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Roseburg Lumber Co. v. Madigan

Decided: October 19, 1992.


Appealed from: U.S. Department of Agriculture Board of Contract Appeals

Before Nies, Chief Judge, Rich, Circuit Judge, and Restani, Judge.*fn*



Appeal from decision of the United States Department of Agriculture Board of Contract Appeals ("AGBCA"), Docket Numbers 87-344-1 and 88-172-1, denying plaintiff's consolidated appeal for: (1) reformation or termination of its timber-sale contract with the Forest Service; and, (2) damages. We affirm.

This appeal presents two issues; namely, whether the AGBCA erred in determining that plaintiff was not entitled to rely on the information misrepresented by the Forest Service and whether it erred in finding insufficient proof of injury to necessitate modification of the stumpage rates provided for in the timber-sale contract at issue.*fn1


A. Factual Setting Prior To Contract Formation*fn2

On August 25, 1981, Roseburg Lumber Company was awarded the Corral Timber Sale, Contract No. 050158, at an oral auction conducted by the Forest Service. The sale area encompassed five species of timber.*fn3

Pursuant to the National Forest Management Act ("NFMA"), 16 U.S.C. § 472a (1988), and the NFMA's implementing regulations, 36 C.F.R. § 223.4(a)-(g) (1981),*fn4 before conducting a timber auction the Forest Service is required to estimate the fair market value of each species of timber included in the proposed sale. 36 C.F.R. § 223.60 (1991). The process of appraising the volume and quality of timber located on a proposed sale area is termed a "cruise." Based upon its cruise, the Forest Service is required to establish a "minimum stumpage rate" for each species of timber. 36 C.F.R. § 223.61 (1991). A stumpage rate is the per unit price paid by a timber purchaser, often expressed as the price paid per thousand board-feet ("MBF") of wood. The NFMA prohibits the Forest Service from offering timber for sale at less than its appraised value. 16 U.S.C. § 472a(a) (1988). Thus, a minimum stumpage rate represents the legal minimum acceptable bid rate ("MABR") for a particular species of timber. The Forest Service may not entertain bids which fail to meet this threshold price.

Federal regulations permit the Forest Service to choose from among various appraisal methods. See 16 C.F.R. § 223.60 (1991). In this instance, it employed a residual appraisal methodology. The Forest Service first estimated the selling value of lumber to be produced from the sale, by species; it then subtracted values associated with costs of production, including an allowance for risk and profit margins. Normally the residual figures represent fair market values for each timber species, and thus provide MABR values against which bids may be measured. In this case, however, the Forest Service failed to subtract logging costs for four of the five timber species. This unintentional error resulted in inflated MABR figures for Ponderosa Pine, Sugar Pine, Douglas Fir, and Incense Cedar.*fn5 The Forest Service published these erroneous MABR figures in the sale's advertisement, prospectus, and bidding documents. In fact, the sale's prospectus expressly stated that "advertised rates are the minimum acceptable bid rates" which "have been established by appraisal . . . ."*fn6 Timber Sale Prospectus, at 2. The following table provides a comparison of the published figures with accurately calculated MABR values:

Advertised Actual


Ponderosa Pine $95.35 $18.08

Sugar Pine $91.91 $18.08

White Fir $9.08 $9.08

Douglas Fir $86.27 $18.08

Incense Cedar $76.09 $9.08

Each species of timber would have been advertised at actual MABR values, had the Forest Service not made the computational errors.

Pursuant to 16 U.S.C. § 472a(e)(2), before conducting the oral auction the Forest Service solicited written sealed qualifying bids. Participants were required to submit bids that specified the stumpage rates being offered for each species of timber. Only those potential purchasers who submitted bids containing stumpage rates equal to, or in excess of, published MABR values for each of the five species of timber were permitted to participate in the oral auction. A total of four bidders, including Roseburg, submitted satisfactory qualifying bids. All participants premised their bids on partially inflated MABR data.

Before bidding on the corral Timber Sale, Roseburg conducted its own cruise of the sale area, formulating its own estimates of timber volume, by species. Roseburg then developed a bidding strategy based upon its independent volume estimates, as well as location of the sale area, timber quality, anticipated competition, and expectations of future timber availability.

In contrast to the sealed-bid phase of the sale, during the oral auction all bids were submitted on a lump-sum basis. Thus a bidder was forced to combine internal cost-benefit analyses of logging the various timber species, in order to determine an acceptable aggregate price range within which to bid. Based upon published MABR values and Forest Service estimates of timber volume, the advertised value of the sale was $930,630. It was anticipated that market forces would compel the high bidder to offer well in excess of this sum. In fact, Roseburg was awarded the contract with a final bid of $3,171,000 which was $1,000 more than Roseburg's closest competitor.*fn7

Despite being auctioned on a lump-sum price basis, the Corral timber was actually sold on a scaled basis; that is, payments were to be calculated by multiplying contractual stumpage rates (which are specified after the bid is awarded) by volume measurements taken as timber is physically removed from the sale area. Thus, the total price ultimately paid could be determined only after all designated timber had been removed. The contract did not vest Roseburg with discretion over the volume of timber to be logged; all timber meeting contract specifications was required to be removed in accordance with the contract's cumulative removal schedule.*fn8 Failure to meet yearly targets set by the removal schedule resulted in cash payments to cover the value of such timber left standing.*fn9

Calculation of contractual per species stumpage rates, the root of the instant dispute, depended upon the amount of allocable "bid premium." Bid premium, also known as "overbid," is defined as the amount by which the winning bid exceeds the appraised value of the sale. Accordingly, the bid premium is determined by the original Forest Service estimates of timber volume and total sale value, as well as Roseburg's winning bid price. Published MABR values reflected the Forest Service's appraisal of total sale value at $930,630. Therefore, Roseburg had $2,240,370 to allocate as bid premium. Following award of the contract, Roseburg was required to apportion this amount among four of the five species of timber included in the sale.*fn10 As a result of its cruise, Roseburg believed that the Forest Service had considerably overestimated the volume of White Fir located or the sale area; therefore, it was to Roseburg's advantage to allocate the entire amount of bid premium to White Fir. This is precisely what Roseburg chose to do. Dividing total bid premium by the Forest Service volume estimate of 1,800 MBF results in an overbid allocation of $1,244.65 per MBF of White Fir. As a result, the executed contract resulted in the following terms:

Final Gov't

Allocated Stu mpage Estimated Estimated

Species Bid Premium Rate/MBF Volume Price

Ponderosa Pine $0.00 $95.35 3,900 MBF ...

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