Metamining Inc. v. Barnette et al

Filing 149

OPINION and ORDER on Motions; Order follows 147 ORAL ORDER Finding 104 Motion to Strike as withdrawn ; granting in part and denying in part 106 Motion to Strike ; denying 108 Motion for Summary Judgment; granting in part and denying in part 111 ; granting in part and denying in part 113 Motion for Partial Summary Judgment; denying 133 Motion to Strike. Signed by Judge James P. Jones on 6/26/2013. (lml)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF VIRGINIA
BIG STONE GAP DIVISION
METAMINING, INC.,
Plaintiff,
v.
WILLIAM DAVID BARNETTE,
ET AL.,
Defendants.

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Case No. 2:12CV00024
OPINION AND ORDER
By: James P. Jones
United States District Judge

Eric R. Thiessen, McElroy, Hodges, Caldwell & Thiessen, Abingdon,
Virginia, for Plaintiff; Stephen M. Hodges and Seth M. Land, Penn, Stuart &
Eskridge, Abingdon, Virginia, for Defendants.
In advance of a jury trial in this civil case, the parties have filed cross
motions for partial summary judgment, as well as objections to proposed evidence.
The motions and objections have been fully briefed and orally argued and are
resolved in this Opinion.

I. Background.1
This case results from a transaction in which a coal mining business in
Virginia was sold to the plaintiff, Metamining, Inc. (“Metamining”), a California
corporation, for the sum of $5 million. The president of Metamining is Ling Li, a
1

The facts are taken from the Complaint and the summary judgment record
submitted by the parties.

resident of California. It is owned by Li and Song Chen, a Chinese national. Prior
to the transaction, Metamining had little or no experience in coal mining in the
United States.
As a result of the sale, Metamining obtained the ownership of Barnette
Energy, LLC (“Barnette Energy”), a Virginia limited liability company, from its
sole members, William David Barnette (“David Barnette”) and his wife, Arlene V.
Barnette (“Arlene Barnette”).

Barnette Energy operated a surface coal mine at

Mill Creek, in Dickenson County, Virginia, as well as a combined rock quarry and
surface coal mine in nearby Tarpon. A written Sales Agreement, dated August 25,
2010, is at the center of the present controversy. 2 This agreement, prepared by an
attorney for the sellers (not sellers’ present counsel, I must add), is a model of
impreciseness and ambiguity. Doubtless in light of these defects, it has spawned
numerous disagreements between the parties about its meanings.
In the Complaint, filed two years after the Sales Agreement, Metamining
claims breach of contract, fraud, and fraud in the inducement. 3 The defendants
named are the Barnettes and Barnette Construction, Inc., an entity allegedly

2

A copy of the Sales Agreement is attached as Exhibit 2 to the Complaint. The
parties to the agreement are Mr. and Mrs. Barnette and Barnette Energy, as sellers, and
Metamining as purchaser.
3

The defendants have asserted a Counterclaim, but it is not involved in the
present motions.
-2-

controlled by David Barnette. Jurisdiction of this court is based upon diversity of
citizenship and amount in controversy. 4 28 U.S.C.A. § 1332 (West 2006).

II. Plaintiff’s Motion for Partial
Summary Judgment.
Metamining seeks summary judgment on certain breach of contract claims
as to certain assets to be held by Barnette Energy following the transfer of
ownership, as well as contractual indemnity for certain undisclosed liabilities of
Barnette Energy.
Summary judgment is appropriate where “there is no genuine dispute as to
any material fact and the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a). In this diversity case, I must apply the substantive law of

4

One of the defects in the Sales Agreement is that it combines the normal terms
of an asset purchase with that of a “stock” or ownership purchase. For example, in its
habendum clause it describes an asset to be transferred as Barnette Energy itself, along
with specific assets possessed or owned by Barnette Energy. Nevertheless, it appears
clear from this record that what was intended was that Metamining would purchase from
the Barnettes the ownership of Barnette Energy, and that representations were also made
in the Sales Agreement concerning the assets owned by Barnette Energy that were to
remain with it after the transfer of that ownership. Barnette Energy is not a party to the
present case, even though it survived the transfer in ownership and it suffered the contract
damages claimed rather than its new owner, Metamining. See RBA Capital, LP v.
Anonick, No. 3:08cv495, 2009 WL 960090, at *2 (E.D. Va. Apr. 8, 2009) (“Shareholders
or members lack standing where injury to them is merely derivative of the injury to the
corporation.”). The defendants suggest that Barnette Energy was not added as a plaintiff
because it would have destroyed diversity and thus foreclosed a federal court forum for
this case. Metamining contends that it has standing to sue for Barnette Energy’s damages
because of an indemnity provision in the Sales Agreement. I will await the evidence at
trial to determine this issue, if necessary.
-3-

