This legal dispute stemmed from American Carbon Corporation (ACC) allegedly breaching a lease granting exclusive mining rights for coal owned by Big Sandy in Pike County, Kentucky. ACC was allowed to mine the “Demised Coal,” defined as mineable and merchantable coal within the property boundaries. In return, ACC was obligated to diligently mine, pay royalties, and reimburse tax payments for the coal.

The lease expired on February 1, 2021, and during the entire five-year term, ACC did not conduct any coal mining. ACC also failed to fulfill financial obligations such as paying minimum annual royalties, deficiency payments, or tax reimbursements to Big Sandy. Approximately three months post-expiration, ACC notified Big Sandy via email that it considered the Demised Coal unmineable and unmerchantable without a capital investment from Big Sandy, using this as justification to excuse itself from lease obligations. ACC consistently argued it was not obliged to perform duties due to the coal’s alleged unmineable and unmerchantable state. Subsequently, on October 25, 2021, Big Sandy initiated legal action in this Court, alleging three counts of breach of contract. The lawsuit sought pre-judgment and post-judgment interest along with attorneys’ fees.

To support its position, ACC presented Bill Johnson as an expert. Big Sandy filed a motion for summary judgment as well as a motion to exclude Johnson’s testimony, citing ACC’s failure to disclose crucial information as required by Federal Rule of Civil Procedure 26(a)(2)(B)(ii). Big Sandy contended that Johnson’s expert opinions were unreliable, irrelevant, and lacked disclosed supporting evidence, urging the Court to exclude them.

Big Sandy claimed ACC breached the Lease by failing to diligently mine the Demised Coal, pay deficiency payments, and reimburse tax payments related to the coal. Big Sandy sought summary judgment on the diligent mining claim, asserting that mineability and merchantability were objective inquiries under Kentucky law. They argued ACC did not use the alternative dispute process outlined in the lease and was estopped from contesting its mineability or merchantability claims due to earlier representations.

Regarding deficiency and tax payments, Big Sandy argued no agreement excused these payments, seeking interest and attorney’s fees if successful. ACC countered that the coal was not mineable or merchantable without a substantial loan from Big Sandy, citing market turmoil and the pandemic. ACC argued that a March 7, 2017 email exchange provided notice that the coal was not mineable and merchantable, and formally altered ACC’s obligation to pay Big Sandy the royalties and tax payments. Additionally, ACC argued that an oral agreement, despite falling under the Statute of Frauds, could act as a waiver, excusing ACC from fulfilling its obligations.

The Court ruled ACC’s belief in profitability was not relevant to mineability or merchantability. ACC admitted no physical conditions hindered mining. ACC points to no provision in the lease that excused its obligation to diligently mine the Demised Coal unless it would be unprofitable to do so.

ACC had relied on Mark Jensen’s deposition, a corporate representative, to support an oral agreement related to minimum royalties. However, Jensen’s deposition didn’t explicitly mention an oral agreement to suspend deficiency or tax payments. Instead, he indicated an oral agreement tied to production forecasts and minimums based on an anticipated loan to restart the mine. ACC failed to clarify the impact of this on provision § 4.7 of the lease, which mandated deficiency payments if Production Royalties fell below the Minimum Annual Royalty.

Even if there was an oral modification regarding minimum calculations, ACC didn’t explain how this alteration affected its obligation to pay deficiencies and taxes as per the lease. The link between the oral agreement on production forecasts and minimums and the modification of ACC’s payment obligations for deficiencies and taxes, as specified in the lease, remained unclarified in ACC’s Response.

However, both parties acknowledged a disagreement over material facts, preventing a summary judgment on Big Sandy’s breach of contract regarding damages for the diligent mining claim. Consequently, the issue of damages was scheduled to be settled in subsequent proceedings, and no judgment favoring Big Sandy would be entered until resolution of the Plaintiff’s claim for damages.

Mining Engineering Expert Witnesses

Bill Johnson has a Bachelor’s degree in Mining Engineering from the University of Kentucky and holds Professional Engineer certifications in multiple states, including Kentucky. He is the owner of Mountain Professional Services—an engineering consulting firm. He worked in the coal industry as a Mine Manager and Engineer for 32 years. He has extensive managerial skills overseeing all facets of the Mining, Permitting, and Reclamation process.

