Randall Waldman v. Ronald Stone

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 15a0219n.06
No. 13-5404
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
RANDALL SCOTT WALDMAN; R.W. LIMITED, ) Mar 19, 2015
CO.; STONE MACHINE AND FABRICATION, ) DEBORAH S. HUNT, Clerk
LLC; INTEGRITY MANUFACTURING, LLC, )
)
Appellants, )
ON APPEAL FROM THE
)
UNITED STATES DISTRICT
v. )
COURT FOR THE WESTERN
)
DISTRICT OF KENTUCKY
RONALD B. STONE, )
)
Appellee. )
Before: KETHLEDGE and STRANCH, Circuit Judges; GWIN, District Judge.*
KETHLEDGE, Circuit Judge. De novo review is not a second trial. Five years ago, the
bankruptcy court conducted a trial after which it found that Randall Waldman had defrauded his
business partner, Ron Stone. We vacated that decision on constitutional grounds, instructing the
bankruptcy court to recast its decision as proposed findings of fact and conclusions of law, and
instructing the district court to review those findings and conclusions de novo. Both courts
followed those instructions on remand; the district court then entered judgment against Waldman
for approximately $3 million. In this appeal, Waldman principally argues that the district court
was required to receive additional evidence when performing its de novo review. We reject that
argument. Of Waldman’s many other arguments, two have merit: that the district court erred
*
The Honorable James S. Gwin, United States District Judge for the Northern District of Ohio,
sitting by designation.
No. 13-5404
Waldman v. Stone
when it calculated actual damages, and that the district court should have allocated fault between
Waldman and Atherton. With those two exceptions, we affirm.
I.
Stone’s business, Stone Tool and Machine, began to have serious cash-flow problems in
2003. The next year, Fifth Third Bank sued Stone for over $1 million in unpaid debts. Stone
contacted his attorney, Bruce Atherton, who introduced him to Waldman. What Stone did not
know was that Atherton himself owed Waldman tens of thousands of dollars, and that Atherton
planned to help Waldman exploit Stone to settle that debt. Waldman told Stone that, if Stone
would transfer to Waldman all of Stone Tool’s assets, Waldman would pay off Stone’s debts,
guarantee him a salary for five years, and give him a 40% ownership stake in Waldman’s new
company, Stone Machine and Fabrication.
But Waldman tricked Stone into signing a very different agreement. On May 20, 2005,
Atherton called Stone and urged him to come to Waldman’s office within 15 minutes. When
Stone arrived, Waldman said that Stone needed to sign a contract immediately. If Stone even
took time to read the contract, Waldman said, the bank would foreclose. Atherton and Waldman
assured Stone that the documents reflected the terms of their deal, and Waldman reiterated his
promise to pay off Stone’s debts. In reality, however, the contract transferred all of Stone Tool’s
assets to Waldman, and gave Stone only a job with Stone Machine in return. Stone signed the
contract. Waldman then used Stone Tool’s assets to buy all of Stone’s debts, which Waldman
had no obligation to forgive. Thus, in effect, Stone gave away his old company, received no
equity in the new company, and owed the same amount of debt—only now to Waldman instead
of to the bank.
-2-
No. 13-5404
Waldman v. Stone
For more than a year thereafter, Stone continued to work for Waldman at Stone Machine.
During that time, Stone repeatedly asked to see the contract that he had signed, but Waldman and
Atherton refused to show it to him, though Waldman assured Stone that he owned 40% of Stone
Machine. Stone also asked Waldman to pay Stone’s debts as promised, but Waldman never did
so. Only in October 2006—after Atherton’s assistant finally gave Stone a copy of the contract—
did Stone realize that he had been duped. He confronted Waldman (leading to a fist-fight) and
left the company shortly thereafter. Two months later, Waldman filed a notice of garnishment
against Stone for the unpaid debts, forcing him into bankruptcy.
