Burlington Northern and Sante Fe Ry. Co. v. Burlington Resources Oil & Gas Co., 980194

• Decision Date: 26 February 1999
• Docket Number: No. 980194,980194
• Citation: 590 N.W.2d 433
• Parties: BURLINGTON NORTHERN AND SANTE FE RAILWAY COMPANY, Plaintiff and Appellant, v. BURLINGTON RESOURCES OIL & GAS COMPANY, Defendant and Appellee. Civil
• Court: North Dakota Supreme Court

Page 433

590 N.W.2d 433

1999 ND 39

BURLINGTON NORTHERN AND SANTE FE RAILWAY COMPANY, Plaintiff and Appellant, v. BURLINGTON RESOURCES OIL & GAS COMPANY, Defendant and Appellee.

Civil No. 980194

Supreme Court of North Dakota.

Feb. 26, 1999.

Daniel S. Kuntz (argued) and James S. Hill, of Zuger Kirmis & Smith, Bismarck, ND, for plaintiff and appellant.

John W. Morrison, Jr., of Fleck, Mather & Strutz, Bismarck, ND, for defendant and appellee.

NEUMANN, Justice.

¶1 The Burlington Northern and Sante Fe Railway Company, formerly known as Burlington Northern Railroad Company, (Burlington Northern) appeals from a judgment dismissing its action for breach of a fiduciary duty against Burlington Resources Oil & Gas Company, formerly known as Meridian (Meridian). We hold Burlington Northern's authorization for Meridian to deal "for its own account" with Burlington Northern's oil and gas rights was an "authority expressed in general terms" under N.D.C.C. § 3-02-05, and thus the obligations of a trustee under N.D.C.C. §§ 59-01-09 to 59-01-19 applied to Meridian's agency relationship with Burlington Northern. We reverse and remand for further proceedings.

¶2 Burlington Northern is primarily engaged in owning and operating a railroad. Before 1989, Burlington Northern and Meridian were subsidiaries of the same parent company, and Meridian managed Burlington Northern's oil and gas rights.

¶3 As part of a corporate reorganization, Burlington Northern and Meridian executed a management agreement, effective January 1, 1989, under which Meridian agreed to continue managing Burlington Northern's oil and gas rights for its railroad properties, including the interests in a 102.2 acre tract of land in Stark County. The management agreement authorized Meridian to "sell, trade, exchange, mortgage, lease, develop, operate, refine or otherwise deal with such oil and gas rights and oil and gas produced therefrom with others or for its own account." The agreement required Meridian to exercise "ordinary business judgment and [take] into account appropriate business usages and practices pertaining to the oil and gas industry." The agreement ran through December 31, 1989, and thereafter until terminated by either party by 90 days written notice.

¶4 Meridian administered the agreement through its Fort Worth, Texas office. Meridian also was actively involved in oil and gas exploration and development, and managed its exploration activities through several regional offices, including an office in Denver, Colorado. In February 1993, the Dickinson State # 74 well, a major discovery in a new formation, was completed near Burlington Northern's 102 acre tract in Stark County. In June 1993, Duncan Energy offered to lease Meridian's mineral interests near the Dickinson State well. Meridian refused Duncan's offer, but they later agreed to jointly explore and develop the area. In August 1993, Meridian and Duncan entered a joint exploration and development agreement for their existing and future leases on land near the Dickinson State well, including Burlington Northern's 102 acre tract.

¶5 Burlington Northern and Meridian began negotiating a new management agreement in 1992. By September 1993, negotiations had reached an impasse, and Burlington Northern hired Catellus Management to oversee its oil and gas rights. On December 21, 1993, Burlington Northern gave Meridian written notice of termination of their management agreement, effective March 31, 1994, and asked Meridian to return a power of attorney executed with the agreement. Meridian declined to return the power of attorney. On January 7, 1994, Burlington Northern asked Meridian to process any new inquiries concerning Burlington Northern's oil and gas rights through Catellus. Meridian replied it would continue to limit its communications to Burlington Northern personnel, and, as an alternative, indicated it would provide Burlington Northern with file copies of new transactions if Meridian received an expedient response to an earlier request for asset transfer deeds. Burlington Northern did not respond to Meridian's reply.

¶6 In January 1994, a Duncan landman asked a landman in Meridian's Denver office to secure a lease for Burlington Northern's property in Stark County. The Meridian landman contacted Meridian's Fort Worth office, which asked Burlington Northern for copies of deeds for property in Stark County. Burlington Northern provided Meridian with the deeds. Meridian's Fort Worth office asked the Meridian landman for information about the prevailing prices and terms for oil and gas leases in Stark County. Duncan's landman informed Meridian's landman the prevailing terms for that area were for a five year primary term with a 15% royalty and $25 per acre bonus. On February 15, 1994, without providing any other information to Burlington Northern, Meridian leased Burlington Northern's oil and gas rights in the 102 acre tract to itself for a three year primary term with a 17.5% royalty and $30 per acre bonus.

