Daniel Popa v. Lucia Tiberia Popa ( 2020 )

RENDERED: OCTOBER 23, 2020; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2018-CA-1053-MR
DANIEL POPA; BLUETONE
CONNECT, PTY LTD (AUSTRALIA);
PULSE TELECOM PTY, LTD
(AUSTRALIA); NECC TELECOM,
INC.; NECC TELECOM, INC.
(CANADA); PULSE TELECOM, INC.
(CANADA); QUICKCALL.COM, LLC
D/B/A BLUETONE, LLC; AND SRVR,
LLC APPELLANTS
APPEAL FROM JEFFERSON CIRCUIT COURT
v. HONORABLE CHARLES L. CUNNINGHAM, JR., JUDGE
ACTION NO. 13-CI-002337
LUCIA TIBERIA POPA; RAMONA
CEAN; RAUL TURCU; SHERBAN
APOSTOLINA; AND VICENT
PETRESCU APPELLEES
OPINION
AFFIRMING IN PART,
VACATING IN PART,
AND REMANDING
** ** ** ** **
BEFORE: COMBS, DIXON, AND MAZE, JUDGES.
COMBS, JUDGE: NECC Telecom, Inc. (Canada); NECC Telecom, Inc.; Pulse
Telecom, Inc. (Canada); Pulse Telecom PTY, LTD (Australia); SRVR, LLC;
Quickcall.com, LLC d/b/a Bluetone, LLC; and Bluetone Connect, PTY, LTD
(Australia) (referred to collectively as “the Transfer Companies”), and Daniel Popa
appeal several orders of the Jefferson Circuit Court entered as follows: on
February 8, 2017; on February 2, 2018; on February 5, 2018; on May 3, 2018; and
an order entered on July 9, 2018, which denied the motion to alter, amend, or
vacate the final and appealable order of May 3, 2018. After careful review of the
record and the applicable law, we affirm in part, vacate in part, and remand for
further proceedings.
This matter has been litigated for many years at every level of our
court system. In one of its most recent iterations, the Supreme Court of Kentucky
affirmed our dismissal of Daniel Popa’s petition for a writ of mandamus as moot.
In its opinion, the Supreme Court provided the following summary of the factual
and procedural history of the proceedings underlying this appeal:
Daniel Popa (Daniel) and Lucia Popa (Lucia), a married
couple, operated several telecommunications businesses
together. In 2010, their marriage was dissolved, and the
ownership and control of the companies was divided
between the two individuals, presumably because a lack
of liquidity precluded having one individual “buy-out”
the other. On May 3, 2013, Daniel filed a Complaint
against Lucia, alleging that one of the companies she
controlled was not providing his companies with
software and support they needed, contrary to a
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commitment she made in the parties’ marital settlement.
Daniel named Lucia, her associates who were managing
the companies, and several of the companies (Lucia and
the companies), as defendants in the Jefferson Circuit
Court action. The Complaint also named companies
NECC US, SRVR, NECC Canada and Pulse Australia as
defendants. Lucia was a 51% majority shareholder in
three of the named companies. Lucia and the companies
retained attorneys Alan Linker and Paul Hershberg to
represent the interests of Lucia and the named companies
in the litigation.
After two years of active litigation, it became clear that
the only viable solution was for one party to take
complete control and pay the other for his/her interests in
the companies. In September 2015, nearly two and a half
years after the Complaint was filed, the parties entered a
79-page Settlement Agreement which gave Daniel full
control and ownership of the companies in exchange for
making $3.58 million in payments to Lucia over roughly
three years. Daniel also purchased all of Lucia’s
ownership interest in three additional companies - SRVR,
Quickcall/Bluetone, and Bluetone Australia (the Transfer
Companies). In the Settlement Agreement, Lucia
warranted that the financial statements delivered to
Daniel fairly and accurately represented the financial
condition and operations of the Transfer Companies.
In 2016, Daniel learned that, during Lucia’s ownership
and exclusive control of the companies, the companies
incurred approximately $8 million in unpaid tax
liabilities. On February 16, 2017, Daniel filed a Second
Amended Complaint, alleging, among other things,
breach of contract, fraud, and negligent
misrepresentation. Around the same time, Daniel sought
to formally realign the parties, naming all companies
involved in this litigation as plaintiffs, and leaving Lucia
and her associates as the only defendants.
