Wayne Michael Putnam v. Hon Ernesto M. Scorsone Judge, Fayette Circuit Court

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WAYNE MICHAEL PUTNAM; AND
BETH DIANE GUDEMAN APPELLANTS
ON APPEAL FROM COURT OF APPEALS
V. CASE NO. 2014-CA-001635-OA
FAYETTE CIRCUIT COURT NO. 05-CI-01717
HONORABLE ERNESTO M. SCORSONE,
JUDGE, FAYETTE CIRCUIT COURT APPELLEE
AND
ESTATE OF JOSEPH WILLIAM PHELPS; MARY
MARGARET PHELPS; MELANIE McCOOL; AND
WILLIAM PHELPS, JR. REAL PARTIES IN INTEREST
MEMORANDUM OPINION OF THE COURT
VACATING AND REMANDING
This case presents the question whether judgment-debtor defendants
ordered to produce documents related to a company that they have a
substantial interest in and that they likely control have standing to challenge
the order in a writ action. The Court of Appeals concluded that they do not
because they have no concrete, personal interest in the company's documents.
This approach ignores that the discovery order is directed at the judgment-
debtor defendants, requiring them to produce the documents in question.
Because the order affects their rights and obligations, to the extent they can
even comply with it, they have standing to challenge it. For that reason, the
order of the Court of Appeals denying the petition for a writ is vacated, and this
case is remanded for further consideration.
I. Background
The Appellants, Wayne Michael Putnam and Beth Diane Gudeman, and a
third person, Stephen L. Whitman,' were officers and part-owners of two sets of
corporations. One set of corporations consisted of a series of pharmaceutical
companies that were dedicated to developing a potentially lucrative cancer drug
that appears to be undergoing FDA approval. These companies appear to have
been consolidated into CBA Pharma, Inc. The only asset owned by the company
is the cancer drug. The Appellants are not the only owners of CBA Pharma,
Inc., which has approximately 800 shareholders, though they are trustees of a
voting trust holding approximately 90% of the company's stock.
The other set of companies, consisting at present of Scientific Imaging
Technology Enterprises, Inc., Pixelvision of Oregon, Inc., and PixelVision, Inc.,
manufacture digital cameras and parts for digital cameras. These companies
were allegedly profitable through the late 1990s. The profits are alleged to have
been used to fund the pharmaceutical companies, which had no revenue
because they were in the development phase.
Joseph William Phelps became involved in a series of business
transactions with the Appellants beginning in 2001, when the camera
companies became less profitable. Specifically, Phelps provided a series of
substantial loans to the companies, which the Appellants personally
guaranteed and which were consolidated into a promissory note in 2002.
1 Whitman is not part of the litigation at this time.
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Phelps also agreed to guarantee a substantial loan from U.S. Bank, N.A. to the
camera companies, and, in turn, the Appellants agreed to a secondary
guarantee under which they would repay any amount that Phelps had to pay to
U.S. Bank. The details of these transactions are immaterial, but they are
recounted in Scientific Imaging Technology Enterprises, Inc. v. Phelps, 2011-CA-
002119-MR, 2014 WL 97393 (Ky. App. Jan. 10, 2014) (unpublished).
In 2003, Phelps entered into an agreement with the Appellants, and
some of their companies, under which he agreed to release the remaining debt
on the promissory note (which at that time was still almost $3,000,000) and to
release the Appellants from all their guarantees, both as to the direct loans
from Phelps and the loan from U.S. Bank. In exchange, Phelps received
2,000,000 shares of CBA Pharma, Inc. common stock.
As it turned out, Phelps was not well and had begun having symptoms of
dementia. He was diagnosed as having Lewy body dementia, a degenerative
neurological disease similar to Alzheimer's disease and Parkinson's disease. In
light of this diagnosis and after discovering apparently unusual dealings in
Phelps's finances, in 2004, Phelps's family contacted a lawyer to examine
Phelps's relationship with the Appellants and their companies.
In April 2005, the camera companies defaulted on the U.S. Bank loan,
and U.S. Bank initiated the underlying litigation. Phelps, the Appellants,
Whitman, and the camera companies were named as defendants. Phelps filed
an answer and cross-claim against the other defendants alleging fraud and
that he had lacked capacity to enter into the 2003 release agreement. Phelps
also moved the circuit court for leave to file a third-party complaint against the
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' pharmaceutical companies, but that was denied. The motion was made and
denied at least one more time in the course of the litigation.
