Xcoal says Southern Coal Sales lawsuit lacks legal merit

Xcoal Energy & Resources LLC has denied claims in a contract lawsuit filed against it and its founder, Ernie Thrasher, by Southern Coal Sales Corp. (SCS), which is controlled by prominent Central Appalachia coal producer Jim Justice.

The SCS lawsuit was filed June 15, with an amended version filed June 20, at the U.S. District Court for the Eastern District of Kentucky. The SCS principal place of business is in Roanoke, Va. Xcoal, headed by veteran coal marketer Ernie Thrasher, is located in Latrobe, Pa. The court in Kentucky is a proper forum because the contracts in question were to be performed in Kentucky, said the lawsuit. But, the case in the Kentucky court was later dismissed to clear the way for the same case to be pursued in a Virginia court.

The lawsuit itself isn’t clear on this point, but attached purchase orders show that SCS is a company of coal operator James “Jim” Justice II, since the purchase orders are addressed to his son, James “Jay” Justice III, who is a senior executive in his father’s companies. The SCS address on the purchase orders is in Beaver, W.Va.

Xcoal filed two responses Aug. 31 at the new court, the U.S. District Court for the Western District of Virginia. One was a point-by-point denial of the SCS claims, with an included counterclaim by Xcoal. The other was an overall brief citing legal precedents for why Xcoal doesn’t think SCS has a legal leg to stand on.

In the point-by-point answer, Xcoal noted that in March and June 2011, SCS and Xcoal entered into a series of seven purchase orders, setting forth the terms and conditions that would apply to Xcoal’s purchase of coal from SCS through March 2012. In February 2012, SCS and Xcoal agreed to amend the purchase orders to extend the end of the term from March 2012 to March 2013. Copies of the purchase orders were attached to the Xcoal answer.

Under the orders, SCS is obligated to deliver coal ordered by Xcoal at SCS mines or storage facilities. Delivery price is FOB at SCS’s mines or storage facilities. “Delivery time by SCS is of the essence, and in the event of late delivery, or non-delivery, SCS is liable to Xcoal for all damages incurred,” said Xcoal. “Xcoal is responsible for transporting the coal from the point of delivery by SCS to the port where the coal is sampled, analyzed for compliance with quality specifications and loaded onto vessels for transport to Xcoal’s customers.”

If Xcoal’s sample analysis reveals a substantial deviation from the contracted quality specs, Xcoal is entitled to reject the SCS coal, and SCS will be liable to Xcoal for all damages resulting from rejection of the coal. “On numerous occasions in 2011 and 2012, when Xcoal ordered coal from SCS under the aforementioned Purchase Orders, SCS breached its obligations under the Purchase Orders by failing to timely deliver coal and/or by failing to deliver coal which met the quality specifications of the applicable Purchase Order,” said Xcoal as part of its counterclaim for damages. “As a direct and proximate result of SCS’s breaches of its obligations under the Purchase Orders described above, Xcoal incurred damages in the form of demurrage charges which are imposed by vessel owners for delays in the loading and departure of the vessels hired by Xcoal’s customers or by Xcoal to transport coal to Xcoal’s customers.”

Xcoal added: “During the period May, 2011 through April, 2012, Xcoal has incurred and paid demurrage charges in the approximate amount of $3,845,533.93 relating to coal purchased under Purchase Orders Nos. 3350, 3370 and 3371 (Exhibits E, F and G) as a direct result of SCS’s failure to deliver coal ordered by Xcoal as required by the terms and conditions of the Purchase Orders. These demurrage charges are damages which Xcoal is entitled to recover from SCS under the terms of the Purchase Orders and applicable law. Xcoal therefore moves for entry of judgment in its behalf against SCS in the principal sum of $3,845,533.93, plus prejudgment interest and the costs of this proceeding.

Xcoal counters fraud and other SCS claims

In the Aug. 31 brief, Xcoal said the SCS complaint is subject to multiple bases for dismissal. “This case is a straightforward breach of contract action involving the obligations of SCS and Xcoal under a series of purchase orders that the two companies signed between March and June 2011, and then amended in early 2012,” Xcoal noted. “SCS has chosen to repackage this contractual dispute by adding two unsubstantiated tort claims for fraud and duress, which are inadequately pled and contrary to controlling Virginia law.”

Neither SCS’s fraud claim nor its duress claim is adequately pled, Xcoal said. The fraud claim comes nowhere near to meeting a heightened pleading standard. SCS’s factual support of its duress claim boils down to an allegation that SCS “agreed to extensions for the time for performance under the purchase orders” when Xcoal asked for those extensions, it added. These “threadbare allegations” fail to meet Supreme Court pleading standards and do meet rules which are designed to prevent claims with absolutely no basis from going forward, Xcoal said.

In setting the background for this matter, Xcoal said it agreed with certain points made in the SCS lawsuit, including that in March 2011, SCS and Thrasher first discussed the possibility of SCS selling metallurgical and soft coking coal to Xcoal. Thrasher told SCS that Xcoal could handle any quantity of coal produced by SCS and that Xcoal had a significant amount of the coal sales business in Asia. In March and April 2011, SCS and Xcoal executed seven purchase orders. Under those purchase orders, SCS was to provide 3.91 million tons of coal and Xcoal was to pay it over $560m.

SCS stated that Xcoal refused to accept delivery of coal under certain purchase orders, and the parties agreed in early 2012 to amend their arrangement to extend the term of the purchase orders to March 2013. To date, SCS has delivered 450,856.45 tons of coal for which Xcoal has paid over $20m. However, an additional $24.5m is owed on the delivered coal, Xcoal said in repeating basic elements of the SCS lawsuit.

