Continental Potash, Inc. v. Freeport-McMoran, Inc.

• Decision Date: 10 August 1993
• Docket Number: FREEPORT-M,No. 19054,19054
• Citation: 115 N.M. 690,1993 NMSC 39,858 P.2d 66
• Parties: CONTINENTAL POTASH, INC., et al., Plaintiffs-Appellees and Cross-Appellants, v.cMORAN, INC., et al., Defendants-Appellants and Cross-Appellees.
• Court: New Mexico Supreme Court

Page 66

858 P.2d 66

115 N.M. 690

CONTINENTAL POTASH, INC., et al., Plaintiffs-Appellees and Cross-Appellants, v. FREEPORT-McMORAN, INC., et al., Defendants-Appellants and Cross-Appellees.

No. 19054.

Supreme Court of New Mexico.

Aug. 10, 1993.

[115 N.M. 692] Montgomery & Andrews, John B. Pound, Santa Fe, for appellants and cross-appellees.

Roth, VanAmberg, Gross, Rogers & Ortiz, Michael P. Gross, Raymond Z. Ortiz, Santa Fe, for appellees and cross-appellants.

OPINION

FROST, Justice.

The motion for rehearing filed in this matter is denied. The decision initially filed in this case is vacated and this opinion is substituted therefore.

Plaintiffs brought this breach of contract and fraud lawsuit in 1982 to recover lost royalty payments, and the jury found for the plaintiffs. Defendants asserted that the plaintiffs' claims were barred by the relevant statutes of limitations and by the doctrines of estoppel and laches. The trial court, however, denied the defendants' motion for summary judgment on these issues.¹ Defendants also moved for a directed verdict at the close of the plaintiffs' case, renewed the motion at the close of all evidence, and moved for judgment notwithstanding the verdict, all of which were denied. In these motions, the defendants primarily claimed that no implied covenants existed, which the jury found the defendants had breached. We conclude that the trial court erred on the statute of limitations issue and in submitting the issue of implied covenants to the jury. Accordingly, we reverse the trial court and vacate the jury's verdict.

I. PROCEDURAL HISTORY

This case arose from agreements made in 1948, 1949, 1951, 1953, and 1956 between the plaintiffs, Continental Potash Company (Continental) and Kansas City Testing Laboratories, Inc. (KCTL), later known as Cross Laboratories, Inc., and the defendants, Freeport Sulphur Company, predecessor to the named defendants Freeport-McMoran, Inc. and Freeport Minerals Company (Freeport), and National Potash Company (National). The agreements granted Freeport the right to explore commercial potash deposits with an option to acquire mining rights through assignment of certain prospecting permits and leases that the plaintiffs held on lands located in southeastern New Mexico. In the assignment of the leases to Freeport, the plaintiffs reserved an overriding royalty interest² in the net profits derived from the mining operation.

In a 1982 lawsuit, the plaintiffs alleged that the mining operation conducted by the defendants during the periods 1956-1968 and 1976-1982 should have resulted in substantial net profits instead of accumulating a $16 million net loss. Thus, the plaintiffs alleged that they suffered loss of royalties due to the defendants' breach of contract and fraud in the operation of the mine.

The issues of breach of contract and fraud were tried to a jury, but the parties stipulated that the district court would be the fact finder on all issues concerning the affirmative defenses. The jury returned a verdict in favor of the plaintiffs for breach of implied covenants and fraud. The district court then denied all of the affirmative defenses as a matter of law, finding that the statutes of limitations were tolled by the doctrine of equitable estoppel. The court based its application of the doctrine of equitable estoppel upon its finding that the defendants had fraudulently concealed from the plaintiffs the facts upon which they could have based their lawsuit within the respective limitations periods. The court further concluded that substantial evidence supported each of the jury's express and implicit findings underlying the fraudulent concealment issue.

II. ISSUES

The legal questions presented on appeal are whether the trial court was incorrect (1) to toll the six-year statute of limitations on the contract claims and the four-year statute of limitations on the fraud claim; and (2) to find implied covenants governing the defendants' conduct, which the defendants allege were inconsistent with the express terms of the written agreements. In addition, National challenges the award of compensatory damages ($1,816,690.23) and punitive damages ($3,000,000), and it contends that the court erred by permitting the plaintiffs to recover on the claim of a nonparty, Mary Borders Byrte. National also claims that the trial court should not have submitted the fraud issue to the jury. Because we hold that the district court erred in denying defendants' motion for directed verdict on the statute of limitations issue and in implying and enforcing contractual obligations against the defendants beyond the duties in the written agreements, it is unnecessary to address the other issues raised on appeal and on cross-appeal.

