United States District Court, W.D. Kentucky, Louisville Division
MEMORANDUM OPINION AND ORDER
J. Hale, United States District Court Judge
financial-services companies hire employees away from
competitors, litigation often follows. Here, Pinnacle hired
Todd Loehnert and Brian Ayres away from Wells Fargo,
resulting in lawsuits. Pinnacle now claims that the lawyers
it retained to represent Loehnert, Ayres, and itself in those
lawsuits breached their obligations to Pinnacle when they
later assisted Loehnert and Ayres in leaving Pinnacle and
establishing a competing business. Defendants have moved to
dismiss, for leave to file excess pages, and to stay
discovery until the Court rules on the motion to dismiss.
(Docket No. 57; D.N. 68; D.N. 58) For the reasons set forth
below, the motion for leave to file excess pages will be
granted; the motion to dismiss will be granted in part and
denied in part; and the motion to stay discovery will be
denied as moot.
following facts are set out in the complaint and accepted as
true for purposes of the motion to dismiss. See Directv,
Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007).
Plaintiff Pinnacle is a California surety-bond company. (D.N.
53, PageID # 352) It opened an office in Louisville,
Kentucky, in 2013. (Id.) Pinnacle contracted with
Todd Loehnert and Brian Ayres to open the Louisville office.
(Id.) Loehnert and Ayres left Wells Fargo in order
to join Pinnacle. (Id.) Wells Fargo then sued
Loehnert and Ayres for breaching their employment agreements.
(Id.) Wells Fargo also sued Pinnacle. (Id.)
Defendants G. Bruce Stigger and Rex H. Elliott and their
respective law firms, Defendants Manion Stigger, LLP and
Cooper & Elliott, LLC, jointly represented Loehnert,
Ayres, and Pinnacle in the Wells Fargo litigation.
(Id., PageID # 352-53) The Wells Fargo lawsuit
settled, and the final settlement payment from Loehnert,
Ayres, and Pinnacle to Wells Fargo was due on June 4, 2014.
(Id., PageID # 353)
parties dispute the moment at which the attorney-client
relationship between Pinnacle and Defendants ended. Pinnacle
argues that it continued until at least June 4, 2014, when
payment was due. (Id.) Defendants, however, argue
that the relationship ended on June 10, 2013, the day the
settlement agreement was reached and the case was dismissed.
(D.N. 57-2, PageID # 500-01)
their joint representation of Loehnert, Ayres, and Pinnacle,
Defendants allegedly encouraged and assisted Loehnert and
Ayres in breaching their employment agreement with Pinnacle.
(D.N. 53, PageID # 354-55) Pinnacle further alleges that
Defendants helped Loehnert and Ayres form their own business,
L.A. Surety LLC, to compete with Pinnacle. (Id.)
These alleged actions form the basis of the present lawsuit,
in which Pinnacle asserts claims against Defendants for legal
malpractice, breach of fiduciary duty, fraudulent
concealment, intentional interference with a contractual
relationship, civil conspiracy, aiding and abetting a breach
of fiduciary duty, constructive trust, and accounting.
(Id., PageID # 359-72)
9, 2014, Loehnert and Ayres, represented by Defendants, sued
Pinnacle in Jefferson County Circuit Court, alleging that
Pinnacle failed to pay amounts owed under a promissory note
related to the Wells Fargo settlement. (D.N. 53, PageID #
357-58; D.N. 53-3, PageID # 451) On that same date, Pinnacle
sued Loehnert and Ayres in this Court for breaching their
employment agreement with Pinnacle. (D.N. 53, PageID # 358;
D.N. 57-6, PageID # 538- 39) Pinnacle removed the state-court
action to federal court, and the Court consolidated the two
actions. (D.N. 53, PageID # 358; D.N. 53-3, PageID # 451)
Pinnacle then filed a motion to disqualify Defendants as
counsel for Loehnert and Ayres, which the Court granted on
November 18, 2014. (D.N. 53, PageID # 358; D.N. 53-3, PageID
# 459) The Court entered an order staying this case while the
parties litigated the underlying action between Pinnacle and
Loehnert and Ayres. (D.N. 43) That case settled in March
2016, with the Court entering an agreed order dismissing the
matter with prejudice. (D.N. 57-9; D.N. 57-10) The Court
later lifted the stay, and Pinnacle filed its amended
complaint against Defendants. (D.N. 52; D.N. 53)
survive a motion to dismiss for failure to state a claim,
“a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is
plausible on its face.'” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is
plausible on its face “when the plaintiff pleads
factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct
alleged.” Id. Factual allegations are
essential; “[t]hreadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do
not suffice, ” and the Court need not accept such
statements as true. Id. A complaint whose
“well-pleaded facts do not permit the court to infer
more than the mere possibility of misconduct” does not
satisfy the pleading requirements of Rule 8 of the Federal
Rules of Civil Procedure and will not withstand a motion to
dismiss. Id. at 679.