At one point, Xcoal wrote about an SCS claim that SCS had to turn away longstanding coal customers to fill the Xcoal orders: “Here, SCS’s allegations do not amount to a plausible duress claim against Xcoal and Xcoal, LLC. SCS’s complaint is internally inconsistent in that it first alleges that it has numerous ‘existing customers,’ some of which ‘had been customers of SCS’s affiliates for decades.’ Nevertheless, SCS then tries to claim that in spite of its longstanding relationships with numerous customers, its ‘economic survival’ depended upon Xcoal’s acceptance of coal under the purchase orders. Such inconsistent allegations, depicting SCS on the one hand as a robust and well-established coal producer and on the other as a fragile entity wholly dependent upon Xcoal’s mercy, does not ‘state a claim to relief that is plausible on its face.’”

Along those same lines, Xcoal later said: “Accepting as true for purposes of this motion the allegation that SCS was in dire economic straits, there is nothing to permit the inference that the only choice available to SCS when XCoal allegedly failed to perform in 2012 was to amend the purchase orders. As this civil action illustrates, SCS can certainly find its way to the courthouse, and there is no suggestion that it was subjected to either ‘improper threats’ or ‘physical force’ prior to agreeing to the amendments.”

Purchase orders covered a lot of met-quality coal

In March and April 2011, SCS and Xcoal entered into, among others, the following purchase orders:

  • Purchase Order No. MET3348-11, dated March 17, 2011, which, as amended, obligated Xcoal to purchase 490,000 tons of high vol soft coking coal in Harlan County or Pike County, Ky., or Wise County or Lee County, Va. This purchase order is attached to the lawsuit, and shows this coal originally priced at $105/ton, FOB rail at the Sequoia loadout on CSX at Bardo, Ky., but with additional loading points, like Sigmon and Paragon, written in by hand. The original order was for 400,000 tons, with a later amendment to 490,000 tons.
  • Purchase Order No. MET3349-11, dated March 17, 2011, which obligated Xcoal to purchase 200,000 tons of high vol met coal in Harlan or Pike counties, Ky., or Wise or Lee counties, Va. This coal was priced at $160.60/ton, FOB the Sequoia/Bardo loadout, with later addition of loadouts like Sigmon and Paragon.
  • Purchase Order No. MET3350-11, dated March 17, 2011, where Xcoal was to purchase 360,000 tons of high vol soft coking coal in Harlan or Pike counties, Ky., or Wise or Lee counties, Va. This was for “Bevins Branch” raw high-vol coal, priced at $105/ton, FOB the Sequoia/Mousie Branch facility in Kentucky, with loadouts like Sigmon later written in. This deal started at 450,000 tons, later reduced to 360,000 tons.
  • Purchase Order No. MET3371-11, dated June 8, 2011, which obligated Xcoal to purchase 720,000 tons of high vol soft coking coal in Pike County, Ky. This is “Jamboree” washed and raw high-vol coal, priced at $105/ton, FOB the Jamboree loadout on Norfolk Southern.

SCS: soon after these deals were done, Xcoal backed away

All told, Xcoal was obligated under these purchase orders to take 1,770,000 tons of coal and to pay SCS $185.85m for the coal. “Less than 60 days after entering into the above described purchase orders, Xcoal routinely and persistently refused to accept delivery of the contractually designated volumes of SCS’s coal under the purchase orders; in fact on some purchase orders, Xcoal has refused to accept delivery of any coal,” said the SCS lawsuit. “During Xcoal’s continuous nonperformance SCS consistently attempted to contact Thrasher and Xcoal via email, telephone and text message to schedule meetings or conference calls to discuss Xcoal’s nonperformance. In most instances SCS would receive no response from Thrasher or Xcoal. In rare instances when Xcoal and/or Thrasher would respond to SCS communications, Xcoal and/or Thrasher would commit to scheduled follow up conference calls, meetings and shipping schedules, but Xcoal and Thrasher consistently failed to follow through on their commitment to have a phone call, in person meeting or provide a shipping schedule. Because, by early 2012, Xcoal had continuously failed to perform under the above purchase orders and based on Thrasher’s continuing assurances and promises of performance, SCS agreed to amend the above mentioned purchase orders to extend Xcoal’s performance deadlines throughout 2012 and into the first three months of 2013.”

Since amending the purchase orders, notwithstanding promises to perform, Xcoal continuously failed to perform under the Amended POs, SCS said. As of the date of the June lawsuit, SCS said that Xcoal had purchased the following coal tonnages on the Amended POs:

  • Purchase Order No. MET3348-11: 34,943 tons purchased of 490,000 required tons.
  • Purchase Order No. MET3349-11: zero tons purchased of 200,000 required tons.
  • Purchase Order No. MET3350-11: 102,416 tons bought of 360,000 required tons.
  • Purchase Order No. MET3371-11: 516,009 tons bought of 720,000 required tons.

Between Dec. 15, 2011, and June 2012, SCS said it had delivered to Xcoal a total of 450,856.45 tons of coal, which was all of the coal ordered by Xcoal during that period. Xcoal was obligated to pay $45,339,927.25 for that coal. However, to date, Xcoal has paid only $20,831,117.85 towards its total payment obligation for the delivered coal, leaving a balance due of $24,508,809.40, said the lawsuit. Based on past performance, it is plain that Xcoal will be unable to fulfill its contractual obligations to take the additional 1,116,632 tons of coal that it has yet to schedule under the Amended POs for delivery by March 2013, SCS added.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.