Court Opinion

ID: 3017824
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:18:10.232261+00
Date Added: 2024-06-11T15:03:47.920710
License: Public Domain

___________

                                  No. 96-2286
                                  ___________

Basin Electric Power                  *
Cooperative; The Coteau               *
Properties Company; Dakota            *
Coal Company,                         *
                                      *   Appeal from the United States
           Appellees,                 *   District Court for the
                                      *   District of North Dakota.
     v.                               *
                                      *
ANR Western Coal Development          *
Company,                              *
                                      *
           Appellant.                 *

                                  ___________

                    Submitted:    December 9, 1996

                         Filed:   January 28, 1997
                                  ___________

Before BOWMAN and LAY, Circuit Judges, and SMITH,1 District Judge.

                                  ___________

BOWMAN, Circuit Judge.

     ANR Western Coal Development Company (WCDC) appeals from the District
Court's declaratory judgment in favor of plaintiffs Basin Electric Power
Cooperative (Basin), The Coteau Properties Company (Coteau), and Dakota
Coal Company (Dakota) in this action involving accounting procedures for
coal royalties.   We reverse and remand.

     1
      The Honorable Ortrie D. Smith, United States District Judge
for the Western District of Missouri, sitting by designation.
                                      I.

     Numerous agreements among the parties and non-parties govern the
movement of the coal and the royalty payments involved in this case.      A
careful examination of the record reveals the following essential facts.

     In a 1979 contract between WCDC and the parent company of Coteau,
WCDC agreed to fund the acquisition of coal reserves near Beulah, North
Dakota.   In return, WCDC was entitled to receive an overriding royalty of
forty cents per ton of coal, adjusted for inflation, from the company that
mined the coal (eventually Coteau).    This situation was modified somewhat
in a 1987 agreement among WCDC, Coteau, and the predecessor of Dakota,
among others.    In the 1987 agreement, Dakota's predecessor assumed from
WCDC the responsibility for funding further acquisitions of coal reserves,
and WCDC's royalty was limited to coal reserves acquired by Coteau before
March 2, 1987.     Since 1987, Dakota has funded the acquisition of new
reserves, and the mine near Beulah, known generally as the Freedom Mine,
now contains some coal on which WCDC is entitled to a royalty (royalty
coal) and some coal on which WCDC is not entitled to a royalty (non-royalty
coal).

     Coteau records the amount of royalty coal and non-royalty coal
extracted from the Freedom Mine and then commingles the coal in its
handling facilities.     When the coal is commingled, royalty coal is
indistinguishable from non-royalty coal.    Coteau sells the coal to Dakota,
a wholly-owned subsidiary of Basin.    Dakota then supplies the coal to four
end users:    Basin's Antelope Valley Station (AVS), Basin's Leland Olds
Station, United Power Association's Stanton Plant, and the Great Plains
Synfuels Plant, which is owned and

                                      -2-
operated by an affiliate of Dakota.2         Royalties flow from the end users
through Coteau to WCDC.

        The process is complicated by one additional agreement.      In 1982,
Basin paid WCDC $40 million to satisfy WCDC's overriding royalty on "the
amount of coal which is mined from the reserves dedicated to the [1979]
Agreement and which is delivered to Basin Electric for the Antelope Valley
Station," subject to an annual cap of 5.2 million tons and a total cap of
210 million tons.       Purchase Agreement ¶ 2, Appellant's App. at 188, 191.
In effect, the 1982 agreement relieves Basin of the obligation to pay the
forty-cent royalty (as adjusted for inflation) on royalty coal delivered
to the AVS, except to the extent that deliveries of royalty coal exceed the
annual or total limits.        The $40 million price is not to be "adjusted
upwards or downwards in the event that coal ultimately delivered to Basin
Electric . . . is in excess of or is less than the maximum" 210 million
tons.       Id. ¶ 1.3

