Rio Algom Corp. v. Jimco Ltd.

• Decision Date: 19 September 1980
• Docket Number: No. 16032,16032
• Citation: Rio Algom Corp. v. Jimco Ltd., 618 P.2d 497 (Utah 1980)
• Parties: RIO ALGOM CORPORATION, Plaintiff and Appellant, v. JIMCO LTD., Humeca Exploration Company, Jim L. Hudson, Juanita J. Meyer as Executrix of the Estate of Daniel H. Meyer, Eldon J. Card, Norma Hudson, Jean L. Card, Juanita J. Meyer, N. J. White, Audrey White, Wilma White, Otis Dibler, Dorothy Mae Dibler, Grace Davis, and Marlowe C. Smith, Defendants and Respondents.
• Court: Utah Supreme Court

Page 497

618 P.2d 497

RIO ALGOM CORPORATION, Plaintiff and Appellant, v.JIMCO LTD., Humeca Exploration Company, Jim L. HudsonJuanita J. Meyer as Executrix of the Estate of Daniel H Meyer, Eldon J. Card, Norma Hudson, Jean L. Card, Juanita J Meyer, N. J. White, Audrey White, Wilma White, Otis DiblerDorothy Mae Dibler, Grace Davis, and Marlowe C. Smith, Defendants and Respondents.

No. 16032.

Supreme Court of Utah.

Sept. 19, 1980.

James B. Lee and Kent W. Winterholler of Parsons, Behle & Latimer, Salt Lake City, for plaintiff and appellant.

Albert J. Colton and Anthony L. Rampton of Fabian & Clendenin, Clifford Ashton of VanCott, Bagley, Cornwall & McCarthy, and Clifford D. Vernon, Salt Lake City, William G. Waldeck, Grand Junction, Colo., for defendants and respondents.

STEWART, Justice:

The plaintiff, Rio Algom Corporation("Rio"), ¹ brought this action seeking a declaratory ruling as to the proper basis for computing and disbursing royalties payable by Rio as a lessee under lease agreements covering uranium producing properties in San Juan County, Utah.There are two groups of defendants: the Jimcos ² and Audreys.³The Jimcos counterclaimed against Rio and also cross-claimed against the Audreys.The Audreys cross-claimed against the Jimcos and counterclaimed against Rio, alleging breach of contract and seeking payment of royalties above the amount which Rio claimed to be due.

This appeal is taken by Rio from a district court order dated August 29, 1978, which ruled that a settlement agreement dated July 10, 1978, between the Audreys and the Jimcos was enforceable as to the royalty rate to be paid by Rio and that the agreement did not violate any contract duty owed to Rio by any of the defendants.The court dismissed with prejudice all additional claims by Rio against the Audrey defendants, the claims by the Audrey defendants against Rio and the Jimcos, and the claims by the Jimcos against the Audrey defendants.The court ordered Rio to pay to the Audreys that portion of the royalties to which the Audreys were entitled under the Audrey lease and the settlement stipulation.

In 1964 the Audreys leased uranium properties to the predecessors in interest of the Jimcos.This lease was later superseded by a new agreement between the Audreys and the Jimcos (the "Amended Audrey Lease," or "headlease") executed July 12, 1968, and back-dated to June 1, 1968.Prior to the execution of the amended Audrey lease, Rio acquired a 1/4 undivided interest in the subject properties.In addition, in an agreement dated June 3, 1968, the Jimcos granted to Rio an option to acquire Jimcos' rights and obligations as a lessee under the amended Audrey lease.Rio exercised the option June 18, 1968.In so doing Rio became not only the lessee of all the properties subject to the Audrey lease, but also one of the lessors under the headlease with a 1/4 undivided royalty interest.As consideration for Jimcos' assignment to Rio, Rio agreed to pay royalties to the Jimcos, in addition to the royalties payable under the amended Audrey lease to the Audreys.

The following diagram illustrates the various relationships among the parties:

--------------------------
                  AUDREYS, Co-owners of
                unpatented mineral claims,
                       (3/4 owner)
                     RIO (1/4 owner)
                --------------------------
                                            AMENDED AUDREY LEASE (Headlease)
                --------------------------
                          JIMCOS
                         (Lessee)
                --------------------------
                                            RIO-JIMCO ASSIGNMENT (Sometimes
                                            the "Option Agreement")
                --------------------------
                           RIO
                  Assignee of Leasehold
                 With Royalty Obligations
                   To Jimcos and Under
                      the Headlease
                --------------------------
                

Pursuant to the assignment of the leasehold interest from the Jimcos, Rio commenced the mining of uranium ore from the subject properties.Rio contracted to sell to Duke Power Company the beneficiated product U 3O 8, also referred to as uranium concentrate or "yellowcake."

