United States Court of Appeals
For the First Circuit
No. 01-1219
THE RHODE ISLAND CHARITIES TRUST,
Plaintiff, Appellee,
v.
ENGELHARD CORPORATION,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Ronald R. Lagueux, U.S. District Judge]
Before
Boudin, Chief Judge,
Gibson,* Senior Circuit Judge,
and Torruella, Circuit Judge.
H. Jerome Strickland with whom Robert C. Norman, Jones, Cork
& Miller, Benjamin V. White and Vetter & White were on brief for
appellant.
Michael P. DeFanti with whom Brian C. Newberry and Hinckley,
Allen & Snyder LLP were on brief for appellee.
*
Honorable John R. Gibson, of the Eighth Circuit, sitting by
designation.
September 27, 2001
BOUDIN, Chief Judge. Engelhard Corporation appeals from
the district court's grant of summary judgment, and its award of
$597,463 in damages plus $191,029.60 in prejudgment interest, in
favor of the Rhode Island Charities Trust ("the Trust"). The
facts are somewhat complicated but undisputed.
In 1937, the Trust was formed for the purpose of
distributing money grants for charitable purposes. In 1948, the
Trust purchased Southern Clays, Inc., a kaolin mining and
processing company based in Georgia. Kaolin is a clay which,
among other uses, is widely employed in the paper industry. In
1963, the Trust sold nearly all of the assets of Southern Clays,
with the exception of certain clay properties in Washington
County, Georgia, to the Freeport Sulphur Company ("Freeport").
At the same time, Southern Clays and Freeport entered
into a ninety-nine year agreement (the "Indenture") as to
properties containing the clay. Some of the properties are
owned in fee by the Trust (the "fee properties"), while other
properties are owned by third parties who have entered into
mineral leases with the Trust with termination dates ranging
from 1967 to 2023 (the "leased properties"). Under the
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Indenture the Trust leased the fee properties to Freeport, and
it assigned to Freeport its rights as to the leased properties.
Engelhard acquired Freeport in 1985 and is its successor in
interest; the Trust has succeeded to Southern Clays' rights
under the Indenture.
The Indenture, whose pertinent provisions are reprinted
in an appendix to this decision, requires a royalty payment to
the Trust from Engelhard in consideration of the latter's right
to mine the clay from the covered properties. To oversimplify
slightly, the royalty rate for each period was 1.5 percent of
Engelhard's "net receipts" from kaolin derived from the
properties and sold by Engelhard during the period. Indenture
¶ 5(a). Engelhard was also required to pay real estate taxes on
the fee properties and to make various payments on the leased
properties, including the royalties that the Trust was required
to pay to the third-party owners. Id. ¶ 7(a), (c). Engelhard
was entitled to deduct these payments from the royalties it paid
to the Trust. Id. ¶ 7(b).
One other set of provisions in the Indenture is
important to the dispute that is now before us. With respect to
the leased properties, Engelhard was entitled under the
Indenture to alter, modify, renew, or extend those third-party
leases (by agreement with the relevant third-party owners).
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Indenture ¶ 2(e). This could be done either before or upon
expiration and without the Trust's consent. Id. But, as to any
changes effective before the preexisting termination date of a
lease that was renewed or extended, any increase in fixed costs
or in the royalties payable to the owners under the new terms
was to be borne by Engelhard. Id.
This case centers around a group of leased properties
that are described in paragraph 23 of the Indenture (the "Veal
leases"). The Veal leases all had a royalty rate negotiated
years ago that is very low by current prices ($.11 per cubic
yard) and had termination dates of March 23, 1995. Because of
royalty disputes with the third-party owners, Engelhard did not
mine the properties until the 1990s. In August 1990, Engelhard
agreed with the owners to extend the terms for 20 years and
increase royalties immediately--by a multiple of almost 30--to
$3 per cubic yard on three leases and $2.90 on the fourth. For
the remainder of the preexisting lease terms, Engelhard absorbed
the cost of the increased royalties.
