Trail Mountain Coal Co. v. Utah Div. of State Lands and Forestry

• Citation: 884 P.2d 1265
• Decision Date: 27 October 1994
• Docket Number: No. 930226-CA,930226-CA
• Parties: 95 Ed. Law Rep. 1075 TRAIL MOUNTAIN COAL COMPANY, Plaintiff, Appellant, and Cross-Appellee, v. The UTAH DIVISION OF STATE LANDS AND FORESTRY; Ralph Miles, Director of the Division of State Lands and Forestry; The Utah Department of Natural Resources; and Dee Hansen, Executive Director of the Utah Department of Natural Resources, Defendants, Appellees, and Cross-Appellant.
• Court: Utah Court of Appeals

Page 1265

884 P.2d 1265

95 Ed. Law Rep. 1075

TRAIL MOUNTAIN COAL COMPANY, Plaintiff, Appellant, and Cross-Appellee, v. The UTAH DIVISION OF STATE LANDS AND FORESTRY; Ralph Miles,

Director of the Division of State Lands and Forestry; The

Utah Department of Natural Resources; and Dee Hansen,

Executive Director of the Utah Department of Natural

Resources, Defendants, Appellees, and Cross-Appellant.

No. 930226-CA.

Court of Appeals of Utah.

Oct. 27, 1994.

William B. Prince (argued), Ballard Spahr Andrews & Ingersoll, L.R. Curtis, Jr., Brian T. Hansen, Holme Roberts & Owen, and Calvin L. Rampton, Jones, Waldo, Holbrook & McDonough, Salt Lake City, for Trail Mtn.

Gayle F. McKeachnie (argued), Clark B. Allred, McKeachnie and Allred, Vernal, for Lands & Forestry.

Jan Graham, State Atty. Gen., Stephen G. Boyden, Asst. Atty. Gen., Salt Lake City, for appellees.

Before BENCH and BILLINGS, JJ., and ORME, Associate P.J.

ORME, Associate Presiding Judge:

Plaintiff Trail Mountain Coal Company appeals the trial court's decision requiring Trail Mountain to pay additional royalties arising from its coal mining lease with the State. We affirm the trial court's decision in part, reverse in part, and remand for a reevaluation of the amount due.

FACTS

Trail Mountain Coal Company operates an underground coal mine located west of Orangeville, Utah. Part of the mine is on Utah school trust land, ¹ from which Trail Mountain has extracted coal pursuant to a State lease agreement. The State lease was initially issued to Malcolm N. McKinnon in 1965, who assigned the lease, with the approval of the Director of the State Land Board (the Director), to Myron F. Fetterolf on July 11, 1979. On August 13, 1979, Fetterolf orally assigned the lease to Trail Mountain, at which time he also notified the Director that Trail Mountain would be operating the mine. In a document executed by Fetterolf's estate, the assignment was later reduced to writing. Trail Mountain mined coal from the leased property from 1979 through 1985, submitting all required quarterly Coal Production & Settlement Transmittal forms to the Division of State Lands and Forestry, then known as the Division of State Lands (the Division), and enclosing the state royalty payment it calculated in accordance with the instructions set forth in the forms.

The State lease required the payment of a royalty on all coal mined from the school trust land. According to the language of the lease, the lessee agreed

[t]o pay to Lessor quarterly, on or before the 15th day of the month succeeding each quarter, royalty

(a) at the rate of 15cents per ton of 2000 lbs. of coal produced from the leased premises and sold or otherwise disposed of, or

(b) at 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,

whichever is higher....

Beginning with its first production from the state-leased portion of the mine, apparently in 1979, Trail Mountain paid the Division a fifteen cents per ton royalty, under subsection (a), for the coal it extracted. When the lease was originally issued in 1965, the royalty rate set by the federal government on its coal leases was also fifteen cents per ton. However, in August of 1976, the federal government changed the generally applicable royalty rate on underground coal leases from fifteen cents a ton to eight percent of the value of the coal produced. ² All Continuously from 1979, the Division received Trail Mountain's subsection (a) royalty payments without question or protest. Division employees also informed Trail Mountain at various times that the royalty rate was still fifteen cents per ton. However, in 1985 the Division conducted an audit of the royalties received on its various coal leases. As a result of the audit, the Division concluded that Trail Mountain had underpaid its royalties from 1979 through 1984. According to the audit, Trail Mountain should have been paying royalties under subsection (b) of the lease agreement rather than subsection (a), because the prevailing federal rate of eight percent for newly issued leases was higher than the fifteen cents per ton rate.

federal underground mining leases thereafter issued or readjusted in Utah, with minor exceptions, contained the new eight percent royalty provision.

