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Ip Timberlands Operating Co. v. Denmiss Corp.

April 02, 1998

IP TIMBERLANDS OPERATING COMPANY, LTD. AND INTERNATIONAL PAPER COMPANY
v.
DENMISS CORPORATION, JOHN H. HAUBERG 1982 LIVING TRUST, ET AL.



DATE OF JUDGMENT: 01/05/96

COURT FROM WHICH APPEALED: HINDS COUNTY CIRCUIT COURT

Before Prather, C.j., Roberts And Mills, JJ.

The opinion of the court was delivered by: Roberts, Justice,

TRIAL JUDGE: HON. JAMES E. GRAVES, JR.

NATURE OF THE CASE: CIVIL - CONTRACT

DISPOSITION REVERSED AND REMANDED

STATEMENT OF THE CASE

¶1. IP Timberlands Operating Co., and International Paper Company appeal two orders of the Hinds County Circuit Court. In construing a 1945 lease agreement with a purchase option, Judge James E. Graves, Jr., determined as a matter of law that the purchase option unambiguously called for appraisers to fix the lands' value, although the option expressly provided for arbitrators to fix the value of the lands. Also, Judge Graves determined as a matter of law that the purchase option called for the lands' value to be appraised as unencumbered from the remainder of the prepaid ninety-nine year lease that runs through 2044. Appellants raise the following issues on appeal:

I. WHETHER THE CIRCUIT COURT ERRONEOUSLY MADE A NEW CONTRACT FOR THE PARTIES AND VIOLATED THE FEDERAL ARBITRATION ACT?

II. WHETHER THE CIRCUIT COURT'S $38,500,000 JUDGMENT, ENTERED WITHOUT AN EVIDENTIARY HEARING OR A TRIAL, WHICH ORDERED IPTO AND IP TO PAY TWICE FOR PROPERTY RIGHTS BOUGHT LONG AGO, DEPRIVED THEM OF PROPERTY WITHOUT DUE PROCESS OF LAW?

III. WHETHER THE ORDERS AND JUDGMENT ENTERED BELOW WERE PROCEDURALLY DEFECTIVE?

STATEMENT OF THE FACTS

¶2. On October 25, 1945, the Denkmann Lumber Company authorized John H. Hauberg, President, or John D. Shuler, Vice-President, or W. H. Giles, Vice-President, to sell and convey to International Paper Company or Southern Kraft Timberland Corporation, all of the timber, trees, wood and other forest products, of every nature, kind and description, including the future growth thereof, on all or any part of the lands of the Denkmann Lumber Company, for such price and consideration and on such terms and conditions as may be deemed fit and proper by said officers, all without any restrictions or reservations whatsoever.

¶3. On October 25, 1945, Southern Kraft Timberland Corporation, a division of International Paper Corporation, executed an agreement with the Denkmann Lumber Company, in which Kraft leased approximately 140,000 acres of Mississippi land from Denkmann. Also, on the same day, Kraft leased approximately 95,000 acres of Louisiana land in another lease agreement.

¶4. The Mississippi agreement stated that in consideration of $1,000,000 cash paid by Kraft, and a further sum constituting the balance of the consideration, Denkmann thereby:

A

Sell, convey and warrant unto KRAFT all of the timber, trees, wood and other forest products, of every size, kind, character and condition, together with any future growth thereof, during the life hereof standing, lying and being on the lands described in Exhibit A hereto, which is made a part hereof, with full right to KRAFT, its successors and assigns, to enter, cut and remove said timber, trees, wood and other forest products whatsoever, save as hereinafter provided, which may now be, or may hereafter, during the life of this agreement, grow, upon said lands, by virtue of the efforts of KRAFT, its successors or assigns, by natural reforestation or reproduction, or by any cause whatsoever, for the full term of ninety-nine (99) years from this date, subject to the further terms, conditions and reservations hereof.

KRAFT shall have the right to cut and remove timber, trees, wood and other forest products from said property, or from any part thereof, repeatedly, at such times as it may elect, during the life of this contract, and the removal of all or a part of said timber, trees, wood or other forest products from said property or any portion thereof, one or more times, shall not terminate nor affect KRAFT'S rights at subsequent times to remove timber, trees, wood and other forest products that may be on said property, or that may grow or be grown thereon during the life of this contract, KRAFT being hereby granted full authority to cut and remove any such timber, trees, wood or other forest products now on or which may hereafter grow on any of said lands, and utilize the same for commercial purposes or any other purposes desired by it, and no such cutting or use shall constitute waste, all of which rights are subject to the payment of taxes on the property, or portions thereof, and to the other obligations assumed by KRAFT and reservations made by DENKMANN, as herein set out.

