R&J Oil, LLC et al v. Rodgers et al

Filing 63

MEMORANDUM OPINION AND ORDER Signed by Chief Judge Greg N. Stivers on 1/10/2020. For the reasons set forth, Plaintiffs' Motion for Partial Summary Judgment (DN 42 ) on Counts V and VI of their Complaint (DN 1 ) is GRANTED. cc: Counsel; R&R Oil Plus, LLC (Columbia); Ronnie C. Rodgers (FCI Forrest City Low)(CDF)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:18-CV-00117-GNS-CHL
R&J OIL, et al.

PLAINTIFFS

v.
R.C. RODGERS, et al.

DEFENDANTS
MEMORANDUM OPINION AND ORDER

This matter is before the Court on Plaintiffs’ Motion for Partial Summary Judgment (DN
42) on Counts V and VI of their Complaint (DN 1). The motion is ripe for adjudication. For the
reasons that follow, the motion is GRANTED.
I.

STATEMENT OF FACTS AND CLAIMS

Plaintiffs Keith and Nikkoll Johnson are residents of Ohio who decided to invest in the oil
and gas industry in hopes of enhancing their retirement savings. (Pls.’ Mem. Supp. Mot. Partial
Summ. J. 1, DN 43 [hereinafter Pls.’ Mot.]).1 Plaintiffs entered into a “Refurbishing Contract
Agreement” with John Patterson (“Patterson”) and Defendants Ronnie Charles Rodgers
(“Rodgers”) and R&R Plus, LLC (“R&R Plus”), a Tennessee limited liability company of which
Rodgers was the sole member. (Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. A, at 1, DN 43-1;
Compl. ¶¶ 4, 8, DN 1). The Refurbishing Contract Agreement provided that Rodgers and R&R
Plus would transfer mineral rights to a 67-acre tract in Tennessee, along with an existing well and
associated personalty, and refurbish the existing well. (Pls.’ Mem. Supp. Mot. Partial Summ. J.

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The Johnsons and the limited liability company of which they are the sole members, R&J Oil,
LLC, are jointly referred to as “Plaintiffs.”
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Ex. A, at 1-3). Patterson, who is not a party to this action, was to check the wells and remove the
oil. (Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. A, at 3).
Plaintiffs, Rodgers, and R&R Plus entered into a separate “Escrow Agreement” to
accomplish the transfer of the mineral rights, designating Defendant Elmer George (“George”) a
party to the contract as the escrow agent.2 (Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. B, at 1,
DN 43-2). The Escrow Agreement provided that Plaintiffs would deposit $105,000 with George,
who was not to release the funds “until receipt from the Parties of all documents, properly
completed and executed, necessary to affect [sic] the transfer of ownership or assignment of the
Oil and Gas Lease, including but not limited to the Assignment of Oil and Gas Lease and
Refurbishing [Contract] Agreement between First Party and Second Parties herein . . . .” (Pls.’
Mem. Supp. Mot. Partial Summ. J. Ex. B, at 1). The Escrow Agreement further stated that in the
event the transfer documents were not received within thirty days, George was to return the escrow
funds to Plaintiffs. (Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. B, at 1).
Plaintiffs, Rodgers, and R&R Plus also signed a document titled “Assignment of Oil and
Gas Lease” (“Assignment”). (Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. C, at 1, DN 43-3).
Notwithstanding the nominal caption, the Assignment conveyed only an 87.5% working interest
in a particular well (#12313) and did not include transfer of the referenced oil and gas lease. (Pls.’
Mem. Supp. Mot. Partial Summ. J. Ex. C, at 1). Nevertheless, upon receipt of the executed
Assignment and Refurbishing Contract Agreement, George disbursed the escrowed funds.
(George Aff. ¶ 27).

