J.R. Simplot v. Chevron Pipeline Co.

• Decision Date: 23 April 2009
• Docket Number: No. 07-4074.,07-4074.
• Parties: J.R. SIMPLOT; Simplot Phosphates LLC, formerly known as SF Phosphates Limited Company; SF Pipeline Limited Company, Plaintiffs-Counter-Defendants-Appellees, v. CHEVRON PIPELINE COMPANY; Chevron Chemical Company; Chevron U.S.A., Inc., Defendants-Counter-Claimants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

563 F.3d 1102

J.R. SIMPLOT; Simplot Phosphates LLC, formerly known as SF Phosphates Limited Company; SF Pipeline Limited Company, Plaintiffs-Counter-Defendants-Appellees, v. CHEVRON PIPELINE COMPANY; Chevron Chemical Company; Chevron U.S.A., Inc., Defendants-Counter-Claimants-Appellants.

No. 07-4074.

United States Court of Appeals, Tenth Circuit.

April 23, 2009.

Peder K. Batalden of Horvitz & Levy LLP, Encino, CA (David M. Axelrad of Horvitz & Levy LLP, Encino, CA; and E. Scott Savage and Stephen R. Waldron of Berman & Savage, P.C., Salt Lake City, UT, with him on the briefs), for Defendants-Counter-Claimants-Appellants.

Peter W. Billings (Douglas B. Cannon, William H. Adams, and Timothy K. Clark, with him on the brief) of Fabian & Clendenin, Salt Lake City, UT, for Plaintiffs-Counter-Defendants-Appellees.

Before BRISCOE, SEYMOUR and LUCERO, Circuit Judges.

SEYMOUR, Circuit Judge.

J.R. Simplot Company, Simplot Phosphates, LLC, and Simplot Pipeline, LLC (collectively "Simplot") sued Chevron Pipeline Company, Chevron Chemical Company, and Chevron U.S.A., Inc., (collectively "Chevron") for failure to defend and indemnify Simplot pursuant to two sales agreements. Chevron denied its liability and asserted counterclaims. The district court granted summary judgment in favor of Simplot, determining Chevron breached its duty to defend. As damages, the court awarded Simplot the attorneys' fees and costs it had incurred in defending the underlying litigation. Chevron appeals from the district court's judgment. We affirm in part and reverse in part.

I.

The relevant background begins over twenty years ago in the western United States. Chevron owned and operated a phosphate mine in Utah. It also owned a phosphate fertilizer processing plant in Wyoming. To transport the phosphate ore from Utah to Wyoming, Chevron constructed a ninety-seven mile pipeline between the two locations. Ashley Creek Phosphate Company owned undeveloped phosphate leases adjacent to Chevron's Utah mine. Ashley Creek sought access to Chevron's pipeline, claiming Chevron was a common carrier and its pipeline was an essential facility for developing a phosphate mining operation.

The Initiation of the Ashley Creek Litigation

In May 1989, Chevron published a tariff for its pipeline. Ashley Creek sued Chevron, alleging the pipeline tariff was so high that it violated antitrust laws by excluding Ashley Creek from the market. The district court referred the question of the tariff's reasonableness to the Surface Transportation Board ("STB") and stayed the remainder of the case.¹ While the action was pending before the STB, Chevron began negotiations to sell its entire phosphate operation, including the pipeline, to Simplot.

Negotiations and the Sale

Simplot knew it might be subject to suit by Ashley Creek if it purchased Chevron's pipeline, and it entered negotiations with Chevron over who would be responsible for the defense of the pending Ashley Creek litigation. Chevron informed Simplot, "[i]t is our preference to sell the business as is and reflect the risk of possible pre-closing liabilities in the closing price. If this should be unacceptable, Chevron might be willing to accept pre-closing liabilities on a cost sharing basis for a limited time." 8 Aplt.App. at 2105. Simplot counter-offered that it would take control of the Ashley Creek litigation at Chevron's expense. The parties met and tentatively agreed that "Chevron w[ould] retain responsibility [over the litigation] but w[ould] consult with [Simplot] regarding any settlement." Id. at 2112 (capitalization omitted).

Simplot circulated a draft sale agreement following the face-to-face negotiations. The draft provided that Simplot would assume control over the defense of the Ashley Creek litigation, but that Chevron would be responsible for attorneys' fees, costs, and damages resulting from the litigation. Chevron did not accept Simplot's draft, stating that the "principal issue continues to be the liability provisions." Id. at 2140.

Simplot circulated revised drafts. The drafts stated that Chevron would retain control over the defense of the Ashley Creek litigation, advise Simplot of the status of the proceedings, consult with Simplot concerning defense strategy, settle the litigation only with Simplot's permission, and pay "all [resulting] penalties, damages, and costs." Id. at 2149, 2163. Simplot would assume only "the responsibility and cost of prospective compliance with the tariff when set in the [STB] Case." Id. at 2163. Simplot circulated three additional drafts. None of the drafts materially altered these revised terms. Simplot and Chevron closed the sale in 1992.

