Textana v. Klabzuba , 2009 MT 401 ( 2009 )

November 24 2009
DA 08-0243
IN THE SUPREME COURT OF THE STATE OF MONTANA
2009 MT 401TEXTANA, INC., SANDTANA, INC., and
SANDRA LEE BROWN.
Plaintiffs and Appellants, Cross-Appellees,
v.
KLABZUBA OIL & GAS, a limited family partnership
and KLABZUBA OIL & GAS, INCORPORATED,
Defendants, Appellees, and Cross-Appellants.
APPEAL FROM: District Court of the Twelfth Judicial District,
In and For the County of Hill, Cause No. DV 02-215
Honorable David Rice, Presiding Judge
COUNSEL OF RECORD:
For Appellants:
James H. Goetz; Goetz, Gallik & Baldwin, P.C.; Bozeman, Montana
John D. Stephenson; Jardine, Stephenson, Blewett & Weaver, P.C.; Great
Falls, Montana
For Appellees:
Danielle V. Wiletsky and Keith D. Tooley; Welborn, Sullivan, Meck &
Tooley, P.C.; Denver, Colorado
Matthew Hutchison; Kaufman, Vidal, Hileman & Ramlow, P.C.;
Kalispell, Montana
Submitted on Briefs: June 17, 2009
Decided: November 24, 2009
Filed:
__________________________________________
Clerk
Justice Brian Morris delivered the Opinion of the Court.
¶1 Textana, Inc., Sandtana, Inc., and Sandra Lee Brown, the executor for the estate of
John O. Brown (collectively Browns), appeal the judgment and related orders of the Twelfth
Judicial District Court, Hill County, in favor of Klabzuba Oil & Gas and Klabzuba Oil &
Gas, Inc. (collectively Klabzubas). Klabzubas cross-appeal the court’s decision to reduce
sanctions against Browns from $1.4 million to $94,000.
¶2 This appeal represents the second trip for these parties to this Court. The parties
litigated the first suit on very similar issues in 2000 before then District Court Judge John
Warner (Browns I). We affirmed the district court’s imposition of a constructive trust on
Browns. Textana v. Klabzuba, 2003 MT 157N, 316 Mont. 532, 77 P.3d 551. We now
affirm in part and reverse in part.
¶3 The parties left few stones unturned in scouring the record for appealable issues. We
review the following ten issues:
¶4 Did the District Court properly refuse to dismiss Klabzubas’ counterclaims regarding
the Starcher claims based on statute of limitations grounds?
¶5 Did the District Court properly award a 12.5 percent interest in the Starcher claims
to a non-party?
¶6 Did the District Court properly refuse Browns’ evidence of their costs in developing
the Starcher claims?
¶7 Did the District Court properly instruct the jury on punitive damages?
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¶8 Did the District Court properly dismiss Browns’ 2 percent ORR claims as barred by
res judicata?
¶9 Did the District Court properly dismiss Browns’ interest claims where Klabzubas
withheld, but later paid, production revenues due to Browns?
¶10 Did the District Court properly deny sanctions against Klabzubas based on alleged
false statements by their counsel?
¶11 Did the District Court properly award attorney fees against Browns without first
holding a hearing?
¶12 Did the District Court properly allow Klabzubas to double-count interest on the
judgment?
¶13 Should the District Court’s first sanctions order be reinstated and the cause
remanded for entry of additional attorney fees to Klabzubas?
FACTUAL AND PROCEDURAL BACKGROUND
¶14 J. Burns Brown and his son, John O. Brown, worked together in the oil and gas
industry in north central Montana. J. Burns Brown and Robert Klabzuba began collaborating
in 1974 to lease and develop oil and gas fields. John O. Brown and Robert Klabzuba entered
into a written contract for professional services (PSC) in 1976 with a primary term of one
year. John O. Brown agreed to perform landman and other services in support of Robert
Klabzubas’ business of exploring oil and gas reserves, drilling wells, and producing oil and
gas. John O. Brown received a salary and expenses.
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¶15 The PSC required John O. Brown to investigate opportunities in the Havre area and to
present the opportunities to Robert Klabzuba. The PSC required John O. Brown to assign to
Robert Klabzuba a 75 percent interest in all leases. The PSC further provided that John O.
Brown and his father, J. Burns Brown, had the option to participate up to 25 percent by
paying a proportionate share of the acquisition costs for the land and development costs of
the wells. The PSC also entitled Browns to a 2 percent overriding royalty (ORR) on
production revenues on all oil and gas leases obtained by Browns and assigned to Klabzubas.
The parties entered into a similar PSC each year through 1997.
¶16 Klabzubas, who were headquartered in Texas, would conduct the geological analysis
and identify areas desirable for oil and gas leasing. Klabzubas provided their confidential
analysis of the results to Browns, who would then negotiate and obtain leases, check titles,
and make public land recordings. Klabzubas relied on Browns to function as their land
office in Montana. Browns owed fiduciary duties to the Klabzubas, including the duty to
report and inform on available opportunities.
¶17 Browns operated most of the wells in which the parties shared an interest through
their operating company, J. Burns Operating Company (JBBO). John O. Brown and his
wife, Sandra Brown, owned and operated JBBO. John O. Brown and his siblings also owned
and operated another oil company, 5B Company (5B). J. Burns Brown created 5B in 1981
for the purpose of participating in various leasing opportunities.
¶18 Klabzubas came to Havre on November 17, 1997, to inform Browns that they planned
to terminate the business relationship. The final PSC expired on January 1, 1998. The
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parties continued to co-own shares in existing leases and gas wells, but the operation of the
wells transferred from Browns to Klabzubas in April of 1998.
