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Dethloff v. Zeigler Coal Co.

OPINION FILED FEBRUARY 28, 1979.

PHILLIP A. DETHLOFF ET AL., PLAINTIFFS-APPELLEES AND CROSS-APPELLANTS,

v.

ZEIGLER COAL COMPANY, DEFENDANT-APPELLANT AND CROSS-APPELLEE.



APPEAL from the Circuit Court of Douglas County; the Hon. JAMES N. SHERRICK, Judge, presiding.

MR. JUSTICE MILLS DELIVERED THE OPINION OF THE COURT:

Mr. JUSTICE MILLS delivered the opinion of the court:

Coal lease.

Verdict for plaintiffs: $4,019,867.08.

We affirm upon remittitur to $1,573,455.57. Otherwise, we reverse and remand for a new trial.

This will be a long opinion. The facts are prolix and complex, but their tiresome recitation is requisite to a hopefully lucid discussion of the substantial issues before us on appeal.

On June 20, 1945, the Dethloffs' predecessors in title executed a mining lease in favor of Zeigler's predecessors in title. The lease covered a 40-acre tract located in Douglas County, Illinois, and by its terms, pertained to "all of the coal lying in or under" that property. Plaintiffs acquired their title to the property as joint tenants on October 18, 1969, for a payment of $20,000, and it is agreed by the parties that the mining lease was in full force and effect at least until the time of the conveyance of October 18, 1969. Through various mergers and name changes, Zeigler is the present lessee.

The Dethloffs sued Zeigler as follows: Count I sought compensatory damages for a trespassory taking of coal commencing on or about January 10, 1976; count II asked for punitive damages for the trespass based upon the alleged wilful, malicious and deliberate actions of Zeigler; count III prayed for a declaration that the mining lease expired by its own terms solely because there had been no mining or removal of coal from the premises by Zeigler prior to June 20, 1970 (which was 25 years after the lease was executed). Zeigler's answer denied the material allegations and asserted the affirmative defenses of laches and unreasonable delay, estoppel and accord and satisfaction.

A hearing before the circuit court on count III (terms of the lease) was held on September 14, 1977. It was established that Zeigler's mining operations commenced on the leased property in January 1976. Mr. Dethloff testified that at the time of acquisition of the property he knew of the existence of the mining lease and was aware of the terms of the lease. Sometime in 1971, plaintiffs' attorneys commenced correspondence and negotiation with the defendant respecting the lease in question and in July of that year H.E. Wenninger, general mine manager, was directed to contact plaintiffs' attorneys. In approximately May 1975, Dethloff went to Zeigler's Murdock, Illinois, offices where he learned from an employee of defendant that within perhaps a year mining operations would be commenced under plaintiffs' land. Dethloff then recontacted one of his attorneys. An advance royalty payment and a transmittal letter (bearing date of March 25, 1976) from defendant were received by plaintiff and placed in his lock box, since he considered them to be evidence of mining a certain quantity of coal. He did not cash the check. Other similar checks and transmittal letters reflecting production of coal by defendant from the land in question were subsequently received by Dethloff and similarly handled.

George P. Latchford III (called by plaintiffs under section 60) testified that he had been a licensed attorney in Illinois since 1955 and was senior vice president of finance and general counsel for Zeigler, a position that he had held since about May 1973. He knew on June 2, 1975, that plaintiffs had taken the position (as early as 1973) that the mining lease had previously expired and he was still of the opinion, as he was in 1972, that the defendant should proceed under the lease and he intended to recommend to defendant to go forward with mining operations. He said that the first time coal was mined under plaintiffs' property was in January 1976, and the first royalty check was March 25, 1976. He allowed as how the royalty check and transmittal letter were probably the first notice to the plaintiffs that coal was in fact being mined. Zeigler continued its mining operations under plaintiffs' land, notwithstanding receipt of the original of plaintiffs' exhibits 13-16, and notwithstanding receipt of papers commencing the present litigation. Plaintiffs' exhibit 15 is an opinion of counsel relating to the mining lease in question rendered on or about November 30, 1973, to defendant.

