BPI Energy Holdings, Inc. v. IEC (Montgomery), LLC

• Decision Date: 08 December 2011
• Docket Number: No. 10–3871.,10–3871.
• Citation: 664 F.3d 131
• Parties: BPI ENERGY HOLDINGS, INC., et al., Plaintiffs–Appellants, v. IEC (MONTGOMERY), LLC, et al., Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

664 F.3d 131

BPI ENERGY HOLDINGS, INC., et al., Plaintiffs–Appellants,

v.IEC (MONTGOMERY), LLC, et al., Defendants–Appellees.

No. 10–3871.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 13, 2011.Decided Dec. 8, 2011.

Jon D. Robinson (argued), Attorney, Bolen Robinson & Ellis, Decatur, IL, for Plaintiffs–Appellants.

Paul R. Elliott (argued), Attorney, Baker Botts LLP, Houston, TX, for Defendants–Appellees.

Before POSNER, SYKES, and HAMILTON, Circuit Judges.

POSNER, Circuit Judge.

The plaintiffs, affiliated corporations that we'll refer to jointly as BPI, are producers of “coal bed methane” gas, a form of natural gas present in coal seams. (Natural gas is methane. We'll call coal bed methane gas simply “the gas”; the trade calls it CBM.) The defendants comprise a large private coal-mining company named Drummond Company, Inc., see www. drummondco. com (visited Dec. 5, 2011) and a number of limited liability companies created by and affiliated with it and unnecessary to discuss separately. For simplicity's sake we'll pretend that all the Drummond companies are one company and call it Drummond. BPI has sued Drummond for fraud, basing jurisdiction on diversity of citizenship. The district court granted summary judgment in favor of Drummond, precipitating this appeal. The substantive issues in the appeal are governed by Illinois law.

Groundwater traps the gas on the surface of the coal. Being flammable, the gas must for reasons of safety be extracted from coal before the coal is mined. Pumping out the water frees the gas, which can then be pumped to the surface and recompressed for shipping. Gas extraction firms need access to coal from which to extract the gas and the coal companies need to have the gas removed from their mines before mining. Coal-mining companies can therefore benefit from working with a gas extraction firm, like BPI, and vice versa. See Nelson Antosh, “Conoco Enters Alliance to Develop Coal–Bed Gas,” Houston Chronicle, July 6, 1994, www. chron. com/ CDA/ archives/ archive. mpl/ 1994_ 1212361/ conoco- enters- alliance- to- develop- coal- bed- gas. html (visited Dec. 5, 2011); Amoco Production Co. v. Southern Ute Indian Tribe, 526 U.S. 865, 870–71, 875–76, 119 S.Ct. 1719, 144 L.Ed.2d 22 (1999); Northern Cheyenne Tribe v. Norton, 503 F.3d 836, 839 (9th Cir.2007); Northern Plains Resource Council v. Fidelity Exploration & Development Co., 325 F.3d 1155, 1157–58 (9th Cir.2003).

Alliances between coal companies and gas extraction companies are therefore common, and BPI decided to try to form such an alliance. It began by acquiring options to buy coal-mining rights; its plan was to sell the options to a coal company in exchange for the right to extract gas from its partner's coal. It advertised for a partner in Coal Age. Drummond responded, and after brief negotiations the parties signed a memorandum of understanding in which they agreed that BPI would sell its coal options to Drummond and Drummond would lease to BPI the right to extract gas from many of its coal holdings, not limited to those Drummond would obtain by exercising the coal-mining options that BPI would be transferring to it.

The memorandum of understanding is brief and recites that it is merely “intended to form the basis for negotiation of a final agreement” and that “the parties acknowledge that [it] does not constitute a binding agreement upon the parties” with an immaterial exception regarding confidentiality.

The memorandum had a short term, and upon its expiration was succeeded by a letter of intent that lists some of BPI's coal interests and Drummond's gas extraction opportunities, states that BPI has no interest in mining coal and Drummond no interest in producing gas, avers that the two firms “are desirous of forming a strategic alliance whereby BPI can assist [Drummond] in expanding [its] coal interests and [Drummond] can assist BPI in expanding [BPI's gas] interests,” and adds that BPI “can further assist [Drummond] by degassing the coal and coal mines prior to, during and following coal mining operations on [Drummond's] reserves.” The letter of intent further states that it “will serve as the basis for negotiations of final agreements that will specifically outline the relationship between the parties” and adds that BPI will exercise its options to acquire more coal-mining rights and sell those rights to Drummond at cost and that Drummond will use its influence in pending negotiations to obtain gas extraction rights for BPI and the latter will have a right of first refusal to any such rights secured by Drummond. But the terms on which Drummond will lease those rights to BPI are not indicated in the letter of intent or elsewhere. Again there is a disclaimer: “the parties acknowledge that this [letter of intent] does not constitute a binding agreement upon the parties” (with again an irrelevant exception). “A binding commitment with respect to the transactions contemplated in this [letter of intent] will result only from execution of definitive agreements. This [letter of intent] contains the entire understanding of the parties as of the date hereof, and supersedes all prior oral or written agreements or understandings.” Finally, the “parties agree to complete due diligence as quickly as possible and to work on final agreements that will specifically define the [parties'] responsibilities and commitments.”

