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Aces High Coal Sales, Inc. v. Community Trust & Bank of West Georgia

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

July 21, 2017

ACES HIGH COAL SALES, INC. PLAINTIFF
v.
COMMUNITY TRUST & BANK OF WEST GEORGIA, et al. DEFENDANTS

          MEMORANDUM OPINION AND ORDER

          David L. Bunning United States District Judge

         I. Introduction

         Defendants initially moved to dismiss Plaintiffs' Second Amended Complaint in March 2016, and moved to dismiss Intervening Plaintiffs' Complaint in April 2016. Those motions were granted in a memorandum opinion and order entered on November 3, 2016. (Doc. # 170). Plaintiffs and Defendants have now moved to alter or amend that order.

         II. Factual Background

         This case is the product of a lengthy, complicated set of facts involving a large number of parties. The Plaintiffs, Aces High Coal Sales, Inc. (“Aces High”) and Wendell Elza, brought claims against Defendants Community Bank & Trust of West Georgia (“CB&T”), William R. Stump, Jr. (individually and as officer and director of CB&T), Taylor Rose Energy, LLC (“Taylor Rose”), Bransen Energy, Inc. (“Bransen Energy”), Michael Peters, Kyle Tomlin, Riverside Advisors, LLC (“Riverside”), Troutman Sanders, LLP (“Troutman Sanders”), and Michael E. Johnson, Esq, seeking a declaratory judgment and alleging fraud, tortious interference, libel, unjust enrichment, and RICO claims. Intervening Plaintiffs, Mike Trimble and Trimble Coal Sales, also brought a claim against all of the named defendants for a declaratory judgment. The defendants can be categorized into four (4) groups as follows:

• Peters Defendants - Michael Peters and his two companies, Taylor Rose and Bransen Energy
• Tomlin Defendants - Kyle Tomlin and the company he works for, Riverside
• Bank Defendants - CB&T and its President, William Stump
• Troutman Sanders Defendants - the law firm Troutman Sanders and attorney Michael E. Johnson

         Plaintiff Aces High buys, sells, and finances the purchase of coal by third parties. (Doc. # 111 at ¶ 22). Intervenor Plaintiff Michael Trimble is also in the business of buying and selling coal, and finalizing the purchase of coal for third parties. (Doc. # 62 at ¶ 27). Michael Trimble conducts business with Trimble Coal Sales, LLC, as a joint venturer. Id. at ¶ 28.

         In or around early 2011, Trimble introduced Aces High's sales manager, Wendell Elza, to Defendant Michael Peters. (Doc. # 111 at ¶ 22). Peters informed Elza that he had contacts with Dominion Virginia Power (“Dominion”), an electrical utility that was building a plant in Virginia. Id. Aces High subsequently entered into a contract with one of Peters's companies, Bransen Energy, to stockpile coal while the Dominion plant was being built. Id. at ¶ 23. Several months later, Aces High began delivering the coal to the stockpile location pursuant to the contract. Id. at ¶ 24. Elza and Peters became friends, and continued to “engage[] in a large volume of business in the ensuing years.” Id. at ¶¶ 26-27. But, according to Plaintiffs, Peters engaged in fraudulent activity throughout their years-long relationship.

         First, Plaintiffs claim that Peters defrauded Dominion. Bransen Energy entered into an agreement with Dominion to supply a substantial portion of the performance fuel needed to power the new plant. Id. at ¶ 31. Under the terms of the agreement, Bransen would supply Dominion with “run-of-mine” coal. Id. at ¶ 32. As part of that agreement, Bransen contracted with Aces High to deliver the coal for Dominion. Id. at ¶ 33. Unbeknownst to Plaintiffs, Peters had mixed “coke breeze”[1] in with the “run-of-mine” coal that was delivered to Dominion. Id. at ¶ 37. In 2014, Dominion terminated its agreement with Bransen, and filed a complaint against Bransen in federal court in Virginia. Id. at ¶¶ 48-49. The court entered partial summary judgment in Dominion's favor, and Dominion later obtained a sizeable judgement against Bransen. Id.

