Case No. 01-16034 (AJG)
January 22, 2003
This memorandum decision and order addresses whether the storage of natural gas pursuant to contracts between Columbia Gas Transmission Corporation ("TCO") and Enron North America ("ENA" or "Debtors") was a bailment.
II. STATEMENT OF FACTS
The Relationship Between TCO and ENA
Unless otherwise indicated, the parties do not dispute the following facts basic to this controversy. TCO is a large natural gas pipeline company that both transports and stores natural gas. ENA is a purchaser and seller of natural gas. TCO entered into two Parking and Lending Service Agreements ("PAL Agreements") with ENA. Under the PAL Agreements TCO would receive gas from ENA to hold in TCO's system. The agreements were for one-year terms and expired December 31, 2001 and January 31, 2002 respectively. The PAL Agreements refer to two other agreements: (i) the PAL Rate Schedule and (ii) the General Terms and Conditions of TCO's Tariff (the "Tariff"). There were two services provided to ENA under the PAL Agreements by TCO — (1) Parking Services and (2) Lending Services. The Parking Services provided that ENA could deliver a specified quantity of gas to TCO at agreed upon locations. The stored gas is said to be "parked" for the purposes of the PAL Agreements. TCO would hold the parked quantities in TCO's system until TCO delivered gas back to ENA at an agreed upon location. In order for ENA to have gas returned from TCO, ENA was required to follow several steps to request its return. The process by which ENA would inform TCO of the quantity, date, and location of ENA's needs is known as a "nomination." Each PAL Agreement called for TCO to park 310,000 dekatherms ("dth") of gas in TCO's pipelines, for a total of 620,000 dth.
The Lending Services provided that ENA could borrow additional gas from TCO, if it was necessary to correct an imbalance. No party seems to dispute any issue regarding Lending Services. TCO and ENA also entered into numerous other contracts between December of 2000 and October of 2001. These contracts included, but were not limited to, FTS Service Agreements and an Assignment Agreement. Under these agreements ENA has amassed both prepetition and postpetition debts to TCO.
The terms and the scope of these agreements were not defined in TCO's or ENA's submissions.
The Dispute Between TCO and ENA
TCO initially requested that this Court modify the automatic stay to permit TCO to exercise setoff rights vis-a-vis ENA. In response, ENA argued that TCO has no right to setoff because TCO is holding ENA's parked gas as a bailee. Neither party seems to contest that a bailee has no right to setoff. This is so because:
setoff is applicable only where the debtor and creditor `owe' one another. It is inapplicable where the debtor's property is in the possession of the creditor as bailee or trustee. In such an instance, the property is `owned' by the bankruptcy estate, and the creditor's obligation as bailee or trustee cannot form the basis for a debt which the creditor may set off against his claim against the debtor.
Marshall v. Shipman Elevator Co. (In re Marshall), 240 B.R. 302, 304 (Bankr.S.D.Ill. 1999).
TCO argues that the relationship between TCO and ENA is not a bailment for two reasons. First, TCO argues that a bailment requires the return of the same goods that were delivered to the bailee. Because ENA never received exactly the same gas ENA deposited with TCO, TCO argues that the relationship between the parties cannot be characterized as a bailment. Second, TCO argues that the intent of the parties is required to create a bailment. Because the PAL Agreements do not contain the term "bailment" and there is no indication that the parties otherwise intended a bailment, TCO contends that the relationship between the parties cannot be characterized as a bailment.
(i) TCO's Argument That A Bailment Requires The Return Of The Same Goods That Were Delivered To The Bailee
TCO argues that commingled goods cannot be the subject of a bailment because a bailment requires the return of the identical goods that were delivered to the bailee. Because ENA is not entitled to receive the identical gas that is delivered into TCO's system and because it would be impossible to segregate natural gas once commingled, TCO argues that the gas cannot be the subject of a bailment. In support of this conclusion, TCO relies on Bretz v. Diehle, 117 Pa. 589, 11 A. 893 (Pa. 1888). Bretz involved the storage of wheat flour where the court explained that:
The fundamental distinction between a bailment and a sale is that in the former the subject of the contract, although in an altered form is to be restored to the owner, whilst in the latter there is no obligation to return the specific article; the party receiving it is at liberty to return some other thing of equal value in place of it. In the one case the title is not changed; in the other it is, — the parties standing in the relation of debtor and creditor.
Bretz, at 894-95.
