Moore v. Pennsylvania Castle Energy Corp.

United States Court of Appeals,

Eleventh Circuit.

No. 95-6142.

Gladys MOORE, Plaintiff-Appellee, Cross-Appellant,

v.

PENNSYLVANIA CASTLE ENERGY CORPORATION, Defendant-Appellant,
Cross-Appellee.

July 31, 1996.

Appeals from the United States District Court for the Northern
District of Alabama. (No. CV 93-C-2092-W), U.W. Clemon, Judge.

Before ANDERSON and COX, Circuit Judges, and RONEY, Senior Circuit
Judge.

ANDERSON, Circuit Judge:

In this diversity case involving Alabama law, Pennsylvania

Castle Energy Corporation ("Penn Castle") appeals from a final

judgment entered in the district court upon a jury verdict in favor

of plaintiff Gladys Moore. The issue raised by Penn Castle on

appeal concerns the introduction of parol evidence to vary the

terms of a written agreement, which Penn Castle claims is complete

and unambiguous. The cross-appeal by Moore raises the issue of the

dismissal of her claim for punitive damages.

Because we conclude that the district court erred in admitting

the parol evidence, we reverse the judgment entered in favor of

Moore. With respect the cross-appeal, we conclude that Moore's

claim for punitive damages was properly dismissed, and we therefore

affirm on that issue.

I. FACTS

Moore owns the surface rights to several hundred acres of land

in Tuscaloosa County, Alabama; however, she does not own the
subsurface minerals and mineral rights. In 1907, Moore's

predecessor-in-interest conveyed by severance deed the title to all

minerals in the land, along with certain rights to use the surface

land in the extraction of the minerals. Penn Castle is the lessee

of the subsurface mineral estate and all rights appurtenant

thereto. Penn Castle acquired this leasehold interest by

assignment from TRW, Inc. ("TRW") in 1990.

Under Alabama law and the terms of the severance deed, TRW had

the right to enter and to make reasonable use of Moore's land to

explore, develop, and produce subsurface minerals, including

coalbed methane gas. See, e.g., Vines v. McKenzie Methane Corp.,

619 So.2d 1305 (Ala.1993). Notwithstanding this right of

reasonable surface use, Penn Castle presented evidence that

producers in the Alabama coalbed methane industry often negotiate

"surface access and surface damage agreements" with surface estate

owners. The purpose of such agreements is to avoid litigation by

compensating surface estate owners for any damage that might be

caused by the use of the surface property in the extraction of

minerals.

In 1983, TRW became interested in drilling several wells on

Moore's property, and in entering a surface access and surface

damage agreement with Moore. As negotiations progressed during the

spring of 1983, TRW representatives met with Moore and spoke to her

by telephone several times. During this period, TRW sent Moore a

map of her property, which indicated the locations of six proposed

gas well drill sites. On August 2, 1983, Moore and her son Gene

Moore met with several TRW representatives at Moore's house, with
the map spread across a table. According to the trial testimony of

Moore and her son, she and the TRW representatives reached an oral

agreement after three hours of negotiation. The parties orally

agreed to the following terms: (1) TRW would never drill more than

six gas wells on Moore's property; (2) TRW would drill these gas

wells in accordance with the six drill sites indicated on the map;

and (3) TRW would never drill a gas well in a fifty-acre field on

the Moore property (the "Field"). These three oral understandings

were not reduced to writing that day.

On the next day, a TRW representative came to Moore's house

and dropped off a proposed written contract. In this proposal, TRW

promised to pay Moore $10,000 in exchange for a "perpetual easement

with the right to construct six (6) drill sites for drilling and

production of coalbed methane gas, construction of necessary access

roads, installation of power lines and gathering systems and other

coalbed methane gas recovery activity...." The $10,000 was to

constitute "full and complete payment for any and all damages to

and/or loss of trees and vegetation, easements and drill sites for

six (6) coalbed methane gas wells." The locations of two of the

six drill sites were specified in the written proposal. With

respect to the four remaining drill sites contemplated, the written

proposal provided as follows:

It is agreed and understood that TRW will discuss with Surface
Owner the easement and drill site locations for the remaining
four (4) coalbed methane gas wells of which TRW has the final
decision for location. Each of the four (4) drill sites will
not exceed one (1) acre and the associated easement for the
four (4) drill sites will not exceed three (3) net acres.
Should additional easement be required, TRW will remunerate
Surface Owner at the rate of Six Hundred Dollars ($600.00) per
net acre.
Moore expressed disagreement about the last sentence of the

above-quoted paragraph, and it was changed to read: "Should

additional easement be required, TRW will remunerate Surface Owner

at a rate to be negotiated per net acre."

On August 5, 1983, Moore and her son met with the TRW

representatives again. After making and initialling a correction

to a description of the location of "Well Site 1" in paragraph two,

Moore signed the proposed contract (hereinafter, the "written

agreement"). The written agreement includes the modified language

in paragraph two, and an attached "Exhibit A," referred to in

paragraph two, which more specifically describes the locations of

the two drill sites and associated easements. The written

agreement does not incorporate or otherwise refer to the map, nor

does it mention TRW's oral promise never to drill more than six

wells. The written agreement also does not mention the oral

promise not to drill in the Field. To the contrary, the written

agreement states that "TRW has the final decision for location"

with respect to the four remaining drill sites contemplated by the

written agreement. Nevertheless, Moore and her son testified that

at the August 5, 1983, meeting, TRW representatives repeated the

oral assurances that TRW would drill its gas wells only in

accordance with the drill sites indicated on the map, and that it

would never drill in the Field. After hearing these oral

assurances, Moore signed the written agreement.

Between December of 1983 and August of 1984, TRW and Moore

executed three supplemental letter agreements, each of which

described an additional drill site on Moore's property (for a total
of five). Although none of the supplemental letter agreements

mentioned the map or the oral promise not to drill on the Field,

all five of the drill sites chosen by TRW roughly corresponded to

the sites on the map, and TRW did not drill on the Field. TRW

completed its drilling on the Moore property in late 1984,

apparently without having chosen a sixth drill site.1

In 1990, TRW assigned its lease to the defendant, Penn Castle.

Beginning in October of 1992, a representative of Penn Castle

contacted Moore in an effort to negotiate additional drill sites.

However, Moore and her son told Penn Castle that they were not

amenable to additional wells. Several subsequent attempts to

negotiate additional drill sites failed. Unable to reach a

compromise, Penn Castle began constructing an access road and drill

pad in the middle of the Field on December 26, 1992.

II. PROCEDURAL HISTORY

On August 24, 1993, Moore filed this action against Penn

Castle in Alabama state court, stating claims for breach of oral

contract and trespass. Penn Castle removed the case to federal

court based on diversity of citizenship. See 28 U.S.C. § 1332.

The case proceeded to trial.

1
However, Moore presented evidence at trial that a drill pad
for a well located on a neighbor's property may have protruded
partly onto the Moore property. Moore argued that this counted
as one of TRW's six wells, making the well drilled by Penn Castle
in the Field the seventh. Penn Castle, on the other hand,
presented evidence to the contrary, and argued that the well in
the Field was only the sixth well.

We need not resolve this controversy in order to decide
this appeal. Construing the facts in the light most
favorable to Moore, we assume arguendo that the well in the
Field constituted the seventh well.
 During the trial, the district court admitted evidence of the

oral conversations between Moore and TRW over Penn Castle's

objection that such negotiations were merged into the written

agreement. Penn Castle similarly objected to the admission of the

map into evidence, but the district court overruled the objection.

At a break in the trial testimony, the district court

considered Penn Castle's motion for judgment as a matter of law,

which was based in part on the parol evidence rule. After hearing

argument, the district court denied the motion, concluding "that

there is a latent ambiguity in the contract, in the written

contract, and that it is for the jury to determine whether there

was a separate oral agreement." At the close of all the evidence,

the district court summarily denied the motions for judgment as a

matter of law by Moore and Penn Castle. However, the district

court granted Penn Castle's motion for judgment as a matter of law

as to Moore's claim for punitive damages.

