Consolidated Minerals Corp. v. Madison Gold Mines, Inc.

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
Submitted on Briefs: November 10, 1993
Decided: December 22, 1993
Filed:
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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