Candelaria Industries v. Occidental Petroleum Corp.

• Decision Date: 18 June 1987
• Docket Number: Civ. No. R-81-229 BRT.
• Citation: 662 F. Supp. 1002
• Parties: CANDELARIA INDUSTRIES, INC. and International Development Fund, by its General Partner Henry Von Kohorn, Sr., Plaintiffs, v. OCCIDENTAL PETROLEUM CORPORATION, Occidental Minerals Corporation, and Candelaria Partners, Defendants.
• Court: U.S. District Court — District of Nevada

662 F. Supp. 1002

CANDELARIA INDUSTRIES, INC. and International Development Fund, by its General Partner Henry Von Kohorn, Sr., Plaintiffs, v. OCCIDENTAL PETROLEUM CORPORATION, Occidental Minerals Corporation, and Candelaria Partners, Defendants.

Civ. No. R-81-229 BRT.

United States District Court, D. Nevada.

August 8, 1984.

Order Denying Renewed Motion for Summary Judgment July 29, 1985.

Procedural Order October 30, 1985.

Order on Motion to Join Necessary Party May 19, 1986.

Court's Statement of Subsequent Proceedings June 18, 1987.

Woodburn, Wedge, Blakey & Jeppson, Suellen Fulstone, Reno, Nev., and Willkie, Farr & Gallagher, David L. Foster, New York City, for plaintiffs.

Vargas & Bartlett, Reno, Nev., for Occidental Petroleum Corp.

Mitchell, Silberberg & Knupp, Los Angeles, Cal., for Arthur Groman.

Raymond J. Schlauch, Denver, Colo., and Earl M. Hill, Reno, Nev., for Occidental Minerals Corp. and Candelaria Partners.

ORDER RESPECTING MOTIONS FOR SUMMARY JUDGMENT

BRUCE R. THOMPSON, District Judge.

In 1970, Candelaria Industries, Inc. (CI), a closely held corporation owned by Henry Von Kohorn, sold several mining claims which it owned in Nevada's Candelaria mining district to Thomas E. Congdon. The purchase agreement provided, inter alia, that CI reserved ten percent of the net profits derived by Congdon from the property. CI later sold seventy percent of its net profits interest to a partnership, International Development Fund (IDF).

Congdon's interest in the property was eventually transferred to a limited partnership, Candelaria Partners (CP). CP was comprised of Occidental Minerals Corporation (OM), a subsidiary of Occidental Petroleum Corporation (OP), as the general partner, and Congdon and Carey, Ltd., No. 4 (C & C4), as the sole limited partner. In the fall of 1979, a feasibility study was completed which recommended construction of a mine and recovery plant on the Candelaria property. Commercial production of minerals began in November of 1980.

Prior to production from the mine, silver had risen to record levels and, in January of 1980, OP entered into a series of short sales of silver and gold on the commodities exchanges. OP's trading agreement with Merrill Lynch stated that OP was acting as the agent of OM and CP and characterized the trading as hedging transactions. By late March of 1980, the price of silver had fallen dramatically. OP closed out the futures positions for a profit of approximately $120 million. As a result of the lower silver prices, mining operations stopped on the Candelaria property in 1982.

Following a refusal to share the profits made in the futures trading, CI and IDF brought this action against OP, OM, and CP alleging breach of covenant and breach of fiduciary duty. The parties have now submitted cross motions for summary judgment. CI and IDF have moved for partial summary judgment on the issue of liability asserting three grounds for recovery. OM and CP have also moved for summary judgment disputing the plaintiffs' entitlement to relief on any of the three theories advanced. OP has joined in the latter motion.

Although this is a diversity action, the Federal Rules of Civil Procedure apply. Hanna v. Plumer, 380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965). Under Fed.R. Civ.P. 56, "summary judgment is properly granted when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Clipper Exxpress v. Rocky Mountain Motor Tariff, 674 F.2d 1252 (9th Cir.1982). The parties' cross motions do not change that standard. "It is well settled that a court's duty to ascertain whether facts remain in contention is not obviated by cross motions for summary judgment." Eby v. Reb Realty, Inc., 495 F.2d 646, 649 n. 4 (9th Cir.1974).

In contrast to rules of procedure, this court is bound to apply the substantive law of Nevada including its choice of law rules. Klaxon Co. v. Stentor Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Despite some evidence that this case has contacts with other jurisdictions, such as execution of the purchase agreement in Colorado, neither party has argued that Nevada would look to another forum's law in order to resolve this controversy. Nor is there any indication that Nevada law would conflict with the law of any other state or that Nevada's choice of law theory requires application of foreign law. See Hanley v. Tribune Publishing Co., 527 F.2d 68 (9th Cir.1975); Restatement (Second) of Conflict of Laws. Therefore, we will apply Nevada law or, where the Nevada Supreme Court has not addressed an issue, use our own best judgment to predict how the state court would rule. See Takahashi v. Loomis Armored Car Service, 625 F.2d 314 (9th Cir.1980).

