MAY (MILLICENT), ET AL. VS. JOHNSON FAMILY COAL, CO. , ET AL.
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CORRECTED: JULY 16, 2010; 10:00 A.M.
Commonwealth of Kentucky
Court of Appeals
NO. 2008-CA-001047-MR
MILLICENT MAY; RUTH BRUNING;
ROBERT CROOKS; TOM SELF; ROBERT
G. SELF; SYDNEY (SELF) PHILLIPS;
THELMA SEALS; GRETCHEN BOGAN;
MARJORIE WENDT; JANICE TANKSLEY;
WILLIAM C. ROBINSON; REBECCA Q. LOGUE;
JOHN H. ROBINSON; AND H.L. ROBINSON, JR.
v.
APPEAL FROM PIKE CIRCUIT COURT
HONORABLE STEVEN D. COMBS, JUDGE
ACTION NO. 02-CI-00104
JOHNSON FAMILY COAL CO.;
LINDA ANDERSON; AND
DR. WILLIAM JOHNSON
AND
APPELLEES
NO. 2008-CA-001072-MR
KENNY TRIVETTE; SIDNEY TRIVETTE;
MARILYN MAY; AND PATTY BLAIR
v.
APPELLANTS
APPELLANTS
APPEAL FROM PIKE CIRCUIT COURT
HONORABLE STEVEN D. COMBS, JUDGE
ACTION NO. 02-CI-00104
JOHNSON FAMILY COAL CO.;
LINDA ANDERSON AND
DR. WILLIAM JOHNSON
APPELLEES
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE: ACREE AND DIXON, JUDGES, GRAVES,1 SENIOR JUDGE.
ACREE, JUDGE: In consolidated appeals, Millicent May, et al., and Kenny
Trivette, et al., (collectively May and Trivette, or Lessors) seek reversal of a Pike
Circuit Court judgment that a coal lease between May and Trivette, as lessors, and
Johnson Family Coal Company (JFCC, or Lessees), as lessees, remains in full
force and effect. Because the judgment is not supported by substantial evidence
and is contrary to law, we reverse.
Facts and Procedure
This is the second time these parties have appeared before this Court
regarding the subject lease. See May v. Johnson Family Coal Co., 2003 WL
21554968 (Ky. App. July 11, 2003)( 2002-CA-001493-MR), disc. rev. denied May
12, 2004; hereafter “May I”). However, the prior appeal was from a different
judgment. Nevertheless, JFCC’s assertion that the doctrine of res judicata should
have barred the case now before us makes the prior case relevant to our decision
here. We will discuss May I as necessary.
On April 1, 1956, May’s and Trivette’s predecessors-in-title entered
into a coal lease with JFCC’s predecessors-in-title. The lease provided for
payment of a royalty of $0.25 per ton of coal mined by the parties. In 1965, the
1
Senior Judge J. William Graves sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statute(s)
(KRS) 21.580.
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lease was amended to reduce the royalty, but later informally amended to return
the royalty rate to the original figure and to allow for assignment or sublease by the
lessee. A minimum royalty of $2,000 per year was payable under the lease
regardless of the amount of coal mined. As successors, May and Trivette are
entitled to approximately half the subject mineral estate, and JFCC is entitled to the
other half. Consequently, in addition to the lessor-lessee relationship, the parties
are co-tenants.
Specific provisions of this lease largely determine the outcome of this
case. We here quote those provisions in pertinent part.
II. RENTS AND ROYALTIES
The Lessee agrees to pay to the Lessors [a certain
royalty] for each and every ton of coal mined and
produced from any other property not contained in this
lease which may be hauled through or over any of the
leased premises . . . until this lease is terminated.
. . . Lessees shall make a report to the Lessors at the end
of each and every month of the coal mined from or
hauled over or through the leased premises, during the
preceding month and the monthly tonnage and/or haulage
royalties shall be paid on the basis of said reports . . . but
it is understood and agreed that the amount of tonnage
royalties due under this lease shall be ascertained and
calculated at the end of each lease year by survey made
by a competent engineer approved by Lessors and the
royalty adjusted on the basis of said survey at the next
succeeding monthly royalty payment date after said
survey is completed, said survey and calculation to be
made at the expense of the Lessees.
III. MINING METHODS
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The Lessee agrees to pursue a plan of mining in
accordance with a plan projected by a competent mining
engineer [and] to maintain at all times a map showing
such plan and workings of the mine as it progresses, and
to furnish the Lessors a blueprint of same at the
commencement of mining and at least every six (6)
months . . . .
VII. TERMINATION
[F]ailure on the part of the Lessees to pay any installment
of rents or royalties herein for a period of thirty (30) days
after the due date thereof, or upon any breach of any
other covenants or conditions herein provided, this lease
shall automatically terminate and be canceled and no
forbearance or failure to declare a forfeiture or to enter
upon or repossess the leased premises on the part of
Lessors shall in any wise waive this provision or prevent
the cancellation or termination of this lease.