Virginia, the forum state. Erie R.R. v. Tompkins, 304 U.S. 64, 78-79 (1938).
Normally, the plain language of a written contract controls. See Winn v. Aleda
Constr. Co., 315 S.E.2d 193, 194 (Va. 1984). However, where the language of the
contract taken as a whole is ambiguous and open to more than one interpretation,
the court may permit extrinsic evidence to prove its meaning. See Amos v. Cofffey,
320 S.E.2d 335, 337 (Va. 1984). The mere fact that the parties disagree as to the
meaning of the contract language is not sufficient to show ambiguity, id., and
moreover, “contractual provisions are construed strictly against their author,” Am.
Realty Trust v. Chase Manhattan Bank, 281 S.E.2d 825, 831 (Va. 1981).
Nevertheless, I find that in this case the language of the Sales Agreement is
ambiguous in important respects and the proper construction of the contractual
terms at issue must await the trial.
For example, the Sales Agreement lists as one of the “Assets to be
Transferred” the following, in its entirety:
Barnette Energy, LLC mining Permit # 1101978 is located on the
4,000 acre tract per Deed Book 11, page 16 (or 116) and here
referenced at the following Latitude and Longitude locations:
Corner
Northwest
Southwest
Northeast
Southeast

Latitude
37 11ƍ 49Ǝ
37 09ƍ 01Ǝ
37 11ƍ 59Ǝ
37 09ƍ 34Ǝ

(Sales Agreement ¶ III(3) (emphasis in original).)
-4-

Longitude
82 21ƍ 35Ǝ
82 19ƍ 46Ǝ
82 20ƍ 51Ǝ
82 18ƍ 49Ǝ

Metamining contends that the plain meaning of this contractual term is that
after the sale, Barnette Energy was to own a surface coal mine lease of 4,000 acres.
Instead, it contends, the actual acreage is 1,921. In response, the defendants argue
that the contractual obligation is only to transfer a specified mining permit and that
in any event, Metamining was provided in connection with the Sales Agreement a
document, referred to by the parties as the “Reserve Estimate” that shows that the
Barnette Energy’s surface coal mine was located on a 1,900-acre tract.5 Moreover,
the defendants assert that the metes and bounds description in the deed referred to
plots out to 1,921 acres.
I find that there is a genuine dispute of a material issue of fact as to the
meaning of this contractual obligation. The language of the contract states that the
mining permit in question is “located on” the referenced 4,000 acre tract, not
composed of 4,000 acres. Even if the other references cited by the defendants
show that the mining permit covered less than that, the plain language of the
agreement, without extrinsic proof, could not support summary judgment.
I similarly find that issues of fact exist as to the remaining claims by the
plaintiff involving other assets that are grounded upon the same “4,000 acre tract”
language.

5

The Reserve Estimate was prepared by Barnette Energy’s engineering firm,
Terra Tech Engineering Services.
-5-

The plaintiff also moves for summary judgment on another asset described
in the Sales Agreement, described variously by the parties as the Raising Kane,
Billie Branham, or Big Ridge property. The Sales Agreement described this asset
as follows:
The Barnette Energy, LLC/Raising Kane, LLC lease aka the Branham
property is located on their 1,042 acre tract per Deed Book 11, page
126, Dickenson County Clerk’s Office, Clintwood, Virginia and here
referenced at the following Latitude and Longitude locations:
Corner
Northwest
Southwest
Northeast
Southeast

Latitude
37 13ƍ 47Ǝ
37 13ƍ 20Ǝ
37 14ƍ Ǝ
37 13ƍ 41Ǝ

Longitude
82 20ƍ 27Ǝ
82 19ƍ 54Ǝ
82 19ƍ 17Ǝ
82 18ƍ 51Ǝ

(Sales Agreement ¶ III(7).) While it appears that there is no lease from Raising
Kane, LLC (“Raising Kane”), to Barnette Energy, there is a document entitled
“Surface Rights Agreement” from Raising Kane to Barnette Construction, Inc. (not
Barnette Energy), which agreement purports to permit the use of the surface of the
Branham property for coal mining. Metamining contends that the description in
the Sales Agreement of this asset was untrue because Raising Kane did not own
the property. Accordingly, Metamining claims that “[t]he Barnettes’ silence about
Raising Kane’s dubious ownership of the property leased was a clear breach of
their warranty under the Sales Agreement that all ‘information contained in this

-6-

sales agreement and documents attached or appended there unto are true and
accurate to the best of the SELLER’S knowledge.’” (Pl.’s Mem. 30.)
I agree with the defendants that there are genuine issues of material fact that
preclude summary judgment on this claim. For one thing, the defendants dispute
that they knew that Raising Kane did not have the power to enter into the Surface
Rights Agreement, even assuming that it did not.
In the Sales Agreement, the sellers warranted “that Barnette Energy, LLC is
free of debts and liabilities and lawsuits.”

(Sales Agreement ¶ IV(4).)

Metamining claims that there were debts and liabilities and seeks recovery for
breach of this warranty.

In particular, Metamining asserts there were (1)

reclamation liabilities; (2) a claim by a property owner named Arlene Deel, and (3)
regulatory violations for mining off-permit. 6
The alleged reclamation liabilities compose the largest claim.

