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GQ Sand, LLC v. Conley Bulk Services, LLC

United States District Court, W.D. Wisconsin

June 10, 2016

GQ SAND, LLC, Plaintiff and Counterclaim Defendant,
v.
CONLEY BULK SERVICES, LLC, Defendant, Counterclaim Plaintiff and Crossclaim Defendant, RANGE MANAGEMENT SYSTEMS, LLC, and Defendant and Counterclaim Plaintiff, and NEJGID, LLC, Defendant and Counterclaim/Crossclaim Plaintiff.

          OPINION AND ORDER

          WILLIAM M. CONLEY, District Judge.

         Plaintiff GQ Sand, LLC, brings this civil action against defendants Conley Bulk Services, LLC ("CBS"), Range Management Systems, LLC ("RMS") and NEJGID, LLC, arising out of a multi-million dollar frac sand deal gone awry. Defendants have in turn filed counterclaims against plaintiff. Finally, defendant NEJGID has asserted a crossclaim against defendant CBS.

         Now before the court are GQ Sand’s motion for summary judgment on claims it asserted against the three defendants, as well as CBS's motion for summary judgment on its breach of contract counterclaim against GQ Sand. (Dkt. ##50, 72.) Save for GQ Sand’s motion for summary judgment on negligence and misrepresentation claims againt RMS, the court finds genuine issues of material fact preclude entry of summary judgment on any of the parties’ claims.

         UNDISPUTED FACTS[1]

         A. The Parties

         Plaintiff and counterclaim defendant GQ Sand, LLC, is a Wisconsin limited liability company, with its principal place of business located in Mazomanie, Wisconsin. Josh Quisling and Joe Gargano are the sole members of GQ Sand. Quisling is a citizen of Nevada; and Gargano is a citizen of Wisconsin.

         Defendant, counterclaim plaintiff and crossclaim defendant Conley Bulk Services, LLC ("CBS") is a Texas limited liability company, with its principal place of business located in Weatherford, Texas. CBS’s sole member is Transportation II, Inc., which is incorporated in Arkansas, with its principal place of business also located in that state. Rory Conley is CBS’s President, and Brock Brockinton is its Vice President. CBS provides truck transportation and procurement services of hydraulic fracturing proponents to the petroleum industry.[2]

         Defendant and counterclaim plaintiff Range Management Systems, LLC ("RMS"), is a Texas limited liability company, with its principal place of business located in Kellar, Texas. RMS’s sole member is Cody Lyon, a citizen of Texas. RMS is in the business of lending railcars, and then using those railcars to arrange for the transport of goods and materials for others.

         Finally, defendant and counterclaim/crossclaim plaintiff NEJGID, LLC, is a Texas limited liability company, with its principal place of business in Austin, Texas. NEJGID’s sole member at all times relevant to this matter was Carl Hudspeth. Hudspeth is a citizen of Texas. RMS’s Lyon testified at his deposition that at some point in 2015, Lyon purchased NEJGID from Hudspeth.

         As such, the defendants are all citizens of different states (Texas and Arkansas) than the plaintiff (Nevada and Wisconsin). Moreover, the amount in controversy exceeds $75, 000.

         B. GQ Sand’s and CBS’s Sand Supply Agreement

         i. Events Leading up to Agreement

         On or about December 2, 2014, CBS contracted to sell to Advanced Stimulation Technologies ("AST"), "certain types of API [American Petroleum Institute] and ISO [International Organization for Standardization] quality sand for hydraulic fracturing operations." (Watt Decl., Ex. 1 (dkt. #69-1).) Specifically, the AST contract required CBS to sell AST 10, 000 tons each of frac sand with the following specifications: 20/40 grade sand of 7-K API quality; 30/50 grade sand of 8-K API quality; and 40/70 grade sand of 9-K API quality. (Id.) The size of the sand grains determines the grade of the sand. For example, 20/40 grade sand means that 90 percent of the sand is small enough to pass through a 20 mesh screen, but large enough to be retained on a 40 mesh screen.[3]The "K value" represents the crush strength of the frac sand and is defined by the pressure applied to the sand in thousands of pounds per square inch.

