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DABBS v. INTERNATIONAL MINERALS & CHEM. CORP.

February 24, 1972

R.T. DABBS, Plaintiff,
v.
INTERNATIONAL MINERALS & CHEMICAL CORPORATION, Defendant


Keady, Chief Judge.


The opinion of the court was delivered by: KEADY

KEADY, Chief Judge.

 Invoking diversity jurisdiction, R.T. Dabbs (Dabbs), a Mississippi citizen, brings this suit against International Minerals and Chemical Corporation (IMC), a New York citizen, for a declaration to determine his rights as assignee of a mineral royalty contract executed on November 29, 1955, between Needham W. Dahlem (Dahlem), Dabbs' assignor, and IMC. *fn1" By that contract IMC agreed to pay Dahlem (or his assignee) a royalty of 5 cents per ton on all bentonite which IMC mined on certain described lands in Monroe County, Mississippi, the stated consideration for payment of the royalty being Dahlem's disclosure to IMC of the location of bentonite deposits "known only to him." *fn2" Attached as a rider to the contract is a legal description of the subject land comprising a contiguous body of about 1000 acres situated about 5 miles south of Aberdeen (yellow area). *fn3"

 By its answer IMC interposed several defenses which rest upon the assertion that IMC executed the contract at Dahlem's insistence before the rider containing land description was inserted by Dahlem, and it claims the contract was invalid for the following reasons: (i) the existence of bentonite deposits on the described lands was already known to IMC through prior geological explorations and studies and hence there was a failure of consideration as Dahlem did not disclose to IMC any bentonite deposit, the existence of which was known only to him; (ii) when IMC first saw the land description tendered by Dahlem it repudiated the contract and disavowed any intention to be bound thereby; (iii) Dahlem fraudulently induced IMC to sign the contract upon representations that the secret bentonite deposits were near IMC's plant at Smithville and within an economically feasible distance from that plant, although Dahlem knew that his alleged secret bentonite discovery was in an entirely different area of Monroe County and located south of Aberdeen, and was of a quality of bentonite different from that in which IMC was interested; and (iv) Dahlem and Dabbs are estopped on account of Dahlem's actions in obtaining IMC's signature to the contract in the first instance and barred by laches because of inaction after disavowal of the contract.

 The parties have agreed to submit for decision the basic issue of liability, reserving for future hearing an accounting in event the plaintiff might prevail. After the entry of a pretrial order, the court conducted an extensive evidentiary hearing. The case is now ripe for decision and this Memorandum Opinion shall suffice for findings of fact and conclusions of law required by Rule 52 of F.R. Civ. P.

 I.

 (a) General Background.

 Although the mineral itself was apparently known by other names as early as 1905, it was not until about 1915 that it was described in geological publications and it did not come on the American market in quantity until 1919. Bentonite derives its name from large deposits of the material first discovered in the United States near Fort Benton, Wyoming, in 1888.

 A resident of Monroe County, Dahlem was a farmer, trapper, and woodsman, as well as a self-educated geologist. He is generally credited with the discovery in 1927 of the first bentonite deposit in Mississippi. This discovery was made on lands that he owned south of Aberdeen. His property, an extremely rugged and heavily wooded area, was traversed by the Panther and Little Panther Creeks, which cut deep ravines in their flow to the Tombigbee River. It is a generally accepted fact that Dahlem discovered bentonite when he trapped a mink in an outcropping of the material in Panther Creek and sent a sample of the strange clay taken from the furry animal to the Mississippi and the United States Geological Surveys. His sample was confirmed to be bentonite of excellent quality. The published literature on Mississippi geology affirms the foregoing to be an established fact. *fn3"

 Despite Dahlem's discovery, his first efforts to arouse interest in the new material were unsuccessful. In the early 1930's however, he induced Perel and Lowenstein (P & L), owners of a laundry in Memphis, Tennessee, to develop the mineral deposit he had earlier located. P & L purchased 320 acres just east of Dahlem's own property and began an exploratory program. P & L employed Dr. Poole Maynard, a New York geologist, to make a detailed study of the bentonite discovery, and Dahlem learned the methods of geological exploration for bentonite by working with Maynard. These investigations included digging wells and shafts for drilling numerous holes with hand augers, none exceeding 35 feet, and taking samples for laboratory analysis. Maynard conducted these tests on property south and east of the yellow area, or lands in controversy; and his geological studies culminated in a report dated March 18, 1935, and known as the Poole Maynard Report.

