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AAA Valley Gravel, Inc. v. Totaro

Supreme Court of Alaska

October 30, 2009

AAA VALLEY GRAVEL, INC., Appellant,
v.
Alicia TOTARO and Herman Ramirez, Appellees. Alicia Totaro, Cross-Appellant,
v.
AAA Valley Gravel, Inc., Cross-Appellee.

Page 154

William G. Royce, Law Office of William G. Royce, Anchorage, for Appellant/Cross-Appellee.

Richard L. Harren, Law Offices of Richard L. Harren, P.C., Wasilla, for Appellee/Cross-Appellant Alicia Totaro.

Ross A. Kopperud, Palmer, for Appellee Herman Ramirez.

Before : FABE, Chief Justice, MATTHEWS, EASTAUGH, CARPENETI, and WINFREE, Justices.

OPINION

PER CURIAM.

I. INTRODUCTION

A property owner leased gravel mining rights to a lessee. The lessee in turn leased its rights to a sublessee. The sublessee assumed the lessee's duty to pay royalties to the property owner and agreed to pay overriding royalties to the lessee. The lessee later assigned the overriding royalties to an assignee. After more than a decade of operating under these arrangements, the sublessee purchased the property under a warranty deed with no title exception for the lease and then stopped paying the overriding royalties to the assignee.

The assignee sued the sublessee for the overriding royalties. The sublessee claimed it is not liable because the original lease is not exclusive and, as the new owner of the property, it can extract gravel in its own right. Alternatively, the sublessee claimed the former property owner should pay the overriding royalties under the title covenants of the warranty deed. The trial court held the sublessee liable to the assignee for the overriding royalties and ruled that the warranty deed covenants did not shift this liability to the former property owner. Because the trial court failed to make necessary findings of fact and conclusions of law regarding both (1) the interpretation of the lease as to its exclusivity and (2) a reformation analysis for the warranty deed, this portion of the trial court's decision is vacated and remanded for further proceedings.

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A related holding based on additional facts is important only if the sublessee ultimately is found liable to the assignee for past or future overriding royalty payments. About seven years after assigning all of the overriding royalties to the assignee, the lessee purported to assign fifty percent of the overriding royalties to a second assignee. The first assignee did not protest and thus ratified the new assignment, and the sublessee honored it by paying half of the overriding royalties to the first assignee and half to the second. When the sublessee stopped paying any royalties at all, the second assignee told the first assignee that she could have back his interest in the overriding royalties. The first assignee therefore claimed the entire amount of the overriding royalties, and at trial the second assignee confirmed this arrangement. The trial court ruled that the first assignee was entitled to only fifty percent of the unpaid royalties. This ruling is reversed because the second assignee orally assigned to the first assignee his interest in the unpaid overriding royalties, his testimony confirmed the assignment, and the assignment was effective.

II. FACTS

A. The Ramirez/Cosmos Lease

On March 29, 1984, Bill Nelson, acting on behalf of his corporation, Cosmos Development, Incorporated, executed a gravel lease with Herman Ramirez, the owner of an approximately one-hundred-acre parcel near the Palmer-Wasilla Highway.[1] The lease was to " last as long as the economical price of gravel is feasible in this pit," and Cosmos was to pay royalties for gravel taken from the pit. The superior court found:

After the lease was signed, Mr. Nelson invested several thousand dollars in the operation. He put in a scale and scale house. He built a road and a bridge to get the gravel from the mine to Trunk Road. He also was sued by an adjoining landowner, Mr. Schultz, when he built the road, because the road crossed Mr. Schultz's property. Mr. Nelson eventually was able to purchase a license from Mr. Schultz which allowed him legally to use the land on which the road had been constructed.

B. The Cosmos/AAA Sublease

A few months after signing the gravel lease agreement with Ramirez, Nelson approached Bill Fuger, a Cosmos employee, and Ken Mearkle of Northland Steel. Nelson offered to transfer another of his corporations, AAA Valley Gravel, Inc., to Fuger and Mearkle and to sublease Cosmos's gravel mining rights to AAA, allowing the two men

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to take over the Cosmos operation. Fuger and Mearkle were attracted to this proposal and Fuger sought legal advice about the Cosmos/Ramirez lease.

