Tipton v. Mill Creek Gravel, Inc.

• Decision Date: 28 June 2004
• Docket Number: No. 03-2821.,No. 03-2868.,03-2821.,03-2868.
• Parties: Marvin TIPTON, Plaintiff-Appellee, v. MILL CREEK GRAVEL, INC.; Defendant-Appellant, Ed Kelley; Dixie Kelley, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 913

373 F.3d 913

Marvin TIPTON, Plaintiff-Appellee, v. MILL CREEK GRAVEL, INC.; Defendant-Appellant, Ed Kelley; Dixie Kelley, Defendants-Appellants.

No. 03-2821.

No. 03-2868.

United States Court of Appeals, Eighth Circuit.

Submitted: January 12, 2004.

Filed: June 28, 2004.

Rehearing Denied August 4, 2004.

COPYRIGHT MATERIAL OMITTED

Frank M. Evans, III, argued, Springfield, MO (Mark A. Fletcher, on the brief), for appellants.

Bryan O. Wade, argued, Springfield, MO (Cory L. Collins and Ginger K. Gooch, on the brief), for appellee.

Before BYE, LAY, and SMITH, Circuit Judges.

LAY, Circuit Judge.

Marvin Tipton brought this shareholder derivative action against Ed and Dixie Kelley ("the Kelleys") on behalf of Mill Creek Gravel, Inc. ("Mill Creek"), alleging breach of a pre-incorporation agreement. The case went to trial, whereupon the jury found a breach of the agreement and awarded Mill Creek $1.5 million in damages. The Kelleys now appeal on numerous grounds; we affirm in part and reverse in part.

I. BACKGROUND

The Kelleys own a large tract of land near the Arkansas border in southwestern Missouri, which they refer to as "Lazy E Estates." In April of 1999, Ed Kelly was approached by businessmen Marvin Tipton and Lindy Barrett about the possibility of mining gravel on the Kelleys' property. Tipton and Barrett owned and operated 2-N-1, Inc. ("2-N-1"), which acted as a "go-between" service, arranging for businesses in need of gravel to enter private landowners' property to remove rock and soil. After 2-N-1 determined that Lazy E Estates contained gravel, it reached a verbal agreement with Ed Kelley to allow the mining of gravel from the property. In return, 2-N-1 agreed to make royalty payments to the Kelleys in the amount of fifty cents for each cubic yard of gravel or dirt removed. Tipton proceeded to file a mine plan with the Missouri Department of Natural Resources requesting permission to mine 135 acres on Lazy E Estates through the year 2019. The plan was approved. Later, in July of 1999, Ed Kelley memorialized his verbal agreement with Tipton in a written contract, which permitted either party to terminate the agreement upon thirty days written notice. The Kelleys received approximately $3,000 to $5,000 in royalty payments under the contract.

Although it is disputed who first introduced the idea, in the fall of 1999 Ed Kelley and Tipton talked about Kelley becoming a partner in 2-N-1. This never occurred, however, apparently because of Barrett's reluctance to the idea. At this point, without providing the thirty-day notice, Kelley terminated 2-N-1's access to his property.¹ A few months later, however, in December of 1999, Ed Kelley and Tipton entered into a pre-incorporation agreement (the "agreement" or "contract") for the creation of a gravel mining corporation. Again, it is disputed who initiated the idea or what the parties' motivations were for entering the agreement.² Tipton and Kelley were the only two shareholders of Mill Creek stock, with Ed Kelley owning fifty-one percent of the corporate stock, and Tipton owning forty-nine percent. The agreement contained no right of revocation, nor any provision setting a date by which the gravel plant was required to be in operation. The agreement did, however, provide that "Ed Kelley shall lease to the corporation adequate property in the valley of his property known as Lazy E Estates for a gravel and rock operation with royalties of $.50 per yard." Mill Creek was subsequently registered as a corporation with the Missouri Secretary of State.

In early 2000, a $500,000 loan was obtained for the equipment and other expenses necessary to set up the mine site. In February of 2000, Mill Creek filed a mine plan for twenty acres with the Missouri DNR, which was approved. Tipton testified at trial that the intent was to mine these twenty acres until Mill Creek could secure the 135 acre mine plan of 2-N-1 mentioned above, which would be revoked when 2-N-1 failed to file an annual renewal. Tipton appears to have been primarily in control of setting up the gravel plant during 2000. He oversaw the work required to put in new roadways, assemble new gravel plant equipment, and generally get the gravel plant up and running. He did not receive a salary for his work.

