Knox Energy, LLC v. Gasco Drilling, Inc., Case No. 1:12CV00046.

• Decision Date: 28 June 2017
• Docket Number: Case No. 1:12CV00046.
• Citation: 258 F.Supp.3d 709
• Parties: KNOX ENERGY, LLC, Plaintiff, v. GASCO DRILLING, INC., Defendant.
• Court: U.S. District Court — Western District of Virginia

258 F.Supp.3d 709

KNOX ENERGY, LLC, Plaintiff,

v.GASCO DRILLING, INC., Defendant.

Case No. 1:12CV00046.

United States District Court, W.D. Virginia, Abingdon Division.

Signed June 28, 2017

Guy M. Harbert, III, J. Scott Sexton, H. David Gibson, Michael J. Finney, Abigail E. Murchison, and Scott A. Stephenson, Gentry Locke Rakes & Moore, LLP, Roanoke, Virginia, for Plaintiff and Counterclaim Defendants.

Daniel G. Bird, Kellogg, Hansen, Todd, Figel & Frederick, PLLC, Washington, D.C., and Thomas R. Scott, Jr., Benjamin A. Street, and Jason D. Gallagher, Street Law Firm, LLP, Grundy, Virginia, for Defendant and Counterclaim Plaintiff.

OPINION AND ORDER

James P. Jones, United States District Judge

In this breach of contract action arising under Virginia law, a jury found for the plaintiff and counterclaim defendants, Knox Energy, LLC and Consol Energy, Inc., on the ground that there was no mutual assent to enter into the alleged contract. The defendant and counterclaim plaintiff, Gasco Drilling, Inc., has moved for a new trial pursuant to Rules 59(a) and 60(b)(3) of the Federal Rules of Civil Procedure. For the reasons that follow, I will deny the Motion for New Trial.

I. PROCEDURAL HISTORY.

Knox Energy, LLC ("Knox"), a natural gas producer, filed this action seeking a declaratory judgment that no contractual relationship existed between it and Gasco Drilling, Inc. ("Gasco"), a gas drilling company. Gasco in turn filed a Counterclaim against both Knox and an additional party, Consol Energy, Inc. ("Consol").¹ In its Counterclaim, Gasco sought recovery of more than $14 million under an expired drilling contract that Gasco claimed had been resurrected by a form addendum that Consol sent to Gasco. Without objection, I ruled prior to trial that Gasco would be treated as a plaintiff and had the burden of proof as to the existence of an enforceable contract.

This case was first tried in September 2014. At that trial, at the close of Gasco's case-in-chief, I granted judgment as a matter of law pursuant to Rule 50(a) in favor of Knox/Consol. Knox Energy, LLC v. Gasco Drilling, Inc. , 54 F.Supp.3d 489, 501 (W.D. Va. 2014) (holding that no reasonable jury could find that there was mutual assent to the alleged contract). On appeal by Gasco, the court of appeals reversed, finding that, "[g]iven this mix in the evidence ... without weighing the evidence or making credibility determinations," the issue of mutual assent to the alleged contract was a matter for the jury. Knox Energy, LLC v. Gasco Drilling, Inc. , 637 Fed.Appx. 735, 739 (4th Cir. 2016) (unpublished).

In its opinion, the court of appeals recited the basic facts as follows:

In 2008, Consol, a natural gas producer, and Gasco, a drilling company, entered into a drilling agreement that lasted for two years, or until Gasco completed its work. Under the contract, Consol agreed to pay a "standby" rate of $10,800 per day, per drilling rig, for time when Gasco was on site but not actively drilling. While drilling, Gasco received an even higher fee. Additionally, the 2008 agreement contained a special "take-or-pay" provision, which guaranteed that Gasco would make two rigs available for Consol whenever it requested work. Whether or not Gasco was on site, it provided that Consol would pay the standby rate for 328 days of each twelve-month period. In May 2010, the parties amended the agreement to release one of the rigs from the contract. The remaining rig completed its work, and the contract terminated, in July 2010.

The essential dispute in this case is whether Gasco and Consol reinstated that 2008 contract in 2011. On June 6, 2011, Consol emailed Gasco a document titled "Addendum to Contract Purchase Order." Clyde Ratliff, Gasco's CEO, signed the Addendum and returned it on June 14, 2011. Consol returned the countersigned Addendum to Gasco on July 29, 2011. The Addendum stated that Gasco and Consol "agree to modify the ‘term’ provision of the contract purchase order to read as follows:" that the new "term of this agreement shall be for one year from the date set forth above and shall be automatically extended for one year terms unless either party gives written notice" of termination at least thirty days before renewal. The Addendum was "effective" on June 13, 2011. The "contract purchase order" referenced in the Addendum was the 2008 drilling agreement, "PO No. 5600000439."

....