Fuger's lawyer, J.B. McCombs, wrote a single-spaced six-page letter critical of the Ramirez/Cosmos lease, noting myriad problems and unanswered questions. McCombs noted the lease's lack of a legal description, its silence on whether the gravel mining rights were assignable, the indefinite term of the agreement, its ambiguity as to whether or not the mining rights were exclusive,[2] Cosmos's failure to conduct a title search to verify that Ramirez was the sole owner of the gravel pit and to verify that the property had no encumbrances, and the fact that the agreement had been neither notarized nor recorded and would not be recordable unless it were notarized.

After considering McCombs's letter, Fuger, Mearkle, and Nelson met with Nelson's lawyer, Michael Patterson, who drafted a lease agreement between Cosmos and AAA. This sublease was signed on December 20, 1984, by Nelson on behalf of Cosmos and Fuger on behalf of AAA, and it became effective on January 1, 1985. Under this sublease AAA agreed to pay (1) the royalties due Ramirez under the Ramirez/Cosmos lease and (2) overriding royalties to Cosmos.[3]

The term of the sublease was " as long as it is economically feasible to extract gravel from said property." The sublease was expressly " exclusive" and " contingent upon the Ramirez lease," and further provided that " [b]oth parties are familiar with the letter of December 12, 1984" -a reference to McCombs's detailed critique of the Ramirez/Cosmos lease. The sublease bound AAA to " take all reasonable steps to protect [Cosmos's] lease with Ramirez." It also provided that " this agreement may be recorded by [AAA]," but although the sublease was notarized and contained a property description, it never was recorded.

After the Cosmos/AAA sublease took effect, AAA proceeded to further develop the pit and take gravel from it. The superior court found:

AAA proceeded to develop the mine, which required the expenditure of substantial amounts of money and the construction of related facilities. Pursuant to the lease, AAA paid Mr. Ramirez the royalties to which he was entitled under the Cosmos/Ramirez lease, and it paid additional royalties to Cosmos under the Cosmos/AAA lease. Mr. Ramirez evidently was never told about the Cosmos/AAA lease, nor was he involved in the negotiations that led to the lease. But he clearly had to know that AAA, not Cosmos, was operating there, since AAA was the entity that sent him the royalty checks.

C. Assignment of Overriding Royalties

In October of 1986 Cosmos assigned all of its overriding royalty rights under the sublease to Nelson's wife, Alicia Totaro. On November 21, 1986, the State of Alaska involuntarily dissolved Cosmos for failure to file a biennial report.

Nelson formed a new corporation, Cosmos Development, Inc., in April 1991, but it filed for bankruptcy later that year. The bankruptcy schedules referenced assets and liabilities dating back to 1985, suggesting that Nelson had intended that the second Cosmos corporation simply step into the shoes of the first Cosmos corporation-the parties do not question this. However the bankruptcy schedules made no mention of the Ramirez/Cosmos lease or the Cosmos/AAA sublease, and Nelson voluntarily dissolved the second Cosmos corporation in 1992, declaring

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" no assets of the corporation to distribute to shareholders or to be applied toward the corporation's debts and liabilities." Nothing in the record suggests that either Cosmos corporation had assigned anything to Totaro other than the overriding royalty interest.

Meanwhile Totaro and Nelson legally separated and Totaro moved to California. AAA was aware of these changes and sent its overriding royalty payments to Totaro in California. In July 1993 Nelson directed AAA to disburse fifty percent of the overriding royalties to Sam Oil Company, a company owned by Mike Palmquist. The superior court observed that it was " utterly opaque ... why Mr. Nelson chose to have half of the royalties sent to Mr. Palmquist" and that " [t]he explanations offered by Mr. Nelson and Mr. Palmquist were vague, internally inconsistent, inconsistent with each other, and inconsistent with Mr. Nelson's July 1, 1993 letter to AAA." But the court found that " neither Ms. Totaro nor AAA challenged the assignment-to the contrary, AAA paid one-half of the royalties to Ms. Totaro and one-half to Sam Oil Company without any demur from Ms. Totaro." The court concluded that " Ms. Totaro and AAA thereby ratified the assignment to Sam Oil."

