Opinion
NO. 2011-CA-000601-MR NO. 2011-CA-000783-MR
01-25-2013
ATMOS ENERGY CORPORATION; ATMOS ENERGY MARKETING, LLC; and ATMOS GATHERING COMPANY, LLC APPELLANTS v. BILLY JOE HONEYCUTT; TAMMIE HONEYCUTT; JAMES T. BEWLEY; NORMA BEWLEY; JACKIE McCOMBS; PATRICIA McCOMBS; ROYCE HOUCHIN; EDWARD G. PARSLEY; ORAOLA PARSLEY; DEBORA PARSLEY; DELORES JONES and RICHARD D. JONES, SR., as Executors of the ESTATE OF MOLLIE KERSEY, deceased; PARK CITY GAS, LLC; RHONDA W. EHRICH and JIM BROWN, Co-Executors of the ESTATE OF ROBERT E. THORPE, JR.; STRIDER LLC, DT AND ASSOCIATES, INC. (a/k/a TD AND ASSOCIATES, INC.); ELI SAKHAI; AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.; SMITH ENERGY #1, LLC; RP ENERGY #1, LLC; and EC VENTURES, LLC APPELLEES BILLY JOE HONEYCUTT; TAMMIE HONEYCUTT; JAMES T. BEWLEY; NORMA BEWLEY; JACKIE McCOMBS; PATRICIA McCOMBS; ROYCE HOUCHIN; EDWARD G. PARSLEY; ORAOLA PARSLEY; DEBORA PARSLEY; DELORES JONES and RICHARD D. JONES, SR., as Executors of the ESTATE OF MOLLIE KERSEY, deceased CROSS-APPELLANTS v. ATMOS ENERGY CORPORATION; ATMOS ENERGY MARKETING, LLC; and ATMOS GATHERING COMPANY, LLC CROSS-APPELLEES
BRIEF FOR APPELLANTS/CROSS- APPELLEES: Charles E. English Charles E. English, Jr. E. Kenly Ames Bowling Green, Kentucky ORAL ARGUMENT FOR APPELLANTS/CROSS- APPELLEES: Charles E. English Bowling Green, Kentucky BRIEF AND ORAL ARGUMENT FOR LANDOWNER APPELLEES: A.V. Conway, II Hartford, Kentucky BRIEF AND ORAL ARGUMENT FOR THORPE PARTY APPELLEES: Chadwick N. Gardner Louisville, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM EDMONSON CIRCUIT COURT
HONORABLE RONNIE C. DORTCH, JUDGE
ACTION NOS. 09-CI-00198 and 10-CI-00040
CROSS-APPEAL FROM EDMONSTON CIRCUIT COURT
HONORABLE RONNIE C. DORTCH, JUDGE
ACTION NOS. 09-CI-00198 and 10-CI-00040
OPINION
REVERSING AS TO APPEAL NO. 2011-CA-000601-MR;
DISMISSING IN PART, VACATING, AND REMANDING AS TO APPEAL
NO. 2011-CA-000783-MR
BEFORE: ACREE, CHIEF JUDGE; DIXON AND MOORE, JUDGES. MOORE, JUDGE: These two consolidated appeals from Edmonson Circuit Court involve a plaintiff's judgment awarding damages for fraud, conversion, negligence, interference with contract, and "excessive post-production fees" relating to several oil and gas leases and the production and sale of natural gas from several properties in Edmonson County (e.g., the "Park City project"). The appellants and cross-appellees are Atmos Energy Corporation; Atmos Energy Marketing, LLC, and Atmos Gathering Company, LLC. The first of two groups of appellees, who we will refer to as the "Landowners," are the owners of royalty interests (or their representatives) described in the several oil and gas leases at issue in this matter;they are also cross-appellants, and, except as otherwise noted in this opinion, their claims in this matter were identical. The second group of appellees, who we will refer to collectively as the "Thorpe Parties," consists of the lessees and assignees of those oil and gas leases.
The "Landowners" are Billy Joe Honeycutt; Tammie Honeycutt; James T. Bewley; Norma Bewley; Jackie McCombs; Patricia McCombs; Royce Houchin; Edward G. Parsley; Oraola Parsley; Debora Parsley; Delores Jones and Richard D. Jones, Sr., as executors of the Estate of Mollie Kersey, deceased.
The "Thorpe Parties" consist of appellees Rhonda W. Ehrich and Jim Brown, co-executors of the Estate of Robert E. Thorpe, Jr.; Park City Gas, LLC, and several parties who style themselves as Park City Gas's "investors" whose claims, as they describe it, derive solely from Park City Gas's rights in this matter. Those investors consist of appellees Strider LLC, DT and Associates, Inc. (a/k/a TD and Associates, Inc.); Eli Sakhai; Australian-Canadian Oil Royalties LTD.; Smith Energy #1, LLC; RP Energy #1, LLC; and EC Ventures, LLC. Although originally named an appellee in this matter, Robert Thorpe, Jr., passed away during the pendency of this appeal and, as noted, his estate was substituted in his stead.
By way of background, between 2001 and 2003, Robert Thorpe entered into natural gas leases with several landowners in Edmonson County, Kentucky. When Thorpe entered into the leases, he was doing business as a sole proprietor under the names Resource and Energy Technologies Company and Resource and Energy Technology Companies ("RETCO"). In 2002, John Charles became Thorpe's business partner. Thorpe and Charles drilled natural gas wells on the leased properties. In November 2003, Thorpe and Charles formed Park City Gas, LLC ("Park City") and were Park City's only two members. Thorpe then assigned the leases to Park City.
Thorpe and Charles also formed Resource Energy Technology, LLC ("RET"), in November 2003. Thorpe and Charles were the only two members of RET. In December 2006, Park City and RET entered into a contract whereby RET would be the operator of the natural gas wells on the leased property. In November 2006, RET, through Thorpe and Charles, entered into a contract with appellant Atmos Gathering under which Atmos Gathering agreed to build a gas gathering system, to provide gas compression services, to deliver the gas from the wellheads to a treatment facility, and to deliver the gas from the treatment facility to the interstate transmission pipeline ("Gas Gathering Contract"). RET, through Thorpe and Charles, also entered into a contract with appellant Atmos Marketing, whereby Atmos Marketing would purchase the gas at the delivery point on the interstate transmission pipeline ("Gas Marketing Contract").
Although Charles and RET are extensively involved in this matter, neither were parties.
RET entered into a separate contract with non-party HNNG Development, LLC, to design and build the treatment facility. Because HNNG was not able to complete the treatment facility, Atmos Gathering and RET executed two written amendments to their contract under which Atmos Gathering would complete the treatment facility. The parties' amended agreement provided for Atmos Gathering to recoup its investment in the project from the proceeds of the sale of the gas. Pursuant to the contract, Atmos Marketing would act as the disbursing agent for the sale proceeds, taking specified deductions from the sale proceeds for the various services provided by Atmos Gathering and for recovery of Atmos Gathering's investment. Atmos Marketing was to pay any remaining sale proceeds to RET. A subsequent amendment provided that Atmos Gathering was to purchase the gas from RET at the wellhead. According to Doug Schroeder, who testified on behalf of Atmos Gathering, Atmos Gathering regarded much of its investment as a loan to RET, and also regarded its top priority in the disbursement of proceeds from the sale of gas as a structured repayment of that loan.
At all times, the agreement between RET and Atmos Gathering prioritized the distribution of proceeds realized from the sale of gas. After RET and Atmos Gathering executed the second amendment to their agreement on April 1, 2007, the section of their agreement relating to the priority of those distributions provided in relevant part:
Section 10.6 AEM [Atmos Energy Marketing] as Disbursing Agent and Netting. The parties acknowledge and agree that they have designated AEM as their respective disbursing agent for purposes of making specific disbursements as set forth herein. Monthly, AEM shall prioritize and make disbursements, from the amount then due Producer from AEM for Gas purchased under the Gas Purchase Agreement, in the following manner: 1) to Gatherer, for the amounts Producer owes Gatherer as set forth in this Agreement, including, but not limited to, the Gathering Fees as set forth in Section 5 of this Agreement, the ECL Installments as set forth in Section 4.3 of this Agreement and any other amounts due Gatherer by Producer under this Agreement, then; 2) to HNNG, the amount due from Producer to HNNG for that same time period, under the Agreement between Producer and HNNG, then; 3) to Producer for actual compression and Gas Plant operating costs incurred by Producer, which include rental, utilities, maintenance and labor, provided however, labor and maintenance costs shall refer to costs related to extraordinary events such as equipment failures and scheduled maintenance items which require more than eight hours labor and shall not include routine maintenance performed by Producer's full-time contract pumpers, then; 4) to Producer for an amount of $2000 per month for pumper services related to the Gas Plant and Gatherer's compression, then: 5) to Gatherer, for the escrow amount as set forth in paragraph 10.2 above. If after disbursing funds to Gatherer, HNNG and Producer as set forth herein, any funds remain, they shall be paid by AEM to Producer. It shall be the obligation of Producer to cause proper settlement and accounting to be made and to make distribution of proceeds to all owners of interest in the proceeds from the sale of Producer's gas delivered to AEM under the Gas Purchase Agreement. Producer shall indemnify and hold Gatherer, its Affiliates, and their respective employees, officers, directors, agents and representatives harmless from any and all charges, penalties, costs and expenses of whatever kind or nature arising from Producer's failure to pay such payments, including costs and expenses of any litigation and reasonable attorneys' fees associated therewith.