Then, in mid-1995, Engelhard began deducting the
increased royalties on the Veal lease extensions from the total
royalties due to the Trust from all covered properties--not just
the Veal leases--with drastic effects on the payments otherwise
due to the Trust. Although Engelhard's semi-annual payments to
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the Trust usually exceeded $300,000, the payment for the last
six months of 1995 was $30,000. By its calculations, the Trust
was effectively paying Engelhard, by a reduction in royalty
payments, about $1.80 for each cubic yard Engelhard mined on
Veal properties.
In due course, the Trust brought suit against Engelhard
in federal district court in Rhode Island. The complaint
alleged that Engelhard had violated the terms of the Indenture,
violated the implied covenant of good faith and fair dealing,
and violated an alleged fiduciary duty owed by Engelhard to the
Trust. On cross motions for summary judgment, the district
court held for the Trust on the implied covenant claim and for
Engelhard on the contract and fiduciary duty counts. In
substance, the court held that Engelhard could not deduct the
increased royalty payments on the Veal leases from other
royalties due to the Trust.
Engelhard now appeals to this court. It says that the
district court erred so far as it favored the Trust and,
further, in awarding prejudgment interest to the Trust as to
royalties wrongly withheld by Engelhard since 1995. The parties
are agreed that Georgia law governs the contract-related issues;
they disagree about whose law controls as to prejudgment
interest. On the grant of summary judgment and the legal issues
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presented as to prejudgment interest, our review is de novo.
Augat v. Fenoglio, 254 F.3d 368, 370 (1st Cir. 2001).
In our view the able district judge reached the correct
result and our own analysis differs only in emphasis.
Specifically, we think that the contract, read in the framework
of plausible business expectations, can reasonably be read only
one way, namely, to preclude the negative royalty deductions
sought by Engelhard and, for that reason, the district court's
judgment is correct without regard to the Trust's implied
covenant claim. But the difference is more a matter of labels
than of substance.
The critical language of the Indenture provides in
paragraph 5 for the 1.5 percent royalty to the Trust. In
subparagraph 7(a) the Indenture sets forth Engelhard's
obligation to pay both (i) taxes on fee properties and (ii)
payments on leased properties that the original lessee must pay
"other than royalties on production, provision for which is made
in [subparagraph 7(c)]." Subparagraph 7(b) then allows "[t]he
aggregate amount" of all such payments under subparagraph 7(a)--
taxes and non-royalty payments--to be deducted by Engelhard from
"the aggregate royalties" payable to the Trust.
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Subparagraph 7(c) then treats in a single provision the
subject of production royalties payable to the owners of leased
land and credits for payment of those royalties:
[Engelhard] also agrees to pay to the
person entitled thereto all royalties based
on production required to be paid under the
Leases, but with respect to any Lease only
so long as [Engelhard] remains an assignee
thereof; provided, however, that [Engelhard]
shall be entitled to a credit for any
amounts paid or payable by it pursuant to
this subparagraph (c) against royalties
thereafter payable to [The Trust] under the
provisions of Paragraph 5 of this Agreement.
It is this "entitled to a credit" language on which
Engelhard relies in deducting the full amount of the Veal lease
royalties paid to the landowners from the total royalty package
owed by Engelhard to the Trust under the Indenture. The Trust,
it should be stressed, does not claim to be owed any royalties
after mid-1995 from sales by Engelhard of kaolin derived from
the Veal properties. It simply wants to prevent its non-Veal
related royalties from being reduced because of the increased
royalties that Engelhard has agreed to pay the Veal property
owners.
Although Engelhard thinks that the language of
subparagraph 7(c) is unequivocally in its favor, this is far
from true. Indeed, if words alone are considered, the Trust can
point--as the district court noted--to the contrast with
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subparagraph 7(b) which (unlike subparagraph 7(c)) provides for
the deduction of the specified items from aggregate royalties
owed to the Trust. But it is guesswork whether the omission of
the term "aggregate" in subparagraph 7(c) was intended to
control the issue before us; quite likely the drafters never
envisaged the precise problem. Certainly, there is no extrinsic
evidence that they did.1
But even if the language taken in the abstract is not
decisive in the Trust's favor and even if the drafters never
focused on the risk of negative royalties, only one reading of
the contract makes any sense. No rational party in the Trust's
position would agree to such negative royalties, nor would
anyone in Engelhard's position demand such an option, because it
would create an extraordinary perverse incentive for Engelhard
to engage in otherwise irrational conduct and would create an
unlimited risk to the Trust's legitimate general expectations.
