Unpublished Disposition, 875 F.2d 870 (9th Cir. 1988)

MEMORANDUM^* 

Gordon Hodgson brought this action in his fiduciary capacity as Executor of the Estate of Wendell Phillips against Occidental Petroleum Corporation (Oxy) and its wholly-owned subsidiary, Occidental of Libya, Inc. (Oxy Libya).

Hodgson appeals the district court's dismissal of his claim for tortious breach of the good faith covenant and the district court's grant of Oxy's motion for summary judgment on Hodgson's rescission, fraud, and Seaman's claims. Hodgson also appeals the district court's denial of his summary judgment motion on his request for rescission and damages in connection with his royalty agreement with Oxy.

FACTS

In 1965, Wendell Phillips assisted Oxy to obtain two petroleum producing concessions in Libya. In return, Phillips was granted a one-third of one percent overriding royalty. After he died in 1975, his estate succeeded to his remaining 0.3% overriding royalty.

Beginning in 1980, Hodgson and his representatives, attorney Samuel Nakasian and accountant Michael Moy, met with Oxy's representatives, raising various issues concerning the interpretation of the 1965 Agreement and Oxy's reporting of royalties. These discussions led to a new agreement, signed in 1982, which supposedly settled all disputes concerning the 1965 Agreement.

In the proceedings below, Hodgson sought to rescind the 1982 agreement, claiming (a) Oxy fraudulently induced him to enter the 1982 Agreement; (b) Oxy engaged in fraud in performing its obligations under the 1982 Agreement; and (c) there was failure of adequate consideration. Hodgson also alleged Oxy tortiously breached the covenant of good faith and fair dealing implied in both the 1982 Agreement and the decisions of the California Supreme Court in Seaman's Direct Buying Service, Inc. v. Standard Oil Co., 36 Cal. 3d 752, 206 Cal. Rptr. 354, 686 P.2d 1158 (1984).¹

Oxy filed cross-motions for partial summary judgment on the rescission, fraud, and Seaman's claims. The district court granted summary judgment in Oxy's favor.

After partial summary judgment was granted in its favor on most of Hodgson's claims, Oxy entered into a stipulation for judgment on the remaining claim for breach of the 1982 Agreement in the amount of $1,218,000. Execution as to a portion of the judgment was stayed.

DISCUSSION

This suit is governed by California law which provides that "a contract may be rescinded where the breach or non-performance is so substantial and fundamental as to defeat an important objective of the non-breaching party." May v. Watt, 822 F.2d 896, 900 (9th Cir. 1987).

Hodgson in effect argues that in 1982 the Estate accepted diminished royalty payments in order to secure the fundamental non-pecuniary objective of verifiability. In exchange for this promise, Hodgson contends the Estate did not receive the performance by Oxy which it was bound to deliver--it did not receive royalties owed, or the honest and fair dealing to which it was entitled. Hodgson submits that Oxy's failure to provide its Libyan tax return to the Estate, its failure to provide annual audits, and its failure to calculate tax credits pursuant to the terms of the Agreement warrant rescission.

Oxy contends the fundamental purposes of the 1982 Agreement were to settle past disputes, to pay $485,000 to Hodgson in settlement of those claims, and to provide for increased future royalty payments by excluding the benefits or burdens of Buyback Oil operations and reducing other charges.

The district court concluded that even assuming the alleged breaches occurred, they were not material breaches that were so dominant and pervasive in real or substantial measure as to frustrate the purpose of the contract. We agree. We find that the facts show the 1982 Agreement's purposes have not been materially breached. Oxy never denied Hodgson's right to receive tax returns or certified royalty reports, and has tendered performance due. At most, Oxy is guilty of failing to perform its obligations in a timely manner. Since time was not of the essence pursuant to the 1982 Agreement, delay in performance is not a material failure of consideration, and rescission would not be justified--especially since damages are easily compensable. See Medico-Dental Bldg. v. Horton & Converse, 21 Cal. 2d 411, 433-434, 132 P.2d 457 (1942); May v. Watt, 822 F.2d at 900. Because there is no evidence from which a fact-finder could infer that untimely performance was a material breach justifying the extraordinary remedy of rescission, we affirm district court on this issue.