Commercial gas production began on the leased property in May 2008. In April 2009, the Landowners sued RET, Atmos Gathering, Atmos Energy, and Atmos Marketing in Edmonson Circuit Court seeking to recover unpaid gas royalties (e.g., "Honeycutt I.") The complaint in Honeycutt I asserted claims for breach of the lease agreements against RET, for a declaratory judgment as to the royalties due to the Landowners, and for an accounting from RET and the Atmos entities (collectively "Atmos"). Atmos asserted a cross-claim against RET for indemnification pursuant to its contract with RET and common law. RET asserted a counterclaim against the Landowners for interfering with the operation of its gas wells.
In July 2009, RET filed a voluntary petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Western District of Kentucky. Honeycutt I was then removed to the Bankruptcy Court where it became an adversary proceeding. In November 2009, the plaintiff Landowners in Honeycutt I and RET agreed to dismiss all claims without prejudice. The plaintiff Landowners also moved to dismiss their claim against Atmos for an accounting. Because Atmos's cross-claim against RET was the only remaining claim in Honeycutt I, Atmos moved to dismiss that claim. The claim was dismissed without prejudice.
In September 2009, while RET was in bankruptcy proceedings, the Landowners filed the instant matter in Edmonson Circuit Court against Thorpe d/b/a RETCO and the Atmos entities (e.g., "Honeycutt II").The complaint in Honeycutt II asserted various tort claims against Thorpe and Atmos, including fraud, conversion, trespass, and negligence. Park City, who was later added as a defendant in Honeycutt II, asserted cross-claims against Atmos for apportionment, negligence, intentional interference with contractual relationships, and fraud. Atmos then asserted cross-claims against Thorpe and Park City for common law indemnity, contribution, and apportionment.
Additionally, Atmos filed a proof of claim in RET's bankruptcy proceeding for indemnity, contribution, apportionment, and breach of contract. Atmos's motion for relief from the automatic stay was denied by the Bankruptcy Court. After Atmos appealed the denial to the United States District Court, but before the appeal was decided, RET moved to voluntarily dismiss its bankruptcy proceeding because it was unable to propose a confirmable reorganization plan. RET's bankruptcy proceeding was thereafter closed on September 29, 2010.
The trial in Honeycutt II began on November 12, 2010. After a fourteen-day trial, the jury found the following: (1) RET was the implied agent of Atmos for purposes of paying royalties to the Landowners; (2) Atmos was liable for failing to pay royalties to the Landowners; (3) Atmos converted gas from the Landowners; (4) Atmos negligently failed to exercise reasonable care in its business transactions and failed to enforce its code of conduct; (5) Atmos intentionally interfered with the contractual relationship between the Landowners and Thorpe/Park City by preventing Thorpe/Park City from paying the Landowners' royalties, which led to the Landowners filing a successful action to forfeit the leases; (6) Atmos charged excessive post-production expenses back against the Landowners' royalties; (7) Atmos defrauded Thorpe/Park City and the Landowners; and (8) Atmos Gathering trespassed on property owned by one of the Landowners (i.e., the Estate of Mollie Kersey). Finally, the jury apportioned 100% of the fault to Atmos and 0% to Thorpe d/b/a RETCO and Park City. After post-judgment motions, the circuit court entered judgment for the Landowners, Thorpe and Park City in the amount of $28,454,210; the jury found that approximately $450,000 of this amount represented the Landowners' loss of gas revenues, $3,374,160 of this amount represented the Thorpe Parties' "lost future gas revenues," and the remainder represented punitive damages (of which the Thorpe Parties received $20,244,960).
As noted, the jury instructions in this matter provide that the Landowners' respective trespass claims were solely against Atmos Gathering.
Atmos now appeals each of the findings of the jury, with the exception of its findings relative to trespass. In sum, Atmos argues that it was entitled to a directed verdict because each of the claims asserted against it failed as a matter of law; that various errors relating to the selection of jurors and admission of evidence warrant a new trial; and, alternatively, that it is entitled to a reduction in the amount of punitive damages awarded to the Landowners and the Thorpe Parties. The Landowners have cross-appealed, arguing that they were entitled to a greater amount of punitive damages.
Additional facts and procedural history will be discussed as it becomes relevant in our analysis.
STANDARD OF REVIEW
Because we have resolved that each of the claims asserted by the Thorpe Parties and the Landowners against Atmos should have been dismissed as a matter of law, the dispositive standard of review is the standard for reviewing a decision to either grant or deny a motion for directed verdict. As quoted in Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 215-16 (Ky. App. 2009):
When a directed verdict is appealed, the standard of review on appeal consists of two prongs. The prongs are: "a trial judge cannot enter a directed verdict unless there is a complete absence of proof on a material issue or if no disputed issues of fact exist upon which reasonable minds could differ." Bierman v. Klapheke, 967 S.W.2d 16, 18-19 (Ky. 1998). "A motion for directed verdict admits the truth of all evidence which is favorable to the party against whom the motion is made." National Collegiate Athletic Ass'n By and Through Bellarmine College v. Hornung, 754 S.W.2d 855, 860 (Ky. 1988), citing Kentucky & Indiana Terminal R. Co. v. Cantrell, 298 Ky. 743, 184 S.W.2d 111 (1944).
Clearly, if there is conflicting evidence, it is the responsibility of the jury, the trier of fact, to resolve such conflicts. Therefore, when a directed verdict motion is made, the court may not consider the credibility or weight of the proffered evidence because this function is reserved for the trier of fact. National, 754 S.W.2d at
860 (citing Cochran v. Downing, 247 S.W.2d 228 (Ky.1952)).
In order to review the trial court's actions in the case at hand, we must first see whether the trial court favored the party against whom the motion is made, including all inferences reasonably drawn from the evidence. Second, "the trial court must determine whether the evidence favorable to the party against whom the motion is made is of such substance that a verdict rendered thereon would be 'palpably or flagrantly' against the evidence so as 'to indicate that it was reached as a result of passion or prejudice.'" If the answer to this inquiry is affirmative, we must affirm the trial court granting the motion for a directed verdict. Id. Moreover, "[i]t is well argued and documented that a motion for a directed verdict raises only questions of law as to whether there is any evidence to support a verdict." Harris v. Cozatt, Inc., 427 S.W.2d 574, 575 (Ky.1968). Further, "a reviewing court cannot substitute its judgment for that of the trial judge unless the trial judge is clearly erroneous." Bierman, 967 S.W.2d at 18.
Importantly, evidence that is speculative, conjectural, or both is not sufficient to defeat a motion for directed verdict. Id. at 216.
ANALYSIS
1. Thorpe Parties v. Atmos: Fraudulent Misrepresentation
In Kentucky, to make a claim for fraudulent misrepresentation a party must establish by clear and convincing evidence "the 'who, what, when, where, and how' of the alleged fraud." Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 877 (6th Cir. 2006). Stated differently, the elements of this claim are: a) a material representation, b) which is false, c) known to be false or made recklessly, d) was made with inducement to be acted upon, e) was acted in reliance thereon, and f) caused injury. Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544, 549 (Ky. 2009) (citing United Parcel Serv. Co. v. Rickert, 996 S.W.2d 464 (Ky. 1999)). Reliance on the representation must be reasonable, and the representation must relate to a past or present material fact. Flegles, 289 S.W.3d at 549 (citations omitted). "'A mere statement of opinion or predication may not be the basis of an action.'" Id. (quoting McHargue v. Fayette Coal & Feed Co., 283 S.W.2d 170 (Ky. 1955)).
Essentially, the Thorpe Parties argue that Atmos acted fraudulently by purchasing gas from RET and then keeping a substantial portion of the gas sales proceeds for itself, which, in turn, prevented the Thorpe Parties from paying royalties to the Landowners. For support, their argument focuses in large part upon the Atmos-RET agreement, described above. The Thorpe Parties argue that 1) RET entered into its contract with Atmos based upon a prior understanding that it had with Brent McDaniel, a former Atmos executive, to the effect that Atmos would charge far less than what the Atmos-RET contract ultimately allowed Atmos to charge for post-production expenses; 2) prior to executing their contract, RET and Atmos had not discussed allowing Atmos to recoup certain capital expenses from gas sale proceeds, and there had been no indication that Atmos would complete the HNNG treatment facility as part of its capital expenses; 3) after RET executed its contract with Atmos and the subsequent amendments to that contract, RET believed that the contract it had executed was unfair, coercive, and bore little resemblance to what it had previously discussed with McDaniel; and 4) RET believed that it had not been fully informed of Atmos's motives behind its decision to enter their contract.
Among the several bases offered by Atmos for reversing the jury's finding of fraud in favor of the Thorpe Parties, Atmos argues that if the Thorpe Parties' fraud claim is properly characterized as "fraudulent inducement to enter a contract," the Thorpe Parties themselves had no contract with it and therefore had no standing to assert such a claim. We agree.
