EXHIBIT 99.1
F I L E D
UNITED STATES DISTRICT COURT
DENVER, COLORADO
JUL 30 2003
GREGORY C. LANGHAM
CLERK
IN THE UNITED STATES DISTRICT COURT
OR THE DISTRICT OF COLORADO
Lewis T. Babcock, Chief Judge
Civil Action No. 91-B-1153 (PAC)
U.S. ENERGY CORP., a Wyoming corporation, and CRESTED CORP., a Colorado
corporation, d/b/a USE/CC, a joint venture,
Plaintiffs,
v.
NUKEM, INC., a New York corporation and CYCLE RESOURCE INVESTMENT CORPORATION, a
Delaware corporation,
Defendants.
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ORDER
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Defendants Nukem, Inc. and Cycle Resource Investment Corporation
(collectively, Nukem or Defendants) move to adopt the May 1, 2003 Special
Master's report in this matter. Oral argument would not materially assist in
determination of the motion. After consideration of the motion and responses and
for the following reasons, I adopt the Special Masters report in part and reject
it in part.
I.
BACKGROUND
In 1988, the parties formed the Sheep Mountain Partners (SMP) Colorado
general partnership for the purpose of exploration, development, production, and
world-wide acquisition and marketing of uranium concentrates to commercial
utilities pursuant to long term supply contracts. In 1991, Plaintiffs U.S.
Energy
Corp. and Crested Corp. (Plaintiffs or USE/CC) filed this action asserting
claims for, inter alia, misappropriation of partnership assets and opportunities
and unjust enrichment.
In 1994, the dispute was referred to arbitration. After a 73-day hearing,
the arbitration panel issued a written Arbitration Order and Award on Apri1
18,1996 (Arbitration Order No. 1) including an equitable award impressing a
constructive trust in favor of the SMP partnership over: 1) purchase rights for
uranium [from the Commonwealth of Independent States (CIS) including Uzbekistan,
Kazakhstan, and Kirgizstan]; 2) uranium acquired pursuant to those rights; and
3) the profits therefrom. See Arbitration Order No. 1. On May 15, 1996,
Plaintiffs filed the Arbitration Order and Award with this Court and moved for
its confirmation. On July 3, 1996, the arbitration panel issued an Order
(Arbitration Order No. 2) in which it clarified Arbitration Order No. 1 as
follows: We... clarify Paragraph 163 of our Award as follows:
163. It is clear that Nukem without authority and without SMP's
permission or consent used the SMP uranium supply contracts which were
partnership assets to obtain purchase rights for CIS U308. Since the rights
to purchase the CIS uranium were obtained through the use of SMP contracts
(partnership assets), those purchase rights, the uranium acquired pursuant
to those rights and the profits therefrom are impressed with a constructive
trust in favor of SMP, and we conclude that SMP is entitled to damages in
the amount of $31,355,070 to compensate it for its past and future lost
profits. The uranium should have been made available to SMP to meet
deliveries required by SMP's grandfathered supply contracts, We enter
awards for those past and future profits denied to the partnership,
together with statutory interest at 8% per annum. . . .
2
Arbitration Order No.2, pp. 4-5; see U.S. Energy v. Nukem, Inc., 162 F.3d 1175,
1998 WL 738336 *2(10th Cir. 1998)(unpublished)(Nukem I).
On June 27, 1997, pursuant to Arbitration Order Nos. 1 and 2, I entered a
second amended Judgment impressing a constructive trust in favor of SMP on
Defendants' "rights to purchase CIS Uranium, the uranium acquired pursuant to
those rights and the profits therefrom," and on the separate damages award
against Defendants. Specifically, the second amended judgment contained the
following clarification of paragraph 163:
2) pursuant to paragraph 163 of Arbitrators Order No. 1. as modified by
Arbitrators' Order No. 2, the rights to purchase CIS uranium, the uranium
acquired pursuant to those rights, and the profits therefrom are IMPRESSED
WITH A CONSTRUCTIVE TRUST in favor of SMP[.]
Second Amended Judgment, p. 7, P. 2. (Emphasis in original). In affirming
the Second Amended Judgment, the Tenth Circuit held that "amended paragraph 163
clearly retain[ed] both a constructive trust and a damage award." Nukem 1, 1998
WL 738336 at **4. The Court stated further that "[a]mended paragraph 163
explains that the purchase rights, uranium, and profits acquired through Nukem's
use of SMP's five utility supply contracts were impressed with a constructive
trust" Id. On November 13, 1998, Nukem filed a motion seeking permission to
deposit the net monetary award in favor of the Plaintiffs in the Registry of the
United Stated District Court for the District of Colorado and for entry of
3
satisfaction of judgment. On February 8,1999,1 entered an Order denying the
motion. See February 8,1999 Order. On February 10, 1999, Defendants filed a
certificate of compliance with the February 8, 1999 Order stating that they had
paid Plaintiffs the balance of Plaintiffs 50% share as an equal partner with
Defendants in the SMP partnership of the $31,355,070 in damages awarded
separately by the Arbitration Panel. See February 10, 1999 Certificate of
Compliance. The parties had executed a mutual release as to this separate damage
component of the arbitration award.
