BETH A. BUCHANAN, Bankruptcy Judge.
Prior to the petition date, the creditor obtained a default judgment in state court against the debtor's company for breach of contract and against the debtor and his company for fraud related to a construction contract. The debtor appealed the entry of the default judgment to the state appellate court, which court affirmed the judgment. The creditor filed this adversary proceeding seeking a determination that the default judgment is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2) and (6).
In connection with his answer to the non-dischargeability complaint, the debtor filed counterclaims against the creditor for breach of contract and unjust enrichment. The creditor asks this court to dismiss the debtor's counterclaims for breach of contract and unjust enrichment on the basis that the debtor had an opportunity to raise these claims as part of the state court action but failed to do so; therefore, the debtor is now precluded from doing so in this non-dischargeability action. The creditor further seeks summary judgment on his § 523(a)(2) claim on the grounds that the debtor is precluded from relitigating the issue of fraud before this court based on the state court's finding of fraud in the default judgment.
This court finds that the debtor is precluded, under the doctrine of claim preclusion, from asserting the counterclaims in this non-dischargeability action because the default judgment is a final decision on the merits by the state court that involves the same parties and the same nucleus of facts and the debtor could have raised the counterclaims in the state court action. The creditor, however, is not entitled to summary judgment on his § 523(a)(2) claim under the doctrine of issue preclusion. While the default judgment satisfies three of the four requirements for issue preclusion, this court is unable to determine from the default judgment, in considering the state court record as a whole, the extent of the state court's finding of fraud or the amount of damages attributed to such fraud. Construing the facts in the light most favorable to the debtor, the creditor has failed to meet his burden to establish that the issue of fraud was actually and directly litigated in the state court to the degree of specificity needed to warrant summary judgment on the grounds of preclusion.
This matter is before this Court on Nicholas Yust's ("Yust") Motion to Dismiss Counterclaims [Docket Number 14] (the "Motion to Dismiss"), Daniel W. Henkel's (the "Debtor" or "Henkel") Objection to Plaintiffs Motion to Dismiss Counterclaims [Docket Number 17] and Yust's Reply in Support of His Motion to Dismiss Counterclaims [Docket Number 18].
Also before this Court is Yust's Motion for Summary Judgment [Docket Number 19] (the "Motion for Summary Judgment "), the Debtor's Memorandum in Response [Docket Number 21], Yust's Reply Memorandum in Support [Docket Number 23], Yust's Notice of Filing Copy
The debt at issue in this adversary proceeding arose by way of a default judgment (the "Default Judgment") issued by the Hamilton County, Ohio Court of Common Pleas (the "State Court" and the "State Court Action") on May 20, 2011 stemming from a complaint ("State Court Complaint") by Yust against the Debtor and the Debtor's business, Henkel Design-Build, Inc. ("Henkel Design"). In the State Court Complaint, Yust alleges that he and Henkel Design entered into a contract (the "Contract") pursuant to which Henkel Design,
Issues arose during the course of the Contract, ultimately giving rise to the State Court Action. Specifically, Yust alleged in the State Court Complaint that Henkel Design failed to use commercially reasonable efforts to complete the construction project resulting in the project being behind schedule and coming in at a cost significantly in excess of the Contract budget. Yust further alleged that Henkel Design submitted fraudulent draw requests
At the Default Judgment Hearing, the Magistrate found, after reviewing the record and questioning Yust and his counsel, that the Debtor was properly served with the State Court Complaint and summons on August 20, 2010 at the Zig Zag Road and Eagles Lake Drive, Cincinnati, Ohio addresses listed for service in the record. The Magistrate also heard testimony from Yust regarding his understanding of the business structure and operations of Henkel Design, the formation of the Contract, matters leading up to Yust's termination of the Contract, matters relating to alleged fraud in connection with certain draw requests and damages associated with completing the construction project.
As relates to the issue of fraud, Yust testified that Henkel Design falsely represented in connection with the first three draw requests submitted to and paid by the Bank that subcontractors had been paid when Yust later had to directly pay several of these same subcontractors for the work already performed. Yust also testified that his signature was forged on a $950 change order dated July 16, 2009 (the "July 2009 Change Order"), which was also signed by the Debtor as president of Henkel Design and submitted to the Bank for payment. Lastly, Yust testified regarding a $5,718 invoice from Bolton Bros. Concrete dated November 24, 2009 (the "Bolton Bros. Invoice"), which Henkel Design submitted as part of the Fourth Draw Request. Yust stated that the Bolton Bros. Invoice submitted with the draw request was inflated by approximately $1,000 when compared to the original Bolton Bros. Invoice provided to him by Bolton Bros. Concrete, which original invoice was dated the same date as the invoice submitted with the draw request but reflected an invoice amount of only $4,715.