Throughout this matter, Thorpe and Charles played varying roles within the Thorpe Parties outside of being agents and members of RET. If Thorpe and Charles relied upon any misrepresentation from Atmos, they did so while acting in their roles as RET's agents. As a consequence, it would have been RET relying upon those alleged misrepresentations as an inducement to contract with Atmos. The Thorpe Parties overlook that the agreement in question was between RET and Atmos; the only individual that Atmos induced to enter into that agreement was RET; and, RET was never a party to these proceedings, never authorized any of the Thorpe Parties to represent its interests in these proceedings, and never assigned the Thorpe Parties any of its rights under its agreement with Atmos. RET has never asserted any claim against Atmos, let alone any claims of fraud or breach of contract or rescission.
Even if Thorpe Parties could have asserted standing to sue Atmos for breach of contract or rescission, they did not do so.
Even assuming that the Thorpe Parties could assert standing to sue for fraudulent inducement on behalf of RET, however, their claim of fraud nevertheless fails. The Thorpe Parties do not cite any instance where Atmos acted in excess of the rights that Thorpe, Charles, and RET purported to give it under the various contracts they executed. The Thorpe Parties also cite nothing demonstrating that when Thorpe and Charles executed the Atmos-RET agreement and its various amendments on behalf of RET, they executed that agreement and those amendments with anything less than a full understanding of their terms; indeed, when parties execute a written contract—especially experienced businessmen such as Thorpe and licensed attorneys such as Charles—the law presumes that they did so with full understanding of the terms. Blackstone Mining Co. v. Travelers Ins. Co., 351 S.W.3d 193, 200 (Ky. 2010). Those agreements contained merger clauses that affirmatively disclaimed any prior understanding between the parties relating to their agreement. Notably, each of Atmos's alleged misrepresentations, as appearing above and recited by the Thorpe Parties, predated RET-Atmos agreement, and, at best, constituted a series of predictions about the shape of a future agreement. It was unreasonable as a matter of law for RET, let alone any of the Thorpe Parties attempting to assert rights through RET, to rely upon McDaniel's promises for the purpose of a fraudulent inducement claim. See Rivermont Inn, Inc. v. Bass Hotels & Resorts, Inc., 113 S.W.3d 636, 640 (Ky. App. 2003) ("a party may not rely on oral representations that conflict with written disclaimers to the contrary[.]"); see also Restatement (Second) of Contracts § 210(1) (1981) ("A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement").
Charles testified that he is licensed to practice law in Oregon.
Furthermore, Charles testified that the negotiations regarding the RET-Atmos contract were conducted between April and November of 2006, that McDaniel played no part in those negotiations, and that no material terms of the RET-Atmos agreement had been "ironed out" with McDaniel prior to that time. And, Charles not only testified that he understood the agreement prior to when RET executed it in November 2006, he also testified that he believed, prior to when RET executed that agreement, that the agreement was "unfair." Nevertheless, he testified that RET executed the agreement because, as he saw it, it was the best deal that RET could strike with Atmos. Charles further acknowledged that when Thorpe executed the agreement on behalf of RET, it was reasonable for Atmos to assume that RET believed that the agreement was fair.
In rebuttal, the Thorpe Parties make the following argument:
Atmos filed a motion for summary judgment with a forty (40) page supporting memorandum, but never sought a legal declaration that the contracts defeat the claims in this case. It argued the evidence failed to meet the elements of the causes of action. Atmos admitted RET had no choice in entering into these contracts. John Charles stated there was no negotiation or choice. Atmos simply handed him these contracts and told him to sign them. Perhaps Atmos pre-empted enforcement of its contract with good reason, for if the trial court held it unenforceable for fraud or unconscionability, Atmos would have little defense. Instead, Atmos litigated these claims using the alleged "agreements" as a defense, but the jury was not persuaded.
This argument basically contains three contentions: 1) even if the RET-Atmos contract did purport to give Atmos the right to take each of the actions that the Thorpe Parties alleged were fraudulent, Atmos cannot rely on the RET-Atmos contract as a defense to fraud because Atmos did not ask a court to declare that the RET-Atmos contract was "preemptive," and, thus, Atmos acted fraudulently when it acted pursuant to the terms of the contract; 2) some evidence demonstrates that the RET-Atmos contract might have contained unconscionable terms or could have been the product of economic duress; and 3) the jury was entitled to disregard the RET-Atmos contracts and hold Atmos liable for fraud in any event. Altogether, these contentions have no merit.
As to their first contention, the species of fraud alleged here required, as one of its essential elements, proof that the party accused of it—Atmos—made a knowingly false statement to the Thorpe Parties, or made a statement with reckless disregard of whether it was false. Flegles, 289 S.W.3d at 549. Here, in order to defeat that element, Atmos offered its agreements with RET as evidence of what it believed it was legally entitled to do, how it arrived at that belief, and to support that when it took each of the actions that the Thorpe Parties later asserted to be fraudulent (i.e., deducting its fees from the gas sale proceeds and prioritizing which party was paid from those proceeds first), it merely acted with the intent to enforce what it justifiably and honestly believed were its contractual rights. In short, the issue was never whether a court ultimately would enforce the Atmos-RET contract. Rather, the issue was, and remains: What did RET, through Thorpe and Charles, represent to Atmos? To resolve this issue, all that was necessary was for Atmos to prove the existence of the Atmos-RET contract, and to demonstrate that it complied with the terms of that contract—which is exactly what Atmos did at trial.
RET represented in its agreement with Atmos that it held the title to the gas that it sold to Atmos, along with the authority to sell it to Atmos according to the terms of the RET-Atmos agreement. Atmos had no reason to doubt RET's representations because the individuals who signed the RET-Atmos agreement and its various amendments on RET's behalf were Thorpe and Charles, and Thorpe and Charles were not only RET's agents, but also the only members of Park City, LLC, the assignee of each of the gas leases at issue in this matter. Moreover, the Thorpe Parties failed to introduce evidence of any action taken by Atmos that exceeded the scope of Atmos's rights as described under the RET-Atmos contract. As such, Atmos's contracts did defeat the Thorpe Parties' claim of fraud because they defeated an essential element of that tort—they were the only evidence of Atmos's intent in this matter, and they demonstrated that Atmos had no fraudulent motive.
As to the Thorpe Parties' second contention, even if some evidence did reflect that the RET-Atmos agreement was the product of economic duress or contained unconscionable terms, it does not follow that any action Atmos took pursuant to the terms of that contract constituted fraud. Economic duress and unconscionability are merely bases for declaring a contract voidable—that is, legally enforceable unless it is voided at the other party's option—rather than void ab initio. See 8 Williston on Contracts § 18:1 (4th ed.) Nothing in this record demonstrates that anyone ever attempted to avoid the RET-Atmos agreement. Thus, it necessarily follows that the parties to a potentially voidable contract remain justified in relying upon it to define their rights.
As to their third contention, the RET-Atmos agreements were, as previously noted, relevant evidence of Atmos's intent throughout this matter. The Thorpe Parties have failed to put forth any evidence, aside from their own speculation and conjecture, indicating that Atmos acted with any intent inconsistent with its intent to enforce the contractual rights that Thorpe and Charles purported to give it. No jury is authorized to base its findings upon speculation, conjecture, and legal misinterpretation, which, from our review, is the extent of what the Thorpe Parties offered to rebut Atmos's evidence. See, e.g., O'Bryan v. Cave, 202 S.W.3d 585, 588 (Ky. 2006) ("[S]peculation and supposition are insufficient to justify a submission of a case to the jury, and . . . the question should be taken from the jury when the evidence is so unsatisfactory as to resort to surmise and speculation." (Citation omitted)). Therefore, we reverse the jury's finding of fraud in this regard.
2. Landowners v. Atmos: Fraudulent Misrepresentation
In their brief, the Landowners describe their claim of fraudulent misrepresentation against Atmos as follows:
The facts substantiate Atmos's total control of RET and of the Park City project. Although Atmos paid for the construction of a gathering system, took over and purchased the NRU plant, entered into multiple contracts with RET as well as there being multiple contracts between the various Atmos entities (all relating to the Landowners' properties), yet not one single landowner knew or was aware of Atmos's total control of the project.
It is essentially uncontradicted that RET was held out by Atmos as the operator and producer of the project and it was not until the landowners received the first accounting for gas production in July 2008 that they knew of the real misrepresentation, i.e., it was Atmos who was in control and had taken the steps necessary to deprive the Landowners of their property and as planned, to assume ownership by control over the wells. Clearly, the representation that this was RET's project and they were in control of production was false. Obviously, Atmos well knew that it was false. It is also clear from the evidence that these landowners reasonably relied upon the misrepresentation with regard to control to their detriment and damage. No one ever informed the Landowners of Atmos's alleged costs, nor of their intent
to charge their capital expenditures and preproduction expenses back against the their [sic] royalty.
At best, the Landowners have asserted that an agency relationship was created between Atmos and RET, whereby Atmos became RET's undisclosed principal. Absent from this description, however, is any explanation of how that alleged relationship supplies a basis for the Landowners' claim of fraud against Atmos. Even if an agency relationship had been formed between Atmos and RET, the Landowners cite no authority—and we have found none—supporting that Atmos or RET had any affirmative obligation to inform the Landowners about their relationship or what it entailed. The Landowners also fail to indicate what, if anything, this alleged relationship induced them to do; it could not have induced them to enter into the oil and gas leases at issue in this matter because they had already entered into those leases long before Atmos became involved; it also did not induce the Landowners to forgo filing suit against both RET and Atmos to recover what they believed they were owed under those leases.
