Opinion
NO. 2011-CA-001303-MR
07-13-2012
PHOENIX COAL CORPORATION AND R & L WINN, INC. APPELLANTS v. RANDALL WINN APPELLEE
BRIEFS FOR APPELLANTS: Brian M. Johnson Jeremy J. Sylvester Lexington, Kentucky BRIEF FOR APPELLEE: Karen J. Greenwell Lexington, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM MUHLENBERG CIRCUIT COURT
HONORABLE BRIAN WIGGINS, JUDGE
ACTION NO. 09-CI-00672
OPINION
AFFIRMING
BEFORE: CAPERTON, LAMBERT, AND NICKELL, JUDGES. LAMBERT, JUDGE: R & L Winn, Inc. and Phoenix Coal Corporation appeal the judgment entered on a jury verdict rendered against them and the denial of their motion for summary judgment on Randall Winn's fraud claim. After careful review, we affirm.
In 2006, Randall Winn (Winn) was the sole shareholder of R & L Winn, Inc. (R & L Winn), a mining company with operations including the Back in Black Mine in Muhlenberg County, Kentucky. At that time, appellant Phoenix Coal Corporation (Phoenix) was a mining company that was in the early stages of acquiring properties to mine in the same region. In approximately March 2006, Brett Wilson (Wilson), the Chief Operating Officer of Phoenix at the time, approached Winn about the possibility of Phoenix purchasing all the stock of R & L Winn. Negotiations commenced on April 11, 2006, and Winn and Wilson signed a letter of intent (the "Letter of Intent") describing general terms and conditions of an agreement under which Phoenix would purchase all of R & L Winn's stock.
R & L Winn had already obtained mining permits for the Back in Black Mine before the Letter of Intent was signed. The parties thought that the coal reserves for this existing permitted area contained approximately 500,000 tons of coal reserve. The amount of estimated coal reserves at the Back in Black Mine was based upon core drilling that had been completed before R & L Winn acquired its interest in the Back in Black Mine. R & L Winn provided Phoenix with access to the resulting studies, and Phoenix performed no core drilling at the Back in Black Mine. Likewise, Winn conducted no core drilling or other independent analysis of the Back in Black Mine to determine the extent of the reserves R & L Winn intended to sell to Phoenix.
The Letter of Intent provided that the transaction was contingent upon the acquisition by R & L Winn of additional leases of certain coal reserves of at least 700,000 tons of mineable and merchantable coal (the "Additional Coal Reserves"), the adequacy of which would be determined at Phoenix's discretion. The contemplated Additional Coal Reserves were in areas commonly referred to as Buck Knob and Winn North. The purchase price under discussion was $1.9 million, based upon the presumption that once R & L Winn obtained the Additional Coal Reserves, it would own or lease reserves of about 1.2 million tons. The full purchase price for the stock of R & L Winn was based, in part, on Phoenix's confirmation during due diligence that at least 1.2 million tons of coal reserves were located in place on the three properties leased by R & L Winn. Both parties also knew that underground mining had been conducted in areas north of the Back in Black Mine and that the extent of those old mine works, as determined by Phoenix's exploratory drilling, would likely impact its calculation of reserve tons.
As Phoenix drilled the properties, the results were sent back to Phoenix's engineering office, where engineering technician Rick Parks entered the data into a computer modeling system. Parks had been assigned the task of determining the quantity of reserves on the R & L Winn properties prior to the closing.
At the end of June 2006, Wilson and Winn met to discuss the results of Phoenix's drilling. Wilson told Winn that the drilling encountered more old works than anticipated, and Phoenix calculated the R & L Winn properties were 500,000 tons short of the required 1.2 million tons. The parties agreed to think the situation over for a night, and the following day, Winn suggested that he might replace the reported shortfall with reserves he hoped he could lease in McLean County amounting to 1,000,000 tons of coal (McLean County Reserves) and the right to mine coal on a 103-acre tract in Muhlenberg County known as the Cundiff Property.
