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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. AAA Valley Gravel, Inc. v. Totaro (10/30/2009) sp-6427

AAA Valley Gravel, Inc. v. Totaro (10/30/2009) sp-6427, 219 P3d 153

     Notice:   This opinion is subject to correction  before
     publication  in  the  Pacific  Reporter.   Readers  are
     requested to bring errors to the attention of the Clerk
     of  the  Appellate  Courts, 303  K  Street,  Anchorage,
     Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
     e-mail corrections@appellate.courts.state.ak.us.


            THE SUPREME COURT OF THE STATE OF ALASKA


AAA VALLEY GRAVEL, INC., )
) Supreme Court No. S- 12207
Appellant, )
) Superior Court No. 3PA-00-00716 CI
v. )
) O P I N I O N
ALICIA TOTARO and HERMAN )
RAMIREZ, ) No. 6427 - October 30, 2009
)
Appellees. )
)
)
ALICIA TOTARO,           )
                              )    Supreme Court No. S-12237
             Cross-Appellant,      )
                              )
     v.                       )
                              )
AAA VALLEY GRAVEL, INC., )
                              )
             Cross-Appellee.       )
                              )



          Appeal  from the Superior Court of the  State
          of  Alaska, Third Judicial District,  Palmer,
          Eric Smith, Judge.

          Appearances:  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.

          PER CURIAM
          FABE,  Chief  Justice,  with whom  CARPENETI,  Justice,
          joins, concurring in part and dissenting in part.
          MATTHEWS, Justice, with whom EASTAUGH, Justice,  joins,
          concurring in part and dissenting in part.

          
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 lessees 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  courts  decision  is  vacated  and  remanded  for  further
proceedings.

     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.  Schultzs  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 Cosmoss gravel mining rights to AAA,
allowing  the  two men to take over the Cosmos operation.   Fuger
and  Mearkle  were  attracted to this proposal and  Fuger  sought
legal advice about the Cosmos/Ramirez lease.
          Fugers 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 leases 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
Cosmoss  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 McCombss letter, Fuger, Mearkle,  and
Nelson met with Nelsons 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 McCombss detailed
critique of the Ramirez/Cosmos lease.  The sublease bound AAA  to
take all reasonable

steps  to protect [Cosmoss] 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  Nelsons  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 no assets  of  the
corporation to distribute to shareholders or to be applied toward
the  corporations 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.  Nelsons
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.
               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.  Nelsons  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  Totaros  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
Totaros  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  responsible  under the warranty  deed  for  payment  of
Totaros overriding royalties.
          Final   judgment  was  issued  on  December  13,  2005,
establishing   AAAs  monetary  obligation  to  Totaro,   ordering
specific  performance  of AAAs overriding royalty  obligation  to
Totaro,  and dismissing AAAs claim against Ramirez.  AAA  appeals
and Totaro cross-appeals.
IV.  CONTENTIONS ON APPEAL
          AAA  presents three contentions on appeal, two relating
to  Totaros  judgment against AAA and one relating to  the  trial
courts  refusal to hold Ramirez liable on the warranty deed.   As
to Totaro, AAA argues that:  (1) Cosmoss assignment to Totaro was
gratuitous and therefore revocable and was terminated by  Cosmoss
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.  AAAs  argument  concerning
Ramirez is that the covenant against encumbrances inherent in its
warranty  deed  encompasses Totaros 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.   AAAs Arguments with Respect to Totaros 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 Cosmoss subsequent dissolution.
          AAAs 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 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
Palmquists  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 Cosmoss subsequent dissolution did not affect its
continuing validity.
          2.   We  remand for further proceedings on the issue of
               AAAs   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  Ramirezs retained right to extract gravel.   The  trial
court  did not directly address this argument, but AAAs 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  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 contracts 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
          
          courts 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 Ramirezs  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 in to process material,  I
          was  to receive an additional thirty cents  a
          yard which would be reduced by five cents  if
          I didnt 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.)
          
Ramirezs  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
fact, whether the Ramirez/Cosmos lease is exclusive.
          If  the trial court finds that the Ramirez/Cosmos lease
is  non-exclusive, it seems doubtful that AAA could not  exercise
owner-retained gravel rights, even in light of the  provision  in
the  Cosmos/AAA  sublease requiring AAA to  take  all  reasonable
steps  to protect the Ramirez/Cosmos lease.  First, neither lease
compels the extraction of gravel  the leases grant only the right
to  extract gravel.  Second, if the Ramirez/Cosmos lease is  non-
exclusive,  the fact that the property owner extracts  gravel  or
allows  others to extract gravel should not affect the  continued
legal  viability  of  the  Ramirez/Cosmos  lease.   Even  if  AAA
extracts  gravel under its property ownership rights,  it  likely
would  not fail to protect the Ramirez/Cosmos lease; but if there
is  a  question,  as the trial court suggested, whether  AAA  can
unilaterally decide to extract gravel as an owner and  not  as  a
sublessee without violating some duty to Cosmos19 or Totaro, that
question  cannot  be decided without a full factual  inquiry  and
perhaps the consideration of our cases on economic privilege.20
          We  therefore vacate the judgment as it relates to AAAs
liability to Totaro and remand for further proceedings consistent
with this decision.
     B.   AAAs Argument with Respect to Ramirez
          AAA  argues  that  Ramirez should  be  responsible  for
paying the royalties AAA owes Totaro because Ramirez conveyed the
property to AAA under a warranty deed.
            Ramirez, by the trial courts account a very  careful,
experienced, and clever businessman, conveyed the property to AAA
by  warranty deed without any express warranties of title.21  But
even  if  not expressly written in the instrument, by  statute  a
warranty  deed includes covenants that at the time of the  making
and delivery of the deed the [property is] free from encumbrances
and  the  grantor . . . will defend the title to the  property.22
Ramirezs  warranty  deed  expressed some standard  exceptions  to
title,  such  as patent reservations and recorded easements,  but
did not mention the Ramirez/Cosmos lease.23
           The trial court refused to enforce the title covenants
of  Ramirezs  warranty  deed with respect to  the  Ramirez/Cosmos
lease,  reasoning that both Ramirez and AAA knew of the existence
of  the  lease, both Ramirez and AAA were aware of the  potential
legal issues revolving around the sale of the property, and:
          While  there is no direct evidence  that  the
          legal  uncertainties  affected  the  purchase
          price,  the  court  has  no  doubt  that  AAA
          carefully  evaluated the relative  costs  and
          benefits  of proceeding and decided  that  it
          was  best to proceed and to run the risk that
          AAA would be held liable under the Cosmos/AAA
          lease.
          
          The  fundamental flaw in the trial courts  analysis  is
that  AAAs evaluation and assumption of risk cannot be determined
without considering the type and express contents of the deed AAA
received.   The  trial  court might be  correct  if  Ramirez  had
conveyed   the   property  to  AAA  by  quitclaim  deed   without
warranties.24   But  AAAs assumption of risk looks  significantly
different  with  a conveyance by warranty deed that  contains  no
relevant  exceptions  to  title   indeed,  by  conveying  with  a
warranty  deed it was Ramirez, not AAA, who decided that  it  was
best to proceed and to run the risk that the Ramirez/Cosmos lease
would  have  continued  legal viability  and  be  an  encumbrance
against  title to the property.  Had Ramirez intended  to  convey
the property subject to the Ramirez/Cosmos lease, he could easily
have  inserted an appropriate exception in the statutory warranty
          deed.25  But had he done so AAA likely would have viewed the risk
calculations  in  a  very different manner, perhaps  demanding  a
significant price reduction.
          In  Groff v. Kohler we stated the general rule  that  a
deed properly executed, delivered, and accepted is considered the
final expression of parties agreement for the

transfer  of  land  and  that  all prior  terms  of  the  parties
agreement  are extinguished and unenforceable under the  doctrine
of merger.26  But as we also stated:
          Professor Corbin has observed:
          
          The  doctrines of merger or estoppel by  deed
          have  never  prevented the reformation  of  a
          deed in which the words of description or  of
          conveyance fail to describe correctly  or  to
          convey  the land or interest that was  agreed
          upon.
          
          . . . .
          
          In   line   with  this  authority,  we   have
          previously held:
          
          Reformation  of  a writing is justified  when
          the  parties  have come to a complete  mutual
          understanding of all the essential  terms  of
          their   bargain,  but  by  reason  of  mutual
          mistake . . . the written agreement is not in
          conformity with such understanding . . . .[27]
          
          This  framework  should  not be  lightly  set  aside.28
Warranty  deeds provide certainty and predictability in  property
transactions through the express allocation of financial risk for
title defects.  Prospective purchasers of property often learn of
title  defects  prior to the final closing of a transaction,  and
such  defects may be handled in at least the following two  ways:
(1)  the purchaser can agree to the continuance of the defect and
to take the risk of loss, in which case the deed will not contain
a  warranty against the defect; or (2) the purchaser can agree to
the  continuance  of the defect but rely on the  sellers  express
warranty against the defect for later indemnity if necessary.29
          If  Ramirez contends that AAA actually agreed to accept
the  financial  risk of the Ramirez/Cosmos lease encumbrance  and
that there was a scriveners error in preparing the warranty deed,
then  Ramirez may seek to have the deed reformed to  express  the
parties actual agreement.30  But [a] party urging reformation must
establish  the  elements of reformation by clear  and  convincing
evidence.31  The trial court did not make a finding by clear  and
convincing  evidence that AAA had, before the warranty  deed  was
executed  and  delivered, agreed to waive  the  warranty  against
encumbrances  with  respect  to  the  Ramirez/Cosmos  lease.   We
therefore vacate the portion of the judgment in favor of  Ramirez
and   remand  for  further  proceedings  to  allow  Ramirez   the
opportunity to (1) establish standing to seek reformation of  his
warranty  deed  to  AAA  and (2) prove by  clear  and  convincing
          evidence that AAA had actually agreed to accept a deed that did
not covenant against the encumbrance of the Ramirez/Cosmos lease.32
If  Ramirez cannot make a case for reformation then AAA should be
entitled  to  recover provable damages for breach  of  the  title
covenants in the warranty deed.
V.   CONTENTIONS ON CROSS-APPEAL
     A.   Overriding Royalties Assigned to Palmquist
          
          Totaro alleged in her complaint that:
          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.
          
          On the first day of trial Totaro called Palmquist as  a
witness.   Palmquist  testified that he  had  advanced  money  to
Nelson  over the years, some of it in connection with the  gravel
operation, and that he received the 1993 assignment in  order  to
repay  these  obligations.  He testified that royalties  received
under the assignment had satisfied Nelsons obligation, leaving  a
$200  credit.   Palmquist  testified as  follows  concerning  his
desire that Totaro have his half of the overriding royalties:
          A:   Alicia  [Totaro] called  me  after  they
               quit   paying.    I  dont   particularly
               remember   the  circumstances,   but   I
               remember  that the context was  that  if
               she  felt  it necessary to go after  AAA
               that  she could have my half.  You know,
               if  she  went to the effort,  she  could
               have it all.
               
          Q:   Did you tell her that?
               
          A:   I think so.
               
          Q:   And   did   you   say   that   with   an
               understanding of  did you  try  to  sort
               out  the  legal issues about who  should
               get what or  when you said that to her?
               
          A:   Alicia  and I are not attorneys,  right.
               We dont know the legal bullshit.  Sorry.
               But  I wanted her to understand that she
               didnt  owe  me anything, right.   And  I
               felt  comfortable with  the  way  things
               were  and I wanted her  I wanted her  to
               have my half.
               
          Q:   And  would  that be whether  you  had  a
               legal right to your half or whether  you
               didnt have anything more
               
          than Bill Nelsons cockeyed idea?
          
          A:   Exactly.  Exactly.
               
          After  testimony was taken on July 23, 2003, the  trial
was  continued  until September 16, 2003.   On  the  day  before,
Totaros  counsel submitted an unsigned formal written  assignment
of  Palmquists overriding royalty interest to Totaro.33   At  the
conclusion  of the evidence on September 16 the court called  for
all  of  the  parties  to submit proposed findings  of  fact  and
conclusions of law to serve as a substitute for final  arguments.
The court then stated:
               I have some concerns about any effort to
          award more than half of the royalties to  Ms.
          Totaro  because of the fact that it  directly
          affects  the rights of Mr. Palmquist and  hes
          not a party to the case.  And I have a lot of
          concern   about  the  extent  to  which   Mr.
          Palmquists  rights can be adversely  affected
          by  virtue  of  this litigation  without  him
          being a party to the case.
          
          . . . .
          
