Consolidation Coal Co. v. Utah Div. of State Lands and Forestry

Citation886 P.2d 514
Decision Date02 December 1994
Docket NumberNo. 920321,920321
CourtSupreme Court of Utah
PartiesCONSOLIDATION COAL COMPANY and Pittsburgh & Midway Coal Mining Company, Plaintiffs, Appellants, and Cross-Appellees, v. UTAH DIVISION OF STATE LANDS AND FORESTRY; Ralph Miles, Director of Division of State Lands and Forestry; Utah Board of State Lands and Forestry; Utah Department of Natural Resources; Dee Hansen, Executive Director of Utah Department of Natural Resources, Defendants, Appellees, and Cross-Appellants.

Keith E. Taylor, Kenneth R. Barrett, Salt Lake City, for plaintiffs.

R. Paul Van Dam, Atty. Gen., David S. Christensen, Steven F. Alder, Asst. Attys. Gen., Salt Lake City, and Clark B. Allred, Gayle F. McKeachnie, Vernal, for defendants.

ZIMMERMAN, Chief Justice:

Consolidation Coal Company and Pittsburgh & Midway Coal Mining Company (collectively "Consol") appeal, and the Utah Division of State Lands and Forestry, the Utah Board of State Lands and Forestry, the Utah Department of Natural Resources, and various individual defendants employed by the State of Utah (collectively the "State") cross-appeal, a decision of the Seventh Judicial District Court of Emery County. This case involves the proper interpretation of the royalty provision in a coal lease entered into between the State and Consol and the amount of royalties and interest due under that provision. As discussed below, this case has previously been before this court and was remanded in Plateau Mining Co. v. Utah Division of State Lands & Forestry, 802 P.2d 720 (Utah 1990). On remand, the trial court held a two-day bench trial, after which it rejected Consol's arguments regarding the proper interpretation of the royalty provision and found that Consol had underpaid its royalties to the State by a substantial amount. The trial court further determined that Consol owed prejudgment interest on the unpaid royalties at an interest rate of 6%.

This time on appeal, Consol argues that the trial court erred (i) in rejecting the interpretation of the royalty provision purportedly established by the parties' course of conduct; (ii) in concluding that the interpretation of the royalty provision allegedly agreed to by the parties was a modification of the royalty provision; (iii) in failing to make necessary findings of fact; (iv) in finding that the State was not estopped from asserting a royalty higher than that which had been paid by Consol; and (v) in determining that prejudgment interest on the unpaid royalties was appropriate. Conversely, the State contends that the trial court erred in assessing a 6% interest rate on the unpaid royalties rather than the higher rates and penalties provided for under the Utah Board of State Lands and Forestry's rules and regulations. We reject all of Consol's claims of error but agree with the State that the trial court erred in assessing a 6% rate of interest. We remand for further proceedings on the interest rate matter.

Consol operates a coal mine in central Utah that includes State Coal Lease ML-25005 (the "Lease"). The land that is subject to the Lease was granted to the State for the support of the common schools by the United States Congress under the Utah Enabling Act. Utah Enabling Act ch. 138, §§ 6, 10, 28 Stat. 107 (1894). At all times relevant to this case, the school trust lands were managed by the Utah Division of State Lands and Forestry (the "Division") under policies, rules, and regulations established by the Utah Board of State Lands and Forestry (the "Board"). Utah Code Ann. §§ 65A-1-2, -1-4, -4-3, -7-1 (1993) (amended 1994). 1

The State originally issued the Lease to Kemmerer Coal Company ("Kemmerer") in January 1968 for a twenty-year term. The State used a standard lease form in its transaction with Kemmerer. That form authorizes the lessee or its assignees to extract coal in exchange for specified royalties. These royalties are fixed at the higher of 15cents per ton or the "rate prevailing, at the beginning of the quarter for which payment is being made, for federal lessees of land of similar character under coal leases issued by the United States at that time." 2 The Lease also indicates that it "is granted subject in all respects to and under the conditions of the laws of the State of Utah and existing rules and regulations and such operating rules and regulations as may be hereafter approved and adopted by the State Land Board."

