UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 07-1539
DOUBLE DIAMOND PROPERTIES, LLC; CYPRESS POINT CITGO,
INCORPORATED, trading as Bayside BP,
Plaintiffs - Appellants,
v.
BP PRODUCTS NORTH AMERICA, INCORPORATED, f/k/a Amoco Oil
Company,
Defendant - Appellee,
v.
PAPCO, INCORPORATED,
Movant.
Appeal from the United States District Court for the Eastern
District of Virginia, at Norfolk. Walter D. Kelley, Jr., District
Judge. (2:06-cv-00226-WDK)
Submitted: March 20, 2008 Decided: May 13, 2008
Before WILKINSON, NIEMEYER, and GREGORY, Circuit Judges.
Affirmed by unpublished per curiam opinion.
Peter G. Zemanian, ZEMANIAN LAW GROUP, Norfolk, Virginia, for
Appellants. David M. Harris, Lizabeth M. Conran, GREENSFELDER,
HEMKER & GALE, P.C., St. Louis, Missouri; William F. Devine,
WILLIAMS MULLEN, Norfolk, Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
Double Diamond Properties, LLC (“Double Diamond”),* a
Virginia Limited Liability Company that owns and operates a gas
station on Haygood Road in Virginia Beach (the “Haygood station”),
appeals the district court’s order granting summary judgment on
Double Diamond’s complaint for declaratory relief and damages under
Virginia state law against BP Products North America, Incorporated,
formerly known as Amoco Oil Company (“BP”), a Maryland corporation
with its principal place of business in Illinois. Double Diamond
seeks relief from the operation of a restrictive covenant in favor
of BP in the deed to a parcel of property where Double Diamond
operates the Haygood station. The district court found that the
deed restriction was enforceable as it is applied against Double
Diamond. We affirm.
Double Diamond purchased the Haygood station in January
2006 from Canal Enterprises, LLC (“Canal”). Canal purchased the
Haygood station from Amoco in 2001, subject to a deed restriction
that provides in pertinent part:
The Grantee herein covenants and agrees, for itself, and
its heirs, executors, grantees, successors and assigns,
that no part of the real estate herein conveyed, shall be
used by said Grantee, its heirs, executors, grantees,
successors and assigns, for the purpose of conducting or
*
Cypress Point Citgo, Incorporated, trading as Bayside BP,
joined the lawsuit as an additional party plaintiff with claims
based upon the same legal theory as those of Double Diamond.
Cypress Point is also a party to this appeal. For the sake of
clarity, we refer only to Double Diamond.
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carrying on the business of selling, handling, or dealing
in gasoline, diesel fuel, kerosene, benzol, naphtha,
greases, lubricating oils, or any fuel used for internal
combustion engines, or lubricants in any form; unless the
items sold, handled or dealt in are supplied, either
directly or indirectly, from the Grantor. This
restriction binds and restricts the property as a
covenant and restriction running with the land and is
deemed to benefit Grantor as an owner or lessee of lands
in the City of Portsmouth, Virginia metropolitan area or
as the operator or supplier of retail operations in the
City of Portsmouth, Virginia metropolitan area. Except
as otherwise provided herein, this restrictive covenant
will remain in full force for a term of ten (10) years
from the date of this conveyance, whereupon this
restrictive covenant will automatically lapse and
terminate and be of no further force or effect. If
Grantor discontinues supplying gasoline to Grantee or an
Affiliate (as hereinafter defined) of Grantee, or their
respective heirs, executors, grantees, successors or
assigns (unless such discontinuance is a result of the
action of Grantee or an Affiliate of Grantee), on a
direct or indirect basis for a period of thirty (30) or
more consecutive days during such ten (10) year term,
then, within thirty (30) days after receipt of Grantee’s
written request therefor, Grantor, at Grantor’s sole
option, shall either recommence supplying gasoline or
terminate the foregoing restrictive covenant.
Notwithstanding anything herein to the contrary, in the
event the Dealer Supply Agreement with Grantee or an
Affiliate of Grantee is terminated early pursuant to
Section 27 of the Dealer Supply Agreement, this
restrictive covenant shall remain in full force and
effect for the remaining balance of the ten (10) year
term of this restrictive covenant.