Pared down, the Landowners merely argue that they did not receive the royalty specified in their oil and gas leases as a consequence of whatever relationship Atmos and RET entered into. However, even if Atmos or RET were obligated to pay the Landowners their royalties pursuant to those leases, where a person promises to perform an act in the future—such as paying royalties—and fails so to do, that failure is a breach of contract, not a fraudulent or deceitful act. Brooks v. Williams, 268 S.W.2d 650, 652 (Ky. 1954). In light of the above, the jury's finding of fraud in this regard is also reversed.
3. The Landowners and the Thorpe Parties v. Atmos: Negligence
Generally speaking, "To recover under a claim of negligence in Kentucky, a plaintiff must establish that (1) the defendant owed a duty of care to the plaintiff, (2) the defendant breached its duty, and (3) the breach proximately caused the plaintiff's damages." Lee v. Farmer's Rural Elec. Co-op. Corp., 245 S.W.3d 209, 211-12 (Ky. App. 2007).
We will address both the Landowners' and Thorpe Parties' arguments in support of the jury's findings of negligence against Atmos because their arguments are roughly identical. In their brief, the Landowners describe their negligence claim as follows:
In this instance, the landowners sustained damages to their property rights when they were not paid the required 1/8th royalty. The jury found that Atmos failed to exercise reasonable care to prevent damage to these property rights, and in doing so caused the landowners damage. The Code of Conduct at issue contains a requirement for fair dealing as between officers and other persons. Every officer associated with the Park City Project was required to execute and acknowledge receipt of the Code of Conduct its [sic] application to their business conduct. Each officer acknowledged the requirement for fair dealing to "others" and that they promptly report violations of the Code to their
supervisors. None of the officers involved in the Park City Project ever reported any violation of the fair dealing requirement.
Similarly, the Thorpe Parties argue:
Atmos's Code of Conduct partially defined what Atmos regarded as reasonable and expected by articulating a deep commitment to fairness, mutual respect and participation, any violation of which was subject to discipline, including termination. Established as a "framework" against which to make decisions, the jury was entitled to find Atmos negligent based upon it. The landowners suffered damage to their property rights in the form of unpaid royalties, and so did the Thorpe parties when the trial court forfeited the leases for nonpayment of royalties. To the extent Atmos bears responsibility for their non-payment, it was negligent.
As an aside, nothing in the record supports that the relationship between Atmos, the Thorpe Parties and the Landowners was anything beyond contractual. And,
where the only relation between the parties is contractual, the liability of one to the other in an action of tort for negligence must be based upon some positive duty which the law imposes because of the relationship, or because of the negligent manner in which some act which the contract provides for is done, and that the mere violation of a contract, where there is no general duty, is not the basis of such an action.Dice's Adm'r v. Zweigart's Adm'r, 161 Ky. 646, 171 S.W. 195, 197 (1914) (citation omitted).
Here, both the Thorpe Parties and the Landowners have based their negligence claims against Atmos upon two assumptions: 1) "paying money that is owed," such as a royalty, qualifies as an act which, if performed in an unreasonable manner, could serve as the basis of a negligence action; and 2) a company's breach of its own rules of conduct is evidence that the company acted negligently.
As to their first assumption, it has long been held in Kentucky that "failing to pay money that is owed" is not negligence.
The action of tort has for its foundation the negligence of the defendant, and this means more than a mere breach of a promise. Otherwise, the failure to meet a note, or any other promise to pay money, would sustain an action in tort for negligence, and thus the promisor be made liable for all the consequential damages arising from such failure.Id. (quoting Tuttle v. George H. Gilbert Mfg. Co., 13 N.E. 465, 467 (Mass. 1887)). Thus, to the extent that the Landowners premised their negligence claim against Atmos upon Atmos's alleged failure to pay royalties, and to the extent that the Thorpe Parties premised their negligence claim against Atmos upon the consequence of Atmos's alleged failure to pay royalties—namely, the forfeiture of their oil and gas leases—their negligence claims fail as a matter of law.
Furthermore, their second assumption is a gross oversimplification of the law. The Landowners and the Thorpe Parties provide no authority—and we have found none—establishing that a company's code of conduct, as opposed to a statute, ordinance, or regulation, creates a positive legal duty independent of any contract that is cognizable in negligence. Indeed, the cases collectively cited by the appellees in support of their negligence claim simply restate the general rule that a company's code of conduct is relevant evidence of the degree of care that a reasonable person should exercise while performing a duty that has already been recognized at common law or by statute or regulation. These cases include the following:
• Rogers v. Kasden, 612 S.W.2d 133 (Ky. 1981), which recognized the common law duty of hospitals and their employees "to exercise toward [their patients] that degree of care and skill ordinarily expected of reasonable and prudent hospitals under similar circumstances." Id. at 136. It held that testimony and other records indicating that certain hospital procedures had not been followed during the course of the hospital's care of its patient constituted substantial evidence that this common law duty had been breached. Id. at 134.Id. at 247 (emphasis added).
• Williams v. St. Clair Medical Ctr., 657 S.W.2d 590 (Ky. App. 1983), which is another medical malpractice case standing for the same propositions discussed above in Kasden. Indeed, it relies upon Kasden for support. Id. at 594.
• Ray v. Hardees Food Systems, Inc., 785 S.W.2d 519 (Ky. App. 1990), which recognized "the well-known common law rule that an employer owes his employee a reasonably safe place to work," id. at 520, concerned "Hardee's failure to provide a safe place to work by not enforcing its own rules promulgated for employee safety." Id. In support of its conclusion that
"violation of safety rules may properly be considered in a negligence action by an employee against his employer," the Hardees Court cited Chesapeake & O. Ry. Co. v. Wiley, 134 Ky. 461, 121 S.W. 402 (1909), which, in turn, held that an employer's policies are relevant evidence because they tend to show an evidentiary "admission" by the employer of what is necessary to provide a safe place to work. Wiley, 121 S.W. at 403.
• Wells v. Bottling Group, LLC, 833 F.Supp.2d 665 (E.D.Ky. 2011), which also involved an alleged violation of "the common law rule that an employer owes his employee a reasonably safe place to work," id. at 671, also recognized that "the failure of a company to enforce its own rules for employee safety is evidence of negligence under Kentucky law." Id. (citing Hardees, 785 S.W.2d at 520; emphasis added.)
• Finally, the appellees cite Calhoun v. CSX Transp., Inc., 331 S.W.2d 236 (Ky. 2011), which actually defeats the notion that a company's operating rules could create a legal duty cognizable in negligence:
Appellants claim that, "as a matter of first impression," Kentucky law should require CSX's engineer, Paul McClintock, to an act in a prudent manner. Appellants assert that McClintock's failure to sound the horn, warning Mary Calhoun of the train's approach, violated CSX's operating rules, and his "common law duty to act as a reasonably prudent engineer." However, the issue of whether McClintock violated CSX's rules brings us full circle to the issue of an assumed duty, which we have already addressed. Moreover, Appellants fail to direct us
to a Kentucky case wherein we have recognized such a duty in this context.
With that said, the relevant provision of the Atmos code of conduct, as cited by the appellees in their respective arguments, provides as follows:
Fair Dealing
Each director, officer and employee shall attempt to deal fairly and in good faith with each of the Company's [Atmos's] customers, shareholders, employees, regulators, suppliers, competitors and others. No director, officer or employee shall in any way attempt to take or take [sic] unfair advantage of any person through concealment, manipulation, misrepresentation, fraud, misuse of confidential information or any other unfair dealing practice or act.
At best, the Atmos code of conduct recognizes that good faith and fair dealing are essential components of Atmos's business relationships. To be sure, Kentucky recognizes that every contract contains an implied covenant of good faith and fair dealing. Ranier v. Mount Sterling Nat'l Bank, 812 S.W.2d 154, 156 (Ky. 1991) (citations omitted). However, Kentucky has only ever recognized a breach of the implied covenant of good faith and fair dealing as tortious (e.g., as a violation of a general duty owed independently of a contract) where the situation has involved parties in a special relationship not found in ordinary commercial settings, such as between an insurer and an insured, where distinct elements are present such as unequal bargaining power, vulnerability and trust among the parties. See Hulda Schoening Family Trust v. Powertel/Kentucky, Inc., 275 F.Supp.2d 793, 797-8 (W.D. Ky. 2004) (citing Ennes v. H & R Block E. Tax Serv., Inc., Civ. A. No. 3:01CV-447-H, Not Reported in F.Supp.2d , 2002 WL 226345, at *2-*3 (W.D. Ky. Jan. 11, 2002)). Here, even if Atmos had breached an implied covenant of good faith in one or more of its contracts, no such special relationship between Atmos and any of the appellees is present under the circumstances of this case, nor is one even alleged to have existed. Therefore, Atmos's code of conduct does not implicate any duty it owed to the appellees arising independently of any contract, and, thus, its alleged violation of its own code of conduct cannot serve as the basis of any tort claim, let alone one for negligence. For these reasons, the jury's findings of negligence in favor of the Thorpe Parties and the Landowners are reversed.
