Opinion ID: 1830892
Heading Depth: 1
Heading Rank: 4

Heading: coal sales and washer loss

Text: The special master noted in his findings that the coal which DTK began mining in January 1975 was shipped to the Black Diamond Coal Mining Company washer under Burgess Mining's contract. (A washer separates the coal from rock, clay, dirt, and high ash material, and the reduction in weight because of the removal of these extraneous items is referred to as washer loss). He found that after being weighed, DTK's coal was commingled with Burgess Mining's coal and washed and that Black Diamond made monthly weight reports to Burgess Mining which showed the amount of coal received from each pit, and the amount of coal washed, as well as the percentage of washer loss of all the coal washed that month. The computations, according to the special master, assumed that DTK and Burgess Mining coal possessed the same percentage of washer loss as the percentage for their coal combined. Burgess Mining and DTK received separate checks every month from Black Diamond for the purchase of coal each month. When DTK began mining coal in January 1976, the base price per ton of coal was $20.46, with a bonus of 25 cents per ton for every one percent under twenty-five percent of washer loss, and a penalty of 25 cents per ton for every one percent over twenty-five percent of washer loss. During the time DTK was mining coal under the Black Diamond contract, Black Diamond paid the Alabama severance tax and all the royalties due the United Mine Workers of America (UMWA). Black Diamond resold the coal it purchased from Burgess Mining and DTK to United States Steel Company (U.S. Steel). In June of 1976, U.S. Steel terminated its contract with Black Diamond and contracted with Burgess Mining to supply the company with coal. The formal contract executed between U.S. Steel and Burgess Mining on November 1, 1977, provided for a base price of $31.38 per ton of washed coal and a bonus or penalty based upon moisture and ash content, but no adjustment for washer loss. In addition to other requirements and restrictions, the contract provided that U.S. Steel would reject any coal that did not conform to certain specifications for ash and sulphur content, and a quality known as the free swelling index (FSI). Moreover, Burgess Mining was required to produce a specified amount of washed coal per month. In his findings, the special master noted that after July 1, 1976, Burgess Mining purchased all of the coal produced by DTK and resold it to U.S. Steel, yet continued to deliver the coal to the Black Diamond washer along with the coal it produced. Beginning in the summer of 1976, DTK mined the Atkins Seam. The special master made the finding that A.E. Burgess wanted DTK to mine this particular seam because of the bottom layer of the seam which had a low ash content and a good FSI rating, despite the fact that the Atkins Seam produced higher washer loss than other seams. Subsequent to DTK's mining the Atkins Seam, A.E. Burgess complained to Lees about the excessive dirt in the coal. Accordingly, on instructions from A.E. Burgess, W.E. Prescott devised a formula for the price to be paid to DTK by Burgess Mining which, the special master concluded, was designed to force Lees to produce cleaner coal. This formula included a base rate of $20.46 per ton, with a penalty of $1.02 for each one percent over twenty percent washer loss, and no bonus. Charles Burgess computed the percentage of washer loss each month and reported it to T.H. Terrell, who in turn prepared monthly summaries of coal sales from DTK to Burgess Mining. The severance tax and royalties which had previously been paid by Black Diamond, were, after July 1, 1976, paid by DTK. Concerning the coal sales issue, the special master found that upon receiving the July 1976 monthly statement in August 1976, showing the computations under the revised formula, Lees complained to A.E. Burgess and some of the other partners about the price Burgess Mining was paying DTK for coal. Consequently, in September of 1976, a meeting of some of the partners took place in Charles Burgess's office. Although Lees was present, A.E. Burgess was not; however, A.E. Burgess had advised some of the other partners that were present at the meeting that DTK would be out of business unless it stopped shipping dirty coal. No action was taken at the meeting and the special master found that no minutes of the meeting were kept. At the time Lees complained to A.E. Burgess in August of 1976, he also informed Burgess that he was quitting as mine superintendent of DTK. At A.E. Burgess's request, however, Lees remained long enough to train a replacement and retired on December 31, 1976. Apparently at the request of Charles Burgess, A.E. Burgess agreed to adjust the price Burgess Mining paid DTK so that the penalty was not effective until the washer loss was over twenty-five percent. The other factors remained unchanged and the adjustment became effective on January 1, 1977. On July 1, 1977, U.S. Steel increased the base price it paid to Burgess Mining for coal. Subsequently, A.E. Burgess increased the base price Burgess Mining paid DTK from $20.46 to $21.46 per ton. The special master found that for coal sales to Black Diamond, DTK had a bonus in 1975 of $41,939.12 and a bonus of $31,869.61 in 1976. For sales to Burgess Mining, the special master found that DTK incurred a penalty of $245,006.01 in 1976, and a penalty of $44,588.37 in 1977. Concerning washer loss, the special master made a finding that Black Diamond operated a sampling program which it used to test the effectiveness of its washer and for other internal purposes. The testing program consisted of taking an occasional shovelful of coal from the top of a load while the trucks were being weighed, and placing the coal in a box. There was a separate box for each pit from which Black Diamond received coal, including a box for the pit operated by DTK. Each week, the contents of each box were mixed and five-pound samples then taken to Black Diamond's laboratory, where they were tested for various purposes, including washer loss. The special master found that these tests did not conform to the American Society for Testing and Materials (ASTM) standards, the generally accepted standards for testing in the industry, although the tests did conform to the usual practices in the southeast for the purpose of inhouse testing, the purpose for which the tests were used. Black Diamond's weekly lab reports of these tests for DTK coal which were introduced as evidence by Burgess Mining, indicated that DTK's coal had a higher washer loss than that shown by the procedure used for determining payment. Using the results of these reports and the appropriate formulas for pricing, the special master calculated that DTK would owe Burgess Mining $1,192,008.08. He found, however, that Black Diamond's reports were based on an inadequate number of samples and were not routinely made known to either DTK or Burgess Mining, and therefore, concluded that the reports were never used or intended to be used for coal payment computations. The special master further concluded that had the Black Diamond agreement continued, Burgess Mining would be indebted to DTK for washer loss adjustments in 1976 of $236,809.40, and in 1977 of $27,871.41. In addition, Black Diamond would have paid severance taxes of $2,678.80 in 1976, and $8,395.42 in 1977, and UMWA royalties of $33,936.11 in 1976, and $72,774.00 in 1977, which DTK was otherwise forced to pay. Based on these findings, the special master made the following recommendations concerning coal sales and washer loss, which the circuit court accepted: The pricing arrangements by which Burgess Mining paid DTK for coal was determined solely by A.E. Burgess, and was not an arm's length transaction. Neither Lees nor DTK is bound by the arrangement. The basis on which DTK sold coal to Black Diamond as it related to washer loss, severance taxes and UMWA royalties was fair and reasonable at the time DTK sold to Black Diamond and was also a fair and reasonable basis for determining price when DTK sold coal to Burgess Mining. The plaintiffs are entitled to the relief prayed for [in] counts two, three and four against Burgess Mining for the difference between what was actually paid and the amounts that would have been paid, had the Black Diamond arrangement continued. Burgess Mining is not entitled to recover on the claims set out in paragraph 6 of its counterclaim. The amounts due DTK by Burgess Mining for these adjustments totaled: 1976 1977 Washer Loss $236,809.40 $ 27,871.41 Severance Tax 2,678.80 8,395.42 UMWA Royalties 39,936.11 72,774.00 ___________ ___________ $279,424.31 $109,040.83 Thus, the special master recommended that a judgment be entered on behalf of Lees against Burgess Mining in the amount of $32,383.16. DTK's income adjustment in accordance with the special master's findings and recommendation and Lees's distributive share appear in Figure I. Burgess Mining asserts that the judgment against it for coal sales is due to be set aside. Although Burgess Mining admits that DTK received less per ton under the July 1, 1976, contract signed by W.E. Prescott as managing partner for DTK, it argues that there is no evidence to sustain the finding that the price and terms of the Black Diamond contract, had it continued in force, represented the fair market value for the period of July 1, 1976, to October 1977. The special master's findings and his recommendation based on those findings are substantiated by the unique circumstances of this case. After July 1, 1976, Burgess Mining purchased all of the coal produced by DTK and resold it to U.S. Steel. Although U.S. Steel's contract with Burgess Mining provided for a base price of $31.38 per ton for washed coal and a bonus or penalty based upon moisture or ash content, Burgess Mining continued initially to pay DTK the same as under the Black Diamond contract, i.e., $20.46 per ton, while substantially increasing the washer penalty and abolishing the washer bonus altogether. Moreover, DTK was required to pay its own severance taxes and UMWA royalties, which had previously been paid by the Black Diamond company. The Court interprets the special master's utilization of the Black Diamond agreement simply as a minimum price for purposes of effecting an accounting to restore to DTK the minimum washer loss adjustments to which he found the partnership entitled and which the Court believes he was authorized to do under the facts of this case. Consequently, the Court holds that the special master's recommendation is supported by the evidence. As for Burgess Mining's counterclaim for washer loss, the Court likewise considers that under the evidence presented, the special master was correct in disregarding the Black Diamond testing procedure, a procedure which the Black Diamond company used not for computing coal payments, but for its own internal purposes, because it did not conform to ASTM standards. Lees cross appeals as to the judgment entered in his behalf against Burgess Mining in the amount of $21,383.16, insisting that the judgment should have been entered against A.E. Burgess as well. He asserts that Burgess Mining's liability, as principal, cannot exist independently of A.E. Burgess's liability, as its agent, because it was A.E. Burgess as chief executive officer who did the things which led to the judgment against Burgess Mining. Indeed, this argument takes on added significance, as Lees suggests, in view of the fact that Burgess Mining is apparently a debtor under Chapter XI of the bankruptcy code. The judgment entered against Burgess Mining by the circuit court, as recommended by the special master, was not predicated on the legal theory of respondeat superior, however. See e.g., Larry Terry Contractors, Inc. v. Bogle, 404 So.2d 613 (Ala.1981). The judgment amount was instead an accounting of the amount which the special master found Burgess Mining had profited on the washer loss adjustments at the expense of DTK and ultimately at the expense of Lees as a member of DTK. There was no evidence to suggest that the washer loss adjustments taxed to DTK by Burgess Mining was being intercepted by A.E. Burgess, thus necessitating a recommendation by the special master that A.E. Burgess be disgorged of the washer loss adjustment paid to DTK by Burgess Mining. Consequently, the Court finds no merit in Lees's cross appeal concerning washer loss adjustments.