Two final agreements were central to this sale: the Phosphate Slurry Pipeline Asset Sale Agreement ("Pipeline Agreement") and the Phosphate Fertilizer Business Asset Sale Agreement ("Plant Agreement"). The Agreements contain virtually identical pertinent terms, discussed more fully infra, which include indemnification provisions and an integration clause. The Agreements provide, as of the closing date, that Simplot would assume (i) liabilities relating to its purchase that arose after the closing date and (ii) liabilities specifically set forth in particular provisions. Chevron retained responsibility for its defense in the pending Ashley Creek litigation and any concomitant damages and costs. The Agreements also provide that Chevron would, inter alia, indemnify and defend Simplot for liabilities (i) arising from the operation of the pipeline before the closing date or (ii) arising from a breach of any representation, warranty, or covenant. In exchange, Simplot agreed to indemnify and to defend Chevron for liabilities (i) arising from the operation of the pipeline after the closing date or (ii) arising from a breach of any representation, warranty, or covenant.

The Ashley Creek Litigation Post Closing

Upon acquiring the pipeline, Simplot adopted the same tariff previously published by Chevron. In response, Ashley Creek filed an STB complaint against Simplot alleging various antitrust claims. Simplot retained Chevron's STB lawyer for representation before the STB, and it paid for this initial defense.

The STB eventually consolidated Ashley Creek's cases against Simplot and Chevron. Simplot notified Chevron of its contractual duty to pay the expenses of the Ashley Creek litigation, proposing that "Chevron reimburse [it] for all costs incurred to date in the [STB] proceedings and agree to assume all costs incurred in the future." 9 Aplt.App. at 2396. Simplot reasoned that this proposal conformed with the Pipeline Agreement "[b]ecause all of the Ashley Creek proceedings revolve around the question of Chevron's compliance or noncompliance with [] [federal law]." Id. Chevron rejected Simplot's proposal, claiming it "should not pay for additional costs, if any, related solely to [Simplot] obtaining [STB] approval for its tariff or allegations by Ashley Creek directed at [Simplot]." Id. at 2399.

Ashley Creek also sued Simplot in district court. The court consolidated Ashley Creek's cases against Simplot and Chevron. Simplot asked Chevron to pay for its attorneys' fees, costs, losses, and liabilities incurred in connection with the district court case. As in the STB case, Chevron refused. Simplot and Chevron agreed to toll any claims against each other until the completion of the Ashley Creek litigation. Simplot and Chevron ultimately prevailed against Ashley Creek.

The road to Ashley Creek's defeat began in 1996 when the STB issued its decision outlining the framework and methodology for calculating a reasonable tariff. Although the STB did not determine reasonableness, it did suggest the aggregate tariffs charged were likely unreasonable. The STB's implied solution was adoption of a tariff well below Simplot's operating costs to offset the higher tariffs charged during Chevron's period of ownership. Simplot did not publish a new, significantly reduced tariff until 1999. When it did so, its goal was to defeat Ashley Creek's claims by "lowering the tariff to remove any argument that the tariff [wa]s preventing Ashley Creek from mining phosphate rock." 1 Aplt.App. at 264.

Thereafter, the district court granted summary judgment in favor of Simplot and Chevron in the Ashley Creek litigation. The court held that Simplot's current and prior tariffs were not unreasonable or exclusionary.² Even if Chevron's higher tariffs were included in the analysis, the total tariff collections over the relevant time frame were not unreasonable because of Simplot's new, below market rates. Ashley Creek appealed, and we affirmed based on a lack of antitrust standing. See Ashley Creek Phosphate Co. v. Chevron USA, Inc., 315 F.3d 1245, 1261 (10th Cir.2003).

The Current Action

In July 2004, Simplot sued Chevron for the attorneys' fees and costs it incurred in the Ashley Creek litigation, as well as prejudgment interest. Simplot claimed Chevron had a duty to defend and to indemnify it under the Agreements and demanded a jury trial. Chevron filed counterclaims, asserting Simplot had a contractual obligation to pay part of Chevron's attorneys' fees and costs.

The district court granted partial summary judgment in favor of Simplot with respect to its claims against Chevron. After reviewing Chevron's proffered extrinsic evidence, the court determined the relevant contractual language was unambiguous. It analogized the Agreements to third-party insurance contracts and held Chevron had breached its contractual duty to defend Simplot in the Ashley Creek litigation. It reasoned Chevron had a duty to defend Simplot because Ashley Creek's allegations (i) related to or arose out of acts occurring before the 1992 closing and (ii) raised the question of whether Chevron's pre-closing tariffs constituted a breach of warranty. The court held, however, that Chevron had no indemnification duty because Ashley Creek did not obtain a judgment against Simplot.

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