Tana Cutcliff v. Kathleen Reuter

United States Court of Appeals
For the Eighth Circuit
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No. 14-1429
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Tana S. Cutcliff; James A. Fields; Joshua P. Haeflinger; LaDonna S. Henderson,
(as Trustee for LaDonna S. Henderson Living Trust); Patricia A. Reitz, (as Trustee
for Frances L. Reitz Trust); Terry J. Schippers; James D. Teegarden, II; Michael S.
Trom; James D. Fields
lllllllllllllllllllll Plaintiffs - Appellees
v.
Nathan Paul Reuter; Vertical Group, LLC
lllllllllllllllllllll Defendants
Kathleen Reuter
lllllllllllllllllllllIntervenor - Appellant
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No. 14-1730
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Tana S. Cutcliff; James A. Fields; Joshua P. Haeflinger; LaDonna S. Henderson,
(as Trustee for LaDonna S. Henderson Living Trust); Patricia A. Reitz, (as Trustee
for Frances L. Reitz Trust); Terry J. Schippers; James D. Teegarden, II; Michael S.
Trom; James D. Fields
lllllllllllllllllllll Plaintiffs - Appellees
v.
Nathan Paul Reuter
lllllllllllllllllllll Defendant - Appellant
Vertical Group, LLC
lllllllllllllllllllll Defendant
Kathleen Reuter
lllllllllllllllllllllIntervenor
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Appeals from United States District Court
for the Western District of Missouri - Jefferson City
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Submitted: January 15, 2015
Filed: June 30, 2015
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Before LOKEN, MELLOY, and GRUENDER, Circuit Judges.
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GRUENDER, Circuit Judge.
Nathan and Kathleen Reuter each appeal from the district court’s1 entry of a
default judgment that awards damages against Vertical Group, LLC. We dismiss
Nathan’s appeal for lack of standing and affirm the district court’s judgment as to
Kathleen’s appeal.
1
The Honorable Nanette K. Laughrey, United States District Judge for the
Western District of Missouri, adopting the report and recommendations of the
Honorable Dennis R. Dow, United States Bankruptcy Judge for the Western District
of Missouri.
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I. Background
This is the second time we have considered a matter involving Nathan Reuter
and a scheme where victims were “lure[d]” into making a “high-yield, zero-risk
investment” from which their money was “appropriated.” Reuter v. Cutcliff (In re
Reuter), 686 F.3d 511, 513-14 (8th Cir. 2012). Nine of these victims (“the plaintiffs”)
brought this lawsuit against Nathan and Vertical Group, LLC (“Vertical Group”)
based on their alleged roles in perpetrating this scheme. Our initial appeal dealt with
claims that the plaintiffs also asserted as creditors in Nathan’s ensuing bankruptcy.
Id. This appeal concerns the plaintiffs’ original lawsuit against Vertical Group.
Vertical Group failed to defend against this action. The district court thus
granted, and the clerk entered, an order of default. The court did not award damages
at that time. Shortly thereafter, Nathan filed for Chapter 11 bankruptcy, and the
district court statistically closed this matter until Nathan’s bankruptcy was resolved.
Nathan proposed a Chapter 11 plan that would settle the plaintiffs’ claims
against him. The plaintiffs objected to this plan and brought an adversary proceeding
against Nathan, incorporating their allegations from the complaint in this case and
asserting that their claims against Nathan were non-dischargeable. After holding a
trial on these issues, the bankruptcy court found that the plaintiffs’ claims against
Nathan were non-dischargeable and rejected Nathan’s Chapter 11 plan. Cutcliff v.
Reuter (In re Reuter), 427 B.R. 727, 737-38, 779-80 (Bankr. W.D. Mo. 2010), aff’d,
443 B.R. 427, 438 (B.A.P. 8th Cir. 2011), aff’d, 686 F.3d 511, 520 (8th Cir. 2012).
The bankruptcy court awarded actual and punitive damages to the plaintiffs for their
claims against Nathan. Id. at 766-68, 779. The court also determined that Nathan’s
bankruptcy estate acquired his interest in the Kathleen S. Reuter Revocable Trust (the
“Kathleen Trust”), a trust into which Nathan and his wife, Kathleen Reuter, had
transferred assets before his bankruptcy was filed. Id. at 768-69, 774-75. At that
juncture, the court declined to opine on the “specific value of [Nathan’s] interest in
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the [property in the trust] or how that value will be realized.” Id. at 779. The court
later converted Nathan’s bankruptcy to a Chapter 7 bankruptcy.
