Connie Smith v. SEECO, Inc. , 922 F.3d 406 ( 2019 )

United States Court of Appeals
For the Eighth Circuit
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No. 17-3636
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Connie Jean Smith, Individually and on behalf of all others similarly situated
Plaintiff - Appellant
v.
SEECO, Inc., Now known as SWN Production (Arkansas), LLC; Desoto
Gathering Company, LLC; Southwestern Energy Services Company;
Southwestern Energy Company
Defendants - Appellees
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Appeal from United States District Court
for the Eastern District of Arkansas - Little Rock
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Submitted: January 15, 2019
Filed: April 23, 2019
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Before SMITH, Chief Judge, COLLOTON and ERICKSON, Circuit Judges.
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ERICKSON, Circuit Judge.
Connie Jean Smith was the named plaintiff in a class action suit against
Southwestern Energy Company (“Southwestern”) and three of its subsidiaries
alleging underpayment of gas royalties. The defendants prevailed at trial. Smith now
appeals, arguing that a new trial is warranted because of the district court’s1 erroneous
evidentiary and trial management rulings. Smith also requests certification of certain
questions of state law to the Arkansas Supreme Court. We deny the motion to certify
and affirm.
I. Background
SEECO, a subsidiary of Southwestern, began developing the Fayetteville Shale
formation in 2004. DeSoto Gathering Company (“DeSoto”), a separate Southwestern
subsidiary, was created to act as the gathering company for SEECO’s operations.
DeSoto accepted business as a gathering company for other producers as well. SES,
another Southwestern subsidiary, marketed and sold SEECO’s gas. SEECO and
DeSoto entered into a Dedicated Field Services Agreement (“Agreement”) to govern
the terms of DeSoto’s gathering, compression, and treatment services.
As part of its operations SEECO entered into leases with landowners to obtain
gas from their land. The typical lease provided a one-eighth royalty interest in the
proceeds derived from the sale of gas captured from the leasehold. Connie Jean
Smith leased acreage to SEECO under the standard one-eighth royalty lease. The
terms of Smith’s lease permitted deductions from the royalty for “all reasonable
gathering, transportation, treatment, compression, processing, and marketing costs
that are incurred by [SEECO] in connection with the sale” of the gas. Consistent with
the lease, SEECO deducted certain costs paid to its fellow Southwestern subsidiary
DeSoto for its “gas gathering” services.
Smith sued on behalf of a class claiming that SEECO underpaid royalties
because it had engaged in self-dealing when it reduced the royalty payment to reflect
1
The Honorable Brian S. Miller, Chief Judge, United States District Court for
the Eastern District of Arkansas.
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the amounts it paid to DeSoto for gathering. Specifically, Smith alleged that
Southwestern engaged in self-dealing by instructing DeSoto to charge inflated rates
to SEECO for the costs of DeSoto’s services. Smith also contended that each of
Southwestern’s three subsidiaries were shells established and used by Southwestern
to secure greater profits at the expense of landowners. Smith claimed that the
improper cost deductions allowed Southwestern to gain nearly $100 million in profits
between 2006 to the present. Smith sued on theories of breach of contract, fraud and
deceit, unjust enrichment, violations of various Arkansas statutes, and civil
conspiracy.
In pretrial motions, the district court was asked to decide whether the amounts
DeSoto charged SEECO qualified as gathering, treatment, and compression costs
incurred in connection with the sale of the gas under the lease. Smith had argued that
because those costs were paid by a third Southwestern subsidiary, SES, they were not
costs “incurred” by SEECO. SEECO countered that SES acted as its agent and that
in return for paying SEECO’s costs, the amount of the costs were later deducted from
what SES owed SEECO. The district court agreed with SEECO that SEECO
“incurred” those costs “when it became liable to pay for DeSoto’s services.” In
making its partial grant of summary judgment, the district court reserved for the jury
the issue of whether the costs were reasonable. The district court granted a motion
in limine prohibiting references to the partial grant of summary judgment.