D. The AAA Purchase of the Property from Ramirez

AAA did not stop making royalty payments under the Ramirez/Cosmos lease and the Cosmos/AAA sublease until AAA purchased the property from Ramirez in August 1998. The purchase was effected through an earnest money agreement signed on August 5, 1998,[4] and was made final by a warranty deed signed August 26, 1998. The warranty deed did not mention the Ramirez/Cosmos lease as an exception to title.

The superior court described the circumstances of the sale as follows:

Mr. Ramirez decided some time in July 1998 to sell the entire property. He placed an advertisement in the newspaper offering the property. He also came to the property and asked Mr. Fuger and Mr. Mearkle whether they were interested in purchasing the property. To put some pressure on them to [buy], he indicated to them that he had another prospective buyer, even though no one had approached him with a concrete offer.
AAA decided it wanted to purchase the property. According to Mr. Fuger, AAA felt it had no choice but to purchase the property because of the legal deficiencies in the Cosmos/Ramirez lease. In particular, Mr. Fuger believed that that lease was unenforceable, which meant that if someone other than AAA purchased the property, AAA could be forced to leave, losing its only asset and source of revenue. The court found this testimony credible, given the legal advice Mr. Fuger had received from Mr. McCombs.
AAA and Mr. Ramirez then negotiated the terms of the sale. During these negotiations, Mr. Fuger and Mr. Ramirez discussed the impact of the sale on the Cosmos/Ramirez and Cosmos/AAA leases. Mr. Fuger insisted at trial that he asked Mr. Ramirez if there was a lease on the property and that Mr. Ramirez said no. Mr. Ramirez claimed to have no recollection of that conversation, and he asserted that he thought the Cosmos/Ramirez lease had expired. The court has difficulty with all of this testimony. Mr. Fuger was well aware of the Cosmos/Ramirez lease-indeed, Mr. Fuger relied on what he perceived to be the unenforceability of that lease as the reason he purchased the property. Mr. Ramirez also was well aware of the lease, since he signed it; and he cannot very well have thought it expired since he was continuing to receive royalty payments from it. Mr. Ramirez in particular came across as a very clever and accomplished businessman; the court finds it hard to believe he was not well aware of the precise status of the Cosmos/Ramirez lease, and that had he thought the lease had expired, he would have made that fact very clear to AAA.

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The more likely scenario is that Mr. Fuger and Mr. Ramirez thought at the time that if AAA bought the property, then neither of them would have to worry about the Cosmos/Ramirez lease anymore, and that their testimony at trial was colored by their effort to blame each other for any liability that might be owed to Ms. Totaro. This is supported by the fact that Mr. Fuger and Mr. Ramirez each testified at trial that they agreed that AAA would not have to pay Mr. Ramirez once it purchased the property, that they discussed whether AAA would have to pay Ms. Totaro, and that Mr. Ramirez stated that Mr. Fuger should talk to an attorney about any responsibilities AAA had to Ms. Totaro. This testimony indicates that Mr. Fuger and Mr. Ramirez were well aware of the leases at issue and that they decided not to deal with the ramifications of the sale on the Cosmos/AAA lease.

After AAA bought the property it stopped paying overriding royalties. Totaro called Fuger in October 1998 to ask why she had not received a royalty check. Fuger informed her that he had purchased the pit and that she would no longer be receiving royalty checks. She also called Palmquist-he was not interested in suing and later testified that he told her " I wanted her to have my half."

