NO. 93-071

IN THE SUPREME COURT OF THE STATE OF MONTANA

1993

CONSOLIDATED MINERALS CORPORATION,

a Montana corporation: and ROBERT

DECKER, SR., an individual,

Plaintiffs and Respondents,

V. i

MADISON GOLD MINES, INC., a Montana

corporation; and JEFFERSON MINING

LIMITED, a Montana corporation,

Defendants and Appellants.

APPEAL FROM: District Court of the Fifth Judicial District,

In and for the County of Madison,

The Honorable Frank M. Davis, Judge presiding.

COUNSEL OF RECORD:

For Appellants:

Gregory A. Jackson, Jackson & Rice,

Helena, Montana

For Respondents:

Mark David Hoffman, Jones, Hoffman & Suenram,

Virginia City, Montana

Filed:

Submitted on Briefs: November 10, 1993

Decided: December 22, 1993
Justice Terry N. Trieweiler delivered the opinion of the Court.

Consolidated Minerals Corporation and Robert Decker, Sr.,

filed a complaint in the District Court for the Fifth Judicial

District in Madison County against Madison Gold Mines, Inc., and

Jefferson Mining Limited, in which they sought payment of royalties

and damages for an alleged breach of a lease agreement. Madison

Gold Mines and Jefferson Mining responded by filing a complaint

against Consolidated Minerals and Decker in which they sought

specific performance of the lease agreement, damages, and a

temporary restraining order. The two cases were consolidated and

a nonjury trial was held on June 30, 1992. In its judgment entered

in favor of Consolidated Minerals and Decker, the court terminated

the lease agreement between the parties and dismissed the complaint

filed by Madison Gold Mines and Jefferson Mining. Madison Gold

Mines and Jefferson Mining appeal.

We reverse and remand with instructions.

The issues on appeal are restated as follows:

1 . Did the District Court err when it found that Madison

Gold Mines and Jefferson Mining were in default of the lease

agreement?

2 . Did the District Court err when, based on its findings of

default, it terminated the lease agreement and failed to

specifically enforce the default clause of the agreement?

Robert Decker, whose family corporation, Consolidated Minerals

Corporation (CMC), owns the Freida Marie mine near Silver Star,

Montana, became acquainted with William Cooper and Kevin Pierce in

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1986 when they were all employed by Atlantic-LeaCo, a now defunct

mining company. After Atlantic-LeaCo ceased business, Decker,

Cooper, and Pierce decided to undertake their own mining venture.

Those three individuals, along with Jerry Lorbeck, who

financed the parties' mining operation, formed two corporations--

Madison Gold Mines (MGM) and Jefferson Mining (JM). The intent was

that JM would own the equipment, and MGM would own the property

involved in their mining venture. The two corporations had

interlocking officers and boards of directors. Decker held the

positions of executive vice president and board member of both

corporations. Additionally, Decker was a director and president of

CMC.

The parties began mining Decker's Freida Marie mine in late

1986 with the hope of striking ore in order to generate cash flow

for the two corporations. Several other individuals worked at the

mine site without pay, providing labor, services, equipment, and

materials, with the understanding that if the mine developed and

was profitable, they would share in the profits. Although the

parties discussed having CMC lease the Freida Marie mine to MGM, no

agreement had been entered into at the time they struck what was

thought to be a valuable vein of gold on April 18, 1987.

Approximately six tons of ore were hauled out of the mine that day

and were stockpiled at the mine site.

Two days later, on April 20, 1987, the parties entered into a

formal lease for the Freida Marie mine site. The written agreement

was based upon a form lease previously drafted for Decker and

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utilized by him in other dealings. Although there is conflicting

testimony regarding whether changes were made in the form provided

by Decker and typed by Cooper, none of the parties have contested

the validity or content of the executed agreement in their

complaints.

Because the complaints filed by both parties involve alleged

defaults or breaches of the lease agreement, the key provisions of

the agreement will be summarized. The agreement states that the

lease was entered into for the purpose of "exploring and

prospecting for, developing and mining . . . minerals of all kinds"

from the Freida Marie site "continuing for such time as deemed

profitable by Lessee or until terminated as provided herein." A

work commitment provision was included which states that "[lIessee

[MGM] agrees to expend at least Fifty Thousand dollars ($50,000) on

exploration and development work within the first Ten (10) years of

this Lease."

Paragraph 3 of the lease requires MGM to pay a minimum royalty

to CMC and Decker as follows:

When oroduction is commenced, reoardless of the

amount of production, Lessee shall pay to Lessors a

minimum monthly royalty payable on the first day of each

calendar month following the commencement of production

of the value of l/4 ounce of Au. [gold] per month at that

time, during the Lease term, unless this Agreement is

terminated as hereinafter provided . . . . [Emphasis

added].

