Reis v. Peabody Coal Co.

Decision Date08 June 1999
Docket NumberNo. 73915,73915
Citation997 S.W.2d 49
PartiesCarl T. REIS, et al., Plaintiffs/Respondents, v. PEABODY COAL COMPANY, et al., Defendants/Appellants.
CourtMissouri Court of Appeals

W. Stanley Walch, Lawrence C. Friedman & Mike W. Bartolacci, St. Louis, for Appellants.

George A. Barton & Matthew S. Jensen, Kansas City, Robert F. Ritter & Jeffrey J. Lowe, St. Louis, for Respondent.


Defendants, Peabody Coal Co. (Peabody Coal), Peabody Development Company (Peabody Development), and Peabody Holding Company, Inc. (Peabody Holding), appeal from the judgment entered after a jury found for plaintiffs on their fraud claims. 1 We affirm.


In November 1963, C.A. Reis and Annie R. Reis, as lessors, entered into a mineral lease agreement with Sentry Royalty Company (Sentry). Under the terms of the lease, Sentry, as lessee, agreed to pay the Reises for the coal mining rights to certain property located in Kentucky. The lease requires Sentry to pay the Reises earned royalties, including "[f]our per cent (4%) on the monthly average gross sales realization to [Sentry]...." The lease defines gross sales realization, in part, as the "sales price without deduction of sales commission or expenses." The lease also contains what the parties refer to as a most favored nations clause that provides, "Should [Sentry] agree to pay other owners of coal land adjoining or adjacent higher royalty rates (no matter how based, i.e. per ton, per acre, or otherwise) than those set out hereinabove, thereupon those higher rates shall forthwith become the rates due and applicable to this lease and shall be paid by [Sentry] to [the Reises]." The lease requires Sentry to provide with each royalty payment a statement showing the amount of coal mined and "the monthly average gross sales realization f.o.b. [Sentry's] Preparation Plant for all coal prepared there and sold during said month." The lease also contains arbitration and audit clauses. In January 1966, the Reises assigned their rights under the lease to the Green River Mine Trust (GRMT). Sentry's rights and obligations under the lease were assumed by Peabody.

In 1971, Kentucky enacted a severance tax for coal, section 143.010. In 1977 and 1978, Congress enacted two excise taxes for surface-mined coal, 26 U.S.C. Section 4121 and 30 U.S.C. Section 1232 which is designated as a reclamation fee by the Surface Mining Control and Reclamation Act of 1977 (SMCRA). Peabody billed its customers for the three taxes. Peabody mined coal on the GRMT property from January 1979 until May 1980, and from January 1986 until October 1990. When Peabody paid GRMT royalties, it excluded the sums received for the taxes from its calculation of gross sales realization under the lease.

In December 1972, Peabody entered into a lease agreement with Consolidation Coal Company (Consol) for the mining of property adjoining the GRMT property. This lease requires Peabody to pay Consol royalties at a rate of 4 1/2 % of the monthly average gross sales realization. Peabody paid GRMT 4 % of the average gross sales realization for mining occurring from December 1972 until November 1987, and 4 1/2 % for mining occurring thereafter.

GRMT invoked the arbitration clause of the lease in April 1992. GRMT claimed that Peabody breached the lease and committed fraud. GRMT sought punitive damages for Peabody's alleged fraudulent conduct. Peabody objected to GRMT's request for punitive damages, asserting that the lease did not authorize punitive damages. The arbitration panel determined that it lacked authority to consider GRMT's fraud claims. After a hearing, the panel found that Peabody breached the lease by failing to include in its calculation of average gross sales realization those amounts that Peabody billed to and received from its customers for the three taxes. The panel also found that Peabody breached the lease's most favored nations clause by failing to increase GRMT's royalty rate to 4 1/2 % in December 1972 when Peabody agreed to pay a 4 1/2 % royalty to the lessor under the Consol lease. The panel awarded GRMT $708,721.32 for damages and pre-judgment interest. The United States District Court for the Eastern District of Missouri entered judgment and confirmed the arbitration award.

