United States: Subsurface Trespass In Kentucky For Coal And Aggregate Producers: Adopting Net Value Rule And Eliminating Punitive Damages

The Kentucky Supreme Court, which does not frequently address issues that have a direct impact on the heavy highway and construction materials industry; issued a decision in 2015 that does just that.  In Harrod Concrete & Stone Co. v. Crutcher, the Court adopted the “net value rule” for damages in cases involving the mistaken removal of minerals from property owned by a third party.  458 S.W.3d 290 (Ky. 2015).  Innocent trespassers are now liable for the “net value” of the extracted resource, which excludes the cost of extraction.  A willful trespasser, one who knowingly, willfully, or recklessly extracts resources from another’s property, is liable for the entire value of the extracted resource with no deduction for the extraction costs.  Willful trespassers, however, are not subject to punitive damages.  This ruling aligns Kentucky law with other mineral-producing states, and in doing so, limits potential liability in comparison to prior law.

Background

Prior to this case, Kentucky common law was inconsistent with regard to the measure of damages for mineral trespass cases.  Courts historically viewed extracted resources as a claim for conversion—or, unlawfully taking ownership of another’s personal property.  The measure of damages for unauthorized removal was traditionally the full market value of the removed resource.  At the turn of the Twentieth Century, courts tempered this rule for those who made “an honest mistake” and limited potential damages to the value of the resource “as it lay in the mine.”  North Jellico Coal Co. v. Helton, 219 S.W. 185, 186 (Ky. 1920).  

This introduced an “innocent trespasser” standard of damages, but courts still disagreed as how to measure the value of a resource in the ground.  Kentucky courts initially equated the value to the amount of a royalty for the right to extract the resource.  Kentucky courts also distinguished cases in which the injured landowner was not equipped to extract the resource from those in which the party had the ability to mine the land.  This placed Kentucky in the minority of jurisdictions and led to criticism.  Many viewed this modified royalty rule as a reward for innocent trespassers when the profits of extraction exceeded the royalty measure.  Moreover, some courts did not apply the rule, which led to inconsistencies and unpredictability.

Harrod Concrete & Stone v. Crutcher

Responding to these concerns, the Kentucky Supreme Court replaced the royalty rule with a uniform “net value rule” for innocent trespassers.  Where a party innocently removes resources from the property of another, the proper measure of damages is now “the value of the mineral after extraction, less the reasonable expenses incurred by the trespasser in extracting the mineral.”  Crutcher, 458 S.W.3d at 296.  Reasonable expenses are those items that are beneficial and productive in the mining operation. The trial court determines whether to allow or disallow specific expenses in calculating damages.

The conduct of the trespasser is still important.  An innocent trespasser is one who makes an honest mistake, while a willful trespasser either knowingly, willfully, or recklessly extracts resources from another’s property.  A party that is merely negligent in extracting resources from another’s property qualifies as an innocent trespasser, and will benefit from the limited damage exposure offered by the net value rule.  A willful trespasser, however, can be held liable for the full value of the resource with no deduction for extraction costs.

To avoid the financial consequences of being deemed a willful trespasser, companies must establish and follow routine procedures to ensure they are mining the correct property.  Such procedures include routine surface and subsurface surveying to confirm the property boundary lines and also accurately correlating the location of subsurface mining activities to those surface boundary lines  Otherwise, an innocent mistake could be transformed into a willful trespass and subject the company to significant damages.

Importantly, the Court also declared that punitive damages do not apply to willful trespassers.  Instead, willful trespassers must pay the gross fair market value of the resource and do not receive a credit for the costs of extraction.  The Court reasoned that punitive damages are not appropriate for mineral trespass cases because losing a credit for the cost of extracting the resource “serves as a sufficient financial penalty for the wrongdoing of the trespasser . . . .”  Id.

Conclusion

These new rules simplify the foreseeable cost of extracting minerals near property lines and eliminate uncertainty in potential damages for a company who oversteps in boundaries during the mining process.  Overall, the Crutcher decision advances Kentucky’s jurisprudence toward a predictable, efficient measure of damages in mineral trespass cases. 

*The author would like to acknowledge and thank Gardner Beach Bell for his contributions to this legal update.

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