Court Opinion

ID: 4244972
Source: CourtListenerOpinion
Date Created: 2018-02-14 17:00:20.422568+00
Date Added: 2024-06-11T14:43:30.966409
License: Public Domain

NOT RECOMMENDED FOR PUBLICATION
                               File Name: 18a0074n.06

                                      Nos. 16-2598/2679

                         UNITED STATES COURT OF APPEALS                           FILED
                              FOR THE SIXTH CIRCUIT                           Feb 14, 2018
                                                                          DEBORAH S. HUNT, Clerk
PCA MINERALS, LLC,                                           )
                                                             )
       Plaintiff-Appellant/Cross-Appellee,                   )
                                                                   ON APPEAL FROM THE
                                                             )
                                                                   UNITED       STATES
v.                                                           )
                                                                   DISTRICT COURT FOR
                                                             )
                                                                   THE WESTERN DISTRICT
MERIT ENERGY COMPANY, LLC,                                   )
                                                                   OF MICHIGAN
                                                             )
       Defendant-Appellee/Cross-Appellant.                   )

BEFORE: BOGGS, GRIFFIN, and WHITE, Circuit Judges.

       HELENE N. WHITE, Circuit Judge. In this diversity action involving mineral rights,

PCA Minerals (PCA) challenges the magistrate judge’s dismissal of its unjust-enrichment claim

as barred under the unclean-hands doctrine. On cross-appeal, Merit Energy (Merit) asserts that

both unclean hands and laches bar PCA’s unjust-enrichment claim. We reverse the magistrate

judge’s dismissal of PCA’s unjust-enrichment claim under the unclean-hands doctrine; we

reverse as well the determination that the unclean-hands doctrine bars Merit’s laches defense,

and remand for further proceedings consistent with this opinion.

                                               I.

       By quit-claim mineral deed dated September 29, 1997, Tenneco Packaging Inc.,

conveyed to PCA (then called Martin-Marks I, LLC) mineral rights in certain real estate in

Manistee County, Michigan, including reversionary interests in two oil-drilling tracts, the

Manistee 24 Unit and the Bahr Unit, that would ripen on January 11, 2005. In 2004, Merit
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

succeeded to the interests of Shell Western E&P (SWEPI), including the working interests in the

Manistee 24 and Bahr Units. Merit, the unit owner and operator of the wells within each Unit,

thus began paying the costs of operating the wells in 2004. PID 2487-88/Dist. Ct. Op.

       Neither party realized until April 2013 that PCA’s reversionary interests had ripened on

January 11, 2005, at which time PCA became the 50% working-interest owner of the Bahr Well

and part of the Manistee 24 Unit, and Merit’s interest terminated. Unaware that its 50% working

interest was extinguished, Merit continued to produce oil and gas after January 11, 2005, PID

2501, and asserts that it paid out $467,000 in royalty payments to third parties; payments PCA

now claims it should have been paid. Merit Cross-Appeal Opening Br. 50.

       There is no dispute that the principals of both parties have decades of experience in oil-

and-gas-drilling operations.

                                    II. Procedural History

       PCA filed its complaint in state court in October 2013, alleging entitlement to a share of

the production of oil, gas, and other hydrocarbons from the Manistee 24 and Bahr Units. PID 8-

9. PCA alleged that its right to share in the production accrued on January 11, 2005, but that

Merit, the unit operator of the Units and owner and operator of the wells within each Unit, has

not accounted for, calculated or paid PCA its share of the production. PID 2481. PCA alleged

claims of unjust enrichment, conversion, and breaches of fiduciary duty, the reasonably-prudent-

operator standard, and the plan of unitization (a contract pertaining to the Manistee 24 Unit).

PCA sought a constructive trust, equitable lien, declaratory judgment as to royalties, and an

accounting. PID 3-14/Complaint; 2488-98/Dist. Ct. Op. Merit removed the action to federal

court based on diversity jurisdiction. PID 366/Order Granting Merit’s Motion to Amend Notice
                                              -2-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

of Removal. The parties consented to dispositive jurisdiction by a magistrate judge. See PCA

Minerals LLC v. Merit Energy Co., LLC, No. 1:13-cv-1243, 2015 WL 4546287, at *1–5 (W.D.