Phoenix agreed to accept the substitution and continued to move toward closing the deal (the Stock Purchase Agreement) in July 2006. Winn signed the Stock Purchase Agreement on July 6, 2006. Under the terms of the agreement, the parties agreed to a "Hold Back Provision," which indicated that $250,000.00 of the purchase amount was to be held in escrow to be released on the condition that Winn obtain the additional reserves above.
Six months later, Winn saw a map of the R & L Winn coal reserves that Phoenix prepared based on its drilling results. The map neither revealed more extensive old works than the parties originally anticipated, nor did it demonstrate a shortfall. To the contrary, it showed that Phoenix had calculated there were more than 1.2 million tons of reserves on the R & L Winn properties. When Winn raised the discrepancy with Phoenix, he was instructed to speak with the CEO, Dave Wiley. Wiley told Winn the only recourse was to sue Phoenix.
Winn sued Phoenix for breach of contract, fraud, and unjust enrichment. Phoenix filed for summary judgment, and the trial court entered an order on April 21, 2011, dismissing Winn's breach of contract claim, but finding there were genuine issues of material fact with regard to the fraud and unjust enrichment claims.
A trial was held from May 10-12, 2011. Winn presented his case in chief by calling three witnesses and reading the depositions of three unavailable witnesses. Rick Parks, the Phoenix employee in charge of quantifying the R & L Winn reserves prior to closing, told the jury there was no information known to Phoenix prior to closing that would have justified the tonnage shortfall represented by Wilson to Winn. In fact, Parks explained that his pre-closing calculation totaled more than 1.2 million tons of coal reserves in place on the properties, and that he shared that number with Wilson. Parks authenticated another map of the R & L Winn reserves that he created around the time of closing to demonstrate Phoenix's calculation of the quantity of mineable and merchantable coal. This map further confirmed that Phoenix believed there were at least 1.2 million tons of coal on the properties at the time of Wilson's misrepresentations. Parks also conceded that the Phoenix drilling did not discover more extensive old works on the properties prior to closing.
At the close of Winn's evidence, Phoenix moved for a directed verdict. The trial court denied Phoenix's motion with regard to the fraud claim, finding that sufficient evidence existed to create a material issue of fact for the jury and deferred ruling with regard to the unjust enrichment claim. Phoenix then called one witness and rested. The jury returned a verdict in favor of Winn on the fraud claim, awarding him $250,000.00 in compensatory damages, but electing not to award any punitive damages. Phoenix now appeals the trial court's entry of summary judgment and the jury verdict rendered in favor of Winn.
On appeal, Phoenix argues that it was entitled to judgment as a matter of law and that the trial court improperly denied its motion for summary judgment with regard to Winn's fraud claims. Phoenix argues that at the least, the trial court should have granted a directed verdict at trial.
Winn argues that only the directed verdict issue is properly before the Court, arguing that "an order denying a motion for summary judgment is not appealable." Gumm v. Combs, 302 S.W.2d 616, 617 (Ky. 1957). Winn urges this Court only to review the trial court's denial of directed verdict and argues that only some of Phoenix's arguments in support thereof were preserved.
In Bell v. Harmon, 284 S.W.2d 812, 814 (Ky. 1955), the Court held that "sound reasoning supports the conclusion that an order denying summary judgment should not be reviewed on appeal." (Emphasis in original). Courts are cautioned against granting motions for summary judgment if any doubt exists as to a party's right to trial, so review of the trial court's denial of summary judgment "would put the appellate court in the position of trying the question of doubt in the mind of the trial judge." Id. The Court reasoned that this would not be "proper review" and that the decision would "in no sense prejudice the substantive rights of the party making the motion since he still has the right to establish the merits of his motion upon the trial of the cause." Id.