¶19 Browns and Klabzubas have engaged in protracted and complicated litigation since
the expiration of the final PSC. Browns filed a declaratory judgment action in Hill County
regarding Browns’ rights to prospect and explore for oil and gas in north central Montana
after the termination of the final PSC. Klabzubas responded with a number of counterclaims
in the action that we describe as Browns I.
¶20 Browns I went to trial in the fall of 2000. The district court determined that the final
PSC had terminated on January 1, 1998. From about 1993 to 1998, Klabzubas had
identified 940 sections, over 601,000 acres of land, as desirable for oil and gas leases. The
court imposed a constructive trust on 201 of these sections. The court required Browns to
“account for and disgorge” 75 percent of the profits received after January 1, 1998, on these
201 sections. The court required Klabzubas to pay for 75 percent of the costs of developing
the wells on the 201 sections. The court further determined that Browns “shall not have a 2
percent overriding royalty in said lease and mineral interests” in the constructive trust lands
for those leases acquired after the termination of the PSC in 1998. This Court affirmed
Judge Warner’s final judgment. Textana, ¶ 6.
¶21 Klabzubas withheld ORR and production payments for all of the leases held jointly by
Browns after the final judgment in Browns I. Browns filed an action in Hill County in
December of 2002 to collect the unpaid ORR and production revenues on leases located on
sections not covered by Judge Warner’s constructive trust order.
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¶22 District Judge Marc G. Buyske assumed jurisdiction over this second action. The
District Court dismissed with prejudice Browns’ claims for unpaid ORR on 546 jointly-
owned wells based on res judicata. The court determined that the parties had litigated the
ORR issue in Browns I and that the district court in Browns I had dismissed Browns’ claims
to the ORR on all properties jointly owned by Browns and Klabzubas.
¶23 Klabzubas periodically sent delinquent production payments to Browns between April
of 2002 and 2006, so that by the time of the jury trial in May of 2006, Klabzubas no longer
owed Browns the principal amounts on the production payments. Klabzubas refused to pay
interest to Browns on the delinquent production payments. The District Court determined
before trial that Browns were not entitled to accrued interest on the overdue production
payments, except for one well – the State-4 well. The parties disputed ownership to the
State-4 well. Browns argued that Klabzubas owed $302,284.31 in production revenues on
the State-4 well. Klabzubas agreed to deposit the $302,284.31 in the registry of the court
while the parties resolved a title dispute to the State-4 well.
¶24 Klabzubas asserted a counterclaim in which they alleged that they had learned for the
first time of a productive well that Browns had developed on land obtained by Browns in
1983 (Starcher claim). Klabzubas claimed that John O. Brown in 1983 wrongfully had
concealed from Robert O. Klabzuba his acquisition of the Starcher claim in violation of the
PSC. Klabzubas argued that Browns had a duty to acquire the Starcher lease on behalf of
Klabzubas.
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¶25 Browns moved for summary judgment on the Starcher counterclaim based on the
eight-year statute of limitations for breach of a written contract. Browns argued that they
had disclosed their interest in the Starcher claims in numerous public documents and through
documents submitted to Klabzubas over the years. The District Court denied Browns’
summary judgment motion in May of 2005.
¶26 The Starcher counterclaim went to trial in May of 2006. John O. Brown testified that
he had informed Robert Klabzuba in 1983 about Browns’ acquisition of the Starcher claims.
John O. Brown testified that Robert Klabzuba was not interested in participating. Robert O.
Klabzuba had died by the time of the trial. Mainly through the testimony of Stephen Frazier
(Klabzubas’ vice president), Klabzubas maintained that Robert O. Klabzuba never would
have declined an interest in the Starcher claims. Klabzubas further claimed that John O.
Brown never had disclosed his interest in the Starcher claims to Robert Klabzuba or Frazier.
Browns argued alternatively that Klabzubas should be obligated to pay their share of the
costs in developing and operating the Starcher wells if the court determined that Klabzubas
were entitled to a 75 percent share.
¶27 The District Court sent the statute of limitations issue to the jury. The court instructed
the jury on the issues of equitable tolling and fraudulent concealment. The jury awarded
$1,483,232.41 to Klabzubas in compensatory damages. These damages equaled 75 percent
of the production revenues from the Starcher claims from June of 1983 to the date of trial.
¶28 The District Court instructed the jury on punitive damages and malice and fraud. The
court sent a verdict form to the jury that allowed findings of fraud and malice and punitive
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damages. The jury determined that Browns had acted with both malice and fraud, but
awarded no punitive damages.
¶29 The District Court entered Findings of Fact and Conclusions of Law on December 4,
2006. The court directed that Browns convey a 75 percent interest on the Starcher claim to
Klabzubas. The court further ordered that Browns transfer a 12.5 percent interest in the
Starcher claims to 5B, a non-party. The court rejected Browns’ claims for the costs of
operating and developing the Starcher wells. The court also denied Browns’ claim for
interest on the delinquent production payments. The court finally found that Browns were
entitled to the $302,284.31 of production revenue on the State-4 well. The court rejected
Browns’ claim for accrued interest on the basis that Browns had failed to seek interest in a
timely manner.
¶30 In a separate order on that same day, the court, without conducting a hearing, imposed
sanctions against Browns “in the form of reasonable attorney fees incurred by [Klabzubas] in
this case.” The court cited M. R. Civ. P. 37(d), as authority for the sanctions. Judge Buyske
did not rule, however, on what amount of attorney fees Klabzubas should be awarded. Judge
Buyske instead set a hearing solely to evaluate the reasonableness of Klabzubas’ fees. Judge
Buyske never imposed an actual amount of attorney fees before he relinquished jurisdiction
over the case in late December 2006. The court also did not address Browns’ separate
motion for sanctions against Klabzubas for alleged false statements to the court by
Klabzubas’ counsel.