The point is so obvious as to require only brief explanation.
1
In an attempt to show that the parties considered the
present scenario, Engelhard points to subparagraph 2(e), which
provides that Engelhard shall not modify any existing lease
unless it agrees to pay any additional fixed costs or royalties
itself for the period prior to the lease's natural termination
date. This provision does nothing to suggest that the parties
thought about increased royalties being deducted from the
aggregate royalties owed to the Trust after the natural
termination date.
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If the contract were read as the Trust urges, it might
well make economic sense for Engelhard to agree to a lease
extension for the Veal property coupled with a very large
increase in royalties paid to the owners. That would depend on
whether the increase in kaolin prices was large enough for
Engelhard to pay a greatly increased royalty to the Veals and
still have room for a reasonable profit after mining and
processing costs were paid. In fact, although unnecessary to
our reasoning, it appears that Engelhard (reasonably enough)
paid $3 or less in royalties to the Veal property owners while
the kaolin could be sold for $4 or more.
But if the contract were read as Engelhard urges, then
it would have an incentive to pay royalties on extended leases
in any amount necessary to secure the extension up the point
that all of the Trust's other royalties were wiped out. Of
course, Engelhard might always prefer to pay the third party
owners as little as possible. Nevertheless, its reading would
make it profitable (for Engelhard) to make lease extensions that
were economically unsound as a whole (e.g., on high extraction-
cost property) simply because it could offload the royalty costs
onto the Trust, which received no benefit from the lease
extension.
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There is a long tradition in contract law of reading
contracts sensibly; contracts--certainly business contracts of
the kind involved here--are not parlor games but the means of
getting the world's work done. Fishman v. LaSalle Nat'l Bank,
247 F.3d 300, 302 (1st Cir. 2001). Even where courts are sure
that the parties never thought about an issue, small wrinkles
may be ironed out by interpretation where it is clear how the
parties would have handled them. Farnsworth, Contracts § 7.16,
at 545 (1990). Although no Georgia case directly in point has
been cited to us, we are confident that Georgia courts are as
commonsensical as those elsewhere in the country. See Ga. R.R.
Bank & Trust v. Fed. Deposit Ins. Corp., 758 F.2d 1548, 1551
(11th Cir. 1985).
True, parties can contract for preposterous terms. If
contract language is crystal clear or there is independent
extrinsic evidence that something silly was actually intended,
a party may be held to its bargain, absent some specialized
defense. But the language here is not at all clearly in
Engelhard's favor; nor is there any extrinsic evidence as to
original intent. Some evidence exists of what Engelhard
unilaterally thought when it began to negotiate the extensions,
and it is seemingly unhelpful to Engelhard's current position;
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but the post-Indenture views of one side are in any event poor
evidence of what the parties originally negotiated.
In our view there was nothing unreasonable about
Engelhard's extension of the Veal leases: the transaction looks
as if it made sense, and Engelhard thought it made sense, even
if it could not deduct the higher third party royalties against
non-Veal lease royalties owed to the Trust. And this is so even
though the extensions might wipe out all Veal lease royalties to
the Trust after mid-1995; the Trust, after all, had no assurance
that the Veal leases could ever be extended on terms that would
give the Trust anything after mid-1995.
The problem for us is not that the leases were extended
on the terms agreed between Engelhard and the owners but that
Engelhard wants to deduct the new royalties due to the Veal
owners not just from the royalties due to the Trust on the Veal
leases but also from the Trust's other royalties. Possibly the
covenant of good faith and fair dealing, compare West v.
Koufman, 384 S.E.2d 664, 666 (Ga. 1989), with Automatic
Sprinkler Corp. of Am. v. Anderson, 257 S.E.2d 283, 284 (Ga.