         Next, Plaintiffs assert that Peters defrauded others in a scheme to sell cannel coal briquettes. Allegedly, Peters engaged in this scheme with the Tomlin Defendants. Defendant Kyle Tomlin is a hedge fund manager for Riverside Advisors, LLC. Id. at ¶ 82. At some point, Tomlin introduced himself to Elza as Peters's partner. Id. Plaintiffs learned about the briquette scheme from Peters's and/or Tomlin's purported employees. Id. at ¶ 127. The employees told Plaintiffs that a building was loaded with bags of briquettes in order to appear full to prospective financial partners, when in reality, the building was empty past the first few layers. Id. at ¶ 127-28. Allegedly, Peters and Tomlin used this scheme to defraud CB&T into approving them for a loan. Id.

         In 2012, Peters informed Elza that he was involved in a deal with an Irish importer, in which he would sell the cannel coal briquettes in Ireland for home heating. Id. at ¶ 52. Peters explained that he and Tomlin were working to put together financing for the briquette sales. As his part of the deal, Tomlin would bring in capital by investing into Taylor Rose, another one of Peters's companies. Id. at ¶ 53. This deal eventually fell through when an Irish official determined that the briquettes could not be sold in Ireland. Id. at ¶ 129. As a result, Peters could not make the payments on his loan from CB&T. Id. at ¶ 133.

         After the briquette deal failed, Peters advised Elza that he was selling the cannel coal to domestic buyers. Id. at ¶ 54. Aces High found a buyer for some portion of the cannel coal, and paid Bransen $250, 000 for 25, 000 tons. Id. at ¶ 55. A few days later, Aces High purchased more of the cannel coal, and voluntarily paid Bransen double the amount charged. Id. Aces High continued to prepare, load, and ship the cannel coal on a regular basis through February 2015. Id. at ¶¶ 55-59. Aces High was not aware that the cannel coal was subject to a lien by CB&T. Id. at ¶¶ 60-61.

         In July 2014, the Peters Defendants and Tomlin Defendants joined together to obtain a loan for Peters, allegedly because they were under financial stress after the Irish briquette deal fell through. Id. at ¶ 62. Tomlin had invested in Peters's company, Taylor Rose, and thus, the infusion of capital into one of Peters's companies would also benefit Tomlin directly. Id. at ¶ 63. Tomlin had a relationship with a bank, CB&T, and undertook efforts to obtain a loan from them on Taylor Rose's behalf. Id. at ¶ 64. CB&T made a loan to Taylor Rose, which was secured by a piece of real property and the cannel coal located on the property. Id. at ¶¶ 72, 76. Taylor Rose represented that they owned the cannel coal, but Bransen Energy was selling the same cannel coal to Aces High and others. Id. at ¶ 77.

         Over time, Peters had incurred a large debt to Aces High. In or around July 2014, Aces High entered into a deal with Peters's other company, Bransen Energy, whereby Aces High would sell coal to Bransen, Bransen would sell the coal to Duke Power Company, and Aces High would deliver and load the coal for transport. Id. at ¶ 89. The agreement provided that Bransen would pay Aces High after Duke wired its payment to Bransen. Id. Bransen never paid Aces High for eight barge loads, but claimed that this was because Duke had never paid it. Id. at ¶ 90. Later in 2014, Peters told Elza that he had a buyer for some of the coal. Id. at ¶ 91. Aces High wired money to Bransen to purchase the coal to sell to the buyer. Id. Peters was supposed to repay Aces High within two weeks, but he never did. Id. In January 2015, Peters presented a deal to Aces High to purchase a bond to fund Taylor Rose. Id. at ¶ 92. Aces High loaned money to Peters, which he promised to repay with interest within five days. Id. at ¶ 93. Instead of repaying Aces High, Peters applied the money to an outstanding debt on the loan from CB&T. Id. at ¶ 96.

