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UMC PETROLEUM CORP. v. J & J ENTER.

February 12, 1991

UMC PETROLEUM CORPORATION, IN ITS CORPORATE CAPACITY, AND ON BEHALF OF BENSON DRILLING ASSOCIATES NO. 1, A GENERAL PARTNERSHIP; BENSON DRILLING ASSOCIATES NO. 2, A LIMITED PARTNERSHIP; JIC DRILLING COMPANY NO. 3, A LIMITED PARTNERSHIP; JIC DRILLING COMPANY NO. 4, A LIMITED PARTNERSHIP; AND JIC DRILLING COMPANY NO. 5, A LIMITED PARTNERSHIP; AND JOSEPH L. CASTLE, II, AS MANAGING PARTNER AND SOLE GENERAL PARTNER OF BENSON DRILLING ASSOCIATES NO. 2, JIC DRILLING COMPANY NO. 3, JIC DRILLING COMPANY NO. 4, AND JIC DRILLING COMPANY NO. 5, PLAINTIFFS,
v.
J & J ENTERPRISES, INC.; CNG TRANSMISSION CORPORATION; JAMES H. MCELWAIN, DEFENDANTS.



The opinion of the court was delivered by: Lee, District Judge.

MEMORANDUM OPINION

Presently before this Court is a motion by defendant, J & J Enterprises, Inc. (J & J), to Stay Litigation Pending Arbitration.

This case arises out of the activities of five (5) joint venture general partnerships established between 1974 and 1981 for the drilling, production and marketing of natural gas. Each of the joint ventures was made up of three co-venturers: defendant, J & J; Ensource, Inc., plaintiff UMC Petroleum Corporation's (UMC's) predecessor in interest; and a different partnership for each respective joint venture from which the joint ventures took their name.

There are five different types of agreements associated with this action: (1) the Oil and Gas Partnership Agreements; (2) the Joint Venture Agreements; (3) the Operating Agreements; (4) the Gas Purchase Contracts; and (5) the Gas Purchase Contract Amendments of March, 1986, and September, 1987. The Joint Venture Agreements set forth the rights and obligations of the respective oil and gas partners and coventurers in the programs. In each of the Joint Venture Agreements there is a section regarding the management of the joint venture operation, which states that J & J:

  ". . . shall manage and conduct all drilling,
  completion operation, production and marketing
  activities of the Joint Venture, devoting such
  time and talents to the same as it may from time
  to time deem necessary, and shall, except as
  otherwise limited herein, have full and complete
  power to do any and all things necessary or
  incident thereto."

See Joint Venture Agreement — Section 7.

In addition to being a substantial investor in the joint ventures, J & J was the operator of the alleged 187 wells in which the joint ventures had an interest. Pursuant to five Operating Agreements executed between J & J and the respective joint ventures, J & J was designated as the Operator for the drillers, production and marketing of natural gas wells in Pennsylvania and West Virginia. In the Operating Agreements, J & J was appointed attorney-in-fact for the respective joint venture with authority to:

  ". . . execute any and all documents or writings
  deemed necessary to produce, transport or market
  any gas produced by that Joint Venture." (Emphasis
  added)

Defendant, Consolidated Natural Gas Transmission Corporation (CNG) was the exclusive purchaser of the gas produced by the joint venture wells. The price paid by CNG for the gas was established by the various Gas Purchase Contracts negotiated by J & J as Operator of the wells. The price reflected in the Gas Purchase Contracts was subject to occasional modification.

On two separate occasions, in March of 1986 and September of 1987, J & J entered into Amendments to the Gas Purchase Contracts which reduced the price CNG was to pay for gas produced by the joint venture wells. The defendants contend that the amendments were dictated by adverse market conditions. UMC objected to the unilateral reduction in prices which J & J entered into with CNG.

When UMC's protests proved unfruitful, UMC filed suit against J & J on the 28th of January, 1988, for breaches of contract, breaches of fiduciary duties and for injunctive relief.*fn1 The basis of jurisdiction of such action was diversity of citizenship. In September of 1989, upon motion of J & J to Dismiss for Failure to Join Indispensable Parties, whose joinder would destroy diversity, UMC's action was dismissed.

Two weeks later, on October 11, 1989, UMC filed the instant litigation. In their Complaint, plaintiffs assert fourteen (14) causes of action including: five (5) counts under RICO; two (2) counts of breach of contract by J & J; one (1) count of tortious breach of fiduciary duty by J & J; one (1) count breach of contract by defendant CNG; one (1) count tortious interference by CNG; one (1) count fraud and deceit on the part of J & J, Jack*fn2 and McElwain; Injunctive relief against CNG and J & J; and a constructive trust against J & J.

J & J has filed a Motion to Dismiss the Complaint, or in the alternative to Stay the Litigation Pending Arbitration on the grounds that each Joint Venture Agreement, as adopted by UMC's predecessor in interest contains the following arbitration provision:

  Section 22. Arbitration. Any dispute or controversy
  arising out of or relating to this Agreement shall
  be determined and settled by arbitration in the
  City of Philadelphia, Pennsylvania, in accordance
  with then prevailing Commercial Arbitration Rules
  of the American Arbitration Association. The award
  rendered by the arbitrators shall be final and
  conclusive. The expenses of the arbitration shall
  be borne equally by the parties to ...

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