On direct, Latchford testified that Zeigler has never received from plaintiffs a copy of their deed of conveyance and received no instructions subsequent to 1969 with respect to payment or the depositing of advance royalties or delayed rentals; that the coal mine (of which the underground portion of plaintiffs' land formed a part) is approximately 200 feet below the surface, deploys four operating units or four separate sets of equipment and is equipped to wash coal; that modern equipment is used and underground haulage is accomplished by electrically driven belts; that the coal is raised to the surface by the same method as a slope belt; that the production capacity of the mine is about 1,500,000 tons per year; that there are at least 5,000-6,000 acres of ground under lease as part of the mining operation; that many acres under lease are necessary to economically justify investment in a mine; and that obtaining mining leases was relied upon prior to initial installation of the mine. (There was an offer of proof that large sums of money had been invested in the mine, that approximately 350 people are employed at the Murdock Mine, and that several miles of mining corridors were present in the mine, but the circuit court rejected the offer.)

The circuit court opined that there was no ground for legal action by plaintiffs until the knowledge of the alleged trespass was known and that he saw no laches or estoppel. His written order declared that the lease expired by its own terms on June 20, 1970, at the end of 25 years. Defendant filed a motion for rehearing and to vacate the judgment, and plaintiffs filed a motion to strike. Defendant, over objection of plaintiffs, presented testimony by offers of proof (a chief mining engineer, a mining expert, and an accountant), which were rejected by the circuit court. Motion for rehearing was denied and the trial judge sent a letter to counsel of record setting forth the reasons for his rulings. In that memorandum he indicated that the "basic problem" presented in count III was "the meaning" of the clause referring to a specific 25-year term, stated that under Illinois law there is an implied covenant to produce within a reasonable time, found that the language in the instant mining lease was almost identical to language used in standard oil and gas leases, and held that: "I believe this clause has universally been construed to grant the right to produce within the stated term and to continue production for so long as there is any oil. If production is not attempted on the premises within the term, the lease expires."

Thereafter, Zeigler moved to transfer venue of the case to Piatt County and for summary judgment on count II (punitive damages). Over 200 affidavits in support of the petition for transfer of venue were filed by Zeigler, and plaintiffs filed six affidavits in opposition. The circuit court denied transfer of venue and allowed summary judgment on count II.

The cause went to jury trial on count I (compensation for trespassory taking of coal). In chambers prior to voir dire the Dethloffs argued their motion to strike Zeigler's affirmative defenses (laches, estoppel, accord and satisfaction) which — over objection — the circuit court allowed. In the course of the argument on plaintiffs' motion in limine (which would exclude defendant's evidence of good faith), they moved to amend by omitting language from count I reading "* * * knowingly, wantonly and wilfully, and with force and arms," and there being no objection by defendant, it was allowed. The operative language of count I was reduced to "Defendant * * * broke and entered said vein of coal * * *." The trial judge ruled that once the plaintiffs had communicated to defendant a claim that the lease had expired, any mining thereafter could not be in good faith, and the question of whether there was good faith or not was not for the jury, but for the court. The motion in limine was allowed. (The motion for change of venue was renewed, but again denied.)

Upon trial, the evidence may be compressed and summarized like this:

GEORGE SEAMAN (surveyor for Zeigler): testified as to measuring the quantity of coal taken; coal is weighed when sold or shipped; it is possible for the amount of coal mined to be computed from the figures he recorded in field book #6.

ROBERT HINKLE (mine superintendent): all coal goes through a rotary breaker for sizing and discharge of impurities; some is crushed, some washed; raw coal is coal that has gone through the breaker and the crusher.

THOMAS G. CORMAN (vice president and comptroller of Zeigler): testified as to sales prices realized by defendant; an average sales figure of $19.88 per ton; this is determined by dividing the total dollars realized by defendant by the tons sold to arrive at an average price; the figure is an "arithmetical" average of the number of contract prices, divided by the number of customers; the figure is also stated as $19.33.

(Over objection, Zeigler's answer to a written interrogatory was read to the jury: The cost of loading and hauling coal from the place where mined to the foot of the shaft is $1.038 per ton.)

