Hemenway v. Peabody Coal Co.

Decision Date14 October 1998
Docket Number96-2462,Nos. 96-2367,s. 96-2367
Citation159 F.3d 255
PartiesGeorge E. HEMENWAY, et al., Plaintiffs-Appellants, Cross-Appellees, v. PEABODY COAL COMPANY and Peabody Development Company, Defendants-Appellees, Cross-Appellants.
CourtU.S. Court of Appeals — Seventh Circuit

George E. Stigger, III, Henderson, KY, George A. Barton (argued), Rasmussen, Barton & Willis, Kansas City, MO, for Plaintiffs-Appellants in No. 96-2367.

John B. Drummy, Kightlinger & Gray, Indianapolis, IN, W. Stanley Walch (argued), Stephen R. Welby, Lawrence C. Friedman, St. Louis, MO, for Peabody Coal Company in No. 96-2367.

John B. Drummy, Kightlinger & Gray, Indianapolis, IN, for Peabody Development Company in No. 96-2367.

George E. Stigger, III, Henderson, KY, George A. Barton (argued), Rasmussen, Barton & Willis, Kansas City, MO, for Plaintiffs-Appellees in No.96-2462.

John B. Drummy, Kightlinger & Gray, Indianapolis, IN, W. Stanley Walch (argued), Stephen R. Welby, Lawrence C. Friedman, St. Louis, MO, Ron A Hobgood, David R. Sauvey, Brent Weil, Kightlinger & Gray, Evansville, IN, for Peabody Coal Company in No. 96-2462.

Before POSNER, Chief Judge, and EASTERBROOK and ROVNER, Circuit Judges.

EASTERBROOK, Circuit Judge.

A mineral lease signed in 1969 requires Peabody Coal Company to pay a royalty based on the coal's "sales price". During the 1970s Congress enacted two excise taxes. One, for the benefit of the Black Lung Disability Trust Fund, is 55cents per ton of surface-mined coal, with a cap at 4.4% of the coal's selling price. 26 U.S.C. § 4121. (The amount of this tax has varied since its enactment in 1978; 55cents is the current rate.) The other, designated a "reclamation fee" by the Surface Mining Control and Reclamation Act of 1977, is 35cents per ton of surface-mined coal, capped at 10% of "the value of the coal at the mine". 30 U.S.C. § 1232(a). In 1983 Peabody began to charge its customers a "mine closing and final reclamation payment" of 25cents per ton. Peabody's invoices list a per-ton charge for coal, the two taxes, and the mine closing fee. In an invoice that Peabody calls typical, the charge for coal was $28.635 per ton, and the three additional charges were $1.10 per ton. Peabody paid royalties only on the coal charge, which represented 96.3% of the invoice total.

In this suit under the diversity jurisdiction, plaintiffs (assignees of the original lessors' royalty interests) contend that the two taxes and the mine closing fee are part of the "sales price" for royalty-calculation purposes. The district court granted summary judgment to plaintiffs on this theory but rejected their further contention that Peabody defrauded them. To arrive at a judgment the district court also had to select a statute of limitations. Plaintiffs contend that the period is 20 years because this is a suit on a written contract; Peabody contends that it is 6 because an underpaid mineral royalty is delinquent rent in Indiana (whose law governs); the district court chose 8, adopting Peabody's position but adding 2 years because these plaintiffs were members of the class in an abortive suit against Peabody in Kentucky. The final judgment is about $88,000, plus $67,000 in prejudgment interest.

Before we take up the merits, a few words about jurisdiction are in order. The complaint alleges plaintiffs' residence rather than their citizenship. This defect is fixed by a proposed amendment tendered after the oral argument on appeal. See 28 U.S.C. § 1653. Post-argument motions explored a second jurisdictional issue: a national banking association, as trustee, is among the plaintiffs. The citizenship of a trust is the citizenship of the trustee. Navarro Savings Association v. Lee, 446 U.S. 458, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980). Peabody does not dispute that a trust exists as Navarro defines it (not always an easy question, see Indiana Gas Co. v. Home Insurance Co., 141 F.3d 314 (7th Cir.1998)), but there is a potential problem with the identity of the trustee. Some documents in the case call the trustee "Bank One Trust Company, N.A." This bank has a branch in Kentucky, where Peabody has its principal place of business. Some district courts have concluded that in light of 28 U.S.C. § 1348 national banking associations are citizens of every state in which they have branches, Ferraiolo Construction, Inc. v. KeyBank, N.A., 978 F.Supp. 23 (D.Me.1997) (collecting authority), and if this is right--and if Bank One Trust Company, N.A., is the trustee--then complete diversity of citizenship is missing and the case must be dismissed. But the amended complaint identifies "Bank One Ohio Trust Company, N.A." as the trustee. Plaintiffs maintain (a) that Bank One Ohio Trust Company was the trustee when the suit began (the relevant time, see Freeport-McMoRan, Inc. v. K N Energy, Inc., 498 U.S. 426, 111 S.Ct. 858, 112 L.Ed.2d 951 (1991)), and (b) that Bank One Ohio Trust Company does not have a branch outside Ohio. Peabody informs us that it has no reason to doubt that Bank One Ohio Trust Company is indeed the trustee, so the parties have dodged a bullet. Plaintiffs' motion to amend the complaint is granted. Jurisdiction now is secure--though it would have been much better had the district court handled these issues when the suit began.