         After incurring a debt of approximately $1.4 million owed to Aces High, Peters ceased communication with Elza. Id. at ¶ 104. Eventually, Elza contacted Trimble, who was still in communication with Peters. Id. Consequently, Trimble contacted Peters and advised him that he found a buyer for a large portion of the cannel coal. Id. at ¶ 105. Trimble proposed a deal in which he would sell coal to Eagle Coal Sales, which would yield enough profit for Peters to satisfy the debt owed to Aces High. Id. Aces High would be paid for its services rendered in loading and screening the coal sold by Trimble in lieu of being repaid its debts by Peters. Id. According to Plaintiffs, this arrangement “constituted good and valuable consideration.” Id. The arrangement also provided for Eagle Coal Sales to sell the coal it received to Kolmar Americas, Inc. in West Virginia and Noble Energy, Inc. in Kentucky. Id. at ¶ 106. Aces High performed its part of the deal, loading and screening coal at the West Virginia site until April 16, 2015, when it had “earned back the amounts unpaid by [Peters] together with repayment of its costs associated with screening and loading the cannel coal.” Id. at ¶ 124.

         Unbeknownst to Aces High, the cannel coal in the Eagle Coal Sales deal was subject to a lien as collateral for CB&T's loan to Taylor Rose. Id. at ¶ 174. On August 21, 2015, CB&T, through Michael Johnson, its attorney at Troutman Sanders, sent letters demanding payment for the allegedly secured coal that was taken by Aces High and sold without the bank's authorization. Id. at ¶ 170. One of the letters was sent to Plaintiffs' attorney James David Johnson. Id. at ¶ 170. The letter asserted that CB&T held a security interest in the coal that was wrongfully taken from Taylor Rose by Elza, without CB&T's consent. Id. The letter also claimed that Plaintiffs were civilly and criminally liable for taking the coal, and demanded immediate payment of the fair market value of the coal, estimated at $6, 375, 000. Id. at ¶ 185.

         CB&T's attorney also sent letters to the two downstream purchasers of the secured coal, Kolmar and Noble. Id. at ¶ 205. According to the Complaint, “[i]t was the intent of CB&T, and the Troutman Sanders Defendants, undeservedly to cause Kolmar and Noble Energy to pay them monies toward the debt on the Loan, which debt was owed by the Tomlin Defendants and/or the Peters Defendants, with full knowledge of those defendants, all in a concocted scheme to defraud Kolmar and Noble Energy.” Id. at ¶ 209.

         III. Procedural Background

         Soon after receiving the demand letters, Plaintiffs filed a complaint in this Court. (Doc. # 1). On March 1, 2016, Plaintiffs filed a second amended complaint (“SAC”), requesting a declaratory judgment, alleging RICO violations, and asserting state law claims for fraud, libel, tortious interference, and unjust enrichment. (Doc. # 111). On March 31, 2016, Defendants initially moved to dismiss Plaintiffs' Second Amended Complaint (Docs. # 117, 118, 119, and 121), and on April 4, 2016 moved to dismiss the Intervening Plaintiffs' Complaint (Docs. # 124, 125, and 128). The parties thereafter entered into an agreed order of referral, referring the motions to dismiss to Magistrate Judge Hanley Ingram for final resolution pursuant to 28 U.S.C. § 636(c). (Doc. # 160).

         The Magistrate Judge entered a final Order on the motions to dismiss on November 3, 2016, dismissing Plaintiffs' RICO claims for failure to state a claim. (Doc. # 170). He dismissed the remaining claims without prejudice, finding that the court did not have subject-matter jurisdiction over the supplemental state-law claims, and declining to exercise jurisdiction over the declaratory judgment action. Id. However, the parties all agreed that diversity jurisdiction existed in this case, and that the state law claims should not have been dismissed without prejudice.

         Because the order was a final order, it was appealable directly to the circuit court. Plaintiffs and Intervenor Plaintiffs filed an appeal in the Sixth Circuit. (Docs. # 171 and 172). The Bank Defendants chose instead to file a motion to alter or amend the judgment. (Doc. # 173). Subsequently, Plaintiffs also filed a motion to alter or amend. (Doc. # 174). At this juncture, it was unclear whether the Magistrate Judge retained jurisdiction over the motions to reconsider pursuant to the Section 636(c) referral. Accordingly, the Court ordered the parties to file notice “describing [their] position as to whether the consent memorialized [in the agreed order of reference] include[d] consent for the [Magistrate Judge] to conduct all proceedings in relation to” the motions to alter or amend. (Doc. # 176). Plaintiffs and Intervenor Plaintiffs indicated that they did not believe their prior consent extended to the motions to alter or amend (Docs. # 178 and 179), while Bank Defendants claimed that the Magistrate Judge must enter final judgment on the motions to reconsider (Doc. # 180). Thus, while the Court believed that its prior referral order included all matters related to the motions to dismiss, including motions to reconsider, the parties' lack of explicit consent gave the Court pause. Out of an abundance of caution and for good cause, this Court found that to the extent the prior referral did, in fact, encompass the motions to reconsider, it should be vacated. Therefore, the Court entered a new order of reference, referring the pending motions to alter or amend to the Magistrate Judge for a recommended disposition pursuant to 28 U.S.C. § 636(b). (Doc. # 181).