         Shortly after CBS entered into the AST contract, Hudspeth, the manager of defendant NEJGID, introduced Brockinton, CBS’s Vice President, to Quisling of plaintiff GQ Sand, as a potential provider of sand to service the AST contract. Specifically, the parties discussed whether GQ Sand could source the sand and railcars, as well as manage the delivery of sand to a trans-loading facility designated by CBS. On December 19, 2014, Brockinton sent Quisling a draft contract. Over the next two to three weeks, CBS and GQ Sand negotiated the final language of an agreement. On December 23, CBS sent back a marked-up version highlighting "areas of concern, " including a note that the "Account" referred to in § 1.9 must be an escrow account. (CBS’s Add’l PFOFs (dkt. #95) ¶ 2 (quoting Salman Decl., Ex. 4 (dkt. 98-4) 8).) During these negotiations, both parties were represented by counsel, Attorney Steven Brezinski for GQ Sand and Attorney Matt Lindsay for CBS.

         On December 29, Attorney Brezinski, on behalf of GQ Sand, stated that "[t]here needs to be a deposit which GQ [Sand] can use to cover their costs outside of the escrow account equal to the amount to be paid for the first and last shipments. Future payments can be made from the escrow account." (CBS’s PFOFs (dkt. #74) ¶ 54 (citing Lindsay Aff. (dkt. #76) ¶ 4).) On January 2, 2015, Attorney Lindsey, on behalf of CBS, responded that it would "[p]rovide a cash payment outside of escrow of $157, 000.00 within 7 days of the signing of a purchase agreement" and would "[p]lace an additional $628, 000.00 in escrow and agree to fund it as we previously set forth." (Id. at ¶ 55 (citing Lindsay Aff., Ex. B (dkt. #76-2)).)

         On January 13, 2015, Quisling and Gargano for GQ Sand met in Madison, Wisconsin, with Brockinton and Attorney Lindsay for CBS to finalize the Sand Supply Agreement. During that meeting, Quisling made some redlined edits to the Agreement on his computer. The parties dispute whether CBS was aware of these changes, but this dispute appears immaterial in light of the fact that the final version of the Agreement incorporates those edits and Brockinton signed the Agreement on CBS's behalf. Specifically, Quisling made the following change:

The sum of $628 157, 000.00 shall be paid by Buyer to the Account designated by Seller no later than 27 days after the Agreement Date. Further payments shall be made to a designated Escrow Account, and both parties shall execute the Escrow Agreement attached hereto. This Deposit consists of a prepayment for the first 20 rail car loads and the last 20 rail car loads An additional $628, 000 shall be paid to the Escrow Account within 7 days of the Agreement Date.

(Quisling Decl., Ex. 1 (dkt. #56-1) § 1.9; see also Quisling Decl., Ex. 2 (dkt. #56-2) § 1.9 (signed version with redlined edits incorporated).)

         ii. Key Provisions of the Sand Supply Agreement

         On January 13, 2015, GQ Sand as Seller and CBS as Buyer entered into the Sand Supply Agreement. On behalf of their respective companies, Brockinton and Quisling initialed each page of the Agreement and its incorporated Standard Terms and Conditions, then signed the Agreement. (Quisling Decl., Ex. 2 (dkt. #56-2).) The "Agreement Date" is expressly defined as January 13, 2015. Moreover, the Agreement states that it "shall be governed by and interpreted in accordance with the law of the State of Wisconsin." (Id. at § 9.)

         In general terms, the Agreement requires GQ Sand to supply and CBS to purchase 30, 000 tons of sand at $157 per ton "CIF, " which is short for Cost, Insurance and Freight. The sand was to be delivered to Kress, Texas. CBS’s plan was to then sell this sand to AST pursuant to their separate contract. That contract provided that AST would accept delivery of the sand from CBS at Kress.

