Knox Energy, LLC v. Gasco Drilling, Inc. ( 2016 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-2256
KNOX ENERGY, LLC; CONSOL ENERGY, INCORPORATED,
Plaintiffs - Appellees,
v.
GASCO DRILLING, INC., A Virginia Corporation,
Defendant - Appellant.
No. 14-2296
KNOX ENERGY, LLC; CONSOL ENERGY, INCORPORATED,
Plaintiffs - Appellants,
v.
GASCO DRILLING, INC., A Virginia Corporation,
Defendant - Appellee.
Appeals from the United States District Court for the Western
District of Virginia, at Abingdon. James P. Jones, District
Judge. (1:12-cv-00046-JPJ-PMS)
Argued: December 9, 2015 Decided: February 2, 2016
Before MOTZ and FLOYD, Circuit Judges, and John A. GIBNEY, Jr.,
United States District Judge for the Eastern District of
Virginia, sitting by designation.
Affirmed in part, reversed in part, and remanded by unpublished
per curiam opinion.
ARGUED: Daniel G. Bird, KELLOGG, HUBER, HANSEN, TODD, EVANS &
FIGEL, P.L.L.C., Washington, D.C., for Appellant/Cross-Appellee.
Michael John Finney, GENTRY LOCKE, Roanoke, Virginia, for
Appellees/Cross-Appellants. ON BRIEF: J. Scott Sexton, Monica
T. Monday, H. David Gibson, GENTRY LOCKE, Roanoke, Virginia, for
Appellees/Cross-Appellants.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
Knox Energy, LLC and Consol Energy, Inc. (collectively
“Consol”) brought this action seeking a declaratory judgment
that a purported contract it signed with Gasco Drilling, Inc.
(“Gasco”) was not enforceable. The district court granted
judgment as a matter of law in favor of Consol. Gasco appeals
that order and several pre-trial rulings. We reverse the grant
of judgment as a matter of law, but affirm in all other
respects.
I.
A.
In 2008, Consol, a natural gas producer, and Gasco, a
drilling company, entered into a drilling agreement that lasted
for two years, or until Gasco completed its work. Under the
contract, Consol agreed to pay a “standby” rate of $10,800 per
day, per drilling rig, for time when Gasco was on site but not
actively drilling. While drilling, Gasco received an even
higher fee. Additionally, the 2008 agreement contained a
special “take-or-pay” provision, which guaranteed that Gasco
would make two rigs available for Consol whenever it requested
work. Whether or not Gasco was on site, it provided that Consol
would pay the standby rate for 328 days of each twelve-month
period. In May 2010, the parties amended the agreement to
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release one of the rigs from the contract. The remaining rig
completed its work, and the contract terminated, in July 2010.
The essential dispute in this case is whether Gasco and
Consol reinstated that 2008 contract in 2011. On June 6, 2011,
Consol emailed Gasco a document titled “Addendum to Contract
Purchase Order.” Clyde Ratliff, Gasco’s CEO, signed the
Addendum and returned it on June 14, 2011. Consol returned the
countersigned Addendum to Gasco on July 29, 2011. The Addendum
stated that Gasco and Consol “agree to modify the ‘term’
provision of the contract purchase order to read as follows:”
that the new “term of this agreement shall be for one year from
the date set forth above and shall be automatically extended for
one year terms unless either party gives written notice” of
termination at least thirty days before renewal. The Addendum
was “effective” on June 13, 2011. The “contract purchase order”
referenced in the Addendum was the 2008 drilling agreement, “PO
No. 5600000439.”
B.
For a year after signing this Addendum, Consol did not ask
Gasco to drill, and neither party communicated about the
Addendum. Then, in June 2012, Gasco sent Consol a $7,084,800
bill for 328 days of take-or-pay standby charges. Contending
that it had mistakenly signed the Addendum, Consol refused to
pay. Additionally, Consol filed this diversity action for
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declaratory relief. In response, Gasco sent Consol a second
$7,084,800 invoice as liquidated damages for early termination,
and counter-sued for breach of contract.
After discovery, both parties moved for summary judgment.
Consol argued in the alternative that, if the parties had
reinstated the contract, it was in the same form as when it
originally terminated -- with only one rig. The district court
granted Consol partial summary judgment on this basis.
Otherwise, the district court denied both parties’ motions for
summary judgment.
The court also denied two of Gasco’s motions in limine.