Mich. 2015); docket entry R. 16.

       Following discovery, PCA filed various motions for partial summary judgment and Merit

filed a motion for summary judgment. The magistrate judge granted PCA partial summary

judgment regarding its interest in the lands and the extinguishment of Merit’s lease covering

PCA’s lands; dismissed several of PCA’s claims on grounds not pertinent to this appeal;

dismissed PCA’s unjust-enrichment claim and rejected Merit’s laches defense on the basis that

both parties had unclean hands based on their lack of diligence in discovering that PCA’s

interests in the lands vested on January 11, 2005 and that Merit’s term mineral interest expired

on that date, PID 2517-19; and granted Merit summary judgment “to the extent it requests the

Court to apply a three year statute of limitations” to PCA’s conversion claim. PID 2520.

       On October 12, 2016, pursuant to the parties’ stipulation, the magistrate judge entered a

stipulated judgment of $233,120.86 in PCA’s favor, with no award of costs, interest or attorney

fees. PID 2839-40. The stipulated judgment states that it “shall not be deemed to be a waiver of

either party’s right of appeal, and it shall be without prejudice as to the right of either party to

pursue an appeal and cross appeal with regard to the Court’s opinion and ruling made on July 28,

2015 (Page ID 2840-2520) and August 26, 2016 (Page ID. 2829-2832) and this Judgment.” PID

2839-40/Stipulated J. entered 10/12/16. Because the parties negotiated informally, the record

reveals no more regarding how the amount was calculated.

                                                -3-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

        On appeal, PCA challenges the dismissal of its unjust-enrichment claim as barred under

the unclean-hands doctrine.1 Merit challenges the district court’s rejection of its laches defense

under the same doctrine, and also argues against application of the six-year statute of limitations

to PCA’s dismissed unjust-enrichment claim.

                                                   III.

        Federal courts sitting in diversity “apply state substantive law and federal procedural

law.” Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393, 417 (2010),

(quoting Hanna v. Plumer, 380 U.S. 460, 465 (1965)); Hayes v. Equitable Energy Res. Co., 266
F.3d 560, 566 (6th Cir. 2001). This court reviews de novo the district court’s interpretation of

Michigan law, Berrington v. Wal-Mart Stores, Inc., 696 F.3d 604, 607 (6th Cir. 2012), as well as

the district court’s determinations on summary judgment, John Hancock Fin. Servs., Inc. v. Old

Kent Bank, 346 F.3d 727, 730 (6th Cir. 2003). “Summary judgment is proper if . . . there is no

genuine dispute as to any material fact and the moving party is entitled to judgment as a matter

of law.” Fed. R. Civ. P. 56(a). “The evidence must be viewed in a light most favorable to the

party opposing the motion, giving that party the benefit of all reasonable inferences.” Id.

                                           IV. Unjust Enrichment

        Under Michigan law, to establish unjust enrichment PCA must show 1) the receipt of a

benefit by Merit from PCA, and 2) an inequity resulting to PCA because of the retention of the

benefit by Merit. Karaus v. Bank of N.Y. Mellon, 831 N.W.2d 897, 905 (Mich. Ct. App. 2012).

1
  PCA asserts for the first time on appeal that it appears that the amount Merit claims to have improperly
paid to third parties must have ceased in October 2009, and posits that Merit knew or must have known in
2009 that PCA’s reversionary interest had ripened in 2005. Appellant Br. 7-8, 19; Third Br. 17. This
argument is not properly before us and we do not address it. See Galinis v. Cty. of Branch, 660 F. App’x
350, 354 (6th Cir. 2016).

                                                   -4-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

If PCA can establish that Merit has been unjustly or inequitably enriched at its expense, the law

will imply a contract to prevent the unjust enrichment. See id.