Paragraph 4 requires additional royalty payments "upon all

minerals and values mined, produced, saved, sold, in whatever form

. . . as a percentage of the net smelter return (NSR). NSR is

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defined as the amount of revenue payable to MGM by any smelter or

other purchaser of concentrates, ores, minerals, metals, or

by-products mined or produced from the Freida Marie.

The other provisions which are relevant to this appeal are

Paragraphs 13 and 14, which address termination of the lease and

default. Paragraph 13 allows MGM to terminate the lease at any

time after five years from the date of the lease, upon ten days

notice to CMC. Paragraph 14 provides for termination of the lease

by CMC upon a default and failure to cure by MGM. In relevant

part, it states as follows:

The failure of Lessee to keep or perform any

obligations on its part to be kept or performed according

to the terms and provisions hereof shall, at the election

of Lessors, constitute a breach of this Agreement, unless

such default be cured as hereinafter provided. . . .

Lessee shall have a reasonable time, which, if the

specified default involved only the payment of money,

shall be not more than thirty (30) days, and which, in

any other case, shall be not more than ninety (90) days,

after receipt of such notice within which such specified

default or defaults may be cured. If such default or

defaults are cured, there shall be no breach hereunder

with respect to such default or defaults. . . .

If Lessee shall dispute that a default has occurred,

it shall so advise Lessors . . . and the question shall

be determined in a court of competent jurisdiction. If

decision of the court shall be that Lessee was z

default, then it shall have the reasonable time aforesaid

after said decision within which to cure the default or

defaults before Lessors mav terminate this Asreement in

the manner aforesaid, and if such default or defaults be

cured, there shall be no breach hereunder with resoect to

the same. [Emphasis added].

Finally, the agreement contains an integration clause which

states that it encompasses the parties' entire agreement and

understanding, including all prior negotiations and dealings, and

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cannot be varied by oral or parol evidence. Furthermore, it states

that any modifications to the agreement must be in writing.

After the ore was discovered and the lease signed, the parties

ceased mining activities and began construction of a millsite which

was to be used for milling the ore removed from the Freida Marie

mine. MGM and JM allege that this decision was a joint decision

made by Decker, Cooper, Pierce, and Lorbeck, and that Decker was

actively involved in the day-to-day activities and decisions of the

two corporations. However, Decker claims that the decision to

cease mining while the millsite was under construction was made

over his objection. Nonetheless, the only activities that appear

to have taken place after the lease was signed, other than the

construction of the millsite, were Decker's removal of another five

to seven tons of ore from the mine, the transportation of the

stockpiled ore to the millsite, and the initial processing of some

of the ore by running it through a trommel.

Several months later, the parties apparently ran out of the

money needed to complete the millsite. On November 5, 1987, Decker

sent a notice of default to MGM. Specifically, he claimed that MGM

had failed to pay the minimum royalty which was due once production

was commenced, it had failed to pay royalties on all minerals and

values mined, and it had failed to comply with the work commitment

provision of the lease. Decker then resigned as an officer and

director of MGM and JM on November 25, 1987. The parties do not

dispute that MGM objected to the notice of default in a timely

manner pursuant to the terms of the lease. Decker then retook

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possession of the Freida Marie in February 1988 and locked it in

order to deny MGM access to the leased property.

Thereafter, Decker and CMC filed a complaint in the District

Court in June 1988, alleging that MGM and JM had defaulted on the

lease agreement. The complaint stated that MGM had failed to pay

the required royalties and had "failed to perform in that it did

not continue production of the minerals." Decker also sought

damages for the corporations' failure to pay him for his services

as a professional consultant, and for the unpaid rent on equipment

which was in the corporations' possession. The complaint also

requested reasonable attorney fees and costs.

In July 1988, MGM filed a complaint against CMC seeking

specific performance of the lease agreement and possession of the

leased property. It also sought an accounting from CMC for any

minerals removed from the Freida Marie, damages incurred due to

CMC's possession of the mine, a temporary restraining order, and

attorney fees and costs. A hearing was held on August 2, 1988, in

response to this complaint but no intermediate relief was granted.

The two causes were consolidated and a nonjury trial was held

on June 30, 1992. In findings of fact and conclusions of law

issued on November 24, 1992, the court found that the parties had

entered into a valid lease agreement. The provisions of the lease

were incorporated into the findings. The court also found, in

relevant part, the following:

8 . Both before and following the formal lease, the

various entities and individuals conducted mining and

milling operations. Ore was removed and stockpiled,

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perhaps as much as 25 tons. Whether any was ever

delivered to a smelter is not clear, probably not. What

is certain is that the lessee [MGM] paid no royalty

minimum, general or other.