B

Subject to the further terms, conditions and reservations hereof, lease and lot unto KRAFT, with full warranty of title, the said lands for the full term of ninety-nine (99) years from this date, with right to use said lands in the future, during the life of this contract, for the purposes, among others, of growing timber, trees, wood and other forest products, and of promoting the supply, stand and growth of any or all of same on said land, and or removing and marketing the same, from time to time, and at will, the aforesaid consideration covering all such rights and privileges as herein provided, in addition to the conveyance and rights set forth in "A" next above.

The balance of the consideration for which the above sale is made, and for which the lease and future operating and cutting privileges herein set out are granted, is as follows:

At KRAFT'S option, to be exercised by March 1, 1946, (a) the sum of One Million, Two Hundred Fifty Thousand Dollars ($1,250,000) then and there to be paid in cash, or (b) a sum equal to the total price of the timber estimated to be on said lands by a cruise made in the manner hereinafter provided...

The said cruise shall be made by Pomeroy & McGowin, Estimators, of Wilma, Arkansas; provided, however, that should it become apparent that Pomeroy & McGowin will be unable to complete said cruise on or prior to March 1, 1947, either party hereto may notify the other party of that fact and thereupon each party shall nominate one arbitrator and the arbitrators thus nominated shall nominate a third arbitrator, and the said three arbitrators shall thereupon select another firm of estimators, who shall complete said cruise within time limit. In case the two arbitrators appointed by the parties are unable to agree upon the third arbitrator, said arbitrator shall be designated by one of the Judges of the United States District Court for the State of Mississippi...

¶5. Kraft made total payments of $2,250,000 to Denkmann as consideration for the ninety-nine year lease. However, the agreement imposed upon Kraft the duty to pay the annual land taxes, exercise good forestry practices and leave the land reforested for Denkmann at the end of the lease in 2044. Kraft's rights under the lease would terminate if it failed to pay the annual land tax. Also, Denkmann reserved "the right to make and grant any and all oil, gas, gravel and other mineral leases and contracts necessary or desirable to the full mineral development of the said lands".

¶6. Further, the agreement allowed Kraft the right to exercise one of two purchase options for all of the leased Mississippi land. The first was to be exercised on or before March 1, 1946, at a price of $3.50 per acre. The second option stated:

At any time between January 1, 1986, and December 31, 1995, to purchase all of said lands, not theretofore released from it, at a price to be fixed by three arbitrators to be named at that time - one by DENKMANN, its successors and assigns, one by KRAFT, its successors and assigns, and the third by the two so named; or, in case they shall be unable to agree upon said third arbitrator, said third arbitrator shall be named upon application by either party by one of the Judges of the United States District Courts for the State of Mississippi, after notification to the other party of intent to apply to such judge for such appointment, given in writing at least thirty (30) days in advance of such application, such amount so fixed to be paid upon execution and delivery of deed conveying such lands, with warranty as in other instance.

In either event, said deed shall contain full reservation to DENKMANN, or its assigns (Vendor therein) of all minerals and rights therein, and the rights reasonably necessary to full mineral development. Notice of the exercise of either of such options to be given by registered mail.

¶7. The agreement provided that if either of the purchase options were exercised, the deed would contain full reservation to Denkmann, or its assigns of all minerals, and rights reasonably necessary to full mineral development.

¶8. The agreement allowed Kraft and Denkmann to assign their rights and obligations. Although not clear from a review of the record, Denkmann distributed its assets to the distributees before 1960. In 1971, the distributees of Denkmann exchanged their share of the distributed assets for $10 par value stock in the newly formed Denmiss Corporation. Beginning as late as 1960, the Denkmann distributees were represented by Agents and Attorneys-in-Fact, which included Denkmann former President John H. Hauberg, and Vice-President W. H. Giles, among others. Kraft assigned its rights to the International Paper Company, which later transferred its rights to International Paper Timberlands Operating Co., LTD. On February 15, 1996, IPTO transferred its rights and obligations to the purchase option back to IP, which left IPTO with the timber and leasehold estates. For simplicity, all rights and obligations held by IP and IPTO will be referred to as belonging to IP.