The bankruptcy trustee then tried to reach the assets in the Kathleen Trust. The
court concluded that Nathan and Kathleen were co-trustees of the trust and that
Nathan’s powers as a co-trustee were the property of his bankruptcy estate. Olsen v.
Reuter (In re Reuter), 499 B.R. 655, 670-71 (Bankr. W.D. Mo. 2013). However,
Nathan lacked “the authority to carry out an action as a trustee under the [Kathleen
Trust] without Kathleen’s consent,” meaning that the rights to which the bankruptcy
estate succeeded were “limited to the extent they are subject to Kathleen’s consent.”
Id. at 671. The court further concluded that only Kathleen had the power to revoke
the trust. Id. at 672, 682.
Before this ruling, the plaintiffs also sought to reach the assets in the Kathleen
Trust. They reopened this action to determine their damages and “to collect the
Vertical Group judgment from the assets of a revocable trust [i.e., the Kathleen Trust]
that has been determined to be the property of [Nathan’s] bankruptcy estate.”2 The
plaintiffs asked the district court to refer this matter to the bankruptcy court. Nathan,
who was still a party to this action, opposed this course of action. Kathleen joined
the litigation at this point due to her interests with respect to the Kathleen Trust and
likewise argued against having the bankruptcy court consider this matter. The district
court sided with the plaintiffs and referred this matter to the bankruptcy court.
After receiving affidavits and documentary proof concerning how much money
the plaintiffs lost in the investment scheme, but without conducting an evidentiary
hearing, the bankruptcy court prepared proposed findings of fact and conclusions of
2
The plaintiffs explained that they intend to reach the assets in the Kathleen
Trust by means of a creditor’s bill to pursue any assets of Vertical Group that were
transferred into the trust.
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law in which it recommended awarding actual damages, punitive damages, and
attorneys’ fees to the plaintiffs. The amount of actual and punitive damages that the
court recommended was the same amount that the court had awarded to the plaintiffs
in the bankruptcy adversary proceeding against Nathan. Nathan and Kathleen
objected to the bankruptcy court’s recommendations, and after a de novo review, the
district court adopted the bankruptcy court’s proposed findings of fact and
conclusions of law and entered a default judgment against Vertical Group. Nathan
and Kathleen each appeal. Vertical Group did not file a notice of appeal.
II. Discussion
A. Standing to Appeal
We begin with the threshold issue of Nathan’s and Kathleen’s standing to
appeal. “Ordinarily, only a party aggrieved by a judgment or order of a district court
may exercise the statutory right to appeal therefrom.” Deposit Guar. Nat’l Bank v.
Roper, 445 U.S. 326, 333 (1980). Consequently, “a litigant that is a party to the
overall case may lack standing to appeal from a judgment [concerning] a claim to
which it was not a party [where] the appellants were not personally aggrieved by the
judgment under appeal.” United States v. Northshore Mining Co., 576 F.3d 840, 846
(8th Cir. 2009) (alterations in original) (ellipsis omitted) (quoting City of Cleveland
v. Ohio, 508 F.3d 827, 836 (6th Cir. 2007)). “A party may be aggrieved by a district
court decision that adversely affects its legal rights or position vis-a-vis other parties
in the case or other potential litigants, but a ‘desire for better precedent does not by
itself confer standing to appeal.’” Custer v. Sweeney, 89 F.3d 1156, 1164 (4th Cir.
1996) (quoting HCA Health Servs. v. Metro. Life Ins. Co., 957 F.2d 120, 124 (4th Cir.
1992)).
In the unique circumstances presented here, Kathleen has standing to appeal due
to her interests with respect to the Kathleen Trust. As the bankruptcy court found,
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Kathleen is a co-trustee of the trust with the sole power to revoke it. See Mo. Rev.
