Title Insurance & Guaranty Co. v. Hart , 160 F.2d 961 ( 1947 )

ORR, Circuit Judge.

Mount Gaines Mining Company petitioned the United States District- Court for the District of Nevada for reorganization and for relief under chapter 10 of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. Pursuant to said petition the said court appointed James B. Hart trustee.¹

What may be said to be the sole asset of the corporation is a lease and option to purchase valuable mining property situate in Mariposa County, State of California. The cause is before us on an appeal from an order of the District Court extending said lease for a ten-year term.²

The lease involved was executed on December 16, 1933, and provided that lessees should operate the mine and pay a 10% royalty to the owners “of all production of and from said mine, from the gross returns of ores shipped and sold, the returns from all recovery of ores milled, concentrates, amalgams, mint returns on bullion [sic].” Time was to be of the essence, and it was also provided that any failure by the lessors to insist on strict compliance of the lease should not be deemed a waiver by the lessor of the right to insist on such strict compliance. Provision was made for an extension of ¡the lease in the following clause:

“In consideration of, and the faithful compliance thereto by said lessees of the foregoing agreement and covenants therein, the said owner agrees that upon written application of the lessees to grant unto said lessees a further lease upon said mine, its improvements and acquisitions, an extension of this lease for a further term of ten years under the same covenants, royalties and rights.”

The lease granted lessees an option to purchase by providing:

“Said owner, for and by the considerations and agreements herein therefore grants unto the lessees an option to purchase an undivided three-fourths (%) interest in said mine * * * for the sum of fifty thousand dollars ($50,000) at any time within the period of this lease and or any extensions of time thereof; provided this lease shall be in force and effect.”

Lessee attempted to exercise this option by serving notice on May 25, 1937 that it elected to exercise the option by the application of royalty payments until such payments totalled $50,000. The matter was litigated in 1942 and the District Court held the attempted exercise of the option not to be in conformity with its terms and, hence, did not constitute an election to exercise said option.³ On appeal this court affirmed that judgment.⁴

The original lessees assigned their interest to one Ilseng, who formed the Mt. Gaines Mining Co., a Nevada corporation, and assigned to it the lease in question here, in December 1934.

At the time the lease was executed, the ownership of lessors was in dispute and the original lessees never secured possession. Ilseng entered in 1934 and found the entire mine in a state of disrepair and unworkable. The shaft had caved in and was filled with water. The hoist machinery had been removed, the mill and other buildings were in a rotting condition. The general aspect of disrepair was one natural to a property, the main part of which had not been worked since 1911.

Lessee assumed control and by intelligent and minerlike operation developed and extracted during the 10-year period of the lease, ending December 15, 1943, ore having a gross value of nearly one and one-half million dollars, and from this extensive operation over a ten year period the lower court was able to find but $93.19 due lessors as unpaid royalties.

On November 24, 1943, appellee, as trustee in bankruptcy, filed a petition asking the District Court to direct him to apply for an extension of the lease. On the granting of that petition, appellee, on December 3, 1943, applied to appellants for a further lease, “the said agreement of lease to. contain the option as now contained in the present lease, and to run for the full period of 10 years as provided for in the lease.”

Appellants refused to renew and appellee then instituted this proceeding by filing in the District Court a petition praying for a decree that appellee and the Mt. Gaines Mining Company be adjudged in lawful possession and that the lease and option were extended to December 16, 1953.

The Court found that appellee was entitled to a judgment quieting his title to the extended term of the lease and that ap-pellee’s written application to appellants on December 3, 1943 had extended the lease “under the same covenants, royalties and rights, including the option to purchase * * * as provided in said lease * *

The Court also fqund there had been no default or failure of faithful compliance with the covenants in the lease; that, ap-pellees owed appellants $93.19 as unpaid royalties, and that the attempt to exercise the option to buy a % interest in 1937 was ineffective for any purpose .and did not exhaust lessee’s right to exercise this option later.