For a year after signing this Addendum, Consol did not ask Gasco to drill, and neither party communicated about the Addendum. Then, in June 2012, Gasco sent Consol a $7,084,800 bill for 328 days of take-or-pay standby charges. Contending that it had mistakenly signed the Addendum, Consol refused to pay. Additionally, Consol filed this diversity action for declaratory relief. In response, Gasco sent Consol a second $7,084,800 invoice as liquidated damages for early termination, and counter-sued for breach of contract.

Id. at 736–37. The court of appeals held that "[i]f Gasco knew or should have known that Consol made a mistake, we agree there was no mutual assent. But Gasco presented sufficient evidence that, if credited, a reasonable jury could have found in its favor." Id. at 738.

The court of appeals affirmed several rulings I had made prior to the first trial. Id. at 739–40. These included my ruling, based on an addendum dated May 10, 2012, that Gasco's potential recovery was limited to standby charges associated with only one drilling rig. Op. & Order, Sept. 4, 2014, ECF No. 236. I had also declined to exclude parol evidence of Knox/Consol's mistake, which Gasco argued was irrelevant, confusing, and misleading. In affirming that ruling, the court of appeals found that "Consol had to present some evidence of a mistake in order to prove that its mistake was obvious to Gasco." 637 Fed.Appx. at 740. The court of appeals further noted that "both parties proposed essentially the same jury instructions, that ‘[i]f a person's words or actions warrant a reasonable person in believing that he intended real agreement, his contrary, but unexpressed, state of mind is immaterial.’ Thus the jury would have been instructed that its decision on mutual assent must rest on the objective circumstances." Id.

After the second trial in this case, the jury found for Knox/Consol. The first question on the special verdict form read,

1. Has Gasco proved by a preponderance of the evidence that Gasco and Consol had a meeting of the minds—mutual assent—such that the expired 2008 drilling contract was reinstated by the Addendum, with a distinct and common intent and understanding by both parties as to all of its material terms?

Verdict Form, ECF No. 409. The jury checked "No" and, in accordance with the form's instructions, did not answer the remaining questions.

II. TRIAL EVIDENCE.

The following is a summary of the evidence presented at the second trial.

In 2011, Clyde Beaver "Ben" Ratliff was the president and part owner of Gasco. Ben Ratliff's brother, Jerry Ratliff, and Ben's two sons, Chris and Brian Ratliff, were also part owners of the company. In early 2008, at its peak, Gasco employed about 180 people.

Using an International Association of Drilling Contractors ("IADC") contract form titled "Drilling Bid Proposal and Daywork Drilling Contract—U.S.," Knox/Consol and Gasco entered into a drilling contract effective January 10, 2008. The contract covered natural gas horizontal wells in eastern Tennessee in the first quarter of 2008. A daywork drilling contract is different from a footage drilling contract, which the parties would have used for drilling vertical wells. The day rate stated in the January 2008 contract was $10,800 per day without drill pipe and $11,800 per day with drill pipe. The January 2008 contract also stated a standby rate of $10,800 per day. The standby rate was to be paid even when Gasco was not performing any drilling. In the "Special Provisions" section of the contract form, the parties had stated certain additional terms, including that the vertical part of the well would be drilled at a footage rate of $21.50 per foot.

The January 2008 contract had a term of one year, but the parties cancelled that contract before its term ended. In June 2008, Knox/Consol and Gasco entered into a take-or-pay contract because Knox/Consol wanted a guarantee that rigs would be available to drill anytime they were needed. "Take-or-pay" means that Knox/Consol agreed to pay Gasco to have rigs and personnel ready to drill for a specified number of days per year, regardless of whether any drilling actually took place. This new 2008 take-or-pay contract ("2008 Drilling Contract") differed from the January 2008 contract it superseded in that the earlier contract did not entitle Gasco to any payment prior to when it was called to mobilize its equipment and go to the well site. The take-or-pay provision benefitted Gasco by guaranteeing that Gasco would receive payment for a specified number of days, but it disadvantaged Gasco by preventing it from using the dedicated rigs to perform other drilling work at higher rates.

The 2008 Drilling Contract used the same IADC form that the parties had used for the earlier contract. The take-or-pay provision, written into the Special Provisions part of the form, reads:

Operator shall pay for 328 days per 12–month period, at the following rates per day, per rig:

$ 13,500.00/ with pipe

$ 12,000.00/ without pipe

$ 10,800.00/ standby

Contractor must have rig available to work or these rates will be adjusted for days rig is not available to work. The days that rig is drilling top hole on Footage Rate will be deducted from the 328 day total.

Gasco Trial Ex. 2 at 6, ECF No. 387–2.

The 2008 Drilling Contract covered a larger geographical area than the earlier contract—eastern Tennessee, eastern Kentucky, Virginia, and southern West Virginia. Gasco drilled about five wells under the January 2008 contract, and about eight additional wells under the 2008 Drilling Contract during the rest of 2008.

In February 2009,...