Kansas Municipal Gas Agency v. Vesta Energy Co., Inc.

Citations: 840 F. Supp. 814; 1993 U.S. Dist. LEXIS 18428; 1993 WL 544833Docket: 92-2350-JWL

Court: District Court, D. Kansas; December 3, 1993; Federal District Court

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The case concerns breach of contract and fraud claims stemming from a natural gas supply contract between Kansas Municipal Gas Agency (KMGA) and Vesta Energy Company, Inc. (Vesta), with Vesta also asserting claims against GasTrak Corporation (GasTrak). The court is addressing three motions: GasTrak's motion for summary judgment, Vesta's motion for summary judgment against KMGA, and KMGA's motion for summary judgment. A hearing was held on November 22, 1993. The court granted summary judgment to KMGA on Vesta's fraud claim, to GasTrak on Vesta's breach of contract and unjust enrichment claims, and to Vesta on KMGA's fraud claim. All other claims were denied.

KMGA, formed by Kansas municipalities, is tasked with acquiring natural gas for local distribution and electric generation. GasTrak was retained by KMGA as its executive agent to manage gas supply acquisition and related transportation and accounting matters. On January 31, 1992, GasTrak issued a request for proposals (RFP) to various gas suppliers, detailing KMGA's gas requirements and pricing structures. Vesta responded to the RFP on February 14, 1992, proposing to supply all of KMGA's gas needs for the specified pipelines at various pricing terms for a one-year period starting May 1, 1992. Following a meeting on April 1, 1992, it was indicated that Vesta would be awarded the contract, leading to negotiations and the execution of three letter agreements for gas supply between Vesta and KMGA.

The letter agreements between the parties were established for one-year terms, detailing fixed pricing for summer and winter gas, and specifying delivery points corresponding to relevant pipelines. Each agreement included a clause stating that it would remain valid until a mutually agreeable contract was executed, and if such an agreement was not reached, the letter agreements would become null and void. Vesta committed to supplying the agreed volumes at the specified prices, barring situations of Force Majeure. 

Following the agreements, negotiations for a finalized written contract began, with Vesta proposing a revised contract on April 9, 1992. Over several months, the parties exchanged drafts and engaged in discussions, yet unresolved issues persisted, including gas supply assurances for KMGA member cities, pricing during curtailments, creditworthiness, and force majeure provisions. A memo outlining Vesta's concerns was sent on July 20, 1992, followed by a meeting on August 4, 1992, where KMGA believed most issues were resolved and only formalization remained. However, after KMGA sent a new draft on August 17, 1992, Vesta declared the letter agreements void on September 8, 1992, citing the lack of a mutually acceptable contract. Consequently, KMGA had to procure gas from another supplier at a higher price than originally set.

Additionally, a motion for summary judgment allows a judge to evaluate the necessity of a trial without assessing evidence credibility. Summary judgment is appropriate if there are no genuine issues of material fact, allowing the moving party to be entitled to judgment as a matter of law. The initial burden lies with the moving party to demonstrate the absence of genuine material fact issues, which can be established by showing a lack of evidence supporting the nonmoving party's case. Once this is satisfied, the burden shifts to the nonmoving party to prove that a genuine issue exists, necessitating a trial, and they must present factual evidence rather than relying solely on pleadings.

The existence of a factual dispute does not prevent a properly supported motion for summary judgment from being granted. The court must view the record favorably for the opposing party. Summary judgment is a vital procedure aimed at ensuring a fair and efficient resolution of cases. KMGA seeks summary judgment on its breach of contract claim against Vesta, arguing that Vesta's unilateral termination of their letter agreements was improper. KMGA asserts that the agreements were intended to remain active unless both parties mutually agreed they could not reach an agreement. However, the court finds no support for this interpretation in the agreements' language, which states that the agreements become void if the parties cannot reach a mutually agreeable contract.