During the trial, SEECO sought to establish the reasonableness of its costs by
comparing the rate it paid DeSoto to the rates other producers in the Fayetteville
Shale region paid for gathering. Part of SEECO’s offered evidence related to the
post-production costs of BHP, another operator that sent royalty statements to Smith.
SEECO offered the BHP statements which reflected specific post-production costs
that were higher per unit of gas than those SEECO had deducted. Smith objected,
claiming the statements were inadmissable hearsay and that they were unduly
prejudicial and irrelevant. The district court overruled the objections, holding that the
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statements were covered by the business records exception to the hearsay rule and
would aid the jury in determining the reasonableness of DeSoto’s rates.
SEECO also sought to introduce evidence of a term sheet from 2005 between
SEECO and DeSoto for the purpose of showing that their agreements were
“arms-length.” Smith objected claiming the 2005 term sheet was not timely disclosed
and had only been produced 25 days before trial. The district court sustained Smith’s
objection as to the admission of the term sheet, but allowed questions related to any
witness’s personal knowledge of the term sheet. In making this ruling, the court
found that the evidence was relevant to rebut Smith’s claim that the contract
negotiations were a sham.
John Thaeler, the former head of SEECO, and Gene Hammons, the former head
of DeSoto, were among the witnesses who testified about the term sheet. Their
testimony laid in significant details about the term sheet, including how the term sheet
was first created and what it was designed to cover. Smith did not object when this
testimony was received. Smith later renewed her overall objections concerning the
term sheet when questions were asked of DeSoto employee Josh Weber. The district
court overruled the objections and allowed Weber to testify about his personal
knowledge of the term sheet.
Southwestern briefly questioned Smith about the pre-suit notice provision in
her lease. Because such provisions are inapplicable to breach-of-contract suits in
Arkansas as a matter of law,2 the district court gave a curative instruction directing
the jury to ignore that paragraph of the contract when deciding whether Smith
complied with the contract.
2
TXO Prod. Corp. v. Page Farms, Inc., 698 S.W.2d 791, 794 (Ark. 1985)
(citing Texas Oil & Gas Corp. v. Vela, 429 S.W.2d 866 (Tex. 1968)).
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During the trial, SEECO’s counsel made several comments in the presence of
the jury which implied that the action was actually on behalf of Smith’s lawyers,
rather than Smith. For example, in closing argument SEECO’s counsel stated “I’m
not going to focus on Dr. Smith. I don’t think this lawsuit is her idea. The arguments
that these lawyers are making make no sense for anybody….” The district court twice
sustained objections to SEECO’s suggestion that the suit was driven by her lawyers.
In SEECO’s closing argument, counsel briefly stated that they “had not heard”
from any other royalty owners complaining about DeSoto’s practices. The district
court responded with a curative instruction:
[T]here was a concern brought to my attention that I want to
address with you. Understand that this is a class action. And we talked
about it when we got started. And the plaintiff, Connie Jean Smith, is
the class representative who represents the class. So whatever position
she takes in this courtroom is the position of the class. And to the extent
that you have heard anything or you in any way think that her position
may not be the same as other class members in any way, you have to
disregard that because her—she is the class representative and her
position is the position of everybody who has opted into this lawsuit or
declined to opt out.
SEECO asked the district court to give a jury instruction substantially
mirroring the district court’s grant of partial summary judgment that the costs
incurred by SEECO were costs incurred as gathering and compression costs under the
contract. The jury instruction provided by the court only stated that SEECO “was
allowed to deduct all reasonable gathering, transportation, treatment, compression,
processing, and marketing costs that [we]re incurred by SEECO in connection with
the sale of gas.” The court allowed both sides to argue their interpretation to the jury.
At the conclusion of deliberations, the jury returned a full defense verdict,
finding that the deducted costs were both incurred and reasonable. Smith filed a
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motion for a new trial, or in the alternative, relief from the judgment. The district
court denied the motions. Smith now appeals.
Additionally, Smith has moved to certify two questions of law to the Arkansas
Supreme Court: (1) Whether SEECO “incurred” costs as a matter of Arkansas law
under its arrangement with DeSoto and SES, and (2) whether, under Arkansas law,
payment for “costs incurred” may include rates of payment under which DeSoto (the
gathering company) makes a profit, or whether they must be limited to actual costs.