The Magistrate admitted the following exhibits into evidence at the Default Judgment Hearing, which exhibits were introduced in connection with Yust's testimony:
Exhibit A The Contract
Exhibit B A January 5, 2009 e-mail from Henkel Design to Yust with a copy of the
Contract attached
Exhibit C The July 2009 Change Order
Exhibit D The Bolton Bros. Invoice
Exhibit E The original Bolton Bros. Invoice
IT IS SO ORDERED.
On February 24, 2011, approximately two weeks after the entry of the Magistrate's Decision, the Debtor — who had by this time obtained counsel — filed both an objection to and a motion to dismiss and vacate the Magistrate's Decision. In support thereof, the Debtor asserted that the State Court lacked subject matter jurisdiction over the dispute since the Contract provided that all controversies relating to the Contract must be settled by arbitration. The Debtor further argued that the State Court lacked personal jurisdiction over him since he was not properly served with the State Court Complaint and summons. The Debtor filed an affidavit in support of his objection and motion to dismiss, which provides as follows regarding the issue of service:
After a hearing on March 28, 2011, Judge Steven E. Martin (the "State Court Judge") overruled both the Debtor's objection and motion to dismiss by letter to counsel dated April 27, 2011. The State Court Judge concluded that the Debtor had not timely exercised his rights under the arbitration clause of the Contract and further found that the Debtor was properly served with the State Court Complaint based on the record. The State Court Judge subsequently entered the Default Judgment, which incorporated these findings and adopted the Magistrate's Decision.
The Debtor filed an appeal of the Default Judgment with the Court of Appeals for the First District of Ohio (the "State Appellate Court") on June 22, 2011. The State Appellate Court issued an opinion affirming the Default Judgment on January 18, 2013.
On September 13, 2011, the Debtor filed his Chapter 7 petition. Yust initiated this adversary proceeding against the Debtor on December 20, 2011 by way of a Complaint to Determine Dischargeability of Debt (the "Bankruptcy Complaint"), which substantially incorporates the facts alleged in the State Court Action. By the Bankruptcy Complaint, Yust seeks a determination that the debt adjudicated in the State Court Action is nondischargeable pursuant to § 523(a)(2), (4) and (6) of the United States Bankruptcy Code.
In his Amended Bankruptcy Complaint, Yust focuses on three events that he asserts substantiate his claim that the Default Judgment is nondischargeable. The first relates to Yust's allegation that the Debtor forged Yust's signature on the July 2009 Change Order. The second relates to the Third Draw Request and Yust's allegation that the Debtor falsely represented to the Bank that all work covered by the
The Debtor filed an answer to the Amended Bankruptcy Complaint on April 13, 2012, setting forth a variety of defenses and also asserting two counterclaims against Yust (the "Counterclaims"). The Debtor's first counterclaim is for breach of contract, alleging that Yust owes the Debtor an amount to be determined at trial under the Contract based on unpaid invoices, contractor fees as related to cost overruns, unbilled monies for labor and materials and appearances at zoning hearings and other meetings. The second counterclaim is for unjust enrichment. The Debtor seeks damages, a complete discharge of any alleged obligations owed to Yust, attorney fees and costs. Yust thereafter filed the Motion to Dismiss the Counterclaims and the Motion for Summary Judgment.
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(C) and (I).
Yust maintains that under the doctrine of res judicata, or claim preclusion, the Debtor's Counterclaims should be dismissed pursuant to Civil Rule 12(b)(6)
Under the related doctrine of collateral estoppel, or issue preclusion, Yust asserts he is entitled to summary judgment pursuant to Civil Rule 56
To survive a motion to dismiss pursuant to Civil Rule 12(b)(6) for failure to state a claim upon which relief can be granted, a complaint must contain factual allegations that are "enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (internal citations omitted). The defendant bears the
Civil Rule 56(a) provides that a "court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A "genuine" dispute exists only where "evidence is such that a reasonable [finder of fact] could return a [judgment] for the non-moving party." See id.; Gallagher v. C.H. Robinson Worldwide, Inc., 567 F.3d 263, 270 (6th Cir.2009). In reviewing a motion for summary judgment, this Court must view all inferences to be drawn from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Anthony v. BTR Auto. Sealing Sys., Inc., 339 F.3d 506, 511 (6th Cir.2003).
"One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses." Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). As such, the summary judgment process should not be regarded "as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed `to secure the just, speedy and inexpensive determination of every action.'" Id. at 321, 106 S.Ct. 2548 (citing Fed. R.Civ.P. 1).