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Shortly before formally realigning the parties in the
litigation, Daniel filed a motion to disqualify attorneys
Linker and Hershberg. Since the companies were now
completely owned by Daniel, and Linker and Hershberg
previously represented some of the companies when the
initial Complaint was filed, Daniel alleged an actual
conflict under Kentucky Supreme Court Rule (SCR)
3.130(1.9). Daniel argued that because Linker and
Hershberg were still representing Lucia in the litigation,
the attorneys could use confidential information they
obtained through their representation of the companies in
a way which was adverse to the interest of those
companies - companies now aligned with Daniel as
plaintiffs.
Popa v. Cunningham Popa, No. 2018-SC-000399-MR, 2019 WL 2462307, at *1-2
(Ky. Jun. 13, 2019).
Pursuant to provisions of the parties’ Settlement Agreement, the
circuit court apparently was vested with authority to resolve disputes that might
arise with respect to it throughout the term of the payments. To this end, the court
appointed a telecommunications attorney, Allison Rule, a neutral expert, whose
role it was to investigate and “to offer a qualitative assessment with regard to
whether the Transfer Companies’ telecommunications tax issues were real and
severe. . . .” Findings of Fact, Conclusions of Law, and Order and Judgment
entered May 3, 2018, at 5. Rule determined that “a significant
underpayment/nonpayment situation existed . . . potentially a seven-figure
problem.” Order entered February 2, 2018, at 3. After the scope of the problem
was confirmed, the circuit court ordered Lucia’s attorney to stop distributing
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Daniel’s installment payments to Lucia. Those funds had been accumulating in an
escrow account until Daniel stopped forwarding the installments altogether
because of his contention that Lucia had materially breached the terms of the
Settlement Agreement.
Meanwhile, Lucia filed a motion on December 8, 2017, to enjoin
Daniel from re-routing customers from one of the Transfer Companies (NECC) to
a business that he controlled but operated outside the jurisdiction of the court
(Apelo). She also sought relief under the provisions of Kentucky’s Voidable
Transactions Act, KRS1 378A.005, et seq. Lucia indicated that she feared that
Daniel was allowing the Transfer Companies to become insolvent before she was
paid the full purchase price of the Transfer Companies.
The circuit court conducted a hearing on a temporary injunction on
January 29, 2018. Although the hearing was held to take proof on Lucia’s pending
motion, it was conducted off the record. With respect to that off-the-record
conduct, the Supreme Court of Kentucky observed that a pattern had emerged in
the course of the proceedings:
In the early stages of this litigation, the parties requested
that much of the filings and discussions regarding the
failure to pay taxes, a large underlying issue in the case,
be kept off the record in order to avoid providing insider
information to competitors and to not impair the
companies’ ability to resolve the problem.
1
Kentucky Revised Statutes.
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Unfortunately, the trial court obliged but it later
recognized that this was improper and declined to
continue the practice.
Popa, 2019 WL 2462307, at *2 n.4.
In an order entered on February 2, 2018, the court noted Rule’s
testimony at the injunction hearing that during the time Lucia had been in control
of the Transfer Companies, the taxes and fees collected from telecommunications
customers were not forwarded to taxing authorities. She stated that the problem
persisted after Daniel took control of the companies and that the companies
continued to fail to meet their tax obligations.
Daniel also testified. According to the circuit court, Daniel
acknowledged that NECC was winding up business and that its customers were
being advised to transfer their accounts to a new company, Apelo. He admitted
that the Transfer Companies were not meeting state and federal tax obligations.
Lucia was also scheduled to testify, but the hearing was adjourned for
the day. The following morning, the circuit court announced that after considering
the matter overnight, it had decided to enforce the terms of the Settlement
Agreement. It concluded that there had been no material breach of the Settlement
Agreement because the failure of Lucia and her associates to disclose the tax
liabilities of the Transfer Companies was simply immaterial to Daniel. The court
indicated that “there’s really nothing for us to discuss” and that “bottom line is, I’m
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done talking about all of this.” The court released Allison Rule and terminated the
proceedings. However, it did not make a ruling on the pending motion for a
temporary injunction filed by Lucia and her associates.
The court memorialized its oral remarks in an order entered on
February 2, 2018, determining: (1) that all further proceedings would be
conducted on the record; and (2) that Daniel could not prove -- as a matter of law --
that Lucia breached the Settlement Agreement because his actions indicated that
the Transfer Companies’ timely payment of taxes was not a material fact upon
which he had relied at the time the Settlement Agreement was executed. See Popa
v. Popa, No. 2019-SC-000115-1, 2019 WL 4072977, at *2 (Ky. Aug. 29, 2019).
