Neilson Ex Rel. MGT Chapter 11 Liquidating Trust v. Straight-Out Promotions, LLC (In Re Tyson)

12-936-cv
Straight-Out Promotions, LLC v. Warren
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
1 At a stated term of the United States Court of Appeals
2 for the Second Circuit, held at the Thurgood Marshall United
3 States Courthouse, 40 Foley Square, in the City of New York,
4 on the 15th day of February, two thousand thirteen.
5
6 PRESENT: DENNIS JACOBS,
7 Chief Judge,
8 AMALYA L. KEARSE,
9 SUSAN L. CARNEY,
10 Circuit Judges.
11
12 - - - - - - - - - - - - - - - - - - - -X
13 IN RE: MICHAEL G. TYSON, et al.,
14 Debtors,
15
16 R. TODD NEILSON, PLAN ADMINISTRATOR
17 OF THE MGT CHAPTER 11 LIQUIDATING
18 TRUST, on behalf of the MGT CHAPTER
19 11 LIQUIDATING TRUST and on behalf of
20 MICHAEL G. TYSON, an Individual,
21 Plaintiff,
22
23 -v.- 12-936
24
25 STRAIGHT-OUT PROMOTIONS, LLC, and
26 CHRIS WEBB, an Individual,
27 Defendants-Cross-Claimants-
28 Appellants,
1
1
2 -v.-
3
4 FRANK WARREN, EDWARD SIMONS,
5 Defendants-Cross-Defendants-
6 Appellees.1
7 - - - - - - - - - - - - - - - - - - - -
8
9 FOR APPELLANTS: J. BRUCE MILLER, J. Bruce Miller
10 Law Group, Louisville, KY.
11
12 FOR APPELLEE FRANK WARREN: HOWARD KARASIK, Sherman, Citron
13 & Karasik, New York, NY.
14
15 Appeal from a judgment of the United States District
16 Court for the Southern District of New York (Cote, J.).
17
18 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
19 AND DECREED that the judgment of the district court be
20 AFFIRMED.
21
22 Straight-Out Promotions, LLC and Chris Webb
23 (collectively, the “Kentucky Defendants”) appeal from the
24 judgment of the United States District Court for the
25 Southern District of New York (Cote, J.), affirming the
26 decision of the United States Bankruptcy Judge (Gropper,
27 J.), which denied their cross-claims against Frank Warren
28 and Edward Simons (collectively, the “UK Defendants”). We
29 assume the parties’ familiarity with the underlying facts,
30 the procedural history, and the issues presented for review.
31 1. The UK Defendants are related to a British shell
32 company, Brearly, that contracted with the Kentucky
33 Defendants to sell foreign rights to a prizefight between
34 Michael Tyson and an English boxer, Danny Williams.
35 Brearly’s guarantee on the foreign rights was dishonored;
36 Tyson’s estate in bankruptcy sued all of the above
37 defendants in the Bankruptcy Court of the United States
38 District Court for the Southern District of New York, and
39 the Kentucky Defendants cross-claimed against the UK
40 Defendants, relying chiefly on a default judgment that they
41 had obtained against Brearly of over $4 million. See
1
The Clerk of Court is directed to amend the caption
of this case to conform to the listing of the parties shown
above.
2
1 Straight–Out Promotions, LLC. v. Brearly (Int’l) Ltd., No.
2 3:04–CV–473–H, 2008 WL 6604013 (W.D. Ky. Dec. 16, 2008), ECF
3 No. 51; see also Straight-Out Promotions, LLC v. Warren, 467
4 B.R. 684, 692 (S.D.N.Y. 2012). The Kentucky Defendants cite
5 the Supreme Court’s recent res judicata guidance in Taylor
6 v. Sturgell, 553 U.S. 880 (2008) to argue that the UK
7 Defendants should be liable on the default judgment. “A
8 district court’s order in a bankruptcy case is subject to
9 plenary review, meaning that this Court undertakes an
10 independent examination of the factual findings and legal
11 conclusions of the bankruptcy court. Findings of fact are
12 reviewed for clear error, and conclusions of law are
13 reviewed de novo.” In re Kalikow, 602 F.3d 82, 91 (2d Cir.
