W. Va. Dep't of Transp., Div. of Highways, Corp. v. W. Pocahontas Props., L.P., 14–0381.

• Court: Supreme Court of West Virginia
• Writing for the Court: Justice KETCHUM
• Citation: 777 S.E.2d 619,236 W.Va. 50
• Parties: WEST VIRGINIA DEPARTMENT OF TRANSPORTATION, DIVISION OF HIGHWAYS, a public corporation, Petitioner Below, Petitioner v. WESTERN POCAHONTAS PROPERTIES, L.P., a Delaware Limited Partnership; WPP, LLC, a Delaware Limited Liability Company; and Beacon Resources, Inc., Respondents Below, Respondents.
• Docket Number: No. 14–0381.,14–0381.
• Decision Date: 17 June 2015

236 W.Va. 50
777 S.E.2d 619

WEST VIRGINIA DEPARTMENT OF TRANSPORTATION, DIVISION OF HIGHWAYS, a public corporation, Petitioner Below, Petitioner
v.
WESTERN POCAHONTAS PROPERTIES, L.P., a Delaware Limited Partnership; WPP, LLC, a Delaware Limited Liability Company; and Beacon Resources, Inc., Respondents Below, Respondents.

No. 14–0381.

Supreme Court of Appeals of West Virginia.

Submitted Feb. 24, 2015.
Decided June 17, 2015.

Leah R. Chappell, Esq., Adams, Fisher & Chappell, PLLC, Ripley, West Virginia, Counsel for the Petitioner.

Lori A. Dawkins, Esq., Steptoe & Johnson PLLC, Denver, Colorado, Lauren K. Turner, Esq., Steptoe & Johnson, PLLC, Bridgeport, West Virginia, Counsel for Respondent Beacon Resources, Inc.

David H. Wilmoth, Esq., Elkins, West Virginia, Jeffrey S. Zurbuch, Esq., Busch, Zurbuch & Thompson, PLLC, Elkins, West Virginia, Counsel for Respondents, Western Pocahontas Properties, LP and WPP, LLC.

Opinion

Justice KETCHUM :

It is a well-established rule in the law of eminent domain that a jury may not award just compensation for the lost profits of a business on land taken by condemnation.¹ However, in this appeal of a jury's $24 million verdict in a condemnation case, a litigant testified and valued his interest in a tract of condemned land using only the future lost profits of his business. Despite this evidence, the Circuit Court of Tucker County refused to instruct the jury to disregard lost

777 S.E.2d 627

business profits when calculating just compensation.

As set forth below, we reverse the circuit court's judgment on the jury's verdict, and remand the case for a new trial.

I.

FACTUAL AND PROCEDURAL BACKGROUND

Respondents Western Pocahontas Properties, L.P., and WPP, LLC (collectively “Western Pocahontas”) own several tracts of land in Tucker County, West Virginia. There is mineable coal² beneath this land.

On June 21, 2011, Western Pocahontas leased 187 acres of its land to respondent Beacon Resources, Inc. (“Beacon”). The lease allowed Beacon to extract the coal in exchange for royalty payments to Western Pocahontas.³ Shortly thereafter, in July or August, Beacon opened a surface mine on the land and began removing coal.

On August 15, 2011, Beacon signed a contract to sell coal to a neighboring mine;⁴ the contract expired by its own terms on March 31, 2012. Beacon claims it did not renew the contract because it learned some of the land would be taken through condemnation to build a highway and did not believe it would be able to fulfill the contract. However, Beacon continued to mine and sell coal for several months thereafter.

In April 2012, petitioner West Virginia Department of Transportation, Division of Highways (“the DOH”) filed a condemnation action against Western Pocahontas and Beacon. The DOH sought to take approximately 30 of the 187 acres owned by Western Pocahontas and leased to Beacon to construct a portion of the Corridor H highway.⁵

On July 25, 2012, the circuit court granted the DOH the right to take possession of the 30 acres of land. Around this same time, Beacon halted all mining operations on the entire 187 acres and began selling its equipment.

As required by law,⁶ on July 25, 2012, the DOH deposited $750,000 with the circuit clerk as its estimate of just compensation for the surface of the land taken; Western Pocahontas later accepted that valuation of the surface. However, the DOH also deposited $5,863,100 as the DOH's estimate of just compensation for the coal underlying the 30 acres of land taken. Beacon objected to the DOH's valuation of the coal, specifically the value of Beacon's lease to extract and sell the coal beneath the surface.

A three-day jury trial was held in July 2013 to establish the just compensation value for Beacon's leasehold interest in the coal taken by the DOH, as of July 25, 2012. The trial centered on two issues.