 Until his death in 1962, Dahlem continued to be very active in exploring for bentonite deposits. He closely followed the work of different geologists who studied the area, and gradually acquired a good working knowledge of the material, which is not easily detectable. When found in outcroppings and exposed to the weather, bentonite has a creamish color, but when taken from deposits beneath soil overburden, it has a dark or bluish hue. Having an intimate familiarity with the rugged terrain, Dahlem conducted independent explorations for bentonite by various methods. He searched for and examined outcrops or areas of exposed bentonite, drilled holes with a hand auger, dug deep shafts in the ground and entered the holes by ladder. Later he followed and closely observed oil drilling and seismographic crews operating in the county to ascertain if bentonite strata had been encountered, and at what depth, on various lands in the search for oil and gas. Although in the 1930-40 era the industry considered 30 feet the allowable maximum soil overburden for commercially feasible mining for bentonite, Dahlem drilled and dug holes of 100 feet maximum depth prospecting for underground deposits.

 In 1939 the first processing plant for bentonite was established in Monroe County; it was built by Dahlem and C.C. Ruprecht. Shortly thereafter this plant was purchased by the American Colloid Company, which subsequently moved its plant operation to or near Aberdeen.

 Also in 1939 Eastern Clay Products (ECP), the predecessor of IMC, entered Mississippi to mine bentonite and, after a general survey, established its plant in Pontotoc County. In 1944 bentonite reserves in the Pontotoc area became exhausted and ECP moved its plant to Smithville, in north Monroe County, where it began active mining operations and continued its exploration program for new bentonite reserves. This exploration program was still in progress when IMC in 1951 acquired ECP. IMC at once entered into active competition with other national companies which were engaged in mining and marketing Mississippi bentonite. Filtrol Corporation had a plant near Smithville, and American Colloid Company had its plant just south of Aberdeen.

 ECP's explorations from the inception were directed by Norman J. Dunbeck, the company official responsible for locating the plant at Pontotoc and relocating it at Smithville. Dunbeck employed E.D. Phillips, a self-trained prospector, to hunt new reserves, or "wildcat" for bentonite deposits over a large territory, including Monroe, Itawamba, Pontotoc and Tishomingo Counties in Mississippi, as well as portions of Alabama and south Mississippi. Phillips' job, described as "birddogging", was to be active throughout the area, check all rumors, watch competitors and other prospectors including Dahlem and keep Dunbeck regularly advised. Phillips made many "horseback" guesses on bentonite locations, but seldom did detail work on any particular property. His reports, consisting of a volume of letters written over a long span of time, were not limited to bentonite, but included activities on oil, bauxite, aluminum and other minerals. Phillips worked off and on for IMC for a number of years and worked with a succession of geologists sent into the area by ECP. In 1942 Phillips was joined by Frederic Mellen, a geologist hired by ECP to conduct an exploratory program for bentonite. Mellen drilled holes at designated locations and recorded the data; this drilling program was conducted east of the yellow area. In 1952, Mellen made a comprehensive study of the P & L properties; he reviewed the Poole Maynard Report, and inspected the remaining reserves indicated by Maynard's map and by outcrops. While Mellen suggested that IMC might give serious consideration to exploring the subject lands and other lands, IMC did no drilling in the area south of Aberdeen from 1942 until 1955. As for the specific property in controversy, IMC made no effort to acquire ownership, options or other control over any portion of it until after the royalty contract was signed with Dahlem on November 29, 1955.

 (b) Events Leading to Execution of Royalty Contract.

