Marvin Tipton v. Ed Kelley ( 2004 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
Nos. 03-2821 and 03-2868
___________
Marvin Tipton, *
*
Plaintiff-Appellee, *
*
v. *
*
Mill Creek Gravel, Inc.; * Appeals from the United States
* District Court for the
Defendant-Appellant, * Western District of Missouri.
*
Ed Kelley; Dixie Kelley, *
*
Defendants-Appellants. *
___________
Submitted: January 12, 2004
Filed: June 28, 2004
___________
Before BYE, LAY, and SMITH, Circuit Judges.
___________
LAY, Circuit Judge.
Marvin Tipton brought this shareholder derivative action against Ed and Dixie
Kelley (“the Kelleys”) on behalf of Mill Creek Gravel, Inc. (“Mill Creek”), alleging
breach of a pre-incorporation agreement. The case went to trial, whereupon the jury
found a breach of the agreement and awarded Mill Creek $1.5 million in damages.
The Kelleys now appeal on numerous grounds; we affirm in part and reverse in part.
I. BACKGROUND
The Kelleys own a large tract of land near the Arkansas border in southwestern
Missouri, which they refer to as “Lazy E Estates.” In April of 1999, Ed Kelly was
approached by businessmen Marvin Tipton and Lindy Barrett about the possibility
of mining gravel on the Kelleys’ property. Tipton and Barrett owned and operated
2-N-1, Inc. (“2-N-1”), which acted as a “go-between” service, arranging for
businesses in need of gravel to enter private landowners’ property to remove rock and
soil. After 2-N-1 determined that Lazy E Estates contained gravel, it reached a verbal
agreement with Ed Kelley to allow the mining of gravel from the property. In return,
2-N-1 agreed to make royalty payments to the Kelleys in the amount of fifty cents for
each cubic yard of gravel or dirt removed. Tipton proceeded to file a mine plan with
the Missouri Department of Natural Resources requesting permission to mine 135
acres on Lazy E Estates through the year 2019. The plan was approved. Later, in
July of 1999, Ed Kelley memorialized his verbal agreement with Tipton in a written
contract, which permitted either party to terminate the agreement upon thirty days
written notice. The Kelleys received approximately $3,000 to $5,000 in royalty
payments under the contract.
Although it is disputed who first introduced the idea, in the fall of 1999 Ed
Kelley and Tipton talked about Kelley becoming a partner in 2-N-1. This never
occurred, however, apparently because of Barrett’s reluctance to the idea. At this
point, without providing the thirty-day notice, Kelley terminated 2-N-1’s access to his
property.1 A few months later, however, in December of 1999, Ed Kelley and Tipton
entered into a pre-incorporation agreement (the “agreement” or “contract”) for the
creation of a gravel mining corporation. Again, it is disputed who initiated the idea
1
The Kelleys maintain that Tipton requested that Kelley terminate access so
that he and Kelley could obtain 2-N-1’s mine permits and form a new business, Mill
Creek. Tipton implies that Kelley did it because he was upset that he was not made
a partner in 2-N-1.
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or what the parties’ motivations were for entering the agreement.2 Tipton and Kelley
were the only two shareholders of Mill Creek stock, with Ed Kelley owning fifty-one
percent of the corporate stock, and Tipton owning forty-nine percent. The agreement
contained no right of revocation, nor any provision setting a date by which the gravel
plant was required to be in operation. The agreement did, however, provide that “Ed
Kelley shall lease to the corporation adequate property in the valley of his property
known as Lazy E Estates for a gravel and rock operation with royalties of $.50 per
yard.” Mill Creek was subsequently registered as a corporation with the Missouri
Secretary of State.
In early 2000, a $500,000 loan was obtained for the equipment and other
expenses necessary to set up the mine site. In February of 2000, Mill Creek filed a
mine plan for twenty acres with the Missouri DNR, which was approved. Tipton
testified at trial that the intent was to mine these twenty acres until Mill Creek could
secure the 135 acre mine plan of 2-N-1 mentioned above, which would be revoked
when 2-N-1 failed to file an annual renewal. Tipton appears to have been primarily
in control of setting up the gravel plant during 2000. He oversaw the work required
to put in new roadways, assemble new gravel plant equipment, and generally get the
gravel plant up and running. He did not receive a salary for his work.