14 2010) (quotation marks and citation omitted).
15 The district court properly ruled that “for judgments
16 in diversity cases, federal law incorporates the rules of
17 preclusion applied by the State in which the rendering court
18 sits.” Taylor, 553 U.S. at 891 n.4; see Straight-Out, 467
19 B.R. at 692 (“[I]n determining the preclusive effect of the
20 Kentucky Default Judgment, Kentucky law governs.”).
21 Kentucky courts recognize the related doctrines of claim and
22 issue preclusion. Moorhead v. Dodd, 265 S.W.3d 201, 203-204
23 (Ky. 2008). They identify four elements required to
24 establish collateral estoppel, or issue preclusion: “(1)
25 identity of issues; (2) a final decision or judgment on the
26 merits; (3) a necessary issue with the estopped party given
27 a full and fair opportunity to litigate; (4) a prior losing
28 litigant.” Moore v. Commonwealth, 954 S.W.2d 317, 319 (Ky.
29 1997). They identify three elements for claim preclusion to
30 bar future litigation: (1) “identity of the parties”; (2)
31 “identity of the causes of action”; and (3) “the [prior]
32 action must have been resolved on the merits.” Yeoman v.
33 Commonwealth, 983 S.W.2d 459, 465 (Ky. 1998).
34 As the district court ruled, there was no claim
35 preclusion because there was no identity of the parties.
36 The UK Defendants were not parties to the Kentucky action.
37 They were not in privity with Brearly because they did not
38 share an “absolute identity of legal interest.” BTC
39 Leasing, Inc. v. Martin, 685 S.W.2d 191, 198 (Ky. Ct. App.
40 1984). The district court observed that “Brearly,
41 apparently, decided that it did not have an interest in
42 defending itself in the Kentucky Action, or indeed in the
43 proceedings before the Bankruptcy Court,” whereas the UK
44 Defendants “have litigated the present action determinedly.”
45 Straight-Out, 467 B.R. at 694. The Kentucky Defendants
46 argue that Brearly “adequately represented” the interests of
47 the UK Defendants, see BTC, 685 S.W.2d at 198, but Brearly
3
1 withdrew counsel and defaulted. The UK Defendants may have
2 controlled Brearly’s counsel, but, as the bankruptcy court
3 found, that does not establish privity. See Straight-Out,
4 467 B.R. at 693 (“A party’s ‘assumption of control does not
5 make him a party to the litigation.’”) (quoting Restatement
6 (Second) of Judgments § 39 cmt. b (1982)).
7 The Kentucky Defendants emphasize that certain cases
8 show that Kentucky courts use a “transactional approach” in
9 claim preclusion cases. See Cobble v. Commonwealth of
10 Kentucky, CIV.A. 3:01CV-62-H, 2001 WL 1772020, at *2 (W.D.
11 Ky. July 24, 2001), aff’d, 46 F. Appx. 320 (6th Cir. 2002);
12 Smith v. Bob Smith Chevrolet, Inc., 275 F. Supp. 2d 808, 813
13 (W.D. Ky. 2003). But that “transactional approach” is used
14 to ascertain if the claims are identical; it does not bear
15 on common party identity.
16 As for issue preclusion, the UK Defendants had no full
17 and fair opportunity to litigate the relevant issue because
18 the judgment was entered on the basis of Brearly’s default.
19 “In the case of a judgment entered by confession, consent,
20 or default, none of the issues is actually litigated.”
