City of Marshall v. Heartland Consumers Power District

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________

No. 03-3115
___________

City of Marshall, Minnesota, *
suing as City of Marshall, Minnesota,
*
by and through the Marshall *
Municipal Utilities, *
*
Appellee, * Appeal from the United States
* District Court for the
v. * District of Minnesota.
*
Heartland Consumers Power District, *
*
Appellant. *
___________

Submitted: May 10, 2004
Filed: September 13, 2004
___________

Before LOKEN, Chief Judge, BRIGHT, and SMITH, Circuit Judges.
___________

SMITH, Circuit Judge.

The City of Marshall ("Marshall") operates an electric utility and buys its
power from Heartland Consumers Power District ("Heartland"). In 1998, Marshall
sued Heartland for breach of contract and violations of statutory requirements. The
litigation was aborted after the parties entered into a settlement agreement
establishing reserve funds for various purposes, which included a process for refund
to customers of excess reserve funds. In 2002, Marshall sued Heartland for breach of
the settlement agreement alleging that Heartland failed to return excess reserve funds
to customers in accordance with the agreement. The district court agreed and granted
summary judgment in favor of Marshall, ordering Heartland to pay Marshall
$3,759,999.43.

On appeal, Heartland contends that the district court erred in its grant of
Marshall's motion for summary judgment, and its denial of Heartland's counterclaim
for summary judgment. Heartland more specifically argues that the district court
misinterpreted the contract language and erred in ordering the refund to Marshall.

Although both parties agree that the terms of the agreement are unambiguous,
at the heart of this dispute is whether Heartland has the unilateral right under the
terms of the settlement agreement to change the funds' levels–at any time. We hold
that it does and, therefore, reverse the district court's grant of summary judgment in
Marshall's favor.

I. Discussion
In 1999, Marshall and Heartland entered into a settlement agreement as a result
of a long-running dispute between the two parties regarding refunds to Heartland's
customers. The settlement agreement provided that Heartland would commit to
establishing two separate funds, a Rate Stabilization Fund1 ("RSF") and a General
Reserve Fund ("GRF"). The Heartland Board would also develop written polices for
the RSF, setting up guidelines for its sources, uses, replenishing, and levels. In
addition, Heartland agreed "to implement a policy of cash position," whereby the

1
The function of the RSF is to minimize the rate impact of power plant outages
and other events that could create upward spikes in Heartland's rates. Heartland also
expressly retained the right to utilize the RSF for other uses, related to power supply
operations, in the event of unanticipated or emergency circumstances. Heartland
retained similar rights with respect to the GSF.

-2-
company would maintain a set balance to be subtracted from the sum of the RSF and
GRF. The parties agreed that any excess revenue shall be refunded to its customers.2

The relevant contract language includes the following: "Heartland will
establish specified minimum and maximum levels of the RSF . . . on each occasion
that the Heartland Board determines to replenish the RSF." Also, the agreement sets
the maximum level of the RSF and the GRF at $1,250,000 and $2,500,00 respectfully
"until further action by the Heartland Board." Additionally, Heartland reserved the
right to use monies from both the RSF and GRF "in the event of unanticipated or
emergency circumstances."

In its decision below, the magistrate interpreted the contract to limit the
effective date of any reserve fund modifications by the Board to the next fiscal year.
However, the contract itself has no such limitation. The magistrate believed its
interpretation necessary because the Board's discretion could conceivably be misused
to avoid ever paying refunds. The district court adopted the recommendation of the
magistrate.

On appeal, Heartland argues that a plain reading of the contract requires the
Board to develop policies for the funds before January 1, 2000, and set an initial
maximum level of the funds. However, the contract did not identify any specific time
or timetable for reconsideration of the initial fund levels. Instead, the contract only

2
The agreement provides in section (c) Margins:

. . . After replenishing or drawing down the Rate Stabilization Fund and
General Reserve Fund to the appropriate levels established by the
Heartland policies set forth above, Heartland shall promptly within sixty
(60) days following the presentation of Heartland's annual audit to the
Heartland Board for each fiscal year, refund or credit to each of
Heartland's customers any amount of unbudgeted cash reserves that may
be available for distribution to its customers . . . .

