Parton v. Parton
Decision Date | 21 February 2023 |
Docket Number | CIVIL 6:22-cv-00018-GFVT |
Parties | DAVID PARTON, Plaintiff, v. JOHNNY PARTON, et al., Defendants. |
Court | U.S. District Court — Eastern District of Kentucky |
This matter is before the Court on the Defendants' Motion to Dismiss. [R. 15.] David, Johnny, and Timothy Parton jointly owned coal mining companies which dissolved and merged into Henley Mining, owned by just Johnny and Timothy, in early 2017. [R. 1 at 2-3.] In previous litigation between these parties, this Court determined Henley's value as a going concern as of January 31, 2017. [R. 1-8 at 2.] David later discovered that on four occasions during and surrounding the bench trial in that case, Henley distributed equipment to Johnny and Tim to satisfy liabilities that Henley owed them. [R. 1 at 4.] David alleges that the Defendants misled himself and the Court about Henley's value by not disclosing these distributions until after the Court entered judgment. Id. Consequently, he filed this action alleging fraud, negligent misrepresentation, and fraudulent transfer. Id. Only the fraudulent transfer claim survives dismissal, so the Motion to Dismiss [R. 15] is GRANTED IN PART and DENIED IN PART.
The Court provided a detailed factual background of this matter in its order granting David's Motion for Preliminary Injunction but will summarize the facts critical to the instant motion. [R. 29 at 1-3.] David, Timothy, and Johnny Parton jointly owned a group of coal mining companies that ceased operations in 2016 after the brothers could not agree on the companies' continued operations. [R. 1-8 at 4-5.] On January 31, 2017, “Johnny and Tim Parton executed a ‘squeeze-out' merger . . . and formed Henley Mining.” Id. at 3. As part of the dissolution Henley transferred equipment to David which necessitated equal distributions to Johnny and Tim. [R. 15-1 at 5.] Henley valued the distributions at $445,762.50 each ($891,525 total). [R. 1 at 4.] It did not distribute any assets to Johnny or Tim; rather, it recorded the distributions as an $891,525 liability on Henley's books. Id. at 5.
In the meantime, Henley filed a lawsuit against David in this Court the main issue of which was determining the company's fair value. Id. at 3; Henley Mining, Inc. v. David Parton, 6:17-cv-00092-GFVT. The Court determined that Henley was worth $3,318,980 as a going concern as of January 31, 2017 (the date of the merger). [R. 1-8 at 15.] This entitled David to a $957,517.67 distribution, reflecting one-third of Henley's total value minus $148,809 he had already been paid. Id. The Court also determined that the distributions owed to Johnny and Tim were worth $282,500 each ($565,000 total), in contrast to the $891,525 total valuation that they recorded as a liability on Henley's books. Id. at 9.
After the Court entered Judgment, counsel for the Defendants contacted David with a settlement offer. [R. 1-6.] That offer stated that “well before the Judgment, Henley Mining, Inc. distributed the majority of its assets to Johnny and Tim in satisfaction of the distribution payable and other amounts loaned to the company.” Id. The offer included records of four distributions that occurred between August 17, 2020 (the day before trial began) and December 15. Id. at 4. David filed this action in response, alleging that the distributions were fraudulent transfers and turn representations by the Defendants into fraud and negligent misrepresentation. [R. 1.]
First the Defendants seek dismissal of Counts II (fraud) and III (negligent misrepresentation) under Rule 9(b)'s heightened pleading standard for allegations of fraud. [R 15-1 at 7-12; R. 1 at 7-8.] Rule 9(b) states that Fed.R.Civ.P. 9(b). This heightened pleading standard is balanced by “the policy favoring simplicity in pleading, codified in the ‘short and plain statement of the claim' requirement of Federal Rule of Civil Procedure 8.” Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 876 (6th Cir. 2006). At the same time, “a district court need not accept claims that consist of no more than mere assertions and unsupported or unsupportable conclusions.” Id. (citing Kottmyer v. Maas, 436 F.3d 684, 688 (6th Cir. 2006)).
