Nos. 87-1928, 87-2071.

United States Court of Appeals, Ninth Circuit.

Appeal from the United States District Court for the Eastern District of California; R.E. Coyle, District Judge, Presiding.

MEMORANDUM*

* FACTS

Ancora-Verde was the lessee of 60 acres of land under an oil and gas lease from Tenneco. Adjacent to the leased land was a 5-acre parcel which, although not included in the lease, was used by Ancora-Verde, and subsequently by Gulf Oil Corporation, as a storage yard. In 1977, Ancora-Verde assigned its lease for the 60-acre parcel to Gulf. The assignment included all wells, casing, tubing, wellhead connections and other producing equipment. Gulf had the right to use the equipment at no cost, and when it was no longer useful to Gulf, Gulf was to notify Ancora-Verde so that Ancora-Verde could either salvage the equipment or dispose of it as it saw fit.

In 1983, Ancora-Verde and Gulf negotiated a reassignment of the lease. Ancora-Verde only wanted back three wells which were located on the north half of the leased premises. The wells on the south half were not commercially viable. Gulf reassigned the north half of the property to Ancora Verde. It abandoned and plugged the wells on the south half, and quitclaimed the south half to Tenneco. The district court found that at the time Gulf abandoned the wells on the south half of the property, the south half "was a liability rather than an asset, considering the lack of producing capability of the wells and the cost of plugging and abandonment of the wells and surface restoration."

Ancora-Verde sued Gulf in November 1984. Ancora-Verde sought damages for Gulf's failure to return equipment which had been on the leased premises when Ancora-Verde assigned the lease to Gulf. Ancora-Verde also sought damages for Gulf's failure to return equipment and facilities which had been on the adjacent 5-acre storage yard, and for Gulf's alleged breach of contract in quitclaiming the south half of the 60-acre parcel to Tenneco.

The district court granted judgment in favor of Ancora-Verde for $92,948, which it found to be the replacement cost of Ancora-Verde's equipment which Gulf had removed from the 60-acre parcel. The court granted judgment in favor of Gulf on Ancora-Verde's claim for equipment which had been on the 5-acre storage yard. Judgment in favor of Gulf was also entered on Ancora-Verde's claim that Gulf had wrongfully quitclaimed the south half of the leased premises to Tenneco. Both parties appeal. We have jurisdiction under 28 U.S.C. Sec. 1291 and we affirm.

Gulf challenges the award of $92,948 to Ancora-Verde on two grounds: First, it contends this claim is barred by the statute of limitations. Second, it argues that the district court applied the wrong measure of damages.

a. Statute of Limitation

Following Ancora-Verde's assignment of the lease to Gulf, Gulf began removing from the leased premises various items of equipment which belonged to Ancora-Verde. The equipment was not suitable for Gulf's use. The assignment documentation consisted of a letter agreement dated November 15, 1977 (the "Letter Agreement") and a document entitled "Assignment of Oil and Gas Lease and Producing Equipment" (the "Assignment"). Both the Letter Agreement and the Assignment obligated Gulf to notify Ancora-Verde before removing any of Ancora-Verde's equipment, so that Ancora-Verde could salvage or dispose of the equipment. Gulf did not give any notice of its removal of the equipment.

In this diversity action we apply the law of the forum state, California. See Erie Railroad Co. v. Tomkins, 304 U.S. 64, 78 (1938). Ancora-Verde's claim is for breach of a written contract. This claim is subject to California's 4-year statute of limitations. Cal.Civ.Proc.Code Sec. 337(1) (West 1982). Gulf argues that because it completed removal of all the equipment by June 1980, the statute of limitations began to run no later than that date, and the statute had expired by the time Ancora-Verde filed its complaint in November 1984. The district court did not agree. It concluded the statute did not begin to run against Ancora-Verde until Gulf failed to return the equipment upon termination of its operations on the leasehold. We agree with the district court.

By the terms of the parties' agreement, paragraphs 2 and 4 of the Assignment placed two separate obligations upon Gulf: (1) to notify Ancora-Verde when the equipment was no longer useful and (2) to return the equipment following termination of Gulf's operations. Both provisions were breached. Ancora-Verde could have filed suit against Gulf for the value of the equipment under either provision. By the time suit was brought, the limitations period had run as to the notice requirement of paragraph 2. Suit could still have been maintained, however, for breach of the obligation to return the equipment as set forth in paragraph 4. Failure to file suit timely under paragraph 2 did not bar suit under paragraph 4, because the two provisions covered two separate and independent obligations. Ancora-Verde's suit was timely filed.

b. Measure of Damages

The district court concluded that the proper measure of damages was the cost of replacing the Ancora-Verde equipment which Gulf failed to return, i.e., $92,948. Gulf contends the proper measure of damages is the equipment's fair market value at the time of removal, not its replacement cost. According to Gulf, allowing Ancora-Verde to replace its run-down equipment with better equipment results in a windfall to Ancora-Verde.

