MC Oil & Gas, LLC v. Ultra Res., Inc.

• Decision Date: 12 November 2015
• Docket Number: Case No. 1:15–cv–0038–DN.
• Citation: 145 F.Supp.3d 1066
• Parties: MC OIL AND GAS, LLC, a Nevada limited liability company, Plaintiff, v. ULTRA RESOURCES, INC., a Wyoming corporation, UPL Three Rivers Holdings, LLC, a Delaware limited liability company, and Axia Energy, LLC, a Delaware limited liability company, Defendants.
• Court: U.S. District Court — District of Utah

145 F.Supp.3d 1066

MC OIL AND GAS, LLC, a Nevada limited liability company, Plaintiff,

v.ULTRA RESOURCES, INC., a Wyoming corporation, UPL Three Rivers Holdings, LLC, a Delaware limited liability company, and Axia Energy, LLC, a Delaware limited liability company, Defendants.

Case No. 1:15–cv–0038–DN.

United States District Court, D. Utah, Northern Division.

Signed Nov. 12, 2015.

Stephen J. Trayner, Stuart H. Schultz, Alan R. Houston, Paul W. Hess, Strong & Hanni, Salt Lake City, UT, for Plaintiff.

Brent O. Hatch, Phillip J. Russell, Shaunda L. McNeill, Hatch James & Dodge, Tracy H. Fowler, Amber M. Mettler, Mark O. Morris, Snell & Wilmer, Salt Lake City, UT, for Defendants.

MEMORANDUM DECISION AND ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT REGARDING THE FIRST RIGHT OF OFFER

DAVID NUFFER

, District Judge.

Defendants Ultra Resources, Inc. (“Ultra”), UPL Three Rivers Holdings, LLC (“UPL”), and Axia Energy, LLC (“Axia”) (collectively “Defendants”) moved¹ for partial summary judgment (“Motion”) on part of the third cause of action brought by Plaintiff MC Oil and Gas, LLC (“MC Oil”).² Specifically, the Motion seeks judgment in Defendants' favor to the extent that MC Oil alleges breach of the “first Right of Offer.” The parties' memoranda and supporting documentation have been carefully reviewed. For the reasons set forth below, Defendants' Motion is GRANTED.

BACKGROUND

MC Oil buys and re-sells wax crude oil from oil producers in the Uintah Basin in Utah. Axia began producing wax crude oil in the Uintah Basin in late 2011. On April 24, 2013, MC Oil and Axia entered into an agreement (the “Purchase Agreement”) covering the sale and delivery by Axia, and the purchase and receipt by MC Oil, of crude oil under the terms and conditions specified in the Purchase Agreement.³ On or about October 1, 2013, pursuant to an Assignment, Bill of Sale, and Conveyance (the “Axia to UPL Assignment”), Axia sold certain of its oil and gas properties in the Uinta Basin to UPL.⁴

On January 13, 2015, Ultra communicated to MC Oil that, “[i]n light of the dramatic recent drop in oil prices, effective March 1, 2015, we do not plan to deliver further barrels for MC Oil under the April 24, 2013 agreement between MC Oil and Axia Energy.” Ultra discontinued delivering and selling crude oil to Plaintiff on March 1, 2015.

MC Oil commenced this lawsuit on February 24, 2015,⁵ asserting, among other things, breach of the Purchase Agreement. MC Oil's breach allegation is based upon Paragraph 2 of the Purchase Agreement. That paragraph provides in relevant part:

Quantity and Quality: MC shall guarantee a base minimum of 1,000 barrels per day. Axia and MC agree to meet from time to time and discuss potential volume increases under this Agreement. Allowing Axia the first Right of Refusal on additional volumes that MC procures at the local Salt Lake City refineries. Likewise Axia agrees to allow MC the first Right of Offer on additional volumes that Axia produces in the Uintah Basin. If such increases are agreed upon, this Agreement will be amended to reflect the volume change and any new pricing negotiated.

MC Oil alleges that the Purchase Agreement was breached in two respects. First, Defendants “breached the terms of the [Purchase] Agreement by failing and/or refusing to sell and deliver to MC Oil a base minimum of 1,000 barrels of wax crude oil per day under the terms of the [Purchase] Agreement.”⁶ Second, Defendants “breached the terms of the [Purchase] Agreement by failing and/or refusing to acknowledge, extend, and honor the ROFO [Right of First Offer] in favor of MC Oil for the right to purchase and receive additional volumes of wax crude oil produced by ... [Defendants] in the Uintah Basin above the base minimum of 1,000 barrels of crude oil per day.”⁷

The present Motion is directed only against MC's second breach claim. Defendants argue that summary judgment is appropriate on MC Oil's claim for breach of the “first Right of Offer” (“FROO”) because the FROO is an unenforceable agreement to negotiate.

