How not to argue about extrinsic evidence

breach-of-contractIn Smith Group JJR, PLLC v. Forrest General Hospital, a dispute about an architect’s fee, the appellant argued that “the district court erred by considering extrinsic evidence bearing on the meaning of the term ‘actual contstruction cost’ in the parties’ agreement. This issue – the proper role of extrinsic evidence in determining the meaning of a contract, produces frequent litigation and frequent differences of opinion between district courts and the Fifth Circuit. Here, the TexasBarToday_TopTen_Badge_VectorGraphiccourt found a waiver of these arguments before the trial court, reminding that “citing cases that may contain a useful argument is simply inadequate to preserve that argument for appeal; ‘to be preserved, an argument must be pressed, and not merely intimated.'” No. 16-60134 (Sept. 9, 2016, unpublished). (This post was picked as one of the top five of the week by the Appellate Advocacy blog on the Law Professor Blogs Network!)

Mutual mistake, ambiguity, and extrinsic evidence

The Fifth Circuit addressed the doctrine of mistake under Louisiana law in Fruge v. Amerisure663 F.3d 743 (2011).  After reminding that choice-of-law issues are waived unless presented to the district court, the Court considered reformation of an insurance policy under general contract principles.  The Court began by noting that Louisiana law allows reformation in the case of mutual mistake, and consideration of extrinsic evidence to prove such a mistake, even if the policy language is unambiguous.  It reviewed different post-accident reformation scenarios, noting that a Louisiana statute generally precludes a post-accident reformation to rescind coverage, and concluded that a reformation claim based on mutual mistake was cognizable in the post-accident setting presented in this case.  The Court reversed and remanded, noting that the extrinsic evidence could potentially prove that no mistake occurred.

Conduct slides dispute into arbitration.

The parties in IQ Products Co. v. WD-40 Co.disputed whether an arbitration agreement was limited to “propane/butane-propelled produicts” or also “carbon dioxide-propelled products.” The party who prevailed in the arbitration relied mainly on the parties’ subsequent conduct to justify the broader reading, and the Fifth Circuit agreed (applying California law): “Considering . . . ‘the words used . . . as well as extrinsic evidence of such objective matters and the surrounding circumstances under which the parties negotiated [and] entered into the contract; the object, nature and subject matter of the contract; and the subsequent conduct of the parties . . . WD-40’s assertion is . . . not wholly groundless.” No. 16-20595 (Sept. 13, 2017).

Barge at large not discharged.

GD MorganConstango Operators Inc. built a pipeline beneath the Atchafalaya Channel.  Unfortunately, the Corps of Engineers neglected to forward information about that new pipeline to its Waterways Division, which supervises dredging operations. A dredging barge operated by Weeks Marine (the G.D. MORGAN, right) then hit the pipeline. The resulting trial awarded damages to Constango, with the U.S. liable for 60% and Weeks 40%, and the Fifth Circuit affirmed.

The opinion turns largely on issues or maritime law and the applicable federal regulations, but has three features of broad general interest:

  1. An exceptionally clear definition of “extrinsic evidence” as “anything outside a contract itself,” which excluded consideration of material from the Federal Register and CFR in construing an exculpatory clause;
  2. A reminder that a duty of care can arise from common law even though regulations control and define some aspects of the parties’ dealings; and
  3. A reminder, under general tort law, that “[t]he fact that Weeks followed the custom of the dredging industry is not dispositive, because a common practice can still be negligent.”

Contango Operators, Inc. v. USA, No. 14-20265 (May 28, 2015, unpublished).

“Replace” = ambiguous pipeline easement

AngusIn Angus Chemical Co. v. Glendora Plantation, Inc., an industrial facility had an easement that gave it “the right to construct, maintain, inspect, operate, protect, alter, repair, replace and change” a pipeline.  No. 14-30416 (March 24, 2015).  The company plugged and abandoned its original 12″ pipeline in favor of a new 16″ one.  The key appellate issue was whether the right to “replace” a pipeline allowed the company to simply substitute one pipeline for another, or whether it also “impl[ied] a corresponding duty to remove” the old one.  The Fifth Circuit found the term “replace” was ambiguous in this context, and that there was a material fact issue in the extrinsic evidence about which meaning should prevail.  Therefore, it reversed the district court’s summary judgment in favor of the chemical company.  This topic — the role of extrinsic evidence in contract disputes — was most recently before the Court in a major case in the “Whoomp! There it is” litigation, and as detailed in a link from that post, frequently leads to disagreement between the trial courts and the Fifth Circuit.

