Basin Elec. Power Co-op. v. ANR Western Coal Development Co.

• Decision Date: 28 January 1997
• Docket Number: No. 96-2286,96-2286
• Citation: 105 F.3d 417
• Parties: 31 UCC Rep.Serv.2d 932 BASIN ELECTRIC POWER COOPERATIVE; The Coteau Properties Company; Dakota Coal Company, Appellees, v. ANR WESTERN COAL DEVELOPMENT COMPANY, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 417

105 F.3d 417

31 UCC Rep.Serv.2d 932

BASIN ELECTRIC POWER COOPERATIVE; The Coteau Properties

Company; Dakota Coal Company, Appellees, v. ANR WESTERN COAL DEVELOPMENT COMPANY, Appellant.

No. 96-2286.

United States Court of Appeals,

Eighth Circuit.

Submitted Dec. 9, 1996.

Decided Jan. 28, 1997.

Lawrence E. Stevens, argued, Salt Lake City, UT (Douglas R. Davis, Daniel J. Crothers, on the brief), for appellant.

Malcolm H. Brown, argued, Bismarck, ND, for appellees.

Before BOWMAN and LAY, Circuit Judges, and SMITH, ¹ District Judge.

BOWMAN, Circuit Judge.

ANR Western Coal Development Company (WCDC) appeals from the District Court's declaratory judgment in favor of plaintiffs Basin Electric Power Cooperative (Basin), The Coteau Properties Company (Coteau), and Dakota Coal Company (Dakota) in this action involving accounting procedures for coal royalties. We reverse and remand.

I.

Numerous agreements among the parties and non-parties govern the movement of the coal and the royalty payments involved in this case. A careful examination of the record reveals the following essential facts.

In a 1979 contract between WCDC and the parent company of Coteau, WCDC agreed to fund the acquisition of coal reserves near Beulah, North Dakota. In return, WCDC was entitled to receive an overriding royalty of forty cents per ton of coal, adjusted for inflation, from the company that mined the coal (eventually Coteau). This situation was modified somewhat in a 1987 agreement among WCDC, Coteau, and the predecessor of Dakota, among others. In the 1987 agreement, Dakota's predecessor assumed from WCDC the responsibility for funding further acquisitions of coal reserves, and WCDC's royalty was limited to coal reserves acquired by Coteau before March 2, 1987. Since 1987, Dakota has funded the acquisition of new reserves, and the mine near Beulah, known generally as the Freedom Mine, now contains some coal on which WCDC is entitled to a royalty (royalty coal) and some coal on which WCDC is not entitled to a royalty (non-royalty coal).

Coteau records the amount of royalty coal and non-royalty coal extracted from the Freedom Mine and then commingles the coal in its handling facilities. When the coal is commingled, royalty coal is indistinguishable from non-royalty coal. Coteau sells the coal to Dakota, a wholly-owned subsidiary of Basin. Dakota then supplies the coal to four end users: Basin's Antelope Valley Station (AVS), Basin's Leland Olds Station, United Power Association's Stanton Plant, and the Great Plains Synfuels Plant, which is owned and operated by an affiliate of Dakota. ² Royalties flow from the end users through Coteau to WCDC.

The process is complicated by one additional agreement. In 1982, Basin paid WCDC $40 million to satisfy WCDC's overriding royalty on "the amount of coal which is mined from the reserves dedicated to the [1979] Agreement and which is delivered to Basin Electric for the Antelope Valley Station," subject to an annual cap of 5.2 million tons and a total cap of 210 million tons. Purchase Agreement p 2, Appellant's App. at 188, 191. In effect, the 1982 agreement relieves Basin of the obligation to pay the forty-cent royalty (as adjusted for inflation) on royalty coal delivered to the AVS, except to the extent that deliveries of royalty coal exceed the annual or total limits. The $40 million price is not to be "adjusted upwards or downwards in the event that coal ultimately delivered to Basin Electric ... is in excess of or is less than the maximum" 210 million tons. Id. p 1. ³

In light of the foregoing facts, the nature of the present dispute becomes somewhat more evident. Because Coteau commingles royalty coal and non-royalty coal, and because some of the commingled coal winds up at the AVS, the parties must have a procedure to determine how much royalty coal is attributable to the AVS and therefore free from further royalty payments. Coteau, backed by the other plaintiffs, implemented an accounting method that deems all royalty coal in the mixture to be delivered to the AVS, subject to the 5.2 million ton annual limit (the deeming method). WCDC, on the other hand, argues that the doctrine of "confusion of goods" applies and that the royalty coal should be traced proportionally from Coteau to Dakota to each of the four end users (the pro rata method).

An example from a deposition in this case (with numbers rounded slightly) provides a useful illustration of exactly what the parties are disputing. In August 1992, Coteau sold and delivered to Dakota 1,221,000 tons of coal, of which 863,000 tons (71%) were royalty coal and 358,000 tons (29%) were non-royalty coal. Dakota delivered 456,000 tons of the commingled coal to the AVS. After the inflation adjustment, WCDC's royalty was 73 cents per ton. The deeming method directs royalty coal to the AVS first; as a result, all 456,000 tons delivered to the AVS would be considered royalty coal. Because Basin prepaid the royalty on coal delivered to the AVS, WCDC would receive a royalty only on the 407,000 tons of royalty coal delivered to the other end users, for a total royalty payment of $297,000. Under the pro rata method, 71% of the coal delivered to each end user would be considered royalty coal; accordingly, only 324,000 tons of the coal delivered to the AVS would be considered royalty coal. WCDC would thus be entitled to a royalty on the other 539,000 tons of royalty coal, for a total royalty payment of $393,000. ⁴ See Appellant's App. at 215-17.