Additionally, section IX of the lease granted the Lessees, but not the Lessors, the
right to cancel the contract on ninety (90) days’ notice. And finally, the 1965 lease
amendment provided:
That the Lessee may assign or sub-lease any portion of
the lease coal without the written consent of the Lessors;
provided, a verified copy of any such assignment or
sublease is promptly furnished to [Lessors or their agent]
and provided further that no such assignment or sub-lease
shall relieve the Lessees from the obligations to pay
royalties or from any other provision of this Lease.
In 1992, JFCC entered into a sub-lease with Enterprise Coal
Company. Mining began during this time but ended in the mid-1990s. No claim
of abandonment was ever asserted.2 In 1997, JFCC provided to May and Trivette a
2
In fact, there were several periods, some of several years’ duration, in which no mining was
taking place. JFCC continued making the minimum royalty payment but, in the absence of
mining, and construing the lease as a whole, no compliance under sections II and III would have
been required under the lease and we suspect the Lessors did not expect them then.
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notice that its rights under the lease had been assigned,3 and in November 2000,
Pike-Letcher Land Company resumed the mining operation previously suspended.
From the inception of the lease, JFCC timely tendered all royalty
payments required by the lease. However, it is significant that, beginning with the
second payment tendered after Pike-Letcher resumed mining, around December
2000, May and Trivette expressed to JFCC’s attorney their refusal to accept royalty
payments, and those royalties have been held in escrow since that time.
In January 2002, May and Trivette filed an action against JFCC to
terminate the lease under section VII for JFCC’s failure to provide: (1) monthly
reports of the amount of coal mined (section II); (2) year-end reconciliation reports
performed by an engineer approved by May and Trivette (section II); (3) mining
maps upon the commencement of mining and every six months thereafter (section
III); and (4) notice of assignments of the lease (1965 amendment).
The case proceeded to trial before the court, Judge Charles E. Lowe
presiding, on October 31, 2002. Judge Lowe resigned from the bench before
rendering a judgment. Judge Steven Daniel Combs replaced Judge Lowe and, on
August 15, 2005, May and Trivette moved the circuit court for entry of judgment.
On May 26, 2007, JFCC filed a Motion for Court to Conclude Adjudication. The
Pike Circuit Court’s Findings of Fact, Conclusions of Law and Judgment were
finally entered on May 6, 2008.4 This appeal followed.
3
JFCC states in its brief that notice of the 1992 assignment to Enterprise Coal was given in 1997.
However, in the trial court’s ruling, JFCC gave notice of the assignment to Pike-Letcher in 1997.
4
We do not find it necessary to comment on this delay except to recognize it.
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May and Trivette assert the circuit court erred in two ways. First, they
claim that certain of the circuit court’s findings of fact lack the support of
substantial evidence. Second, they argue the court misapplied Cameron v. Lebow,
338 S.W.2d 399 (Ky. 1960), thereby committing reversible error. We agree with
both contentions.
Lack of Substantial Evidence for Certain Findings
When reviewing a trial court’s findings of fact, we apply the clearly
erroneous standard of review. Moore v. Asente, 110 S.W.3d 336, 354 (Ky. 2003).
Under this standard, the Court will uphold the factual findings of a trial court if
those findings are supported by substantial evidence on the record. OwensCorning Fiberglas Corp. v. Golightly, 976 S.W.2d 409, 414 (Ky. 1998).
Substantial evidence means “evidence of substance and relevant consequence
having the fitness to induce conviction in the minds of reasonable men.” Id.
May and Trivette claim seven of the trial court’s findings of fact lack
the support of substantial evidence. We will narrow the objections to those that are
necessary to our analysis.
One specific finding of fact merits particular attention. The circuit
court found that “all mining maps required under the Lease were provided by
JFCC to” May and Trivette. This is clearly contrary to the evidence. May’s and
Trivette’s agent under the lease presented uncontradicted testimony that from
November 2000 until after May and Trivette filed suit in January 2002, JFCC
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provided no maps whatsoever to May and Trivette. There is clearly no substantial
evidence supporting the circuit court’s finding to the contrary.
The circuit court’s error in this regard is not inconsequential. As a
condition of the right to continue mining the property, the lease requires JFCC to
provide the Lessors with a map of mining operations “at the commencement of
mining and at least every six (6) months” thereafter. Generally, the purpose of
such a requirement in a coal lease is to assist the property owners in determining
how and to what extent the mining operation is affecting their property, to confirm
that no waste is being committed, and to help assure the recovery of coal is
maximized under the lease. Specifically, the provision in this lease allowed May
and Trivette to independently assess whether the coal operator was “conduct[ing]
the mining in a workmanlike manner and in accordance with modern and approved
mining methods.” Therefore, when JFCC failed to comply with the requirements
of section III, it was in breach of this condition of the lease.