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George, an attorney licensed in Kentucky, prepared all of the documents associated with these
transactions.
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Notably, before closing it was necessary for Rodgers and R&R Plus to obtain the leasehold
interest they were obligated to transfer to Plaintiffs under the terms of the Refurbishing Contract
Agreement. George effected this transfer by drafting a document (“Adventure Assignment”)
conveying Adventure Enterprises, Inc.’s interest in the well and lease to Rodgers and R&R Plus.
(Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. D, at 1, DN 43-4). The language of the Adventure
Assignment assigned to Rodgers and R&R Plus all of Adventure Enterprises’ interests in both the
“well and Oil and Gas Lease . . . .” (Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. D, at 1). Indeed,
before preparing either transfer, George consulted John Nisbet, Adventure Enterprises’ Tennessee
attorney, who provided a written title abstract to George and advised that, “[b]ecause [Rodgers] is
purchasing BOTH the well and lease, I would suggest that you include a paragraph about the
lease.” (Pls.’ Reply Mot. Partial Summ. J. Ex. 1, at 1, DN 50-1 (emphasis in original)).
After the closing, relations between Plaintiffs and Rodgers ultimately fell apart. Plaintiffs
allege Rodgers failed to meet his obligations under the Refurbishing Contract Agreement. (Pls.’
Mot. 7). The well was eventually filled with concrete and the permit necessary to drill was
temporarily lost. (Pls.’ Mot. 7). In this lawsuit, Plaintiffs assert claims against George because he
failed to accomplish the transfer of the oil and gas lease to them from Rodgers as specified in the
Escrow Agreement. (Compl. ¶¶ 56-65). Plaintiffs have moved for summary judgment on those
claims.
II.

JURISDICTION

The Court has subject matter jurisdiction over this action under 28 U.S.C. § 1332 as there
is complete diversity between the parties and the amount in controversy exceeds the sum of
$75,000.00.

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III.

STANDARD OF REVIEW

In ruling on a motion for summary judgment, the Court must determine whether there is
any genuine issue of material fact that would preclude entry of judgment for the moving party as
a matter of law. See Fed. R. Civ. P. 56(a). The moving party bears the initial burden of stating
the basis for the motion and identifying evidence in the record that demonstrates an absence of a
genuine dispute of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). If the
moving party satisfies its burden, the non-moving party must then produce specific evidence
proving the existence of a genuine dispute of fact for trial. See Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 247-48 (1986).
While the Court must view the evidence in the light most favorable to the non-moving
party, the non-moving party must do more than merely show the existence of some “metaphysical
doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
586 (1986) (citation omitted). Rather, the non-moving party must present specific facts proving
that a genuine factual dispute exists by “citing to particular parts of the materials in the record” or
by “showing that the materials cited do not establish the absence . . . of a genuine dispute . . . .”
Fed. R. Civ. P. 56(c)(1). “The mere existence of a scintilla of evidence in support of the [nonmoving party’s] position will be insufficient” to overcome summary judgment. Anderson, 477
U.S. at 252.

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IV.
A.

DISCUSSION

Indemnification for Breach of Contract Claims

As an initial matter, the pending motion implicates the Escrow Agreement’s
indemnification clause.3 This provision provides:
First Party agrees to indemnify and hold harmless the Escrow Agent from any and
all claims, liabilities, losses, expenses, actions, suits, or proceedings at law or in
equity, or any other expense, fees, or charges of any character or nature whatever
that it may incur by reason of acting as the Escrow Agent under this Escrow
Agreement except for the Escrow Agent’s gross negligence, bad faith or willful
misconduct.
(Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. B, at 1-2). In this instance, Plaintiffs are the First
Party asserting a breach of contract claim against the Escrow Agent, George. George argues that
the quoted indemnity provision shields him from this claim. (Def.’s Resp. Pls.’ Mot. Summ. J.
11-16, DN 49).
“Indemnify” is defined as “[t]o reimburse (another) for a loss suffered because of a third
party’s or one’s own act or default.” Black’s Law Dictionary 886 (10th ed. 2014); CHS, Inc. v.
Yellow Banks River Terminal, LLC, No. 4:16-cv-151-JHM, 2017 WL 4542225, at *4 (W.D. Ky.
Oct. 6, 2017) (citation omitted). In this instance, there is no third-party claim—both Plaintiffs and
George were parties to the Escrow Agreement—nor did Plaintiffs default on their obligations
under the Escrow Agreement. As such, the concept of indemnity does not fit here. See Am. Towers
LLC v. BPI Inc., 130 F. Supp. 3d 1024, 1037 (E.D. Ky. 2015) (“BPI’s indemnification duty is
triggered by a third-party claim against ATC—that is the nature of indemnification agreements.”).
Even if the indemnity provision purported to protect George from this claim, “a party to a contract

