Justices Deal Stiff Blow to Texaco in Pennzoil Case

WASHINGTON — In a decision that could move Texaco closer to a threatened bankruptcy filing, the Supreme Court on Monday ruled that a federal judge erred in excusing the company from posting an $11-billion bond as security during appeals of a Texas state jury’s award against it in its court battle with Pennzoil.

In its 9-0 decision, the Court ruled that Texaco had no right to challenge the bond requirement in federal courts before exhausting its appeals in Texas state courts--where Texaco has lost repeatedly in its defense against Pennzoil’s contention that Pennzoil had a binding merger agreement in 1984 to buy Getty Oil before Texaco outbid it.

The justices said U.S. District Judge Charles L. Brieant of New York should have ignored Texaco’s appeal. Brieant, whose own ruling was later upheld by the U.S. Court of Appeals in New York, instead had overturned the Texas bond requirement and ordered Texaco to post a bond of only $1 billion.

But the Supreme Court stopped well short of ruling on Texaco’s key claim: that the bond required under Texas law in this case is so huge that its very magnitude breaches the company’s constitutional right to appeal.

Wall Street securities analysts said the legal setback might increase the pressure on Texaco to seek an out-of-court settlement with Pennzoil over their nearly four-year legal battle. The ruling also increases the chances that Texaco might seek refuge from the jury award under Chapter 11 of the bankruptcy code. Under Chapter 11, a company continues to operate under its existing management while it works out a plan to pay creditors.

“Chapter 11 has got to be considered somewhat more likely now than it was after the close of business Friday,” said Mark P. Gilman, oil industry analyst for E. F. Hutton.

Texaco said immediately after the ruling that it would pursue its appeals through the Texas courts, and would appeal to the U.S. Supreme Court any adverse final ruling from the state. David Boies, Texaco’s appellate counsel, said an appeal should be filed in Texas within a few days.

Boies said Texaco is relying on Pennzoil’s promises that it will not try unilaterally to attach any Texaco assets pending resolution of the bond issue. He said Texaco considers those promises binding, and if Pennzoil does try to impose liens on Texaco to meet the jury award, Texaco might resort to bankruptcy protection.

Pennzoil lawyers said, however, that they would insist that Texaco post some security valued at close to the judgment award during its appeal. The security, said Pennzoil lead attorney Joseph D. Jamail Jr., might be in the form of properties that Texaco could continue managing but would be prevented from selling or depleting until the case is resolved.

Among other things, the security would give Pennzoil a favored position if Texaco does seek bankruptcy protection from creditors.

In a statement issued late Monday, Pennzoil said it it would “refrain from executing its judgment . . . so long as Texaco proceeds promptly in an appropriate manner in the Texas courts to provide satisfactory alternative security arrangements.”

Texaco stock plummeted Monday in trading on the New York Stock Exchange, where the stock was the most active issue. The shares lost $4.125 to close at $33.50, a figure that analysts say reflects investors’ expectations that Texaco will have to pay an out-of-court settlement of well more than $3 billion. Pennzoil stock rose by $6.625, to $88.25 per share.

Texaco Chairman Alfred C. DeCrane Jr. declined to say Monday whether any negotiations with Pennzoil have borne fruit. He said the two companies had no contact with each other Monday after the ruling.

“We have said all the way that if a reasonable economic settlement could be reached, that would be to the benefit of our shareholders,” he said during a brief press conference near the company’s White Plains, N.Y., headquarters. He also said Texaco had retained bankruptcy counsel and had made itself “familiar with the process” of filing under Chapter 11.

Higher Bid

This case arose in January, 1984, when both Pennzoil and Texaco sought to acquire Los Angeles-based Getty Oil. Two days after Pennzoil announced its agreement in principle to buy nearly half of Getty, Texaco outbid its rival and purchased the Getty stock.

Pennzoil sued, contending that Texaco had stolen the company from its grasp, and a Houston jury agreed. It awarded Pennzoil $7.5 billion in compensatory damages and $3 billion in punitive damages, by far the largest such award on record. A Texas appeals court on Feb. 12 trimmed $2 billion from the punitive damage award, making the total judgment $8.5 billion, but upheld the basic jury verdict.

With interest, the judgment now stands at more than $10.2 billion--the sum that Texaco must theoretically post as security.

Less than one month after a state court in Houston awarded Pennzoil $10.5 billion in damages in 1985, attorneys for Texaco went to federal court in New York and won an order from Brieant that blocked the posting of the huge bond in Texas. The company contended that the amount of the bond would effectively bankrupt Texaco, and thereby deny it its constitutional right to appeal the verdict.

The high court on Monday said it was not making any ruling on the staggering size of the damage award, nor was it considering Texaco’s claim that the posting of the bond alone would effectively deny it the right to appeal.

“Today we decide only that it was inappropriate for the (federal) District Court to entertain these claims,” Justice Lewis F. Powell Jr. wrote for the court, concluding that Texaco must first make such appeals in state courts. “Proper respect for the ability of state courts to resolve federal questions . . . mandates that the federal court stay its hand.”

Sees Victory for Federalism

Pennzoil attorney Laurence H. Tribe, a professor at Harvard Law School, said Monday he was “delighted that the Court accepted our position that the fundamental principles of federalism apply as much to a great corporation as to an impoverished individual.”

Boies had sought to portray Texaco, the nation’s third-largest oil firm, as akin to a beleaguered civil rights organization which had been victimized by an unfriendly and unfair state court. The NAACP had, in fact, appealed to federal courts in 1979 when Mississippi courts upheld a $1-million verdict against it, a judgment later overturned by the Supreme Court.

But the strategy may have backfired. Justice Thurgood Marshall pointedly noted that had the defendant been a small businessman, not a “wealthy business corporation,” the federal court would likely have ignored the appeal.

David Savage reported from Washington and Michael A. Hiltzik from New York.