In November 2000, Plaintiffs sought to enforce the constructive trust and
obtain an accounting of the SMP Partnership assets impressed with the
constructive trust. To value the constructive trust, in December 2000, pursuant
to Fed.R.Civ.P. 53(a), I appointed Raymond L. Friedlob, Esq. Special Master to
conduct an accounting and related discovery of the following issues: 1) all of
Defendants' transactions in CIS uranium based on CIS purchase rights obtained
through the use of SMP uranium supply contracts; 2) the profits realized
therefrom; 3) the location and poundage of all such CIS uranium; and 4) the
status of such ClS purchase rights with reference to and consistent with: a)
Arbitration Order No. 1; b) Arbitration Order No. 2; c) this Court's June
27,1997 Second Amended Judgment; 3) Nukem I; and d) Nukem II. Special Master
Friedlob submitted his Report on May 1, 2003. Neither party disputes the results
4
of the accounting calculations or the evidence upon which the Special Master and
the accountants relied.
II.
SPECIAL MASTER'S REPORT
Pursuant to the Special Master's Appointment Order, Special Master Friedlob
engaged Cordes & Company (accountants) to conduct the accounting in accordance
to the Appointment Order. Based on, inter alia, the accounting, confirmed by
three different methodologies, see Report, pp. 31-34, 38-41; 45, 48, the Special
Master made the following pertinent determinations:
1. Nukem and its affiliates earned a total gross profit of $66,399,200 on
the sale of CIS U3O8 purchases from Uzbekistan, Kazakhstan and Kyrgyzstan. See
Special Masters Report, pp. 14, 94;
2. after deduction of $39,243,560 in costs, including interest, Nukem and
its affiliates earned a total net profit of $27,155,640 on the sale of CIS U3O8
purchases from Uzbekistan, Kazakhstan and Kyrgyzstan. See Special Master Report,
pp. 14, 94;
3. the constructive trust did not include any uranium or services other
than U3O8 uranium;
4. 50% of the $31,355,070 Arbitration Award to Plaintiffs should be offset
against the total net profit of $27,155,640;
5
5. as calculated by the Accountants, the hypothetical profit that the SMP
partnership would have made had the SMP sales contracts been supplied with
U3O8 purchased under the CIS purchase contracts totaled $21,970,588 rather than
the $31,355,070 awarded by the Arbitration Panel;
6. by December 31, 2001, all uranium deliveries had been made under the
five SMP contracts. Accordingly, the CIS purchase rights were extinguished by
December 31, 2001. Id. at 6-7, 17: and
7. based on provisions in the SMP Agreement, allowing each of the parties
to pursue their separate business interests, specifically excluded from the
constructive trust were all products and services listed at Section IX of the
report, including, but not limited to purchases of U308 from Tajikistan, id.
p. 81, purchases by Nukem Germany from Uzbekistan under separate contracts, id.
pp. 83 and 86, and purchases and sales by Nukem and its affiliates of other
forms of uranium such as contaminated low enriched uranium (CLE), UF6, Enriched
Uranium Product (EUP), and Low Enriched Uranium (LEU), Id. at 9, and 81-96.
III.
Law of the Case
As an initial matter, the Defendants argue that the law of the case rule
and its corollary, the mandate rule, do not preclude the Special Master's
findings to which Plaintiffs object. I disagree.
6
Pursuant to law of the case doctrine, previous rulings in the same case
usually cannot be relitigated. "Generally. `once a court decides an issue, the
same issue may not be relitigated in subsequent proceedings in the same case'
and there must be compliance with the reviewing court's mandate." Grigsby v.
Barnhart, 294 F.3d 1215, 1218 (10th Cir. 2002) quoting Ute Indian Tribe v. Utah
114 F.3d 1513, 1520 (10th Cir. 1997).
Moreover, law of the case and the mandate rule are discretionary, not
mandatory. See, e.g., Grigsby, 294 F.3d at 1218-19. Among other things, the law
of the case rule "does not deprive the trial judge of the power to reexamine
and, if necessary, to alter a previous ruling in order to avoid the perpetuation
of an error." United States vs. Horton, 622 F.2d 144, 149 (5th Cir. 1980) (trial
court did not err when altering its earlier ruling on prejudgment interest). In
addition to the discretionary nature of the doctrines, there are exceptions and
limitations.