I

The lease defines "sales price" unhelpfully as the "average invoice price of coal mined, removed and sold". Are excise taxes part of the "average invoice price"? In one sense this is a trivial question. Of course they are. They appear on the invoice as part of the price the customer must pay. But the idea that a mine operator must pay the mineral owner a royalty on taxes, as opposed to coal, is jarring, and Peabody insists that the parties could not have contemplated this result in 1969. (The "mine closing" charge does not appear to represent an excise tax, but the parties make nothing of this. Like the parties, we treat all three surcharges as excise taxes.)

A tax lowers the demand for coal, and its burden is distributed according to the elasticity of demand. The district court supposed that demand for coal is perfectly inelastic, and if so buyers bear the whole tax and sellers are unaffected. Richard A. Posner Economic Analysis of Law 525-29 (5th ed.1998); Charles E. McLure, Jr., Incidence Analysis and the Supreme Court: An Examination of Four Cases from the 1980 Term, 1982 S.Ct. Econ. Rev. 69. If demand is not perfectly inelastic, then the sellers bear some of the loss, which participants on the seller's side normally would share (or would have so agreed in advance, had they thought about the possibility). But if the excise taxes are included in "sales price," then if elasticity is less than 1 the mineral owners will be better off and Peabody worse off. (If elasticity exceeds 1, both the mineral owners and Peabody can be worse off, because total revenues will fall.)

Consider a simple example. Suppose coal sells for $10 per ton, the royalty paid to the mineral owners is $1 per ton (10% of sales price), and Peabody makes a profit of $1 per ton. Now Congress adds an excise tax of $1 per ton, so that (at first approximation) the price rises to $11. If the tax is part of the "sales price" then the mineral owners' royalty rises to $1.10 per ton and Peabody's profit falls to 90cents per ton. If because of elastic demand Peabody cannot raise the price to $11 (or sells fewer tons at that price than at $10) then Peabody's share will be less than 90cents per ton, it will make that return on fewer tons, or both. Economists believe that many mineral and (other) property taxes fall on the land owner, because real property lacks alternative uses. See Richard A. Musgrave & Peggy B. Musgrave, Public Finance in Theory and Practice 412-13, 419-20 (5th ed.1989). This implies that if mineral owners and mine operators could bargain in advance they would be likely to assign the economic effects of future taxes to the mineral owners. (The tax is not on any asset specific to coal extraction, so operators that can bargain with many mineral owners won't deal with those who seek to shift its incidence to mine operators.) A pact that makes the mineral owner better off, and the mine operator worse off, as a result of a tax makes little economic sense--plaintiffs have not suggested why they would have bargained for this result, or why a mine operator would have agreed to it--and leads to caution in employing a plain-language reading of the text. Especially when plaintiffs agree that a sales tax, nominally imposed on the buyer but collected and remitted by the seller, would not be part of the "sales price" under the contract. The choice between a tax formally on the seller (as these two taxes are, cf. Gurley v. Rhoden, 421 U.S. 200, 95 S.Ct. 1605, 44 L.Ed.2d 110 (1975)), and one formally on the buyer is arbitrary; the two have identical economic and practical effects. Yet according to plaintiffs everything turns on this designation.

But it takes more than an economic puzzle to justify giving an unusual spin to contractual language. Contracts allocate risks, and judicial decisions changing those allocations after the fact not only lead to expensive litigation (as each side invests in the pursuit of advantage) but also make the institution of contract less useful ex ante. Parties to contracts may prefer simple-minded textualism to costly disputes later on, even knowing that a plain-language reading sometimes goes wrong, and they may make adjustments--in other parts of the contract, or in the royalty rate--to compensate for this possibility. Or perhaps they just made a mistake and now rue the choice. Learned Hand remarked that "in commercial transactions it does not in the end promote justice to seek strained interpretations in aid of those who do not protect themselves" (James Baird Co. v. Gimbel Bros., Inc., 64 F.2d 344, 346 (2d Cir.1933...

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