Phelps died in October 2005, and his estate was substituted as a party.
Eventually, U.S. Bank also brought suit against Phelps's wife, Mary Margaret
Phelps; his daughter, Melanie McCool; and his son, William Phelps, Jr.;
claiming they had participated in fraud in obtaining an extension of the
substantial loan from U.S. Bank. They counterclaimed for abuse of process.
Eventually, U.S. Bank settled with the estate and the named members of
the Phelps family. The bank assigned its interest in its loan to the Phelps
family. In exchange, the bank was paid $675,000, and the family dropped their
counterclaims. The settlement agreement also provided that 20% of any money
recovered based on the bank's assigned rights would be paid to the bank. This,
in effect, made the estate and the family the plaintiffs in the underlying action,
leaving the Appellants, Whitman, and the camera companies as the
defendants.
The case went to trial on the Phelps family's fraud and incapacity claims
and for collection of amounts owed on the promissory note and the U.S. Bank
loan. The trial court granted a directed verdict in the family's favor as to the
enforceability of the loans, reserving the question of damages. The jury found
that Phelps lacked capacity to enter into the 2003 release agreement and did
not reach the fraud claim. The circuit court entered a judgment against the
Appellants, Stephen Whitman, and the camera companies in an amount
exceeding $12,000,000. This judgment, except for $675,000, was affirmed by
the Court of Appeals, Scientific Imaging Technology Enterprises, Inc. v. Phelps,
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2011-CA-002119-MR, 2014 WL 97393, at * (Ky. App. Jan. 10, 2014)
(unpublished), and this Court declined discretionary review.
The Phelps family then began trying to collect from the judgment
debtors. As part of this effort, they served a series of post-judgment discovery
requests. Eventually, in 2014, the circuit court entered a discovery order
commanding
that the Judgment Debtors shall produce to the Judgment
Creditors within ten ... days of the date of entry of this Order the
following information and documents: The name, address, type of
account, name of account and account number of any bank or
other institution at which any business in which the Judgment
Debtors Michael Putnam and Beth Diane Gudeman have an
interest maintains any type of account; and the production of bank
statements and accounts receivable and payable ledgers for such
businesses for the years 2001-2005 and the past year.
Such documents may be produced subject to the Agreed
Protective Order and Confidentiality Agreement submitted by the
parties.
Concerned that this order would lead to the production of irrelevant
information about the pharmaceutical companies, particularly CBA Pharma,
Inc. (and, apparently, sensitive information about the company that could help
its competitors), the Appellants filed a petition for a writ of prohibition with the
Court of Appeals seeking to bar enforcement of the order. The Court of Appeals
did not address whether the remedy of a writ was available under the
procedural test laid out in Hoskins v. Maricle, 150 S.W.3d 1 (Ky. 2004), nor did
it address the substantive question whether the lower court was acting
erroneously. Instead, the court denied the petition on the ground that the
Appellants lacked standing because they were named only in their individual
capacities, the pharmaceutical companies were not named parties, and thus
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the Appellants "ha[d] not demonstrated a personal and concrete interest in the
records of CBA Pharma."
The Appellants now appeal to this Court. Because a writ petition filed in
the Court of Appeals is an original action in that court, the Appellants' appeal
to this Court is a matter of right. See CR 76.36(7)(a) ("An appeal may be taken
to the Supreme Court as a matter of right from a judgment or final order in any
proceeding originating in the Court of Appeals."); Ky. Const. § 115 ("In all
cases, civil and criminal, there shall be allowed as a matter of right at least one
appeal to another court....").
IL Analysis
The Court of Appeals' conclusion about the Appellants' standing is
incorrect for several reasons. The most important of these is that the circuit
court's discovery order is directed at the Appellants, as "Judgment Creditors,"
not CBA Pharma. Though the order may have an effect on CBA Pharma, it will
do so through the Appellants' interest in the company and possession or
control over the documents ordered to be disclosed.
The Phelps family claims there is keen irony in the Appellants' having
fought throughout the litigation to keep CBA Pharma out of the underlying
litigation as a named party, and their now seeking to assert that they have a
concrete and personal interest in the records of the company. Ironic though
this may be, it is not an irrational position to take in that the discovery order
itself is directed to the Appellants, not CBA Pharma. To the extent that the
discovery order—which aims to force disclosure of a third party's documents-
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is directed at the Appellants, they have standing to try to resist the order
through legal means of redress, such as a writ petition.