         More specifically, GQ Sand was to provide 10, 000 tons each of 20/40, 30/50 and 40/70 grades of sand, with K-values of 7K, 9K and 9K, respectively. The Agreement gave GQ Sand the right to source its sand from any plant of its choosing so long as the sand met these specifications. The Agreement also requires that the sand meet minimum API standards as provided in "Exhibit B" to the Agreement, even though there is no attached Exhibit B. (Id. at § 1.11.) Finally, the Agreement provides that CBS, as the Buyer, "acknowledges that it has reviewed and has accepted the specification for Sand (‘Specifications’) and sampling procedures provided by Seller." (Id. at § 3(d).) (Although at his deposition, Brockinton admitted that he did not specifically remember requesting samples prior to entering the Agreement.)

         The Agreement further binds GQ Sand to deliver the 30, 000 tons of sand over four months in fifteen separate 2, 000-ton deliveries. In turn, CBS is to make fifteen payments into an escrow account of $314, 000 per delivery, for a total of $4, 710, 000. This escrowed money, however, was only to be released as payment for the sand shipments upon the production of a "Disbursement Direction, " which included attaching an invoice and manifest that GQ Sand was to send to both CBS and the escrow agent.[4](Quisling Decl., Ex. 3 (dkt. #56-3) § 3.)

         The "Commencement Date" for beginning scheduled deliveries is also defined as "January 15, 2015 or upon Sellers’ receipt of the Deposit, if later." (Quisling Decl., Ex. 2 (dkt. #56-2) § 1.5.) As described above, § 1.9 of the Agreement contains the heading "Deposit."[5] The Agreement also allows for a "Ramp-Up Period, " beginning on the Commencement Date and ending 15 days later. (Id. at § 1.8.) GQ Sand had no obligation to sell or deliver sand during the Ramp-Up Period.

         Section 3(a)(i) requires GQ Sand to "use commercially reasonable efforts to accommodate the Delivery Date(s)." (Id. at § 3(a)(i).) If it could not meet the dates, GQ Sand was required to "notify Buyer of the reason for such inability, " and then Seller and Buyer were required to "attempt to resolve such matters." (Id.) GQ Sand was also required to "use its best efforts to specify Delivery Dates at least ten (10) days" before delivery of the sand. (Id.)

         Finally, the Agreement sets forth the terms for termination. Under Section 7(b) of the Standard Terms and Conditions, CBS had the ability to terminate the agreement, but only if GQ Sand accumulated more than three "Seller Uncured Failures" within a four month period. The Agreement further requires CBS to promptly provide written notice of the failure to GQ Sand. In the notice itself, CBS must also "specify the nature of such failure with particularity and in reasonable detail" and require reference to the relevant section of the Agreement. (Id. at p.9.) GQ Sand would then have ten days to cure the specified failure to perform.[6]

         C. Rail Delivery Agreement

         Around the same time GQ Sand and CBS were negotiating their Agreement for delivery of frac sand, Quisling was introduced by a mutual friend to Cody Lyon, the sole member of defendant RMS. GQ Sand needed the ability to transport 30, 000 tons of frac sand by rail, and RMS had the equipment and accounts to do so, including RMS’s account with Union Pacific.

         On December 22, 2014, Lyon sent Quisling an approximate schedule he had created for RMS to deliver 30, 000 tons of sand from Tomah, Wisconsin, to Kress, Texas, over 15 weeks in 20-ton increments using 20 covered hopper railcars belonging to RMS.[7] Defendant RMS does not dispute that Lyon sent such a schedule, but claims inter alia that: (1) it was created to "chip away at a deal"; (2) it meant "absolutely nothing"; (3) it contained a disclaimer; and (4) it was "suggested and . . . approximate." (RMS and NEJGID’s Resp. to Pl.’s PFOFs (dkt. #104) ¶ 53.) Even crediting these caveats, RMS has difficulty squaring even this very rough, approximate schedule with Lyon’s representations about timing in his declaration submitted in opposition to GQ Sand’s motion for summary judgment.

         On January 20, 2015, RMS and GQ Sand signed the Rail Delivery Agreement. (Quisling Decl., Ex. 4 (dkt. #56-5).)[8] That Agreement required RMS to deliver 20 covered hopper railcars to Tomah, Wisconsin, by January 26, 2015, and gave GQ Sand the right to use those cars, without limitation, on a month-to-month basis until terminated. At his deposition, however, Lyon admitted that only 18 of the 20 railcars for which GQ Sand contracted were operational at the time of signing of the Agreement.