In fact,

Metamining asserts that the cost of reclamation at Barnette Energy’s Mill Creek
Mine existing as of the sale “exceeded the value of the existing permitted and
proven coal reserves remaining at the mine.” (Pl.’s Mem. 15.) In support of this
claim, Metamining also relies on another provision of the Sales Agreement that
provides that “SELLER agrees to indemnify and hold harmless the PURCHASER,
its subsidiaries and affiliates for any actions and/or inactions by SELLER
6

The plaintiff also contends that there were other liabilities, but does not seek
summary judgment as to those claims. (Pl.’s Mem. 30 n.1.)
-7-

regarding its permitted coal mining and stone quarry operations which have
occurred in, around or upon the leased and permitted operations on or prior to the
date of closing of this transaction.” (Sales Agreement ¶ VIII(1).)
The defendants deny that the Sales Agreement provided that they pay for the
purchaser’s reclamation costs, particularly when viewing the agreement as a
whole. They point out that the Sales Agreement provides that “[t]here is no
warranty either expressed or implied, by the SELLER to PURCHASER regarding
the permitted coal mining or quarry operations being transferred herein.” (Sales
Agreement VIII(3).) They cite part VII of the Sales Agreement, which contains
specific obligations regarding reclamation, including that purchaser must “adhere
to all applicable state and federal mining and reclamation laws and timely pursue
and correct any violations assessed against the permits transferred herein during
any period after the closing wherein SELLER and/or William David Barnette is
listed as responsible operator and/or prior to SELLER’S and/or Barnette’s bonds
being released.” (Sales Agreement ¶ VII(2).) The defendants assert that they are
prepared to introduce testimony showing that the intent of the parties was that
Barnette Energy was not to reclaim the property sold, in order to allow
Metamining to engage in further mining.

-8-

In light of the apparent inconsistencies in the provisions of the contract and
the resulting ambiguity, I find that there are disputed issues of fact as to this claim
and will deny summary judgment. 7
As to the claimed Arlene Deel liability, it appears that Deel did file suit
against Barnette Energy after the sale, and eventually obtained a judgment for coal
mined from her property, but the defendants dispute that any alleged mining
occurred prior to the closing and that it was not until after the sale that Deel made
her claim as to a specific tract of land.

In regard to the alleged regulatory

violations, it appears that prior to the sale, Barnette Energy was cited by the
Virginia Department of Mines, Minerals and Energy (“DMME”) with notices of
violation for mining on neighboring property owned by Ronnie Branscome.
Barnette Energy contested the violations and won initially before a hearing officer
on March 31, 2011. On May 6, 2011, the deputy director of DMME overruled the
hearing officer, and Barnette Energy timely noted an appeal on June 10, 2011, to
the local circuit court, but failed to perfect the appeal by filing a petition within 30
days of noting the appeal. See Va. Sup. Ct. R. 2A:4(a). Thereafter, in 2012, before
this suit was filed, the new owner settled the matter with DMME. Pursuant to the

7

The plaintiff has filed a motion seeking to strike two affidavits filed in response
to this aspect of the plaintiff’s Motion for Partial Summary Judgment on the ground that
the opinions as to the costs of reclamation set forth in the affidavits are unsubstantiated.
However, since I have not relied on those affidavits in determining the summary
judgment motion, I will deny the motion to strike.
-9-

Settlement Agreement, Barnette Energy was required to remediate the damage to
the Branscome property, which the plaintiff asserts cost it over $40,000, with other
costs to come.
I find that there are disputed issues of fact as to the Arlene Deel matter,
requiring resolution at trial. As to the DMME violations, those do appear to be
covered within the scope of the indemnity provisions of the Sales Agreement, but I
find it necessary for the plaintiff to show the reasonableness of the remediation
agreed to by it in the Settlement Agreement with DMME. While the new owner
may not have had much choice but to reach an accommodation with the state
agency, the terms of that accommodation are matters left to the plaintiff’s proof at
trial.
For all of these reasons, partial summary judgment for the plaintiff will be
denied.

III. Defendants’ Motion for Partial
Summary Judgment.
The defendants have moved for partial summary judgment on certain of the
claims made by Metamining in its pretrial disclosures for specific amounts of
compensatory damages. According to the defendants, there is no evidence that the
plaintiff has suffered monetary damages as a result of any of the circumstances
surrounding these claims.
-10-

The claims in question are as follows: (1) the claim for damages resulting
from the so-called Raising Kane lease, including (2) damages associated with
Metamining’s preparation to mine that property; (3) lost profits at the Mill Creek
mine; (4) funds withdrawn after the sale from a Barnette Energy checking account;
(5) insurance premiums paid after the sale covering the sellers; and (6) any tax
liabilities of Barnette Energy left remaining after the sale.

In addition, the

defendants seek summary judgment as to any claim for fraud against Arlene
Barnette and any claim for fraud or breach of contract against Barnette
Construction, Inc. I will discuss these claims seriatim.
As earlier explained, one of the assets described in the Sales Agreement is
“The Barnette Energy, LLC/Raising Kane, LLC lease aka the Branham
property . . . located on their 1,042 acre tract . . . .” (Sales Agreement ¶ III(7).)
Metamining claims that it believed that this represented a “major asset” to be
obtained in the transaction on the ground that the property in question (also known
as Big Ridge) contained a large quantity of minable coal. (Pl.s’ Mem. in Opp’n 2.)
As Charles Merchant, Metamining’s agent, testified in his deposition, “We counted
big time on Big Ridge, that was to be our future.” (Merchant Dep. 98.)
Metamining contends that representatives of Barnette Energy assured it of
the important value of this property, including, for example,