STANDARD FOR SUMMARY JUDGMENT

“The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”⁸ When analyzing a motion for summary judgment, the court must “view the evidence and draw all reasonable inferences therefrom in the light most favorable to the party opposing summary judgment.”⁹ However, “the nonmoving party must present more than a scintilla of evidence in favor of his position.”¹⁰ A dispute is genuine only “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”¹¹

UNDISPUTED MATERIAL FACTS

The parties have each offered a single material fact. The two facts are undisputed.

1. The Purchase Agreement contains the following provision regarding the “first Right of Refusal” and “first Right of Offer”:

Axia and MC agree to meet from time to time and discuss potential volume increases under this Agreement. Allowing Axia the first Right of Refusal on additional volumes that MC procures at the local Salt Lake City refineries. Likewise Axia agrees to allow MC the first Right of Offer on additional volumes that Axia produces in the Uintah Basin. If such increases are agreed upon, this Agreement shall be amended to reflect the volume change and any new pricing negotiated.¹²

2. After MC Oil and Axia entered into the Agreement, Axia and its successor-in-interest, Ultra, produced volumes in excess of 1,000 BOPD from their properties in the Uintah Basin and sold those volumes to third parties without first offering to sell them to MC Oil.¹³

MC Oil, in a footnote, states that it has “filed a motion for partial summary judgment regarding the FROO (Dkt. 198). Many of the facts and arguments presented by MC Oil in its motion are pertinent to refute Defendants' present motion. MC Oil will not repeat all its facts and arguments here, but does refer the court thereto.”¹⁴ For the reasons discussed, MC Oil's additional facts do not affect the legal analysis below.

DISCUSSION

Defendants contend that “[b]ecause the FROO explicitly leaves pricing and other essential terms to future negotiation, the FROO is unenforceable as a matter of law.”¹⁵ Defendants point out that the FROO “states that the price for ‘additional volumes that Axia produces in the Uintah Basin’ and other essential terms would be ‘negotiated’ and reflected in an amended Purchase Agreement ‘if such increases are agreed upon.’ ”¹⁶ Defendants argue that the “[u]se of the term ‘if’ signifies the conditional nature of the future transaction, and the term ‘negotiated’ likewise signifies that the language is only aspirational—i.e., an unenforceable agreement to agree.”¹⁷ Defendants state that their interpretation is further supported by “the second sentence of Paragraph 2, which comes before and is consistent with the agreement-to-agree language.”¹⁸ That second sentence reads: “Axia and MC agree to meet from time to time and discuss potential volume increases under this Agreement.”¹⁹ According to Defendants, Paragraph 2 can only be interpreted to mean that “the parties have agreed to meet from time-to-time and negotiate future volume increases at pricing to be determined by the parties through the negotiation: A classic agreement to meet and try to agree in the future.”²⁰

MC Oil rejects Defendants' argument, contending that it is “based on the incorrect legal assertion that a contract that contains a preemptive right is automatically invalid because it is not sufficiently definite.”²¹ According to MC Oil, “ ‘[a] right of first offer gives the grantee of the right the right to buy property before it is offered for sale to third parties.’ ”²² Moreover, the right of first offer requires “ ‘the seller, upon deciding to market its property, ... [to] first make an offer to the grantee of the right of first offer. If the grantee does not accept that offer, the seller is then free to sell to anyone else on the terms rejected by the grantee or on terms which are better—but not worse—for the seller; in other words, no other buyer can get a better deal than that which was presented to the grantee.’ ”²³ Based on the above cited legal principles, MC Oil contends that the FROO provision provides MC Oil

the right to have Defendants offer terms on additional volumes of oil to MC Oil before they attempted to sell volumes to any third parties. And because of the nature of rights of first offer, as well as the implied covenant of good faith and fair dealing inherent in every contract, Defendants were required to offer the additional volumes to MC Oil at the same price and on the same terms and conditions at which the volumes were sold to third parties.²⁴

MC Oil further argues that “[s]ince Defendants did sell their additional volumes of oil to third parties, there is a sufficiently definite standard by which ‘the court could, without fabricating a contract, ascertain the price,’ namely the exact price for which it was sold to those third parties.”²⁵ MC Oil provides two additional reasons why “Defendants' argument that the FROO is unenforceable is problematic....”²⁶

First, because there is a way to interpret and apply the FROO so that it has effect, concluding that it is unenforceable and invalid would violate the mandate that contracts should be applied “with a view toward giving effect to all [provisions] and ignoring none.”²⁷ And second, Defendants' analysis of preemptive rights would effectively prohibit their use in any industry where the price of assets contracted for is unpredictable to any commercially significant degree—i.e., where the parties are unable to predict with any certainty what the future price of the asset should be—such as real estate or oil and gas.²⁸

MC Oil concludes that “[b]ecause rights of first offer are frequently held to be enforceable even when they do not contain an explicit purchase price, and because the FROO provision contains a sufficiently...