Many of the other challenges to the circuit court’s findings of fact
center on its determination that May and Trivette failed to notify JFCC of their
objections to certain of JFCC’s breaches of the lease. Consistent with their
complaint, these objections were to JFCC’s failure: (1) to provide an annual
reconciliation under section II of the lease; (2) to engage a competent engineer
approved by May and Trivette to conduct the reconciliation; (3) to provide those
mining maps under section III of the lease; and (4) to provide a verified copy of the
subleases under the 1965 lease amendment. May and Trivette argue that, as a
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matter of law, they were not required to give such notice, and we will address that
issue later. For now it is sufficient to note the fact that by finding May and
Trivette failed to give notice to JFCC of its breaches, the court implicitly
acknowledged that the breaches occurred. In fact, the record is clear that they did.
Again without contradiction, the Lessors’ agent testified that no
annual reconciliation was conducted under section II of the lease; however, his
testimony also established that there had been no reconciliation for over forty-six
(46) years prior to May’s and Trivette’s request in conjunction with their lawsuit,
even when mining was actually occurring.
Obviously, since no reconciliation was undertaken, no competent
engineer was engaged in accordance with section II to conduct it, nor had one been
demanded by the Lessors for those forty-six (46) years.
We already recognized that, contrary to the circuit court’s finding, no
maps were provided to May and Trivette prior to their filing of the lawsuit. Again,
no maps had been provided for the life of the lease to that time, but it is more
important to note that JFCC failed to comply with this condition, and the other
conditions, after May and Trivette began refusing JFCC’s tender of royalty
payments in December 2000.
On the other hand, substantial evidence does support the circuit
court’s finding that JFCC provided notice to May and Trivette when the lease was
assigned. On this matter, May’s and Trivette’s agent testified that he had not
received such notice before the complaint was filed in this case. However, JFCC’s
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agent testified that she mailed a notice to May and Trivette every time the lease
was assigned. It is within the discretion of the trial court as fact-finder to accept
the testimony of a witness, even to the exclusion of evidence to the contrary.
Moore v. Asente, 110 S.W.3d at 354. Even if we have some doubt as to the
correctness of the findings, JFCC’s agent’s testimony constitutes substantial
evidence upon which the trial court can rely. We cannot say the circuit court made
an incorrect finding that May and Trivette were notified of the assignment.
Finally, May and Trivette assert that substantial evidence does not
support the circuit court’s finding that “all of the breaches complained of in the
herein action existed at the time of the Trial [in May I] on February 18, 2002.”
May and Trivette are correct. The evidence clearly demonstrated that, with the
exception of providing a mining map in January 2002, JFCC’s noncompliance with
the remainder of sections II and III of the lease continued until October 31, 2002,
the date of trial in this action. Furthermore, the post-trial record indicates the
breaches continued thereafter. Therefore, substantial evidence does not support a
factual finding that all of JFCC’s breaches occurred before February 18, 2002.
In the context of these facts, we turn to consideration of May’s and
Trivette’s assertion that the circuit court misapplied the case of Cameron v. Lebow.
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Misapplication of Cameron v. Lebow
As with oil and gas lessees,5 a coal lessee may lose his interest in the
lease in three ways: “The first ground is forfeiture. . . . The second ground is
abandonment . . . . The third and final ground occurs when the lease terminates by
its own terms.” Hiroc Programs, Inc. v. Robertson, 40 S.W.3d 373, 377 (Ky.App.
2000). These three grounds are not entirely distinct. In our jurisprudence,
concepts of forfeiture and abandonment have overlapped. See Clark v. Wilson, 316
S.W.2d 693, 696 (Ky. 1958)(“[a]bandonment and breach of the condition to
develop the property forfeited the rights which passed under the . . . lease”). The
5
Caution must be exercised when construing coal leases by utilization of legal principles
developed in the interpretation of oil and gas leases. “[C]onditions that are peculiar to the gas
and oil industry have, to some extent, influenced the application of the general principles
governing the interpretation of ordinary contracts to the interpretation of gas and oil leases.” 38
Am. Jur. 2d Gas and Oil § 105 (2009). The primary factor influencing such interpretation is “the
fugitive nature of the substance to be extracted.” Flanigan v. Stern, 204 Ky. 814, 265 S.W. 324,
325 (1924). “[B]ecause of the peculiar nature of the substance, the lessor might be deprived of
his royalty profits on account of the oil under his land being drained by surrounding wells, [so]
that the chief purpose of the parties to such a contract was the development of production as
speedily as possible under the prevailing circumstances and conditions.” Id. In 1942, the
Kentucky legislature recognized the distinctive nature of oil and gas leases by enacting KRS
353.020, captioned “Oil and gas lease or contract, when lessor may avoid”; no such similar
legislation addresses coal leases. See Walter v. Ashland Oil & Refining Co., 300 Ky. 43, 187
S.W.2d 425, 426 (1945)(“recogniz[ing] the distinction which this court has always made
between oil and gas leases and other types of agreements affecting real estate - a distinction
which has been recognized and approved by the legislature”). However, in the case before us,
the distinction between oil and gas leases on the one hand and coal leases on the other is less
important than the fact that the subject lease includes an automatic termination clause, or
“forfeiture clause.” As discussed infra, when such a lease provision is present, even in oil and
gas leases, the analysis is wholly different than when there is no such provision, as was the case
in Cameron v. Lebow.