Pursuant to 28 U.S.C. § 1738, federal courts must give the same "full faith and credit" to a state court judgment as would be given that judgment under the law of the state in which it is rendered. Corzin v. Fordu (In re Fordu), 201 F.3d 693, 703 (6th Cir.1999) (comparing claim preclusion and issue preclusion under Ohio law). "When a federal court is asked to give preclusive effect to a state court judgment, the federal court must apply the law of the state in which the prior judgment was rendered in determining whether and to what extent the prior judgment should be given preclusive effect in a federal action." Id. (citations omitted). Thus, in order for the Default Judgment to carry preclusive weight in the instant adversary proceeding, "it must be entitled to such effect under Ohio's preclusionary principles." Chandler v. Alexakis (In re Alexakis), 2012 Bankr.LEXIS 4164, at *9 (Bankr.S.D.Ohio Sept. 6, 2012). The party seeking to invoke issue preclusion has the burden to establish its applicability. Winget v. JP Morgan Chase Bank, N.A., 537 F.3d 565, 572 (6th Cir.2008)(discussing claim preclusion); Simmons Capital Advisors, Ltd. v. Bachinski (In re Bachinski), 393 B.R. 522, 535 (Bankr.S.D.Ohio 2008) (discussing issue preclusion).
"`Claim preclusion generally refers to the effect of a judgment in foreclosing litigation of a matter that never has been litigated, because of a determination that it should have been advanced in an earlier suit.'" In re Fordu, 201 F.3d at 703 (quoting Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 77 n. 1, 104 S.Ct. 892,
Hapgood v. City of Warren, 127 F.3d 490, 493 (6th Cir.1997) (citations omitted).
In comparison, "[i]ssue preclusion refers to the effect of a judgment in foreclosing relitigation of a matter that has been actually litigated and decided." In re Fordu, 201 F.3d at 703 (citing Migra, 465 U.S. at 77 n. 1, 104 S.Ct. 892). Under Ohio law, the doctrine of issue preclusion has four elements:
Sill v. Sweeney (In re Siveeney), 276 B.R. 186, 189 (6th Cir. BAP 2002) (citations omitted).
While the two doctrines have separate requirements, each embodies the fundamental principle that a "right, question or fact distinctly put in issue and directly determined by a court of competent jurisdiction... cannot be disputed in a subsequent suit between the same parties or their privies...." In re Fordu, 201 F.3d at 703 (internal quotation marks and citations omitted). Both doctrines "serve the necessary function of conserving judicial and litigant resources and minimize the possibility of inconsistent decisions." Id. (citations omitted).
The first element of claim preclusion looks to whether there is a prior final decision on the merits. As to this element, it is well-settled law in Ohio that a default judgment carries the weight of a final decision on the merits that may serve to bar later claims. See Frazier v. Matrix Acquisitions, LLC, 873 F.Supp.2d 897, 901 (N.D.Ohio 2012) (collecting cases). The conclusive character of a default judgment — like any other final judgment — is not changed by a litigant's pursuit of its appellate rights. "It is well established that when a judgment has been vacated, reversed, or set aside on appeal, it is thereby deprived of all conclusive effect, both as res judicata and as collateral estoppel." State v. Baron, 156 Ohio App.3d 241, 249, 805 N.E.2d 173 (2004) (citing Erebia v. Chrysler Plastic Prods. Corp., 891 F.2d 1212, 1215 (6th Cir.1989)). Until such time as a decision is made on appeal, however, a final judgment retains its preclusive effect. Id; see also Ashley v. Ashley, 118 Ohio App. 155, 160, 193 N.E.2d 535 (1962) ("The pendency of an appeal does not necessarily prevent the application of the principle of res judicata because jurisdiction of the cause of action involving the adjudicated issue remains in the court of first instance which excludes jurisdiction of the court having before it the same issue in a second action.").
The Default Judgment in this case has not been vacated, reversed, or set aside on appeal; rather it was affirmed by the State Appellate Court. As such, the Default
The second element of claim preclusion, which looks to whether the prior action and the subsequent action involve the same parties, is also met. Yust and the Debtor are parties in this adversary proceeding and were likewise parties in the State Court Action.
The third element of claim preclusion looks to whether the later action raises claims that were or could have been litigated in the first action. "The scope of claims covered by this prong is quite broad, [extending] not only [to] relitigation of a claim previously adjudicated; [but also to litigation of] a claim or defense that should have been raised, but was not, in the prior suit." Frazier, 873 F.Supp.2d at 902 (internal citations, quotation marks and alterations omitted) (emphasis in original). Yust argues that the Debtor's Counterclaims for breach of contract and unjust enrichment are claims that could have, and should have, been raised as counterclaims in the State Court Action.