On appeal, appellants attack the judgment on three major grounds :

1. That appellee, as trustee in bankruptcy, did not assume the lease, and, hence, had no right to an extension of that lease;

2. That the attempted exercise of the option, and appellee’s application for a “further lease” constituted counter-proposals and, hence, rejections of the option and renewal provisions of the lease; and

3. That the District Court erred in finding that appellee had performed all of the conditions precedent so as to entitle lessee to an additional ten year lease, and that the Court further erred in finding that only $93.19 was due appellants as unpaid royalties.

First: Appellant argues that Hart, as trustee, has never assumed the lease. While no writing is found which expressly so provides, the facts and circumstances clearly demonstrate that he did.

The District Court, on June 29, 1939, approved the filing by Mt. Gaines Mining Company, of its petition for reorganization under Chapter 10 of the Bankruptcy Act, and ordered the debtor to continue in possession of the mine under the terms of the lease involved herein.

On August 11, 1939 appellee James P. Hart was appointed trustee of Mt. Gaines, and all of the debtor’s “property, money, assets and accounts” were ordered turned over to said Hart.

From August 11, 1939 to December 15, 1943, the end of the first ten year period of the lease, Hart was, by the District Court, found to be in “lawful possession as lessee under said lease of all of the property”, of the mine during which time ores were extracted and milled having a gross value of $766,381.86. Hart, as trustee, paid to appellants royalties of $76,556.36.

Hart, as trustee, tendered reports to appellants covering these royalties, furnished copies of smelter returns for the same period, and sent monthly reports covering the operations of the mines to representatives o f lessors, all in accordance and compliance with the terms of the lease.

Hart, as trustee, caused extensive underground development of the mine to be made and placed additional machinery 'and equipment on the property, which included a sorting plant, amalgam barrel, etc., all done with the full knowledge and consent of lessors.

In 1942 Hart, as trustee, litigated the question of whether the Mount Gaines Company had exercised its option, contained in the lease, to purchase a three-quarter interest in the mine. The District Court held that Hart was not entitled to the relief he asked because “such option has not as yet been complied with”, and dismissed the action without prejudice, and on appeal, we affirmed.⁵

At no time was there any question raised as to Hart’s qualifications to prosecute the action because he had not assumed the lease. On the contrary, in its temporary restraining order, prior to its decision in that matter, the District Court ordered that “the trustee in reorganization continue to pay 10% rent and royalties heretofore paid by virtue of the lease and option” involved herein.

In December 1943 the court also ordered the trustee to apply for an extension of the lease in the following terms:

“It is therefore ordered and adjudged that James P. Hart, the trustee of the above named debtors, Mount Gaines. Mining Company and International Mining & Milling Company, immediately file his written application and make a demand for the extension of the agreement of lease with option to purchase now owned by the Mount Gaines Mining Company for the said Mount Gaines Mine, under the same terms and conditions, all as provided in the agreement of lease with option to purchase dated December 16th, 1933, and to take all steps necessary for securing such extension.”

From the foregoing facts the conclusion seems inevitable, not only that Hart assumed the lease and acted under its terms, but that such assumption was recognized by the lessors and by the District Court. It would seem that lessors, by reason of their recognition of the operation of the mine by Hart, as trustee, and the acceptance of the benefits resulting from such operation are in no position to question his assumption of the lease.

A further argument made in support of appellants’ contention is that becatise appellee as trustee in bankruptcy did not assume the lease within 60 days after the adjudication, the lease is, under § 70, sub. b of the Bankruptcy Act,⁶ deemed to have been rejected by the trustee.

Appellant argues that § 70, sub. b is applicable to reorganization proceedings under Chapter X of the Bankruptcy Act since § 102 of Chapter X provides that the provisions of Chapters I to VII (of which § 70, sub. b is a part) are applicable to Chapter X proceedings "Insofar as they are not inconsistent or in conflict with the provisions of this chapter.”

However, we think that § 116 of Chapter X ⁷ which gives the judge power to permit the rejection of executory contracts (in which term leases are included by definition)⁸ is clearly in conflict with § 70 sub. b and, hence, the assumption provisions of § 70, sub. b cannot apply to Chapter X reorganizations.⁹

§ 116(1) does not require the judge to act within 60 days or any other period. Yet if § 70 sub. b were held to apply to Chapter X proceedings and the trustee, as here, took no affirmative action for 60 days, the trial court would be foreclosed from any action in a Chapter X proceeding. Such a result is obviously inconsistent with the provision in § 116(1) of Chapter X allowing the trial judge to permit the rejection of a lease.