In the bankruptcy court, Stone sought a discharge of the unpaid debts, and alleged that
Waldman had defrauded him. Stone asked for a judgment that would require Waldman to satisfy
Stone’s debts, give Stone the value of a 40% stake in Stone Machine, and pay punitive damages.
The bankruptcy court held a multi-day trial on Stone’s claims; afterwards, the court made
detailed findings that Waldman had defrauded Stone. The court therefore disallowed Waldman’s
claims and awarded Stone approximately $3 million. The district court affirmed.
Waldman appealed to this Court, arguing among other things that the bankruptcy court
acted contrary to Article III of the Constitution when it entered a final judgment in favor of Stone
on his fraud claims. We agreed with that argument, vacated the judgment, and remanded.
Waldman v. Stone, 698 F.3d 910, 921-22 (6th Cir. 2012). We instructed the bankruptcy court
and the district court to exercise their respective authorities pursuant to 28 U.S.C § 157(c)(1).
Under that provision, the bankruptcy court may “hear a proceeding that is not a core proceeding
but that is otherwise related to a case under title 11,” and “submit proposed findings of fact and
conclusions of law to the district court.” Id. The district court must then “consider[] the
-3-
No. 13-5404
Waldman v. Stone
bankruptcy judge’s proposed findings and conclusions and . . . review[] de novo those matters to
which any party has timely and specifically objected.” Id.
On remand, the bankruptcy court recast its decision as proposed findings of fact and
conclusions of law. After briefing by both parties, the district court then adopted some of those
findings and conclusions, rejected others, and entered its own judgment against Waldman, three
of Waldman’s companies, and Atherton in the amount of $3,074,374, which included $1,074,374
for compensatory damages, and $2,000,000 for punitive damages. This appeal followed.
II.
A.
Waldman primarily argues that the district court failed to review de novo the bankruptcy
court’s proposed findings of fact and conclusions of law. We review de novo whether the
district court did so. See generally United States v. Levy, 904 F.2d 1026, 1029 (6th Cir. 1990).
De novo review means to review without giving “deference . . . or any presumption of
correctness” to the lower court. Perry v. Simplicity Eng’g, 900 F.2d 963, 966 (6th Cir. 1990).
The district court hewed to that standard here: it acknowledged its obligation to “review de novo
the bankruptcy record” and expressly refused to afford the bankruptcy court’s findings and
conclusions a “presumption of validity.” Dist. Ct. Op. at 1, 4.
For two reasons, however, Waldman argues that the district court was also required to
take additional evidence as part of its de novo review. The first we reject summarily: Waldman
contends that the district court was “compelled” to receive additional evidence “by the body of
Article III case law.” But he cites no such “case law,” and we are aware of none.
Second, Waldman contends that Federal Rule of Bankruptcy Procedure 9033(d) required
the district court to receive additional evidence. That Rule provides in full:
-4-
No. 13-5404
Waldman v. Stone
The district judge shall make a de novo review upon the record or, after
additional evidence, of any portion of the bankruptcy judge’s findings of fact or
conclusions of law to which specific written objection has been made in
accordance with this rule. The district judge may accept, reject, or modify the
proposed findings of fact or conclusions of law, receive further evidence, or
recommit the matter to the bankruptcy judge with instructions.
Fed. R. Bank. P. 9033(d). In Waldman’s view, the Rule’s first sentence compels the district
court to take “additional evidence” as to “any portion of the bankruptcy judge’s findings of fact
or conclusions of law to which specific written objection has been made[.]” Id.
But the Rule’s second sentence flatly contradicts Waldman’s reading: the sentence says
that “[t]he district judge may . . . receive additional evidence” in connection with the district
court’s review of the bankruptcy court’s proposed findings and conclusions, not that the district
court must do so. (Emphasis added.) Waldman’s reading changes that “may” to “must,” and
thus rewrites the Rule’s plain terms. We decline to read the Rule that way. See Deutsche Bank
Nat’l Trust Co. v. Tucker, 621 F.3d 460, 464 (6th Cir. 2010).