By the fall of 2000, the relationship between the parties began to sour. Ed Kelley became angered that the plant was still not operational, despite the fact that Tipton had spent all $500,000 loaned and an additional $200,000 of the Kelleys' personal funds. Consequently, just before Thanksgiving, Ed Kelley told Tipton that he had decided to take over the mining operations, and that Tipton should focus his efforts on obtaining contracts to sell gravel. Tipton, however, was not successful in selling any gravel. Ed Kelly, around this time, also asked Tipton to contribute money in order to keep Mill Creek operational. Tipton did not have any money, and was unable to borrow any money at that time because he had already signed a personal guaranty for the $500,000 Mill Creek note.

In January of 2001, Kelley told Tipton to get off the property and barred him from entering thereafter. At the time, Kelley allegedly told Tipton "You own 49 percent of nothing and nothing is nothing and if I have to, I'll bankrupt this corporation and start a new one tomorrow." Instead of dissolving the corporation properly, however, the evidence at trial showed that the Kelleys continued to perform some mining operations after Tipton's removal and sold some Mill Creek equipment, without remitting any sales to the Mill Creek treasury or following any corporate formalities.

On March 15, 2003, Tipton filed a shareholder derivative suit in federal district court for the Western District of Missouri on behalf of Mill Creek against the Kelleys alleging, inter alia,³ that Ed Kelley breached the pre-incorporation agreement insofar as he prohibited Mill Creek from mining gravel on his land. Much of the trial consisted of testimony regarding Tipton's lost profits theory of damages. Numerous witnesses were called upon to testify regarding the amount of gravel available on Lazy E Estates, the purposes to which that gravel could be put, the prevailing value of such gravel, and the demand for such gravel at present and in the future. After a three-day trial, the jury found that Kelley breached the agreement and returned a verdict for Mill Creek in the amount of $1.5 million. Over the Kelleys' objections the district court then assessed costs against the Kelleys in the amount of $13,689.11, and assessed Tipton's attorney fees against Mill Creek in the amount of $91,192.46. The Kelleys filed motions for judgment as a matter of law and a new trial, which were denied. The Kelleys now appeal the denial of those motions and the district court's award of costs and attorney fees to Tipton.

II. ANALYSIS

Breach of Contract

The Kelleys argue that the district court erred in denying their renewed motion for judgment as a matter of law, claiming that Tipton failed to present sufficient evidence for a reasonable jury to conclude that the Kelleys breached the pre-incorporation agreement.

We review a denial of a motion for judgment as a matter of law de novo, using the same standard as the district court. See Lawrence v. CNF Transp., Inc., 340 F.3d 486, 491 (8th Cir.2003). Judgment as a matter of law is appropriate when "there is no legally sufficient evidentiary basis for a reasonable jury to find for that party." Fed.R.Civ.P. 50. We view the record in the light most favorable to Tipton and give him the benefit of all reasonable inferences. Lawrence, 340 F.3d at 491.

The Kelleys argue that they had no duty under the terms of the pre-incorporation agreement to operate the business indefinitely, and therefore their decision to shut down the corporation was not a breach of the agreement. We conclude, however, that there was sufficient evidence for a reasonable jury to find a breach of the pre-incorporation agreement, which provides, in relevant part: "Ed Kelley shall lease to the corporation adequate property in the valley of his property known as `Lazy E Estates' for a gravel and rock operation with royalties of $.50 per yard." Contrary to the Kelleys' arguments, the pre-incorporation agreement clearly creates a duty for Ed Kelley to lease his land to the corporation for a gravel and rock operation. The contract contains no right of revocation or requirement that the mine be operational by a certain date. A mine plan subsequently filed by the corporation extends until 2019, making it possible for the jury to find that the parties intended the lease of the Kelleys' property to extend at least until that time.

The undisputed evidence in this case is that Ed Kelley ejected Tipton from the property, and would not allow him to return to operate the Mill Creek mining business. The evidence further reveals that the Kelleys thereafter attempted to continue mining operations for their own personal benefit and without respect for Mill Creek's rights under the contract or Tipton's rights as a shareholder. For instance, the Kelleys sold Mill Creek equipment for their own personal benefit without remitting the money from the sale to Mill Creek. Furthermore, the Kelleys sold property that Mill Creek intended to mine to a third party. Finally, Ed Kelley failed to conduct required Mill Creek shareholder meetings or to file 2000 or 2001 Mill Creek tax returns. In light of this evidence, we believe a reasonable jury could find that the Kelleys prevented Mill Creek Gravel from performing mining operations on their property, essentially ruining that enterprise and salvaging what was left for themselves personally. As this was clearly a breach of Kelley's duty under the pre-incorporation agreement, we hold that the district court's denial of the Kelleys' renewed motion for judgment as a matter of law on this issue was correct.

Lost Profits

Tipton argued at trial...