In October 2005, BP assigned to Miller Oil Company
(“Miller Oil”) its exclusive rights, pursuant to deed restrictions,
to distribute BP fuel to several gas stations in the Virginia Beach
area, including the Haygood station, which at the time was owned by
Canal but not in operation. The assignment was part of BP’s broad
corporate strategy to transition from directly supplying retail
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operations with BP fuel to indirectly supplying retailers through
contracts with “jobbers” such as Miller Oil that would distribute
BP fuel to the retailers. Miller Oil paid BP for the rights to
distribute fuel to the specified stations, with the expectation
that the Haygood station in particular would generate approximately
one million gallons per year in fuel sales.
Also in October 2005, Canal entered into an agreement to
sell the Haygood Station to Double Diamond. Double Diamond
negotiated with Miller Oil concerning a supply agreement in
November 2005, but closed on the purchase of the Haygood Station in
January 2006 without a supply agreement for BP fuel in place.
Double Diamond then attempted to enter into a supply agreement for
BP fuel with PAPCO, Inc., another jobber for BP. PAPCO was unable
to supply BP fuel for the Haygood station because BP had assigned
the exclusive distributorship right from the deed to the Haygood
station to Miller Oil. Double Diamond preferred the terms
available under a supply contract with PAPCO to those available
from Miller Oil because the cost of BP fuel from PAPCO was lower
than the cost of BP fuel from Miller Oil, and because Miller Oil
operates retail gas stations in the Virginia Beach market, whereas
PAPCO does not compete in the retail market with Double Diamond.
Double Diamond sought a declaratory judgment that the
restrictive covenant is no longer enforceable, as well as damages
based upon the difference in cost between obtaining BP fuel from
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Miller Oil or PAPCO. Double Diamond argues that: (1) the
restrictive covenant is no longer enforceable according to its
stated terms, because BP no longer benefits from the covenant as an
owner or lessee of lands or as an operator or supplier of retail
operations; (2) the covenant has terminated due to changed
circumstances because the Haygood station is now supplied directly
by a retail competitor, Miller Oil, that has the power to determine
the wholesale price of fuel purchased by the Haygood station,
rather than BP, which does not compete with the Haygood station in
the retail market; and (3) the covenant has been invalidated by its
unreasonable application to Double Diamond, because BP would earn
the same profit margin on sales of fuel to the Haygood station
through either Miller Oil or PAPCO.
BP moved for summary judgment, arguing that the
restrictive covenant is enforceable according to its terms because,
when read as a whole, the covenant benefits BP as either a direct
or indirect supplier of fuel to retail operations, rather than only
as a direct supplier of fuel. Accordingly, BP claims that the
covenant did not become unenforceable when BP switched from
supplying fuel directly to retailers to supplying fuel indirectly
through jobbers. BP also argued that the covenant is not
unreasonable as applied to Double Diamond, because it is applied in
a non-arbitrary and non-discriminatory manner. Although BP could
earn the same profit margin on fuel sold to Double Diamond for the
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Haygood station through a jobber other than Miller Oil, BP would be
subject to a claim by Miller Oil that it breached the contract for
the sale of its supply agreement for the Haygood station if Double
Diamond were allowed to purchase BP fuel elsewhere, because part of
the value of the supply agreements that Miller Oil purchased from
BP included the anticipated profits from selling fuel to the
Haygood station.
BP also claimed that the marketability of its supply
agreements to other jobbers throughout the country would be damaged
if Double Diamond were able to avoid purchasing fuel from Miller
Oil under this agreement. BP argued that the circumstances under
which it executed the restrictive covenant have not changed
radically, so as to invalidate the covenant, because although
Miller Oil, unlike BP, is allowed to operate retail gas stations
that could compete with the Haygood station, Miller Oil does not
operate any gas stations within two miles of the Haygood station.
BP’s stated purpose for enforcing the restrictive covenant, to
guarantee a market for its fuel, has not changed despite the move
from directly supplying retailers to supplying retailers
indirectly, and, therefore, BP argues that the circumstances
surrounding the covenant have not radically changed.
The district court granted BP’s motion for summary
judgment, finding that the restrictive covenant remained valid
according to its terms because BP still benefits from the covenant
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as a supplier of fuel for retail operations, despite the fact that
it now supplies fuel to retailers only indirectly. The court
reasoned that BP may benefit as either a direct or an indirect
supplier because the covenant specifies that its restriction
terminates if BP stops selling fuel “on a direct or indirect
basis.” The inclusion of “indirect” in that provision would be
meaningless if BP were to lose its status as beneficiary, thereby
invalidating the covenant, by changing its operation from that of
a direct supplier of fuel to that of an indirect supplier of fuel.
