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Elkhorn-Hazard Coal Land, LLC v. Enterprise Mining Company, LLC

United States District Court, E.D. Kentucky, Southern Division, Pikeville

February 18, 2015

ELKHORN-HAZARD COAL LAND, LLC, Plaintiff,
v.
ENTERPRISE MINING COMPANY, LLC, Defendant.

MEMORANDUM OPINION AND ORDER

AMUL R. THAPAR, District Judge.

This breach-of-contract action presents two questions to the Court: First, did the lease at issue impose a duty to mine on Enterprise Mining Company, LLC ("Enterprise")? Second, did the lease require that Enterprise receive permission from the Lessor, Elkhorn-Hazard Coal Company ("Elkhorn"), before surrendering coal-mining premises back to Elkhorn? Because the answer to both questions is "no, " the Court will grant Enterprise's motion for summary judgment and deny Elkhorn's motion for summary judgment.

BACKGROUND

Elkhorn owns coal-mining property in eastern Kentucky. In 2001, Elkhorn leased some of its land to Diamond May Coal Company ("Diamond")-Enterprise's predecessor. Diamond received the right to mine the coal in exchange for paying Elkhorn royalties from the sale of the coal. R. 6-1 at 2, 6-7 (the "Lease"). Additionally, Diamond agreed to pay certain minimum royalties regardless of how much-if any-coal it mined. R. 6-1 at 6, 11-12. By 2006, Enterprise and Diamond merged, and Enterprise took over Diamond's rights and responsibilities under the Lease. See R. 6-7 at 2 (Fifth Supplement to the Lease). Over the life of the Lease, the parties added several parcels of land to the Lease, some of which Enterprise surrendered back to Elkhorn. This suit centers on one such parcel: the Sugar Branch Premises.

In December 2011, Enterprise began shutting down operations on one mine in the Sugar Branch Premises, the EMC #8 mine. R. 14-1 (letter from Enterprise agent Paul Mullins, dated January 31, 2012). Nine months later, Enterprise gave written notice that it would surrender the Sugar Branch Premises back to Elkhorn. R. 6-12 (letter from Paul Mullins, dated September 24, 2012). Shortly thereafter, Elkhorn brought this diversity action for a declaratory judgment, compulsion of arbitration, and breach-of-contract damages. R. 1. Elkhorn seeks a declaration that Enterprise breached the Lease by failing to conduct its mining operations according to the Lease terms, damages associated with the breach, and to compel Enterprise to arbitrate the dispute. Id. at 7-9.

The parties filed cross-motions for summary judgment. R. 98 (Enterprise), R. 103 (Elkhorn). For the reasons stated below, the Court will grant Enterprise's motion and deny Elkhorn's motion.

DISCUSSION

Before addressing the merits of this contract dispute, the Court must first decide what law to apply. The Lease provides that the agreement "shall at all times be governed by and construed in accordance with the laws of the Commonwealth of Kentucky." R. 6-1 at 33 (section 13.8). And neither party disputes that Kentucky law applies. In Kentucky, the interpretation of a contract is a question of law for the court. Abney v. Nationwide Mut. Ins. Co., 215 S.W.3d 699, 703 (Ky. 2006). Courts must give effect to the plain and unambiguous terms of a contract. Id. If the contract is unambiguous, the court looks "only as far as the four corners of the document" to determine the parties' intent. Id. The contract "must be construed as a whole, " giving effect to "every word in it, if possible." Morganfield Nat'l Bank v. Damien Elder & Sons, 836 S.W.2d 893, 895 (Ky. 1992).

Elkhorn contends that Enterprise breached two contractual obligations: (1) to mine EMC #8 until all of the mineable and merchantable coal ("M and M coal") is exhausted, and (2) to provide notice and receive Elkhorn's approval before surrendering any coal premises in the leasehold. But the Lease-as amended by the supplements-does not impose either duty on Enterprise.

I. Duty to Mine

When a lease requires the lessee to mine a specific amount of a coal or mine until a coal seam is exhausted, the requirement is usually explicit. See, e.g., Hall v. Eversole's Adm'r, 64 S.W.2d 891, 893 (Ky. 1933) ("The second parties agree to mine not less than 40, 000 tons of coal from the Harlan seam of coal during each year of the life of the lease."); Laurence E. Tierney Land Co. v. Kingston-Pocahontas Coal Co., 43 S.W.2d 517, 519 (Ky. 1931) ("In case the lessee... shall fail to work and operate [the leasehold] for a period of four (4) months, at any one time, then this lease... shall be forfeited."); Muncey Coal Mining Co. v. Muncey, 268 S.W. 293, 293 (Ky. 1925) ("[L]essee agrees that he will mine from the leased premises such an amount of coal during each and every year of this lease... as will amount to and make the royalty due at least twelve hundred dollars."). But the Lease in this case does not explicitly impose a duty to mine a certain amount of coal nor, indeed, to mine any coal at all.

Two sections of the Lease indicate that Enterprise does not have any duty to mine- much less a duty to mine all of the M and M coal in the leasehold. The first, section 1.1, recites the duration of the Lease: Elkhorn leased premises to Enterprise for two years or until Enterprise mined all of the M and M coal, whichever occurred first. R. 6-1 at 2. Enterprise has a unilateral right to renew the Lease from year to year for up to thirteen additional years; if Enterprise does not give notice of intent to terminate, the Lease renews automatically. Id. at 2-3. Because Enterprise had complete discretion over whether to renew the lease after the second year, it could terminate the lease before mining all of the coal. Thus, from the outset, the parties contemplated that Enterprise might not mine all of the M and M coal in the leasehold.

The second section supporting the absence of a duty to mine is section 4.1. For the two-to-fifteen years that Enterprise could lease Elkhorn's land, section 4.1 of the Lease gives Enterprise "the right to develop the Leasehold at Enterprise's discretion." 6-1 at 6. "[A]t Enterprise's discretion" likely means that Enterprise does not have a duty to mine coal. The minimum royalties clause in section 4.1 supports this interpretation. Evidently anticipating that Enterprise might not produce any coal, section 4.1 also provides that Enterprise must pay minimum royalties to Elkhorn "regardless of Enterprise's failure to produce coal from the Leasehold, " id., as provided for by section 5.1, id. at 11 (describing the minimal-royalty requirement). Yet again, the Lease specifically contemplates that Enterprise might not mine all of the M and M coal in the leasehold.

In an attempt to get around sections 1.1 and 4.1, Elkhorn alleges that sections 5.4 and 13.14 imply that Enterprise has a duty to mine. Section 5.4 provides that if Enterprise "encounters or leaves unmined" coal that it finds unmineable or unmerchantable, then it may give Elkhorn an "Abandonment Notice" and abandon that section of the mine. R. 6-1 at 12-13. Elkhorn could accept the Abandonment Notice and declare the abandoned coal no longer part of the leasehold, or it could reject the Notice, meaning the coal would remain part of the Lease. Id. If Elkhorn accepted the Notice, it could then lease the abandoned coal to another company. Id. However, Enterprise could abandon the coal as unmineable and unmerchantable only if Elkhorn consented or a "proper court of last resort" determined that the coal was unmineable and unmerchantable. Id. at 12. ...


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