The present dispute evolved from a potential conflict between the Audrey-Jimco headlease provisions for alternative methods for computing royalties under that lease and the royalty provisions in the Jimco-Rio lease.Basically, two alternative royalty formulas for determining the royalty to be paid by the Jimcos (or its assignee) were provided under the headlease.The first formula was based on the sales price or gross value of the product sold or used by Rio: 8% of the sales price if crude ore were sold, or 4% of the gross value of yellowcake if yellowcake were sold.The second formula was based on fair market value of crude ore.

The royalty provisions of the Amended Audrey lease are found in Paragraphs 3.1 and 3.2.Paragraph 3.1 provides:

(a) In the event Lessee shall mine or extract ore from the Audrey Group which is sold in its raw or crude form Lessee shall pay Lessors a royalty equal to eight per cent (8%) of the 'Sales Price'(as hereinafter defined) received by Lessee from the sale of all ores mined, produced and sold in the crude form from the Audrey Group ...

(b) In the event Lessee shall mine or extract ore from the Audrey Group and recover therefrom for sale or use in commercial quantities any of the minerals contained in such ore, and if the minerals so recovered shall be any uranium compound, Lessee shall pay to Lessors a royalty of four per cent (4%) of the 'Gross Value' of such compounds (as hereinafter defined)....

Paragraph 3.2 of the Audrey agreement provides the alternative basis for the computation of royalties.That provision allows the lessors to elect to have royalties computed on the basis of the fair market value of crude ore, regardless of whether uranium concentrate or crude ore was sold by Rio.That provision states:

Irrespective of the provisions set forth in paragraph 3.1 above, Lessors shall have the election and option to have royalties due them under the terms of this Lease calculated and paid upon the basis of eight percent (8%) of the fair market value at the mine portal of crude ore mined and produced from the Audrey Group....

Paragraph 3.2, which is critical in this dispute, also provides for an election by the lessors under the Audrey lease as to which royalty formula would be binding.That paragraph states:

... (I)n order to exercise such election Lessors must unanimously agree and notify Lessee in writing at least ninety (90) days prior to the commencement of any calendar year of their election to require royalties to be calculated and paid in such manner.After having given such notice, the election so made shall remain in force and effect for the next ensuing calendar year, and from year to year thereafter, unless the Lessors should unanimously agree to notify Lessee in writing of their revocation of said election, which notification must be given at least ninety (90) days prior to the commencement of a calendar year and shall become effective at the commencement of, and remain in effect during the ensuing calendar year, and from year to year thereafter, unless another such notification of election is given at the time and in the manner as specified above.

However, because of the assignment by the Jimcos to Rio, Rio was placed in a conflict of interest situation with the other lessors under the Audrey headlease as a result of its contractual right to receive one-fourth of the royalties earned under the Audrey lease and, at the same time, as a lessee with the obligation to pay the full amount of the royalties.Under these provisions, Rio's interest was to pay the smallest amount of royalties possible.To deal with that conflict of interest, Paragraph 21.3 of the amended Audrey lease excluded Rio from voting in an election for selection of a royalty formula under the headlease.Paragraph 21.3 states:

Rio Algom Corporation shall, by reason of its interest in this Lease as described in Section II hereof, be excluded from any vote or decision of the Lessors relating to royalties and requiring unanimity of the Lessors, as provided for in Section 3.2 hereof.The unanimous vote or decision of the remaining Lessors other than Rio Algom Corporation shall constitute unanimity for the purpose of the said Section 3.2.(Emphasis added.)

The Jimco assignment establishes royalties to be paid by Rio to the Jimcos and sets payment priorities as between the Audreys and the Jimcos.The Jimco assignment provides in Paragraph X that if uranium concentrate is sold, Rio, as assignee of that lease, is to pay "earned royalties" to royalty interest holders (i.e., the Audreys and Rio under the Audrey lease, and the Jimcos under the Jimco agreement) according to a schedule that provides for payments of between 8% and 15% of the average price per pound of U 3O 8.Once the dollar amount thereof has been calculated, Rio is to make payments according to the following priorities:

(i) first, to satisfy the royalty to the Lessors in the Head Lease (Audrey Lease) ... in its entirety ...

(ii) second, if a balance of Earned Royalty ... remains after payment of Lessors' royalties ... to pay in their entirety the Overriding Royalties ... (iii) third, if a balance of Earned Royalty ... remains after payment of the Lessors' royalties and Overriding Royalties ... to pay such balance to JIMCO.(Emphasis added).

The Jimco agreement also establishes a ceiling based on the sales price of U 3O 8 which operates to limit Rio's total obligations under the Audrey and Jimco agreements and gives payment priority to the obligation under the Audrey lease in case the ceiling is met.If the royalties paid under the Audrey lease were based on the value of yellowcake, the Jimcos would be assured of receiving some royalties; but if the royalties were based on a percentage of the ore value and that amount equaled or exceeded 15% of the yellowcake value, no royalties would be owed the Jimcos because of the ceiling provision in the Jimco agreement.As long as the Audreys...