          [I]f liability were to be found that the most
          that  could  come out of this  case  is  half
          because   I   cant   adversely   affect   Mr.
          Palmquists rights, . . .  then Mr.  Palmquist
          would have to decide what he wants to do with
          the other half.
          
               And Mr. Harren [Totaros counsel], before
          you  leap  up  and tell me about the  exhibit
          that  you attached to your opposition,  thats
          not  an  exhibit formally in this case.   And
          from my standpoint any relation  any dealings
          between  .  . . Ms. Totaro and Mr.  Palmquist
          that  post date all of these events  are  not
          part  of this case.  They may affect whatever
          arrangements Mr. Palmquist chooses  to  make.
          If I find liability and he chooses to enforce
          his  half  of it, then you can deal with  it.
          But  I dont  thats way beyond anything I  can
          deal  with here and I dont want to  kick  the
          door  open to what could be a very legitimate
          set  of issues raised by the defendants  here
          about  how  that  agreement plays  into  this
          case.  I think its just going to add way more
          complexity to this case than is worthwhile.
          
          On  December 1, 2003, the written assignment signed  by
Palmquist  was  submitted  by  Totaro  along  with  her  proposed
findings  of  fact  and  conclusions of  law.   In  her  proposed
findings  Totaro  requested the court find that Palmquist  wanted
Totaro  to have his half of the overriding royalties and that  he
had expressly rejected a continuing interest in the royalties  in
favor of Totaro.
          The  trial  court issued its decision  on  February  6,
2004.  The court ruled that Totaro could recover only half of the
          overriding royalties, but did not mention Totaros claim that
Palmquist had assigned or relinquished his interest to her.
          On  April 21, 2004, Totaro moved for permission to file
an  amended  or supplemental complaint adding an allegation  that
Palmquist  had  assigned his royalty interest  to  Totaro.   This
motion was opposed on untimeliness grounds.  The court denied the
motion,  ruling that it raises a new issue that could and  should
have been raised long before trial.  The court stated:
               Plaintiff  initially  alleged  that  Mr.
          Nelson  and  Mr.  Palmquist agreed  that  the
          assignment  was to pay off a debt,  and  that
          once  the debt was paid, the royalties  would
          all  revert to Ms. Totaro.  According to  the
          plaintiff,  the  new  allegation  essentially
          adopts  this  approach because Mr.  Palmquist
          has  now assigned to her any claim he had  to
          the  royalties.  The problem with this  claim
          is  that there was no limitation on the  face
          of the assignment  Mr. Palmquist was entitled
          to the royalties for as long as they would be
          paid.   And  the assignment which  forms  the
          basis of the amendment only was granted  long
          after   this  case  commenced.   The  amended
          complaint  therefore  does  not  conform  the
          complaint to the evidence.
          
          In  her  arguments to this court Totaro notes that  her
complaint  alleged the overriding royalties assigned to Palmquist
either  had or soon would go to her.  She argues that she  proved
this allegation through Palmquists testimony that she should have
his  half of the overriding royalties.  She contends that no real
issue was made as to the effect of Palmquists testimony and  AAAs
defense was simply that she was not entitled to any royalties  at
all.  Totaro also notes that neither AAA nor Ramirez ever claimed
Palmquist was a necessary or indispensable party.
          In  response  AAA  first argues  that  Totaro  ratified
Cosmoss  assignment  of  half  of  the  overriding  royalties  to
Palmquist.  But this argument does not address Totaros contention
that Palmquist reassigned his overriding royalty interest to her.
AAA  also argues that the trial court correctly refused to  grant
Totaros post-decision motion to amend the complaint, quoting  the
courts  conclusion  that [p]laintiff could  have  worked  out  an
arrangement with Mr. Palmquist long before trial, but  she  chose
not  to  do so.  What plaintiff cannot now do is see[k] to  amend
the  complaint to cure a legal deficiency through  a  back  door,
when she lost the argument at trial.
          The  trial courts reference to Totaros failure to  work
out  an  arrangement  with  Palmquist  before  trial  is  clearly
erroneous.   Palmquist  testified that prior  to  trial  he  told
Totaro she could have his interest and at trial he confirmed this
intent.   We fail to see why this testimony was not an  effective
assignment  of  his  interest to Totaro.   Oral  assignments  are
legally  effective and no special form of words is  required,  so
long  as the transfer is clearly intended as a present assignment
of  the  interest held by the assignor.34  Here Palmquists intent
was  clear  and the parties have never questioned it,  either  at
trial  or  in  this  court.  Further, if the  statute  of  frauds
generally requires a writing

to  transfer royalty interests in real estate, it is satisfied by
Palmquists testimony in open court that he told Totaro  that  she
could  have  his interest.35  We therefore conclude that  it  was
error not to acknowledge Totaro as the proper recipient of all of
the overriding royalty.
     B.   The  Trial Courts Description of the Leases Termination
          Date
          
          In its findings of fact the trial court stated:

          The  lease  contained  provisions  consistent
          with  Mr. Ramirezs testimony that the purpose
          of  the  agreement was to level the  property
          for  future subdivision purposes.   According
          to  Mr. Ramirez, Mr. Nelson told him that  it
          would take only 10 to 12 years to remove  the
          gravel.   The  lease itself, however,  stated
          that it would remain in effect for as long as
          it  was  economically feasible to take gravel
          from  the property.  As discussed below,  the
          court  finds  that the lease did  not  expire
          after  10  or  12 years; rather, the  parties
          intended  that it expire either  when  mining
          was  no longer economically feasible or  when
          the  property  was suitable  for  residential
          development, whichever came first.  (Emphasis
          added.)
          
          Totaro  argues that the trial courts finding  that  the
lease  would  terminate  when  the  property  was  suitable   for
residential development should be recognized as dicta and  of  no
binding  consequence.  Totaro observes that [a]t  this  point  in
time it is unknown whether any dispute will ever rise between the
parties   over   the   appropriate  time  to   terminate   gravel
[extraction]  and  to embark upon a subdivision.   Totaros  basic
contention seems to be that the interplay between the  mining  no
longer   economically  feasible  and  suitable  for   residential
development  criteria was not litigated and therefore  should  be
considered dicta.
          AAA   contends  that  the  [enforceabililty]   of   the
Cosmos[/]Ramirez lease, including its term, was  fully  litigated
at  trial.   AAA also observes that the Ramirez/Cosmos lease  was
correctly found by the court not to be an integrated contract and
therefore the court properly considered extrinsic evidence as  to
when it should terminate.
          The  exact  meaning  of  the suitable  for  residential
development alternative termination date may be unclear.  Nor was
it  the  focus of this litigation.  The final judgment  does  not
mention  the  phrase,  but  simply  states  that  the  Cosmos/AAA
sublease  shall be specifically performed until it is  terminated
          by its terms or by agreement of parties.  While the court may not
have  facially erred in expressing the termination  dates  as  it
did, the courts expression is not binding and questions as to the
termination criteria will have to be resolved in the future.
     C.   The  Trial  Courts Allowance of AAAs Royalty  Deduction
          for Additives
          
          Totaro  claims  that  the trial  court  erred  when  it
allowed   AAA  to  reduce  weight  ticket  amounts  to  recognize
additives  of oil and sand to its asphalt products.  This  was  a
deviation from the strict terms of the contract, which provided:
               3.    Lessor  will be paid  Fifty  Cents
          ($.50)  per ton by the 15th of each  calendar
          month for any processed material sold in  the
          preceding month.
          
               . . . .
          
               5.    Lessor  will  be  paid  Ten  Cents
          ($.10) per ton by the 15th of each month  for
          any   pit   run  material  sold  during   the
          preceding month.
          
               . . . .
          
               13.  Since all materials will be weighed
          when  leaving  the pit the  tonnage  will  be
          converted   to  yards  using  an  established
          conversion  of  1.6 tons per  yard,  with  no
          restrictions on minimum or maximum tons to be
          extracted,  processed or  sold.   Accumulated
          weight tickets will be the basis of payment.
          
          AAA presented a verified statement of royalties and  an
affidavit  explaining  the basis of the calculations.   Based  on
those  documents  and  AAAs testimony at the damages  evidentiary
hearing,  the trial court determined that Totaro was entitled  to
receive  royalties only on the weight of the product produced  at
the  pit,  not including the weight of additives to  the  product
used  to  convert  gravel to asphalt.  This  entitled  AAA  to  a
reduction in royalties of up to sixteen percent.
          The the trial court arrived at this calculation because
it found that at the time of the original contract, in 1984, none
of the parties contemplated that the pit would eventually produce
asphalt.36  In 1984 gravel was the principal product of the  pit.
As the trial court found:
          [T]his  all  re[v]olves around the  contract.
          The  contract  was a gravel  lease  contract.
          The   royalty  payments  were  for  processed
          material,  so  I have to interpret  what  the
          parties  intended  by  the  phrase  processed
          material.   Because it was a gravel contract,
          they were thinking gravel.
          