The Tenth Circuit has recognized three "exceptionally narrow" reasons for
departing from the doctrine when: 1) the evidence in a subsequent proceeding is
substantially different; 2) controlling authority has subsequently made a
contrary decision of the law applicable to such issues; or 3) the decision was
clearly erroneous and would work a manifest injustice. See, e.g., Grigsby, 294
F.3d at 1219 n.4.
The exceptions to the mandate rule are similar: 1) a dramatic change in
controlling legal authority: 2) significant new evidence that was not earlier
7
obtainable through due diligence but has since come to light; or 3) if blatant
error from the prior decision would result in a serious injustice if
uncorrected. Id.
Relying solely on the new evidence exception, Defendants argue that the
accounting generated a considerable amount of new evidence, including the re-.
calculation of SMP lost profits with actual data as to purchases and sales of
ClS uranium by Nukem. Therefore, according to Defendants, the Arbitration
Panel's separate $31,355,070 damages award was wrong. It is undisputed that much
of this information did not exist at the time of the arbitration hearings or the
subsequent litigation in this Court and the Tenth Circuit. However, the vast
majority of the documentation supporting the sales transactions between Nukem
and its affiliates and the CIS nations upon which the accountant's calculations
were based was in the control of Nukem and its affiliates. Also, the details as
to some of the uranium contracts were not disclosed by Defendants until the
accounting. See Plaintiffs' Reply, pp. 21-23.
Furthermore, Defendants' arguments misconstrue the nature of the new
evidence and its relationship to the previous holdings in this case concerning
the arbitration panel's award establishing a specific, separate damages award in
the amount of $31,355,070 and, separately, establishment of a constructive
trust. The two remedies were and are distinct. See Nukem I; Arbitration Order
Nos. 1 and 2.
8
The evidence elicited as a result of the related accounting may have been
new in the sense that it had not been disclosed or calculated previously. This
evidence, largely in the control and custody of Defendants, however, related
solely to the value of the constructive trust rather than the factual and legal
determinations of the Arbitration Panel and the remedies set out in Arbitration
Orders No. 1 and 2 as affirmed by this Court and the Tenth Circuit. Therefore, I
conclude that the new evidence exception to the law of the case rule and the
mandate rule is not applicable in this case.
IV.
OBJECTIONS TO THE SPECIAL MASTER'S REPORT
A. LAW
Fed.R.Civ.P. 53. provides in pertinent part:
RULE 53. Masters
(a) Appointment and Compensation. The court in which any action is pending
may appoint a special master therein. . . .
(c) Powers. The order of reference to the master may specify or limit the
master's powers and may direct the master to report only upon particular
issues or to do or perform particular acts.... Subject to the
specifications and limitations stated in the order, the master has and
shall exercise the power to regulate all proceedings in every hearing
before the master and to do all acts and take all measures necessary or
proper for the efficient performance of the masters duties under the order.
. . .
(3) Statement of Accounts. When matters of accounting are in issue
before the master, the master may prescribe the form in which the
accounts shall be submitted and in any proper case may require or
receive in evidence a statement by a certified public accountant who
is called as a witness. . . .
9
(e) Report.
(1) Contents and Filing. The master shall prepare a report upon the matters
submitted to the master by the order of reference and, if required to make
findings of fact and conclusions of law, the master shall set them forth in
the report. . . .
(2) In Non-Jury Actions. In an action to be tried without a jury the court
shall accept the master's findings of fact unless clearly erroneous. The
court may adopt the report or may modify it or may reject it in whole or in
part or may receive further evidence or may recommit it with instructions.
ld.
Pursuant to Rule 53(e)(2), a special master's findings of fact must be
accepted unless they are clearly erroneous. See, e.g., Gottlieb v. Barry, 43
F.3d 474, 486 (10th Cir. 1994). Conclusions of law are reviewed de novo. See,
e.g., Polin v. Dun & Bradstreet, Inc., 634 F.2d 1319, 1321 (10th Cir. 1980).
B. PLAINTIFFS' OBJECTIONS
Plaintiffs contend that the Special Master failed to follow the Order of
Reference and law of the case in preparing his Report. Specifically, according
to Plaintiffs, the Special Master erred by:
1) creating a 1.5% gross royalty in lieu of the remedy provided by the
Arbitration Panel in impressing a constructive trust on the purchase
rights, pounds and profits therefrom;
2) deducting the damage award of $31,355,070 from the Gross Profits of
$66,399,200 realized by Nukem on the sales of CIS uranium;
3) deducting $35,134,972 of indirect costs and overhead of Nukem and Nukem
Germany from the gross profits of $66,399,200 on sales of CIS uranium;
10
4) excluding from the Constructive Trust the gross profits of $7,563,811
realized from Nukem Germany's sales of uranium from its two contracts with
Uzbekistan and the gross profits of $2,197,646 realized by Nukem's sale of
Tajikistan uranium pursuant to its Kirgistan contract; and
5) ignoring Arbitration Orders No.1 and 2, this Court's Second Amended
Judgment, the mandate of both Orders and Judgment of the Tenth Circuit
Court of Appeals, and the Mutual Release entered into among the parties by
ordering Plaintiffs to refund $4,692,241 of the damage award paid by Nukem.