The letter of intent was signed in September 2004. The following month BPI began transferring coal rights to Drummond as contemplated by the letter of intent. Drummond dragged its heels in reciprocating by leasing gas extraction rights to BPI, and when it did begin leasing them (after BPI threatened to exercise its remaining coal options itself rather than transfer them to Drummond), it failed to include maps showing where it was mining coal—and without those maps BPI did not know where it could begin to extract gas without interfering with Drummond's mining. And Drummond had second thoughts about some of the gas leases that the parties had executed, proposing substitute leases with terms less favorable to BPI.

The relationship between the parties went from bad to worse. In February 2007 Drummond announced that it was terminating the letter of intent “in all respects, and specifically as to the proposed strategic alliance.”

Drummond has a different version of the facts, but we'll accept BPI's (of course without vouching for them) because even if its version is accurate it does not have a fraud case. We note, however, that virtually the only source cited in BPI's statement of facts is its complaint. Because a grant of summary judgment is based on a determination that dispositive facts alleged by the prevailing party are not or cannot reasonably be disputed, it can be challenged (other than by showing that the opponent's claim or defense is groundless as a matter of law even if all its factual allegations are conceded) only by showing that some or all of those alleged facts are disputed, and this requires evidence, and allegations are not evidence. Tibbs v. City of Chicago, 469 F.3d 661, 663 n. 2 (7th Cir.2006); Nisenbaum v. Milwaukee County, 333 F.3d 804, 810 (7th Cir.2003); FDIC v. Deglau, 207 F.3d 153, 172 (3d Cir.2000); see Fed.R.Civ.P. 56(c), (e), and Committee Notes to 1963 and 2010 Amendments to Rule 56. But BPI's sin was a venial one, because the essential facts on which it relied in the argument section of its brief are supported by citations to exhibits that contain admissible evidence.

The memorandum of understanding and the letter of intent, had they singly or jointly formed a legally enforceable contract, would in essence have obligated Drummond to swap its gas extraction leases for BPI's coal-mining options on mutually favorable terms. If indeed Drummond failed to do that, BPI could have sued for breach of contract. It could have charged that Drummond had failed to perform its side of the bargain in good faith (thus violating the duty of good-faith performance that is read into every contract, In re Ocwen Loan Servicing, LLC Mortgage Servicing Litigation, 491 F.3d 638, 645–46 (7th Cir.2007) (Illinois law); Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273, 279–80 (7th Cir.1992) (same); Restatement (Second) of Contracts § 205 (1981)), by dragging its heels, as by failing to furnish mining maps and seeking to revise a key term in leases of gas extraction rights to BPI after having executed them.

But both the memorandum of understanding and the letter of intent unambiguously disclaim the creation of enforceable rights. A document can be a contract without calling itself a contract; many letters of intent create contractual rights. Quake Construction, Inc. v. American Airlines, Inc. 141 Ill.2d 281, 152 Ill.Dec. 308, 565 N.E.2d 990, 993–94 (1990); Glass v. Kemper Corp., 133 F.3d 999, 1002 (7th Cir.1998) (Illinois law); E. Allan Farnsworth, “Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations,” 87 Colum. L.Rev. 217, 253–63 (1987). But when a document says it isn't a contract, it isn't a contract. Each lease of gas extraction rights by Drummond to BPI was a contract, but BPI isn't charging violation of the leases. Its complaint is that Drummond had promised to make the terms of the leases favorable to BPI, just as BPI had promised to sell its coal-mining options to Drummond at cost, but that not only had Drummond failed to carry out its promise, the promise was fraudulent—Drummond had never intended to lease gas rights on terms favorable to BPI; it was merely stringing BPI along in the hope of obtaining coal options on the cheap.

Illinois recognizes “promissory fraud,” though, unlike most other jurisdictions, see Speakers of Sport, Inc. v. ProServ, Inc., 178 F.3d 862, 866 (7th Cir.1999), and references there, only if it is part of a scheme to defraud. See, e.g., HPI Health Care Services, Inc. v. Mt....