Bonner Farms, Ltd. v. EXCO-North Coast Energy, Inc. ( 2009 )

NOT RECOMMENDED FOR FULL TEXT PUBLICATION
File Name: 09a0754n.06
No. 08-4338 FILED
Nov 30, 2009
UNITED STATES COURT OF APPEALS LEONARD GREEN, Clerk
FOR THE SIXTH CIRCUIT
Bonner Farms, Ltd., )
)
Plaintiff-Appellee, )
) ON APPEAL FROM THE UNITED
v. ) STATES DISTRICT COURT FOR
) THE NORTHERN DISTRICT OF OHIO
Thomas A. Fritz, Deborah D. Weise, )
and Exco-North Coast Energy, Inc., )
)
Defendants-Appellants. )
BEFORE: KENNEDY, ROGERS, Circuit Judges, and HOOD*, District Judge.
CORNELIA G. KENNEDY, Circuit Judge. Defendants, the beneficiaries of a lease that
allows them to extract oil and gas from four wells on the plaintiff’s property, appeal the declaratory
judgment that the lease had expired by its terms when defendants failed to continue production.
Defendants do not challenge the jury’s finding that all production had ceased by the end of 2004.
Instead, they seek to avoid the conclusion that the lease expired raising two affirmative defenses: (1)
the plaintiff is estopped from denying the continuation of the lease because the plaintiff accepted
benefits under the lease when the defendants reinstated production in 2005; and (2) the plaintiff has
unclean hands because it took gas from the defendants’ pipeline without their consent. The district
court rejected these defenses. The defendants assert on appeal that both defenses require judgment
in their favor. Because neither defense defeats the district court’s judgment, we AFFIRM.
*
The Honorable Joseph M. Hood, United States District Judge for the Eastern District of
Kentucky, sitting by designation.
I. FACTUAL AND PROCEDURAL BACKGROUND
In 1970, James and Martha Leet entered into a lease (the “Leet Lease”) with Pointer Oil
Company, allowing access to their land for the purpose of drilling for and extracting gas and oil. The
lease provides that it shall continue for ten years “and so much longer thereafter as oil, gas, or their
constituents are produced in paying quantities thereon, or operations are maintained on” the land.
Under the lease, the landowner was entitled to a royalty in the amount of one-eighth (12.5%) of the
value of the oil and gas removed from the premises less the expense related to its removal.
Eventually, plaintiff-appellee Bonner Farms obtained the land and the landowner’s rights,
and Power Gas (to which defendant-appellant Exco-North Coast energy is a successor in interest)
assumed the extraction privileges. Defendants Thomas A. Fritz and Deborah D. Weise also have
an interest in the lease that would terminate if the Leet Lease was no longer in effect, and they were
therefore joined as defendants.
Four wells (known as Jones #1, Jones #2, Jones #3, and Jones #8, collectively the “Bonner
wells”) were placed on the 155 acres now owned by the plaintiff, and gas was extracted by Power
Gas pursuant to the 1970 lease. The Pochedly Pipeline System, owned by Power Gas, gathers
resources from plaintiff’s wells and several others for its pipeline system. Pursuant to the plaintiff’s
request, at some point Power Gas removed all flow lines, which had not been operating, from the
Jones #2 and #3 wells.
This much was, and is, undisputed. The plaintiff believed that productive use of all wells and
operations had ceased by the end of 2004, so it attempted to clarify the expiration of the lease by
filing an affidavit with the county recorder. See Ohio Rev. Code § 5301.332. Power Gas contested
the affidavit, contending that the lease remains in full effect, causing the plaintiff to commence the
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present declaratory judgment action in the Portage County, Ohio Court of Common Pleas, seeking
a declaration that the lease had expired.
The case was removed to federal court on the basis of diversity of citizenship,1 and the parties
agree that Ohio law provides the substantive rule of decision. After extensive proceedings not
relevant to this appeal, a jury was asked to return a special verdict containing interrogatories on
factual disputes. Through a special verdict form, the jury found “by a preponderance of the evidence
that defendant Power Gas Marketing & Transmission, Inc. stopped producing oil or gas in paying
quantities” from all four Bonner wells, and that Power Gas had stopped maintaining operations on
the property subject to the lease. There is no challenge to the jury’s findings on these issues.