Counts II and III are both subject to this heightened standard. Count II alleges the common law tort of fraud, which encompasses fraudulent misrepresentation and fraudulent omission. [R. 1 at 7]; Waldridge v. Homeservices of Ky., Inc., 384 S.W.3d 165, 171 (Ky. Ct. App. 2011). Count II does not specify whether David believes the Defendants engaged in fraudulent misrepresentation or fraudulent omission. [R. 1 at 7; R. 15-1 at 8.] The Complaint includes distinct elements of fraudulent omission but his Response outlines the elements of fraudulent misrepresentation. [R. 1 at 7; R. 20 at 10.] Nevertheless, both are subject to Rule 9(b). See Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239, 247 (6th Cir. 2012). Courts also apply the 9(b) standard to negligent misrepresentation, which David alleges in Count III. Id. at 247-48.
The Defendants ask the Court to dismiss Count II, to the extent that it alleges fraudulent misrepresentation, and Count III because the Complaint does not identify any specific statements that were allegedly false. [R. 15-1 at 8-9.] Count II alleges that the Defendants committed fraud by “not disclosing the August 17, 2020 distribution and pretending that Henley Mining still had all of the assets it had when the Lawsuit was filed.” Id. The Defendants argue that this is insufficient to allege fraudulent misrepresentation because it alleges that the Defendants failed to disclose information, which is the opposite of an affirmative misrepresentation. [R. 15-1 at 8-9.] Count III, which alleges negligent misrepresentation, claims that the Defendants represented that Henley had the same assets during trial as it had when the lawsuit began and did so in the course of their business. [R. 1 at 7.] The Defendants similarly argue that this does not satisfy Rule 9(b) because it does not identify an affirmative false statement. [R. 15-1 at 10-12.]
David attempts to clarify the specific representations supporting his claims for fraud and negligent misrepresentation in his Response. He claims that the Defendants “falsely testified that Henley Mining had maintained certain assets” and cites Paragraphs 24, 43, 53, and 58 of the Complaint. [R. 20 at 10.] He also states that the “Defendants put forth false statements regarding the liquidation of some of Henley Mining's assets during trial,” but does not provide a citation. Id. at 11.
Even as clarified by David's Response, the Complaint does not identify a specific misrepresentation underlying Count II or III. As applied to fraudulent misrepresentation, Rule 9(b)'s heightened pleading standard requires a plaintiff: “(1) to specify the allegedly fraudulent statements; (2) to identify the speaker; (3) to plead when and where the statements were made; and (4) to explain what made the statements fraudulent.” Bear Stearns, 683 F.3d at 247 ( ). Negligent misrepresentation also “requires [that a plaintiff plead] an affirmative false statement.” Bear Stearns, 683 F.3d at 260 (quoting Giddings & Lewis, Inc., v. Indus. Risk Insurers, 348 S.W.3d 729, 744-45 (Ky. 2011) (alteration in original)).
Paragraphs 43 and 53 do not identify representations. [R. 1 at 6, 7.] They state, respectively, that “Henley Mining was insolvent at the time the distributions were made or these distributions rendered Henley Mining insolvent” and “Defendants deceived David Parton and the federal court by not disclosing the August 17, 2020 distribution and pretending that Henley Mining still had all of the assets it had when the Lawsuit was filed.” Id. The former alleges Henley's actual financial state. Id. at 6. The latter is an omission and a vague claim that the Defendants “pretended,” which is far from a specific representation. Id. at 7.
Paragraphs 24 and 58 at least discuss representations, but do not identify them with sufficient specificity. Paragraph 24 references claims Henley made “throughout the lawsuit,” including expert witness testimony at trial. [R. 1 at 4.] A general reference to claims made “throughout the lawsuit” fails to identify a particular statement or when and where it was made. See Bear Stearns, 683 F.3d at 247. Expert witness testimony at trial is more specific but still insufficient. The Defendants presented two expert witnesses at trial, so the Court cannot even infer a specific representation or its speaker. [R. 1-8 at 3.] Paragraph 58 fares no better. It states that the “Defendants represented to David and the federal court that Henley Mining had the same assets during trial that it had when the Lawsuit was filed.” [R. 1 at 7.] This allegation does not identify any such statements or when and where they were made.
David's fraudulent and negligent misrepresentation claims do not satisfy Rule 9(b)'s heightened pleading standard. David invokes the Sixth Circuit's guidance that, while Rule 9(b) is a heightened standard, it is to be read liberally. [R. 20 at 9.] But the minimum requirement is that the plaintiff allege the time, place, and content of an allegedly fraudulent representation. Coffey v. Foamex L.P., 2 F.3d 157, 161-62 (6th Cir. 1993) (quoting Ballan v. Upjohn Co., 814 F.Supp. 1375, 1385 (W.D. Mich. 1992))....
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