        A. Equitable Doctrine of Unclean Hands2

        Applying the equitable doctrine of unclean hands,3 the magistrate judge dismissed PCA’s

unjust-enrichment claim and rejected Merit’s laches defense to PCA’s claims.4

        PCA asserts that the doctrine of unclean hands cannot be invoked as an equitable defense

based solely on “mere negligence,” and that the magistrate judge determined only that both

parties were negligent.     Merit asserts that dismissal of the claim under the unclean-hands

doctrine was proper because PCA’s eight-year delay in instituting this action constituted more

than mere negligence.

        We review the district court’s application of the unclean-hands doctrine for abuse of

discretion, Performance Unlimited, Inc. v. Questar Publishers, Inc., 52 F.3d 1373, 1383 (6th Cir.

1995), but review de novo pure questions of law related to the doctrine, Cyber Sols. Int’l, LLC v.

2
  Merit’s answer to PCA’s complaint asserted as affirmative defenses laches, unclean hands, and the
statute of limitations. PID 278. PCA incorrectly asserts that Merit raised the unclean-hands doctrine only
as an affirmative defense in its answer to PCA’s complaint, and because of that, PCA “did not address the
doctrine of unclean hands in the pleadings it filed regarding the motions for summary judgment.”
Appellant Br. 11. Although Merit principally argued that laches should bar PCA’s claims, it also argued
unclean hands, see PID 1035-39, 1042-50 and ns.25-26/ Merit’s Summ. J. Brief. Moreover, PCA’s
response to Merit’s motion for summary judgment acknowledged that Merit sought dismissal under the
doctrines of laches and unclean hands. See PID 1423/PCA Brief in Resp. to Merit Mo. for Summ. J.
3
  We reject Merit’s assertion that the magistrate judge dismissed PCA’ s unjust-enrichment claim not only
under the unclean-hands doctrine, but also on the independent bases of “want of equity” and the equitable
decision to “leave the parties where it found them.” The magistrate judge’s opinion is clear that these
statements are based on the unclean-hands determination. See PID 2516-19.
4
  Merit conceded at argument that its cross-appeal is confined to PCA’s unjust-enrichment claim; the
district court’s rulings regarding the conversion claim are no longer at issue.

                                                   -5-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

Pro Mktg. Sales, Inc., 634 F. App’x 557, 562 (6th Cir. 2016); see also Bonner Farms, Ltd. v.

Fritz, 355 F. App’x 10, 17 (6th Cir. 2009) (diversity case applying Ohio substantive law) (citing

Ne. Women’s Ctr., Inc. v. McMonagle, 868 F.2d 1342, 1354 (3d Cir. 1989)).

       As the Michigan Supreme Court observed in Stachnik v. Winkel:

       (The clean hands maxim) “is a self-imposed ordinance that closes the doors of a
       court of equity to one tainted with inequitableness or bad faith relative to the
       matter in which he seeks relief, however improper may have been the behavior of
       the defendant. That doctrine is rooted in the historical concept of the court of
       equity as a vehicle for affirmatively enforcing the requirements of conscience and
       good faith. This presupposes a refusal on its part to be ‘the abettor of iniquity.’
       Bein v. Heath, 47 U.S. 228, 6 How. 228, 247, 12 L. Ed. 416.”

230 N.W.2d 529, 532 (Mich. 1975) (quoting Precision Instrument Mfg. Co. v. Auto. Maint.

Mach. Co., 324 U.S. 806, 814 (1945)). Iniquity is defined as “the quality of being unfair or

evil.” See https://www.merriam-webster.com/dictionary/iniquity.

       PCA is correct that negligence alone is insufficient to warrant application of the unclean-

hands doctrine under Michigan law. In Attorney General v. Ankersen, 385 N.W.2d 658 (Mich.