First, the court refused to bar Consol from introducing a
privilege log of “the general subject matter or timing of
communications between Gasco and its attorney.” Second, the
court allowed Consol to present parol evidence that it genuinely
made a mistake when it signed the Addendum. The case proceeded
to trial. At the conclusion of Gasco’s evidence, Consol moved
for judgment as a matter of law, which the court granted.
II.
A.
The principal issue before us is whether the district court
erred in granting judgment as a matter of law. We review the
district court’s ruling de novo. Sales v. Grant, 158 F.3d 768,
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775 (4th Cir. 1998). We “must draw all reasonable inferences in
favor of [Gasco],” and “may not make credibility determinations
or weigh the evidence.” Reeves v. Sanderson Plumbing Products,
Inc., 530 U.S. 133, 150 (2000). We must reverse a grant of
judgment as a matter of law if “reasonable minds could differ”
on a verdict in Gasco’s favor. Sales, 158 F.3d at 775.
Under Virginia law, a contract is not valid unless there is
an “agreement or mutual assent” between the parties. Lucy v.
Zehmer, 84 S.E.2d 516, 522 (Va. 1954). Objectively, if a
party’s “words and acts, judged by a reasonable standard,
manifest an intention to agree, it is immaterial what may be the
real but unexpressed state of [the party’s] mind.” Id. In
Lucy, defendants Zehmer contended that a document purporting to
sell their farm to the plaintiff, Lucy, had been a bluff. Id.
at 517-20. The Supreme Court of Virginia enforced the contract
because the parties’ “conduct and words would warrant a
reasonable person in believing that [they] intended a real
agreement.” Id. at 522. Virginia courts continue to look for
outward “manifestation[s] of mutual assent.” Wells v. Weston,
326 S.E.2d 672, 676 (Va. 1985); see also Falls Church v.
Protestant Episcopal Church in the United States, 740 S.E.2d 530(Va. 2013) (evaluating the expressions communicated between the
parties).
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B.
Consol’s basic argument supporting grant of judgment as a
matter of law is that “one cannot snap up an offer that is too
good to be true,” and Gasco could not have reasonably believed
Consol intended to renew the 2008 contract. Consol Br. 41. If
Gasco knew or should have known that Consol made a mistake, we
agree there was no mutual assent. But Gasco presented
sufficient evidence that, if credited, a reasonable jury could
have found in its favor.
Gasco’s case for contract formation included the Addendum
and a copy of the 2008 drilling agreement. Gasco also
introduced emails showing that Consol initiated the transaction,
confirmed that the 2008 drilling agreement (referenced by
number) was the contract referred to in the Addendum, confirmed
Gasco’s contact information, and returned the executed Addendum.
The parties dispute whether those documents and actions carry
any meaning.
First, in Consol’s view, its mistake was obvious. Despite
Gasco’s decades-long relationship with Consol, Gasco’s CEO
Ratliff had never heard of the Consol employees who sent or
signed the Addendum. In her email returning the executed
Addendum, a Consol representative perfunctorily thanked Gasco
“for [its] cooperation with this matter.” And the Addendum, as
sent to Gasco, did not include an effective date. But Ratliff
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maintained he “never thought Consol made a mistake” and “didn’t
know who to call about the drilling.” His secretary, who reads
and sends his emails, informed him that Consol wanted to renew a
contract. Ratliff testified that it was not odd to renew an
expired contract, because “every contract [he had] ever had with
Consol was always open for additional drilling down the road.”
He thought nothing of the unfamiliar names, because Consol had
informed him that it “made a major change” and that “all
contracts [would] be coming out of chain supply management.”
Second, Consol argues that Gasco’s behavior demonstrated
its knowledge of the mistake, and points to the following
evidence. Gasco bid on Consol’s 2011 drilling in December 2010,
and knew Consol rejected that bid and hired a different company.
When Gasco received the Addendum, Ratliff consulted an attorney
before signing it, although his usual practice was to make
contract decisions alone. In September 2011, Ratliff met with
Consol without mentioning the take-or-pay contract he maintains
was in place. Moreover, Ratliff did not tell his employees or
other executives about the contract. Finally, Gasco billed
Consol after a whole year, rather than monthly. Gasco responds
that Ratliff heard that the company that had won Consol’s 2011
bid “was having lots of problems.” Ratliff testified that he
usually waited to tell his drilling team about a contract until
he had a work order to drill. He said he did not follow up with
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Consol about drilling because the people he knew “had moved on.”