argue that Pinnacle has been fully compensated for Loehnert
and Ayres's decision to terminate their employment and is
not entitled to additional compensation. (D.N. 57-2, PageID #
480) They base this argument on a liquidated-damages
provision contained in the employment agreement between
Pinnacle and Loehnert and Ayres. The provision stated:
“[I]f, within three years of the date of this
Agreement, either Executive's employment is terminated by
Pinnacle for cause or if either Executive resigns, without
cause, . . . Pinnacle, in its sole discretion, may obtain
$125, 000, as liquidated damages from the terminated or
resigning executive.” (D.N. 53-1, PageID # 407-08)
According to Defendants, Loehnert, Ayres, and L.A. Surety
paid Pinnacle $300, 000 in settlement of all claims asserted
by Pinnacle. (D.N. 57-2, PageID # 481; see D.N.
asserts that Defendants have waived this argument, as well as
their res judicata defense discussed below, because they
“were not plead[ed] by Defendants as affirmative
defenses.” (D.N. 64, PageID # 635) However, Defendants
responded to Pinnacle's complaint by filing this motion
to dismiss. (See D.N. 53; D.N. 57) A defendant is
permitted to respond to a complaint by filing a motion to
dismiss. See Doss v. Lexington Fayette Urban Cty.
Gov't, No. 5:15-12-KKC, 2015 WL 4372715, at *3 (E.D.
Ky. July 14, 2015). And “[a] defendant can raise
affirmative defenses in a motion to dismiss.” White
v. Corr. Med. Servs. Inc., No. 1:08-cv-277, 2009 WL
596473, at *4 (W.D. Mich. Mar. 6, 2009). Defendants asserted
both payment and res judicata as defenses in their memorandum
of law in support of their motion to dismiss. (See
D.N. 57-2, PageID # 480-87) The Court thus rejects
Pinnacle's waiver argument.
general, the Court may consider only the pleadings in ruling
on a motion to dismiss. See Fed. R. Civ. P. 12(d).
But the Court may also consider public records without
converting the motion into one for summary judgment so long
as the facts to be judicially noticed are not subject to
reasonable dispute. See Jones v. City of Cincinnati,
521 F.3d 555, 562 (6th Cir. 2008). “Settlement
agreements are documents of which a court may take judicial
notice in order to determine whether future claims are barred
by a previous settlement.” Valassis Commc'ns,
Inc. v. News Corp., No. 2:13-cv-14654, 2014 WL 12585773,
at *3 (E.D. Mich. July 16, 2014). Here, neither party
disputes that Pinnacle settled its claims against Loehnert
and Ayres for $300, 000. (See D.N. 57-2, PageID #
481; D.N. 64, PageID # 641-42) The Court will therefore take
judicial notice of the settlement agreement.
the settlement agreement expressly provides: “The
Parties further agree and acknowledge that the Malpractice
Action [i.e., this case] is in no way settled, compromised,
resolved[, ] or affected in any way by this Agreement.”
(D.N. 57-9, PageID # 587-88) Thus, it appears that the
parties did not intend to settle the claims against
Defendants when they settled the claims against Loehnert,
Ayres, and L.A. Surety.
Defendants have not shown that the liquidated-damages
provision was actually enforced. In fact, Pinnacle moved to
recover its liquidated damages under the employment agreement
in its prior action against Loehnert, Ayres, and L.A. Surety
(D.N. 57-8), but the Court denied Pinnacle's motion.
Pinnacle Surety Servs., Inc. v. Loehnert, No.