On February 1, 1995, the jury returned a general verdict of

$159,000 in favor of Moore, and the district court entered final

judgment. Penn Castle repeated its arguments to the district court

by filing a Rule 50(b) motion for judgment as a matter of law, or,

in the alternative, a Rule 59 motion for new trial or remittitur.

On February 13, 1995, the district court entered an order summarily

denying Penn Castle's post-judgment motions. Penn Castle filed a

notice of appeal from the $159,000 final judgment entered by the

district court. Moore filed a notice of cross-appeal from the

order of the district court granting Penn Castle's motion for

judgment as a matter of law on her claim for punitive damages.
 III. DISCUSSION

We address only one issue on appeal: whether the district

court erred in permitting Moore to present evidence of her alleged

oral agreement with TRW.2 Under Alabama law, once the parties to

a contract have reduced their agreement to writing, all prior

statements, promises, and negotiations are merged into the

resulting written document. See Guilford v. Spartan Food Systems,

Inc., 372 So.2d 7 (Ala.1979) (noting that it is presumed at law

that "all prior negotiations are merged into the written contract,

which purports to cover the entire transaction"). In the absence

of fraud, mistake, or illegality, parol evidence is not admissible

to explain, contradict, vary, add to, or subtract from the express

terms of a complete and unambiguous written agreement. See Lake

Martin/Alabama Power Licensee Assoc., Inc. v. Alabama Power Co.,

Inc., 601 So.2d 942, 945 (Ala.1992).

Moore makes two arguments in support of the district court's

admission of the evidence relating to her alleged oral agreement

with TRW. First, she argues that the parol evidence bar does not

apply because the written document is ambiguous. Second, she

contends that the written document does not reflect the complete

agreement of the parties, and that extrinsic evidence of their

2
This issue is dispositive: Moore's entire case depends
upon the oral promises allegedly made by TRW. Moore does not
argue that Penn Castle breached any term of the written
agreement. In addition, Moore offered no evidence, and makes no
argument, that Penn Castle's use of her land was unreasonable,
and thus not within the common-law right of reasonable use.
Similarly, Moore's trespass claim also depends entirely on the
alleged oral promises. Moore's only argument in support of her
trespass claim is that the breach of the oral agreement
automatically resulted in a trespass to her property.
"true agreement" is therefore admissible. We address each of

Moore's arguments in turn.

A. Is the Written Agreement Ambiguous?

Under Alabama law, extrinsic evidence relating to the alleged

"true intent" of the parties is not admissible if the written

document is clear and unambiguous. See, e.g., Kerrigan v. Sherrer,

535 So.2d 74, 75-76 (Ala.1988) ("[A]bsent a finding of ambiguity,

it was improper for the trial court to consider evidence .. [of the

alleged] true intentions of the parties...."); Darling Shop of

Birmingham v. Nelson Realty Co., 52 So.2d 211 (Ala.1951) ("[I]n the

absence of ambiguity the court cannot interpret the contract but

must take it as it is written."). However, resort to parol

evidence is proper to show that the contract language contains a

"latent ambiguity." Cathbake Investment Co. v. Fisk Electric Co.,

Inc., 700 F.2d 654, 656 (11th Cir.1983) (applying Alabama law).

"An ambiguity is latent when the language employed is clear and

intelligible and suggests but a single meaning, but some extrinsic

fact or extraneous evidence creates a necessity for interpretation

or a choice among two or more possible meanings." Thomas v.

Principal Financial Group, 566 So.2d 735 (Ala.1990). If a latent

ambiguity exists, parol evidence may be admitted for the purpose of

explaining or clarifying the language revealed to be ambiguous, but

not for the purpose of uncovering the parties' alleged "true

intent." See Gafford v. Kirby, 512 So.2d 1356, 1363 (Ala.1987)

(where a latent ambiguity exists, parol evidence is admissible "to

clear up that ambiguity"). As the Supreme Court of Alabama

explained:
 Such evidence is received, not for the purpose of importing
into the writing an intention not expressed therein, but
simply with the intention of elucidating the meaning of the
words employed; and in its admission, the line which
separates evidence which aids the interpretation of what is in
the instrument, from direct evidence of intention independent
of the instrument, must be kept steadily in view; the duty of
the court being, to declare the meaning of what is written in
the instrument, not of what was intended to be written.