in the Reserve

Estimate prepared by Barnette Energy’s mining engineer, formally entitled
-11-

“Estimated Remaining Reserve – Barnette Energy, LLC Properties,” and made part
of the Sales Agreement. The Reserve Estimate describes the property as “Big
Ridge Operation – Billie Braham [sic] Lease.” (Reserve Estimate 2.) The Reserve
Estimate recites the royalty rates for the coal, both surface and underground, and
states, “The Billie Branham lease properties consist of various tracts recorded
under Raising Kane, LLC which lie on the watershed of Cane and White Branch of
Big Ridge in Dickenson County.” (Reserve Estimate 3.)
In fact, as noted previously, the Raising Kane agreement does not lease any
coal. While it purports to license surface rights in order to mine coal, it does not
lease any of the coal itself, as is clear from a careful reading of the document.
While Merchant has testified that he tried to read it, no one else with Metamining
did, and Metamining claims that it did not benefit from any legal assistance at all
during the entire transaction.
The defendants contend that Metamining has suffered no damages from the
Raising Kane representations, since post-sale Barnette Energy leased the
underground coal on the property, for which it does not need what was purportedly
conveyed in the Raising Kane agreement.

Moreover, the defendants contend that

it was unreasonable for Metamining to rely on any representations made about this
property, in light of the actual Raising Kane document.

-12-

It appears to be undisputed that as of March 1, 2011, following the sale, and
prior to this lawsuit, Barnette Energy obtained a lease of the coal reserves
attributable to this property from Steinman Development Company, the owner of
the coal. The plaintiff does not contend that there is any material difference in the
royalty rate or other expense that it must pay for the coal under this current lease
from that which it anticipated based upon the defendants’ representations.
According to the defendants, Metamining has now received, at no claimed extra
cost, all that was represented to it by the sellers. Barnette Energy can now mine if
it wishes the estimated 4.4 million tons of coal at Big Ridge, just as Metamining
expected it to be able to when it bought Barnette Energy.
On the other hand, the plaintiff argues that this different lease is irrelevant
because it would not have paid the sellers as much for the business as it did if it
had known that it was actually receiving nothing from the false representations that
Barnette Energy had an existing lease for the coal reserves in question. (Pl.’s
Mem. in Opp’n 15-16.) In other words, it claims that it paid an inflated purchase
price for the business because of the misrepresentation by the defendants. But the
present record does not contain evidence by which a jury could reasonably
determine what amount, if any, Metamining paid based upon the alleged
representation concerning the Raising Kane lease.

After all, Barnette Energy

owned other assets, including operating coal mines at Mill Creek and Tarpon.
-13-

Metamining also claims that the Steinman lease does not provide it “all” of
the mining rights that it expected under the defendants’ representations. (Pl.’s
Mem. in Opp’n 16.) It is true that Barnette Energy has only the right under the
Steinman lease to take coal from the property under the deep mining method. But
Metamining does not contend that it has suffered any harm in that regard. In fact,
the Reserve Estimate upon which it says it relied estimates only coal tonnage from
deep mineable seams.
Damage to the injured party is a prerequisite to a fraud claim. Murray v.
Hadid, 385 S.E.2d 898, 903-04 (Va. 1989). I find that Metamining is unable to
prove any such damages as a result of the alleged misrepresentation as to the
Raising Kane property and will enter summary judgment for the defendants as to
the claim.
I also find that Metamining cannot prove that its reliance upon the
representations of the defendants as to this property was reasonably justified, in
light of the clear language of the Surface Rights Agreement, which Charles
Merchant, Metamining’s agent, claims he read and which was available to
Metamining’s principals. See Harris v. Dunham, 127 S.E.2d 65, 72 (Va. 1962).
As an excuse, Metamining asserts that it was told that it had only 19 working days
for due diligence, since David Barnette was threatening to sell to someone else, but
not only was that sufficient time to have had this important document carefully
-14-

examined by a competent advisor, Metamining was free to refuse to purchase the
business unless and until it had conducted a prudent investigation.
The breach of contract claim by Metamining regarding the Raising Kane
property stands on a somewhat different footing. Damages are not an element of
the cause of action. 24 Richard A. Lord, Williston on Contracts § 64:6 (4th ed.
2002) (“An unexcused failure to perform a contract is a legal wrong. An action
will therefore lie for the breach although it causes no injury.”). Where there are no
damages, the action may proceed even though only nominal damages can be
awarded.