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¶31 District Judge David G. Rice assumed jurisdiction over the case on January 3, 2007.
Judge Rice conducted a hearing on Klabzubas’ request for attorney fees. Judge Rice limited
proof to the reasonableness of the amount of Klabzubas’ attorney fees request. Klabzubas
claimed over $1.4 million as their attorney fees. Judge Rice later reversed himself upon
discovering that Judge Buyske’s order had not been final.
¶32 Judge Rice determined that no evidence supported a discovery sanction under Rule
37(d). Judge Rice concluded, however, that Browns should be sanctioned pursuant the
court’s equitable powers outlined in Foy v. Anderson, 176 Mont. 507, 511-12, 580 P.2d 114,
116-17 (1978). Judge Rice trimmed Klabzubas’ request of $1.4 million in fees to an actual
award of $94,000 in attorney fees. The court further denied Browns’ motion for sanctions
against Klabzubas. The court entered a $2,260,834.78 judgment in favor of Klabzubas. The
judgment constituted the jury verdict, pre-judgment interest on the jury verdict, post-
judgment interest on the jury verdict, sanctions, and attorney fees and costs.
¶33 Klabzubas again withheld production revenues that they owed to Browns after Judge
Buyske’s December 4, 2006, order. The production payments accumulated at the rate of
more than $163,000 per month. Klabzubas withheld sufficient unpaid production revenues
to satisfy the judgment by the time of the May 6, 2008, judgment. Klabzubas filed a
Satisfaction of Judgment on August 21, 2008. Browns appeal and Klabzubas cross-appeal.
DISCUSSION
¶34 Did the District Court properly refuse to dismiss Klabzubas’ counterclaims regarding
the Starcher claims based on statute of limitations grounds?
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¶35 The parties dispute the appropriate standard for determining who decides whether to
toll the statute of limitations when a dispute exists as to when the party “discovered” facts
giving rise to a claim. The confusion over the applicable standard in this case hinges on the
difference between “accrual” and “discovery.” Accrual begins at breach in a breach of
contract action. Kitchen Krafters v. Eastside Bank of Montana, 242 Mont. 155, 163, 789
P.2d 567, 571 (1990) (abrogated in part on other grounds). Discovery serves to toll the
statute of limitations only if fraudulent concealment has hindered a party from discovering a
breach. Kitchen Krafters, 242 Mont. at 163, 789 P.2d at 571-72.
¶36 The District Court determined that the question must be submitted to the jury in light
of the existence of sufficient facts to raise a question of fraudulent concealment. This Court
determined in Kitchen Krafters that the statute of limitations runs from the time of breach in
a breach of contract action. The Court reasoned that, unlike a tort claim, a breach of contract
constitutes a legal wrong “independent of actual damage.” Kitchen Krafters, 242 Mont. at
163, 789 P.2d at 571-72. This Court also noted, however, that the statute of limitations runs
from the time of discovery if there has been fraudulent concealment. Nothing in Kitchen
Krafters limits application of the fraudulent concealment tolling exception to § 27-2-102,
MCA, “injury to person or property.” This fraudulent concealment rule applies even in a
breach of contract claim. Kitchen Krafters, 242 Mont. at 163, 789 P.2d at 571-72, citing
Williston on Contracts at § 2025C.
¶37 Fraudulent concealment entails the employment of artifice, planned to prevent inquiry
or escape investigation, and to mislead or hinder information acquisition. Holman v.
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Hansen, 237 Mont. 198, 202, 773 P.2d 1200, 1203 (1989) (citing E.W. v. D.C.H., 231 Mont.
481, 488, 754 P.2d 817, 821 (1988)). The standard changes where a trust relationship exists,
such as a fiduciary. Mere silence or failure to reveal information in the presence of a duty to
disclose can constitute fraudulent concealment sufficient to toll the statute of limitations.
Estate of Watkins v. Hedman, 2004 MT 143, ¶ 25, 321 Mont. 419, 91 P.3d 1264. Further, in
Watkins we stated that “these [fraudulent concealment] are exactly the type of factual
questions appropriate for resolution by a trier of fact.” Watkins, ¶ 27.
¶38 Watkins contradicts Browns’ argument that fraudulent concealment requires some
affirmative conduct to conceal or mislead. Further, this Court stated in Kerrigan v.
O’Meara, 71 Mont. 1, 227 P. 819 (1924), that a trust or confidence relationship modifies the
general rule that there must be some affirmative acts to prove fraudulent concealment. Mere
silence may suffice when a trust or confidence relationship exists between the parties.
Kerrigan, 71 Mont. at 7, 227 P. at 821.
¶39 The District Court determined that Browns owed Klabzubas the highest duties of
loyalty and fairness as a fiduciary. Browns served as Klabzubas’ “eyes and ears” in
Montana. These duties required Browns to inform Klabzubas of all available opportunities.
Browns’ silence and failure to disclose their interest in the Starcher claims rises to the level
of fraudulent concealment under Watkins and Kerrigan in light of their fiduciary duty. The
fact that Browns put on evidence of various public filings and invoices sent to Klabzubas
that indicated Browns’ ownership interest in the Starcher claims failed to satisfy these duties.
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Browns trust relationship with Klabzubas imposed on Browns an affirmative duty to
disclose. Kerrigan, 71 Mont. at 7, 227 P. at 821.