The defendants seek to avoid a finding that the lease had expired through two affirmative
defenses: quasi-estoppel and unclean hands. In support of their quasi-estoppel argument, the
defendants contend that the plaintiff is estopped from denying the continuing vitality of the lease
because after the commencement of this litigation the wells were again actively pumped and the
plaintiff had accepted payments each equal to 12.5% of the value of oil and gas produced from the
Bonner wells in the preceding interval, the property owner’s share under the lease. The parties
stipulate that there were twenty-one Power Gas checks deposited by the plaintiff in that period,
1
The parties agree that jurisdiction is proper in this court. The parties stipulate that Plaintiff
Bonner Farms is “an Ohio limited liability company.” In order to proceed based on diversity of
citizenship, no defendant can be a citizen of Ohio. Defendant Power Gas is a Delaware corporation
with a principal place of business in Pennsylvania. Although Thomas A. Fritz and Deborah D. Weise
are named as Defendants, there are no allegations or other facts showing their citizenship. See Fed.
R. Civ. P. 8(a)(1) (requiring that the complaint contain allegations establishing the court’s
jurisdiction). Nevertheless, Fritz and Weise were served in states outside of Ohio, and counsel for
both sides agreed at oral argument that they are not citizens of Ohio.
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although the parties do not agree on the dates the checks were negotiated. All checks were dated
after August 2005.
At trial, the defendants emphasized that the checks were accompanied by a letter dated
August 11, 2005, indicating that the checks were made in accordance with the terms of the lease:
It was recent [sic] brought to my attention that your accounts relative to the wells
known as Jones #1, 2/3, 7, 8, 11 and Gould #1 had been suspended in error.
Therefore, I am enclosing two checks (162006 for $1,981.25, 162008 for $2,231.47)
to bring your account up to date, along with a complete statement of said accounts.
Attached to the letter was a statement computing 12.5% of various transactions. The defendants
elicited testimony from the plaintiff’s owner, Richard Bonner, on cross-examination regarding this
letter:
Q. What this letter does, Mr. Bonner, is explain to you that your account had been
suspended in error by Power Gas, and the enclosed checks were being sent to you
because they had some past due royalties that they had not paid because of that error.
Isn’t that true?
A. I think it’s a coverup, I really do. Excuse me. I don’t know what it means. It’s
legal stuff.
Q. That’s what the letter says though; right, sir?
A. If you say so.
Q. And those checks were royalty checks; right, sir?
A. Yes.
MR. KELLER: Objection. We stipulated he received checks, he cashed them. The
characterization of those checks is a question that depends on whether the lease is
still in effect or not.
THE COURT: Yes, it does.
MR. MENDOZA: Your honor, I asked the question because the stipulations only go
so far.
THE COURT: That’s true. Okay. Let’s move on.
Plaintiff’s counsel had sent a letter dated December 16, 2004 to defendants’ counsel, stating the
plaintiff’s position:
As you understand, the lease(s) underlying the wells on the Bonner and
Burrows property subject to this action have expired and/or been otherwise
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terminated. We understand that your client is removing and selling oil and gas from
some of these wells and is sending our clients a royalty of 1/8th. We understand that
your client currently disagrees with our position and intends to continue operating
these wells until the resolution of this action in spite of our objections.
The purpose of this letter is to demand that your client account for and pay
our clients the other 87.5% of the oil and gas removed from their property. Since our
clients are entitled to all the proceeds, they will negotiate any checks they receive
from your client, without any waiver, ratification or agreement that the lease(s) are
valid, and with full reservation of all their rights.
Through interrogatory number three, the jury declined to find “by a preponderance of the evidence
that plaintiff Bonner Farms, Ltd. accepted royalty payments under the provisions of the Leet Lease
from defendant Power Gas Marketing & Transmission, Inc.” in any year.
The defendants also argued that the plaintiff was barred from recovery due to its “unclean
hands,” citing evidence that the plaintiff took gas from the Pochedly System to use for its seven-
million-BTU grain dryer without consent. The parties stipulated as follows:
14. At some point in time in the past, Bonner tapped into the Pochedly System to
obtain gas for its grain dryer.