Ct. App. 1986), the Michigan Court of Appeals explained:

       Here, there was no showing that the DNR acted in bad faith or with fraud in
       licensing and inspecting the operation. Nor had there been a showing that the
       DNR sought to mislead or deceive any other party. Compare, Stachnik [v.
       Winkel,] 230 N.W.2d 529[, 534 (Mich. 1975)]. At most, the evidence may show
       that the DNR was negligent in licensing ARS in the first place and in not moving
       sooner to compel compliance. There is simply insufficient evidence on the record
       showing bad faith or lack of morality on the part of the DNR which would justify
       invoking the doctrine of unclean hands to protect the integrity of the court. Mere
       negligence in issuing a license and monitoring the premises do not constitute facts
       giving rise to the application of the doctrine of unclean hands. Therefore, we
       conclude that the trial court erred in granting defendants’ motions for dismissal at
       the conclusion of plaintiffs’ proofs on the basis or either equitable estoppel or
       unclean hands.

                                               -6-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC
385 N.W.2d at 667 (second emphasis added); see also Rose v. Nat’l Auction Grp., Inc., 646
N.W.2d 455, 461 (Mich. 2002).

        Here, the magistrate judge made no determination that PCA’s or Merit’s lack of diligence

in discovering that PCA’s reversionary interest had ripened in 2005 amounted to more than mere

negligence. See PID 2516-19. The magistrate judge’s remarks that each party seeks relief on the

basis that the other party should have known about the reversion in 2005 and that “both parties

could have pursued their homework more rigorously,” PID 2516-19, at most reflect a

determination of negligence, and negligence alone cannot support the magistrate judge’s

determination that both parties are “tainted with inequitableness” and barred from invoking

equity on the basis of unclean hands. Ankersen, 385 N.W.2d at 667. That determination

constituted error regardless whether our review is de novo or for abuse of discretion. See Cyber

Sols. Int’l, 634 F. App’x at 562; Bonner Farms, 355 F. App’x at 17; Performance Unlimited,

Inc., 52 F.3d at 1383. Accordingly, we reverse the dismissal of PCA’s unjust-enrichment claim

and the rejection of Merit’s laches defense based on unclean hands.5

        B. Statute of Limitations Governing Unjust-Enrichment Claim

        Merit asserts that “any proper application of the Michigan gravamen analysis precludes

PCA’s attempted use of its unjust enrichment count to allow any recovery beyond that already

provided by the District Court via its application of the conversion 3-year statute of limitations.”

Cross-Appeal Br. 42.

5
  Merit’s assertion that the continuing-wrong doctrine precludes PCA’s unjust-enrichment claim is not
properly before us because Merit failed to raise it before the magistrate judge. See Galinis, 660 F. App’x
at 354.

                                                   -7-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

        We first observe that although the magistrate judge dismissed PCA’s unjust-enrichment

claim on the basis of unclean hands, the magistrate judge’s preliminary observations regarding

that claim can be read as finding that the six-year statute of limitations applicable to breach-of-

contract actions applies.6 The magistrate judge went on to dismiss the unjust-enrichment claim

as barred by unclean hands and did not engage in a gravamen analysis with respect to the claim.

Relying on the magistrate judge’s discussion of PCA’s other claims, Merit asserts that the

magistrate judge’s determination that conversion is the gravamen of those other claims mandates

the determination that conversion is the gravamen of the unjust-enrichment claim as well.

        Michigan courts typically apply a gravamen analysis, that is, review the complaint in its

entirety to determine the true nature of the claims, and apply the statute of limitations governing

the legal gravamen claim to equitable claims that seek analogous relief. The Michigan Supreme

Court “has long recognized that statutes of limitation may apply by analogy to equitable

claims.” Taxpayers Allied for Constitutional Taxation v. Wayne Cty., 537 N.W.2d 596, 600 n.9

(Mich. 1995). “If legal limitations periods did not apply to analogous equitable suits, ‘a plaintiff

[could] dodge the bar set up by a limitations statute simply by resorting to an alternate form of

relief provided by equity.’” Id. (quoting Lothian v. Detroit, 324 N.W.2d 9, 14 (Mich. 1982)).

