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Robert G. Fowler v. Lac Minerals (Usa)

August 10, 2011


The opinion of the court was delivered by: Jeffrey L. VIKEN United States District Judge


This matter is before the court on the amended complaint of plaintiff Robert G. Fowler and the counterclaim of defendant LAC Minerals (USA), LLC ("LAC"). Plaintiff's amended complaint (Docket 16) contains claims for declaratory judgment, specific performance and quiet title. The defendant's counterclaim (Docket 17) asserts claims for declaratory judgment and quiet title--all relating to the same ninety mining claims and documents relating to that real estate. The court entered an order on cross motions for summary judgment (Docket 46) which resolved a number of issues and identified those issues to be resolved at trial. The undisputed material facts and the issues resolved in the order on cross motions for summary judgment (Docket 46) are incorporated by reference. A chronological description of events and transactions between the parties is set out in Docket 46 and will not be fully repeated here.

A court trial was held on February 1 and 2, 2011, at which Mr. Fowler was represented by his attorney Harlan Schmidt. LAC appeared through its site manager, Todd Duex, and its attorneys Max Main and Dwight Gubbard. The court, after considering the deposition transcripts and exhibits, together with the trial testimony of Mr. Fowler and Mr. Duex, entered the following findings of fact and conclusions of law on the unresolved issues.*fn1 ISSUE #5: Since Viable holds an assignable right, is the assignment from Viable to Douglass and then to Fowler in violation of the terms of the 1988 RJVA,*fn2 thus rendering the assignment void?

Stated another way, is the assignment from Viable to Mr. Douglass and then to Mr. Fowler valid or in violation of the 1988 RJVA? Sections 11.1 and

11.2 of the 1988 RJVA specifically address the rights of the original parties to assign their interests in the agreement.

11.1 Assignment - Except as provided in Section 11.3 below [not relevant to this current analysis], neither party shall assign its rights in the Agreement or the Property without the prior written consent of the other party, which consent shall not be unreasonably withheld. This provision shall not apply to sales and assignments to any Affiliate of the parties. "Affiliate" means any person, partnership, corporation, or other form of enterprise which directly or indirectly controls, is controlled by, or is under common control with, a Participant. For purposes of the preceding sentence, "Control" means possession, directly or indirectly of the power to direct or cause direction of management and policies through ownership of voting securities, contract, voting trust, or otherwise.

11.2 Right of First Refusal - Except as provided in Section 11.3 below [not relevant to this current analysis], if either party receives a bona fide offer to sell or otherwise transfer all or a portion of its respective interest in the Property, the Agreement, any Venture, Prospect, or any share of production, it is expressly understood that the other party will have the first right to accept such offer for a cash equivalent of one hundred and ten percent (110%) of the offer within thirty (30) days after receipt of written notice containing the written terms of such offer. This provision shall not apply to any transfer to an affiliate as defined above. (Docket 28-20 at pp. 15 & 16). The court previously ruled the language, purpose and intent of Sections 11.1 and 11.2 are clear and unambiguous as they are only subject to one interpretation. (Docket 46, p. 25). Under these provisions neither party could assign their interest in either the property or the agreement without the advance written consent of the other party, except where the assignment is to an affiliate of the assignor.

At trial, Mr. Fowler testified about his lifelong experience and career in the mining industry. His experience includes creating a number of startup companies and taking public a number of other companies. Mr. Fowler was one of the original organizers of Viable. He testified he had the mining expertise and experience to put Viable into productive precious metal properties and the Viable board of directors and officers looked to him for guidance.

To create capital for the company, Mr. Fowler and others*fn3 took Viable public in 1981. (Trial Exhibit 1). Mr. Fowler testified he was an affiliate of Viable because he held more than 10 percent of its stock, either personally or as an officer and director of Dakota Minerals. The prospectus issued as part of Viable's public stock offering disclosed Mr. Fowler controlled 49.3 percent of the Viable stock through his personal stock holding and his interest in Dakota Minerals. Id.