To resolve this dispute, Basin, Coteau, and Dakota filed a declaratory judgment action in state court, seeking approval of the deeming method. WCDC removed the action to federal court on diversity grounds and responded with six counterclaims: (1) declaratory relief; (2) breach of contract; (3) tortious interference with contract; (4) breach of a duty of good faith and fair dealing; (5) breach of an implied covenant of reasonable development and mining; and (6) tortious interference with prospective economic advantage.

After discovery, the parties filed cross-motions for partial summary judgment. WCDC moved for summary judgment on its first counterclaim, seeking a declaration that the confusion of goods doctrine applies and requires the pro rata accounting method. The plaintiffs argued that disputed material facts precluded summary judgment; they did not move for summary judgment in their favor on the accounting issue. The plaintiffs did seek summary judgment on WCDC's fourth and fifth counterclaims, arguing that they owed WCDC no duty of good faith and fair dealing or duty of reasonable development and mining.

The District Court denied WCDC's motion for summary judgment on the accounting issue and granted the plaintiffs declaratory relief, approving the deeming method. In addition, the District Court granted the plaintiffs' motion for summary judgment on the fourth and fifth counterclaims, dismissing these claims without prejudice. A revised judgment dismissed WCDC's first, second, and third counterclaims with prejudice and its fourth, fifth, and sixth counterclaims without prejudice. After a post-judgment motion was denied, WCDC appealed. We review a decision on summary judgment de novo. See Smith v. City of Des Moines, 99 F.3d 1466, 1468-69 (8th Cir.1996).

II.

We begin with the dispositive issue in this appeal, the accounting issue. As WCDC has demonstrated convincingly, the doctrine of confusion of goods has been a part of the law for centuries. See 2 William Blackstone, Commentaries

Page 405

In its strictest form, the doctrine provides that one who wrongfully intermixes his goods with the goods of another so that the goods are indistinguishable forfeits the entire mixture to the wronged party. See id.; The Idaho, 93 U.S. 575, 585-86, 23 L.Ed. 978 (1876). WCDC does not claim that the commingling of the coal in this case is in any way wrongful, nor does it seek a forfeiture of any coal. Rather, WCDC seeks to apply the more lenient form of the doctrine, which holds that each owner of goods that are intermingled "becomes the owner as tenant in common of an interest in the mass proportionate to his contribution." The Intermingled Cotton Cases, 92 U.S. 651, 653, 23 L.Ed. 756 (1875); see also 2 Blackstone at * 405; W.E. Shipley, Annotation, Confusion of Goods by Accident, Mistake, or Act of a Third Person, 39 A.L.R.2d 555, 559 (1955).

Courts in a number of jurisdictions have applied the confusion of goods doctrine--in its forfeiture form or its shared-ownership form--to a wide variety of situations and goods. See, e.g., Silver King Coalition Mines Co. v. Conkling Mining Co., 255 F. 740, 743 (8th Cir.1919) (ore); Norris v. United States, 44 F. 735, 738-39 (C.C.W.D.La.1891) (logs); Gilberton Contracting Co. v. Hook, 267 F.Supp. 393, 394-95 (E.D.Pa.1967) (coal silt); Vest v. Bond Bros., 223 Ala. 552, 137 So. 392, 392-93 (1931) (lumber); Buckeye Cotton Oil Co. v. Taylor, 186 Ark. 284, 53 S.W.2d 428, 428-29 (1932) (cotton seed); Ramsey v. Rodenburg, 72 Colo. 567, 212 P. 820, 821 (1923) (wheat); Troop v. St. Louis Union Trust Co., 25 Ill.App.2d 143, 166 N.E.2d 116, 122-23 (1960) (oil); Hanna Iron Ore Co. v. Campbell, 319 Mich. 113, 29 N.W.2d 393, 401-02 (1947) (iron ore); Swanson v. St. Paul Union Stockyards Co., 156 Minn. 483, 195 N.W. 453, 454-55 (1923) (cattle); Belmont v. Umpqua Sand & Gravel, Inc., 273 Or. 581, 542 P.2d 884, 891 (1975) (gravel); Stone v. Marshall Oil Co., 208 Pa. 85, 57 A. 183, 187-88 (1904) (oil); Mooers v. Richardson Petroleum Co., 146 Tex. 174, 204 S.W.2d 606, 607-08 (1947) (oil); Johnson v. Covey, 1 Utah 2d 180, 264 P.2d 283, 283-84 (1953) (pipe). In a case in which royalty-bearing natural gas was mixed with nonroyalty-bearing gas, the Texas Supreme Court held that if the party mixing the two sources could prove with reasonable certainty the relevant amounts of gas, the royalty owner would be entitled to a royalty on its proportional share of the commingled gas. See ...