Thus, when an equitable claim would provide relief that is analogous to the relief available under

6
  The magistrate judge set forth various legal principles regarding unjust enrichment in Michigan, citing
Michigan cases, including Romeo Inv. Ltd. v. Mich. Consol. Gas Co., No. 260320, 2007 WL 1264008, at
*8 (Mich. Ct. App. May 1, 2007), which applied the six-year limitation period for contract claims to an
unjust-enrichment claim. PID 2517. The magistrate judge also noted that, after Romeo, the Michigan
Court of Appeals found in Trudel v City of Allen Park, No. 304507, 2013 WL 6037152, at *17 (Mich. Ct.
App. Nov. 14, 2013), that the statute of limitations for unjust-enrichment claims is six years, citing Mich.
Comp. Laws Ann. § 600.5813 (“All other personal actions shall be commenced within the period of 6
years after the claims accrue and not afterwards unless a different period is stated in the statutes.”), and
Mich. Comp. Laws Ann. § 600.5815 (“The prescribed period of limitations shall apply equally to all
actions whether equitable or legal relief is sought.”). PID 2517 n.10. The magistrate judge then stated,
“A claim for unjust enrichment accrued each time that Merit Energy sold oil or gas produced from the
property commencing on October 8, 2007 (six years prior to the filing of the action).” PID 2517.

                                                    -8-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

a similar legal claim, courts typically apply the legal claim’s statute of limitations to the

equitable claim as well. Lothian, 324 N.W.2d at 14.

         When an unjust-enrichment claim is not based on an analogous contract claim, but on a

different legal claim, Michigan courts will apply the statute of limitations applicable to that

claim.    See Peabody v. DiMeglio, 856 N.W.2d 245, 251 (Mich. Ct. App. 2014) (ten-year

limitations period for enforcement of judgments applied to unjust-enrichment claim based on the

enforcement of the provisions of a divorce judgment).

         PCA is correct that there is a lack of authority to support Merit’s assertion that under

Michigan’s gravamen analysis, because conversion is the gravamen of some of PCA’s claims,

PCA’s unjust-enrichment claim cannot be governed by the six-year statute of limitations. In that

regard, Merit cites two federal district court decisions to support the position that the three-year

statute applies to PCA’s unjust-enrichment claim. Cross-Appeal Br. 42-46 & n.44. In Brilinski

v. Merit Energy Co., LLC, No. 14-CV-10015, 2015 WL 418091 (E.D. Mich. Jan. 30, 2015),

which involved conversion and unjust-enrichment claims, the district court concluded that the

gravamen of the complaint was for conversion and that both claims were thus governed by the

three-year statute of limitations:

         The two claims are not, however, governed by two different limitations periods.
         As advised above, a court must determine the gravamen of the complaint and
         apply the appropriate limitations period to the harm alleged. Adams [v.
         Adams], 742 N.W.2d [399,] 403. Here, Brilinski’s claim is that Defendants
         drilled a gas well within the 330 foot buffer zone around his property line which
         led to the drainage of gas from his land. Such claims have been consistently held
         to be claims of conversion. See, e.g., Ross v. Damm, 278 Mich. 388, 270 N.W.
722, 725 (Mich. 1936) (“From these facts we conclude that defendants by drilling
         their wells too close to the [property] line . . . deprived plaintiff of the opportunity
         of claiming and taking the oil that was rightfully hers; and defendants must
         respond in damages for such conversion.”).                     Thus, the gravamen
         of Brilinski’s complaint is for conversion and his claims are controlled by a three
         year statute of limitations.

                                                   -9-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

Brilinski, 2015 WL 418091, at *4. Miller v. Pathway Fin., Assured Capital Funding, No. 12-cv-

14387, 2013 WL 1821252, at *4 (E.D. Mich. Apr. 30, 2013), another federal district court

decision that Merit cites, applied a gravamen analysis to various claims alleging predatory

lending practices and concluded that claims for rescission and quiet title were based on fraud and

subject to the six-year statute of limitations applicable to fraud claims.