III. FACTS

A. The Parties.

In the 1940s, Walter M. Cross, the original prospector on the lands, discovered a potash deposit in southeastern New Mexico. Cross and members of his family obtained prospecting permits and leases from the federal and state governments for discovering the ore body. Shortly thereafter Cross incorporated Continental for the purpose of developing the ore body and assigned part of his interest in the mineral rights to Continental. Cross also assigned part of his interest in the same mineral rights to KCTL, another closely held corporation.

At about the same time, Freeport was prospecting for potash deposits in the same general area, which led to negotiations between KCTL, Continental, and Freeport about the possibility of Freeport developing both ore bodies. Negotiations resulted in the formation of a contract that was initiated by a letter agreement in 1948 and that was subsequently modified and supplemented in more formal documents in 1949, 1951, 1953, and 1956. In 1948 and 1949, the plaintiffs granted Freeport the right to explore for potash on land in Lea County, New Mexico with the option of receiving assignment of the prospecting permits and mine leases issued by the United States government and the State of New Mexico. In 1951, after initial exploration and completion of the prospecting work, KCTL and Freeport executed another agreement covering two additional mining permits with terms substantially the same as those in the 1949 agreement. Freeport exercised its option for assignment of the permits and leases.

Thus, as of the early 1950s, Freeport was the lessee of the subject mining lands, and the United States and the State of New Mexico were the lessors. KCTL and Continental held overriding royalty interests. KCTL was under the control of Walter Cross until his death in 1954, and Continental had been sold to a group of investors headed by Milton McGreevy.³ With the consent of the federal and state governments, Freeport assigned its rights as lessee in the potash leases to National in 1955. National was a corporation equally owned by Consolidation Coal Company and Freeport, and it was created for the purpose of developing the Lea County potash deposits.

B. The Arrangement for Payment of Royalties.

Freeport had agreed to pay KCTL and Continental a royalty of eight percent of the divisible profits from the production and marketing of the mined potash. Sometime after the McGreevy group purchased Continental, a dispute arose between Continental and KCTL concerning their respective royalty rights. The dispute was resolved in 1956 in an agreement between the plaintiffs and National to pool all royalty interests, thus merging fractional holdings into a unified whole. The 1956 agreement expressly superseded previous royalty provisions and granted the plaintiffs a cumulative net profit royalty. Payment of royalties, however, was conditioned upon realizing a net profit during each fiscal year. Under this arrangement, whenever National was in a net profit posture, all royalty holders would receive payment without regard to whose potash was being mined, milled, and sold.

The net profit royalty provisions also included what the parties called a "net loss carry-forward," which meant that if National began production on the mining lands, it was required to pay a net profit royalty in any given fiscal year only if the net loss that had accumulated prior to that year had been overcome. By reserving a net profit royalty instead of a smaller gross receipts royalty, the plaintiffs were tied to the profitability of the mine rather than to its gross output, a fact that became pivotal when the mining operation later proved to be unprofitable.

C. Exclusive Control and Discretion by National.

In addition to the provisions detailed above, the parties agreed that: (1) National could elect to terminate the agreement or to surrender any permit or lease after giving proper notice to the plaintiffs; (2) National could exercise its sole judgment and discretion in determining which extensions of permits or which leases would be applied for; (3) if National failed to instruct the plaintiffs regarding extensions, release to the plaintiffs of any permit or lease would be automatic; (4) National could exercise exclusive control, discretion, and judgment regarding all of its mining operations, and it could determine the quantity of ore mined and the quantity left unmined; and (5) National could elect to suspend operations "for as long as it may determine whenever in its opinion economic conditions or other causes make it desirable so to do." The relevant federal and state statutes, rules, and regulations were incorporated by reference. National also agreed to furnish the royalty holders with periodic financial statements of the results of its operations to be verified by an independent certified public accounting firm and prepared in accordance with generally accepted accounting principles.

D. Mining Operations.

National operated the mine from the time it opened in 1956 until 1968 (first run) when operations were temporarily suspended until 1976. Immediately upon opening the mine, it became apparent that the quality of the Lea...