         Accordingly, the Magistrate Judge reviewed the pending Rule 59(e) motions and prepared a Report and Recommendation (“R&R”) for the Court. (Doc. # 198). In his R&R, the Magistrate Judge recommends granting the Bank Defendants' Rule 59(e) Motion, and granting in part and denying in part Plaintiffs' Rule 59(e) motion. (Doc. # 198). Specifically, the Magistrate Judge recommends vacating the prior order (Doc. # 170) and reinstating the Defendants' Motions to Dismiss, but recommends that the Court still dismiss the RICO claims with prejudice. Id. With respect to the state law claims, the Magistrate Judge recommends dismissing them all (Counts 5, 6, 7, 8, 9, and 10) with prejudice. Finally, the Magistrate Judge recommends dismissing the declaratory judgment action without prejudice. The parties having filed objections to the R&R (Docs. # 199, [2] 200, 201, and 202), and responses to those objections having now been filed (Docs. # 203, 204, 205, 206, 207, 208, 209, 210, and 211), the R&R is ripe for the Court's review.

         For the reasons explained herein, the Report and Recommendation of the Magistrate Judge will be adopted in part and rejected in part. The Court will adopt the recommendation with respect to the state law claims. That portion of the prior order will be vacated, and Defendants' Motions to Dismiss will be reinstated with respect to those claims. However, the Court does not agree with the recommendation that the entire order should be vacated, and the RICO claims and declaratory judgment action reinstated. The portions of the Court's prior order dismissing the RICO claims and declaratory judgment action will remain intact.

         For ease of reference throughout the Court's analysis, the following chart provides a summary of which claims Plaintiffs bring against each group of Defendants:

         Plaintiffs' Claims by Defendant Group

Peters

Tomlin

Bank

Troutman Sanders

Declaratory Judgment

x
x
x
x

1962(c)

x
x

1962(b)

x
x

1962(d)

x
x
x
x

Libel per se

x
x

Tortious Interference

x
x

Fraud

x
x

Unjust Enrichment

x

Constructive Trust

x

Civil Conspiracy

x
x
x

         IV. Analysis

         A. Jurisdiction

         This matter's complicated procedural history invites questions with respect to this Court's jurisdiction and standard of review. As described above, there have been multiple referrals to the Magistrate Judge throughout the life of this case, each pursuant to a different section of the referral statute, and thus, providing for differing levels of review from the District Court. Furthermore, Plaintiffs have appealed the Magistrate Judge's original order to the Sixth Circuit, while at the same time filing a motion to alter or amend the order in this Court. This leaves the Court with multiple layers of jurisdictional questions and potential standards of review. In light of this confusion, the Bank Defendants have moved for the Magistrate Judge to enter a final order on the pending motions. Thus, it is necessary for the Court to peel back each layer to demonstrate its jurisdiction over the pending motions, and to explain the standards of review that will apply to the various issues.

         1. This Court has Jurisdiction despite the pending appeal

         First, and most simply, this Court has jurisdiction over the motions to alter or amend despite an appeal having been filed in the Sixth Circuit. Normally, an appeal would divest the district court of jurisdiction. However, if a party files a motion to alter or amend a judgment under Federal Rule of Civil Procedure 59, “the time to file an appeal runs for all parties from the entry of the order disposing of [that motion].” Fed. R. App. P. 4(a)(4). Thus, “[w]hen a party has filed a timely motion to alter or amend a judgment after a notice of appeal has been filed, the district court still retains jurisdiction to consider the motion.” O'Sullivan Corp. v. Duro-Last, Inc., 7 F. App'x 509, 519 (6th Cir. 2001). Accordingly, the pending appeal does not divest this Court of jurisdiction over the motions to alter or amend.

