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MARTIN OIL SERV. v. KOCH REF. CO.

March 21, 1989

MARTIN OIL SERVICE, INC., Plaintiff,
v.
KOCH REFINING CO., et al., Defendants


James B. Moran, United States District Judge.


The opinion of the court was delivered by: MORAN

JAMES B. MORAN, UNITED STATES DISTRICT JUDGE

 Several issues are before us. We evaluate, in order, plaintiff's motion to strike the special master's report and the proper increments of monthly price increases. We inquire of the special master to clarify his conclusions pertaining to the pricing period issue, and we decide the sale/exchange and V-factor/stipulation issues. We reaffirm our May 15, 1986 ruling as to the appropriate computation methodology and, finally, we rule on the various statutes of limitation controversies and specify further proceedings consistent with this opinion. Before discussing each issue, however, we set out the procedural history by way of introduction.

 INTRODUCTION

 Plaintiff Martin Oil Service, Inc. ("Martin Oil" or "Martin") brought suit in this court on April 2, 1981, alleging that defendants Koch Refining Co. and Koch Industries, Inc. (collectively "Koch") had sold gasoline to it at prices in excess of the maximum allowable under the mandatory petroleum allocation and price regulations, 10 C.F.R. §§ 211 and 212, promulgated pursuant to the Emergency Petroleum Allocation Act, 15 U.S.C. § 751 et seq. Our earlier rulings decided issues relating both to the substance of this allegation as well as to the procedural issues which have arisen during the course of the litigation.

 On October 18, 1982, we granted two of plaintiff's motions. First we struck two of Koch's affirmative defenses and, second, we issued a protective order foreclosing discovery by Koch to prove Martin recovered the alleged overcharges in the prices charged to customers. Martin Oil Service, Inc. v. Koch Refining Co. and Koch Industries, Inc., No. 81 C 1844, slip op. (N.D. Ill. Oct. 18, 1982). We reviewed the procedural and substantive legality of the "deemed recovery rule" in our memorandum and order of February 1, 1984. That decision denied defendants' motion for partial summary judgment on plaintiff's fourth cause of action (alleging that defendants increased their prices beyond the level allowed under the relevant regulations by misapplying the Federal Energy Agency's ("FEA") deemed recovery rule), because the rule was both procedurally and substantively valid. Martin Oil Service, Inc. v. Koch Refining Co. and Koch Industries, Inc., 582 F. Supp. 1061 (N.D. Ill. 1984). In the interest of economy and efficiency, we later stayed a civil action in the Northern District of Georgia. Martin Oil Service, Inc. v. Koch Refining Co. and Koch Industries, Inc., No. 81 C 1844, slip op. (N.D. Ill. Aug. 6, 1984). Our memorandum and order of May 15, 1986, established the methodology for computing the alleged overcharges and suggested that the appointment of a special master to supervise the relevant calculations might be appropriate. Martin Oil Service, Inc. v. Koch Refining Co. and Koch Industries, Inc., 636 F. Supp. 1186 (N.D. Ill. 1986). We refused to reconsider our methodology choice by denying defendants' motion in limine on September 29, 1986, and simultaneously held that the appointment of Special Master Avrom Landesman was appropriate and, absent objection by the parties, would be forthcoming. Martin Oil Service, Inc. v. Koch Refining Co. and Koch Industries, Inc., No. 81 C 1844, slip op. (N.D. Ill. September 29, 1986). Most recently, we deferred decision on defendants' motion for summary judgment alleging a statute of limitation defense until after the court received the special master's report. Martin Oil Service, Inc. v. Koch Refining Co. and Koch Industries, Inc., No. 81 C 1844, slip op. (N.D. Ill. March 17, 1988). Mr. Landesman's findings were received by this court in April of last year.

 The court has reviewed the special master's report and rules on the issues discussed therein, as well as various other pending matters. Necessary background is provided, though material discussed in our prior opinions may be given short-shrift as we are all too aware of the difficulty of beginning at "square 1" with a subject matter as complex as this.

