ASARCO, L.L.C. v. Mont. Res., Inc.

• Decision Date: 02 June 2017
• Docket Number: No. 16-40682,16-40682
• Citation: 858 F.3d 949
• Parties: ASARCO, L.L.C., a Delaware Corporation; ASARCO Master, Incorporated, a Delaware Corporation, Plaintiffs–Appellees v. MONTANA RESOURCES, INCORPORATED, a Montana corporation; Montana Resources, L.L.P., a Montana limited liability partnership, Defendants–Appellants
• Court: U.S. Court of Appeals — Fifth Circuit

858 F.3d 949

ASARCO, L.L.C., a Delaware Corporation; ASARCO Master, Incorporated, a Delaware Corporation, Plaintiffs–Appellees

v.MONTANA RESOURCES, INCORPORATED, a Montana corporation; Montana Resources, L.L.P., a Montana limited liability partnership, Defendants–Appellants

No. 16-40682

United States Court of Appeals, Fifth Circuit.

FILED June 2, 2017

Gregory L. Evans, Esq., Keola R. Whittaker, McGuireWoods, L.L.P., Los Angeles, CA, Benjamin L. Hatch, McGuireWoods, L.L.P., Norfolk, VA, Thomas Miles Farrell, Attorney, McGuireWoods, L.L.P., Houston, TX, Patrick L. Hayden, McGuireWoods, L.L.P., New York, NY, Dion W. Hayes, Esq., Karen Elizabeth Sieg, McGuireWoods, L.L.P., Richmond, VA, for Plaintiffs–Appellees.

James Patrick Sullivan, King & Spalding, L.L.P., Austin, TX, Mark W. Wege, Dentons US, L.L.P., Houston, TX, for Defendants–Appellants.

Before DAVIS, CLEMENT, and COSTA, Circuit Judges.

GREGG COSTA, Circuit Judge:

ASARCO, L.L.C., through an affiliate, became partners in a Montana copper

mine with Montana Resources, Inc. (MRI). Because of financial troubles in the early 2000s, ASARCO was unable to meet cash calls the partnership required. When it failed to contribute on four occasions, MRI covered ASARCO's portion. But this was not an act of benevolence. By covering its partner's cash calls, MRI diluted ASARCO's interest in the partnership from 49.9% to nothing.

About eight years after it lost its interest in the mine, ASARCO sent a letter invoking a clause in the partnership agreement that discusses a right to reinstatement. Surprisingly, the clause contains no time limit. In seeking reinstatement, ASARCO offered to pay MRI the full amount of the missed cash calls plus interest. MRI refused to bring ASARCO back into the partnership. ASARCO filed this lawsuit challenging that refusal.

ASARCO's suit is complicated by a significant legal proceeding that took place after it missed the cash calls but before it sought reinstatement. Fiscal problems—likely the same that prevented it from making the partnership contributions—resulted in ASARCO filing Chapter 11 bankruptcy. MRI contends that two of ASARCO's decisions during that bankruptcy prevent it from now suing for reinstatement. First, it contends that an adversary proceeding the parties litigated has preclusive effect on the reinstatement claim. Second, it contends that ASARCO's alleged failure to disclose the potential partnership interest to the bankruptcy court estops it from now pursuing that interest. In this interlocutory appeal, we agree with the district court that neither of these arguments presents an obstacle to ASARCO's suit.

I.

An ASARCO affiliate¹ and MRI formed a mining partnership called Montana Resources in 1989. The partnership agreement provided that if a partner failed to pay a cash call within thirty days, that partner fell into default. The nondefaulting party could cover the deficit, but the defaulting partner's share would dilute by 1% for every $100,000 it failed to contribute. According to ASARCO, section 12.02 of the agreement allows for reinstatement through the following provision: "[T]he defaulting partner may cure such default by contributing all amounts owed, plus interest at the Overdue Rate, to the non-defaulting partner and the Partnership, which repayment shall constitute reinstatement."

During a fourteen month period starting in 2002, the affiliate missed four cash calls totaling more than $5 million. MRI covered all of them, which resulted in a reduction in the affiliate's interest from 49.9% to 25.3%, to 3.9%, to 1.2%, and finally to 0%. At that time, MRI purported to dissociate the affiliate from Montana Resources.

In 2005, ASARCO and its affiliates filed for bankruptcy. As part of those proceedings, MRI filed Proofs of Claim against ASARCO to recover contingent environmental liability incurred by the partnership prior to ASARCO's bankruptcy. ASARCO responded by initiating an adversary proceeding. ASARCO alleged fraudulent transfer, breach of contract, and improper expulsion relating to its affiliate's dilution and purported dissociation from the partnership. The original complaint also alleged that ASARCO had a right to reinstatement after dilution. As a remedy, that complaint sought (1) a declaration that ASARCO had a right to reinstatement if it cured its default, and (2) monetary damages for income that ASARCO would have received had it not been improperly diluted. ASARCO later amended its complaint, dropping the declaratory judgment claim without prejudice. The other claims were dismissed with prejudice pursuant to an agreement between the parties, and shortly after the underlying bankruptcy concluded. The bankruptcy was a remarkable success: the plan offered full payment to all creditors.

