Bellingham Securities Syndicate, Inc. v. Bellingham Coal Mines, Inc.

• Decision Date: 30 April 1942
• Docket Number: 28552.
• Citation: 13 Wn.2d 370,125 P.2d 668
• Parties: BELLINGHAM SECURITIES SYNDICATE, Inc., v. BELLINGHAM COAL MINES, Inc.
• Court: Washington Supreme Court

125 P.2d 668

13 Wn.2d 370

BELLINGHAM SECURITIES SYNDICATE, Inc., v. BELLINGHAM COAL MINES, Inc.

No. 28552.

Supreme Court of Washington

April 30, 1942

Department 1.

Action by the Bellingham Securities Syndicate, Incorporated, against the Bellingham Coal Mines, Incorporated, to recover royalties due under a coal lease. From a judgment of dismissal plaintiff appeals.

Reversed and remanded with direction.

Appeal from Superior Court, Whatcom County; Ralph O. Olson, judge.

Green &amp Burnett, of Seattle, for appellant.

Little Leader, LeSourd & Palmer, of Seattle, for respondent.

MILLARD, Justice.

This action was instituted to recover royalties alleged to be due as of September 30, 1940, under a contract denominated 'Coal Lease,' executed in 1918 by plaintiff's predecessor in interest as lessor and defendant's predecessors in interest as lessees. Under the terms of the lease, which is for a period of fifty years from August 27, 1918, the lessee was obligated to install all necessary machinery and equipment and to do all development work for extraction of the coal. The lessor was to receive twelve and one-half cents a ton for all coal mined, plus an additional royalty equal to twenty-five per cent of the net profits when the mining operations had earned a net profit to lessee equal to lessee's capital investment.

By answer defendant alleged that payments already made exceeded the amount of royalties due to plaintiff and, as affirmative defenses, pleaded an accord and satisfaction, estoppel, waiver and that the action was barred by the statute of limitations. The cause was tried to the court which found that, taking into account the reasonable requirement of working capital of not less than two hundred thousand dollars for normal operations, the requirements for the expenditure of not less than one hundred and eleven thousand dollars in capital improvements, and the reasonable requirements of the defendant to safeguard against the hazards inherent in its mining operations, the defendant has not withheld as working capital any amount in excess of its reasonable requirements under its contract with plaintiff. From the foregoing findings the court concluded that defendant was entitled to judgment of dismissal. Judgment was entered accordingly. Plaintiff appealed.

Counsel for appellant contend that the trial court erred in holding that respondent lessee, who was obligated to pay as royalty to appellant lessor twenty-five per cent of its net profits, with the privilege of delaying payment if respondent reasonably required the money for use in its business, could successfully assert the privilege as an excuse for refusing payment of royalty from profits earned, when respondent lessee had diverted large sums from its net current assets to its stockholders in the form of dividends. Counsel for appellant also argue that the trial court erred in holding that the lease, which obligates respondent lessee to pay as royalty to appellant lessor twenty-five per cent of its net profits after the lessee's capital investment is repaid, permits the lessee in an accounting for royalty to both deduct from net profits one hundred per cent of the cost of all capital investments made and to compute net profits by deducting from gross earnings not only all operating expenses and taxes, but also charges amortizing and depreciating its said capital investments.

The provisions of the lease pertinent to this action read as follows:

6. 'Immediately upon the execution of this lease will proceed with the mining of the coal deposits aforesaid by installing all necessary machinery and equipment including the buildings and necessary shipping facilities on the area to be designated on the map referred to in paragraph three hereof, all of such development work and installation to be completed within eighteen months from the date of this lease, and such mine to be thereafter during the life of this lease continuously operated to the extent that such operation may be physically and commercially practical. In addition to such installation of machinery and equipment, all of which shall be at the sole cost and expense of the lessee, the lessee shall from time to time continue to expend sufficient money in the purchase and installation of machinery, equipment, supplies and labor for the development, mining and extraction of the merchantable coal from the above described real estate.'