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same overlap has occurred with forfeitures and terminations by the lease’s own
terms, the terms “self-executing forfeiture” and “automatic termination” often
being used interchangeably. See 53A Am. Jur. 2d Mines and Minerals §§ 205, 208
(2009), citing Marcum v. Brock, 257 S.W.2d 55, 55 (Ky. 1953). Sometimes
appellate opinions have referenced all three to explain how the lessee’s rights came
to an end. See Taylor v. Newman, 318 S.W.2d 407, 408 (Ky. 1958)(because “the
wells had been completely abandoned . . . lease of the tract of 54 acres had been
forfeited under the terms of the lease”; emphasis supplied). Courts attempting to
determine which of these three grounds applies in a particular case must proceed
cautiously since the term “forfeiture” appears in nearly all of these cases.
The Pike Circuit Court proceeded as though the lease in this case, like
the lease in Cameron v. Lebow, lacked an explicit self-executing termination
provision, or “forfeiture clause.”6 The circuit court concluded as a matter of law
that May and Trivette “failed to provide notice as required by Cameron v. Lebow
[and that a] lessor cannot forfeit a Coal Lease unless he first notifies the lessee that
he will no longer accept the annual rent and permit the land to remain idle and
undeveloped but will require the lessee to execute the contract according to the
intention of the parties[.]” The circuit court then held that May and Trivette “failed
to give appropriate notice as required by law[.]” These conclusions ignore the fact
that the lease between JFCC and May and Trivette did include a specific, self6
The leases construed in Hiroc, supra, and Carrs Fork Corp. v. Kodak Min. Co., 809 S.W.2d
699, 702 (Ky. 1991)(addressing only “forfeiture on due diligence grounds”), like Cameron v.
Lebow, also lacked a self-executing termination, or forfeiture, provision. JFCC and the circuit
court relied on these cases as well.
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executing termination clause. Therefore, some principles enunciated in Cameron
v. Lebow, and relied upon by the circuit court, are inapplicable.
Cameron v. Lebow addressed a particular circumstance of forfeiture
that is not at issue in the case before us. As the Court there explained,
Forfeiture for nondevelopment, or delay in development,
or for a failure to reasonably develop, is highly essential
in the business of producing oil, but the law does not
favor forfeitures, and none should be allowed without the
one claiming the right shall have first placed the other
party on notice that a forfeiture will be demanded, unless
the terms of the lease as to development are carried out.
(Our emphasis.)
This then, is our basic rule, which is accurately described
as “forfeiture.”
Cameron v. Lebow at 402 (citation and quotation marks omitted; emphasis in
original). Furthermore, it is clear from the emphasized language in Cameron v.
Lebow that the Court was not interpreting an explicit termination provision or
forfeiture clause. Rather,
[t]he principal controversy . . . raged over the nature of
the implied obligation of the assignee and whether or not,
before his interest may be terminated, he is entitled to
notice and demand to develop from the lessor.
Id. at 402 (emphasis in original). Cameron v. Lebow, therefore, followed
the general rule that the breach by a lessee of the
covenants or stipulations on his part contained in the
lease does not work a forfeiture of the term in the
absence of an express proviso to that effect in the lease
. . . and the same has been held true as to a mining
lease . . . .
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Continental Fuel Co. v. Haden, 182 Ky. 8, 206 S.W. 8, 10-11 (1918)(construing a
coal lease; emphasis supplied). This exception to the general rule described in
Continental Fuel is not simply anomalous. “That such a provision in this character
of leases is recognized as an exception to the above general rule and favored by the
courts is just as well settled in this jurisdiction and quite generally as the rule itself
. . . .” Bell v. Kilburn, 192 Ky. 809, 234 S.W. 730, 731 (1921)(emphasis supplied).
May’s and Trivette’s complaint never utilized the term “forfeiture,”
but simply claimed that the lease automatically terminated because JFCC failed to
satisfy certain conditions in the lease. We conclude that the circuit court, misled
by the use of the word “forfeiture” in the termination provision, failed to first
recognize that the lease did contain “an express proviso” calling for termination of
the lease upon the lessee’s breach of specific conditions.7 The presence or absence
of such a termination provision has been the deciding factor in many cases
7
The lease refers to conditions and covenants somewhat interchangeably. In this case, the
distinction between the two is not significant. See 49 Am. Jur. 2d Landlord and Tenant § 58
(2009)(“[t]he primary distinction between a covenant and condition pertains to the remedy in
case of a breach; the breach of a condition upon which a leasehold estate is granted results in
automatic termination or forfeiture of the estate, whereas the breach of a covenant does not
automatically terminate the estate, but instead subjects the breaching party to liability for
monetary damages . . . ”). The subject lease itself provides that a breach of either shall result in
automatic termination.