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Kentucky state law forms the substantive law used to evaluate Plaintiffs’ claims. Shady Grove
Orthopedic Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393, 417 (2010) (“[F]ederal courts sitting
in diversity ‘apply state substantive law and federal procedural law.’” (quoting Hanna v. Plumer,
380 U.S. 460, 465 (1965))).
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cannot recover indemnification from another contracting party for a breach which the first party
caused or substantially helped to cause.” Turner v. Glob. Seas, Inc., 505 F.2d 751, 754 (6th Cir.
1974).
Plaintiffs allege here that George breached the Escrow Agreement. (Compl. ¶ 56).
Distilled, George’s defense is that Plaintiffs must indemnify him for the damage that he caused
Plaintiffs through George’s alleged breach of the Escrow Agreement. While no Kentucky case
is squarely on all fours with the present matter, Kentucky law strongly disfavors an interpretation
of a contract that would either render the contract a nullity or fail to give effect to the intent of the
parties. Henderson v. Cont’l Cas. Co., 39 S.W.2d 209, 211 (Ky. 1935). In this instance, requiring
the buyers to protect their escrow agent from his own misfeasance would operate effectively to
relieve their agent of any obligation to perform his duties. Nullification of George’s duties is
untenable. Kentucky courts strive to avoid interpretations of contracts resulting in an illusory
promise, “that is, a promise merely in form, but in actuality not promising anything, [which] cannot
serve as consideration.” Maze v. Bd. of Dirs. for Commonwealth Postsecondary Educ. Prepaid
Tuition Tr. Fund, 559 S.W.3d 354, 367-68 (Ky. 2018). Accepting George’s contention that he
cannot be held liable for his breach of the Escrow Agreement would render his promises illusory.
See Commercial Movie Rental, Inc. v. Larry Eagle, Inc., 738 F. Supp. 227, 230-31 (W.D. Mich.
1989) (“The unambiguous terms of the contract at issue here exempt [Defendant] from all liability
for a breach of its obligations. Commercial’s promise to perform is, therefore, entirely illusory
because, under the unambiguous terms of the contract it drafted, Commercial could never be held
liable for the failure to perform those promises.”).
George believes the indemnity provision relieves him of any responsibility under the
Escrow Agreement. However, “[a] party cannot promise to act in a certain manner in one portion

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of a contract and then exculpate itself from liability for breach of that very promise in another part
of the contract.” Jewelers Mut. Ins. Co. v. Firstar Bank Ill., 820 N.E.2d 411, 416 (Ill. 2004) (citing
Shorr Paper Prods., Inc. v. Aurora Elevator, Inc., 555 N.E.2d 735, 737-38 (Ill. App. Ct. 1990)
(criticizing the defendant for focusing solely on exculpatory provision of contract to the exclusion
of its specifically articulated obligations, noting that such an interpretation would render
defendant’s contractual duties illusory); Contact Lenses Unlimited, Inc. v. Johnson, 531 N.E.2d
928, 931 (Ill. App. Ct. 1988) (holding that contractual requirements imposed upon the defendant
would be meaningless if the defendant could ignore those provisions with no penalty)); see also
17A Am. Jur. 2d Contracts § 281 (Nov. 2019 update) (“An exculpatory agreement will be held to
contravene public policy if it is so broad that it would absolve the defendant from any injury to the
plaintiff for any reason.” (citing Richards v. Richards, 513 N.W.2d 118, 121 (Wis. 1994))).
The Court therefore concludes that Plaintiffs are not required to indemnify George against
his own breach of the Escrow Agreement.
B.

Breach of Contract

The next issue is whether the undisputed facts establish that George breached the Escrow
Agreement. Kentucky law recognizes that escrow agreements are created when parties make
known to a depositary that they wish the depositary to hold something in escrow until satisfaction
of a certain condition or conditions. Home Ins. Co. of N.Y. v. Wilson, 275 S.W. 691, 693 (Ky.
1925). “There is no question of the liability of an escrow holder if he violates the requirements of
the contract.” Southern v. Chase State Bank, 61 P.2d 1340, 1342 (Kan. 1936); see also Vaughan
v. Vaughan, 170 S.W. 981, 983 (Ky. 1914).
The evidence in this case is clear. In the Refurbishing Contract Agreement, Rodgers and
R&R Plus “agree[d] to assign unto [Plaintiffs] 67 acres, more or less, of mostly vacant land, one

