Date: 10-30-2009

Case Style: AAA Valley Gravel, Inc. v. Alicia Totaro and Herman Ramirez

Case Number: S-12207

Judge: Per Curiam

Court: Supreme Court of Alaska on appeal from the Third Judicial District, Palmer

Plaintiff's Attorney: Bill Royce, Law Office of William G. Royce, Anchorage, for Appellant/Cross-Appellee.

Defendant's Attorney: Richard Harren, Law Offices of Richard L. Harren, P.C., Wasilla, for Appellee/Cross-Appellant Alicia Totaro. Ross A. Kopperud, Palmer, for Appellee Herman Ramirez.

Description: A property owner leased gravel mining rights to a lessee. The lessee in turn leased its rights to a sublessee. The sublessee assumed the lessee’s 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 court’s 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. Schultz’s 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 Cosmos’s 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.

Fuger’s 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 lease’s 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 Cosmos’s 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 McCombs’s letter, Fuger, Mearkle, and Nelson met with Nelson’s 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 McCombs’s detailed critique of the Ramirez/Cosmos lease. The sublease bound AAA to “take all reasonable steps to protect [Cosmos’s] 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 Nelson’s 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 corporation’s 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. Nelson’s 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. Nelson’s 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 Totaro’s 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 Totaro’s 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 Totaro’s overriding royalties. Final judgment was issued on December 13, 2005, establishing AAA’s monetary obligation to Totaro, ordering specific performance of AAA’s overriding royalty obligation to Totaro, and dismissing AAA’s claim against Ramirez. AAA appeals and Totaro cross-appeals.

IV. CONTENTIONS ON APPEAL

AAA presents three contentions on appeal, two relating to Totaro’s judgment against AAA and one relating to the trial court’s refusal to hold Ramirez liable on the warranty deed. As to Totaro, AAA argues that: (1) Cosmos’s assignment to Totaro was gratuitous and therefore revocable and was terminated by Cosmos’s 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. AAA’s argument concerning Ramirez is that the covenant against encumbrances inherent in its warranty deed encompasses Totaro’s 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. AAA’s Arguments with Respect to Totaro’s 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 Cosmos’s subsequent dissolution. AAA’s 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 Palmquist’s 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 Cosmos’s subsequent dissolution did not affect its continuing validity.

2. We remand for further proceedings on the issue of AAA’s 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 Ramirez’s retained right to extract gravel. The trial court did not directly address this argument, but AAA’s 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 contract’s 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 court’s 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 Ramirez’s 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 didn’t 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.) Ramirez’s 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 AAA’s liability to Totaro and remand for further proceedings consistent with this decision.

B. AAA’s 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 court’s 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 Ramirez’s 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 Ramirez’s 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 court’s analysis is that AAA’s 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 AAA’s 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 seller’s 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 scrivener’s 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 Nelson’s 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 don’t 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 don’t know the legal bullshit. Sorry. But I wanted her to understand that she didn’t 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 didn’t have anything more than Bill Nelson’s 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, Totaro’s counsel submitted an unsigned formal written assignment of Palmquist’s 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 he’s not a party to the case. And I have a lot of concern about the extent to which Mr. Palmquist’s 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 can’t adversely affect Mr. Palmquist’s rights, . . . then Mr. Palmquist would have to decide what he wants to do with the other half. And Mr. Harren [Totaro’s counsel], before you leap up and tell me about the exhibit that you attached to your opposition, that’s 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 don’t — that’s way beyond anything I can deal with here and I don’t 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 Totaro’s 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 Palmquist’s testimony that she should have his half of the overriding royalties. She contends that no real issue was made as to the effect of Palmquist’s testimony and AAA’s 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 Cosmos’s assignment of half of the overriding royalties to Palmquist. But this argument does not address Totaro’s contention that Palmquist reassigned his overriding royalty interest to her. AAA also argues that the trial court correctly refused to grant Totaro’s post-decision motion to amend the complaint, quoting the court’s 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 court’s reference to Totaro’s 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 Palmquist’s 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 Palmquist’s 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 Court’s Description of the Lease’s Termination Date

In its findings of fact the trial court stated:

The lease contained provisions consistent with Mr. Ramirez’s 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 court’s 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.” Totaro’s 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.

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).

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 court’s expression is not binding and questions as to the termination criteria will have to be resolved in the future.

C. The Trial Court’s Allowance of AAA’s 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 AAA’s 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 court’s 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 court’s findings in this respect are clearly erroneous, and therefore they will be upheld.

* * *

See: http://www.courts.alaska.gov/ops/sp-6427.pdf

Outcome: For these reasons we VACATE the final judgment entered by the trial court and remand for further proceedings consistent with this opinion.

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