Kerman v. Chenery Assocs., Inc.
| Decision Date | 23 March 2015 |
| Docket Number | NO. 3:06-CV-00338-CRS,3:06-CV-00338-CRS |
| Parties | MARK L. and LUCY M. KERMAN PLAINTIFFS v. CHENERY ASSOCIATES, INC., et al., DEFENDANTS |
| Court | U.S. District Court — Western District of Kentucky |
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 theirrelations 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 theplaintiff'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.
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) (). 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 an effective means of deterring illegality." See id.; see also In re Dublin Securities, Inc., 133 F.3d 377, 380 (6th Cir.1997) ().
In one germane application of the doctrine, a Kentucky court found that when two parties participate in a tax evasion transaction, they are deemed to be in pari delicto. Eline Realty Co. v. Foeman, 252 S.W.2d 15, 19 (Ky. 1952)(citing Stacy v. Williams, 253 Ky. 353, 69 S.W.2d 697; Middlesboro Home Telephone Co., v. Louisville & N. R Co., 214 Ky. 822, 284 S.W. 104). Thisis true even if the plaintiff was induced to enter the transaction. Id. Here, the Kermans' admit that "[i]ndisputably, [they] participated in the abusive CARDS tax-shelter with HVB and the other Defendants." DN 227, p. 5. Moreover, they do not even dispute that, as a result, they are in pari delicto with HVB. Id. Instead, they argue that, regardless of whether they are in pari delicto with the Defendants, the defense does not bar their claims for rescission or under KRS § 446.070 in this instance. We address these arguments in turn.
Where parties are in pari delicto, a court will not grant equitable relief - like rescission - between them. Schmidt v. Schmidt, 343 S.W.2d 817, 819 (Ky.1961). As stated above, the Kermans do not dispute that they are in pari delicto with the Defendants. On the contrary, they argue that the doctrine of in pari delicto is inapplicable to their claim for rescission because "joint intentional tortfeasors in pari delicto can recover from each other" under KRS § 411.182. DN 227, p. 5 (emphasis in original). But this statute, which provides for allocation of fault in tort actions, see id., is immaterial here.
The Kermans and HVB cannot be "joint tortfeasors" under § 411.182 because neither party has committed, or allegedly committed, any torts, and the Kermans have no such claims against HVB. By its express terms, § 411.182 applies only to "tort actions . . . involving fault of more than one (1) party to the action." Ky. Rev. Stat. Ann § 411.182(1); Kentucky Farm Bureau Mut. Ins. Co. v. Ryan, 177 S.W.3d 797, 800 (Ky. 2005) (). But the Kermans and HVB were merely joint participants in a transaction that resulted in a tax penalty and potential criminal repercussions. Kerman v. C.I.R., 101 T.C.M. (CCH) 1241 at *8, 20; see Ky. Rev. Stat. Ann § 141.990 (West). Not once during their storied relations has any party or governmental body alleged that either party has committed any tortswhatsoever, let alone jointly. Nor have the Kermans cited to any authority suggesting that KRS § 411.182 encompasses any actions other than those based in tort.
In fact, in Kentucky Farm Bureau Mutual Insurance Co. v. Ryan, the Supreme Court of Kentucky explained that, even if a contractual claim sounds in tort, it does not fall within the purview of KRS § 411.182 so long as it is based in contract. 177 S.W.3d 800, 802 (Ky. 2005). Moreover, compare the situation at hand to that in Sandoz Inc. v. Commonwealth of Kentucky ex rel. Jack Conway, 405 S.W.3d 506 (Ky. Ct. App. 2012). In Sandoz, the Commonwealth of Kentucky brought action against two pharmaceutical companies for reporting inflated prices on Medicaid-eligible prescription drugs in violation of numerous Kentucky statutes. Id. at 508-09. The...
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