Rhode Island Charities Trust v. Engelhard Corp.

• Decision Date: 08 August 2000
• Docket Number: C.A. No. 97-369L.
• Citation: 109 F.Supp.2d 66
• Parties: The RHODE ISLAND CHARITIES TRUST, Plaintiff, v. ENGELHARD CORPORATION, Defendant.
• Court: U.S. District Court — District of Rhode Island

109 F.Supp.2d 66

The RHODE ISLAND CHARITIES TRUST, Plaintiff, v. ENGELHARD CORPORATION, Defendant.

C.A. No. 97-369L.

United States District Court, D. Rhode Island.

August 8, 2000.

Michael P. DeFanti, Brent R. Canning, Hinckley, Allen & Snyder Providence, RI, for plaintiff.

Benjamin V. White, III, Vetter & White, Providence, RI, H. Jerome Strickland, Robert C. Norman, Jr., Jones, Cork & Miller, Macon, GA, for defendant.

OPINION AND ORDER

LAGUEUX, District Judge.

This matter is before the Court on cross motions for summary judgment. This is a breach of contract case and the parties ask this Court to delve into the realm of the implied covenant of good faith and fair dealing. Specifically, in this matter the Court is confronted with the vexing question of whether and to what extent a term should be implied into a well-negotiated contract by utilizing the implied covenant of good faith and fair dealing. In Count I of the Amended Complaint plaintiff, Rhode Island Charities Trust ("RICT"), asks this Court to interpret the contract and seeks a declaration that defendant Engelhard Corporation ("Engelhard") has violated the express terms of that agreement. In Count II, RICT alleges that even if the terms of the contract permit the action taken by Engelhard, such action is proscribed by the implied covenant of good faith and fair dealing. In Count III, plaintiff alleges that Engelhard's conduct constitutes a breach of fiduciary duty owed to plaintiff. Plaintiff, RICT has moved for partial summary judgment pursuant to Fed.R.Civ.P. 56(d) on Count II seeking a declaration that Engelhard has breached the covenant of good faith and fair dealing with respect to the performance of the contract governing the relationship between the parties. Defendant has moved for summary judgment on all three Counts set forth in the Amended Complaint. For the reasons set forth below, this Court denies Engelhard's motion for summary judgment on Count II but grants its motion for summary judgment on Count I and III. This Court also grants RICT's motion for partial summary judgment on Count II and makes a declaration as to the proper interpretation of the contract applying the implied covenant of good faith and fair dealing.

I. Background

The parties do not dispute the following recitation of the facts. In 1937, RICT was formed for purposes of distributing money grants for charitable causes. In 1948, RICT purchased Southern Clays, Inc., a kaolin mining and processing company located in middle Georgia. Kaolin is a clay utilized in many industries, but the principal use of the type of clay mined and processed by Southern Clays was in the paper industry.

In 1963, RICT sold the assets of Southern Clays to Freeport Sulphur Company. At the time, the assets consisted of a modern processing plant, mining equipment, a laboratory and certain clay lands either owned by Southern Clays or on which it held long-term mineral leases. In addition to the asset sale pursuant to an Asset Purchase Agreement, Southern Clays and Freeport entered into a ninety-nine year Indenture, whereby Southern Clays leased and assigned to Freeport its right to mine the clay on lands it owned (the "Fee Properties") and on land which it held the right to mine through various leases (the "Leased Properties") in exchange for royalties. The Indenture involved a ninety-nine year lease of twenty-three Fee Properties, and an assignment of sixteen Leased Properties, with termination dates ranging from 1967 to 2023. See Indenture, §§ 22,23 and Defendant's Ex. E. The leases at the heart of this case, Nos. 5, 6, 7 and 8, as described in paragraph 23 of the Indenture (collectively, the "Veal leases"), all had termination dates of March 23, 1995. Southern Clays then dissolved and RICT succeeded to all of its rights under the Indenture.

Pursuant to the Indenture, RICT received a one and one-half percent (1.5%) royalty on the sale of the clay and clay products. In 1985, Engelhard acquired Freeport and became successor in interest, as Lessee, under the Indenture.

The provisions of the Indenture detailing the calculation of the royalties payable to RICT by Engelhard are as follows:

5. Royalties

(a) [Engelhard] agrees to pay [RICT] for each Royalty Period on (i) processed clay ... (ii) unprocessed clay and — (iii) "mixed products" ... sold in such Royalty Period ... as hereinafter provided in clauses (i), (ii) and (iii) (i) A royalty equal to one and one-half percent (1.5%) of [Engelhard's] Net Receipts from sales in such Royalty Period of each kind of process clay ... processed mineral ... and each kind of unprocessed mineral ... derived from the Properties.