Stat. § 456.8-816.24 (“[A] trustee may . . . prosecute or defend an action, claim, or
judicial proceeding in any jurisdiction to protect trust property and the trustee in the
performance of the trustee’s duties.”). In the plaintiffs’ filings before the district court
and this court, they have emphasized that they intend to use this action to reach the
assets of the Kathleen Trust. Because of the focused purpose of this action, we are
hard pressed to say that Kathleen somehow lacks standing to appeal. See City of
Cleveland, 508 F.3d at 837 (“We have little trouble concluding that the [appellant] had
‘a sufficient stake in the outcome of the controversy’ . . . . If it were not for the
[appellant], there would be no controversy in this case.” (quoting Bryant v. Yellen, 447
U.S. 352, 368 (1980))). And the parties seem to agree that the default judgment
presents a virtual certainty, rather than a remote possibility, that the plaintiffs will
pursue the assets in the Kathleen Trust. Compare Custer, 89 F.3d at 1164 (finding
standing to appeal where the order “presents a certainty, rather than a mere
hypothetical possibility, that [the appealing party] will be forced to incur considerable
expense relitigating [a claim in another case]”), with Rohm & Hass Tex., Inc. v. Ortiz
Bros. Insulation, Inc., 32 F.3d 205, 208 (5th Cir. 1994) (explaining that a speculative
concern about the eventual result of the district court’s judgment does not provide
standing to appeal). For these reasons, we conclude that Kathleen has standing to
appeal the district court’s judgment.
The trust documents also designated Nathan as a co-trustee of the Kathleen
Trust. But Nathan does not argue that this fact means that he is aggrieved by the
default judgment against Vertical Group. The bankruptcy court has determined that
Nathan’s powers as a co-trustee became the property of his bankruptcy estate.
Because “[t]he [bankruptcy] trustee is the ‘legal representative’ of the bankrupt estate,
with the capacity to sue and be sued,” Vreugdenhil v. Hoekstra, 773 F.2d 213, 215 (8th
Cir. 1985), Nathan does not have standing to appeal on the same basis as Kathleen, see
Longaker v. Boston Scientific Corp., 715 F.3d 658, 662 (8th Cir. 2013) (“Because the
guaranteed payments, if due at all, are property of the bankruptcy estate, [the debtor]
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lacked standing to assert his breach of contract claim.”). Nathan offers no argument
to the contrary.
Nathan does argue that he has standing to appeal because he is a member of
Vertical Group, a limited liability company. In support of this argument, Nathan cites
three Missouri statutory provisions that discuss the powers of a member of a limited
liability company and the relationship between a member and a limited liability
company. See Mo. Rev. Stat. §§ 347.065.1, 347.069.1, 347.171. However, these
statutory provisions do not support the notion that Nathan was aggrieved by the
district court’s judgment merely by virtue of his status as a member of Vertical Group.
Cf. Conway v. Heyl (In re Heyl), 770 F.3d 729, 730 (8th Cir. 2014) (per curiam). We
therefore dismiss Nathan’s appeal for lack of standing.
B. Kathleen’s Appeal
1. “Related to” Jurisdiction
Kathleen contends that the district court erred by referring this matter to the
bankruptcy court. Congress has provided that a district court may refer certain
proceedings over which it has jurisdiction to a bankruptcy court, including those that
are “related to a case under title 11” of the United States Code. 28 U.S.C. § 157(a)
(emphasis added); see also id. § 1334(b) (“[T]he district courts shall have original but
not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in
or related to cases under title 11.”). The statute further specifies that “[a] bankruptcy
judge may hear a proceeding that is not a core proceeding but that is otherwise related
to a case under title 11.” Id. § 157(c)(1). When the bankruptcy court hears such a
proceeding, the court is to submit proposed findings of fact and conclusions of law to
the district court. Id. “[A]ny final order or judgment shall be entered by the district
judge after considering the bankruptcy judge’s proposed findings and conclusions and
after reviewing de novo those matters to which any party has timely and specifically
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objected.” Id. Whether a proceeding is “related to” a bankruptcy case is an issue that
we review de novo. GAF Holdings, LLC v. Rinaldi (In re Farmland Indus.), 567 F.3d
1010, 1016-19 (8th Cir. 2009).
A proceeding is “related to” a bankruptcy case if “the outcome of that
proceeding could conceivably have any effect on the estate being administered in the
bankruptcy.” Speciality Mills, Inc. v. Citizens State Bank, 51 F.3d 770, 774 (8th Cir.
1995) (quoting Dogpatch Props., Inc. v. Dogpatch U.S.A., Inc. (In re Dogpatch U.S.A.,
Inc.), 810 F.2d 782, 786 (8th Cir. 1987)). This broad test is met if the proceeding
“could alter the debtor’s rights, liabilities, options, or freedom of action . . . and which
in any way impacts upon the handling and administration of the bankruptcy estate.”
