Wake Forest Law Review
2Feb

FTX Arena – Miami-Dade County Feeling the Heat

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By Sam Kiehl

Anytime you are stuck in a relationship that you want out of, it’s tough. But that’s especially so when you’re only five hundred twenty-six days into a nineteen-year contract with an embattled cryptocurrency exchange that allegedly used customer funds to make risky trades and reportedly owes creditors more than $3 billion.[1]  Fortunately for Miami-Dade County, a federal bankruptcy judge recently terminated the naming rights agreement of the Miami area arena between the county and FTX.[2]

In March 2021, the Miami-Dade County Board of County Commissioners approved a $135 million deal with FTX for naming rights of what was formerly American Airlines Arena.[3]  While $2 million a year went to the Miami Heat, the professional basketball organization that uses the twenty-one thousand capacity arena as its home venue, approximately $90 million of the agreement was allocated to the county’s anti-poverty and gun violence mitigation program, known as the Peace and Prosperity Plan.[4]

In response to the announcement that FTX would initiate Chapter 11 proceedings, however, Miami-Dade County and the Miami Heat immediately sought to terminate the business relationship between the parties and find a new naming rights partner for the arena.[5]  On November 22, 2022, the county petitioned the U.S. Bankruptcy Court for the District of Delaware to remove FTX’s name from the venue.[6]  This request came just over a month after the arena had finally replaced the aircraft associated with the arena’s original sponsor, American Airlines, with FTX’s logo on the arena’s roof.[7]

Most recently, on January 11, 2023, Judge Dorsey of the bankruptcy court approved a stipulation ending the naming rights agreement between the two parties.[8]  The order, which is retroactive to December 30, 2022, terminated all licenses and other rights granted by FTX to Miami-Dade County in accordance with the original agreement under any trademarks or trade names, including naming rights.[9]  The order does not prevent FTX and the county from asserting additional damage claims under the agreement moving forward.[10]  This means that starting soon, if not already, all FTX signage and advertising will be removed from the arena, which will proceed under the name Miami-Dade Arena until a new naming rights partner is found.[11]  Removing signage is not a small undertaking.  This will include removing FTX’s logo from the arena’s roof, the basketball court, entrances into the stadium, and even the logo from the polo shirts worn by security.[12]

While a naming rights deal of this magnitude being terminated so quickly into its term is surprising, it is not unheard of.  Remember Enron?  Several years before the Houston-based energy company’s massive collapse in the early 2000s, Enron entered a thirty-year $100 million contract with the professional baseball team, the Houston Astros, to acquire naming rights to their stadium.[13]  Less than three years into the contract, the Astros sought to terminate the deal when the Enron scandal became household news.[14]  Unlike FTX, Enron had already paid for the year ahead.[15]  So, despite Enron’s bankruptcy filing, the company refused to consent to the Astros’ seeking a third party to replace Enron in the naming rights arrangement.[16]  Enron’s main argument was that the naming rights contract did not include a provision that allowed the Astros to terminate the contract based on the company’s bankruptcy filing.[17]  Ultimately, due to public pressure and bad optics, the Astros agreed to pay Enron’s creditors $2.1 million to buy back the naming rights in an out-of-court settlement.[18]

Miami-Dade County and the Heat avoided misfortune to the extent suffered by the Astros, as FTX was already in arrears due to a $5.5 million payment going unpaid on January 1, 2023.[19]  Beyond this, the county learned from the Astros mistake and included a provision in its contract with FTX that said in the event of a default, which included an “insolvency event,” FTX would still be liable to pay “all unpaid fees for the three contract years following the date of termination” within sixty days.[20]

An overarching question following this debacle is whether it leads to concerns for another arena that houses the professional basketball team, the Los Angeles Lakers.  The Lakers, following Miami’s lead, entered into a massive $700 million twenty-year contract for the naming rights of their arena with another crypto exchange, Crytpo.com.[21]  Miami-Dade County and the Lakers both entered into these contracts worth hundreds of millions of dollars stretching across decades with FTX and Crypto.com during the peak of cryptocurrency in 2021.[22]  Counties and professional sports organizations may have to ask, moving forward, how much consideration should go into assessing the financial creditworthiness and long-term viability of a partner in a naming rights deal?  Or are they just going to continue to ask, who can show me the money?

