ELK HORN COAL CORPORATION v. CHEYENNE RESOURCES, INC. and PC&H CONSTRUCTION, INC.
Annotate this Case
Download PDF
RENDERED: February 25, 2000; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NOS.
1998-CA-002815-MR and 1998-CA-002375-MR
ELK HORN COAL CORPORATION
v.
APPELLANT
APPEAL FROM FLOYD CIRCUIT COURT
HONORABLE JOHN DAVID CAUDILL, JUDGE
ACTION NO. 97-CI-00634
CHEYENNE RESOURCES, INC. and
PC&H CONSTRUCTION, INC.
APPELLEES
OPINION
AFFIRMING
* * * * * * * * * *
BEFORE:
BUCKINGHAM, KNOPF, and McANULTY, Judges.
BUCKINGHAM, JUDGE.
The Elk Horn Coal Corporation (“Elk Horn”)
appeals from a judgment of the Floyd Circuit Court awarding
damages in the amount of $9,500,000 as well as prejudgment
interest to Cheyenne Resources, Inc., and PC&H Construction, Inc.
(hereinafter collectively referred to as Cheyenne).
The issues
which resulted in a jury trial involved whether Elk Horn
fraudulently induced Cheyenne to enter into a coal lease and
whether Elk Horn wrongfully terminated the lease.
We have
examined the record, considered the oral and written arguments of
counsel, and reviewed the applicable law.
affirm.
Finding no error, we
By a lease with an effective date of September 1, 1990,
Elk Horn leased mineral holdings to four parcels of a tract of
property in Floyd County, Kentucky.1
Parcels 1 and 2--the
Whitesburg Seam--were to be mountaintop mined, and Parcels 3
and 4--the Amburgey Seam--were to be deep mined.
The initial
term of the lease was two years, but it was to be extended if
Cheyenne met certain requirements of the lease, including
obtaining mining permits by a certain date.
If mining then began
within a year of each permit’s issuance, the lease would be
extended for seven years on the parcels on which mining began.
The lease contained an attachment (“Attachment E”)
which was prepared by Elk Horn and consisted of a series of maps
which purported to represent prior mining on the parcels and the
number of tons of recoverable coal in each of the seams.
The
maps showed some prior surface mining but not any prior deep
mining.
The lease also provided that Cheyenne would make
escalating monthly minimum royalty payments to Elk Horn which
capped at $30,000 per month at the beginning of the third year.
In April 1992, the ownership of Cheyenne changed hands.
Elk Horn and Cheyenne agreed at that time in a “First Supplement”
to the lease to extend the deadline to obtain permits to
September 1, 1993.
On September 1, 1995, a “Second Supplement”
was executed which allowed Cheyenne until March 1, 1997, to
“commence mining” on the property.
In April 1996, Cheyenne was
repurchased by its original shareholders.
1
The parties refer to the lease as Lease 834.
-2-
In the fall of 1996, Cheyenne was preparing to relocate
its mining operations to the property, when one of its principal
owners, Ricky Kirk, discovered an undisclosed commercial deep
mine while walking over the property.
Further research by Kirk
led Cheyenne to become concerned about the existence of other
undisclosed mines and the impact this would have on Cheyenne’s
mining plan.
Claiming that Elk Horn continued to refuse to
provide further information regarding previously undisclosed
mining, Cheyenne elected to cease making the minimum royalty
payments under the lease.
On February 28, 1997, Elk Horn sent an employee to
inspect the property.
Although mining activities on the lease
had commenced, on March 5, 1997, Elk Horn sent Cheyenne a letter
terminating the lease.
The letter explained that the lease had
expired due to Cheyenne’s failure to “commence mining,” and it
also noted that Cheyenne was in default of the lease for failure
to pay the minimum royalties.
On July 31, 1997, Cheyenne filed suit in the Floyd
Circuit Court against Elk Horn alleging wrongful termination of
the lease and fraud.
Following a jury trial, a judgment in favor
of Cheyenne and against Elk Horn was entered in the amount of
$5,000,000 on the wrongful termination/breach of contract claim
and $4,500,000 on Cheyenne’s fraud claim, for a total award of
$9,500,000.
The judgment further provided for Cheyenne to
recover prejudgment interest in the amount of eight percent per
annum from the date suit was filed.
followed.
-3-
This appeal by Elk Horn
Elk Horn’s first argument concerns an action taken by
the trial court before the jury trial began.
Several days before
the trial, the trial judge viewed the leasehold and concluded
that mining operations had commenced on the property within the
meaning of the term “commence mining” as used in the Second
Supplement to the lease.