        2
      The Great Plains plant, which converts coal into synthetic
gas, has been the subject of considerable litigation before this
Court and the district courts of North Dakota.       See Dakota
Gasification Co. v. Pascoe Bldg. Sys., 91 F.3d 1094 (8th Cir.
1996); Dakota Gasification Co. v. Natural Gas Pipeline Co., 964
F.2d 732 (8th Cir. 1992), cert. denied, 506 U.S. 1048 (1993);
United States v. Great Plains Gasification Assocs., 819 F.2d 831
(8th Cir. 1987); United States v. Great Plains Gasification
Assocs., 813 F.2d 193 (8th Cir.), cert. denied, 484 U.S. 924
(1987).
        3
      The parties have characterized the 1982 agreement in rather
different fashions. WCDC asserts that Basin purchased from WCDC
the right to receive the royalty, while the plaintiffs describe the
$40 million as a prepayment of the royalty. We will use the term
"prepayment" because it is a fair description of what happened in
1982, but we disagree with Basin's implication that the
"prepayment" entitles Basin to receive 210 million tons of royalty
coal. Paragraph 1 of the agreement places squarely on Basin the
risk that the AVS may not receive a full 210 million tons of
royalty coal to be credited against the "prepayment."

                                       -3-
        In light of the foregoing facts, the nature of the present dispute
becomes somewhat more evident.       Because Coteau commingles royalty coal and
non-royalty coal, and because some of the commingled coal winds up at the
AVS, the parties must have a procedure to determine how much royalty coal
is   attributable to the AVS and therefore free from further royalty
payments.      Coteau,   backed    by   the    other   plaintiffs,   implemented   an
accounting method that deems all royalty coal in the mixture to be
delivered to the AVS, subject to the 5.2 million ton annual limit (the
deeming method).    WCDC, on the other hand, argues that the doctrine of
"confusion of goods" applies and that the royalty coal should be traced
proportionally from Coteau to Dakota to each of the four end users (the pro
rata method).

        An example from a deposition in this case (with numbers rounded
slightly) provides a useful illustration of exactly what the parties are
disputing.   In August 1992, Coteau sold and delivered to Dakota 1,221,000
tons of coal, of which 863,000 tons (71%) were royalty coal and 358,000
tons (29%) were non-royalty coal.         Dakota delivered 456,000 tons of the
commingled coal to the AVS.       After the inflation adjustment, WCDC's royalty
was 73 cents per ton.     The deeming method directs royalty coal to the AVS
first; as a result, all 456,000 tons delivered to the AVS would be
considered royalty coal.          Because Basin prepaid the royalty on coal
delivered to the AVS, WCDC would receive a royalty only on the 407,000 tons
of royalty coal delivered to the other end users, for a total royalty
payment of $297,000.     Under the pro rata method, 71% of the coal delivered
to each end user would be considered royalty coal; accordingly, only
324,000 tons of the coal delivered to the AVS would be considered royalty
coal.    WCDC would thus be entitled to a royalty on the other 539,000 tons
of royalty coal,

                                         -4-
for a total royalty payment of $393,000.4        See Appellant's App. at 215-17.

       To   resolve   this   dispute,   Basin,    Coteau,   and   Dakota   filed   a
declaratory judgment action in state court, seeking approval of the deeming
method.     WCDC removed the action to federal court on diversity grounds and
responded with six counterclaims:       (1) declaratory relief; (2) breach of
contract; (3) tortious interference with contract; (4) breach of a duty of
good   faith and fair dealing; (5) breach of an implied covenant of
reasonable development and mining; and (6) tortious interference with
prospective economic advantage.

       After discovery, the parties filed cross-motions for partial summary
judgment.      WCDC moved for summary judgment on its first counterclaim,
seeking a declaration that the confusion of goods doctrine applies and
requires the pro rata accounting method.            The plaintiffs argued that
disputed material facts precluded summary judgment; they did not move for
summary judgment in their favor on the accounting issue.           The plaintiffs
did seek summary judgment on WCDC's fourth and fifth counterclaims, arguing
that they owed WCDC no duty of good faith and fair dealing or duty of
reasonable development and mining.

