Contract – Royalty Payments

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7^th Circuit Court of Appeals

Case Name: Pronschinske Trust v. Kaw Valley Companies, Incorporated, et al.

Case No.: 17-2889

Officials: BAUER, EASTERBROOK, and ROVNER, Circuit Judges.

Focus: Contract – Royalty Payments

In June 2012, Ivan and Beverly Pronschinske through their trust, the Pronschinske Trust Dated March 21, 1995 (hereinafter “Pronschinske”), entered into a Mining Leasing Agreement (“the lease”) with Kaw Valley Companies (“Kaw Valley”). The land owned by Pronschinske contained frac sand, useful to gas and oil fracking operations, and the lease gave Kaw Valley the right to mine the sand, stone and rock products, but also provided that it was not obligated to extract any materials or sell any product by virtue of the lease.

Pronschinske argues that the italicized language reflects a stand‐alone requirement of a minimum annual payment of $75,000 beginning with the first anniversary of the Effective Date, regardless of what actions are taking place on the property. It reads the “[n]otwithstanding anything to the contrary contained herein” language as meaning that its location in paragraph 6 is irrelevant and that it represents a minimum annual payment unconnected to Production Royalties generally. Kaw Valley, however, argues that the “notwithstanding” language references the paragraph in which it is found, and should be read as stating that notwithstanding the calculation of Production Royalties in this paragraph, a minimum payment of $75,000 is owed once the Production Royalty provision is triggered. In other words, Kaw Valley argues that it merely sets a floor for Production Royalties once owed, which applies only when product begins to be mined from the property as set forth in paragraph 6.

Moreover, that reading cannot coexist with the first sentence of paragraph 6, which states that a Production Royalty of $1.50/ton should be paid for the first 65,000 tons of sand, stone and rocks mined “in satisfaction of the offset requirements for the Initial Royalty Credit and Commencement Royalty Credit,” and thereafter a royalty of $2.50 per ton is to be paid. That paragraph therefore alters the payment of the mined products by $1 per ton for the first 65,000 tons, thus reducing the payments due to the Lessor by $65,000. That $65,000 is the amount owed to offset the $20,000 Initial Royalty Credit and the $45,000 Commencement Royalty Credit; yet if the Minimum Production Royalty applied as a minimum annual payment from year one, those credits would have already been offset in the year that they were paid – by deducting them from that Minimum Royalty Payment for the year. Paragraph 6 sets forth that payment amount without exception and without any provision for the possibility that some of the credits would have been offset already, thus making clear that until that time the credits would not have been offset by any other payments. That payment scheme is thus inconsistent with a reading of the lease that would recognize an annual minimum payment due from the start of the lease. See DeWitt Ross & Stevens, S.C. v. Galaxy Gaming & Racing Ltd.

Pʹship, 682 N.W.2d 839, 849 (Wis. 2004) (“[c]ontracts must be read in such a manner as to give a reasonable meaning to each provision and without rendering any portion superfluous.”) Finally, paragraph 9 of the lease provides that: “[t]he royalties payable under paragraph 6 and paragraph 7 shall be payable based on the removal from (or transportation across) the Property.” That sentence creates no exception for the Minimum Royalty Payment, and reinforces the reading of paragraph 6 as providing for a minimum payment only once product is mined from the property. Accordingly, the district court properly held that Kaw Valley did not owe any Production Royalty payments to Pronschinske, and its determination is consistent with the clear language and structure of the lease.

Affirmed

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.