All in all, while dealing with this fractured partnership has assuredly been tough on Miami-Dade County and its residents, at the very least, they may find some solace knowing that Madonna will be performing at Miami-Dade Arena later this year.[23]

[1] Ryan Browne, Collapsed Crypto Exchange FTX Owes Top 50 Creditors Over $3 Billion, New Filing Says, CNBC (Nov. 21, 2022, 9:34 AM), https://www.cnbc.com/2022/11/21/collapsed-crypto-exchange-ftx-owes-top-50-creditors-3-billion-filing.html. 

[2] Dean Budnick, Miami Terminates FTX Arena Naming Rights Deal Following Crypto Exchange’s Bankruptcy, Variety (Jan. 15, 2023, 2:00 PM), https://variety.com/2023/music/news/ftx-arena-miami-naming-rights-terminated-bankruptcy-1235490252/; Christina Vazquez, Companies Already Inquiring with Miami-Dade County, Miami Heat Regarding Arena Naming Rights Deal, Local 10 (Jan. 17, 2023, 6:21 PM),  https://www.local10.com/news/local/2023/01/17/companies-already-inquiring-with-miami-dade-county-miami-heat-regarding-arena-naming-rights-deal/. 

[3] Budnick, supra note 2.

[4] Id.; Budnick, supra note 2.

[5] Miami-Dade County and Miami Heat Statement on FTX, NBA.com (Nov. 11, 2022, 6:47 PM), https://www.nba.com/heat/news/miami-dade-county-and-miami-heat-statement-on-ftx. 

[6] Budnick, supra note 2.

[7] Id.

[8] Julia Musto, FTX Bankruptcy Judge Terminates Miami Heat Arena Naming Rights Deal, Fox Bus. (Jan. 11, 2023, 2:38 PM), https://www.foxbusiness.com/economy/ftx-bankruptcy-judge-terminates-miami-heat-arena-naming-rights-deal. 

[9] Id.

[10] Id.

[11] Judge Terminates FTX Naming Rights Deal for Miami Heat Arena, CBS News (Jan. 11, 2023 9:32 PM), https://www.cbsnews.com/news/ftx-miami-heat-arena-naming-rights-deal-terminated/. 

[12] Id.

[13] Charles Bowles & Ed Flynn, Sports Stadiums: What’s in A Name?, Am. Bankr. Inst. J., July 2015, at 38, 38 (2015).

[14] Id. at 39.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Judge terminates FTX naming rights deal for Miami Heat arena, supra note 11.

[20] Sam Reynolds, FTX Owes Miami $16.5M For Arena Sponsorship Cancellation, CoinDesk (Nov. 12, 2022, 1:07 AM), https://www.coindesk.com/business/2022/11/12/heres-how-much-ftx-owes-miami-after-arena-sponsorship-cancellation/. 

[21] Ronald D. White, FTX’s Downfall Casts a Shadow Over Other Sports-Rights Deals. What’s Up, Crypto.com Arena, L.A. Times (Nov. 18, 2022, 5:00 AM), https://www.latimes.com/business/story/2022-11-18/ftx-was-a-sports-sponsorship-mvp-its-collapse-is-roiling-the-sports-marketing-world. 

[22] Id.

[23] Madonna Announces ‘The Celebration Tour’, Madonna.com (Jan. 17, 2023), https://www.madonna.com/news/title/madonna-announces-the-celebration-tour.

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25Oct

A defense of the equitable defense: Vice Chancellor Laster makes the argument against dodging equity through contractually specified incurable voidness

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Keegan Hicks

As “part of an ongoing dialogue between the Delaware Supreme Court and the trial courts,”[1] Delaware Vice Chancellor Laster recently made a direct proposal that the Delaware Supreme Court “retreat from the concept of contractually specified incurable voidness.”[2] This blog post aims to explore the facts that motivated Vice Chancellor Laster’s suggestion, consider the law and his reasoning, summarize his proposed regime, and outline a few practical implications of the Delaware Supreme Court possibly considering this question.[3]

The Facts[4]