Dakota Minerals, another company in which Mr. Fowler was a significant participant, originally developed the 944 acres upon which the ninety mining claims existed. As part of its own restructuring, Dakota Minerals transferred the ninety mining claims to Viable in exchange for shares of Viable stock. After that transaction, Dakota Minerals became the single largest shareholder of Viable common stock. When Dakota Minerals filed bankruptcy,*fn4 the trustee held 1,440,000 shares of common stock in Viable. (Trial Exhibit 13). It also acquired 85,000 Viable common stock shares from Mr. Fowler in satisfaction of a judgment Dakota Minerals secured against him in 1989. Id.

Mr. Fowler and Mr. Douglass met and became friends in the 1970s. Mr. Fowler testified, in addition to their work in a number of earlier business ventures, Mr. Douglass was acting as his agent in the transactions relevant to this case. In the year prior to the activities described below, Mr. Fowler authorized Mr. Douglass to try to acquire Dakota Minerals and its Viable stock so the ninety mining claims could be reacquired by Mr. Fowler.*fn5 Mr. Fowler testified he understood the affiliate requirements of Section 11.1 of the 1988 RJVA. He and Mr. Douglass always kept the affiliate requirements in mind as they developed their plan to reacquire the ninety mining claims.

On November 15, 1995, Mr. Douglass acquired an option to purchase Viable's residual and reassignable interests in the 1988 RJVA. (Trial Exhibit 123). Those residual and reassignable interests included the ninety mining claims. Id. at Exhibit A. The option also specifically referenced the reassignment rights delineated in Section 4.3 of the 1988 RJVA. Id. at Exhibit

B. The option to purchase was later extended by agreement. (Trial Exhibit 10). On October 15, 1997, while the extension of the option was pending, Viable executed a quitclaim deed assigning the ninety mining claims to Mr. Douglass.*fn6

(Trial Exhibit 11). Mr. Douglass paid $2,500 at the time of the option and, with additional installment payments, paid a total of $7,500 to Viable.

The bankruptcy trustee offered the assets of Dakota Minerals for sale to the public in 1998 as part of the liquidation of the company's assets.*fn7 Id. Mr. Douglass was the highest bidder for the Viable stock and purchased it for $800 from the bankruptcy trustee in the summer of 1998.

Mr. Douglass transferred the Viable stock and ninety mining claims to Mr. Fowler in two separate transactions. Mr. Douglass signed a quitclaim deed dated November 14, 1999, which transferred the ninety mining claims. (Trial Exhibit 19). A separate assignment, bill of sale and conveyance was executed by Mr. Douglass on January 13, 2000, which transferred the Viable stock to Mr. Fowler. (Trial Exhibit 20).

As part of the transaction, Mr. Fowler paid the remaining $7,500 due Viable under the Douglass option, $7,500 to Mr. Douglass for the funds he had previously paid to Viable, and an additional $800 for the money paid by Mr. Douglass to the Dakota Minerals bankruptcy trustee. On May 17, 2000, onbehalf of Viable, Mr. Z. S. Merritt signed a receipt for full payment of the option to purchase originally held by Mr. Douglass and subsequently assigned to Mr. Fowler. (Trial Exhibit 21).

Mr. Merritt's deposition was offered by the parties at trial. (Dockets 74 & 75). Mr. Merritt testified he and Mr. Fowler founded Viable to acquire and develop mineral properties, including the mining claims Mr. Fowler had been accumulating since 1978 as president of Dakota Minerals. (Docket 61-2, p. 6:1-3). Mr. Fowler was Viable's first president and Mr. Merritt its third president. Id. at lines 4-5. Mr. Merritt negotiated the 1988 RJVA with LAC's predecessor. Id. at line 17-21. After executing the 1988 RJVA, Viable filed for bankruptcy the next month. Id. at lines 22-24.