By the fall of 2000, the relationship between the parties began to sour. Ed
Kelley became angered that the plant was still not operational, despite the fact that
Tipton had spent all $500,000 loaned and an additional $200,000 of the Kelleys’
personal funds. Consequently, just before Thanksgiving, Ed Kelley told Tipton that
he had decided to take over the mining operations, and that Tipton should focus his
2
Tipton argues that he was “forced” to agree to form a new corporation because
he could not otherwise access the land to take advantage of his mine permit there.
The Kelleys argue that Tipton lured them into forming Mill Creek with false
representations that Tipton was experienced enough to set up and operate a profitable
mining plant on their property.
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efforts on obtaining contracts to sell gravel. Tipton, however, was not successful in
selling any gravel. Ed Kelly, around this time, also asked Tipton to contribute money
in order to keep Mill Creek operational. Tipton did not have any money, and was
unable to borrow any money at that time because he had already signed a personal
guaranty for the $500,000 Mill Creek note.
In January of 2001, Kelley told Tipton to get off the property and barred him
from entering thereafter. At the time, Kelley allegedly told Tipton “You own 49
percent of nothing and nothing is nothing and if I have to, I’ll bankrupt this
corporation and start a new one tomorrow.” Instead of dissolving the corporation
properly, however, the evidence at trial showed that the Kelleys continued to perform
some mining operations after Tipton’s removal and sold some Mill Creek equipment,
without remitting any sales to the Mill Creek treasury or following any corporate
formalities.
On March 15, 2003, Tipton filed a shareholder derivative suit in federal district
court for the Western District of Missouri on behalf of Mill Creek against the Kelleys
alleging, inter alia,3 that Ed Kelley breached the pre-incorporation agreement insofar
as he prohibited Mill Creek from mining gravel on his land. Much of the trial
consisted of testimony regarding Tipton’s lost profits theory of damages. Numerous
witnesses were called upon to testify regarding the amount of gravel available on
Lazy E Estates, the purposes to which that gravel could be put, the prevailing value
of such gravel, and the demand for such gravel at present and in the future. After a
three-day trial, the jury found that Kelley breached the agreement and returned a
verdict for Mill Creek in the amount of $1.5 million. Over the Kelleys’ objections,
the district court then assessed costs against the Kelleys in the amount of $13,689.11,
and assessed Tipton’s attorney fees against Mill Creek in the amount of $91,192.46.
3
Tipton’s Complaint also alleges breach of fiduciary duty, fraudulent
misrepresentation, and quantum meruit.
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The Kelleys filed motions for judgment as a matter of law and a new trial, which were
denied. The Kelleys now appeal the denial of those motions and the district court’s
award of costs and attorney fees to Tipton.
II. ANALYSIS
Breach of Contract
The Kelleys argue that the district court erred in denying their renewed motion
for judgment as a matter of law, claiming that Tipton failed to present sufficient
evidence for a reasonable jury to conclude that the Kelleys breached the pre-
incorporation agreement.
We review a denial of a motion for judgment as a matter of law de novo, using
the same standard as the district court. See Lawrence v. CNF Transp., Inc., 340 F.3d
486, 491 (8th Cir. 2003). Judgment as a matter of law is appropriate when “there is
no legally sufficient evidentiary basis for a reasonable jury to find for that party.”
Fed. R. Civ. P. 50. We view the record in the light most favorable to Tipton and give
him the benefit of all reasonable inferences. Lawrence, 340 F.3d at 491.