Whoomp! Extrinisic evidence.

The same week as whoompthe en banc vote in the whooping crane litigation, the Fifth Circuit analyzed “Whoomp! (There It Is).”  The unfortunate song has been mired in copyright infringement litigation for a decade; the district court entered judgment for the plaintiff for over $2 million, and it was affirmed in Isbell v. DM Records, Inc., Nos. 13-40787 and 14-40545 (Dec. 18, 2014).  [The opinion notes: “The word “‘Whoomp!’ appears to be a neologism, perhaps a variant of ‘Whoop!,’ as in a cry of excitement.”]

The main appellate issue was a variant of a frequently-litigated topic — the role of extrinsic evidence in contract interpretation.  The assignment in question was governed by California law, which the Court found to “employ[] a liberal parol evidence rule” with respect to consideration of extrinsic evidence.  The appellant argued that the district image court erred “in interpreting the Recording Agreement without asking the jury to make any findings on the extrinsic evidence.”  The Court disagreed, finding that the record did not present “a question of the credibility of conflicting extrinsic evidence” (emphasis in original): “The only dispute is over the meaning of the Recording Agreement and the inferences that should be drawn from the numerous undisputed pieces of extrinsic evidence.  This is a question of law for the court, not for a jury.”

Preservation twofer in contract case

The parties to a contract about the construction of a barge disputed whether an amendment required price adjustments based on the price of steel.   Blessey Marine Services, Inc. v. Jeffboat, LLC, No. 13-30731 (Nov. 10, 2014, unpublished).  In a pretrial summary judgment ruling, the district court rejected the plaintiff’s argument that the contract was unambiguous, and held a jury trial to hear extrinsic evidence and resolve the ambiguity.  On appeal, the Fifth Circuit held:

1.  Because the plaintiff did not renew the ambiguity argument in a Rule 50 motion (although it did raise the point in a motion in limine and in opposition to the other side’s motion), the Court could not consider it on appeal; and

2.  “By adducing some of the same extrinsic evidence at trial that it had sought to exclude in its motion in limine, [Plaintiff] waived its right to challenge the district court’s admission of that evidence.”  (citing Fed. R. Evid. 103(b) and Ohler v. United States, 529 U.S. 753, 755 (2000) [“[A] party introducing evidence cannot complain on appeal that the evidence was erroneously admitted.”])

Only consider parol evidence when you consider it.

In Bluebonnet Hotel Ventures, LLC v. Wells Fargo Bank, N.A., the Fifth Circuit considered whether there had been an “[e]rror that vitiates consent” because of a “failure of cause” about an interest rate swap agreement, so as to allow its cancellation under Louisiana contract law.  No. 13-30827 (June 6, 2014).  In the course of affirming summary judgment for the bank, the Court declined to consider emails written around the time of contracting, noting: “Under Louisiana law, courts may only consider parol evidence when a contract is ambiguous.” To illustrate the sharp edge that separates holdings in the area of extrinsic evidence, cfFruge v. Amerisure663 F.3d 743 (5th Cir. 2011) ( applying Louisiana law and holding: “Parol evidence is admissible to show mutual error even though the express terms of the policy are not ambiguous.”) (citations omitted).

Out of the frying pan of Rule 12, into the fire of Rule 56

First case: Highland Capital sued Bank of America for the alleged breach of an oral contract to sell a $15.5 million loan.  After the Fifth Circuit reversed the dismissal of this claim under Rule 12(b)(6), it affirmed summary judgment for the defendant in Highland Capital Management LP v. Bank of America, No. 13-11026 (July 3, 2014). Highland relied upon standard terminology promulgated by an industry association, while the Bank pointed to evidence showing that, in this specific transaction, the Bank was not familiar with that terminology and not want it to control.  “Although industry custom is extrinsic evidence a factfinder can use to determine the parties’ intent to be bound, its value is substantially diminished where, as here, other evidence overwhelmingly shows that the persons involved in the dealings were unaware of those customs.”    The Court also rejected an alternative theory that a prior transaction that involved the terminology continued to govern the parties’ relationship, noting: “Whether a prior contract had a binding effect on the procedures available for future contract-formation is a legal question.”

Second case:  As with the previous case, WH Holdings LLC v. Ace American Ins. Co. was remanded for development of a factual record, this time for extrinsic evidence about a contract ambiguity.  No. 13-30676 (June 26, 2014, unpublished).   And as with the previous case, the Fifth Circuit affirmed a summary judgment, finding that seven pieces of extrinsic evidence were either not relevant to the specific contract issue, or “equally consistent with both” readings.

