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Rocky Mountain Exploration, Inc. v. Davis Graham & Stubbs LLP

Supreme Court of Colorado, En Banc

June 11, 2018

Rocky Mountain Exploration, Inc. and RMEI Bakken Joint Venture Group, Petitioners
v.
Davis Graham & Stubbs LLP and Gregory Danielson. Respondents

          Certiorari to the Colorado Court of Appeals Court of Appeals Case Nos. 14CA1483 & 15CA216

          Attorneys for Petitioners: German May PC William D. Beil Phillip G. Greenfield Kansas City, Missouri The Viorst Law Offices Anthony J. Viorst Denver, Colorado

          Attorneys for Respondents: Connelly Law LLC Sean Connelly Denver, Colorado Lewis Roca Rothgerber Christie LLP Gregory B. Kanan Frederick J. Baumann Tamara F. Goodlette Denver, Colorado

          Attorneys for Amicus Curiae Attorneys' Liability Assurance Society, Inc.: Snell & Wilmer L.L.P. James D. Kilroy Denver, Colorado

          OPINION

          GABRIEL, JUSTICE

         ¶1 This case arises out of a series of transactions in which petitioners Rocky Mountain Exploration, Inc. and RMEI Bakken Joint Venture Group (collectively, "RMEI") sold oil and gas assets to Lario Oil and Gas Company ("Lario"). In that transaction, Lario was acting as an agent for Tracker Resource Exploration ND, LLC and its affiliated entities (collectively, "Tracker"), which were represented by respondents Davis Graham & Stubbs LLP and Gregory Danielson (collectively, "DG&S").

         ¶2 Prior to RMEI's sale to Lario, RMEI and Tracker had a business relationship related to the oil and gas assets that were ultimately the subject of the RMEI-Lario transaction. The RMEI-Tracker relationship soured after Tracker unsuccessfully sought to buy out RMEI's interests at a price that RMEI deemed too low.

         ¶3 Thereafter, Tracker and Lario reached an understanding by which Lario would seek to purchase RMEI's interests and then assign a majority of those interests to Tracker. Recognizing the history between Tracker and RMEI, however, Tracker and Lario agreed not to disclose Tracker's involvement in the deal.

         ¶4 DG&S represented Tracker throughout RMEI's sale to Lario. In that capacity, DG&S drafted the final agreement between RMEI and Lario, worked with the escrow agent, and hosted the closing at its offices. No party disclosed to RMEI, however, that DG&S was representing Tracker, not Lario.

         ¶5 After the sale from RMEI to Lario was finalized, Lario assigned a portion of the assets acquired to Tracker, and Tracker subsequently re-sold its purchased interests for a substantial profit. RMEI then learned of Tracker's involvement in its sale to Lario and sued Tracker, Lario, and DG&S for breach of fiduciary duty, fraud, and civil conspiracy, among other claims. As pertinent here, the fiduciary breach claims were based on RMEI's prior relationship with Tracker. The remaining claims were based on allegations that Tracker, Lario, and DG&S misrepresented Tracker's involvement in the Lario deal, knowing that RMEI would not have dealt with Tracker because of the parties' strained relationship. Based on these claims, RMEI sought to avoid its contract with Lario.

         ¶6 Lario and Tracker eventually settled their claims with RMEI, and DG&S moved for summary judgment as to all of RMEI's claims against it. In this motion, DG&S argued (1) prior agreements between Tracker and RMEI expressly disavowed any fiduciary duties between the two companies, (2) RMEI could not establish that it reasonably relied on the alleged misrepresentations, and (3) DG&S did not owe RMEI a duty to disclose that it represented Tracker.