¶40 The record also raises legitimate questions as to whether Browns made affirmative
misrepresentations. John O. Brown changed his story through various depositions and
during trial regarding when he had acquired his interest in the Starcher claims and when he
had disclosed the interests to Klabzubas. John O. Brown testified in his first deposition that
he had told Robert Klabzuba that he acquired the Starcher claims in the 1970s, before
entering into a PSC with Klabzubas. He testified in his second deposition, however, that he
first had told Robert Klabzuba about the Starcher claims in 1981. John O. Brown changed
his story again at trial. He testified that he first had notified Robert Klabzuba in May of
1983 of the Starcher claims after receiving a letter from Cole Chandler, his partner in the
Starcher claims. Cole Chandler testified, however, that John O. Brown never had informed
him of any relationship with Klabzubas. The record reveals sufficient evidence of potential
fraudulent concealment to support the District Court’s decision to send the statute of
limitations question to the jury. Watkins, ¶ 27.
¶41 Did the District Court properly award a 12.5 percent interest in the Starcher claims
to a non-party?
¶42 The District Court imposed a constructive trust over the Starcher claims after the jury
found in favor of Klabzubas on the grounds of fraudulent concealment. The District Court
granted a 12.5 percent interest in the Starcher claims to 5B, a non-party to the action, as part
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of its equitable division of the Starcher claims. John O. Brown’s family members control
5B. Browns argue that they lacked notice of the need to defend against this claim at trial.
¶43 Equitable rulings of this type fall within the district court’s discretion and we will
sustain these rulings unless the district court abused its discretion. Ruegsegger v. Welborn,
237 Mont. 317, 321, 773 P.2d 305, 308 (1989) (abrogated in part on other grounds). The
plaintiff in Howard v. Dalio, 249 Mont. 316, 318, 815 P.2d 1150, 1151 (1991), alleged that
her sister had breached her duty as trustee by cashing out certificates of deposit that had been
left by their deceased sister’s estate. The district court imposed a constructive trust against
the defendant sister, for the benefit of the plaintiff sister, as well as for the benefit of a third
sister, who remained a non-party to the lawsuit. Howard, 249 Mont. at 318, 815 P.2d at
1151. The defendant sister alleged that the court lacked jurisdiction to impose a valid
judgment in favor of the non-party sister. Howard, 249 Mont. at 319, 815 P.2d at 1152.
¶44 The Court upheld the district court’s imposition of a constructive trust that named the
non-party sister as one of the beneficiaries. The Court recognized as “pivotal” the fact that it
possessed jurisdiction over the person upon whom the trust had been imposed. The Court
rejected the notion that all potential beneficiaries needed to be parties. Howard, 249 Mont.
at 319-20, 815 P.2d at 1152. The defendant sister could point to no prejudice from the
court’s imposition of the constructive trust as the complaint and the pretrial order had put the
defendant sister on notice of the plaintiff’s efforts to seek a constructive trust for the benefit
of both the plaintiff and the non-party sister. Howard, 249 Mont. at 320, 815 P.2d at 1152.
Browns likewise can point to no prejudice.
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¶45 Klabzubas’ second amended counterclaim, filed almost two years before trial, alerted
Browns of their intent to seek a constructive trust over the Starcher claim. Klabzubas’
proposed findings of fact and conclusions of law specifically named 5B as a potential
beneficiary of the constructive trust. Frazier testified at trial regarding the percentage
interests held by the various entities during the early 1980s when Browns had acquired the
Starcher claims. David B. Brown, John O. Brown’s brother, also testified regarding the
customary 12.5 percent split between 5B and John O. Brown employed by Browns. The
court did not abuse its discretion in awarding 5B an interest in the Starcher claims when
Browns had notice of Klazbuzas’ efforts to seek a constructive trust. Howard, 249 Mont. at
320, 815 P.2d at 1152.
¶46 Did the District Court properly refuse Browns’ evidence of their costs in developing
the Starcher claims?
¶47 Browns contend that Klabzubas’ claim of entitlement to 75 percent of the revenues
from the Starcher claims brings with it a corresponding obligation to pay 75 percent of the
development costs. The District Court ruled that Browns’ failure to “come to this Court with
clean hands” precluded the court from shielding Browns from the “risk of loss of their
fraudulent scheme.”
¶48 The District Court relied upon Ruegsegger, where the Court denied an offset to a
defendant who had not acted in good faith. The plaintiff landowner in Ruegsegger had
commenced foreclosure proceedings against the defendant. The parties initially attempted to
settle the matter through an agreement that allowed the defendant to stay on the property for
14
a set period. The defendant’s worsening financial condition prevented him from performing
the terms of the settlement, but the defendant remained on the property beyond the terms of
the settlement agreement. Ruegsegger, 237 Mont. at 318-19, 773 P.2d at 306-07.
¶49 The defendant next filed a frivolous bankruptcy petition in a failed effort to delay
foreclosure proceedings. The bankruptcy court lifted the automatic stay and the landowner
continued his foreclosure action. The defendant filed a counterclaim for restitution to recoup
costs that he had incurred in planting, irrigating, fertilizing, and harvesting crops while the
defendant had been leasing the property from the plaintiff. The Court denied the offset due
to the fact that the defendant had not acted in good faith in filing the frivolous bankruptcy
petition. Ruegsegger, 237 Mont. at 321-22, 773 P.2d at 308-09.
¶50 Klabzubas based their claim on Browns’ alleged breach of contract. The defendant in
Ruegsegger proceeded under the equitable claim of unjust enrichment. Klabzubas argue that
the District Court’s imposition of a constructive trust triggered application of Ruegsegger.
Both Klabzubas and the District Court failed to address Browns’ argument that § 27-1-303,
MCA, applies.