The Kelleys argue that they had no duty under the terms of the pre-
incorporation agreement to operate the business indefinitely, and therefore their
decision to shut down the corporation was not a breach of the agreement. We
conclude, however, that there was sufficient evidence for a reasonable jury to find a
breach of the pre-incorporation agreement, which provides, in relevant part: “Ed
Kelley shall lease to the corporation adequate property in the valley of his property
known as ‘Lazy E Estates’ for a gravel and rock operation with royalties of $.50 per
yard.” Contrary to the Kelleys’ arguments, the pre-incorporation agreement clearly
creates a duty for Ed Kelley to lease his land to the corporation for a gravel and rock
operation. The contract contains no right of revocation or requirement that the mine
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be operational by a certain date. A mine plan subsequently filed by the corporation
extends until 2019, making it possible for the jury to find that the parties intended the
lease of the Kelleys’ property to extend at least until that time.
The undisputed evidence in this case is that Ed Kelley ejected Tipton from the
property, and would not allow him to return to operate the Mill Creek mining
business. The evidence further reveals that the Kelleys thereafter attempted to
continue mining operations for their own personal benefit and without respect for
Mill Creek’s rights under the contract or Tipton’s rights as a shareholder. For
instance, the Kelleys sold Mill Creek equipment for their own personal benefit
without remitting the money from the sale to Mill Creek. Furthermore, the Kelleys
sold property that Mill Creek intended to mine to a third party. Finally, Ed Kelley
failed to conduct required Mill Creek shareholder meetings or to file 2000 or 2001
Mill Creek tax returns. In light of this evidence, we believe a reasonable jury could
find that the Kelleys prevented Mill Creek Gravel from performing mining operations
on their property, essentially ruining that enterprise and salvaging what was left for
themselves personally. As this was clearly a breach of Kelley’s duty under the pre-
incorporation agreement, we hold that the district court’s denial of the Kelleys’
renewed motion for judgment as a matter of law on this issue was correct.
Lost Profits
Tipton argued at trial that, as a result of Ed Kelley’s breach, Mill Creek was
deprived of around $14 million in profits that the gravel corporation would have
generated due to increased growth in the area. The jury agreed, at least in theory if
not in amount, and awarded Mill Creek about ten percent of what Tipton asked for,
or $1.5 million. On the Kelleys’ renewed motion for judgment as a matter of law, the
district court upheld the award, stating “it cannot be said that there was a complete
absence of probative facts to support plaintiff’s claim for lost profits, and that the jury
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could conclude, as it apparently did, that Mill Creek could have achieved profits of
approximately 10% of plaintiff’s estimates.”
The Kelleys argue that the district court erred in denying their renewed motion
for judgment as a matter of law with regard to the issue of lost profits. The Kelleys
claim that Tipton failed to present sufficient evidence for a reasonable jury to find lost
profits and did not meet the exacting burden of proof for establishing lost profits
under Missouri law.
The general rule under Missouri law is that anticipated profits of a commercial
business are too remote and speculative to warrant recovery. Coonis v. Rogers, 429
S.W.2d 709, 714 (Mo. 1968). They can only be recovered when “they are made
reasonably certain by proof of actual facts, with present data for a rational estimate
of their amount.” Id. (quotations and citation omitted).
The proof required to sustain lost profits is “exacting.” Ozark Employment
Specialists, Inc. v. Beeman, 80 S.W.3d 882, 897 (Mo. Ct. App. 2002). “[C]ompetent
and substantial evidence is required to support an award of damages.” Id. Moreover,
“[s]peculation as to probable or expected lost business profits is spurned,” id., and
“[a]n unsupported opinion or estimate of a loss of profits is generally held to be
insufficient.” Farris v. Mitchell, 745 S.W.2d 262, 264 (Mo. Ct. App. 1988).
For established businesses, “proof of the income and expenses of the business
for a reasonable time anterior to its interruption, with a consequent establishing of the
net profits during the previous period, is indispensable.” Coonis, 429 S.W.2d at 714
(quotations and citation omitted). In Independent Business Forms, Inc. v. A-M
Graphics, Inc., 127 F.3d 698 (8th Cir. 1997), this court noted that it is nevertheless
possible for new businesses to recover lost profits:
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This Court has observed that: “[U]nder Missouri law there is no per se
rule that a so-called ‘new’ business may not, regardless of the facts and
circumstances, recover for loss of net profits or net gain.” Handi Caddy,
Inc. v. American Home Products Corp., 557 F.2d 136, 139 (8th Cir.