After arbitration, plaintiffs, the co-trustees of GRMT, brought an action in the Circuit Court of the City of St. Louis against defendants. Plaintiffs alleged that Peabody fraudulently excluded the three taxes from the monthly average gross sales realization in calculating the royalties due the trust. Plaintiffs also alleged that Peabody committed fraud prior to November 1987 by paying GRMT royalties at the rate of 4 % of monthly average gross sales realization instead of 4 1/2 % as provided for in the Consol lease. Plaintiffs sought punitive damages for both fraud claims. Peabody moved to dismiss or, in the alternative, for summary judgment. Peabody argued that because GRMT arbitrated its contract claims, GRMT was barred by the doctrine of res judicata from litigating the fraud claims. The trial court denied Peabody's motions. This court dismissed Peabody's appeal from the judgments denying these motions for lack of appellate jurisdiction.

After certain discovery, Peabody renewed their motion for summary judgment. The trial court denied the motion. Peabody next filed a motion to compel arbitration and stay litigation pursuant to the Federal Arbitration Act and Missouri Arbitration Act. The trial court also denied this motion. Peabody appealed. This court affirmed the trial court's denial of Peabody's motion to compel arbitration and stay litigation because defendants waived the right to arbitrate. Reis v. Peabody Coal Co., 935 S.W.2d 625, 632 (Mo.App. E.D.1996). We dismissed Peabody's appeal from other orders by the trial court for lack of appellate jurisdiction. Id.

The case then proceeded to trial. The evidence included a 1981 letter from Donan Engineering, Inc. to GRMT, a claim by Beaver Dam Coal Company (Beaver Dam) regarding the deduction of taxes in calculating royalties, and two decisions by the United States Interior Board of Land Affairs (IBLA). There was also evidence regarding a proposed internal accounting change by Peabody where it would include the taxes at issue as part of gross revenue.

A January 20, 1981 letter to a GRMT co-trustee from Donan Engineering, Inc. begins "As per your instruction, we have investigated and made the following conclusions concerning the [GRMT.]" The letter provides in part:

3. Refer[r]ing to the "most favorable nation clause", only one other coal owner is involved, the W.T. Fitts tract. According to Peabody, the Fitts property received the same royalty rate as does [GRMT]. We have not verified this further beyond taking Peabody's word. I would assume some representative of the Fitts tract would need to be contacted to get further verification. I will await further instruction from [GRMT] before attempting this verification.

4. The remaining objectives of our investigation involve[ ] retroactive adjustment made by Peabody concerning gross realization. After several conversations with Peabody, I have determined that these adjustments included positive and/or negative quality adjustments, adjustments due to the [SMCRA], and possibly other adjustments unique to various sales contracts involved. These adjustments could only be verified by conducting a thorough audit of Peabody studies, accounting practices and contracts. This could turn out to be a major project in itself and I do not believe you intended such verification in your original instructions. We have assumed the dollars of adjusted gross to be correct and verified that it was applied to correct tonnages.

The letter then provides that attempts were not been made to verify gross realization and corresponding retroactive dollar adjustments.

Beaver Dam, a Kentucky landowner, had a lease with Peabody for mining coal. The lease provides that part of the royalty to be paid by Peabody was based on gross realization for coal mined and sold. The lease defines gross realization as the "gross selling price of all merchantable coal invoiced f.o.b. mines to the customer or buyer, without any deductions for sales commissions." In October 1978, Beaver Dam's accountants examined Peabody's "books" and found that Peabody had been deducting the three taxes, at issue in the present case, in its calculation of gross realization. In January 1979, Beaver Dam told Peabody that in their opinion the taxes should not be deducted. Beaver Dam requested that Peabody reimburse the taxes deducted for all past royalties and include the taxes in its future royalties.

Peabody also had coal leases with the Navajo and Hopi Indian Tribes in Arizona. The two leases' definition of gross realization is nearly identical to that provided in the lease here. In 1978, the Indian tribes made claims for reimbursement after learning that the SMCRA tax was not being included in Peabody's calculation of gross realization. The District Mining Supervisor, Geological Survey, Bureau of Indian Affairs ordered Peabody to include the federal tax in the royalty base. The Acting Deputy Commissioner, Bureau of Indian Affairs, affirmed this decision and Peabody appealed to the IBLA. In 1981, the IBLA found that the tax should be included in the royalties and affirmed the decision. Peabody Coal Co., 53 IBLA 261 (1981). The issue arose again in another claim by the Indian tribes against Peabody. In April 1983, the IBLA found that the two federal taxes at issue here and an Arizona tax should be included in calculating gross realization. Peabody Coal Co., 72 IBLA 337 (1983). Peabody did not appeal from the two IBLA decisions. Peabody paid the Indian tribes at least $500,000 for past royalties and thereafter...

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