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MARINE MIDLAND BANK v. KEPLINGER & ASSOCS.

March 25, 1980

MARINE MIDLAND BANK, Plaintiff, against KEPLINGER & ASSOCIATES, INC. and J.W. MILLER & ASSOCIATES, INC., Defendants.


The opinion of the court was delivered by: DUFFY

OPINION AND ORDER

Plaintiff, Marine Midland Bank (hereinafter referred to as "MMB"), commenced this action against the defendants, Keplinger & Associates, Inc. (hereinafter referred to as "Keplinger"), and J.W. Miller & Associates, Inc. (hereinafter referred to as "Miller"), charging them with negligence, breach of contract and material misrepresentations of fact. The charges emanate from MMB's financing of a Utah coal mining project which was allegedly based upon certain information and reports submitted to it by Miller and Keplinger concerning the quantity and quality of recoverable coal.

In the summer of 1977, a group of investors, later to form the partnership of Atlas-Dirty Devil Mining, sought financial backing from MMB for the development of a Utah coal mine to be owned and operated by the partnership. Before advancing any monies, however, MMB wanted assurance that the potential coal recoveries were sufficient in quantity and quality to safeguard its investment.

 To this end, MMB secured the geological report on the Atlas-Dirty Devil Mining Project (hereinafter the "ADDM project"), which was prepared by J.W. Miller & Associates, Inc. (hereinafter the "Miller report"). The Miller report recited, inter alia, that the development of the Utah mine could yield a recovery of nearly 27 million tons of clean coal. In order to interpret and verify the geological data upon which this conclusion was based, MMB sought the services of an expert coal consultant.

 After a telephonic communication between one of MMB's vice presidents and H.F. Keplinger, President of Keplinger & Associates, Inc., it was agreed that Keplinger's firm would review all the geological data of the ADDM project and report to MMB on the potential coal recoveries. The report (hereinafter the "Keplinger's report"), issued in August, 1977, contained the following:

 
(1) The procedures employed in the calculation of coal reserves have been executed according to standard professional procedures and are supported by adequate drilling data. However, the data used for the calculations were not obtained under supervision of Keplinger and Associates, Inc.
 
(2) The data submitted on the quality of coal have been reviewed. A reputable testing laboratory conducted all analyses and sufficient coring and trenching have been undertaken to indicate the quality expected to be produced during mining operators (sic) of the subject properties. Again, the samples submitted for testing were not obtained under supervision of Keplinger and Associates, Inc.
 
(3) The mine plan has been well developed by a consultant with acceptable coal mining experience and has been prepared according to standard professional procedures of equipment selection, construction and operation.
 
(4) The mine plan is based on contract mining. This is potentially the weakest part of the entire proposed project.
 
In general, the results of our review of the information submitted suggest that: 1) reserves are adequate for large-scale surface mining; 2) coal quality, after washing, will meet consumer requirements; 3) adequate operational planning has been executed in the project to date; 4) all state and federal approvals have been obtained; and 5) cost estimates of capital requirements are realistic.
 
However, the effectiveness and reliability of the contract miner is in question at this date. The productivity and hence profitability of the entire project depends directly on the contract miner; contractural (sic) agreements should be made between Atlas Resources and Hunts Service Construction Company. Provisions should also be made by Atlas Resources to anticipate any operational problems with the contract miner by developing contingency plans for back-up contract mining, perhaps via their consultant J.W. Miller and Associates.
 
Our analysis of the proposed project indicates that with a prudent and effective management and maintenance of the operations, a profitable surface coal mining operation could be operated on the subject properties, with considerable potential for expanded operations if the neighboring federal leases are obtained.
 
It should be emphasized that our evaluation is preliminary in nature. Subsequent information could alter our opinions substantially. If the project is funded and operations are commenced, we suggest that periodic inspections be made on your behalf to assess the project's development and evaluate its on-going potential profitability. We would be pleased to continue as your consultants in this project.

 Thereafter, in October and November, 1977, MMB entered into loan agreements with the Atlas-Dirty Devil partnership. These agreements called for the disbursement of funds by MMB to the partnership or directly to its creditors for costs and expenses arising out of the ADDM project.

 During the following year, MMB continued to finance the ADDM project to the tune of $ 8 million. And, from time to time during this period, Keplinger would report to MMB in New York on the status of the project.

 As it developed, however, by the fall of 1978 the ADDM project began to go sour. It became apparent that the recoverable coal from the project was simply not the quality necessary to make the mine a profitable enterprise. MMB confirmed this grim conclusion through Keplinger's later reports. The Atlas-Dirty Devil ...


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