1977). While the general rule requiring proof of expected profits with
reasonable certainty places a greater burden upon a newly established
business, it does not mean a new business can never recover lost profits.
Id. at 703. Thus, while new businesses “labor[] under a greater burden of proof in
overcoming the general rule that evidence of expected profits is too speculative,
uncertain, and remote to be considered,” Handi Caddy, 557 F.2d at 139, lost profits
may nevertheless be recovered if “they are made reasonably certain by proof of actual
facts, with present data for a rational estimate of their amount.” Coonis, 429 S.W.2d
at 714 (quotations and citation omitted).4
Given this difficult standard, we hold that Tipton did not prove lost profits with
reasonable certainty. Essentially, Tipton’s theory of lost profit damages was that in
light of “increased growth” in the area, Mill Creek would have been able to sell all
4
Citing two Missouri cases, the Kelleys insist that even new businesses must
show a history of profits prior to interruption in order to recover lost profits. See
Anderson v. Abernathy, 339 S.W.2d 817, 824 (Mo. 1960) (noting that as a new
business, plaintiff did not have a history of profits and holding that “[i]n any event,
there was not sufficient proof of facts and data”); Lowder v. Mo. Baptist Coll., 752
S.W.2d 425, 428 (Mo. Ct. App. 1988). We do not believe, however, that this is the
proper rule. First of all, Coonis v. Rogers, 429 S.W.2d at 714, which was decided
after Anderson, clearly states that proof of profits prior to interruption is
“indispensable” only for established businesses. Id. Second, the Kelleys’ theory
contradicts the reasoning of Handi Caddy, 557 F.2d at 139, and Independent Business
Forms, 127 F.3d at 703, which only require new businesses to prove expected profits
with a “reasonable certainty.” Finally, such a rule seems illogical on its face, given
that new businesses, by definition, will not have any prior profits.
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the gravel and dirt within the mine plans for an enormous profit.5 He introduced the
following evidence to support this theory at trial: 1) that there was gravel and top-soil
available to Mill Creek; 2) that the market value for gravel was $10 per yard, and $14
per yard for top-soil; 3) that the gravel available to Mill Creek could be used for some
construction and landscaping purposes; 4) that one purchaser would have bought Mill
Creek gravel for future projects, but he did not say how much; and 5) that there would
be a demand for the gravel due to the growth of the area and the nearby construction
of two four-lane highways.
This evidence was insufficient under Missouri law to support the jury’s lost
profits award. Tipton never showed that Mill Creek was “reasonably certain” to make
any profit, much less the $1.5 million profit that the jury awarded (or the $14 million
profit that Tipton claimed was actually lost). The primary problem with Tipton’s
evidence was that his entire profits calculation was based on the proposition that there
would be an increased demand for gravel in the area at some time in the future.
5
We note that the principal case that Tipton relies upon in this appeal, State ex
rel. State Highway Comm’n v. Foeller, 396 S.W.2d 714 (Mo. 1965), does not deal
with lost profits at all, but with a condemnation proceeding. Tipton relies on that case
for the proposition that
all that is required is testimony about the value of the mineral, present
and future expected demand for the mineral, and evidence of every use
to which the mineral may be put, regardless of whether the mineral has
been so used and regardless of the owner’s present intentions to devote
the mineral to such use.
(Appellee’s Br. at 40.) While this may be all that is required in the condemnation
context, we find that under Coonis and subsequent cases, the burden of proof for
showing lost profits is much higher. For one thing, to recover lost profits, one must
show not only the hypothetical value of a resource as it sits in the ground, but that
profits can be produced through actual sales. This is exactly the part of the equation
that Tipton failed to prove.
