ANR Western Coal Dev. v. Basin Electric Power

• Decision Date: 13 June 2001
• Docket Number: CROSS-APPELLANTS,00-1628,CROSS-APPELLEE,No. 00-1625,00-1625
• Citation: 276 F.3d 957
• Parties: (8th Cir. 2002) ANR WESTERN COAL DEVELOPMENT COMPANY, APPELLANT/, v. BASIN ELECTRIC POWER COOPERATIVE; THE COTEAU PROPERTIES COMPANY; DAKOTA COAL COMPANY, APPELLEES/ Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 957

276 F.3d 957 (8th Cir. 2002)

ANR WESTERN COAL DEVELOPMENT COMPANY, APPELLANT/CROSS-APPELLEE, v. BASIN ELECTRIC POWER COOPERATIVE; THE COTEAU PROPERTIES COMPANY; DAKOTA COAL COMPANY, APPELLEES/CROSS-APPELLANTS.

No. 00-1625, 00-1628

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: June 13, 2001

January 10, 2002

Appeal from the United States District Court for the District of North Dakota. [Copyrighted Material Omitted] Harry Reasoner, Houston, TX, argued, for appellant.

Malcolm H. Brown, Bismark, ND, argued, for appellee.

Before Wollman, Chief Judge, Bowman and Hamilton,¹ Circuit Judges.

Bowman, Circuit Judge.

Basin Electric Power Cooperative, Dakota Coal Co., and The Coteau Properties Co. sued ANR Western Coal Development Co. (WCDC) in a dispute arising out of the development of coal fields to supply a gasification plant (Gas Plant) near Beulah, North Dakota.² Basin, Coteau, and Dakota Coal sued WCDC in North Dakota state court in 1992; WCDC removed to the District Court and filed counterclaims. The District Court granted summary judgment to Basin, Dakota Coal, and Coteau; we reversed and remanded for trial. Basin Elec. Power Coop. v. ANR W. Coal Dev Co., 105 F.3d 417 (8th Cir. 1997) (Basin I). After our remand the District Court assigned the case to a Magistrate Judge who realigned the parties, positioning WCDC as the plaintiff, and tried WCDC's counterclaims. The Magistrate Judge entered judgment for WCDC on its claim for breach of implied duty to reasonably develop and against WCDC on its claim for tortious interference with contract.

WCDC appeals and Basin, Coteau, and Dakota Coal cross-appeal from the judgment of the Magistrate Judge. The case, in federal court on diversity jurisdiction, is governed by North Dakota law. We affirm on the cross-appeal, but on the appeal we reverse and remand for further proceedings.

I.

Our previous opinion in this litigation sets forth its long and complicated history. Id. at 420-22. We recount much of it here to clarify the issues presented in the current appeal and cross-appeal.

In the early 1970s, WCDC's predecessor-in-interest³ began pursuing a plan to construct several coal-gasification plants in North Dakota. The initial stages of the project required the acquisition of coal reserves dedicated to supplying the coal needs of the gasification plants. Thus, in 1972 WCDC's predecessor entered into an agreement with Coteau's parent company, the North American Coal Co. (NACCO), which required NACCO to set aside coal reserves under its control to be used exclusively to supply the future needs of the proposed plants. Specifically, the 1972 Basic Agreement obligated NACCO to dedicate certain coal reserves to WCDC and in return obligated WCDC to finance the acquisition and carrying costs of additional coal reserves necessary to meet the anticipated needs of the proposed plants. The parties to the 1972 agreement envisioned that Coteau would mine the dedicated reserves and supply the coal from them to the proposed plants.

After the 1972 agreement, plans for the construction and operation of the gasification plants moved forward. In 1979, WCDC and NACCO entered the first of three agreements implicated in this lawsuit. The 1979 Restatement of Basic Agreement superseded the 1972 agreement, but retained most of the major provisions of the original contract. It again obligated WCDC to fund the acquisition and carrying costs of the coal reserves near Beulah.⁴ In return, the agreement entitled WCDC to receive an overriding royalty of forty cents per ton, to be adjusted for inflation, on all coal mined from the WCDC-funded reserves (royalty-bearing reserves). The agreement imposed upon Coteau the duty to pay this overriding royalty to WCDC. It also provided that WCDC would receive a delay-rental-payback payment of five cents per ton,⁵ also to be adjusted for inflation, on a defined amount of coal produced from these reserves, as consideration for WCDC's fronting an amount that eventually totaled over $11 million dollars to NACCO to hold the coal reserves from the time of the 1972 agreement until the Gas Plant and its accompanying power plant (the Antelope Valley Station or AVS) were completed.⁶ See 1979 Restatement of Basic Agreement ¶ 10(a). Moreover, the 1979 Restatement designated Coteau as holder of all deeds and leases on the dedicated coal reserves and limited Coteau's business activities to those set forth in the agreement. Id. at ¶¶ 4, 3. It is under this agreement that WCDC argues Coteau's implied duty to reasonably develop WCDC's royalty-bearing reserves first arose.