See Plaintiffs' Reply, pp. 6-8.
C. RULING SUMMARY
Pursuant to the following analysis based on Nukem I and Arbitration Orders
No. 1 and 2.P.P. 163:
1. the Arbitration Panel awarded the SMP partnership $31,355,070 in
damages;
2. separate and distinct from the $31,355,070 damages award, the
Arbitration Panel impressed a constructive trust on the: a) purchase rights
for CIS U3O8 from the CIS obtained through the use of SMP contracts; b)
uranium acquired through those purchase rights; and c) profits therefrom;
3. because the damages award was distinct and separate from the
constructive trust, the $31,355,070 damages award may not be offset;
4. the SMP is entitled to the value of the purchase rights as a separate
portion of the constructive trust;
5. the SMP is entitled to the net profits earned on the CIS U3O8 purchases;
and
6. 50% of the following monies belong to Plaintiffs and 50% to Defendants
as equal partners in SMP: a) the separate $31,355,070 damages award which
was satisfied in 1999; and b) the following contents of the separate
11
constructive trust: i) the value of the purchase rights totaling
$12,932,727; and ii) net profits totaling $27,155,640.
D. ANALYSIS
1) 1.5% GROSS ROYALTY IN LIEU OF THE REMEDY PROVIDED BY THE ARBITRATION
PANEL
Relying on unjust enrichment principles, the Special Master valued the
constructive trust purchase rights in the amount of $12,932,727 by calculating a
1.5% royalty of the $616,977,221 in sales by Nukem and its affiliates under the
original C1S purchase contracts through December31, 2001, including 8% interest,
the rate used by the Arbitration Panel. Special Master Report, pp. 6-7.
Plaintiffs object to the Special Master's reliance on the theory of unjust
enrichment to value the purchase rights because "[n]either the Panel, this Court
nor the [Tenth Circuit] made any reference or determination of unjust enrichment
in this case." Plaintiffs' Supplemental Objections, p.6. I disagree.
Colorado courts employ constructive trusts, an equitable remedy, to set
aside property transfers when the property was gained through fraud, duress, or
abuse of a confidential relationship. A constructive trust may be applied when
the property was originally acquired without fraud, but it is inequitable for
the person retaining it to keep it. See People v. 21020 Colorado Highway 74,
Jefferson County, 791 P.2d 1189 (Colo. App. 1989). A constructive trust is "an
extremely flexible remedy, appropriate in circumstances involving fraud or
duress, or when a confidential relationship exists, and also to prevent unjust
12
Well Service, Inc. v, Cimarron Oil Co., Inc., 841 P.2d 1068, 1070 (Colo. App.
1992)(emphasis added). "Necessary to most constructive trusts is the presence of
fraud (active or constructive) or duress, or abuse of confidence by commission
of a wrong, or some other form of unconscionable conduct or questionable means
by which the trustee gains his title, . . . [T]he theoretical reason for the
imposition of constructive trusts is that unjust enrichment should not occur."
First Nat. Bank of Denver v. Harry W. Rabb Foundation, 479 P.2d 986, 989 (Colo.
App. 1970)(emphasis added).
In Colorado, the elements of a claim for unjust enrichment are as follows:
1) a benefit was conferred upon the defendant by the plaintiff;
2) the benefit was appreciated by the plaintiff; and
3) the benefit was accepted by the defendant under such circumstances that
it would inequitable for it to be retained without payment of its value.
DCB Constr. Co. v. Central City Dev, Co., 965 P.2d 115, 119 (Colo. 1998).
In AAA No. 1 and 2, the Panel stated:
[i]t is clear that Nukem without authority and without SMP's permission or
consent used the SMP uranium supply contracts which were partnership assets
to obtain purchase rights for CIS U308.
Id. at P. P. 163.
In AAA No. 2, the Panel wrote:
There was wrongdoing on the part of Nukem when it used what were clearly
partnership contracts to obtain financial benefits for itself alone. . . .
Our Award. . . . is premised upon wrongdoing by Nukem end a judgment
13
by us that Nukem ought not to be permitted to profit from that wrongful
conduct.