Id. (ellipsis in original) (quoting In re Dogpatch U.S.A., 810 F.2d at 786). “Even a
proceeding which portends a mere contingent or tangential effect on a debtor’s estate
meets this broad jurisdictional test.” Buffets, Inc. v. Leischow, 732 F.3d 889, 894 (8th
Cir. 2013) (alterations omitted) (quoting Nat’l Union Fire Ins. Co. of Pittsburgh v.
Titan Energy, Inc. (In re Titan Energy, Inc.), 837 F.2d 325, 330 (8th Cir. 1988)).
We agree with the district court that the conceivable-effects test is met here.
First, when the plaintiffs requested that this matter be referred to the bankruptcy court,
they unambiguously informed the district court of their intent to use the default
judgment against Vertical Group to reach the assets in the Kathleen Trust. And at that
time, the bankruptcy court had concluded that Nathan’s bankruptcy estate succeeded
to Nathan’s powers with respect to this trust. Second, each of the plaintiffs had filed
a proof of claim in Nathan’s bankruptcy based upon their claims against Vertical
Group, on the ground that Nathan also is liable for these claims. Because the plaintiffs
intended to use a judgment in this case to access a trust in which Nathan’s bankruptcy
estate has rights and because the plaintiffs were trying to satisfy the judgment in this
case from Nathan’s bankruptcy estate, the district court did not err by concluding that
this matter could have a conceivable effect on Nathan’s bankruptcy. See, e.g., In re
Titan Energy, 837 F.2d at 330 (“It remains to be seen whether, and to what extent,
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[this] action will affect [the debtor’s] estate. Yet, even a proceeding which portends
a mere contingent or tangential effect on a debtor’s estate meets the broad
jurisdictional test . . . .”); Buffets, 732 F.3d at 894 (“We think the court was correct that
if [a party to the action] has an enforceable indemnification claim against [the debtor],
then its claim conceivably could affect the bankruptcy.”). As a result, referring this
proceeding to the bankruptcy court was permitted by 28 U.S.C. § 157(a).
2. Calculation of Damages
Kathleen raises two objections to the award of actual and punitive damages
against Vertical Group. A district court’s determination of damages in connection
with a default judgment is reviewed for clear error. Stephenson v. Batrawi, 524 F.3d
907, 915-16 (8th Cir. 2008). The necessity of an evidentiary hearing to determine a
plaintiff’s damages is committed to the sound discretion of the district court. Id. at
916.
Kathleen asserts that the district court clearly erred in awarding damages
because Vertical Group is not responsible for the plaintiffs’ damages. Kathleen
theorizes that the evidence from Nathan’s bankruptcy case “suggests” that the
complained-of misconduct is solely chargeable to a partnership between Nathan and
Daryl Brown that is “independent” from Vertical Group. See In re Reuter, 686 F.3d
at 517 (“[I]t was not clear error for the bankruptcy court to conclude that a partnership
existed between Reuter and Brown.”). This argument requires us to examine the
distinction between facts that relate to liability and facts that relate to the amount of
damages. Once a default has been entered on a claim for an indefinite or uncertain
amount of damages, “facts alleged in the complaint are taken as true, except facts
relating to the amount of damages, which must be proved in a supplemental hearing
or proceeding.” Everyday Learning Corp. v. Larson, 242 F.3d 815, 818 (8th Cir.
2001); see also 10A Charles A. Wright et al., Federal Practice & Procedure § 2688 (3d
ed. 1998). A defaulted claim thus precludes a party from contesting the facts in the
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complaint that establish liability. The facts that relate to the amount of the plaintiff’s
damages, by contrast, are fair game.