Mr. Merritt acknowledged that Mr. Fowler, as president of Dakota Minerals, accumulated the ninety mining claims from 1969 to 1977. Id. at p. 8:16-25. Viable exchanged $1.5 million of stock for the mining claims from Dakota Minerals. Id. at p. 9:1-3. Dakota Minerals received 1.5 million shares of Viable stock, which was about 11 or 12 percent of Viable's outstanding stock, and Dakota Minerals became the largest shareholder in Viable. Id. at lines 9-12. Dakota Minerals was a "very influential stockholder dominating other interests." Id. at line 12-13.

Mr. Merritt knew Mr. Douglass wanted an option from Viable for its reversionary rights to the mining claims and also intended to acquire the Viable stock held by Dakota Minerals, which was in bankruptcy. Id. at p. 10:9-11. By acquiring Viable stock through the Dakota Minerals bankruptcy, Mr. Douglass became the largest Viable stockholder and that status, coupled with his close relationship with Mr. Fowler and the other Viable shareholders, made Mr. Douglass "very influential in the relationship." Id. at p. 16:1-5.

After Mr. Douglass acquired the Viable stock from the Dakota Minerals bankruptcy, he gave Mr. Merritt notice of his intent to exercise the option. Id. at p. 12:8-11. Mr. Douglass agreed to pay at a later date the remaining $7,500 balance due on the option, so Mr. Merritt agreed and delivered the Viable quitclaim deed for the ninety mining claims to Mr. Douglass. Id. at lines 11-16. Delivery of the quitclaim deed occurred in October of 1998 or early 1999.*fn8

Id. at pp. 12:15-16 and 17:12-13. Mr. Fowler ultimately paid the remaining $7,500 balance due to Viable. (Docket 61-2, pp. 12:17-21 and 13:1-2).

The court finds Mr. Fowler's testimony credible. This determination is based on Mr. Fowler's testimony describing his mining experience, his personal involvement in both Viable and Dakota Minerals, his relationship with Mr. Douglass, the exhibits admitted at trial on these issues, and the deposition testimony of Mr. Merritt.

The court finds both Mr. Douglass and Mr. Fowler were affiliates of Viable as contemplated by Section 11.1 of the 1988 RJVA. Mr. Douglass was a Viable affiliate as an individual shareholder through the Dakota Minerals acquisition and as Mr. Fowler's agent. Together with Mr. Fowler, Mr. Douglass controlled or was in common control of Viable. Mr. Fowler, directly or indirectly, was an affiliate of Viable because of his separate stockholding and with the stock held by Mr. Douglass as his agent. Mr. Fowler had the power to direct or control direction of Viable's management and its policies. His Viable stock ownership and the expertise he brought to the corporation allowed him to influence or direct corporate management.

LAC filed a pretrial motion to dismiss Mr. Fowler's complaint for lack of standing. (Docket 53). LAC argues SDCL § 43-4-3 prohibits an assignment of the condition subsequent from Viable to Douglass to Fowler. Id. at p. 1. That statute provides in part that "[a] mere right of re-entry, or of repossession for breach of a condition subsequent, cannot be transferred to anyone except the owner of the property affected thereby." SDCL § 43-4-3.

LAC relies on Rowbatham v. Jackson, 5 N.W.2d 36 (S.D. 1942) for its argument. (Docket 54, p. 5). The South Dakota Supreme Court in Rowbatham focused on the very restrictive nature of the language of the contract provision in question in that case. The language was "[i]f these restrictions be in any way violated, or not fully complied with in the event of any building being placed on said lot, then all right and title shall revert to the grantors without process of law." Id. at 37. The court concluded "[t]he reverter language used . . . pertains to [a single lot] and for and during the lifetime of the grantors. It does not purport to be made for the benefit of any other person." Id. "No further provision has been made and there is absolutely nothing in the evidence to indicate that this provision was made for the benefit or for the protection of the adjoining contiguous property . . . . We are unable to say that this provision is tied up with the title to the property." Id. The deed did "not contain any expressed covenant, stipulation or agreement in reference to [the contiguous lot]. It would therefore seem that the restrictions were not intended to run with the land." Id. at 38. The South Dakota Supreme Court found this language was contrary to deeds where a restriction is intended to run with the land. "[T]he grantee did not enter into any covenant or agreement restricting his rights in the premises . . . or that a general plan or scheme of restrictions was contemplated as to such tract; and there is nothing to indicate that such restrictions were intended to run with the land . . . ." Id. (internal citation omitted). The court concluded the language in the Rowbotham deed was only a "mere possibility of interest" and could only be transferred to the owner of the property affected by the restriction under the language of the predecessor of SDCL § 43-4-3. Id.