Furthermore, § 216(4) of the Bankruptcy Act states that a plan of reorganization under Chapter X “may provide for the rejection” of any lease and, as the Securities and Exchange Commission points out,¹⁰ reorganization plans are seldom formulated within 60 days after adjudication and the statutory requirements for notice and hearing on the qualification of the trustees and the plan normally exceed 60 days. Clearly, lack of affirmative action by the trustee within 60 days should not work an automatic rejection of the lease in 'Chapter X cases.

In the ordinary bankruptcy which § 70, sub. b covers, the purpose is to liquidate the estate and to distribute the assets to creditors as soon as possible. Since continued operation of a lease held by the ordinary bankrupt is not contemplated, the trustee is required to decide whether the lease has any value, and if so, to dispose of it quickly so that the assets realized may be added to the bankrupt’s estate.

But in reorganization proceedings the purpose is rehabilitation of the debtor and to preserve it as a going concern if possible; therefore, it is vital that favorable leases be held and unfavorable leases be rejected. But often it. cannot be decided by the trustee within 60 days after adjudication (particularly when the trustee is not appointed until some time after the adjudication) whether a lease is favorable or not from the standpoint of continued operation. Here the lease was the sole asset of the debtor and rejection of the lease would have ended any possibility of reorganization. Consequently, the debtor was ordered by the District Court to continue in possession under the lease until the plan of reorganization could be prepared, and when the lease was about to expire, the Court ordered the trustee to apply for a renewal in accordance with the terms of the lease.

The difference between this situation and the situation normal to the usual bankruptcy covered by § 70, sub. b, is decisive, and hence, we hold that the assumption, rejection, and automatic rejection provisions of § 70, sub. b are inconsistent with and inapplicable to Chapter X reorganization proceedings.

Finn v. Meighan, 325 U.S. 300, 65 S.Ct. 1147, 89 L.Ed. 1624, cited by appellants, is limited, by a subsequent modification by the Supreme Court of its original opinion, to the forfeiture provisions of § 70, sub. b, not here involved (325 U.S. 300, 302, 840, 65 S.Ct. 1147).

Second: Appellant contends that appel-lee’s ineffective attempt in 1937 to exercise the option, terminated that option immediately since appellee in effect rejected the option by submitting a counter-proposal, namely, appellee’s attempt to exercise the option on terms different from those set forth in the lease.

It is of course elementary that a qualified acceptance, or a new proposal rejects the original offer, but here appellee’s attempt to exercise the option was not a new offer. It was merely appellee’s interpretation of what the option required on his part.

Appellee interpreted the option. as permitting the royalties paid to appellants to be applied to the first payment of $10,000 due on the purchase price when the option was accepted.

The District Court held, and we agreed, that the first $10,000 was due in cash on the exercise of the option. But appellee’s interpretation was, at the least, a reasonable one, with nothing to show an absence of good faith, and the District Court in holding against appellee, merely dismissed his petition without prejudice.

Appellee was well within the time during which he could exercise the option, and although, as we finally held, appellee’s interpretation was not correct and his attempted exercise of the option ineffective, it cannot be said that appellee was rejecting, by making a counter-offer, the option in the lease. In an area not free from doubt he complied, as he thought, with the original offer. The events proved him incorrect as to the method of compliance and we agree with the trial court that the “attempted exercise of the option was * * * ineffective for any purpose and in no wise constituted an exhaustion of the right of the lessee to exercise said option to purchase ij: *

It is contended that the extension provision in the lease was merely an offer to grant a further lease, importing the idea of the execution of a new instrument by the lessor; and that the trial court erred in finding that appellee had, by his written application, extended the lease for an additional term of ten years.

In support of this argument appellant urges that lessor’s offer was a conditional offer, conditioned on (1) faithful compliance with the covenants of the lease, (2) time to be of the essence, and (3) a written application for an extension to be in compliance with the offer, and not to propose new conditions or terms. Further, it is urged that the extension provision means only that the lessor offered a further lease of ten years on the same terms as the original lease (without the renewal clause), and including the option to buy, provided that option was not previously exercised or rejected.