With its newfound solvency, ASARCO tried to get back its interest in the mine, as the mine was doing well. Two years after the bankruptcy plan was confirmed, ASARCO sent MRI a letter that tendered the full cure amount to cover the cash call defaults and notified MRI that ASARCO would commence all appropriate action if tender was not accepted within five business days. MRI did not accept,² and ASARCO filed this suit.

The complaint alleges that MRI's failure to accept the tender constituted a breach of contract, along with other claims that accrued prebankruptcy. MRI initially filed a motion to dismiss based on ASARCO's lack of standing to prosecute claims postbankruptcy, judicial estoppel, and res judicata. The district court held that all undisclosed claims that existed during the bankruptcy or that were not specifically scheduled postbankruptcy were barred on standing, estoppel, or res judicata grounds.

All was not lost for ASARCO, though, because the district court also ruled that none of these doctrines could bar the breach of contract claim that arose from the postbankruptcy tender and demand for reinstatement. For judicial estoppel and standing, the court reasoned that the breach of contract claim did not exist during bankruptcy, as the demand for reinstatement and tender had not yet occurred. For res judicata, the court held that the breach of contract was a new claim, unrelated to the other claims for coercive relief in the adversary proceeding. The court also concluded that the dropped request for declaratory relief concerning the right to reinstatement filed during the adversary proceeding did not have preclusive effect.

Following discovery, MRI filed a motion for summary judgment, again arguing lack of standing, judicial estoppel, and res judicata. It also asserted a limitations defense. The district court rejected those procedural defenses. MRI also raised the principal merits issue: whether the partnership agreement allows ASARCO's attempted reinstatement. The court concluded that question could not be decided as a matter of law because of ambiguity in the reinstatement provision and inconclusive extrinsic evidence. The court was, however, able to grant summary judgment on another merits question that greatly weakened ASARCO's attempted reinstatement: assuming there is a right to reinstatement, the court held it only allows ASARCO to regain the 1.23% interest it held before the final default.

Even that 1.23% interest in the mine must have significant value as MRI has pressed full speed ahead in challenging the district court's refusal to dismiss the entire case.³ After the district court certified its rulings on estoppel and res judicata for interlocutory appeal, MRI successfully obtained permission from this court to appeal.⁴ See 28 U.S.C. § 1292(b).

II.

We turn first to MRI's contention that ASARCO's breach of contract claim is barred by res judicata, which is more descriptively known as claim preclusion. The district court held that it was not, a determination we review de novo. Matter of Baudoin , 981 F.2d 736, 739 (5th Cir. 1993). The crux of MRI's argument is that ASARCO could have brought its current breach of contract claim alleging a failure to reinstate during the adversary proceeding, so it is barred from doing so now.

ASARCO did seek a declaratory judgment in that adversary proceeding on the main issue the current case raises: whether the partnership agreement provides ASARCO with a right to reinstatement if it tenders the missed cash calls.

ASARCO voluntarily dismissed that claim prior to obtaining a ruling, however, so issue preclusion does not apply. Because that declaratory judgment was part of the prior case MRI is invoking for claim preclusion, the parties focus their attention on Kaspar Wire Works, Inc. v. Leco Engineering & Machine, Inc. , 575 F.2d 530 (5th Cir. 1978). That opinion by Judge Rubin is the seminal decision on the res judicata effect of declaratory judgment claims. In that pre-Federal Circuit era, this court determined the preclusive effect of a suit seeking a declaration of patent invalidity and noninfringement on a later infringement action. Because the earlier declaratory action settled without the court deciding the issues it raised, issue preclusion was not available although the court recognized that the doctrine would normally apply when a court makes a declaration of rights. Kaspar Wire , 575 F.2d at 537 ("Under the usual rationale of issue preclusion, there is no reason to permit the relitigation of any issue actually litigated and necessary to the judgment rendered in such an anticipatory declaratory action.").

But the nature of declaratory actions led the court to conclude that the related but distinct doctrine of claim preclusion should not apply. Claim preclusion of course bars a party from relitigating the same claim that has been resolved in an earlier suit. What gives claim preclusion far-reaching force, however, is that it also bars claims that could have been brought in the earlier suit. Id . at 535 ("Under these rules of claim preclusion, the effect of a judgment extends to the litigation of all issues relevant to the same claim between the same parties, whether or not raised at...