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Kerman v. Chenery Associates, Inc.

United States District Court, W.D. Kentucky, Louisville Division

March 23, 2015

MARK L. and LUCY M. KERMAN Plaintiffs,
CHENERY ASSOCIATES, INC., et al., Defendants.


CHARLES R. SIMPSON, III, Senior District Judge.

This matter is before the court on motion by the Defendants, Bayerische Hypo-und Vereinsbank AG and HVB U.S. Finance, Inc., f/k/a HVB Structured Finance, Inc. (collectively, "HVB")[1], to dismiss the Plaintiffs', Mark L. and Lucy M. Kerman ("the Kermans"), claims for Statutory Violations (Claim V), Rescission (Claim IX), and Punitive Damages (Claim XII) against HVB in their Fourth Amended Complaint. DN 224; DN 183. Fully briefed, this matter is now ripe for adjudication. Having considered the parties' respective positions, we conclude that the Plaintiffs' remaining claims against HVB fail as a matter of law. For the reasons set forth below, the Court will grant the Defendant's motion to dismiss. DN 224.


This case came before the Court upon removal nearly nine years ago. DN 1. The parties' history before and after is well-chronicled, but we need only delve into those parts of their relations that are relevant to the Defendant HVB's now-pending motion to dismiss.[2] These undisputed facts are as follows.

Back in 2011, the Court dismissed the Kermans' First, Second, Third, Sixth, Eighth, Tenth, and Eleventh claims as against HVB. DN 205. We denied dismissal of the Kermans' Fifth, Ninth, and Twelfth claims against HVB, however, and these claims have remained. Then on March 8, 2011, as this action pended, the Kermans took action to challenge the IRS's treatment of a "CARDS transaction" they had participated in - specifically, the IRS's imposition of a 40-percent penalty and disallowance of a $4, 251, 389 loss claimed from that transaction. Not coincidentally, that transaction is the impetus for this suit. The Tax Court ultimately denied the Kermans' claimed loss and upheld the penalty, explaining that the CARDS transaction was an "economic sham" that would have "seem[ed] to a reasonable person to be too good to be true.'" Kerman v. C.I.R., 101 T.C.M. (CCH) 1241, *20 (T.C. 2011), aff'd, 713 F.3d 849 (6th Cir. 2013). We were then made aware that the Kermans would appeal the Tax Court decision to the Sixth Circuit, so we stayed the current action pending resolution of that appeal. DN 208. On appeal, the Sixth Circuit affirmed the Tax Court decision.

HVB now asks us to consider the viability of the Kermans' remaining claims against HVB in light of the affirmed Tax Court decision. HVB moved the Court for leave to "file a second motion to dismiss on a theory of collateral estoppel, " which we granted, and HVB so filed. In the Kermans' response to HVB's motion, the Kermans abstain from disputing HVB's collateral estoppel argument and instead concede that "[i]ndisputably, the[y] participated in the abusive tax-shelter in conjunction with HVB." DN 227, p. 5. HVB now contends that this admission is fatal to the Kermans' remaining claims against it under the theory of in pari delicto.


To overcome a motion to dismiss, a complaint must contain sufficient facts to state a claim for relief that is "plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). As explained in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009):

A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. [ Twombly, supra . ] at 556, 127 S.Ct. 1955. The plausibility standard is not akin to a "probability requirement, " but it asks for more than a sheer possibility that a defendant has acted unlawfully. Ibid. Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of entitlement to relief.'" Id. at 557, 127 S.Ct. 1955 (bracket omitted).

As noted in Southfield Education Association v. Southfield Board of Education, No. 13-1600, 2014 WL 2900928 (6th Cir. June 26, 2014), "A complaint will be dismissed pursuant to Rule 12(b)(6) if no law supports the claim made, if the facts alleged are insufficient to state a claim, or if the face of the complaint presents an insurmountable bar to relief." Twombly, 550 U.S. at 561-64." Southfield Ed. Assoc., 2014 WL 2900928 at *2. "The factual allegations, assumed to be true, ... must show entitlement to relief" under "some viable legal theory." Id. at *2, (quoting League of United Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007).


HVB has moved the Court for dismissal of the remaining claims pending against it in the Fourth Amended Complaint ("FAC") - Ky. Rev. Stat. Ann § 446.070 (Claim V), Rescission (Claim IX), and Punitive Damages (Claim XII). It contends that the Kermans' claims under KRS § 446.070 and for rescission fail as a matter of law under the common-law doctrine of in pari delicto. DN 224-1. In pari delicto is an equitable defense that generally "refers to the plaintiff's participation in the same wrongdoing as the defendant." In re Nat'l Century Fin. Enterprises, Inc., 783 F.Supp.2d 1003, 1014 (S.D. Ohio 2011) (citing Bubis v. Blanton, 885 F.2d 317, 321 n. 1 (6th Cir.1989)); Memorex Corp. v. Int'l Bus. Machines Corp., 555 F.2d 1379, 1382 (9th Cir.1977)); see also 27A Am. Jur. 2d Equity § 103. HVB also argues that because in pari delicto mandates dismissal of the Kermans' statutory and rescission claims, their punitive damages claim must fail as well. We will assess these arguments in turn.

A. In Pari Delicto

The common law docntrine in pari delicto is a phrase that is short for the maxim in pari delicto potior est condition defendentis, which means: "In a case of equal or mutual fault... the position of the [defending] party... is the better one." Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 105 S.Ct. 2622, 2626, 86 L.Ed.2d 215 (1985) (quoting Black's Law Dictionary 711 (5th ed. 1979) (alternation in original)). When applied, it serves as a defense that prevents two parties whose wrongdoing are found to be in pari delicto from recovering from one another for any damages that arose from that joint wrongdoing. Bateman Eichler, 472 U.S. at 306, 105 S.Ct. 2622 (footnotes omitted). Courts apply the doctrine based on "two premises: first, that courts should not lend their good offices to mediating disputes among wrongdoers; and second, that denying judicial relief to an admitted wrongdoer is ...

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