How Did this Claim Against the Government Survive 70 Years of Corporate Mergers and Reorganizations?

An oil company entered contracts with the government during World War II. The government agreed it would reimburse the company for costs and liabilities associated with the contracts. Over the next 70 years, the company underwent a series of mergers and reorganizations. A successor company sued the government, seeking reimbursement for environmental liabilities. The government alleged the claim was barred the Anti-Assignment Act. The court found the claim was not barred. The Anti-Assignment Act does not apply when the assignment is made incidental to a merger. The claimant in this case had succeeded to the original contractor’s assets. The claim fell under the operation of law exception to the Anti-Assignment Act.

OXY USA and CITGO Petroleum Corporation v. United States, COFC No. 19-694C

Background

During World War II, the government entered contracts with petroleum companies to obtain critical wartime commodities. Under these contracts, the petroleum companies agreed to expanded production at low profit margins. In exchange, the government agreed to reimburse the companies for costs and liabilities associated with the contracts.

In 1942 the government entered a contract with Cities Service Refining Corporation. Cities Services agreed to provide the government with aviation gas from its refinery in Lake Charles, Louisiana. The government agreed to pay any “taxes, fees, or charges . . . required by any municipal, state, or federal law.”

That same year, the government entered a second contract with Cities Services for the production of butadiene, a material used in synthetic rubber. As part of the contract, the government agreed to lease Cities a government-owned butadiene plant near the company’s Lake Charles Refinery.

The butadiene plant, however, had been hastily constructed without adequate waste processing facilities. Thus, by 1946, the site was contaminated. To contend with this, Cities Services and the government entered a third agreement—the Right of Way Agreement. Under this agreement, Cities Services granted the government an easement at the Lake Charles Refinery for a butadiene disposal plant. The plant would dispose of waste into a surge pond at the Lake Charles Refinery. Like the aviation gas contract, the Right of Way Agreement included an indemnification clause. Under the clause, the grantee (the government) agreed to indemnify the grantor (Cities Services) for losses, claims and demands resulting from the government’s uses of the property.

In 1956, the government sold the butadiene plant to Cities Services. Over the next 70 years Cities Services went through a series of mergers and reorganizations. The rights to the aviation gas contract and the Right of Way Agreement passed to various successor companies. By the 2000s, OXY USA, Inc. owned the butadiene plant. Another company, CITGO Petroleum Corporation, ended up with Cities Services’ petroleum assets, including the aviation gas contract and the Right of Way agreement.

Cities Services and its successors were involved in extensive litigation for cleanup costs at the Lack Charles Refinery under CERCLA and state law. Invoking the indemnification provisions in Cities Services’ contracts, OXY and CITGO submitted claims to GSA seeking $94 million in reimbursement costs. GSA denied the claims. OXY and CITGO filed suit in the Court of Federal Claims, alleging breach of the aviation gas agreement and the Right of Way agreement. The government moved to dismiss the claims. OXY and CITGO moved for summary judgment as to the government’s liability under the agreements.

Analysis

Anti-Assignment Act

The government alleged CITGO’s and OXY’s claims were barred by the Anti-Assignment Act. That Act prohibits the assignment of government contracts or claims against the government. The government reasoned it not entered into contracts directly with CITGO or OXY and thus was not in privity with either. Because the Anti-Assignment Act bars the assignment of contracts and claims, those companies had not received valid assignments of the aviation gas and Right of Way contracts. The could not sue for breach.

CITGO’s Claims

The court found the assignment of the aviation gas and Right of Way contracts to CITGO fell under the operation of law exception to the Anti-Assignment Act. That exception applies when a claim or contract is transferred by consolidation or merger of the successor with a the claimant corporation. The exception applies when an entity has undergone a change in form or ownership, but the government contract is still with the same party. The exception also permits assignments where the transfer is incident to the sale of an entire business the entire portion of a business.

Here, Cities Services separated its refining services and transferred them to the entity that became CITGO in 1983. Cities Services executed an assignment agreement that transferred “all assets whatsoever.” The transferred business had the same funding and management. The court reasoned the assignment was akin to a change in corporate identity.

The court further reasoned that the assignment did not undermine the Anti-Assignment Act. The aim of the Act is prevent duplicative clams against the government from multiple parties. Thus, the Act does not prevent an assignment where there is no probability the government could suffer injury. Here, performance under the aviation gas contract and the Right of Way Agreement had ended years ago. There was no chance a successor to CTIGO could somehow interfere with performance.

CITGO had succeeded to claims under the aviation gas and Right of Way contract. The court denied the government’s motion to dismiss these claims.

OXY’s Claims

The court did not think the assignment of the butadiene plant to OXY fell under an exception to the Anti-Assignment Act. Unlike the transfer to CITGO, the assignment to OXY did not name an entity, business group, or business division that could be characterized as an assignment incident to the sale of business. It was unclear whether the same employees, management, and financial structure had been transferred to OXT. It did not appear OXY had simply stepped into the shoes of the Cities Services. The operation of law exception to the Anti-Assignment Act did not apply.

Indeed, the court noted it was not clear OXY even had a right to reimbursement. As the owner of the butadiene plan, OXY’s path to reimbursement had to run through the Right of Way Agreement. But that agreement only indemnified the grantor of the right of way for losses. OXY was not the grantor and nothing in the agreement stated that the agreement applied to future owners of the plant. The court granted the government’s motion to dismiss OXY’s claims.

Liability Under Aviation Gas Contract

Having granted in part the government’s motion to dismiss, the court turned to CITGO’s motion for summary judgment. The government argued that CITGO was not entitled to summary judgment under the aviation gas contract because Cities Services signed a settlement agreement with the government in 1947 that released the government.

The court, however, found that the 1947 settlement only pertained to an alleged breach in 1945. The settlement did not release the government from future claims; indeed, it appeared to reserve future claims. CITGO had demonstrated that it was entitled to indemnification under the aviation gas contract. The court granted summary judgment as to liability under the aviation gas contract.

Liability Under Right of Way Agreement

The government also argued that Cities Services had entered a 1957 settlement that released the government from liability under the Right of Way Agreement. The court found this argument compelling. Th\e 1957 settlement stated that the parties had agreed to release each other from all claims that may have arisen of may hereafter arise. CITGO had not established it was entitled to indemnification under the Right of Way Agreement. The court denied summary judgment as to the Right of Way Agreement.

OXY and CITGO are represented by Daniel M. Steinway. The government is represented by Matthew Paul Roche of the Department of Justice.

–Case summary by Craig LaChance, Senior Editor

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