Hunt Petroleum Corporation v. State

• Decision Date: 01 January 2004
• Docket Number: No. 1011762.,1011762.
• Parties: Hunt Petroleum Corporation v. State of Alabama.
• Court: Alabama Supreme Court

Page 1

Hunt Petroleum Corporation v. State of Alabama.

No. 1011762.

Supreme Court of Alabama.

Appeal from Mobile Circuit Court (CV-99-2526).

SEE, Justice.¹

Hunt Petroleum Corporation appeals from a judgment entered against it and in favor of the State of Alabama awarding the State $3,403,200 in compensatory damages² and $20,000,000 in punitive damages on the State's fraud claims.

The State's fraud claims were based on alleged misrepresentations made by Hunt to the State regarding the payment of royalties by Hunt on gas extracted from Mobile Bay pursuant to a lease agreement between the State and Hunt. Hunt argues that the State failed to establish that it relied on the alleged fraudulent misrepresentations, and that, therefore, the State failed to establish a necessary element of fraud. Therefore, Hunt argues, the trial court erred when it denied Hunt's motion for a judgment as a matter of law ("JML"). We reverse and remand.

I.

In 1984, Exxon Corporation and Hunt Petroleum Corporation entered into a joint venture to extract gas and gas byproducts ("gas") from Mobile Bay.³ In that same year, Exxon and Hunt entered into a lease agreement with the State, pursuant to which they leased the oil-and-gas rights to certain sections of Mobile Bay. In consideration for the right to extract and sell the gas, Exxon and Hunt made an initial payment to the State of Alabama of more than $52 million and also agreed to pay certain royalties based on the amount of gas successfully produced by drilling wells in Mobile Bay. The relevant provision of the lease agreement provides:

"5. When production of oil, gas or any other liquid or gaseous hydrocarbon mineral from the leased area is obtained, [Hunt] agrees to pay [the State], during the time hereof, the following royalties:

"(a) The value of ... 25% of the gross proceeds from oil, distillate, condensate, gas, natural gasoline or other product covered by the lease, produced and sold from the leased area at the price received therefor or at the best price realizable in the exercise of reasonable diligence, whichever is higher ...."

(Emphasis added.) Hunt and the State dispute the proper point in the extraction process at which the gas should have been valued, that is, the point at which "gross proceeds" should have been calculated; this litigation is the result of that dispute.

Hunt interpreted the lease agreement to obligate it to pay royalties based on the value of the gas at the point of extraction, that is, at the wellhead. This interpretation of the lease agreement allowed Hunt to deduct from the sale price of the gas (1) the costs it incurred in transporting the gas to an onshore treatment plant, (2) the costs of transforming the gas at the treatment plant into a commercially salable product, and (3) the costs of transporting the transformed gas from the treatment plant (the point at which the gas leaves the treatment plant is referred to as "the tailgate") to a pipeline for final sale.

The State agreed that Hunt could deduct from the sale price the cost of transporting the gas from the treatment plant to the pipeline for final sale, but disputed the deductions Hunt took (1) for transporting the gas from the wellhead to the treatment plant and (2) for transforming the gas into its final form. Thus, the State took the position that royalties were due on the value of the gas "at the tailgate."

While the State interprets the term "gross proceeds" as used in the lease agreement to mean revenue "at the tailgate," net of transportation costs from the tailgate to a pipeline, Hunt acted in accordance with its interpretation of the lease agreement and, each month, reported royalties to the State based on the value of the gas produced "at the wellhead."⁴ Hunt thus took the position that the term "gross proceeds" as used in the lease agreement means revenue not only net of the costs of transporting the gas from the tailgate to a pipeline for final sale, but also net of the transportation costs from the wellhead to the treatment plant and the costs of treating the gas. Thus, the contract question presented was what was deducted from the "gross proceeds" as that term was used in the lease agreement.

Before trial, the State moved for a partial summary judgment on the breach-of-contract claim. The trial court granted the motion and adjudged Hunt liable for breach of contract. Therefore, the State's interpretation of the lease agreement had been established as the correct interpretation and that issue was not before the jury.

At trial, the State pursued its fraud claim against Hunt. The State argued that Hunt had sent it over 100 monthly reports in which Hunt misrepresented the amount of the royalties Hunt owed the State on the gas it had extracted from its wells in Mobile Bay. The State argued that each of those monthly royalty reports fraudulently misrepresented that "net proceeds" were "gross proceeds" under the lease agreement and that the State was therefore entitled not only to damages for breach of contract, but also to damages for fraud. The jury returned a verdict in favor of the State and against Hunt and awarded the State $3,403,200 in compensatory damages and $20,000,000 in punitive damages. Hunt moved the trial court for a JML, or, in the alternative, for a remittitur. The trial court denied Hunt's motions; Hunt appealed.

