CF Industries, Inc. v. Transcontinental Gas Pipe Line Corp., C-C-77-131.

Decision Date27 February 1978
Docket NumberNo. C-C-77-131.,C-C-77-131.
Citation448 F. Supp. 475
CourtU.S. District Court — Western District of North Carolina
PartiesCF INDUSTRIES, INC., and Farmers Chemical Association, Inc., Plaintiffs, v. TRANSCONTINENTAL GAS PIPE LINE CORPORATION, Defendant.

COPYRIGHT MATERIAL OMITTED

William H. McCullough, Robert H. Spearman, Sanford, Cannon, Adams & McCullough, Raleigh, N. C., Stephen A. Herman, Kirkland, Ellis & Rowe, Washington, D. C., J. S. Crawford, Anthony E. Cascino, Jr., CF Industries, Inc., Long Grove, Ill., E. Osborne Ayscue, Jr., Helms, Mulliss & Johnston, Charlotte, N. C., for plaintiffs.

Lawrence H. Gall, Transcontinental Gas Pipe Line Corp., Houston, Tex., W. Pendleton Sandridge, Jr., Womble, Carlyle, Sandridge & Rice, Winston-Salem, N. C., W. T. Covington, Jr., Kennedy, Covington, Lobdell & Hickman, Charlotte, N. C., for defendant.

MEMORANDUM OF DECISION

McMILLAN, District Judge.

Plaintiffs, Farmers Chemical Association, Inc. (FCA) and CF Industries, Inc. (CFI), brought this diversity action against defendant Transcontinental Gas Pipe Line Corporation (Transco) on May 18, 1977. FCA and CFI are both agricultural cooperative corporations. FCA as owner and CFI as lessee operate a large fertilizer plant at Tunis, North Carolina, which uses natural gas as a raw material in the manufacture of nitrogen-based fertilizer.1 Transco is a major interstate natural gas pipeline company which transports gas from fields in the Gulf of Mexico and the southwest to states along the eastern seaboard as far as New York. It is the only interstate pipeline company serving North Carolina. North Carolina Natural Gas Corporation (NCNG), a material participant in the events at issue but not a party in this case, is an intrastate natural gas distribution company which serves eastern North Carolina, including the Tunis area.

The complaint sets out four claims based on a series of dealings among the parties and third persons from 1965 to the present: (1) breach by Transco of a contract to deliver to NCNG certain quantities of natural gas on an uninterruptible basis to be used at plaintiffs' Tunis plant; (2) negligent performance of that contract resulting in foreseeable injury to plaintiffs' operations; (3) fraud arising out of negotiations from 1965 to 1969 between Transco and FCA concerning the location and construction of the Tunis plant; and (4) violation by Transco of North Carolina's Monopolies, Trusts and Consumer Protection Act, N.C.G.S. § 75-1.1. Plaintiffs seek damages of $16.5 million on each of the first three claims and the same amount trebled on their fourth claim.

The case came before the court on defendant's motion for dismissal under Rule 12(b)(6) or in the alternative for summary judgment under Rule 56. The parties filed lengthy briefs and numerous affidavits and other documents and a hearing was conducted on September 8, 1977. Based upon the materials presented by the parties the court has been able to treat the motion as one for summary judgment on the first claim only. The supporting affidavits and documents do not address the issues raised by plaintiffs' remaining claims and the motion is therefore treated as one under Rule 12(b)(6) as to those claims.

For the reasons set out below defendant's motion was granted in part and denied in part, by order entered October 11, 1977.

I. Facts

The Tunis plant was constructed in 1969 following four years of investigation and study by FCA. FCA's principal concern in planning the complex had been to locate the plant in an area having an assured uninterruptible natural gas supply, such supply being crucial since there was (and is) no commercially feasible alternative to natural gas in the manufacturing process used by the plant. During the same time Transco had become interested in extending from its main north-south pipeline a lateral branch through southeastern Virginia and into northeastern North Carolina. On the basis of existing demand and without a large commitment from new customers in the area, however, it could not justify the extension. Letters and other documents filed by plaintiffs suggest that Transco became actively involved in securing the location of the FCA plant in the area of the proposed pipeline extension and offered assurances to FCA that its natural gas requirements could be met by the new Transco pipeline.