Under Ohio law, a litigant is required to plead as a compulsory counterclaim any claim that arises out of the same "transaction or occurrence that is the subject matter of the opposing party's claim." Ohio R. Civ. P. 13(A); see also Astar Abatement, Inc. v. Cincinnati City Sch. Dist. Bd. of Educ., 2012 U.S. Dist. LEXIS 18422, at *18, 2012 WL 481799, at *6 (S.D.Ohio Feb. 14, 2012) (citing Grava v. Parkman Twp., 73 Ohio St.3d 379, 382, 653 N.E.2d 226 (1995)). To determine whether a counterclaim arises from the same transaction or occurrence as the opposing party's claim, courts generally consider whether the claims involve a "common nucleus of operative facts" or share the same legal issues such that there is a "logical relationship" between the claims. Id. (citations omitted). Failure to assert a compulsory counterclaim in a prior action bars a litigant from asserting such claim in subsequent litigation based on the doctrine of claim preclusion. Id. This same principle applies to actions in which a default judgment was entered against the party later seeking to raise a claim that should have been asserted in the prior litigation. Id. (citing Broadway Management, Inc. v. Godale, 55 Ohio App.2d 49, 378 N.E.2d 1072 (1977)).
The breach of contract and unjust enrichment claims that the Debtor raises as Counterclaims in this adversary proceeding directly relate to the Contract, which was likewise the subject of the State Court Action. There is a logical relationship between the Debtor's Counterclaims and the claims asserted by Yust in the State Court Action since they involve related factual and legal issues and each "seek[s] to redress the same basic wrong." Id. As such, it seems evident that the Debtor's Counterclaims qualify as compulsory counterclaims. The Debtor in fact admits as much. See Counterclaim, ¶¶ 2, 9 (stating that the Counterclaims arise from the same nucleus of operative facts as the Amended Bankruptcy Complaint and are compulsory counterclaims pursuant to Bankruptcy Rule 7013).
The Debtor nonetheless maintains that he could not have brought the Counterclaims in the State Court Action because he was not properly served with the State Court Complaint. The Debtor argues that defenses or issues — such as the Counterclaims — must be "actually litigated and determined in an earlier action and [be] necessary to the judgment" for the doctrine of
Finally, the fourth element of claim preclusion, which requires that the second action arise out of the transaction or occurrence that was the subject matter of the previous action, is also satisfied. Both this adversary proceeding and the State Court Action relate to the parties' transactions arising out of the Contract.
For the foregoing reasons, this Court finds that the Debtor's Counterclaims are barred by the doctrine of claim preclusion. Accordingly, the Motion to Dismiss is GRANTED.
The issue in this adversary proceeding is whether the Debtor owes a nondischargeable debt to Yust pursuant to § 523(a)(2)(A) of the Bankruptcy Code for money obtained by false pretenses, false representations or actual fraud. In the State Court Action, Yust likewise alleged and the State Court held that the Debtor was liable to Yust for fraud under Ohio common law.
A finding of fraud under § 523(a)(2)(A) of the Bankruptcy Code requires proof of the following elements by a preponderance of the evidence:
Renibert v. AT & T Universal Card Sews., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir.1998), cert. denied, 525 U.S. 978, 119 S.Ct. 438, 142 L.Ed.2d 357 (1998) (discussing the elements of false representation). In comparison, to prevail on a common law fraud claim under Ohio law, a plaintiff must prove the following elements by a preponderance of the evidence:
Passa v. City of Columbus, 748 F.Supp.2d 804, 814 (S.D.Ohio 2010) (citing Groob v. KeyBank, 108 Ohio St.3d 348, 357, 843 N.E.2d 1170 (2006)) (additional citations omitted). Because the elements of the claim asserted in this adversary proceeding under § 523(a)(2)(A) of the Bankruptcy Code and the elements of the claim asserted in the State Court Action for fraud under Ohio law are virtually identical, Yust has established the third requirement for issue preclusion. Ed Schory & Sons, Inc. v. Francis (In re Francis), 226 B.R. 385, 389 (6th Cir. BAP 1998) (holding that "the bankruptcy court properly found that the elements of a dischargeability claim under 11 U.S.C. § 523(a)(2)(A) are virtually identical
With respect to the fourth element of issue preclusion — relating to the relationship between the parties in the prior action compared to the parties in the present action — the facts of this case clearly reflect that the Debtor was a party in the prior State Court Action as well as this adversary proceeding; therefore, Yust has established the fourth requirement for issue preclusion.
The first and second elements of issue preclusion, however, warrant more extensive examination.
To satisfy the first requirement for issue preclusion under Ohio law, there must be a final judgment on the merits in a previous case after a full and fair opportunity to litigate the issue. In re Sweeney, 276 B.R. at 189. As was the case for purposes of claim preclusion, the Default Judgment also is considered a final judgment on the merits for purposes of issue preclusion. See Wagner v. Schulte (In re Schulte), 385 B.R. 181, 190 (Bankr. S.D.Ohio 2008).