Id. at P. 5
Under these circumstances, the Special Master's reliance on unjust
enrichment principles, as embodied in the imposition of a constructive trust, as
a matter of law, was proper.
According to the Special Master, valuing the purchase rights involves
consideration of the party which markets and sells the natural resource while
recognizing the value to others involved in the "chain of development" in
procuring the resource. Special Master Report. p.6. The Special Master settled
on a 1.5% royalty based on a 1.5% fee paid by Nukem previously to a third party
who arranged for a relationship with another uranium source based on the third
party's involvement in fostering the original relationship and ongoing
management activities. Id. While not a perfect analogy, the Special Master's
factual determination was neither clear error nor error as a matter of law.
Therefore, I approve and adopt the Special Masters use of a 1.5% royalty to
value the purchase rights in the constructive trust and allocate to the SMP
$12,932,727 to be spilt equally between Plaintiffs and Defendants as equal
partners in the SMP.
14
2. 1.5% GROSS ROYALTY ON OTHER URANIUM SALES
Plaintiffs assert that the Special Master erred in excluding the 1.5%
royalty on the following uranium sales by Nukem and its affiliates: 1) the sales
of CIS uranium by Nukem after December 31, 2001; 2) the gross profits on sales
of uranium acquired by Nukem Germany on its two contracts with Uzbekistan; and
3) the gross profits on the sales of Tajikistan uranium acquired by Nukem
pursuant to its contract with Kirgizstan.
According to the Arbitration Panel, Nukem was free to purchase U3O8 for its
own account as such purchases were not prohibited by the parties' Marketing and
Trade Agreement (MTA) or their Partnership Agreement. See AAA No. 1, P. 162.
Based on this directive, the Special Master examined the pertinent contracts and
transactions and found correctly that they were not part of the SMP partnership
CIS purchase contracts. See Special Master Report, p. 86.
Plaintiffs have failed to meet their burden to demonstrate that the Special
Master committed clear error in finding that these additional purchases by Nukem
and its affiliates were excluded from the gross profits calculations. Neither
did he err as a matter of law.
3) OFFSET
Plaintiffs assign error to the Special Masters deduction of the Arbitration
Panel's separate damage award of $31,355,070 from the gross profits of
$66,399,200 realized by Nukem on the sales of CIS uranium. Arguing for an
15
offset, Defendants contend that the settled damage award should be recalculated
through the guise of the constructive trust accounting. It is way too late for
that. I conclude that the Special Master erred in offsetting the damage award
against profits.
According to the Special Master
A plain reading of ss. 163 of the Arbitration Order supports this
conclusion in that there were two awards determined by the panel. The first
was a damage award and the second was the impression of a constructive
trust consisting in part of "those" purchase rights, namely, the rights to
purchase uranium through the use of partnership assets. That award is a
separate portion of the constructive trust.
Special Master Report, p. 5.
If viewed as a finding of fact, the Special Master's statement that the
damage award is a separate portion, i.e. included within the constructive
trust, is clearly erroneous. It is further contrary to the law of the case.
The Arbitration Panel impressed a constructive trust including profits from
uranium acquired pursuant to the SMP CIS contracts and a damages award in the
amount of $31,355,070 to compensate SMP for past and future lost profits. AAA
No. 1, P. 163; AAA No. 2. P. 163. In affirming this Court's Second Amended
Judgment confirming the Arbitration Panel's Order and award, the Tenth Circuit
stated that "Amended Paragraph 163 clearly retains both a constructive trust and
a damage award." Nukem I at *4.
16
During the course of this litigation, Defendants have repeatedly challenged
the amount and nature of the separate damage award by characterizing it as a
double recovery. In Nukem I, the Tenth Circuit stated that in making the
separate damage award:
the [Arbitration] [P]anel meant what it said. Moreover, even if the panel's
logic. . . is flawed, the arbitrators' damages calculation does not evince
a `manifest disregard of the law.' A mistake of fact or misinterpretation
of law is not enough to warrant reversal. We may not substitute our
judgment for that of the arbitrators, nor may we `instruct the arbitrator
as to the correct computation of damages.' (citation omitted).
Id.
Under these circumstances, I conclude that the Special Master also erred,
as a matter of law, in offsetting the damage award of $31,355,070 from the gross
profits of $66,399,200 realized by Nukem on the sales of SMP uranium. I also
specifically reject any refund by Plaintiffs to Nukem based on the damages award
previously paid by Defendants to Plaintiffs.
4. DEDUCTION OF NUKEM'S INDIRECT COSTS AND OVERHEAD
Plaintiffs contend that the Special Master erred in deducting $35,134,972
in indirect costs and overhead of Nukem and Nukem Germany from the gross profits
of $66,399,200 on sales of CIS uranium. According to Defendants, to grant
Plaintiffs gross profits without regard to costs and overhead would constitute a
prohibited windfall. I agree with Defendants.