Citing North American Refractories Co.
v. Jacobs, Ky., 324 S.W.2d 495 (1959), Elk Horn argues that the
trial court erred in concluding that Cheyenne had begun mining as
required to extend the lease term and that the trial court should
have granted Elk Horn’s motion for summary judgment.
The Jacobs case involved a clay mining lease which
provided that the lease could be extended if the lessee was
“operating and mining clay at the expiration of the term herein,
if renewed[.]”
Id. at 497.
The lessee in Jacobs had not mined
any clay except for test purposes.
Work had been done on the
property to uncover it for stripping; however, clay had not been
extracted for commercial purposes.
In holding that the lease had
not been extended, the court held that “while appellant may have
been ‘operating’ on the premises, it was not ‘mining’ clay.
Mining means the excavation or removal of minerals from a natural
deposit.”
Id.
Cheyenne asserts that Jacobs has been superseded by
Litton v. Mountaineer Land Co., Ky., 796 S.W.2d 860 (1990), which
is factually very similar to this case.
Litton involved a coal
lease which contained a provision that “if mining operations have
not commenced within three years from the date hereof, Lessor may
declare this lease void by giving written notice to the Company.”
-4-
Id.
The Kentucky Supreme Court held that this was a case of
first impression in Kentucky but that there was analogous
precedent in cases involving oil and gas leases.
The court
quoted from 2 W. Summers, The Law of Oil and Gas, § 349 (1959),
as follows:
The general rule seems to be that actual
drilling is unnecessary, but that the
location of wells, hauling lumber on the
premises, erection of derricks, providing a
water supply, moving machinery on the
premises and similar acts preliminary to the
beginning of the actual work of drilling,
when performed with the bona fide intention
to proceed thereafter with diligence toward
the completion of the well, constitute a
commencement or beginning of a well or
drilling operations within the meaning of
this clause of the lease. If the lessee has
performed such preliminary acts within the
time limited, and has thereafter actually
proceeded with the drilling to completion of
a well, the intent with which he did the
preliminary acts is unquestionable, and the
court may rule as a matter of law that the
well was commenced within the time specified
by the lease.
Id. at 861.
The court then held that “[w]e are of the opinion
that mining leases present an even more compelling rationale for
holding that the actions of the respondent herein constituted
‘mining operations’ within the phraseology of the lease.”
Id.
As in Litton, the lessee, Cheyenne, has not actually
mined any coal for commercial purposes.
However, as did the
lessee in Litton, Cheyenne engaged in activities which were
properly construed by the trial court as a matter of law to
constitute a commencement of mining.
Cheyenne had engaged in
construction activities including road building, had extracted
coal from two seams, had engaged in core drilling on the
-5-
property, had purchased surface tracts and obtained the necessary
permits, and had approached the tract pursuant to a reasonable
mine plan.
In short, we agree with Cheyenne that no distinction
should be drawn between the phraseology in the Litton lease
concerning the commencement of mining operations and the
phraseology of “commence mining” in the lease supplement in this
case.
Consequently, we conclude that the trial court did not err
in holding that Cheyenne had commenced mining.
Elk Horn’s second argument is that the statute of
limitations barred Cheyenne’s claim of fraud in the inducement.
In an order entered following the liability phase of the trial,
the trial court held that the five-year limitation period of
KRS 413.120(12) did not begin to run until 1994 at the earliest,
which was when Cheyenne’s general manager, Steve Dula, became
aware of the existence of a previously undisclosed deep mine.
The trial court further held that Elk Horn’s fraud was a
continuing act which was renewed each time a supplement to the
lease was executed by the parties.
Additionally, the trial court
held that Elk Horn waived this issue since it did not tender a
jury instruction regarding the date when Cheyenne discovered or
should have discovered Elk Horn’s fraud.
The controlling statute provides:
In an action for relief or damages for fraud
or mistake, referred to in subsection (12) of
KRS 413.120, the cause of action shall not be
deemed to have accrued until the discovery of
the fraud or mistake. However, the action
shall be commenced within ten (10) years
after the time of making the contract or the
perpetration of the fraud.
-6-
KRS 413.130(3).
Elk Horn cites Boone v. Gonzales, Ky. App., 550
S.W.2d 571 (1977), which holds that “when an action is brought
later than five years after the alleged perpetration of the fraud
there must be an allegation and proof that the fraud was not
discovered within the five years and by the exercise of ordinary
care could not have been discovered within that time[,]” id. at
573, and argues that Cheyenne failed to meet that burden.
In the Boone case, the plaintiff’s complaint alleged
the date of the fraudulent misrepresentations but did not allege
the date she discovered the fraud or the circumstances
surrounding its discovery.
Id. at 573-74.