As to the latter requirement, the "full and fair opportunity to litigate" element of the issue preclusion doctrine "is rooted in due process concerns." S. All, Neurology and Pain Clinic, P.C. v. Lupo (In re Lupo), 353 B.R. 534, 553 (Bankr. N.D.Ohio 2006) (internal quotation marks and citations omitted) (analyzing Georgia law); see also In re Sweeney, 276 B.R. at 191 (discussing due process concerns regarding default judgments in the context of issue preclusion under Ohio law); Goodson v. McDonough Power Equip., Inc., 2 Ohio St.3d 193, 200-01, 443 N.E.2d 978, 985 (1983) ("The main legal thread which runs throughout the determination of the applicability of res judicata, inclusive of the adjunct principle of collateral estoppel, is the necessity of a fair opportunity to fully litigate and be `heard' in the due process sense."). To trigger the "full faith and credit" statutory directive of 28 U.S.C. § 1738, "state proceedings need do no
The Debtor argues that he did not have a full and fair opportunity to litigate the issue of fraud in the State Court Action because he was not properly served with the State Court Complaint. The Debtor looks to In re Sweeney as support for his position that this Court should convene an evidentiary hearing to independently examine the issue of service. In re Sweeney, however, is distinguishable from this case in two material respects. First, the debtor in In re Stveeney asserted that he "was completely ignorant of the [state court] litigation" until after the Default Judgment was entered. In re Stveeney, 276 B.R. at 189-90. In contrast, the Debtor in this case fully acknowledges that he had actual notice of the State Court Action prior to the Default Judgment Hearing. Indeed, the Debtor filed a pro se motion requesting an extension of time in which to respond to the motion for default judgment and to retain counsel. The Debtor's prior notice of the Default Judgment Hearing — and thereby notice of the existence of the State Court Action — supports a finding that the Debtor was afforded an opportunity to participate at the Default Judgment Hearing with respect to the determination of whether the Debtor was liable to Yust for fraud. In re Lupo, 353 B.R. at 553-54 (observing that "the key to [the] full and fair opportunity analysis is determining whether the party had adequate notice of the issue and was afforded the opportunity to participate in its determination" and concluding that this standard was satisfied where a default judgment against the debtor's corporation resulted from the debtor and his corporation's "own failure to act, not from a lack of opportunity to litigate the issue") (internal quotation marks and citations omitted); State v. Foster (In re Foster), 280 B.R. 193, 206 (Bankr.S.D.Ohio 2002) (finding that under' Ohio law, "if a party is afforded an opportunity to litigate disputed issues of fact and elects not to participate fully in the proceeding, that tactical decision will not prevent the application of preclusion principles in a subsequent action"); Hawkins Pro-Cuts, Inc. v. Garcia, 1998 Ohio App. LEXIS 96, at *13, 1998 WL 12652, at *5 (Ohio Ct.App. Jan. 16, 1998) (concluding that constitutional due process rights were not violated where defendant had actual notice of the declaratory judgment action before the state court granted the default judgment) (citing Palazzi v. Estate of Gardner, 32 Ohio St.3d 169, 174, 512 N.E.2d 971 (1987)); cf. United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 1378, 176 L.Ed.2d 158 (2010) ("Due process requires notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections. Here, [the creditor] received actual notice of the filing and contents of [the debtor's]
While the Debtor's pro se status and his misunderstanding of the consequences of his failure to appear at the Default Judgment Hearing may have established grounds to set aside the Default Judgment for excusable neglect, this case again differs from In re Sweeney in that State Court has already made a determination — not once but three times — that service of the State Court Complaint was nonetheless proper. In essence, this creates a second question of issue preclusion pertaining to the State Court's determination that service was proper. With respect to that inquiry, the third and fourth elements of issue preclusion are satisfied in that the issue of service was raised in both this adversary proceeding and the State Court Action and Yust and the Debtor were parties in both actions. The first and second elements of issue preclusion are also satisfied in that the State Appellate Court decision is a final judgment after the Debtor had a full and fair opportunity to litigate the issue of service and the issue of service was actually and directly litigated in the prior suit and was necessary to the final judgment.