From this appellant then argues that the trial court “tortured a mere ‘application’ for a new lease into an act which automatically extended the lease”, because specific performance of a lease could not be compelled. Since specific performance is not sought we do not pause to consider that phase of appellants’ argument.¹¹

It is clear from the terms of the lease itself that the lessor’s offer of an extension of the lease was conditioned on faithful compliance with the covenants of the lease by lessee. But, given such faithful compliance (which the trial court found, and which we shall consider later) we think the trial court was correct in holding that appellee’s application extended the lease for an additional term of ten years on the same terms as the original lease.

True, appellee’s application to lessor did request a “further lease” with the option “now contained in the present lease”. But this was merely asking that to which he was entitled (assuming faithful compliance), since the lease provided for a “further lease upon said mine * * *, and extension of this lease for a further term of ten years under the same covenants, royalties and rights”.

Appellee’s application for a further lease was merely phrased in the terms of the lease itself and the application was for a “further lease, * * * being an extension of the present lease”. Hence, appellee’s application was not a rejection by way of a counter-offer since appellee proposed no new terms but complied with the lease by making application for what the lease granted him, in the very language of the lease itself.

Further, both the lease and appellee’s application refer to an “extension” of the lease on its same terms, and we cannot hold that the trial court erred in deciding that the mere application actually extended the lease since regardless of whether this provision is interpreted as a renewal or an extension clause (a distinction which the California courts draw)¹² the terms and conditions of the extended term concededly are to he the same as the original period.

“Therefore, whether it be treated as an option for a ‘renewal,’ as the trial court did, or as a ‘mere extension of the old lease,’ is wholly immaterial, for in either case the terms and conditions are to be exactly the same”. Braun v. Leo G. MacLaughlin Co., 93 Cal.App. 116, 123, 269 P. 191, 194.

“Where the parties, however, have agreed in writing upon the essential terms of the lease, there is a binding lease even though a formal instrument is to be prepared and signed later”. Gavina v. Smith, 25 Cal.2d 501, 504, 154 P.2d 681, 682.

Appellee having accepted the offer of a renewal or an extension by notifying appellants of his decision, the parties were bound without more for an additional term of ten years, assuming faithful compliance by ap-pellee, which is appellants’ third contention, and to the consideration of which we now turn.

Third: The breaches of agreements and covenants contained in the lease of which appellants specifically complain fall roughly into three categories:

A. Breaches in connection with the payment of royalties in accordance with the covenant:

“That lessees shall pay as a royalty to the owner ten per cent (10%) of all production of and from said mine, from the gross returns of ores shipped and sold, the returns from all recovery of ores milled, concentrates, amalgams, mint returns on bullion * * *. That all payments shall he made and accompanied by a duplicate copy of such returns, not later than the 25th day of following calendar month; and that upon said 25th day lessees shall make in writing a full report of all operations, developments and exposures of moment”.

B. Breaches in connection with violations of California law in accordance with the covenant:

“That all operations of said lessees herein shall be in accordance with the laws and mine and milling regulations of the state of California”.

C. Breaches in connection with failure to keep complete records in accordance with the covenant:

“That lessees shall * * * keep complete records of operations, accounts, mining maps and production * *

A. Failure to pay royalties: Under this heading appellants specifically refer to 32 breaches: 1. Of these, five relate to late or unpaid royalties due Holcomb or Kempley. Holcomb and Kempley have waived any unpaid royalty and are now actively assisting the trustee and desire to have the lease extended. These five breaches therefore would not seem ground for refusal to renew, since the only persons adversely affected thereby do not complain.

2. Seven other alleged breaches relate to the" unpaid royalties shown on appellee’s Exhibit FF which is a summary of production figures and royalties accrued and paid since the beginning of lessee's operations. This exhibit shows $498.96 unpaid in the period from September 21, 1934 to October 8, 1937, referred to as the Useng Period. The exhibit also shows $1,358.70 unpaid royalties during the period October 8, 1937 to May 9, 1938, referred to as the Humphrey Period. Although seven breaches are assigned for these two items, all those seven breaches refer only to these two items, totalling $1,857.66.