A district court's award of damages is typically a finding of fact reviewable under the clearly erroneous standard. U.S. for use of Morgan & Son. v. Timberland Paving, 745 F.2d 595, 599 (9th Cir.1984). Gulf, however, challenges the district court's method of measuring damages, not the computation. To the extent the district court's determination of damages was based upon its interpretation and application of California statutory law, its determination is subject to de novo review. See Jackson Waterworks v. Public Utilities Comm'n, 793 F.2d 1090, 1092 (9th Cir.1986), cert. denied, 107 S.Ct. 1334 (1987).

Gulf's contention regarding the proper measure of damages for the removal of the Ancora-Verde equipment brings into play two California damages statutes. Cal.Civ.Code Sec. 3354 (West 1970) provides:

In estimating damages, ... the value of property, to a buyer or owner thereof, deprived of its possession, is deemed to be the price at which he might have bought an equivalent thing in the market nearest to the place where the property ought to have been put into his possession, and at such time after the breach of duty upon which his right to damages is founded as would suffice, with reasonable diligence, for him to make such a purchase.

California Civil Code section 3358 (West Supp.1988) states: "Except as expressly provided by statute, no person can recover a greater amount in damages for the breach of an obligation than he could have gained by the full performance thereof on both sides."

California courts generally allow damages under Civil Code section 3354 based upon a determination of the price at which replacements, equal in value to the property lost, could be bought in the open market. See, e.g., Wilkinson v. Singh, 93 Cal.App. 337, 269 P. 705 (1928). Under this formulation, fair market value is the correct measure of damages, so long as replacement of items of equivalent value can be had.

The evidence at trial established that equipment in the depreciated condition of the Ancora-Verde equipment could not be found. It was Gulf who took the equipment, without notice, and then breached its obligation to return the equipment. Under these circumstances, Gulf cannot escape its contractual obligation by not only failing to return Ancora-Verde's equipment, but by forcing Ancora-Verde to accept damages in an amount insufficient to replace the equipment. The $92,948 damage award will stand.

It is undisputed that the 5-acre storage yard was not within the description of the premises covered by the leasehold, and was not assigned to Gulf. The parties stipulated to this fact in their pretrial order. In arguing that the equipment located on the storage yard was assigned to Gulf, Ancora-Verde contends that the Assignment defines the equipment by its use, not by the equipment's location. According to Ancora-Verde, because the tanks and flow lines located on the storage yard were used by Gulf in its production of oil on the leasehold, the equipment was part of the Assignment. As proof for this contention, Ancora-Verde directs our attention to paragraph 2 of the Assignment which reads as follows:

2. Producing Equipment Included with this Assignment are the six (6) producing oil wells, all casing, pumps, tanks, rods, tubing, flow lines, wellhead connections and all other producing equipment used in connection with the production of oil and gas from the subject lands as hereinabove described.

If considered in isolation, without benefit of the several other provisions within the Assignment relating to the producing equipment, paragraph 2 might be read so as to include the storage yard equipment within the Assignment. In this respect, the "hereinabove described" language can be interpreted as describing the "subject lands" rather than the "producing equipment." However, the second sentence of paragraph 2 contradicts this reading. The second sentence begins: "That portion of said equipment which is referred to in the subject lease as 'facilities' shall remain attached to the lease ..." (emphasis added). The equipment and facilities located on the storage yard cannot "remain attached to the lease" given that the storage yard was not a part of the lease. Moreover, Ancora-Verde's interpretation does not reasonably comport with other provisions in the Assignment.

California Civil Code section 1641 (West 1985) provides: "The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other." In interpreting the terms of the Assignment, this court must therefore consider the entire instrument, mindful that "no term of a contract is uncertain or ambiguous if its meaning can be ascertained by fair inference from other terms of the agreement." Hawkins v. York, 2 Cal.App.3d 98, 106, 82 Cal.Rptr. 434, 439 (1969).

In all the other relevant provisions of the Assignment, the producing equipment that was to be assigned to Gulf is consistently described as located on and in the 60-acre leasehold. For example, the second recital of the Assignment describes the 60-acre leasehold and states that the assignor has agreed to sell its leasehold rights pertaining to that specifically described property, "together with the producing equipment located thereon and therein, to [Gulf] ..." (emphasis added). The assignment's granting clause provides, in pertinent part:

Assignor does hereby bargain, sell, transfer and assign to Assignee all of its leasehold estate rights in and to the aforesaid Oil and Gas Lease, being Fruitvale Oil and Gas Lease OG-328, in and under the above-described 60-acre tract consisting of the [description of the leasehold] together with the producing equipment located thereon and therein. (emphasis added).

Under California law, the granting clause of an assignment is controlling over ambiguous recitals. See National Reserve Co. v. Metropolitan Trust Co., 17 Cal.2d 827, 832, 112 P.2d 598, 601 (1941). Also, paragraph 4 of the Assignment states: "Assignee shall be obligated to reassign said lease to assignor together with the producing equipment on the property at the time of the assignment." (emphasis added).