Specifically, the Magistrate found at the Default Judgment Hearing that the Debtor was properly served with the State Court Complaint and summons on August 20, 2010 at the Zig Zag Road and Eagles Lake Drive, Cincinnati, Ohio addresses listed for service. The Debtor, at which point was now represented by counsel, filed an objection to and motion to dismiss the Magistrate's Decision. In connection with the objection and motion to dismiss, the Debtor submitted an affidavit which stated that the Debtor resided "intermittently" at the Zig Zag Road address between the summer of 2009 and the fall of 2010 and that he also resided with his sister in Covington, Kentucky during this timeframe. The Debtor further averred that he "left the state of Ohio for a construction project in South Carolina between July 30, 2010 and August, 2010." Id. The State Court Judge, after considering the parties' briefs and oral argument on the issue of service, issued the Default Judgment overruling the Debtor's objection and denying his motion to dismiss, having concluded that the Debtor was properly served.
On appeal, the State Appellate Court noted that:
State Appellate Court Decision. In affirming the Default Judgment, the State Appellate Court concluded that the Debtor "did not rebut the presumption of proper service." This conclusion is supported by the Debtor's own affidavit, which states that he resided at the Zig Zag Road address — albeit "intermittently" — during the period of time that the State Court found that service was properly effectuated. Accordingly, this Court finds that the State Court's determination that service was proper is entitled to full faith and credit under 28 U.S.C. § 1738 and the Debtor is precluded from re-litigating this issue. Correspondingly, because service was sufficient in the State Court Action, the Debtor had a full and fair opportunity to litigate
The second element of the issue preclusion analysis requires a determination of whether the issue sought to be precluded — in this instance, fraud under § 523(a)(2)(A) — was "actually and directly litigated in the prior suit" and if the adjudication of that issue was "necessary to the final judgment." Noting that Ohio courts have not agreed on whether or how to apply issue preclusion standards to default judgments, the Sixth Circuit Bankruptcy Appellate Panel concluded that the rule to be gleaned from the limited Ohio case law on this subject "is that a default judgment must contain express findings in order to be given preclusive effect in subsequent litigation between the parties" and adopted the following test to determine whether an issue was "actually and directly litigated" in the context of default judgments:
In re Sweeney, 276 B.R. at 193-94 (quoting Hinze v. Robinson (In re Robinson), 242 B.R. 380, 387 (Bankr.N.D.Ohio 1999)) (emphasis in original). In adopting this approach, the Bankruptcy Appellate Panel explained that:
Id. at 194.
The Debtor raises several arguments as to why the issue of fraud was not "actually and directly litigated" in the State Court Action. First, the Debtor asserts that the Default Judgment was premised on a faulty complaint because the fraud allegation was not sufficiently pled in the State Court Complaint as required by the rules of civil procedure. In particular, the Debtor contends that the State Court Complaint is deficient in that it fails to specify which draw requests, change orders or invoices were allegedly fraudulent, who committed the fraud and when it was committed.
Rule 9(B) of the Ohio Rules of Civil Procedure ("Rule 9(B)"), like Rule 9(B) of the Federal Rules of Civil Procedure, requires that allegations of fraud and circumstances constituting fraud must be pled with particularity. Ohio R. Civ. P. 9(B). Interpreting the requirements of Rule 9(B), Ohio courts note that "[t]he `circumstances constituting fraud' to which Civ. R. 9(B) refers normally include the time, place and content of the false representation, the fact misrepresented, and the nature of what was obtained or given as a consequence of the fraud." Baker v. Con-Ian, 66 Ohio App.3d 454, 458, 585 N.E.2d 543 (Ohio Ct.App.1990) (citations omitted). Ohio courts determine on a case by case basis whether a pleading contains the appropriate degree of specificity where a claim of fraud is asserted. Id,
Ohio courts also note, however, that "[t]he Civ. R. 9 requirement of particularity must be applied in conjunction with the general directives in Civ. R. 8 that the pleadings shall contain `a short and plain statement of the claim' and that each averment should be `simple, concise, and direct.'" In balancing these dual requirements, Ohio courts observe that:
F & J Roofing Co. v. McGinley & Sons, Inc., 35 Ohio App.3d 16, 17, 518 N.E.2d 1218 (1987) (ellipses and citations omitted).
While the State Court Complaint may be less than ideal, it nonetheless satisfies the requirements of Rule 9(B) as interpreted by Ohio courts. Yust's fraud claim is premised on allegedly false representations made by Henkel Design to Yust and his Bank pertaining to certain draw requests submitted in connection with the Contract. Complaint, 1150. The State Court Complaint describes three categories of actions relating to the allegedly fraudulent draw requests: (1) submission of false draw requests based on misrepresentations that subcontractors and materialmen had been paid; (2) submission of inflated or misrepresented invoices for materials and services; and, (3) submission of unauthorized change orders.
In support of these contentions, the State Court Complaint specifies the dates of the draw requests submitted by Henkel Design to Yust and his Bank and the amounts that were paid to Henkel Design with respect to those draw requests.