          The  trial court based this ruling in large part on the
oral  testimony  during the damages hearing  and  throughout  the
course  of  the  trial.   It  is  well  settled  that  [w]e  give
          particular deference to the trial courts factual findings when,
as  here, they are based primarily on oral testimony, because the
trial  court, not this court, judges the credibility of witnesses
and weighs conflicting evidence.37  We are unable to say that the
courts  findings  in  this  respect are  clearly  erroneous,  and
therefore they will be upheld.
VI.  CONCLUSION
          For  these reasons we VACATE the final judgment entered
by  the trial court and remand for further proceedings consistent
with this opinion.
FABE,   Chief  Justice,  with  whom  CARPENETI,  Justice,  joins,
concurring in part and dissenting in part.
          As  the superior court acknowledged, the Ramirez/Cosmos
gravel  lease  had a host of deficiencies including a  relatively
indefinite  term  and  a  lack  of a  legal  description  or  any
description  of the property to be mined.  Most importantly,  the
Ramirez/Cosmos lease lacked any language whatsoever regarding the
exclusivity  of  Cosmoss mining right.  Yet the  court  concludes
that   the   hopelessly  deficient  Ramirez/Cosmos  lease   could
potentially support a result that would require AAA to pay Totaro
royalties  on  behalf  of  a  now-defunct  corporation  for   the
remainder  of the useful life of AAAs gravel pit, with AAA  never
having  the  right to mine gravel on its property as the  owner.1
Because the Ramirez/Cosmos lease cannot possibly sustain  such  a
highly restrictive, multi-decade arrangement, I do not believe  a
remand  is necessary and would simply reverse the superior courts
decision holding AAA liable to Totaro.  But because I agree  with
the  court that this decision cannot be affirmed as it stands,  I
agree that if it is not reversed outright, it must be remanded.
          I  share  the courts view that AAAs potential liability
to  Totaro turns on whether the Ramirez/Cosmos lease was intended
to  be  an  exclusive lease.2  The Ramirez/Cosmos lease does  not
include any provision stating that Cosmos had the exclusive right
to  mine gravel on the property.3  Totaros interest in the gravel
pit   could  best  be  characterized  as  an  overriding  royalty
interest.4   This interest was enforceable5 but was tied  to  the
terms  of  the  lease and sublease out of which it  was  carved.6
When AAA purchased Ramirezs property, it purchased Ramirezs right
to  mine  gravel  on  the  property as owner  rather  than  as  a
sublessee  of  Cosmos  with an obligation  to  pay  royalties  to
Totaro.7
          The  court  asserts  that some of  [the  Ramirez/Cosmos
leases]  provisions  may make sense only if the  lease  had  been
intended to be exclusive and thus that the lease is ambiguous  on
its  face  as  to  exclusivity.8  But the subtle  suggestions  of
exclusivity that the court points to in the leases word  choice,9
such  as  the  reference to Cosmos as the pit operator,  are  not
sufficient to create ambiguity regarding the existence of such  a
crucially  important  restriction in a lease  that  is  otherwise
completely  silent on the matter.  And the fact  that  the  lease
contemplated  that Cosmos would make certain investments  in  the
property  in  order to extract gravel does not in and  of  itself
create  ambiguity regarding exclusivity simply because  it  casts
doubt  on  the  wisdom  of Cosmoss entering into  a  nonexclusive
leasing arrangement.10
          Ambiguity  in a contract does not arise from silence.11
And  unambiguous  contract  language is  not  rendered  ambiguous
simply  because the parties disagree on their intent at the  time
of  contracting,  because they advance different  interpretations
during the course of litigation, or because the clear meaning  of
the  language used would work a hardship on one of the parties.12
By  omitting  any  mention  of exclusivity,  Ramirez  retained  a
concurrent right to mine the gravel on his property.  Indeed, its
attorney,  McCombs, warned AAA that Ramirez could have execute[d]
          a similar, non-exclusive agreement with another party for th[e]
same property.
          The   evidence   in  the  record  suggests   that   the
uncertainty  surrounding  the  parties  leasing  arrangement   is
precisely what roused AAA to action when Ramirez put the property
up  for  sale.   Fuger testified that he was concerned  that  the
Ramirez/Cosmos lease was real spooky, and questionable  at  best.
And  the  evidence leaves no doubt that AAA had ample  cause  for
concern.   Recognizing its vulnerability to the whims  of  a  new
owner, AAA bought the gravel pit for itself.  Just as Ramirez had
the   right  to  mine  the  gravel  pit  as  fee  simple   owner,
unencumbered by the lease with Cosmos, so too did AAA  enjoy  the
full  panoply  of  ownership rights after  the  sale.   When  AAA
secured the right to mine the pit as its owner, its obligation to
pay  royalties  to Totaro as a sublessee ended.  AAA  might  have
discussed  its plans to exercise a concurrent mining  right  with
its  former  sublessor  Cosmos, but  Cosmos  no  longer  existed.
Accordingly,  I believe the superior court erred in  ruling  that
AAA owes royalties to Totaro under the sublease.
          Because  I  would  not require AAA to continue  to  pay
royalties  to  Totaro,  I would not reach  the  question  whether
Ramirez  should be held liable to AAA for breach of the  covenant
against encumbrances under the warranty deed by which he sold AAA
the property.  Nonetheless I agree that if AAA is held liable  to
Totaro  for royalties under the gravel leases, then Ramirez,  who
sold  AAA  a warranty deed with no exceptions to title,  must  be
held liable to AAA for breach of warranty.  A grantor should  not
be  allowed to avoid the clear obligations of a warranty deed  by
asserting  that  the  grantee knew or should  have  known  of  an
encumbrance  against  title, particularly  where,  as  here,  the
purchase price for the property does not reflect the encumbrance.
          For  these  reasons, I respectfully dissent  from  part
IV.A.2 of the per curiam opinion.
MATTHEWS, Justice, with whom EASTAUGH, Justice, joins, concurring
in part and dissenting in part.
          I  would  affirm  the superior courts ruling  that  AAA
remains liable to pay royalties to Totaro and thus disagree  with
the  per  curiam opinion that a remand is necessary to  determine
whether  the  Ramirez/Cosmos lease was exclusive.  I  also  would
affirm  the  superior  courts ruling that  the  implied  covenant
against  encumbrances inherent in the warranty deed  under  which
Ramirez  conveyed  title to AAA did not  shift  to  Ramirez  AAAs
obligation  to  pay such royalties.  I thus disagree  with  parts
IV.A.2  and IV.B of the per curiam opinion, but agree with  parts
IV.A.1 and V.
EXCLUSIVITY
          At  the  outset of the trial the superior court offered
the  parties  a  hypothetical example under which A,  the  owner,
leases  the  pit to B, B turns around and leases the  pit  to  C.
Under  the first lease B was going to pay A two cents a  ton  and
under the second lease C was going to pay B 21/2 cents a ton.   C
now  buys  the pit.  My question is doesnt C still owe B  half  a
cent  a ton?  After some discussion counsel for all three parties
agreed  that  Cs obligation to pay a royalty to B  would  not  be
extinguished by Cs acquisition of As ownership interest  so  long
as the leases were valid and had not expired.  In accordance with
this  example, the court at the end of the trial found that  both
leases  were valid and had not expired and therefore AAA was  not
relieved  of  its  duty  to  continue making  overriding  royalty
payments to Totaro.
          AAA contends, notwithstanding this colloquy, that it no
longer  owes  overriding  royalties under  the  Cosmos/AAA  lease
because  the Ramirez/Cosmos lease was not exclusive  and  AAA  as
owner  is entitled to exercise Ramirezs retained right to extract
gravel  directly.   I think that this argument  lacks  merit  for
three reasons.
     1.    First,  there  is  no  persuasive  evidence  that  the
Ramirez/Cosmos  lease  was  not  exclusive.   AAA  in  its  brief
contends  that  Ramirez allowed other gravel  operators  such  as
Northland [sic] Steel to mine gravel on the property at the  same
time  Cosmos was operating.  It also contends that Ramirez always
retained  the  right to extract gravel on his  land  directly  or
through permission granted to other operators.
          As  authority for the first proposition AAA  cites  the
courts finding that
          [f]our  or  five  months  after  signing  the
          agreement with Mr. Ramirez, Mr. Nelson opened
          negotiations with Mr. Fuger, an  employee  of
          Mr.  Nelson  who was working in  the  Ramirez
          pit,  and Ken Mearkle, an independent  gravel
          operator working under the business  name  of
          Northland  [sic]  Steel, which  in  turn  was
          working  in the Ramirez pit at the same  time
          as Cosmos.
          
AAA  interprets this as a finding that Mearkle/Northern Steel was
operating  in the pit under permission granted by Ramirez  rather
than  permission  granted by Nelson.  But the court  did  not  so
find.   Nor  would  the evidence have justified such  a  finding,
because both Mearkle and Fuger testified that Northern Steel  was
working in the pit under an arrangement made with Nelson.1
          AAA  also  cites Ramirezs testimony for the proposition
that he retained the right to extract gravel.  But Ramirez merely
testified  that  he  had  no  discussions  with  Nelson   as   to
exclusivity.   Ramirez also testified that he did not  recall  an
agreement  with  Mearkles  company for  gravel  extraction.   The
colloquy went as follows:
          Q:   [by  Ramirezs counsel]  Did you have  an
               agreement with Mr. Mearkles company  for
               gravel extraction?
               
          A:   Not that I recall.
               
          Q:   Did  Mr.  Mearkle pay you royalties,  do
               you recall?
               
          
          
          A:   Well  I  didnt remember but I think  you
               said   I believe it was one or three   I
               dont how many checks he sent, one or two
               or three, I dont remember.
               
          Q:   Im sorry.
               
          A:   I  dont  recall the checks.   I  know  I
               think I got some, but I dont recall, you
               know, how many or . . . . .
               
          Q:   Oh,   you   got  checks  from   Northern
               . . . . .
               
          A:   I believe so.
               
Given  that Nelsons subsequent arrangement with AAA was that  AAA
would pay Ramirez directly, the fact that Ramirez received checks
from  Northern Steel is not inconsistent with Mearkle and  Fugers
testimony  that  Northern  Steel was working  at  the  pit  under
Nelsons auspices.
          As  noted  in  the  per  curiam  opinion,  there  is  a
considerable body of evidence that indicates that the  lease  was
intended  to be exclusive.2  To reiterate this briefly,   Ramirez
stated that [i]n 1984, I advertised in the newspapers for someone
to  develop  my property into gravel pit. (Emphasis added.)   And
when  Nelson responded, again according to Ramirez,   we  entered
into  letter  of intent concerning the development  of  the  pit.
Ramirez  consistently refers to the pit in the  singular,  noting
that  Cosmos was to manage it and that Ramirez would either  help
to  manage  the pit or take a five-cent-per-yard price reduction.
Ramirez  states that Fuger of AAA took over running the  pit  and
ran  the pit from 1985 through August 1998 when Ramirez sold  the
pit to AAA.  As the per curiam opinion notes, Ramirezs statements
imply exclusivity.3
          Further,  the Ramirez/Cosmos lease contains terms  that
show that the parties

to the lease intended the lease to be exclusive.  For example, as
the per curiam opinion also notes,
          Cosmos is referred to as the operator or  pit
          operator.      Cosmos    assumed     pit-wide
          responsibilities regarding slope  preparation
          as   the   pit  recedes  and  undertook   the
          responsibility  to  dig test  holes  for  the
          owners  benefit every 1,000 feet.  The  lease
          contemplated that Cosmos would build a bridge
          to  get better access to the gravel and would
          build a large washing and separation plant on
          the property.[4]
          
In  my  view it would be inconsistent with these lease  terms  to
conclude  that Ramirez could sell gravel from the pit independent
of  the  lease.  Cosmos can hardly have been expected to  improve
the pit to facilitate its exploitation by other operators.
     2.     Second,   the   question  is  not   simply   one   of
nonexclusivity, but whether Ramirez retained the right to  permit
another  large-scale gravel extraction operation. We  can  assume
for purposes of argument that Ramirez retained the right to allow
contractors to take occasional loads of gravel from the pit.  The
exercise of such a right would not necessarily have substantially
interfered  with  the  high  volume operations  contemplated  and
conducted   under  the  Ramirez/Cosmos  lease.   But  large-scale
alternative  operations   operations comparable  to  those  being
conducted  under the lease by AAA  clearly would have  conflicted
with  the Ramirez/ Cosmos lease.5  Again, Cosmos pit-wide  duties
regarding  slope preparation, test holes, and access  improvement
would  not  have  been undertaken if the pit could  be  mined  by
another large operator.  It follows that if Ramirez retained  the
right  to mine or permit mining on an occasional basis free  from
the Cosmos lease he could transfer that right to a buyer.  But he
could  not  transfer a right to conduct large-volume  operations,
because he did not retain such a right.
          Here AAA claims the right to conduct its operations  as
Ramirezs transferee exactly  in terms of both volume and location
in  the  pit   as it had conducted them as lessee.  There  is  no
evidence  that AAAs operations in the pit changed  on  and  after
August 26  when AAA became the pit owner  from what they were  on
August  25, 1998, and before   when AAA was Cosmoss lessee.   For
AAA to prevail on its argument that it is now exercising Ramirezs
retained  extraction rights, it would have to show not only  that
the  Ramirez/Cosmos  lease was not exclusive,  but  that  Ramirez
retained the right to permit another gravel operation in the  pit
comparable  in size to, and side by side with, that  contemplated
and  exercised  under  the auspices of the Ramirez/Cosmos  lease.
Because  no  such showing has been or can be made, AAAs  argument
fails.
     3.    Third, even if we assume that the Ramirez/Cosmos lease
is  not  exclusive and further assume that it would not  preclude
Ramirez  from  entering  into another lease  with  a  large-scale
operator,  AAA  could  not  have made such  an  arrangement  with
     Ramirez without breaching the Cosmos/AAA lease.  The Cosmos/AAA
lease was explicitly exclusive and expressly required AAA to take
all  reasonable steps to protect Cosmoss lease with Ramirez.   If
AAA  had contracted directly with Ramirez to take all its  gravel
from  Ramirez,  such  a  contract  rather  than  protecting   the
Ramirez/Cosmos  lease  would  have  rendered  it  without  value.
Because  of the exclusive nature of the Cosmos/AAA lease,  Cosmos
was  precluded  from extracting gravel on its own, or  permitting
another  operator to do so.  Therefore AAAs hypothesized separate
direct arrangement with Ramirez would have left Cosmos without  a
potential revenue source under its lease with Ramirez.   Such  an
action  would not be consistent with AAAs obligation  to  protect
the value of Cosmoss interest in the gravel operation.
          For  these reasons, I would affirm the superior  courts
rejection  of  AAAs  argument  that  it  freed  itself  from  its
obligation  to pay royalties under the Cosmos/AAA lease  when  it
purchased Ramirezs interest in the property.6
THE IMPLIED COVENANT AGAINST ENCUMBRANCES
          AAA  argues that Ramirez should indemnify AAA  for  the
royalties  that  AAA  owes Totaro because  Ramirez  conveyed  the
property to AAA under a warranty deed.  AAA notes that a standard
warranty deed such as was given here contains an implied covenant
against  encumbrances, and argues that Totaros overriding royalty
right arising from the Cosmos/AAA lease is an encumbrance covered
by  the implied covenant. AAA contends that its knowledge of  the
encumbrance  should  not exclude it from the  protection  of  the
covenant.  AAA also argues that there is no ground for finding  a
waiver of its covenant rights.
          Todays   per   curiam  opinion  largely  accepts   AAAs
arguments.  According to the per curiam opinion, [t]he  intention
to  exclude  an  encumbrance should be  manifested  in  the  deed
itself,  for a resort to oral or other extraneous evidence  would
violate  settled  principles of law in  regard  to  deeds.7   The
superior  courts  decision reflects a less absolute  and,  in  my
opinion,  more  accurate view of the law concerning  encumbrances
than that accepted by the per curiam opinion.
          The  superior  court initially ruled  on  the  covenant
against  encumbrances  issue  on the  parties  cross-motions  for
summary  judgment.8   The  court ruled at  the  outset  that  the
Cosmos/Ramirez  lease  was  an encumbrance.9   This  led  to  the
question  whether a grantee can bring an action for breach  of  a
statutory  warranty when it knew or should have known  about  the
encumbrance  upon which the action for breach  is  based.10   The
court   recognized  the  general  rule  that  knowledge   of   an
encumbrance  on the part of a purchaser does not bar  its  claim,
but  noted two exceptions.11  The first would apply if there were
physical  conditions of the land itself which  were  apparent  on
inspection   and  which  are  found  to  have  been  within   the
contemplation  of the parties in agreeing on the purchase  price.
12  The second would apply if the grantee knew of the encumbrance
and  agreed to the conveyance with the encumbrance intact.13   As
authority  for  the  first exception the court  relied  on  Tabet
Lumber Co. v. Golightly,14 which in turn was based on Powell, The
Law  of  Real  Property   907, at 268.21  (1968).15   The  second
          exception was based on Powell, Powell on Real Property  81A.06[3]
(1999).16
          The  court identified four material issues which  would
be  relevant  to  a  determination as to whether  the  exceptions
applied.  The issues identified by the court were (1) whether the
parties  knew  about the Cosmos/Ramirez lease when AAA  purchased
the  property,  (2)  whether the lease  infringed  on  the  title
itself,  (3) whether the lease involved physical facts concerning
the  premises,17 and (4) the intent of the parties, in particular
whether  AAA was willing to purchase the property notwithstanding
the  encumbrance.18  Focusing in particular on the issue  of  the
parties  intent  the court held that a trial was needed  on  AAAs
covenant-based claim.19
          At  the  trial  the  court addressed and  resolved  the
issues  that  it  had identified in its summary judgment  ruling.
The  court  made  detailed findings of  fact  and  discussed  and
integrated its findings in its conclusions of law.20
          The  court  began its conclusions of law discussion  by
referring  to its summary judgment ruling.  The court  reiterated
the  general  rule that a purchasers knowledge of an  encumbrance
will  not ordinarily suffice to defeat the purchasers claim under
a  covenant  against encumbrances.21  The court again  noted  two
exceptions  under which a claim on a covenant would be  defeated,
namely, (1) where physical conditions on the land are apparent on
inspection  and  affect  the purchase price  and  (2)  where  the
grantee knows of the encumbrance and the parties act in a  manner
reflecting a waiver of any claim of breach by the grantee.22  The
court  then  referred to the four material  issues  that  it  had
identified  in  its  summary judgment ruling:   (1)  whether  the
parties  knew of the encumbrance; (2) whether the lease infringed
on  the  title  itself; (3) whether the lease  involved  physical
facts  concerning the property; and (4) whether the parties acted
in   a  manner  that  reflected  an  intent  by  AAA  to  proceed
notwithstanding  the  encumbrance.23  The court  noted  that  the
infringement  issue was a legal issue, observing that  the  court
has  found  that the lease infringed on title, and  proceeded  to
discuss the other three issues in light of the evidence presented
at the trial.24
          Concerning knowledge of the lease, the court found that
both  parties  knew about both the Cosmos/Ramirez lease  and  the
Cosmos/AAA  lease when they negotiated and arrived  at  the  land
sale  agreement.25  The court concluded that  in  light  of  this
knowledge,  neither party could reasonably have relied  upon  any
alleged misrepresentation by the other party.26
          Concerning  the  physical condition  issue,  the  court
concluded  that  contrary  to its summary  judgment  ruling,  the
physical condition exception applied.27  The court stated:
          The  evidence  at  trial indicated  that  the
          gravel mining operations were obvious to  any
          casual  observer and that it was  clear  that
          AAA was conducting the mining operations.  It
          is  self-evident that the gravel mine was the
          principal basis for the purchase price. . . .
          The  evidence  indicated that the  operations
          and lease were tied together in the minds  of
          the parties and that any person who inspected
          the  property would have been on notice  that
          someone  other than the owner was mining  the
          gravel.  The court accordingly concludes that
          there  were  physical features  on  the  land
          which gave notice of the encumbrance and were
          within the contemplation of the parties  when
          they negotiated the sale.[28]
          