         2. This Court has jurisdiction despite the prior referrals

         Despite the multiple referrals to the Magistrate Judge throughout the course of this case, this Court presently has jurisdiction over the pending motions. To illustrate, it is necessary to walk through each referral, and the review process available for that referral.

         First, the Defendants' motions to dismiss were originally referred to the Magistrate Judge pursuant to 28 U.S.C. § 636(c)(1). Upon consent of the parties, a Magistrate Judge “may conduct any or all proceedings in a jury or nonjury civil matter and order the entry of judgment in the case, when specially designated to exercise such jurisdiction by the district court or courts he serves.” 28 U.S.C. § 636(c)(1); see also Fed. R. Civ. P. 73. Once a Magistrate Judge enters judgment in a case referred pursuant to Section 636(c)(1), an aggrieved party may appeal directly to the appropriate United States court of appeals from the judgment of the magistrate judge in the same manner as an appeal from any other judgment of a district court.” 28 U.S.C. § 636(c)(3). In discussing the referral statute, the Supreme has stated:

Unlike nonconsensual referrals of pretrial but case-dispositive matters under 636(b)(1), which leave the district court free to do as it sees fit with the magistrate judge's recommendations, a 636(c)(1) referral gives the magistrate judge full authority over dispositive motions, conduct of trial, and entry of final judgment, all without district court review. A judgment entered by a magistrate judge designated to exercise civil jurisdiction under 636(c)(1) is to be treated as a final judgment of the district court, appealable in the same manner as an appeal from any other judgment of a district court.

Roell v. Withrow, 538 U.S. 580, 585 (2003) (internal quotations omitted). Furthermore, a 636(c) referral to a Magistrate Judge may be vacated, but only for good cause shown upon the court's own motion, or for extraordinary circumstances shown by the parties. 28 U.S.C. § 636(c)(3). Accordingly, a District Court does not have authority to review a final order entered by a Magistrate Judge pursuant to a 636(c) referral.

         Here, the parties agreed for the District Court to refer the motions to dismiss to Magistrate Judge Hanley Ingram pursuant to 28 U.S.C. § 636(c). The Order of Reference reflected the parties' consent to refer the motions to dismiss (Docs. # 117, 118, 119, 121, 124, 125, and 128) to the Magistrate Judge, and for the Magistrate Judge to “conduct all proceedings in relation thereto and enter a final order on the motions identified[.]” (Doc. # 160 at 1). The Order noted that the reference was “limited to the specified motions.” Id. at 2. From the terms of the agreed order, it was clear that the Magistrate Judge had full authority to enter a final order on the motions to dismiss. That order was not, and is not, subject to review by the District Court.

         After the Magistrate Judge entered the final order on the motions to dismiss, Plaintiffs and Defendants filed motions to alter or amend that order. Uncertainty ensued as to which judge should properly preside over those motions. The Bank Defendants claim that the motions to alter or amend the order on the motions to dismiss falls within the Magistrate Judge's grant of authority to “conduct all proceedings in relation” to the motions to dismiss. (Doc. # 199 at 6). Plaintiffs, conversely, rely on the limiting language in the Order to assert that their consent extended only to the explicitly identified motions to dismiss, and that subsequent motions to alter or amend are not part of the proceedings “in relation” to those motions.

         As illustrated by the parties' dispute, the Magistrate Judge's authority to enter a final order on the motions to alter or amend hinges on whether those motions are “related” to the motions to dismiss. Indeed, the Rule 59(e) motions relate directly to the substance of the motions to dismiss that were referred to the Magistrate Judge, as they are merely motions for the Court to revisit its prior judgment on the referred motions. It follows that a final ruling on the Rule 59(e) motions would, in effect, serve as a final ruling on the referred motions to dismiss. Because the Magistrate Judge was explicitly granted authority to enter a final judgment on the Motions to Dismiss, the related Rule 59(e) motions to alter or amend that judgment should also fall within the scope of that authority. However, this case presented a more difficult question when Plaintiffs expressed doubt as to the scope of their consent. Because consent from the parties is required for a referral to a Magistrate Judge under § 636©, and because the scope of the consent in this situation was at least questionable, the Court found that there was good cause to enter a new order of reference. See Ambrose v. Welch, 729 F.2d 1084, 1085 (6th Cir. 1984) (per curiam) (finding that there must be “a clear and unambiguous statement in the record indicating that the parties consented to the exercise of plenary jurisdiction by the Magistrate”).