¶9. On May 18, 1960, W. H. Giles, former Vice-President and then Agent of the distributees of the Denkmann Lumber Company, contacted the distributees of the Denkmann Lumber Company in regard to the sale of land that was part of the 1945 agreement with Kraft. Giles explained that the Mississippi Legislature had created the Pearl River Valley Water District to construct a dam across the Pearl River a few miles north of the City of Jackson, and that the Water District now wanted to purchase 21,320 acres of Denkmann land to create the reservoir. Giles wrote:

As you know, the Denkmann lands are under a long term timber lease to International Paper Company, which still has eighty- five years to run. Under this lease the Paper Company is entitled to payment for all merchantable timber and for the value of timber growth for the next eighty-five years. The Denkmann distributees are entitled to some value for the reversionary interest in the land at the end of eighty-five years. All mineral rights will be excepted from the sale.

¶10. Further, Giles explained that the Water District would not separately negotiate with Denkmann and IP, but that IP had reached an agreement with the Water District at a price of $47 per acre. Giles stated that after many weeks of negotiation with IP, the Denkmann Agents and Attorneys-in-Fact agreed to accept $10 per acre for the reversionary interest in the land. The Denkmann distributees approved the agreement, and on August 2, 1960, the Denkmann distributees conveyed a warranty deed to the Pearl River Valley Water Supply District for development of the Ross Barnett Reservoir "subject, however, to the fee simple ownership of all trees, timber and forest products on said lands and their ninety-nine year lease to the surface thereof owned by International Paper."

¶11. On October 7, 1971, Rudy V. Ewing, an Agent for the distributees of the Denkmann Timber Corporation, wrote a letter in regard to the valuation of Denmiss Corporation stock. Ewing wrote, "trying to establish a true value is almost impossible, because the interests traded to the corporation for stock are all reversionary interests." In an April 7, 1972 letter, Ewing again declared that there was no way of arriving at a value for the Denmiss Corporation stock because all of its assets are reversionary interests. On April 12, 1979, Ewing responded to a request to furnish an estimated value stock held in the Denmiss Corporation. In this letter, Ewing stated, "The lands are under a 99 year paid-up lease to International Paper Company."

¶12. On April 30, 1979, John H. Hauberg, former President and then Agent of the Denkmann Lumber Company, wrote to the distributees and successors in interest of Denkmann to inform the group of the purpose of the 1979 business meeting. Hauberg wrote:

In the immediate years ahead lies the same business that we have been doing since 1945, leasing the mineral rights to oil companies and individual speculators who drill for oil and gas. Beyond these years lies a negotiation with International Paper Company which has the right to buy the lands it is now leasing from us between the years 1985-1995. There should be several million of dollars involved.

I.P. is in the driver's seat because its lease will not expire until 2044. If it buys our lands, it will not be offering the current market value of the lands that it can have the tree use of for another 50 to 60 years, having paid us for the lease back in 1945.

¶13. On May 31, 1979, Barton L. Bennett, a Registered Forester, wrote to Fred Reimers, an Agent and Attorney-in-Fact for the distributees of the Denkmann Lumber Company. Bennett wrote:

Within recent months we have had the opportunity of working with two different clients toward the termination of long-term leases and cutting contracts between the clients and large forest industries. Before this, we felt the termination of these instruments would be quite impossible. Legally, it still seems a remote chance to have the contracts broken. But, we now are able to see areas of possible negotiation which may permit the landowners to obtain release of at least part of their lands. With these thoughts in mind, the following Discussion will be in the form of an example of the calculations necessary to produce negotiating points for the possible termination of a long-term forest lease.

¶14. Bennett predicted that Denmiss could profit by over $16,000,000 if only 25% of the leased lands were released from the contract. Another letter from Bennett was sent to Reimers to confirm plans to map the leased property, review the tax payments for the property, inspect the property and to make recommendations.

ΒΆ15. On July 8, 1980, the office of John H. Hauberg again referred to the lease agreement as "paid-up" until the year 2044. James H. McCuiston, a minerals agent for the distributees of the Denkmann Lumber Company, in estimates of the value of Denmiss Corporation stock, referred to the IP agreement as a ninety-nine year lease ...


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