Discussions by the Court

Big Sandy persisted in seeking the exclusion of Johnson’s opinion, citing several reasons. They argued that Johnson’s opinion relied on market conditions rather than the physical characteristics of the coal, thus applying an incorrect standard and rendering the opinion unhelpful to the fact-finder. Additionally, Big Sandy claimed that Johnson hadn’t conducted a proper calculation regarding the profitability of mining the Demised Coal, thereby lacking support for his opinion based on market conditions. They also alleged that Johnson’s conclusions were drawn from undisclosed documents that were withheld in violation of Civil Rules, and further asserted that the remaining parts of Johnson’s opinions, aimed at rebutting those of Big Sandy’s expert David Newman, lacked any substantiating evidence from the record.

ACC defended Johnson’s opinions, asserting their reliability without the need for specific calculations. They argued that the lack of disclosures regarding the underlying data relied upon by Johnson was inconsequential, pointing out that Big Sandy hadn’t disclosed the underlying data from its expert witness. ACC emphasized that there was no attempt from Big Sandy to compel Johnson or the Defendant to provide additional information regarding the matter.

The Court found that Johnson’s opinions weren’t considered in the summary judgment analysis, which would warrant granting the Motion to Exclude. ACC had only briefly referenced Johnson’s testimony in response to the Motion for Summary Judgment, highlighting a material dispute regarding damages that required separate proceedings. Although ACC mentioned Johnson’s concerns about the damage calculations based on David Newman’s report, no specific citations from Johnson’s report supported these claims upon review. Johnson’s report primarily stated an opinion that none of the coal in Newman’s calculations was mineable or merchantable due to coal pricing and recovery percentages during a specific timeframe. ACC’s assertion of Johnson raising legitimate issues regarding damage calculations did not align with the content of Johnson’s report.

ACC had acknowledged that it wasn’t contending any defects rendered the Demised Coal unmineable or unmerchantable. They clarified that profitability wasn’t a factor in determining the coal’s mineability or merchantability according to Kentucky standards. This acknowledgment led to the conclusion that Johnson’s expert report wouldn’t assist the fact-finder in comprehending the evidence or deciding relevant facts. As a result, it could be excluded on these grounds.

Even if Johnson’s report had been considered in the Court’s analysis of the Motion for Summary Judgment, it was evident that ACC had not adhered to the rules regarding expert disclosures. Johnson, in his expert report, mentioned reviewing specific documents but revealed in his deposition that he had reviewed additional undisclosed materials, including documents from a Dropbox and his former employer, which ACC had not disclosed in written discovery.

ACC did not file a motion to exclude Big Sandy’s expert, so the Court dismissed the argument that ACC’s failure to disclose should be excused due to errors made by Big Sandy. The Court highlighted that this wasn’t a substantial justification or a harmless oversight. Additionally, ACC didn’t provide any legal basis or precedent supporting the idea that a Plaintiff must file a motion to compel information from expert reports before seeking relief in a motion to exclude. The Court pointed out that according to Rules 26(a) and 37(c), as well as Sixth Circuit precedent, failure to make proper disclosures could lead to automatic and mandatory exclusion without justification from the non-compliant party.

Held

Big Sandy’s motion for summary judgment was granted by the Court on each breach of contract claim. The Court also granted Big Sandy’s motion to exclude the testimony of Bill Johnson. However, the Court decided that the matter of damages will be resolved by subsequent proceedings and no judgment in favor of Big Sandy will be entered until the resolution of the Plaintiff’s claim for damages.

Key Takeaways:

The Court found Johnson’s opinions regarding whether the coal was mineable or merchantable to be irrelevant because ACC conceded it was not arguing there were defects with the coal that made it unmineable. Under Kentucky law, profitability is not part of the calculation for whether coal is mineable or merchantable. The Court also found ACC failed to comply with expert disclosure rules under Rule 26(a) by not disclosing all the information Johnson relied on in forming his opinions. ACC did not provide justification for this failure. The Court stated that exclusion of non-disclosed evidence is automatic under Rule 37(c) unless the failure was justified or harmless. Overall, the key takeaways regarding expert testimony are the importance of complying with expert disclosure rules and offering opinions relevant to the specific legal issues in the case. Irrelevant opinions or noncompliance with disclosure requirements can result in exclusion of the expert testimony.

Tag: Tax Payment