Polley's Lumber Co. v. United States

• Decision Date: 23 November 1940
• Docket Number: No. 9425.,9425.
• Parties: POLLEY'S LUMBER CO. v. UNITED STATES. UNITED STATES FIDELITY & GUARANTY CO. v. SAME.
• Court: U.S. Court of Appeals — Ninth Circuit

115 F.2d 751 (1940)

POLLEY'S LUMBER CO. v. UNITED STATES.

UNITED STATES FIDELITY & GUARANTY CO. v. SAME.

No. 9425.

Circuit Court of Appeals, Ninth Circuit.

November 23, 1940.

Howard Toole, W. T. Boone, and Donovan Worden, all of Missoula, Mont., for appellants.

Norman M. Littell, Asst. Atty. Gen., John B. Tansil, U. S. Atty., of Butte, Mont., and Norman McDonald, Charles R. Denny, Frank J. Dugan, and Roger P. Marquis, Attys., Department of Justice, all of Washington, D. C., for appellee.

Before GARRECHT, HANEY, and HEALY, Circuit Judges.

HEALY, Circuit Judge.

The appeal is from a judgment in favor of the government, entered on a directed verdict, in a suit on behalf of the Flathead tribe of Indians and certain individuals of the tribe.

In 1928, appellant Lumber Company and the Superintendent of the Flathead agency entered into a contract for the sale of timber located on lands in the Flathead Reservation. By the terms of the contract the Lumber Company agreed to cut and pay for at least 12,000,000 feet of timber prior to March 1, 1933, and not less than that amount each year thereafter, all of the timber sold to be removed by 1943. The unit prices for the period ended March 31, 1934, were fixed at $4.06 per thousand feet for pine and $3 for fir and larch. These prices were to be upped 12% for the ensuing three year period, and further increases might be made for subsequent periods should the Commissioner of Indian Affairs find such increases fairly representative of then existing stumpage values.

The general Timber Sale Regulations were made part of the contract. Regulations 52 and 56, relating to breach by the purchaser and to the ascertainment of damages, are as follows:

"52. * * * Persistent failure to comply with any one of the requirements of the contract or regulations after written notice addressed to the purchaser by the superintendent or the officer in charge will be ground for revocation by the officer approving the contract of all rights of the purchaser under this and other contracts and the forfeiture of his bond and of all moneys paid, and the purchaser will be liable for all damage resulting from his breach of contract.

* * * * * *

"56. * * * Failure of the purchaser to complete his contract or to log promptly an area damaged by fire, wind, insects, or other causes, or the commission by him of any act for which the officer approving this contract shall declare the contract forfeited, will render the purchaser and his bondsmen liable for the depreciation in the value of the remaining timber on an estimate of value and quantity to be made under the direction of the officer approving this contract." Emphasis supplied.

Because of adverse economic conditions the time for cutting was extended; and in August, 1934, a modified agreement was entered into relieving the purchaser from some of the more onerous terms of the sale. The original contract and the regulations were deemed modified or abrogated so far as inconsistent with the new agreement. We may say at this point that we find nothing in the modified agreement which could properly be construed as an abrogation or alteration of the regulations just quoted.

Appellant failed to cut any timber or to perform otherwise and in consequence the contracts were, in October, 1935, declared forfeited. At that time a Mr. Muck, assistant director of forestry for the Indian Service, shown by the record to be an experienced and qualified man, was ordered to make a report "covering the appraisal of damages suffered by the Flathead Indians due to the failure of the Polley's Lumber Company to carry out the terms of the contract." Pursuant to these instructions, and in line with the regulations, Muck determined that the depreciation in the market value of the timber as of the date of the breach was $83,490. The purchaser and its surety¹ refused to pay the estimate and this action was commenced.

At the trial Muck was called as a witness. The government's proof of damages consisted of his appraisal and his explanation of the basis on which it was made. After an extensive cross-examination of the witness appellants moved to strike his testimony upon the ground that the method he had employed was unsound and unreasonable. The court denied the motion, ultimately holding the appraisal conclusive in the absence of a showing of fraud or bad faith. The ruling upon this motion, and the ultimate holding, furnish the grounds on which reversal is sought.

Muck's estimate of damages, made pursuant to regulation 56, was based upon the difference between the contract prices and the prices for which a similar contract could have been negotiated at the date of the breach. He did not attempt to forecast stumpage prices, but rested his appraisal upon a comparison between the value of the contract in 1928 and the value of a similar contract in 1935 contemplating a similar logging program. In estimating the prices obtainable under a similar contract, as of 1935, Muck first computed the weighted average of wholesale lumber prices in the Spokane area for the three years — 1925, 1926, 1927 — immediately preceding the date of the contract. For these prices he had recourse to Forest Service bulletins based on data compiled by the Western Pine Manufacturers' Association. Comparing these weighted average prices with the stumpage prices stipulated in the contract, Muck found that the latter were approximately 15% of the wholesale lumber prices.

Muck next computed the weighted average wholesale prices of lumber for the period 1928 to 1935, including three quarters of the latter year, explaining that he used this long period because of instability in the prices which prevailed during the depression. After considering numerous factors, such as the trend of logging costs and stumpage values, he concluded that the 15% ratio between lumber prices and stumpage rates was properly applicable at the time of the breach in 1935; and he then computed the prices which the timber would have brought if offered for sale at that time upon terms similar to those contained in the 1928 contract. These prices were $3.31 for pine and $2.62 for fir and larch. The difference between these and the base contract prices constituted his estimate of the depreciation in the fair market value of the timber.

It is conceded that the Lumber Company breached its contract and is liable to respond in damages if there were any; and the parties are not at variance in their interpretation of the phrase "depreciation in value" as contained in regulation 56. Appellants concede that the phrase has reference to damages, not to the mere physical deterioration of the timber. Questions on that score were set at rest in the cognate case of United States v. Harris, 100 F.2d 268, decided by this court.

1. It is first contended that the estimate of damages made under regulation 56 was not intended by the parties to be conclusive, and that if so intended, a provision of the sort is invalid under the Montana law.

In United States v. Harris, supra, a suit involving the same regulation, we held that the determination of damages under the direction of the Secretary of the Interior was a duty imposed by the terms of the contract and that it was to be presumed the duty was performed. Further, that the determination, when made, was binding in the absence of a showing of fraud or bad faith. The rule is applicable...