Smith v. Arrington Oil & Gas Inc.

• Decision Date: 01 March 2012
• Docket Number: 10–3542,11–1526,11–1498.,Nos. 10–3423,11–1519,10–3785,s. 10–3423
• Parties: Joe K. SMITH; Jan G. Smith; Burke Smith, Executor of Irene Smith's Estate, Appellees, v. ARRINGTON OIL & GAS, INC., Appellant.Winston P. Foster, Jr.; Mary Ned Foster; Mary Frances Gaston, Appellees, v. Arrington Oil & Gas, Inc., Appellant.Samuel P. Hall; Brenda Hall, Appellees, v. Arrington Oil & Gas, Inc., Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

664 F.3d 1208

Joe K. SMITH; Jan G. Smith; Burke Smith, Executor of Irene Smith's Estate, Appellees,

v.ARRINGTON OIL & GAS, INC., Appellant.Winston P. Foster, Jr.; Mary Ned Foster; Mary Frances Gaston, Appellees,

v.Arrington Oil & Gas, Inc., Appellant.Samuel P. Hall; Brenda Hall, Appellees,

v.Arrington Oil & Gas, Inc., Appellant.

Nos. 10–3423

11–1526

10–3542

11–1519

10–3785

11–1498.

United States Court of Appeals, Eighth Circuit.

Submitted: Sept. 22, 2011.Filed: Jan. 5, 2012.Rehearing Denied March 1, 2012.

William Arnold Waddell, Jr., argued, Robert S. Shafer, Little Rock, AR, William M. Bridgforth, Jenny R. Wilkes, Pine Bluff, AR, Harper Estes, Steven C. Kiser, Midland, TX, on the brief, for Appellant.

Brian Gene Brooks, argued, Greenbrier, AR, John T. Holleman, Maryna O. Jackson, on the brief, Little Rock, AR, for Appellees.

Before RILEY, Chief Judge, COLLOTON and GRUENDER, Circuit Judges.

GRUENDER, Circuit Judge.

In this consolidated appeal, three sets of landowners assert claims against Arrington Oil & Gas, Inc. for breach of contract, promissory estoppel, and unjust enrichment relating to Arrington's failure to pay cash bonuses under oil and gas leases. The district court ¹ granted summary judgment to the landowners on the breach of contract claims and thereafter dismissed the landowners' other claims with prejudice on the landowners' motions. For the reasons stated below, we affirm.

I. BACKGROUND

Arrington is an oil and gas production company headquartered in Midland, Texas. Each landowner was a resident of Arkansas at the time the present actions were filed.² From January through July of 2006, Arrington's landmen presented oil and gas lease agreements to the landowners for certain properties in Phillips County, Arkansas. The lease agreements were prepared by Arrington and are substantially identical with the exception of the names of the property owners, execution dates, and property descriptions.

Each lease agreement recites an exchange in which the landowner (as lessor) grants to Arrington (as lessee) an exclusive right to explore and develop oil and gas resources on specifically described property “for and in consideration of a cash bonus in hand paid ... and of the covenants and agreements hereinafter contained....” In addition to the recitation of a cash bonus, the amount of which is not stated, the lease agreements recite in Paragraph 2 that as consideration for the lease, the lessee will pay the lessor royalties in the amount of fifteen percent of sales of oil and gas derived under the lease less certain costs of production. The lease agreements remain in force for five years from the date of execution and grant the lessee the option of extending the lease for an additional five-year term. Paragraph 13 specifically provides that the lease agreements “shall be effective as to each Lessor on execution hereof as to his or her interest.” Paragraph 15 provides that the lessor “warrants and agrees to defend the title to the lands herein described.” Paragraph 16 grants Arrington the opportunity to cure any failure to perform any of its covenants under the lease after notice of the breach by the landowner. The lease agreements provide a notarized signature block for each landowner, but they do not contain a signature space for Arrington.

In each transaction, Arrington's landman delivered one or more bank drafts to the landowners in exchange for receiving the signed lease agreement. Each draft designates Arrington as the “Drawee,” the landman as the “Drawer,” and Western National Bank in Midland, Texas, as the “Collecting Bank.” Each draft references a corresponding lease agreement by execution date and property description. The drafts were issued to pay the “cash bonus” referenced in the lease agreement and the total payment amount for drafts corresponding to any particular lease agreement was equal to $300 for each acre of property covered by the lease agreement.³ Each draft also contains additional language providing that (emphasis added):

On approval of lease or mineral deed described hereon, and on approval of title to same by drawee not later than [a stated number of] banking days after arrival of this draft at Collecting bank, with the right to Re–Draft.

PAY TO THE ORDER OF [landowner].

After disclosing the payee name and payment amount, each draft then contains language regarding escrow of the draft, including the following exculpatory language:

[T]here shall be no liability whatsoever on the collecting bank for refusal to return the [drafts] prior to [expiration of the escrow period printed on the draft].