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interpreting both oil and gas leases8 and coal leases.9 The presence or absence of
the provision has also determined the outcome of cases involving leases created for
other purposes.10
The lease before us unquestionably contains the type of “express
proviso” referred to in Continental Fuel Co. and the cases cited in footnotes 8, 9,
8
See, e.g., Ledford v. Atkins, 413 S.W.2d 68, 70 (Ky. 1967)(disallowing forfeiture in reliance on
“Trammel Creek Oil and Gas Co. v. Server, 197 Ky. 594, 247 S.W. 753 [1923], where the lease
didn’t contain a specific provision for forfeiture”); Kelley v. Ivyton Oil & Gas Co., 204 Ky. 804,
265 S.W. 309, 311 (1924)(“[b]ut beyond all that the lease makes no provision for a forfeiture for
such failure”; emphasis supplied); Flanigan v. Stern, supra, 265 S.W. at 325 (adjudging
forfeiture by distinguishing cases with leases in “which there was no forfeiture clause, or, if one,
it was not of automatic operation”); Jenkins v. Williams, 191 Ky. 165, 229 S.W. 94, 96
(1921)(the law “will work a forfeiture of the lease, if so provided in the contract”); Kies v.
Williams, 190 Ky. 596, 228 S.W. 40, 41 (1921)(recognizing “positive, effectual, and unequivocal
forfeiture clauses, which gave to the [lessor] the right to terminate the lease entirely if these
conditions were not kept and performed.”).
9
See, e.g., Duff v. Duff, 205 Ky. 10, 265 S.W. 305, 306 (1924)(action for damages was the only
remedy allowed for breach because “there is no forfeiture clause in the lease”); Cassidy v.
E.M.T. Coal Co., 204 Ky. 278, 264 S.W. 744, 747 (1924)(Lease provided that lessee’s breach of
a covenant “gave [lessors] the right to cancel the lease and required the lessees to surrender
peaceable possession of the leased property to it without further notice.”); Hogg v. Forsythe, 198
Ky. 462, 248 S.W. 1008, 1011 (1923)(“language in the forfeiture clause [required] that three
things must happen before the right of forfeiture accrues”); Blue Ridge Coal Co. v. Hurst, 196
Ky. 432, 244 S.W. 892, 893 (1922)(“where the lease provides that a breach of one or more of the
covenants shall work a forfeiture, the lessor may declare the forfeiture on an occurrence of the
breach, even though the condition be a harsh one.”); Ross v. Sheldon, 119 S.W. 225, 228
(1909)(court found significance in the fact that “[t]here is no forfeiture clause in the contract”).
10
See, e.g., Marshall v. Fraser, 258 S.W.2d 12, 14 (Ky. 1953)(commercial building lease; “[i]n
the case at bar, the lease . . . contained no forfeiture clause for a breach of covenant”); McHugh
v. Knippert, 243 S.W.2d 654, 656 (Ky. 1951)(lease of boarding house; “where there is clear and
substantive violation of . . . covenants, the courts will enforce an express forfeiture provision”);
Dean v. Stillwell, 284 Ky. 639, 145 S.W.2d 830, 832 (1940)(lease of hotel; “forfeiture clause . . .
reserved to the lessor an option to terminate it [and] lessee could prevent the termination of the
lease under the reserved right by complying with its provisions”); Schwartz Amusement Co. v.
Independent Order of Odd Fellows, Howard Lodge, No. 15, 278 Ky. 563, 128 S.W.2d 965, 969
(1939)(lease of theater; lessor “became alarmed about the future renting of the property and took
advantage of the forfeiture clause contained in the lease”); Pettitte v. Smith, 261 Ky. 411, 87
S.W.2d 945 (1935)(filling station lease “provides that any failure to comply with any of its
stipulations shall terminate the contract at once and possession revert to the first party” lessor);
Elliott v. Marrs, 222 Ky. 642, 1 S.W.2d 1049, 1050 (1928)(right of way to haul logs; breach of
covenant to pay rentals required that “contract should automatically terminate.”).
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and 10, supra, and recognized as favored by the courts in Bell v. Kilburn. The
relevant portion of this lease’s proviso plainly states that “upon any breach of any
[of the] covenants or conditions herein provided, this lease shall automatically
terminate[.]”
In context, this automatic termination provision is not particularly
harsh. Cf., Blue Ridge Coal Co. v. Hurst, supra, fn.9. Just as section IX grants the
right to cancel the lease to JFCC only, section VII places the power to maintain the
lease solely in JFCC’s hands, provided JFCC simply complies with the agreed
upon conditions. See Dean v. Stillwell, supra, fn.10. Such compliance would have
guaranteed JFCC’s right to continue indefinitely the mining of May’s and
Trivette’s property under the lease terms.
Then the question becomes whether a proper interpretation of section
VII requires the Lessors to give the Lessees notice of termination of the lease. It is
true that some such clauses explicitly require the giving of notice. See Reis v.
Norton Coal Corp., 346 S.W.2d 8, 9 (Ky. 1961)(“lessor did not invoke the
forfeiture provisions of the lease, which called for the giving of notice”). The
termination provision in this lease did not. On the contrary, it specifically states
that termination occurs “automatically.” Furthermore, in the strongest language, it
states that
no forbearance or failure to declare a forfeiture or to
enter upon or repossess the leased premises on the part of
Lessors shall in any wise waive this provision or prevent
the cancellation or termination of this lease.