As to the Useng Period, the amount is less than $500, which, when considered with the total of over $141,000 of royalties paid might well be classified as de minimis. As to the Humphrey Period, there was evidence to support appellee’s contention that this underpayment was acquiesced in by the lessors. Further, the evidence shows that the underpayments for both these periods have since been made up.

3. Four breaches relate to the disputed deduction of $5.00 per ton made by lessees prior to the bankruptcy proceedings on each ton of concentrates hauled from mine to smelter. The trial court found that this deduction (which amounted to something in the neighborhood of $600) was done with knowledge and consent of the mine owners, and because of lessee’s construction of the lease.

4. Two breaches relate to payments made two days and one day late, respectively, and as such hardly require serious discussion as a basis for refusing to renew a lease on a mine improved by lessees from a virtually valueless property to one worth nearly $300,000.

5. Three breaches relating to the failure of appellees to enclose the required “statement”, presumably the “duplicate copy of such returns”, and the “full report of all operations, etc.”, called for in the lease, belong in the same category as 4, supra.

6. One breach refers to the Gullic judgment. This is a disputed item involving only $296.18. Appellee contends he settled a judgment liability of the mine owners involving occupancy of houses on the mine property, for a lump sum, at a saving of $296.18, which they then deducted from royalty payments. While there is no specific finding by the trial court on this issue, the court’s general finding that lessee did not deviate from faithful performance, and the finding as to the amount of unpaid royalties still due, would indicate that the court adopted appellee’s contentions and there is support in the record for such a holding.

7. One breach relates to “other lapses” in payments occasioned by strikes and other causes, although the lease specifically provided its terms were subject to “fire, flood, strike and other acts of God.”

8. One breach was caused by appellee’s withholding part of a royalty payment one month upon receipt of notice from one royalty owner that he held a third party claim against another owner. This would scarcely appear to be a sufficient ground for refusing to renew the lease.

9. Seven breaches, involving approximately $3400,¹³ are explained by appellee on the ground that they involve underpayments or late payments prior to June 1937.

Appellee bases his principal explanation of these breaches on the ground that lessee sent a statement to appellants as of May 30, 1937, showing underpayment of only $17.00 to that date. To this statement no objection was made. Appellee argues that this amounted to an account stated which settled the royalty payments up to that date. Again we have only the trial court’s general finding that appellee faithfully complied with the terms of the lease, but we cannot say that the record on this point requires a reversal. Appellants argue that appellee had exclusive knowledge of the facts on which the statement was rendered and that appellants had no way of ascertaining the correctness of the statement. But appellants had, by the lease, full access to lessees’ books and could have ordered a full audit if it did not find the information readily available.

10. One breach, involving $10.51, was occasioned by an “oversight”.

B. Violations of California Law: Appellants set forth some 21 violations of Mine Safety and Mechanical Power Transmission orders of the California Industrial Accident Commission. Appellee does not dispute these separate violations. He does contend, however, that the lease provision had no reference to regulations of the Accident Commission, but referred only to statutes and regulations of the Bureau of Mines.

Assuming this contention is not well taken, the record shows that the Commission allows a reasonable time for correction of any infraction of its numerous regulations, and it further shows that all matters testified to as violations were settled, and the case closed as far as the Accident Commission was concerned. All of these alleged violations appear to be relatively minor infractions and while it was necessary for the Commission to call the attention of lessees to certain violations more than once, it nevertheless is undisputed that appellee was not proceeded against, the mine was not closed and lessors were not injured by any of the violations of these safety orders. Furthermore, correction of all these violations to the satisfaction of the Commission fully bears out the trial court’s finding of faithful compliance.

With reference to the alleged violations, by lessee, of California mining regulations, the record disclosed an exceptionally safe operation of the mine.

Insofar as can be discerned from the record during said ten year period not one fatality occurred. Lessee received a letter from the Industrial Indemnity Exchange, the company carrying the compensation insurance, a portion of which we quote:

“You have asked that we write you a letter setting forth the classifications and rates applicable to your operations at Hornitos, California, by policy year from 1939 up to the current policy year, which will reflect to a certain degree your past experience and the safe manner in which you have operated your mine.