15. At some point in time in the past, Power Gas disconnected Bonner’s line to the
grain dryer from the Pochedly System.
16. At some point in time in the past, Bonner re-connected a line into the Pochedly
System to obtain gas for its grain dryer
Bonner claimed that he received permission from Equity Gas, which owned the Pochedly System
at the time, but such permission was ineffective because the line was operated by Power Gas, which
had the exclusive right to grant such permission. Mr. Bonner initially agreed to pay for at least some
of the gas that was taken; however, when he received an invoice from Power Gas, he refused to pay
at the rate demanded, and instead paid at a lower rate. At trial, Robert Crissinger, district manager
for North Coast Energy, which operates Power Gas, testified that he believed the plaintiff’s illicit
use of gas to be a “serious contributing factor” as to why Power Gas’s records showed no production,
5
although the basis for this conclusion is not apparent from the record. Another defense witness, John
Firko, drilling supervisor for North Coast Energy, testified that “sales of gas was impeded as a result
of significant leaks” throughout the Pochedly System. The jury found “by a preponderance of the
evidence that plaintiff Bonner Farms, Ltd. took gas from the Pochedly Pipeline System without the
consent of defendant Power Gas,” on September 1, 2004. The jury was not asked to decide whether
this conduct was related to the issue of whether the lease was effective.
The district court entered a declaratory judgment that the lease had expired by its own terms
as of December 31, 2004. The court relied on the jury’s answer to interrogatory number three,
writing: “This was a limited finding. The Court does not have a factual finding from the jury upon
which to conclude whether Bonner accepted benefits from Power Gas within the law of quasi-
estoppel under Ohio law.”
The court also rejected the defendants’ argument of unclean hands. Acknowledging the
jury’s finding that the plaintiff took gas from the Pochedly Pipeline System without consent, the
district court nevertheless found that “such action does not affect the equitable relations of the parties
with respect to the validity of the Leet Lease,” because the lease expired “irrespective of Bonner’s
having taken gas without the consent of defendants.”
The defendants filed a motion for judgment as a matter of law or for a new trial, which the
district court denied on August 18, 2008. The defendants appeal this order.
II. DISCUSSION
A. Standard of review
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“The district court’s conclusions of law are subject to de novo review on appeal, as are its
findings as to ‘ultimate facts’ or mixed questions of law and fact.” McDermitt v. United States, 954
F.2d 1245, 1250 (6th Cir. 1992).
B. Quasi-estoppel
The defendants argue that the plaintiff is estopped from denying the effectiveness of the lease
because the plaintiff accepted payments after the litigation commenced.2 Ohio “[c]ourts have
recognized that a party who accepts the benefits of a contract or transaction will be estopped to deny
the obligations imposed on it by that same contract or transaction,” Dayton Securities Assoc. v.
Avutu, 105 Ohio App. 3d 559, 563, 664 N.E.2d 954, 957 (1995), a species of estoppel described as
“acceptance of benefits” or “quasi estoppel.” Id. at 564, 664 N.E.2d at 957 (citing Hampshire Cty.
Trust Co. of N. Hampton, Mass. v. Stevenson, 114 Ohio St. 1, 13-17, 150 N.E. 726, 729-731 (1926)).
“[S]trict adherence to some of the elements of technical estoppel, such as knowledge and reliance,
may not be required for the doctrine to be invoked.” Id. For estoppel to apply, the conduct of the
party to be estopped must be “inconsistent” with the termination of the contract. Stevenson, 114
Ohio. St. at 19, 150 N.E. at 731 (holding that estoppel applies to prevent a person who induced
reliance by another on his course of conduct from “assum[ing] a position or assert[ing] a title
inconsistent with such course of conduct”); Rayl v. East Ohio Gas Co., 46 Ohio App. 2d 175, 179,
348 N.E.2d 390, 393 (1975) (noting that estoppel would apply if the landowner acted in a manner
“inconsistent with the attempted termination of the agreement[]”); cf. Greer-Burger v. Temesi, 116
Ohio St. 3d 324, 331, 879 N.E.2d 174, 183-84 (2007) (noting that judicial estoppel only applies to
a situation where the litigant takes a position inconsistent with one he took previously).
