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Pinnacle Surety Services, Inc. v. Manion Stigger, LLP

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

March 27, 2018

MANION STIGGER, LLP, et al., Defendants.


          David J. Hale, United States District Court Judge

         When 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.

         I. BACKGROUND

         The 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)

         The 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)

         During 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)

         On June 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)

         II. STANDARD

         To 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.

         III. ANALYSIS

         A. Liquidated-Damages Provision

         Defendants 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. 57-9)

         Pinnacle 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.

         In 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.

         Notably, 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.

         Moreover, 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).[1] 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.

         B. Res Judicata

         In 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 preclusion issue.

         As an 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 suit.

         “The 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 judicata requires

“(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)).

         “Causes 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.

         In the 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.

         Even if 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.[2] 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.

         The 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.[3] 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.[4] Id. at 1289.

         As the 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.

         C. Statute ...

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