¶7 In accordance with Burlington Northern's December 21, 1993 notice to Meridian, the parties' management agreement terminated on March 31, 1994, and Meridian forwarded its Burlington Northern files to Catellus. In October 1995, Burlington Northern received an offer from another company to lease its oil and gas rights in the 102 acre tract for a term of 18 months with a royalty of 27.5% and $2,500 per acre bonus.

¶8 Burlington Northern then discovered Meridian had leased those rights to itself in February 1994, and asked Meridian to release the lease. Meridian declined. Burlington Northern sent Meridian a notice of rescission of the lease and tendered a draft for $3,264.64, which Burlington Northern claimed represented the payments and bonus it had received under the lease. Meridian returned the draft and refused to rescind the lease.

¶9 Burlington Northern sued Meridian, alleging Meridian's lease to itself violated its fiduciary duties to Burlington Northern. After a bench trial, the court concluded general agency duties requiring Meridian to provide Burlington Northern with information and obtain Burlington Northern's consent before self-dealing were not applicable to Meridian, because the management agreement specifically and unambiguously allowed Meridian to lease Burlington Northern's oil and gas rights "for its own account." The court recognized the management agreement required Meridian to exercise ordinary business judgment on behalf of Burlington Northern, and concluded Meridian complied with that requirement because it had leased Burlington Northern's oil and gas rights to itself under prevailing market terms. The court said the lease was presumed fair, and to the extent Burlington Northern claimed the lease was unfair or did not comply with Meridian's duties, Burlington Northern had failed to satisfy its burden of proof. The court dismissed Burlington Northern's complaint, and it appealed.

¶10 We review the trial court's findings of fact under the clearly erroneous standard of N.D.R.Civ.P. 52(a). A finding of fact is clearly erroneous if it is not supported by any evidence, if, although there is some evidence supporting the finding, a reviewing court is left with a definite and firm conviction a mistake has been made, or if the finding is induced by an erroneous conception of the law. Edwards v. Edwards, 1997 ND 94, p 4, 563 N.W.2d 394. A trial court's conclusions of law are fully reviewable. Id.

¶11 Burlington Northern contends the trial court erred in deciding certain fiduciary duties imposed on an agent by operation of law were not applicable to Meridian. Burlington Northern argues, even though Meridian was authorized to deal "for its own account" with Burlington Northern's oil and gas rights, Meridian nevertheless was required to satisfy certain fiduciary duties of a trustee incorporated into agency law under N.D.C.C. § 3-02-05.

¶12 "Agency is the relationship which results where one person, called the principal, authorizes another, called the agent, to act for him in dealing with third persons." N.D.C.C. § 3-01-01. See Farmers Union Oil Co. v. Wood, 301 N.W.2d 129, 133 (N.D.1980); Tostenson v. Ihland, 147 N.W.2d 104, 109 (N.D.1966). See also Restatement (Second) of Agency § 15 (1958) (stating "agency relation exists only if there has been a manifestation by the principal to the agent that the agent may act on his account, and consent by the agent so to act").

¶13 Section 3-02-05(3), N.D.C.C., says "[a]n authority expressed in general terms, however broad, does not authorize an agent ... [t]o do any act which a trustee is forbidden to do by the provisions of sections 59-01-09 to 59-01-19, inclusive." Under N.D.C.C. Ch. 59-01, a trustee must act with the highest good faith toward the beneficiary and not obtain any advantage over the beneficiary by the slightest concealment, see N.D.C.C. § 59-01-09, and a trustee must not take part in any transaction adverse to the beneficiary without obtaining the beneficiary's permission after full disclosure of all facts which might affect the beneficiary's own decision. See N.D.C.C. § 59-01-11. Section 59-01-16, N.D.C.C., establishes a presumption all transactions between a trustee and the beneficiary are entered into without sufficient consideration and under undue influence.

¶14 Here, the management agreement created a principal-agent relationship between Burlington Northern and Meridian and expressly authorized Meridian to deal "for its own account" with Burlington Northern's oil and gas rights. The issue is whether that authority was expressed in general terms, thus rendering the enumerated trustee duties in N.D.C.C. ch. 59-01 applicable to Meridian.

¶15 Agency involves both a contractual and a fiduciary relationship. Restatement (Second) of Agency, Ch. 13, Introductory Note at p. 171. The interpretation of an agent's authority is governed by rules for construing contracts, except to the extent the fiduciary...