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royalty payments. ERL’s total liability for the advance
royalties, however, totaled $200 million in cash and notes.
Each note, recourse and nonrecourse, became due 20 years
after execution; however, at the election of either JAD or ERL,
each note could be extended for an additional 10 years. Although
each note bore annual interest at a rate of 6 percent, no partner
was personally liable for the payment of such interest. The
maturity date of each recourse note would not change if the lease
were terminated prior to its primary term. The offering
materials explained that the coal reserves underlying the leased
property would serve as security for each note.
The coal property was acquired by JAD in 1977 for
$3,750,000. Information pertaining to this acquisition was
presented in the offering materials. The offering materials
explained that the coal property contained three principal coal
seams; namely the Mason, Harlan, and Wallins Creek seams. The
offering materials further explained that the objective of the
partnership was to develop these three seams and then to develop
other seams if such development were practicable. The Coal
Reserve Report, which accompanied the offering memorandum,
however, did not lend solid support for this objective. Although
it maintained that the Mason seam was “of good quality”, the Coal
Reserve Report noted that the Mason seam was not without serious
limitations. The report further indicated that coal recovered
from the Harlan seam would be burdened by a high ash content and
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Last modified: May 25, 2011