The key issue is whether Vesta's failure to finalize a contract constituted a breach of its duty to act in good faith as outlined in the Kansas Uniform Commercial Code (UCC). Both parties acknowledge that the agreements are governed by the UCC, which requires good faith in contract performance. KMGA claims that Vesta breached this duty by using pretextual reasons to void the agreements, motivated by rising natural gas prices that made the deal unfavorable for them. KMGA supports its claims with extensive documentation and asserts that only three terms were left to negotiate when Vesta began altering previously agreed-upon terms and introducing new ones.

KMGA argues that Vesta improperly declared the letter agreements null and void based on disagreements that Vesta itself created, suggesting the motive was to avoid financial losses due to rising natural gas prices. Vesta, however, asserts it acted in good faith while negotiating a final written agreement, claiming unresolved contract terms justified the termination of the letter agreements. The court notes the existence of disputed material facts, preventing summary judgment on KMGA's breach of contract claim regarding Vesta's duty of good faith and fair dealing.

In its fraud claim, KMGA alleges that Vesta misrepresented the nature of its gas supply contracts, asserting that Vesta promised a "firm supply" of gas, contrary to the actual "best efforts" contracts upon review. KMGA claims to have relied on Vesta's assurances during contract negotiations, which they argue constitutes fraudulent behavior warranting punitive damages. However, the court finds KMGA's fraud claim insufficient, as it fails to demonstrate that the alleged fraud caused any additional injury beyond the breach of contract damages. Under Kansas law, punitive damages require proof of an independent tort leading to extra injury, which KMGA has not established, as their claimed damages only relate to costs incurred from finding a new gas supplier after Vesta's termination of the agreements.

KMGA's assertion of actual damages related to its fraud claim, specifically that it paid a higher price for gas from Vesta under the belief it was from a "firm supply," was introduced for the first time in response to Vesta's summary judgment motion. The court ruled that KMGA should be barred from this damage theory due to its untimeliness, as it was not presented until November 5, 1993, after Vesta's motion was filed. The court emphasized that a party cannot shift to a new theory in response to a motion when it realizes its original theory lacks merit. Furthermore, the evidence showed that KMGA's fraud claim was based on the assumption that it would not have contracted with Vesta had it known the gas was supplied under best efforts contracts. KMGA provided no evidence indicating it would have contracted with a lower-priced supplier under those circumstances. The only damages KMGA appeared to have suffered were related to costs incurred after Vesta terminated their agreements, which aligned with KMGA's claims throughout the litigation. Thus, due to a lack of additional injury as required by Kansas law, the court granted summary judgment for Vesta on KMGA's fraud claim.

In its counterclaim, Vesta accused KMGA of fraud, alleging that a KMGA agent misrepresented the existence of a lower-priced deal with another supplier, leading Vesta to lower its price. KMGA sought summary judgment on this counterclaim, arguing that Vesta failed to comply with the notice requirements of K.S.A. 12-105b, which mandates that claims against municipalities be filed in writing before commencing action. The court acknowledged that Vesta had not adhered to this requirement, raising the issue of whether K.S.A. 12-105b was applicable to Vesta's counterclaim.

Vesta asserts that the Kansas notice statute does not pertain to its fraud counterclaim, which is governed by Oklahoma law. The court agrees that Oklahoma law applies to Vesta's fraud claim, as determined by Kansas's choice of law rule, which dictates that the law of the state where the tort occurs is applicable. In this instance, the fraudulent representation occurred during a telephone call received in Oklahoma. Consequently, under Kansas's choice of law rule, Oklahoma law governs Vesta's common law fraud claims.

However, the court must also consider whether Oklahoma would recognize Kansas's notice requirement for a claim against a Kansas municipality for a tort occurring in Oklahoma. In Beard v. Viene, the Oklahoma Supreme Court addressed whether Oklahoma would acknowledge Missouri's municipal tort liability limits as a matter of comity. The case involved a traffic accident in Oklahoma caused by a Kansas City, Missouri employee. The court ultimately held that Oklahoma would recognize Missouri's recovery limits, citing the longstanding principle of sovereign immunity and noting that Oklahoma's Governmental Tort Claims Act has similar liability limitations and notice provisions to those in Kansas. This suggests that Oklahoma is inclined to limit recoverability for torts by its political subdivisions, regardless of where claims are prosecuted.