In clear and unequivocal language in the order of February 2, 2018,
the court emphasized its reliance on the equitable doctrine of “unclean hands” on
Daniel’s part (i.e., the ongoing failure to pay taxes on the various businesses) as a
basis for denying him the relief he sought.
There is a second, and perhaps more readily
grasped, reason the court can no longer entertain a
motion to essentially declare the September, 2015,
agreement breached. Daniel’s acknowledgment that he is
not paying the taxes the businesses owe as they come due
presents a fundamental problem with any effort to relieve
him of an obligation to pay for those businesses because
his seller did not do so either. The common law has long
had a doctrine, and it has been adopted in Kentucky, that
one seeking an equitable remedy (i.e., relief from a
financial obligation) must come into court with clean
hands. Time Finance Co. v. Varney, 253 S.W.2d 233
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(Ky. 1953). The courts withhold their aid from those
who transgress the law in and about a matter regarding
which redress is sought. Munn v. Munn, 291 S.W.2d 560
(Ky. 1956).
In the context of this case, Daniel has “unclean”
hands. He asks the court to alleviate his obligation to
complete his payment for the businesses (or, more
precisely, to place its stamp of approval on his decision
to not complete the payment). But his basis for doing so
– Lucia’s alleged failure to pay taxes owed – is behavior
manifested with equal or possibly greater impact by his
own conduct since taking the reins. The Court must
therefore withhold its aid.
Order entered February 2, 2018, at 7-8.
Consequently, the court ordered that the escrowed funds be released
to Lucia and that the balance owed on the purchase price of the Transfer
Companies be paid. The court advised the parties that they might ask for the
court’s assistance “[i]f there is disagreement on this rather simple math.
Otherwise, the Court will expect this matter to progress to a conclusion in a
businesslike manner without the need for further Court assistance.” Order entered
February 2, 2018, at 8. Furthermore, the circuit court advised Daniel’s counsel “to
be cautious in deciding whether to file [a motion to reconsider].” Id. It instructed
that “any such motion must include a list of all [taxing authorities], with contact
information, for all of the transferred companies.” Id. at 9 (emphasis original). It
warned that if counsel filed a motion asserting that Daniel has a right to proceed, it
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would consider sanctions pursuant to the provisions of CR2 11. Comparing
Daniel’s operation of the Transfer Companies to a “bust-out” scheme, the court
warned that “an attorney [] assisting a client in such a scheme” must be reported to
the bar association.
In a separate order, the circuit court reiterated its earlier determination
that disqualification of Lucia’s attorneys was not warranted. The court found that
Daniel had not shown an actual conflict of interest and that it would be inequitable
to remove Linker and Hershberg from the representation. These orders were
interlocutory because the other claims asserted by Daniel and the Transfer
Companies against Lucia and her associates remained outstanding.
On February 15, 2018, Daniel and the Transfer Companies filed a
petition for a writ of mandamus and a writ of prohibition in this Court. They
asserted that the circuit court’s summary judgment, sua sponte, in favor of Lucia
and her associates had been entered without due process. They sought to prohibit
the circuit court from enforcing its orders and to compel the court to disqualify
Linker and Hershberg.
While the writ petitions were pending in this Court, Lucia’s counsel
filed a motion to supplement the record with correspondence between the circuit
court and Allison Rule. The circuit court conducted a lengthy hearing on February
2
Kentucky Rules of Civil Procedure.
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27, 2018, during which the parties and the court attempted to interpret the nature of
the orders entered only a few weeks earlier and to find a way forward. As part of
the discussion, counsel conceded that both parties had wanted at least some of the
hearing to be conducted off the record, and the court agreed that it had determined
that the entirety of the proceedings would remain off the record. The parties
struggled to devise a means by which a record of the testimony taken at the
January 29, 2018, hearing could be obtained to allow for adequate appellate
review.
During this hearing (February 27, 2018), the court acknowledged that
its February orders “smelled” like summary judgment and indicated that it
anticipated that its ruling would come as a complete surprise to Daniel and the
Transfer Companies. It also recognized that there were other issues in the case to
be resolved. Counsel for Lucia and her associates contended that the court’s order
-- as entered -- could not be enforced as a judgment, however, and they complained
that Daniel and the Transfer Companies intended to continue litigating the case.