A car and eight corners

In Star-Tex Resources, LLC v. Granite State Ins. Co., the parties disputed whether an “auto exclusion” barred coverage in a personal injury case.  553 F. App’x 366 (5th Cir. 2014).  The Fifth Circuit concluded that it was not possible to determine coverage form the plaintiff’s pleading: “The complaint contains only one, brief sentence describing the facts of the accident. Importantly, it contains no description of how Esquivel caused the collision.”  Therefore, it was appropriate to consider extrinsic evidence (beyond the “eight corners” of the pleading and policy) that the insured was driving a car at the time of the accident, as it was relevant to coverage and by itself did not go to liability, citing Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (2004).

Top five cases from mid-2013

The Fifth Circuit addressed several important business litigation topics in May-August of 2013:

1.       Borrowers survive.  Mortgage servicers still won many cases, including a published opinion rejecting claims of “robosigning.”   Three times, however, the Fifth Circuit reversed Rule 12 dismissal of borrowers’ pleadings.

2       Personal jurisdiction.  The Fifth Circuit applied for the first time  a 2011 Supreme Court opinion about the “stream of commerce,” finding jurisdiction over a foreign manufacturer, but noting that the opinion may affect older Circuit cases suggesting that a general intent to sell in the US could create jurisdiction in a specific state.

3.       Extrinsic evidence.  The proper handling of extrinsic evidence is a recurring challenge in contract litigation.  A recent case reminds of the importance of evidence about course of performance, even for an unambiguous contrac

4.       Venue.  The Court granted mandamus to compel an intra-district transfer from East Texas’s Marshall Division to its Tyler Division.

5.       Jury deference.  In Wellogix, Inc. v. Accenture, LLP, the Court affirmed a $44 million jury verdict, reminding: “Had we sat in the jury box, we may have decided otherwise.”  Three other published opinions substantially affirm jury awards.

BONUS: Where is the M/V OCEAN SHANGHAI?  An admiralty appeal was recently found moot, in part because the “ship had sailed” from the Fifth Circuit.  Modern technology lets blog readers follow the SHANGHAI to non-Fifth Circuit locations around the globe.

Ambiguity resolved, mineral interests not conveyed.

In Temple v. McCall, the Fifth Circuit confronted a series of property conveyances with ambiguous language about whether mineral rights were included.  No. 12-30661 (June 20, 2013).  The Court affirmed, approving the weight given by the district court to expert testimony about “customary interpretation” of similar deed language in Louisiana.  The Court discussed the proper weight that Erie gives to an intermediate state appellate opinion, but ultimately found the relevant Louisiana case distinguishable on its facts.  (The proper role of extrinsic evidence in contract cases is a recurring issue in the Court’s diversity cases, although the express finding of ambiguity in this dispute simplifed the analysis on that point.)

One contract clause, three opinions.

An assignment of royalty interests for a continental shelf project had this “calculate or pay” clause:  “The overriding royalty interest assigned herein shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner’s royalty under the Lease.”  The parties disputed whether the clause simply required calculation of royalties in the same way as the government’s royalty, or allowed suspension of the assigned payments during a period when the government’s royalty right was suspended. Total E&P USA, Inc. v. Kerr-McGee Oil & Gas, No. 11-30038 (revised June 20, 2013).  Applying Louisiana law, the majority found the clause ambiguous on that issue, and further reasoned that at the time of contracting, legal principles that eventually became settled and could resolve the ambiguity were not yet settled.  Noting that no cross-appeal was taken, the Court reversed a summary judgment and remanded for consideration of extrinsic evidence.   A succinct concurrence noted an additional reason for finding ambiguity based on the grammar of the clause.  A dissent took issue with the majority’s analysis of other contract provisions and applicable law, and would have affirmed summary judgment about interpretation but reversed as to reformation for mutual mistake.    Both the majority and dissent endorsed consideration of extrinsic evidence, for different reasons and purposes — a general topic which recurs with some regularity in the Court’s contract opinions.

CAFA jurisdiction

The Fifth Circuit’s recent opinions about CAFA jurisdiction have focused on two main issues.  The first is the definition of a “mass action,” which like a class action can justify federal diversity jurisdiction; the second is the scope of the “local controversy” exception to CAFA jurisdiction, a kind of abstention that applies if several statutory requirements are satisfied.