         By its terms, GQ Sand was to pay a $15, 000 security deposit to RMS within five days of their agreement, and an additional $15, 000 per month for the use of the 20 cars. GQ Sand actually paid the security deposit on January 20, five days early. In addition to these payments, GQ Sand was to pay $60.01 per ton in freight charges, $4.80 per ton in switching fees, and $1.95 per ton in waybilling[9] to RMS upon the delivery of the sand to Kress, Texas. It was RMS’s responsibility to pay for the fees and cost of relocating and repositioning the railcars to their established origin and destination points.[10]

         Under the Agreement, RMS was required to obtain a commercial insurance policy including contractual liability coverage with limits per occurrence of $3, 000, 000, with GQ Sand listed as an additional insured. (Id. at § 6.2.) RMS never obtained that insurance. The Rail Delivery Agreement also requires RMS to indemnify GQ Sand for any losses and damages GQ Sand suffers as a result of RMS’s breach of the agreement, the negligent acts or omissions of RMS or its agents, and/or the condition or operation of the railcars. (Id. at § 6.1.)

         D. Wisconsin White Sand

         On January 13, 2015, the day GQ Sand and CBS executed the Sand Supply Agreement, GQ Sand also signed a purchase order with Wisconsin White Sand, LLC ("WWS"), for 30, 000 total tons of sand (10, 000 each of the three grades required by the Supply Agreement). CBS disputes whether GQ Sand intended to source all of that sand to CBS or to other purchases, pointing to Quisling’s deposition testimony in which he stated that he was planning on sending a "portion" of sand from WWS to CBS. (CBS’s Resp. to Pl.’s PFOFs (dkt. #94) ¶ 83 (quoting 10/23/15 Quisling Depo. (dkt. #59) 44-45.) This argument seems silly in light of the fact that GQ Sand had arranged to purchase sand from WWS exactly matching what CBS needed to fulfill its contract with ATS. Regardless, this dispute is not material.

         WWS in turn had a lease agreement with Allied Cooperative which provided WWS with non-exclusive use of Allied’s land and premises for the receiving, staging, switching, loading and deploying of railcars from its rail terminal in Tomah, Wisconsin. (Brewer Decl., Ex. 4 (dkt. #55-4) § 3.) On January 18, 2015, Bob Schenken, Director of Business Development for WWS, emailed Quisling about available origin locations to obtain rail quotes for both Canadian Pacific Railroads, also in Tomah, and Union Pacific Railroads.

         The parties dispute when CBS, specifically Brockinton, was aware that at least some of the sand would be supplied by WWS. CBS had previously purchased 1, 000 tons of 40/70 sand from WWS, and therefore has some familiarity with the product. On December 1, 2014, WWS’s Schenken sent CBS’s Brockinton information with test results for WWS’s grades. Those tests reveal that both the 30/50 and 40/70 grades had obtained a crush value of 9K. CBS does not dispute this, but contends that the test results also showed that the 20/40 and 30/50 grades had 6K and 7K values, respectively. Also on December 1, Schenken emailed GQ Sand’s Quisling with the same test results, along with an additional spreadsheet showing that the 20/40 grade had tested for a crush value of 7K. Additional material from WWS to Quisling and Brockinton similarly showed crush values of 7K for the 20/40 grade and 9K for the 40/70 grade. CBS persists in maintaining, however, that some of the materials showed values of 6K for the 20/40 grade and 7K for the 30/50 grade.

         E. Post-Agreement Problems

         Over the next month, GQ Sand encountered an escalating set of problems with both its Sand Supply Agreement with CBS and its Rail Delivery Agreement with RMS. With the benefit of hindsight, these problems were inevitable. Starting in mid- to late-January 2015, the number of open hydrofracking sites in Texas dropped rapidly. Within three weeks of the signing of the Sand Supply Agreement, the number of operational fracking sites in Texas dropped from approximately 740 to a little over 600, and by May 2015, the number of sites dropped by almost 50% percent, to 375. As a result, the supply of frac sand exceeded demand and prices for frac sand began to fall. Brockinton plausibly opined at his deposition that this market decline explained AST’s decision not to honor its contract with CBS despite the fact that the contract between the parties contemplates fluctuating prices and allows for adjustments. To appreciate the death spiral in which the parties’ business deal was caught, the court details the problems encountered in chronological order, as did the parties, while interspersing developments in their efforts to procure both the sand and railcars.