In support of its decision, the Court of Appeals cited Commonwealth ex
rel. Brown v. Interactive Media Entertainment and Gaming Association, Inc., 306
S.W.3d 32 (Ky. 2010), in which we stated: "Writs are to be granted only as an
extraordinary remedy, and certainly only when parties who have demonstrated
a concrete interest are before the court." Id. at 40. It is certainly true that a writ
petitioner must have a concrete interest at stake. But that case is not
analogous to this one. In that case, the underlying litigation was a forfeiture
action. A pair of trade associations claimed to represent various owners of
property at issue in the underlying litigation and tried to appear in the
litigation on the owners' behalf, but they were unwilling to reveal the identity of
those owners. This Court concluded that the trade associations had not
established standing because they had not established that they were acting on
behalf of anyone with anything at stake in the litigation.
But in this case, the Appellants are not trying to intervene in the
litigation on behalf of CBA Pharma. Instead, the Appellants are the named
defendants, against whom a judgment has been rendered and against whom
discovery has been ordered. If anything, this could suggest that the circuit
court's discovery order is too broad to the extent that it arguably tries to bind a
non-party.
That said, this Court has held that discovery may extend to the records
of a non-party where "the documents sought were 'in the possession, custody
or control of the party upon whom the request is served."' Edwards v.
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Hickman, 237 S.W.3d 183, 189 (Ky. 2007) (quoting CR 34.01). And the
Appellees have alleged, repeatedly, that CBA Pharma is under the Appellants'
control. As in Edwards, the discovery requests here were served on the named
parties, the Appellants, and the discovery order purported to bind them. Of
course they have standing to challenge that order—to the extent it can bind
them.
The Court of Appeals' approach to standing here is unusual. On the one
hand, the trial court may order discovery only as to documents under a party's
control, which may in this case extend to records of CBA Pharma. On the other
hand, the Court of Appeals presumed that because the records in question
were those of a third party, the Appellants had no standing to seek a writ to
undo the discovery order. But both of those things cannot be correct. The
Appellants cannot be subject to the discovery order and have no standing to
challenge it.
No doubt, questions of standing can be difficult at times. That is one of
the reasons that this Court has held that standing may not be raised by a
court sua sponte, Harrison v. Leach, 323 S.W.3d 702, 709 (Ky. 2010), as it
appears to have been here. Where the issue is not fully litigated by the parties,
there is too much danger of error based on incorrect assumptions about the
relationships between the parties and third parties. Under Harrison, even if the
Court of Appeals had been correct on the substance of the standing question, it
had no power to raise the issue sua sponte. Since the Phelps family did not
raise it, it is considered waived.
Finally, because the Court of Appeals denied the petition on standing
grounds, it never reached the merits of the petition, namely, whether the
Appellants have satisfied the tests for availability of a writ of prohibition laid
out in Hoskins v. Maricle, 150 S.W.3d 1 (Ky. 2004), and subsequent cases, and,
if so, whether the lower court erred and a writ should issue. Because a writ
action is an original action in the Court of Appeals, at least when the writ is
sought against a circuit court judge, the appropriate forum for consideration of
those questions for the first time is the Court of Appeals. We therefore decline
to address them at this time.
III. Conclusion
The Court of Appeals was incorrect in deciding that the Appellants had
no standing to challenge the trial court's post-judgment discovery order. That
was the sole basis of the court's decision, which did not reach the traditional
questions of whether a writ was even available as a remedy and, if it was,
whether the writ should issue. The Court of Appeals' order denying the writ
petition is vacated, and this matter is remanded to that court for further
consideration of the Appellants' petition.
Minton, C.J.; Abramson, Cunningham, Keller, Noble and Venters, JJ.,
sitting. All concur. Wright, J., not sitting.
COUNSEL FOR APPELLANTS:
Denise Duane Cook
John Milton Sosbe
Duane Cook 86 Associates, PLC
135 N. Broadway
Georgetown, Kentucky 40324
APPELLANT:
Honorable Ernesto M. Scorsone
Judge, Fayette Circuit Court Court
Robert F. Stephens Courthouse
120 N. Limestone
Lexington, Kentucky 40507
COUNSEL FOR REAL PARTIES IN INTEREST:
Sam Preston Burchett
200 West Vine Street, #720
Lexington, Kentucky 40507
William Joseph Walsh IV
Buchenberger Walsh, PLLC
2010 Edgeland Avenue
Louisville, Kentucky 40204
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