2
The defendants do not claim that any other conduct by the plaintiff gives rise to estoppel.
7
Through answers to interrogatory three, the jury found that the plaintiff did not accept royalty
payments. The district court relied on this finding to hold that estoppel was not warranted in this
case. The defendants assail this conclusion on three grounds. They first argue that the jury’s finding
that these payments were not “royalty payments” is unsupportable by the evidence presented at trial,
so the defendants are entitled to judgment as a matter of law, or at least a new trial. They posit that
an improper argument made by Bonner’s counsel during closing argument must have led the jury
astray. Alternatively, they suggest that the question posed to the jury on the special verdict form was
flawed.
These arguments share a common, yet faulty, premise: the payments must be considered to
be royalty payments under the lease, and the plaintiff is estopped from challenging the lease as long
as it had accepted these “royalty payments.” However, whether the plaintiff is estopped actually
turns on whether the plaintiff acted in a manner “inconsistent” with its litigating position. See
Stevenson, 114 Ohio. St. at 19, 150 N.E. at 731. The plaintiff’s acceptance of the payments, whether
they be called “royalty” payments or not, is not dispositive of this question, because the plaintiff was
entitled to at least this payment regardless of whether the lease had been terminated. If the lease was
no longer in effect, the plaintiff was entitled to 100% of the value of resources taken from its
property, and could properly treat the 12.5% as a partial payment towards the defendants’ debt.
Bonner made this point clearly and unequivocally in the letter dated December 16, 2004, sent to
Power Gas before the checks were negotiated, and there can be no basis to claim that the defendants
did not understand Bonner’s position or were misled by its conduct.
The defendants argue that the case of Rayl v. East Ohio Gas Co., 46 Ohio App. 2d 175, 179,
348 N.E.2d 390, 393 (1975), compels us to hold that accepting any payment during litigation gives
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rise to estoppel. In Rayl, the landowners sought a judicial decree that their agreements with a gas
company had ended. The court found that the agreements were terminable at will by either party,
but that the landowners were estopped from arguing that the lease was over based on their conduct
of accepting payments and taking free gas from the company’s storage chamber after the alleged
termination date. The court held that “Although plaintiffs did not intentionally misrepresent any
facts to defendant, they did act in a manner inconsistent with the attempted termination of the
agreements. Because plaintiffs accepted the benefits of their agreement during the pendency of this
litigation, they are estopped from pursuing this action at this time.” Id.
To the contrary, Rayl actually supports Bonner’s position. Rayl does nothing to change the
basic rule that the plaintiff’s conduct must be “inconsistent with the attempted termination of the
agreement[]” for estoppel to apply. Id. In contrast to the Rayl landowners, Bonner did not act in a
manner “inconsistent with the attempted termination of the agreement[]” by negotiating the
payments. The Rayl landowners cashed not only royalty payments, but rent checks to which they
would not be entitled except under the terms of the lease agreement. They also accepted free gas,
which was one of the benefits to which they were entitled under the agreement. Bonner’s deposit
of Power Gas’s payments, on the other hand, is equally consistent with the termination of the lease
as with its continuation, because Bonner had a claim to payment in the absence of the lease. Bonner
did not accept a benefit that it could only receive under the lease, but a benefit that it was equally
entitled to with or without the lease.
The case relied on by the plaintiff, Stitzlein v. Willey, 1979 WL 209691 (Ohio. Ct. App. Dec.
12, 1979), is more persuasive on the facts of this case. There the Ohio Court of Appeals rejected the
argument that the landowners were estopped from arguing that the lease had expired because they
9
had accepted royalty payments, noting that, like here, “as owners of the land, [they] were entitled to
at lease [sic] the royalties, no matter what the outcome in this case.” Id. at *2. Instead, the court
made clear that “[b]efore a party is estopped by the receipt of benefits from a transaction to deny the
validity of the transaction it must initially appear that he is not otherwise entitled to those benefits.”
Id.