At its heart, this case is a dispute over Class B shares (“Disputed Shares”) in XRI Investment Holdings LLC (“XRI”). XRI is owned by Morgan Stanley, and co-founders Matthew Gabriel and Defendant Gregory Holifield.[5] Originally, the Disputed Shares were owned by Holifield, but to finance another company, Holifield—with the help of Gabriel—transferred the Disputed Shares to secure a 3.5-million-dollar loan from a third-party private equity fund (“Assurance”).[6] Specifically, Holifield transferred (“Blue Transfer”) the Disputed Shares into a newly formed LLC (“Blue Fund”) because XRI was already a Direct Creditor to the disputed shares.[7] This allowed Holifield to subordinate the creditor claims over the Disputed Shares—XRI would remain the only secured creditor of the shares, whereas Assurance became a general creditor over Blue Fund and could only claim as collateral the net proceeds that Blue Fund would receive in the event of a sale of the Disputed Shares.[8] Though XRI’s LLC Agreement (“LLC Agreement”) likely prohibited Blue Transfer as a “void” act against the no transfer provision, XRI made a business judgment to not originally not pursue disputing Blue Transfer under the LLC agreement.[9]    

XRI changed its position and decided to enforce the LLC Agreement almost a year after the loan had been secured when Holifield ran into financial struggles and was unable to perform on his loan from XRI.[10] Holifield attempted to renegotiate this debt and offered to sell part of the Disputed Shares, but asserts that XRI chose to pursue a strict foreclosure instead because the Disputed Shares were worth much more than the remaining balance of the loan.[11] Strict foreclosures are generally consensual agreements that relieve the debtor of her obligations, but only if the debtor surrenders the entirety of the collateral.[12]  XRI performed the strict foreclosure by taking advantage of a provision in the UCC that deems silence as acceptance of a strict foreclosure where the offer is made and the debtor fails to respond.[13] According Holifield, XRI intentionally sent a physical offer of the strict foreclosure to an address XRI knew Holifield had vacated.[14] When Holifield did not respond, XRI foreclosed on the Disputed Shares.[15] Holifield and Assurance brought an action in Texas courts to challenge XRI’s foreclosure, claiming that the foreclosure performed against Holifield was ineffective because Blue Fund, not Holifield, was the owner of the Disputed Shares.[16] XRI responded by bringing this action in Delaware Court seeking declaratory judgment that Blue Transfer was an act void ab initio[17] under the no transfer provision of the LLC Agreement. Under the doctrine of voidness, this would mean (1) that Blue Transfer was a legal nullity that never occurred; (2) that Holifield, not Blue Fund, was the owner of the Disputed Shares; and (3) that the Strict Foreclosure had correctly been performed against Holifield.[18]

The Law

Holifield primarily claims acquiescence, an equitable defense which bars XRI from claiming breach.[19] The Court found that “[t]aken as a whole, XRI’s initial actions, followed by a subsequent and lengthy period of inactive silence, clearly establish acquiescence.”[20] XRI responded by arguing that this defense was unavailable to Holifield, first asserting that equitable defenses were not available to actions at law; and second, that under CompoSecure, LLC v. CardUX, LLC II,[21] a binding Delaware Supreme Court precedent, the plain language of the XRI LLC agreement mandated a finding that any acts in violation of the no transfer provision of the LLC Agreement are void ab initio.[22]

The Court disagreed with XRI’s first assertion. After reviewing the centuries-long conflict between courts of law and courts of equity in old England, the Court held that “the reality is that whether a party can raise an equitable defense in response to a legal claim depends on the equitable defense.”[23] Specifically, the Court distinguished the “relief asserted [by equity courts] to defend against an action at law” called “equitable affirmative relief”[24] and the “equitable remedies” which courts of equity “issued when providing relief in [their] own right.”[25] The Court then asserted that fraud, mistake, illegality, and estoppel are all forms of equitable affirmative relief available against actions at law, and that laches and unclean hands were equitable remedies only available against equitable claims.[26] Because acquiescence is a special form of estoppel, the Court held that it is available against legal claims.[27]

The Court begrudgingly agreed with XRI’s second assertion. In CompoSecure, LLC v. CardUX, LLC II, the Supreme Court of Delaware held that “when an agreement states that a noncompliant act is ‘void,’ then the plain language of that provision trumps the common law and requires that a court deem the act void ab initio.”[28] Because the LLC Agreement defined wrongful transfers as ‘void,’ and because CompoSecure II was binding precedent, the Court found that Blue Transfer was void ab initio and held that acquiescence, although clearly proven, was unavailable to Holifield.[29]