Basin and WCDC signed the second agreement central to this dispute in 1982. At the time, Basin was involved with the Gas Plant project through its construction and operation of AVS. Basin negotiated a deal directly with WCDC whereby it paid $40 million to WCDC as a prepayment on the overriding royalty due on all coal mined by Coteau from the WCDC royalty-bearing reserves and delivered to AVS. The agreement, known as the 1982 Purchase Agreement, specified that this prepayment would exempt from WCDC's overriding royalty 5.2 million tons per year of coal mined from royalty-bearing reserves and "delivered to Basin Electric for the Antelope Valley Station," up to a maximum of 210 million tons over the life of the agreement. 1982 Purchase Agreement ¶¶ 1, 2. Basin's later imposition of a particular accounting method in an attempt to get full credit for coal delivered to AVS against the 5.2 million tons per year under the 1982 Purchase Agreement forms the basis for WCDC's claim of tortious interference with contract.

In 1987 the parties entered into the Coal Reserve Agreement, the final agreement implicated in this lawsuit. By 1987, WCDC no longer had an ownership interest in the Gas Plant, see supra note 6, and had little need for the vast coal reserves acquired as a result of and protected by the 1972 and 1979 agreements. Through other agreements, WCDC had already narrowed its obligations under the 1979 agreement to encompass only Mine Areas 1 through 4, also known as the Freedom Mine. The Coal Reserve Agreement superseded the 1979 agreement. It relieved WCDC of the obligation to fund any further carrying costs or acquisition of Freedom Mine reserves and relieved Coteau of the obligation to pay the overriding royalty to WCDC on any coal reserves acquired after March 2, 1987, the date of the agreement. Moreover, the agreement transferred to a third party (whose rights were eventually assumed by appellee Dakota Coal) all rights held by WCDC to direct Coteau in the acquisition and mining of the Freedom Mine and other reserves. Thus, WCDC retained only its right to receive the overriding royalty on coal Coteau held prior to March 2, 1987 and for which WCDC had paid carrying and acquisition costs. WCDC argues that Coteau's implied duty to reasonably develop WCDC's royalty-bearing reserves continued under the 1987 agreement.

In 1988, Basin purchased the Gas Plant from the Department of Energy (DOE) and created Dakota Coal to manage the Gas Plant's coal resources. At this time, Basin held the rights to the Dakota Star reserves, an area of coal contiguous to Mine Areas 1 through 4. Basin also operated the Leland Olds Station (LOS), a power plant located at another mine. Before purchasing the Gas Plant, Basin maintained a business relationship with Coteau based upon Basin's operation of AVS and Coteau's mining of the coal used to fuel AVS's operations. Once Basin learned it was the successful purchaser of the Gas Plant, and after discussing its plans with Coteau, Basin determined that it would incorporate the Dakota Star reserves into the Freedom Mine. Thus, Coteau arranged to purchase Dakota Star from Basin, incorporate it into the Freedom Mine, and supply coal to LOS and to the UPA Stanton Station (UPA) (which had been supplied with coal from soon-to-be-exhausted reserves also owned by Basin). Basin, pursuant to the rights it had obtained as owner of the Gas Plant to direct Coteau's mining through its newly created subsidiary Dakota Coal, directed Coteau to preferentially mine the Dakota Star reserves to supply LOS, UPA, and the Gas Plant. In Basin's notes from an April 1990 meeting between representatives of Basin and Coteau, the discussion summary states, "Meeting participants were also informed that the Dakota Star reserves should be utilized as much as practical to minimize overriding royalty payments to WCDC." Conference Notes prepared by Karl Lemmerman ¶ 2 (Apr. 17, 1990). WCDC points to this evidence as part of the basis for its claim that Coteau breached an implied duty to reasonably develop WCDC royalty-bearing reserves.

By 1993, Coteau was mining coal from the Freedom Mine and the Dakota Star reserves, commingling it, and delivering commingled coal to AVS, the Gas Plant, LOS, and UPA (collectively, the end users). Coteau could determine what percentage of the coal mined came from royalty-bearing reserves but could not identify how much royalty-bearing coal was actually delivered to each end user. Up to 5.2 million tons of royalty coal delivered to AVS per year were exempt from WCDC royalties under the 1982 Purchase Agreement, so the parties had to devise a method to calculate the royalties owed to WCDC. After some discussion between WCDC and Coteau, and among Coteau, Basin, and Dakota Coal, Basin and Dakota Coal directed Coteau to use a deeming accounting method. Under the deeming method, all coal delivered to AVS would be deemed to have been mined from royalty-bearing reserves, regardless of its actual origin. The use of this accounting method substantially reduced WCDC's royalty payments on coal delivered to the Gas Plant, LOS, and UPA because Basin received credit against its royalty pre-payment on more royalty-bearing coal than was physically being delivered to AVS.

The decision to implement the deeming accounting method led Basin, Dakota Coal, and Coteau to file...