Waldman also misreads the Rule’s first sentence, which states at its outset what the
district court must do: “make a de novo review.” After some intervening language, the Rule then
specifies what, exactly, the court must review: “any portion of the bankruptcy judge’s findings of
fact or conclusions of law to which specified written objection has been made.” (Of course,
Article III might separately impose on the district court a duty to review de novo all of the
bankruptcy court’s proposed findings and conclusions. See generally Waldman I, 698 F.3d at
917-22.) In the intervening language, the Rule merely identifies two methods by which the court
may perform that review: either “upon the record” or “after additional evidence.” Which method
to employ, the next sentence makes clear, is up to the district court. Thus, Waldman’s reading of
the Rule is meritless.
-5-
No. 13-5404
Waldman v. Stone
B.
The parties agree that Kentucky law applies to Stone’s claims for fraud. Waldman argues
that the district court misapplied that law in three respects. First, he argues that the district court
erred in its damages calculation. We review that calculation for clear error. See Huss v. King
Co., 338 F.3d 647, 652 (6th Cir. 2003). Kentucky follows the “benefit of the bargain rule” in
calculating damages for fraud. See Dempsey v. Marshall, 344 S.W.2d 606, 607 (Ky. Ct. App.
1961). Under that rule, a court awards damages necessary to place the injured party “in the same
position he would have occupied had he not been defrauded.” Sanford Const. Co. v. S & H
Contractors, Inc., 443 S.W.2d 227, 239 (Ky. 1969).
Here, Stone promised to transfer ownership of Stone Tool to Waldman. In return,
Waldman promised to pay off Stone’s debts, give him a job, and give him a 40% stake in
Waldman’s new business, Stone Machine. Thus, absent the fraud, Stone would have lost Stone
Tool but gained a job, the amount of his unpaid debts, and a 40% stake in Stone Machine. In
fact, however, Stone lost Stone Tool and received nothing in return except the job. To place
Stone “in the same position he would have occupied had he not been defrauded,” therefore, the
district court should have awarded him the amount of his debts plus the value of a 40% stake in
Stone Machine.
The amount of Stone’s debts is undisputed: $121,044. And Stone’s own damages expert,
Andrew Green, provided the only testimony as to the value of a 40% stake in Stone Machine:
$529,732. BR 244, Tr. Vol. 4 at 24:17. Thus, to give Stone the benefit of his bargain, the
district court should have awarded him $650,776.
But the court awarded Stone $1,074,374 instead. That amount correctly included
$121,044 for Stone’s debts, but included an additional $953,330 as well. That additional figure
-6-
No. 13-5404
Waldman v. Stone
reflected, among other things, 100% of Stone Tool’s value. But Waldman never promised to pay
Stone the value of Stone Tool; instead, Waldman promised to pay off Stone’s debts and give him
a stake in Stone Machine, in return for Stone’s transfer of Stone Tool to Waldman. Thus, even if
Waldman had kept his promises, Stone would not have kept the value of Stone Tool. Stone
therefore was not entitled to its value as damages, which means his compensatory damages
totaled only $650,776.
Second, Waldman challenges the district court’s punitive-damages award, arguing that a
Kentucky statute, K.R.S. 411.186, required the district court to discuss certain statutory factors
before awarding punitive damages to Stone. But Waldman did not make that argument to the
district court. The argument is therefore waived. See In re Klein Sleep Prods., Inc., 78 F.3d 18,
29 (2d Cir. 1996).
Third, Waldman argues that the district court erred by requiring him to pay for all of
Stone’s damages, rather than apportioning them between Waldman and Atherton. We review de
novo the district court’s interpretation of Kentucky law, and “anticipate how the relevant state’s
highest court would rule in the case.” In re Dow Corning Corp., 419 F.3d 543, 549 (6th Cir.
2005).