Gibson v. Anderson, 265 Ala. 553, 92 So.2d 692, 695 (1957)

(quotations omitted).

Whether a written contract is ambiguous is a question of law

for the court, subject to de novo review. Vulcan Painters, Inc. v.

MCI Constructors, Inc., 41 F.3d 1457, 1460 (11th Cir.1995); Wayne

J. Griffin Elec., Inc. v. Dunn Constr. Co., 622 So.2d 314, 316

(Ala.1993). In the instant case, Moore can point to no language in

the written document which is revealed to be ambiguous by the

extrinsic evidence. Nor did the district court point to any such

language, either in its rulings or in its instructions to the jury.

Our review of the written agreement persuades us that there is no

language therein which the extrinsic evidence reveals to be

ambiguous. Moreover, the interpretation urged by Moore is

unreasonable. See Orkin Exterminating Co., Inc. v. F.T.C., 849

F.2d 1354, 1362 (11th Cir.1988) (explaining that "[n]o latent

ambiguity exists unless the contract is actually susceptible to the

meaning contended for by a party" and rejecting an unreasonable

interpretation of a written contract), cert. denied, 488 U.S. 1041,

109 S.Ct. 865, 102 L.Ed.2d 989 (1989). Any interpretation of the

contract prohibiting Penn Castle from drilling in the Field is

unreasonable in light of the plain language of the written

agreement, which leaves to Penn Castle the "final decision for
location" with respect to four of the wells. It is also

unreasonable to interpret the contract as prohibiting Penn Castle

from ever drilling more than six wells on the Moore property. The

obvious purpose of the agreement is to prevent Moore from suing in

tort for any damage caused by the drilling of six wells, not to

eliminate Penn Castle's common-law right to make reasonable use of

Moore's land in the extraction of subsurface minerals. We readily

conclude that the latent ambiguity exception to the parol evidence

rule does not apply.

B. Is the Written Agreement Incomplete?

Moore's second argument in support of the district court's

admission of the parol evidence is that the parties did not intend

the written instrument to embody their complete agreement. "The

parol evidence rule is based upon the idea that a completely

integrated writing, executed by the parties, contains all of the

stipulations, engagements, and promises that the parties intended

to make, and that all of the previous negotiations, conversations,

and parol agreements are merged into the terms of the instrument."

Quimby v. Memorial Parks, Inc., 667 So.2d 1353, 1357 (Ala.1995)

(quoting Alfa Mutual Ins. Co. v. Northington, 561 So.2d 1041, 1044

(Ala.1990)). In light of its purpose, "[t]he parol evidence rule

... does not apply to every contract of which there exists written

evidence, but applies only when the parties to an agreement reduce

it to writing, and agree or intend that the writing shall be their

complete agreement." Hibbett Sporting Goods, Inc. v. Biernbaum,

375 So.2d 431, 434 (Ala.1979) (plurality opinion); see also

Quimby, 667 So.2d at 1357. Accordingly, prior negotiations and
oral conversations merge into a resulting written instrument only

if that instrument was actually intended to contain the parties'

entire agreement. See Hibbett, 375 So.2d at 436 (plurality

opinion); I.H.M., Inc. v. Central Bank of Montgomery, 340 So.2d

30, 33 (Ala.1976) ("[T]here was no error in allowing parol evidence

where there is no doubt that the written instrument was not

intended to reflect the full agreement between the parties.");

Alabama Power Co. v. Pierre, 236 Ala. 521, 183 So. 665 (1938)

("[W]e think the parol agreement admissible upon the theory that it

clearly appears the parties never intended that the written ...

contract should express their full agreement."); Southern Guaranty

Ins. Co. v. Rhodes, 46 Ala.App. 454, 243 So.2d 717, 721 (1971)

("[W]e must determine ... whether it was the intent of the parties

that the written instrument embody all of the prior negotiations

and represent the final jural act, or whether it represented only

a part thereof and it was intended there be an additional,

collateral and separate oral agreement.").

