BP Prods. North America v. Stanley

• Decision Date: 14 February 2012
• Docket Number: No. 10–2097.,10–2097.
• Citation: 669 F.3d 184
• Parties: BP PRODUCTS NORTH AMERICA, INCORPORATED, Plaintiff–Appellant, v. Charles V. STANLEY, Jr.; Telegraph Petroleum Properties, LLC, Defendants–Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

669 F.3d 184

BP PRODUCTS NORTH AMERICA, INCORPORATED, Plaintiff–Appellant,

v.Charles V. STANLEY, Jr.; Telegraph Petroleum Properties, LLC, Defendants–Appellees.

No. 10–2097.

United States Court of Appeals, Fourth Circuit.

Argued: Oct. 26, 2011.Decided: Feb. 14, 2012.

ARGUED: John E. Petite, Greensfelder, Hemker & Gale, PC, St. Louis, Missouri, for Appellant. John Edwin Coffey, Redmond, Peyton & Braswell, Alexandria, Virginia, for Appellees. ON BRIEF: Mark M. Hanna, Murphy Anderson PLLC, Washington, D.C., for Appellant. Daniel D. Mauler, Redmond, Peyton & Braswell, Alexandria, Virginia; Harry Carl Storm, Lerch, Early & Brewer, Chartered, Bethesda, Maryland, for Appellees.

Before TRAXLER, Chief Judge, and SHEDD and FLOYD, Circuit Judges.

Reversed in part, vacated in part, and remanded by published opinion. Chief Judge TRAXLER wrote the majority opinion, in which Judge SHEDD joined. Judge FLOYD wrote a dissenting opinion.

OPINION

TRAXLER, Chief Judge:

BP Products North America, Inc. (“BP”) appeals a district court order granting summary judgment in favor of Charles V. Stanley, Jr., and his business, Telegraph Petroleum Properties, LLC (“Telegraph”) (together, “Defendants”) in BP's action seeking to enforce a restrictive covenant in a deed. BP also appeals the district court's award of attorneys' fees and costs. We reverse the grant of summary judgment, vacate the fee and cost award, and remand to the district court.

I.

BP is a petroleum refiner and distributor of motor fuel under the BP, Amoco, and Arco brands. Prior to December 2005, BP sold fuel directly to its lessees and station-owner retailers, who then resold the fuel to the public. Stanley was one of these lessees. For many years before December 2005, Stanley operated an Amoco-branded gasoline station in Alexandria, Virginia, on property leased from BP (“the Property”). During that time, in addition to selling BP fuel, Stanley operated an automobile repair shop on the Property.

In 2005, BP entered into an agreement to sell its Virginia, Maryland, and District of Columbia station properties and dealer fuel supply rights to Eastern Petroleum, an independent wholesale supplier, or “jobber.” This agreement was subject to first providing individual retailers the chance to match Eastern's offer. The agreement was part of a transition by BP to a new distribution model, under which BP would no longer sell fuel directly to retailers such as Stanley. Rather, BP would sell to a large jobber, who would resell to BP-branded dealers under supply agreements the jobber had with the retailers. With its acquisition of BP's Virginia retail assets, Eastern entered into a 15–year supply agreement with BP, under which Eastern agreed to buy more than 100 million gallons of fuel annually from BP. Eastern also agreed to purchase each of the station properties subject to a restriction that they could not be used to sell non-BP-branded fuel.

BP offered Stanley and its other lessee-retailers the opportunity to match Eastern's offer to purchase the property they were leasing. The purchases would have to be subject to the restriction against using the property to sell non-BP-branded fuel, and the retailers would have to enter into 15–year supply agreements with Eastern. If the dealers decided not to purchase the properties, they could continue to operate their stations as they had been, with the only change being they would be leasing from Eastern rather than BP and buying fuel from Eastern rather than BP. The purpose of these dealings was to move BP to its new jobber distribution model, which required that demand for BP fuel at the station properties be maintained during the period under which Eastern's 15–year supply agreement with BP was in force.

Stanley, represented by legal counsel, agreed to purchase the Property pursuant to a Purchase and Sale Agreement (“PSA”) with BP dated September 2, 2005. He also agreed to enter into a 15–year fuel-supply agreement with Eastern. Attached to the PSA was a Special Warranty Deed that included restrictions on the Property's use. As is relevant here, one of these restrictions (“the PR”) states:

I. Petroleum Restriction: No part of the Property shall be used by Grantee or any other Grantee Party, directly or indirectly, for an automobile service station, petroleum station, gasoline station, or for the purpose of conducting or carrying on the business of selling, offering for sale, storage, handling, distributing or dealing in petroleum, gasoline, motor vehicle fuel, diesel fuel, kerosene, benzol, naphtha, greases, lubricating oils, or any fuel used for internal combustion engines, or lubricants in any form, or other petroleum or petroleum-related products, except for the personal use or consumption of such products by Grantee or its lessees of the Property, unless any such use is in connection with the operation of the Property as a Grantor branded service station. For purposes hereof, “Grantor branded service station” shall mean a service station under the brand BP, Amoco, Arco or any other brand of Grantor or any of its affiliates or their respective successors and assigns.

