Coal Resources, Inc. v. Gulf & Western Industries, Inc.

• Decision Date: 04 March 1985
• Docket Number: Nos. 82-3443,s. 82-3443
• Citation: 756 F.2d 443
• Parties: COAL RESOURCES, INC., et al., Plaintiffs-Appellees, Cross-Appellants, v. GULF & WESTERN INDUSTRIES, INC., et al., Defendants-Appellants, Cross-Appellees. to 82-3446.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 443

756 F.2d 443

COAL RESOURCES, INC., et al., Plaintiffs-Appellees, Cross-Appellants, v. GULF & WESTERN INDUSTRIES, INC., et al Defendants-Appellants, Cross-Appellees.

Nos. 82-3443 to 82-3446.

United States Court of Appeals, Sixth Circuit.

Argued Nov. 10, 1983.

Decided March 4, 1985.

Donald J. Mooney, Jr., Jacob K. Stein (argued), Paxton & Seasongood, Cincinnati, Ohio, for Gulf & Western Industries.

Thomas S. Calder, Vincent B. Stamp (argued), Dinsmore, Shohl, Coates & Deupree, Cincinnati, Ohio, for Coal Resources.

Before CONTIE and WELLFORD, Circuit Judges, and MORTON, Senior District Judge. ^*

CONTIE, Circuit Judge.

This is the rehearing under Rule 40 of the Federal Rules of Appellate Procedure of both an appeal brought by defendant Gulf & Western Industries, Inc. and a cross-appeal brought by plaintiff Coal Resources, Inc. In the district court, the plaintiff asserted claims for breach of contract, common law fraud and violations of the federal securities laws. The defendants asserted a counterclaim for fraud. A jury awarded Coal Resources $6,384,000 on the breach of contract claim, $5,666,000 on the common law fraud claim, $5,000,000 on the securities claim, $11,000,000 in punitive damages and $350,000 in attorney's fees. Coal Resources subsequently accepted a remittitur under which it would receive $12,050,000 "in full of all jury awards." The district court also granted Gulf & Western's motion for JNOV on the securities claim.

In its original opinion, the hearing panel affirmed the judgment on the securities law issue, reversed the judgment on the other claims and remanded those claims for a new trial. 738 F.2d 438. Coal Resources then filed a petition for rehearing and/or suggestion for rehearing en banc, primarily arguing that the panel had ignored the parties' stipulation at trial regarding the burden of proof and that the panel had not articulated any reason justifying the reversal of the breach of contract award. The panel granted rehearing and the parties have filed supplemental briefs. Gulf & Western contends on rehearing, as it did on appeal, that it is entitled either to judgment as a matter of law on all claims or to a retrial of those claims. For the reasons set forth below, we conclude that the JNOV on the securities law claim should be affirmed, that the judgment on the common law fraud claim should be reversed and that the judgment on the contract claim should be vacated and remanded for a new trial.

I.

Before proceeding further, we emphasize several points which were correctly decided in our first opinion and which require no further discussion. First, we reaffirm our conclusion that the acquisition agreement in question was not a security within the meaning of the federal securities laws. See Marine Bank v. Weaver, 455 U.S. 551, 559-60, 102 S.Ct. 1220, 1225-26, 71 L.Ed.2d 409 (1982). Accordingly, the district court properly granted JNOV to Gulf & Western on the securities law claim. Second, we again hold that Coal Resources obtained a double recovery. On the breach of contract claim, Coal Resources sought to be placed in the position that it would have achieved had the contract been fulfilled by Gulf & Western. On the common law promissory fraud claim, Coal Resources sought to obtain the monetary value of the Virginia and Kentucky leasehold interests which Gulf & Western had disposed of and which cannot be returned. Thus, Coal Resources achieved the monetary equivalent of contract rescission through its promissory fraud theory. It is clear, however, that a plaintiff may not have a contract both enforced and rescinded at the same time. Since Coal Resources has obtained a double recovery, the damage award under review cannot stand. Third, we reaffirm our holding that the testimony of witnesses Zegeer and Owens concerning damages for fraud was inadmissible speculation. Finally, we note that although the original opinion referred to the statute of frauds in a footnote, the reversal of the judgment on the breach of contract and common law fraud claims was not based upon the statute of frauds.

II.

Gulf and Western has contended throughout this litigation that it is entitled to judgment as a matter of law on the Ohio common law fraud claim. The plaintiff's theory is one of promissory fraud. Specifically, Gulf & Western is alleged to have promised to invest $3.9 million in the leaseholds with knowledge that it would not perform the promise. This promise was not included in the written contract. The contract contains an integration clause.