In the event this draft is not paid within said time, the collecting bank shall return the same to forwarding bank and no liability for payment or otherwise shall be attached to any of the parties hereto.

Each landowner subsequently deposited the drafts he or she received in exchange for the lease agreement at a local bank. Arrington failed to make payment on the drafts and never otherwise paid the cash bonuses discussed in the lease agreements. As a result, the landowners filed the present actions. During discovery, Arrington admitted that it had no record of title disapproval for any of the lease agreements at issue. Arrington also admitted in a separate case that it decided to abandon its oil and gas leases in Phillips County on July 26, 2006, because it drilled an unproductive well there. The district court granted summary judgment for the landowners on the breach of contract claims, finding that the lease agreements were enforceable contracts subject only to Arrington's good faith disapproval of title and that there was no genuine question that Arrington decided not to pay the drafts for reasons that were unrelated to title. The landowners subsequently moved for costs and attorneys' fees pursuant to Arkansas law, and the court granted those motions as well. Arrington timely appeals.

II. DISCUSSION

We review the district court's grant of summary judgment de novo. Taylor v. St. Louis Cnty. Bd. of Election Comm'rs, 625 F.3d 1025, 1026 (8th Cir.2010) (per curiam). Summary judgment is appropriate when, viewing the record in the light most favorable to the nonmoving party, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Id.

Arrington contends that the lease agreements were not enforceable contracts because (1) the drafts' no-liability clause negated mutuality of obligation in the lease agreements, (2) Arrington never “approved” the leases in accordance with the condition stated on the bank drafts, and (3) Arrington never approved title in accordance with the condition stated on the bank drafts. The landowners counter that the lease agreements they executed before receiving the bank drafts control the agreement. They argue that the bank drafts are merely the method of payment of the cash bonuses referenced in the lease agreements and that Arrington is obligated to pay the cash bonuses under the lease agreements regardless of any terms to the contrary recited on the drafts. Thus, we must determine whether the drafts' no-liability, lease approval, or title approval clauses absolved Arrington of a legally enforceable duty to pay the cash bonuses recited in the lease agreements.

We review de novo the district court's “interpretation and construction of a contract, as well as a district court's interpretation of state law.” Am. Prairie Constr. Co. v. Hoich, 594 F.3d 1015, 1023 (8th Cir.2010). Our jurisdiction in these cases is based on diversity of citizenship, and the parties agree that we are to apply Arkansas law. See Kaufmann v. Siemens Med. Solutions USA, Inc., 638 F.3d 840, 843 (8th Cir.2011). Thus, we “must attempt to predict what [the Arkansas Supreme Court] would decide if it were to address the issue.” Raines v. Safeco Ins. Co. of Am., 637 F.3d 872, 875 (8th Cir.2011). In so doing, “we apply three well-established principles of contract law.” First Nat'l Bank of Crossett v. Griffin, 310 Ark. 164, 832 S.W.2d 816, 819 (1992). “[T]he primary rule in the construction of instruments is that the court must, if possible, ascertain and give effect to the intention of the parties.” Harris v. Stephens Prod. Co., 310 Ark. 67, 832 S.W.2d 837, 840 (1992). Arkansas law requires courts to “look to the contract as a whole and the circumstances surrounding its execution to determine the intention of the parties.” Griffin, 832 S.W.2d at 820. Second, in construing any contract, Arkansas courts “must consider the sense and meaning of the words used by the parties as they are taken and understood in their plain, ordinary meaning.” Id. at 819 (quoting Farm Bureau Mut. Ins. Co. of Ark. v. Milburn, 269 Ark. 384, 601 S.W.2d 841, 842 (1980)). Third, “different clauses of a contract must be read together and the contract construed so that all of its parts harmonize, if that is at all possible.” Id. (quoting Cont'l Cas. Co. v. Davidson, 250 Ark. 35, 463 S.W.2d 652, 655 (1971)). “A construction that neutralizes any provision of a contract should never be adopted if the contract can be construed to give effect to all provisions.” Tyson Foods, Inc. v. Archer, 356 Ark. 136, 147 S.W.3d 681, 686 (2004). Applying these principles, we hold that the lease agreements required Arrington to pay the cash bonuses unless Arrington disapproved of title in good faith within the time prescribed on the face of each bank draft.

We begin by rejecting the landowners' assertion that the lease agreements can be construed without considering the language of the bank drafts. Under Arkansas contract law, multiple documents executed as part of a single transaction generally will be construed together as a single contract. W.T. Rawleigh Co. v. Wilkes, 197 Ark. 6, 121 S.W.2d 886, 888 (1938). The drafts here were executed as part of the same transaction as the lease agreements and the drafts were executed at substantially the same time. Furthermore, each draft specifically...