¶51 Section 27-1-303, MCA, provides that no person can recover a greater amount in
damages than he could have gained by full performance of the contract in a breach of
contract action. Klabzubas alleged that Browns had breached their duty under the PSC to
disclose their interest in the Starcher claims. Klabzubas’ claim lies in contract and § 27-1-
303, MCA, applies even though the court imposed a constructive trust.
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¶52 The principal espoused in § 27-1-303, MCA, supports the well-established “benefit of
the bargain rule.” Castillo v. Franks, 213 Mont. 232, 242, 690 P.2d 425, 430 (1984); § 27-1-
311, MCA. This rule places the injured party in as good a position as if the contract had
been performed, less any costs or other loss that the injured party has avoided by not having
to perform. Castillo, 213 Mont. at 242, 690 P.2d at 430.
¶53 The PSC obligated Klabzubas to pay 75 percent of the development costs. The
court’s imposition of a constructive trust granted to Klabzubas 75 percent of profits—the
result contemplated by the PSC. The PSC, in turn, obligated Klabzubas to incur 75 percent
of the costs. This outcome provides Klabzubas with the benefit of the bargain, less Browns’
expenses that Klabzubas avoided by not having to perform.
¶54 We further note that Judge Warner imposed a similar constructive trust in Browns I.
Judge Warner required Klabzubas to pay 75 percent of the costs if they were to benefit from
75 percent of Browns’ disgorged profits. Judge Warner required Klabzubas to pay their
share of the costs despite Browns’ breach of their fiduciary duties. We reverse the District
Court’s decision to exclude Browns’ evidence of their costs in developing the Starcher
claims.
¶55 Did the District Court properly instruct the jury on punitive damages?
¶56 The District Court allowed the jury to consider whether to award punitive damages
based on Klabzubas’ claim that Browns had acted with actual malice or actual fraud.
Although the jury awarded no punitive damages, Browns argue that the court’s decision to
provide the punitive damages instruction permitted Klabzubas to introduce otherwise
16
inadmissible evidence of illegal bad acts by Browns. We address this issue in light of
Browns’ claims that the evidence introduced by Klabzubas prejudiced the jury regarding the
other issues.
¶57 We will not reverse a district court on the basis of its jury instructions absent an abuse
of discretion. Cartwright v. Equitable Life Assurance Soc. of U.S., 276 Mont. 1, 26, 914
P.2d 976, 992 (1996). Section 27-1-220, MCA, generally precludes punitive damages
recovery for breach of contract claims. This Court has held, however, that § 27-1-221,
MCA, permits an award of punitive damages where the claimant “proves by clear and
convincing evidence that the defendant is guilty of actual fraud or actual malice outside the
contract context.” Weter v. Archbambault, 2002 MT 336, ¶ 40, 313 Mont. 284, 61 P.3d 771.
Tort type damages also may be available in contract actions where a special relationship
exists or for traditional contract related torts such as fraud. Grenfell v. Anderson, 2002 MT
225, ¶ 80, 311 Mont. 385, 56 P.3d 326 (citing Daniels v. Dean, 253 Mont. 465, 473, 833
P.2d 1078, 1083 (1992)).
¶58 The court determined that Browns’ fraudulent concealment and breach of fiduciary
duty outside the PSC warranted the jury’s consideration of Klabzubas’ punitive damages
claim. The court relied upon its undisputed finding that Browns owed Klabzubas the highest
duty of loyalty under their fiduciary relationship. Klabzubas presented evidence that Browns
had failed to disclose their 1983 Starcher acquisition to Klabzubas. This alleged omission
supported Klabzubas’ claim of actual fraud or actual malice based on the special relationship
between the parties. Grenfell, ¶ 80.
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¶59 Frazier also testified regarding John Brown’s affirmative misrepresentation in 1991
that he had acquired the Starcher claims in the 1970s. John Brown contradicted Frazier’s
testimony on this point. This contradiction remained for the jury to resolve. Frazier’s claim
of John Brown’s affirmative misrepresentation provides further support, however, for the
court’s decision that it was for the jury to decide whether Klabzubas had proven by clear and
convincing evidence that Browns had acted with actual fraud or actual malice in withholding
information about their interest in the Starcher claims. Weter, ¶ 40.
¶60 Did the District Court properly determine that res judicata barred Browns’ 2 percent
ORR claims?
¶61 Klabzubas began to withhold Browns’ ORR payments for all leases jointly held by
Browns and Klabzubas after the district court’s judgment in Browns I. Browns filed this
second action in large part to recover what they claimed to be the unpaid ORRs. The District
Court dismissed Browns’ claim on the basis that Browns and Klabzubas previously had
litigated the issue of the 2 percent ORR in Browns I.
¶62 Res judicata bars a claimant from relitigating issues and claims decided in a former
action or issues and claims that the litigant had an opportunity to litigate in the former action.
Balyeat Law, P.C. v. Hatch, 284 Mont. 1, 3, 942 P.2d 716, 717 (1997). A district court’s
application of the doctrine of res judicata presents a question of law that we review to
determine if it was correct. Thornton v. Alpine Home Center, 2001 MT 310, ¶ 10, 307 Mont.
529, 38 P.3d 855.
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¶63 Browns contend that the court in Browns I never resolved the issue of whether the
PSCs between 1976 and 1997 entitled Browns to a 2 percent ORR on the numerous wells
jointly developed by the parties. Browns further contend that they could not have raised the
issue in Browns I as “Klabzubas did not systematically terminate the ORR payments to
Browns until after Browns I.” Browns argued that the 2 percent ORR arose in Browns I only
“tangentially on two issues.”
