Douglas Sumner, a coal executive with experience in western Kentucky, and Armstrong Coal are still battling in federal court over whether Sumner adequately performed under an agreement for him to help sell coal to Louisville Gas and Electric.
Sumner sued Armstrong Coal, which was formed as a coal producer in 2006, in August 2011 at the U.S. District Court for the Western District of Kentucky. He said he was not being paid under an agreement to help Armstrong sell its coal to LG&E. Armstrong Coal has responded that Sumner did little work under the agreement that it found out, after working out the agreement with him, that Sumner had a bad reputation in the coal business that actually made it more difficult for Armstrong to sell its coal.
Armstrong Coal on April 2 filed a memorandum of law with the court in response to Sumner’s motion for partial summary judgment as to liability.
“In August 2011, in apparent recognition of the fact that Armstrong would likely soon be filing suit against Sumner for breach of fiduciary duty, fraudulent misrepresentation and unjust enrichment in order to seek the disgorgement of well over $2,000,000 of unearned commissions that Sumner had been unjustly paid in exchange for literally only a few dozen hours of work pursuant to the ‘Consulting Agreement’ that is the subject matter of this litigation, Sumner launched a preemptory strike and filed this lawsuit ostensibly seeking to recover even greater commissions he now claims are owed under that Consulting Agreement,” said the Armstrong filing.
Although the parties have not even commenced discovery, consistent with his “shoot first, aim later” approach, Sumner is now seeking a “premature” partial summary judgment for additional commissions related to three specific coal supply contracts with LG&E: contracts No. J07032, No. J10009 and No. J10007.
“Sumner’s motion must be denied because: (1) one of the three contracts, No. J10007, is expressly excluded from the scope of the Consulting Agreement; (2) Sumner is not entitled to compensation under the Consulting Agreement for contracts he did not negotiate; (3) Sumner is not entitled to commissions for contract No. J10009 because it did not become a contract during the term of the Consulting Agreement; (4) at minimum, the Consulting Agreement is ambiguous and discovery is required to ascertain the parties true intent; and (5) Armstrong’s counterclaim for fraudulent inducement and related affirmative defenses will render the Consulting Agreement unenforceable as a matter of law,” Armstrong contended.
Armstrong retained Sumner when it was new to the coal business
Shortly after Armstrong Coal came into existence in 2006, it entered into the agreement with Sumner in reliance on his representations that he had significant experience and numerous contacts in the coal and utilities industries that would help the nascent company acquire coal supply contracts, Armstrong noted. Sumner represented that he had contacts within LG&E and claimed that such influence would be necessary in order to secure a sales contract with LG&E, Armstrong added.
“After entering into the Consulting Agreement, Armstrong discovered that, contrary to Sumner’s representations, he did not have a close professional relationship with the Chairman and Chief Executive Officer of LG&E, that he did not have a close and positive relationship with the primary individuals in the fuel procurement department, and that they did not respect (or could not by virtue of their lack of familiarity with him) his work in the coal industry,” Armstrong contended. “Armstrong also discovered that Sumner did not have substantial prior successful experience negotiating the sale of coal to many utilities, including LG&E. In fact, Sumner had a lengthy negative experience in the coal business in Western Kentucky; namely, he was the President and Chief Executive Officer of Centennial Resources, a coal company which he subsequently caused to go into bankruptcy, as well as caused it to default on a substantial number of coal supply contracts and similar agreements.”
With respect to the limited work Sumner did perform under the Consulting Agreement with respect to LG&E contract J07032, he did so in a “self-serving manner” in direct breach of the fiduciary duties he owed to Armstrong, the coal company said. “Specifically, Sumner negotiated the base sales price for LG&E Coal Sales Contract No. J07032 of $27.31 per ton of coal sold by Armstrong, and Sumner further strongly advised – in fact, pressured – Armstrong to accept the foregoing sales price. Sumner did so knowing that negotiating a lower-than- market sales price would induce LG&E to purchase more tons from Armstrong, which in fact, actually occurred. Indeed, the price Sumner negotiated was so low that it induced LG&E to agree to purchase 4 million tons of coal per year from an unproven producer, Armstrong, far and away its single largest contract of the year, and twice the quantity purchased from the next largest producer, Alliance Coal, a well-established, publicly-traded coal company.”