          Concerning the issue of the parties intent,  the  court
had  earlier found that the parties had mutually decided that the
sale  transaction  would be independent of whatever  consequences
might  flow from the Cosmos/AAA lease:  Mr. Fuger and Mr. Ramirez
were well aware of the leases at issue and . . . they decided not
to  deal  with  the ramifications of the sale on  the  Cosmos/AAA
lease.29  In line with this finding the court determined that the
parties  had discussed whether royalties would have  to  be  paid
under  the  two  leases  and whether the Cosmos/AAA  lease  would
remain in effect once the property were sold.30  The court  found
that  notwithstanding concerns that it would still  have  to  pay
royalties to Totaro AAA decided to purchase the property.31   The
court found that
          [w]hile there is no direct evidence that  the
          legal  uncertainties  affected  the  purchase
          price,  the  court  has  no  doubt  that  AAA
          carefully  evaluated the relative  costs  and
          benefits  of proceeding and decided  that  it
          was  best to proceed and to run the risk that
          AAA would be held liable under the Cosmos/AAA
          lease.[32]
          
The court also found that
          AAA would have purchased the property even if
          it knew for a fact that it had to keep paying
          royalties  to  Ms. Totaro; for AAA  had  been
          paying her and Mr. Ramirez royalties for many
          years,  and  by purchasing the  property  AAA
          would be increasing its future revenue stream
          since  it  would no longer have  to  pay  Mr.
          Ramirez.[33]
          
          In  accordance with these findings the court  concluded
that  the  second  exception  also  applied:   AAA  knew  of  its
potential  obligation to pay royalties to Totaro  and  agreed  to
proceed  with  the sale knowing that Ramirez had  not  agreed  to
assume any responsibility concerning this potential obligation.34
          The  courts findings are reviewed on appeal  under  the
deferential clearly erroneous standard.  They clearly pass muster
under  this  standard  for they are all based  either  on  direct
evidence or permissible inferences from the evidence.
          The   real  difference  between  the  superior   courts
position  and  that of todays per curiam opinion  appears  to  be
rooted  in  a  conflict  of  legal  precedents.   While  the  two
exceptions relied on by the superior court are well supported  by
          case law,35 there are also authorities taking the strict view
reflected by the per curiam opinion.36
          In my opinion the exceptions represent better law.  The
per  curiam  opinion explains its strict approach on  the  ground
that title covenants inherent in warranty deeds provide certainty
and   predictability   in   property  transactions.37    But   in
contemporary transactions title covenants have little to do  with
certainty and predictability.  A quitclaim, or bargain and  sale,
deed will provide a title that is as certain and predictable as a
warranty  deed.38   Assurance that a title is good  is  typically
provided by a professional title insurance company based on title
insurance  that  is issued only after the title company  makes  a
careful  examination of recorded title documents.39  The covenant
against  encumbrances inherent in a warranty deed simply reflects
a  personal contract of indemnity in which the seller  agrees  to
indemnify the buyer against losses the buyer may suffer by reason
of  defects or encumbrances.40  Most buyers pay little  attention
to  the  solvency  of those from whom they purchase,  preferring,
understandably,  to rely on professional title  insurers.   Given
that  title  covenants are personal contracts  of  indemnity,  it
makes  good  sense to treat them as such.41  Employing exceptions
like  those applied by the superior court tends to prevent  title
covenants   from  becoming  traps  for  unwary  sellers.42    The
exceptions  are  designed  to ensure  that  a  sellers  indemnity
obligation runs only to defects and encumbrances that the parties
to the transaction would reasonably expect to be covered.
          This  case is a good example of what can happen in  the
absence  of  some such approach.  Here the buyer seeks  indemnity
from  the  seller  for a contractual obligation  that  the  buyer
itself  has incurred.43  The seller has not participated  in  the
creation of this obligation, but under todays per curiam decision
he will be required to pay it.44  The obligation is a substantial
one  and  the upshot of this case may be that the seller  may  be
required  to  pay  the  whole amount  of  the  sale  proceeds  to
indemnify the buyer for the buyers contractual obligation.   This
court should avoid choosing a line of authority that leads  to  a
result that is so obviously contrary to the actual and reasonable
expectations of the parties.
          For  these reasons I dissent from parts IV.A.2 and IV.B
of the per curiam opinion.
            APPENDIX A  Excerpt from Superior Courts
     Order on Motions for Summary Judgment of June 2, 2003
AAA/Ramirez claims
     There  are  two  interrelated issues  between  AAA  and  Mr.
Ramirez.   AAA  claims that if it is held liable  for  breach  of
contract, Mr. Ramirez must reimburse AAA because of his  wrongful
behavior in giving AAA a warranty that there were no encumbrances
on  the  property, when in fact the property was subject  to  the
potentially valid Cosmos/Ramirez lease.  Mr. Ramirez asserts that
he  is entitled to summary judgment against AAA because AAA  knew
about  that  lease and hence has waived any claim it has  against
him.2   The difficulty with both of these arguments is that there
is a dispute as to the intention of the parties regarding whether
AAA  acceded  to  the  encumbrance, and  that  dispute  precludes
summary judgment.
     AAA  rests  its claim against Mr. Ramirez on its  allegation
that Mr. Ramirez breached the covenant against encumbrances.   In
particular,  AAA asserts that Mr. Ramirez warranted in  both  the
earnest  money  agreement and the statutory  warranty  deed  that
there were no encumbrances upon the property.  According to  AAA,
plaintiffs  breach  of  contract  claim  is  predicated  on   the
Cosmos/Ramirez lease; if that lease is found by the court  to  be
valid,  then the lease was an encumbrance upon the property,  and
hence Mr. Ramirez breached the warranties.
     Mr.  Ramirez responds that AAA knew about the Cosmos/Ramirez
lease and so it has waived any claim of breach of the warranties.
AAA  does not directly deny that it knew about the lease, but  it
alleges  that its knowledge is irrelevant, because the warranties
apply  notwithstanding  actual or constructive  knowledge  of  an
encumbrance.
     There  are at least two distinct legal issues involved here.
The  first  is whether the Cosmos/Ramirez lease is an encumbrance
on  the property.  The parties agree that the lease must be valid
in  order to be an encumbrance; while neither party believes that
the court will find the lease to be valid, they assume the leases
validity  for  purposes  of assessing  who  would  be  liable  to
plaintiff should she prevail on that claim.
     Mr.  Ramirez  suggests that the lease is not an  encumbrance
because  AAA was not and has not been disturbed in its possession
of  the  land due to the fact that Cosmos no longer exists  as  a
corporate  entity  and so is not seeking to exercise  its  lease.
But aside from the fact that Ms. Totaro has the right to seek  to
vindicate  Cosmos royalty rights, the case law  simply  does  not
support  Mr.  Ramirezs  claim that  a  lessee  must  actually  be
dispossessed   in  some  fashion  for  a  lease  to   become   an
encumbrance.   The  general definition  of  encumbrance  includes
leases and any right in a third party which diminishes the  value
or  limits  the use of the land granted.  Domer v.  Sleeper,  533
P.2d  9, 11 n.5 (Alaska 1975).  By granting rights to the  gravel
in the property, the Cosmos/Ramirez lease clearly both diminishes
the  value of the land and limits the lands use.  More important,
the  case  upon which Mr. Ramirez relies specifically contradicts
his analysis:
          Since the lease is an encumbrance, a covenant
          against  encumbrances is  broken  immediately
          upon  making the covenant if a lease is  then
          outstanding,  although  there  has  been   no
          ouster  by  the lessee nor interference  with
          the possession and use by the owner.
          
Chicago,  Mobile Devel. Co. v. G.C. Coggin Co., 66 So.  2d.  151,
160 ([Alabama] 1953).
     There  accordingly  is no question that  the  Cosmos/Ramirez
lease  is an encumbrance.  This leads to the second legal  issue:
whether a grantee can bring an
action  for breach of a statutory warranty when it knew or should
have known about the encumbrance upon which the action for breach
is based.  There is no Alaska case law that addresses this issue,
even  indirectly.   AAA presented a number of out-of-state  cases
that  support  its contention that any knowledge it  had  of  the
Cosmos/Ramirez  lease  does  not  bar  its  claim  of  breach  of
warranty.   Mr.  Ramirez supported his claim to the  contrary  in
part  on Somers v. Leiser, 259 P.2d 843 (Wash. 1953), which  held
that  a  free  of encumbrances warranty does not cover  easements
that  are known to the vendee.  Somers is of particular relevance
since  it  interpreted the Washington statute upon which  the  AS
38.15.030(b) is based.  See Domer, 533 P.2d at 11.
     Both  parties are somewhat correct:  AAA cites  the  general
rule, while Mr. Ramirez relies on the principal exception to  the
rule.   As the New Mexico Supreme Court explained in Tabet Lumber
Co. v. Golightly, 457 P.2d 374, 375 (N.M. 1969):
          Encumbrances,   however,   fall   into    two
          categories:  (1) those which infringe on  the
          title  itself;  and (2) those  which  involve
          physical facts concerning the premises. . . .
          The  courts appear to be unanimous in holding
          that where an encumbrance infringes upon  the
          title  itself, a purchasers knowledge  of  it
          does  not  prevent recovery in an action  for
          breach  of  covenant, but after stating  this
          general  rule, Powell, [Law of Real Property,
          268.21  (Recomp. 1968)], follows it  with  an
          exception:
          
               [T]his  statement must be  qualified  by
               excepting  physical  conditions  of  the
               land  itself  which  were  apparent   on
               inspection and which are found  to  have
               been  within  the contemplation  of  the
               parties  in  agreeing  on  the  purchase
               price.
               