 I. STRIKING SPECIAL MASTER'S REPORT AND STANDARDS FOR REVIEW

 A. Background

 We initially raised the possibility of appointing a special master in our memorandum and order of May 15, 1986. The parties were therein invited to submit comments on the advisability of utilizing a special master as well as to suggest particular individuals for the appointment. Martin opposed the appointment of a special master and made no recommendations. Koch argued in favor of the proposed appointment and suggested two persons, one of whom was Avrom Landesman of the Department of Energy. Martin replied to Koch's arguments as to the necessity of a special master, but again made no suggestions as to particular individuals worthy of consideration. Even more important, Martin registered no objection to the two persons proposed by Koch. Our memorandum and order of September 29, 1986 held that the appointment of a special master was appropriate and that Avrom Landesman appeared to be well-suited for the task.

 Given Martin's failure to comment on the appointment of Mr. Landesman, we offered it an additional opportunity to object:

 
Unless this court is advised by plaintiff of cogent reasons to the contrary, it will in 14 days inquire of Avrom Landesman whether he is available for appointment.

 Slip op. at 8 (Sept. 29, 1986). Before the special master commenced work pursuant to his appointment, counsel for Martin Oil appeared before this court for status conferences on October 27, 1986, November 20, 1986, and January 22, 1987. However, not until November 11, 1988, after Mr. Landesman's report was issued, and some two and one-half years after his name was first suggested, did the plaintiff object to his suitability as special master.

 B. The Choice of Mr. Landesman

 In sum, we feel Martin Oil has waived its right to object to Mr. Landesman's appointment, on whatever grounds may have existed. To hold otherwise would permit parties such as Martin Oil to base their decisions whether or not to object to particular special masters on the conclusions those appointees subsequently reach. This court cannot condone such manipulation of Rule 53, and thus plaintiff's motion to strike the report of the special master is denied.

 In what can only be characterized as an over-abundance of caution, we now discuss the substantive objections to Mr. Landesman's appointment. Martin alleges that Mr. Landesman, while employed as acting special counsel for the Department of Energy, negotiated and settled the government's overcharge claims against Koch for a purportedly insufficient amount. Martin contends that the appointment of Mr. Landesman violated (1) 18 U.S.C. § 207(a), as a conflict of interest; (2) D.R. 9-101(B), as unethical attorney behavior under the ABA's Model Code of Ethics; and (3) Canon 3 of the ABA's Code of Judicial Conduct, as unethical judicial behavior. We find each of these allegations substantively baseless.

 Section 207 is entitled, "Disqualification of Former Officers and Employees; Disqualification of Partners of Current Officers and Employees." It addresses the problem of individuals who attempt to utilize the knowledge and influence gained in government service to further private ends. More specifically, the scope of § 207(a) is limited to

 
whoever, having been an officer or employee of the executive branch of the United States Government, of any independent agency of the United States, or of the District of Columbia, including a special Government employee, after his employment has ceased, knowingly acts as agent or attorney for, or otherwise represents, any other person (except the United States), in any formal or informal appearance before, or, with the intent to influence, makes any oral or written communication on behalf of any other person (except the United States) . . . .

 18 U.S.C. § 207(a). This provision is irrelevant to Landesman's role as special master. In this capacity he has not acted as an "agent or attorney, for, or otherwise represent[ed] a party." Instead, he has served pursuant to court appointment. Special Master Landesman has acted as an extension of the third branch of government -- the one "party" explicitly exempted by the statute. And as anyone even passingly familiar with the operative ethical norms knows, an attorney is permitted to represent conflicting interests if all parties consent. See Illinois Code of Professional Responsibility, Rule 5-105(c); ABA Model Rules of Professional Conduct, Rule 2.2; ABA Model Code, DR 5-105(C).

 Martin also alleges that Mr. Landesman is "constrained" by Disciplinary Rule 9-101 -- "Avoiding Even the Appearance of Impropriety" -- subsection (B):

 
A lawyer shall not accept private employment in a matter in which he had substantial responsibility while he was a public employee.

 ABA's Model Code, D.R. 9-101(B). We fail to see how Mr. Landesman's appointment -- after both sides had ample opportunity to object to his selection -- gives even the appearance of impropriety. As noted above, Mr. Landesman's current efforts on behalf of a United States District Court can hardly be characterized as "private employment." In addition, the prior and current matters are substantively distinct. Mr. Landesman negotiated a settlement on behalf of the government in his prior position; his responsibility here as a special master is to aid in fact-finding pertaining to alleged overcharges in private transactions.

