West Virginia Record

Sunday, October 20, 2019

Both parties object to federal magistrate's recommendations in 2012 case against Justice Companies

Federal Court

By Kyla Asbury | Jul 12, 2019

LONDON, Ky. — Both parties filed objections to a report and recommendation by a federal magistrate judge for James C. Justice Cos. Inc. to pay nearly $60 million in damages.

The objections were filed in a 2012 case by New London Tobacco Market (NLTM) and Fivemile Energy against Kentucky Fuel Corporation and James. C. Justice Cos. Inc. The 2012 case is related to the 2017 case filed by NLTM and Fivemile against Justice alleging violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act.

"Magistrate Judge Ingram has once again recommended that this Court award an amount that could exceed $60 million in default damages, and once again there is nothing in the record to suggest that Plaintiffs have suffered any damage as a result of the breaches alleged in Plaintiffs’ Amended Complaint," the July 10 objection states.

The defendants' argued in the objection that it would appear that the three-day evidentiary hearing did nothing to change the magistrate judge's opinion of the defendants or of the validity of their arguments that led to the court's March 31, 2017, memorandum opinion and order that set aside the Jan. 17, 2017, report and ordered the evidentiary hearing.

"When fully and carefully considered, the Report does not represent appropriate compensatory damages," the objection states. "Instead, it is again an award solely punitive in nature, intended to punish Defendants rather than to compensate Plaintiffs for any damage they may have actually suffered."

Magistrate Judge Hanly Ingram’s opinion of the defendants is evident throughout the report, as is his clear belief that the defendants have continually disrespected the court, despite the compelling testimony of Jay Justice apologizing to the court and assuring the court of the respect that he and the defendant companies hold for the court, according to the objection.

"The Report rests on the Magistrate Judge’s conclusion that determining the amount of coal that Defendants would have mined under the subject lease had they used 'commercial and reasonable good faith and best efforts to maximize, within the constraints of industry standards, the amount of coal extracted...' did not require him to account for the mineability or the merchantability of that coal," the objection states.

Instead, the defendants argue, Ingram relied on the contractually stipulated royalty rate mechanically applied it to each ton of coal that the arbitrator selected by the plaintiffs opined, without significant support, was underlying the leased premises.

"Despite having conducted the evidentiary hearing, it appears that the Magistrate Judge has simply rubber-stamped the damages calculations prepared by Dixie Fuel’s expert – whose report this Court earlier pointedly called in to question," the objection states. "Kentucky Fuel therefore respectfully requests that this Court independently assess the evidence through its de novo review of the record so as to reach a just and reasonable result actually supported by the evidence."

In its own objection, NLTM wrote that Ingram’s report and recommendation is a careful, well-thought-out analysis of the evidence on damages.

"For that reason, Plaintiffs are reluctant to object to any of its conclusions and recommendations," NLTM wrote. "However, in several instances, the Report offers alternatives without recommending them. The thoroughness of the Report, however, is evidenced by the fact that even where it does not recommend these alternative measures of damages, it carefully lays out the options for this Court in case this Court adopts the alternative measures."

Those objections primarily address the alternative remedies foreshadowed by the report, according to NLTM's objection.

It notes that the most significant of these is the report’s failure to recommend the alternative measure of fraud damages.

On June 26, Ingram authored a report and recommendation and order in the case. Ingram recommended $59,658,452 in damages, as well as attorneys' fees.

"Through litigation misconduct, Defendants earned the heavy sanction of default judgment against them," Ingram wrote. "The undersigned’s previous recommendation as to the damages due to Plaintiffs was rejected by Judge Van Tatenhove, who referred that issue back to the undersigned for an evidentiary hearing and renewed recommendation. After significant pre-hearing planning and preparation, the hearing was held over three days and post-hearing briefs have been submitted. Although illuminating, the evidence does not change much of the undersigned’s previous analysis, particularly the appropriate interpretation of the contract at issue."

Ingram wrote that he hoped his recommendations would bring the came to a resolution.

"Hopefully, the recommendations made herein will prompt a speedy resolution of the case, at least in this Court," Ingram wrote. "But, if the misconduct continues, the District Judge should consider pursuing additional sanctions...At a minimum, their continuing misconduct means the undersigned and the District Judge must view Defendants’ testimony and arguments with skepticism."

The 2017 RICO suit against the defendants argues that the defendants executed a guaranty agreement with the NLTM and Kentucky Fuel Corp., according to the suit. It also provided an audited consolidated financial statement for it and its subsidiaries that showed more than $175 million in assets, stockholders' equity greater than $48 million, and a net income for one year of $47 million.

"The defendants intended for the plaintiffs to rely upon this disclosure to induce plaintiffs to do business with them and to conclude that any debt owed by the defendants to the plaintiffs could be paid," the amended complaint states.

Kentucky Fuel agreed to pay $10,000 per month to NLTM, and Justice Cos. reaffirmed its obligations under the guaranty. Kentucky Fuel has not paid the monthly retainer fees in the amount of $970,000.

The plaintiff claims the monthly retainer fees continue to accrue at the rate of $10,000 per month.

The defendants also failed to pay rent for a property known as the "Strong Brothers property."

"Kentucky Fuel and JCJC have failed and refused to pay rents due under the leases of the Strong Brothers property as required by the fourth amendment," the complaint states. "Kentucky Fuel and JCJC have admitted that they owe the unpaid amounts for the Strong Brothers leases."

U.S. District Court for the Eastern District of Kentucky case number 6:12-cv-00091

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