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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
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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