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Based on this language, May and Trivette argue that no notice
whatsoever was necessary. Citing Elliott v. Marrs, 222 Ky. 642, 1 S.W.2d 1049
(1928), they argue, “[t]he contract was not to become void at the election of
[lessors], but the provision was self-executing.” Elliott at 1050. Indeed, Estes v.
Gatliff, 291 Ky. 93, 163 S.W.2d 273, 276 (1942) recognized Elliott and two other
cases for this very proposition. Estes at 276 (“[s]ome provisions for forfeiture, as
in the cases cited, are self-executing”), citing Elliott, supra, Dean v. Stillwell, 284
Ky. 639, 145 S.W.2d 830 (1940), and Wender Blue Gem Coal Co. v. Louisville
Property Co., 137 Ky. 339, 125 S.W. 732 (1910).
We agree with May and Trivette on this point, but only to a certain
extent. Requiring the kind of notice heralding the lessee’s right to cure a breach, as
described in Cameron v. Lebow, would nullify the purpose of an automatic
termination provision. Therefore, notice of a breach and a right to cure is not
required where an automatic termination provision is involved.
However, even with an automatic termination provision, “[t]here must
be some act upon the lessor’s part evidencing his intention to treat the lease as
actually forfeited.” Union Gas & Oil Co. v. Gillem, 212 Ky. 293, 279 S.W. 626,
629 (1925). If this were not so, the lessee could unilaterally misuse such a
provision to end his obligations under the lease. Id. (automatic termination
provisions are “for the benefit of the lessor”); see also Walter v. Ashland Oil &
Refining Co., 300 Ky. 43, 187 S.W.2d 425, 428 (1945)(in lease termination
provision, even “the word ‘void’ means ‘voidable’ at the election of the lessor.”).
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The requirement that a lessor engage in some act to proclaim a selfexecuting forfeiture or automatic termination is simply the complement of our
well-understood concept of waiver.11 That is to say, engaging in some affirmative
act declaring an intention to no longer ignore or forgive the lessee’s breaches, and
treating the lease as terminated by its own operation, is the means by which one
avoids a waiver of the breaches and, consequently, of the termination provision.
Therefore, knowing how a lessor can waive an automatic termination provision
reveals both how that waiver can be avoided and what will suffice as an
affirmative act under Union Gas & Oil. All of this is touched upon in Walter v.
Ashland Oil & Refining Co.
Walter involved “what is known in the parlance of oil and gas men,
and by the legal profession, as an ‘unless’ lease,” that is, one which under proper
circumstances is subject to automatic forfeiture.12 Id. at 426. Ashland Oil, the
original lessee in Walter, failed to timely commence a well but paid the agreed
11
The right to the remedy of forfeiture can, of course, be waived. See Citizens Fidelity Bank &
Trust Co. v. Norfleet, 252 S.W.2d 54, 54-55 (Ky. 1952), and Hogg v. Forsythe, 198 Ky. 462, 248
S.W. 1008, 1011 (1923). We see no reason why forfeiture should be treated differently because
it occurs automatically. Waiver of any right to claim forfeiture occurs because the underlying
breach is waived. See Simmerman v. Fort Hartford Coal Co., 310 Ky. 572, 221 S.W.2d 442
(1949), where the court held the coal lease in question never reached the question of forfeiture
because lessee’s breaches of “certain provisions of the agreement, were waived by [lessor’s]
failure to insist on compliance therewith and her continued acceptance of royalties under the
lease as though all its terms were being complied with.” Id. at 576 (emphasis supplied).
12
Generally, an “or” lease “leaves the lessor to an action at law for a default in rentals and is
subject to rescission only on a clear proof of its abandonment by the lessee[,]” while under an
“unless” lease “such failure caus[es] an automatic termination of the lease.” 38 Am. Jur. 2d Gas
and Oil § 62 (2009); see Denniston v. Kenova Oil Co., 187 Ky. 831, 220 S.W. 1078, 1080
(1920)(“[d]rawing a distinction between an ‘or’ and an ‘unless’ lease, [the Sixth Circuit Court of
Appeals] held that the lease was of the latter character, and the failure to pay the rental when due
forfeited all rights of the lessee.”), citing Hopkins v. Zeigler, 259 F. 43, 46 (6th Cir. 1919).
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upon minimum rent which the lessor accepted. Nevertheless, the lessor leased the
same property to a second lessee, Walter. Ashland Oil learned of the second lease
and brought a declaration of rights action against Walter and the lessor. The trial
court determined the Ashland Oil lease had not been forfeited (even though it was
an “unless” lease) and held that Walter obtained no rights under the second lease.
The discussion of our former Court of Appeals in affirming the trial court sheds
much light on the case before us.
[O]f all the Kentucky cases cited by [Walter] not one of
them holds that the termination clause of an oil and gas
lease may not be mutually construed by the parties as
merely rendering the lease voidable, or that the parties
may not avoid its terminating effect by the payment and
acceptance of past due rentals. True, there are Kentucky
cases, as cited by [Walter], in which we have said that the
lease terminated or became void upon the lessee’s
[breach]; but in each of such instances the lessor was
declining to join the lessee in a different construction, or
to accept the past due rentals, or to consent to a waiver.