       4
      It is important to recognize that under neither accounting
method would Basin pay anything to WCDC on account of royalty coal
delivered to the AVS. Basin favors the deeming method because it
would allow Basin to recoup its $40 million prepayment more rapidly
by accelerating its progress toward the 210 million ton limit in
the 1982 agreement. WCDC favors the pro rata method because the
attribution of royalty coal to end users other than the AVS has the
obvious cash flow advantage demonstrated in the example.         In
addition, to the extent that the pro rata method delays the time at
which the 210 millionth ton of royalty coal is delivered to the
AVS, it requires Basin to bear the risks of the shutdown of the AVS
or the depletion of the royalty coal reserves.

                                        -5-
      The District Court denied WCDC's motion for summary judgment on the
accounting issue and granted the plaintiffs declaratory relief, approving
the   deeming   method.         In   addition,    the   District    Court    granted   the
plaintiffs'     motion    for    summary    judgment     on   the   fourth    and   fifth
counterclaims, dismissing these claims without prejudice.                      A revised
judgment dismissed WCDC's first, second, and third counterclaims with
prejudice and its fourth, fifth, and sixth counterclaims without prejudice.
After a post-judgment motion was denied, WCDC appealed.                      We review a
decision on summary judgment de novo.            See Smith v. City of Des Moines, 99
F.3d 1466, 1468-69 (8th Cir. 1996).

                                           II.

      We begin with the dispositive issue in this appeal, the accounting
issue.   As WCDC has demonstrated convincingly, the doctrine of confusion
of goods has been a part of the law for centuries.                      See 2 William
Blackstone, Commentaries *405.             In its strictest form, the doctrine
provides that one who wrongfully intermixes his goods with the goods of
another so that the goods are indistinguishable forfeits the entire mixture
to the wronged party.       See id.; The Idaho, 93 U.S. 575, 585-86 (1877).
WCDC does not claim that the commingling of the coal in this case is in any
way wrongful, nor does it seek a forfeiture of any coal.                    Rather, WCDC
seeks to apply the more lenient form of the doctrine, which holds that each
owner of goods that are intermingled "becomes the owner as tenant in common
of an interest in the mass proportionate to his contribution."                         The
Intermingled Cotton Cases, 92 U.S. 651, 653 (1876); see also 2 Blackstone
at *405; W.E. Shipley, Annotation, Confusion of Goods by Accident, Mistake,
or Act of a Third Person, 39 A.L.R. 2d 555, 559 (1955).

      Courts in a number of jurisdictions have applied the confusion of
goods doctrine--in its forfeiture form or its shared-ownership form--to a
wide variety of situations and goods.             See, e.g., Silver

                                           -6-
King Coalition Mines Co. v. Conkling Mining Co., 255 F. 740, 743 (8th Cir.
1919) (ore); Norris v. United States, 44 F. 735, 738-39 (C.C.W.D. La. 1891)
(logs); Gilberton Contracting Co. v. Hook, 267 F. Supp. 393, 394-95 (E.D.
Pa. 1967) (coal silt); Vest v. Bond Bros., 137 So. 392, 392-93 (Ala. 1931)
(lumber); Buckeye Cotton Oil Co. v. Taylor, 53 S.W.2d 428, 428-29 (Ark.
1932) (cotton seed); Ramsey v. Rodenburg, 212 P. 820, 821 (Colo. 1923)
(wheat); Troop v. St. Louis Union Trust Co., 166 N.E.2d 116, 122-23 (Ill.
App. Ct. 1960) (oil); Hanna Iron Ore Co. v. Campbell, 29 N.W.2d 393, 401-02
(Mich. 1947) (iron ore); Swanson v. St. Paul Union Stockyards Co., 195 N.W.
453, 454-55 (Minn. 1923) (cattle); Belmont v. Umpqua Sand & Gravel, Inc.,
542 P.2d 884, 891 (Or. 1975) (gravel); Stone v. Marshall Oil Co., 57 A.
183, 187-88 (Pa. 1904) (oil); Mooers v. Richardson Petroleum Co., 204
S.W.2d 606, 607-08 (Tex. 1947) (oil); Johnson v. Covey, 264 P.2d 283, 283-
84 (Utah 1953) (pipe).   In a case in which royalty-bearing natural gas was
mixed with non-royalty-bearing gas, the Texas Supreme Court held that if
the party mixing the two sources could prove with reasonable certainty the
relevant amounts of gas, the royalty owner would be entitled to a royalty
on its proportional share of the commingled gas.   See Humble Oil & Refining
Co. v. West, 508 S.W.2d 812, 818-19 (Tex. 1974); see also Exxon Corp. v.
West, 543 S.W.2d 667, 673-74 (Tex. Civ. App. 1976) (after remand, limiting
amount of royalty gas to maximum proved at trial); cert. denied, 434 U.S.
875 (1977).