         After depositing $157, 000 into GQ Sand’s operating account on January 20, 2015, as required by the Sand Supply Agreement, CBS asked GQ Sand to verify receipt of the "deposit." (CBS’s Reply to its PFOFs (dkt. #123) ¶ 24 (citing Salman Decl., Ex. 5 (dkt. 77-5) 2).) That same day, GQ Sand responded "[g]ot deposit…Rail cars moving today need to get escrow info to the bank today to get that process moving." (Id. at ¶ 25 (citing Salman Decl., Ex. 5 (dkt. #77-5) 2).)

         Also on January 20, shortly after signing the Rail Delivery Agreement, RMS’s Lyon informed GQ Sand’s Quisling that he was starting the empty railcar move from Colorado to Tomah, Wisconsin. Despite this communication, Lyon learned on the same day from his Union Pacific contact that it did not serve the Allied Terminal in Tomah "at this time." (Pl’s Add’l PFOFs (dkt. #107) ¶ 230.) Based on Lyon's original communication, however, Quisling informed CBS that the railcars were moving. Quisling also confidently sent WWS the railcar numbers, which it could use to track the cars through a computer system. Finally, on January 20, Brockinton informed GQ Sand that CBS’s customer AST was "balking at taking the product for which it contracted with [CBS]." (Pl.’s PFOFs (dkt. #51) ¶ 92.)

         On January 22, GQ Sand’s Quisling informed RMS’s Lyon that there was trouble tracking the railcars. According to an email exchange, despite knowing of the Union Pacific problem, Lyon told Quisling that he would not be able to track the railcars "until the destination is opened by the checkoffs" and that Lyon would take care of it, stating "a word to the wise, let me do my end." (Pl.’s PFOFs (dkt. #51) ¶ 100 (quoting Quisling Decl., Ex. 7 (dkt. #56-7) 1).)[11] On January 23, WWS’s Schenken emailed Quisling to inform him that the railcars leased to GQ Sand by RMS were not appearing in the Union Pacific computer system. That same day, Lyon informed Quisling that the cars were in Alomsa, Colorado. Also on January 23, Brockinton called Quisling to let him know that CBS’s customer AST would only be willing to take 5, 000 tons of sand, rather than the 30, 000 tons promised. Quisling offered to slow down the railcars so that CBS would have time to work things out with its customer or find another buyer; he also asked CBS’s V.P. Brockinton to keep him apprised of any developments.

         The parties dispute whether CBS agreed to GQ Sand's offer to slow down the shipments. On January 26, Quisling and Brockinton spoke again, and Brockinton said that CBS had to get litigators involved with its customer. Quisling again agreed to work with CBS and to wait for an alternative to emerge, at least until GQ Sand started to incur additional fees on the railcars. CBS does not directly dispute this version of events, but again asserts that it never agreed to slow down shipments. (See Brockinton Decl. (dkt. #97) ¶ 8.)

         On January 28, the escrow agreement was signed. On January 29, Brockinton texted Quisling asking him to send sand samples. Quisling responded that it may take a day or two to obtain the samples. Brockinton texted Quisling again with the same inquiry on February 2nd, 4th and 5th. On or about February 5, Quisling sent Brockinton samples via overnight delivery.

         On February 6, Brockinton received the samples. That same day, CBS deposited $628, 000 into the escrow account as required by the Supply Agreement. GQ Sand maintains that after receipt of these samples, Quisling heard nothing from Brockinton. Although Brockinton testified at his deposition that he "believed" they had multiple phone conversations, he does not state that they discussed sand quality during any of those conversations. (Pl.’s Reply to Pl.’s PFOFs (dkt. #128) ¶ 125.) Also on February 6, RMS’s Lyon informed Quisling that the railcars were in "Iowa somewhere, " despite the Agreement ...


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