 
Unless he is bound by a stricter standard imposed by the public body, a lawyer who leaves public employment shall not appear in the capacity of a lawyer before the public body by which he was employed on a matter in which during the public employment the lawyer participated personally and substantially or which was under his official responsibility.

 Mr. Landesman is appearing before no public body, let alone the same one which had previously employed him.

 The substantive distinction between the matter at bar, and that in which Mr. Landesman previously participated, also addresses the purported violation of the ABA Code of Judicial Conduct, Canon 3, subsection (C)(1). Furthermore, while special masters do perform quasi-judicial functions, we are hesitant to apply the Code of Judicial Conduct to them with full force and effect. Unlike the traditional federal bench, they are appointed at a district court's behest. As such, special masters are more like arbitrators whose independence is best safeguarded by the parties themselves before the results of the arbitration are made available.

 No violation of either the ethical rules for lawyers or those for judges has occurred. But even assuming arguendo that Mr. Landesman's appointment could be so characterized, we think it irrelevant for these purposes. The parties here have consented to the appointment and we painstakingly review infra each of their objections to his report. Whatever ethical transgressions can be dreamed up would be resolved elsewhere without impacting this adversary proceeding.

 Defendants move for their attorneys' fees attributable to plaintiff's motion to strike. But in the absence of an objectively "serious misstatement" of law, contra Thornton v. Wahl, 787 F.2d 1151, 1154 (7th Cir. 1986), cert. denied, 479 U.S. 851, 93 L. Ed. 2d 116, 107 S. Ct. 181 (1986), we are not about to add another level of conflict to an overly-contentious lawsuit. Both plaintiff's motion to strike the report of the special master and defendants' motion for attorneys' fees are therefore denied.

 II. MONTHLY INCREMENTS USED TO COMPUTE RECOVERIES AND OVERCHARGES

 The special master's report suggests that an agreement has been reached between the parties as to the monthly increments of price increases to be used in computing recoveries and overcharges (rpt. at 1). Neither party appears to contest this conclusion: Martin agrees directly (pl. omnibus brief at 1-2) while Koch, in its omnibus brief, does not argue to the contrary. The special master has represented that a listing of the particular monthly increments will be forthcoming to this court. We look forward to its receipt.

 III. THE APPROPRIATE PRICING PERIOD

 This court has reviewed the report of the special master and the comments of both sides thereto. Before disposition of the issues resolved and raised therein, we request the special master to clarify his conclusions pertaining to the pricing period issue.

 A. Background

 The special master concludes that "it is suggested that the proper period for measuring recoveries is by calendar month" (rpt. at 3). Plaintiff merely echoes that "the Special Master has recommended that the proper period for measuring those recoveries is by calendar month" (pl. omnibus brief at 2). With this suggestion, the special master contends that "it appears that Koch does not disagree." Id.

 B. The Need for Clarification

 We act pursuant to our equitable powers:

 
It is the duty of the court to act on the master's report, and it may confirm, modify, reject, reverse, set aside, or recommit it, or frame an issue for trial by a jury, as the circumstances may require.

 30A C.J.S. Equity § 555 (1965). "The court has discretion, on motion of a party or ex mero motu, and for good cause shown, to recommit a master's report after it has been filed or permit the master to withdraw it for correction and amendment." Id. at § 558. The report has been filed and both sides have been heard through their omnibus briefs. Prior to our dispositive review of the special master's conclusions, however, we request a "further report of the evidence taken," id., namely, some clarification and amplification of the pricing period issue.