¶64 The district court in Browns I addressed the ORR issue in two contexts. The court
first addressed certain leases that Browns had obtained when Browns and Klabzubas began
to compete for leases after the final PSC terminated on January 1, 1998. Klabzubas had
shared certain proprietary geotechnical information and other trade secrets with Browns
during the parties’ relationship. Klabzubas had identified 940 sections between 1993 and
1998 as desirable to lease based on this information.
¶65 The court determined that it would have been unfair to interpret the PSC to preclude
the Browns from attempting to acquire leases in any of the 940 sections despite the existence
of the fiduciary relationship. To interpret the PSC in this way would “effectively prohibit
Browns from engaging in the exploration business in the whole area [and] restrain Browns
from exercising their lawful profession and business.”
¶66 The court reached a different conclusion, however, with respect to about 200 leases
that Klabzubas obtained after the parties had begun to compete. Browns had
misappropriated certain trade secret information with respect to these 200 leases, and, in
turn, had violated their fiduciary duty to Klabzubas. The court imposed a constructive trust
19
on Browns’ interest in those 200 leases in an effort to provide a remedy for Browns’ breach
of their fiduciary duty. The court required Browns “to account for and disgorge 75 percent
of the profits” from these 200 leases. The court, “[a]s a corollary,” required Klabzubas to
pay for 75 percent of the costs of developing these 200 leases.
¶67 The court nevertheless determined that Browns were not entitled to the 2 percent ORR
on any of 200 leases. The court noted that the 2 percent ORR constituted payment to
Browns for landman services, and did not bear any relation to the fiduciary relationship
between the parties after January 1, 1998. The court thus determined that the “Browns
should not have an overriding royalty on production under leases taken after January 1,
1998.” This denial of ORR applied to the 200 leases that Klabzubas had obtained after the
PSC terminated. Res judicata bars relitigating these 200 leases. Bayleat Law, 284 Mont. at
3, 942 P.2d at 717.
¶68 The court in Browns I also addressed a number of leases that contained disputed or
unverified amounts of ORRs. Klabzubas and Browns jointly owned approximately 546
leases at the time that the last PSC ended on January 1, 1998. Klabzubas dismissed as
“unverified” Browns’ claim to ORRs on approximately 170 of the 546 leases. The following
exchange between the court and Klabzubas’ counsel confirms that no dispute existed as to
the validity of Browns’ right to the ORR on the remaining leases obtained before January 1,
1998:
Court: Do I have to make a decision about the amount of a 2 percent
overriding royalty on 300 and some odd wells?
Counsel: No . . . I think that quite a few of them are being paid properly.
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The court further attempted to clarify the issue:
Court: I’ve got 170 wells with a disputed amount of overriding interest.
Counsel: Unverified I think is probably more accurate.
The court never fully resolved this issue. The court instead ordered the parties to make
further efforts to settle these disputed leases.
¶69 Browns I resolved only the Browns’ right to ORR payments on the 200 leases
obtained after the last PSC ended on January 1, 1998. The court subjected these after-
acquired leases to a constructive trust and denied Browns’ claim for ORR payments. The
court in Browns I never resolved, however, the dispute regarding Browns’ claim to ORR on
the jointly held leases developed by the parties during the 21-year life of the PSCs. The
District Court wrongly concluded that res judicata barred Browns’ claims for withheld ORR
payments on the leases that the parties jointly had developed during the 21-year period
covered by the PSCs.
¶70 Did the District Court properly dismiss Browns’ interest claims where Klabzubas
withheld, but later paid, production revenues due to Browns?
¶71 The district court in Browns I imposed a constructive trust on lands “acquired by
Browns between January 1, 1998 and January 25, 2001.” Browns refused to comply with the
constructive trust order for a period of seventeen months. The court eventually granted
Klabzubas’ motion to enforce the constructive trust order. Klabzubas, in the interim, had
withheld from Browns production payments on all jointly held leases.
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¶72 Browns filed suit in December 2002 to recover almost $2 million in overdue
production payments. Klabzubas had repaid Browns almost the entire principal amount of
the withheld production revenues by the time of trial in May 2006. Browns admit that these
production revenues have become a “non-issue.” Klabzubas refused to pay, however, any
accrued interest on these production revenues that they had withheld between 2002 and the
time of trial in 2006. The District Court dismissed Browns’ claims for interest on the
withheld production revenues based on § 27-1-214, MCA. The District Court determined
that Browns’ acceptance of the entire principal of unpaid production payments had waived
any claims to interest.
¶73 Section 27-1-214, MCA, provides that “accepting payment of the whole principal, as
such, waives all claims to interest.” Section 27-1-214, MCA. We review for correctness a
district court’s application of law. James Talcott Const., Inc. v. P & D Land Enterprises,
2006 MT 188, ¶ 28, 333 Mont. 107, 141 P.3d 1200. The District Court relied on Kawasho
Intl. U.S.A. Inc. v. Lakewood Pipe Serv. Inc., 152 Cal. App.3d 785, 794 (1983), which
addressed the issue of waiver when a party accepts payment of the principal. We note,
however, that the court in Kawasho refused to apply the waiver principle. Kawasho, 152
Cal. App.3d at 795. We further note that the court in Kawasho recognized that the waiver
rule cannot be invoked where the conditions of payment preclude the person entitled to
payment from asserting his claim to interest at the time of the payment. Kawasho, 152 Cal.
App.3d at 795.
