The Second U.S. Court of Appeals yesterday ruled that Texaco Inc. does not have to post a full $12 billion bond in its legal battle with Pennzoil Co., because of the likelihood that the bond requirement would lead to Texaco's "irreversible destruction."
Texaco's bond remains at $1 billion, the amount set by U.S. District Judge Charles L. Brieant Jr. in New York last month after he asserted jurisdiction over the dispute, overruling the Texas state judge who had presided over the Texaco-Pennzoil trial. Texaco has pledged stock in its Canadian subsidiary to meet the $1 billion requirement.
The three-judge appeals court panel also approved Brieant's injunction barring Pennzoil from attempting to enforce an $11.1 billion judgment plus interest against Texaco, which was awarded last year following the Texas trial.
Pennzoil Chairman J. Hugh Liedtke said yesterday the ruling is "constructive," removing the threat of a Texaco bankruptcy. He doubts his company will contest the ruling and is looking instead for prompt consideration of Texaco's appeal in the Texas courts.
Although the court ordered Texaco to make its appeal "promptly and diligently," yesterday's ruling frees Texaco from immediate pressure to seek a settlement on Pennzoil's terms, analysts said.
"It gives Texaco the power to drag this thing as far as they can take it," said Bruce Lazier, an analyst with Prescott, Ball and Turben.
While winning another victory in the federal courts in New York, Texaco continued to lose in Texas. Judge Solomon Casseb Jr., the trial judge, yesterday turned down Texaco's request for a hearing on its motion for a new trial. Texaco has until March 10 to file its appeal of the original jury verdict, a spokesman said.
The jurisdictional question had been a major issue before the appeals court. Pennzoil's lawyers had argued that the dispute was a state, not a federal, matter, and that Judge Brieant had overstepped his authority in reducing Texaco's bond.
But the appeals court disagreed. Its decision, written by Circuit Judge Walter Mansfield, rested "partly on the extraordinary circumstances of this case, which are unlikely ever to recur."
The sheer size of the $11.1 billion judgment, which the court called "unprecedented in the annals of legal history," clearly was a decisive factor in its ruling. The Texas jury had set that amount, which includes compensatory damages, after ruling that Texaco had wrongfully interfered with Pennzoil's agreement to buy 42 percent of Getty Oil Co. Texaco ended up buying Getty for $10.1 billion two years ago.
Under Texas law, Texaco is required to post a bond for the full amount of the judgment, plus interest, bringing the size of the bond to $12 billion at this point. Although Pennzoil argued that other options were available, the appeals court concluded that Texaco would be obliged to meet the full requirement to prevent Pennzoil from filing claims on Texaco's assets.
The appeals court said that the bond requirement "would rapidly produce a catastrophe of major proportions causing major harm to Texaco itself and to thousands of others . . . including stockholders, customers and suppliers." Pennzoil concedes that Texaco could not post a bond or security in that amount, the court said.
"Unable to finance its operations or obtain credit lines needed for its continued existence, Texaco, the fifth-largest business organization in the United States, would be forced into bankruptcy," the court said.
The appeals court did not rule on the $11.1 billion judgment against Texaco. Judge Brieant had called the judgment "absurd," and concluded that Pennzoil was entitled to no more than $800 million. The appeals court said this issue was up to the Texas appeals court and Judge Brieant should not have dealt with it.