1979), could be used in this context--not to "limit discretion"
but as a gap-filler for a situation not anticipated by the
parties. See Thomas Diamond & Howard Foss, Proposed Standards
for Evaluating When the Covenant of Good Faith and Fair Dealing
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Has Been Violated: A Framework for Resolving The Mystery, 47
Hastings L.J. 585, 586-87 (1996). But to us it is more
straightforward simply to say that subparagraph 7(c) does not
permit the deduction of royalties on an aggregate basis but only
on a lease-by-lease basis.
Separately, Engelhard asks us to reverse the district
court's award to the Trust of prejudgment interest on the unpaid
royalties. Applying Rhode Island law, the district judge
directed that the statutory rate of 12 percent interest apply
from date of accrual to date of judgment. R.I. Gen. Laws § 9-
21-10 (1997). Engelhard says that Georgia law governs
prejudgment interest and under Georgia law no prejudgment
interest, or at least a lesser amount, would be awarded.
O.C.G.A. § 7-4-2 (Michie 1997); id. § 13-6-13 (Michie 1982).
Under settled conflict principles, the question whether
Rhode Island or Georgia rules on prejudgment interest should be
applied by a district court sitting in diversity in Rhode Island
depends on how a Rhode Island state court would resolve the
matter. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496
(1941); Commercial Union Ins. Co. v. Walbrook Ins. Co. Ltd., 41
F.3d 764, 774 (1st Cir. 1994). Here, there is every reason,
short of an unqualified decision by the Rhode Island Supreme
Court, to believe that--as the district court held in a bench
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ruling--Rhode Island courts measure the award as a matter of
Rhode Island law even where the dispute is controlled by the
substantive law of another state.
The Rhode Island prejudgment statute, typically enough,
does not contain any choice of law directions. We are forbidden
under Supreme Court precedent, see Salve Regina Coll. v.
Russell, 499 U.S. 225, 238-39 (1991), from giving any separate
weight to the fact that the district judge is expert in Rhode
Island law, having sat for many years on the state court and
then on the federal court in Rhode Island. So we merely record
his factual report that in over 30 years on the bench, he never
heard of a case of a Rhode Island court applying the prejudgment
interest law of a different state.
In all events, some states, like Massachusetts, treat
prejudgment interest as substantive, Morris v. Watsco, Inc., 433
N.E.2d 886, 889 (Mass. 1982); Commercial Union, 41 F.3d at 774,
while "others associate prejudgment interest with costs and
attorneys' fees which are governed by the law of the forum," Am.
Home Assurance Co. v. Dykema, Gossett, Spencer, Goodnow & Trigg,
811 F.2d 1077, 1088 (7th Cir. 1987). What little precedent
exists on this issue in Rhode Island suggests that for conflict
of law purposes, Rhode Island courts view their own prejudgment
interest statute as "procedural" (and so governed by local law)
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rather than "substantive." Holmes v. Bateson, 434 F. Supp.
1365, 1391 (D.R.I. 1977).
To the extent that prejudgment interest is viewed
simply as an element of damages, standard conflict analysis
would associate it with the substantive law governing the
controversy, here, Georgia law. But Rhode Island prejudgment
interest, although partly intended to compensate the plaintiff
for temporary loss of the use of his money, is also
administrative, being intended to promote the prompt settlement
of claims. Roy v. Star Chopper Co., Inc., 584 F.2d 1124, 1135
(1st Cir. 1978); Isserlis v. Dir. of Pub. Works, 300 A.2d 273,
274 (R.I. 1973). Given the latter objective, there is patently
a local interest in applying Rhode Island's prejudgment rule
even to "foreign" causes of action.
Affirmed.
