N.D. Mgmt., Inc. v. Gregory Hawkins ( 2019 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 19a0583n.06
No. 19-5124
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
N.D. MANAGEMENT, INC.; MEDAPPROACH ) Nov 27, 2019
HOLDINGS, INC.; W. BRADLEY DANIEL, ) DEBORAH S. HUNT, Clerk
)
Plaintiffs-Appellants,
)
) ON APPEAL FROM THE
v.
) UNITED STATES DISTRICT
GREGORY D. HAWKINS; SHARON HAWKINS, ) COURT FOR THE MIDDLE
) DISTRICT OF TENNESSEE
Defendants-Appellees. )
)
Before: COLE, Chief Judge; MERRITT and LARSEN, Circuit Judges.
LARSEN, Circuit Judge. MedApproach Holdings, Inc. and W. Bradley Daniel are engaged
in a dispute with Gregory and Sharon Hawkins over the control of N.D. Management, Inc. (NDM).
MedApproach Holdings, Daniel, and NDM brought this action against the Hawkinses for breach
of contractual duty to negotiate in good faith and promissory estoppel, claiming that the Hawkinses
had agreed to give Daniel all of the voting shares in NDM. But the United States District Court
for the Southern District of New York had previously rejected this same argument. The district
court therefore held that issue preclusion barred this action. For the reasons stated below, we
AFFIRM.
I.
MedApproach Holdings, NDM, and Daniel appeal the district court’s dismissal of their
complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). In this
No. 19-5124, N.D. Mgmt., Inc. v. Hawkins
posture, we take the plaintiffs’ well-pleaded allegations as true. Guertin v. Michigan, 912 F.3d
907, 916 (6th Cir. 2019). Accordingly, we present the facts in that light.
Daniel is the 100% owner of MedApproach Holdings. Medapproach Holdings is the
general partner of MedApproach L.P., which is not party to the present suit. MedApproach L.P.
holds a 75% share in NDM. Daniel also holds a proxy to vote the shares of NDM. Gregory
Hawkins was one of the original investors in MedApproach L.P. He transferred his interest in the
partnership to his wife Sharon Hawkins.
MedApproach Holdings filed a lawsuit against the Hawkinses in the United States District
Court for the Middle District of Tennessee in 2011, asserting that the Hawkinses had failed to pay
management and other fees owed to MedApproach Holdings. MedApproach Holdings, Inc. v.
Hawkins, No. 3:11-cv-1199 (M.D. Tenn. dismissed Oct. 11, 2016) (The Tennessee lawsuit). In
2013, while the Tennessee lawsuit was ongoing, Sharon Hawkins filed a lawsuit against
MedApproach Holdings and Daniel in the Southern District of New York, challenging the proxy
held by Daniel to vote and control the shares of NDM. Hawkins ex rel. MedApproach, L.P. v.
MedApproach Holdings, Inc., No. 1:13-cv-05434-ALC-SDA (S.D.N.Y. filed Aug. 2, 2013) (The
New York lawsuit). The New York lawsuit is ongoing.
On February 2, 2016, Daniel and Gregory Hawkins, who was acting on Sharon’s behalf,
held a daylong settlement conference in Nashville. At the meeting, the parties marked up an earlier
letter dated September 16, 2014 (The Settlement Agreement). The letter called for the dismissal
of the New York and Tennessee lawsuits and outlined terms relating to the corporate governance
and organization of NDM. The parties wrote by hand “Agreed” next to all the terms in the letter,
except for § 1.B, and initialed both sides of the letter. Section 1.B reads, “Pro rata distribution of
non-voting shares of NDM to beneficial owners with voting shares distributed to Brad Daniel.”
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Next to that term the parties wrote, “(Subject to attorney review and discussion).” At the
conclusion of the meeting, Daniel and Hawkins shook hands and congratulated each other on
reaching an agreement.
In reliance on the Settlement Agreement, MedApproach Holdings retained outside experts
to analyze the reorganization of NDM contemplated in the Settlement Agreement and draft the
necessary corporate documents. It also tendered certain payments to the Hawkinses as
contemplated in the agreement. The Hawkinses, however, never cashed or deposited the checks
they received, and in subsequent communications they insisted that Sharon Hawkins be able to
exercise a “veto power” over NDM’s actions. The parties dismissed the Tennessee lawsuit in
October 2016 pursuant to a separate written settlement agreement, but the Hawkinses continued
to prosecute the New York lawsuit with the stated purpose of “gain[ing] control” over NDM.