4. The Landowners v. Atmos: Conversion
In Kentucky, "The elements of a conversion claim are (1) ownership rights in a certain property, (2) the wrongful act of taking or disposing of property, and (3) causing damages." Davis v. Siemens Medical Solutions USA, Inc., 399 F.Supp.2d 785, 801 (W.D. Ky. 2005) (citing Anderson v. Pine South Capital, LLC, 177 F.Supp.2d 591, 603 (W.D. Ky. 2001); Goss v. Bisset, 411 S.W.2d 50, 53 (Ky.1967)). In their brief, the Landowners describe their claim of conversion against Atmos as follows:
[T]he Landowners did not transfer and sell their gas in fee simple. Rather, they executed a lease in which Thorpe/RETCO, after drilling the wells, was permitted to
market the gas, provided the required 1/8th royalty was in fact paid. No royalties were paid in May or June, 2008, although there was very significant production. The gas clearly did not belong to Atmos and the only conceivable way that anyone was allowed to produce that gas was for the Landowners [sic] royalties to be paid.
In making this argument, however, the Landowners acknowledge that the gas that was extracted from their properties was extracted pursuant to the terms of valid oil and gas leases. And, in Kentucky, the lessee under an oil and gas lease takes title to the oil and gas which is found and removed from the ground. Rice Bros. Mineral Corp. v. Talbott, 717 S.W.2d 515, 517 (Ky. App. 1986) (citing Williams' Adm'r v. Union Bank and Trust Co., 283 Ky. 644, 143 S.W.2d 297 (1940); Swiss Oil Corp. v. Hupp, 253 Ky. 552, 69 S.W.2d 1037 (1934)). Therefore, the Landowners had no ownership rights in the gas removed from their property and, to the extent that their conversion claim relates to that gas, their claim against Atmos fails as a matter of law. See also Gross v. Citizens Fidelity Bank of Winchester, 867 S.W.2d 212, 215 (Ky. App. 1993) (providing that when a plaintiff consents to a transfer of property, he no longer has a cause of action for conversion). Moreover, even if the Landowners' conversion claim could be interpreted to encompass royalty payments relating to that gas, it would similarly fail as a matter of law: A conversion claim will not exist if the property right alleged to have been converted arises entirely from contractual rights to compensation. See Davis, 399 F.Supp.2d at 801. For these reasons, the jury's finding of conversion in favor of the Landowners is reversed.
5. The Landowners and the Thorpe Parties v. Atmos: "Independent action for charging excessive post-production expenses"
Next, we will address what the appellees collectively characterized as their claim against Atmos for charging excessive post-production expenses. The Landowners describe this claim as follows:
Atmos asserts that it cannot be held liable for charging unreasonable post-production expenses against the landowners' royalty because it had a contract with RET. If you follow that logic, then Atmos could have taken all of the landowners' royalties in the form of post-production expenses forever simply because it had a contract with RET which authorized it to do so. In fact, the so-called True Up agreement . . . indeed allowed Atmos to take all distributions from gas sales if its capital expenses had not been paid in full within the first twenty-four months.
. . .
In this case, the Landowners have asserted that the alleged post-production expenses are unreasonable. This is a case of first impression in this jurisdiction and Atmos would have this Court determine that a midstream gas production operator can by contract, take all, or virtually all of the money from the gas sales leaving the operator financially depleted and in bankruptcy, and the Landowners who own the gas without any compensation for their property. There was and is a custom and practice for what is reasonable in the gas industry and Atmos's actions are totally unacceptable and unreasonable. We agree with [former Atmos executive Brent] McDaniel when he said it is one thing to play hardball, it's quite another to play foul ball. The foul ball that he was referencing was Atmos's actions in the Park City Project.
For their part, the Thorpe Parties describe this claim as follows:
While the law allows deduction of post production expenses, recent decisions interpreting Poplar Creek Dev. Co. v. Chesapeake Appalachia, LLC, 636 F.3d 235, 244 (6th Cir. 2011), relied upon by Atmos, hold post production expenses must be reasonable. In re KY USA Energy, Inc., et al. v. KY USA Energy, Inc., 448 B.R. 191, 195 (Bankr. W.D. Ky. 2011). The plaintiffs in Poplar Creek did not claim and the Sixth Circuit did not address, the reasonableness of the post production expenses. Here, the jury heard expert testimony that the post production expenses charged by Atmos were grossly unreasonable.
Before we delve any deeper into these claims, it becomes necessary to identify what they are. Over the course of their various arguments against Atmos's motions for directed verdict, the appellees vaguely characterized these claims as "independent actions." However, the cases cited by the appellees in their arguments supporting this claim (i.e., In re KY USA Energy, Inc., 448 B.R. 191 (Bkrtcy.W.D.Ky. 2011), and Poplar Creek Development Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235 (6th Cir. 2011)), address the issue of charging excessive fees exclusively within the context of an action for breach of contract, rather than tort. See also Pioneer Resources Corp. v. Nami Resources Co., LLC, Civ. A. No. 6:04-465-DCR, Not Reported in F.Supp.2d, 2006 WL 1778318 at *8-*11 (E.D. Ky. June 26, 2006) (holding that claims for "fraudulent underpayment" and "fraudulent overcharging" pursuant to a validly executed contract were, at best, merely claims for breach of contract or unjust enrichment). This Court is not aware of any relevant authority recognizing a tort cause of action for "charging excessive post-production expenses." The appellees have failed to bring any such authority to our attention. We therefore find no basis supporting that a claim of "charging excessive post-production expenses" could properly be categorized as anything other than a claim of unjust enrichment or breach of contract.
With that said, it is apparent from the instructions tendered to the jury that the Thorpe Parties nevertheless attempted to characterize their incarnation of this claim as one sounding in tort. "Instruction No. 11," entitled "COMPENSATORY DAMAGES OF PARK CITY GAS/THORPE, d/b/a RETCO/THE INVESTORS," identifies "Instruction No. 7B, Interrogatory D" as their instruction relating to their "Post Production Expenses" claim, and "Instruction No. 7B, Interrogatory D" asked the jury to determine the following:
Do you believe the expense deductions at issue were a substantial factor in preventing Park City/Thorpe, d/b/a Retco/the Investors from paying landowners royalties? In answering this Interrogatory, you may consider the Agreements between RET and Atmos.
Stated differently, the Thorpe Parties did not assert that Atmos underpaid them or owed any independent duty to pay royalties to the Landowners; rather, the Thorpe Parties asked for compensatory damages because, as they asserted, Atmos's allegedly excessive fees prevented the Thorpe Parties from performing their own obligation to pay the Landowners pursuant to the terms of the oil and gas leases. In all fairness, the Restatement (Second) of Torts does recognize a claim entitled "Intentional Interference with Another's Performance of His Own Contract," and the Restatement's description of that claim is largely identical to Instruction No. 7B, Interrogatory D:
One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person, by preventing the other from performing the contract or causing his performance to be more expensive or burdensome, is subject to liability to the other for the pecuniary loss resulting to him.Restatement (Second) of Torts § 766A.
The above-referenced Restatement section describes a subspecies of the tort of intentional interference with a contract. In fact, the intentional interference with a contract claim that the Thorpe Parties also asserted in this matter—which we will discuss later in this opinion—is the same as their "independent action for charging excessive post-production expenses." But, because the Thorpe Parties did not submit their "independent action" theory to the jury in the form of a breach of contract action against Atmos, and because this claim is merely duplicative of another tort claim asserted by the Thorpe Parties which, as discussed later, is also not recognized in Kentucky (i.e., the subspecies of intentional interference with a contract that the Thorpe Parties asserted against Atmos, which derives from Restatement (Second) of Torts § 766A), there was no legal basis for this claim and the jury's finding to the contrary is therefore reversed.
As to the Landowners' version of this claim, it is apparent from their argument that they believe Atmos was somehow directly liable for paying them their royalties pursuant to the terms of their oil and gas leases, and that when they received less than what they thought they were entitled to receive under those leases due to Atmos's fee deductions, they believed that Atmos was directly liable to them for breach of contract. This argument fails, however, because Atmos was never a party to those leases, Atmos never deducted fees pursuant to those leases, and the Landowners cite nothing in any contract indicating that Atmos ever directly assumed any duty to pay their royalties.
The Landowners further argue, however, that RET was actually Atmos's agent, and that when RET failed to pay them the full extent of their royalties pursuant to the oil and gas leases, RET's failure was attributable to Atmos as its principal.
Necessarily, the Landowners' argument conflicts with the Thorpe Parties' position in their version of this claim; as noted above, the Thorpe Parties represented that they were responsible for paying the Landowners' royalties, and that Atmos prevented them from doing so. The Landowners' argument also conflicts with their own prior successful argument that they offered to the circuit court when they sought an order of partial summary judgment forfeiting the oil and gas leases at issue. In their reply to the Thorpe Parties' response to their motion for summary judgment, the Landowners argued:
The lease agreements for which [the Landowners] seek forfeiture were between the [Landowners] and RETCO. That lease was subsequently assigned to the Defendant, Park City Gas, LLC (Park City) who has legally admitted receipt of the required notice and their own failure to pay the required royalties. The required privy [sic] of contract is between [the Landowners] and RETCO and its assignee, Park City. The "devil made me do it" defense, i.e., "it was Atmos's fault" is in no way a defense to RETCO and Park City's admission that they continually failed to pay the landowners royalty that they contractually agreed to pay.
The Landowners' argument also conflicts with their own claim against Atmos for intentional contractual interference, discussed at length below; assuming Atmos was RET's principal, and that Atmos could be held directly liable for breaching the terms of the Landowners' leases by virtue of a principal-agent theory, Atmos could not also be held liable for intentional contractual interference because a party cannot interfere with its own contract. See Carmichael-Lynch-Nolan Advertising Agency, Inc. v. Bennett & Associates, Inc., 561 S.W.2d 99, 102 (Ky. App. 1977) (adopting Restatement (Second) of Torts, § 766 (1939), requiring the tortfeasor to be a third party, not a party to the contract or such party's agent).
