R & R Energies v. Mother Earth Industries, Inc.

• Decision Date: 28 March 1997
• Docket Number: No. 950056,950056
• Citation: 936 P.2d 1068
• Parties: 313 Utah Adv. Rep. 33 R & R ENERGIES, a Utah corporation, Plaintiff and Appellant, v. MOTHER EARTH INDUSTRIES, INC., a corporation, Defendant and Appellee.
• Court: Utah Supreme Court

Page 1068

936 P.2d 1068

313 Utah Adv. Rep. 33

R & R ENERGIES, a Utah corporation, Plaintiff and Appellant, v. MOTHER EARTH INDUSTRIES, INC., a corporation, Defendant and Appellee.

No. 950056.

Supreme Court of Utah.

March 28, 1997.

Rehearing Denied April 29, 1997.

Raymond N. Malouf, Logan, for plaintiff and appellant.

Jack L. Schoenhals, Salt Lake City, for defendant and appellee.

HOWE, Justice:

Plaintiff R & R Energies, Inc. ("R & R"), appeals from a final judgment by the trial court in favor of defendant Mother Earth Industries, Inc. ("MEI"), dismissing R & R's complaint and granting MEI attorney fees. R & R assails a protective order granted by the trial court that prohibited R & R from conducting certain discovery and an order denying R & R's motion to amend its complaint. R & R seeks reversal of the protective order and the award of attorney fees and asks that it be allowed to amend its complaint and that judgment as a matter of law be entered in its favor or, in the alternative, that the case be remanded for trial.

FACTS

R & R filed this action to enforce the terms of a settlement agreement it entered into with MEI in 1982 that resolved a suit between them then pending in federal district court. The federal suit arose from a dispute surrounding certain geothermal energy fields near Cove Fort, Utah. MEI had attempted to develop the fields into a viable source of geothermal energy that could be used in the production of electricity at the same time that R & R was attempting to construct an ethanol plant on the fields. Because R & R claimed that MEI had interfered with its endeavors to build the ethanol plant, it filed suit for damages.

The six-page settlement agreement that terminated the federal suit, dated June 16, 1982, required that MEI pay 0.5 percent of its "gross geothermal energy sales revenue," minus federal royalty payments, to R & R and a higher percentage from a specific well called "Well 42-7." After the settlement, MEI negotiated a preliminary power purchase agreement with Provo City. On the strength of this agreement, MEI began drilling wells in an attempt to tap into the geothermal energy. In 1983, MEI located a Cove Creek's plant began producing in 1985. Cove Creek leased the geothermal resource from MEI, converted the geothermal energy into electricity, and sold the electricity produced to Provo City. Cove Creek paid MEI a steam fee of $0.015 per kilowatt hour ("kWh"). Pursuant to its interpretation of the settlement agreement, MEI deducted the federal royalty and then paid 0.5 percent ¹ of the remainder to R & R.

viable geothermal energy source and by 1984 had completed two producing geothermal wells. Thereafter, Cove Creek Geothermal ("Cove Creek") was created by the president of MEI, Wayne A. Portanova, and his brother-in-law, Thomas Canada, and Cove Creek constructed an electrical generating facility adjacent to the geothermal property.

The federal government values geothermal energy for purposes of calculating its royalty in several ways. If the steam is sold in an arm's-length transaction, the contract price is considered to be the actual value and the royalty is calculated on that amount. See Subpart H--Geothermal Resources, 30 C.F.R. § 206.352(b)(1)(i) (1996). If it is not sold in an arm's-length transaction, the federal government will look to other steam contracts with the same power plant or use the "netback procedure." 30 C.F.R. § 206.352(c)(1)(i), (ii) (1996). The netback procedure is a formula that begins with revenues from the electricity produced, a figure called "gross revenues," and then deducts all reasonable actual costs, including return on investment, to approximate the market value of the steam. 30 C.F.R. § 206.352(d)(1)(ii) (1996). MEI originally paid its 10 percent royalty on the actual sales price charged Cove Creek by MEI. However, after the Minerals Management Service ("MMS"), the branch of the Bureau of Land Management that actually administers the leases, determined that the sale of steam to Cove Creek was not arm's-length, MEI began paying its royalty pursuant to the netback procedure. ²

In 1987, R & R filed this suit in the trial court, claiming that (1) MEI received $.032/kWh in addition to its steam fee as a "capacity charge" that should be considered "gross geothermal energy sales revenues"; (2) MEI had received a $1 million development fee from Provo City that should be included as well; and (3) Well 42-7 was being used as a reinjection well, which entitled R & R to compensation pursuant to the settlement agreement. Additionally, R & R sought interest and attorney fees. ³ After filing its complaint, R & R developed and argued to the court on numerous occasions its claim that the settlement agreement entitled R & R to 0.5 percent of the revenues from electricity sold by Cove Creek to Provo City, although it did not amend its complaint to reflect this new theory.