         ¶7 The district court granted DG&S's motion, and in a unanimous, published opinion, a division of the court of appeals affirmed. Rocky Mountain Expl., Inc. v. Davis Graham & Stubbs LLP, 2016 COA 33, P.3d . RMEI then sought, and we granted, certiorari to consider whether (1) Lario and DG&S created the false impression that Lario was not acting for an undisclosed principal (i.e., Tracker) with whom Lario and DG&S knew RMEI would not deal; (2) an assignment clause in the RMEI-Lario transaction agreements sufficiently notified RMEI that Lario acted on behalf of an undisclosed principal; (3) prior agreements between RMEI and Tracker negated all previous joint ventures and any fiduciary obligations between them; (4) RMEI stated a viable claim against DG&S for fraud based on affirmative misrepresentations; and (5) RMEI can avoid the Lario sale based on statements allegedly made after RMEI and Lario signed the sale agreement but prior to closing.[1]

         ¶8 We now affirm the division's ruling. Addressing the first and second certiorari questions together, we conclude that the assignment clause in the RMEI-Lario transaction agreements made clear to RMEI that Lario had partners in the transaction to whom Lario could assign a portion of its interests. As a result, Tracker was not an undisclosed principal under the Restatement provision on which RMEI's contract avoidance argument is exclusively premised, and that argument and the civil conspiracy claim against DG&S that flowed from it fail as a matter of law. Even if the Restatement provision applied, however, the record does not support the requisite finding that either Lario or DG&S, as its purported attorney, created a false impression that Lario was not acting on behalf of an undisclosed principal. For this reason as well, the civil conspiracy claim against DG&S, which is premised on the allegation that Lario was a fraudulent strawman purchaser, fails as a matter of law, and in light of this disposition, we need not address the fifth certiorari question.

         ¶9 Turning then to the fourth certiorari question, we conclude that, as a matter of law, RMEI did not demonstrate the requisite false representation or reasonable reliance to support a viable fraud claim against DG&S.

         ¶10 Finally, addressing the third certiorari question, we conclude that the controlling agreements between RMEI and Tracker expressly disavowed any pre-existing joint ventures and any fiduciary obligations between the parties. Accordingly, the district court properly granted summary judgment on RMEI's claim against DG&S for aiding and abetting a purported breach of fiduciary duty by Tracker.

         I. Facts and Procedural History

         ¶11 In 2006, RMEI and Tracker signed a purchase and sale letter agreement (the "Tracker Purchase Agreement") under which RMEI agreed to sell to Tracker an undivided eighty percent of its oil and gas interests in certain oil and gas leaseholds in North Dakota. Pursuant to that Agreement, the parties entered into an area of mutual interest that surrounded and included certain of the leases that RMEI already owned. The Tracker Purchase Agreement contemplated that Tracker and RMEI would jointly acquire more oil leases within the area of mutual interest, on an undivided eighty/twenty profit-and-loss basis.

         ¶12 Over the succeeding two years, RMEI and Tracker entered into a model form of operating agreement (the "Tracker Operating Agreement") and a participation agreement (the "Tracker Participation Agreement"). The purpose of the latter was "to provide for [the parties'] participation in the development of the Subject Lands and the [area of mutual interest]." As pertinent here, the Tracker Participation Agreement provided that "[it] and the [Tracker Operating Agreement] contain the entire agreement between the Parties concerning the subject matter referred to herein and they shall supersede and replace any prior agreements between the Parties concerning such subject matter." In addition, the Tracker Operating Agreement contained a provision disclaiming any joint venture or fiduciary relationship between RMEI and Tracker:

It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other partnership, joint venture, agency relationship or association, or to render the parties liable as partners, co-venturers, or principals. In their relation with each other under this agreement, the parties shall not be considered fiduciaries or to have established a confidential relationship but rather shall be free to act on an arm's-length basis in accordance with their own respective self-interest, subject, however, to the obligation of the parties to act in good faith in their dealings with each other with respect to activities hereunder.

         ¶13 After proceeding under the foregoing agreements for a period of time, the relationship between Tracker and RMEI deteriorated. Tracker offered to buy out RMEI's remaining twenty percent interest in the leases, but RMEI declined Tracker's offer as too low. Thereafter, the parties' relationship continued to decline as a result of disagreements concerning the leases, with Tracker claiming that RMEI had breached the Tracker Operating Agreement and RMEI denying that allegation.

         ¶14 Eventually, RMEI engaged a broker to find a third-party purchaser for RMEI's interest. RMEI asserts that it did so because of its soured relationship with Tracker.