In support of his argument, Waldman relies on a Kentucky statute, K.R.S. 411.182, which
provides in relevant part:
In all tort actions, including products liability actions . . . the [factfinder] shall
make fact findings indicating the percentage of the total fault of all the parties to
each claim that is allocated to each [defendant] . . . [and] determine the award of
damages . . . in accordance with [those] findings.
Id (emphasis added). On Waldman’s reading of this provision, he is liable for the full amount of
Stone’s damages only if the court determined that Waldman was 100% at fault for them.
-7-
No. 13-5404
Waldman v. Stone
The district court held that K.R.S. 411.182 does not apply here because, the court said,
the “substantive law” of civil conspiracy allows a plaintiff to recover from one conspirator all of
the losses that the plaintiff sustained as a result of the conspiracy. Dist. Ct. Op. at 17 (citing a
treatise). But that same argument was rejected by the Kentucky Court of Appeals, James Med.
Equip., Inc. v. Allen, 2006 WL 2788435 at *7 (Ky. Ct. App. Sept. 29, 2006), whose opinions we
must follow unless we think the Kentucky Supreme Court would decide the case differently.
Allstate Ins. Co. v. Thrifty Rent-A-Car Sys., Inc., 249 F.3d 450, 454 (6th Cir. 2001).
We see no reason to think that here. At one time, Kentucky indeed had a common-law
rule that co-conspirators are each liable for all of the damages that result from the conspiracy.
But the Kentucky legislature was free to abrogate that rule, which it did by enacting K.R.S.
411.182. That statute provides that a court must apportion liability in “all tort actions.”
(emphasis added). And a claim for civil conspiracy to defraud is a tort action. James v. Wilson,
95 S.W.3d 875, 898 (Ky. Ct. App. 2002). Thus, under K.R.S. 411.182, the district court was
required to apportion liability for Stone’s damages.
Stone suggests that this apportionment is impossible here because the district court found
that Waldman and Atherton were “equally to blame” for Stone’s damages. But we doubt that the
district court’s statement expressed a quantitative analysis; and thus we leave it to the district
court to allocate Stone’s damages in the first instance on remand. We likewise leave it to the
district court to determine whether K.R.S. 411.182 also applies to Stone’s award of punitive
damages—an issue that neither party briefed on appeal.
C.
We make shorter work of Waldman’s remaining arguments. He argues that the district
court should have stricken from the record the deposition of Atherton’s secretary. But “[a]n
-8-
No. 13-5404
Waldman v. Stone
erroneous evidentiary ruling amounts to reversible error . . . only if it affected the outcome of the
[case].” Cummins v. BIC USA, Inc., 727 F.3d 506, 510 (6th Cir. 2013). Here, the district court
stated that the deposition did not affect the outcome, Dist. Ct. Op. at 5 n.6, and Waldman gives
us no reason to think otherwise. So this argument fails.
Next, Waldman argues that the district court erred by holding that he owed a fiduciary
duty to Stone. The court so held for two reasons: because Waldman exercised “undue influence”
over Stone, and because Waldman and Stone were partners. Dist. Ct. Op. at 8-9, 9 n.9. On
appeal, Waldman disputes that Waldman exercised undue influence, but not that Waldman and
Stone were partners. But under Kentucky law, partners owe each other a fiduciary duty. Lach v.
Man O'War, LLC, 256 S.W.3d 563, 569 (Ky. 2008). That Stone and Waldman were partners,
therefore, is reason enough to hold that Waldman owed Stone a fiduciary duty.
Waldman also argues that the district court erred by finding that he committed fraud. We
have already rejected that argument. See Waldman I, 698 F.3d at 922. Finally, Waldman does
not explain how his remaining arguments provide grounds on which to reverse the district court.
So we need not address them.
***
The district court’s judgment is affirmed, except that we reduce the amount of Stone’s
compensatory damages from $1,074,374 to $650,776, and remand the case with instructions to
apportion Stone’s damages pursuant to K.R.S. 411.182.
-9-