Counsel for Lucia argued that all the claims asserted by Daniel and the Transfer
Companies warranted dismissal by virtue of the unclean hands doctrine. Counsel
suggested that a final and appealable judgment could be entered upon that basis
rendering moot Daniel’s petition for writ of mandamus and writ of prohibition to
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this Court. Counsel also contended that provisions of the Voidable Transactions
Act applied.
Daniel and the Transfer Companies argued that only a trial could
resolve the issues surrounding the failure of Lucia and her associates to see that the
Transfer Companies’ taxes had been paid and their alleged breaches of the
Settlement Agreement and of the express warranty included in the Settlement
Agreement. Counsel for Daniel argued that a trial date should be set. They
explained how damages could be calculated based upon the cost to the Transfer
Companies of resolving the undisclosed tax liabilities that they inherited from
Lucia and her associates. The circuit court acknowledged that Daniel and the
Transfer Companies might well be entitled to an award of damages based upon the
alleged material misrepresentations concerning the financial well-being of the
companies made by Lucia and her associates.
Ultimately, the court proposed that Lucia’s counsel file a motion for
summary judgment and suggested that the proposed judgment include findings of
fact incorporating references to the unrecorded testimony. The court anticipated
that the findings of fact included therein would be an adequate compilation of the
record. The proposed judgment was to incorporate a figure based upon the parties’
computations of Daniel’s delinquent payments toward the purchase price of the
Transfer Companies and an acceleration of the remaining balance.
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Lucia and her associates filed a motion for final judgment on March
22, 2018. They requested an order: (1) dismissing the second amended complaint
filed by Daniel and the Transfer Companies; (2) declaring a default under the
parties’ 2015 Settlement Agreement; and (3) accelerating the balance of the unpaid
installment payments. They sought judgment in an amount that included the
outstanding balance of the purchase price of the Transfer Companies. No rule of
civil procedure was cited in support of the motion.
Daniel and the Transfer Companies strenuously objected to the
motion. They observed that Lucia and her associates had not denied that they had
caused the Transfer Companies to incur several million dollars in unpaid tax
liabilities and that they had failed to disclose this fact to Daniel -- despite an
obligation to do so under the terms of the Settlement Agreement. They argued that
they were entitled to pursue their claims for damages through discovery and trial.
At a hearing conducted in April 2018, Daniel and the Transfer
Companies contended that Lucia and her associates had never asserted a claim
under the Voidable Transactions Act. In response, counsel moved orally to amend
the counterclaims that they had asserted in March 2017. These counterclaims had
been filed in response to the amended complaint filed by Daniel and the Transfer
Companies in February 2017 in which Daniel asserted claims of breach of contract,
fraud, and negligent misrepresentation; and the Transfer Companies alleged that
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Lucia and her associates as owners and directors of the Transfer Companies had
breached their fiduciary duties to the business entities. Lucia and her associates
sought to include in the amendment to their counterclaims a specific claim for
relief under the provisions of the Voidable Transactions Act, KRS 378A.005, et
seq.
On May 3, 2018, the circuit court entered its findings of facts,
conclusions of law, order, and judgment, granting the motion of Lucia and her
associates to amend their counterclaim. Additionally, it reiterated its earlier
conclusion that the failure of Lucia and her associates to include the Transfer
Companies’ unpaid tax liability in the financial statements warranted and delivered
to Daniel could not have been material to Daniel’s decision to enter into the
Settlement Agreement. Next, the court dismissed Daniel’s claims for breach of
contract, fraud, negligent misrepresentation, and breach of warranty; it also
dismissed the claims of the Transfer Companies against Lucia and her associates.3
It denied Daniel’s equitable claims for rescission, unjust enrichment, and
promissory estoppel.
The judgment provided that Lucia and her associates were entitled to
immediate judgment against Daniel in the amount of $1,525,000, to be paid within
3
At this point, the Transfer Companies no longer had a viable claim or interest in this case. All
of the claims were dismissed and were not raised in this appeal. (Nor were they mentioned in the
prehearing statement). See Appellees’ brief, page 2, footnote 1.