Since the complaint
was filed over five years after the alleged fraud occurred and
the plaintiff made no allegations concerning when or how the
fraud was discovered, the complaint was dismissed as barred by
the statute of limitations.
Id.
In the case sub judice,
however, Cheyenne alleged the date and circumstances surrounding
its discovery of the fraud in its complaint.
That date, 1996,
was beyond the five-year limitation period of KRS 413.120(12).
Assuming the fraud was discovered by Cheyenne in 1996, it was
incumbent upon it to prove why it could not have discovered the
fraud by the exercise of ordinary care within the five-year
limitation period.
See Boone, supra.
On the other hand, Elk
Horn claimed that when Cheyenne’s general manager observed
undisclosed mining in 1994, which was within the five-year
-7-
limitation period, Cheyenne was put on notice to inquire into the
facts and determine whether fraud had occurred.2
We believe the competing allegations concerning the
date the fraud was discovered or could have been discovered
created a fact issue subject to determination by the jury.
The
trial court could have denied Elk Horn’s motion to dismiss and
submitted the issue to the jury for determination; however, by
failing to rule, it left the matter unresolved.
Furthermore, Elk
Horn neither requested a ruling on its motion from the trial
court at the close of evidence nor requested a jury instruction
to determine the issue.
The evidence at trial was sufficient to support a
finding that the fraud was discovered in 1996, that the fraud
could not have been discovered within the five-year limitation
period by the exercise of ordinary care, and that Cheyenne’s
fraud action brought in July 1997 was not barred by the statute
of limitations.
Because Elk Horn did not request a jury
instruction to resolve the matter, we conclude that it may not
assign error in this regard.
(CR) 51(3).
Kentucky Rule of Civil Procedure
See also Kroger Co. v. Willgruber, Ky., 920 S.W.2d
61, 64 (1996).
Elk Horn’s third argument is that the evidence did not
support the jury’s verdict of fraud.
While Elk Horn makes many
assertions in this regard, it essentially argues that the
2
Assuming the fraud was discovered in 1994, then under the
holding in Shilling v. McGraw, 298 Ky. 783, 184 S.W.2d 97 (1944),
Cheyenne would have had five years from 1994 in which to file its
complaint.
-8-
evidence of fraud was insufficient and damages were not proven.
With regard to the sufficiency of the evidence, we “must
determine whether the jury verdict was flagrantly against the
evidence so as to indicate that it was reached as a result of
passion or prejudice.”
19 (1998).
Bierman v. Klapheke, Ky., 967 S.W.2d 16,
We conclude that there was substantial evidence,
including the maps which were provided in Attachment E to the
lease, to support a finding by the jury that Elk Horn
fraudulently induced Cheyenne to enter into the lease.
Concerning Elk Horn’s argument that Cheyenne failed to
prove damages from fraud, Elk Horn argues that Cheyenne’s expert
witness testified only about lost profits and not the correct
measure of damages of the difference between the value of the
property as represented by Elk Horn and its actual value.
We
agree with Elk Horn that the proper measure of damages in a
fraudulent inducement case is the “benefit of the bargain.”
Dempsey v. Marshall, Ky., 344 S.W.2d 606, 607 (1961).
See
We
conclude, however, that Cheyenne could recover lost profits as
was permitted in Dempsey.
Id. at 608.
Elk Horn’s fourth argument is that Cheyenne affirmed
the lease in 1994 and that the trial court erred by ruling that
no election of remedies was required by Cheyenne until after the
jury verdict on liability.
Elk Horn claims that the siting of
undisclosed prior mining in 1994 put Cheyenne on notice of any
fraud by Elk Horn and required Cheyenne to either affirm the
lease or rescind it and sue for damages.
-9-
The trial court did not
require Cheyenne to make an election until after the jury’s
special verdict on the issue of liability.
The court in Hampton v. Suter, Ky., 330 S.W.2d 402
(1959), held that
[f]raud inducing a contract may be waived by
affirmance that is equivalent to ratification
of the contract by the party who claimed to
have been deceived into entering into it.
That ratification may be shown by his acts
after he acquired full knowledge of the real
facts and had shown a clear intent to affirm
the contract despite the fraud, as where he
accepted the benefits thereof or acted in a
manner inconsistent with repudiation. The
intention may be in part shown by a failure
to act promptly to repudiate the transaction.
Id. at 406.
The evidence indicates that Cheyenne did not become
aware of Elk Horn’s fraud until the fall of 1996 and that it did
not ratify or affirm the contract as evidenced by its withholding
of the monthly minimum royalty payments.
We find no error in
this regard.
Elk Horn’s fifth argument is that the trial court erred
in refusing Elk Horn’s instruction regarding delay damages and
that, at any rate, Cheyenne’s damages were based on impermissible
speculation.