Similarly, the State Court Complaint sufficiently apprises the Debtor that Yust was seeking to hold the Debtor individually liable for the alleged fraud of Henkel Design under the doctrine of piercing the corporate veil based on the Debtor's ownership, management and control over Henkel Design. State Court Complaint, ¶¶ 2, 3, 35-39 and Prayer for Relief. Again, the State Court Complaint is sufficiently specific to apprise the Debtor of the nature of the claims against him individually and thereby afford him the opportunity to prepare a defense against such claims.
Moreover, the State Court Complaint is sufficiently specific that it is not "a pretext for discovery of unknown wrongs" nor are the allegations made in the State Court Complaint so unfounded as to injure the reputation and goodwill of the Debtor. Accordingly, this Court rejects the Debtor's argument that the State Court Complaint is not sufficiently detailed to establish a foundation for issue preclusion.
The Debtor next argues that the issue of fraud was not actually litigated in the State Court Action because the testimony and documentary evidence presented at the Default Judgment Hearing was inadmissible evidence. The transcript of the Default Judgment Hearing reflects that the Magistrate reviewed the pleadings in the record, heard testimony from Yust and admitted into evidence those exhibits offered by Yust during the course of the Default Judgment Hearing. The "actually and directly litigated" requirement "does not refer to the quality or quantity of argument or evidence addressed to an issue. It requires only two things: first, that the issue has been effectively raised in the prior action, ... and second, that the losing party has had a `fair opportunity
Lastly, the Debtor maintains that there are inadequate findings of fact in the Default Judgment to support a determination by this Court that the issue of fraud was actually and directly litigated in the State Court Action. The Debtor makes three arguments in this regard. First, the Debtor argues that there is no basis for the State Court's finding that the Debtor — in addition to Henkel Design — is individually liable for committing fraud. Second, the Debtor argues that the State Court's findings regarding fraud (i.e., "Defendants committed fraud by falsifying at least one draw request and one change order and said actions demonstrate malice or aggravated or egregious fraud") are too vague. Third, the Debtor argues that the State Court's findings are deficient because the Default Judgment does not apportion the damages award between the judgment against Henkel Design on the breach of contract claim and the judgment against Henkel Design and the Debtor on the fraud claim.
Regarding the Debtor's first argument, as relates to the Debtor individually, the State Court Complaint charges that the Debtor should be found personally liable for the fraud of Henkel Design under the doctrine of piercing the corporate veil based on the Debtor's ownership, management and control over Henkel Design. To establish a cause of action to pierce the corporate veil under Ohio law, a plaintiff must prove by a preponderance of the evidence that:
In re Lupo, 353 B.R. at 542 (quoting Belvedere Condominium Unit Owners' Ass'n v. R.E. Roark Cos., 67 Ohio St.3d 274, 617 N.E.2d 1075 (1993) (other citations omitted)). With respect to the first factor, Ohio courts consider such factors as:
Id. (internal quotation marks and citations omitted).
The State Court Complaint alleges that the Debtor is the sole owner of Henkel Design. Yust testified, based on his interactions with Henkel Design, that Henkel Design was operated out of the Debtor's home and that the Debtor was the only employee of Henkel Design. While a corporation being owned and operated by its sole principal is not a per se basis to hold the corporation's principal personally liable, id., there is evidence in the record that the Debtor disregarded corporate formalities by virtue of the fact that the Contract is between Yust and the Debtor individually — not Yust and Henkel Design. Moreover, the Contract provided that all applications for payment (e.g., draw requests) submitted to Yust and the Bank were to be supported by affidavits, which necessarily would have been submitted by the Debtor as the sole employee of Henkel Design. See Sloan Dev., LLC v. Gill (In re Gill), 2012 Bankr.LEXIS 1133, at *4, 2012 WL 909513, at *4 (Bankr.N.D.Ohio Mar. 15, 2012) (giving preclusive effect to state court judgment finding debtor individually liable for fraud of debtor's wholly-owned corporation where debtor personally signed the fraudulent invoices requesting payment on construction contract).
When assessing whether a state court judgment should be given preclusive effect in a nondischargeability action, a bankruptcy court may review the entire record in the state court case to determine the grounds for, or the meaning of, the state court's judgment or order. See Miller v. Grimsley (In re Grimsley), 449 B.R. 602, 615 (Bankr.S.D.Ohio 2011) (collecting Ohio case law); Hogan v. George (In re George), 2013 Bankr.LEXIS 114, at *20, 2013 WL 135274, at *7 (6th Cir. BAP Jan. 11, 2013) (citing Spilman v. Harley, 656 F.2d 224, 228 (6th Cir.1981)). In finding that "Defendants committed fraud by falsifying at least one draw request and one change order and said actions demonstrate malice or aggravated or egregious fraud," an argument could be made that the State Court determined from the foregoing information in the record that the Debtor exercised control over Henkel Design to obtain money from Yust via his Bank based on fraudulent misrepresentations in the draw requests, which misrepresentations were justifiably relied upon by Yust and his Bank. Cf. In re Grimsley, 449 B.R. at 618 (inferring that the state court found that the debtor committed fraud by virtue of the state court's imposition of punitive damages against the debtor based on the bankruptcy court's review of the entire record in the nonbankruptcy litigation, including the jury instructions, special interrogatories and verdict); but see Clark v. Springhalt (In re Springhart), 450 B.R. 725, 734 (Bankr.S.D.Ohio 2011) (declining to infer fraud in context of a default judgment based solely on damages award).