Moreover, in urging this conclusion, the Landowners ask this Court to disregard the fact that RET was never a lessee or assignee under any of the oil and gas leases and, thus, was never liable for paying the Landowners' royalties under the terms of those lease agreements. RET's obligation to pay the Landowners their royalties originated solely from its operating agreement with Park City, particularly "Article VI, Section C," and "Article VII, Section G," which provide that RET agreed to market all of the gas produced by virtue of the oil and gas leases, and pay the Landowners their royalties pursuant to the terms of those oil and gas leases, on behalf of Park City, who, as the Landowners themselves previously recognized, was the lessee of those oil and gas leases. Indeed, even where In re KY USA Energy, Inc., 448 B.R. 191 (Bkrtcy.W.D.Ky. 2011), and Poplar Creek Development Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235 (6th Cir. 2011), discuss the issue of charging unreasonable post-production fees, both cases do so within the context of a lessee charging those fees to its lessor.
In any event, the extent of the authority that the Landowners cite in support of their agency theory consists of the following five cases: Paintsville Hospital Co. v. Rose, 683 S.W.2d 255 (Ky. 1985); CSX Transp., Inc. v. First Nat'l Bank of Grayson, 14 S.W.3d 563 (1999); United Engineers and Contractors, Inc. v. Branham, 550 S.W.2d 540 (Ky. 1977); Grant v. Bill Walker Pontiac-GMC, Inc., 523 F.2d 1301 (6th Cir. 1975); and Wedding v. Duncan, 220 S.W.2d 564 (Ky. 1949).
The first of these cases, Paintsville Hospital, was resolved based upon the Restatement (Second) of Agency § 267 (1958), which discusses the principles of apparent or ostensible agency. The relevant part of that section, as cited by Paintsville Hospital, 683 S.W.2d at 257, provides:
One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to liability to the third person for harm caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such.
Here, there is no basis for an apparent agency theory because, as the Landowners' counsel conceded in responding to Atmos's motion for directed verdict, "it is true, it is accurate, that—that the Atmos entities did not make direct representations to the [Landowners] in this case." Moreover, the Landowners could not have justifiably relied upon Atmos or any purported agent of Atmos to pay them their royalties because their oil and gas leases, and the assignments of those leases, plainly made the Thorpe Parties responsible for paying the Landowners their royalties.
As to CSX Transp., Inc. v. First Nat'l Bank of Grayson, 14 S.W.3d 563 (1999), the portions of this case cited by the Landowners stand for two basic rules of agency: first, "Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act," Id. at 566 (citation omitted); and, second, that notice received by an agent while acting within the scope of the agency relationship constitutes notice to the principal. Id. at 568. The case itself was based upon the recognized duty of the principal in that matter —CSXT—to pay the assignee of an outstanding account, rather than the assignor of that account, upon receiving notice of the assignment. Id. at 566. CSXT argued that when another entity received that notice instead, i.e., CTI, its duty was not triggered. However, in resolving that CTI was CSXT's agent, and that CTI acted within the scope of its agency in receiving notice of the assignment, the Court held that CSXT's duty had been triggered, and that CSXT had breached its duty by remitting its payments to the account assignor, rather than the account assignee. Id. at 569-60. Unlike the plaintiffs in CSX, the Landowners have failed to identify any independent duty that Atmos owed to them, let alone any duty to pay them royalties. Therefore, when RET failed to pay the Landowners their royalties, it was not acting on Atmos's behalf and, thus, CSX has no bearing here.
The Landowners cite United Engineers and Contractors, Inc. v. Branham, 550 S.W.2d 540 (Ky. 1977), a workers' compensation case, solely for the proposition that "in determining whether one is an agent or servant or an independent contractor, substance prevails over form, and . . . the main dispositive criteria is whether it is understood that the alleged principal or master has the right to control the details of the work." Id. at 543. The Landowners ignore, however, that Branham also stands for the proposition that one must act on behalf of a principal to be considered an agent: Branham held that a construction company was not responsible for the negligence of its employees when those employees were assisting a crane crew in work for which the crane crew was responsible and where the construction company employees, in the performance of that particular work, were under the supervision of the crane crew alone and not under the supervision of the construction company or its superintendent. Id. at 546. Thus, Branham is inapplicable for the same reason that CSX is inapplicable.
Next, Grant v. Bill Walker Pontiac-GMC, Inc., 523 F.2d 1301 (6th Cir. 1975), involved the question of vicarious liability for the results of an automobile accident, and similarly recognized that an agent must act for the benefit of its principal:
However, it is the right to control the details that is the determining factor, and we think that the evidence shows that the parties intended that Moore [the agent] should take the car where, when and how Marcum and Hurley [the principals] desired.Id. at 1305 (emphasis added; citing Marcum v. Hedger, 303 S.W.2d 558, 560 (Ky. 1957). Again, having failed to identify any direct obligation of Atmos to pay the Landowners their royalties, or any direction from Atmos to RET for RET to do so on its behalf, Grant does not support the Landowners' theory of agency.
Finally, the Landowners cite Wedding v. Duncan, 220 S.W.2d 564, 568 (Ky. 1949), for the general proposition that, to the extent that there are any facts in dispute on the question of agency, they are to be determined by a jury. Having failed to demonstrate that Atmos had any duty to pay the Landowners' royalties, however, the Landowners have failed to demonstrate that RET acted as Atmos's agent when RET failed to pay the Landowners their royalties, and their theory of RET's alleged agency should therefore never have been presented for the jury to consider. We are not required, nor inclined, to research the merits of the Landowners' agency theory beyond the scope of the authority they have presented to us in support of it. For the aforementioned reasons, the Landowners' theory of agency fails, along with their breach of contract action against Atmos for excessive post-production fees.
6. The Thorpe Parties v. Atmos: Tortious Interference with Contract
In their brief, the Thorpe Parties have summarized their claim against Atmos for intentional interference with contract as follows:
Atmos claims to have paid RET more than $618,000.00, but fails to disclose that it dictated how all gas revenues were distributed, both in the 11-20-06 Gas Compression Agreement, and in clear directives Doug Schroeder gave John Charles. Atmos dictated the landowners were the last to receive payment, and in doing so, tortiously interfered with lease obligations of Thorpe.
Before we address this claim, it becomes necessary to identify what it is, and what it is not. As noted in CMI, Inc. v. Intoximeters, Inc., 918 F. Supp. 1068 (W.D. Ky. 1995),
Since 1930, Kentucky has evolved from limited acknowledgment of business torts to support for business torts in certain well-defined circumstances. See Brooks v. Patterson, 234 Ky. 757, 29 S.W.2d 26 (1930); Derby Road Building Co. v. Commonwealth, Ky. 317 S.W.2d 891 (1958). Finally, in Carmichael-Lynn-Nolan, etc. v. Bennett, etc., 561 S.W.2d 99 (Ky. App. 1978) the Kentucky Court of Appeals set forth the principles governing the tort of intentional interference with contractual relations. The court stated that § 766 of theId. at 1079.
Restatement (Second) of Torts provides the correct guidelines. Id. at 102. [FN1]
[FN1] The Restatement (Second) of Torts, § 766, provides:In essence, to recover under this specific theory, [the plaintiff] must prove the following elements: (1) the existence of a contract; (2) Defendants' knowledge of this contract; (3) that it intended to cause its breach; (4) its conduct caused the breach; (5) this breach resulted in damages to [the plaintiff]; and (6) Defendant had no privilege or justification to excuse its conduct.
[e]xcept as stated in Section 698, one who, without a privilege to do so, induces or otherwise causes a third person not to
a) perform a contract with another, or
b) enter into or continue a business relation with another is liable to the other for the harm caused thereby.
At a minimum, to be actionable, [the plaintiff] must show that a contract existed between it and a third party followed by a breach by the third party. Industrial Equipment Co. v. Emerson Elec. Co, 554 F.2d 276, 289 (6th Cir. 1977).
Here, the Thorpe Parties have failed to assert a claim for intentional interference with contractual relations as the tort is described in the Restatement (Second) of Torts § 766 because they have failed to allege that Atmos caused a third party to breach a contract with them; rather, the Thorpe Parties reversed this element and sought recovery against Atmos for Atmos's alleged conduct in causing the Thorpe Parties to breach the terms of their oil and gas leases with the Landowners: in their own words, they claim that Atmos "tortiously interfered with the lease obligations of Thorpe." (Emphasis added).
When the Landowners sought forfeiture of the oil and gas leases, they were not induced to breach any contract with the Thorpe Parties. If anything, they successfully and legally enforced those contracts against the Thorpe Parties.
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The Thorpe Parties have also cited Nat'l Collegiate Athletic Ass'n v. Hornung, 754 S.W.2d 855 (Ky. 1988), which analyzed another variation of the tort of intentional interference recognized in Kentucky known as "intentional interference with prospective contractual relation," as described in the Restatement (Second) of Torts § 766B. However, this variation of intentional interference "is concerned only with intentional interference with prospective contractual relations, not yet reduced to contract." Restatement (Second) of Torts § 766B, comment (a). Because the oil and gas leases between the Thorpe Parties and the Landowners constituted existing contracts, this second variation also has no application to the case at bar.