Kathleen does her best to frame her argument in terms of the amount of the
plaintiffs’ damages. However, by contending that a separate partnership between
Nathan and Brown committed the complained-of misconduct, she is contesting
Vertical Group’s liability—i.e., whether Vertical Group engaged in misconduct in the
first place. Because Vertical Group failed to defend against this action, Kathleen
cannot now argue that Vertical Group never should have been a defendant. This
defense has been lost. See Wehrs v. Wells, 688 F.3d 886, 893 (7th Cir. 2012) (“To
permit [the defendant] to argue that [the plaintiff] should have . . . mitigate[d] his
damages would allow [the defendant] to contest his liability, rather than the extent of
the damages suffered from the injuries pled. This he may not do; a defaulting party
‘has no right to dispute the issue of liability.’” (quoting 10 James W. Moore et al.,
Moore’s Federal Practice § 55.32(1)(a) (3d. ed. 2012)); see also Stephenson, 524 F.3d
at 915 n.9. Because Kathleen is impermissibly contesting Vertical Group’s liability,
the court did not clearly err by rejecting her argument that a separate partnership is at
fault.3
Kathleen next argues that an evidentiary hearing was necessary to determine the
amount of the plaintiffs’ damages. We discern no abuse of discretion in the decision
to award actual damages without an evidentiary hearing. In connection with their
3
For the first time in her reply brief, Kathleen asserts that the plaintiffs failed
to plead that Vertical Group committed the misconduct alleged in the complaint. This
argument implicates an unsettled area of the law in our circuit. See Everyday
Learning Corp., 242 F.3d at 818 (describing as a “debatable proposition” whether “a
default judgment conclusively establishes liability, as opposed to establishing the fact
allegations in the complaint”). This provides all the more reason for us to enforce our
general rule that we do not consider an argument raised for the first time in a reply
brief. See Union Pacific R.R. Co. v. Progress Rail Servs. Corp., 778 F.3d 704, 711
n.5 (8th Cir. 2015).
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motion for damages, the plaintiffs submitted affidavits and documentary proof
evincing how much they invested in the complained-of scheme. Neither Kathleen nor
Nathan challenged the accuracy of this evidence. Because the amount of the
plaintiffs’ investments was readily discernable on the basis of undisputed evidence in
the record, it was not an abuse of discretion to award actual damages without an
evidentiary hearing. See Taylor v. City of Ballwin, 859 F.2d 1330, 1333 (8th Cir.
1988).
Whether an evidentiary hearing was necessary before awarding punitive
damages requires closer examination. We agree with Kathleen’s contention that “[a]s
a general proposition, punitive damages cannot be awarded simply on the basis of the
pleadings, but must instead be established at an evidentiary hearing held pursuant to
Fed. R. Civ. P. 55(b)(2) because they clearly are not liquidated or computable.”
Comdyne I, Inc. v. Corbin, 908 F.2d 1142, 1152 (3d Cir. 1990). However, we think
this rule is subject to at least one exception. In James v. Frame, 6 F.3d 307 (5th Cir.
1993), the Fifth Circuit affirmed an award of punitive damages without an evidentiary
hearing because of the district court’s longstanding familiarity with the matter. Id. at
310-11 (“The district judge, himself, has maintained a long and close familiarity with
the issues in this matter.”); see also Action S.A. v. Marc Rich & Co., Inc., 951 F.2d
504, 508-09 (2d Cir. 1991). In such a situation, we agree that a court “should be
trusted when [it] elects not to seek more evidence on matters with which [it] is already
familiar.” James, 6 F.3d at 311.
The district court referred this matter to the bankruptcy court because it was
handling Nathan’s bankruptcy. Not only was this referral permitted, see 28 U.S.C.
§ 157(a), but having the bankruptcy court initially consider this matter made sense
from the perspective of judicial economy. At that point, the bankruptcy court had been
handling Nathan’s bankruptcy for more than five years. More relevant here, the
bankruptcy court had conducted a trial concerning Nathan’s liability to the plaintiffs.
Consequently, when the bankruptcy court recommended awarding punitive damages
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against Vertical Group without first having an evidentiary hearing, the court was well
acquainted with the facts and the issues at stake. Indeed, the bankruptcy court already
had awarded actual and punitive damages against Nathan in the same amount that it
ultimately recommended awarding against Vertical Group. When Kathleen filed
objections with the district court regarding the recommended award of punitive
damages, she did not raise the need for an evidentiary hearing. Instead, she merely
asserted, as she does here, that the evidence from the bankruptcy adversary proceeding
against Nathan was insufficient to justify the imposition of punitive damages against
Vertical Group. Kathleen therefore appeared to recognize, as we do here, that the
bankruptcy court’s adjudication of the plaintiffs’ adversary proceeding provided the
bankruptcy court with a basis to consider whether punitive damages were justified and
in what amount. See James, 6 F.3d at 310-11. We thus find no abuse of discretion in
awarding punitive damages without an evidentiary hearing.
III. Conclusion
We dismiss Nathan’s appeal for lack of standing and affirm the district court’s
judgment as to Kathleen’s appeal.
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