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¶74 Browns’ interest claim arises from a contractual debt under the PSC. Klabzubas’
decision to withhold production payments caused a debt to Browns to accumulate under the
PSC. Klabzubas attempted to make good on this overdue contractual obligation by making a
series of irregular payments to Browns in the months leading up to the trial. Browns asserted
a claim for accrued interest on the withheld production revenues in their second amended
complaint. We decline to view Browns’ acceptance of this series of sporadic payments from
Klabzubas as having extinguished their claim for accrued interest. Kawasho, 152 Cal.
App.3d at 795.
¶75 The District Court’s application of § 27-1-214, MCA, fails to account for a party’s
right to interest under § 27-1-211, MCA. Section 27-1-211, MCA, provides that a party
entitled to recover damages certain, or capable of being made certain by calculation, also
may recover interest on the damages. Section 27-1-211, MCA. Browns sought to recover
production payments contemplated by the PSC. The PSC set forth the division of the
production payments between Browns and Klabzubas. Klabzubas operated the jointly held
wells after the last PSC terminated in 1998. Klabzubas had in their possession information
needed to calculate the sum certain due to Browns. Ramsey v. Yellowstone Neurosurgical
Assoc. P.C., 2005 MT 317, ¶ 21, 329 Mont. 489, 125 P.3d 1091.
¶76 The general rule provides that “when the debtor knows what he is to pay, and when he
is to pay it, no demand is necessary to start the running of interest from the date the payment
should have been made.” W.J. Lake & Co. v. Montana Horse Products Co., 109 Mont. 434,
443, 97 P.2d 590, 594 (1940). Interest began to run upon Klabzubas’ withholding of
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Browns’ share of the production payments due under the terms of the PSC. Klabzubas
cannot extinguish this interest obligation by repaying the principal at some later date through
a series of irregular payments. Ramsey, ¶ 21. We do not interpret § 27-1-214, MCA, to
allow Klabzubas to withhold contractually obligated payments on millions of dollars of
production revenues for several years and avoid interest obligations by repaying the full
amount of the principal on the eve of trial. The District Court improperly dismissed Browns’
claim for interest on production payments wrongfully withheld by Klabzubas.
¶77 Browns also sought a declaratory judgment and accounting of revenue for the State-4
well. The parties’ dispute regarding the ownership rights prompted Klabzubas to withhold
$302,284.31 in production revenues from the State-4 well. Klabzubas deposited the disputed
$302,284.31 in the registry of the court. The District Court later awarded this amount to
Browns, along with accrued interest, but only the interest that accrued from the time that
Klabzubas had deposited the funds with the court registry. The District Court rejected
Browns’ claim to an additional $70,000 in interest on the disputed State-4 well for the time
period from November 2002 until the date that Klabzubas had deposited the $302,284.31
with the court registry.
¶78 The court reasoned that Browns had failed to assert a timely claim for interest after
Klabzubas had deposited the amount in the registry of the court. Browns specifically had
asserted a claim for interest on the withheld production revenues in their second amended
complaint. In a separate count, however, Browns sought a declaratory judgment and
accounting on the State-4 well. Browns did not request interest on the disputed $302,284.31.
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The District Court restricted Browns’ claims to those alleged in their second amended
complaint. The court determined that any further amendments would prejudice Klabzubas.
¶79 The district court retains discretion to allow amendment of a pleading. Porter v.
Galarneau, 275 Mont. 174, 188, 911 P.2d 1143, 1151-52 (1996). Browns sought to amend
their complaint to add the claim for accrued interest more than two years after filing the
original complaint. The general rule calls for a court to allow amendments. Peuse v.
Malkuch, 275 Mont. 221, 227, 911 P.2d 1153, 1156 (1996). The court must balance this rule
in favor of amendments, however, with considerations of prejudice to the opposing party.
Peuse, 275 Mont. at 227, 911 P.2d at 1156.
¶80 The District Court conducted a hearing on the proposed amendments. The District
Court cited Browns’ repeated failures to meet the court’s pleading deadlines and Browns’
repeated attempts to amend their damages calculations. A district court has the authority to
set deadlines for amendments to pleadings. Lindey’s, Inc. v. Professional Consultants, Inc.,
244 Mont. 238, 242, 797 P.2d 920, 923 (1990). The court recognized that the parties had
engaged in protracted discovery and had extended significant resources in preparing this
case. The court determined that any further amendments by Browns to their pleadings would
prejudice Klabzubas. We cannot determine that the District Court abused its discretion in
denying Browns’ motion to amend their pleadings to add a claim for accrued interest on the
State-4 well at that late stage in the litigation. Peuse, 275 Mont. at 227, 911 P.2d at 1156.
¶81 Did the District Court properly deny sanctions against Klabzubas based on alleged
false statements by their counsel?
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¶82 Browns argue that Klabzubas’ counsel knowingly made six false statements to the
District Court in his March 4, 2005, brief regarding the State-4 well monies deposited in the
court registry. Klabzubas asserted that Browns improperly had been withholding revenue
payments on this well for years. Browns objected to Klabzubas claim as patently false and
demanded that the District Court impose sanctions against Klabzubas pursuant to M. R. Civ.
P. 11. Judge Buyske never ruled on the Browns’ motion for sanctions. Judge Rice
eventually denied Browns’ motion.
¶83 We afford district courts wide latitude to determine whether the factual circumstances
of a particular case warrant imposition of sanctions. We recognize that “the district court has
tasted the flavor of the litigation and is in the best position to make these kinds of
determinations.” D’Agostino v. Swanson, 240 Mont. 435, 446, 784 P.2d 919, 926 (1989).
The flavor of this litigation most likely left a sour taste in the mouth of the District Court.
The competing allegations, prevarications, and outright falsehoods presented by the parties
leaves little confidence in the accuracy of any statement.