21 Restatement (Second) of Judgments § 27 cmt.e (1982); see 18A
22 Charles Alan Wright & Arthur R. Miller, Federal Practice and
23 Procedure § 4442 (2d ed.) (“Judgment by default in the
24 technical sense that the issues have not been litigated does
25 not warrant issue preclusion for the very reason that the
26 issues have not been litigated or decided.”). The
27 bankruptcy court expressed its equitable misgivings about
28 enforcing a default judgment against the UK Defendants when
29 it was clear that there was nothing in the record to support
30 the underlying claims. See In re Tyson, No. 03-41900 ALG,
31 2011 WL 1841881, at *7 (Bankr. S.D.N.Y. May 13, 2011), aff’d
32 sub nom., Straight-Out Promotions, LLC v. Warren, 467 B.R.
33 684 (S.D.N.Y. 2012) (“At the trial, the evidence did not
34 support the theories underlying the Kentucky Default
35 Judgment on the issue of damages. . . .”).
36 2. The Kentucky Defendants assert that the bankruptcy
37 court should not have denied their post-trial Rule 15(b)(2)
38 and Rule 54 motions. They sought to amend their pleading to
39 include a fraud cross-claim against the UK Defendants. In
40 re Tyson, 2011 WL 1841881, at *6. As the district court
41 concluded, amendment would be futile. In Kentucky, a fraud
42 claim requires clear and convincing proof of the following
43 six elements:
44
45 (1) that the declarant made a material representation
46 to the plaintiff, (2) that this representation was
47 false, (3) that the declarant knew the representation
4
1 was false or made it recklessly, (4) that the declarant
2 induced the plaintiff to act upon the
3 misrepresentation, (5) that the plaintiff relied upon
4 the misrepresentation, and (6) that the
5 misrepresentation caused injury to the plaintiff.
6
7 Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544, 549 (Ky.
8 2009). “The plaintiff[‘]s reliance, of course, must be
9 reasonable.” Id.10 For several reasons, the Kentucky Defendants could not
11 reasonably have relied upon the statements of Brearly or the
12 UK Defendants, and therefore the Kentucky Defendants cannot
13 support a fraud claim. First, the Kentucky Defendants were
14 explicitly warned “that the UK Defendants would not
15 guarantee Brearly’s obligations.” Straight-Out, 467 B.R. at
16 690. Second, the Kentucky Defendants performed no
17 appreciable due diligence on Brearly. Id. Third, their own
18 legal counsel advised them that the Distribution Agreement
19 with Brearly did “‘not guarantee a minimum payment of 2.7
20 million by irrevocable letters of credit’ and was ‘not
21 acceptable.’” In re Tyson, 2011 WL 1841881, at *6 (quoting
22 March 27, 2009, Trial Tr. at 50). The Kentucky Defendants
23 proceeded to contract with Brearly in spite of these
24 warnings.
25 The Kentucky Defendants argue that they could not have
26 reasonably learned of the fraud until it was too late,
27 citing the Kentucky rule that “where the defrauded party has
28 performed substantially before discovering the fraud, he may
29 go on with the performance and also recover damages.” See
30 Sanford Constr. Co. v. S&H Contractors, Inc., 443 S.W. 2d
31 227, 236 (Ky. 1969). However, the Kentucky Defendants did
32 not incur any significant expenses as a result of the
33 alleged fraud until after they had reached an “impasse” over
34 whether Brearly’s funds would be held in escrow or secured
35 with a letter of credit. Even if it had been reasonable for
36 the Kentucky Defendants to perform no due diligence about
37 their counter-party at the outset of their multimillion
38 dollar negotiations (a dubious proposition), the “impasse”
39 certainly should have alerted them to the risks at hand.
40 Since they failed to show clear and convincing evidence that
41 they reasonably relied upon the statements of the UK
42 Defendants, the fraud claim would have been futile. Their
43 motion to amend to assert such a claim was properly denied.
44 See, e.g., MacDraw, Inc. v. CIT Group Equip. Financing,
45 Inc., 157 F.3d 956, 962-63 (2d Cir. 1998).
46
5
1 Finding no merit in the remaining arguments, the
2 judgment is AFFIRMED.
3
4
5 FOR THE COURT:
6 CATHERINE O’HAGAN WOLFE, CLERK
7
6