The  more  recent  edition  of Powells  treatise  adds  a  second
exception:  if the grantee knew of the encumbrance and agreed  to
the  conveyance with the encumbrance intact, then in effect,  the
grantee  has waived his or her right to apply the title covenants
to  that  particular  encumbrance or interest.   Powell,  Law  of
Property, sec. 81A.06[3], at 81A-126-27 (1999).  Powell notes  in
this respect that evidence of waiver can include an adjustment of
the  purchase  price  or some other aspect of  the  agreement  to
reflect the encumbrance.  Id.
     There are four material factual issues with respect to  this
analysis.   The  first  is  whether the parties  knew  about  the
Cosmos/Ramirez  lease when AAA purchased the  property  from  Mr.
Ramirez.   While  both  AAA  and Mr. Ramirez  presented  evidence
suggesting that neither of them knew about the lease, it would be
exceedingly  difficult  for a finder of  fact  to  conclude  that
either  party lacked such knowledge.  Mr. Ramirez was a party  to
the  lease  and  signed it himself.  As for AAA, its  lease  with
Cosmos  stated  explicitly that both parties were  aware  of  the
Cosmos/Ramirez  lease and of the cautionary letter,  procured  by
Mr.   Fuger,  regarding  the  validity  of  that  lease.    There
accordingly  is no issue of fact regarding the parties  knowledge
of the existence and terms of the Cosmos/Ramirez lease.
     The  second and third factual issues are whether  the  lease
infringed  on  the  title  itself  or  involved  physical   facts
concerning  the premises.  As noted above, there is  no  question
that  if  it  is valid, the lease infringed on the title  itself,
which suggests that AAA can maintain its breach of warranty claim
should  Ms. Totaro prevail on her breach of contract claim.   Mr.
Ramirez  argues  that  the  lease also  involved  physical  facts
concerning the property, because the gravel mining operation  was
a  substantial physical presence on the land.  The  court  agrees
that  the existence of the operation may be relevant evidence  of
the   parties intent.  But the fact that the operation was on the
land  is  not dispositive, for there is no intrinsic tie  between
the  lease and the operation  the lease and operation can and now
do  operate  independently of one another.  The  lease  therefore
does not fall within the exception noted in Tabet Lumber.
     The  final  issue  concerns the intent of the  parties.   It
appears that while both parties knew of the Cosmos/Ramirez lease,
neither  thought it was valid.  This suggests that the conditions
of the sale were not affected by the existence of the lease.  But
it  also  suggests that the parties were willing  to  ignore  the
lease,  from  which  a finder of fact could infer  that  AAA  was
willing to purchase the property notwithstanding the encumbrance.
The court has little evidence on either score,3 and the available
evidence  does not unquestionably support the position of  either
AAA  or Mr. Ramirez.  Since the issue of the parties intent is  a
material one which is in substantial dispute, the court therefore
cannot rule as a matter of law that Mr. Ramirez either should  or
should not be liable for any breach of contract committed by  AAA
or Mr. Fuger.
       APPENDIX B  Excerpts from Superior Courts Findings
       of Fact and Conclusions of Law of February 6, 2004

                        Findings of Fact
     . . . .
     Plaintiff  [Totaro] continued to receive her royalty  checks
until  August 1998.  AAA also paid royalties to Mr. Ramirez until
that  date.  The payments stopped when AAA purchased the property
from Mr. Ramirez.  The circumstances of the sale were 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 sell, 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.
     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.
     At  the  close of the negotiations, AAA proposed a  purchase
price of $650,000.00 with a down payment of $100,000.00, and  Mr.
Ramirez   accepted.   AAA  authorized  the  purchase  through   a
corporate  resolution, and an Earnest Money Receipt and Agreement
(Purchase  Agreement)  was executed by AAA  and  Mr.  Ramirez  on
August 5, 1998.  The Purchase Agreement was provided and prepared
by  Mr.  Ramirez,  although it contained a provision  recognizing
AAAs  right  to  consult an attorney about  the  agreement.   The
Purchase  Agreement also contained several somewhat  inconsistent
provisions relating to the possible existence of encumbrances  on
the land.
     On  the  one  hand, the Purchase Agreement stated  that  Mr.
Ramirez was to provide a title insurance policy to AAA, and  that
if   the   title  insurance  policy  disclosed  any  defects   or
encumbrances,  then AAA could renegotiate the purchase  price  to
cover the defects or encumbrances.  A title insurance policy  was
issued, but it listed no defects or encumbrances relating to  the
Cosmos/Ramirez  lease.  Accordingly, the purchase  price  in  the
Purchase   Agreement  remained  at  $650,000.00   and   was   not
renegotiated by Mr. Ramirez and AAA.
     The  Purchase  Agreement further provided that the  property
would   be  conveyed  free  of  encumbrances  except  for   those
specifically listed, and that any encumbrances not listed in  the
Purchase  Agreement  could be discharged at closing  out  of  the
purchase  money.   No encumbrances were listed  in  the  Purchase
Agreement, and none were discharged at closing.
     On  the  other  hand, the Purchase Agreement  provided  that
[t]he undersigned parties acknowledge and agree that the property
is  sold  in  an  as  is, where is condition with  no  warranties
implied  or  expressed  by seller except those  which  appear  in
writing  on  the receipt and agreement to purchase  dated  8/6/98
.  .  .  .  The Purchase Agreement also stated that the [p]arties
hereto  agree  that  these  instructions  constitute  the   final
agreement between the parties and acknowledge by execution hereof
that  all contingencies prior to closing of this transaction have
been  met  or  waived or otherwise arranged between  the  parties
outside this escrow . . . .  The Purchase Agreement thus appeared
both  to place the responsibility for revealing encumbrances upon
Mr.  Ramirez and to require AAA to raise any issues it  may  have
had regarding encumbrances.
     On  August  26,  1998,  Mr.  Ramirez  executed  a  Statutory
Warranty  Deed  conveying the Property  to  AAA.   The  Statutory
Warranty  Deed  made  the  conveyance  subject  to  a  number  of
reservations  and  exceptions, but it  did  not  make  any  title
exception  for  any rights in the property held  by  Cosmos,  Ms.
Totaro, or anyone else by virtue of either the Cosmos/Ramirez  or
the Cosmos/AAA leases.
     . . . .
                       Conclusions of Law
     . . . .
Allocation of liability between AAA and Mr. Ramirez
     AAA argues that Mr. Ramirez should be held liable because he
breached  the covenant against encumbrances.  In particular,  AAA
asserts  that  Mr.  Ramirez warranted in both the  earnest  money
agreement  and  the statutory warranty deed that  there  were  no
encumbrances   upon  the  property.   According   to   AAA,   the
Cosmos/Ramirez  lease was an encumbrance upon the  property,  and
hence  Mr. Ramirez breached the warranties.  Mr. Ramirez responds
that AAA knew about the Cosmos/Ramirez lease and so it has waived
any  claim  of  breach of the warranties.  AAA replies  that  any
knowledge  it  had  of  the  lease  is  irrelevant,  because  the
warranties apply notwithstanding actual or constructive knowledge
of an encumbrance.
     The  court  addressed the legal issues underlying defendants
claims in its June 2, 2003 order denying their cross motions  for
summary  judgment  on this issue.  Based on the undisputed  facts
set forth in the motions, the court ruled that the Cosmos/Ramirez
lease  is  an encumbranceon the property.  The facts  adduced  at
trial fully supported this ruling.
     The  more  difficult legal issue is whether  a  grantee  can
bring  an action for breach of a statutory warranty when it  knew
or  should have known about the encumbrance upon which the action
for  breach is based.  The court ruled in its June 2, 2003  order
that a partys knowledge of an encumbrance that infringes on title
ordinarily will not defeat that partys claim of a breach  of  the
warranty regarding encumbrances, unless one of two exceptions  is
shown:  1) where physical conditions on the land were apparent on
inspection  and  affected the purchase price; and  2)  where  the
grantee knew of the encumbrance and the parties acted in a manner
that  reflected  a waiver of any claim of breach by  the  grantee
(such  as  a  modification of the purchase price  reflecting  the
encumbrance). The court found that there were material issues  of
fact  regarding  the  second exception  that  precluded  granting
summary judgment to either party.
     The  court  then  identified four material  factual  issues:
whether the parties knew of the encumbrance; whether [the]  lease
infringed  on  the  title  itself;  whether  the  lease  involved
physical  facts concerning the property; and whether the  parties
acted  in  a  manner that reflected an intent by AAA  to  proceed
notwithstanding  the encumbrance.  The third  issue  is  a  legal
issue,  and  as noted above, the court has found that  the  lease
infringed  on  title. The court has reevaluated the  other  three
issues in light of the evidence presented at the trial, and  will
address them in turn.
     Knowledge  of the lease.  Both AAA and Mr. Ramirez  continue
to  claim  in their proposed findings of fact and conclusions  of
law  that  they  were  misled by the other  party  regarding  the
existence and/or validity of the leases.  These positions are not
supported  by  the evidence.  Mr. Fuger was quite  clear  in  his
testimony  that he knew about the Cosmos/Ramirez lease,  that  he
knew  that  the lease had a number of deficiencies, and  that  he
purchased the property because he was concerned that someone else
might  buy  the  property  and tell  him  to  leave  because  the
Cosmos/Ramirez  lease  was not valid.  Mr. Fuger  obviously  knew
about  the Cosmos/AAA lease, since he signed it, and he testified
that  he  was  concerned throughout the sale  negotiations  about
whether  he would still have to pay Ms. Totaro royalties once  he
purchased the property.
     Mr.  Fuger asserts that Mr. Ramirez told him that there  was
no  lease  on the property and that he relied on that  statement.
While  the  court does not believe that Mr. Ramirez made  such  a
straightforward  statement, the court would not be  surprised  if
Mr. Ramirez left Mr. Fuger with that impression, for as discussed
below,  the court finds it hard to believe that Mr. Ramirez  said
anything  without carefully qualifying it.  But Mr. Fuger  simply
could  not have been misled by any such statement by Mr. Ramirez,
for  he knew all about the Cosmos/Ramirez lease, he knew that his
lease  was  contingent on that lease, and so  he  knew  that  his
company  was on the property only by virtue of the lease  between
Cosmos  and Ramirez.  He accordingly had no reasonable basis  for
relying  on some claim by Mr. Ramirez that there were no existing
leases on the property.
     Mr.  Ramirez  claims that he thought that the Cosmos/Ramirez
lease  had expired and that he had no knowledge of the Cosmos/AAA
lease  until  he  was told about it during the negotiations  over
selling  the property.  Both claims are very difficult to credit.
Mr.  Ramirez presented as a very careful, experienced, and clever
businessman  who watched everything he said extremely  carefully.
His  testimony consistently contained qualifications and  nuanced
statements.   In  addition, Mr. Ramirez received  royalties  from
1984  through 1998, a period of 14 years; and the bulk  of  those
royalties came from AAA. Under these circumstances, there  simply
is no way that Mr. Ramirez could not have been aware that AAA was
mining gravel from his property and that it was doing so pursuant
to the lease that he had signed with Mr. Nelson.
     Mr.  Ramirez  also had to have known about the  deficiencies
with  the lease he signed.  As noted above, he was an experienced
businessman  and property owner.  He participated in negotiations
with  Mr.  Nelson regarding a new lease to cure the deficiencies.
The  court  cannot escape the feeling that Mr.  Ramirez  felt  no
incentive  to  cure those deficiencies because  they  provided  a
potential vehicle by which he could have another party  mine  the
gravel  if Cosmos and AAA did not work out, and so they maximized
his  flexibility  in deciding how he wanted the  property  to  be
mined.
     In  short,  both  AAA and Mr. Ramirez knew  about  both  the
Cosmos/Ramirez   lease  and  the  Cosmos/AAA  lease   when   they
negotiated  and  arrived at the land sale agreement.  Given  that
knowledge,  neither party could reasonably have relied  upon  any
alleged misrepresentation by the other party.
     Physical  conditions.  The court found in its June  2,  2003
order  that  the  Cosmos/Ramirez lease did not  involve  physical
facts concerning the property because there was no intrinsic  tie
between  that  lease  and  the gravel mining  operations  on  the
property.  The evidence at trial indicated that the gravel mining
operations  were obvious to any casual observer and that  it  was
clear  that  AAA  was conducting the mining  operations.   It  is
self-evident that the gravel mine was the principal basis for the
purchase  price.   The  issue, then,  is  whether  that  physical
presence  on  the land necessarily implicated the  Cosmos/Ramirez
lease.  This is a closer question than the court believed when it
issued  the June 2, 2003 order.  The evidence indicated that  the
operations  and  lease were tied together in  the  minds  of  the
parties and that any person who inspected the property would have
been  on notice that someone other than the owner was mining  the
gravel.  The court accordingly concludes that there were physical
features  on  the  land which gave notice of the encumbrance  and
were within the contemplation of the parties when they negotiated
the sale.
     Intent  of the parties.  Both AAA and Mr. Ramirez were  well
aware of the potential legal issues revolving around the sale  of
the property.  They discussed whether royalties would have to  be
paid  under the two leases and whether the Cosmos/AAA lease would
remain   in   effect   once   the  property   were   sold.    But
notwithstanding  those  concerns, AAA  decided  to  purchase  the
property.   While  there  is no direct evidence  that  the  legal
uncertainties affected the purchase price, the court has no doubt
that  AAA carefully evaluated the relative costs and benefits  of
proceeding and decided that it was best to proceed and to run the
risk that AAA would be held liable under the Cosmos/AAA lease.
     The  court accepts as credible Mr. Fugers testimony that  he
felt  he  had  no choice but to purchase the property.   But  the
court finds that he felt this way because he did not want to lose
his  gravel mine.  The court further finds that this concern  was
so  strong that AAA would have purchased the property even if  it
knew  for  a  fact  that it had to keep paying royalties  to  Ms.
Totaro; for AAA had been paying her and Mr. Ramirez royalties for
many  years,  and  by  purchasing  the  property  AAA  would   be
increasing  its  future revenue stream since it would  no  longer
have to pay Mr. Ramirez.
     The court also recognizes that Mr. Fuger did not feel fairly
treated  by  Mr.  Ramirez  because Mr. Ramirez  was  not  totally
straight  with him regarding the status of either  the  lease  or
other persons who might have wanted to purchase the property; and
Mr.  Ramirez did not identify the lease as an encumbrance in  any
of  the  legal  paperwork.   If there were  a  correlate  to  the
comparative negligence doctrine, the court might well be inclined
to  place some liability on Mr. Ramirez.  But the court is  aware
of  no  case law, and AAA cited none, that authorizes a court  to
share liability in the context of a claim of breach of a warranty
against encumbrances.
     In sum, while Mr. Ramirez was less than straightforward with
AAA,   the   fact  remains  that  AAA  was  aware  of  both   the
Cosmos/Ramirez lease and the potential liability imposed  by  the
Cosmos/AAA  lease, and it decided both to purchase  the  property
and  to  stop  paying royalties to Ms. Totaro.  In so  doing,  it
acted  in  a manner that precludes any liability on Mr.  Ramirezs
part by virtue of the breach of the Cosmos/AAA lease.
_______________________________
     1    The full text of the lease is as follows:

                     Gravel Lease Agreement
                                                   March 29, 1984
          Owner:   Mr. Herman RamirezOperator:   Cosmos
          Developers Inc.
          Agreement:
               This  contract  is  between  Mr.  Herman
          Ramirez and Cosmos Developers Inc.
               The property shall be posted with Notice
          of non-responsibility.
               This contract shall last as long as  the
          economical  price of gravel  is  feasible  in
          this pit.
               As   the  pit  receeds  [sic]  into  the
          property  all  slopes shall  be  prepared  to
          owners [sic] reasonable requests.
               All  major haulers shall show  proof  of
          liability upon request of pit operator.
               Operator  agrees to dig test holes,  for
          Owners  [sic]  benefit, to determin[e]  water
          table.  Operator shall use deligence [sic] to
          stay  8 feet above same.  Operator shall  dig
          these  test  holes a minimun [sic]  of  every
          1000 feet.
               If  it is feasible, Owner agrees to  let
          operator  excavate a lake for  extra  gravel,
          this  can only be done with owners [sic] full
          control.
               Until  bridge  is  built  into  property
          Owner  is  to  receive 50 cents per  yard  of
          gravel sold.
               [W]hen  bridge or culvert is  installed,
          Owners 50 cents per yard is to be reduced  to
          35 cents per yard.
               The  operator  is currently  building  a
          large  tromo  washing  and  seperation  [sic]
          plant.    This   plant  will  start   washing
          material on owners [sic] property.  The owner
          shall receive an additional 30 cents per yard
          maximum  (the  30  cents is negociable  [sic]
          downward  if market price changes.)   Out  of
          this  30  cents per yard the owner agrees  to
          pay  5  cents per yard for a manager if owner
          is not available to help operator manage.
               The  owner has the right to inspect  the
          operators  [sic]  books and  agrees  to  keep
          everything strictly confidintual [sic].
               Owner  and  operator  agree  to  do  all
          business  in a family style, good faith,  and
          honorable relationship.
          /s/ Bill Nelson                      /s/ Herman Ramirez
          Bill  Nelson (Cosmos)          Herman Ramirez
          (owner)
          
     2    As to exclusivity, McCombs wrote:

          One major problem with this Agreement is that
          it  does  not state that this is an exclusive
          agreement  with  Mr.  Ramirez.   Under   this
          agreement, there is a very good argument that
          he  could  execute  a similar,  non-exclusive
          agreement  with another party for  this  same
          property.  That other party could then access
          the  property and mine gravel on a  different
          portion  of  this same land.   The  agreement
          should   clearly  state  that  this   is   an
          exclusive  right  to mine  gravel  from  this
          property.
          
     3    [A]n overriding royalty interest is a percentage of the
gross production payable to some person other than the lessor  or
persons  claiming under the lessor.   Allen v. Alaska Oil  &  Gas
Conservation Commn, 1 P.3d 699, 700 n.1 (Alaska 2000) (quoting 38
Am. Jur. 2d Gas and Oil  215 (1999)).

     4     The parties used a pre-printed form which left a blank
to be filled in for the type of deed to be used.  The parties did
not  fill  in  that blank, but did insert N/A in  the  space  for
intended non-standard encumbrances.

     5    Summers v. Hagen, 852 P.2d 1165, 1169 (Alaska 1993).

     6     AAA  argues  that  Totaro neither  purchased  nor  was
assigned the Cosmos-AAA contract.  She may not therefore bring an
action  for  breach of that contract.  Although it  appears  true
that Cosmos did not assign to Totaro all of its rights under  the
Cosmos/AAA sublease, it did assign one specific right under  that
sublease:    the  right  to  overriding  royalty   payments.    A
corporation need not assign every right it has under  a  contract
for  AS 10.06.633(g) to preserve the assignees capacity to assert
the particular rights that were assigned.

     7    Restatement (Second) of Contracts  332 (1981).

     8    Id.  332, cmt. e.

     9    Norville v. Carr-Gottstein Foods Co., 84 P.3d 996, 1004
(Alaska  2004) (citing Little Susitna Constr. v. Soil Processing,
Inc.,  944  P.2d  20, 23 (Alaska 1997)).  On appeal,  this  court
substitutes  its own independent judgment regarding questions  of
law.   Old Harbor Native Corp. v. Afognak Joint Venture, 30  P.3d
101,  104  (Alaska 2001) (citing Alaska Energy Auth. v.  Fairmont
Ins. Co., 845 P.2d 420, 421 (Alaska 1993)).

     10     Casey v. Semco Energy, Inc., 92 P.3d 379, 383 (Alaska
2004)  (citing  Exxon Corp. v. State, 40 P.3d  786,  793  (Alaska
2001)); Norville, 84 P.3d at 1004; Williams v. Crawford, 982 P.2d
250, 253 (Alaska 1999).

     11     Ellingstad v. State, Dept of Natural Res.,  979  P.2d
1000,  1004 (Alaska 1999) (citing Klosterman v. Hickel Inv.  Co.,
821 P.2d 118, 124 (Alaska 1991)).

     12     Casey,  92  P.3d  at 383 (citing  Alaska  Diversified
Contractors,  Inc. v. Lower Kuskokwim Sch. Dist., 778  P.2d  581,
584  (Alaska 1989) (citing Restatement (Second) of Contracts  214
cmt. b (1981))).

     13    Williams, 982 P.2d at 253.

     14    Neal & Co., Inc. v. Assn of Village Council Presidents
Regl Hous. Auth., 895 P.2d 497, 502 (Alaska 1995).

     15    See supra notes 1-2.

     16     For example, Cosmos is referred to as the operator or
pit operator.  Cosmos assumed pit-wide responsibilities regarding
slope   preparation  as  the  pit  recedes  and   undertook   the
responsibility  to  dig test holes for the owners  benefit  every
1,000  feet.   The lease contemplated that Cosmos would  build  a
bridge to get better access to the gravel and would build a large
washing  and  separation  plant on the  property.   It  might  be
inconsistent  with  the  pit-wide  responsibilities  assumed   by
Cosmos, the contemplated improvements, and Cosmoss status as  the
pit  operator to conclude that Ramirez could extract gravel  from
the same pit independent of the lease.

     17     Little Susitna Constr. Co. , 944 P.2d at 23 (internal
citations omitted).

     18     The  record  is undeveloped about the boundaries  and
contours  of  the property, the location of gravel deposits,  and
the possibility of more than one pit.

     19    On the record before us it is not clear who might be in
a   position  to  defend  Cosmoss  rights  under  the  Cosmos/AAA
sublease.

     20     See,  e.g., RAN Corp. v. Hudesman, 823 P.2d 646,  649
(Alaska  1991) (holding that landlord has economic  privilege  to
interfere with tenants assignment of lease); Oaksmith v. Brusich,
774  P.2d 191, 198 (Alaska 1989) (noting lack of privilege as  an
element  of  the  tort of interference with prospective  economic
advantage); Bendix Corp. v. Adams, 610 P.2d 24, 31 (Alaska  1980)
(holding  that  where there is a direct financial interest  in  a
contract,  the essential question in determining if  interference
is  justified  is whether the persons conduct is motivated  by  a
desire  to  protect  his  economic interest,  or  whether  it  is
motivated by spite, malice, or some other improper objective).

     21    Ramirezs deed was entitled Statutory Warranty Deed and
expressly referenced AS 34.15.030, which covers form and  content
of warranty deeds.

     22    AS 34.15.030(b) provides:

          A deed substantially in the form set forth in
          (a)  of  this  section, when  otherwise  duly
          executed, is considered a conveyance  in  fee
          simple  to  the  grantee and  the  heirs  and
          assigns  of  the grantee, with the  following
          covenants  by the grantor:  (1) that  at  the
          time  of the making and delivery of the  deed
          the   grantor  is  lawfully  seized   of   an
          indefeasible  estate in  fee  simple  to  the
          premises  described, and has  the  right  and
          power to convey the premises; (2) that at the
          time  of making and delivery of the deed  the
          premises are free from encumbrances; and  (3)
          that  the  grantor  warrants  the  quiet  and
          peaceable  possession of  the  premises,  and
          will defend the title to the premises against
          all   persons  claiming  the  premises.   The
          covenants are binding upon a grantor and  the
          heirs  and  personal  representative   of   a
          grantor as if written in the deed.
          
     23     A lease is an encumbrance covered by a warranty deeds
title  covenants.   Domer v. Sleeper, 533 P.2d 9, 11 n.5  (Alaska
1975).   We have not yet had occasion to consider damages  for  a
breach  of a title covenant, but one could reasonably expect  the
grantee  might be entitled to recover the lesser of (1) the  cost
to  cure  the breach, i.e., the cost incurred in eliminating  the
encumbrance,  or  (2)  the diminution  in  value  caused  by  the
encumbrance,  perhaps subject to a maximum of  the  consideration
paid  for  the property.  6A Richard R. Powell et al., Powell  on
Real  Property   81-A.06 [4][b].  Although we do  not  reach  the
adoption of these measures of damages or their application to the
Ramirez/Cosmos lease if it is an encumbrance contrary to Ramirezs
covenants of title, potential damages for that encumbrance  would
not  necessarily  be  the  overriding  royalties  due  under  the
Cosmos/AAA sublease.

