Wake Forest Law Review

document-428338_1280

By: Mikhail Petrov

On February 19, 2016, in a published civil case of W.C. & A.N. Miller Dev. Co. v. Continental Casualty Co., the Fourth Circuit amended its decision from December 30, 2015, and affirmed the decision of the district court to deny W.C. & A.N. Miller Development Company (“Miller”) insurance coverage from its insurer, Continental Casualty Company (“Continental”). In 2006, Miller was sued in a contract dispute. Subsequently, Miller entered into a liability insurance contract with Continental. Miller was then sued again, in 2010, in a fraudulent conveyance action seeking recovery on the judgment entered in the 2006 lawsuit. Miller asked Continental to cover the 2010 suit. Continental, however, determined that the 2010 lawsuit was unrelated, and refused. In 2014, after Miller successfully defended the 2010 lawsuit, it sued Continental for breach of the insurance contract. The main issue was whether the 2006 and the 2010 disputes were interrelated, as defined by the insurance policy. The Fourth Circuit found that they are not.

The Facts

In the early 2000s, one of the principles of Miller founded the land development company Haymount Limited Partnerships. Miller owned more than 80% of Haymount at all relevant times. Haymount’s goal was to develop land in Virginia. In order to develop the land, Haymount needed financing. Haymount entered into an agreement with two companies to search for a third party lender, International Benefits Group (“IBG”) and American Property Consultants (“APC”). The company that introduced Haymount to the eventual third-party lender would receive a finder’s fee. Haymount secured a $14 million loan from General Motors Acceptance Corporation Residential (GMAC). Haymount then paid a finder’s fee to APC. Upon learning of the GMAC loan, IBG also sought payment of its fee and sent Haymount a list of lenders, which included GMAC, to whom IBG had introduced Haymount. Haymount refused to pay and IBG sued for breach of contract. The suit commenced in 2006, and on January 8, 2010, the district court entered judgement against Haymount, awarding $4,469,158 to IBG.

Eight months after the judgment in the 2006 lawsuit, on October 29, 2010, IBG again sued Haymount. The 2010 lawsuit alleged that the Haymount took actions to render itself judgment proof so that IBG could not collect on the judgment entered in its favor after the 2006 lawsuit. The causes of action asserted in the 2010 lawsuit included fraudulent transfer, fraudulent conveyance, common law and statutory conspiracy, and creditor fraud. The complaint included detailed information of the 2006 lawsuit, which gave rise to the judgement in favor of IBG.

Miller (Haymount’s parent corporation) entered into a liability insurance contract with Continental Casualty Company in 2010. Miller sought for Continental to cover the defense costs. Continental denied coverage as being outside the scope of the policy and Miller proceeded with the defense at its own expense and won. Miller then filed a lawsuit against Continental, alleging that Continental wrongfully denied coverage under the policy and should be required to pay the costs Miller incurred defending the 2010 lawsuit.

The policy, J.A. 35-75, provided that “More than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be considered as one Claim which shall be deemed made on . . . the date on which the earliest such Claim was first made. . . .” In other words, this provision stated that if more than one claim involving “interrelated wrongful acts” is made against Miller or its subsidiaries, the multiple claims are considered a single claim made on the date on which the earliest of the claims was made. Further, the policy expansively defined “interrelated wrongful acts” as “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.” From this language, Continental reasoned that the acts alleged in the 2006 lawsuit and other acts alleged in the 2010 lawsuit were interrelated wrongful acts. The district court agreed with Continental and dismissed Miller’s claim.

Rules of the Case

The Fourth Circuit was tasked with determining whether the district court properly interpreted and applied the provisions of the insurance contract. Because the district court sat in Maryland, Maryland law applied to the case. Under Maryland law, insurance policies are interpreted in the same manner as contracts generally. There is no rule in Maryland that insurance policies are to be construed against the insurer. Catalina Enters., Inc. Pension Tr. v. Hartford Fire Ins. Co., 67 F.3d 63, 65 (4th Cir. 1995). Clear and unambiguous language, however, must be enforced as written and may not yield to what the parties later say they meant. Additionally, unless there is an indication that the parties intended to use words in a special technical sense, the words in a policy should be accorded their “usual, ordinary, and accepted meaning.” Bausch & Lomb, Inc. v. Utica Mut. Ins. Co., 625 A.2d 1021, 1031 (Md. 1999). However, where an insurance contract is ambiguous, “any doubt as to whether there is a potentiality of coverage under [the] insurance policy is to be resolved in favor of the insured.” Clendenin Bros. v. U.S. Fire Ins. Co., 889 A.2d 387, 394 (Md. 2006).

