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New London Tobacco Market, Inc. v. Kentucky Fuel Corp.

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

September 23, 2019

NEW LONDON TOBACCO MARKET, INC., AND FIVE MILE ENERGY, LLC, Plaintiffs,
v.
KENTUCKY FUEL CORPORATION AND JAMES C. JUSTICE COMPANIES, INC., Defendants.

          MEMORANDUM OPINION & ORDER

          Gregory F. Van Tatenhove, United States District Judge.

         Due to extensive litigation misconduct, this Court entered default judgment against the Defendants on September 30, 2014 as to Counts I, II and V of the Plaintiffs’ Amended Complaint. [R. 206.] The undersigned referred the issue of damages on those counts to Magistrate Judge Ingram for Report and Recommendation. [R. 383; R. 384.] Judge Ingram conducted a three-day evidentiary hearing and reviewed post-hearing briefing before issuing his exhaustive and carefully considered Recommendation. [R. 437.] The parties were given fourteen days to object to Judge Ingram’s Recommendation, and both have done so. [R. 438; R. 444.] For the reasons that follow, the Court will OVERRULE the parties’ objections and ADOPT Judge Ingram’s recommendation, with sight modification.

         I

         A

         Under Federal Rule of Civil Procedure 72(b)(2), a petitioner has fourteen days after service to register any objections to the Recommended Disposition or else waive his rights to appeal. In order to receive de novo review by this Court, any objection to the recommended disposition must be specific. Mira v. Marshall, 806 F.2d 636, 637 (6th Cir. 1986). A specific objection “explain[s] and cite[s] specific portions of the report which [counsel] deem[s] problematic.” Robert v. Tesson, 507 F.3d 981, 994 (6th Cir. 2007). A general objection that fails to identify specific factual or legal issues from the recommendation, however, is not permitted, since it duplicates the Magistrate’s efforts and wastes judicial economy. Howard v. Sec’y of Health & Human Servs., 932 F.2d 505, 509 (6th Cir. 1991).

         Plaintiffs objected to the Report and Recommendation on July 10, 2019 [R. 438], and Defendants objected on July 24, 2019.[1] [R. 444.] In sum, Plaintiffs argue for declaratory relief in Count I and offer alternative methods of calculating damages with respect to Count V and punitive damages. [R. 438.] Defendants argue that Judge Ingram’s recommended award for lost royalties is excessive, and that the award of damages for fraud and consulting services were in error. [R. 444.] Many of the parties’ objections are sufficiently definite to trigger this Court’s obligation to conduct a de novo review. See 28 U.S.C. § 636(b)(1)(c). The Court has satisfied that duty, reviewing the entire record, including the motions, briefing, the parties’ arguments, relevant case law and statutory authority, as well as applicable procedural review.

         B

         Magistrate Judge Ingram’s Recommended Disposition more thoroughly sets out the facts of this case, but a few will be repeated here. This lawsuit arises out of a contract to mine coal. On September 30, 2014, this Court entered default judgment against Defendants as to Counts I, II and V of the Amended Complaint. [R. 206.] Count I alleges Defendants breached Section 9 of the Fourth Amendment to the parties’ contract by failing to pay required minimum royalty payments and failing to pay monthly retainer fees. Count II alleges that, because of the breach, Defendants owe lost tonnage royalties, as calculated using an independent arbiter pursuant to Section 7 of the Fourth Amendment. Finally, Count V alleges that Defendants committed fraud in the inducement of agreement to the Fourth Amendment of the parties’ contract. Plaintiffs previously voluntarily dismissed Counts III and IV. [R. 251.] Only the issue of damages remained, which the undersigned referred to Judge Ingram. [R. 251.] Two rounds of briefing followed, and Judge Ingram prepared an initial recommendation without holding a hearing. The undersigned rejected that recommendation, finding it necessary to hold an evidentiary hearing on the issue of damages. [R. 321.] An evidentiary hearing was conducted before Judge Ingram from December 11 to December 13, 2018. [R. 415; R. 416; R. 417.] Judge Ingram considered the evidence presented at the hearing and post-hearing briefing to formulate the Recommendation that is before the Court. [R. 437.]

         As to Count I, Judge Ingram recommended damages of $970, 000.00 in unpaid monthly retainer fees. [R. 437 at 9.] The Amended Complaint alleges that Kentucky fuel paid $50, 000.00 in retainer fees in May 2011, but had not paid any since then. The parties disputed whether retainer fees continued to accrue, or whether Defendant’s obligation to pay retainer fees ceased when Plaintiffs initiated this lawsuit. Judge Ingram found that the effect of default judgment is a finding for Plaintiffs that retainer fees have continued to accrue to the date of final judgment. Accordingly, Judge Ingram found that, at the time of filing his recommendation, 102 months had passed since December 2010, when the first monthly payment was due, and therefore the retainer fees owed amounted to $1, 020, 000.00. Subtracting the $50, 000.00 already paid, Judge Ingram recommended awarding Plaintiffs $970, 000.00 in unpaid retainer fees.