Okla. Stat. tit. 51, § 156 mandates that claims against political subdivisions must be in writing and submitted to the governing body's clerk. The content requirements for this notice align with those in K.S.A. 12-105b(d). Under Okla. Stat. tit. 51, § 157, a claim is considered denied if not fully approved within 90 days, while K.S.A. 12-105b allows 120 days for municipalities. Both statutes stipulate that no action can proceed without valid notice, and claims must be initiated within specified timeframes after denial (180 days for Oklahoma, 120 days for Kansas). The court determines that Oklahoma recognizes K.S.A. 12-105b due to similar provisions under its Governmental Tort Claims Act, based on comity principles established in Beard.

Vesta contends that K.S.A. 12-105b does not apply to its counterclaim, arguing that KMGA is not a municipality as defined by K.S.A. 12-105a(a). However, the court finds that KMGA, as an interlocal cooperation agency formed under the Kansas Interlocal Cooperation Act, qualifies as an "other agency" under the definition of a municipality and possesses the same privileges and immunities, including reliance on K.S.A. 12-105b.

Vesta also argues that the statute pertains only to plaintiffs initiating actions, not defendants with counterclaims. The court rejects this interpretation, noting that K.S.A. 12-105b(d) applies to any claim against a municipality that could lead to an action under the Kansas tort claims act. Vesta's fraud counterclaim fits this definition, and it is undisputed that Vesta did not provide the required notice. The court emphasizes that the notice requirement serves to enable the public entity to investigate claims and assess liability, which remains relevant even when a claim arises as a counterclaim in ongoing litigation. Vesta's argument that the statute's purposes no longer apply once a municipality has sued is dismissed.

The court disagrees with Vesta's conclusion regarding its fraud counterclaim, which significantly broadened the scope of KMGA's original breach of contract action. Had Vesta adhered to K.S.A. 12-105b requirements prior to filing, KMGA might have considered settling the fraud claim rather than litigating. Vesta's assertion that its counterclaim and KMGA's denial amounted to substantial compliance with the statute is rejected, as there are no Kansas cases supporting this interpretation. The court emphasizes that the statute's purpose is to prevent litigation by ensuring municipalities receive proper notice, and strict compliance is necessary. Vesta's argument that KMGA waived the K.S.A. 12-105b defense is also deemed meritless; compliance is a condition precedent for relief, placing the burden on Vesta to meet notice requirements. Consequently, Vesta's fraud counterclaim against KMGA is dismissed.

Regarding Vesta's third-party claims against GasTrak, Vesta abandoned its breach of contract and unjust enrichment claims, leading to summary judgment for GasTrak on those counts. The remaining claim involves allegations of fraud based on misrepresentations by Mr. Vannatta regarding KMGA's gas supply offer. To establish fraud under Oklahoma law, Vesta must demonstrate a false material misrepresentation, made knowingly and with intent to induce reliance, which Vesta claims led to a reduced bid. GasTrak contends that even if the statement was made, it constitutes mere sales talk and is not actionable fraud, referencing Beavers v. Lamplighters Realty, Inc., which discusses the distinction between actionable fraud and non-actionable sales puffery.

The realtor's claim that misrepresentations regarding another buyer were merely puffery and not actionable was rejected by the court. The court stated that a vendor's assertion about a third-party offer is a material fact that can establish a basis for fraud. Specifically, Mr. Vannatta allegedly made a deliberate false statement regarding a gas supply offer from KMGA, knowing no such offer existed. This was deemed more than mere puffing, as it could support a fraud claim if the facts are believed by a trier of fact. Consequently, GasTrak's summary judgment motion was partially granted and denied: granted for breach of contract and unjust enrichment claims, but denied for Vesta's fraud claim. Vesta's motion against KMGA was also partially granted regarding KMGA's fraud claim, while other claims were denied. KMGA's motion was granted concerning Vesta's fraud counterclaim but denied for all other claims. The court ordered that the case proceed to trial on January 4, 1994, after all parties waived their jury demands. Additionally, the order clarified that KMGA's breach of contract claim is limited to good faith and fair dealing. The court set forth the elements required for establishing a fraud claim in Kansas.