New London Tobacco Mkt., Inc. v. Ky. Fuel Corp.

• Decision Date: 09 August 2022
• Docket Number: 20-5565
• Citation: 44 F.4th 393
• Parties: NEW LONDON TOBACCO MARKET, INC. ; Fivemile Energy, LLC, Plaintiffs-Appellees, v. KENTUCKY FUEL CORPORATION; James C. Justice Companies, Inc., Defendants-Appellants, The Getty Law Group, PLLC ; Richard A. Getty, Interested Parties.
• Court: U.S. Court of Appeals — Sixth Circuit

44 F.4th 393

NEW LONDON TOBACCO MARKET, INC. ; Fivemile Energy, LLC, Plaintiffs-Appellees,

v. KENTUCKY FUEL CORPORATION; James C. Justice Companies, Inc., Defendants-Appellants,The Getty Law Group, PLLC ; Richard A. Getty, Interested Parties.

No. 20-5565

United States Court of Appeals, Sixth Circuit.

Argued: January 28, 2021

Decided and Filed: August 9, 2022

ARGUED: Thomas H. Dupree, Jr., GIBSON, DUNN & CRUTCHER LLP, Washington, D.C., for Appellants. John A. Lucas, BROCK SHIPE KLENK PLC, Knoxville, Tennessee, for Appellees. ON BRIEF: Thomas H. Dupree, Jr., Jacob T. Spencer, GIBSON, DUNN & CRUTCHER LLP, Washington, D.C., for Appellants. John A. Lucas, W. Edward Shipe, BROCK SHIPE KLENK PLC, Knoxville, Tennessee, Scott M. Webster, TOOMS, DUNAWAY & WEBSTER, London, Kentucky, for Appellees.

Before: BATCHELDER, STRANCH, and NALBANDIAN, Circuit Judges.

NALBANDIAN, Circuit Judge.

By all accounts, this case involves discovery abuses and violations that are (thankfully) unusual in their frequency and mendacity. That conduct by Defendants resulted in the ultimate sanction—default judgment for the Plaintiffs. That judgment, however, is not this appeal's subject, the damages awarded by the district court are.

New London Tobacco Market, Inc. and Fivemile Energy, LLC, ("New London") sued Kentucky Fuel Corporation and James C. Justice Companies, Inc. ("Kentucky Fuel") for breach of contract and fraud. During this litigation, Kentucky Fuel committed a string of egregious discovery violations. As a result, the district court entered default judgment against it and awarded damages to New London on all counts. On appeal, Kentucky Fuel challenges these awards. For the reasons below, we affirm in part, reverse in part, and remand.

I.

The agreements. This case is about a coal-mining arrangement gone wrong. In 2005, New London acquired several leases and related permits to mine coal on various properties.¹ A short time later, it assigned these leases and permits to Kentucky Fuel with the understanding that Kentucky Fuel would mine the coal and New London would get a cut.

But things did not go as New London had planned. Five years passed and Kentucky Fuel did not mine any of the coal. So by 2010, the leases expired with no coal to show for it. Despite the delay, New London gave Kentucky Fuel another chance. The parties made various amendments to their original agreement. Relevant here is the fourth amendment ("Agreement").

This Agreement included a "Covenant to Mine" in which Kentucky Fuel promised "to use commercial and reasonable good faith and best efforts to maximize within the constraints of industry standards the amount of coal extracted from these real properties." (R. 40-5, Agreement, PageID 337, ¶ 10.) The parties also agreed to various fee arrangements. The first arrangement provided for a retainer fee. Kentucky Fuel agreed to pay New London a monthly retainer fee of $10,000 for assistance with leasing and permitting matters. This retainer would remain in effect until thirty days after either party sent a termination notice to the other. The second covered minimum monthly royalty fees that had to be paid no matter how much coal was mined. The third, tonnage royalty fees, were New London's cut; Kentucky Fuel agreed to pay a fee for every ton of coal it mined.

To make sure it got these tonnage fees, New London built a failsafe into the Agreement. If Kentucky Fuel breached, such as by not mining, New London could "determine the estimated lost [tonnage] royalties that it would have received." (R. 40-5, Agreement, at PageID 336, ¶ 7.) To calculate that amount, New London would select an "independent arbiter." (Id. ) Last, the Agreement included a choice-of-law clause, in which the parties agreed Kentucky law governs.

Despite this new Agreement, Kentucky Fuel still did not mine any of the coal, saying it would be unprofitable. Of course, the Agreement did not make an exception for unprofitability. Still, Kentucky Fuel pointed to the "covenant to mine," arguing that the "constraints of industry standards" language relieved it of its obligation to mine where the coal's quality was poor and the permits too expensive. (R. 424, Evidentiary Hr'g Tr., PageID 10403.)