         Accordingly, for good cause shown, and upon the Court's own motion, the Court entered a new order of reference on December 14, 2016, referring the pending Rule 59(e) motions to the Magistrate Judge for a recommended disposition pursuant to 28 U.S.C. § 636(b). (Doc. # 181). Thus, to the extent that the prior referral order did confer authority upon the Magistrate Judge to enter a final order on the Rule 59(e) motions, that authority was vacated. Therefore, the Bank Defendants' Motion (Doc. # 199) for the Magistrate Judge to preside over the pending motions is denied.

         B. Standard of Review

         While the District Court has established jurisdiction over the pending motions to alter or amend, the standard of review it must employ it is not immediately clear. Again, the Court will walk through each step of the proceeding to deduce the appropriate standard of review. The motions presently before the Court were referred to the Magistrate Judge pursuant to § 636(b) for a report and recommendation. Under a § 636(b) referral, “the magistrate judge must promptly conduct the required proceedings” and “enter on the record a recommendation for disposing of the matter, including any proposed findings of fact.” 28 U.S.C. § 636(b)(1)(B). “The district judge must determine de novo any part of the magistrate judge's disposition that has been properly objected to.” Fed R. Civ. P. 72. Here, the parties raised specific and detailed objections to every part of the Magistrate Judge's R&R. Thus, the motions to alter or amend are subject to de novo review. However, the District Court's review is complicated by the fact that the motions seek to alter or amend an order the Magistrate Judge entered pursuant to a referral for final judgment under § 636(c)(1). The question arises, then, concerning the extent to which a District Court may review such an order, which is typically not reviewable, by way of a motion to alter or amend that order.

         The § 636(c) referral gave the Magistrate Judge authority to enter a final judgment on the motions to dismiss “without district court review, ” and “to be treated as a final judgment of the district court.” Roell, 538 U.S. at 585; 28 U.S.C. § 636(c)(3). The referral statute previously contained a provision allowing parties to agree that appeal should be taken to the district court. 28 U.S.C. § 636(c)(4) (West 1996) (repealed Pub. L. 104-317, § 207 (Oct. 19, 1996)). But, Congress eliminated this option in the Federal Courts Improvement Act of 1996. “As a result of that legislation, an appeal from an order or judgment entered by a magistrate judge under § 636(c)(1) is now appealable only to a court of appeals.” Darnell v. Rossen, 116 F.3d 187, 188 (6th Cir. 1997). Accordingly, the District Court is prohibited from reviewing a final order entered by a magistrate judge pursuant to a section 636(c) referral.

         However, the prohibition against District Court appellate review does not necessarily preclude a district court from employing other forms of review. If a final judgment entered by a Magistrate Judge pursuant to a § 636(c) referral is supposed to be treated like a final judgment by the district court, then that judgment must be reviewable pursuant to a Rule 59(e) motion to the same extent that a judgment entered by the district court would be reviewable upon such a motion. Thus, the Court will not review the Magistrate Judge's final judgment de novo, but will elect to review it pursuant to the Rule 59(e) standards, altering the judgment only to the extent that it is subject to alteration under the parameters of Rule 59(e).

         “A court may grant a motion to alter or amend judgment only if there was ‘(1) a clear error of law; (2) newly discovered evidence; (3) an intervening change in controlling law; or (4) a need to prevent manifest injustice.'” ACLU of Ky. v. McCreary Cty., Ky., 607 F.3d 439, 450 (6th Cir. 2010) (quoting Intera Corp. v. Henderson, 428 F.3d 605, 620 (6th Cir. 2005)). The grant or denial of a Rule 59(e) motion “is within the informed discretion of the district court.” Gen. Corp, Inc., v. Am. Int'l Underwriters, 178 F.3d 804, 832 (6th Cir. 1999); see also Leisure Caviar v. United States Fish and Wildlife ...


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