II. Discussion
A. Partial Grant of Summary Judgment
We review the district court’s partial grant of summary judgment de novo,
viewing the evidence in the light most favorable to the non-moving party. Barry v.
Barry, 78 F.3d 375, 379 (8th Cir. 1996) (citing Michalski v. Bank of America Ariz.,
66 F.3d 993, 995 (8th Cir. 1995)). When reviewing a grant of summary judgment,
“[w]e will consider only evidentiary materials that were before the trial court at the
time the summary judgment ruling was made.” Id. (citing Fed. R. App. P. 10(a);
Amerinet, Inc. v. Xerox Corp., 972 F.2d 1483, 1489–90 (8th Cir. 1992)). “We review
the denial of a motion for a new trial for a ‘clear’ abuse of discretion, with the key
question being whether a new trial is necessary to prevent a miscarriage of justice.”
Dindinger v. Allsteel, Inc., 853 F.3d 414, 421 (8th Cir. 2017) (quoting Hallmark
Cards, Inc. v. Murley, 703 F.3d 456, 462 (8th Cir. 2013)).
Smith claims that the evidence available to the district court was insufficient
to support a grant of partial summary judgment on the question of whether or not
SEECO “incurred” costs in its relationship with DeSoto where SES actually paid
DeSoto. Smith argues that this error necessitates a new trial. We doubt that the
district court erred by concluding that SEECO had “incurred” costs when the
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evidence before it established the existence of a legal obligation held by SEECO to
ensure that DeSoto was paid. See Hall v. United States, 566 U.S. 506, 520 (2012)
(“[T]he ordinary meaning of ‘incur’ [is] bringing a liability upon oneself.”). We need
not definitively resolve that question, since the instructions provided to the jury did
not include the legal ruling and Smith was allowed to argue for her favored position.
Cf. Cavataio v. City of Bella Villa, 570 F.3d 1015, 1024 (8th Cir. 2009) (holding that
“any error in granting [partial] summary judgment . . . was harmless” in light of the
trial record). The district court’s actions following the grant of summary judgment
tended to favor Smith, rather than SEECO, ranging from granting a motion in limine
prohibiting references to the partial grant of summary judgment to denying SEECO’s
request for a jury instruction that “SEECO’s incurred costs are the fees DeSoto
charged for its services to SEECO.” Any error in granting the motion was harmless
in light of the district court’s management of the issue during the trial.
B. Motion to Certify Questions of State Law
As part of her arguments over whether or not SEECO “incurred” certain costs,
Smith requests that we certify two questions to the Arkansas Supreme Court:
1. Whether SEECO “incurred” costs for gathering and treatment
under the express and implied covenants of its form oil and gas
lease, as a matter of Arkansas law, where (a) the services were
performed by one affiliate, DeSoto, (b) billed to and “cleared” by
another affiliate, SES, and (c) all three of these entities are
subsidiaries of their common parent, SWN; and
2. Whether the express and implied covenants in the lease, as a
matter of Arkansas law, allow SEECO to deduct from royalty
payments as “costs incurred” fees for gathering and treatment at
rates that provide profit to SEECO’s affiliate, DeSoto, over and
above the costs actually incurred by DeSoto.
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“Absent a close question and lack of state sources enabling a nonconjectural
determination, a federal court should not avoid its responsibility to determine all
issues before it.” Shakopee Mdewakanton Sioux Cmty. v. City of Prior Lake, Minn.,
771 F.2d 1153, 1157 n.2 (8th Cir. 1985) (quotation marks omitted). We accept the
basic principle that federal courts “should be slow to honor a request for certification
from a party who chose to invoke federal jurisdiction.” 17A Charles Alan Wright,
Arthur R. Miller et al., Fed. Prac. & Proc. Juris. § 4248 (3d ed. 2017 update)
(collecting cases). We are also mindful of Arkansas’s standards for accepting
requests for certification, which require “all facts material to the question of law to
be determined” to be “undisputed” plus the existence of “special and important
reasons” such as conflicting decisions in the courts or “an unsettled issue of the
constitutionality or construction of a statute of this State.” Longview Prod. Co. v.
