Lawsuits shed light on Peabody's clout
By Marley Shebala
WINDOW ROCK, Aug. 29, 2011
No, it was just business as usual, the defendants maintained.
The tribe filed suit alleging violations of the federal Racketeering Influenced and Corrupt Organizations Act after learning that Peabody had hired a friend of then Interior Secretary Donald Hodel to seek his support as the industry giants maneuvered to derail coal royalty increases that his own agency said were justified.
After enjoying years of royalty rates equaling about 2 percent on Black Mesa coal, Peabody and the utilities, managing partners in the two power plants that used the coal, were facing a new rate as high as 20 percent.
Then BIA Navajo Area Director Donald Dodge had agreed with the Navajo Nation that the rate, set by a 1964 lease agreement, needed to be increased.
The tussle over a rate increase began when Congress in 1976 established a minimum royalty rate of 12 percent for federally owned coal. A year later the Interior Department adopted a policy that set 12 percent as the minimum rate for Indian coal, which the government considers federal property that is held in trust for the tribes.
Dodge notified Peabody in September 1979 that it was in violation of its lease with the Navajo Nation, which could be canceled as a result.
Peabody obtained the tribe's support to have Dodge back off the talk of cancellation in return for agreeing to substantially increase the royalties and apply the rates retroactively to Jan. 1, 1980.
That's according to the 1999 RICO complaint filed by then Navajo Nation Department of Justice Attorney General Levon Henry and a host of outside attorneys hired to help with the case.
But shortly after Dodge backed off, Peabody denied any such agreement.
The BIA tried again in 1981 to pressure Peabody to raise the royalty rate by challenging the company's failure to obtain a right-of-way over Navajo lands for the access road it built to its two mines on Black Mesa.
Peabody responded that it had worked out an agreement with SRP and Edison to comply with the federal minimum rate for coal royalties, and would promptly present the deal for approval by the Navajo Nation.
And so the BIA backed off again.
By late 1983, there was no new agreement and meanwhile Peabody had earned about $141 million from Navajo coal while paying just $2.7 million in royalties to the tribe.
Losing $50,000 a day
In March 1984, the Navajo Nation asked then Interior Secretary William Clark to raise the rate himself. He delegated the matter to the agency's Navajo Area director.
Two months later the Interior field solicitor urged prompt action on the request, and estimated that the Navajo Nation was losing $50,000 a day for each day the royalty rate was not increased.
In response to a request Dodge for expert opinions on a proper royalty rate adjustment, the U.S. Bureau of Mines issued a report on June 6, 1984, that concluded Peabody's profitability would permit a 20 percent royalty rate.
On the same day, the BIA Division of Energy and Mineral Resources issued report recommending that the BIA negotiate a royalty rate of not less than 25 percent, subject to adjustment every five years, based on what private owners of coal reserves were getting.
Peabody, meanwhile, declined to release information about its cost of production and profits from Black Mesa coal, telling Interior officials that this information was not really germane to the issue.
On June 18, 1984, Dodge sent a letter to Peabody notifying the global coal giant about his decision to increase the coal rate to 20 percent, citing "reports and recommendations from the Bureau's Navajo Area and Energy and Mineral Resources Office, the Bureau of Mines and others." The new rate would take effect Aug. 28, 1984.
Peabody and the utilities appealed the decision and the Navajo Nation continued to receive a royalty rate of 37.5 cents per ton for its coal - not enough to buy a can of Coke, as former tribal Chairman Peter MacDonald Sr. had once pointed out.
In April 1985, the U.S. Supreme Court unanimously upheld the Navajo Nation's Business Activities Tax and Possessory Interest Tax, enacted by the tribal Council in 1978. This opened the defendants to significant back tax liabilities and possible increases in future taxes.
Then Deputy Assistant Interior Secretary John Fritz, in June 1985, issued a written decision that upheld the 20 percent royalty rate for Navajo coal. But he never signed it.
Why? Because when the defendants learned of the impending decision favoring the Navajo Nation, Edison wired Peabody and instructed Peabody to hire Stanley Hulett, Hodel's close friend, former Interior official and later business associate.
Hulett's job was to communicate directly with Fritz and Hodel about the peril to Peabody and the utilities' customers, who would have seen a $1-a-year hike in their power bills to cover the royalty increase, according to Interior's calculations.
This raised a red flag at Interior, where Interior Solicitor Frank K. Richardson - the agency's in-house legal counsel - advised Hodel in a March 12, 1985, memo not to discuss the appeal with Peabody because "it would raise the problem of ex parte contact."
"Ex parte" is a legal term meaning "on one side only or done for or in behalf of one party only," according to Black's Law Dictionary.
Richardson informed Hodel that Fritz had already decided "he cannot meet with Peabody because in his case it would clearly constitute ex parte contact."
Nevertheless, Hulett managed to meet with Fritz, Hodel and other federal officials without the Navajo Nation's knowledge, the tribe was later able to prove.
Hodel, in a July 17, 1985, internal memo, instructed Fritz to suppress his June 1985 decision favoring a 20 percent royalty rate and also the technical studies supporting it. In another departure from standard practice, Hodel also assumed personal jurisdiction over the case under appeal.
Kept in the dark
According to a Feb. 23, 2000, legal memo filed by attorney Samuel J. Buffone, one of the tribe's outside attorneys in the case, Hodel's actions "remained undisclosed for 11 years until revealed inadvertently during discovery in this case."