     WCDC suggests that North Dakota law is the appropriate rule of
decision in this diversity action.   The plaintiffs do not argue otherwise,
and we see no reason to disagree.    The parties have not cited, nor have we
located, any controlling North Dakota case or statute.     Accordingly, our
duty is to predict how the North Dakota Supreme Court would resolve the
accounting issue.   See Jackson v. Anchor Packing Co., 994 F.2d 1295, 1301
(8th Cir. 1993).

     We believe the cases cited above--particularly the closely analogous
Humble Oil--provide strong support for the proposition

                                     -7-
that the North Dakota courts would apply the confusion of goods doctrine
in this case.     Our decision is further aided by a provision of Article 9
of the Uniform Commercial Code, which North Dakota has adopted.             Section
9-315(2) of the U.C.C. governs multiple security interests in goods that
are commingled so that their identity is lost in a product or mass:

     When . . . more than one security interest attaches to the
     product or mass, they rank equally according to the ratio that
     the cost of the goods to which each interest originally
     attached bears to the cost of the total product or mass.

N.D. Cent. Code § 41-09-36(2) (1983); see also Dakota Bank & Trust Co. v.
Brakke, 404 N.W.2d 438, 443-45 (N.D. 1987) (applying this section to
security     interest   in   grain   commingled   in   grain   elevator).   In   the
circumstances of this case, a royalty interest in commingled coal is
analogous to a security interest in commingled grain.          We conclude that the
North Dakota Supreme Court would apply the confusion of goods doctrine in
this case.

     There remains one logical step in the resolution of this issue.
Contrary to WCDC's assertions, the confusion of goods doctrine does not of
its own force require that a particular accounting method be applied in
this case.    Because none of the cases we have located have involved facts
like those in the case at bar, other courts have not had to consider the
precise issue presented here.        Aside from the wrongful-mixture cases that
result in forfeiture, the usual remedy in a confusion of goods case is
either a proportional division of the goods, see Ramsey, 212 P. at 821, or
a money judgment proportional to the plaintiff's contribution, see Buckeye
Cotton Oil Co., 53 S.W.2d at 428.          In this case, WCDC does not seek to
recover a portion of the coal, and it is not possible to calculate how much
money WCDC is owed until the correct accounting method is determined.

                                         -8-
      To make this determination, we rely on one consequence of the
application of the confusion of goods doctrine:             the contributors to the
commingled mass are considered tenants in common in the whole.                  See The
Intermingled Cotton Cases, 92 U.S. at 653; 2 Blackstone at *405; Shipley,
39 A.L.R. 2d at 559.    But cf. Vest, 137 So. at 393 (contributors considered
owners of severable portions of mixture).              A tenancy in common is an
undivided interest in property.       See Volson v. Volson, 542 N.W.2d 754, 756
(N.D. 1996); Roger A. Cunningham et al., The Law of Property § 5.2, at 190-
91 & n.29 (2d ed. 1993).         In this case, a tenancy in common implies that
the royalty coal constitutes an undivided proportion of the commingled coal
distributed by Dakota to the four end users.           Because Basin and WCDC have
agreed that Basin may offset against its prepayment only that royalty coal
"which is delivered to Basin Electric for the Antelope Valley Station," the
pro   rata   method   is   the   appropriate   means   of   accounting    for    WCDC's
royalties.   Not surprisingly, it also appears to be the method used by the
coal industry, including Coteau, in other situations involving commingling
of coal bearing different royalty interests.       See Appellant's App. at 522,
1163-65, 1186-88.