17
As part of the accounting, the Special Master calculated Nukem's profits
from sales of CIS uranium. See Report at 9-15. The accounting determined that
Nukem earned net profits of $27,155,640 on the sale of CIS uranium. See id. at
14 (chart). The net profits were derived after deductions for finance costs of
$4,108,588 and indirect costs of $35,134,972 from the gross margin on CIS sales.
Id. Plaintiffs do not object to the deduction of the finance costs in the
profits calculation. They do, however, object to the deduction of the indirect
costs, arguing that the SMP Partnership is entitled to gross profits.
It is well established in Colorado that gross profits are not a proper
basis for an award. Rather, the proper measure is net profits, which is
established by deducting expenses of the business from gross profits. Lee v.
Durango Music, 355 P.2d 1083, 1087 (Colo. 1960). "Damages sustained by a
business must relate to loss of net profits; they may not be speculative,
remote, imaginary, or impossible of ascertainment" Id. In discussing the term
"profits" the Durango Music court stated:
the word "profit" has a fixed and definite meaning. It means the net
earnings, or the excess of returns over expenditures, and relates to any
excess which remains after deducting from the returns the operating
expenses and depreciation of capital and also, in a proper case, interest
on the capital employed. "Profit," in the ordinary acceptation of the law,
is the benefit or advantage remaining after all costs, charges, and
expenses have been deducted from the income, because, until then, and while
anything remains uncertain, it is impossible to say whether or not there
has been a profit.
Lee, 355 P.2d at 1088.
18
In Earthinfo, Inc. v. Hydrosphere Resource Consultants, Inc., 900 P.2d 113
(Colo.1995), the Court discussed the issue of calculating profits:
`some apportionment must be made between those profits attributable to the
plaintiffs property and those earned by the defendant's efforts and
investment, limiting the plaintiff to the profits fairly attributable to
his share. Dobbs ss. 4.5(3) at 642-43. `Even the wilful wrongdoer should
not be made to give up that which is his [or her] own; the principle is
disgorgement, not plunder.' Id at 642. The defendant's personal efforts in
contributing profits must be taken into account, but are often difficult to
measure. For example, if the defendant uses the plaintiffs machine in
producing goods, which it packages, distributes and sells to retail
customers, it may increase its profits, but we are not so sure that the
increase has much if any connection with the plaintiff's machine. We can be
sure, however, that the defendant's profits relate in part to the
defendant's own investments, efforts, or enterprising attitude. Id. at 647.
Hydrosphere, 900 P.2d at 120.
The Hydrosphere decision mandates two separate and distinct allocations in
calculating profits for purposes of disgorgement. First, the Colorado Supreme
Court requires an allocation of all costs, both direct and indirect, which must
then be deducted from gross revenues in order to arrive at an accurate picture
of what profit the defendant actually earned through the use of the property or
assets held in trust for the benefit of the plaintiff. This is proper in this
case because the costs incurred benefit both parties. Second, the Colorado
Supreme Court has held that an additional allocation is required to segregate
the profits properly earned by the defendant from those that were earned through
the defendant's wrongdoing. This allocation is necessary because the accounting
of profits should be limited to only
19
those profits wrongfully obtained by the defendant, and should not include
profits that were earned independent of the wrongful conduct.
In his Report, the Special Master set out the scrupulous procedures
followed by the accountants in determining Nukem's costs incurred with respect
to the uranium acquired pursuant to the SMP CIS contracts. See Report ss. VI, p.
73. The accountants also apportioned the costs between those incurred by Nukem
with respect to the SMP CIS contracts and non-CIS uranium purchases.
Contrary to Plaintiffs' assertion, Nukem's costs relating to buying and
selling CIS uranium are not a "benefit" to Nukem. See, e.g., Beck v. Northern
Natural Gas Co., 170 F.3d 1018, 1024 (10th Cir. 1999); Hydrosphere, 900 p .2d at
120-21. The actual financial gain or, in other words, the net profit is the
benefit. Id. (recognizing that legitimate business expenses should be deducted
in calculating lost profits for purposes of disgorgement); see also Beck, 170
F.3d at 1024 (the benefit received was use of plaintiffs' property without
payment of rent, for which the proper measure of compensation was fair rental
value). Any other recovery would be a windfall to Plaintiffs and operate as an
additional unwarranted sanction of Nukem.
Under the circumstances of this case, the Special Master did not err in
deducting the interest, costs and overhead incurred by Nukem from the gross
profits. 5. EXCLUSION OF THE GROSS PROFITS OF OTHER URANIUM CONTRACTS
According to Plaintiffs, the Special Master erred in excluding from the
Constructive Trust $7,563,811 gross profits from Nukem Germany's sales of
20
uranium from its two contracts with Uzbekistan and $2,197,646 gross profits from
Nukem's sale of Tajikistan uranium pursuant to its Kirgistan contract. For the
reasons set out above inss.C (2), I find no error.