“We ,are pleased to enclose a copy of our History Sheet showing the premium and losses as well as the dividends earned from 1939 to 1944. This sheet also shows the classifications and rates applicable by policy year as well as the experience modifications. In 1939 you started out at manual rates and your favorable loss record has now produced for you a 25 per cent below manual, which is indeed a fine achievement.”

The record further contains testimony of a mining engineer praising lessee’s safety record. This expert also testified that it is a very rare thing for a California State mining inspector to go through any mine and not have improvements to suggest; and further that although “quite often very strict demands” are made, time is always allowed for corrections.

Lessors had knowledge of the alleged infractions of the mining regulations prior to the request for a renewal of the lease. The Humphrey interests not only had notice of these alleged violations as early as March 5, 1937, but they notified lessees of these alleged breaches then, and again in 1938.

At the time application for the extension was made owners of but a 10/36th interest opposed any extension. All of the other beneficial owners, or lessors, either favored an extension of the lease for another 10-year period, expressed ho opinion, or favored a new lease which would not contain an option in lessee to purchase a three-quarters interest in the mine. Holders of 26/36ths interest were sufficiently satisfied, with lessee’s compliance with the mining regulations to trust them with the continued operation of the mine, if other terms of the lease were adjusted.

C. Failure to keep complete records: Appellants’ contentions on this point are based on the testimony of one Thain, the accountant employed by appellee, to the effect that he was unable, in reviewing the books of the Company in the early days of the lease, to determine from those books just what the royalty liability was as to various lots of concentrates, ores, and bullion sent to the smelter at particular times. Thain testified that it was necessary for him to go outside the books covering that early period for oral and other information to make up his records, and that some of the hauling deductions were not fully reflected on the books.

The fact remains, however, that despite this difficulty that Thain experienced in examining the books kept by his predecessors, he was able to work out the royalty liability of the lessee over the whole period of the lease. It should also be noted that the only complaint as to the failure to keep these records appears in this suit. Appellants can scarcely claim injury now because appellee’s accountant had trouble, due to the method, or lack of method of bookkeeping used in the early days of the lease, in determining lessee’s liability. There is no complaint by appellants that, at any time during the period when the completeness of the records is challenged, appellants were unable to determine how much it was owed, or how it was harmed by this alleged violation of the lease.

These then are the breaches and violations of the covenants relied upon by appellants as justifying their refusal to renew the lease. Appellants urge that strict compliance with all covenants in the lease was a condition precedent to the granting of a new lease, and argue that, while the breaches here perhaps would not justify a forfeiture, they are sufficient to warrant appellants’ refusal to renew appellee’s lease. In support of this proposition appellants cite Swift v. Occidental Mining & Petroleum Co., 141 Cal. 161, 74 P. 700, and Behr-man v. Barto, 54 Cal. 131.

In Swift v. Occidental Mining & Petroleum Co., supra [141 Cal. 161, 74 P. 704], the language relied on that “The waiver of the forfeiture is one thing; the renewal of the lease is quite another”, etc., was unnecessary to the decision in that case, which was to remand the proceeding for a new trial because findings, other than those to which the quoted language was applicable, were held to be unsupported by the evidence. (141 Cal. 171, 74 P. 700) Furthermore, the court did, also by way of dictum indicate that a practical construction of the lease by lessee, or a waiver of a doubtful right in the lease by lessor should certainly not defeat the right to a renewal.

Behrman v. Barto, supra, merely holds that where the lessee had committed certain defaults, her remaining in possession after the original term would not constitute notice to the lessor that lessee elected to continue the lease.

The trial court found no deviation from faithful performance of the lease because of any grossly negligent, wilful, or fraudulent breach of duty, and, viewing the whole record, we are unable to disagree with the trial court.

Under the terms of the lease faithful performance is the requirement. It is not reasonable in human experience to expect that there could have been full, exact, strict, complete and perfect compliance with all of the covenants. Operators of a mine are dependent on all their employees doing their full duty at all times. Despite the exercise of the highest standard of care some breaches were bound to occur over a 10-year period. At some point during the term some of the records were bound to be “incomplete” within that covenant of the l'ease. -At certain times, due to the impossibility of human perfection, some of the Mine Safety Orders were bound to be violated.

