Opinion ID: 1154750
Heading Depth: 4
Heading Rank: 1

Heading: The Central Farmers Agreement.

Text: Plaintiffs theorize that the sales agreement between National and Central Farmers was unreasonably beneficial to Central Farmers and unduly burdensome to National. They contend that the favorable terms for Central Farmers were the result of a less than arms-length relation between the two corporations. The argument is that if National had sold its product on the open market during the period in which it was obligated by the Central Farmers contracts, it would have shown a profit and would have been able to pay royalties to the plaintiffs. The plaintiffs were aware of these facts, however, many years before 1976, which was the inception of the six-year period on the contract claim provided by the statute of limitations. The record indicates that National made no effort to conceal from the plaintiffs its 1958 contract with Central Farmers. In fact, two weeks after the sales agreement was executed, Continental learned about it. McGreevy expressed his opinion that the sales agreement was not in the normal course of business and might adversely affect National's profits, which in turn could prejudice the royalty holders' interests. The royalty holders complained about the royalty arrangement and sought to amend the contract. In the same month, Wells, an agent of National, answered McGreevy and refused to amend the agreement, stating that the royalty holders are in the position of sharing not only the profits from mining but also the risk ... [and that] mining on these leases has resulted in very substantial losses to this company since February 1957, when ore was first mined on them ... [which] have been a direct result of the vastly inferior quality of the ore found on these leases compared to other ore presently being mined on a commercial basis in the Carlsbad area. In a letter dated April 4, 1960, McGreevy complained to his lawyer about the Central Farmers contract: In addition it seems to me it is a major item in this situation that [Freeport] sold half their stock in National Potash to a cooperative which means their profits will not be handled on a normal corporation basis and since our royalties are related to the profit, they may have by that action prejudiced our future position.       I am wondering if we could go into court and reconstrue [sic] the whole situation in such a way as to protect our equitable position in that we might be entitled to a fair royalty on a basis of tonnage mined. If we don't do something like that, I am very doubtful as to whether our stockholders will have any kind of a proper recovery for their investment and for their position in this matter. [Emphasis added.] In November 1960, McGreevy again complained to Wells specifically about the contract with Central Farmers. McGreevy wrote another letter to Wells in January 1962 complaining about the same thing. In the January 1962 letter, the plaintiffs again expressed detailed concerns about the Central Farmers arrangement, the discretion to operate the mine that was granted to the defendants under the agreements, and the alleged accounting inequities. The letter states in part: [W]e made some legal investigation ... and we have not gone to great expense to employ accountants to exhaustively study this situation or attorneys to explore it fully, but we did develop some rather strong and persuasive decisions of law ... that the operator must conduct his operations in such a way as to be fully fair and equitable to the royalty owner....       We think that your operations have been without proper regard to our position ... and that we have enforceable rights to correct this situation.... [W]e feel very strongly that under the fiduciary relationship that exists between National Potash and [the royalty interest holders], the former has not only failed to protect the interests of the latter but has subordinated them to what has most suited your company with resultant prejudice to the [royalty interest holders]. This certainly could never have been the purpose of our agreement. Wells answered in March 1962 and vigorously defended National, advising McGreevy in no uncertain terms that National was not going to renegotiate the contracts or pay a settlement to the royalty holders. By letter of March 1962, the defendants responded in detail to each ground that the plaintiffs addressed, in particular the history of the Lea County mine, the lack of profits, and the reasons for the long-term contract with Central Farmers. Moreover, in a 1963 letter to the plaintiffs, their attorney summarize[d] the exchange of correspondence and arguments with National Potash Company and suggested a response. In 1963, one of the royalty interest holders, in summarizing his conversation with one of the defendants' agents, stated: the question of a law suit has in fact been mentioned from time to time in discussion among the [royalty interest holders], but none of them would be desirous of taking such course of action if it could be avoided. Even if legal action was taken, the sentiment would not be one of ill will or anger but rather as a result of a feeling of frustration. It would be the same as if having exhausted all possible avenues of reaching a friendly settlement, there was nothing left but to test the validity of the contract through the Courts. In this connection, the [royalty interest holders] might feel that there was nothing to lose by trying this. Despite all of this, the plaintiffs waited until 1982 to file a lawsuit alleging breach of contract. Clearly, at least by 1962, plaintiffs were aware of the Central Farmers marketing plan and possessed sufficient knowledge upon which to base a breach of contract action against the defendants. McGreevy's letters quoted above also indicate an awareness of a possible conflict of interest arising from the agreement between National and Central Farmers. McGreevy specifically addressed the conflicts of interest in a subsequent letter to Wells. The plaintiffs were also aware that National was according multiple discounts to Central Farmers over and above the discount specified in the outputs contract. In addition, the plaintiffs complained that the price structure in the Central Farmers agreement decreased and that they had no way, absent disclosure from National, to discover the true price at which National sold potash to Central Farmers. The plaintiffs stated that no one outside the potash industry could learn the price of potash. Yet, McGreevy sat on the board of directors of a company that was also in the potash market. Thus, if the plaintiffs were not aware of material facts, McGreevy and the others could have discovered the material facts through exercise of due diligence.