This comports with the longstanding rule from other jurisdictions that “[e]stoppel does not
arise where the person accepting the benefits is entitled thereto, regardless of the questioned
transaction.” Grand Trunk Western R. Co. v. H.W. Nelson Co., 116 F.2d 823, 836 (6th Cir. 1941);
accord Bankers Trust Co. v. Pacific Employers Insurance Co., 282 F.2d 106, 112 (9th Cir. 1960)
(“An acceptance of a portion of that to which a party is entitled, unless by way of compromise and
settlement or accord and satisfaction, is not a bar to the subsequent assertion of a claim for the rest,
especially where acceptance is accompanied by a reservation of the remaining rights, or it is manifest
that the party doesn’t intend to surrender them.”); Cook v. Ball, 144 F.2d 423, 438 (7th Cir. 1944)
(“It is well settled that even by quasi estoppel one cannot be estopped by reason of accepting that
which he is legally entitled to receive in any event.”). The plaintiff here did no more than accept a
payment that the plaintiff was entitled to regardless of the termination of the contract, and this was
what the plaintiff said it was going to do. Estoppel is inapplicable to these facts.
Having rejected the premise behind the defendants’ claims of error, we also find no error in
the judgment. The defendants argue that we are bound to those aspects of the district court’s
reasoning that favor the defendants because the plaintiff did not file a cross appeal. This position
is without merit. While it is true that there is an “unwritten but longstanding rule [that] an appellate
court may not alter a judgment to benefit a nonappealing party,” Greenlaw v. United States, 128 S.
10
Ct. 2559, 2564 (2008), “a cross-appeal is inappropriate when the only relief sought is an affirmance
of the district court judgment,” Shropshire v. Laidlaw Transit, Inc., 550 F.3d 570, 571 n. 2 (6th Cir.
2008) (citing Bailey v. Dart Container Corp., 292 F.3d 1360, 1362 (Fed. Cir. 2002)); Olympic
Fastening Systems, Inc. v. Textron Inc., 504 F.2d 609, 617 (6th Cir. 1974) (“The appellee may,
without having to file a cross appeal, defend a judgment on any ground consistent with the record,
even if rejected in the lower court.”); see also Charles Alan Wright et al., 16A Fed. Prac. & Proc.
Juris.4th § 3950.7 (noting that “any named party, without filing a separate or cross-appeal, may make
or renew in the appellate court any available argument designed to preserve or justify that portion
of the judgment favorable to that party”). The plaintiff merely seeks affirmance of the district court,
and we can affirm the district court’s judgment on grounds other than those relied upon by the court.
E.g., Eidson v. State of Tennessee Dept. of Children’s Serv., 510 F.3d 631, 641 (6th Cir. 2007). The
estoppel claimed does not apply in this case.
C. Unclean hands
The defendants also argue that the plaintiff cannot prevail because it has unclean hands. “The
‘clean hands doctrine’ of equity requires that whenever a party takes the initiative to set in motion
the judicial machinery to obtain some remedy but has violated good faith by his prior-related
conduct, the court will deny the remedy.” Marinaro v. Major Indoor Soccer League, 81 Ohio App.
3d 42, 45, 610 N.E.2d 450, 452 (1991) (citing Bean v. Bean, 14 Ohio App. 3d 358, 363-364, 471
N.E.2d 785, 791-793 (1983)). “The application of the unclean hands defense ‘depends upon the
connection between the complainant’s iniquitous acts and the defendant’s conduct which the
complainant relies upon as establishing his cause of action.’” Wuliger v. Manufacturers Life Ins. Co.,
567 F.3d 787, 797 (6th Cir. 2009) (quoting McClanahan v. McClanahan, 79 Ohio App. 231, 72
11
N.E.2d 798, 800 (1946)). Accordingly, this rule does not require the plaintiff to be a saint in all of
its affairs, but only “that the plaintiff must not be guilty of reprehensible conduct with respect to the
subject matter of [its] suit.” Marinaro, 81 Ohio App. 3d at 45, 610 N.E.2d at 452 (citing Kinner v.
