## Facts

- A 1969 mineral lease required the coal lessee, Peabody Coal Company, to pay royalties calculated on the coal’s “sales price.”
- In the 1970s, federal law imposed two per-ton charges on coal: a Black Lung excise tax and a surface-mining reclamation fee, each subject to statutory caps tied to coal value.
- Beginning in 1983, Peabody also billed customers a 25¢ per-ton “mine closing and final reclamation payment.”
- Peabody’s invoices itemized (1) a per-ton coal charge and (2) separate line items for the two federal charges and the mine-closing fee.
- Peabody computed royalties using only the invoice line item labeled as the coal price, excluding the two federal charges and the mine-closing fee from the royalty base.
- Assignees of the lessors’ royalty interests sued in federal court (diversity jurisdiction) for breach of contract and alleged fraud.
- The district court granted summary judgment to plaintiffs on contract interpretation, rejected the fraud claim, and applied a shorter Indiana limitations period (with an added two years based on plaintiffs’ participation in an earlier, unsuccessful class action), awarding underpaid royalties and prejudgment interest.
- On appeal, Peabody challenged the inclusion of the charges in “sales price,” the limitations/damages period, and raised diversity pleading issues; plaintiffs sought to preserve the judgment.

## Issues

1. Whether “sales price” under the lease includes mandatory per-ton federal charges and Peabody’s per-ton mine-closing fee when those amounts are passed through to purchasers on invoices.
2. What Indiana statute of limitations governs claims for underpaid coal royalties, and whether the damages period could be extended based on plaintiffs’ prior participation in a failed class action.
3. Whether diversity jurisdiction was adequately pleaded and, if not, whether defective allegations could be cured by amendment on appeal, including where a national bank sued as trustee.
4. Whether Peabody’s invoicing and royalty-payment practices supported a fraud claim in addition to breach of contract.

## Decision

- The Seventh Circuit found diversity jurisdiction proper after correction of defective jurisdictional allegations under 28 U.S.C. § 1653 and clarification of citizenship for the trustee plaintiff.
- The court agreed with the district court that the two federal per-ton charges and Peabody’s per-ton mine-closing fee were part of the coal’s “sales price” for royalty purposes because purchasers had to pay them to obtain coal.
- The court affirmed rejection of the fraud claim, treating the dispute as contract interpretation rather than actionable misrepresentation.
- The court applied Indiana’s shorter limitations approach for recurring payment obligations (analogous to rent) rather than a 20-year written-contract period and limited any enlargement of the recovery period absent a valid tolling basis.
- The judgment was affirmed in part and reversed in part to the extent the damages/limitations calculation exceeded what Indiana law allowed.

## Legal Principles

- When a royalty clause uses “sales price,” the relevant measure is the total mandatory consideration required from the buyer to obtain the product, not the seller’s invoice labels or accounting categories.
- Per-unit taxes and fees that a seller passes through to purchasers as a condition of sale may be included in “sales price” for royalty computations, even if separately itemized and even if imposed after the lease was executed.
- Under Indiana law, claims for recurring royalty underpayments may be treated like periodic payment claims (similar to delinquent rent) and governed by a shorter limitations period than the period for written-contract actions.
- Participation in other litigation does not extend a state limitations period in federal diversity cases without a valid state-law tolling doctrine.
- In diversity cases, jurisdictional allegations must plead citizenship (not residence), but defective allegations may be amended under 28 U.S.C. § 1653 when jurisdiction in fact exists; for a trust litigated by a trustee, citizenship is determined by the trustee.

## Conclusion

The court held that a coal lease royalty based on “sales price” required royalties on mandatory per-ton charges paid by purchasers—including passed-through federal charges and a per-ton mine-closing fee—while limiting recovery to the applicable shorter Indiana limitations period and rejecting fraud, and it allowed amendment to cure defective diversity allegations where complete diversity existed.


Hemenway v. Peabody Coal Co., 159 F.3d 255 (7th Cir. 1998)