12. 'When the mining operations conducted hereunder shall have earned to lessee a net profit equal to the capital investment of lessee, the lessor shall from thenceforth during the balance of the life of this lease, be entitled to, and shall be paid by lessee, in addition to said royalty of twelve and a half cents (12-1/2¢) per ton, the following additional royalty and consideration, to-wit: (a) the further royalty of one quarter of the net profit thereafter accruing from lessee's operations hereunder, and, (b) the still further consideration of one quarter of the consideration for which lessee may (after then first obtaining the consent in writing of the lessor to do so) assign the interest of lessee in this lease. All machinery, equipment, appliances, buildings, sidings and everything used and useful, employed by the lessee in the operation of the mining business of lessee hereunder, in the event of such an assignment being made, shall be regarded as a part of this lease, and the lessor shall be paid one quarter of the entire consideration for which lessee shall with such consent, assign the interest of lessee in this lease and in said used and useful appurtenances. Should the lessee with such consent assign the interest of the lessee in this lease Before the mining operations conducted hereunder shall have earned to lessee a net profit equal to the capital investment of the lessee, there shall be deducted from such consideration and retained by the lessee an amount sufficient when added to the net profit theretofore earned by lessee to equal the capital investment of lessee, and the lessor shall then be paid one quarter of the remaining consideration for which the lessee shall with such consent assign the interest of the lessee in this lease and in said used and useful appurtenances. Any involuntary alienation of lessee's interest in this lease shall be regarded as an assignment thereof entitling lessor to the same one quarter of the consideration accruing to the lessee therefor which the lessor would then have been entitled to had such alienation been a voluntary one, consented to by lessor. The lessor shall also in like manner be entitled to the same propertion of all monies paid to lessee as insurance on account of fire or other losses to any of the used and useful appurtenances aforesaid. For the purpose only of determining 'net profit' as between lessor and lessee, the term 'capital investment' as used in this paragraph, shall mean the actual money invested by lessee, plus the cash value of all tangible property supplied or turned in by lessee in lieu of cash, employed in mining operations under this lease, but shall not, as between lessor and lessee, include any amount on account of lessee's interest in this lease, or any amount on account of lessee's interest in the additional lands and deposits contemplated by section thirteen hereof, or of lessee's investment therein of cash, tangible property, construction or operating expenses, or otherwise.'

15. 'Lessee shall not by any scheme or device whatsoever pay or permit to be paid any excessive salaries, wages, or unnecessary construction, equipment, or operating expenses, or devote any of the proceeds from the sale of the coal mined from the real estate described in paragraph four of this lease to any other than the economical workmanlike development of the coal mine or mines therein contained, and to the shipping and marketing of such coal, and the payment of taxes; all to the end that the highest net profits may be available for the purpose of repaying the capital investment of lessee as such term is defined in paragraph twelve hereof at the earliest time practical so that the vesting of lessor's quarter interest in the net profits thereafter to accrue be not unduly or unnecessarily delayed, all consistent with good business and good faith operation and management. * * *'

18. 'Net profit arising from lessee's operations hereunder shall not be held in reserve and undistributed beyond the reasonable requirements of lessee hereunder, and lessor's proportion of all net profit not so reasonable required shall be paid to lessor within twenty days after the expiration of each three months period in which the same shall have accrued. * * *'

Appellant concedes that respondent has made capital expenditures from August 27, 1918, to September 30, 1940, in the amount of $754,792.27. Prior to 1925 all of respondent's profits were put back into the business. During this period of 1918 to 1940 appellant has received, as provided by the contract, twelve and one-half cents a ton for all coal mined. No 'additional royalty' payments were made to appellant until July, 1925. The total earnings from the mine to September 30, 1940, aggregated $2,039,817.37. After deduction of capital investment made by respondent in the amount of $574,792.27, a balance remains of $1,465,025.10. Of this balance, if treated as net profits, appellant would have been entitled to twenty-five per cent, or an additional royalty under the terms of the contract of $366,256.28. It is admitted that appellant received royalty payments from July 1925 to September 30, aggregating $283,333.39. Under this computation a balance remains of $82,922.89 which appellant claims is due to it as 'additional royalty' under the contract.

In its computation respondent first...