      The District Court had several objections to the application of the
pro rata method in this case, and the plaintiffs have raised still others.
We consider these in turn.        Contrary to the District Court's suggestion,
the confusion of goods doctrine is not merely a construction of oil and gas
law, as the variety of the cases cited above demonstrates.               Nor does the
doctrine apply only when it is established by agreement of the parties.
In none of the cases we have cited was the court merely enforcing a
contractual provision requiring the result reached by the court.

      The District Court based its decision in part on the intent of the
signatories to the various agreements and on the complicated circumstances
surrounding the troubled history of the Great Plains gasification plant.
WCDC argues that the court, in performing this

                                         -9-
analysis, relied on a number of facts without support in the record.    See
Memorandum and Order at 10-13; Appellant's App. at 569-72.        WCDC also
suggests that determining the intent of the parties involves the resolution
of disputed questions of fact, an inappropriate endeavor at the summary
judgment stage.   We need not address these objections specifically, because
we believe these questions of intent and the history of the gasification
plant are irrelevant in any event.         The confusion of goods doctrine
determines the rights of the parties in the commingled coal, and the
unambiguous contract between Basin and WCDC, along with a bit of basic
property law and common sense, determines the appropriate method of
accounting for their rights.

     The plaintiffs argue, as they did below, that factual disputes
preclude the entry of judgment in favor of WCDC on the accounting issue.
The only disputes raised by the plaintiffs, however, are immaterial.    The
plaintiffs first argue that WCDC "caused" the commingling when it entered
into the 1987 agreement that relieved WCDC of further responsibility for
funding the acquisition of coal reserves.       But it does not matter who
causes the commingling--the alternative argument being that Coteau causes
the commingling when it combines coal mined from different areas--because
it is undisputed that Coteau knows the correct proportions of royalty coal
and non-royalty coal from which to make the necessary calculations.     For
the same reason, the argument that some of the coal is "commingled in the
ground" (a concept that WCDC says is nonsensical) is immaterial.        The
confusion of goods doctrine places the burden on the commingling party to
identify the proportional interests of each party, see Humble Oil, 508
S.W.2d at 818, but because the proportional interests in this case are
readily known, we need not be concerned with the issue of who causes the
commingling.

     Finally, we consider several equitable arguments pressed by the
plaintiffs.    Confusion of goods is an equitable doctrine, and

                                    -10-
concepts such as unclean hands play a role in its application.              See, e.g.,
Troop, 166 N.E.2d at 121.          The District Court evidently considered the
misfortunes     of     the   gasification   plant    and   the   ensuing,     probably
unpredictable, effects on Basin and others as a rather amorphous equitable
factor weighing in favor of allowing Basin to reap the benefits of its
royalty prepayment as rapidly as possible.             We disagree.     In the 1982
prepayment agreement, Basin clearly took the risk that it would not receive
210 million tons of royalty coal for use at the AVS at all, much less in
any particular period of time.        Basin was well-compensated for this risk;
assuming that Basin receives all 210 million tons, its $40 million payment
translates to nineteen cents per ton, compared to the forty-cents-plus per
ton that Basin would owe if it paid the royalty over time.              Having taken
a significant risk in exchange for a significant benefit, Basin cannot now
complain that it does not like its bargain and ask a court effectively to
rewrite the contract.

     One      other    equitable   factor   raised    by   the   plaintiffs     merits
discussion.     The plaintiffs attempt to demonstrate that if the pro rata
accounting method is adopted, WCDC will receive its royalty on too much
coal--that is, more royalty coal than exists in reality.              See Appellees'
App. at 98.    At first blush, this calculation, which we will not repeat in
detail, is rather persuasive, for surely there is something wrong with an
accounting procedure that permits WCDC to receive double royalties on some
of the royalty coal.         As it turns out, there is something wrong with the
plaintiffs' calculation instead:       they have apparently counted 210 million
tons of royalty coal as belonging to Basin, and because the pro rata method
recognizes that some of those 210 million tons may go to end users other
than the AVS, the plaintiffs claim that WCDC will be overpaid.              But, as we
have now repeated several times, Basin did not purchase the right to
receive 210 million tons of royalty coal at the AVS; in prepaying the
royalty at a reduced rate, Basin specifically took the risk that it would
receive less.         WCDC will receive a royalty on account of royalty coal
delivered to end users

                                        -11-
other than the AVS, and, depending on future events, Basin may not be able
to take full advantage of its royalty prepayment, but under the pro rata
accounting method, WCDC will not be paid twice for any royalty coal.