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ten days of entry. If not paid within ten days, Daniel’s obligation to pay the
purchase price would be accelerated, and he would owe the full amount of the
remaining purchase price from the Settlement Agreement, totaling $1,749,964.20,
plus prejudgment interest. Daniel was enjoined and prohibited from re-routing
customers from the Transfer Companies to Apelo, and he was ordered to provide
an itemization of all the bank accounts of the Transfer Companies. The order
restored Lucia’s right to monitor the business activities of the Transfer Companies
pursuant to the terms of the Settlement Agreement, and Daniel was ordered not to
interfere with or to frustrate her ability to do so. The court explained that its
decision to dismiss the claims asserted against Lucia and her associates was
bolstered by its inherent power to sanction bad-faith conduct. It concluded that
Daniel’s second amended complaint and the litigation that followed were “part of
an apparent strategy to ‘bust out’ the assets of the Transfer Companies, and
perpetrate a fraud on [Lucia and her associates].” Order entered May 3, 2018, at
15. The subsequent motion to alter, amend, or vacate was denied, and this appeal
followed.
On appeal, Daniel and the Transfer Companies argue that the circuit
court erred by granting summary judgment and by failing to disqualify opposing
counsel. We agree in part. Thus, we vacate in part and remand for further
proceedings.
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Summary judgment is proper where there exists no material issue of
fact, and the movant is entitled to judgment as a matter of law. CR 56; Steelvest,
Inc. v. Scansteel Service Center, Inc., 807 S.W.2d 476 (Ky. 1991). We review de
novo the trial court’s grant of a motion for summary judgment. Caniff v. CSX
Transp., Inc., 438 S.W.3d 368 (Ky. 2014).
Daniel and the Transfer Companies first argue that the circuit court
erred by ordering summary judgment, sua sponte, after the first day’s testimony at
the injunction hearing. They contend that they were deprived of a meaningful
opportunity to be heard before the court issued its order. Furthermore, they argue
that the order resolved an issue that was not the focus of the injunction hearing;
namely, Daniel’s contention that his non-performance of the Settlement Agreement
was excused by Lucia’s breach of its terms.
In Storer Communications of Jefferson County, Inc. v. Oldham County
Board of Education, 850 S.W.2d 340 (Ky. App. 1993), we considered the decision
of a trial court to award a judgment on the merits without notice to the parties and
without the benefit of briefing or opportunity for arguments. We held that this
procedure violated the appellant’s right to due process. We observed as follows:
While a court might be justified in using its inherent
powers to dismiss sua sponte for lack of subject matter
jurisdiction, it is fundamental that a trial court has no
authority to otherwise dismiss claims without a motion,
proper notice and a meaningful opportunity to be heard.
CR 56.01 and CR 56.02 clearly provide that a “party”
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may seek a summary judgment. The rules do not
contemplate such a proceeding on the court’s own
motion. CR 56.03 provides that one will have a
minimum of ten days to respond to such a motion. This
requirement is mandatory unless waived. Even if it is
appropriate for the trial court to enter a summary
judgment on its own motion, the trial court’s failure to
afford the appellant the most basic procedural
protections, notice of its intention and an opportunity to
respond, is unjustifiable, constitutionally defective, and
requires reversal.
Id. at 342 (citation omitted).
In this case, the circuit court heard testimony concerning Daniel’s
operation of the Transfer Companies during a hearing conducted for the purpose of
evaluating the claim of Lucia and her associates that Daniel was wrongfully re-
routing customers from NECC to Apelo. Based on this evidence, the court
concluded that Daniel was not entitled to suspend his performance of the
Settlement Agreement by withholding his installment payments -- despite the
failure of Lucia and her associates to disclose the massive tax liabilities of the
Transfer Companies. Reviewing the day’s testimony, the court determined that
Daniel’s failure to bring the Transfer Companies’ outstanding tax bills current
proved -- as a matter of law -- that the undisclosed tax liabilities were immaterial to
his decision to purchase the businesses. It concluded that Daniel’s bad conduct
(failure to pay taxes and decision to wind up NECC’s business) precluded him
from seeking any equitable remedy for Lucia’s breach of the parties’ Settlement
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Agreement. However, these arguments were not propounded by any party. And
no party requested a summary judgment with respect to Daniel’s claims.
Nevertheless, the court terminated the proceedings, and its written orders were
entered a few days later.
We cannot agree with the contention of Lucia and her associates that
the court’s order of February 2, 2018, was not a “sua sponte summary judgment.”
After precluding the presentation of further testimony and explaining its rationale
for terminating the proceedings, the circuit court announced from the bench that it
would “put all of that in a ruling that will allow either side, if they’re unhappy with
what we’re doing, . . . to take everything up. . . .” It suggested that Daniel’s
counsel “take some time and think about it – you got thirty days – but it, it . . . I
guess I could call it a final ruling although it really isn’t a final and appealable
kinda ruling. . . .” (The orders were eventually made final and appealable by entry
of the court’s final judgment on May 3, 2018). The court substantively made a
summary disposition of the issues set forth in the order.