Metamining was under a duty to avoid any damages resulting from

breach of contract, see id. § 64:27, and it appearing that it has so mitigated such
damages, I will enter summary judgment for the defendants as to compensatory
damages but allow Metamining to proceed with its breach of contract claim,
which, if proved, would entitled it to nominal damages only.
The defendants object to any evidence that Barnette Energy suffered lost
profits from its Mill Creek operations following the sale. While I agree with the
defendants that evidence of lost profits may be speculative, it appears that the lost
profit claim is based upon the contention that the defendants breached their
contractual obligation with respect to reclamation liabilities. Accordingly, I will
not grant summary judgment as to this claim, although it appears that the plaintiff

-15-

could not recover for both the costs of reclamation and any lost profits resulting
from such costs.
I hold that defendant Arlene Barnette is entitled to summary judgment on
any claim against her for commission of fraud. This claim is based solely on her
alleged vicarious liability, but I find that there is no evidence in the present record
of her relationship with others that would create such a liability. She was David
Barnette’s spouse and was an owner of Barnette Energy, but I know of no legal
principle that would thus make her liable based on this status.8
I also have determined that there is no actionable claim in this case against
Barnette Construction, Inc. It is a separate entity, and there is no evidence that
David Barnette, an officer of Barnette Construction, Inc., performed in that
capacity in connection with any of his actionable conduct.
Finally, I find that there are genuine issues of fact as to the insurance, bank
account, and tax liability claims by Metamining and will deny summary judgment
as to those issues.

8

Arlene Barnette will remain a defendant as to the contract claims. While it is
argued that she signed the Sales Agreement only in a representative capacity, I find that a
proper interpretation of that agreement is that she was an individual party to it.
Otherwise, it would not have been possible to have transferred her interest in the limited
liability company.
-16-

IV. Defendants’ Motion to Strike Plaintiff’s
Fourth and Fifth Supplemental
Initial Disclosures.
The defendants have moved to exclude new witnesses disclosed by the
plaintiff in its Fourth and Fifth Supplemental Initial Disclosures, filed on the day of
and the day before the discovery cutoff date.
The proper analysis of such a motion is as follows:
Federal Rule of Civil Procedure 26(a)(1)(A)(i) requires that a party
must provide to its opponent, without awaiting a discovery request,
the name of each individual likely to have discoverable information
that the disclosing party may use to support its claims, unless the use
would be solely for impeachment. Fed. R. Civ. P. 26(a)(1)(A)(i).
These initial disclosures must be made within fourteen days of the
parties’ first discovery planning conference. Fed. R. Civ. P.
26(a)(1)(C). In addition, Rule 26(e)(1)(A) requires that a party must
supplement or correct these initial disclosures in a timely manner, if
the additional or corrective information has not otherwise been made
known to the other parties during the discovery process or in writing.
Fed. R. Civ. P. 26(e)(1)(A).
If a party fails to identify a person as required by Rules 26(a) or
26(e), that party is not permitted to call that person as a witness at trial
unless such failure was substantially justified or harmless. Fed. R.
Civ. P. 37(c)(1). The basic purpose of this exclusionary rule is to
prevent “surprise and prejudice to the opposing party.” S. States Rack
& Fixture, Inc. v. Sherwin-Williams Co., 318 F.3d 592, 596 (4th
Cir.2003). It is not necessary that the nondisclosure be in “bad faith or
callous disregard of the discovery rules” for the evidence to be
excluded. Id. The burden is on the nondisclosing party to show
harmlessness or justification. See id. When assessing whether the
nondisclosure was substantially justified or harmless, the court, in its
broad discretion, should consider “(1) the surprise to the party against
whom the evidence would be offered; (2) the ability of that party to
-17-

cure the surprise; (3) the extent to which allowing the evidence would
disrupt the trial; (4) the importance of the evidence; and (5) the
nondisclosing party’s explanation for its failure to disclose the
evidence.” Id. at 597.
Quesenberry v. Volvo Grp. N. Am., Inc., 267 F.R.D. 475, 478 (W.D. Va. 2010).
According to the plaintiff, a number of the new witnesses are designated
merely to authenticate documents earlier disclosed. While I will not exclude those
authenticating witnesses, I urge the parties to seek to agree as to the authenticity of
the documents, in order to avoid unnecessary trial time.
Three witnesses are apparently substantive: Arlene Deel, Thomas Shilling,
and Roger Viers. The plaintiff asserts that these witnesses were “well-known” to
the defendants and thus they will not be prejudiced by allowing them to testify.
The defendants respond that despite their knowledge of the witnesses, they did not
know that they had knowledge useful to the plaintiff in proving its claims and are
thus prejudiced by their inability to depose them.
Based upon my consideration of the relevant factors cited above, I will allow
witness Arlene Deel. That witness has been at the center of one of the plaintiff’s
claims and I accept the plaintiff’s explanation of the recently developed testimony
that produced the need for her testimony. On the other hand, I will exclude
witnesses Shilling and Deel. No appropriate explanation has been given for the
failure to disclose these witnesses earlier, nor has the overbalancing need for their
testimony been shown. While an alternative to exclusion would be to allow the
-18-

defendants to depose these witnesses at this late date, in light of the vagueness of
explanation of their expected testimony and the burden depositions would place on
defendants’ last-minute trial preparations, I decline to exercise my discretion in
that regard.