9 . In addition to its failure to pay royalties as

provided in paragraph 4 of the lease, MGM defaulted in

the lease and related agreements. It failed to make

agreed investments: it failed to issue its corporate

stock to anyone: it failed to continue production at

least from June of 1987.

Based on these findings, the court concluded that Decker and

CMC were entitled to judgment against MGM and JM. However, rather

than award damages to Decker and CMC, the court terminated the

April 20, 1987, lease agreement and quieted title to the leased

property, all mining equipment owned or furnished by Decker or CMC,

and the ore which was stockpiled on the leased property or the

millsite. Neither party was awarded damages, attorney fees and

costs, or other relief. Additionally, the complaint filed by MGM

and JM seeking specific performance of the lease was dismissed.

The court's rationale for fashioning this type of equitable remedy

was to "restore the parties to their respective positions before

the advent of this ill-advised, mining dream."

From this judgment, MGM and JM appeal.

Did the District Court err when it found that Madison Gold

Mines and Jefferson Mining were in default of the lease agreement?

There is no dispute that the parties voluntarily entered into

an enforceable agreement and the validity of this agreement was not

challenged on appeal. However, after reviewing the contract's

provisions and considering the evidence, the District Court found

8
that MGM and JM were in default of the lease agreement in four

specific ways.

Appellants MGM and JM contend that the court's findings in

this regard are clearly erroneous. They assert that they were not

in default of the agreement with regard to royalty payments because

production had not yet commenced. Furthermore, they had ten years

to make the agreed investments, and the notice of default had been

issued only six and one-half months after the lease was signed.

Finally, they contend that the lease agreement did not contain

provisions regarding issuance of stock or an obligation to

"continue production."

This Court will affirm the findings of a trial court sitting

without a jury unless the findings are clearly erroneous. Rule

52 (a), M.R.Civ.P. In Interstate Production Credit V. DeSaye ( 199 1) , 250 Mont.

320, 323, 820 P.2d 1285, 1287, we adopted a three-part test to

determine if the findings are clearly erroneous in a nonjury case:

A finding is clearly erroneous if it is not supported by

substantial credible evidence, if the court misapprehended the

effect of the evidence, or, if after review of the record, this

Court is left with a definite and firm conviction that a mistake

has been committed.

After a careful review of the record and the provisions of the

lease agreement, we conclude that the District Court's findings of

default by MGM and JM were clearly erroneous because they were not

supported by substantial credible evidence.

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First, the court found that MGM and JM failed to pay royalties

as provided in paragraph 4 of the lease. There is no dispute that

no royalties were paid to CMC and Decker. However, it is not clear

whether royalty payments were due. Paragraph 3 of the lease

requires monthly royalty payments "[w]hen production is commenced,

regardless of the amount of production." It is not clear from the

face of the contract what constitutes "commencement of production"

and the court did not make any findings in this regard.

The parties generally agree that the only activities which

took place after the lease was signed were the transportation and

stockpiling of the ore at the millsite, and partial construction of

the millsite. Additionally, Decker testified that he removed

another five to seven tons of ore from the Freida Marie after

April 20, 1987. The record also demonstrates that some of the ore

that was transported to the millsite was initially processed by

running it through a trommel.

The obligation for MGM to pay royalties is dependent on

whether production had commenced. However, it is unclear whether

the additional mining by Decker, at that time acting on behalf of

MGM and JM, and the transportation, stockpiling, and partial

processing of the ore constituted "commencement of production."

Because a finding of default for failure to pay the minimum royalty

depends on whether production had commenced, we conclude that there

was no factual basis for the court's finding that minimum royalty

payments were due. We reverse and vacate this portion of the

judgment and remand for a determination, based on the evidence in

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the record, of whether production had "commenced" and whether MGM

and JM were, therefore, obligated to pay minimum royalties to

Decker and CMC.

Also in regard to royalties, the court found that MGM and JM

were in default because they had not made general royalty payments

pursuant to Paragraph 4 of the lease. This section requires

payment of royalties "as a percentage of the net smelter return"

based on payments to MGM by purchasers of any products mined from

the Freida Marie mine. The court found that ore had "probably not"

been transported to a smelter. Furthermore, there is no evidence

in the record demonstrating that any products from the Freida Marie

were actually sold to a smelter or other purchaser. Therefore, we

conclude that there was not substantial evidence to support a

finding that general royalty payments were due.