Elk Horn contends that, at worst, Cheyenne lost
interest on delayed profits since it could have reinstated the
lease by paying the minimum royalties and begun mining at a later
date in accordance with Elk Horn’s offers following the lease
termination.
Elk Horn’s offers were merely settlement offers,
however, and Cheyenne was under no obligation to accept them.
Therefore, Cheyenne was not limited to recovering delay damages
only.
-10-
Elk Horn also contends that the damage award was
impermissibly speculative because “Cheyenne has never mined coal,
has no equipment, has no cost data, has no experience with the
high wall mining equipment which is essential to its claim of
estimated profits, and has no history of profitability from
mining.”
In Pauline’s Chicken Villa, Inc. v. KFC Corp., Ky., 701
S.W.2d 399 (1985), it was held that “the test is not whether the
business is a new or unestablished one, without a history of past
profits, but whether damages in the nature of lost profits may be
established with reasonable certainty.”
Id. at 401.
There was
expert witness testimony as well as testimony from an owner of
Cheyenne concerning profit expectations and Cheyenne’s history
and mining experience.
We conclude that the damages were proven
with reasonable certainty.
Elk Horn’s sixth argument is that it was entitled to
exercise its option regarding the surface rights acquired by
Cheyenne.
There was a provision in the lease giving Elk Horn an
option for ninety days “after termination of this Lease for any
reason” to purchase or lease “any and all” surface rights
acquired by Cheyenne during the course of the lease.
The trial
court ruled that Elk Horn had no right to acquire surface
properties because it wrongfully terminated the lease.
Elk Horn acknowledged in a letter dated March 18, 1997,
that the lease had terminated as of February 28, 1997.
Since Elk
Horn did not attempt to exercise its option until May 30, 1997,
which was ninety-one days after the termination of the lease,
Elk Horn did not timely exercise its option.
-11-
Elk Horn’s seventh and final argument is that the trial
court’s award of prejudgment interest on the damage award was
improper as an abuse of discretion.
The award of prejudgment
interest was within the discretion of the trial court, even
though the claim was unliquidated.
Nucor Corp. v. General
Electric Co., Ky., 812 S.W.2d 136, 143-44 (1991).
In light of
the finding of fraud, we conclude that the award of prejudgment
interest was not an abuse of the trial court’s discretion.
The judgment of the Floyd Circuit Court is affirmed.
KNOPF, JUDGE, CONCURS; McANULTY, JUDGE, DISSENTS BY
SEPARATE OPINION.
McANULTY, JUDGE, DISSENTING.
Respectfully, I dissent.
The
Litton case relied upon by the majority is not factually similar
to the case sub judice since the contract in that case required
“mining operations” to extend the contract.
That is not a term
in the contract between the parties in the case at bar.
This
court may not expand upon the terms of the contract of the
parties.
The lease and its supplements in this case required
Cheyenne to conduct “mining” in order to avoid termination of the
lease.
No mining was conducted on the property.
Furthermore,
Jacobs is on point and it states that there is a distinction
between “mining” and “operating” on the site of a mine.
Jacobs
has not been overruled or disaffirmed in subsequent cases, and so
it has not been superseded by the Litton case as the majority
implicitly finds.
-12-
Jacobs controls this situation.
Thus, I believe the
trial court improperly determined that prospecting and other
activities conducted on the site qualified as mining.
As a
result, there was a submissible issue to the jury whether, under
all of the circumstances of the case, there was a wrongful
termination in light of the fact that Cheyenne had not commenced
mining.
Additionally, I believe Elk Horn argues correctly that
Cheyenne affirmed the lease by not promptly seeking recission
upon discovering evidence of fraud.
Cheyenne concedes that it
continued operating on the site after the discovery.
Cheyenne's
continued activity evidenced an intention to affirm the lease
while reserving the right to seek reparation for damages from the
fraud.
The consequence of this is that Cheyenne continued to be
liable to Elk Horn for royalty payments under the terms of the
lease while it continued its activity on the property.
Other aspects of this case are troublesome as well.
I
would reverse for a reconsideration of the wrongful termination
claim and the damages due to the foregoing errors of law.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEES:
Richard C. Ward
Penny R. Warren
Lexington, KY
Bruce E. Cryder
David A. French
Lexington, KY
Richard E. Fitzpatrick
Prestonsburg, KY
Keith Bartley
Prestonsburg, KY
ORAL ARGUMENTS FOR APPELLANT:
ORAL ARGUMENTS FOR APPELLEES:
Richard C. Ward
Lexington, KY
Bruce E. Cryder
Lexington, KY
-13-
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