¶84 Browns alleged that Klabzubas falsely had accused Browns of keeping oil lease
revenues in a personal account, rather than in an escrow account. Klabzubas cited deposition
testimony of Sandra Brown, however, in which she admitted to having held these oil lease
revenues in a JBBO company account. Browns further alleged that Klabzubas falsely
accused Browns of relying on title confusion to withhold oil lease revenue payments. Once
again, however, Klabzubas cited both Sandra Brown’s deposition and John O. Brown’s
deposition in which each admitted that they had not paid Klabzubas and other owners for a
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period of years due to unresolved title issues. The record reveals a reasonable factual basis
for Klabzubas to have made the allegations.
¶85 Browns further contend that the District Court failed to hold a hearing on its request
for sanctions as due process requires. M. R. Civ. P. 11 requires a court to hold a hearing in
order to satisfy due process requirements before the court may impose sanctions. Kinsey-
Cartwright v. Brower, 2000 MT 198, ¶ 17, 300 Mont. 450, 5 P.3d 1026. The hearing
requirement protects the party against whom sanctions are sought. The court imposed no
sanctions. Nothing in M. R. Civ. P. 11, or within the ambit of due process, requires a court
to conduct a hearing before deciding that a party’s conduct does not warrant the imposition
of sanctions.
¶86 Did the District Court properly award attorney fees against Browns without first
holding a hearing?
¶87 Browns allege that the District Court abused its discretion in awarding attorney fees
without first holding a hearing. We review for abuse of discretion a district court’s award of
attorney fees. Good Schools Missoula, Inc. v. Missoula County Public School Dist. No. 1,
2008 MT 231, ¶ 16, 344 Mont. 374, 188 P.3d 1013.
¶88 A district court must conduct an evidentiary hearing when it imposes attorney fees
pursuant to M. R. Civ. P. 11, or under the court’s equitable powers. Good Schools Missoula,
¶ 16. A district court should examine evidence elicited through oral testimony, cross
examination, and introduction of exhibits at the hearing to determine whether imposition of
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sanctions would be appropriate. Glaspey v. Workman, 234 Mont. 374, 377-78, 763 P.2d 666,
668 (1988).
¶89 Judge Rice correctly held a hearing on the reasonableness of the amount of
Klabzubas’ fees. Judge Rice failed to protect Browns’ due process right, however, in not
considering the appropriateness of imposition of a fee award in the first place. Judge Rice
imposed the sanctions against Browns pursuant to Foy. This Court repeatedly has noted the
extremely limited scope of the equitable power to impose sanctions under Foy. Goodover v.
Lindey’s Inc., 255 Mont. 430, 447, 843 P.2d 765, 775 (1992).
¶90 We cannot overcome the unusual role played by Judge Rice in this litigation in
evaluating whether Foy provided support for his imposition of sanctions. Judge Rice did not
oversee the pretrial litigation or the trial itself. Judge Rice assumed jurisdiction over the case
after Judge Buyske had entered findings of fact, conclusions of law, and an order. Judge
Buyske also had entered a separate order that imposed sanctions against Browns. Judge Rice
was sitting in a position little different from this Court on appeal.
¶91 Judge Rice reviewed the record and modified Judge Buyske’s sanctions award. This
record review alone could not equip Judge Rice to make a decision on the appropriateness of
an imposition of sanctions against Browns under the limited Foy exception. Judge Rice
abused his discretion in failing to conduct a hearing on the appropriateness of imposition of
sanctions against Browns under these circumstances.
¶92 Did the District Court properly allow Klabzubas to double-count interest on the
judgment?
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¶93 Browns filed their Notice of Appeal with this Court on May 21, 2008. Klabzubas
filed their Notice of Cross-Appeal on May 27, 2008. Klabzubas filed a Notice of
Satisfaction of Judgment in the District Court on August 21, 2008. Browns objected on
September 2, 2008. Browns claim that Klabzubas double-counted the amount of interest
owed by including pre-judgment interest and using estimated revenue figures on the Starcher
well, rather than actual revenue figures. Browns also claim that Klabzubas inflated the
interest owed on the attorney fee award.
¶94 The District Court has never ruled on the satisfaction of judgment or how Klabzubas
calculated the interest. We are in no position to rule on this issue. The District Court first
must evaluate Klabzubas’ accounting. The District Court can consider this issue, as needed,
at the conclusion of the other proceedings on remand.
¶95 Should the District Court’s first sanctions order be reinstated and the cause
remanded for entry of additional attorney fees to Klabzubas?
¶96 We agree with Judge Rice that Judge Buyske misapplied M. R. Civ. P. 37(d) in
imposing sanctions against Browns. The District Court on remand can determine the
appropriateness of any sanction being imposed against Browns following a hearing.
CONCLUSION
¶97 We affirm in part, reverse in part, and remand for limited proceedings consistent with
this Opinion. The District Court on remand shall allow Browns to present evidence
regarding their costs in developing the Starcher claims. The District Court shall consider
Browns’ claim for 2 percent ORR on those leases not covered by Judge Warner’s
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constructive trust in Browns I. The District Court shall address Browns’ interest claims from
Klabzubas’ withholding of production payments, except for the State-4 well. The District
Court can reconsider at the conclusion of these proceedings whether to proceed with an
imposition of sanctions against Browns. The District Court must conduct a hearing
regarding whether sanctions would be appropriate under the limited Foy exception. Finally,
the District Court must resolve Klabzubas’ claim to have satisfied the judgment in light of
the outcome of these proceedings on remand.
/S/ BRIAN MORRIS
We Concur:
/S/ MIKE McGRATH
/S/ JAMES C. NELSON
/S/ PATRICIA O. COTTER
/S/ JIM RICE
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