It is uncontested that ENA did not receive the identical gas back from TCO. In response, ENA argues that TCO is incorrect in concluding that a bailment cannot exist where goods are commingled. ENA relies on a series of cases to support this proposition (discussed, in part, below). ENA further argues that the sole authority relied upon by TCO does not support TCO's position. According to ENA, the import of Bretz signifies that commingling is solely a potential clue as to whether title has transferred. ENA interprets Bretz to conclude that the transfer of title is the key to the existence of a bailment.
A bailment is "[the] delivery of personal property by one person (the bailor) to another (the bailee) who holds the property for a certain purpose under an express or implied in fact contract. Unlike a sale or gift of personal property, a bailment involves a change in possession but not in title." BLACK'S LAW DICTIONARY 136-137 (7th ed. 1999). Public Service Electric Gas Co. v. Federal Power Commission, 371 F.2d 1 (3d Cir. 1967) ("Public Service Electric") is instructive here in demonstrating the law of bailments and fungible goods. In Public Service Electric, the court of appeals for the third circuit affirmed a ruling by the Federal Power Commission ("FPC") that concluded, among other things, that the physical commingling of natural gas in a pipeline is not inconsistent with a bailment. Public Service Electric involved a transportation contract between Transcon and Texaco whereby Transcon agreed to transport Texaco's natural gas from Texas and Louisiana to New Jersey. The court of appeals rejected the argument, raised by one of Transcon's potential competitors, that because Transcon was ultimately delivering different gas to Texaco in New Jersey, that the arrangement between the parties was a sale. If the transaction was a sale, then Texaco would have had to obtain authorization from the FPC pursuant to the Natural Gas Act. If the transaction was a conventional arrangement to transport natural gas, then Texaco would not be required to obtain any authorizations from the FPC. Pursuant to the applicable provisions of the Natural Gas Act, Transcon applied, and received, authority from the FPC to perform the transportation services contemplated under Transcon's contract with Texaco. The propriety of Texaco's failure to obtain similar authorization was an issue on appeal.
The court of appeals recognized that the arrangement between Transcon and Texaco involved nothing more than a bailment for a fungible commodity. In rejecting the notion that the arrangement between Transcon and Texaco was a sale, the court relied on the reasoning, supplied by the FPC, that:
`We conclude that the mere physical commingling of Texaco's gas in Transcon's lines with gas Transcon has purchased for subsequent resale does not compel rejection of historic notions of bailments and require us to transform the transportation agreement into a succession of sales . . . . An essential feature of this transaction is that Texaco is the owner of the gas both at the beginning and the end of its journey. . . .'
Public Service Electric, 371 F.2d at 4.
Reaching similar conclusions, other courts have recognized that a bailment is not destroyed where fungible goods are commingled. See, e.g., National Corp. Housing P'ship v. Liberty State Bank, 836 F.2d 433, 436 (8th Cir. 1988) (rejecting argument that unless a landlord was required to return to the tenant the identical check or money the tenant deposited, the relation cannot be a bailment. The court stated that "[w]hile such appears to have been the ancient rule regarding bailment of money[,] the rule requiring return of the identical item has been liberalized in the case of bailment of fungible goods") (citation omitted)); General Motors Corp. v. Bristol Indus. Corp. (In re Bristol Industries Corp.), 690 F.2d 26, 30-1 (2d. Cir. 1982) (Mansfield, J., concurring) (concluding that the bankruptcy judge erred by holding that the law of bailments is inapplicable to fungible goods. The judge stated that "[w]hen commingling is required by the needs of the trade and is done with the consent of the parties a bailment is established if that is the intent of the parties") (citing Public Service Electric, at 4)); Gulf Oil Corp. v. Banque De Paris (In re Fuel Oil Supply Terminaling, Inc.), 72 B.R. 752, 758 (S.D. Tex. 1987), rev'd on other grounds, Gulf Oil Corp. v. Fuel Oil Supply Terminaling, Inc. (In re Fuel Oil Supply Terminaling, Inc.), 837 F.2d 224, 227 (5th Cir. 1988), (the district court reasoned in a "loan and exchange" context where there is no indication of a sale and where Gulf agreed to deliver and Fuel Oil agreed to replace at a later date the same amount and grade of gasoline that: "[i]f, as in the majority of situations involving fungible goods, the commodity is placed in another's receptacle where similar commodities belonging to others are deposited, the transaction is a bailment." The Court concluded that the agreement between Gulf and Fuel Oil was a bailment contract and not one of sale because of traditional notions regarding transfers of fungible commodities of like quantity and quality).
