NITV Fed. Servs., LLC v. Herring (In re Herring)

• Decision Date: 22 April 2021
• Docket Number: Adversary No. 20-00180-MDC,Bankruptcy No. 20-12141-MDC
• Citation: NITV Fed. Servs. v. Herring (In re Herring), Adversary No. 20-00180-MDC, Bankruptcy No. 20-12141-MDC (Bankr. E.D. Pa. Apr 22, 2021)
• Parties: In re: Arthur Herring, III, Debtor. NITV Federal Services, LLC, Plaintiff, v. Arthur Herring, III, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

In re: Arthur Herring, III, Debtor.

NITV Federal Services, LLC, Plaintiff, v. Arthur Herring, III, Defendant.

Bankruptcy No. 20-12141-MDC

Adversary No. 20-00180-MDC

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Entered: April 23, 2021

April 22, 2021

Chapter 7

MEMORANDUM

BY: THE HONORABLE MAGDELINE D. COLEMAN, CHIEF UNITED STATES BANKRUPTCY JUDGE

I.INTRODUCTION

The plaintiff, NITV Federal Services, LLC("Plaintiff" or "NITV"), initiated this adversary proceeding (the "Adversary Proceeding") by filing a complaint (the "Adversary Complaint")¹ against debtor Arthur Herring, III(the "Debtor-Defendant" or "Mr. Herring"), for a determination that the judgment (the "Florida Judgment") it obtained in a lawsuit (the "Florida Action") against Mr. Herring and his wholly-owned corporation in the United States District Court for the Southern District of Florida(the "Florida District Court") is nondischargeable pursuant to §523(a)(6) of the United States Bankruptcy Code,11 U.S.C. §§101, et seq.(the "Bankruptcy Code").NITV has moved for summary judgment (the "Summary JudgmentMotion"),² asserting that the findings made by the Florida District Court in rendering the Florida Judgment against Mr. Herring are entitled to preclusive effect in this Adversary Proceeding pursuant to the doctrine of collateral estoppel, otherwise known as issue preclusion.The Debtor-Defendant opposes the entry of summary judgment, arguing that the Florida District Court's findings do not meet the requirements of collateral estoppel.For the reasons stated herein, the Court will deny the Summary Judgment Motion.

II.RELEVANT FACTUAL AND PROCEDURAL BACKGROUND

A.The Florida Action³

1.The Florida Complaint and the Sanctions Order

On July 27, 2018, NITV filed the Florida Action against Mr. Herring and his wholly owned corporation, Dektor Corporation("Dektor"), in the Florida District Court.Mr. Herring is the sole shareholder, officer, and/or director of Dektor.The complaint in the Florida Action (the "Florida Complaint") alleged that Mr. Herring and Dektor, which was a competitor of NITV in the business of truth verification products and services, disparaged and defamed NITV, its products, and its founder and employees.The Florida Complaint asserted claims against Mr. Herring and Dektor for violation of the Lanham Act,⁴ deceptive and unfair trade practices under the Florida Deceptive and Unfair Trade Practices Act, defamation/business disparagement, and tortious interference with business relationships.

On June 10, 2019, NITV filed a motion for sanctions against Mr. Herring, asserting thathe had engaged in various activities prior to and during the pendency of the Florida Action that constituted spoliation of evidence and discovery abuse (the "Sanctions Motion").On September 20, 2019, the Florida District Court granted the Sanctions Motion(the "Sanctions Order").The Florida District Court found the unrefuted record evidence established that Mr. Herring had engaged in unreasonable misconduct involving the exchange of discovery in the Florida Action with intent to deprive NITV of the ability to discover information, and that NITV had been prejudiced as a result.Exercising its discretion, the Florida District Court found the extraordinary circumstances warranted the extraordinary sanction of entering default against Mr. Herring.The Sanctions Order instructed NITV to file a motion for final default judgment(the "Default Judgment Motion") against Mr. Herring and provided that such motion could include information regarding the final amount of monetary damages to be imposed against both Mr. Herring and Dektor.⁵

2.The Florida Judgment

On October 11, 2019, NITV filed the Default Judgment Motion, as well as a separate motion for a permanent injunction against Mr. Herring and Dektor (the "Injunction Motion").On December 10, 2019, the Florida District Court held an evidentiary hearing at which time the parties submitted evidence and argument related to the Court's determination of damages and the injunctive relief NITV sought.On December 16, 2019, the Florida District Court entered the Florida Judgment against Mr. Herring and Dektor, finding that NITV met its burden under Federal Rule of Civil Procedure 55 to show that it was entitled to default judgment against both Mr. Herring and Dektor, and had also met its burden in establishing that it was entitled topermanent injunctive relief.