MedApproach and Daniel filed a motion to enforce the Settlement Agreement in the New
York lawsuit in March 2017. They argued that the Settlement Agreement was an enforceable
contract under New York law and that the parties had agreed to all of its terms. The parties argued
in detail whether the Hawkinses had agreed to § 1.B in light of the notation written next to it.
Applying the four-factor test for contract formation laid out in Winston v. Mediafare
Entertainment Corp., 777 F.2d 78, 80 (2d Cir. 1985), a magistrate judge issued a report and
recommendation concluding that the Settlement Agreement was not enforceable. Hawkins ex rel.
MedApproach, L.P. v. MedApproach Holdings, Inc., No. 1:13-cv-05434-ALC-SDA, 2018 WL
1371404 (S.D.N.Y. Jan. 9, 2018). Under the first factor, he found that “the ‘subject to’ language”
written next to § 1.B “constituted an express reservation of the right not to be bound.” Id. at *3.
He found that the other three factors also weighed against MedApproach Holdings and Daniel. Id.
at *3–4.
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The district court adopted the magistrate judge’s report and recommendation in full.
Hawkins ex rel. MedApproach, L.P. v. MedApproach Holdings, Inc., No. 1:13-cv-05434-ALC-
SDA, 2018 WL 1384502 (S.D.N.Y. Mar. 15, 2018). The court’s opinion placed particular
emphasis on the first Winston factor:
Relying on a New York Court of Appeals decision, Magistrate Judge Aaron
concluded that “subject to” is the equivalent of “condition or depending on.” This
is undoubtedly correct. On its face, the language of the notation indicates that the
term remained an open issue. Contrary to Defendants’ assertion, the notation is not
akin to a provision indicating that parties will enter a more formalized agreement
pursuant to the terms. If the phrase “subject to attorney review and discussion”
called for the drafting of additional corporate documents, then there would be text
in the agreement indicating just that, as was the case in Suarez. But there is not.
On the contrary, the words “attorney review and discussion” demonstrate that the
issue was open and subject to further negotiation. Accordingly, the Court agrees
with Judge Aaron’s finding that the factor weighs in favor of non-enforcement.
This should end the inquiry.
Id. at *1 (citations omitted). The district court then concluded without analysis that the magistrate
judge had “correctly weighed” the other three Winston factors. Id. at *2.
MedApproach Holdings, NDM, and Daniel (collectively, MedApproach1) then filed this
suit against the Hawkinses in the Chancery Court for Davidson County, Tennessee. MedApproach
brought claims for breach of contractual duty to negotiate in good faith and promissory estoppel.2
In the first count, MedApproach alleges that the Settlement Agreement “bound the parties . . . to
pursue NDM’s reorganization along the terms set forth in the February 2, 2016 Settlement
Agreement in good faith.” MedApproach claims that the Hawkinses breached that duty by
demanding a veto power over NDM and continuing to prosecute the New York lawsuit. The
1
We will also refer to MedApproach Holdings and Daniel collectively as “MedApproach” when
discussing the New York lawsuit and the February 2, 2016 settlement conference.
2
MedApproach also brought a third claim for abuse of process, whose dismissal it does not appeal.
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second count is similar: MedApproach alleges that the Hawkinses “promised to pursue the terms
set forth in the February 2, 2016 Settlement Agreement” and that MedApproach reasonably relied
on their promise. The complaint states that the Hawkinses broke their promise to MedApproach’s
detriment by demanding “supervoting shares of NDM.”