These cases demonstrate that commingling fungible goods is not categorically antithetical to a bailment. Based on these cases, the fact that TCO commingled natural gas in TCO's pipelines would be insufficient, as a matter of law, to destroy an otherwise valid bailment. The question still remains, however, whether the PAL Agreements establish a bailment. This brings the Court to TCO's second argument, that the parties intent is necessary to create a bailment.
(ii) TCO's Argument That A Bailment Requires The Intent Of The Parties And That The Parties Did Not Intend A Bailment In The Relevant Agreements
TCO relies on the proposition that a bailment is created by the intent of the parties. Applied to the facts of this case, TCO argues that neither the PAL Agreements nor the Tariff indicate that the parties intended for TCO to hold parked gas as a bailee for ENA. TCO contends that the agreements do not contain the term "bailment" or any other language indicative of a bailment. In addition, TCO argues that the Affidavit of Michael D. Watson submitted on behalf of TCO, establishes the contrary position. Specifically, that TCO did not intend to create a bailment and that ENA did not convey an intent to TCO at the time the parties entered into the PAL Agreements to create a bailment.
ENA contends that TCO's argument is meritless because TCO asks this Court to consider the subjective intent of the parties where the terms of the parties obligations are otherwise defined by contract. According to ENA, TCO has provided this Court no justification to consider the subjective intent of the parties. Further, ENA argues that because the PAL Agreements do not contemplate a sale, the relationship between the parties is a bailment. ENA reiterates from its original response that under the PAL Agreements, title to gas does not transfer to TCO, except in special circumstances. ENA relies upon the name of the PAL Agreements ("PAL Service Agreement") and the premise that a bailment is a service. Further, ENA relies on the fact that the PAL Rate Schedule incorporates by reference Section 1 of the PAL Agreements. According to ENA "[t]hat section is entitled `Services to be Rendered' and provides that TCO `shall park quantities of gas for' ENA." ENA relies on the description of the services to be rendered as support for characterizing the parties' relationship as a bailment. As described by ENA:
Any doubt concerning the transfer of title to the gas is eliminated by the PAL Rate
Schedule, incorporated by reference in Section 1 of the PAL Agreements. The Rate Schedule's description of the parking service makes clear that title to the gas remains with ENA at all times. It provides that the service consists of (i) "receipt [by TCO] of gas quantities delivered" [by ENA] to the points of service agreed to . . . for receipt of the parked quantities;" (ii) the "holding" of the parked gas by TCO on its system; and (iii) the "return of the parked quantities to [ENA] at the agreed upon time and at the same point(s) or other mutually agreed upon point(s) on [TCO's] system." PAL Rate Schedule, § 2(a)(i). Such a service, contemplating only "delivery," "holding" and "return" of the gas, clearly does not involve any transfer of title to TCO. In fact, the PAL Rate Schedule identifies only one discrete circumstance when title to parked gas passes to TCO. Specifically, title passes when TCO notifies ENA to remove parked gas — either during the effective period of the PAL Agreements or after they have expired — and ENA fails to do so within the time frame specified in the notice. Id., § 5(b). . . .
(Debtors' Response To Motion of Columbia Gas Transmission, dated Apr. 22, 2002 at ¶ 15.)
TCO contends that ENA has selectively chosen portions of the PAL Agreements to support a bailment theory. TCO suggests that this Court should not be swayed by ENA's selective citation to portions of the PAL Agreements.
As an initial matter, the Court notes that the parties do not dispute that West Virginia law is implicated in the construction of the parties contractual relationship. The parties have relied on West Virginia cases in their submissions and therefore this Court will apply West Virginia law.
"In general, implied consent to use a forum's law is sufficient to establish choice of law." American Century Services Corp. v. American Int'l Specialty Lines Insur. Co., No. 01 Civ. 8847(GEL), 2002 WL 1879947, at *3 (S.D.N.Y. Aug. 14, 2002) (slip copy) (applying New Jersey law) (citing Tehran-Berkeley Civil Environmental Engineers v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989)). The Court notes that the Tariff includes choice of law provisions that provide that West Virginia law will govern the construction and resolution of contract disputes. However, ENA disputes the applicability of the Tariff to the PAL Agreements. TCO relies on the PAL Agreements, the PAL Rate Schedule and the Tariff to support its contentions. TCO depends on West Virginia law in defining TCO's rights to setoff. Regarding contract issues, both parties have relied to some extent on West Virginia contract cases.