Kemmerer never mined the Lease and eventually assigned it to Consolidation Coal Company ("Consolidation") and its co-plaintiff in this case, Pittsburgh & Midway Coal Mining Company ("Pittsburgh & Midway"). On June 22, 1977, Consol submitted to the Utah State Division of Oil, Gas and Mining a proposed mine plan. The proposed mine, known as the Deep Emery Mine, consisted of private lands as well as state and federal leases, including federal lease number U5287. 3 The royalty rate payable on this federal lease was 17.5cents per coal ton. Consol began mining during the second quarter of 1981 and continued to mine through 1986. During this time, it paid the State royalties of 17.5cents per coal ton, on the basis of its view that the rate on its federal lease in the same mine constituted the "rate prevailing ... for federal lessees of land of similar character."

When the State issued the Lease in 1968, the federal government's royalty rate on its mining leases was generally 15cents per ton. 4 In 1976, Congress enacted the Federal Coal Leasing Amendments Act ("FCLAA"). Pub.L. No. 94-377, 90 Stat. 1083 (1976). The FCLAA authorized the secretary of the interior to prescribe increased federal royalty rates on newly issued leases. 30 U.S.C. § 207 (1979). The new rates were fixed at 8% of the value of the coal produced from any underground mines. 43 C.F.R. § 3473.3-2(a)(3) (1979).

In December 1984, the State began an audit of state coal leases, including Consol's. The auditors discovered that in 1977, the royalty rates on newly issued federal coal leases had been increased to 8% but Consol and others had not reported or paid the higher rates on their state leases.

In October of 1985, the Division notified Consol that it owed the State the difference between 17.5cents per ton and 8% of the value of all coal mined from the Lease up to that time and that all future royalties would be 8% of value. After receiving notice of the higher rate, Consol continued to mine the Emery Mine and pay only 17.5cents per ton.

Consol filed this action, seeking a declaratory judgment that the royalty rate due under the Lease was 17.5cents per ton of coal. It based its claim on the terms of the Lease and on its assertion that the State had agreed to the 17.5cents royalty rate. The State counterclaimed, asserting that the rate was 8% of the value of the coal, which the State contended represented the prevailing federal rate. The State also denied entering into any agreement to fix the royalty rate at 17.5cents per ton. Finally, the State claimed late-payment penalties and interest on the amount alleged to be owing.

The trial court initially granted summary judgment in favor of Consol on the ground that the rate provision was facially ambiguous. It ruled similarly in three other declaratory judgment actions brought by other mining companies against the State, all involving the 8% royalty. The State appealed the dismissals to this court, which consolidated the cases. We reversed the grants of summary judgment and remanded the cases with instructions to take further evidence on several issues, as discussed below. Plateau Mining Co., 802 P.2d at 732. 5

On the royalty question, we primarily addressed whether the trial court had erred in ruling that the alternative rate provision was ambiguous and therefore unenforceable. Id. at 725-28. We agreed with the trial court that the provision was somewhat ambiguous but disagreed that this made it unenforceable. Id. at 726. We concluded that any ambiguity in this case arose from the phrase "rate prevailing ... for federal lessees of land of similar character." Id. In other words, the Lease provision was ambiguous only in the sense that the exact alternative rate was not clear on the face of the document, but this ambiguity did not make the Lease unenforceable. Id. Instead, we indicated that the fact finder should have resolved any ambiguity by reference to extrinsic evidence of the parties' intent. Id. We remanded the case to the trial court to determine how "the federal rate was to be calculated, what the rate was, and when it became 'prevailing,' if it did." Id.

Because the matter had been decided on summary judgment, the trial court had not determined whether Consol had reached an "agreement" with the State regarding the proper interpretation of the royalty provision. Id. at 727. This agreement allegedly set the royalty rate on Consol's Lease at 17.5cents per ton, which corresponded with the rate Consol was paying on its federal lease in the same mine. Id. We remanded the case to the trial court to decide this issue on the merits. Id.

In short, two broad questions relating to the proper interpretation of the alternative rate provision were to be decided on remand. First, what was the prevailing rate, and when did it become prevailing? Second, did Consol and the State "agree" upon an interpretation of the royalty provision, or is the State estopped from denying such an agreement, under which 17.5cents would be the prevailing rate for federal lessees of land of similar character? As to the issue of interest on the unpaid royalties, the trial court was to determine whether prejudgment interest was appropriate and the rate at which it was to be computed. Id. at 732.

On remand, the trial court conducted a two-day bench trial. It found that (i) during the relevant period, "the same federal royalty rate was being charged by the federal government during the audit period for coal leases in Utah on all land whether it was within the same mine, the same canyon, or the same...

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