-3-
specifies that Heartland will establish minimums and maximums for the funds. Thus,
the initial maximum fund amount is set "[u]ntil further action by the Heartland Board
. . . ." Based on the discretion accorded Heartland's Board, Heartland argues that we
should decline to review its exercise of that discretion when there is no evidence of
fraud, bad faith, or gross mistake of judgment. We agree.

We review the district court's interpretation of this settlement agreement and
the grant of summary judgment de novo. Evergreen Invs., LLC v. FCL Graphics, Inc.,
334 F.3d 750, 754 (8th Cir. 2003). A settlement agreement between two parties is a
contract, and, accordingly, is governed by contract principles. Michalski v. Bank of
Am., 66 F.3d 993, 996 (8th Cir. 1995). If possible, the intentions of the parties to a
contract should govern. Hunt v. IBM Mid Am. Employees Fed. Credit Union, 384
N.W.2d 853, 856–57 (Minn. 1986).We construe unambiguous contract language
according to its plain meaning. Furthermore, judicial review of an unambiguous
contract that leaves a decision to the discretion of one party is not warranted unless
there is "fraud, bad faith, or a grossly mistaken exercise of judgment." Brozo v.
Oracle Corp., 324 F.3d 661, 667 (8th Cir. 2003) (citing Vigoro Industries v. Crisp,
82 F.3d 785, 785 (8th Cir. 1996)).

In its brief, Marshall responds that (1) "the plain language of the settlement
agreement requires Heartland to refund or credit to its customers any amount in
excess of budgeted cash reserves"; that (2) "the Heartland reserve fund contained
excess cash reserves, requiring that Heartland return the excess amounts to its
customers"; and (3) that "there are no unanticipated or emergency circumstances
permitting deviation from the policy of refunding or crediting customers with any
amount of unbudgeted cash reserves."

Because its first assertion fails, Marshall's entire argument fails. Although the
agreement "requires Heartland to refund or credit to its customers any amount in
excess of budgeted cash reserves," the plain language of the agreement allows

-4-
Heartland to change the budgeted cash reserves at its sole discretion, and thus, at any
time. Hence, any decision by Heartland to change the fund levels also changes the
formula for any refunds. Therefore, although Marshall's contention is technically
correct, any amount of refund hinges on the level of budgeted reserves, and the level
of budgeted reserves hinges on decisions vested solely in Heartland's Board.

Marshall contends that Heartland cannot be allowed to change the terms of the
agreement on a whim, or retroactively, because to do so would allow Heartland to
circumvent the main purpose of the agreement–which Marshall claims is to provide
Heartland's customers with refunds. However, the contract does not indicate that
customer refunds is its main purpose. Rather, it plainly states that "the RSF will be
used to minimize the impact upon Heartland's rates to its customers due to any outage
at the Laramie River Station . . . or other planned or unplanned events that could
cause a sudden increase in rates charged to Heartland customers." As to the GRF, the
contract authorizes Heartland to determine its uses and specifically identifies
appropriate use to include capital improvements.

Heartland asserts that the main purpose of the agreement is to provide a system
that would act as a shock absorber by using monies in the funds to subsidize rate
increases, thereby avoiding sudden bill increases to its customers. The plain language
of the agreement supports this argument. With the requisite deference to our holding
in Brozo, and because there is no evidence of fraud, bad faith, or a grossly mistaken
exercise of judgment, we see no basis for judicial review of Heartland's business
decision based upon the parties' agreement. 324 F.3d at 667.

II. Conclusion
In sum, we hold that under the agreement Heartland had the broad discretion
to change the funding levels at any time. Accordingly, the cash position set by the
Heartland Board did not exceed the sum of the RSF and GRF in any of the disputed
years. Because the plain language of the settlement agreement was followed, there is

-5-
no need for us to address either the soundness of the district court's funding formula
or what constitutes "unanticipated circumstances." For the foregoing reasons, we
reverse the order of the district court and enter summary judgment in favor of
Heartland.
______________________________

-6-