## Facts

- Landowners in Floyd County, Kentucky executed two coal mining leases providing (1) tonnage royalties on coal mined and sold and (2) escalating annual minimum royalties due each year regardless of production.
- The parties understood at contracting that the coal was of relatively poor quality, but they still agreed to the minimum royalty provisions.
- The original lessee later became bankrupt; the leases gave the lessors a contractual right to declare the leases void upon bankruptcy.
- The lessee’s interests were assigned to Mountain States Coal Corporation, which mined only small quantities, paid tonnage royalties on coal it did mine, and did not pay annual minimum royalties.
- Mountain States argued it owed no minimum royalties because (a) there was no mineable/merchantable coal as contemplated by the parties, and (b) the leases had been voided or effectively terminated after the original lessee’s bankruptcy, allegedly reflected by a lessor’s oral statement permitting Mountain States to mine “whatever it could find.”
- The trial court entered judgment for Mountain States, denying the lessors’ claim for unpaid minimum royalties; the lessors appealed.

## Issues

1. Whether annual minimum royalties are excused when coal exists but later becomes unprofitable to mine due to market conditions, given the parties’ knowledge of coal quality at contracting.
2. Whether the leases were terminated or voided by the original lessee’s bankruptcy and the lessors’ alleged post-bankruptcy conduct or statements, relieving the assignee of minimum royalty obligations.

## Decision

- The Kentucky Court of Appeals reversed the judgment for Mountain States and remanded.
- The court held the assignee remained obligated to pay annual minimum royalties so long as the coal seams existed in substantially the quantity and quality known to the parties when the leases were made, even if mining later became unprofitable because of market conditions.
- The court rejected the claim that the leases had been voided or terminated by the bankruptcy clause or by an informal oral understanding; no clear exercise of the contractual right to void, nor a sufficient rescission or modification, was shown.

## Legal Principles

- A mineral lease may contain an implied condition relieving a lessee from minimum royalties when no workable or merchantable seam exists and reasonable, diligent efforts to locate such a seam have failed.
- That implied condition is limited to failure of the leased resource (nonexistence or nonworkability), not to later economic unprofitability caused by market changes where the parties contracted with knowledge of the resource’s characteristics.
- Minimum royalty provisions generally allocate market risk to the lessee; continued existence of the leased seam in the contemplated condition sustains the obligation to pay.
- A contractual right to void or terminate a lease (including upon bankruptcy) must be clearly exercised; ambiguous conduct or informal statements do not extinguish written minimum royalty obligations absent clear cancellation or a valid modification.

## Conclusion

The court enforced the leases’ annual minimum royalty clauses against the assignee because the coal remained in the condition contemplated at contracting and later market unprofitability did not excuse payment; the lessors’ bankruptcy-related rights were not clearly exercised and no effective rescission or modification displaced the written royalty obligations.


Browning v. Mountain States Coal Corp., 338 S.W.2d 220 (Ky. Ct. App. 1960)