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Projecting $14 million in lost profits upon a future demand that does not yet exist is
exactly the kind of conjectural assumption that is disfavored by all Missouri courts
that have addressed the issue of lost profits.6
Even if such growth did occur, it is still a matter of speculation as to whether
this increased demand would create business for Mill Creek. Presumably, the
corporation would need to bid for contracts along with its competitors, and there is
no guarantee that it would win any contracts that would create profits. In fact, the
evidence suggests that Mill Creek would have been at a competitive disadvantage in
6
Missouri courts have consistently rejected projections when they are based
upon assumptions or hopeful expectations. As stated above, “[s]peculation as to
probable or expected lost business profits is spurned, and proof of lost profits must
be substantial.” Ozark Employment Specialists, 80 S.W.3d at 897; see also
Gesellschaft Fur Geratebau v. GFG America Gas Detection, Ltd., 967 S.W.2d 144,
147 (Mo. Ct. App. 1998) (reversing the jury’s judgment for lost profit damages
because the plaintiff only offered “projections that were calculated on neither any
actual sales nor revenue”); Brown v. McIbs, Inc., 722 S.W.2d 337, 341 (Mo. Ct. App.
1986) (rejecting lost profits and stating that “evidence of lost profits must be
sufficiently definite and certain so as to allow a reasonably accurate estimate of the
loss without resorting to speculation”). Similarly, other jurisdictions require that lost
profits be supported by the existence of future contracts from which lost profits can
actually be calculated. See Edmunds v. Sanders, 2 S.W.3d 697, 705 (Tex. App. 1999)
(“[T]o recover lost profits, a party must show either a history of profitability or the
actual existence of future contracts from which lost profits can be calculated with
reasonable certainty.”); Kidder, Peabody & Co., Inc. v. IAG Int’l Acceptance Group
N.V., 28 F. Supp. 2d 126, 131-34 (S.D.N.Y. 1998) (denying lost profits where
plaintiff could not “identify a single contract or a single potential transaction in which
[it] was involved from which lost profits can be derived,” and holding that lost profits
could not be based “upon a variety of assumptions about hypothetical deals”). While
Missouri law does not appear to require a plaintiff to identify actual contracts from
which lost profits can be derived, it does require “substantial” evidence, Ozark
Employment Specialists, 80 S.W.3d at 897, and these cases serve to demonstrate just
how far Tipton was from being able to meet this standard.
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this regard because of the high clay content of the gravel, the sharpness of the gravel,
the porousness of the gravel, the limited uses to which the gravel could be put, and
the inferior roads over which Mill Creek trucks would need to travel.7
7
Tipton’s own expert was very damaging in this respect. The expert’s report
concludes that Mill Creek faced many disadvantages:
Gravel quality insofar as a potential source of construction aggregate,
which constitutes a significant, prospective long-term consumer of
acceptable rock products, appears somewhat diminished by the
preponderance of relatively porous chert and abundance of clay in the
deposits. Inquiry made with the Missouri Department of Transportation
(MoDOT) regional office in Joplin, Missouri revealed that gravel
deposits in general in McDonald County are not utilized for their
construction projects due to high absorption characteristics . . . Other
potential uses of gravel resources [exist], . . . but it is believed such uses
would be comparatively sporadic and subject to prevailing market
conditions in the area. Moreover, the high clay content of the colluvial
deposits necessitates an additional step [to] . . . mechanically agitate[]
the gravel to remove undesired clay coatings and clay balls. . . . [T]he
additional step undoubtably increases processing costs, which likely
places such deposits at an economic disadvantage with in-stream
operations, which mine inherently “clean” alluvial deposits.
(J.A. at 139-40.) The report goes on to say that:
Currently, there are five other legally permitted sand and gravel
operations in McDonald County . . . . Each of the five sites lay in closer
proximity to improved roads than the Edwin Kelley property, suggesting
higher visibility to the general public and, possibly, lower truck
transportation costs.
(J.A. at 140.)
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Furthermore, Tipton was able to produce almost no evidence that any buyer
would purchase Mill Creek gravel.8 Many buyers flatly refused to buy the gravel
because of its inferior quality. The undisputed evidence was that the corporation had
no contracts to sell gravel, even though Tipton and other Mill Creek employees
dedicated some time attempting to secure contracts for the gravel that would be
forthcoming from the mine. Despite these efforts, only a small amount of the paltry
eighty tons of gravel produced by the mine was ever sold. Given these deficiencies,
Tipton’s assertion that Mill Creek would have sold all of the rock and dirt existent on
the property for a sum total of $14 million in profits strikes us as wishful thinking.