“Mass action.”  The Fifth Circuit concluded that a consumer suit brought by the Mississippi Attorney General was a “mass action” in State of Mississippi v. AU Optronics Corp., 701 F.3d 696 (2012), but the Supreme Court reversed 9-0 on January 14, 2014.    After review of CAFA’s language and structure, that Court concluded that an action brought on behalf of consumers by a state was not a “mass action” that could allow removal, since it has only one plaintiff, and the claims of the relevant consumers cannot be counted without “unwieldy inquiries.”  The Supreme Court characterized the “mass action” provision of CAFA as a “backstop” to prevent the repackaging of a class action.

“Local controversy” exception.  
  • In Williams v. Homeland Insurance, the Court affirmed the denial of a motion to remand, concluding that the “local controversy” exception to CAFA jurisdiction was satisfied.  The opinion reminds that “[t]he parties moving for remand bear the burden of proof that they fall within an exception to CAFA jurisdiction.”  657 F.3d 287 (5th Cir. 2011).  In this challenge to discounts made by a PPO program, the Court concluded that adding a claims administrator as a new party did not change the fact that ”significant relief” was still sought from the in-state entity that operated the PPO network, thus satisfying that element of the local controversy exception.  The Court went on to state that “a class arbitration is not a class action,” and that as a result, a prior arbitration did not implicate the requirement of the exception that no other class action have been filed against a defendant in the previous three years.
  • The Court found CAFA jurisdiction in Opelousas General Hospital v. FairPay Solutions, 655 F.3d 358 (5th Cir. 2011).  The plaintiff sued a medical bill review company and two of its clients, alleging that discounts violated Louisiana workers compensation laws.  All class members were from Louisiana and one of the clients was based there, so the question addressed was whether the conduct of that defendant was a “significant basis of all the claims asserted.”   Bypassing an issue for procedural reasons about whether extrinsic evidence may be considered, the Court found no allegations or evidence that allowed an evaluation of that party’s conduct in the alleged wrongful scheme.  The Court also rejected the argument that potential “solidary” (joint and several) liability could satisfy this statutory requirement.  (The author of this blog was counsel for Petitioner in this matter.)
  • The exception was discussed incidentally in Horn v. State Farm Lloyds, No. 12-40410 (Dec. 21, 2012), in which the parties agreeed: “State Farm agrees not to remove any Hurricane Ike cases filed by your firm to Federal Court.”   Roughly a year later, the firm filed a 100,000-member class action against State Farm, who removed the case.  State Farm argued that the agreement was intended to resolve large numbers of individual claims and extending it to a class action was not consistent with the specific consideration given.  Among its contentions, State Farm argued that the waiver was inconsistent with CAFA’s elimination of the requirement of unanimous consent to removal.  The Fifth Circuit rejected that argument, noting that it was not clear that CAFA jurisdiction would apply given the general makeup of the class.  

Are the terms “reasonableness” and “due diligence” ambiguous?

In Ergon-West Virginia, Inc. v. Dynegy Marketing & Trade, the Fifth Circuit found that Dynegy had no duty under two natural gas supply contracts to attempt to get replacement gas after a declaration of force majeure in response to hurricane damage, affirming the district court as to one contract and reversing as to the other.  No. 11-60492 (Jan. 22, 2013).  The first contract’s force majeure clause required Dynegy to “remed[y] with all reasonable dispatch” the event.  The Court found that “reasonable” was not ambiguous but that extrinsic evidence of industry standards (favorable to Dynegy) was properly admitted to give it full meaning (contrasting its approach with the district court’s, which found the term ambiguous and admitted the testimony to resolve the ambiguity).  The second contract’s provision had language about “due diligence” by Dynegy.  The Court found the term ambiguous as both parties’ readings of it were reasonable, and then held that the district court should have credited the same evidence here as it did for the first contract.

Role of “commercial context” in construing unambiguous contract

The parties in Ballard v. Devon Energy disputed when a provision in an oil field joint operating agreement, about the effect of “surrendering” certain leases, would apply.  No. 10-20497 (April 19, 2012)  The Court affirmed the denial of leave to amend the plaintiff’s contract claims to add a fiduciary duty count, based on a lengthy delay in raising the issue.  Op. at 6.  The Court then, applying Montana law, concluded that while the parties had both advanced “facially plausible” readings of the provision in isolation, the defendant’s reading was more persuasive in the overall context of the entire development project.  Id. at 12-15.  The Court affirmed summary judgment for the defendant, although it criticized the trial court for considering “extrinsic evidence” before attempting to construe the document on its face.  Id. at 9-10.