          In his dissent, Justice Matthews appears to assume that
the  relevant encumbrance is the Cosmos/AAA sublease, noting that
AAA  seeks  indemnity  for a contractual  obligation  that  [AAA]
itself  has  incurred and asserting that under todays per  curiam
decision  [Ramirez]  will  be  required  to  pay  it.   This   is
incorrect.   It  is  the  Ramirez/Cosmos lease  that  may  breach
Ramirezs title covenants, an encumbrance incurred by Ramirez, not
AAA,  and  any resulting damages would have to be based  on  that
encumbrance.

     24    Cf. AS 34.15.050 (stating that a quitclaim deed passes
all of the grantors rights in the property).

     25    Jones v. Grow Investment & Mortgage Co., 358 P.2d 909,
911  (Utah 1961)  (The intention to exclude an encumbrance should
be  manifested in the deed itself, for a resort to oral or  other
extraneous evidence would violate settled principles  of  law  in
regard to deeds. (citing 7 Thompson on Real Property, Perm.  Ed.,
210)).

     26     Groff  v.  Kohler, 922 P.2d 870,  873  (Alaska  1996)
(Execution  and delivery of a deed by the seller .  .  .  usually
constitute  full performance on his part, and acceptance  of  the
deed  by  the  buyer manifests his acceptance of that performance
even though the estate conveyed may differ from that promised  in
the antecedent agreement. Therefore, in such a case, the deed  is
the  final  agreement  and all prior terms,  whether  written  or
verbal, are extinguished and unenforceable.).

     27    Id. (emphasis in original; internal citations omitted).

     28      Jones  v. Grow Investment, 358 P.2d at 911  (stating
that ordinarily parol evidence is inadmissible to show exceptions
to  express covenants in a deed or to show the grantee knew of an
encumbrance  and took title subject to it, and that  [t]his  rule
should not be lightly disregarded for titles to real estate would
be  uncertain and recordation of deeds useless if their  contents
were to be determined by the testimony of witnesses).

     29    Justice Matthews argues in his dissent that because of
the  availability of title insurance, a quitclaim deed is as good
as  a warranty deed in providing certain and predictable title to
real  property.   It  is true that in a transaction  involving  a
quitclaim  deed a title insurance policy may act as a  substitute
for  a  warranty deed, and it is also true that in a  transaction
involving  a  warranty deed a title policy may provide  the  only
solvent source of recovery for a breach of a title covenant.  But
it  is  also true that a title policy generally contains standard
exceptions from the insurance obligation that would not otherwise
be implied exceptions to the title covenants of a warranty deed.

          Although  the title insurance policy obtained  for  the
Ramirez/AAA transaction is not in the record, the pre-closing and
closing   title  insurance  materials  reflect   that   (1)   the
Ramirez/Cosmos  lease was not listed as an express  exception  to
the title insurance, but (2) the standard exceptions to the title
insurance included the exception that Justice Matthews would read
into  AS  34.15.030(b)  an exception for unrecorded interests  in
the  property that could be ascertained by an inspection  of  the
land or inquiry of the person in possession.  Thus even given the
existence  of title insurance in this transaction, we  return  to
the  fundamental question about the allocation of financial  risk
for  the  possibility  that  the  Ramirez/Cosmos  lease  was   an
encumbrance  against the title conveyed by Ramirez to  AAA:   did
Ramirez  accept the risk of the uninsured encumbrance or was  the
warranty deed mistakenly drafted?

     30     Groff,  922 P.2d at 873-74; Wasser & Winters  Co.  v.
Ritchie  Bros.  Auction,  Inc., 185 P.3d  73,  77  (Alaska  2008)
(Reformation is an equitable remedy by which a

court  alters  the  terms  of a written instrument  to  make  the
writing  conform with the meaning that the parties  agreed  upon.
(citing  Restatement (Second) of Contracts  155 cmt.  a  (1981)).
Ramirez might not be able to obtain reformation based on a mutual
mistaken  belief that the Ramirez/Cosmos lease was not valid  and
therefore not an encumbrance, because the warranty deed allocated
the  risk of that mistake to Ramirez.  Id. at 78 (noting  that  a
party  which bears the risk of mistake cannot satisfy the  mutual
mistake  test).  Ramirez did raise the possibility of  rescission
in  his  pleadings,  and  rescission of  a  real  property  sales
agreement has been allowed upon the clear and convincing  showing
of  the  parties  mistaken belief that title to the  property  in
question  was  unencumbered.   See  Matanuska  Valley   Bank   v.
Abernathy,  445  P.2d 235 (Alaska 1968).  It is conceivable  that
AAA  or  Ramirez, or both, might be able to sustain an  equitable
claim for rescission on the facts of this case.

     31     Wasser  &  Winters, 185 P.3d at 82 (citing  Adams  v.
Adams, 89 P.3d 743, 752 (Alaska 2004)).

     32     The  possibility  of further proceedings  focused  on
rescission is not precluded.  See supra note 30.

     33     Palmquist  signed the document on September  16,  but
Totaro  did  not  file the signed document with the  court  until
December 1, 2003.

     34     Andersen  v.  Edwards, 625 P.2d 282,  290-91  (Alaska
1981).

     35     See  AS  09.25.010(a)(6) and (b) and AS  09.25.020(4)
(signed  writing  is  required to transfer an  interest  in  real
property, but if the transferor admits the transfer in court, the
transfer is enforceable).

     36     The  production of asphalt involves blending oil  and
other materials with gravel.

     37     Josephine B. v. State, Dept of Health & Soc.  Servs.,
Office of Childrens Servs., 174 P.3d 217, 222 (Alaska 2007).

1    Slip Op. at 14-20.

     2    Id. at 15.

     3     Indeed,  J.B.  McCombs, the attorney AAA  retained  to
review  the  Ramirez/Cosmos  lease,  noted  that  the  lease  was
problematic because it lacked an exclusivity provision:

          One major problem with this Agreement is that
          it  does  not state that this is an exclusive
          agreement  with  Mr.  Ramirez.   Under   this
          agreement, there is a very good argument that
          he  could  execute  a similar,  non-exclusive
          agreement  with another party for  this  same
          property.  That other party could then access
          the  property and mine gravel on a  different
          portion  of  this same land.   The  agreement
          should   clearly  state  that  this   is   an
          exclusive  right  to mine  gravel  from  this
          property.
          
     4     See  Allen v. Alaska Oil & Gas Conservation  Commn,  1
P.3d 699, 700 n.1 (Alaska 2000) ([A]n overriding royalty interest
is  a  percentage of the gross production payable to some  person
other  than  the  lessor or persons claiming  under  the  lessor.
(quoting 38 Am. Jur. 2d Gas and Oil  215 (1999)).

     5     As  the holder of an overriding royalty interest,  she
held a share of . . . revenue from production . . . carved out of
a  lessees  interest  under the gravel  pit  lease.   Blacks  Law
Dictionary 1356 (8th ed. 2004).

     6     See  38  Am.  Jur.  2d Gas and  Oil   217  (1999)  (An
overriding royalty interest is subject to the terms of the  lease
upon   which  it  is  founded,  so  generally,  when  the   lease
terminates,  either  by its own terms or in  some  other  regular
manner consistent with good faith, the royalty itself comes to an
end.);  Blacks Law Dictionary 1356 (8th ed. 2004) (An overriding-
royalty  interest  ends when the underlying  lease  terminates.).
Arguably,  when Cosmos dissolved for a second and final  time  in
1992  declaring  no assets of the corporation  to  distribute  to
shareholders or to be applied toward the corporations  debts  and
liabilities,  the company effectively abandoned the  leases.   In
that case, Totaro may be left with no basis on which to claim any
continued  interest in the pit.  See 38 Am. Jur. 2d Gas  and  Oil
217;  Ridge  Oil  Co. v. Guinn Invs., Inc., 148 S.W.3d  143,  155
(Tex.  2004)  (noting that an overriding royalty  interest  is  a
nonparticipating interest, which means that the royalty owner  is
wholly dependent on the lessee to keep the lease alive).

     7    While there is a general rule that a tenant is estopped
from  challenging  his  landlords title as  long  as  he  remains
undisturbed in his possession of the property, even if he himself
purchases  a  title  to  the property that  is  superior  to  his
landlords title, this rule only applies where the tenant  asserts
a  title that is inconsistent with the idea that at the time  the
tenant  took  possession, the landlord had the  title  which  was
recognized between them.  49 Am. Jur. 2d Landlord and Tenant  768
(2006);  see  id.  764, 778 (explaining the general  rule).   AAA
does  not assert a title that is inconsistent with Cosmoss  title
under  the  Ramirez/Cosmos lease  if Ramirez had always  retained
the  right  to mine the property as the owner, AAAs assertion  of
that  right as Ramirezs successor in interest is not inconsistent
with Cosmoss title under the Ramirez/Cosmos lease.

     8    Slip Op. at 16.

     9    Id. at 16, note 16.

     10    The  extrinsic evidence of exclusivity that the  court
points  to  indirect inferences from Ramirezs word choice  in  an
affidavit written almost two decades after the lease was  drafted
is similarly unpersuasive.  Id. at 18-19.

     11   See 17A Am. Jur. 2d Contracts  331 (2004) (Ambiguity in
a  written  agreement does not arise from silence, but from  what
was  written  so  blindly and imperfectly  that  its  meaning  is
doubtful.).

     12    See Peterson v. Wirum, 625 P.2d 866, 870 (Alaska 1981)
(Differences of opinion among the parties as to their  subjective
intent,  expressed  during the litigation, do  not  establish  an
issue  of  fact regarding the parties reasonable expectations  at
the  time they entered into the contract, since such self-serving
statements are not considered to be probative.  Rather, the court
must  look to express manifestations of each partys understanding
of the contract in attempting to give effect to the intent behind
the  agreement.  (footnote omitted)); 17A Am. Jur.  2d  Contracts
330-331  (2004)  (explaining that unambiguous  contract  language
does not become ambiguous because competing interpretations of it
are  presented during litigation or because implementing it would
inflict hardship on a party).

     1     Mearkle Depo. 41-42, 50-51, 54-55, 144, 166-67 (in the
record beginning at 645, vol. II of the record); R. 554 (p.  15),
596 (pp. 168-69).

     2    See Slip Op. at 16 n.16 and 18-19.

     3    Slip Op. at 18-19.

4    Slip Op. at 16 n.16.

     5     The  conflict  would  be  even  more  obvious  if  the
alternative operations took place in the same area of the pit  as
operations under the Ramirez/Cosmos lease.

6     In  1998  when  AAA  purchased the property  from  Ramirez,
it was concerned that he would sell the property to a third party
free  from the lease.  But the circumstances under which a tenant
may  breach a lease because of the threat that a paramount  title
will  be  asserted are limited.  Generally a tenant is  precluded
from  terminating a lease based on a mere assertion of  paramount
title by a third party; a tenant is justified in attorning  to  a
new owner only if the new owner actually has paramount title that
entitles him to oust the tenant from the possession of the leased
property.   See  Restatement (Second)  of  Property:  Landlord  &
Tenant  4.3 & cmt. b (1977).  In the present case, a claim  by  a
third-party  purchaser  that his title was  not  subject  to  the
unrecorded  lease  and sublease would be hard to  maintain  since
purchasers have a duty to inquire of the possessors of  the  land
they buy as to the authority under which they hold.  See Methonen
v.  Stone,  941  P.2d  1248,  1252  (Alaska  1997)  (It  is  well
established  that a purchaser will be charged with notice  of  an
interest  adverse to his title when he is aware  of  facts  which
would   lead  a  reasonably  prudent  person  to  a   course   of
investigation which, properly executed, would lead  to  knowledge
of  the servitude.  The purchaser is considered apprised of those
facts  obvious  from  an  inspection of the  property.   Lack  of
diligence  in  the  prosecution of a required inquiry  creates  a
conclusive   presumption  of  knowledge  of  those  facts   which
reasonable inquiry would have revealed.) (footnote and  citations
omitted).

     7     Slip  Op.  at 22 n.25 (quoting Jones v.  Grow  Inv.  &
Mortgage Co., 358 P.2d 909, 911 (Utah 1961)).

     8     The  full text of Judge Smiths summary judgment ruling
on this issue is set out in Appendix A.

     9    App. A at 2.

     10   Id.  at 2-3.

     11   Id. at 3-4.

     12   Id. at 3.

     13   Id.

     14   457 P.2d 374, 375 (N.M. 1969).