But a readiness on the part of lessees to comply when violations were called to their attention is evidenced by the fact that before the Industrial Accident Commission was required to take steps which might have slowed production or otherwise injured lessor, all violations were corrected.

It is significant that none of the violations alleged under any category materially harmed the productivity of the mine. For it must be kept in mind that lessees took a virtually worthless, wholly inoperative mine at the beginning of their term, and within ten years they had produced nearly one and one-half million dollars worth of ore, paid lessors over $141,000 in royalties, placed nearly $60,000 worth of equipment at the mine, and developed ore in place at the end of their term on which an estimated net profit of some $200,000 may be made.

Viewed against this background and against the background of the due diligence exercised by appellee in his faithful performance of the lease, we think he has sufficiently complied with the condition precedent.

Our conclusion in this regard is strengthened by § 3275 of the Civil Code of California: “Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.” (Italics ours.)

§ 3275 is but an affirmance of the generally prevailing equitable principles, and for an excellant discussion of those principles, see Fountain Co. v. Stein, 97 Conn. 619, 118 A. 47, 27 A.L.R. 976.

It can scarcely be questioned that the refusal to renew so valuable a lease would, if sustained, be a “loss in the nature of a forfeiture”. The lower court has found, and we think correctly, that there was no “grossly negligent, willful, or fraudulent breach of duty”. Therefore, the only question remaining is whether lessee has made “full compensation to the other party”.

As we have said, the breaches alleged fall into three classes. As to the underpayment of royalties, the trial court found that $93.19 was the amount required to give lessors “full compensation”, and the judgment orders appellee to pay that sum. As to violations of the state laws and regulations, the record shows that all violations have been corrected and that lessee is now in full compliance.

As to failure to keep records, appellee has now compiled a full summary of its production, deductions made, and royalties paid during the 10-year term. We do not understand that appellants, aside from challenging the right of appellee to make certain of the deductions shown, question the correctness of the figures shown on this summary.

Thus, full compensation has been made to the lessor, in the sense that all of the deficiencies have been made up, and what lessor complains of as missing has been supplied. Consequently, we do not think the case is like that of Crowell v. City of Riverside, 26 Cal.App.2d 566, 80 P.2d 120, where the court held that § 3275 would not apply to relieve against a violation of a covenant not to sublet. Such a covenant is clearly not subject to “full compensation” for its breach.

Judgment affirmed.

1 In its order approving the filing of that petition the Court ordered the debt- or to continue in possession of the mine under the terms of the lease involved herein.

2 Appellants are: (1) Owners as trustees of the legal title, and (2) owners of 22/30ths of the equitable title of the mine.

3 In re Mount Gaines Mining Co., D.C. Nev., 46 F.Supp. 910.

4 Hart v. California Pac. Title & Trust Co., 9 Cir., 136 F.2d 430.

5 See notes 3 and 4.

6 11 U.S.C.A. § 110, sub. b.

7 11 U.S.C.A. § 510(1).

8 11 U.S.C.A. § 506(7).

9 In re Childs Co., D.C.S.D.N.Y., 64 F. Supp. 282, Consolidated Gas Electric Light & Power Co. of Baltimore v. United Railways, 4 Cir., 85 F.2d 799, certio-rari denied 300 U.S. 663, 57 S.Ct. 493, 81 L.Ed. 871.

10 In a brief submitted in this case in which they are a statutory party under § 208 of the Bankruptcy Act, 11 U.S.C.A. § 608.

11 See Gavina v. Smith, 25 Cal.2d 501, 505, 154 P.2d 681.

12 Braun v. Leo G. McLaughlin Co., 93 Cal.App. 116, 123, 269 P. 191; Robertson v. Drew, 34 Cal.App. 143, 144, 166 P. 838; Cf. Orr v. Doubleday, Page & Co., 223 N.Y. 334, 119 N.E. 552, 1 A.L.R. 338.

13 These items may partially duplicate the $498.96 of unpaid royalties discussed in 2, supra, since that figure is the total unpaid royalties due in October 1937, whereas the $3400 covered in this heading include late payments', some of which were paid before October 1937