The above covenants and use restrictions bind and restrict the Property as covenants and restrictions running with the land and each portion thereof, and are deemed to benefit Grantor as a user of, operator of, or supplier of Grantor branded fuels to lands or retail operations in the County in which the Property is located. These restrictive covenants will remain in full force and effect for a term of fifteen (15) years from the date of this conveyance whereupon these restrictive covenants will automatically lapse and terminate and be of no further force or effect.

J.A. 64, 468. Stanley expressly acknowledged that “the purchase price ... reflects ... the fact that all of the Use and Operating Restrictions shall be recorded against the Property and shall be binding on Grantee and the other Grantee Parties.” J.A. 462.

The deed took effect when the PSA was signed on December 5, 2005, and Telegraph signed a supply agreement with Eastern seven days later. By early 2006, however, Stanley had become concerned that Eastern was charging commercially unreasonable prices for its fuel. In response to a letter from Stanley on this subject, Eastern and Stanley both agreed to lower their profit margins in an attempt to make the sale of BP fuel at the station property viable. When this effort failed, Stanley requested that Eastern sell Telegraph a different, less expensive brand of fuel. Defendants apparently continued to purchase BP-branded fuel from Eastern until approximately July 2008.

Starting about July 2008, Telegraph did not sell any gasoline from the Property for one year but continued to provide vehicle-repair and inspection services on the Property. Defendants never requested any relief from the restrictive covenant to provide these services.

On April 27, 2009, Stanley sent BP a letter asserting that Eastern had materially breached the supply agreement by failing to offer commercially reasonable fuel prices. The letter stated that the PR was rendered unenforceable by the breach and informed BP that Stanley intended to remove his “Amoco brand imaging and obtain alternate gasoline supply.” J.A. 181. Stanley also repeated this intent in a subsequent letter. Receiving no response, Defendants began selling AmeriGO fuel on July 24, 2009. When BP learned that Defendants were selling AmeriGO fuel, it demanded that they stop doing so.

Stanley refused, prompting BP to file suit against Defendants. BP's complaint alleges that Defendants violated the PSA and the Special Warranty Deed by selling non-BP branded motor fuel during the 15–year period in which the restrictive covenant was in force. The complaint requests monetary damages, injunctive relief, and an award of attorney's fees and costs. Defendants counterclaimed, seeking a declaration that the deed restriction is overbroad and invalid (“Count I”) and that BP violated § 2–305 of Virginia's commercial code by charging commercially unreasonable fuel prices (“Count II”).

The parties filed cross-motions for summary judgment. In its motion, BP sought judgment on both its claims and Defendants' counterclaims. Defendants moved for summary judgment on BP's claims, but only on Count I of their counterclaims. BP also moved to strike a declaration in which Stanley proffered putative expert testimony on the commercial reasonableness of Eastern's fuel prices. The district court granted BP's motion to strike.

The district court subsequently granted Defendants' summary judgment motion and denied BP's, ruling that the PR was unenforceable as written and that it could not be modified by operation of the deed or by BP unilaterally. The court ruled that the PR was overbroad on the basis that it prohibited using the property as a vehicle repair business or using the property to sell kerosene, benzol, naphtha, greases, benzol, greases, or lubricating oils unless the station was BP-branded. The court did not reach Count II of Defendants' counterclaim, concluding that Count II sought the same relief that the court granted pursuant to Count I. The court also awarded $120,031.59 in fees and costs to Defendants.¹

II.

BP argues that the district court erred in concluding that the PR was overbroad and, thus, unenforceable. We agree.

“Because we are sitting in diversity, our role is to apply the governing state law, or, if necessary, predict how the state's highest court would rule on an unsettled issue.” Horace Mann Ins. Co. v. General Star Nat'l Ins. Co., 514 F.3d 327, 329 (4th Cir.2008).

The parties agree that under Virginia law, covenants “restricting the free use of land are not favored and must be strictly construed.” Mid–State Equip. Co. v. Bell, 217 Va. 133, 225 S.E.2d 877, 884 (1976). They disagree, however, regarding the test by which such covenants should be judged. Defendants argue that the restriction should be judged by the...