E. FURTHER OBJECTIONS
1. STATUS OF THE SMP CIS CONTRACTS
According to Plaintiffs, SMP's CIS contacts with Uzbekistan and Kazakhstan
were extended to 2006 and 2010, respectively. Plaintiffs therefore assign error
to the Special Masters findings that the CIS purchase rights were extinguished
on December 31, 2001, the dates by which all deliveries had been made under the
contracts. See Special Master's Report, p. 17.
Plaintiffs have presented insufficient evidence to demonstrate that the CIS
contracts with Uzbekistan and Kazakhstan have been extended beyond December 31,
2001 or that there have been profits earned under these contracts after that
date. Therefore, it was not clear error for the Special Master to find that the
CIS purchase rights were extinguished on December 31, 2001.
2. COSTS OF THE SPECIAL MASTER AND THE ACCOUNTANTS
Plaintiffs state that they are the prevailing parties on the motion to
obtain an accounting and are not the "wrongdoers." See Plaintiffs' Reply, p. 31.
Therefore, according to Plaintiffs, Nukem should bear solely the costs of the
Special Master and Cordes, currently $1,017,656.56, and Nukem should reimburse
USECC for past fees and expenses paid to date. I disagree.
21
In this fractious, protracted, and complex litigation, both sides agreed to
the appointment of a special master and benefited from his services. in my
February 15, 2001 Order of Reference, I ordered that [e]ach party shall pay
one-half of the Special Master's fees and bear their own expenses." See Order of
Reference, p. 5. After the parties disputed the scope of the accounting, the
Special Master received input from both sides and modified the accounting plan.
Thereafter, the Special Master issued an Order Adopting Accounting Plan. See
February 8, 2002 Order of Special Master Adopting Accounting Plan. Plaintiffs
did not seek reconsideration of or object to the Order of Reference or the
Special Master's Order Adopting Accounting Plan. If a litigant falls to object
timely or seek reconsideration of a court order, generally, the objection or
right to reconsideration is waived. See Century 2l Real Estate Corp. v. Meraj
Intern. Inv. Corp., 315 F.3d 1271, 1276 (10th Cir. 2003). The requirement of
timely objections is essential to prevent further unnecessary proceedings and to
protect against "sandbagging." Id.
I have broad discretion in apportioning the compensation of the special
master. See Fed.R.Civ.P. 53(a)("[t]he compensation to be allowed to a special
master shall be fixed by the court, and may be charged upon such of the. . . as
the court may direct.") See Atlantic Richfield Co. v. American Airlines, Inc.,
98 F.3rd 564 (10th Cir. 1996); 9A Charles Wright & Arthur Miller, Federal
Practice & Procedure: Civil 2dss.2608 (1995). Therefore, in my discretion, I
deny Plaintiffs' request that Nukem pay 100% of the costs of the Special Master
and the Accountants.
22
3. REASONABLENESS OF THE FEES AND EXPENSES OF THE SPECIAL MASTER AND THE
ACCOUNTANTS
Casting doubt on the diligence of the Special Master, Plaintiffs argue that
the fees and expenses of the Special Master in the amount of $240,195.19, and
the Accounting Firm in the amount of $777,501.37, for a total of $1,017,696.56
are not reasonable. Specifically, Plaintiffs challenge the hourly rates charged
by the Special Master and the Accounting Firm as follows: 1) Special Master
Friedlob - $400 per hour; 2) John W. Kellogg, a partner of the Special Master at
Friedlob, Sanderson, Paulson & Tourtillott, LLC - $250 per hour; 3) Special
Master Friedlob's associate, Ms. Larsen - $100 per hour; and 4) the Accounting
Firm - $150-225 per hour. I am not persuaded.
"The value of a capable master's services cannot be determined with
mathematical accuracy, and estimates will vary, of course, according to the
standard adopted. He occupies a position of honor, responsibility, and trust;
the court looks to him to execute its decrees thoroughly, accurately,
impartially, and in full response to the confidence extended; he should be
adequately remunerated for actual work done, time employed, and the
responsibility assumed. His compensation should be liberal, but not exorbitant.
The rights of those who ultimately pay must be carefully protected; and while
salaries prescribed by law for judicial officers performing similar duties are
valuable guides, a higher rate of compensation is generally necessary in order
to secure ability and experience in an exacting and temporary employment
23
which often seriously interferes with other undertakings." C. Wright & A.
Miller, Federal Practice & Proceduress. 2608 (Compensation of Masters).