III. PROCEEDINGS

In July 2000 Totaro filed suit against AAA and Fuger. She sought damages for the overriding royalty payments allegedly due, claiming that " Fuger was well aware of the fact that the royalty payments to Ms. Totaro was Mr. Nelson's way of making child support payments." She made it clear that she was claiming one hundred percent of the overriding royalty, alleging:

In 1993, Nelson took back 1/2 of the royalties he had originally assigned to plaintiff and assigned them to Mike Palmquist to pay a debt relating to the gravel pit. At some point Mr. Palmquist was either paid in full or will be paid in full and then 100% of the royalties will again go to Ms. Totaro.

She asserted claims for breach of contract, tortious interference with a contract, and emotional distress, and she asked for compensatory and punitive damages.

AAA and Fuger answered, denying liability. In addition AAA filed a third-party complaint against Ramirez for breach of contract and breach of warranty of title, alleging that " [i]f the court should find for plaintiff, Alicia Totaro, in this matter, then Mr. Ramirez breached his warranty against encumbrances." Ramirez answered the third-party complaint, denying liability to AAA and alternatively counterclaiming for rescission of the property transaction.

AAA and Fuger moved for partial summary judgment on all of Totaro's claims except the breach of contract claim against AAA. This motion was granted. AAA also moved for summary judgment on its claims against Ramirez, and Ramirez cross-moved for summary judgment. The court ordered that all of the claims between AAA and Ramirez be reserved for trial, but did rule that the Ramirez/Cosmos lease was an encumbrance on title to the property.

The case was tried to the superior court on July 22 and 23 and September 16, 2003. The court determined that Totaro was entitled to one-half of the overriding royalties because " AAA remained bound by the [Cosmos/AAA sub]lease even after it purchased the property from Mr. Ramirez. By not paying Ms. Totaro the royalties under that lease, AAA breached the lease." But the court refused to award Totaro the unpaid overriding royalties that had been assigned to Palmquist, ruling only that Totaro ratified the assignment to Palmquist without mentioning Totaro's claim that Palmquist had reassigned his half of the unpaid overriding royalties to her. The court further found that AAA and Ramirez " knew about both the [Ramirez/Cosmos] lease and the Cosmos/AAA lease when they negotiated and arrived at the land sale agreement" and " [g]iven that knowledge, neither party could reasonably have relied upon any alleged misrepresentation by the other party." The court also found that AAA knew of its potential obligation to continue to pay royalties to Totaro under the Cosmos/AAA sublease, but was willing to purchase the property " notwithstanding those concerns." The court concluded that Ramirez was not

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responsible under the warranty deed for payment of Totaro's overriding royalties.

Final judgment was issued on December 13, 2005, establishing AAA's monetary obligation to Totaro, ordering specific performance of AAA's overriding royalty obligation to Totaro, and dismissing AAA's claim against Ramirez. AAA appeals and Totaro cross-appeals.

IV. CONTENTIONS ON APPEAL

AAA presents three contentions on appeal, two relating to Totaro's judgment against AAA and one relating to the trial court's refusal to hold Ramirez liable on the warranty deed. As to Totaro, AAA argues that: (1) Cosmos's assignment to Totaro was gratuitous and therefore revocable and was terminated by Cosmos's dissolution; and (2) because the Ramirez/Cosmos lease was non-exclusive, AAA can extract gravel from the property as the owner of the property free from obligations under the Ramirez/Cosmos lease and the Cosmos/AAA sublease. AAA's argument concerning Ramirez is that the covenant against encumbrances inherent in its warranty deed encompasses Totaro's claim for overriding royalty rights arising under the Cosmos/AAA lease.

Totaro presents three arguments in her cross-appeal, arguing that the trial court erred when it: (1) failed to award her one hundred percent of the overriding royalties; (2) stated in a finding that the Ramirez/Cosmos lease would last only as long as the property was unsuitable for subdivision purposes; and (3) permitted AAA to deduct a certain amount for additives from asphalt tonnages produced at the pit.

We discuss each of these contentions in turn.