The Hawkinses removed the case to the United States District Court for the Middle District
of Tennessee, invoking that court’s diversity jurisdiction. They filed a motion to dismiss under
Rule 12(b)(6), which the district court granted. N.D. Mgmt., Inc. v. Hawkins, No. 3:18-CV-00890,
2019 WL 266715 (M.D. Tenn. Jan. 18, 2019).
The district court held that “plaintiffs are collaterally estopped from arguing that the
Settlement Agreement conclusively binds the Hawkinses to non-voting shares of NDM” and that
issue preclusion barred both of MedApproach’s claims for relief. Id. at *5. It further rejected the
argument that MedApproach had an actionable claim for breach of contractual duty to negotiate
in good faith despite issue preclusion, because Tennessee law governs the settlement negotiations
and Tennessee law does not recognize claims for breach of a duty to negotiate in good faith. Id.
The district court did not consider whether claim preclusion barred MedApproach’s suit because
the Hawkinses did not raise this issue in their motion to dismiss. Id. at *4 n.5.
MedApproach filed a timely notice of appeal.
II.
“We review de novo a district court’s grant of a Rule 12(b)(6) motion to dismiss for failure
to state a claim.” Kanuszewski v. Mich. Dep’t of Health & Human Servs., 927 F.3d 396, 412 (6th
Cir. 2019) (quoting Casias v. Wal-Mart Stores, Inc., 695 F.3d 428, 435 (6th Cir. 2012)). “To
survive a motion to dismiss, a plaintiff must allege facts that state a claim to relief that is plausible
on its face and that, if accepted as true, are sufficient to raise a right to relief above the speculative
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level.” Cates v. Crystal Clear Techs., LLC, 874 F.3d 530, 534 (6th Cir. 2017) (quoting Bickerstaff
v. Lucarelli, 830 F.3d 388, 396 (6th Cir. 2016)). “A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.” Taylor v. City of Saginaw, 922 F.3d 328, 331 (6th Cir. 2019)
(quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
MedApproach argues that issue preclusion does not apply here because the duty to
negotiate in good faith and promissory estoppel were never at issue in the New York lawsuit. It
maintains that it has therefore pleaded a plausible claim for breach of contractual duty to negotiate
in good faith under New York law. The district court erred in applying Tennessee law to the
Settlement Agreement, MedApproach contends, because the parties had agreed in the New York
lawsuit that New York law applied. MedApproach argues in the alternative that if Tennessee law
applies, Tennessee law “should be changed” to recognize a contractual duty to negotiate in good
faith. MedApproach also claims that it has stated a plausible claim for promissory estoppel under
Tennessee law.
The Hawkinses argue in response that the application of issue preclusion is fatal to
MedApproach’s remaining claims, because both claims rely on a premise already rejected in the
New York litigation—namely, that the Hawkinses agreed to accept only non-voting shares of
NDM. We agree with the Hawkinses.
The application of issue preclusion is a question of law that we review de novo. Ga.-Pac.
Consumer Prods. L.P. v. Four-U-Packaging, Inc., 701 F.3d 1093, 1097 (6th Cir. 2012). As an
initial matter, we must determine which preclusion rules apply. The district court applied federal
issue preclusion rules in its decision below, and the parties briefed their arguments under the same
rules on appeal. But New York, not federal, preclusion rules apply here. It is true that a federal
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court issued the order in the New York lawsuit and that the “preclusive effect of a federal-court
judgment is determined by federal common law.” Amos v. PPG Indus., Inc., 699 F.3d 448, 451
(6th Cir. 2012) (quoting Taylor v. Sturgell, 553 U.S. 880, 891 (2008)). But the parties’ earlier case
was before the federal court on diversity jurisdiction, and the court applied New York substantive
law. Hawkins ex rel. MedApproach, L.P., 2018 WL 1371404, at *2 n.4. Where a prior decision
comes from a federal court sitting in diversity, “the federally prescribed rule of decision” is to
apply the preclusion rules “that would be applied by state courts in the State in which the federal
diversity court sits,” except where the state preclusion rules are “incompatible with federal
interests.” Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508–09 (2001); accord
Taylor, 553 U.S. at 891 n.4 (“For judgments in diversity cases, federal law incorporates the rules
of preclusion applied by the State in which the rendering court sits.” (citation omitted)).
Admittedly, we held in Rawe v. Liberty Mutual Fire Insurance Co. that “federal res judicata
principles apply” in “successive diversity actions.” 462 F.3d 521, 528 (6th Cir. 2006) (citing J.Z.G.