                                     III.

     We must also consider the District Court's dismissal of WCDC's other
counterclaims.   Although it is not clear from the court's memorandum and
opinion, the court apparently dismissed WCDC's second (breach of contract)
and third (tortious interference with contract) counterclaims as moot,
given the court's ruling on the accounting issue.   In light of our reversal
of the District Court on that issue, the second and third counterclaims are
not moot, and so we now reinstate them.

     The court's treatment of WCDC's fourth (good faith and fair dealing),
fifth (reasonable development and mining), and sixth (tortious interference
with prospective economic advantage) counterclaims is more puzzling.    All
three claims are based on WCDC's allegations that Coteau is conducting its
operation of the Freedom Mine in an unreasonable manner and thereby
minimizing WCDC's royalty revenue.   The fourth and fifth counterclaims were
the subject of a summary judgment motion by the plaintiffs, who argued that
they did not owe the duties asserted by WCDC.   The District Court, however,
appeared to decide a different issue, holding that the plaintiffs had
satisfied these duties.   See Memorandum and Opinion at 14 ("The court is
reluctant to replace the expert opinion of mining engineers and other
mining experts as is necessary to conclude that Coteau violated its implied
duty of reasonable development and good faith.").   The court then dismissed
these counterclaims without prejudice, although there is at least a
substantial question whether they are compulsory counterclaims that could
not be asserted in another action.    See Fed. R. Civ. P. 13(a).

                                     -12-
     The opinions of the "mining engineers and other mining experts"
supporting the plaintiffs are not in the record on appeal.                     But in
crediting these experts, the court clearly ignored the opinion of WCDC's
expert, backed by a lengthy and detailed study, that Coteau was not mining
the Freedom Mine in an economically prudent manner.        See Appellant's App.
                       5
at 377-79, 387-482.        Similarly, WCDC introduced evidence suggesting that
the plaintiffs have not acted in good faith, but have instead sought to
minimize WCDC's royalties.        See Appellant's App. at 871-72.        We are not
prepared to hold as a matter of law that WCDC has introduced evidence
sufficient to withstand summary judgment; in particular, we are not certain
that WCDC has presented substantial evidence of a breach of the duty of
good faith and fair dealing.      But if WCDC has not produced enough evidence
to withstand summary judgment on the question of breach, that may well be
because the plaintiffs moved for summary judgment on the theory that they
did not owe WCDC the duties alleged in the counterclaims.          WCDC cannot be
faulted for failing to introduce sufficient evidence on an issue that was
not before the court.      The dismissal of the fourth and fifth counterclaims
must therefore be reversed.      On remand, whether the plaintiffs owe WCDC any
duty of good faith and fair dealing or any duty of reasonable development
and mining are threshold questions that remain open for decision.

     Finally, we see no reason in the District Court's opinion for the
dismissal   of   the   sixth   counterclaim,   except   that   perhaps   the    court
considered it moot in light of the dismissal of the fourth

      5
       WCDC acknowledges that this expert's report was not filed
with the District Court before the court entered summary judgment,
but notes that the plaintiffs' experts' reports had not been filed
at the time either. WCDC's expert's report was before the court on
WCDC's motion to alter or amend the judgment. As we explain below,
we cannot fault WCDC for failing to submit the report earlier,
because the report was apparently irrelevant to the issues
presented by the plaintiffs' summary judgment motion.

                                       -13-
and fifth counterclaims.   This claim, too, must be reinstated and remanded
for further proceedings.

                                    IV.

     The judgment of the District Court is reversed.   The case is remanded
with instructions to enter judgment for WCDC on the plaintiffs' complaint
and on WCDC's first counterclaim and to conduct such further proceedings
on the remaining counterclaims as may be necessary.

     A true copy.

           Attest:

                 CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.

                                    -14-