We are left with the Restatement (Second) of Torts § 766A, which we described previously in this opinion and which most aptly describes the nature of the tort asserted by the Thorpe Parties: "intentional interference with another's performance of his own contract." The Thorpe Parties do not suggest that Kentucky has adopted or would adopt such a tort, nor do they explicitly argue that Kentucky should adopt such a tort; indeed, no reference to the Restatement (Second) of Torts § 766A appears in their brief. In any event, no Kentucky court has adopted this tort. Moreover, the Court in CMI, Inc., 918 F. Supp. 1068, predicted that Kentucky would not adopt the Restatement (Second) of Torts § 766A:
Kentucky courts have been very cautious in expanding unduly the tort remedies available to those in contractual relationships. There are sound reasons for this caution. The actual language of § 766A is so all encompassing and vague that to adopt it directly would cause tremendous confusion without creating a clear societal benefit. The conduct conceivably within its scope could be indistinguishable from the kind of unfettered commerce upon which courts have been reluctant to pass judgment. Moreover, the available remedies address the most direct and readily identifiable harms. The torts discussed in § 766A necessarily involve highly speculative damages. Parties to contracts have a full array of contractual remedies to resolve inequities of performance caused by third persons. The Court is not persuaded that this new tort is necessary to correct a glaring inequity among commercial parties.Id. at 1079-80.
We agree with this well-reasoned argument and decline the Thorpe Parties' implicit invitation to regard their claim of intentional interference as a tort recognized under Kentucky law. The jury's finding in favor of the Thorpe Parties relating to their claim of intentional interference with contract is therefore reversed.
7. The Landowners v. Atmos: Tortious Interference with Contract
In relevant part, the Landowners' instruction to the jury regarding intentional interference with contract provided:
In considering this Instruction, you are instructed that the lease agreements between Plaintiff Landowners and Robert Thorpe, d/b/a Resource Energy and Technology Company (RETCO) about which you have heard evidence are each contractual agreements. You will find for the Plaintiff Landowners and Park City Gas, LLC/Robert Thorpe, d/b/a Retco [sic]/the Investors and against the Atmos Defendants under this Instruction, if you believe by a preponderance of the evidence that:
Atmos intentionally and improperly interfered with the contractual relationship between Plaintiff Landowners and Robert Thorpe, d/b/a Resource Energy and Technology Company (which subsequently assigned its leases to Park City Gas and the Investors) by:In determining whether Defendants' conduct in intentionally interfering with the lease contracts was improper or not, you should consider the following factors:
(i) causing Plaintiff Landowners to terminate the existing lease contracts; or
(ii) preventing the continuation of the lease contracts through the handling of the gas revenue proceeds, including the taking of unreasonable post production expenses from Plaintiffs' royalty.
(a) The nature of Atmos's conduct;
(b) Atmos's motive;
(c) The interest of the Plaintiff Landowners and Robert Thorpe, d/b/a Resource and Energy Technology/Park City/the Investors;
(d) The interest sought to be advanced by Atmos;
(e) The social interests in protecting the freedom of action of Atmos and the contractual interests of both the Plaintiff Landowners and Robert Thorpe, d/b/a Retco[sic]/Park City/the Investors;
(f) The proximity or remoteness of Atmos's conduct to the interference; and
(g) The relationship between the parties.
One does not interfere improperly with another's contractual relations by showing that he acted in good faith to assert a legally protected interest of his own.
As the instruction itself notes, it relates to interference with existing contracts; therefore, the relevant elements of this tort derive from the Restatement (Second) of Torts § 766, as discussed above. The first of the two instances of alleged interference is "causing Plaintiff Landowners to terminate the existing lease contracts." But, the tort of contractual interference as it is described in the Restatement requires "causing a third party not to perform the contract." Id. If the Landowners asserted that Atmos interfered with their performance of any contract by causing them to initiate proceedings to forfeit the Thorpe Parties' oil and gas leases, this cannot qualify as contractual interference for two reasons: 1) as previously stated, "intentional interference with another's performance of his own contract" is not actionable as a tort in Kentucky; and 2) when the Landowners initiated proceedings to forfeit the oil and gas leases, they were lawfully exercising a remedy in response to the Thorpe Parties' breach—they did not fail to perform any obligation themselves, nor were they in any kind of breach.
The second of the two instances of alleged interference is "preventing the continuation of the lease contracts through the handling of the gas revenue proceeds, including the taking of unreasonable post production expenses from Plaintiffs' royalty." However, this statement and the entirety of the above jury instruction oversimplify two of the essential elements of the tort of intentional interference with contract, i.e., that the alleged tortfeasor must intend to cause the third party to breach, and that the alleged tortfeasor caused the third person to breach. Id.; see also CMI, Inc. v. Intoximeters, Inc., 918 F. Supp. at 1079.
In terms of intent, the relevant part of Restatement (Second) of Torts § 766, comment (h), provides:
The rule stated in this Section applies to any intentional causation whether by inducement or otherwise. The essential thing is the intent to cause the result. If the actor does not have this intent, his conduct does not subject him to liability under this rule even if it has the unintended effect of deterring the third person from dealing with the other.
The Restatement further elaborates on this point in comment (j). In relevant part, it provides:
The rule stated in this Section is applicable if the actor acts for the primary purpose of interfering with the performance of the contract, and also if he desires to interfere, even though he acts for some other purpose in addition. The rule is broader, however, in its application than to cases in which the defendant has acted with this purpose or desire. It applies also to intentional interference, as that term is defined in § 8A, in which the actor does not act for the purpose of interfering with the contract or desire it but knows that the interference is certain or substantially certain to occur as a result of his action. The rule applies, in other words, to an interference that is incidental to the actor's independent purpose and desire but known to him to be a necessary consequence of his action.(Emphasis added.)
The fact that this interference with the other's contract was not desired and was purely incidental in character is, however, a factor to be considered in determining whether the interference is improper. If the actor is not acting criminally nor with fraud or violence or other means wrongful in themselves but is endeavoring to advance some interest of his own, the fact that he is aware that he will cause interference with the plaintiff's contract may be regarded as such a minor and incidental consequence and so far removed from the defendant's objective that as against the plaintiff the interference may be found to be not improper.
Here, the Landowners' instruction begs two questions, the first of which is: How was Atmos supposed to "handle" the gas revenue proceeds? The only way to resolve this question is by resorting to the contract between RET and Atmos because it is the only evidence in that regard. There is no claim that Atmos breached its contract with RET when it deducted any of its fees from the sales proceeds; nor, for that matter, does any party cite to any instance where Atmos acted inconsistently with its rights and obligations under that contract. The Landowners simply argue that it was unfair that there was little money left to pay their royalties from those proceeds after Atmos deducted its fees.
Necessarily, this leads to the second question: When Atmos "handled" the gas revenue proceeds pursuant to its contract with RET, did Atmos intend to induce or intend to otherwise prevent the Thorpe Parties from fulfilling the Thorpe Parties' lease obligations?
The evidence of Atmos's intent to induce RET's breach, as cited by the Landowners, falls into two categories: 1) evidence of Atmos's intent prior to contracting with RET; and, 2) evidence of Atmos's intent while it collected its expenses from the gas sales proceeds pursuant to that contract.
As to the latter category, the RET-Atmos contract and amendments, which Thorpe and Charles executed and never sought to invalidate, purported to allow Atmos to make each of the deductions that it made. As such, they at least provided Atmos with a good faith basis for believing that it had the right to make its deductions, and Atmos was therefore justified in deducting its expenses pursuant to the RET-Atmos agreement within the meaning of this tort. Hornung, 754 S.W.2d at 860 (citing Restatement (Second) of Torts § 773). In collecting its contractual fees, Atmos was asserting its own legitimate interests and had no obligation to consider the interests of any other party. The Landowners have not demonstrated that Atmos owed a fiduciary duty to any party in this matter and, normally, "[a] creditor is not ordinarily a fiduciary of either his debtor or fellow creditors, and owes them no special obligation of fidelity in the collection of his claim." In re Teltronics Services, Inc., 29 B.R. 139, 169 (Bankr. N.Y. 1983) (citing In re W.T. Grant Co., 699 F.2d 599, 609-10 (2d Cir.1983); Weinberger v. Kendric k, 698 F.2d 61, 78-79 (2d Cir.1982); Crowder v. Allen-West Commission Co., 213 F. 177, 184 (8th Cir. 1914); Ingram v. Lehr, 41 F.2d 169, 170 (9th Cir.1930). As was stated by the Court in In re Prima Company, 98 F.2d 952, 965 (7th Cir. 1938):
Aside from the provisions of the bankruptcy law, a creditor has the right to call a loan when due and to lawfully enforce collection. He may refuse an extension for any cause which may seem proper to him, or even without any cause. The law provides certain means for the enforcement of claims by creditors. The exercise of those rights is not inherently wrongful.
As to the former category, the Landowners assert that a power point presentation that Atmos created for its management indicates that Atmos knew, prior to contracting with RET, that RET was financially depleted. The relevant part of that presentation recited: "Resource Energy Technologies (RET) has limited financial strength and does not have sufficient known reserves or existing production with which we can support the credit risk." The Landowners also point to the following portion of Robert Thorpe's testimony:
COUNSEL: In the months before you signed this agreement, the months leading up to signing this agreement—you had drilled these wells back in 2000, 2001, 2002, maybe a few in 2003, and there had been no production from that time until you entered into this agreement. I guess my question is: What was your financial condition at the time you signed this agreement?