Res., Inc. v. Shelby Ins. Co., 84 F.3d 211, 214 (6th Cir. 1996)). But although Rawe was decided
after Semtek, Rawe does not bind us here. The general rule that we must follow the published
decisions of a prior panel “yields when the prior panel’s reasoning has been undercut or abrogated
by a decision of the Supreme Court.” United States v. White, 920 F.3d 1109, 1113 (6th Cir. 2019)
(citing Ne. Ohio Coal. for the Homeless v. Husted, 831 F.3d 686, 720–21 (6th Cir. 2016)). This is
so “even in the unusual situation where binding circuit precedent overlooked earlier Supreme
Court authority,” Husted, 831 F.3d at 720, which is the case here. Rawe did not discuss Semtek
and offered no support for its conclusion other than to cite to a pre-Semtek decision of this court.
462 F.3d at 528. Because Semtek undercuts Rawe’s reliance on our earlier caselaw, we must follow
Semtek rather than Rawe. See Malcmacher v. Jesse, __ F. App’x __, Nos. 18-3698, 18-3705, 2019
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WL 4316796, at *3 n.1 (6th Cir. Sept. 12, 2019) (applying Semtek rather than Rawe); In re
Leonard, 644 F. App’x 612, 616 (6th Cir. 2016) (same); Wayne Cty. Hosp., Inc. v. Jakobson, 567
F. App’x 314, 317 (6th Cir. 2014) (same). Moreover, the Supreme Court has reaffirmed Semtek’s
holding that state preclusion rules apply to judgments in federal diversity cases in a decision issued
after Rawe. See Taylor, 553 U.S. at 891 n.4. Accordingly, because the federal court that decided
the parties’ earlier case under its diversity jurisdiction sat in New York, we must apply New York
preclusion rules to its decision.
Under New York law, issue preclusion or—as New York courts prefer to call it—collateral
estoppel “precludes a party from relitigating in a subsequent action or proceeding an issue raised
in a prior action or proceeding and decided against that party or those in privity.” Buechel v. Bain,
766 N.E.2d 914, 919 (N.Y. 2001) (citing Ryan v. N.Y. Tel. Co., 467 N.E.2d 487, 490 (N.Y. 1984)).
For the doctrine to apply, “[t]here must be an identity of issue which has necessarily been decided
in the prior action and is decisive of the present action, and there must have been a full and fair
opportunity to contest the decision now said to be controlling.” Launders v. Steinberg, 876 N.E.2d
901, 902 (N.Y. 2007) (alteration in original) (quoting Buechel, 766 N.E.2d at 919). “The party
seeking to invoke collateral estoppel has the burden to show the identity of the issues, while the
party trying to avoid application of the doctrine must establish the lack of a full and fair opportunity
to litigate.” In re Dunn, 27 N.E.3d 465, 468 (N.Y. 2015) (citing Kaufman v. Eli Lilly & Co., 482
N.E.2d 63, 67 (N.Y. 1985)).
MedApproach and the Hawkinses dispute only the identity-of-issues requirement. This
requirement is satisfied only if the same issue has been “‘actually litigated and determined’ in a
prior action.” Kaufman, 482 N.E.2d at 68 (quoting Restatement 2d of Judgments § 27 (1982)).
The issue in question need not have been the ultimate issue in the case, so long as it was
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“necessarily decided and material in the first action.” Parker v. Blauvelt Volunteer Fire Co.,
712 N.E.2d 647, 651 (N.Y. 1999). An identity of issues can exist “whether or not” a party’s
“causes of action are the same.” Id. (quoting Ryan, 467 N.E.2d at 490).
In order to resolve MedApproach’s claim in the New York litigation that the parties had
formed an enforceable settlement contract, the district court first had to decide whether the
Hawkinses had agreed to § 1.B of the proposed Settlement Agreement, which would have limited
them to receiving only non-voting shares of NDM. Both parties briefed the question in detail. The
magistrate judge found that “the ‘subject to’ language” written next to § 1.B “constituted an
express reservation of the right not to be bound.” Hawkins ex rel. MedApproach, L.P., 2018 WL
1371404, at *3. Adopting the magistrate judge’s report, the district court held, “Contrary to
Defendants’ assertion, the notation is not akin to a provision indicating that parties will enter a
more formalized agreement pursuant to the terms. . . . [T]he words ‘attorney review and
discussion’ demonstrate that the issue was open and subject to further negotiation.” Hawkins ex
rel. MedApproach, L.P., 2018 WL 1384502, at *1. In other words, the Hawkinses had made no
commitment as to the voting structure of NDM and had expressly refused to agree to accept only
non-voting shares.