The Division informed Trail Mountain of the audit results by letter dated October 15, 1985, and also provided it with a copy of the Royalty Audit Report. The report concluded that Trail Mountain had underpaid the required royalties by $3,351,474.75. The report also calculated $1,854,115.69 in interest due on the unpaid amount and assessed a late penalty of $16,606.76. The report based the interest amount on the statutory rate of six percent for the period from November 1, 1979, to June 30, 1981; upon the revised statutory rate of ten percent for the period from July 1, 1981, to November 30, 1982; and upon a regulation adopted by the Board of State Lands in November of 1982, purportedly imposing an eighteen percent rate, for the period from December 1, 1982, to October 15, 1985. The Division assessed the penalty based on a rule it promulgated in December of 1983. As a result of the audit report, the Division requested payment from Trail Mountain of unpaid royalties, interest, and penalties in the total amount of $5,222,197.20.

Trail Mountain disputed the auditor's interpretation of the lease and sought a redetermination of the royalty amount due under the agreement. After exhausting its administrative remedies, Trail Mountain filed the present action to enjoin collection of the claimed royalty amounts. The trial court initially granted Trail Mountain summary judgment, but the Utah Supreme Court reversed that decision and remanded the case. See Plateau Mining Co. v. Division of State Lands & Forestry, 802 P.2d 720, 732 (Utah 1990). Following a three-day bench trial, the trial court entered judgment for the Division, ruling that Trail Mountain owed the sum of $3,631,615.53 in delinquent royalty payments together with prejudgment interest at the rate of 6% per annum on each delinquent payment, amounting to $2,070,955.93, for a total judgment of $5,702,571.46.

Trail Mountain appeals the trial court's judgment on various grounds. Its principal claim is that the court erred in interpreting the lease as requiring Trail Mountain to pay an eight percent royalty on the coal mined during the audit period. In the alternative, Trail Mountain argues that even if the lease can be construed to require payment of the higher royalty rate, the trial court erred in ruling that certain royalty claims were not barred by the Statute of Limitations and in failing to allow Trail Mountain to deduct its transportation costs. Finally, Trail Mountain disputes the award and amount of prejudgment interest. ³ The Division cross-appeals, asserting that the trial court should have awarded a higher rate of interest and additional late fees.

ROYALTY PROVISION OF THE LEASE

Trail Mountain argues that the trial court erred in its interpretation of the lease The trial court ruled that the lease required Trail Mountain to pay quarterly royalties at the same rate as then prevailed for newly-issued federal leases. In contrast, Trail Mountain argues that we should interpret the lease to require payment at the prevailing rate for federal leases actually in production, as it claims was the parties' intent. Under such an interpretation, Trail Mountain would only be obligated to pay fifteen cents per ton, up until the point at which the prevailing rate for federal leases in production was eight percent.

                agreement.  A trial court's interpretation of an unambiguous contract constitutes a question of law, which we review for correctness.  West Valley City v. Majestic Inv. Co., 818 P.2d 1311, 1313 (Utah App.1991);  Wilburn v. Interstate Elec., 748 P.2d 582, 585 (Utah App.1988), cert. dismissed, 774 P.2d 1149 (Utah 1989).  However, "[i]f the contract is ambiguous, i.e., susceptible to varying interpretation, extrinsic evidence may be introduced to clarify the parties' contractual intent."  Majestic, 818 P.2d at 1313.   See Barnes v. Wood, 750 P.2d 1226, 1229 (Utah App.1988).  In such cases, "[w]e review the trial court's construction based on extrinsic evidence under the more deferential clearly-erroneous standard."  Majestic, 818 P.2d at 1313.   Accord Wade v. Stangl, 869 P.2d 9, 12 (Utah App.1994)
                

Trail Mountain's argument fails. The Utah Supreme Court already addressed the issue of which rate applies in Trail Mountain's previous appeal. See Plateau Mining Co. v. Division of State Lands & Forestry, 802 P.2d 720 (1990). In Plateau Mining, the trial court granted summary judgment for Trail Mountain, ruling that the lease was ambiguous, and therefore unenforceable, because it did not contain the alternative federal rate within the royalty provision. Id. at 725-26. In reversing the trial court, the Supreme Court specifically considered the meaning of the royalty provision and concluded that the language of the lease was unambiguous, insofar as it clearly established how the federal rate was to be determined. ⁴ See id.

Regarding the parties' intent, the Supreme Court decided that "[t]he intent of the parties was that the higher of the [state and federal] rates should be paid to the State." Id. at 726. In determining what that rate was, the Court stated that "[t]he alternative rate provision, based on the prevailing federal rate clause, provides a practical method by which the appropriate royalty can be determined." Id. As quoted by the Court, federal regulations in effect at the time required a royalty payment on underground coal leases " 'of not less than 8 percent of the value of the coal removed.' " Id. (quoting 43 C.F.R. § 3473.3-2(a)(3) (1989)). Moreover, the Supreme Court concluded Trail Mountain "had the duty to determine whether the...