V. Defendants’ Objections to the Testimony
of Plaintiff’s Designated Expert Witness
Roger Daugherty.
Pursuant to Federal Rule of Civil Procedure 26(a)(2), Metamining has
disclosed Roger Daugherty of Pikeville, Kentucky, as an expert whose testimony it
anticipates presenting at trial. Daugherty gives opinions as to the value of the
assets owned by Barnette Energy at the time of the sale. In addition, he states his
opinion about Barnette Energy’s costs of reclamation.9
Daugherty is well-credentialed. He holds a Bachelor of Science degree in
mining engineering and has worked for coal companies in positions ranging from
9

Daugherty’s written expert’s report is dated March 22, 2013 (ECF No. 104-1),
and is supplemented by an addendum dated April 18, 2013 (ECF No. 104-2). The
defendants initially objected to the addendum as untimely but have now withdrawn that
objection. Daugherty was also deposed by the defendants on April 5, 2013, and the full
transcript of that deposition is part of the record. (ECF No. 122) At the hearing on the
defendants’ objection to Daugherty’s testimony, the plaintiff did not propose any further
evidence for the court to consider prior to trial to determine the admissibility of the
opinions at issue. While courts sometimes conduct pretrial evidentiary hearings in order
to determine the admissibility of expert opinions, that is within the court’s discretion. See
In re Hanford Nuclear Reservation Litig., 292 F.3d 1124, 1138 (9th Cir. 2002).
Particularly since counsel for the plaintiff is unable to specify any additions to
Daugherty’s opinions not contained in his report, its addendum, or in his deposition, I
find that no further evidence is necessary.
-19-

miner, to operations manager, to president and owner.

He is certified as an

appraiser by both the Equipment Appraisers Association of North America and the
Certified Appraisers Guild of America.

Daugherty has made numerous prior

appraisals in the coal industry.
The defendants have objected to Daugherty’s qualifications as an expert for
the purposes of appraising mineral interests, as well as to the substance of the
opinions he expresses. They first contend that because Daugherty is not a licensed
real estate appraiser, he is not qualified to offer an opinion as to the value of leases
and permits to mine coal. Second, they argue that his opinions with regard to the
value of the coal property should be excluded because they are not based on
sufficient facts or data and are not the product of reliable principles and methods.
Finally, the defendants argue that Daugherty’s opinion regarding the costs of
reclamation to Barnette Energy is not based on sufficient facts or data and for that
reason should also be excluded.
The defendants seek to exclude the plaintiff’s expert witness under Federal
Rule of Evidence 702. This rule allows parties to introduce expert testimony under
certain circumstances:
A witness who is qualified as an expert by knowledge, skill,
experience, training or education may testify in the form of an opinion
or otherwise if:

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(a) the expert’s scientific, technical, or other specialized
knowledge will help the trier of fact to understand the
evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and
methods; and
(d) the expert has reliably applied the principles and methods to
the facts of the case.
Fed. R. Evid. 702.
In Daubert v. Merrell Dow Pharmaceuticals, Inc., the Supreme Court
interpreted this rule as placing the court in a “gatekeeping role” between expert
evidence and the trier of fact. 509 U.S. 579, 589, 597 (1993). Accordingly, the
court is tasked with determining whether the proponent has established by a
preponderance of the evidence that the expert’s opinion is admissible. See id. at
592 n.10 (citing Bourjaily v. United States, 483 U.S. 171, 175-76 (1987)); Fed. R.
Evid. 104(a).
To make this determination, Daubert suggests that the trial court examine
the evidence’s reliability and relevance using a number of nonexclusive factors.
Daubert, 509 U.S. at 593-95.

A trial court may consider “(1) whether the

particular scientific theory ‘can be (and has been) tested’; (2) whether the theory
‘has been subjected to peer review and publication’; (3) the ‘known or potential
rate of error’; (4) the existence and maintenance of standards controlling the
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technique’s operation’; and (5) whether the technique has achieved ‘general
acceptance’ in the relevant scientific or expert community.” United States v.
Crisp, 324 F.3d 261, 266 (4th Cir. 2003) (quoting Daubert, 509 U.S. at 593-94).
Daubert applies to all forms of expert evidence, including technical and “other
specialized knowledge” and trial courts have “considerable leeway” in determining
the admissibility of such evidence. Kumho Tire Co. v. Carmichael, 526 U.S. 137,
141, 152 (1999). The proponent of the expert bears the burden of demonstrating
the admissibility of the expert’s testimony “by a preponderance of proof.”
Daubert, 509 U.S. at 592 n.10.
The defendants first argue that Daugherty’s testimony is not admissible
under Rule 702 because he is not, in fact, an expert qualified to give an opinion
about the value of property interests in coal. The defendants cite a decision from
the Virginia Supreme Court concluding that an expert must be a licensed real estate
appraiser before being allowed to testify in any court proceeding in Virginia about
real property values. See Lee Gardens Arlington Ltd. P’Ship v. Arlington Cnty Bd.,
463 S.E.2d 646, 649-650 (Va. 1995).
This argument runs into two obstacles. First, subsequent to the Lee Gardens
decision, the Virginia General Assembly adopted a statutory amendment that
specifically preserves the discretion of a trial judge regarding who might qualify as
an expert in real property valuation. See Va. Code Ann. § 54.1-2010(B) (2009)
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(stating that nothing contained in the code sections regulating professional real
estate appraisers “shall proscribe the powers of a judge to determine who may
qualify as an expert witness to testify in any legal proceeding.”).
Second, the Virginia law with regard to the admission of expert testimony is
not binding on this court. “Unlike evidentiary rules concerning burdens of proof or
presumptions, the admissibility of expert testimony in federal court sitting in the
diversity jurisdiction is controlled by federal law. State law, whatever it may be, is
irrelevant.” Bryte ex rel. Bryte v. Am. Household, Inc., 429 F.3d 469, 476 (4th Cir.
2005) (quoting Cavallo v. Star Enter., 100 F.3d 1150, 1157 (4th Cir. 1996)). My
evaluation of an individual’s qualifications as an expert, therefore, is governed by
the factors outlined in Rule 702 and the exercise of sound discretion.
Given the proposed expert’s background in the industry, as well as his
appraisal experience, I find that he has the requisite knowledge, skill, experience
and education to provide an expert opinion, so long as his testimony meets the
other requirements outlined in Rule 702 and Daubert. The defendants argue that
Daugherty’s testimony regarding the values of the coal property 10 does not meet
this standard. I agree.
10