Thus, we hold that, in light of the difficult standard for proving lost profits
under Missouri law, the evidence was insufficient for a reasonable jury to find that
Mill Creek—a corporation that was $700,000 in debt, had sold almost none of its
product, and had a product that many purchasers were not interested in buying—was
“reasonably certain” to make a profit.
The evidence suggests, however, that there was some smaller amount of actual
damage to the corporation, such as the Kelleys’ sale of corporation equipment for
their own personal benefit, sale of land that the corporation intended to mine, and the
small sales of gravel from the eighty-ton pile that were not remitted to the
corporation. We also hold that Mill Creek may be entitled to recover the loss it
incurred to get its gravel operation up and running in reliance on the pre-
incorporation agreement. See Restatement (Second) of Contracts § 349 (1981) (“As
an alternative to the measure of damages stated in § 347 [expectation damages], the
injured party has a right to damages based on his reliance interest, including
expenditures made in preparation for performance . . .”); see also John D. Calamari,
8
Tipton had only one witness, Pat Adams, testify that he would have bought
gravel from Mill Creek, but he did not say how much gravel he would have bought
or at what price.
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The Law of Contracts 556 (4th ed. West 1998) (“When the aggrieved party cannot
establish a loss of profits with sufficient certainty, the party may recover expenses of
preparation and of part performance, as well as other foreseeable expenses incurred
in reliance upon the contract.”). Because the jury did not identify or distinguish these
other breach of contract damages from the lost profit damages in its $1.5 million
award to the corporation, we find it is necessary to remand the case for a new trial on
damages to calculate the amount due to the corporation without consideration of lost
profits.
Evidentiary Issues
The Kelleys also appeal the district court’s denial of their motion for a new
trial. They argue that the district court made a number of erroneous and prejudicial
evidentiary rulings, including: 1) allowing Tipton’s counsel to improperly use
misleading charts summarizing Tipton’s alleged lost profits damages in closing
arguments; 2) allowing Tipton to present damage calculations that were not disclosed
in accordance with Federal Rule of Civil Procedure 26; 3) admitting the appraisal
report of Dean Seimer, and allowing Tipton to make improper use of that report; and
4) allowing Tipton’s counsel to improperly summarize Mikel Carlson’s expert report
in closing arguments. They argue that they are entitled to a new trial on the basis of
these errors. These evidentiary rulings, however, all relate to the “lost profits” issue.
Because we hold that the evidence in this case was not sufficient to support an award
for lost profits, and remand for a new trial on damages not including lost profits, we
do not need to decide whether the district court abused its discretion as to these
rulings.
Jury Instruction
The Kelleys argue that the jury instruction on breach of contract constituted an
improper “roving commission,” allowing the jury “to find breach of contract in a
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variety of unidentified factors without limitation to the facts and law developed in the
case and without regard to what acts or omissions would constitute liability.”
(Appellant’s Br. at 47.) We do not, as a matter of law, find any problem with the
instruction.9
The district court has broad discretion in the formulation of jury instructions,
and “[a] judgment will be reversed on the basis of an instructional error only if the
error affected the substantive rights of the parties.” Gasper v. Wal-Mart Stores, Inc.,
270 F.3d 1196, 1200 (8th Cir. 2001). “The test is whether the instructions given,
taken as a whole and viewed in the light of the evidence and the applicable law, fairly
9
The instruction provides that:
On Mill Creek Gravel, Inc.’s claim for breach of contract brought by
plaintiff Tipton, your verdict must be for Mill Creek Gravel, Inc. and
against defendants Ed and Dixie Kelley if you believe:
First, defendants Ed and Dixie Kelley agreed they shall lease to Mill
Creek Gravel, Inc. adequate property for mining operations and in
consideration Mill Creek Gravel, Inc. agreed to pay to Ed and Dixie
Kelley 50¢ per yard for each yard of gravel, top soil, or fill dirt removed
from the property, and
Second, Mill Creek Gravel, Inc. was ready, willing, and able to perform
under the terms of the agreement, and
Third, defendants Ed and Dixie Kelley prevented Mill Creek Gravel,
Inc. from performing mining operations, and
Fourth, because of defendants Ed and Dixie Kelley’s failure to perform
the agreement Mill Creek Gravel, Inc. was damaged.