The parties concurred in the appointment of Special Master Friedlob, an
experienced, skilled, and reputable attorney, to implement the difficult tasks
set out in my Order of Reference. The Special Master and the Accountants
informed the parties early in the process of their hourly rates. See Defense Ex.
B. It is undisputed that Plaintiffs have been billed on a regular basis since
September 30, 2001. The invoices submitted by the Special Master and the
accountants displayed their rates. Moreover, until recently, both sides paid the
invoices submitted by the Special Master and the accountants without any
objection to the hourly rates, the amount of time spent, or the scope of the
accounting.
For the reasons set out in ss. IV (E)(2), Plaintiffs have waived any
objections to the reasonableness of the fees charged or the time spent by the
Special Master or the accountants. Furthermore, Plaintiffs offered no pertinent
evidence in support of their objections and their briefs set out only general
objections to the fees and costs. See Martinez v. Roscoe, 100 F.3d 121 (10th
Cir. 1996).
Special Master Friedlob and the accountants spent thousands of hours
examining and analyzing tens of thousands of records supporting the 96 page
report and exhibits detailing the numerous uranium sales transactions in this
case. The parties filed no objections to the financial accounting contained in
the Special Master's report. Although I am not adopting the Special Master's
report in its
24
entirety, it is indisputable that the Special Master met the challenge of
discharging his role with honor and responsibility. Furthermore, he executed the
Order of Reference thoroughly, impartially, and in full response to the
confidence extended to him by me. Therefore, the Plaintiffs' objection to the
fees charged by the Special Master and the accountants is overruled.
V.
CONCLUSION
With the exception of my findings and conclusions concerning the damages
award offset, see ss. IV (D) (3), I approve and adopt the Special Master's
Report consistent with this Order.
Accordingly, IT IS ORDERED that:
1. Plaintiffs' motion to adopt Special Masters Report is GRANTED in part
and DENIED in part consistent with the Orders herein;
2. the Special Master's Report is HEREBY ADOPTED by the Court with the
following exception:
a. Plaintiffs' share of the Arbitration Damage Award in the amount of
$15,677,535 SHALL NOT BE OFFSET against the total net profit of $27,155,640
earned for all of the sales of ClS U3O8 by Nukem and its affiliates;
3. JUDGMENT SHALL ENTER in favor of Plaintiffs and against Defendants in
the amount of $6,466,363.50, Plaintiffs' 50% share of the purchase rights
portion
25
of the constructive trust totaling $12,932,727, as equal partner with Defendants
in the Sheep Mountain Partnership;
4. JUDGMENT SHALL ENTER in favor of Plaintiffs and against Defendants in
the amount of $13,577,820, Plaintiffs' 50% share of the net profits portion of
the constructive trust totaling $27,155,640 as equal partner with Defendants in
the Sheep Mountain Partnership;
5. each party shall pay one-half of the fees and expenses of the Special
Master and the Cordes & Company;
6. each party shall bear their own attorney fees and costs;
7. the Clerk of the Court SHALL ENTER JUDGMENT consistent with the orders
herein;
8. post-judgment interest shall accrue at the legal rate from entry of
judgment as to this Order until the judgment is satisfied; and
9. this judgment and all other judgments in this case resolve all matters
as to all parties and all claims and, therefore, ARE FINAL. Dated: July 30, 2003
in Denver, Colorado.
BY THE COURT:
/s/ Lewis T. Babcock
------------------------------------
LEWIS T. BABCOCK CHIEF JUDGE
26
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT QF COLORADO
CERTIFICATE OF SERVICE
Civil Case No. 91-B-1153 (PAC)
The undersigned certifies that a copy of the foregoing Order was served on
July 30, 2003, by:
(X) delivery to:
Frances A. Koncilja, Esq.
Peter Forbes, Esq. Magistrate Judge Patricia A. Coan
Koncilja & Associates
D.C. Box 9
(X) depositing the same in the United States Mail, postage prepaid,
addressed to:
Bruce D. Pringle, Esq. Raymond L. Friedlob, Esq.
Elzi Pringle & Gurr Special Master
950 17th Street, Suite 1875 1775 Sherman Street, 21st Fl.
Denver, 00 80202 Denver, CO 80203
Robert S. Rifkind, Esq.
Cravath, Swaine & Moore
825 Eighth Avenue
New York, NY 10019
William R. Fishman, Esq.
1600 Broadway, Suite 2600
Denver, 00 80202
Kenneth KB. Roberts, Jr., Esq.
Kenneth A. B. Roberts, P.C.
Kerr, Brosseau, Bartlett, O'Brien, LLC
1800 Broadway, #1600
Denver, CO 80202-4913
------------------------------------
Deputy Clerk