September 30, 2015 Practice Points

Pipeline Company Wins $32.9 Million Judgment in Contract Case

The court based federal jurisdiction on interstate gas pipeline tariffs.

By Ryan Van Steenis – September 30, 2015

On September 16, 2015, following a jury trial, a federal judge in Minnesota entered a $32,902,183 judgment in favor of the plaintiff, an interstate pipeline company, for the defendants’ breach of contract in the case of Great Lakes Gas Transmission Limited Partnership v. Essar Steel Minnesota LLC et al. The defendants had previously moved to dismiss for lack of jurisdiction, but the court denied the motion. Although the court found that diversity jurisdiction was lacking, it concluded that it had original and exclusive jurisdiction because the plaintiff’s requested relief (damages stemming from the defendants’ breach of contract) necessarily depended on the resolution of a substantial question of federal law.

Plaintiff Great Lakes Gas Transmission Limited Partnership is a regulated interstate natural-gas pipeline. Great Lakes’ partners are two Delaware corporations and a Delaware limited partnership. Great Lakes’ Delaware limited partnership partner comprises two more partners: another Delaware corporation and a publicly traded Delaware master limited partnership.

In 2006, Great Lakes entered into a contract with Minnesota Steel Industries. The contract was effective from July 1, 2009 to March 31, 2024, and obligated Great Lakes to deliver up to 55,000 dekatherms of natural gas per day to Essar for steal manufacturing. In exchange, Essar agreed to pay Great Lakes the “maximum reservation rates and charges on a monthly basis, pursuant to the applicable rate schedule reflected in Plaintiff’s gas tariff (the ‘Tariff’) on file with the Federal Energy Regulatory Commission.” The contract specifically stated that it “shall incorporate and in all respects be subject to the ‘General Terms and Conditions’ and the applicable Rate Schedule . . . set forth in [Great Lakes’] FERC Gas Tariff.” Defendant Essar Steel Minnesota LLC bought Minnesota Steel in 2007 and assumed liability for the contract.

In October 2009, three months after the contract began, Great Lakes brought suit claiming breach of contract and anticipatory repudiation and three other causes of action in an attempt to hold Essar’s foreign entities liable. Initially, Great Lakes asserted that the district court had subject-matter jurisdiction pursuant to 28 U.S.C. § 1332(a)(1) and (a)(2), as the amount in controversy exceeded $75,000 and all parties were diverse.

In the fall 2014, on the eve of trial on the appropriate discount rate to apply to Great Lakes’ damages, the defendants notified the court that they believed it lacked subject-matter jurisdiction because not all parties were diverse. Specifically, the defendants discovered that Great Lakes’ Delaware master limited partnership partner had hundreds, or maybe even thousands, of public unitholders. The defendants argued that if any one unitholder was a Minnesota citizen, complete diversity would be destroyed.

The defendants moved to dismiss, and the court agreed that diversity jurisdiction was lacking because Great Lakes could not show that its limited partner (the publicly traded Delaware master limited partnership) was completely diverse from the defendants. The court found that master limited partnerships should be treated as limited partnerships for purposes of diversity. This required Great Lakes to determine the citizenship of all its general and limited partners, including those limited partners who owned “common units” in the publicly traded Delaware master limited partnership, which it failed to do.

Nevertheless, the court denied the defendants’ motion to dismiss, and concluded that it had jurisdiction within a “small and special category” of “federal question” jurisdiction jurisprudence. Even though the court found that federal law did not create Great Lakes’ causes of action, either explicitly or implicitly, Great Lakes’ relief depended on the resolution of a substantial and disputed question of federal law—specifically, interpretation of the tariff incorporated into the parties’ agreement. The court found that federal tariffs are considered federal law, analogous to federal regulations. Without analyzing by the applicability of the tariff’s “Limitation of Liability,” “Force Majeure,” and “Remedies” clauses to the parties’ contract, the court could not determine whether the defendants had breached the contract. Thus, construing “the meaning of these three Tariff provisions was essential to determining whether [Great Lakes] was entitled to relief for [breach of contract]” and imbued the court with original jurisdiction under 28 U.S.C. § 1331 and § 1337, and exclusive jurisdiction under section 717u of the Natural Gas Act.

In light of the court's findings, for a natural-gas business entity to seek relief in federal court on breach-of-contract claim, it must determine whether its owners, partners, members, and in the case of a master limited partnership, every unitholder, is totally diverse from every defendant before filing. If that cannot be achieved, or the task is too labor-intensive, the business entity must analyze the contract at issue and determine whether its terms incorporate tariff rates, or any other question of federal law, that could provide the court with subject-matter jurisdiction.  

Keywords: energy litigation, pipeline, contract, federal question jurisdiction, federal jurisdiction, tariff, Federal Energy Regulatory Commission, FERC

Ryan Van Steenis is with Ajamie LLP in Houston, Texas.

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