 In 1954 IMC undertook to map a program for wildcat drilling for bentonite deposits on the basis of information submitted by two geologists in its employ, Dr. Frank Hunter and Roy Hall. Hall worked in the Monroe-Itawamba Counties area on a drilling program under the direction of Dr. Hunter, who maintained his offices at IMC's Chicago headquarters. Hall and Hunter collaborated to map all known occurrences of bentonite in the two-county area, from which they proposed several localities for further prospecting. By the Hunter-Hall Report to IMC in December 1954, these prospect areas were designated in order of their priority as Areas I, II, III and IV respectively. *fn4" Areas I and II were situated near Smithville in northeastern Monroe County, Area III was in Itawamba County northwest of Smithville; and Area IV was south of Aberdeen and included a large area comprising approximately 23 square miles located in 30 different land sections. The "yellow area" description later disclosed by Dahlem comprised 2 square miles of the territory designated as Area IV by the Hunter-Hall Report. This report, however, indicated all known bentonite deposits in Area IV as reflected by a specially prepared map. *fn5" During the course of his work, Hall was contacted by Dahlem who informed him that he knew of secret bentonite deposits which he was willing to disclose to IMC for an agreed royalty, and the Hunter-Hall Report recommended the negotiation of such an agreement. *fn6"

 In September 1955, Tracy Lusk, a Mississippi-located geologist, was hired by IMC to work under Dr. Hunter's supervision. Lusk's work was divided between development drilling of known deposits and wildcat drilling in areas geologically favorable for the occurrence of bentonite deposits. Using the Hunter-Hall data as a guide, Lusk conducted field investigations in different locations as directed by Hunter and sent samples of clay for analysis to IMC's Smithville plant, where C.M. Clay was superintendent. In mid-October, Hunter suggested that Lusk make reconnaissance of the general area around Aberdeen and contact Dahlem to determine if he would give out information. In his weekly report of November 7, Lusk advised he had contacted Dahlem, who was claiming to know of two secret deposits which he would disclose for a royalty consideration. *fn7"

 As established by the Lusk weekly reports, Dahlem then showed Lusk the location of various holes on the subject land, *fn9" which Dahlem claimed he had drilled and gave him clay samples for analysis. IMC took steps to acquire options wherever possible, and Lusk began at once drilling in the yellow area, starting with Delma Smith at the western extremity. There is no direct evidence from the named property owners that in 1955 they were aware of the existence of bentonite deposits on their lands; and Lusk and other IMC personnel closely guarded their drilling data. Lusk pursued a program of deep-hole drilling throughout the yellow area, and despite the thick overburden, was successful in locating large deposits of bentonite. At the end of several months' exploration he was able to determine that the bentonite bed in the Panther Creek area "is one very large bed about 3 miles long from north to south with the Perel & Lowenstein and Dahlem mine located near the center"; with the maximum thickness 10.5 feet and the maximum width of the bed about one mile located slightly north of the original P&L mine. *fn10" Lusk was able to estimate total reserves of 13 million tons in the Panther Creek area consisting of the original P&L and Dahlem lands, the lands in the yellow area and an adjoining quarter section (SW 1/4 of ยง 13) known as the Worthy tract. Lusk's work with IMC was terminated in March 1956 and no further exploratory work was done by IMC on the subject area.

 In January 1956 Dahlem told Dabbs, who was his friend, physician, and sometime business associate, about his royalty agreement for the secret deposits and agreed to sell him an interest for $5,000, which Dabbs paid in cash. Although the document was recorded on the public land records in December, 1957, presumably by Dahlem, Dabbs did not see the written contract until April 4, 1962, when he received from Dahlem the formal assignment of a one-half interest. In 1964 Dabbs acquired the remaining interest from Dahlem's estate for a consideration of $500. In 1960 Dabbs, who also owned a tract of land south of the P&L mine of American Colloid Company, purchased a mineral interest (2/27ths) in the Cole property, which was within the confines of the yellow area, and offered it to IMC, in an effort to get the latter to commence bentonite mining.

 In the years following, IMC obtained control of a substantial portion of the bentonite mineral interest in the yellow area. When the Smithville bentonite deposits became depleted, IMC in 1968 moved its plant to Aberdeen and soon thereafter commenced strip mining for bentonite on the Cole property, a part of the lands in controversy. The bentonite deposits in the Panther Creek area are rated as one of the largest bentonite formations in the South and presently regarded by geologists as a classic example of marine bentonite of large and continuous lateral extent. The industry has found the thick overburden of the Tombigbee bentonite in the Panther Creek area not to be an obstacle to commercially feasible mining, and the market price of processed bentonite in recent years has ranged from $15 to $22 per ton.

 After IMC began to mine the Cole property, Dabbs called on the company to honor the royalty agreement; the company in July 1970 declined to recognize the agreement, and Dabbs on September 14, 1970, filed the present action in this court seeking declaratory judgment.