This determination was necessary to the district court’s ruling that no enforceable
settlement contract existed. The court held that “where there is a writing between the parties
showing that one party did not intend to be bound[,] a court need look no further than the first
factor.” Id. (alteration in original) (quoting Kaczmarcysk v. Dutton, 414 F. App’x 354, 355 (2d
Cir. 2011)). Accordingly, upon determining that the Hawkinses did not agree to § 1.B, the district
court concluded, “This should end the inquiry.” Id. (citing Kaczmarcysk, 414 F. App’x at 355).
MedApproach is therefore collaterally estopped from re-raising the issue of whether the
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Hawkinses agreed to accept only non-voting shares of NDM. The issue was actually argued and
determined, and the court’s ruling on the issue was necessary to its ultimate ruling on the
enforceability of the Settlement Agreement.
MedApproach nevertheless argues that collateral estoppel does not bar its claims for relief
because the New York litigation “focused solely on the enforcement of the Agreement as written”
and never addressed the duty to negotiate in good faith or promissory estoppel. But this is just to
argue that collateral estoppel does not apply because MedApproach’s causes of action have
changed, a proposition the New York Court of Appeals has expressly rejected. See Parker,
712 N.E.2d at 651. Collateral estoppel may not bar MedApproach’s claims themselves, but it does
bar MedApproach from supporting its claims by alleging that the Hawkinses agreed to accept only
non-voting shares of NDM. Once collateral estoppel is applied, the question becomes whether
MedApproach’s complaint states a plausible claim for relief without this barred allegation.
Because both of MedApproach’s claims for relief are premised on the allegation that the
Hawkinses agreed to accept only non-voting shares of NDM, the application of collateral estoppel
is fatal to the complaint. In the first count, MedApproach claims that the parties entered into a
valid “Type II” preliminary agreement under New York law. See Brown v. Cara, 420 F.3d 148,
153 (2d Cir. 2005); IDT Corp. v. Tyco Grp., 918 N.E.2d 913, 915 n.2 (N.Y. 2009). Unlike a “Type
I” preliminary agreement, which “is fully binding as to the final contractual goal, a Type II
agreement ‘does not commit the parties to their ultimate contractual objective but rather to the
obligation to negotiate the open issues in good faith in an attempt to reach the . . . objective within
the agreed framework.’” Brown, 420 F.3d at 157 (alteration in original) (quoting Adjustrite Sys.,
Inc. v. GAB Bus. Servs., Inc., 145 F.3d 543, 548 (2d Cir. 1998)). “This obligation bars a party
from ‘renouncing the deal, abandoning the negotiations, or insisting on conditions that do not
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conform to the preliminary agreement.’” L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 430
(2d Cir. 2011) (quoting Teachers Ins. & Annuity Ass’n of Am. v. Tribune Co., 670 F. Supp. 491,
498 (S.D.N.Y. 1987)).
MedApproach alleges that the parties “agreed to the terms of the February 2, 2016
Settlement Agreement” and “to complete all remaining corporate documents” necessary to
implement the Settlement Agreement “in good faith.” The complaint states that the parties agreed
that the corporate documents “would reflect that Ms. Hawkins, as a beneficial owner, would
receive only non-voting shares of NDM.” The Hawkinses breached their duty to complete the
corporate documents in good faith, MedApproach alleges, by “later demand[ing] that that they
receive a ‘veto’ over NDM” even though “[t]his was directly contrary to Section 1(B) of the
February 2, 2016 Settlement Agreement which clearly dictates that [Sharon Hawkins] would only
receive non-voting shares in NDM.” MedApproach further alleges that the Hawkinses acted in
bad faith by continuing to prosecute the New York lawsuit with the express purpose of “‘gain[ing]
control’ over NDM” “despite having agreed to maintain the status quo of NDM in the Settlement
Agreement.”