 We request elaboration on the posture which the special master assumed in his decision. On May 15, 1986, this court concluded that the decision as to whether to use a monthly deeming period or another pricing period was a "factual dispute," leaving "determination of which methodology in the circumstances of this case most accurately measures overcharges" to the trier of fact. Martin Oil Service, Inc. v. Koch Refining Co. et al., 636 F. Supp. 1186 1191 (N.D.Ill.1986). We had interpreted Kickapoo Oil Co., Inc. v. Murphy Oil Corp., 779 F.2d 61 (Temp. Emer. Ct. App. ("TECA") 1985), to permit pricing period methodology, but we left to the trier of fact -- for these purposes, the special master -- the question as to whether pricing period calculations were impossible here because of the lack of cost recovery records on the pricing period basis. Slip op. at 9-10. Our fear is that the special master did not inquire into the possibility of an accurate non-monthly pricing period in determining product and non-product costs because he may have thought Koch had conceded the issue. We understand that this inquiry depends on the ability of a refiner like Koch to demonstrate uniform price increases with available records. We merely hope to emphasize that the special master's conclusions should be based on Koch's ability to make such a demonstraton.

 We see how the pricing period can be very relevant because it determines how often both product and non-product costs are deemed recovered. We are therefore reluctant to decide the matter without further amplification by the special master.

 IV. SALES/EXCHANGES

 Martin's overcharge calculations assume that certain of the transactions which Koch had characterized as "exchanges" were in reality "sales." An important consideration in the computation of overcharges is the recovery of costs. Overcharges represent the difference between the actual price charged and the maximum lawful sales price ("MLSP"). The MLSP equals an allowable cost increment added to the base price determined as of May 1973. The cost increment figure is determined by adding increases in both product and non-product costs to what is referred to as "banked" costs, if any of the latter exist.

 A particular refiner's bank is measured by the addition of costs not recouped (presumably volume was overstated), the subtraction of costs actually recovered (presumably volume was underestimated), and the subtraction of costs "deemed" recovered pursuant to the "deemed recovery rule," a/k/a the "equal application rule." A firm's allowable cost increment must reflect the status of its banked costs. It may recover costs that have not been recouped, but its cost increment must also reflect, where appropriate, prior over-recoveries.

 To determine the highest monthly increments and thereby ascertain Koch's recovery of costs -- both actual and deemed -- Martin has assigned a value to the revenue derived by Koch from these "sales." Koch contends the transactions in question were "exchanges" as a matter of law, and that therefore Martin's calculations are incorrect. Both parties have briefed in limine the issue of opinion evidence on whether defendants' exchanges should be treated as sales. We have also reviewed the special master's report and the parties' comments thereon. As a matter of law, we hold that the transactions have been appropriately categorized as "exchanges" within the meaning of the relevant DOE regulations. We will, however, permit Martin to allege such exchanges were not properly reflected in calculating its recoveries, but such a demonstration would have to be based on actual (not deemed) recoveries. Because we conclude that the transactions have been appropriately categorized as "exchanges," we need not decipher whether the November 20, 1981 stipulation disposes of Martin's claim.

 A. Background

 Both sides consented to providing the special master with only the pleadings filed in a similar proceeding in Wisconsin, entitled U.S. Oil v. Koch, No. 79-C0659, slip op. (E.D. Wis. Oct. 15, 1986). Hearings before the special master were conducted where Martin's experts testified that they regarded "Koch's large volume of exchanges as being unusual in the industry, as having represented a departure from Koch's historic practice, and as being abberational in the sense that gasoline was exchanged for exempt products" (rpt. at 4).

 The special master found this testimony to be too "conclusionary in nature" and held that "the record of this proceeding does not contain the kind of data that would enable a finding to be made on a factual basis" (id.). He found that none of Martin's experts conducted a comprehensive study of all of Koch's exchanges and that there was no testimony the gasoline in question had been actually refined -- as opposed to purchased -- by Koch (id.). We, however, need not review these factual issues in this context.

 Koch has chosen to argue the sales/exchange issue as a matter of law (defs. mem. in supp. of motion in limine at 3). It contends the DOE chose not to prohibit exchanges but instead to regulate them through a particular cost recovery formula. Martin suggests that the use of exchanges was a deliberate attempt to evade the maximum pricing regulations and should therefore be treated as sales. As we detail below, both the special master and Judge Warren of the Eastern District of Wisconsin correctly concluded that the DOE regulations properly prescribe the method by which Koch is to account for exchanges and that method is inconsistent with Martin's effort to calculate the revenue created by the transactions by treating them as sales.