        Michigan courts do, indeed, conduct a gravamen analysis when a plaintiff attempts to

avoid the applicable statute of limitations by ignoring the true nature of the wrong alleged and

recasting it as a claim subject to a longer statute. Michigan courts have made clear that a

plaintiff may not plead a malpractice claim subject to a two-year statute of limitations as a

general negligence claim subject to a three-year limitations period, see Simmons v. Apex Drug

Stores, Inc., 506 N.W.2d 562, 564 (Mich. Ct. App. 1993), modified on other grounds, Patterson

v. Kleiman, 526 N.W.2d 879 (Mich. 2004) (“A plaintiff may not evade the appropriate limitation

period by artful drafting.”), or as a breach-of-contract claim, see Nicholson v. Han, 162 N.W.2d
313, 317 (Mich. Ct. App. 1968) (“Count 1 does not allege two substantial causes of action. It is

founded on allegations of breach of contract; but the gravamen of the action sounds in tort, that

is, the substance of the allegations denominate a tort.”).

        On the other hand, nothing prohibits a plaintiff from pleading multiple claims when there

are, in fact, multiple theories of liability that are legally viable and consistent with the facts;

where a plaintiff has a contract claim, tort claim, and a claim for statutory violation, all may be

pled.   See, e.g., Joliet v. Pitoniak, 715 N.W.2d 60, 64, 68–70 (Mich. 2006) (analyzing

individually plaintiff’s claims of alleged violations of Michigan’s Civil Rights Act, breach of

contract, and misrepresentation, to determine whether each was time barred).

                                                 -10-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

       Merit cites no Michigan state-court decisions, and only the two non-binding federal

district court decisions discussed above, to support its argument that PCA’s equitable unjust-

enrichment claim must be governed by the same three-year statute of limitations as its legal

conversion claim, i.e., that different statutes of limitation cannot apply to claims based on the

same facts. This assertion is inconsistent with Peabody’s discussion of the various causes of

action and their applicable statutes of limitations.      And in discussing the very gravamen

principles that Merit relies on, the Michigan Court of Appeals has recognized that the

“applicable period of limitations depends upon the theory actually pled when the same set of

facts can support either of two distinct causes of action”:

       The type of interest allegedly harmed is the focal point in determining which
       limitation period controls. Wilkerson v. Carlo, 101 Mich. App. 629, 631, 300
N.W.2d 658 (1980); Stringer v. Board of Trustees of Edward W. Sparrow
       Hospital, 62 Mich. App. 696, 699-700, 233 N.W.2d 698 (1975), lv. den. 395
Mich. 768 (1975). The applicable period of limitations depends upon the theory
       actually pled when the same set of facts can support either of two distinct causes
       of action. Wilkerson, supra, 101 Mich. App. at 631-632, 300 N.W.2d 658. The
       gravamen of an action is determined by reading the claim as a whole. Smith v.
       Holmes, 54 Mich. 104, 19 N.W. 767 (1884).

Adkins v. Annapolis Hosp., 323 N.W.2d 482, 485 (Mich. Ct. App. 1982), aff’d, 360 N.W.2d 150

(Mich. 1984); see also Campos v. Oldsmobile Div., General Motors Corp., 246 N.W.2d 352, 354

(Mich. Ct. App. 1976) (“The same conduct, falsely accusing another of crime, may give rise to

two causes of action [one being slander and the other intentional infliction of mental distress]

depending on the interest which was injured.”).

       Thus, the magistrate judge’s determination that the conversion claim is subject to a three-

year statute of limitations is not dispositive of the limitations period applicable to the unjust-

enrichment claim. On remand, the court should determine whether the unjust-enrichment claim

is a distinct claim or is simply a recasting of the conversion claim.

                                                -11-
Nos. 16-2598, 16-2679
PCA Minerals, LLC v. Merit Energy Co., LLC

                                                    V.

       We reverse the dismissal of PCA’s unjust-enrichment claim and the determination that

the unclean-hands doctrine bars Merit’s laches defense to that claim, and remand for further

proceedings consistent with this opinion.

                                             -12-