There is a limited exception to the general rule that denials of summary judgment are not appealable where: 1) the facts are not in dispute; 2) the only basis of the ruling is a matter of law; 3) there is a denial of the motion; and 4) there is an entry of a final judgment with an appeal therefrom. Transp. Cabinet, Bureau of Highways, Commonwealth of Kentucky v. Leneave, 751 S.W.2d 36, 37 (Ky. App. 1988). Although Phoenix attempts to argue that the facts were not in dispute, the trial court's order and the facts of the case indicate otherwise:
With the foregoing in mind, and considering the record in this case in a light most favorable to the Plaintiff, the Court is of the opinion that the Defendants' motion regarding the fraudulent inducement claim should be denied. As indicated in more detail below, there exist several issues of material fact relating to this particular cause of action.Accordingly, only the denial of Phoenix's motion for a directed verdict is properly before this Court on appeal, and we will not review the denial of summary judgment for error.
The trial court's failure to grant a motion for directed verdict is reviewed under a clearly erroneous standard. See Aesthetics in Jewelry, Inc. v. Brown, ex rel. coexecutors, 339 S.W.3d 489, 495 (Ky. App. 2011) (internal citations omitted). "An appellate court may reverse the denial of a directed verdict if it determines, after reviewing the evidence in favor of the prevailing party, that the verdict is palpably or flagrantly against the evidence so as to indicate that it was reached as a result of passion or prejudice." Id. (Internal citation omitted).
In reviewing each of the trial court's opportunities to grant judgment to Phoenix, the Court must determine whether the undisputed evidence presented by Winn during the course of this case supports the jury verdict. "Upon completion of such evidentiary review, the appellate court must determine whether the verdict rendered is palpably or flagrantly against the evidence so as to indicate that it was reached as a result of passion or prejudice." Brooks v. Lexington-Fayette Urban County Housing Authority, 132 S.W.3d 790, 798 (Ky. 2004) (internal quotation marks and citations omitted). "A motion for directed verdict admits the truth of all evidence favorable to the party against whom the motion is made." Gibbs v. Wickersham, 133 S.W.3d 494, 495 (Ky. App. 2004) (internal citation omitted).
On appeal, Winn argues that two of the grounds Phoenix argues in its brief were not presented as grounds for the directed verdict motion at the trial level below. Further, Winn argues that Phoenix glosses over this error in its briefs, stating that it moved for directed verdict "on similar grounds as discussed in its motion for summary judgment." Kentucky Rules of Civil Procedure (CR) 50.01 provides that "[a] motion for a directed verdict shall state the specific grounds therefore." Phoenix argued to the trial court that a verdict should be directed in its favor because Winn did not reasonably rely on Wilson's misrepresentation and because Winn was not damaged by the misrepresentation. On appeal, it also argues that Wilson's alleged misrepresentation was an opinion and therefore was not actionable as fraud and that Wilson's alleged misrepresentation about the amount of coal turned out to be materially accurate.
The trial court denied the directed verdict, stating, "I think there are genuine issues of material fact with regard to [reasonable reliance]. The damages, I still think there has been sufficient evidence presented at this point to go forward, so I am going to deny the motion at this point for a directed verdict." Phoenix argues that in its motion for directed verdict, it referred to its original motion for summary judgment, and thus its arguments are preserved. Further, Phoenix argues that the trial court discussed its original ruling on the summary judgment motion.
Winn urges this Court to review Phoenix's other arguments only for palpable error.
It has long been this Court's view that specific grounds not raised before the trial court, but raised for the first time on appeal will not support a favorable ruling on appeal. Most simply put, "[a] new theory of error cannot be raised for the first time on appeal." Springer v. Commonwealth, 998 S.W.2d 439, 446 (Ky.1999) (discussing specifically a directed verdict issue); see, e.g., Harrison v. Leach, 323 S.W.3d 702, 708-09 (Ky.2010); Ten Broeck Dupont, Inc. v. Brooks, 283 S.W.3d 705, 734 (Ky.2009) ("More importantly, this precise argument was never made in the trial court. An appellate court 'is without authority to review issues not raised in or decided by the trial court.' ") (quoting Regional Jail Authority v. Tackett, 770 S.W.2d 225, 228 (Ky.1989)); Combs v. Knott County Fiscal Court, 283 Ky. 456, 141 S.W.2d 859, 860 (1940) ("[A]ppellant is precluded from raising that question on appeal because it was not raised or relied upon in the court below. It is an unvarying rule that a question not raised or adjudicated in the court below cannot be considered when raised for the first time in this court.").Fischer v. Fischer, 348 S.W.3d 582, 588 (Ky. 2011). If a party has not preserved an issue, it can only be reviewed as palpable error on appeal, which requires a finding of manifest injustice to prevail. See CR 61.02.