THORPE: It wasn't too good at that time.
COUNSEL: When I say "your" financial condition, you understand I'm also asking the question with regard to RET?
THORPE: Yes. That's correct.
COUNSEL: So your financial condition was not the best, and RET's financial condition was not the best?
THORPE: Yes, and I told Mr. McDaniel that the first time I met him.
COUNSEL: Did you tell him that RET did not have substantial monies to put into this project over and above what they had already put into it?
THORPE: Yes.
In short, the crux of the Landowners' theory is that Atmos, in entering into its agreement with RET, knew from the onset—or was "substantially certain"—that RET would not be able to fulfill both its fee obligations to Atmos and its royalty obligations to the Landowners. Taking this theory at face value, however, defeats the Landowners' claim of intentional interference. According to the Restatement (Second) of Torts § 766, comment (n), "One does not induce another to commit a breach of contract with a third person under the rule stated in this Section when he merely enters into an agreement with the other with knowledge that the other cannot perform both it and his contract with the third person."
Moreover, while this evidence demonstrates that Atmos was aware of RET's financial condition, and perhaps the financial condition of the Thorpe Parties, it does not demonstrate that Atmos intended to contract with RET for the "primary purpose" of inducing the Thorpe Parties to breach their obligation to pay the Landowners' royalties pursuant to the leases. At best, it, along with other evidence of record, demonstrates that Atmos recognized that this was merely a possibility. Indeed, Atmos considered several possibilities when it contracted to purchase gas from RET and, at the same time, loaned RET funds to cover RET's capital expenses. Atmos represents in its brief that
[e]ssentially, RET made a bet when it made deals with Atmos and [HNNG] in November 2006. RET bet that gas prices would remain high enough, and the wells would produce enough gas, that the project would make enough revenue to pay its expenses. Those expenses included amounts due to Atmos under RET's contract with Atmos, royalties that the Thorpe Parties owed to the Landowners, lease payments to HNNG, and operating expenses of the treatment plant.
As to the market price of gas at or around the time Atmos and RET entered their agreement, Thorpe himself testified:
COUNSEL: Do you remember that the deal was structured in such a way that, for RET—if the price of gas stayed high, RET would have had the possibility to do very well; do you remember that much of it?
THORPE: Well, I know if the pray—price stayed high, everybody had a chance of doing well.
COUNSEL: Okay. And do you recall that sometime between 2000, 2002, the price of gas got, I think, in your words, got pretty ridiculous there for a while, didn't it?
THORPE: Yes, sir.
COUNSEL: And it got as high as $12?
THORPE: $12?
COUNSEL: Maybe $13?
THORPE: Almost.
COUNSEL: But by the time [your attorney] and I were visiting with you in Bardstown in February of this year [2010] to take your deposition, by that time, the price of gas was about $5.30 thereabouts; do you recall that?
THORPE: I don't recall.
COUNSEL: Okay. Fair enough. But you recall that it was much lower than it had been?
THORPE: Yes.
COUNSEL: All right. And if that price of gas had stayed high, RET would have done quite well here, wouldn't it?
THORPE: Yes.
COUNSEL: All right. And for that matter, if the price of gas had stayed up, the landowners would have stood to do well, too, wouldn't they?
THORPE: Absolutely. Yes.
For his part, Charles also testified that when gas prices dropped during production, it "created a big problem for everyone."
As noted, another possibility that Atmos and RET considered was the volume of gas that they believed the Park City project would yield; both projected that volume would be five million cubic feet per day or more. To this effect, Charles testified:
COUNSEL: Did you and Mr. Thorpe have a—have a vision that these wells would produce as much as five million cubic feet a day or more?
CHARLES: These wells, and, again, after stimulation, and additional wells, as they were drilled.
COUNSEL: All right. So your vision was that these wells would produce as much as five million cubic feet a day, or maybe even more, correct?
CHARLES: These wells, plus new wells.
COUNSEL: All right. And the plant was built to that specification, correct?
CHARLES: That's correct.
COUNSEL: As designed by HNNG?
CHARLES: Yes.
Ultimately, this projection did not turn out as expected when the production of gas commenced after RET and Atmos executed their agreement and its amendments:
COUNSEL: All right. Now, it was very clear to you, almost from the beginning, wasn't it, though, Mr. Charles, that this was not going to happen; you were not going to have anything like five million cubic feet a day of gas going through that plant?
CHARLES: We—we did not know how much would be going to the plant until it started up.
COUNSEL: But going back to your grand vision, on the front end, when it was time to tell HNNG how big a plant you needed, what capacity you needed in that plant, your grand vision, Mr. Thorpe's grand vision was that it could be five million cubic feet a day or maybe even more, correct?
CHARLES: There was expectation by the investors that they could continue drilling wells and that there would be enough gas to fill this plant and perhaps expand it.
COUNSEL: But almost from the beginning, it was clear that you didn't have anything like five million cubic feet of gas a day, did you?
CHARLES: I—
COUNSEL: In fact, it was about two and a half million cubic feet of gas?
CHARLES: I think initially, when we started up, it was about three million. But that's correct. When it first started up, that's correct.
COUNSEL: All right. When you first started up, it was barely half of the five million it was built for; and by the
time all was said and done, it was down to about a million and a half cubic feet a day, wasn't it?
CHARLES: As—that was the final amount that was being produced when—when the plant was shut down. But there's—there's an explanation for that.
COUNSEL: Well, let me ask you what the effect of it is. If you have a plant that is built to a certain specification, and the gas that is flowing through there is far short of that specification, the practical effect of all of that is that the costs to operate that higher capacity plant are too high, and therefore the plant is too expensive for the amount of gas that's there. Fair statement?
CHARLES: Yes.
Thorpe and Charles acknowledged that the gas processing plant also experienced several difficulties which often prevented it from regularly functioning. But, in a February, 2009 status report that Charles sent to the Landowners, Charles reiterated: "We are all doing our best in the hard economic times. What we most need at this time is a higher gas price and more production."
As noted previously, the dispositive issue is Atmos's intent at the time that it entered into its agreements with RET. At best, the evidence of record demonstrates that when Atmos executed its agreements with RET and ultimately invested millions of dollars into the Park City project—prior to when RET commenced production—Atmos was or should have been aware of the possibility that, due to any number of factors, the Park City venture might not turn out to be as profitable as projected, and that the Landowners, as a consequence of Atmos's fee deductions and RET's and the Thorpe Parties' financial condition, might not receive their royalties. However, the tort of intentional interference with an existing contract requires a higher standard than knowledge of a possibility, negligence, or even recklessness; it requires, at minimum, "substantial certainty." See Restatement (Second) § 766, comment (j) (incorporating the definition of "substantial certainty" in § 8A). And, without the benefit of hindsight, there is nothing of record demonstrating that when Atmos executed its agreements with RET, Atmos knew enough about the future of the Park City project to know, with substantial certainty, that the project would not proceed the way that it and RET had envisioned.
In light of the above, the jury's finding in favor of the Landowners on their claim against Atmos for intentional interference with contract is also reversed.
THE LANDOWNERS' CROSS-APPEAL AND ATMOS'S APPEAL
REGARDING PUNITIVE DAMAGES
We have reversed each of the claims asserted by the Landowners, with the exception of the claim of trespass asserted against Atmos by the Estate of Mollie Kersey which Atmos has not appealed, and which the jury determined warranted $10,000 in compensatory damages. It is impossible for this Court to determine which amount of the $252,225 of the Estate's award of punitive damages, if any, is attributable to its claim of trespass as opposed to any of the other claims it asserted with the other Landowner appellees which we have reversed. Consequently, we must remand the matter for a new trial on the amount of punitive damages to be awarded, if any. Accordingly, the Estate's award of punitive damages is vacated and the matter is remanded for a new trial solely as to the amount of the Estate's punitive damages award. In all other respects, the Landowners' cross-appeal is dismissed as moot.
CONCLUSION
In sum, we reverse each of the jury's findings with regard to the Thorpe Parties' and Landowners' other claims against Atmos for fraud, conversion, negligence, "excessive fees," and intentional interference with contract, and direct the circuit court to dismiss each of these claims. The Landowners' cross-appeal is therefore dismissed as moot, except as it relates to the Estate of Mollie Kersey's successful claim of trespass against Atmos Gathering, which Atmos Gathering chose not to appeal. The jury's finding with regard to the Estate's claim against Atmos Gathering for punitive damages is therefore vacated and remanded for further proceedings not inconsistent with this opinion.
ALL CONCUR BRIEF FOR APPELLANTS/CROSS-
APPELLEES:
Charles E. English
Charles E. English, Jr.
E. Kenly Ames
Bowling Green, Kentucky
ORAL ARGUMENT FOR
APPELLANTS/CROSS-
APPELLEES:
Charles E. English
Bowling Green, Kentucky
BRIEF AND ORAL ARGUMENT
FOR LANDOWNER APPELLEES:
A.V. Conway, II
Hartford, Kentucky
BRIEF AND ORAL ARGUMENT
FOR THORPE PARTY APPELLEES:
Chadwick N. Gardner
Louisville, Kentucky