Youngstown Daily Legal News

Appellate court rules letters of intent not binding contracts

ANNIE YAMSON
Special to the Legal News
Published: December 6, 2016

The 6th U.S. Circuit Court of Appeals recently ruled that a lower court properly ruled on a contract dispute between an energy company and a mineral interest company.

The judgment affirmed the decision of the U.S. District Court for the Southern District of Ohio, which granted judgment on the pleadings to defendant Bounty Minerals LLC in a diversity action for breach of contract brought by Farmers' Ethanol LLC.

Farmers appealed that judgment in the 6th Circuit court before a three-judge appellate panel whose final opinion on the matter was authored by Judge Martha Craig Daughtrey.

"Farmers' Ethanol argues that letters of intent executed by the parties comprise an enforceable agreement for Bounty Minerals' purchase of certain oil and gas rights from Farmers' Ethanol," Daughtrey wrote. "In the alternative, Farmers' Ethanol argues that it is entitled to recover damages under a theory of promissory estoppel predicated on Bounty Minerals' silence in the face of an alleged duty to speak."

The case stemmed from a period of negotiations during which both companies signed letters of intent that discussed "proposed transactions" in which Bounty would purchase oil and gas interests from Farmers.

Among other provisions, one of the letters of intent outlined a period of review during which Bounty would have one week to review titles and evaluate the properties.

"If after the initial review period, Bounty wants to proceed with the acquisition of the oil and gas interest, Bounty shall prepare an oil and gas deed and order for payment in the forms attached ... and present them to Farmers' for review and approval," the letter stated.

After the review period passed, Bounty did not prepare any deeds or orders for payment and approximately one month later, it informed Farmers that a $600,000 civil judgment and judgment lien against the property prevented it from going forward with the proposed sale.

Court documents state that Farmers informed Bounty that it would satisfy the judgment and a $400,000 premium in order to enter an escrow agreement with Bounty.

Bounty did not respond but Farmers went ahead with its plan anyway.

When it informed Bounty that the judgment had been satisfied, Bounty still declined to buy the proposed properties after review by the company's legal counsel.

In its suit against the mineral interest company, Farmers claimed breach of contract and alleged that the letters of intent were considered binding contract for the sale of the oil and gas interests.

It also alleged that Bounty's silence estopped the company from claiming that it had "no obligation to perform its contracts."

The district court granted Bounty Minerals' motion for judgment, finding that Farmers' Ethanol "failed to state a claim for breach of contract because there was no binding agreement" and that Farmers' Ethanol "failed to state a claim for promissory estoppel by silence because it did not articulate any duty under which Bounty Minerals would be required to speak."

Upon review, the 6th Circuit court came to the same conclusion.

"Farmers' Ethanol argues that the letters of intent constitute a binding contract and that the 'initial review period' clause was in fact a satisfaction clause requiring Bounty Minerals to fill out the deeds and purchase the oil and gas interests unless it was dissatisfied with the title or the properties," Daughtrey wrote. "Farmers' Ethanol argues that Bounty Minerals breached this purported satisfaction clause because it refused to close the transaction in bad faith. We disagree."

The appellate panel noted that the language of the letters of intent was unambiguous - they simply stated that, after an initial review period, Bounty Minerals was free to purchase the rights at issue "if it wants to."

Daughtrey wrote that the letter granted Bounty "unfettered discretion" about whether to proceed with the sale. In fact, the panel held that the obligation "actually runs in the opposite direction in terms of what would be necessary to bind Bounty Minerals to perform."

"It is true that if Bounty Minerals were satisfied with the title work, it could choose to execute the deeds, but it was Farmers' Ethanol (not Bounty Minerals) that the language purports to bind," Daughtrey wrote. "The fact that the 'initial review period' clause appears after language requiring Farmers' Ethanol to provide 'deeds and other title information and documentation regarding title to the properties' does not limit the scope of Bounty Minerals' discretion or transform the provision into a satisfaction clause dependent upon the quality of Farmers' Ethanol's title."

Similarly, the appellate panel ruled that Bounty Minerals had no duty to speak after Farmers' informed the company that it would satisfy the lien.

"Even taking all well-pleaded facts in Farmers' Ethanol's complaint as true, it is not plausible to conclude that Bounty had promised to complete the transaction if Farmers' Ethanol satisfied the lien, much less that such a promise was clear and unambiguous," Daughtrey wrote.

Finding no error in the district court's judgment in favor of Bounty Minerals, the court of appeals affirmed the lower court's judgment.

Judges Eric Clay and Deborah Cook joined Daughtrey to form the majority.

The case is cited Farmers' Ethanol v. Bounty Minerals, Case No. 16-3419.

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