Dubberly, 99 S.W.3d 427, 429 (Ark. 2003).
In light of these principles, certification of the proposed questions would be
improper. Whether SEECO incurred certain costs is an ordinary question of contract
interpretation which federal courts are well-equipped to answer. Cf. Torti v. Hoag,
868 F.3d 666, 671–72 (8th Cir. 2017) (applying Arkansas law to a breach-of-contract
claim). Smith chose to bring her case in a federal forum and, having received an
unfavorable outcome, now seeks a second bite of the apple. Because the questions
she raises are not the type of “close questions” that might be aided by certification to
the Arkansas Supreme Court, we decline the invitation to certify them.
C. BHP’s Royalty Statements
Smith argues that BHP’s royalty statements should have been excluded on both
relevance and hearsay grounds. “A district court’s decision to admit or exclude
testimony is reviewed for an abuse of discretion.” Bady v. Murphy-Kjos, 628 F.3d
1000, 1002 (8th Cir. 2011) (quoting Quigley v. Winter, 598 F.3d 938, 946 (8th Cir.
2010)). “A district court enjoys wide discretion in ruling on the admissibility of
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proffered evidence, and evidentiary rulings should only be overturned if there was a
clear and prejudicial abuse of discretion.” Id. (quoting Quigley, 598 F.2d at 946).
The district court did not abuse its discretion by admitting the statements. The
statements were relevant because they aided the jurors in determining whether the
costs incurred by SEECO were reasonable. Cf. Atlantis Express, Inc. v. Standard
Transp. Servs., Inc., 955 F.2d 529, 537–38 (8th Cir. 1992) (affirming interstate
carrier’s rates as “reasonable” in light of “an extensive comparison of rates between
[appellee] and other . . . carriers that offered the same or similar services in the same
territory during the same time period”). Admission under the business records
exception to the Hearsay Rule was proper under Federal Rule of Evidence 803(6),
which “excepts, under certain circumstances, records of regularly conducted business
activities from the hearsay rule.” In re King Enterprises, Inc., 678 F.2d 73, 77 (8th
Cir. 1982). Under that rule, a “record created by a third party and integrated into
another entity’s records is admissible as the record of the custodian entity, so long as
the custodian entity relied upon the accuracy of the record and the other requirements
of Rule 803(6) are satisfied.” Brawner v. Allstate Indem. Co., 591 F.3d 984, 987 (8th
Cir. 2010). Smith identified the evidence as a statement that she got directly from
BHP in the ordinary course of receiving royalty payments. The district court had
“discretion to admit the evidence if [it] found it to be sufficiently trustworthy.” In re
King Enterprises, Inc., 678 F.2d at 77 (citing United States v. Goins, 593 F.3d 88,
91–92) (8th Cir. 1979)).
D. Questioning Regarding the 2005 Term Sheet
Smith also contends the district court erred by permitting SEECO to question
witnesses about the existence of a 2005 term sheet even though it denied admission
of the term sheet itself. Since the term sheet was produced before trial but after the
discovery window had closed, we consider this argument as a challenge to the district
court’s imposition of discovery sanctions. Essentially Smith argues that the sanction
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was insufficient to address the harm. We review the district court’s sanctions
concerning discovery violations for abuse of discretion. Sentis Grp., Inc. v. Shell Oil
Co., 559 F.3d 888, 898 (8th Cir. 2009) (citation omitted). “Our scope of review
regarding discovery matters is very narrow . . . [and] we are unlikely to fault the
district court’s judgment on discovery matters absent a gross abuse of discretion
resulting in fundamental unfairness in the trial of the case.” Davis v. Am. Jet
Leasing, Inc., 864 F.2d 612, 614 (8th Cir. 1988) (cleaned up) (quoting Prow v.
Medtronic, Inc., 770 F.2d 117, 122 (8th Cir. 1985)).