The allegation that the Hawkinses agreed to complete corporate documents limiting them
to non-voting shares of NDM directly contradicts the Southern District of New York’s ruling that
the “issue” of control over NDM “was open and subject to further negotiation.” Hawkins ex rel.
MedApproach, L.P., 2018 WL 1384502, at *1. MedApproach is collaterally estopped from
making this allegation and consequently fails to plead that the Hawkinses violated any agreed-
upon duty when they demanded a veto power over NDM’s activities. Similarly, since
MedApproach may not allege that the Hawkinses agreed to give Daniel all of NDM’s voting
shares, the complaint does not properly identify any agreed-upon duty that the Hawkinses violated
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by continuing to prosecute their New York lawsuit concerning control over NDM. And since the
complaint does not allege any other concrete acts of breach by the Hawkinses, it alleges no facts
that would allow us to reasonably infer that they are liable for breach of contractual duty to
negotiate in good faith. MedApproach consequently fails to state a plausible claim for relief on
this count under New York law.
Turning to MedApproach’s alternative argument, MedApproach does not identify any
respect in which a claim for breach of contractual duty to negotiate in good faith under its proposed
rule of Tennessee law would differ from the same claim under New York law. Thus, even if
MedApproach is right that the Tennessee Supreme Court would change Tennessee law to
recognize claims for breach of duty to negotiate in good faith, it would still fail to state a plausible
claim for relief for the same reasons that it cannot state one under New York law. Accordingly,
MedApproach fails to state a claim for relief on its first count regardless of which state’s law
governs.
The application of collateral estoppel is also fatal to MedApproach’s second count for
promissory estoppel. Plaintiffs making a claim of promissory estoppel under Tennessee law must
establish “(1) that a promise was made; (2) that the promise was unambiguous and not
unenforceably vague; and (3) that they reasonably relied upon the promise to their detriment.”
Kinard v. Nationstar Mortg., LLC, 572 S.W.3d 197, 210 (Tenn. Ct. App. 2018) (quoting Chavez
v. Broadway Elec. Serv. Corp., 245 S.W.3d 398, 404 (Tenn. Ct. App. 2007)). The complaint
alleges that the Hawkinses “promised . . . that they would pursue in good faith a reorganization of
NDM that involved Mr. Daniel holding voting shares and Defendants holding non-voting shares.”
But MedApproach is collaterally estopped from alleging that the Hawkinses committed themselves
to receiving only non-voting shares of NDM. The complaint does not identify any other concrete
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promise on which MedApproach reasonably relied. MedApproach therefore fails to state a
plausible claim for promissory estoppel.
Finally, New York law requires us to consider not just the formal requirements of collateral
estoppel but also “whether relitigation should be permitted . . . in light of . . . competing policy
considerations, including fairness to the parties, conservation of the resources of the court and the
litigants, and the societal interests in consistent and accurate results.” Jeffreys v. Griffin, 801
N.E.2d 404, 408 (N.Y. 2003) (quoting Staatsburg Water Co. v. Staatsburg Fire Dist., 527 N.E.2d
754, 756 (N.Y. 1988)). These policy considerations favor preventing the parties from relitigating
the issue of whether they had agreed that Daniel would receive all the voting shares of NDM. The
parties in the two lawsuits are the same, and this issue was the central point of contention in the
New York lawsuit. The parties argued the question both before a magistrate judge and before a
district court. Fairness to the parties thus does not require another opportunity to litigate the issue.
Judicial economy and consideration of the litigants’ resources also favor the application of
collateral estoppel. The parties briefed the question twice in the New York lawsuit, and two federal
judges authored opinions resolving it. It would create needless expense for both the parties and
the courts to allow a second action to go forward on an issue that has already been thoroughly
argued and decided. Finally, relitigation would create the risk of inconsistent outcomes, and there
is no reason to believe ex ante that a later federal district court’s judgment would be any more
accurate than an earlier one’s. The equitable considerations identified by New York law therefore
confirm our holding that collateral estoppel bars MedApproach from stating a plausible claim for
relief.
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***
We AFFIRM the district court’s dismissal of MedApproach’s complaint for failure to state
a claim.
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