We agree with the sound reasoning of the circuit court that Daniel was
not entitled to equitable relief in the form of an injunction because he indeed
approached the tribunal with “unclean hands.” Therefore, we affirm that portion of
the February 2, 2018, order denying Daniel’s motion for a temporary injunction.
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However, as to the remaining substantive issues, the court’s sua
sponte summary judgment denied Daniel a meaningful opportunity to be heard
with respect to its conclusions. Consequently, the remainder of that order must be
vacated and remanded for further proceedings.
Next, Daniel and the Transfer Companies argue that the circuit court
erred by granting the motion of Lucia and her associates for judgment filed on
March 22, 2018.
In their motion filed pursuant to the circuit court’s suggestion, Lucia
and her associates sought an order: (1) dismissing the second amended complaint
filed by Daniel and the Transfer Companies; (2) declaring a default under the
parties’ Settlement Agreement; and (3) accelerating the balance of the installment
payments. In their response, Daniel and the Transfer Companies argued that there
was no basis in the law to summarily dismiss their claims.
In its order entered on May 3, 2018, the circuit court granted Lucia’s
motion and dismissed Daniel’s claims for breach of contract, fraud, negligent
misrepresentation, and breach of warranty -- as well as the Transfer Companies’
claims against Lucia and her associates. While the circuit court specifically
acknowledged Daniel’s request for trial, it concluded that “any such effort will do
little (or nothing) to bring closure to the case.” Instead, it sought to “sav[e] [the]
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litigants from each other” by “mov[ing] [the] matter on” and granting a final
judgment. Order entered May 3, 2018, at 19. It observed that a trial would be:
in a practical sense, not really possible [because] key
witnesses on how the companies have been run will be
required, assuming they have competent counsel advising
them, to decline to answer many questions lest they
incriminate themselves in sworn testimony as having
participated in criminal misconduct.
Id. The court further mused as follows: “why have a trial just so Daniel can take
the stand and admit (or imply by his silence) that he has broken the law?” Finally,
the court concluded that if Daniel had been “actually interested in airing all of this
at trial, he would have been negotiating settlements with various taxing entities and
thus be prepared to offer real evidence of the actual cost to the companies of their
unpaid tax liabilities.” Id. According to the judgment, its entry was based upon
Daniel’s inability to show that he relied to his detriment upon the representations
and express warranty of Lucia and her associates. The circuit court also stated that
the dismissal of the claims included in the second amended complaint was
consistent with its inherent authority to sanction Daniel’s bad-faith conduct -- his
decision to file a second amended complaint and to engage in litigation as a
strategy to strip the Transfer Companies of their assets and thereby to perpetrate a
fraud upon Lucia and her associates.
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We are persuaded that the circuit court erred by substituting its
judgment in lieu of granting a trial. In Steelvest, Inc., 807 S.W.2d at 483, the
Supreme Court of Kentucky held as follows:
We adhere to the principle that summary judgment is to
be cautiously applied and should not be used as a
substitute for trial. As declared in Paintsville Hospital, it
should only be used “to terminate litigation when, as a
matter of law, it appears that it would be impossible for
the respondent to produce evidence at the trial warranting
a judgment in his favor and against the movant.” It is
vital that we not sever litigants from their right of trial, if
they do in fact have valid issues to try, just for the sake of
efficiency and expediency.
Summary judgment could not have been properly entered upon the basis of the
court’s desire to “save the litigants from one another” or to “move the matter on.”
Order entered May 3, 2018, at 1. Nor could it have been entered based upon the
circuit court’s inability to see any sense in a trial or its perception that a litigant is
not sufficiently interested in resolving the issues. None of these justifications
legally supports entry of summary judgment, although its human motivation is
clearly understandable under the circumstances of this case.
The circuit court also concluded that Daniel could not prove the
claims included in his second amended complaint because he was unable to show
that he relied to his detriment upon Lucia’s representations and express warranty
concerning the financial condition and operations of the Transfer Companies.
Summary judgment can be granted where it appears that it would be impossible --
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as a matter of law -- for the non-movant to produce evidence at trial warranting a
judgment in his favor.
Daniel argues that the circuit court erred by granting judgment in
favor of Lucia with respect to his breach-of-contract claim because reliance is not
an element of this claim. We agree.