     15   App. A at 3.

16   Id. at 3-4.

     17    The  court in this initial ruling indicated  that  the
first  exception  would  not apply because  of  the  lack  of  an
intrinsic tie between the lease and the [gravel] operation.  App.
A at 4.

     18   Id. at 4-5.

     19   Id.

     20   The courts findings of fact and conclusions of law with
respect to the covenant issue are set out in Appendix B.

     21   App. B at 4-5.

     22   Id.

     23   Id.  at 5.

     24   Id.

     25   App. B at 6.

     26   Id.  at 7.

     27   Id.

28   Id.

     29   Id. at 2.

     30   Id. at 7.

     31   Id.

     32   Id.

     33   Id. at 8.

     34    See App. B.  During . . . negotiations, Mr. Fuger  and
Mr.  Ramirez  discussed the impact of the  sale  on  the  .  .  .
Cosmos/AAA  lease[.]  Id. at 1.  They ultimately decided  not  to
deal  with the ramifications of the sale on the Cosmos/AAA lease.
Id. at 2.

     35   Regarding obvious physical conditions on the land, see,
e.g., Marathon Builders, Inc. v. Polinger, 283 A.2d 617, 621 (Md.
1971) (easements that are readily apparent upon an inspection  of
the  property, such as a public road in use upon the land, do not
breach the covenant against encumbrances because the parties  are
deemed to have contracted with knowledge of the encumbrance,  and
adjusted  the price accordingly); Tabet Lumber Co. v.  Golightly,
457  P.2d  374, 375-76 (N.M. 1969) (covenant against encumbrances
does  not cover physical conditions of the land itself which were
apparent  on  inspection and which are found to have been  within
the  contemplation  of the parties in agreeing  on  the  purchase
price (quoting 6 Powell, The Law of Real Property  907, at 268.21
(1968))  (internal quotation marks omitted)); McKnight v.  Cagle,
331  S.E.2d  707,  712  (N.C. App. 1985) (remanding  for  factual
finding on purchasers knowledge of easement for public highway in
claim  for  breach of warranty against encumbrances, as  such  an
easement  constitutes  breach only where  the  purchaser  has  no
actual  or constructive knowledge of the encumbrance at the  time
of  the  purchase); Hawks v. Brindle, 275 S.E.2d 277  (N.C.  App.
1981)  (reversing grant of summary judgment in sellers  favor  on
purchasers  claim  that  public  right-of-way  breached  warranty
against  encumbrances, and remanding for trial because there  was
issue of fact as to whether the purchaser had actual knowledge of
the  encumbrance) (The parties are taken to have contracted  with
reference  to the existence of a burden of which they were  fully
aware.  (quoting Tise v. Whitaker Harvey Co., 57  S.E.  210,  212
(N.C.  1907)));  Somers v. Leiser, 259 P.2d 843, 844 (Wash. 1953)
(affirming a holding that easement for a graveled public  roadway
did  not  breach  the  covenant against  encumbrances  because  a
provision   in  a  contract  to  convey  real  estate   free   of
encumbrances  does not refer to granted easements,  permanent  in
character,  which are either known to a vendee, or the  existence
of  which  he  should have known or ascertained  had  he  made  a
reasonable  investigation.); Merch. Corp. v.  Marine  Natl  Exch.
Bank, 106 N.W.2d 317, 320 (Wis. 1961) (where purchaser had actual
knowledge  of third partys open, notorious, [and] continuous  use
of  easement prior to purchase, the purchaser cannot maintain  an
action  for  the  breach of the covenants of seizin  and  against
[encumbrances]).
          Regarding  intent  of  the  parties  not  to  cover   a
particular encumbrance, see, e.g., Alumni Assn of Univ. of  North
Dakota  v. Hart Agency, Inc., 283 N.W.2d 119, 121-22 (N.D.  1979)
(covenant against encumbrances not breached by outstanding  lease
because  parties had knowledge of the lease and contemplated  its
existence  in  negotiating  the price);  Klarfeld  v.  Reil,  117
N.Y.S.2d  785, 786 (N.Y. App. Div. 1952) (leases did not  violate
covenant  against  encumbrances where circumstances  showed  that
parties  intended the purchaser would take title subject to  [the
leases]);  Hagelin  v. Lehmann, 126 A. 431,  431-32  (N.J.  1924)
(reversing a judgment in favor of purchaser on breach of covenant
against  encumbrances claim where alleged encumbrance  was  lease
that  purchaser  had  knowledge of, and the contract  apportioned
rent from the lease).

     36    See, e.g., 3 American Law of Property  12.128 (reprint
1974)  (A.  James  Casner  ed., 1952) (Nor,  of  course,  is  the
covenant  broken  by  the  existence of an  encumbrance  excepted
therefrom  or  assumed by the grantee, even when it appears  when
this  is  done  by  parol agreement.  Ordinarily,  however,  mere
knowledge  that  an  encumbrance exists will  not  amount  to  an
implied exception from the covenant, although this has been  held
both  to be the case and not to be the case in respect to a lease
under  which  the  tenant  was  in possession.  (emphasis  added)
(footnote omitted) (citing case authority)).

     37   Slip Op. at 23.

     38    See,  e.g., United States v. Speidel, 562  F.2d  1129,
1132  (8th Cir. 1977) (Under Iowa law a quitclaim is as effective
to  transfer  title  to realty as any other form  of  conveyance.
(citing  Swab  v.  Appanoose Country Club, 203  N.W.2d  318,  319
(Iowa,  1972))); Rust Land & Lumber Co. v. Wheeler, 189  F.  321,
325  (8th  Cir. 1911) ([I]n Arkansas, [a quitclaim  deed]  is  as
effectual  to convey the estate of a grantor as a deed with  full
covenants of warranty . . . . (citing Bagley v. Fletcher, 44 Ark.
153  (Ark. 1884))); Suman Corp. v. Warren, 553 So. 2d 1123,  1127
(Miss.  1989)  (Robertson,  J.,  concurring)  (A  quitclaim  deed
conveys title as effectively as a warranty deed. (citing Owen  v.
Potts, 115 So. 336, 338 (Miss. 1928))); Owen v. Potts, 115 So. at
338 (A quitclaim deed is as effectual to convey title as one with
general  warranty. (quoting Chapman v. Sims, 53 Miss. 154  (Miss.
1876)) (internal quotation marks omitted) (upholding purchase  by
quitclaim deed over prior unrecorded purchase by warranty deed)).

     39    Where  title  insurance is usedwritten by  substantial
corporations  compensated for their riskthere is little  occasion
for  personal  warranties. 2 Milton R. Friedman &  James  Charles
Smith,  Friedman  on Contracts and Conveyances of  Real  Property
8:12,  at  8-35 (7th ed. 2009).  See also 14 Richard  R.  Powell,
Powell on Real Property  81A.06[1] (Michael Allan Wolf ed., 2009)
(explaining that title insurance is replacing the system of title
covenants  that  originated in England in  the  17th  century,  a
system  that  developed because it was then [t]he only  assurance
that  could  be obtained as to the validity of title, as  [t]itle
records   were  virtually  nonexistent).   Title  insurance   was
provided in the sales transaction between Ramirez and AAA.

     40    A  covenant of title which warrants that the  premises
are  free  from  encumbrances is an agreement  to  indemnify  the
covenantee  in the event that he or she suffers any loss  to  the
value of the premises due to the existence of an encumbrance.  14
Powell on Real Property, supra note 39, at  81A.06[2][c][i].  See
also  3  American  Law of Property, supra  note  36,  at   12.128
(stating  that the covenant against encumbrances is [a]  personal
covenant).

     41    Professor Casner suggests that covenants be  construed
as contracts:
          Often the last paragraph of a deed is devoted
          to  covenants of the grantor.  They  are  not
          essential to the import of the instrument  as
          a  present conveyance.  But they are  helpful
          not  only  for  whatever value they  have  as
          personal  [guarantees]  but  as  effecting  a
          future  transfer  of any  title  or  interest
          subsequently  acquired  by  the   covenantor.
          Although  their  inclusion in the  prevailing
          form  of  conveyance gives to it the name  of
          warranty  deed, they could just  as  well  be
          embodied  in a separate contract.   With  the
          exception   above   noted,  [after   acquired
          title,] it is as a contract rather than as  a
          conveyance that they are construed . . . .
3  American Law of Property, supra note 36, at  12.50.  See  also
Taylor  v.  Holter,  1 Mont. 688 (Mont. 1872)  (The  contract  or
covenant of warranty must be construed like any other contract by
arriving  at  the intention of the parties . . . .);  Hampton  v.
Minton, 785 S.W.2d 854, 859 (Tex. App. 1990) (Regardless of  what
label  is  assigned  to the vendors promise  to  pay  holders  of
superior liens, be it a covenant of title or something else,  the
promise  is  still  part  of  a  contractual  agreement  and  the
instrument  must be construed according to the rules of  contract
law.).

     42    Friedman  observes that knowledgeable sellers  already
shy away from

giving warranty deeds:  Traditionally, most deeds have been  full
covenant and warranty, but there has long been a slow but  steady
trend  against  warranties, particularly in  the  larger  cities.
Banks  and lending institutions almost invariably refuse to  give
any warranties.  A well-advised individual will do the same . . .
. Friedman, supra note 39, at  8:12[A] (emphasis added).

     43   I am referring here to AAAs obligation to pay royalties
to Totaro.  AAA incurred this obligation in its lease with Cosmos
which    then   assigned   its   royalty   rights   to    Totaro.
Notwithstanding the per curiam opinions contrary  assertion  (see
Slip.  Op.  at 21 n.23), Totaros right to receive royalties  from
AAA is an encumbrance.  Powell observes that
          a  covenant of title which warrants that  the
          premises  are  free from encumbrances  is  an
          agreement to indemnify the covenantee in  the
          event that he or she suffers any loss to  the
          value of the premises due to the existence of
          an  encumbrance.  An encumbrance is any right
          or  interest existing in a third person which
          diminishes  the value of the  estate  to  the
          grantee,  but  which is consistent  with  the
          passage of the estate to the grantee.
14  Powell  on  Real Property, supra note 39, at  81A.06[2][c][i]
(emphasis added).  Under this definition Totaros right to receive
royalties plainly qualifies as an encumbrance.  Indeed, under the
facts  and circumstances of this case, it appears that  the  only
encumbrance that diminishes the value of the property to  AAA  is
Totaros right to receive royalties.

     44    Ramirez observes that it would be a strange  twist  of
events  if  this  Court  were  to rule  that  Herman  Ramirez  is
responsible to indemnify AAA for damages arising from a  contract
to  which he was not a party.  In my research I have uncovered no
authority  that  suggests that the covenant against  encumbrances
reaches  so  far as to protect a grantee from its own contractual
obligations.   One  case in which something  close  to  this  was
attempted  by  a  party  and rejected  by  the  court  is  Alumni
Association  of  the University of North Dakota v.  Hart  Agency,
Inc.,  283  N.W.2d  119  (N.D. 1979).  In that  case,  R.M.  Hart
obtained   an  option  to  buy  property  owned  by  the   Alumni
Association.    The   option   contained   a   covenant   against
encumbrances but the property was leased to a bank of which  Hart
was  president.  Hart sought to justify his delay in  paying  the
purchase price after exercising the option on the ground that the
lease  to  the  bank was an encumbrance governed by the  covenant
against encumbrances expressed in the option contract.  The trial
court  held  that the lease to the bank was not  intended  to  be
governed by the covenant.  On appeal, the Supreme Court of  North
Dakota affirmed, concluding that [i]t was not error for the trial
court  to conclude that title to the Prince Hotel Properties  was
merchantable  and  free  of  liens and  encumbrances  within  the
contemplation  of  the  parties to the  option,  even  though  an
outstanding lease had not been cleared.  Id. at 122.

2     Mr.  Ramirez  also  claims if AAA  is  entitled  to  relief
against  him,  the  proper  remedy is  rescission,  not  damages,
because AAAs claim against him rests upon an allegation that  Mr.
Fuger  acted under duress; and since a person acting under duress
lacks capacity to contract, the appropriate relief is rescission,
not  damages.   The court will not address this argument  because
AAA  did not raise duress in its third party complaint or  motion
for summary judgment.

     3     Mr. Ramirez points to certain AS IS, WHERE IS language
in  the  earnest  money instructions as evidence of  the  parties
intent  to  exclude  the Cosmos/Ramirez lease from  the  warranty
covenant.   This  language is far from unambiguous,  for  as  AAA
points out, it could refer to the physical features of the  land,
not the lease.

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