So far as we are aware, in every instance in which the
lessee has accepted the past due rental, or in which he has
suffered the lessee to drill after the time had expired
within which the lessee was required to drill, we have
accepted the construction adopted by the parties and
applied the rules of waiver and estoppel.
Id. at 426-27. By accepting rental payments from Ashland Oil, the lessor waived
Ashland Oil’s breaches, thereby preventing commencement of the forfeiture
provision’s operation. Walter at 428 (“acceptance would have discharged the
obligation [to satisfy the lease’s conditions] and prevented the forfeiture.”).
For many years, the parties to this appeal conducted themselves in a
similar manner. During that period, every time JFCC breached the conditions
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contained in sections II and III, May and Trivette waived the breaches by accepting
royalties, thereby suspending the contract-terminating effect of section VII.
But, beginning shortly after Pike-Letcher commenced mining
operations anew, May and Trivette refused JFCC’s payment of royalties. They no
longer waived JFCC’s breaches of sections II and III. Their change in conduct
under the lease evidenced their proclamation that JFCC’s breaches would no
longer be waived, and the operation of section VII would no longer be suspended.
May and Trivette thereby effectively expressed their intent that JFCC’s continued
breaches would no longer be forgiven and that JFCC’s continued failure to perform
under sections II and III would terminate the lease. To borrow language from
Walter, May and Trivette were “declining to join the lessee in a different
construction, or to accept the past due rentals, or to consent to a waiver.” Walter at
426. We believe this is what was contemplated by Union Gas & Oil, supra, when
the Court said there must be some affirmative act evidencing the lessor’s intent to
treat the lease as actually forfeited.
Under our analysis, even at the moment when May and Trivette first
refused the royalties,13 we would have been compelled to enforce the lease. That is
because, at that precise point in time, all JFCC’s prior breaches were waived and
section VII was not yet in play. Under section VII, JFCC still retained the sole
power to prevent forfeiture by thereafter complying with the lease. In other words,
13
It does not matter whether the Lessees or the Lessors controlled the escrow account containing
the rejected royalties. What matters is that the royalties were not unconditionally accepted. See
Miller v. Tutt, 264 S.W.2d 649, 650 (Ky. 1954)(“the only acceptance of rental by [the lessor] was
a conditional one” and therefore the forfeiture was not waived).
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to keep the self-executing forfeiture provision from being triggered, JFCC simply
had to avoid future breaches, or obtain the Lessors’ future waiver of those
breaches.
JFCC could have complied with section II by making monthly reports
to the Lessors of the amount of coal mined, so long as the first report was made
within the month in which the royalties were rejected and subsequent reports were
made at the end of all months thereafter. Assuming JFCC had complied with the
lease in that regard, it had six months to prepare the maps required by section III.
If these two conditions had been satisfied, JFCC then had until the end of the year
to have an approved engineer conduct the survey and reconcile the royalty
payments as called for in section II.
To be clear, we did not just describe JFCC’s right to cure prior
breaches. There was no need to cure prior breaches because they had been waived.
We simply described JFCC’s obligation to perform the lease according to its terms.
Unfortunately, subsequent to May’s and Trivette’s refusal to accept
royalty payments, JFCC failed to satisfy these conditions, or otherwise to
substantially comply with sections II and III, in a timely manner. And May and
Trivette no longer waived JFCC’s failure to comply.
Under these circumstances, the circuit court should have determined
that JFCC’s rights under the lease were forfeited.
Res Judicata
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JFCC argues that even if May’s and Trivette’s cause of action in the
case now before this Court has merit, they were barred from bringing it in the first
place by the doctrine of res judicata. We do not agree.
Two years before May and Trivette filed the complaint in this case,
they filed a complaint in the earlier case, May I. This was almost a year before
Pike-Letcher resumed mining and May and Trivette rejected JFCC’s tendered
royalty payments. May and Trivette alleged in May I that in prior years JFCC had
caused waste on the property, and sought cancelation on grounds that changing
market conditions rendered the lease “grossly unfair, inequitable, and
unconscionable.” There was no allegation or proof on the question of termination
pursuant to section VII.
In January 2002, May and Trivette filed the complaint in the case sub
judice. This was less than one month before the trial in May I was conducted on
February 18, 2002. Before that trial took place, JFCC filed a motion to dismiss the
case now before us on the ground that May and Trivette were splitting their cause
of action between May I and this case. May and Trivette responded that this
subsequent complaint for termination of the lease was independently based upon,
and arose out of, events occurring several months after they filed the complaint in
the prior action, and not until Pike-Letcher resumed mining operations. The circuit
court overruled JFCC’s motion to dismiss on these grounds.
JFCC then filed its answer in the case before us, asserting the
affirmative defense that, once a judgment was entered in May I, res judicata would
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bar May and Trivette from bringing any claim that could have been presented to
the circuit court in May I, including the claim that the lease terminated in
accordance with section VII. On June 26, 2002, judgment was entered in May I.