In entering the Florida Judgment, the Florida District Court noted that the defaults entered against each defendant constituted an admission of the well-pleaded allegations in the Florida Complaint, but did not constitute admissions of facts not well-pleaded or of conclusions of law.The Florida District Court therefore analyzed each claim in the Florida Complaint separately to determine if there was a sufficient basis in the pleadings for final default judgment to be entered, prior to determining appropriate damages and injunctive relief, and made its own factual and legal findings.

i. Lanham Act Violations

The Florida District Court set forth the elements NITV had to prove to prevail on a false advertising/unfair competition claim under the federal Lanham Act: (1) that the opposing party's advertisements were false or misleading; (2) that the advertisements deceived, or had the capacity to deceive, consumers; (3) that the deception materially affected purchasing decisions; (4) that the misrepresentation affects interstate commerce; and (5) that the movant has been injured or is likely to suffer injury because of the false advertising.⁶

The Florida District Court also set forth the elements NITV had to prove to prevail on a product disparagement claim under the Lanham Act: (1) there must be "commercial advertising or promotion" constituting commercial speech of or concerning another's goods or services or commercial activities; (2) by a defendant who is in commercial competition with plaintiff; (3) for the purpose of influencing consumers to buy defendant's goods or services; and (4) the promotion must be disseminated sufficiently to the relevant purchasing public to constituteadvertising within that industry.⁷

The Florida District Court then found that NITV was entitled to default judgment on its false advertising, unfair competition, and product disparagement claims under the Lanham Act: "Defendants have falsely represented their own PSE product as being the same product sold by Dektor Counterintelligence and Security, Inc. and falsely stated that Dektor has been in business since 1969.Defendants' various e-mails, letters, and websites constitute commercial speech from a competitor with the purpose of influencing customers to purchase Dektor's PSE product.Plaintiff has offered credible proof that these communications by Defendants contain materially false information concerning Plaintiff and its CVSA product.Plaintiff has offered specific details showing that Dektor and Mr. Herring are the source of these communications containing materially false information about Plaintiff and its CVSA product."⁸

ii.Florida Deceptive and Unfair Trade Practices Act Violations

The Florida District Court first identified the elements of a claim under the Florida Deceptive and Unfair Trade Practices Act: (1) a deceptive act or unfair practice in the course of trade or commerce; (2) causation; and (3) actual damages.⁹The court then concluded that, based on its factual findings, NITV demonstrated each required element: "As described in detail above, Plaintiff alleges that Dektor and Mr. Herring have engaged in a widespread scheme of intentionally deceptive acts to promote Dektor's own PSE product to the direct detriment of Plaintiff's product and legitimate business.Dektor has engaged in a widespread campaign of disparaging NITV and NITV's competing CVSA product through its websites, in emails, duringphone calls, and at speaking engagements.NITV alleges that Dektor's deceptive and unfair trade practices have damaged NITV's reputation, goodwill, and overall sales."¹⁰

iii.Defamation/Business Disparagement

The Florida District Court listed the elements to be proven to succeed on a defamation claim under Florida law: (1) publication; (2) falsity; (3) the statement was made with knowledge or reckless disregard as to the falsity on a matter concerning a public official, or at least negligently on a matter concerning a private person; (4) actual damages; and (5) the statement must be defamatory.¹¹The court found the elements met: "Here, the evidence shows that Dektor and Mr. Herring published numerous false and defamatory statements about Plaintiff and Plaintiff's product and related services to a multitude of existing and potential customers of Plaintiff's products and services.Defendants knew or should have known that the defamatory statements were false when made and Plaintiff has suffered damages, including but not limited to lost sales and lost goodwill as a direct result of the defamation."¹²

iv.Tortious Interference with Business Relationships

The Florida District Court identified the elements of tortious interference with a business relationship: (1) the existence of a business relationship that affords the plaintiff existing or prospective legal rights; (2)the defendant's knowledge of the business relationship; (3)the defendant's intentional and unjustified interference with that relationship; and (4) damage to the plaintiff.¹³The court found NITV established these elements: "Plaintiff has shown that it had existing contracts or prospective business relationships with various law enforcement agenciesand other entities for the sale of its CVSA product and related services.Plaintiff claims Dektor and Mr. Herring knew about these contracts and business relationships and intentionally interfered by making false and disparaging statements about Plaintiff and the CVSA product to dissuade known CVSA users from using NITV's products and instead use...