The question whether the parties have assented to a writing

as a complete integration of their agreement is a question of law

for the court, which is subject to the de novo standard of review.

Walley v. Bay Petroleum Corp., 312 F.2d 540, 544 (5th Cir.1963);

Hibbett, 375 So.2d at 435; Hartford Fire Ins. Co. v. Shapiro, 270

Ala. 149, 117 So.2d 348, 353 (1960). To resolve this legal

question, we must examine not only the written instrument itself,

but also the conduct of the parties and the surrounding

circumstances. See Hibbett, 375 So.2d at 435-36 (plurality

opinion); Southern Guaranty Ins. Co. v. Rhodes, 46 Ala.App. 454,
243 So.2d 717, 721 (1971). In Hartford Fire Ins. Co. v. Shapiro,

270 Ala. 149, 117 So.2d 348 (1960), the Supreme Court of Alabama

adopted a three-part test to determine whether a collateral or

separate oral agreement is admissible in addition to a written

agreement:

" "(1) The agreement must in form be a collateral one; (2) it
must not contradict express or implied provisions of the
written contract; (3) it must be one that parties would not
ordinarily be expected to embody in the writing....' "

Id. at 353 (quoting Mitchill v. Lath, 247 N.Y. 377, 160 N.E. 646,

647 (1928)); see also Alabama Farm Bureau Mut. Cas. Ins. Co. v.

Haynes, 497 So.2d 82, 83-84 (Ala.1986) (applying the three-part

test articulated in Hartford ); Southern Guaranty Ins. Co. v.

Rhodes, 46 Ala.App. 454, 243 So.2d 717, 722 (1971) (same).

Examining the written agreement itself, as well as the

surrounding circumstances, we conclude that the written instrument

was intended to be a complete integration of the parties'

agreement. Therefore, the alleged oral agreement between Moore and

TRW merged into the written document as a matter of law. Several

considerations persuade us to reach this conclusion.

First, we note that the written agreement itself is a formal

document that appears to embody all the terms of the parties'

agreement with respect to the six wells, as opposed to an informal

memorandum not purporting to be complete. Cf. I.H.M. v. Central

Bank of Montgomery, 340 So.2d 30, 33 (Ala.1976) (parol evidence

held admissible because document at issue was intended only as an
3
informal, preliminary memorandum of agreement). Also, Moore

3
Moore points out that the written document does not contain
an integration, or merger, clause, which states that the written
studied the written document and insisted upon certain changes

before she agreed to sign it, which indicates that she recognized

the importance of the written document in governing the parties'

relationship. Moore's conduct also indicates that she had the

opportunity to require TRW to put its alleged oral promises in

writing.

Second, with respect to TRW's alleged oral promises relating

to the location of the wells, we note that the written agreement

directly addresses that same subject. The written agreement
specifically describes the location of two wells, and provides that