ROY HELFINSTINE (head of the Mineral Section, Illinois State Geological Survey — over objection, read from the evidence deposition): Two exhibits are part of sulphur reduction of Illinois coal washability studies; Part I refers to samples taken from 1967 to 1969, including samples from the Murdock Mine; washability tests were made under his supervision and direction.

GEORGE EADIE (mining engineer and professor): by his calculations, 5,610,030 cubic feet of coal had been removed from plaintiffs' property; coal has a weight of 85 pounds per cubic foot; cubic footage multiplied by weight gives 238,426 tons as the amount of coal removed; this is untreated, raw coal; figures are subject to a margin of error of 1.5%. (He apparently bases the weight figure on the tests run under Helfinstine's direction.)

Plaintiffs rested. Defendant's motion for directed verdict was denied.

CLAYTON SLACK (vice president for engineering of Zeigler): the marketable tonnage extracted from plaintiffs' tract was 215,247.40 tons.

THOMAS G. CORMAN (comptroller): by offer of proof, attempted to show Zeigler's costs of mining. (The evidence was excluded.)

GEORGE P. LATCHFORD (corporate counsel): evidence of the good faith nature of Zeigler's actions; he was aware of a potential dispute over the lease before 1973; the lease was examined by a "land lawyer" employed by Zeigler, by Latchford himself, and by outside counsel; all three concluded that the lease was valid and would continue beyond 25 years; corporate records show royalty payments to the Dethloffs; a similar suit was brought in Douglas County in 1974 but was dismissed; no payment was made to that claimant by defendant; the Dethloff coal either had to be mined sequentially by Zeigler or not at all, because once having passed, the engineering people advised that they could not go back for it.

MACK H. SHUMATE (offer of proof): only way for plaintiffs' parcel to have been mined was for defendant to mine it; exploration showed that the coal was thin, with a bad roof, and was questionable.

HAROLD E. WENNINGER (general mine manager): in 1976 the royalty offered for coal leases was 15 cents per ton.

SCOTT L. ROGERS (vice president of marketing for Zeigler): offer of proof; all of the Murdock Mine product for 1976 was sold; all was prepared to some extent; none was sold from the mouth of the mine; coal, as it was at the mouth of mine, could not be marketed.

ELMER C. HILL (coal broker): offer of proof; coal as it was at the mouth would not be marketable, unless a steam electric plant was located very near the mine.

CHARLES LINKE (an economist and professor): offer of proof; he was familiar with measurement of losses from an economic standpoint; legal rules are not always consistent with economic reality; he measured plaintiffs' loss as worth 15 cents per ton.

The jury returned a verdict for plaintiffs of $4,019,867.08 and judgment was entered accordingly. Defendant appeals from the declaratory judgment (count III) and the jury's money judgment (count I), and plaintiffs' cross-appeal the summary judgment (count II).

TERM OF THE LEASE

The cardinal issue in this appeal pivots on the construction of the habendum clause of the Dethloff-Zeigler Coal Company lease:

"This lease shall be and continue for the term of 25 years from and after the date hereof, and for so long thereafter as shall in the opinion of lessee to be necessary to mine and remove all of the coal in and under the above described leased land and other lands in the vicinity thereof, or included in the block of leased coal hereinafter referred to, unless the lease is sooner terminated as hereinafter provided and unless in the opinion of the lessee the coal which can be economically mined in accordance with good and accepted mining practices from said lands shall be sooner exhausted. It is expressly agreed, however, that the rents and royalties hereinafter provided for shall not be payable after such coal in and under the above described real estate hereby leased cannot be economically mined, as aforesaid. But the right to remove coal and other materials from other lands through any underground ways and entries in said above described leased lands, which rights are hereby expressly granted, shall continue, as an extension of this lease, free of rents and royalties as long as the lessee shall desire to have or use the same, even though all coal economically and practically minable shall have been mined and removed from the above described leased lands, even though the said term of 25 years shall have expired."

The trial court's declaratory judgment held that the lease had terminated by its own terms on June 20, 1970. As already noted, the trial judge held that under Illinois law there is an implied covenant to produce within a reasonable time, and if production is not attempted on the premises within the term, the lease expires.