3:14-cv-00425-JHM-CHL, Docket No. 48 (W.D. Ky. Aug. 25,
2015). Because the liquidated-damages provision
was never enforced, Pinnacle was entitled to seek its actual
damages. See Steffen v. United States, 213
F.2d 266, 270 (6th Cir. 1954); United Servs. Auto.
Ass'n v. ADT Sec. Servs., Inc., 241 S.W.3d 335, 340
(Ky. Ct. App. 2006). Thus, the liquidated-damages provision
does not bar Pinnacle's claims against Defendants.
addition, Defendants assert that res judicata bars
Pinnacle's claims. (D.N. 57-2, PageID # 484)
Specifically, they assert that Pinnacle's prior suit
against Loehnert, Ayres, and L.A. Surety bars the present
suit. (Id., PageID # 485-87) Defendants rely on
materials from the prior litigation in support of their
argument. (See id., PageID # 487) Because the Court
may look to matters of public record, including other court
actions, in ruling on a motion to dismiss, see
Eggerson, 2006 WL 1720252, at *3, the Court will
consider these materials for the purpose of resolving the
initial matter, both parties refer to Kentucky preclusion law
in their briefs. (See D.N. 57-2, PageID # 484-85;
D.N. 64, PageID # 635-40) But the order that Defendants seek
to give preclusive effect was issued by a federal court,
albeit one exercising diversity jurisdiction. (See
D.N. 57-2, PageID # 467-68; D.N. 57-10, PageID # 603; D.N.
53-1, PageID # 374-75) Jurisdiction is based upon diversity
of citizenship in the present action as well. (D.N. 53,
PageID # 351) The Sixth Circuit has held that federal courts
“shall apply federal res judicata principles in
successive federal diversity actions.” J.Z.G. Res.,
Inc. v. Shelby Ins. Co., 84 F.3d 211, 213-14 (6th Cir.
1996). The Court will therefore apply federal res judicata
principles to determine the preclusive effect of the prior
general rule of claim preclusion, or true res judicata, is
that a valid and final judgment on a claim precludes a second
action on that claim or any part of it.” Id.
at 214. “Claim preclusion applies not only to bar the
parties from relitigating issues that were actually
litigated but also to bar them from relitigating issues that
could have been raised in an earlier action.”
Id. The Sixth Circuit uses a four-part test for
determining whether a subsequent action is barred by res
judicata or claim preclusion. Rawe v. Liberty Mut. Fire
Ins. Co., 462 F.3d 521, 528 (6th Cir. 2006). Res
“(1) a final decision on the merits by a court of
competent jurisdiction; (2) a subsequent action between the
same parties or their privies; (3) an issue in the subsequent
action which was litigated or which should have been
litigated in the prior action; and (4) an identity of the
causes of action.”
Id. (quoting Kane v. Magna Mixer Co., 71
F.3d 555, 560 (6th Cir. 1995)).
of action share an identity ‘if they are based on
substantially the same operative facts, regardless of the
relief sought in each suit.'” Old Blast, Inc.
v. Operating Eng'rs Local 324 Pension Fund, 663 F.
App'x 454, 458 (6th Cir. 2016) (quoting United States
v. Tohono O'Odham Nation, 563 U.S. 307, 317 (2011)).
The present case is based upon substantially the same facts
as the prior lawsuit: Pinnacle's employment agreement
with Loehnert and Ayres, the Wells Fargo litigation, Loehnert
and Ayres's premature resignation from Pinnacle,
Defendants' disqualification as Loehnert and Ayres's
counsel, the assistance Defendants allegedly provided
Loehnert and Ayres in setting up a competing business, and
the damages Pinnacle suffered as a result of Loehnert and
Ayres's early resignation. (Compare D.N. 53,
PageID # 352-59, with D.N. 53-1, PageID # 375-86)
Based upon these similar facts, the Court concludes that the
identity-of-claims element is satisfied.
prior suit, Pinnacle sued Loehnert, Ayres, and L.A. Surety.