(ii) ... (1.5%) of the Net Receipts that would have been received by [Engelhard] in such Royalty Period if a number of tons of processed clay which could have been produced from the number of tons derived from the Properties of each kind of unprocessed clay sold in such Royalty Period.

See Indenture, § 5(a). The Indenture defines Properties as "all of the Fee Properties and Leased Properties collectively." Indenture, § 1(a).

Of critical importance to this case is the fact that the Indenture permits Engelhard to deduct from the one and one-half percent (1.5%) royalty any real estate taxes on the Fee Properties and, as to the Leased Properties any advance royalties and production royalties payable to the landowners. See Indenture, § 7(a)-(c). In subparagraph 7(a) of the Indenture, Engelhard, agrees to pay "(i) all real estate taxes imposed on or assessed against the fee properties," and "(ii) all payments (other than royalties based on production, provision for which is made in subparagraph (c) of this Paragraph 7) which the person named as lessee thereunder is required to make under the Leases." Subparagraph 7(b) allows Engelhard to deduct the payments made under 7(a) from the aggregate royalties otherwise payable to RICT pursuant to the Indenture. Finally, subparagraph 7(c) permits Engelhard to credit and deduct from the royalties owed to RICT any production royalties payable to the landowners of the various Leases.

The deduction provisions of paragraph 7 read as follows:

(b) The aggregate amount of all payments made or payable by [Engelhard] for all Royalty Periods within any calendar year pursuant to subparagraph (a) of this Paragraph 7 shall be deducted from the aggregate royalties payable by [Engelhard] for such Royalty Periods pursuant to Paragraph 5 hereof.

(c) [Engelhard] also agrees to pay to the person entitled thereto all royalties based on production required to be paid under the Leases only so long as [Engelhard] remains an assignee thereof; provided, however, that [Engelhard] shall be entitled to a credit for any amounts paid or payable by it pursuant to this subparagraph (c) against royalties thereafter payable to [RICT] under the provisions of Paragraph 5 of this Agreement.

Indenture, §§ 7(b)-(c), Pl.'s Ex.A (emphasis added). As is evident from the plain language of the contract, all payments, except for production royalties on the Leased Properties, made by Engelhard relating to the Properties may be deducted from the aggregate royalties payable to RICT. In contrast, deductions for production royalty payments made to the landowners of the Leased Properties are dealt with in a separate deduction provision which does not contain the word "aggregate."

At the time the Indenture was entered into in 1963, with a few exceptions, the Lease durations were substantial and the Veal leases at issue in this case had upwards of 30 to 35 years to run. Production royalty obligations to landowners were between $0.10 and $0.20 per cubic yard. Although mining on the Leased Properties would have been profitable to RICT at then current prices, there was limited mining on these properties at that time. In the 1980s, however, mining began, and during the period of May, 1981 to May, 1995, RICT earned income from royalties which ranged between $500,000 to $1,100,000 per year. See Plaintiff's Ex. H.

Among the assigned leases in the Indenture, and the leases at issue in this case, were leases with the Veal families. The Veal leases were 50-year leases that dated back to the 1930s. They were renegotiated in 1945 and 1970 and, as a result, would have expired in 1995. Under the original leases, the production royalties payable to the Veals were $0.11 per cubic yard of mined clay. In the 1980s the Veals demanded more money and threatened litigation. For that reason and others that are not relevant, the Veal properties were not mined in the 1960s and 1970s.

Although Engelhard was uncertain of what it would do about the Veal leases in the mid 1980s, it was well aware that the Indenture did permit, with limited restrictions, renegotiation of the assigned Leases. The pertinent provision of the Indenture reads as follows:

(e) It is expressly understood that [Engelhard] shall, without obtaining the consent of [RICT] (or any transferee or the Bank provided in Paragraph 8 hereof), be entitled to enter into any agreement to alter, modify (aside from complete termination), renew or extend any and all Leases and enter into new or additional leases or agreements with respect to any Leased Properties covered thereby, to such extent as [Engelhard] may deem desirable, provided, however, that [Engelhard] shall not make any alteration or modification of any Lease or other arrangement in connection with such Lease (other than alterations, modifications or arrangements contemplated by the terms of the Leases now in effect or which would result by reason of the provisions of any Lease now in effect from the exercise of any option contained therein) which with respect to the period prior to the normal termination date of such Lease would increase any fixed costs to be paid by [Engelhard] thereunder or would increase the amount of royalties payable by [Engelhard] thereunder with respect to any minerals, ores or substances permitted to be mined by...