A. SELF-EXECUTING EXTENSION CLAUSE?

Production of coal from plaintiffs' land occurred 31 years after the lease was executed. Defendant urges this court to construe this lease as a freehold, contending that by mining in the "vicinity" of plaintiffs' premises within the 25-year term, it has complied with the implied covenant to produce. Plaintiffs, however, contend an estate on special limitation was granted, which expired by its own terms on June 20, 1970.

Plaintiffs cite to us the Oregon case of Fremont Lumber Co. v. Starrell Petroleum Co. (1961), 228 Ore. 180, 364 P.2d 773. The mineral lease involved there had a term "`* * * for * * * 5 years * * * and as long thereafter as oil, gas or other mineral is produced from said land * * *.'" (228 Ore. 180, 186, 364 P.2d 773, 776.) The defendant-lessee argued that the thereafter clause was a condition subsequent which required notice before the lease would terminate. Agreeing with plaintiff-lessor, however, the court found it to be a 5-year lease on special limitation, with the incident of automatic termination at the end of the primary term unless production was occurring at that time.

The Fremont case, incidentally, contains an excellent discussion of the similarities between mining and oil and gas leases, as well as a lucid review of "unless" leases, special limitations, conditions subsequent, "drill or pay" provisions, primary terms and indefinite terms, "thereafter" clauses, and the legal meaning of "mine" and "mining."

The Supreme Court of Pennsylvania in Pape v. Hughes (1960), 398 Pa. 436, 158 A.2d 547, interpreted a lease which provided for:

"* * * the sole and exclusive right and privilege of mining, removing and marketing of minerals and material, including gravel, sand, clays, stone and ore * * * for a period of 5 years, `and for such additional longer period as the hereinbefore mentioned minerals and materials may be found on the premises * * * in sufficient quantity as to be profitable commercially to remove, the duration of said extended period to be determined by the' grantee." 398 Pa. 436, 437, 158 A.2d 547, 548.

In the landowner-lessor's action to quiet title, the Pennsylvania court found as a matter of fact that at the end of the 5-year period specified in the lease, minerals were not found on the premises in sufficient quantity to be removed profitably and that the lease expired at the end of the 5-year period. The condition upon which the lease was to be extended beyond the initial 5-year period was that a commercially profitable quantity of minerals be found and that that condition exist at the end of the 5-year base term.

A similar analysis was applied by this court in Metz v. Doss (1969), 114 Ill. App.2d 195, 252 N.E.2d 410. The lease, dated July 29, 1956, provided for a primary term of 1 year and as long thereafter as oil or gas or either of them is produced from said land by lessee. A well was drilled within the primary term and gas was encountered, but there was no commercial production of gas from the lease at any time. Lessees then attempted to develop the area as a gas storage reservoir. Under the terms of the lease, lessor was entitled to have the lease terminate at the end of the primary term unless there was production. Plaintiff-lessor sought a release of record of an oil and gas lease, and the trial court granted plaintiff summary judgment.

An oil and gas lease was also involved in Morris v. Mayden (1976), 35 Ill. App.3d 338, 340, 341 N.E.2d 428, 429. Plaintiffs owned an executory interest in one-half of the oil, gas, and other minerals beneath property they owned in fee that was to become possessory upon the termination of the oil and gas lease between defendant Mayden and the Pure Oil Company. The lease, executed in April 1936, was to "* * * remain in force for a term of 10 years from this date, and as long thereafter as oil or gas or either of them is produced from said land by lessee." In the absence of any allegation that production had ceased from such land, the trial court dismissed on the ground that plaintiffs failed to show a present interest in the oil and gas.

• 1 The distinction of an estate on condition subsequent (urged by defendant) and an estate on special limitation (argued by plaintiffs) is primarily the requirement of notice. While an estate on limitation will terminate automatically, an estate on condition subsequent continues until notice that the conditions will be enforced. Zeigler argues that the Dethloffs' failure to provide notice of termination as provided in the lease leads to the conclusion that the lease was in full force and effect at the time of production. However, the notice provisions in the lease are in reference to default or breach on the part ...


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