We agree with Winn that Phoenix did not properly preserve the arguments that Wilson's misrepresentation was an opinion and that the representation turned out to be materially accurate. Thus, we will review those issues only for palpable error review.
In arguing that Wilson's misrepresentation was merely an opinion, Phoenix misstates the substance of the representation. "The generally recognized distinction between statements of fact and opinion is whatever is susceptible of exact knowledge is a matter of fact, while that not susceptible is generally regarded as an expression of opinion." Pitney Bowes v. Sirkle, 248 S.W.2d 920, 922 (Ky. 1952). Wilson represented that Phoenix had encountered more extensive old works during the diligence period and subsequently calculated that the R & L Winn properties were 500,000 tons short of 1.2 million tons. We agree with Winn that whether Phoenix encountered more extensive old works is either true or it is not. Phoenix's drilling results either resulted in a calculation of a 500,000-ton shortfall or they did not. These statements are not expressions of opinion or prediction. Rather, they are representations of existing fact. See Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544, 549 (Ky. 2009).
Even assuming the statements were opinions, as Phoenix argues, they are arguably still actionable under the so-called "deception exceptions" because they "either incorporated falsified past or present facts or [are] so contrary to the true current state of affairs that the purported prediction is an obvious sham." Id. Based on the evidence at trial demonstrating that Phoenix neither discovered old works nor calculated a shortfall, material issues of fact regarding these representations prevented a directed verdict. The trial judge did not commit palpable error by failing to sua sponte grant a directed verdict on these grounds, which were not specifically argued in Phoenix's motion for directed verdict.
The second unpreserved issue raised by Phoenix is that Wilson's statement regarding the tonnage shortfall proved to be a materially accurate estimation. Winn points out that when Wilson misrepresented the existing results of Phoenix's drilling, he was not predicting how many tons of coal would eventually be recovered or even giving his personal opinion about the reserve base; instead, he was misrepresenting the existing results of his company's drilling results and reserve calculations. Phoenix does not address the justification for the alleged shortfall - that is, Wilson's claim that they had discovered more old works than originally anticipated.
In support of their argument that Wilson's statements turned out to be true and thus a directed verdict was appropriate, Phoenix cites to Leonard v. AT&T Co. of Ky., 43 S.W.2d 187 (Ky. 1931). There the Court held that some allegations of falsity are "so insignificant and infinitesimal as to be trivial, unsubstantial, and immaterial," and that such allegations do not aver the "substantial and material falsity" required to state a cause of action. Id. at 189. We agree with Winn that the court's discussion of "substantial accuracy" (as the converse of trivial falsity) does not support Phoenix's position that the trial court erred in denying the directed verdict. Claiming that there was a shortage of 500,000 tons does not amount to a "trivial falsity." The trial court did not commit palpable error by failing to grant a directed verdict in this regard, and no manifest injustice occurred.
Phoenix's main argument on appeal is that Winn could not have reasonably relied on Wilson's representations about the alleged shortfall and the existence of old works. The bulk of Phoenix's brief is utilized arguing that Winn undertook no efforts of his own to verify the accuracy of Wilson's statements, which it argues was required by Winn's experience and expertise in coal mining. See Bassett v. N.C.A.A., 428 F.Supp.2d 675, 682 (E.D. Ky. 2006) ("With respect to reliance, Plaintiff must prove that his reliance on the misrepresentation was reasonable, and in making this determination, the Court should consider Plaintiff's knowledge and experience.") (Internal citation omitted).