Unaware of Fritz's decision, the supporting studies, or that Hodel had assumed personal jurisdiction over his agency's response to the Peabody appeal, the Navajo Nation had no choice but to negotiate with Peabody, Edison and SRP.
On one side of the table were then President Peterson Zah and Chief Justice Claudeen Bates Arthur. On the other was a phalanx of lawyers for Peabody and the utilities. One addressed Arthur, one of the most revered leaders in Navajo history, as "Little Lady."
During negotiations, Peabody continued its private communications with Interior officials, documents in the case show.
The lease agreement that was finally reached by Peabody, the utilities and the tribe in August 1987 set the royalty rate at the minimum allowed under federal law - 12 percent - and required the Navajo Nation to waive back taxes and royalties worth a total of about $100 million.
The agreement also forced the Navajo Nation to abandon its taxes on the business activities and possessory interests of Black Mesa Pipeline Inc. and the Black Mesa and Lake Powell Railroad for tax years 1978 and 1985.
The pipeline was used to slurry crushed coal from the Black Mesa Mine to Mohave Generating Station in Laughlin, Nev. The railroad is a short line built to transport coal from the Kayenta Mine to Navajo Generating Station in Page, Ariz.
The amendments removed BIA involvement from future adjustments in the royalty rate.
The Navajo Nation agreed to lease an additional 90 million tons of coal to Peabody on the above terms and with no substantial bonus, which included no imposition of the Navajo Nation's Possessory Interest Tax on the additional coal until 2005 - 18 years into the future. At that point, the tax could be imposed but only at half the going state tax rate.
Peabody got the rights to an additional 180 million tons of coal under a separate agreement, called the 9910 lease.
The tribe agreed to lease Peabody an unidentified 2,000 acres of land at $50 per acre at some unspecified time in the future, to waive taxes in the Navajo Generating Station lease, and to cap at 20.5 percent the total of all royalties paid to the Navajo Nation by Peabody, the Black Mesa Pipeline, the Black Mesa and Lake Powell Railroad and any other transporter of the coal, and related facilities.
The Navajo Nation also was forced to waive sovereign immunity should a disagreement arise, consenting to be sued in non-Navajo courts and agreeing not to raise sovereign immunity as a defense in suits that Peabody or the utilities might bring against it.
According to the Navajo Nation's later lawsuit against the defendants, the lease amendments cost the tribe more than $33 million in unpaid back taxes and more than $56 million in unpaid back royalties.
The Navajo Nation and Peabody signed the amendments Nov. 20, 1987, and the tribe asked the BIA to review them, as was normal Interior procedure.
But this time lease amendments went directly to Hodel, who approved them on Dec. 14, 1987.
No friends in court
Upon learning of Hodel's actions, the tribe in 1993 sued the Interior Department for breach of its fiduciary trust duties to protect the interest of Indian tribes.
In 1999, the tribe accused Peabody and its business partners of scheming to defraud, corrupt, cheat, steal and deprive the Navajo Nation of the full benefit of its coal resources.
The latter suit alleged that the defendants engaged in misconduct that included corruption of a federal administrative appeal, fraudulent misrepresentation, obstruction of justice, conspiracy, breach of contract and interference with the fiduciary relationship between the United States government and the Navajo Nation.
In January 2008, the tribe learned it had few friends in high places when the U.S. Supreme Court overturned a favorable appellate decision in the suit against Interior.
The high court ruled 6-3 that the tribe was not entitled to damages from the federal government. Despite compelling friend-of-the-court pleas from former Interior secretaries including Stewart Udall, the majority said there was no breach of federal duty because there was no law that created enforceable fiduciary duties on the secretary of Interior regarding Indian coal. There was no legal mandate that he or she had to support tribal recommendations regarding royalty rates in coal leases executed under the governing laws, the court said.
The ruling overturned a decision made four months earlier by the U.S. Court of Appeals in Washington, which said the federal government owed the tribe damages for violating its trust responsibility.
The Supreme Court also abandoned its own precedent, set in 2003, when it had upheld a 2001 appellate ruling that said Hodel's actions violated the federal government's trust obligation.
Hodel himself said he couldn't remember meeting with the Peabody lobbyist, despite their friendship.
The 2003 Supreme Court decision struck down the appellate court's finding that the federal government owed damages to the Navajo Nation, but the tribe managed to bring the question of monetary compensation back to the appeals court by citing other laws governing trust responsibilities.
In 2007 decision, the court of appeals again agreed with the tribe, based on the new arguments, and referred the case back to the U.S. Court of Federal Claims to determine the exact amount of damages.
While Udall and other former Interior officials argued for the Navajo position, then tribal Attorney General Louis Denetsosie recalled in 2007 that Peabody had the backing of the Bush administration when it asked the Supreme Court to throw out the Navajo Nation's claim for damages.
Then Solicitor General Ted Olson asked the high court to rule against the Navajo Nation because "significant" federal dollars were in danger. If the Navajo claim prevailed, other tribes might come looking for all manner of restitution, he said.
Denetsosie initiated the move to settle the Peabody suit, but later resumed the legal battle based on the favorable appeals court ruling in 2007, among other events.
The disastrous Supreme Court ruling in 2008 left the tribe in a weakened position to fight Peabody, and the incoming Shelly administration resumed negotiating a settlement.
The settlement was quietly announced Aug. 4, bringing the largest damage suit in the tribe's history to a close.