The court found that although the restrictive covenant does not
expressly allow BP to assign exclusive rights to distribute fuel to
particular stations to third-party suppliers, BP has the inherent
authority to unilaterally choose how it distributes its products,
regardless of the covenant. The court determined that the
circumstances surrounding the covenant have not changed so
radically as to destroy its purpose to benefit BP as a refiner and
supplier of gasoline, because BP still benefits from fuel sales as
a result of the covenant, despite the fact that those sales are
made through Miller Oil as an intermediate supplier. Double
Diamond and Cypress Point noted a timely appeal.
We review de novo a district court’s interpretation of a
written contract as a question of law. See Seabulk Offshore,
Ltd. v. Am. Home Assur. Co., 377 F.3d 408, 418 (4th Cir. 2004).
The interpretation of the restrictive covenant at issue is guided
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by Virginia law. Providence Square Assocs., L.L.C. v. G.D.F.,
Inc., 211 F.3d 846, 850 (4th Cir. 2000). A federal court sitting
in diversity must “rule upon [Virginia] state law as it exists and
not . . . surmise or suggest its expansion.” Id. at 850 n.3
(internal quotes and citation omitted).
(I) Enforceability of the Restrictive Covenant by its Stated Terms
Under Virginia law, covenants restricting the free use of
land are disfavored and must be strictly construed. Mid-State
Equipment Co. v. Bell, 225 S.E.2d 877, 884 (Va. 1976). “[T]he
person claiming the benefit of the restrictions must prove that the
covenants are applicable to the acts of which he complains.”
Sloan v. Johnson, 491 S.E.2d 725, 727 (Va. 1997) (citations
omitted). We will also apply Virginia principles of contract
interpretation and “seek to determine the intent of the parties
from the language expressed in the contract.” Providence Square,
211 F.3d at 850 (citation omitted). Contract terms that are clear
and unambiguous will be afforded their plain and ordinary meaning,
but extrinsic evidence may be used to interpret vague or ambiguous
terms, and substantial doubts or ambiguity about the meaning of a
restrictive covenant will be resolved in favor of the unrestricted
use of land. Id. (citations omitted).
To enforce a real covenant in Virginia, a party must
prove the following elements: (1) privity between the
original parties to the covenant (horizontal privity);
(2) privity between the original parties and their
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successors in interest (vertical privity); (3) an intent
by the original covenanting parties that the benefits and
burdens of the covenant will run with the land; (4) that
the covenant “touches and concerns” the land; and (5) the
covenant must be in writing.
Sonoma Dev., Inc. v. Miller, 515 S.E.2d 577, 579 (Va. 1999)
(citation and footnote omitted).
Double Diamond argues that the restrictive covenant has
expired according to its terms because BP no longer benefits from
the covenant as a direct supplier of fuel to the Haygood station.
Double Diamond contends that the language in the covenant
concerning direct or indirect supply of fuel relates only to the
scope of the restriction, meaning that Double Diamond may comply
with the restriction by purchasing BP fuel either directly or
indirectly. Double Diamond likewise contends that BP must benefit
as a direct supplier of fuel if it does not benefit as an owner or
lessee of land or as a fuel retailer, because the language
describing the benefit to BP from the restriction does not include
the description “indirect supplier.”
We find, however, that BP still benefits from the
restriction as an indirect supplier of fuel to the Haygood station.
Arguably, BP would still benefit as a direct supplier of retail
operations even if a particular retail operator chose to obtain its
BP fuel indirectly, thereby maintaining the validity of the
covenant while still giving meaning to the restriction. However,
the restriction could be rendered meaningless under this
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construction if all retail operators in the area chose to obtain BP
fuel indirectly, robbing BP of its status as a direct supplier
through no action of its own. We conclude that the term “supplier”
in the beneficiary sentence was intended to encompass acting as
either an indirect supplier or a direct supplier, because both
manners of supplying are contemplated by the description of the
restriction. The circumstances surrounding the covenant also
indicate that BP was clearly contemplating that it would no longer
own land or operate retail facilities in the area, and strongly
indicate that BP contemplated phasing out its role as a direct
supplier of fuel to retail operations, at the time the covenant was
made. Accordingly, because BP clearly benefits from the covenant
as an indirect supplier of fuel, the covenant is still enforceable
according to its terms.
(II) Reasonableness of the Restrictive Covenant as Applied
A restraint on alienation of property is valid if it is
reasonable. Carneal v. Kendig, 85 S.E.2d 235, 237 (Va. 1955)
(citation omitted). The determination of the reasonableness of a
restraint on alienation requires balancing the policy in support of
free alienation against the policy in favor of carrying out the
wishes of the grantor, while also considering whether the
limitation in question is favored or disfavored by the law. Id.