A. AAA's Arguments with Respect to Totaro's Judgment

1. The assignment of overriding royalties was irrevocable.

AAA argues that Totaro lacks the power to assert rights to the overriding royalties. We apply our independent judgment in reviewing this question and adopt the rule of law most persuasive in light of precedent, policy, and reason.[5]Alaska Statute 10.06.633(g) provides:

An action arising out of a contract assigned by a corporation dissolved under this section may be brought in the name of the assignee. The fact of assignment and of purchase by the plaintiff shall be set out in the complaint or other process.
Cosmos assigned its right to overriding royalties from the Cosmos/AAA sublease to Totaro and notified AAA of the assignment in 1986, Before Cosmos was dissolved.[6] AAA acknowledges that Cosmos was not dissolved at the time of the assignment but argues that the assignment was gratuitous and therefore revocable, and as such was terminated by Cosmos's subsequent dissolution.

AAA's argument is not supported by applicable principles of law. According to the Restatement (Second) of Contracts:

Unless a contrary intention is manifested, a gratuitous assignment is irrevocable if (a) the assignment is in a writing either signed or under seal that is delivered by the assignor;

or (b) the assignment is accompanied by delivery of a writing of a type customarily accepted as a symbol or as evidence of the right assigned.[7]

Commentary to this section states that delivery may be made either to the donee or to a third person on his behalf.[8] Nelson mailed AAA a signed and sealed letter notifying

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AAA of the prior assignment to Totaro and directing payment of all royalties to her. Although this evidentiary writing was delivered a few months after the actual assignment, it nevertheless rendered the assignment irrevocable unless a contrary intention was manifested. No such intention was manifested in 1986 when the assignment was made and notice was delivered to AAA.

AAA contends that Nelson manifested an intention that the assignment be revocable when in 1993 he purported to assign half of the overriding royalties previously assigned to Totaro to Palmquist's Sam Oil Company. But the Restatement rule concerning the manifestation of a contrary intention necessarily requires that the manifestation take place contemporaneously with the delivery of the assignment, otherwise an assignor would have the power at any time to revoke any gratuitous assignment no matter how irrevocable it might appear to be at the time of delivery.

We therefore conclude that the assignment was irrevocable and Cosmos's subsequent dissolution did not affect its continuing validity.

2. We remand for further proceedings on the issue of AAA's duty to pay overriding royalties after becoming the owner of the property.

At the end of the trial the court found that both the Ramirez/Cosmos lease and the Cosmos/AAA sublease were valid, neither had expired, and AAA was not relieved of its duty to continue making overriding royalty payments to Totaro. AAA contends that it no longer owes overriding royalties under the Cosmos/AAA sublease because the Ramirez/Cosmos lease was not exclusive and AAA is entitled to exercise Ramirez's retained right to extract gravel. The trial court did not directly address this argument, but AAA's potential liability to Totaro turns on whether the Ramirez/Cosmos lease was intended to be an exclusive lease.

Contract interpretation generally is a question of law.[9] The goal of contract interpretation is to give effect to the parties' reasonable expectations.[10] If the contract language is unambiguous, the parties' intent is generally determined by the instrument itself,[11] but " extrinsic evidence is always admissible on the question of meaning of the words of the contract itself." [12] Courts look to extrinsic evidence of the parties' contractual intent only if the language of the instrument is ambiguous.[13] Relevant extrinsic evidence includes " the parties' conduct, goals sought to be accomplished, and surrounding circumstances at the time the contract was negotiated." [14]

The Ramirez/Cosmos lease does not mention exclusivity,[15] but even though silent, some of its provisions may make sense only if the lease had been intended to be exclusive.[16]

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Thus the Ramirez/Cosmos lease is ambiguous on its face as to exclusivity.

