Pennzoil Takes Its Case to a Higher Court : Texaco’s Survival Riding on Outcome, Federal Appeals Panel Told

With abstruse arguments over rules of federal court procedure, lawyers for Texaco and Pennzoil on Tuesday took their $12-billion legal fight--one which Texaco contends is a matter of its very survival--to a three-judge panel of the U.S. 2nd Circuit Court of Appeals.

At issue was a Jan. 10 ruling by U.S. District Judge Charles L. Brieant enjoining Pennzoil from enforcing an $11.1-billion award it won from a Houston state court jury against Texaco last year. Brieant countermanded a Texas state rule requiring those who appeal verdicts against them to post a bond equal to the judgment plus interest and ruled that a $1-billion bond would be sufficient.

Pennzoil’s attorneys argued Tuesday that Brieant’s action was an infringement of the state’s right to set its own court procedures, and of the U.S. Supreme Court’s rank as the only court of appeal from state jurisdictions.

“You cannot find a case of more officious interference,” said Arthur Liman, Pennzoil’s New York-based appellate lawyer, who appeared with Texaco attorneys Paul Curran and David Boies. Referring to the capital city where the Texas Supreme Court sits, he said: “If a playwright were to name this case, he might call it, ‘Something Funny Happened on the Way to Austin--or to the Supreme Court in Washington.’ ”

Questions from the three appellate justices suggested that one weakness of Texaco’s case may be that it did not even try to appeal the bond and lien rules to higher Texas courts before asking the federal courts for relief.

“Why not go to the Houston court and plead unconstitutionality?” asked Judge Walter R. Mansfield. Texaco attorney Boies replied that a final state ruling could have taken weeks. “Texaco had a matter of days, or one day, before the financial markets or other financial pressures forced it into Chapter 11,” or the protection of the bankruptcy court.

In the week after Dec. 10, when the Houston judgment was formally entered, he added, the company’s bonds “had been downgraded to below investment grade, joint venture partners were pulling out of the joint ventures, and banks were even refusing to give secured financing.”

The three judges reserved decision, but Judge Lawrence W. Pierce, the presiding judge of the panel, indicated that a ruling would be swift by noting that he understood that “time is of the essence.”

Tuesday’s two-hour hearing drew an overflow audience of lawyers and journalists. Watching from the courtroom were several top Texaco executives, including Chairman and Chief Executive William K. McKinley. Across the room sat Joseph D. Jamail Jr., the colorful Houston attorney who won the original case for Pennzoil.

Both sides have spared little expense to retain top legal talent; among the legal team brought in by Pennzoil was Harvard Law School Professor Lawrence Tribe, a constitutional scholar who argued a portion of the company’s case. Sitting with other Pennzoil lawyers, as if in reserve, was Paul M. Bator, another Harvard expert on the federal judiciary.

Pennzoil Won Verdict

The pitched battle between Texaco, the nation’s third-largest oil company, and Pennzoil, the 17th-largest, began after Pennzoil, which thought it had a completed deal for most of Getty, found itself outbid in early 1984 by Texaco for the entire company.

Pennzoil sued Texaco in state court in Houston, where a jury awarded it compensatory and punitive damages totaling $10.53 billion for Texaco’s interference in its deal--by far the largest such judgment in U.S. history and one whose magnitude instantly overshadowed the legal technicalities of the case.

Texaco contended that its right to appeal was effectively blocked by the $12-billion bond that Texas law required it to post to keep Pennzoil from imposing liens on Texaco assets during an appeal.

Judge Brieant agreed, ruling that a bond of such size “is just so absurd, so impractical and so expensive that it hardly bears discussion.” Were it enforced, he wrote, “Texaco’s right to appeal the judgment . . . would be meaningless.”

The appeals court justices did appear interested Tuesday in how Texaco considered its quandary different from that of any other litigant faced with a devastating judgment--whether a small businessman faced with a $10,000 lien or a criminal defendant unable to post bail.

Question on Appeal

“Why wouldn’t every judgment debtor who couldn’t afford a bond appeal directly to the (federal) district court?” asked Mansfield.

Boies replied that the $12-billion bond was beyond the capacity of not only Texaco but any defendant anywhere.

The jurists were equally probing during Pennzoil’s time at the lectern, picking apart its argument that Brieant had no right to impose his judgment on the state courts. “Unseemly it may be,” said Pierce, “but that doesn’t mean he didn’t have starting jurisdiction.”