         ¶15 Lario subsequently learned both that RMEI's interest was for sale and that Tracker had sought to purchase this interest but was unable to do so as a result of animosity between the two companies. Perceiving an opportunity, Lario spoke with Tracker about jointly bidding on RMEI's interest, with Lario receiving twenty-five percent of the leasehold interests acquired in the sale. Tracker was amenable to such an arrangement, and it and Lario agreed to have Lario pursue a deal with RMEI. Tracker and Lario further agreed that they would not disclose Tracker's involvement to RMEI, recognizing that the issues between RMEI and Tracker might make a deal impossible if RMEI knew of Tracker's involvement. Tracker and Lario's agreement effectively established Lario as Tracker's agent in the transaction.

         ¶16 Lario then requested RMEI's permission to use DG&S as its attorney on the deal. Lario stated that DG&S's knowledge of RMEI's assets, which knowledge was based on DG&S's prior representation of Tracker, would facilitate the transaction. Although RMEI's president agreed to allow such representation, DG&S subsequently determined that its ongoing representation of Tracker created a conflict of interest that prevented it from representing Lario in the proposed transaction. Accordingly, DG&S would only represent Tracker in the deal.

         ¶17 Ultimately, RMEI and Lario signed a letter of intent for RMEI to sell its interest to Lario (the "Lario Letter of Intent"). Tracker and Lario then signed their own letter of intent (the "Tracker Letter of Intent"), under which Lario agreed to assign to Tracker seventy-five percent of Lario's interest in the Lario Letter of Intent. Several weeks later, RMEI and Lario signed an asset purchase and sale agreement (the "Lario Purchase and Sale Agreement"), under which Lario purchased RMEI's interest in the oil and gas leaseholds at issue.

         ¶18 Notably, in its capacity as counsel for Tracker (whose interests Lario was representing in the RMEI-Lario transaction), DG&S drafted many of the pertinent documents in that transaction, communicated with RMEI's bank, and facilitated the creation of an escrow account. In addition, when preparing deal documents, DG&S scrubbed the metadata from anything coming from Tracker to prevent RMEI from learning of Tracker's involvement, which Tracker feared could threaten the deal.

         ¶19 After RMEI and Lario had signed the Lario Purchase and Sale Agreement but before the sale had closed, Lario's president emailed RMEI's president, stating, among other things, "[O]ur attorney is preparing the partial Lien [sic] release for Citizen's Bank to execute." DG&S received a copy of this email and later sent the lien release to RMEI's president, but it did not correct Lario's assertion that its attorney would be sending the document. Similarly, in a subsequent email that Lario sent and on which RMEI's president was copied, Lario again referred to DG&S as its law firm. And RMEI's president referred to DG&S as Lario's counsel in two subsequent emails that DG&S received. Again, DG&S did not correct RMEI's apparent misunderstanding that DG&S was Lario's counsel.

         ¶20 Both the RMEI-Lario transaction and the Tracker-Lario transaction closed, with the closings taking place on the same day and in DG&S's offices, albeit in separate conference rooms. Thereafter, Tracker sold all of its interests in the North Dakota leaseholds at issue and received a substantial price premium.

         ¶21 RMEI then learned of Tracker's involvement in the RMEI-Lario transaction, and in a 53-page, 225-paragraph complaint asserting eighteen separate claims, it proceeded to sue Tracker, Lario, certain of their officers, and DG&S. As pertinent here, RMEI alleged that DG&S (1) engaged in a civil conspiracy to misappropriate RMEI's interests in the leaseholds at issue by setting up Lario as a strawman purchaser; (2) aided and abetted Tracker's breach of its fiduciary duty to RMEI; (3) committed fraud; (4) engaged in a civil conspiracy to commit fraud; and (5) aided and abetted fraud.

         ¶22 Ultimately, all of the defendants except DG&S either settled their claims with RMEI or had their claims dismissed. DG&S, however, moved for summary judgment, asserting, as pertinent here, that RMEI could not establish the requisite justifiable reliance on the alleged misrepresentations because the RMEI-Lario transaction documents made clear that Lario had unnamed partners and investors and that Lario could sell the assets purchased. DG&S further argued that RMEI could not establish that DG&S owed RMEI a duty to disclose that it represented Tracker. Finally, DG&S asserted that RMEI could not establish that Tracker owed a fiduciary duty to RMEI because the Tracker Operating Agreement negated any fiduciary relationship between the parties. Therefore, RMEI's claim against DG&S for aiding and abetting a breach of such a fiduciary duty could not survive.