There is a distinction between the reasonableness of a restriction
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on its face and the reasonableness of the restriction as applied,
and a complaint must raise both issues in order for a court to
properly consider them. See Buchner v. Kenyon L. Edwards Co., 171
S.E.2d 676, 678 (Va. 1970). A court must “consider (1) whether or
not the agreement in question is reasonable as between the parties;
and (2) if so, whether or not the agreement is injurious to the
public interest by reason of its effect upon trade and, therefore,
void.” Klaff v. Pratt, 86 S.E. 74, 77 (Va. 1915).
Double Diamond argues that the restrictive covenant is
unreasonable as applied because the requirement that only BP fuel
be sold at the Haygood station is unreasonable when applied in
conjunction with Miller Oil’s exclusive right to distribute BP fuel
to the Haygood station, because Miller Oil competes in the retail
fuel market and because BP earns the same profit on fuel it
supplies regardless of whether it uses Miller or another supplier.
This argument presents a more difficult question. On the one hand,
as the district court noted, BP possesses an inherent right to
determine how it supplies retailers with fuel in the market, so the
right to supply retailers through distributors with exclusive
supply agreements does not have to be created by the restrictive
covenant itself. However, BP’s decision to supply fuel to the
Haygood station through an exclusive distributorship agreement with
Miller Oil has a greater impact on Double Diamond as a consequence
of the restrictive covenant. Because Double Diamond cannot choose
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to reject Miller Oil as a supplier, the covenant accords a
potential retail competitor great control over the price of the
fuel supply for the Haygood station.
If Double Diamond were allowed to comply with the
restrictive covenant by purchasing BP fuel for the Haygood station
through the supplier of its choice, the burden of the restrictive
covenant on the Haygood station and its owner, Double Diamond,
would be reduced, because Double Diamond could negotiate a lower
price for its fuel supply. The burden is arguably no greater than
it would be if BP were the sole direct supplier of its fuel,
however, because Double Diamond would have no choice as to the
terms of its fuel supply agreement with BP. Although Miller Oil is
a potential competitor with Double Diamond in the retail market,
there is evidence in the record that Miller Oil does not operate
any retail gas stations within two miles of the Haygood station,
and is therefore not currently in direct competition. Although
this is a close issue, the standard for reasonableness established
by Virginia courts does not clearly compel the invalidation of the
restrictive covenant as applied to Double Diamond. Because we are
sitting in diversity jurisdiction, we decline to surmise or suggest
the expansion of Virginia law in this case by holding that the
restrictive covenant is unreasonable as applied.
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(III) Validity of the Restrictive Covenant in Changed Circumstances
A change in circumstances that is “so radical as
practically to destroy the essential objects and purposes of the
[covenant]” will render a restrictive covenant null and void.
Chesterfield Meadows Shopping Ctr. Assocs., L.P. v. Smith, 568
S.E.2d 676, 680 (Va. 2002). “The determination of the degree of
change necessary to have this effect is inherently a fact-specific
analysis in each case.” Id. In order to determine the extent of
the restriction imposed by a covenant, a court should “look to the
substance - not the label - of the activity sought to be
restricted.” Providence Square, 211 F.3d at 851.
Double Diamond argues that the restrictive covenant has
expired due to changed circumstances because BP has radically
altered its business practices by discontinuing its operations as
a direct supplier of fuel to retail operations, instead supplying
fuel for retail operations only indirectly. We hold that the
circumstances surrounding the covenant have not changed so
radically as to destroy the primary purpose of the covenant for its
beneficiary, BP, namely to ensure a continuing retail market for
its fuel in the Virginia Beach area. Although BP now benefits from
the covenant as an indirect supplier of fuel, rather than a direct
supplier, the essential purpose, to ensure an ultimate retail
market for BP fuel, is still being met. Although arguably the
covenant did not expressly restrict the retailer’s choice of
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supplier for BP fuel, the district court properly found that BP had
the power to determine the terms under which it would supply fuel
to retailers before the covenant was in place. The circumstances
surrounding the covenant have not radically changed merely because
BP has opted to exercise that pre-existing right, and BP’s ultimate
purpose in enforcing the covenant is still served.
For the reasons stated above, we affirm the district
court’s judgment in favor of BP and against Double Diamond and
Cypress Point. We dispense with oral argument because the facts
and legal contentions are adequately presented in the materials
before the court and argument would not aid the decisional process.
AFFIRMED
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