Morrison-Knudsen Co., Inc. v. Archer

• Citation: 655 F.2d 962
• Decision Date: 02 December 1981
• Docket Number: MORRISON-KNUDSEN,No. 79-4231,79-4231
• Parties: COMPANY, INC., a Delaware Corporation, Plaintiff- Counterdefendant-Appellee, v. J. D. ARCHER and Elizabeth B. Archer, as individuals and as trustees of the Elizabeth Daly Archer Trust, Defendants-Counterclaimants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 962

655 F.2d 962

MORRISON-KNUDSEN COMPANY, INC., a Delaware Corporation Plaintiff- Counterdefendant-Appellee, v. J. D. ARCHER and Elizabeth B. Archer, as individuals and as trustees of the Elizabeth Daly Archer Trust Defendants-Counterclaimants-Appellants.

No. 79-4231.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 4, 1981.

Decided Aug. 19, 1981.

As Amended on Denial of Rehearing Dec. 2, 1981.

Ryan P. Ambruster, Boise, Idaho, argued, for defendants-counterclaimants-appellants; Carl P. Burke & Phillip M. Barber, Elam, Burke, Jeppesen, Evans & Boyd, Boise, Idaho, on brief.

John T. Hawley, Boise, Idaho, for plaintiff-counterdefendant-appellee.

Appeal from the United States District Court for the District of Idaho.

Before KENNEDY and BOOCHEVER, Circuit Judges, and GRAY, ^* District Judge.

KENNEDY, Circuit Judge:

This case involves a routine dispute over whether a summary judgment was correct, but it also requires us to discuss the requirements that must be observed by a district court before it orders the entry of a separate judgment under Rule 54(b) of the Federal Rules of Civil Procedure. We recite only the bare outline of a controversy which involves other events and technical details that are unnecessary for the purposes of this opinion. Morrison-Knudsen Co. (M-K) formerly owned rights to mine coal from an area known as the Elk River Project in British Columbia. By a letter agreement dated October 6, 1969, M-K granted J. D. Archer, and certain other parties, all referred to here as "Archer," a 15 percent interest in the profits from the sale of that coal, in recognition of Archer's efforts in arranging the successful purchase of the reserves. The agreement conditioned the grant upon the provision that Archer contribute 15 percent of all expenses incurred in developing the project. Later, a dispute arose between the parties as to their respective rights under the agreement, in particular Archer's duty to pay his share of the expenses in developing the coal reserves. In 1973 a declaratory judgment was rendered setting forth certain rights and obligations of the parties. That judgment is final and was not appealed. The judgment confirmed that M-K had the right of ownership and control over the deposits and that Archer was obligated to contribute 15 percent of all costs and expenses.

M-K subsequently billed Archer for his share of the project costs, and when he failed to pay, M-K filed suit to recover the sums. During the course of the dispute over these sums, M-K sold the Elk River Project mining interests to an entity here called Elco. M-K retained a 4 percent royalty. M-K, allegedly in connection with the sale, also negotiated with Elco three service contracts pertaining to the development of the project. Archer then filed counterclaims against M-K alleging injury as a result of the sale. Archer claimed M-K failed to consult Archer or obtain his consent to the sale, violated its duty to exercise good faith business judgment, and breached its fiduciary duty to Archer. The parties apparently dispute, in a part of the litigation not before us here, whether Archer is entitled to receive 15 percent of the royalty payments M-K eventually derives from the sale agreement; they further dispute, for purposes here material, whether Archer is entitled to any of the profits M-K derives from the three service contracts.

M-K filed a motion for summary judgment on each of the counterclaims, relying heavily on the earlier declaratory judgment, which set forth the rights of the parties. The district court granted summary judgment for M-K and against Archer on the counterclaims which alleged that M-K breached its fiduciary duty in making the sale and that M-K failed to exercise its good faith business judgment in obtaining the highest price for the sale. In a further ruling, which gives rise to the procedural difficulty we discuss at length, the district court ordered entry of judgment for M-K on those claims under Fed.R.Civ.P. 54(b). The court reserved for trial Archer's counterclaim to establish an interest in the three service contracts. As discussed below, there is a triable issue of fact as to the dismissed counterclaims, but our analysis reveals also a procedural error in the entry of separate judgment.

In granting summary judgment, the trial court proceeded on the assumption that M-K had the duty to use its business judgment, in good faith, in the sale or other disposition of the mining interests. We agree with that conclusion as a reasonable, in fact necessary, interpretation of the declaratory judgment that is the law of this case. ¹ We decide further, however, that Archer has identified a narrow inquiry which does present a triable issue of fact, and summary judgment should not have been used to foreclose that factual inquiry. The three contracts by which M-K agreed to render consulting and other services were negotiated at or about the time of the sale. The district court expressly reserved for trial the question whether Archer has an interest in those contracts, an inquiry which will entail some factual exploration. That determination may in turn bear on the question of whether M-K breached its duty to use good faith business judgment in sale negotiations. Specifically, if Archer does not share in the proceeds of the three contracts, it may be argued that M-K accepted a lower royalty to be shared with Archer because it was able to secure profitable service contracts, not subject to Archer's percentage of profits. Under such circumstances, M-K would have acted to prejudice Archer's interest without a good faith business justification for doing so. The issue is a narrow one. Archer's interest was in mining operations, and it is unlikely that the intent of the parties was to include him in any consultation or construction contract made with third persons who were to develop the deposits, provided that such contracts were entered into upon terms that were commercially reasonable and were not procured as part of the quid pro quo in making the sale. Nevertheless, as the trial court acknowledged, the interplay between the three contracts and the sale of the interests requires further factual determinations. We cannot say now, in the probable event Archer was excluded from the three contracts, that M-K necessarily was justified in making them contemporaneously with the sale of the interest. ²

Our analysis of the close relation between the questions pertaining to the purpose and effect of the three contracts, on the one hand, and the question whether the sale transaction was an exercise of good faith business judgment, on the other, reveals a further error in these proceedings that should be explained in order to assist the district courts of this Circuit in the correct use of separate judgments as to less than all parties or claims under Fed.R.Civ.P. 54(b). As we have shown, the construction of the three contracts and their interpretation may bear directly upon whether M-K exercised its business judgment properly and whether or not it discharged properly any fiduciary duties it might have to Archer in this regard. Thus, the counterclaim that the court reserved for trial and the counterclaims upon which the court granted summary judgment were logically related, both from a factual and a legal standpoint. In such instances, it is not proper to direct entry of a separate judgment pursuant to Rule 54(b).

Judgments under Rule 54(b) must be reserved for the unusual case in which the costs and risks of multiplying the number of proceedings and of overcrowding the appellate docket are outbalanced by pressing needs of the litigants for an early and separate judgment as to some claims or parties. The trial court should not direct entry of judgment under Rule 54(b) unless it has made specific findings setting forth the reasons for its order. Those findings should include a determination whether, upon any review of the judgment entered under the rule, the appellate court will be required to address legal or factual issues that are similar to those contained in the claims still pending before the trial court. A similarity of legal or factual issues will weigh heavily against entry of judgment under the rule, and in such cases a Rule 54(b) order will be proper only where necessary to avoid a harsh and unjust result, documented by further and specific findings.

If a judgment is entered under Rule 54(b), then, assuming the judgment has the requisite aspects of finality and that the district court has made the findings and determinations we have set forth above, appellate courts must give...