Reasoning

The Fourth Circuit concluded that the conduct alleged in the 2006 and 2010 lawsuits share a common nexus of fact and are, therefore, interrelated wrongful acts under the policy’s definition. The Court noted that the policy’s definition of “interrelated wrongful acts” is expansive. Additionally, the Court did not find the definition to be ambiguous and applied it in accordance with the ordinary meaning of the words used. Like the district court, the Fourth Circuit observed that the two lawsuits are linked by (1) a multitude of common facts: in particular, that Haymount did not pay IBG the finder’s fee; (2) a common transaction: the contract between Haymount and IBG; and (3) common circumstances: namely, Haymount’s attempts to secure financing for its land development project in Virginia. These elements logically and causally connected the two lawsuits. Absent Haymount’s breach of its contract and other alleged torts, IBG would not have sued for damages in 2006, nor would it have sued for enforcement of the 2006 judgment in 2010.

Miller attempts to avoid the Fourth Circuit’s straightforward conclusion by characterizing the allegations in the two lawsuits as alleging merely a “common motive” which is insufficient to establish the interrelatedness of the 2006 and 2010 lawsuits. The Fourth Circuit rejected this argument, citing back to the definition of “interrelated wrongful acts” within the insurance policy as broad and unambiguous. Additionally, the Court cited that both the 2006 and the 2010 lawsuits focus on the same issue, payment of the finder’s fee by Haymount to IBG.

Holding

The Fourth Circuit held that Continental was correct in refusing to cover Miller’s court expenditures for the 2010 lawsuit. Because the 2010 lawsuit and the 2006 lawsuit involve interrelated wrongful acts, they were part of the same claim under the policy. The Court affirmed the judgement of the district court.

Oil Pumps

By Daniel Stratton

Today, the Fourth Circuit issued a published opinion in the civil case K & D Holdings, LLC v. Equitrans, L.P. In K & D Holdings, the court held that an oil and gas lease granted to defendants, Equitrans and EQT, by plaintiff, K & D Holdings, was not divisible into separate components. In reaching that conclusion, the court reversed and remanded the case to the district court with instructions to enter judgment in favor of Equitrans and EQT.

The Terms of the Original Lease

In December 1989, Henry Wallace and Sylvia Wallace signed a lease granting Equitrans the oil and gas rights to an area of land covering 180 acres in Tyler County, West Virginia. Currently, K & D is the successor in interest to the Wallaces. Additionally, Equitrans L.P., the successor-in-interest to Equitrans Corp., subleased the rights to produce and store gas on the land to EQT Corp. Essentially, the terms of the lease now govern a relationship between K & D and EQT.

The terms of the lease grant EQT the right to use the land to explore and produce oil and gas, store gas, and protect stored gas. The lease’s initial term ran for five years and would continue on for as long as a portion of the land was used for “exploration or production of gas or oil, or as gas or oil is found in paying quantities thereon or stored thereunder, or as long as said land is used for the storage of gas or the protection of gas storage on lands in the general vicinity.” After taking control of the land, EQT never engaged in exploration, production, or gas storage, but has engaged in gas storage protection.  Equitrans owns the nearby Shirley Storage Field, a natural gas storage facility. The Federal Energy Regulatory Commission established a buffer zone of 2000 feet around the storage area for protection of the storage facility. The leased land falls within that buffer zone.

Due to EQT and Equitrans not using the leased land for gas or oil production, K & D sought to end the arrangement and enter into a more lucrative contract with another company. On September 20, 2013, K & D filed a lawsuit in state court against EQT, arguing that it was entitled to a rebuttable presumption under West Virginia state law that EQT had abandoned the land after not producing or selling gas or oil from the property for more than twenty-four months. EQT removed to the United States District Court for the Northern District of West Virginia. EQT and K & D filed cross motions for summary judgment.