West Virginia law provides that "[a] valid written instrument which expresses the intent of the parties in plain and unambiguous language is not subject to judicial construction or interpretation, but will be applied and enforced according to such intent." Stricklin v. Meadows, 209 W. Va. 160, 164, 544 S.E.2d 87 (W.Va. 2001) (quoting Cotiga Dev. Co. v. United Fuel Gas Co., 147 W. Va. 484, 128 S.E.2d 626 (W.Va. 1962) (examining lease)). Contract language is considered ambiguous when an agreement's terms are inconsistent on their face or where the phraseology can support reasonable differences of opinion as to the meaning of the parties' obligations. See Fraternal Order of the Police, Lodge Number 69 v. City of Fairmont, 196 W. Va. 97, 101, 468 S.E.2d 712 (W.Va. 1996). If an inquiring court concludes that an ambiguity exists in a contract, the resolution will typically turn on the parties intent marshaled from facts extrinsic to the contract document. Id. at n. 7. When no ambiguity exists, extrinsic evidence should not be permitted. Stricklin, at 164. "[T]he language of the instrument itself and not the surrounding circumstances is the first and foremost evidence of the parties intent." Id. (quoting Sally-Mike Properties v. Yokum, 175 W. Va. 296, 300, 332 S.E.2d 597, 601 (1985)). "The mere fact that the parties do no agree to the construction of a contract does not render it ambiguous. The question as to whether a contract is ambiguous is a question of law to be determined by the court." Fraternal Order of Police, at 102-3 (quoting International Nickel Co. v. Commonwealth Gas Corp., 152 W. Va. 296, 163 S.E.2d 677 (1968)).
As previously defined, a bailment is "[the] delivery of personal property by one person (the bailor) to another (the bailee) who holds the property for a certain purpose under an express or implied in fact contract. Unlike a sale or gift of personal property, a bailment involves a change in possession but not in title." BLACK'S LAW DICTIONARY 136-137 (7th ed. 1999). A bailment is a contract which is governed by the same rules as other contracts. See Barnette v. Casey, 19 S.E.2d 621, 623 (W.Va. 1942). Bailments are defined broadly under West Virginia law. Ingersoll-Rand Financial Corp. v. Nunley, 671 F.2d 842, 845 (4th Cir. 1982). In order to create a bailment "no particular ceremony or actual meeting of the minds is necessary; it is the element of lawful possession, however created, and a duty to account for the thing as property of another that creates the bailment . . . ." Barnette v. Casey, 19 S.E.2d at 623 (cited in Ingersoll-Rand Financial Corp. v. Nunley, 671 F.2d 842, 845 (4th Cir. 1982)).
In determining whether a particular transaction creates a bailment or some other contractual relationship, it is necessary to ascertain the intent of the parties. In so doing, the court will construe the contract between the parties as a whole, weighing all of its terms and provisions in connection with the reasonable and natural results of its performance.
8A Am. Jur.2d Bailments § 15 (2002) (footnotes omitted).
Applied here, TCO does not argue that the PAL Agreements are ambiguous. Rather, TCO concentrates its arguments on ENA's failure to corroborate the existence of a bailment based on evidence extrinsic from the contract. Where a contract is not ambiguous, however, extrinsic evidence should not be permitted. See Stricklin, at 164. Rather, the court should first and foremost rely on the language of the contract to ascertain evidence of the parties' intent. See id. Thus, the Court will ascertain TCO's and ENA's intent by turning to the relevant agreements because neither party contends that the agreements are ambiguous regarding the issue of bailments. "The mere fact that the parties do no agree to the construction of a contract does not render it ambiguous." Fraternal Order of Police, at 102-3.
Upon considering the parties arguments and the language of the relevant agreements, the Court concludes that ENA retained title to the natural gas placed in TCO's pipelines and that TCO was the bailee for such gas. The Court bases this conclusion on the following.
