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Creque v. Texaco Antilles, Ltd.: Transfer Did Not Trigger Right of First Refusal

A federal appellate court has considered whether an intracorporate transfer of property as part of a corporation’s tax avoidance strategy triggered a neighbor’s right of first refusal to purchase the property.

Margaret Creque (“Neighbor”) purchased a parcel of land in the U.S. Virgin Islands in 1957. In 1963, the Texaco Antilles Ltd. (“TAL”) purchased the lot adjoining the Neighbor’s property. TAL was incorporated in Canada. As part of the transaction, TAL sold the Neighbor the northern portion of its lot and gave the Neighbor a right of first refusal for the southern half of the lot for the same terms and price contained in any future “bona fide offers to purchase”. The Neighbor also had the right to operate a gas station on TAL’s property if there was a change in tenancy.

In 1973, TAL transferred its property to Texaco Caribbean, Inc. (“TCI”), a Delaware corporation. The transfer was motivated by a change in Canadian tax laws. Both TAL and TCI were wholly-owned subsidiaries of Texaco. TAL and TCI treated the exchange of property as a sale on their financial statements.

In 1987, the Neighbor exercised her right to operate a gas station on the TAL/TCI property. A dispute arose in 1995 over the amount of rent increases, and the Neighbor for the first time learned that TAL was no longer the owner of the adjoining lot. The Neighbor then sought to exercise her right of first refusal to purchase the adjoining lot. When her offer was refused, she brought a lawsuit seeking to enforce her right of first refusal. A territorial court ruled in her favor, but that decision was overturned by a Federal District Court. The Neighbor appealed the district court’s decision.

The United States Court of Appeals for the Third Circuit affirmed the district court. The issue before the court was whether an intracorporate transfer constituted a bona fide purchase triggering a right of first refusal. The court found no similar decisions within its circuit, and so the court sought guidance from other jurisdictions who had considered this issue. The court found a number of cases where courts had faced similar issues, and so the court derived a few general principles from those cases. First, the absence of arms-length dealing between the related parties usually denies the party the right to exercise a right of first refusal. Second, a right of first refusal is not triggered when the transfer is between two corporations who are owned and controlled by the same interest.

Applying the above principles to the facts of this case, the court determined that the intracorporate transfer did not trigger a right of first refusal. Both corporations were wholly-owned subsidiaries of Texaco, and so the transaction between TAL and TCI was not an arms-length transaction.

The court also rejected the Neighbor’s argument that the transfer was a sale because the financial records of TAL and TCI presented the transfer as a sale and they had paid the relevant taxes related to the transfer. The court stated that it was required to look behind the accounting formalities to determine the true nature of the transaction. Here, the evidence showed that the transaction was entirely motivated by Texaco’s desire to avoid paying increased Canadian taxes because of TAL’s ownership of the property. There was no indication that the property was offered on the open market, and instead the sale had been arranged entirely by Texaco. Additionally, both TAL and TCI had almost identical boards of directors. Based on all of the above, the court determined that the intracorporate transfer had not triggered the Neighbor’s right of first refusal. Therefore, the district court’s decision was affirmed and the case was sent back to the lower courts for entry of judgment in favor of TAL and TCI.

Creque v. Texaco Antilles Ltd., 409 F.3d 150 (3d Cir. 2005).