Armstrong added: “The negotiation of a below-market price, however, worked to Sumner’s benefit because he was to be paid a commission on a fixed, $0.35 per ton, basis. As a result, there was a direct conflict of interest between Sumner and Armstrong, and Sumner placed his own interests above that of his principal, by negotiating a contract that maximized the total number of tons sold by intentionally including a below-market sales price to Armstrong’s detriment. Sumner further breached his fiduciary duties by negotiating the duration of Contract No. J07032 – an unheard of seven years – a term Sumner strongly advised and, indeed, pressured Armstrong to accept. Sumner did so knowing that the combination of an unreasonably long economic term paired with a lower-than-market sales price would induce LG&E to purchase more tons from Armstrong, which in fact, actually occurred.”
Copies of the three LG&E contracts at issue are attached to Armstrong’s April 2 filing.
Sumner says the fact he’s not getting paid not even a question
Sumner’s Feb. 22 motion for partial summary judgment said: “Armstrong engaged Sumner to use his best efforts to negotiate with LG&E and [Big Rivers Electric] to secure contracts for the sale of Armstrong’s coal. Sumner was negotiator, while Armstrong was responsible for the execution and final acceptance of any coal contracts, including all the terms and conditions contained in those agreements. Sumner was required to be available to provide his negotiating services for the time period November 12, 2006 through December 31, 2009. In exchange, Sumner was entitled to ‘thirty-five cents ($.35) per ton of coal shipped under all LG&E and Big Rivers contracts executed by Armstrong during the Term.’ Sumner was entitled to this compensation for the duration of such coal contracts beyond the expiration of the Consulting Agreement.”
In 2007, Sumner said he negotiated a coal supply contract between Armstrong and LG&E. In 2008, and 2009, still during the term of the Consulting Agreement, Armstrong negotiated and executed amendments to the first coal supply contract and two new contracts, to which it shifted part of the coal to be sold to LG&E. “Despite the exclusive Consulting Agreement, Armstrong did not include Sumner in these negotiations,” the Sumner filing said. “Armstrong refuses to pay Sumner compensation based on these additional coal contracts despite the fact that the plain language of the Consulting Agreement requires payment to Sumner because the coal contracts were executed during its term. Armstrong paid Sumner commissions on shipments under the initial coal supply contract until shortly after Sumner commenced this litigation.”
Armstrong “concocted a litany of defenses and counterclaims” designed to nullify the agreement, the Sumner filing said. Those counterclaims are the subject of Sumner’s previously filed motion to dismiss counterclaims and associated affirmative defenses. Summary judgment is appropriate as to Armstrong’s liability to Sumner because there are no disputed material facts concerning the Consulting Agreement, and Sumner said he is entitled to judgment as a matter of law.
Louisville business a big chunk of Armstrong’s sales
Incidentally, Armstrong Coal, which has coal mines only in western Kentucky, is about to go public in an IPO under newly-created parent Armstrong Energy.
Said Armstrong Energy in its March 7 Form S-1/A filing at the SEC: “We currently have two multi-year coal supply agreements with LGE for the sale of coal. The first agreement was entered into in 2008, as amended, and expires in 2016. It calls for 2.1 million tons annually through 2015 and 0.9 million tons in 2016. Pricing ranges from $28.19 to $30.25 per ton over the term of the agreement subject to certain additional quality related adjustments that are typical of the industry. There is no price reopener provision in this agreement.”
The company continued: “The agreement with LGE that was entered into in 2009 calls for annual delivery of 1.25 million tons from 2011 through 2013 and 0.75 million tons from 2014 through 2016. In addition to typical quality adjustments, the price ranges from $42.00 to $45.00 per ton from 2011 through 2013. The agreement then provides that either party may elect at its sole option to reopen the agreement for negotiations with respect to price and/or other terms as it concerns all coal to be delivered in 2014 and beyond. Should either party seek to reopen the agreement (which must be done no later than April 1, 2013) and the parties be unable to reach a mutually acceptable agreement as to those terms being renegotiated, the agreement will terminate as of December 31, 2013.”
It isn’t clear why the third LG&E contract that is subject to the Sumner dispute is not included in this discussion. The three contracts attached to the Armstrong court filing have these basic terms:
- Contract J07032, original term of January 2008-December 2015, 4 million tons of coal in 2012. Subsequent amendment keeps end-of-2015 expiration, changes 2012 tons to 4.2 million, with 4 million tons per year in 2013-2015. Then a second amendment adds a year to the term, to the end of 2016, with 2.1 million tons per year in 2012-2015, and 900,000 tons in 2016. This is the extra big, extra long contract that was worked out first.
- Contract J10007, part of this dispute, is apparently the third mystery contract, since it was only for 600,000 tons just in calendar 2010.
- Contract J10009, term of January 2011-December 2016, 1.25 million tons per year in 2011-2013, 750,000 tons per year in 2014-2016, with an April 2013 reopener for 2014-2016 contract terms.