Considering these provisions, as well as Cal.Civ.Code Sec. 1653 (West 1985) ("Words in a contract which are wholly inconsistent with its nature, or with the main intention of the parties, are to be rejected."), we conclude that the Assignment only includes the equipment on the leasehold, and we reject, as being inconsistentt with the nature of the Assignment, Ancora-Verde's suggested interpretation of the words of paragraph 2. Cal.Civ.Code Sec. 1653 (West 1985).

Even if we were to treat the language of paragraph 2 of the Assignment as ambiguous, the evidence established that Ancora-Verde continued to use the storage yard on a daily basis after the assignment. This is a circumstance which tends to show that Ancora-Verde did not intend to assign the equipment over to Gulf. See Austin v. Hallmark Oil Co., 21 Cal.2d 718, 730, 134 P.2d 777, 784 (1943) (court may properly construe language of contract in light of the facts and circumstances of the case).

Finally, Ancora-Verde contends that an August 17, 1984 letter written by a Gulf local area manager to Ancora-Verde was an admission against interest that the storage yard equipment was included in the assignment. This argument is without merit. The letter states: "We have searched our records regarding the disposition of producing equipment on the subject lease [and] ... it appears the property included a small tank battery [in the Storage Yard]...." The letter's author apparently assumed that the tank battery had been on the leasehold. Ancora-Verde's contention that the letter operates as an admission is unpersuasive as the storage yard itself, which contained the tank battery, was indisputably not part of the Leasehold. Even if taken as an admission, the letter is mistaken and can thus be disregarded as erroneous. See C.H. Elle Construction Co. v. Western Cas. & Sur. Co., 294 F.2d 459, 462 (9th Cir.1961) ("When other evidence clearly discloses that the [non-judicial] admission is a mistaken one, it should be disregarded in the interest of arrival at the truth and actual facts.").

B. Quitclaim of South Half of Premises to Tenneco

Both the Letter Agreement and the Assignment required Gulf, upon termination of its operations on the leasehold, to reassign the lease to Ancora-Verde. The Letter Agreement, which was not modified by the Assignment1, obligated Gulf, upon such termination, to plug and abandon those wells which Ancora-Verde did not want. Paragraph 6 of the Letter Agreement states: "When Gulf finally abandons operations on the project, the subject lease shall, (after notice to Ancora-Verde, and after being plugged and abandoned), either be surrendered or reassigned to Ancora-Verde." Ancora-Verde contends that Gulf breached its obligation to reassign the entire leasehold when Gulf plugged the wells on the south half, quitclaimed the south half to Tenneco, and only reassigned to Ancora-Verde the north half of the property. We disagree.

By letter dated December 2, 1983, Gulf gave Ancora-Verde notice of its intention to abandon operations and requested information regarding Ancora-Verde's plans to resume its operations. Following negotiations, Ancora-Verde notified Gulf by letter dated June 6, 1984, that Ancora-Verde only wanted reassignment of wells nos. 6, 15x and 16x (two waste water disposal wells and one oil well), all located on the north half of the leased premises. These were the only wells that Ancora-Verde considered of economic value. An Ancora-Verde internal memorandum reflects that Ancora-Verde wanted to avoid responsibility for plugging the wells on the south half of the property.

Ancora-Verde's conduct, manifested in its communications with Gulf, was clearly inconsistent with the desire to have the wells on the south half of the leased premises reassigned to it. The evidence shows that at no time between November 1983, when Gulf initially advised Ancora-Verde of its intention to reassign the lease, and September 1984, when Gulf reassigned, did Ancora-Verde advise Gulf that it wanted a reassignment of the entire 60-acre parcel, or that it wanted to take back any wells other than those identified by it in June and July of 1984. Gulf's detrimental reliance on Ancora-Verde's representations (i.e., plugging the wells and quitclaiming the south half of the leased premises to Tenneco) supports the district court's finding that Ancora-Verde is estopped from asserting Gulf breached its agreement. See, e.g., Wieczorek v. Texas Co., 45 Cal.App.2d 450, 458, 114 P.2d 377, 381 (1941) (despite requirement in oil and gas lease that lessee give lessor written notice and opportunity to purchase drilling equipment prior to abandonment, lessor is deemed to have waived formal notice requirements, and is estopped from asserting otherwise, by consenting to abandonment and notifying lessee that she did not desire to purchase equipment).

Ancora-Verde contends that its representations had no legal effect because Gulf had already breached the agreement by failing to reassign before June 1, 1984. Ancora-Verde apparently derives this deadline from Article 13 of the Unit Agreement which provides Gulf with a 6-month period after termination of the project in which to salvage and remove unit equipment and restore the surface of the lands to their original condition. This provision is silent, however, as to when reassignment must take place. Neither the Letter Agreement nor Assignment contain a reassignment deadline. Under these circumstances, a reasonable time for performance is allowed. See Cal.Civ.Code Sec. 1657 (West 1985).

AFFIRMED.