Daugherty’s report identifies these properties as “Mill Creek #1,” “Mill Creek
#1A,” “Tarpon Stone Quarry,” and “Big Ridge.” (Report 14.) Daugherty provided a
distinct valuation for the coal reserves represented by each of these assets. I address them
collectively because the same objections apply to the methodology used in valuing each
lease.
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Daugherty’s expert report provides specific estimates of the dollar values of
the coal reserves available at each of four sites. Although it has become clear that
the assets Metamining acquired with Barnette Energy did not include the right to
mine all of this coal, the plaintiff apparently seeks to introduce this testimony as
evidence of the value of the property it believed it was acquiring in its transaction
with the defendants.
The defendants object to Daugherty’s failure to adequately explain the
procedure he used to reach his opinions. In his report, Daugherty repeatedly
describes his methodology as the “income approach.” 11 He noted that he did not
use a comparable sales or market approach 12 to valuing these properties because
“each property is so unique that a direct comparable is usually not obtainable.”
(Report 15.) Daugherty reached his conclusions by applying factors he described
as a “lease premium,” and “permit value” 13 to the estimated reserve tonnages 14 at

11

This approach is frequently used in appraising properties that are expected to
generate an income stream. See John B. Corgel, et al., Real Estate Perspectives: An
Introduction to Real Estate, Valuation by the Income Approach 321 (4th ed. 2000),
available at http://www.mhhe.com/business/finance/corgel4e/.
12

In this approach, an appraiser compares the asset or property to recent sales of
similar assets in order to arrive at an estimate of the most probable selling price — or
current value — of the asset he is appraising. (Report 8.)
13

In his deposition testimony, Daugherty defined the “lease premium,” which he
put at $1.00 for all of the properties, as representing “just the value of owning the lease
itself.” (Daugherty Dep. 38.) Daugherty stated that he added this factor into his analysis
because leases on good reserves of coal are difficult to acquire and have inherent value
that should be accounted for in his calculations. Similarly, Daugherty stated that the
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each lease site. He also applied a discount factor to each valuation, which he
described as necessary to account for the inherent economic risks of mining at each
site. Daugherty stated that he derived the “lease premium,” “permit value” and
discount factor for each lease by considering nine variables 15 relevant to the value
of these assets, as well as his intuition, personal experience and expertise derived
from his “years of appraising mineral assets.” Id. Although each of these values is
represented as a discrete number in his expert report, Daugherty offered no
explanation or formula for how he arrived at these specific numbers. He also did
not disclose a formula for calculating the discount rate to be applied to the income
stream associated with each lease, other than noting that he applied a higher
discount value to a lease he perceived as a higher risk in order to offset the inherent
dangers associated with that mine.

“permit value,” which he calculated at from fifty cents to $1.25, represented the increased
value associated with reserves for which Barnette Energy already had permits, in contrast
to reserves that were not yet permitted. (Daugherty Dep. 39-40.) But he never explained
how he translated the “lease premium” and “permit value” figures, arrived at by his
intuition, into the final dollar evaluation by simply multiplying these numbers by the
estimated reserve tonnage.
14

Daugherty relied completely on the coal reserve numbers set forth in the
Reserve Estimate prepared by Barnette Energy’s mining engineer, in determining the
value of the properties.
15

These variables were: (1) royalty rate, (2) coal seam characteristics and seam
thickness, (3) coal quality, (4) selling price, (5) status of metallurgical market, (6) rate of
mining, (7) permitted and non-permitted reserves, (8) difficulty of leasing comparable
reserves, and (9) proximity to loadout facilities and buyer.
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I agree with the defendants that Daugherty’s methodology does not satisfy
the requirements of Rule 702 and Daubert. The plaintiff has failed to put forth
evidence that would allow the court to conclude that Daugherty’s valuations were
the product of reliable principles and methods. He cites no formula by which he
derived the lease premiums, permit values or discount factors that were essential to
his conclusions. He recited a number of variables he considered in determining
what these premiums should be, but both the court and the defendants are left to
wonder how Daugherty conjured the precise figures he applied. Daugherty openly
stated that he utilized intuition in reaching his conclusions, and he noted that he
relied on a variety of assumptions and some information that is “extremely
sketchy.” (Report 23.) The court thus has no opportunity to compare his methods
to those employed by other experts in the field.
Moreover, although Daugherty invokes the income approach — a process
that does have wide acceptance among experts for valuing assets — the
methodology he appears to have applied did not focus purely on future streams of
income. For example, Daugherty stated in the addendum to his expert report that
his approach to deriving the “lease premium” and “permit values” is related to the
“cost approach,” another method for valuing property that measures the amount of
money that would be required to replace an asset. (Addendum 2.) Daugherty
emphasized that he derived these premiums and values based on empirical data and
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comparisons to prior similar transactions, but he does not explain what that
empirical data was or how these other transactions are relevant to an income-based
approach to valuation.
Daugherty’s deposition testimony failed to clarify these issues. In response
to a question about how his evaluation of the lease premiums could be verified,
Daugherty described it as a “judgment factor . . . based on 50 years of experience.”
(Daugherty Dep. 40.) Daugherty made the same representation about the permit
values utilized in his report. (Id. at 41.) Daugherty was repeatedly asked to
identify the income stream or data he used in applying the income approach to
reach his conclusions, and he responded that “it would be the cost on a discount
basis that an operator would pay for this reserve.”