Although it is clear that making a contractual promise with no present intention of performing it constitutes promissory fraud in Ohio, see Dunn Appraisal Co. v. Honeywell Information Systems Inc., 687 F.2d 877, 883 (6th Cir.1982) (construing Ohio law); Tibbs v. National Homes Construction Corp., 52 Ohio App.2d 281, 287, 369 N.E.2d 1218 (1977), and that extrinsic evidence always is admissible to show promissory fraud, see Globe Steel Abrasive Co. v. National Metal Abrasive Co., 101 F.2d 489, 491 (6th Cir.1939) (construing Ohio law), Gulf & Western argues that a promissory fraud theory may not be used to impose additional obligations upon a party to a written contract containing an integration clause. According to the defendant, Coal Resources was entitled to show through extrinsic evidence that Gulf & Western had no intention, at the time the contract was entered into, of performing the promises it had made in the written acquisition agreement. The defendant earnestly contends, however, that Coal Resources was not entitled to show that Gulf & Western had no intention of performing promises which were not reflected in the written agreement.

We agree with the defendant. First, the early cases discussing promissory fraud claims arising under Ohio law involved situations in which the promises that the defendants wrongfully had no present intention of performing were included in the respective contracts. See Globe Steel, supra; Monaghan v. Rietzke, 85 Ohio App. 497, 89 N.E.2d 159 (1949). ¹ In contrast, the promise by Gulf & Western to invest $3.9 million in the leaseholds was not part of the acquisition agreement.

Second, the Dunn case, which at first glance appears to support Coal Resources' position, is distinguishable. In Dunn, the defendant sold a computer system to the plaintiff. Although the defendant orally promised to convert approximately four hundred of the plaintiff's programs so that they could be used in the new system, the written agreement only stated that two hundred fifty programs would be converted. The defendant subsequently refused to convert all four hundred programs and the plaintiff sued under a promissory fraud theory. This court held that the defendant had defrauded the plaintiff in having had no intention of performing the promise to convert all four hundred programs when that promise was made. This was true even though the promise to convert the additional one hundred fifty programs was not reflected in the written agreement. Hence, Dunn stands for the proposition that a defendant may be held liable for having had no present intention of performing a promise made outside the terms of a written agreement.

The Dunn case is distinguishable, however, on the ground that the opinion does not indicate that an integration clause was involved. Unlike the dissent, we are unwilling to assume that because a large corporation was involved in Dunn, an integration clause must have been included in the contract. The purpose of an integration clause stating that there are no agreements or understandings between the parties other than those reflected in the written contract is, of course, to prevent either party from relying upon statements or representations made during negotiations that were not included in the final agreement. To permit a plaintiff to use a promissory fraud theory in order to add terms to an integrated contract, as Coal Resources attempts to do here, would completely defeat the purpose of an integration clause. We hold that although Coal Resources was entitled to prove through extrinsic evidence that Gulf & Western had no intention when the contract was made of performing promises that were included in the acquisition agreement, Coal Resources was not entitled to show that Gulf & Western never intended to invest $3.9 million in the leaseholds. As has been indicated, the latter promise was not part of the acquisition agreement. ²

Since Gulf & Western is entitled to judgment as a matter of law on the promissory fraud claim, we need not address the issue of whether the jury instructions on that claim were proper. Nor need we reach the question, which was addressed in our previous opinion, of Coal Resources' burden of proof on that claim. We neither reaffirm nor reject the previous opinion's analysis of that question.

III.

Gulf & Western has also contended on appeal and on rehearing that it is entitled to judgment as a matter of law on the breach of contract claim. Coal Resources' breach of contract theory is three-fold. First, Gulf & Western is alleged to have breached an implied obligation to develop the leaseholds in a reasonably diligent fashion. Second, Gulf & Western is alleged to have breached certain duties, imposed by the Virginia leases, which Gulf & Western expressly assumed in the acquisition agreement. Third, Gulf & Western is alleged to have breached express promises to pay $500,000 on June 11, 1977 as part of the contract price, to obtain permits and reclamation bonds, to perform reclamation work and to pay minimum monthly royalties to the lessors of the properties in question.

According to the plaintiff's expert witness Zegeer, diligent development of the Virginia properties during the two-year multiple period under generally accepted mining principles ³ would have required Gulf & Western to install deep mining equipment and a new coal washing facility. Zegeer testified that during the first...