While we agree with Phoenix that Winn had a duty in light of his knowledge and experience to investigate Wilson's claims, we also note that both parties had knowledge of the existence of old works and had expected some tonnage shortfalls. And, "the defrauding party cannot escape on the ground that the complaining party should not have trusted him, or was negligent in so doing." Meyers v. Monroe, 226 S.W.2d 782, 785 (Ky. 1950) (internal citation omitted). See also Harralson v. Monger, 206 S.W.3d 336, 340 (Ky. 2006) ("It is clearly not good public policy to allow a person who presents inaccurate information to benefit from the misrepresentation.").
Phoenix urges this Court to follow the lead of the Flegles court and reverse the jury verdict, arguing that Winn's reliance on Wilson's information was not justified. See Flegles, 289 S.W.3d at 552. However, a review of that case indicates that the jury verdict was reversed because the allegedly fraudulent expansion advice offered by the defendant was clearly a "prediction of future performance" and "no deception exception to the rule applies." The verdict herein was not reversed because the complainants unjustifiably relied on the misrepresentation at issue, and thus Phoenix's reliance on this case is misguided.
Phoenix also cites to Branch Banking and Trust Co. v. Thompson, 2011 WL 255149 (Ky. App. 2011)(2009-CA-001427-MR), an unpublished decision. In that case, a panel of this Court determined that the evidence was flagrantly against the verdict that the Thompsons exhibited reasonable reliance. Id. at *20-22.
[P]erhaps the most fundamental difference between Kreate, Cline, Lemaster, and Hanson, on the one hand, and this case on the other, is the simple fact that those cases involved a plaintiff's failure to read only one contract, while the Thompsons failed to read three. And after claiming, as of 2004, that BB & T had fraudulently misrepresented the contents of the loan documents they signed (without reading them) in 2002, the Thompsons proceeded to sign two more agreements with BB & T, a modification agreement and forbearance agreement, without reading those, either.Id. at *22. Indeed, there did not appear to be any evidence to support the Thompsons' claimed reliance.
We find Thompson to be distinguishable from the case at bar. The Thompsons clearly had legitimate reasons not to trust the bank, yet they failed to read three documents given to them by the Bank and relied on the Bank's word even though they had prior problems with the Bank. There is no evidence that Winn had any reason not to trust Wilson; in fact, he was going to work for Phoenix at the conclusion of the deal. Based on his prior dealings and experience with Phoenix, Winn had no reason not to rely on Wilson's representations. Accordingly, Phoenix has not presented any controlling legal authority suggesting that the trial court should have determined that Winn failed to reasonably rely as a matter of law on Wilson's representations. Viewing all the evidence in favor of Winn, the jury could reasonably (and did) conclude that the circumstances did not suggest that Wilson's statement was obviously false and that Winn's reliance on it was reasonable. This issue turned on the determination of conflicting evidence and credibility, and was properly submitted to the jury. We find no clear error with the trial court's ruling in this regard.
Finally, Phoenix briefly argues that Winn was not damaged by the fraud and that the jury verdict awarding him $250,000.00 is a windfall. The case cited by Phoenix, Hardaway Management Co. v. Southerland, 977 S.W.2d 910, 917 (Ky. 1998) (internal citation omitted), addresses the issue of whether fraudulent concealment "caused damages independent of those flowing from the wrongful act attempted to be concealed." We cannot identify any applicability of that case on the issues presented to this Court.
Instead, the correct rule as presented by Winn is that "one injured by the commission of a fraud is entitled to recover such damages in a tort action as will compensate him for the loss or injury actually sustained and place him in the same position that he would have occupied had he not been defrauded." Sanford Constr. Co. v. S & H Contractors, Inc., 443 S.W.2d 227, 239 (Ky. 1969). Had Winn not been defrauded by Wilson, he would not have agreed to the Hold Back Provision and would have received the original payment as contemplated by the contract. We find no clear error by the trial court in submitting this issue to the jury, as Winn was returned to his original position absent the fraud.
Discerning no reversible error, we affirm the denial of summary judgment and the monetary judgment entered by the Muhlenberg Circuit Court.
ALL CONCUR. BRIEFS FOR APPELLANTS: Brian M. Johnson
Jeremy J. Sylvester
Lexington, Kentucky
BRIEF FOR APPELLEE: Karen J. Greenwell
Lexington, Kentucky