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APPENDIX
2. Lease and Assignment; Rights of Lessee.
(e) It is expressly understood that the
Lessee [Engelhard] shall, without obtaining
the consent of the Lessor [the Trust] (or
any Transferee or the Bank provided in
Paragraph 8 hereof), be entitled to enter
into any agreement to alter, modify (aside
from complete termination), renew or extend
any and all Leases and enter into new or
additional leases or agreements with respect
to any Leased Properties covered thereby, to
such extent as [Engelhard] may deem
desirable, provided, however, that
[Engelhard] shall not make any alteration or
modification of any Lease or other
arrangement in connection with such Lease
(other than alterations, modifications or
arrangements contemplated by the terms of
the Leases now in effect or which would
result by reason of the provisions of any
Lease now in effect from the exercise of any
option contained therein) which with respect
to the period prior to the normal
termination date of such Lease would
increase any fixed costs to be paid by the
lessee thereunder [the Trust] or would
increase the amount of royalties payable by
[the Trust] with respect to any minerals,
ores or substances permitted to be mined by
such lessee on the date thereof, unless
[Engelhard] agrees to pay such increased
fixed costs or additional royalties.
5. Royalties
(a) [Engelhard] agrees to pay to [the
Trust] for each Royalty Period on (i)
processed clay and other processed minerals
and unprocessed minerals other than clay,
(ii) unprocessed clay and (iii) "mixed
products" (as hereinafter defined), sold in
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such Royalty Period, the sum of the
royalties determined as hereinafter provided
in clauses (i), (ii) and (iii),
respectively, of this subparagraph (a):
(i) A royalty equal to one and
one-half percent (1.5%) of
[Engelhard's] Net Receipts from sales
in such Royalty Period of each kind
of processed clay and other processed
mineral. . . and each kind of
unprocessed mineral, other than clay,
derived from the Properties.
. . .
(ii) A royalty equal to one and
one-half percent (1.5%) of the Net
Receipts that would have been
received by [Engelhard] in such
Royalty Period if a number of tons of
processed clay which could have been
produced from the number of tons
derived from the Properties of each
kind of unprocessed clay sold in such
Royalty Period had been sold in such
Royalty Period. . . .
(iii) A royalty equal to one and
one-half percent (1.5%) of an amount
obtained by multiplying (x) the
number of tons derived from the
Properties of each kind of "mixed
product", as hereinafter defined . .
. sold by the Engelhard in such
Royalty Period by (y) the Average Net
Receipts per ton from sales in such
Royalty Period (or if there were no
such sales, in the next preceding
Royalty Period in which there were
such sales) of processed clay or
other processed mineral derived from
the Properties of the same or most
nearly similar kind as that contained
in such "mixed product". . . .
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7. Taxes And Other Charges.
(a) [Engelhard] covenants and agrees to
pay (i) all real estate taxes imposed on or
assessed against the Fee Properties,
provided that [Engelhard] shall have the
right to contest the amount or validity of
any tax by appropriate proceedings and
[Engelhard] shall not be required to pay any
tax so contested by it until final
determination thereof and provided further
that real estate taxes on any Fee Property
shall be apportioned as of the date such Fee
Property ceases to be a Fee Property
hereunder; and (ii) except as provided in
subparagraph (d) of this Paragraph 7, all
payments (other than royalties based on
production, provision for which is made in
subparagraph (c) of this Paragraph 7) which
[the Trust] is required to make under the
Leases (so long as they are in effect);
provided, however, that nothing contained
herein shall require [Engelhard] to pay any
tax imposed upon or measured by the income
or receipts of [the Trust] or any other
person or any transfer tax, capital gain
tax, gift tax, succession duty or
inheritance tax of [the Trust] or any other
person.
(b) The aggregate amount of all payments
made or payable by [Engelhard] for all
Royalty Periods within any calendar year
pursuant to subparagraph (a) of this
Paragraph 7 shall be deducted from the
aggregate royalties payable by [Engelhard]
for such Royalty Periods pursuant to
Paragraph 5 hereof.
(c) [Engelhard] also agrees to pay to the
person entitled thereto all royalties based
on production required to be paid under the
Leases, but with respect to any Lease only
so long as [Engelhard] remains an assignee
thereof; provided, however, that [Engelhard]
shall be entitled to a credit for any
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amounts paid or payable by it pursuant to
this subparagraph (c) against royalties
thereafter payable to [the Trust] under the
provisions of Paragraph 5 of this Agreement.
. . .
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