In their response to the motion of Lucia and her associates for final
judgment, Daniel and the Transfer Companies explained that upon the sale of the
Transfer Companies, Lucia attested that she had provided financial documents that
“fairly present the financial condition and operating results of the Transfer
Companies . . . in all material respects. . . .” Referring to evidence procured
through discovery, they argued that her promise was patently breached because
Lucia concealed from Daniel the fact that the Transfer Companies had accrued
massive liabilities for unpaid state and federal taxes and other items during the
time that she managed the companies.
Actions for fraud, negligent misrepresentation, breach of warranty,
and promissory estoppel require the plaintiff to prove his justifiable reliance upon
the defendant’s representation. However, an action for breach of contract requires
only proof of the existence of a contract, breach of that contract, and that the
breach caused damages. EQT Prod. Co. v. Big Sandy Co., L.P., 590 S.W.3d 275
(Ky. App. 2019). The circuit court erred by granting summary judgment to Lucia
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and her associates with respect to Daniel’s claim for breach of contract because
Daniel was not required to show his detrimental reliance upon the representations.
In their brief, Lucia and her associates suggest that the circuit court’s
judgment can be affirmed on the basis of Daniel’s attempt to use the judicial
process to authorize a fraud. To the extent that the court’s dismissal of Daniel’s
breach-of-contract claim was based upon its inherent power to protect the integrity
of its judgments, it must be reversed.
Conduct that works a fraud or constructive fraud on a tribunal and has
a detrimental effect on the accuracy or integrity of a judgment does warrant a
remedy that prevents a party from benefitting from his misconduct. Zurich Am.
Ins. Co. v. Journey Operating, LLC, 323 S.W.3d 696 (Ky. 2010). In this case,
Lucia and her associates argued that Daniel’s decision to file a complaint and to
pursue his claims for Lucia’s failure to disclose the massive tax debt of the
Transfer Companies constituted just such conduct. The circuit court accepted the
argument and found that litigation that lasted for a period of less than one year was
“part of an apparent strategy to ‘bust out’ the assets of the Transfer Companies,
and perpetrate a fraud on [Lucia and her associates.]” Order entered May 3, 2018,
at 15. We see nothing in the facts and circumstances of this case which would
support a decision of the circuit court to dismiss Daniel’s claims as a sanction for
misconduct.
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The terms “break out” or “bust out” scheme have been used broadly to
describe various plans implemented by bad actors: to dupe creditors into
extending credit; to incur substantial debt; and, ultimately, to leave creditors
unpaid. In this case, the circuit court concluded that Daniel engaged in a
premeditated scheme to buy out Lucia’s interest in the Transfer Companies; to loot
the companies; and then to disappear before he completed making the installment
payments for their purchase. It found that the claims included in Daniel’s
complaint had never had merit and were “an apparent pretext to conceal the
fraudulent and unlawful scheme to defraud [Lucia and her associates] as well as
the Transfer Companies’ other creditors.” Id. at 16. With respect to the litigation
aimed at having the Transfer Companies’ former lawyers disqualified from
representing Lucia and her associates in litigation adverse to the companies’
interests, the court concluded that that litigation was simply a “cover for a series of
fraudulent and voidable transfers” designed to drain the companies’ assets. Id. at
17. Finally, it observed that:
to the extent that Daniel and his counsel have insisted on
keeping evidence of Daniel’s misconduct out of the
record, based on the unsupported assertion that doing so
would be necessary to protect proprietary information
and the interests of all parties, Daniel has invited the
Court to become an active participant, at least in
shielding this fraud from the light of day.
Id. at 15. However, the record does not support these findings.
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The circuit court concluded that Daniel devised a scheme to loot the
Transfer Companies before he purchased them. The court’s findings overlook the
fact that Daniel acquired the Transfer Companies only after an extended period of
wrangling with Lucia following their divorce about the operations of their
interconnected companies. The findings overlook evidence indicating that Daniel
discovered the massive tax debt that the Transfer Companies had incurred under
Lucia’s management only after the Settlement Agreement had been executed and
that Daniel’s inability to bring current the substantial tax arrearage was a function,
in part, of the Transfer Companies’ income. The findings did not adequately
assess the viability of Daniel’s claims for breach of contract and fraud against
Lucia and her associates or the claims of the companies against their former
owners and directors. The court summarily discounted arguments concerning the
conflict of interest of opposing counsel in their representation of Lucia and her
associates against their former clients.