Hodgson asserts claims for fraud in the inducement and fraud in the performance. We address these claims in order. Hodgson claims Oxy defrauded him by entering into the 1982 Agreement with no intention of performing its obligations concerning allocation of taxes and tax credits. The facts show that Oxy gave Hodgson the benefit of tax credits in its royalty calculations for the first three quarters of 1982, and that the tax credits were inadvertently miscalculated after that. California law provides that something more than nonperformance is required to prove intent not to perform a promise. Tenzer v. Superscope, Inc., 39 Cal. 3d 18, 30, 216 Cal. Rptr. 130, 702 P.2d 212 (1985). Because Oxy initially gave Hodgson the benefit of the tax credits, any possible inference of fraud is negated. Kaylor v. Crown Zellerbach, Inc., 643 F.2d 1362, 1368 (9th Cir. 1981).

To support his claim for fraud in the performance, Hodgson claims to have relied on Hebner's misrepresentation that Oxy did not have tax credit agreements with Libya. The district court found this claim to be a theory wholly made up by Hodgson with no support due to no reliance.

Rescission for fraud is available if the consent of the party rescinding was obtained through fraud. Cal.Civ.Code Sec. 1689(b) (1). We find that the facts show Hodgson knew Hebner's statement to be false, thus there was no reliance on the statement. Moreover, Hodgson could not have relied on matters occurring after the contract was made at the time he entered into the 1982 Agreement, nor could such conduct have induced Hodgson to enter into the Agreement.

Hodgson also bases his "fraud in the performance" allegation upon Oxy's suppression of the Libyan tax returns, termination of audits, and subsequent unsupported assertions that all credits related to Buyback Oil. We find that any delay in producing the tax returns before the 1986 meeting and Oxy's alleged failure to provide audits are not misrepresentations or suppressions which support a claim of fraud. Accordingly we affirm the district court's grant of Oxy's summary judgment motion on the fraud claims.

Hodgson claims that Oxy denied him access to the Libyan tax returns. The evidence shows, however, that Hodgson's only possible complaint is that the tax returns were not provided as quickly as he would have liked. Since time was not of the essence, this delay cannot amount to a material breach--particularly when it took Nakasian nearly a year to renew his initial request for the forms. Hodgson also claims there was a breach due to Oxy's failure to provide him with the 1985 Report. Oxy argues it would have been pointless for them to submit a report because Hodgson had already rejected Oxy's calculations and interpretations of the 1982 Agreement. Moreover, the 1985 and 1986 reports, certified by Arthur Andersen, have been submitted to Hodgson. Thus Hodgson can only complain about the timeliness of the reports. These facts do not warrant rescission based upon a material breach; contract remedies would be available.

Hodgson further claims Oxy's failure to pay royalties due constitutes a material breach. However, as argued by Oxy, this appears to be a case where there is a dispute over the meaning of the royalty agreement and over the manner in which royalties should be calculated, not an intentional failure to pay. Based on the foregoing, rescission cannot be granted on the basis of material breach.

D. TORTIOUS BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING

Under California law, where a "special relationship" exists between the parties to the contract, breach of the implied covenant of good faith and fair dealing will give rise to a cause of action in tort. Wallis v. Superior Court, 160 Cal. App. 3d 1109, 207 Cal. Rptr. 123 (1984). The relationship at issue here is one between the grantor and grantee of a royalty interest and is not characterized by elements of "public interest, adhesion, and fiduciary responsibility." See, e.g., Honolulu Oil Corp. v. Kennedy, 251 F.2d 424, 430-32 (9th Cir. 1957) (royalty interest does not create a fiduciary relationship).

Although Oxy is a large corporation, Hodgson was financially strong enough and well enough represented in the negotiations of the 1982 Agreement to obtain a $485,000 settlement, to obtain concessions on Buyback Oil and other costs, and to impose the verification provisions he now argues were so critical. Hodgson was not a party in a vulnerable position, nor did he trust Oxy; in fact, Hodgson and his representatives have admitted that they never trusted Oxy. Accordingly, we find the district court properly declined to extend California law in this regard.

The court recognized that the stipulated judgment "could very well be the final judgment in this case in the event that [Hodgson] is unsuccessful on appeal." We therefore find specifically that Hodgson has been unsuccessful on this appeal. The parties stipulated that Hodgson recover from Oxy the sum of $1,218,000 (which sum included prejudgment interest, to and including May 9, 1988) on his breach of contract claim. The parties also stipulated that interest shall accrue on the money judgment, computed daily from the date of entry of the judgment to the date of payment as provided by 28 U.S.C. § 1961. The terms stipulated to are final and binding on the parties.

We AFFIRM the district court and remand for the district court to lift the stay, enter judgment for the full amount, and to compute the amount of interest owed and order it paid.