The court's second finding of default was that MGM and JM had

failed to make the investments required by the lease agreement.

The work commitment provision of the lease requires MGM and JM to

expend at least $50,000 within the first ten years of the lease.

Although there was conflicting testimony regarding this clause and

whether the parties had discussed requiring an investment of

$50,000 within the first year of the agreement rather than in ten

years, there is no evidence that the lease had been effectively

modified through a written modification to the agreement.

Furthermore, the validity of this provision was not challenged and

there was no evidence of grounds for invalidating this provision.

Therefore, because ten years had not elapsed, we conclude that the

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court's finding of default in this respect is not supported by the

evidence and is clearly erroneous.

Third, the court found that MGM and JM were in default of

"other agreements" because of their failure to issue corporate

stock. The lease agreement, however, includes no provisions

regarding the issuance of stock. Although several of the parties

testified that this was the original intent, both the original

notice of default and the complaint filed by CMC and Decker were

based on allegations of default of the lease agreement. The

failure to issue stock, even if separately agreed upon, cannot

serve as a basis for default under the lease. Therefore, we

conclude that the court erred when it found that MGM and JM were in

default for failing to issue stock.

Finally, the court based a finding of default on MGM's failure

"to continue produCtiOn at least from June of 1987.l' The lease

provides that the agreement was entered into for the purpose of

exploring, developing, and mining the Freida Marie. However, there

are no specific provisions which discuss when production must be

commenced or if there is an obligation to continue mining

operations after signing the lease.

As already noted, the work commitment clause allows ten years

for the lessees to expend $50,000. Decker contends that the

failure of MGM to continue actively mining the Freida Marie was

contradictory to the purpose of entering into the lease and that

his expectation when he agreed to lease the property was that

mining would continue and royalties would be paid in exchange for

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the indefinite leasing of this property to MGM. Decker contends it

is unreasonable to believe that he and CMC would agree to a lease

where the lessees could potentially "sit on the property for ten

years without doing anything."

Other than stating that MGM failed to continue production, the

court made no specific findings to justify this statement.

Therefore, we conclude that there is insufficient evidence to

support the court's finding of default in this regard. However,

because the stated purpose of the lease was for the exploration,

development, and mining of the Freida Marie mine, a determination

of whether there was an implied obligation to actively continue

this venture is necessary. Therefore, we remand for a

determination by the court of whether, in good faith, MGM and JM

were obligated to commence and continue "exploring, developing, and

mining" the Freida Marie mine and whether their failure to do so

constituted a breach of the lease agreement.

II.

Did the District Court err when, based on its findings of

default, it terminated the lease agreement and failed to

specifically enforce the default clause of the agreement?

Although we have reversed and vacated the judgment of the

court, we will address this issue briefly for the guidance of the

District Court on remand.

Decker and CMC contend that when the court found MGM and JM to

be in default of the lease agreement, it impliedly found that this

breach of the agreement was a material breach which justified

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terminating the contract. MGM and JM, however, assert that even if

they were in default, they should have been allowed the opportunity

to cure as specifically provided for in Paragraph 14 of the lease.

Paragraph 14 provides that if the lessee disputes that a

default has occurred, it shall advise the lessor of the dispute and

the question will then be determined in a court of competent

jurisdiction. It is undisputed that MGM and JM properly objected

to Decker's notice of default. The lease then provides that if the

court determines that the lessee is in default, there shall be a

reasonable time to cure the default. If the default involves the

payment of money, the lease requires that it be cured within

30 days, and in any other case, the default shall be cured within

90 days from the time the court'finds a default to have occurred.

The provisions of the contract regarding default and the

opportunity to cure are clearly set forth. When a contract is

clear and unambiguous, it is a court's duty to enforce the contract

as made by the parties. Lanev.Smith (1992), 255 Mont. 218, 841 P.2d

1143; KeIlerv.Dooling (1991), 248 Mont. 535, 813 P.2d 437.

We conclude that the court erred when it terminated the

contract rather than enforcing the default provisions and allowing

MGM and JM the opportunity to cure. Although the court fashioned

what it believed was an equitable remedy, the parties had entered

into a valid, enforceable contract, and the court was obligated to

enforce this contract.

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Therefore, on remand, if the court determines that MGM and JM

are in default of the lease agreement, the lease agreement's

provisions should be enforced and the court should allow MGM and JM

the opportunity to cure as provided for in Paragraph 14 of the

lease.

The judgment of the District Court, with respect to its

findings of default and termination of the lease agreement, is

reversed and vacated, and this matter is remanded for further

proceedings consistent with this opinion.

We concur:

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