, would restrict the amount of payable dividends. Panama protested that course of action as violative of the September 7, 1965 contract. It sued for a declaratory judgment, basing jurisdiction on diversity of citizenship: in 1973 Panama, a Panamanian corporation, had it principal place of business in Geneva, Switzerland, and Cities, a Delaware corporation, had its principal executive office in New York City. Judge Gurfein summarized Panama's prayed-for relief at 362 F. Supp. at 737:

 
"The relief sought is for judgment "a) declaring that the said contract dated September 8, 1965 remains in full force and effect and is binding upon the defendant in accordance with its terms; b) restraining and enjoining the defendant from in any wise breaching or failing to comply with the terms and conditions of said agreement.' There is no prayer for other and further relief."

 In a letter dated February 13, 1973 to Panama, Cities had taken the position that the September 7, 1965 agreement was not binding. That assertion triggered Panama's suit for a judicial declaration that the agreement was binding. However, Cities' responses also included:

 
"... the expressed interpretation put forward by the defendant that it may proceed with the loan and the expansion project on the ground that Exhibit A (the letter agreement) is subject to changes in the industrial, fiscal and political situation in Brazil and to the corporate objectives and competitive position of Copebras, as well as because the contract has lapsed after a reasonable time." Ibid. (material in brackets supplied).

 Panama did not include in its complaint any prayer that the court approve its interpretation of the contract and reject that of Cities, an omission which puzzled Judge Gurfein. *fn1" In those circumstances, the judge exercised his discretion and dismissed Panama's declaratory judgment suit, on the ground that a declaration limited to the binding nature of the contract would not resolve the parties' disputes as to its proper interpretation. Panama could presumably have amended its complaint so as to pose a fully justiciable controversy. It did not do so, instead appealing Judge Gurfein's order of dismissal, which the Court of Appeals affirmed without opinion. 496 F.2d 533.

 Panama filed the instant complaint against Cities on February 9, 1979. Its allegations of wrongdoing and prayers for relief are cast in language far more broad than the 1973 pleading. In essence, Panama alleges that, since execution of the contract and Cities' ascension to majority control of Copebras, Cities "has employed a variety of artificial and manipulative accounting devices on a selective basis to understate, and in many cases to exhaust, the reported earnings of Copebras." Panama further alleges that Cities "has caused repeated expansion of the Copebras physical plant despite Panama's lack of voluntary consent." These actions allegedly resulted in "Copebras' failure to pay cumulative dividends equal to at least fifty percent (50%) of its true economic earnings." Complaint, P 20. In addition, Panama charges that Cities' "artificial and manipulative accounting has virtually destroyed the value of Panama's interest in Copebras." Id. P 22.

 Such acts by Cities are alleged, in count one of the complaint, to constitute breaches of the September 7, 1965 letter agreement; and, in count two, to constitute the tortious breach of Cities' fiduciary duty, as the majority shareholder of Copebras, to Panama as minority shareholder. The monetary damages claimed under each count are stated in identical language, thus:

 
"(Panama) has been damaged in an amount equal to the dollar value of the cumulative dividends which it should have received (but did not receive) in each year from 1965 through 1978, adjusted for Brazilian monetary correction, and together with interest according to law. Although (Panama) does not have access to the data necessary to compute the exact figure, (Panama) believes that its damages substantially exceed $ 10 million."

 In addition, the complaint prays for declaratory and injunctive relief, as follows:

 
"(b) declaring that (Cities') imposition of artificial and manipulative accounting devices for the purpose of understating Copebras' true economic earnings and shareholders' equity is a breach of the September 7 Agreement and of (Cities') fiduciary obligations to (Panama);
 
"(c) enjoining (Cities), its officers, directors, subsidiaries, successors and assigns from taking any future action to depress Copebras' true economic earnings or the true value of the shareholders' equity in Copebras and from otherwise preventing the payment of properly computed cumulative dividends; ..."

 The September 7, 1965 letter agreement was negotiated and executed in New York City. During the six-year interval between complaints, Cities moved its principal executive offices from New York to Tulsa, Oklahoma. Only a small office remains, peopled by employees not conversant with this action.

 In March, 1973, Cities transferred all its stock in Copebras to Citco do Brasil, a Brazilian corporation not named as a defendant herein. The stock of Citco do Brasil is owned by Citco International Chemicals Co. and Citco Inc., both ...


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