Transco had a general policy not to compete at retail with the local intrastate distribution companies which it also supplied on a wholesale basis; it was therefore not willing to sell directly to FCA. This policy was reinforced by certain tax considerations favorable to Transco and by the fact that Transco's tariffs filed with the Federal Power Commission did not cover direct retail sales of gas. Accordingly, Transco participated with FCA in investigating and selecting among several possible distribution companies in southeastern Virginia and northeastern North Carolina. There is some suggestion in the record that it was immaterial to Transco whether FCA bought its natural gas through an established distribution company or through a shell company organized by FCA to supply only the Tunis plant. Such a company was in fact organized by FCA. However, after discussions with the North Carolina Utilities Commission (which desired the expansion of natural gas service into the northeastern part of the state) and with NCNG, the latter was selected as the distribution company and received permission from the Utilities Commission to serve the area.

By letter of intent dated October 3, 1967, Transco and NCNG agreed to the sale of certain additional gas volumes to be supplied to the new service area. Among other things the agreement was conditioned on NCNG's obtaining a firm commitment to supply gas to the FCA plant and upon Transco's obtaining a certificate of public convenience and necessity to construct its new pipeline extension. The letter recited that the parties were to execute Transco's "CD-2 Service Agreement" on the standard form contract filed with the Federal Power Commission. On November 10, 1967, the contract between FCA and NCNG was signed, providing for a daily maximum supply to FCA of 50,000 Mcf (fifty million cubic feet) of gas. This contract referred to a "companion agreement" to be executed between NCNG and Transco and was apparently drafted to minimize the risks to NCNG of its intermediary status. NCNG's representative in the contract negotiations has characterized the contract as a "`transportation agreement' drafted in the form of a purchase and sale." (Affidavit of Raymond A. Ransom.) Transco reviewed the FCA-NCNG contract and suggested one or two changes.

Four days later on November 14, 1967, Transco applied to the Federal Power Commission for a certificate of public convenience and necessity to construct the pipeline extension into northeastern North Carolina. In its application Transco specifically represented that the additional pipeline was needed to service the FCA Tunis complex and that the existence of that plant made the pipeline economically feasible. The required Commission approval was obtained in May, 1968, and on October 2, 1968, Transco and NCNG executed the contemplated standard form contract adding the new gas volumes required for the northeastern area. This latter document made no reference to FCA or to any other customer of NCNG.

NCNG was to receive under the amended contract a total maximum daily volume of 141,000 Mcf (141 million cubic feet) of gas, of which 50,000 Mcf (fifty million cubic feet) had been committed to FCA. FCA alleges that the Tunis plant is by far the largest customer of NCNG and is the largest single industrial customer on the Transco system.

From 1971 onward the Tunis plant has been subjected to increasingly severe gas curtailments, forcing cutbacks in production and lay-offs. Plaintiffs allege that as a result of projected future curtailments they will have to close permanently a portion of the Tunis complex. The natural gas curtailments have been system wide, and Transco claims it no longer has or can purchase sufficient gas to meet contract demands.

II. Status of FCA and CFI as Third Party Beneficiaries of the Transco-NCNG Contract

The heart of plaintiffs' complaint is the allegation that they are intended third party beneficiaries of the Transco-NCNG contract, entitled to sue for its breach. The North Carolina Supreme Court has adopted the analytical framework of the Restatement (First) of Contracts § 133 which recognizes rights of action for "donee" and "creditor" beneficiaries but excludes "incidental" beneficiaries from those rights. Matternes v. City of Winston-Salem, 286 N.C. 1, 209 S.E.2d 481 (1974); Vogel v. Reed Supply Co., 277 N.C. 119, 177 S.E.2d 273 (1970). Vogel, while endorsing the technical vocabulary of the Restatement, also laid down the more general principle which applies to this case:

". . . The determining factor as to the rights of a third party beneficiary is the intention of the parties who actually made the contract."

277 N.C. at 128, 177 S.E.2d at 279. Vogel specifically held that a landowner who had contracted for improvements to his property could not sue as a third party beneficiary of the contract between his contractor and a subcontractor selected by the latter since no intention to give the landowner a direct right against the subcontractor could be found from an examination of the subcontract and surrounding circumstances. From a reading of Vogel it would appear that the words "donee" and "creditor" and "incidental" were not treated as words of art but as ways to describe the result.

The threshold problem in this case is whether the court can look outside the "four corners" of the October 2, 1968, standard form contract between Transco and NCNG in order to determine the intent of the parties. Defendant contends that where a contract's terms are clear an unambiguous the parties will not be permitted to adduce extrinsic evidence to...

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