 B. Procedural Posture

 Martin isolates several facts which it contends demonstrate that Koch's transactions are "disguised sales." As isolated by the special master, they are as follows:

 
(1) that controlled product was exchanged for uncontrolled product;
 
(2) that Koch delivered enormous quantities of gasoline in return for exempt products (in two months larger volumes than total sales reported to DOE);
 
(3) that the cash component of the exchange differential was determined by the relative spot market price of the products traded (not by the maximum lawful price of the gasoline traded away by Koch);
 
(4) Koch's trades of gasoline for #2 fuel oil commenced only after #2 fuel oil was decontrolled in 1976;
 
(5) Koch sold the fuel oil obtained in its exchanges on the spot market rather than to its historical customers;

 (Rpt. at 5.) Given that Koch has chosen to argue the issue as a matter of law, we treat the motion in limine at issue as a motion for partial summary judgment. That posture, pursuant to Fed.R.Civ.P. 56, requires us to view all disputed facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmovant. Standard Oil Co. v. Department of Energy, 596 F.2d 1029, 1065 (TECA1978).

 It is true that summary judgment is "seldom appropriate" in price overcharge cases. Such cases often involve "indefinite factual foundations involving a welter of statutory or regulatory provisions the application of which may depend on undeveloped facts." McWhirter Distributing Co., Inc. v. Texaco, Inc., 668 F.2d 511, 519 (TECA1981), quoting Kennedy v. Silas Mason Co., 334 U.S. 249, 256-57, 92 L. Ed. 1347, 68 S. Ct. 1031 (1948).

 Koch bases its motion, however, only on those facts which are undisputed:

 
5. In 1978, 1979, and 1980, defendant Koch Refining Co. entered into written exchange agreements with other firms pursuant to which it physically delivered gasoline to such other firms and physically received back in exchange fuel oil plus a payment in cash to compensate it for the difference in market values. These were transactions in which Koch Refining Co. and such other firms reciprocally gave up and received refined product or residual fuel oil and in which one firm made a payment in cash to the other to compensate the other for differences in the values of the volumes given up. The cash payments were made to adjust for differences in the market values of the products exchanged, attributable to the differences in the type of product or the location of the products exchanged. The transactions were completed in accordance with the terms of the exchange agreements and the exchange agreements accurately record the transaction.

 (Pl's response at 1, admitting paragraph 5 of defs' statement of material facts.) By assuming these uncontested facts, and viewing those which are disputed in the light most favorable to Martin, "the facts and circumstances have been sufficiently developed to enable the Court to be reasonably certain that it is making a correct determination of the question of law." McWhirter Distributing Co., Inc., 668 F.2d at 519, quoting Palmer v. Chamberlin, 191 F.2d 532, 540 (5th Cir. 1951). The issue isn't, as Martin alleges, whether courts can never question the parties' characterization of particular transactions. We look instead to whether there a dispositive matter of law. We hold herein that Koch was within its legal rights in characterizing the transactions as "exchanges," and that Martin's calculations which "correct" Koch's treatment are therefore contrary to law.

 C. The Regulatory Definition of Exchange

 To ascertain the DOE's constraints within which refiners such as Koch operated, we consider the Energy Department's rulemaking and the resulting changes to the Code of Federal Regulations.

 We begin our analysis in September of 1974. The mandatory petroleum price regulations were amended to

 
clarify and make explicit the requirement that prices charged for each covered product must reflect the equal application of increased product costs to each class of purchaser, and that failure to charge prices that reflect equal application of increased product costs except to the extent the seller is precluded from charging such prices by the price term of a contract in effect on September 1, 1974, will result in unrecouped increased product costs which the seller will not be permitted to recover in a subsequent month.

 39 Fed.Reg. 32306-07 (Sept. 5, 1974) (codified at 10 C.F.R. §§ 212.83, 212.93). This represents the codification of the Equal Application Rule, "that a seller may not select among classes of purchaser of the same product those classes as to which it will apply increased costs and those classes as to which it will 'bank' increased costs." Id. at 32307.