The Proposed Regime

“On the facts of the case, [holding for XRI] is an inequitable result, and such an outcome is disquieting to a court of equity.”[30] For this reason, the Court argued that the Supreme Court should revisit CompoSecure II, respectfully proposing a new regime: that it would be preferable to treat  “the breach of a contractual provision as making a noncompliant act voidable, regardless of the language that the provision used.”[31] The Court made five primary arguments in support of its suggestion:[32]

1. The Court suggested that Delaware precedents made prior to CompoSecure II supported the Court’s proposed regime, positing that the CompoSecure II court was not briefed on these authorities and therefore did not consider them.

2. The Court noted that there was an active policy to steadily move away from incurable voidness in both contract and entity law because its application leads to harsh outcomes.

3. The Court then argued several aspects of contract law necessitated this new regime. First, the Court posited that to be consistent, Delaware should allow parties to argue all defenses generally available in breach of contract claims. Second, it argued that allowing parties to contract out of equity created poor contracting incentives. And finally, that parties cannot contract for certain remedies, because the courts determine remedies.

4. The Court then argued that “[a] range of authorities suggests that parties, courts, and legislatures do not regard the term ‘void’ as having a settled meaning of “void ab initio.’”[33] Because of this history of ambiguity, the Court stated that the term “lack[ed] the necessary semantic clarity to bear the weight of a rule of incurable contractual voidness.”[34]

5. Finally, the Court noted that the Delaware Constitution established a minimum jurisdiction that even the general assembly could not reduce. The Court argued that this was “intended to establish for the benefit of the people of the state a tribunal to administer the remedies and principles of equity.”[35] Because waiving a constitutional right through such a small contractual provision would be a “significant leap” from this purpose, the Court argued that it was preferable to only give incurable voidness a limited role in reducing equity.

Practical implications

Although the Court ultimately applied CompoSecure II, this Court’s proposal to consider an alternative approach suggests the following implications:

  • At a minimum, this opinion is just the latest in the ongoing push and pull between a formalistic, plain-meaning approach to contract interpretation and a more contextual approach. Because Vice Chancellor Laster’s suggestion favors the latter, practitioners should remember that the facts often outweigh the words of a contract.
  • This opinion puts deal lawyers on notice that contractual voidness provisions may not be enforced as intended.
  • Alternatively, should the Supreme Court ultimately reject Judge Laster’s proposal, it will be important for deal lawyers to recognize that a contractual voidness provision may not be a meaningless provision to be easily conceded in negotiations.
  • Furthermore, should the Supreme Court reject Vice Chancellor Laster’s proposal, that rejection would signal deal lawyers to consider whether that rejection means that parties can not only contract for recission, but other equitable remedies, namely specific performance.
  • To litigators, this opinion clarifies which equitable defenses are available against legal actions and which ones are not. Vice Chancellor Laster’s framework of equitable affirmative relief versus equitable remedies is helpful in determining whether an equitable defense is available in legal actions.
  • This opinion also serves as a basis for non-frivolous arguments against enforcing contractual voidness provisions. As Vice Chancellor Laster pointed out, CompoSecure II was, in part, likely decided the way it was because counsel readily conceded that an act would be void ab initio if the plain language of an agreement indicated as much in a remedy.[36] The Vice Chancellor lists several persuasive arguments that business litigators can use to stave off the harsh effects of incurable voidness.
  • Likewise, the rejection of Chancellor Laster’s regime offers a persuasive opportunity to argue and enforce remedies contractually specified within the four corners of an agreement.
  • Finally, practitioners should follow this case as it moves into an appeal posture. Because the Court was so plain in its dislike for the outcome,  both Plaintiff and Defendants have plenty to argue on appeal. Accordingly, practitioners should have their Westlaw and Lexis alerts turned on to see what happens next.

[1] XRI Invest. Holdings LLC v. Holifield, 2022 Del. Ch. LEXIS 240, at *138, n. 55 (Sept. 19, 2022).

[2] Id. at *174.