(Id. at 45.)

Daugherty

confirmed that no income data pertinent to Barnette Energy was incorporated into
his analysis.
The proponent of expert testimony cannot simply invoke the name of an
accepted methodology without explaining how the expert’s approach fits within
that methodology. I find that the plaintiff has failed to show its expert’s testimony
with regard to the value of these four coal reserve leases is the product of reliable
principles and methods, and therefore has failed to establish its admissibility under
Rule 702.

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In his report, Daugherty rendered opinions regarding two other issues, as
well. First, Daugherty evaluated the costs of reclamation in which Barnette Energy
found itself obligated to engage shortly after the consummation of the sale. He
reviewed Barnette Energy’s production tonnages both before and after the sale and
compared those production amounts to the company’s reclamation costs following
the sale. Daugherty concluded that Barnette Energy’s post-sale reclamation costs
per ton of post-sale coal production were so high as to support the conclusion that
some of that reclamation was necessitated by mining activities that occurred before
the sale.
The defendants object to the introduction of this testimony on two grounds,
neither of which I find compelling. They first argued that this information is not
relevant to any claim that remains in issue. Given my decision regarding the
parties’ motions for summary judgment, however, this information is relevant to
the plaintiff’s claim for breach of the defendants’ warranty that Barnette Energy
had no liabilities at the time of sale, which remains in dispute.
The defendants also argue that Daugherty’s opinion with regard to these
reclamation costs is based on insufficient facts and data to satisfy Rule 702 and
Daubert. In reaching his conclusion, Daugherty simply compared the average cost
of Barnette Energy’s reclamation per ton of post-sale coal mined with the average
cost if the quantities mined both before and after the sale were included. The
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defendants appear to object primarily to the simplicity of this arithmetic. I find,
however, that Daugherty’s conclusion is the product of reliable principles and is
based on sufficient facts and data. The defendants further contend that Daugherty
improperly assumed that the plaintiff was truthful in representing that these
reclamation obligations made it impossible for Barnette Energy to engage in
additional post-sale mining — which, had it done so, would have lowered the cost
of reclamation per ton of production and weakened Daugherty’s opinion. This
objection, however, does not undermine the accuracy of the data Daugherty
considered in reaching his conclusion, and the defendants may cross-examine him
at trial on this issue.
Finally, Daugherty appraised a number of pieces of mining equipment that
were included in the transaction between the parties. The defendants have not
objected to Daugherty’s opinions in this regard, and I find that they satisfy the
standards for admissibility under Federal Rule of Evidence 702.

VI. Summary.
For the reasons stated, it is ORDERED as follows:
1.

Defendants’ Motion to Strike Addendum to Report of Plaintiff’s

Expert Witness Roger Daugherty (ECF No. 104) is WITHDRAWN;
2.

Defendants’

Motion

to

Strike

Plaintiff’s

Fourth

and

Fifth

Supplemental Initial Disclosures (ECF No. 106) is GRANTED IN PART AND
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DENIED IN PART.

Thomas Shilling and Roger Viers will not be permitted as

witnesses. All other witnesses objected to in the motion will be permitted;
3.

Metamining’s Motion for Partial Summary Judgment (ECF No. 108)

is DENIED;
4.

Defendant’s Objections to the Testimony of Plaintiff’s Designated

Expert Witness Roger Daugherty (ECF No. 111) is GRANTED IN PART AND
DENIED IN PART.

Witness Daugherty will be permitted to testify as to his

opinions as to Barnette Energy’s costs of reclamation. He will not be permitted to
testify as to his opinions as to the values of the purported coal reserves involved in
the case;
5.

Defendant’s Motion for Partial Summary Judgment (ECF No. 113) is

GRANTED IN PART AND DENIED IN PART. It is granted as to any claim of
fraud relating to the so-called Raising Kane lease, as to any contractual claim for
compensatory damages relating to such lease, as to any fraud claim against Arlene
Barnette and as to any claims against Barnette Construction, Inc. It is otherwise
denied; and
6.

Plaintiff’s Motion to Strike Portions of David Barnette’s Affidavit and

Austin Barnette’s Affidavit (ECF No. 133) is DENIED.
ENTER: June 26, 2013
/s/ James P. Jones
United States District Judge
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