(J.A. at 5.)
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and adequately submitted the issues in the case to the jury.” Id. (quotations and
citation omitted).
Here, the Kelleys claim that a more specific instruction was needed regarding
exactly how the Kelleys prevented Mill Creek’s performance. We cannot understand,
however, why a more specific instruction was necessary, or why the jury should have
been prohibited from entertaining all of the evidence before it in deciding whether
there was a breach. We therefore hold that the instruction was not a roving
commission, but that in light of the evidence and the applicable law, the district court
fairly and adequately submitted the issue to the jury.
Attorney Fees and Costs
The sole basis on which the Kelleys contest the district court’s award of
attorney fees is that Tipton failed to plead them as special damages in his Complaint.
See Nat’l Liberty Corp. v. Wal-Mart Stores, Inc., 120 F.3d 913, 916 (8th Cir. 1997).
We find that a grant of attorney fees was appropriate in this case for the simple reason
that shifting the attorney fees of a successful plaintiff in a shareholder derivative suit
to the corporation is not a “special damage” within the meaning of Rule 9(g),10 but
is a judge created exception based on equitable principles. See Mills v. Elec. Auto-
Lite Co., 396 U.S. 375, 391-92 (1970). Because shareholder derivative suits are
10
“Special damages” are those types of damages that, although resulting from
the wrongful act, are not usually associated with the claim in question and must be
plead in order to avoid unfair surprise to the defendant. See Avitia v. Metro. Club of
Chicago, Inc., 49 F.3d 1219, 1226 (7th Cir. 1995) (defining special damages as
“damages that are unusual for the type of claim in question–that are not the natural
damages associated with such a claim”). Courts have held attorney fees to be special
damages primarily in instances when available under a contract between the parties.
See Nat’l Liberty, 120 F.3d at 916 (attorney fees available under an agreement
between the parties constitute special damages that must be pled under 9(g));
Maidmore Realty Co., Inc. v. Maidmore Realty Co., Inc., 474 F.2d 840, 843 (3d Cir.
1973) (attorney fees available under contract are special damages).
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brought on behalf of the corporation, courts reason that the corporation should pay
for any benefit it receives as a result of the suit. Id. at 395. Accordingly, Tipton was
not required to plead such fees as special damages in his Complaint, but could raise
the issue of fees, as he did, by motion under Federal Rule of Civil Procedure
54(d)(2).11
Thus, we agree with the district court that Tipton is entitled to attorney fees and
costs. We do not agree with the district court, however, as to the amount Tipton
should be awarded. In light of our ruling as to lost profits, we hold that no attorney
fees or costs should be awarded for the time and expenses spent on Tipton’s lost
profit claim. We believe that a recalculation of attorney fees and costs12 that does not
include the time and expense spent on proof of lost profits would more accurately
represent the degree of success achieved by Tipton’s attorney and the benefit afforded
to the corporation.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the decision of the district court in
regard to the breach of the pre-incorporation agreement and the jury instruction on
breach of the agreement. However, we VACATE the district court’s decision in
regard to lost profits, attorney fees, and costs, and REMAND the case for a new trial
11
Federal Rule of Civil Procedure 54(d)(2)(a) provides that “[c]laims for
attorneys’ fees and related non-taxable expenses shall be made by motion unless the
substantive law governing the action provides for the recovery of such fees as an
element of damages to be proved at trial.”
12
Consistent with this ruling, Tipton is not entitled to the costs for his expert
witnesses on lost profits, Jay McIntyre and Mikel Carlson. We therefore do not need
to reach the issue, raised by the Kelleys on appeal, of whether the district court erred
with respect to its award of costs for these witnesses.
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on damages without consideration of lost profits, and for a recalculation of attorney
fees and costs, excluding time and expenses spent on proof of lost profits.
IT IS SO ORDERED.
______________________________
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