Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-03-02821/USCOURTS-ca8-03-02821-0/pdf.json

Parties Involved:
Dixie Kelley
Appellant
Ed Kelley
Appellant
Mill Creek Gravel
Not Party
Marvin Tipton
Appellee

Document Text:

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.

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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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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

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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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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

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3

Tipton’s Complaint also alleges breach of fiduciary duty, fraudulent

misrepresentation, and quantum meruit.

-4-

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.

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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 preincorporation 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 preincorporation 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 preincorporation 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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-7-

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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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.

-8-

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

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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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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.

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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. 

-10-

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

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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.)

-11-

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

 

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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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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 preincorporation 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,

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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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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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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

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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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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. AutoLite Co., 396 U.S. 375, 391-92 (1970). Because shareholder derivative suits are

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11Federal 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.”

12Consistent 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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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

Appellate Case: 03-2821 Page: 16 Date Filed: 06/28/2004 Entry ID: 1781871 
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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.

______________________________

Appellate Case: 03-2821 Page: 17 Date Filed: 06/28/2004 Entry ID: 1781871