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(1) existing oil well (#12313), two hundred ten (210) barrel tanks, pump-jacks and complete
equipment, and all mineral rights thereupon such property . . . .” (Pls.’ Mem. Supp. Mot. Partial
Summ. J. Ex. A, at 1-3). The Escrow Agreement between Plaintiffs and George provides in
relevant part:
[Rodgers and R&R Plus] have agreed to hereby sell and convey [their] interest in
an Oil and Gas Lease . . . .
The Escrow Agent shall not release any proceeds until receipt from the Parties of
all documents, properly completed and executed, necessary to affect [sic] the
transfer of ownership or assignment of the Oil and Gas Lease, including but not
limited to the Assignment of Oil and Gas Lease and Refurbishing Agreement
between [Plaintiffs] and [Rodgers and R&R plus] herein have been received.
(Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. B, at 1) (emphasis added).
George was obliged by the express terms of the Escrow Agreement to hold Plaintiffs’ funds
until the documents conveying the interests of Rodgers and R&R Plus in the well and the oil and
gas lease were executed. This did not occur. Instead, although Adventure Enterprises, Inc.
assigned to R&R Plus and Rodgers “all its working interest in the following well and Oil and Gas
Lease[,]” R&R Plus and Rodgers assigned to Plaintiffs their interest in one well but not any interest
in the oil and gas lease:
[Rodgers and R&R Plus] hereby agree to sell, assign, transfer, and convey unto
[Plaintiffs] a 87.5% working interest in the following well:
Landowner: Ralph Bowden and Wheeler Bowden #2, Well State Permit #
12313
(Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex D, at 1 (emphasis added); Pls.’ Mem. Supp. Mot.
Partial Summ. J. Ex. C, at 1 (emphasis added)). George released the funds, even though Plaintiffs
never received the “transfer of ownership or assignment of the Oil and Gas Lease,” which violated
the terms of the Escrow Agreement. On the issue of liability for breach of contract, the Court

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concludes that George breached the terms of the Escrow Agreement as a matter of law. Therefore,
the Court will grant summary judgment for Plaintiffs on Count V.
C.

Indemnification for Breach of Fiduciary Duty Claims

As noted above, Plaintiffs cannot be required to indemnify George against his own
obligations as a party to the contract. However, indemnification against contractual violations and
indemnification against tortious conduct require separate considerations. See Ky. Farm Bureau
Mut. Ins. Co. v. Blevins, 268 S.W.3d 368, 374-75 (Ky. 2008). The Court must therefore address
whether the indemnification provision was valid as to George’s allegedly tortious conduct.
Kentucky law holds that when interpreting an indemnification provision, every
presumption should be against the contention that the provision intends to indemnify the
indemnitee against his own negligent acts. Mitchell v. S. Ry. Co., 74 S.W. 216, 217 (Ky. 1903).
With respect to transactions between businesses, “such clauses are not against public policy . . . .”
Fosson v. Ashland Oil & Refining Co., 309 S.W.2d 176, 178 (Ky. 1957) (citing Luton Mining Co.
v. Louisville & Nashville R.R. Co., 123 S.W.2d 1055, 1059 (Ky. 1938)). If, however, one party is
in a “clearly inferior bargaining position,” Kentucky courts are much more likely to invalidate
such provisions. Speedway SuperAmerica, LLC v. Erwin, 250 S.W.3d 339, 344 (Ky. App. 2008).
In these situations, courts consider disparities in the parties’ education as well as whether
the terms of the contract are particularly one-sided. Id. at 342. George enjoyed a superior
bargaining position in this situation by virtue of his training and experience as an attorney. Escrow
agents are utilized for many types of real estate transactions, and upholding this indemnification
provision would allow escrow agents to absolve themselves of nearly any liability resulting from
the performance of their duties. Moreover, it is “not only important for the court to consider the
language employed in the contract, but the circumstances surrounding the parties, and the object

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in view which induced the making of it.” Mitchell, 74 S.W. at 217. Courts examining such
provisions should assess the probability that one party would agree to indemnify the other against
the other party’s own negligence. Erwin, 250 S.W.3d at 343; Fosson, 309 S.W.2d at 178. As
discussed above, it is inconceivable that Plaintiffs would have agreed to entrust George with their
retirement savings if they understood that George would not be held responsible in the event he
failed to perform his duties. Such unlikelihood weighs against enforcement of the indemnification
provision.
Finally, enforcement of the indemnification provision is wholly inconsistent with George’s
fiduciary duties as an attorney serving as an escrow agent. This “duty is imposed by law, not by
the terms of the contract.” Jaffee v. Davis, No. 2001-CA-000817-MR, 2003 WL 2002783, at *5
(Ky. App. May 2, 2003). This legal imposition of responsibility led the court in Jaffee to hold that
the plaintiff could assert a breach of fiduciary duty claim notwithstanding a contractual provision
establishing gross negligence or willful bad faith as the governing standard of care.