         Judge Ingram further recommended against issuing a declaratory judgment holding that Plaintiffs are entitled to continue receiving annual payments of the $75, 000.00 minimum royalty. [R. 437 at 10.] To date, the parties agree that Defendants are current on the minimum royalties payments to Plaintiff, although most payments were made late. Plaintiffs argued that the Defendants continue to be obligated to pay the minimum royalties, but that the history of late payments and of this case indicate that they will likely fail to pay minimum royalties in the future. And although Defendants have continued to pay the royalties up until now, they have contested whether they are still contractually obligated to do so. Assuming without deciding that an actual controversy exists that would confer jurisdiction on the court to issue a declaratory judgment, Judge Ingram nevertheless recommended the Court decline to do so, in its discretion.

         Neither party put forth evidence regarding how the agreement to pay minimum royalties may be terminated, or whether and when it was terminated. Without a more detailed record on the content of the agreement as to this issue, Judge Ingram recommended against issuing a declaratory judgment for the Plaintiffs.

         Damages under Count II consist of lost tonnage royalties for failure to mine. According to Section 7 of the Fourth Amendment to the parties’ contract:

Upon the occurrence of an Event of Default, NLTM and Fivemile Energy may exercise any and all right and remedies available to NLTM at law or in equity by reason of such Event of Default . . . In the alternative, NLTM and Fivemile Energy may determine the estimated lost royalties that it would have received but for the Event of Default by Kentucky Fuel and such amount shall be immediately due and payable by Kentucky Fuel under the terms of this Agreement. Such royalties shall be determined by an independent arbiter selected by NLTM for the purpose of determining the amount of royalties that would have been paid by Kentucky Fuel to NLTM under the terms of this Agreement.

[R. 40-5 at 6.] Under this provision, Plaintiffs hired Bob Conway, an independent arbiter, to calculate the lost tonnage royalties. [R. 40 at 11.] The Amended Complaint seeks $16, 990, 000 in damages based on Mr. Conway’s report. Consistent with his previous recommendation [R. 302], Judge Ingram found that the independent arbiter’s report establishes the appropriate measure of damages on Count II, i.e., $16, 990, 000. The contract was clear: Section 7 provides that damages may be calculated by an independent arbiter, and such damages “shall be immediately due and payable.” [R. 437 at 17.] Judge Ingram further noted that there is no provision within the contract giving the Defendants the ability to challenge the estimate of the independent arbiter. Id. Therefore, Judge Ingram recommended damages as to Count II in the amount of $16, 990, 00, with 8% prejudgment interest compounded annually beginning May 1, 2012.

         Finally, Count V alleges fraud in the inducement of the Fourth Amendment to the parties’ contract. [R. 40 at 3, 7, 10, 14.] Plaintiffs allege “[Defendants] falsely and fraudulently represented to NLTM and Fivemile that they would make the payments required by the Fourth Amendment and perform their obligations thereunder in order to induce NLTM to execute the Fourth Amendment.” Id. at 14. Plaintiffs sought compensatory damages “in the amount of $17, 000, 000, or such other amount that the evidence may show is due and owing.” [R. 40 at 15.] Judge Ingram first determined that compensatory damages under Count V should include $20, 000 “for unreimbursed lease payments for the Strong Brothers Property under Section 9 of the Fourth Amendment.” [R. 437 at 31.] This amount appears to be undisputed, and Defendants make no mention of this figure in their objections to the Recommendation.

         Calculating damages under this section beyond that is complicated. Judge Ingram ultimately put forth two distinct theories of damages for the Court to consider. The first theory is derived from the language of the controlling documents. Id. at 32. Judge Ingram reasoned that because “plaintiffs request compensatory damages ‘in the amount of $17, 000, 000, or such other amount that the evidence may show is due and owing, ” that the proper measure of damages was lost royalties, as calculated in the Conway report, plus the unreimbursed Strong Brothers lease payments. Judge Ingram thought that this figure would be “consistent with the Plaintiffs’ anticipated benefit of their bargain.” [R. 437 at 32; R. 302 at 14.] Judge Ingram reached this conclusion in part because he felt constrained by Rule 54 and its mandate that “[a] default judgment must not differ in kind from, or exceed in amount, what is demanded in the pleadings.” [R. 437 at 33; Fed.R.Civ.P. 54.] Therefore, under this first theory, Judge Ingram recommended $17, 010, 900, without prejudgment interest.

         In the alternative, Judge Ingram recommended restitutionary damages based on the “NewLead figures, ”[2] and dependent on the Court’s decision whether or not to grant Plaintiff’s Renewed Motion for Sanctions. [R. 378.] Judge Ingram’s recommendation more thoroughly set out the procedural posture of the case and this motion specifically. The Court will endeavor to summarize. Plaintiffs filed a Motion for Sanctions based upon Defendants’ failure to timely supplement discovery with production of over 5, 000 documents relating to the transfer of the Fivemile lease and Permits to New Lead Holdings, Ltd. [R. 378.] The Court denied that Motion without prejudice, noting that the motion would be “best suited to be taken up in the course ...


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