Turning to the Debtor's second and third arguments, even if this Court were to conclude that, in considering the record as a whole, the Default Judgment is minimally sufficient to qualify for preclusion on the issue of liability for fraud, this Court nonetheless is unable to discern the extent to which the State Court found that the Debtor committed fraud or the damages affiliated with the State Court's determination on that issue. To be entitled to preclusive effect, a judgment should have sufficient detail to enable a subsequent court to have a clear understanding of the prior court's ruling without having to speculate about the scope of the prior court's findings of fact and conclusions of
The State Court found that the Debtor and Henkel Design falsified
The award of damages in the Default Judgment does nothing to clarify the extent of the State Court's findings of fraud or the amount of damages attributed to such fraud. The Default Judgment provides that Yust is entitled to compensatory damages of $202,784.00 plus attorneys' fees and costs of $10,617.40 "[a]s a result of Defendants' breach of contract
As a result, this Court finds that Yust has failed to establish that the issue of fraud was "actually and directly litigated" in the State Court Action because this Court is unable to determine the extent of the State Court's findings of fraud or the amount of damages attributed to such fraud based on the record before this Court. The Motion for Summary Judgment is therefore DENIED.
For the foregoing reasons, the Motion to Dismiss is
This matter will be set for a status conference by separate order.
Date Amount February 17, 2009 $22,400 ("First Draw Request") July 21, 2009 $32,428 ("Second Draw Request") September 3, 2009 $ 14,826 ("Third Draw Request") December 11, 2009 $128,623 ("Fourth Draw Request")
This Court notes that the first three draw requests total slightly more than the aggregate amount paid as alleged in the State Court Complaint.
Yust argues that the Rooker-Feldman doctrine prevents this Court from reviewing or otherwise adjusting the amount of the Default Judgment. The Rooker-Feldman doctrine is a jurisdictional doctrine which provides that federal courts (other than the Supreme Court) may not sit in direct review of state court decisions. In re Sweeney, 276 B.R. at 195. While the Rooker-Feldman doctrine, as well as principles of claim preclusion, may prevent a bankruptcy court from reviewing and redetermining the amount of damages awarded in a state court judgment, it nonetheless remains within a bankruptcy court's exclusive jurisdiction to determine whether such debt is nondischargeable pursuant to Section 523(a)(2). Id.; Custom Heating & Air, Inc. v. Andress (In re Andreas), 345 B.R. 358, (Bankr. N.D.Okla.2006) ("Nothing in the Rooker-Feldnum doctrine prevents this Court from [determining whether a judgment may be discharged]; indeed, such a determination falls squarely within the core jurisdiction of the bankruptcy court."); see also In re George, 2013 Bankr.LEXIS 114, at *21-22, 2013 WL 135274, at *7 (affirming bankruptcy court's determination that only $171,000 of the $513,000 in total damages awarded in state court judgment was nondischargeable).
The other out of pocket costs to complete the construction project and damages for lost profits do not seem to be debts for money, property, services or financing obtained by fraud; nor is it apparent from the Default Judgment or the State Court record that these damages were proximately caused by the Debtor's fraudulent acts. Rather, these damages appear to be more in the nature of traditional breach of contract damages, which are generally dischargeable. In re Thompson, 354 B.R. at 180 (citing Sandak v. Dobrayel (In re Dobrayel), 287 B.R. 3, 24-25 (Bankr. S.D.N.Y.2002) (carefully and thoroughly distinguishing between building contractor fraud and plain breach of contract in determining damages and dischargeability issues)); Integrated Practice Mgmt. Inc. v. Olson (In re Olson), 325 B.R. 791, 801-802 (Bankr. N.D.Iowa 2005)(finding that consequential damages were not funds obtained by fraud or proximately caused by fraud and were therefore dischargeable breach of contract damages).
This Court also notes that the total dollar amount of the damage award is in stark contrast to the only two allegations of wrongdoing described by a specific dollar amount in the record: a forged $950 change order and a draw request inhaled by approximately $1,000.