Id.

Additionally, a member of the bar serving as an escrow agent is “subject to an expectation of a
greater degree of integrity than the average nonprofessional person acting in the same capacity.”
Fisk v. People’s Liberty Bank & Tr. Co., 570 S.W.2d 657, 660 (Ky. 1978). As a result, the
Kentucky Supreme Court has held that an attorney acting as an escrow agent is subject to the laws
governing fiduciaries. Ky. Bar Ass’n v. Dixon, 373 S.W.3d 444, 447 (Ky. 2012).
“A fiduciary duty is ‘the highest order of duty imposed by law.’” Abbott v. Chesley, 413
S.W.3d 589, 600 (Ky. 2013) (quoting In re Sallee, 286 F.3d 878, 891 (6th Cir. 2002)). It goes
beyond the ordinary duty of reasonable care. Associated Ins. Serv., Inc. v. Garcia, 307 S.W.3d 58,
63 (Ky. 2010). A fiduciary relationship is “founded on trust or confidence reposed by one person
in the integrity and fidelity of another and which also necessarily involves an undertaking in which

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a duty is created in one person to act primarily for another’s benefit in matters connected with such
undertaking.” Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 485 (Ky. 1991).
It is well-established that an escrow agent must act pursuant to the conditions set forth in
the escrow agreement, and failure to do so results in liability. Day & Night Nat’l Bank of Pikeville
v. Blei, 57 S.W.2d 641, 642-43 (Ky. 1933) (citation omitted). One of the principal fiduciary duties
of an escrow agent is “the duty to exercise a high degree of care to conserve the money and pay it
only to those persons entitled to receive it.” Trevino v. Brookhill Capital Res., Inc., 782 S.W.2d
279, 281 (Tex. Ct. App. 1989) (citation omitted).
Kentucky law is clear that a fiduciary owes more than an ordinary duty of care, and George
cannot relieve himself of this duty by inserting a clause into the Escrow Agreement purporting to
hold him to a lesser standard. For these reasons, the Court concludes George cannot require
Plaintiffs to indemnify him against their claims for his own tortious conduct.
D.

Breach of Fiduciary Duty

The final issue is whether George breached his fiduciary duty to Plaintiffs as a matter of
law. George’s most basic responsibility was to hold Plaintiffs’ money in escrow until the oil and
gas lease had been transferred. The Assignment, however, did not transfer any interest in the oil
and gas lease and therefore did not satisfy George’s duty not to transfer any funds until receipt of
all documents “necessary to [e]ffect the transfer of ownership or assignment of the Oil and Gas
Lease . . . .” (Pls.’ Mem. Supp. Mot. Partial Summ. J. Ex. B, at 1). He did not comply with the
terms of the Escrow Agreement which he drafted, and in failing to do so breached the trust
Plaintiffs reposed in him as escrow agent. Steelvest, 807 S.W.2d at 485. It is noteworthy that the
documents George prepared did effect the transfer of Adventure Enterprises’ interest in the oil and
gas lease to Rodgers and R&R Plus. It is unclear why this same interest was excluded from the

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conveyance from Rodgers and R&R Plus to Plaintiffs, who received only rights to Well # 12313
by the terms of the Assignment. Although George seems to fault his staff for the mistake, the fact
that George’s employee may have committed the gaffe certainly does not excuse George’s failure
to properly document the transfer of the oil and gas lease to Plaintiffs. See In re Estate of Divine,
635 N.E.2d 581, 587 (Ill. App. Ct. 1994) (“[T]he idea that an attorney is liable, in malpractice or
as an ethical violation, for his paralegal’s acts is well-supported . . . .”); Musselman v. Willoughby
Corp., 337 S.E.2d 724, 728 (Va. 1985) (attorney held liable for paralegal’s error). Therefore, the
Court concludes that George’s actions constitute a breach of fiduciary duty as a matter of law.
V.

CONCLUSION

For the reasons set forth above, Plaintiffs’ Motion for Partial Summary Judgment (DN 42)
on Counts V and VI of their Complaint (DN 1) is GRANTED.

January 10, 2020

cc:

counsel of record

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