In the first of their three grounds for recovery, the plaintiffs assert that the net profits interest in the purchase agreement (Agreement) between CI and Congdon clearly entitles them to ten percent of the profits made from the commodity trading. The defendants argue that the Agreement clearly does not subject those sums to the plaintiffs' ten percent interest. Construction of the terms of a contract is a matter of law where, as here, the contract is unambiguous and there are no other factual issues. See Castaneda v. Dura-Vent Corp., 648 F.2d 612 (9th Cir.1981); Nevada Industrial Commission v. Dixon, 77 Nev. 296, 362 P.2d 577 (1961).

A contract "must be interpreted by a consideration of all of its provisions with reference to the general subject to which they relate, and in light of the contemporaneous facts and circumstances, so as to arrive at the intention of the parties at the time the contract was entered into." Kennedy v. Schwartz, 13 Nev. 229 (1878). In this case, affidavits from both contracting parties have been submitted which indicate that they did not contemplate the effect of the net profits interest on futures trading. Therefore, we must look to the terms of the contract itself.

Section 4A of the Agreement, which defines the net profits interest, provides that:

Candelaria hereby reserves a Net Profits Interest of Ten (10%) Per Cent of the net profits Congdon and/or his successors in interest (excepting such successors as may gain an interest in the Property through a partial reconveyance of an undivided interest in the Property to Candelaria) may gain from his activities described in Section 2 hereof on the Property....

The activities described in Section 2 are:

the exclusive right to enter and possess the Property and to explore for, develop, mine, remove, treat, reduce, ship and sell all ores and minerals on and under the Property in such manner and using such methods (including methods hereinafter developed) as Congdon deems advisable, and to make such lawful use of the Property in exercising his rights granted hereunder as Congdon deems advisable.

Reading those two sections together, the plaintiffs contend that the hedging transactions constituted a sale of minerals or other lawful use of the property thus triggering the net profits interest. We cannot agree with that contention.

Section 4 of the Agreement reserves ten percent of the gain from activities on the property. Both that language and the language in section 2 describing the activities subject to the plaintiffs' interest clearly imply that the net profits interest only attaches to minerals actually produced from the property. Furthermore, the formula used by the Agreement to determine the amount of net profits contemplates actual production. Net profits are computed by deducting the costs of exploration, development, and production¹ from the proceeds of sales of minerals produced from the property or any other sales of property upon which such costs have been incurred.² Accordingly, the net profits interest is limited to profits realized through actual production of minerals from the property.

"Under well settled rules of contract construction a court has no power to create a new contract for the parties which they have not created or intended themselves." Old Aztec Mine, Inc. v. Brown, 97 Nev. 49, 623 P.2d 981 (1981). We cannot rewrite the unambiguous terms of the Agreement.

The plaintiffs next assert that the defendants had a fiduciary duty which obligated them to share the profits from the commodities trading. A fiduciary duty has been found to exist where there is a special relationship beyond a bare royalty arrangement, such as unit development or an investment scheme. See Young v. West Edmond Hunton Lime Unit, 275 P.2d 304 (Okl.1954); Differding v. Ballagh, 121 Cal. App. 1, 8 P.2d 201 (1932). Some courts have held that the duty may also arise from an agreement that subsequent lease renewals remain subject to a royalty interest, see Independent Gas & Oil Producers v. Union Oil Co., 669 F.2d 624 (10th Cir. 1982); Hivick v. Urschel, 171 Okl. 17, 40 P.2d 1077 (1935); Probst v. Hughes, 143 Okl. 11, 286 P. 875 (1930), or where there is an obligation to keep a permit alive, see Oldland v. Gray, 179 F.2d 408 (10th Cir. 1950). In the usual type of royalty arrangement present here, however, the parties' only obligations arise from their contractual relationship and no fiduciary relationship is created. See Garfield v. True Oil Co., 667 F.2d 942 (10th Cir.1982); Honolulu Oil Corporation v. Kennedy, 251 F.2d 424 (9th Cir.1957). Therefore, the plaintiffs' claims of breach of fiduciary duty are deficient as a matter of law.

The plaintiffs' final theory of recovery is that the defendants have breached their duty of good faith. That claim rests in the contractual relationship of the parties. There is "an implied covenant of good faith and fair dealing in every contract, that neither party should be permitted to do anything which will injure the right of the other to receive the benefits of the agreement." Aluevich v. Harrah's, 99 Nev. 215, 660 P.2d 986 (1983) (Springer, J., dissenting); Fortune v....