II.

On appeal, Hunt argues (1) that the trial court erred in failing to grant its motion for a JML on the State's fraud claims and (2) that, even if we conclude that the trial court did not err in denying Hunt's motion for a JML, the punitive-damages award must be vacated or reduced to comport with statutory and constitutional limitations.⁵ In Alabama Power Co. v. Aldridge, 854 So. 2d 554, 560 (Ala. 2002), we stated the standard of review applicable to a ruling on a motion for a JML:

"We apply the same standard of review to a ruling on a motion for a JML as the trial court used in initially deciding the motion. This standard is `indistinguishable from the standard by which we review a summary judgment.' Hathcock v. Wood, 815 So. 2d 502, 506 (Ala. 2001). We must decide whether there was substantial evidence, when viewed in the light most favorable to the plaintiff, to warrant a jury determination. City of Birmingham v. Sutherland, 834 So. 2d 755 (Ala. 2002)."

In Robbins v. Sanders, [Ms. 1021505, February 27, 2004] ___ So. 2d ___, ___ (Ala. 2004), we stated that "[p]unitive-damages awards are subject to a de novo standard of review."

III.

Hunt argues that the trial court erred in failing to grant its motion for a JML on the State's fraud claims because, it says, the State failed to establish that the State relied on the alleged misrepresentations made by Hunt. The law of fraud is well-settled. "An essential element of any fraud claim is that the plaintiff must have reasonably relied on the alleged misrepresentation." Waddell & Reed, Inc. v. United Investors Life Ins. Co., [Ms. 1012054, July 3, 2003] ___ So. 2d ___, ___ (Ala. 2003). Section 6-5-101, Ala. Code 1975, provides that "[m]isrepresentations of a material fact made willfully to deceive, or recklessly without knowledge, and acted on by the opposite party ... constitute legal fraud." Thus, reliance in the form that the misrepresentation is "acted on by the opposite party" is an essential element of fraud in Alabama. Liberty Nat'l Life Ins. Co. v. Allen, 699 So. 2d 138, 141 (Ala. 1997).

Moreover, the burden is on the party alleging fraud to prove by substantial evidence the element of reliance. Allstate Ins. Co. v. Eskridge, 823 So. 2d 1254, 1264 (Ala. 2001). "Substantial evidence is evidence of such weight and quality that fair-minded persons in the exercise of impartial judgment can reasonably infer the existence of the fact sought to be proved." West v. Founders Life Assurance Co. of Florida, 547 So. 2d 870, 871 (Ala. 1989). See also § 12-21-12, Ala. Code 1975; Thomas v. Principal Fin. Group, 566 So. 2d 735, 738 (Ala. 1990). Evidence that amounts to "mere speculation, conjecture, or guess" does not rise to the level of substantial evidence. Charles W. Gamble, McElroy's Alabama Evidence § 448.01 (1991) (citing Smoyer v. Birmingham Area Chamber of Commerce, 517 So. 2d 585 (Ala. 1987), and Sprayberry v. First Nat'l Bank, 465 So. 2d 1111 (Ala. 1984)).

Reliance requires that the misrepresentation actually induced the injured party to change its course of action. See Restatement (Second) of Torts § 537 (1977) ("The recipient of a fraudulent misrepresentation can recover against its maker for pecuniary loss resulting from it if, but only if ... he relies on the misrepresentation in acting or refraining from action, and ... his reliance is justifiable."); 9 Stuart M. Speiser et al., The American Law of Torts § 32:49 (Clark Boardman Callaghan 1992) ("It is a fundamental principle of the law of fraud throughout the United States, regardless of the form of relief sought, that in order to secure redress, the representee (person to whom or which the misrepresentation was made) must have relied upon the statement or representation as an inducement to his action or injurious change of position.").

This Court has explained what constitutes legal reliance in Alabama:

"`To determine whether or not a misrepresentation was actually relied upon, whether it was a cause in fact of the damage, the sine qua non rule is often applied. If the plaintiff would not have acted on the transaction in question but for the misrepresentation, such misrepresentation was an actual cause of his loss. If he would have adopted the same course irrespective of the misrepresentation and would have sustained the same degree of damages anyway, it can not be said that the misrepresentation caused any damage, and the defendant will not be liable therefor.'"

Shades Ridge Holding Co. v. Cobbs, Allen & Hall Mortgage Co., 390 So. 2d 601, 611 (Ala. 1980) (quoting Fowler V. Harper and Fleming James, Jr., The Law of Torts § 7.13 ...