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Glassberg v. Boyd

Court of Chancery of Delaware, New Castle County

September 14, 1955

Elliot F. GLASSBERG, as Executor of the Last Will and Testament of Morris Glassberg, Deceased, Plaintiff,
v.
Howard BOYD, Lindsay Bradford, C. C. Cragin, A. R. Grambling, Paul Kayser, Frank Liddell, C. L. Perkins, H. F. Steen, D. H. Tucker, W. J. K. Vanston, Fred T. Wagner, Western Natural Gas Company and El Paso Natural Gas Company, Defendants.

Derivative actions by a stockholder of a natural gas corporation for accounting of profits claimed to have been made by its directors at corporation's expense, damages sustained by corporation as result of their alleged breaches of duty to it, injunction against performance of a contract for supply of gas to corporation by another such corporation, and decree declaring an earlier contract between same corporations for such supply still in full force and effect. The Court of Chancery, Marvel, V. C., held that cause of action for accounting and damages arising from revision of earlier contract was not cognizable in chancery court, as fixing of gas rates is under Federal Power Commission's jurisdiction, and that both such cause of action and cause of action for directors' alleged negligence and improvidence in causing corporation to pay gas gathering taxes imposed by Texas statute, subsequently declared unconstitutional by United States Supreme Court, were barred by three year statute of limitations.

Summary judgment for defendant directors.

Page 712

[35 Del.Ch. 295] Robert C. Barab, Wilmington, and Milton Paulson, New York City, for plaintiff.

Killoran & Van Brunt and Berl, Potter & Anderson, Wilmington, Mudge, Stern, Baldwin & Todd, New York City, and Daniel Moody, Austin, Tex., for all defendants except Western Nat. Gas Co.

Morris, James, Hitchens & Williams, Wilmington, for defendant, Western Nat. Gas Co.

MARVEL, Vice Chancellor.

Plaintiff, who is a stockholder of El Paso Natural Gas Company as the California executor of the estate of Morris Glassberg, brings two actions of a derivative nature against the directors of El Paso, a Delaware corporation. The complaint seeks an accounting of profits claimed to have been made by the individual defendants at the expense of their corporation, for damages

Page 713

sustained by the corporation as a result of alleged breaches of duty to the corporation on the part of the individual defendants, the enjoining of the performance of an allegedly void 1953 contract between the defendants, El Paso Natural Gas Company and Western Natural Gas Company, and a decree that an earlier contract of 1947 between the same corporate defendants purportedly amended by the 1953 contract remains in full force and effect. At argument, plaintiff's attorneys withdrew the prayer of the complaint which seeks rescission of the 1953 contract but contended vigorously that plaintiff is entitled to damages from the individual defendants for injuries allegedly suffered by El Paso because said defendants by accepting the 1953 contract changes, subjected El Paso to the burden of paying higher gas rates than those contained in the unexpired 1947 contract.

[35 Del.Ch. 296] Prior to 1947 El Paso had for a number of years owned and operated a pipe line system in western Texas and southeastern New Mexico and had also owned and operated gas wells in the same general area, an oil and gas producing region known in the trade as the Permian Basin.

The first cause of action, which is divided into three parts, complains that in 1947 the defendants, Kayser, Liddell and Vanston, who at all times during the period the acts complained of took place never owned more than 3% of the stock of El Paso, through domination of the[1] board of that corporation, caused El Paso to extend its pipe line system to the California border from the San Juan Basin area of New Mexico and Colorado and also caused El Paso's wholly owned subsidiary, Western Gas Company, to acquire oil and gas interests in the same area with knowledge that the construction of the proposed pipe line would enhance the value of such properties. The complaint charges that these acts were carried out for the purpose of benefiting the named directors rather than El Paso and were consummated as part of a scheme which involved merging Western Gas Company with Gulf States Oil Company, a corporation in which the three named directors owned a 53% stock interest. As a result of the consummation of such merger a new corporation resulted known as Western Natural Gas Company, two thirds of the stock of which was issued to stockholders of Gulf States Oil Company and one third to El Paso. The stock distribution resulting from the merger made the three named defendants and their families substantial stockholders of the resulting Western Natural Gas Company.

El Paso, having received a certificate for such purpose from the Federal Power Commission in July 1950, proceeded to build a pipe line from the San Juan Basin to the California border, completing it in February 1952. As a result of the completion of the pipe line, oil properties owned by El Paso and Western Natural Gas Company in the San Juan Basin increased tremendously in value. Plaintiff [35 Del.Ch. 297] charges that the above named individual directors in causing Western Natural Gas Company to acquire properties, which should have been acquired for El Paso, wrongfully diverted profits and earnings of the new pipe line from El Paso. While there is no answer to the first cause of action the director defendants in their briefs take the position that the merger of Western Gas Company and Gulf States Oil Company was actually accomplished for the purpose of protecting El Paso's stockholders from the penalties placed on the holding of production properties by the ‘ rate base’ approach to the determination of costs of production applied by the Federal Power Commission at the time the merger took place. It is also contended that the terms of the merger were worked out by independent appraisers and are fair and equitable.

It is also charged in the first cause of action that in September, 1950, these same directors wrongfully caused El Paso to pay

Page 714

Western Natural Gas Company $552,898.80 for 13,000 acres of land in the San Juan Basin which had cost Western only $173,000.

Finally the first cause of action complains of the revision at El Paso's expense of a firm contract of 1947 under the terms of which Western was obligated to supply natural gas to El Paso. In May 1947, Western Natural Gas Company had contracted with El Paso to furnish gas from Western's wells in the Permian Basin at a stipulated price per thousand cubic feet. Plaintiff alleges that in July 1953 El Paso without any or adequate consideration furnished to it was caused by the directors, Kayser, Liddell and Vanston to increase substantially the price payable to Western for gas to the injury of the stockholders of El Paso.

For his second cause of action plaintiff charges that the individual defendants, notwithstanding the fact that many pipe line companies had challenged the constitutionality of a Texas law imposing a gas gathering tax, caused El Paso to pay without protest a total of $2,658,935 in such taxes to the State of Texas for the years 1951 through 1953. The Texas gas gathering statute was declared unconstitutional by the Supreme Court of the United States in February, 1954. Plaintiff charges the individual defendants with recklessness, [35 Del.Ch. 298] negligence, improvidence and with responsibility for placing the corporate defendant in a position where not having paid the tax under protest for the years in question it may not be entitled to recover the amount paid in such taxes. If recovery is in fact made it appears that such recovery will be without interest.

The individual defendants have filed two motions to the first cause of action. They ask for summary judgment as to such cause of action insofar as it is based on modification of the 1947 gas contract between El Paso and Western Gas Company on the grounds that the Federal Power Commission has exclusive jurisdiction of plaintiff's claim by virtue of the Natural Gas Act and alternately for the reason that the modified contract is in all respects fair. Defendants also seek dismissal under Rule 12(b), Court of Chancery Rules, Del.C.Ann., of the entire first cause of action other than that part of it ...


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