During discovery, R & R served interrogatories on Provo City seeking information that MEI considered irrelevant and proprietary concerning the exact location of the wells, and their records, such as "down-hole logs," temperature gradients, pressures, temperatures, and flow rates. In response, MEI filed, and the trial court granted, a motion for a protective order prohibiting R & R from seeking or obtaining such information. R & R later moved to amend its complaint to add additional parties and claims. The trial court denied the motion.

Hoping to resolve the case without a trial, MEI moved for summary judgment. ⁴ However, because R & R contended that the term "gross geothermal energy sales" had a specialized MEI then filed a second motion for summary judgment, which incorporated its prior motion for partial summary judgment, seeking judgment in its favor as well as attorney fees. The trial court granted the motion, holding that the settlement agreement did not entitle R & R to any payments for the sale of electricity to Provo or the use of Well 42-7, and granted MEI attorney fees. The court expressly reserved the issues of the amount of payments due by MEI to R & R under its interpretation of the settlement agreement and the amount of attorney fees to be awarded to MEI. To resolve those issues, the trial court ordered that MEI file a disclosure of payments due R & R, which MEI did. After R & R objected to the disclosure filed, MEI served "Requests for Admissions, Interrogatories, and Requests for the Production of Documents" on R & R, requiring that R & R either admit the accuracy of MEI's disclosure or demonstrate its inaccuracy. R & R did not respond until ordered by the court. Even then, rather than addressing MEI's request, R & R's response continued to argue against the trial court's earlier ruling that "gross geothermal energy" did not include electricity, and concluded with a list of "lies," numbered one through ten, that MEI had allegedly told the court. Basing its decision in part on R & R's lack of response and in part on MEI's supporting documents, which included detailed accounting and business records and an affidavit from Portanova, which demonstrated that MEI's figures were prepared in the ordinary course of business and constituted the documents used to pay the federal royalties, the court ruled that MEI's accounting of the amount due was correct. It also ordered that plaintiff pay $63,301 in attorney fees and subsequently ordered plaintiff's counsel, Raymond Malouf, to pay $3,500 of those fees because of his "dilatory tactics and for filing pleadings that were not relevant or productive in the production of the case." A final judgment and order to that effect was thereafter entered, from which R & R appeals.

meaning within the industry, the trial court stayed decision on the summary judgment motion and scheduled a "minitrial" limited to determining whether the term indeed had a specialized meaning. After hearing testimony from experts on both sides, the court ruled that the term did not have a specialized meaning and that, due to its plain and unambiguous language, the settlement agreement did not require MEI to pay a percentage of the revenues received from Provo City for the sale of electricity to R & R.

R & R contends that (1) the trial court erred in ruling that the term "gross geothermal energy sales" is unambiguous and does not include proceeds from the sale of electricity by Cove Creek to Provo City; (2) the trial court erred in granting summary judgment on the issue of whether Well 42-7 was "producing"; (3) the trial court erred in entering a protective order prohibiting R & R from obtaining certain information from Provo City; (4) the trial court erred in refusing to allow R & R to amend its complaint to join additional parties and allege fraud; and (5) the trial court erred in awarding attorney fees to defendant and making plaintiff's counsel personally liable for a portion of them.

ANALYSIS

A. Interpretation of the Settlement Agreement

The settlement agreement provides that "MEI shall pay to R & R one-half of one percent (0.5%) of the gross geothermal energy sales revenues received by MEI after deductions of amounts paid as federal royalty payments from the geothermal field owned by MEI." After the minitrial, in which four experts testified, the court found that "the term 'geothermal energy' is understood in the industry to mean the natural heat of the earth which can be extracted in the form of hot water and/or water vapor and/or [sic] both." ⁵ The trial court further concluded "The gross geothermal energy sales revenues received, shall therefore be only those revenues received by Defendant from the sale of the geothermal energy, and do not include revenues received from products produced by virtue of the utilization of the geothermal energy." On the basis of its ruling that no specialized meaning existed, the court concluded that the agreement was unambiguous and granted summary judgment in favor of MEI, reserving the issues of the amount...