         ¶23 The district court granted DG&S's motion, agreeing that as a matter of law, RMEI could not establish either a duty by DG&S to disclose that it represented Tracker or a fiduciary duty owed by Tracker to RMEI, which RMEI had to establish to support its claim against DG&S for aiding and abetting a breach of such a duty. The district court also concluded that the use of a strawman purchaser was not fraud, citing, among other authorities, the Restatement (Third) of Agency (Am. Law Inst. 2006).

         ¶24 RMEI appealed, arguing that the district court erred in granting summary judgment on RMEI's fraud and breach of fiduciary duty claims. The division, however, affirmed the district court's grant of summary judgment in favor of DG&S. Rocky Mountain, ¶ 68. As pertinent here, the division observed that under the Restatement (Third) of Agency, a contracting party may not avoid a contract entered into by an agent acting for an undisclosed principal unless (1) the agent falsely represented that it did not act on behalf of a principal and (2) the principal or agent had notice that the third party would not have dealt with the principal. Id. at ¶ 23. The division concluded that the foregoing prerequisites for avoiding a contract either did not apply or were not satisfied because (1) the agreements between RMEI and Lario gave RMEI notice that Lario was acting as agent for a principal and thus Tracker was an unidentified but not an undisclosed principal and (2) Lario did not falsely represent that it did not act on behalf of a principal. Id. at ¶¶ 29-34. The division thus concluded that RMEI did not establish the existence of a disputed material fact as to the applicability of the pertinent section of the Restatement. Id. at ¶¶ 27-34. In addition, the division concluded that the district court had correctly determined that Tracker owed no fiduciary duty to RMEI because the agreements between RMEI and Tracker had expressly disclaimed the existence of a joint venture or fiduciary relationship. Id. at ¶ 51. Finally, the division concluded that the district court had properly construed RMEI's fraud claims as claims for fraudulent nondisclosure and therefore RMEI could not prevail unless it demonstrated that DG&S had a duty to disclose Tracker's involvement in the RMEI-Lario transaction, which it could not do. Id. at ¶¶ 60-63.

         ¶25 RMEI petitioned this court for certiorari review, and we granted that petition.

         II. Analysis

         ¶26 We begin by setting forth the applicable standard of review. We then address together the first two questions on which we granted certiorari and conclude that RMEI's civil conspiracy claim against DG&S, which was premised on RMEI's assertion that Lario was a fraudulent strawman purchaser, fails as a matter of law. We then proceed to discuss the fourth question on which we granted certiorari, and we conclude, as a matter of law, that RMEI did not demonstrate the requisite justifiable reliance to support its claim against DG&S for fraud based on affirmative misrepresentations. Finally, we address RMEI's claim against DG&S for aiding and abetting Tracker's alleged breach of fiduciary duty, and we conclude that because the Tracker Operating Agreement expressly disavowed any fiduciary obligations between RMEI and Tracker, RMEI's aiding and abetting claim is not viable as a matter of law.

         A. Standard of Review

         ¶27 We review a grant of summary judgment de novo. Hardegger v. Clark, 2017 CO 96, ¶ 13, 403 P.3d 176, 180. When, as here, the material facts are undisputed, summary judgment is proper only when the pleadings and supporting documents show that the moving party is entitled to judgment as a matter of law. Id.; accord C.R.C.P. 56(c). In determining whether summary judgment is proper, a court grants the nonmoving party the benefit of all favorable inferences that may reasonably be drawn from the undisputed facts and resolves all doubts against the moving party. Hardegger, ¶ 13, 403 P.3d at 180. In responding to a properly supported summary judgment motion, however, the nonmoving party may not rest on mere allegations or demands in its pleadings but must provide specific facts demonstrating a genuine issue for trial. Id.

         B. RMEI's Request to Avoid the Lario Sale

         ¶28 We first consider the two certiorari questions related to RMEI's assertion that the Restatement (Third) of Agency permits it to avoid the sale to Lario because Lario gave the impression that DG&S was representing it in the sale. We begin with the principles of agency law that the parties agree apply here, and we then apply those principles to the facts presented.

         1. Restatement ...


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