United States v. Southwest Potash Corporation, 7945.

• Decision Date: 15 October 1965
• Docket Number: No. 7945.,7945.
• Parties: UNITED STATES of America, Appellant, v. SOUTHWEST POTASH CORPORATION and American Surety Company of New York, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

352 F.2d 113 (1965)

UNITED STATES of America, Appellant, v. SOUTHWEST POTASH CORPORATION and American Surety Company of New York, Appellees.

No. 7945.

United States Court of Appeals Tenth Circuit.

October 15, 1965.

Roger P. Marquis, Atty., Dept. of Justice (J. Edwards Williams, Acting Asst. Atty. Gen., and John F. Quinn, Jr., U. S. Atty., with him on brief), for appellant.

William E. Willis, New York City (Iden & Johnson, Albuquerque, N. M., Sullivan & Cromwell and Anthony Chandler, New York City, with him on brief), for appellees.

Before MURRAH, Chief Judge, SETH, Circuit Judge, and TEMPLAR, District Judge.

MURRAH, Chief Judge.

This suit involves the interpretation of the royalty provisions of Department of Interior leases for the mining and production of potash deposits on public lands in New Mexico. The United States appeals from a summary judgment for the lessee-appellee construing the pertinent provisions contrary to the administrative construction and application. These leases were issued pursuant to the so-called Potassium Act of February 7, 1927, 44 Stat. 1057, 30 U.S.C. § 282, and in accordance with the statute provided for a royalty of 3½ percent of the gross value of the "output of the lease deposits * * * at the point of shipment to market.".¹ Such royalty was to be "paid monthly in cash or delivered in kind at the option of the lessor." In accordance with pertinent regulations,² it was "expressly agreed that the Secretary of the Interior may establish reasonable minimum values for the purpose of computing royalty on any of the lease deposits, due consideration being given to the highest price paid for a part or majority of the production of like quality products from the same general area, the posted price and other relevant matters."

In the mining operations under the leases the appellee, like other lessees in this area, crushed the ore at or near the face of the mine and hoisted it to the surface where it was treated and refined to produce potassium and potash commercial products. These products were then sold f. o. b. at or near the mine site at posted prices ranging from about $35 per ton for potassium sulphate, $21 per ton for muriate of potash, and $3.50 per ton for finely crushed, but unrefined, ore, commonly called manure salts. The prices varied in accordance with the grade or degree of fineness of the product, and royalty was paid and accepted on the gross value of the particular product produced and sold by the lessee.

The National Potash Company, another lessee in the same area, needed Southwest's high grade ore to blend with and upgrade its low grade ore in the refining processes. Southwest contracted with National to sell it about five million tons of high grade crude ore, to be delivered over a five-year period, for $2.75 per ton f. o. b. The ore was to be produced and sold under the contract in connection with appellee's other regular mining operations and commitments. Unlike manure salts, it was delivered exactly as it came from the mine as crude potash ore. It is admittedly a unique transaction in the industry in this area, but no one questions the bona fides of the transaction.

Prior to the consummation of the contract, Southwest informed the Regional Mining Supervisor in New Mexico of the proposed contract, stating in detail the underlying economic reasons for the sale, and suggesting that though the government's royalty would be less because of the sales price, it would be ultimately advantageous and in the interest of conservation. The Regional Supervisor made no objection to the consummation of the contract, but insisted that the royalty from the contracted ore "must be computed and paid by Southwest on the same basis as if the ore were refined and products obtained therefrom marketed by Southwest". The reasons for the Supervisor's position were (1) that the acceptance of the royalty on the basis of the contract price of the ore would amount to a reduction in the royalty income as compared to the royalty on the value of the products then being produced and sold by the lessee; and (2) that it would be discriminatory against other lessees then producing and selling other highpriced products. The Supervisor pointed out that to his knowledge, there had never been a similar situation in the Carlsbad area; and that the sale could not be construed as a sale of manure salts since National did actually market refined products from the ore.

On appeal the Secretary of Interior affirmed the Regional Supervisor, concluding that the Department was "entitled to maintain its royalty position," that is, to require that its royalty return not be diminished as a result of such disposal. The Secretary was moreover of the view that to acquiesce in this "noncustomary" disposition of the ore would amount "in effect to a modification of the lease terms contrary to the interest of the United States." Thereafter the Regional Supervisor informed Southwest that pursuant to the decision of the Secretary the royalty due the United States on the crude ore tonnage sold to National would be computed on the basis of the mean average of the gross value of the refined products of like ore actually sold by Southwest for the current month.

After agreeing with National that if the Secretary's position were finally sustained, the parties would bear equally the added royalty burden, appellee proceeded to perform its contract with National. At first it paid, under protest, monthly royalties computed on the basis of the value of the refined product of the ore. Later, it accounted for the royalties only on the basis of the contract price.

The government filed this suit to recover the difference between the royalties computed on the basis of the refined products of the ore and the contract price. The lessee moved for summary judgment on the basis of answers to interrogatories and affidavits. The government first opposed summary judgment, but after amending its complaint to recover the royalties to the date of judgment and for cancellation of the lease for breach of its terms, itself moved for summary judgment. Inasmuch as the decision of the Secretary and of the trial court turned on construction of the lease contract, the case was ripe for summary judgment.

The trial court's summary judgment for the lessee is premised squarely on full recognition of the Secretary's undoubted power and authority to administratively construe the lease contract in consonance with underlying statutes and regulations and of his wide discretion under the lease to establish reasonable minimum values for the purpose of computing royalty on any of the "lease products" after giving due consideration to the highest price paid for the production of like quality products from the same area. The court was of the view, however, that in the exercise of this broad discretion, the Secretary was confined to the establishment of minimum values on lease products actually produced and sold, and that he was "plainly wrong" in his interpretation of the contract and underlying regulations requiring the lessee to pay royalty on the basis of the reasonable value of refined products it did not actually produce and sell. In arriving at this decision the trial court was impressed by that portion of the lease agreement which provides for royalty in cash or in kind, at the option of the lessor, and reasoned that if the Secretary had elected to take its royalty in kind, he could not have required the lessee to refine and process it for purposes of computing royalty. The court was also influenced by a prior ruling of the Geological Survey affirmed by the Secretary involving similar royalty provisions of another...