 On September 14, 1977, the Federal Energy Administration ("FEA") issued a notice of proposed rulemaking and public hearing to consider amendments to the Mandatory Petroleum Price Regulations. The topics considered included the appropriate allocation of increased crude oil and non-product costs to covered products received pursuant to exchange transactions. 42 Fed.Reg. 48343 (Sept. 23, 1977). The rulemaking continued after the FEA's functions were transfered to the DOE on October 1, 1977, pursuant to the Department of Energy Organization Act, Pub.L. 95-91, and Executive Order No. 12009, 42 Fed.Reg. 46267 (Sept. 15, 1977). Acting by delegation of the Secretary of Energy, and in light of the comments received, the administrator of the Economic Regulatory Administration ("ERA") promulgated special interim regulations concerning exchanges that were adopted during December 1978 and given an effective date of February 1, 1979. 43 Fed.Reg. 59810 (Dec. 21, 1978) (hereinafter, the "exchange amendment").

 Our inquiry begins with the definition of "exchange," which evolved from the rulemaking described above:

 
"Exchange" means, for purposes of this subpart, a transaction in which two firms reciprocally give up and receive crude oil, refined product, or residual fuel oil (but not crude oil for refined product or residual fuel oil). The term includes exchanges in which one firm may make a payment in cash or other property to compensate the other for differences in the values of the volumes involved or to compensate the other for costs incurred pursuant to the transaction, and it also includes matching purchase and sale transactions. The term does not include a firm's acquisition or transfer of refined product or residual fuel oil under a service agreement.

 10 C.F.R. § 212.82 (1980). We do not see how the above excludes the transactions at issue from the meaning of "exchange."

 This definition does not make mention of the relationship or the location of the transacting parties, nor does it specify particular volumes or purposes of the transactions. We therefore fail to see the import of Martin's claim that the transactions should be treated as sales because Koch sought out new customers with whom it transacted in new locations. The same is true for Martin's claim that the size of the transactions, as compared to prior periods, is somehow probative as to how the transactions should be legally treated.

 With respect to unlike exchanges, the definition itself contemplates the trading of dissimilar products as long as crude oil is not traded for either refined product or residual fuel oil, and the time period when those transactions occurred -- purportedly only after #2 fuel oil was decontrolled -- is without relevance to the definition. Thus, Koch's trades of gas for fuel oil are not beyond the meaning of exchange contained in the exchange amendment.

 The same can be said for the cash payments received incident to product trades since the definition explicitly includes transactions in which "one firm may make a payment in cash." The supplementary information provided in the Federal Register surely removes any doubt as to the propriety of cash payments:

 
An exchange frequently includes a cash or crude oil or product volume payment which (1) equalizes the values of the crude oil or products transferred, (2) reimburses a firm for costs incurred pursuant to an exchange, or (3) a combination of these two.

 43 Fed.Reg. 59813 (Dec. 21, 1978).

 A distinct issue, however, relates to whether the payment in cash can only compensate a party for the difference in relative volume, and not market value based on product type differences. That limitation would draw on the phrase, "value of the volumes involved," and would implicitly exclude from the definition of exchange transactions where the cash payment directly reflected the difference in value of the relative products. But we agree with the special master that the meaning of "exchange" should not be so narrowly construed.

 Initially, the limited interpretation would render "the values of the" in the phrase "differences in the values of the volumes" meaningless. "Differences in volumes" would have accurately reflected the purported definition -- that cash can only compensate for differences in volume and not product type. "The values of the volume", however, connotes more. It suggests that something in addition to differences in volume might justify "payment in cash or other property." Because it provides meaning to the words employed in the definition, we conclude transactions where payments compensate for product differential should not be excluded from consideration as an "exchange."

 The limited reading would also make little policy sense: it would define "exchange" to exclude transactions where cash payments are incident to trades of equal volume of dissimilar products, but would include transactions where cash payments are incident to trades of both differing product and volume. We find no justification for treating transactions differently solely on the basis of whether equal or unequal volumes are traded.

 Finally, the limited reading is inconsistent with the straightforward language describing the rationale and implementation of the exchange amendment:

 
Differences in the market value of products exchanged are generally attributable to either the differences in the type of product or the location of the products exchanged.

 43 Fed.Reg. 59813 (Dec. 21, 1978). In sum, we do not see how addition leads to multiplication: if each individual characteristic isolated by Martin is consistent with the prescribed definition of exchange, we cannot see how several of them can ...


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