The language in the 1988 RJVA (Trial Exhibit 119), as a restatement of the 1984 JVA (Trial Exhibit 109), the Mining Deed dated July 18, 1985, conveying eighty-nine of the mining claims to LAC's predecessor-in-interest, (Trial Exhibit 112), and the February 24, 1987, conveyance of the ninetieth mining claim, the Mars No. 1 patented mining claim of M.S. 1851 (Trial Exhibit 114), all clearly establish that the intent of the reversionary rights retained by Viable were intended to run with the land. Were the intent of the reversionary rights paragraph not intended to run with the land, there would have been no purpose for Section 11.1 of the 1988 RJVA. That section specifically allows Viable to transfer those rights to someone other than LAC, so long as the transferee was an affiliate of Viable. If LAC's argument was correct, that is, the reversionary rights cannot be transferred to anyone other than LAC, Section 11.1 would have no meaning or purpose. "The contract is to be read as a whole, making every effort to give effect to all provisions. . . . When the words of a contract are clear and explicit and lead to no absurd consequences, the search for the parties' common intent is at an end." Nelson v. Schellpfeffer, 2003 S.D. 7, ¶ 8, 656 N.W.2d 740, 743. See also Enchanted World Doll Museum v. Buskohl, 398 N.W.2d 149, 152 (S.D. 1986) ("It is a fundamental rule of contract construction that the entire contract, and each and all of its parts and provisions must be given meaning if that can be consistently and reasonably done.").

A covenant running with the land, like this condition subsequent, is transferable. See SDCL § 43-25-18.*fn9 See also Swaby v. Northern Hills Regional R.R. Authority, 2009 S.D. 57, 769 N.W.2d 798, for an excellent discussion of condition subsequent.

LAC's motion to dismiss Mr. Fowler's complaint for lack of standing (Docket 53) is denied. The assignments of the ninety mining claims from Viable to Mr. Douglass to Mr. Fowler were in compliance with the affiliate provision Section 11.1 of the 1988 RJVA. The assignment of the ninety mining claims to Mr. Fowler was a valid transfer under Section 11.1 of the 1988 RJVA. ISSUE #7: Has LAC acted in good faith under the 1988 RJVA in its decision relating to the release of property from that agreement?

The 1988 RJVA addresses the potential for the removal of some portion of the property from the agreement. Section 4.3, Release of Property, provides:

During the course of conduct of mineral exploration under this Agreement the Manager may in its sole discretion determine that certain portions of the Property have little potential for containing minerals of economic value or will not be required for mineral development or mining facilities. Upon annual review the Manager may eliminate such portions of the Property from the terms of this Agreement, and in such event Bond will reassign any such portions to Viable. (Trial Exhibit 119, p. 6).

On November 19, 1997, Mr. Duex wrote to Mr. Merritt who was then president of Viable. (Trial Exhibit 12).

[W]ater treatment at the site using the reverse osmosis system will continue for probably two more years. A long term water management and treatment plan must then be developed and approved by the State of South Dakota. Management of the draindown [sic] from the leach pads is expected to require LAC's presence on the property for a number of years. Once all of the water related issues are resolved, the facilities must be removed and the area re-vegetated. At least three years worth of vegetation monitoring data will have to be collected prior to final bond release.

LAC is diligently working towards completion of the reclamation plan at the Richmond Hill mine site and continues to work with the State in closing the property. Nonetheless, LAC will be obligated by the various permit conditions to continue an ...

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