Four months later, on October 31, 2002, the circuit court conducted
the second bench trial between the same parties, this time in the case sub judice.
The circuit court did not rule on JFCC’s res judicata defense, but proceeded with
the trial. In its trial brief, JFCC again argued the defense of res judicata.
However, the judgment did not reach the legal conclusion that May’s and
Trivette’s cause of action was barred by the doctrine. The judgment merely
contains a finding of fact – determined, supra, to lack the support of substantial
evidence – that all of JFCC’s breaches were known to May and Trivette when May
I was tried.
We believe the foregoing circumstances make the doctrine of res
judicata inapplicable in this case.
The doctrine of res judicata is more than satisfactorily described in
Moorhead v. Dodd, 265 S.W.3d 201, 203-04 (Ky. 2008). However, for a
comprehensive (though incomplete) list of qualifications14 to the doctrine, we will
follow the Supreme Court’s lead in Moorhead and turn to Asher v. G.F. Stearns
Land & Lumber Co., 241 Ky. 292, 43 S.W.2d 1012 (1931). Moorhead at 204.
14
“[A] more appropriate designation of such exclusions [from the application of the doctrine of
res judicata] would be to say that they are qualifications of the doctrine and not exceptions
thereto.” Asher v. G.F. Stearns Land & Lumber Co., 241 Ky. 292, 43 S.W.2d 1012, 1014
(1931).
-22-
Two of the several qualifications recognized in Asher apply here to render the res
judicata doctrine inapplicable.
The first qualification states that “[t]he doctrine does not apply . . . to
facts that subsequently arise . . . .” Asher at 1014. Our Supreme Court relied on
this qualification in Moorhead to reverse a circuit court’s decision that a plaintiff’s
claim was barred by res judicata principles. Moorhead at 204. It also applies
here.
The facts giving rise to May’s and Trivette’s cause of action for
termination of the lease pursuant to section VII occurred ten months after they filed
the complaint in May I; that is, after Pike-Letcher resumed mining, after May and
Trivette rejected JFCC’s tendered royalties, and after JFCC’s continued
noncompliance with sections II and III of the lease. If May and Trivette had filed
their complaint in this action before that sequence of events, their cause of action,
as discussed supra, would have been defeated by the doctrine of waiver.
Furthermore, these events were ongoing and continued even “after entry of the
prior judgment.” Moorhead at 204. This qualification takes the case before us
from application of the doctrine of res judicata.
Asher described a second qualification that applies here.
The doctrine does not apply . . . where the court in
rendering the judgment expressly or by necessary
implication reserved the determination of the issues to be
later litigated, but against the determination of which the
judgment was then interposed as a bar . . . .
-23-
Asher at 1014. The appellate court in Asher relied on this qualification to reverse a
circuit court’s holding that res judicata barred a plaintiff’s claim. The factual and
procedural circumstances in Asher are remarkably similar to those in the case
before us. Consequently, the court’s rationale for holding as it did is directly
applicable to our case.
The parties in Asher contested their respective rights in a contract,
though in Asher the contract was a deed and not a lease. Like the case before us,
however, the plaintiff initiated a second action before the first was resolved. The
appellate court took particular note of how the trial court treated the first case visà-vis the second.
[I]mmediately preceding the submission of the first
case[,] the court’s attention was specifically called to the
pendency of this action, and which was done by a motion
of plaintiffs to consolidate the two cases, and which
motion was either overruled or not acted on, and the trial
proceeded . . . in that action. It was tantamount to an
exclusion by the court of the issues . . . in this action. . . .
[T]he course pursued by the court at that time was
tantamount to an express determination on its part to
reserve the issues involved in this action for future
adjudication . . . .
Id. at 1014-15.
Similarly, JFCC called the court’s attention to the pendency of the
first action, not by a motion to consolidate, but by a motion to dismiss May’s and
Trivette’s second action on the ground that they were splitting their causes of
action between the two cases. As in Asher, the circuit court denied the motion.
Furthermore, the Pike Circuit Court, apparently discounting JFCC’s assertion of
-24-
res judicata as an affirmative defense, went forward with the second action by
conducting a day-long trial just a few months after judgment was entered in the
prior case. And even more, in rendering the judgment in the second case, even
after JFCC briefed the issue again, the circuit court declined to resolve the case by
applying the doctrine of res judicata. These actions by the circuit court, more so
than in Asher, were “tantamount to an express determination on its part to reserve
the issues involved in this action for future adjudication.” Id. at 1015.
Therefore, because this second qualification applies, May’s and
Trivette’s cause of action in this case was not barred by the doctrine of res
judicata.
For the foregoing reasons, the judgment of the Pike Circuit Court that
the lease remains in full force and effect is reversed, and this case is remanded for
proceedings consistent with our opinion.
.
ALL CONCUR.
BRIEFS FOR APPELLANTS:
BRIEF FOR APPELLEES:
W. Sidney Trivette
Pikeville, Kentucky
James P. Pruitt, Jr.
Pikeville, Kentucky
Wayne F. Collier
Lexington, Kentucky
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