Lake Shore & Michigan S. Ry. Co., 69 Ohio St. 339, 69 N.E. 614 (1904)).3
As an initial matter, the parties disagree what standard of review we should apply to the
district court’s finding that unclean hands should not apply in this case. The plaintiff contends that
the application of the doctrine is reviewed only for an abuse of discretion, while the defendants
contend that the application is a conclusion of law subject to de novo review.
“Ordinarily, an abuse of discretion standard applies to . . . review of a district court’s
application of the unclean hands doctrine.” Performance Unlimited, Inc. v. Questar Publishers, Inc.,
52 F.3d 1373, 1383 (6th Cir. 1995) (quoting Northeast Women’s Center, Inc. v. McMonagle, 868
F.2d 1342, 1354 (3d Cir. 1989)). However, whether the unclean hands doctrine can be applied in
a particular case may raise an issue of law, subject to de novo review. Northeast, 868 F.2d at 1354.
Under any level of review, we think the district court’s rejection of defendants’ “clean hands”
arguments is unassailable.
The defendants argue that the district court erred by finding that taking the gas was not
sufficiently related to the issue of whether the lease was still in effect to implicate the clean hands
doctrine. After all, the defendants contend, the jury found that gas was taken, and there was
testimony at trial that this taking may have posed an obstacle to gas production. The defendants
conclude that the district court should have found that the plaintiff’s unclean hands prevent recovery.
3
The plaintiff argues on appeal that this defense only applies to cases sounding in equity, and
therefore cannot apply to its declaratory judgment action. We need not decide this issue because we
reject the defense on the merits.
12
We disagree. Even if we assume that the plaintiff’s conduct was sufficiently inequitable to
implicate the doctrine, the district court could properly conclude that the “connection between the
complainant’s iniquitous acts and the defendant’s conduct which the complainant relies upon as
establishing his cause of action,” Wuliger, 567 F.3d at 797, is not substantial enough to allow the
defense to be applied in this case. The plaintiff took gas from the Pochedly Pipeline System, which
included gas extracted from dozens of wells, including some mined by entities other than the
defendants. The link between taking gas from a system collecting from dozens of wells and the
cessation of activity in all four wells covered by the Leet Lease is sufficiently tenuous that the district
court could properly decline to apply the clean hands doctrine in favor of the defendants. There is
no proof in the record before us regarding the amount of gas taken for the grain dryer and whether
this gas would have negatively affected the record of output of the plaintiff’s wells.4 To the contrary,
gas was taken for the grain dryer during years that the jury found there was no production from the
plaintiff’s wells. The district court could properly conclude that the plaintiff’s inequitable conduct
was not sufficiently related to the subject matter of the suit.
The defendants argue in the alternative that there was error in the verdict form because it did
not specifically ask the jury to decide whether the plaintiff’s conduct was related to the relief the
plaintiff sought. Because defendants’ objection was not preserved, we review it for plain error only
“if the error affects substantial rights.” Fed. R. Civ. P. 51(d)(2); Aetna Cas. and Sur. Co. v. Leahey
4
A post-briefing letter sent by defendants with the court’s permission addressing this point
contends that this proof would have been developed during the second stage of the bifurcated trial
when the defendants sought to prove damages. However, because an element the defendants must
show to prevail on the defense is a connection between the suit and the inequitable conduct, the time
for introducing evidence in support of the connection was at the stage where the merits of the
defense were considered.
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Const. Co., 219 F.3d 519, 541 (6th Cir. 2000). We find no error, much less a plain error, in the
interrogatory. Whether a plaintiff’s conduct is sufficiently related to his basis for relief is a question
for the court, not a jury. See Smith v. World Ins. Co., 38 F.3d 1456, 1462 (8th Cir. 1994) (“[T]he
determination of equitable defenses and equitable remedies is a matter for the court to decide, not
the jury.”); see also International Union v. Cummins, Inc., 434 F.3d 478, 487 (6th Cir. 2006)
(holding that determining whether laches applies is question for court). There was no error in the
district court deciding the question of relatedness itself, and no error in its rejection of the defense.
III. CONCLUSION
Because we find that the defendants are not entitled to prevail on either affirmative defense,
we AFFIRM the judgment of the district court.
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