Contract interpretation involves fact-finding when facially ambiguous contract language read in the context of all relevant extrinsic evidence remains ambiguous:

Interpreting a written contract is generally a task for the trial court; however, interpretation becomes a task for the trier of fact when the parties present extrinsic evidence to clarify a contract's meaning, when this evidence points toward conflicting interpretations of the contract, and when the contract itself is reasonably susceptible of either meaning. In such cases, the trial court initially determines whether the extrinsic evidence meets the criteria to create a [question of fact]; when the court finds that the extrinsic evidence does not conflict or is incompatible with the terms of the written contract, interpretation remains a question of law for the court's determination.[[17]]

Here, some extrinsic evidence implies that the Ramirez/Cosmos lease was non-exclusive. Ramirez testified that he had no discussions with Nelson as to exclusivity; a reasonable inference may be drawn that in the absence of any discussions about exclusivity, Ramirez and Nelson did not make an agreement for exclusivity. The trial court found Ramirez's motivation to enter into a gravel lease was to make his property suitable for subdivision and development; a reasonable inference may be drawn that Ramirez was interested in subdivision development as soon as possible and this would be facilitated by multiple gravel extraction operations on the large property, perhaps in more than one pit.[18]

The trial court also found that Ken Mearkle was " an independent gravel operator working under the business name of Northland Steel, which in turn was working in the Ramirez pit at the same time as Cosmos." Although Mearkle testified that he had a contractual arrangement with Cosmos and that he made his Cosmos-related payments directly to Cosmos, Ramirez testified that he believed he received several checks from Mearkle relating to operations in the gravel pit. A reasonable inference may be drawn that Mearkle operated in the pit under separate arrangements with both Ramirez and Cosmos, thus supporting the notion that the Ramirez/Cosmos lease was not exclusive.

Finally, the trial court found that Nelson, on behalf of Cosmos, submitted a proposed new lease to Ramirez to cure what AAA and Nelson believed were deficiencies in the Ramirez/Cosmos lease, but that Ramirez did not sign the proposed lease. A reasonable inference may thus be drawn that Ramirez did not agree that the Ramirez/Cosmos lease was intended to be exclusive.

On the other hand there is much to suggest that the Ramirez/Cosmos lease was intended to be exclusive. Ramirez stated in an affidavit that after he purchased the one hundred acres-and converted the buildings on the site to a sixteen-unit apartment complex-he wished to subdivide the remainder of the property but he was told that the property was " too steep and rolling to be suitable for a subdivision." Accordingly, Ramirez stated: " In 1984, I advertised in the newspapers for someone to develop my property into [a] gravel pit. " (Emphasis added.) Nelson responded and around March 15, 1984, " we entered into letter of intent concerning the development of the pit." Two weeks later the letter of intent was replaced by the Ramirez/Cosmos lease. Ramirez further stated:

Under the agreement, Cosmos agreed to pay me a royalty of fifty cents a yard for gravel extracted from the pit until a road was built to Trunk Road and a bridge or culvert was installed at which time the royalty would be reduced to thirty five cents a yard. Once the road was put in to [T]runk [R]oad and a washer was brought

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in to process material, I was to receive an additional thirty cents a yard which would be reduced by five cents if I didn't help manage the pit.
Bill Fuger worked for Bill Nelson at the time. Ken [Mearkle] was also working in the pit as well. Sometime in 1985, Bill Fuger took over running the pit from Bill Nelson and ran the pit under the name of AAA Valley Gravel Inc.
I was not a party to the [Cosmos/AAA] agreement. I was aware that Bill Fuger had taken over the pit because he sent me royalty checks from 1985 through August 1998 when I sold the pit to AAA....
Up to the time I sold the property to AAA ... I oversaw the management of the apartments that were located a couple hundred feet from the gravel pit operation. I had no involvement with the operation of the gravel pit. (Emphasis added.)

Ramirez's advertisement for " someone to develop my property into [a] gravel pit" implies exclusivity, as do his references both to the improvements that Cosmos was to make and " taking over" and " running" the pit.

This conflicting extrinsic evidence does not clarify the ambiguity of the written gravel lease agreement. Therefore it is the trial court that should first find, as a matter of ...


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