"TRW has the final decision for location" of the remaining four

document expresses the complete agreement of the parties and that
all prior negotiations are merged into the written document.
Basically, an integration clause "is a portion of a particular
contract that restates the rationale of the parol evidence rule
within the terms of the contract." Environmental Systems, Inc.
v. Rexham Corp., 624 So.2d 1379, 1383 (Ala.1993). The presence
or absence of an integration clause may be a significant,
although not a conclusive, factor in ascertaining whether the
parties intended the written instrument to be a complete
integration. See, e.g., Chandler v. Lamar County Bd. of Educ.,
528 So.2d 309, 313 (Ala.1988) (citing the absence of an
integration clause as one reason for the court to examine parol
evidence); Colafrancesco v. Crown Pontiac-GMC, Inc., 485 So.2d
1131, 1133 (Ala.1986) (citing the presence of a merger clause as
a reason to exclude parol evidence). See also II Farnsworth on
Contracts § 7.3, at 204-07 (1990). Stated differently, the
absence of a merger clause does not preclude a finding that a
written contract constitutes an integration of the parties'
entire agreement. See, e.g., Jake C. Byers, Inc. v. J.B.C.
Investments, 834 S.W.2d 806, 813 (Mo.App.1992) ("The existence of
a merger clause may be a strong indication the writing is
intended to be complete, but its existence is not necessarily
determinative. More important, the absence of a merger clause is
likewise not determinative; the writing still may be complete on
its face.") (citations omitted); Braten v. Bankers Trust Co., 60
N.Y.2d 155, 468 N.Y.S.2d 861, 456 N.E.2d 802 (1983) ("In the
absence of a merger clause, as here, the court must determine
whether or not there is an integration by reading the writing in
light of surrounding circumstances, and by determining whether or
not the agreement was one which the parties would ordinarily be
expected to embody in the writing.") (quotation omitted).
wells. The alleged oral agreement that TRW would drill its wells

only in accordance with the sites indicated on the map, and that

TRW would never drill in the Field, is inconsistent with this

language. If the parties wished to confine TRW to the drill sites

shown on the map, then presumably they would have described all six

sites (rather than just two) in the written agreement, and they

would not have left the location of four of the sites to TRW's

absolute discretion.

Third, we find that TRW's alleged oral promise never to drill

more than six wells on the Moore property is not collateral to the

written agreement, and therefore that this promise also merged into

the written agreement. The purpose of the written agreement was to

define the parties' rights and obligations with respect to TRW's

contemplated extraction of methane gas from the Moore property.

Accordingly, any forfeiture of TRW's common-law right to drill more

than six wells would reasonably be expected to appear in the

written document. Although Moore agreed to accept $10,000 as full

payment for any damage which might be occasioned by TRW's

construction and operation of six coalbed methane gas wells,

nowhere in the written agreement does TRW trade away its common-law

right to drill additional wells, if drilling such additional wells

is reasonably necessary to extract the methane gas. We conclude

that the parol evidence rule bars the admission of TRW's alleged

oral promise never to drill more than six wells.

Before concluding, we pause to distinguish Hibbett Sporting

Goods, Inc. v. Biernbaum, 375 So.2d 431 (Ala.1979), a case upon

which Moore relies in her brief. In Hibbett, a plurality of the
Alabama Supreme Court reversed a trial judge's exclusion of

testimony of an oral non-competition agreement between a lessor, a

retail shopping center, and its lessee, a sporting goods store.

Their lease, which included a merger clause, did not contain a

covenant not to compete, and expressly stated that "there were no

"restrictive covenants or exclusives in favor of Lessee.' " Id. at

434. However, the existence of the oral agreement was not

disputed, and both parties stipulated that the lease was not a true

and complete expression of their agreement. Id. at 436. Thus, the

court reasoned that "[t]he parol evidence rule ... is based on the

assumption that the written contract contains the full and exact

agreement of the parties; but where admittedly it does not, the

reason for the rule ceases." Id.

Hibbett is distinguishable from the case at bar, because Penn

Castle does not concede the validity of the alleged oral agreement.

Rather, Penn Castle maintains that the written documents express

the entire agreement of the parties, and that the alleged oral

agreement was merged. For that reason, Hibbett does not support

the district court's admission of parol evidence in this case. See

Intercorp., Inc. v. Pennzoil Co., 877 F.2d 1524, 1531 (11th

Cir.1989) (distinguishing Hibbett in a case where the parties

disputed the validity of the oral agreement); Hurst v. Nichols

Research Group, 621 So.2d 964, 968 (Ala.1993) (same).

IV. CONCLUSION

Without the parol evidence admitted by the district court,

Moore's breach of contract and trespass claims fail as a matter of

Alabama law. Accordingly, the judgment of the district court that
was entered upon the jury verdict in favor of Moore is REVERSED.

We REMAND the case to the district court for judgment to be entered

for Penn Castle.

With respect to Moore's cross-appeal, the judgment of the

district court dismissing her punitive damages claim is AFFIRMED.