Finally, Ratliff contended that he billed at the end of the year
because that was Gasco’s typical practice.
Third, Consol maintains that a take-or-pay contract was
commercially unreasonable in 2011. Consol points to evidence
that Ratliff knew that natural gas prices were at historic highs
in 2008, when the original contract was signed, and had dropped
dramatically by 2011. In fact, Gasco had only ever entered into
two take-or-pay contracts -- both in 2008 -- and almost all of
Gasco’s rigs were idle in 2011. But Ratliff claimed that he had
a different “view of the market.” Ratliff testified that in his
view Consol might have engaged in gas hedging to lock in higher
prices years in advance. Additionally, Consol might have had
lease obligations requiring it to drill despite the lower
prices. Gasco introduced evidence that in its SEC filings,
Consol admitted that it sometimes attempted to mitigate risk “by
entering into ‘take or pay’ contracts,” even though it “may have
to pay for services that [it] did not use.”
Given this mix in the evidence, we cannot conclude that,
without weighing the evidence or making credibility
determinations, no reasonable jury could have rejected Consol’s
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contentions and instead found mutual assent. Consequently, we
reverse the grant of judgment as a matter of law to Consol. ∗
III.
Gasco next appeals two of the district court’s rulings on
partial summary judgment. As with judgment as a matter of law,
we review summary judgment de novo to determine “whether there
exist any genuine issues of material fact.” Atalla v. Abdul-
Baki, 976 F.2d 189, 192 (4th Cir. 1992).
First, Gasco appeals the district court’s ruling that the
2008 agreement, if reinstated, included only one rig. Gasco
claims that “[a] jury could reasonably infer that, when the
parties further amended the term in 2011, they replaced all
prior term amendments.” Gasco Br. 51. But the Addendum states
that, besides modifying the “term” provision, “all other
provisions of the contract purchase order shall remain in full
force and effect.” The rig amendment was one of the provisions
in effect that remained unchanged. Unlike the appellant in
Midlothian Coal Mining Co. v. Finney, 59 Va. 304 (1868), on
which Gasco relies, Gasco had ample opportunity for discovery.
∗ Because we find disputed issues of material fact
sufficient for this case to proceed to a factfinder, we reject
Consol’s contention that it was entitled to judgment on the
pleadings.
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Gasco did not produce sufficient evidence to support its
contrary interpretation.
Second, Gasco appeals the court’s refusal to foreclose
Consol from arguing unilateral mistake plus fraud as an
affirmative defense. Gasco does not dispute the fact that fraud
is an affirmative defense to contract enforceability. See
Spence v. Griffin, 372 S.E.2d 595, 598 (Va. 1998) (defining
fraud). Rather, Gasco argues that “[a]s a matter of law, Gasco
did not commit fraud” because Consol’s own “system’s error” led
it to sign the Addendum. Gasco Reply Br. 42-43. But
considering the above evidence in the light most favorable to
Consol, we cannot conclude that the district court erred in
refusing to grant summary judgment on this claim to Gasco.
IV.
Finally, Gasco challenges the district court’s denial of
two motions in limine. We review the denial of a motion in
limine for abuse of discretion. Projects Mgmt. Co. v. DynCorp
Int’l LLC, 734 F.3d 366, 373 (4th Cir. 2013).
First, Gasco argues that the court should have excluded
parol evidence of Consol’s mistake as “irrelevant, confusing,
and misleading.” But Consol had to present some evidence of a
mistake in order to prove that its mistake was obvious to Gasco.
Furthermore, both parties proposed essentially the same jury
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instructions, that “[i]f a person’s words or actions warrant a
reasonable person in believing that he intended real agreement,
his contrary, but unexpressed, state of mind is immaterial.”
Thus the jury would have been instructed that its decision on
mutual assent must rest on the objective circumstances. The
court did not abuse discretion in allowing this evidence.
Nor did the court abuse discretion in allowing Consol to
introduce Gasco’s privilege log. Gasco challenges the admission
of this log only on the grounds that it was irrelevant and
prejudicial. But as Consol argues, the log rebuts Gasco’s
narrative that there was nothing unusual about the Addendum that
would have alerted it to Consol’s mistake.
V.
For the forgoing reasons, the judgment of the district court is
AFFIRMED IN PART,
REVERSED IN PART,
AND REMANDED.
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