On September 30, 2014, the court denied both cross motions. Acting sua sponte, the district court found as a matter of law that the lease was divisible. The court argued that because the lease had two primary purposes, (1) exploration and production and (2) storage and protection, the lease could be divided into two separate leases. The lease for exploration and production of oil and gas had expired in the district court’s view, because the initial five-year term had elapsed without EQT exploring for or producing oil or gas. The court held however, that the second lease, for storage and protection, was still in force because EQT had used the land for that purpose.

On January 21, 2015, the district court issued its final order, stating that K & D was entitled to drill exploration and production wells in areas that were not within the buffer zone of the Shirley Storage Field. EQT appealed.

West Virginia is for Lessors

Because this case was heard under diversity jurisdiction, West Virginia state law applies. Under West Virginia law, contract law principles apply equally to the interpretation of leases. The primary criterion for determining if a contract is severable is whether such an intention was reflected by the parties in the terms of the contract itself, the subject matter of the contract, and the circumstances giving rise the question.  A contract is not severable when it has material provisions and considerations that are interdependent and common to each other. Additionally, under West Virginia state law, there is a presumption against divisibility unless the contract explicitly states that it is divisible or the parties intent of divisibility is clearly manifested. As a general matter, West Virginia law regarding oil and gas leases are liberally construed in favor of the lessor, but only when there is ambiguity as to the lease terms.

A Lease Divisible Cannot Stand

On appeal, EQT made two arguments. First, it argued that the district court erred as a matter of law in holding the lease divisible. Second, EQT contended that the district court was wrong in determining that the exploration portion of the lease had terminated after its initial five-year term. Reviewing the district court’s findings of fact for clear error and its conclusions of law de novo, the Fourth Circuit agreed with both of EQT’s arguments.

Starting with its first argument, EQT pointed to the language of the lease itself. The lease’s use of the word “or” between each act required of EQT in order to continue the lease indicated that the acts were alternatives, and that only one would be required to keep the entire lease in effect. Applying West Virginia’s test for determining if a contract is severable, the Fourth Circuit concluded that the lease was intended to be entire and not divisible.  The Fourth Circuit applied the plain, ordinary meaning of the word “or,” holding that in this case it was a disjunctive and could not be considered to have the same meaning as the word “and.”

K & D argued that because EQT paid different rents depending on what activities it was engaging in, the lease was divisible. The court found this argument to not be persuasive, noting that the activities EQT could engage in under the lease were interrelated. Additionally, because the Fourth Circuit found no ambiguity in the lease, it did not need to liberally interpret in favor of the lessor.

Having decided that the lease was not divisible, the court then turned to the question of whether EQT had continuing rights under the lease. The terms of the lease dealing with renewal stated that the lease would continue beyond the initial five-year term if “(1) the lessee explores for or produces gas or oil; (2) ‘gas or oil is found in paying quantities thereon or stored thereunder’; or (3) the ‘land is used for the storage of gas or the protection of gas storage on lands in the general vicinity.” Again noting the use of the disjunctive “or,” the court found that because it was undisputed that part of the land was being used for protection, EQT continued to hold all rights under the original lease.

The Fourth Circuit Hold the Lease is Not Divisible and Valid; Reverses and Remands 

Having determined that the lease was not divisible and that EQT still held all rights under the original lease, the Fourth Circuit reversed and remanded the lower court’s decision, instructing that court to enter judgement in favor of EQT and Equitrans.

By Carson Smith

On February 12, 2015, the Fourth Circuit, in an unpublished opinion, affirmed the District Court of South Carolina’s dismissal in Holmes v. Moore due to lack of subject matter jurisdiction.

Holmes Argued that the Domestic Relations Exception to Subject Matter Jurisdiction Did Not Apply

Holmes brought a breach of contract and promissory estoppel action against her former husband. She brought the case in federal court based on diversity jurisdiction. However, the district court dismissed the case, ruling that Holmes suit fell within the domestic relations exception. This exception has traditionally relieved federal courts from involvement in matters of divorce, child care, and custody.

On appeal, Holmes argued that the domestic relations exception did not apply in this case because the “property settlement agreement that she [sought] to enforce [did] not involve issues related to the divorce decree.” Instead, she argued, the settlement agreement stood alone as an issue of contract law.

Fourth Circuit Found No Reversible Error and Affirmed the District Court’s dismissal

The Fourth Circuit reviewed the issue of law de novo. After reviewing the record, the Fourth Circuit found no reversible error and affirmed the district court’s dismissal based on the domestic relations exception.