[3] On 10/03/2022 Final Order and Judgment were granted. Docket. No. 246. As of 10/04/2022, neither party in Holifield had appealed to the Supreme Court. Nevertheless, Title 10 Delaware Code § 145 provides 30 days to appeal from a final judgment, so watching the status of this case is paramount.

[4] Holifield, 2022 Del. Ch. LEXIS 240 at *11–56.

[5] Id. at *12–14.

[6] Id. at *16–38.

[7] Id.

[8] Id.

[9] Id. at *42–49.

[10] Id. at *46–52.

[11] Here, the parties contended that New York law governed the strict foreclosure. Accordingly, the decision summarized New York’s application of the UCC under N.Y. U.C.C. Law § 9–620(a). See Id. at *5–6, n. 1.

[12] Id.

[13] Id. at 5–7. Admittedly, the requirements for silence as acceptance in this context are more complex, but this explanation is sufficient for our purposes. See generally UCC 9-260.

[14] Holifield, 2022 Del. Ch. LEXIS 420 at *49–52.

[15] Id.

[16] Id. at *52–55.

[17] For the purposes of this blog post, ‘void’, ‘void ab initio’, ‘incurable voidness’, ‘incurable contractual voidness,’ and ‘legal nullity’ are synonymous.

[18] See Holifield, 2022 Del. Ch. LEXIS 420 at *56–59.

[19] See Holifield, 2022 Del. Ch. LEXIS 420 at *87. “The doctrine of acquiescence effectively works a[s] estoppel: where a plaintiff has remained silent with knowledge of her rights, and the defendant has knowledge of the plaintiff’s silence and relies on that silence to the defendant’s detriment, the plaintiff will be estopped from seeking protection of those rights.” Id. at *86-87 (quoting Lehman Bros. Hldgs., Inc. v. Spanish Broad Sys. Inc., 2014 Del. Ch. LEXIS 28, at *9 (February 25, 2014)).

[20] Id. at *87.

[21] CompoSecure, LLC v. CardUX, LLC II, 206 A.3d 807 (Del. 2018).

[22] Holifield, 2022 Del. Ch. LEXIS 420 at *87. Because the Court found that Blue Transfer did breach the LLC agreement, the primary issue before the Court then was whether Blue Transfer was an act void ab initio.  “The distinction between void [ab initio] and voidable is often of great practical importance. Whenever technical accuracy is required, void can be properly applied only to those [acts] that are of no effect whatsoever – those that are an absolute nullity.” Void, Black’s Law Dictionary (11th ed. 2019). In contrast, voidable acts are “valid until annulled,” and “are capable of being affirmed or rejected at the option of one of the parties.” Voidable, Black’s Law Dictionary (11th ed. 2019). Of particular import here, is that equitable defenses are unavailable to acts void ab initio. See Holifield, 2022 Del. Ch. LEXIS 420 at *124.  Thus, if the Court finds that Blue Transfer was void ab initio, as it was ultimately required to do under CompoSecure II, Blue Transfer was incurably void and equitable defenses do not apply. See id. at *84.

[23] Holifield, 2022 Del. Ch. LEXIS 420 at *102.

[24] Id. at 112. (citation omitted).

[25] Id.

[26] Id. at *119–124.

[27] Id.

[28] Id. at *13.

[29] Id. at *132–135.

[30] Id. at *10–11.

[31] Id. at *138.

[32] See Holifield, 2022 Del. Ch. LEXIS 420.

[33] Id. at *168.

[34] Id. at *172.

[35] Id. at 172–173 (quoting Du Pont v. Du Pont, 32 Del. Ch. 413 (Del. 1951)).

[36] Id. at 140–148.

Photo via Ekaterina Bolovtsova by Pexels

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24Feb

Insurer Triumphant in a Case of a Clear and Unambiguous Insurance Policy 

Categories: 4th Cir. Blog Civil Cases
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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.

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8Feb

Oil and Gas Lease Not Divisible into Separate Segments for Production and Storage, Fourth Circuit Says

Categories: 4th Cir. Blog
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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.

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18Feb

No Subject Matter Jurisdiction: Property Settlement Agreements Fall Within the Domestic Relations Exception

Categories: 4th Cir. Blog
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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.

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