The lawsuit. New London responded with a lawsuit, alleging breach of contract and fraud. Its amended complaint raised five counts, three relevant here.² In Count I, New London claimed that Kentucky Fuel breached the contract by failing to pay its monthly retainer fees.³ In Count II, it alleged that Kentucky Fuel also breached when it refused to mine, costing it lost tonnage royalties. And in Count V, it asserted that Kentucky Fuel fraudulently induced New London to enter into the contract when Kentucky Fuel had no intention of performing its obligations.

To this amended complaint, New London attached a report from Bob Conway with the amount of lost tonnage royalties (Count II). Conway was New London's "independent arbiter" and "the person most knowledgeable about the [relevant] properties and their coal," as he had completed the original 1800-page permit application. In the report, Conway concluded that the properties held about 18.6 million tons of mineable coal, and that by failing to mine, Kentucky Fuel cost New London $16,990,900.

As the litigation proceeded, Kentucky Fuel committed several egregious discovery violations. It missed production deadlines, failed to produce documents, and at least one of its corporate officers skipped a deposition. The magistrate judge found Kentucky Fuel's behavior so egregious that it set "an unfortunate new low in [his] experience." (R. 302, R. & R., PageID 7890 n.4.) So following the magistrate judge's recommendation, the district court entered default judgment as a sanction. The default judgment established Kentucky Fuel's liability as to the relevant counts.

With liability established, the district court instructed the magistrate judge to hold an evidentiary hearing and assess damages. At first, the magistrate judge thought that a hearing was unnecessary. And so he recommended damages based on the record. But the district court rejected his recommendation and instructed him to hold an evidentiary hearing. The district court explained that a hearing was necessary to give Kentucky Fuel an opportunity to present evidence on damages.

The damages awards. After the hearing, the magistrate judge recommended awarding New London damages on all three counts. For the monthly retainer fees, he recommended $970,000. Recall that these fees accrued monthly until the parties terminated the Agreement. In its amended complaint, New London alleged that these fees continued to accrue "from and after the filing of the amended complaint." (R. 437, R. & R., PageID 11414; R. 40, Am. Compl., PageID 256.). The magistrate judge accepted this allegation as true because he thought the effect of default judgment required it. From there, he counted the number of unpaid months and multiplied it by the $10,000 monthly fee to arrive at $970,000. Then he awarded eight-percent prejudgment compound interest on that sum, noting that it was required by Kentucky law.

Next, the magistrate judge tackled the lost tonnage royalties (Count II). He recommended $16,990,900 in damages. These calculations were easier. Kentucky Fuel's breach of the contract (established by default judgment) triggered New London's authority to select an "independent arbiter." New London selected Conway, and he calculated the lost tonnage royalties to be $16,990,900. After considering Kentucky Fuel's evidence, which he found unpersuasive, the magistrate judge determined that Conway's estimate was the proper assessment of damages. On this count, too, the magistrate judge recommended awarding eight percent in prejudgment compound interest.

On the last count, fraud, the magistrate judge recommended $17,010,900 in compensatory damages and a similar figure in punitive damages. He based the compensatory award on two things. First, he awarded $20,000 for an unreimbursed lease payment, which Kentucky Fuel conceded that it owed. Second, he explained that Kentucky Fuel's alleged fraud caused New London to miss the (same) tonnage royalties they would have received, which again was $16,990,900. As for the punitive damages, he recommended an award of a 1:1 ratio with the compensatory award. And as for prejudgment interest, the magistrate judge did not recommend any here.

The district court adopted the magistrate judge's recommendations for the breach-of-contract awards (Counts I and II). But it parted ways with the magistrate judge's recommendation for fraud damages (Count V). On the compensatory part of that award, the district court awarded the undisputed $20,000 in unreimbursed lease payments but not the $16,990,900 in lost tonnage royalties. In the court's view, while fraud and breach of contract were different claims, the resulting injury—the amount of lost tonnage—was the same. So double recovery barred compensatory damages for fraud. Still, the district court explained that the magistrate "correctly calculated the compensatory damages" that New London "could have recovered under Count V, if not for the issue of double recovery." (R. 445, Dist. Ct. Order, PageID 11616 (emphasis added).) That said, because the rule against double recovery did not bar punitive damages, the district court awarded the $17,010,900 in punitive damages. This award was "a 1:1 ratio, based on the compensatory damages [New London] would have received" if it was not for double recovery. (Id. ) Kentucky Fuel appealed.

II.

On appeal, Kentucky Fuel raises four different types of arguments. The first concerns the breach-of-contract awards. The second challenges the fraud and punitive damages awards. The third relates to attorney's fees. And the fourth is about the award of compound prejudgment interest. We address each in turn.⁴

A.

Kentucky Fuel begins by challenging the breach-of-contract awards. As mentioned, the district court awarded New London two...