First, the Court concludes that if TCO already had title to parked gas then the PAL Rate Schedule and Tariff referred to in the PAL Agreements would not have contained provisions for the effective transfer of title to the parked gas to TCO. Section 5 of the PAL Rate Schedule contemplates the transfer of title to the parked gas to TCO upon the occurrence of a special event. Specifically, Section 5 of the PAL Rate Schedule provides that title to gas "shall become the property of the Transporter [TCO] at no cost to [TCO], free and clear of any adverse claims" upon proper notice and consistent with TCO's operating requirements. This provision would have been superfluous and meaningless if, as TCO maintains, title to natural gas had already vested in TCO. Similarly, Section 9.7(c) of the Tariff provides for the automatic forfeiture of certain excess gas quantities to TCO free and clear of all liens and encumbrances upon proper notice. Although the parties dispute whether Section 9.7(c) applies to the PAL Agreements, Section 9.7(c) would also be rendered superfluous if the Court agreed with TCO's theory that title to the natural gas in TCO's pipeline had already vested with TCO. On this basis, the Court finds that by interpreting the contract between the parties as a whole, weighing all of the terms and provisions in connection with the reasonable and natural results of its performance, the only logical reading that would give effect and purpose to all the provisions of the PAL Agreements, including the PAL Rate Schedule and the Tariff, would contemplate that ENA maintained title to the natural gas, except upon the occurrence of certain special events. In reaching this conclusion, the Court is mindful that the parties do not dispute that, as a whole, that the relevant agreements provide for the storage of natural gas.
TCO's counsel ostensibly conceded as much at the April 25, 2002 hearing held before this Court. (Tr. at 54.) TCO's alternative argument, not addressed in this Order, does not rely on a finding by this Court that TCO had title to the natural gas parked in TCO's system. TCO's alternative argument relies on Section 9.7(c) of the Tariff.
Second, the court finds that notwithstanding the fact that the term `bailment' is not used in the relevant agreements, the PAL Agreements, including the PAL Rate Schedule and the Tariff, evidence the parties intent to create a bailment. "[I]t is the element of lawful possession, however created, and a duty to account for the thing as property of another that creates the bailment . . . ." Barnette v. Casey, 19 S.E.2d at 623. Both considerations are satisfied by the terms of the relevant agreements because the language of the contract itself and not the surrounding circumstances is the first and foremost evidence of the parties intent. See Stricklin, at 164. Furthermore, bailments are defined broadly under West Virginia law. Ingersoll-Rand Financial Corp. v. Nunley, 671 F.2d at 845.
As an initial matter, it is beyond dispute that TCO was in the lawful possession of natural gas placed in TCO's pipelines. TCO's possession of natural gas was lawful because Section 1 of the PAL Agreement provides that: "Transporter [TCO] shall park quantities of gas for Shipper [ENA] as specified in this Agreement . . . ." Similarly, Section 2 of the PAL Rate Schedule provides that the service consists of (i) "receipt [by TCO] of gas quantities delivered" [by ENA] to the points of service agreed to . . . for receipt of the parked quantities;" (ii) the "holding" of the parked gas by TCO on its system; and (iii) the "return of the parked quantities to [ENA] at the agreed upon time and at the same point(s) or other mutually agreed upon point(s) on [TCO's] system." PAL Rate Schedule, § 2(a)(i). Based on the terms of the PAL Agreement and the services contemplated under the PAL Rate Schedule, TCO's possession of natural gas was an intended consequence of TCO's obligation to park quantities of gas for ENA. Hence, the Court finds that TCO was in the lawful possession of natural gas.
Finally, TCO had an obligation to account to ENA for parked gas. Specifically, Section 4 of the PAL Agreements provides that "Transporter [TCO] shall park . . . gas for the account of Shipper [ENA] . . . ." (emphasis added). Hence, under the plain terms of the PAL Agreements, TCO was obligated to account to ENA for parked gas quantities.
A bailment involves a change in possession but not title. Based on the record before this Court, TCO maintained possession but not title to the natural gas placed in TCO's system. Therefore, the court finds that the contractual relationship between ENA and TCO is properly characterized as a bailment.
Based on the foregoing, the court concludes that the PAL Agreements, including the PAL Rate Schedule and Tariff, were sufficient to create a bailment under West Virginia law between TCO (as bailee) and ENA (as bailor) because ENA maintained title to the natural gas placed in TCO's system; TCO had lawful possession of ENA's gas placed in TCO's system; and TCO was under an obligation to park gas for the account of ENA. Therefore, it is hereby
ORDERED, that the PAL Agreements, including the PAL Rate Schedule and Tariff, were sufficient to create a bailment under West Virginia law between TCO (as bailee) and ENA (as bailor); and it is further
ORDERED, that on January 30, 2003, at 10:00 a.m. (New York City time) or as soon thereafter as the Court's calendar permits, the attorneys for the parties are directed to appear for a status conference before this Court.