Daniel and the Transfer Companies have also argued that the circuit
court erred by failing to disqualify opposing counsel. Having acquired the
Transfer Companies, Daniel and the companies filed a motion in early 2017 to
disqualify Alan Linker and Paul Hershberg, the companies’ former attorneys, from
representing Lucia and her associates. The Supreme Court of Kentucky provided
the following summary of the events that followed:
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The trial court conducted a hearing on February 3, 2017
and determined that the September 2015 Settlement
Agreement contemplated that Linker and Hershberg
would continue to represent Lucia in this case, and
therefore Daniel waived any perceived conflict. In
denying the motion to disqualify, the trial court stated it
was conceivable that Linker and Hershberg’s continued
representation of Lucia would implicate SCR 3.130(1.9)
if they actually used or threatened to use confidential
information they obtained through their representation of
the companies in a way adverse to the interest of those
companies. But since Daniel was not alleging that such
misconduct had occurred, and the court did not expect it
to arise, disqualification was not warranted. Notably,
Daniel did not seek a writ following this February 2017
denial of the attorney disqualification motion.
Over the next few months, the parties engaged in
ongoing discovery efforts. On August 23, 2017, Daniel
filed a renewed motion to disqualify Linker and
Hershberg. The trial court conducted another hearing,
where Daniel’s expert, an attorney specializing in legal
ethics, testified that the Settlement Agreement could not
constitute a waiver. Linker and Hershberg did not
present any evidence at the hearing. On December 12,
2017, the trial court orally indicated that it intended to
deny the renewed motion to disqualify.
Popa, 2019 WL 2462307, at *2.
In its order entered February 5, 2018, the circuit court reiterated its
earlier determination that disqualification of Lucia’s attorneys was not warranted.
The court found that Daniel had not shown an actual conflict of interest and that it
would be inequitable to remove Linker and Hershberg from the representation.
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On February 15, 2018, Daniel and the Transfer Companies filed a
petition for a writ of mandamus with this Court. They sought to compel the circuit
court to disqualify Linker and Hershberg. On May 3, 2018, while the petition was
pending, the circuit court entered its Findings of Fact, Conclusions of Law, Order
and Judgment. Because the judgment disposed of the case on its merits, we
dismissed the writ petition as moot. We reasoned that a writ is an extraordinary
remedy used to prevent potential injury -- not to remedy injuries that have already
occurred. Concluding that Daniel and the Transfer Companies have an adequate
opportunity for recourse through this direct appeal, the Supreme Court of
Kentucky affirmed our decision. Popa, 2019 WL 2462307, at *4-5.
On appeal, Daniel and the Transfer Companies now contend that the
circuit court abused its discretion by failing to disqualify Linker and Hershberg
from the representation because the attorneys have an ethical conflict of interest.
They argue that Linker and Hershberg represent interests in direct opposition to the
interests of the Transfer Companies (their former clients) and that they failed to
secure a written waiver for such conduct. Daniel and the Transfer Companies
argue that Linker and Hershberg obtained confidential and proprietary information
about the companies during their former representation and that they have used and
likely will continue to use that information to the companies’ disadvantage and
extreme prejudice. Those allegations may be true. However, the Transfer
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Companies have raised no argument on appeal with respect to the dismissal of their
claims against Lucia and her associates. Consequently, the Transfer Companies
have no interest in the proceedings to be conducted on remand. The existence of
an actual conflict of interest between Linker and Hershberg and their former clients
that might require disqualification of the attorneys is moot.
In summary, we AFFIRM the denial of the motion for a temporary
injunction in the order of February 2, 2018. We VACATE the summary judgment
entered on February 2, 2018, and REMAND the issues contained therein for
additional proceedings. We AFFIRM the dismissal of the second amended
complaint (Findings of Fact, Conclusions of Law, and Order and Judgment of May
3, 2018) -- with the sole exception of Daniel’s claim for breach of contract, an
issue which also must be resolved on REMAND. We DENY AS MOOT the
arguments related to the disqualification of counsel (Linker and Hershberg)
because the Transfer Companies will not be parties to the litigation on remand,
their claims having been dismissed in the second amended complaint, that portion
of which we have hereby AFFIRMED.
ALL CONCUR.
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BRIEFS FOR APPELLANTS: BRIEF FOR APPELLEES:
Jill F. Endicott David Tachau
Jeremy S. Rogers Paul Hershberg
Philip E. Cecil Alan N. Linker
Bryan J. Dillon Louisville, Kentucky
Louisville, Kentucky
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