State v. Northwest Magnesite Co.

Decision Date07 June 1947
Docket Number29528.
Citation182 P.2d 643,28 Wn.2d 1
CourtWashington Supreme Court

Action by the State of Washington against Northwest Magnesite Company and others for an accounting of royalties due under lease of school grant land. From the judgment rendered, the State appeals.

Reversed and remanded with directions.


Appeal from Superior Court, Stevens County; M. E. Jesseph, Judge.

Smith Troy, of Olympia, E. P. Donnelly, of Seattle, and John Spiller, of Olympia, for appellant.

John T Raftis, of Colville, and Robertson & Smith, of Spokane, for respondent.


Plaintiff the state of Washington, commenced this action originally against Northwest Magnesite Company, a Washington corporation, defendant, to recover from it additional royalties, and interest thereon, alleged to be due the plaintiff from the sale of minerals mined from public land leased to the defendant. In an amended complaint, the state joined as additional defendants Harbison-Walker Refractories Company and General Refractories Company, foreign corporations alleging that those concerns in years past had acquired ownership of Northwest Magnesite Company pursuant to a combination and conspiracy to corner the magnesite market in the United States and elsewhere; that since then Harbison-Walker Refractories Company and General Refractories Company had conducted all sales of Northwest Magnesite Company's output; and that those two foreign corporations had fixed the amount of receipts of the domestic company for its magnesite production. By its action, the state sought to have the court determine that it was entitled to royalties computed on the basis of the amounts received by the dominant corporations from their customers for the products of their subsidiary, Northwest Magnesite Company, and also to determine that Northwest Magnesite Company had taken certain improper allowances in calculating royalties due the state. The state's calculation of the amount due it was $133,817.25 as of April 30, 1943.

For convenience, we shall hereinafter refer to the respective defendants as Northwest, Harbison-Walker, and General.

The defendant Northwest answered, admitting that it had deducted from gross receipts all costs of mining and treatment, and other expenses, Before calculating royalties, so that its remittances to the state were, in effect, royalties on its own net profits from sales of magnesite quarried from the state's property; but denying that it was then indebted to the state in any amount. It also asserted four affirmative defenses: (1) Accord and satisfaction; (2) conduct of the parties constituting a binding practical construction of the terms of the mining contract existing between Northwest and the state; (3) estoppel; and (4) laches.

Northwest also moved that the court quash and set aside the service of summons and amended complaint which had been made upon the other defendants, Harbison-Walker and General, by delivery of process and the accompanying pleading to an officer of Northwest only. Subsequently, Harbison-Walker and General entered their special appearances for the purpose of a similar motion, and, when a ruling on that question was reserved by the court, adopted the answer of Northwest, at the same time preserving their special appearances.

At the conclusion of an extensive trial, without a jury, in July, 1943, and after an inspection of the premises, the trial judge rendered a memorandum opinion and decision on March 1, 1944, in which he declared, as findings, that the mining contract between the state and Northwest was inappropriate to the operation in question; that the venture was not a strictly mining operation, but rather a manufacturing enterprise; that the statute under which the contract was made, as well as the contract itself, was ambiguous with respect to the formula for royalties, 'four per cent of moneys received from the sale of minerals from said lands, after deducting therefrom the cost of transportation and treatment'; that the statute and contract were therefore open to construction by the parties and by the court; and that the manager of Northwest and the commissioner of public lands had orally agreed to a deduction, from gross receipts, of all costs of production, including removal of overburden from the ore site, quarrying, and ore reduction, Before calculation of royalties. From these findings, the trial judge concluded, in his memorandum opinion and decision, that Northwest's defense of practical construction was good, and that the state was estopped to deny that construction. The trial judge further found that during the period of the negotiations here involved the land commissioner had full knowledge of the corporate relations between Northwest and its parent corporations, and of the differential between the price received by Northwest for magnesite and the market price received therefor by Harbison-Walker and General. From these latter findings, the trial judge concluded that these transactions between the dominant corporations and their subsidiary were lawful, and that, since the three corporations were wholly distinct entities, and since Northwest had valuable assets in this state, there was no practical reason why Harbison-Walker and General should be joined in the action.

The trial court therefore held (1) that the motions to quash and set aside the service of summons and amended complaint upon defendants Harbison-Walker and General should be granted, 'for the reason that the evidence discloses that no cause of action exists as to them,' and (2) that Northwest was entitled, under its contract with the state, to deduct all costs of exploration, development, extraction, transportation and processing of ore, and overhead expense generally, but was not entitled to deduct items of depletion, Federal income and capital stock taxes, state corporation tax, and certain insurance expense. The court thereupon ordered an accounting in accordance with the above terms.

Upon a second hearing, in September, 1944, further evidence was taken relative to the accounting. At that hearing, the trial judge denied motions for reconsideration of the memorandum decision, for entry of judgment in faovr of the plaintiff as prayed for in the amended complaint, and for a new trial; directed entry of an order quashing service of summons upon Harbison-Walker and General, for the reason that those defendants were not proper parties to the proceeding and had not been properly served with process; and entered judgment against Northwest in the sum of $10,940.88, that being the amount due under the findings of the memorandum decision, after certain adjustments, as of December 31, 1943. The court also decreed in its judgment that from and after that date Northwest should compute and make payments of royalty in accordance with the terms and conditions set forth in the memorandum decision, 'until otherwise provided by law.' The court allowed no interest prior to the date of judgment, and denied all parties any recovery of costs. Conceiving the amount of the judgment to be insufficient, the state appealed.

Before considering the assignments of error presented by the state upon the appeal, we deem it beneficial to set forth in some detail certain facts relevant to this litigation. For a clearer understanding of the facts, it becomes necessary to explain the nature of magnesite and its production in the United States; the corporate and business relations of Northwest to Harbison-Walker and General; and the development of what is herein referred to as the Moss claim, which comprises the land leased by the state to Northwest, and the subsequent dispute as to royalties arising therefrom.

Magnesite is a mineral consisting of magnesium carbonate. It is a product of alteration of magnesium silicates and occurs, so far is pertinent to our inquiry, as a replacement product, in dolomite rock, in varying degrees of purity. Its principal use is in the manufacture of highly refractory firebricks for lining steel and electric furnaces, although magnesite is but one of numerous types of such bricks, each having a special value.

Crude magnesite ore contains much moisture, and freight rates on such ore are prohibitive. It is thus an economic necessity that the ore be calcined at or near the place where it is mined or quarried from the earth. Calcining is a process by which the water and carbonic acid are driven off. If the ore is then 'clinkered,' it becomes deadburned magnesite, a product usable by industry.

Prior to the First World War no magnesite was mined in this country. Manufacturers of refractory brick got some magnesite derived as a by-product of the manufacture of carbonic acid, but for the most part they imported it from Europe, particularly Austria. With the advent of that war and the necessity for increased steel production, deposits of magnesite ore in the United States, particularly in California and in Stevens county, Washington, were developed, and Northwest's plant at Chewelah became the first highly developed magnesite property in this country.

After the war, Pacific coast producers could not compete with cheap imports, which drove the market price of magnesite downward from $37.50 per ton in 1918 to $23 per ton in 1921. The principal economic burden to these producers was freight costs, ranging from $12.50 to $16.50 per ton between Chewelah, Washington, and Chester, Pennsylvania, as contrasted with a range of from $4.50 to $5 per ton between the European port of Trieste and Chester, Pennsylvania.

In 1922, a tariff of about $11.50 per ton was imposed on magnesite imports, a differential apparently sufficient to enable...

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