 II.

 This case presents two distinct questions that require the making of factual determinations from disputed evidence. First, was IMC induced by misrepresentations on the part of Dahlem to enter the contract, thus rendering it invalid because of fraud? Second, apart from fraud, was the contract void ab initio for want of consideration? Mississippi law must control in the application of legal principles since that jurisdiction was not only the situs of the consummation of the royalty agreement but the "center of gravity" in the contacts affecting all aspects of the entire transaction. *fn11" The parties agree that Mississippi law should apply.

 (a) The Fraud Issue.

 IMC's claim of fraud is based upon the contention that Dahlem tricked it into signing the contract by representing that his secret deposit was located near IMC's Smithville plant, and that it was of the Smithville-type clay with little overburden, thus meeting IMC's known desire to mine additional deposits in the Smithville area to keep its established plant in operation. The assertion is that Dahlem misled defendant since the yellow area which he designated, and situated south of Aberdeen, was well beyond the Smithville region, and the Tombigbee bentonite found in that vicinity could not feasibly be processed at the Smithville plant.

 It hardly requires citation of authority to affirm the familiar rule that fraud must be proved by clear and convincing evidence, *fn12" or by clear proof which is more convincing than a mere preponderance of evidence. *fn13" The difficulty of proving actual fraud does not obviate the necessity of doing so; and mere suspicion, insinuation or presumption is not sufficient. *fn14" IMC, as the party asserting the affirmative defense of fraud, must meet the requisite burden.

  IMC's principal witnesses on this issue were C.P. Loucks, Maurice Clay and Dr. Hunter. Loucks, IMC's principal negotiator, testified that he was shocked to learn that IMC's reserves in the Smithville area were so low that they might be exhausted within 10 years and that Dahlem's claim was of interest because he was under the impression that Dahlem's deposit was within 8 to 10 miles of Smithville. This witness candidly acknowledged, however, that the secret deposit Dahlem had in mind might be located elsewhere than near Smithville. In his negotiation, Loucks endeavored to obtain from Dahlem a limitation of location as well as a designation of the kind of bentonite clay, but Dahlem was unwilling to make even limited disclosure. Dr. Hunter's testimony was even more revealing in that he stated that at the time of the contract IMC's interest in bentonite was widespread and did not have to relate to the Smithville area. The witness Clay, who tendered the strongest testimony on the fraud issue, stated that Dahlem many times had told him that his secret deposit was near Smithville, which information he had passed on to Loucks long before the latter made contact with Dahlem. Nevertheless, it is very significant that Loucks, when confronted with Dahlem's refusal to talk location or description until he had a signed contract, was the person who conceived the phraseology that was used in the royalty agreement. According to his testimony, Loucks' avowed purpose was to protect IMC in its promise to pay a royalty only upon receipt of information of value to defendant when Dahlem did make his disclosure. Yet, the written document drafted by IMC's attorneys under Loucks' directions and using his words contained no territorial limit as to where the deposit should be other than in Mississippi and had no reference to proximity to the Smithville plant, or to type of clay or extent of overburden. Ordinarily, in contract construction, absent a claim of fraud, an instrument is construed against the party who drafts it, and that consideration is likewise pertinent here. Had these omitted matters been at all material to IMC's promise for payment of a royalty, it is incomprehensible that Loucks, an expert in mineral contract negotiations, would fail to insert protective clauses. Actually, the bargain intended to be made, and as made, was quite simple: when and if Dahlem showed IMC the secret deposit, IMC would pay him a royalty on bentonite which it mined therefrom, otherwise Dahlem would receive nothing.

 IMC's evidence shows that Loucks and Hunter, long before the execution of the Dahlem contract, were quite aware of the recorded impressions of their geologist, Roy Hall; these impressions were based on overtures made to him by Dahlem in 1954 concerning the location and character of the secret deposit. Hall had reported to them in detail on what Dahlem had told him regarding the secret bentonite, *fn15" i.e., the largest deposit was "within 30 to 40 miles of Aberdeen", "maximum thickness not known but plus 3 feet thick", "area is in rolling hills", "overburden 60 to 120 feet", and "300 to 400 acres underlain by bentonite." *fn16" On the basis of Dahlem's ...


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