The first issue at trial concerned the amount of land affected by the DOH's take. The DOH asserted it was taking only about 30 of the 187 acres leased by Beacon, and that the remaining 157 acres of coal reserves would be unaffected by the construction of

777 S.E.2d 628

the highway. The DOH's experts therefore testified that Beacon was only entitled to just compensation for the 30 acres expressly encompassed by the take.

Beacon, however, argued that it was also entitled to compensation for the damage to the “residue,” that is, the coal reserves beneath the remaining 157 acres covered by the lease. Beacon argued that the construction of the highway sterilized and made un-mineable the coal that remained on the leasehold.⁷ At the time of trial, Beacon had ceased mining operations and sold all of its equipment because, it claimed, it could no longer profitably mine the coal in its lease.

For purposes of this appeal, the second and more important issue disputed by the parties concerned the fair market valuation of Beacon's lease. The president of Beacon, Jason Svonavec, testified that, because of the profits he would lose from the DOH's taking, the fair market value of the 187–acre lease was $84 million. Mr. Svonavec based his valuation on Beacon's contract to sell coal dated August 15, 2011. The contract set a price of $120.00 per ton for metallurgical coal, which Mr. Svonavec claimed made up 90% of the coal mined by Beacon. The contract also set a price of $46.00 per ton for steam coal, which Mr. Svonavec said made up the remaining 10% of sales. Mr. Svonavec estimated that there are 525,244 tons of coal under the acreage taken by the DOH, and another 1,000,000 tons or so of now-unmineable coal in the residue. Mr. Svonavec further estimated that his mine was operating at about an 80% “recovery” rate, meaning that 80% of the coal mined was usable and marketable while the remaining 20% could not be sold because it was contaminated with rock and other materials.

Mr. Svonavec testified that he based his valuation of Beacon's lease solely on the $120.00 per ton sale price of the recoverable metallurgical coal, less production costs, and concluded that Beacon earned a profit of $65.00 on every single ton of coal sold. Mr. Svonavec confirmed that the $65.00 figure was his “profit margin on that coal” and was purely “profit per ton.” Assuming that each ton of recoverable coal would earn Beacon $65.00 in profit, Mr. Svonavec testified that just compensation from the DOH would be $27 million for the area taken to build the highway and $57 million for the residue, a total of $84 million.

Beacon also offered the expert testimony of an appraiser on valuation. The appraiser's opinion likewise started with the assumption that Beacon sold all of the recoverable coal for $120.00 per ton, and that after production costs was left with about $65.00 in “gross profit to the leaseholder.” This appraiser, whose opinion we discuss later, suggested that just compensation for Beacon's coal lease would be $48 million.

At trial, a problem arose when the DOH offered an expert valuation of Beacon's lease through a mining engineer, Thomas Gray. Mr. Gray intended to offer a valuation opinion derived from “comparable sales” of coal mining properties. However, Beacon moved to exclude Mr. Gray's comparable sales opinion because it was based solely upon newspaper articles and internet press releases. As we discuss later in this opinion, Mr. Gray did nothing to investigate the terms of these supposed comparable sales, or whether the sales were arms-length transactions. The circuit court agreed with Beacon and prevented Mr. Gray from testifying about comparable sales.

Still, the circuit court did permit Mr. Gray to testify that the value of the coal taken was only $2,355,266,⁸ although how this number

777 S.E.2d 629

was reached is not clear from Mr. Gray's testimony. It appears that, unlike Beacon's witnesses, Mr. Gray did not value the coal based upon its anticipated $120.00 per ton contract price; instead, he relied upon Beacon's reports of actual monthly sales. These reports showed Beacon's monthly sales varied from an average high price of $116.82 per ton in August 2011, to a low of $60.67 per ton in July 2012. Furthermore, based on his experience as a mining engineer, Mr. Gray testified that just compensation should be paid only for coal within the 30–acre area taken; he testified the coal reserves under the residue could be profitably mined after the DOH's construction of the highway.

At the close of the trial, the DOH proposed a jury instruction telling the jury that it “may not consider any lost profit” to Beacon's business when it calculated the damages to award as just compensation. The proposed “business profits” jury instruction was based on an axiom of eminent domain law which holds that “[t]he amount of profit earned from a business conducted on the condemned property is ordinarily not admissible in evidence.”⁹ However, upon an objection by Beacon, the circuit court refused to give the jury the DOH's proposed instruction about business profits.

Thereafter, the jury returned a verdict awarding Western Pocahontas and Beacon the sum of $24 million as just compensation for the mineral interest acquired by the DOH...