tractors-quarryA landowner filed suit for damages against neighboring quarry owner, alleging that it encroached on its land and removed subsurface limestone. The trial court jury held in favor of for landowner, but the judge reduced jury’s award of punitive damages. The owner appealed that calculation of damages.  Expert testimony was critical in making that determination.

Two brothers (“C Brothers”) owned 36 acres of unimproved land that bordered a 500–acre tract of land owned by a concrete and stone company (“Harrod”).  Harrod operated an underground limestone quarry.  Harrod discovered it may have encroached on and removed 164,000 tons of shot rock (limestone loosened by blasting) from beneath C Brother’s land.  Harrod told the C Brothers about this in December 2002 and in attempting to reach a settlement:  (1) offered to buy the C Brothers’ property; (2) pay them a reasonable royalty for the limestone it removed; or (3) mine more of the C Brothers’ property to increase the amount of royalty that would be earned.  The parties were unable to reach a settlement, and the C Brothers’ sued.

The C Brothers asked the trial court to measure compensatory damages for willful encroachment and taking of the limestone by its value at the time of removal—without any reduction for the expense of mining.  This is the same measure that would apply to the removal of coal.  Harrod said that Kentucky courts have held that limestone is not a mineral, and as a result, the measure of damages could not be the coal formula.  Harrod argued that the correct measure of recovery was the difference in the fair market value (FMV) of the C Brothers’ land immediately before and after the encroachment and removal of the limestone, which is the traditional measure of damages applied in non-coal/non-mineral cases.

At trial, the C Brothers were allowed—over Harrod’s objection—to introduce proof of market and royalty values because that data could impact the award of punitive damages.  Harrod argued this evidence was inadmissible, irrelevant, and would be overly prejudicial.  The C Brothers offered no proof at trial of the FMV of its land.  However, it did present SG, a mining engineer, as an expert witness.  SG stated that one ton of processed limestone sold in the market for an average of $7.30 and that 6% per ton was a common royalty value.   Harrod testified he told the C Brothers the average market value of finished limestone ranged from $5.50 to $5.65 per ton, and mentioned that $0.05 per ton was a common royalty rate paid for limestone.  Harrod challenged SG’s qualifications as an expert witness, arguing he was not a real estate appraiser and his method of determining royalty and market values—a telephone survey for whom he could not identify the respondents nor their individual answers—was hearsay and unscientific.

Harrod offered its own expert testimony from a real estate appraiser (PT).  According to PT, visual inspection of the surface showed no signs of mining.  PT valued the parcel at $27,900 as of 2002, and concluded Harrod’s underground mining had not reduced its FMV. While The C Brothers disagreed with PT’s statement of its property’s value, the brothers offered no competing testimony about the FMV of its land.

The jurors unanimously found Harrod had trespassed and awarded the C Brothers $36,000 in compensatory damages—an amount slightly less than the FMV of their land ($27,900) plus $0.05 for each ton of limestone removed ($8,200).  The jury also found that Harrod acted with reckless disregard, and awarded the C Brothers another $902,000 in punitive damages.  This was equal to $5.50 for each of ton of limestone removed and 25 times the amount awarded in compensatory damages. The trial court allowed the compensatory damages award to stand, but reduced the award of punitive damages to $144,000—four times the amount of compensatory damages awarded.

The C Brothers appealed, challenging the measure of compensatory damages applied by the trial court as well as the reduction in punitive damages. Harrod cross-appealed attacking various rulings and jury instructions, and arguing the trial court erred in failing to cap compensatory damages at $27,900, which was the maximum FMV of the land as established by the only real estate appraiser expert witness who testified.

Judge Christopher Shea Nickell  of the Kentucky Court of Appeals held that, inter alia, that the expert witness testimony was relevant to assist jury in accurate assessment of damages and agreed with Harrod’s theory of measurement.  Judge Nickell stated that the trial court did not err in allowing SG to testify as an expert witness.  Harrod challenged SG’s qualifications in that he was not a real estate appraiser and was a licensed surveyor in West Virginia, not Kentucky.  He also argued the expert’s methods of data collection about the value of limestone were unscientific.  Contrary to Harrod’s allegations, SG’s testimony was relevant, the judge wrote, and “aided jurors by providing insight into the value, both royalty and market, of limestone—something the average juror would unlikely know but need to know to accurately assess damages.”

SG, who was a licensed mining engineer since 1979, testified that he began working in mines 35 years ago and during that time he had: (i) been involved with appraisals of mining properties; (ii) studied royalties, rights, and market prices to determine the value of minerals; (iii) calculated royalties for companies; (iv) assisted operators in developing mine plans; and, (v) performed surveys and produced maps.  In developing his opinion in this case that the market price of a ton of shot rock averaged $7.30 in 2006 and that 6% per ton was a common royalty rate, he relied on various sources of data.  The data included a list maintained by the Kentucky Transportation Cabinet of entities selling limestone and their sales prices (on which Harrod was listed at $5.00 a ton in 2002), as well as a phone survey of quarries and their prices that he and his staff conducted.  The expert testified industry professionals typically rely on this type of data to determine market and royalty values. On cross-examination, SG stated he did not recall $5.50 per ton being the market value of limestone in 2002, the year the encroachment and taking occurred and was discovered, but acknowledged it was likely.

Judge Nickell cited the rule in Daubert v. Merrell Dow Pharmaceuticals (US 1993) that says that trial courts have flexibility in admitting expert testimony and experts and are “permitted wide latitude to offer opinions, including those that are not based on firsthand knowledge or observation.”  He explained that if the proffered testimony was at all questionable, rather than depriving jurors of the benefit of hearing it, SG had the background to qualify as an expert, and his testimony was relevant and assisted the jury in awarding damages.  Harrod was allowed to vigorously cross-examine him, and Harrod testified about his own “survey” of competitors and the prices they were paying.  As the testimony developed, there was no error under Rule 702 or Daubert. Therefore, the court of appeals held that if offered at a retrial, SG’s testimony as an expert should be admitted.

Judge Nickell determined that the punitive formula for calculating damages in a coal and mineral trespass case did not apply, and that the C Brothers would be entitled to seek punitive damages if they made the requisite showing of proof to support an award.

The opinion and order of the trial court were reversed, vacated, and remanded for further proceedings, as well as those portions of the trial, verdict, and judgment that concerned the award of damages, both compensatory and punitive. In all other respects, the judgment was affirmed.

Case:  — S.W.3d —-, 2013 WL 1163945 (Ky.App. March 22, 2013).

By: Kurt Mattson, J.D.,  LLM