(D.N. 53-1) In the present suit, Pinnacle asserts claims
against Stigger, Elliott, and their law firms. (D.N. 53)
Defendants assert that they are in privity with Loehnert and
Ayres because they represented Loehnert and Ayres in the
prior suit. (D.N. 57-2, PageID # 485, 487) The Sixth Circuit
has held at least twice that attorneys were in privity with
their clients for purposes of res judicata. See
Kimball v. Orlans Assocs. P.C., 651 F. App'x
477, 481 (6th Cir. 2016); Browning v. Levy, 283 F.3d
761, 772 (6th Cir. 2002). In Kimball, the court held
that attorney defendants were in privity with a bank
concerning a mortgage foreclosure “by virtue of their
position as foreclosure counsel.” 651 F. App'x at
481. In Browning, the court held that debtor's
counsel was in privity with a debtor, despite the fact that
it had been replaced as debtor's counsel only one month
after the bankruptcy petition was filed, because debtor's
counsel “participat[ed] in the proceeding on behalf of
the debtor” and “remained as special counsel
throughout the proceeding.” 283 F.3d at 772. Here, the
Court disqualified Defendants as counsel for Loehnert and
Ayres in November 2014, long before the case settled in March
2016. (D.N. 53-3, PageID # 459, see D.N. 57-10)
Thus, it is unclear whether the privity requirement is
satisfied in this case.
the privity requirement is met, however, res judicata does
not apply here because there has been no final decision on
the merits. This element requires the Court to determine
whether the agreed order dismissing the prior suit with
prejudice as settled qualifies as a final decision on the
merits for purposes of res judicata. In the Sixth Circuit,
“[a] consent judgment, which has been freely negotiated
by the parties and has been approved by the court, has the
full effect of final judgment for purposes of [res
judicata].” Old Blast, Inc., 663 F. App'x
at 457 (quoting Blakely v. United States, 276 F.3d
853, 866 (6th Cir. 2002)). A consent judgment is defined as
“a contract acknowledged in open court and ordered to
be recorded” that “binds the parties as fully as
other judgments.” Judgment (2), Black's
Law Dictionary (10th ed. 2014). The settlement agreement
here, however, does not appear in the record of the prior
case, nor does the record show that it was approved or signed
by the judge. The Sixth Circuit's consent-judgment rule
is therefore inapposite.
Sixth Circuit does not appear to have addressed whether an
agreed order of dismissal following settlement acts as a
final decision on the merits where the Court did not approve
the settlement agreement. A decision of the Eleventh Circuit is
instructive, as it involved similar facts. In Norfolk
Southern Corp. v. Chevron, U.S.A., Inc., the district
court entered a judgment of dismissal with prejudice after
the parties executed a settlement agreement. 371 F.3d 1285,
1287 (11th Cir. 2004). In a subsequent suit between the
parties' successors-in-interest, the district court
granted summary judgment for the defendant, concluding that
the plaintiff's claims were barred by the res judicata
effect of the dismissal. Id. at 1287-88. The court
of appeals reversed, holding that “where the parties
stipulate to having a case dismissed, a somewhat modified
form of res judicata applies to the written
settlement agreement upon which such dismissal is predicated,
if one exists.” Id. at 1291. Thus, although
the dismissal had res judicata effect, that effect was
controlled by the settlement agreement the parties entered.
Id. at 1288. The court reasoned that “[a]
judgment dismissing an action with prejudice based upon the
parties' stipulation, unlike a judgment imposed at the
end of an adversarial proceeding, receives its legitimating
force from the fact that the parties consented to it.”
Id. The court determined that it should therefore
“attempt to effectuate the parties' intent”
in determining the res judicata effect of an order of
dismissal based upon a settlement agreement. Id. at
Court previously noted, the settlement agreement in the prior
suit expressly provided that this malpractice action was
“in no way settled, compromised, resolved[, ] or
affected in any way by” the agreement. (D.N. 57-9,
PageID # 587-88) The Court is unable to conclude, based upon
the parties' intent as reflected in the agreement, that
the agreed order of dismissal entered following that
settlement constitutes a final decision on the merits.
Cf. United States v. Armour & Co., 402 U.S. 673,
682 (1971) (“Because the defendant has, by the
[consent] decree, waived his right to litigate the issues
raised, a right guaranteed to him by the Due Process Clause,
the conditions upon which he has given that waiver must be
respected, and the instrument must be construed as it is
written . . . .”). Therefore, res judicata does not bar
Pinnacle from pursuing this action against Defendants.