Garshman v. Universal Resources Holding Inc.

824 F.2d 223
CourtCourt of Appeals for the Third Circuit
DecidedJuly 9, 1987
DocketNos. 86-5647, 86-5648
StatusPublished
Cited by18 cases

This text of 824 F.2d 223 (Garshman v. Universal Resources Holding Inc.) is published on Counsel Stack Legal Research, covering Court of Appeals for the Third Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Garshman v. Universal Resources Holding Inc., 824 F.2d 223 (3d Cir. 1987).

Opinion

OPINION OF THE COURT

GIBBONS, Chief Judge:

Daniel Garshman and others, general partners in Tarbell I (Tarbell), a Pennsylvania limited partnership, which was formed to engage in oil and gas exploration, appeal from a Fed.R.Civ.P. 12(b)(6) order dismissing their complaint against Columbia Gas System, Inc. (System), a registered public utility holding company; its subsidiary, Columbia Gas Transmission Corporation (Transmission), owner of a gas pipeline; and Universal Resources Holding, Inc. (Universal), a producer of natural gas. Universal appeals from a Rule 12(b)(6) order dismissing its crossclaim against System and Transmission, and from the denial of its motion for a preliminary injunction. We will affirm.

I.

This dispute arises out of the changes in the market for natural gas which occurred following the enactment of the Natural Gas Policy Act of 1978, Pub. L. No. 95-621, 92 Stat. 3350, when, as a result of deregulation, supplies of natural gas increased. According to the complaint and the cross-claim, the allegations of which we assume, for purposes of the appeals, to be true, System is a major factor in the natural gas market. System and its subsidiaries are in the business of exploration, production, purchase, transportation, storage and distribution of natural and synthetic gas. One of those subsidiaries, Transmission, owns and operates an interstate natural gas pipeline. Transmission buys natural [226]*226gas from producers and transmits it for resale to customers, including local gas distribution companies which resell it to residential and commercial users. Prior to 1978, System was unable to secure enough natural gas to satisfy its customers’ needs. When the Natural Gas Policy Act of 1978 encouraged exploration and drilling for natural gas, System undertook to secure gas supplies by entering into “take-or-pay” contracts with producers.

In the business of developing commercial deposits of natural gas in western New York and northwestern Pennsylvania, Universal provides the material and personnel required to drill gas wells and to deliver the gas to a pipeline for subsequent distribution. Universal funds its operations by obtaining leasehold interests for gas and by selling rights to the expected production from those leases to investors, who in turn pay Universal for exploration, for successful production, and make periodic payments to Universal based on the value of the gas produced over the life of the wells. Integrated natural gas companies like Transmission typically acquire thousands of acres of mineral leasehold interests and sublease them for production to producers like Universal.

In 1979, Universal acquired from Transmission the right to explore and drill on 12,699.70 acres in Chautauqua County, New York. Under that agreement, Universal was obliged to sell to Transmission all the natural gas it found. On November 23, 1981 Transmission agreed to buy, and Universal agreed to produce and sell, all natural gas produced by wells on a part of the Chautauqua County acreage. Under this “take-or-pay” contract, Transmission was obligated to take from Universal or to pay for, if available but not taken, at least 75% of the wells’ estimated yearly output of gas. Quantities of gas paid for, but not taken, would be available for delivery to Transmission in the future as “make-up gas.” The contract price was “the maximum lawful price applicable” under federal statutory and regulatory authority. The contract authorized Transmission to “restrict the flow or discontinue the taking of gas temporarily, when and for such length of time as in its judgment it is deemed expedient so to do, [Transmission’s] judgment being based upon consideration of market demand, its then existing pipeline facilities, the line pressure it deems necessary to maintain, and the competitive and other conditions in the various fields in which it is purchasing or producing gas.” This right to restrict flow, however, did not operate to diminish Transmission’s obligation to take-or-pay for 75% of the wells’ estimated yearly output.

In order to complete the wells, Universal entered into a turnkey contract with Tarbell to drill wells. Tarbell advanced certain payments and received an assignment of certain of Universal’s rights under the November 23, 1981 “take-or-pay” contract.

Drilling and production commenced in 1983. By then, however, the market for natural gas had changed significantly. As a result of the fall in oil prices and energy conservation efforts, demand for natural gas declined. At the same time, exploration and development stimulated by the Natural Gas Policy Act increased the availability of natural gas. Thus, System and Transmission found themselves contractually obligated to Universal and to many other producers to pay for far more gas than they could resell, and to pay those producers prices greater than the price which their customers would pay for gas. The liability of System and Transmission to pay for gas not taken in 1983 approached $3 billion.

Consequently, in 1983 Transmission sought to renegotiate the price provisions in its “take-or-pay” contracts with Universal and other producers. Transmission threatened that, if price concessions were not forthcoming, it would: a) reduce Universal’s ability to sell gas; b) refuse to enter into future arrangements with Universal for exploration and development of other reserves Transmission owned; c) arbitrarily manipulate pipeline pressure to reduce the flow of gas from Universal’s wells; and d) make drastic cuts in the natural gas production. Transmission refused to authorize Universal to sell its gas to other pipelines. Transmission discrimi-[227]*227natorily granted favored pipeline access to those producers who did agree to modify the price clauses of their “take-or-pay” contracts. On August 29, 1984, as a result of Transmission’s pressure, Universal, as did other producers, agreed to a new price provision with Transmission, effective July, 1983. The effect of the price change was to reduce both for Universal and for Tarbell the return from the wells.

II.

Tarbell reacted to the modified contracts by suing System, Transmission, Universal, and three other natural gas producers— Berea Oil and Gas Corp., U.S. Energy Development Corp. and Chautauqua Energy Inc. Tarbell purported to act on behalf of a class comprised of persons and businesses in the United States who funded gas well exploration in New York and Pennsylvania for resale to Transmission. The complaint alleged federal antitrust violations and pendent state law contract and tort claims.

Universal answered and filed a cross-claim against Transmission and System. In the crossclaim, Universal purported to act on behalf of a class comprised of gas producers operating within the geographic area served by Transmission’s pipeline who have had “take-or-pay” contracts with Transmission any time since 1979. The crossclaim alleged essentially the same antitrust and state law claims as did the Tarbell complaint. Universal’s answer admitted most of Tarbell’s allegations, but raised duress and lack or failure of consideration as defenses.

System and Transmission moved pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss the Tarbell complaint for failure to state a claim on which relief could be granted. System also moved for a dismissal for lack of personal jurisdiction and improper venue.

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Garshman v. Universal Resources Holding Inc., Inc.
824 F.2d 223 (Third Circuit, 1987)

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824 F.2d 223, Counsel Stack Legal Research, https://law.counselstack.com/opinion/garshman-v-universal-resources-holding-inc-ca3-1987.