The issue presented to the district court was how to handle a document
produced 25 days prior to trial but admittedly outside the discovery period. Neither
party disputes that the term sheet was highly relevant to the issues at trial. Despite
the late disclosure and the apparent relevance of the evidence, Smith took no
affirmative step to respond to the disclosure such as moving in limine to suppress the
term sheet or, in the alternative, for a continuance so she could depose the witnesses
on the new evidence. Instead Smith waited until the time that the evidence was about
to be offered to seek its exclusion. Ordinarily the district court has broad authority
to impose a wide range of sanctions for discovery violations. By waiting to raise the
objection, Smith circumscribed the sanctions practically available to the district court.
This was a tactical decision apparently designed to increase the likelihood that the
evidence would be suppressed. The district court appropriately exercised its
discretion to impose a more moderate sanction that limited SEECO’s ability to
introduce the actual document but which allowed it to ask witnesses about their
personal knowledge of the statement. If Smith suffered any prejudice when witness
testimony contradicted Smith’s argument that no such term sheet existed, that
prejudice was a direct result of Smith’s tactical decision and not the district court’s
ruling.
It appears that Smith may also be arguing that the term sheet testimony went
beyond the district court’s sanction for the untimely disclosure. To the extent this
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contention is raised, Smith forfeited her argument by failing to object when the first
two witnesses discussed their knowledge of the document. Day v. Toman, 266 F.3d
831, 837 (8th Cir. 2001) (quoting Powell v. Burns, 763 F.2d 337, 338 (8th Cir.
1985)). Further, Smith has not carried the heavy burden of demonstrating plain error.
By the time Smith objected, during the testimony of Josh Weber, the evidence was
cumulative and any error was harmless. Wilson v. City of Des Moines, 442 F.3d 637,
644 (8th Cir. 2006) (citing Smith v. Firestone Tire & Rubber Co., 755 F.2d 129, 132
(8th Cir. 1985)).
E. Questioning Regarding the Pre-suit Notice Provision
“We normally presume that a jury will follow an instruction to disregard
inadmissible evidence inadvertently presented to it, unless there is an ‘overwhelming
probability’ that the jury will be unable to follow the court’s instructions.” Greer v.
Miller, 483 U.S. 756, 766 n.8 (1987) (quoting Richardson v. Marsh, 481 U.S. 200,
208 (1987)). Smith has not shown the requisite overwhelming probability. The
district court’s instruction was a correct statement of the law and properly informed
the jury that it was not to consider the provision when evaluating Smith’s claims. The
district court’s conclusion that “any resulting prejudice caused to plaintiffs by this
testimony was minimal and certainly not a miscarriage of justice requiring a new trial
under Rule 59” was not erroneous.
F. Statements by SEECO’s Counsel Suggesting Inadequacy of Class
Representation and Maligning Opposing Counsel
Smith argues that she is entitled to a new trial because comments made by
SEECO’s counsel insinuated that Smith was represented by “plaintiff lawyers” whose
arguments did not make “sense for anybody.” We consider three factors in
determining whether a lawyer’s comments warrant a new trial: (1) the extensiveness
of the improper remarks; (2) the absence of any meaningful curative instruction; and
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(3) whether any damage award was exorbitant. Gilster v. Primebank, 747 F.3d 1007,
1011–12 (8th Cir. 2014). The district court sustained Smith’s objections and
instructed the jury to disregard the statements. No new trial is warranted given the
court’s curative instruction and the limited nature of the remarks.
Smith also claims that comments by SEECO’s counsel may have
inappropriately suggested to the jury that Smith was not an adequate class
representative. The district court responded by giving a lengthy curative instruction
that included telling the jury “to the extent that you have heard anything or you in any
way think that [Smith’s] position may not be the same as other class members in any
way, you have to disregard that.” Given our presumption that “a jury will follow an
instruction to disregard inadmissible evidence inadvertently presented to it, unless
there is an ‘overwhelming probability’ that the jury will be unable to follow the
court’s instructions,” the district court appropriately denied Smith’s motion for a new
trial. Greer, 483 U.S. at 767 n.8 (quoting Richardson, 481 U.S. at 208).
III. Conclusion
We deny Smith’s motion to certify questions of law to the Arkansas Supreme
Court and affirm the district court’s judgment.
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