Schmidt v. Panos (In re Panos), Case No. 13–58441

• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio
• Citation: 573 B.R. 723
• Docket Number: Adv. Pro. No. 14–02035,Case No. 13–58441
• Parties: IN RE: Edward F. PANOS, Debtor. Eric Schmidt, et al., Plaintiffs, v. Edward F. Panos, Defendant.
• Decision Date: 26 May 2017

573 B.R. 723

IN RE: Edward F. PANOS, Debtor.

Eric Schmidt, et al., Plaintiffs,
v.
Edward F. Panos, Defendant.

Case No. 13–58441
Adv. Pro. No. 14–02035

United States Bankruptcy Court, S.D. Ohio, Eastern Division.

Signed May 26, 2017

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Thomas R. Allen, Allen Kuehnle Stovall & Neuman LLP, Columbus, OH, for Debtor.

William B. Logan, Jr., Kenneth M. Richards, Larry J. McClatchey, Stephanie P. Union, Columbus, OH, for Trustee.

Mary Anne Wilsbacher, USDOJ–Office of the U.S. Trustee, Pamela Arndt, Columbus, OH, for U.S. Trustee.

ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT ON COUNTS I, III, AND IV OF FIRST AMENDED COMPLAINT (Doc. 54)

C. Kathryn Preston, United States Bankruptcy Judge

This cause came on for consideration of Plaintiffs' Motion for Summary Judgment on Counts I, III, and IV of First Amended Complaint (Doc. 54) (the "Motion"), filed on November 29, 2016; Defendant Edward F. Panos' Memorandum in Opposition to Plaintiffs' Motion for Summary Judgment on Counts I, III, and IV of First Amended Complaint (Doc. 58) (the "Response"), filed December 20, 2016;

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and Plaintiffs' Reply Supporting Motion for Summary Judgment on Counts I, III, and IV of First Amended Complaint (Doc. 61) (the "Reply"), filed December 30, 2016. Eric Schmidt ("Schmidt"), Brenda Schmidt, and Paul Bursey (together, the "Plaintiffs") seek a determination that a certain state court judgment entered in their favor and against Edward F. Panos ("Panos") is nondischargeable in Panos' bankruptcy case. The Court, having considered the record and the arguments of the parties, issues the following opinion.

I. Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and Amended General Order 05–02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

II. Background

This dischargeability proceeding is the result of a failed business arrangement that involved the sale of the Plaintiffs' company to one controlled by Panos. Relevant events leading to this adversary appear to be without dispute and can be briefly summarized as follows:

In 2000, the Plaintiffs founded an information technology company called iBeam Solutions, LLC ("iBeam"). Schmidt and Paul Bursey each owned approximately 40% of iBeam, and Brenda Schmidt owned 2%. The company's revenues grew to $1.6 million in 2006 and $2 million in 2007. Over the course of its existence, iBeam had accumulated significant debt, much of which had been personally guaranteed by Plaintiffs.

One of iBeam's clients was Language Access Network, Inc. ("LAN"), a public company. LAN's primary business was providing foreign language interpretation services in medical treatment settings. Panos was LAN's controlling shareholder and at all times relevant was directly involved in company business.

In 2006, Panos and Schmidt discussed the prospect of LAN purchasing iBeam in order to add iBeam's information technology services to LAN. The acquisition closed on August 1, 2007, and iBeam became a wholly owned subsidiary of LAN. As part of the acquisition agreement, Schmidt agreed to continue serving as president of iBeam at a base salary of $100,000 per year.

Over the course of the next three years and for a combination of reasons, the relationship between Panos and the Plaintiffs steadily soured. Certain debts of iBeam, which the Plaintiffs had personally guaranteed and which they expected would be paid off following LAN's acquisition of iBeam, were never paid. Over the span of six months in 2007, Panos had sold 1.625 million shares of LAN for approximately $750,000, which had driven the stock price down to $0.13 per share. The Plaintiffs believed that iBeam's information technology expertise would serve as in-house support for LAN's medical interpretation business, but LAN's business was spun off from the combined company, now called iB3, in 2008. Plaintiffs also believed that additional investment financing would be secured promptly, but the expected investors never materialized.

In June 2009 Panos sold 191,364 shares of iB3 common stock for approximately $193,000. Following this sale, he refused to support iB3's operations further.

In September 2009 Panos told Schmidt that he was done with iB3 and wanted Schmidt to buy back iBeam. Panos' attorneys sent Schmidt a letter accusing him of mismanagement of iB3, misrepresentation,

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and failure to properly disclose information to iB3 shareholders and the public. The letter indicated that Panos intended to remove the existing Board of Directors and management team, liquidate any assets of the company, and file a lawsuit against Schmidt personally. The letter also proposed a settlement: iBeam would be spun off from iB3 to Schmidt. Further, Schmidt would (1) assume all the debts of iBeam and certain debts of iB3 as well, (including those that Schmidt believed Panos had earlier promised to pay); (2) return all of his shares of iB3; and (3) forgo any debts owed to him by iB3 for employment, past services, or rent.

Schmidt offered a counterproposal, which Panos rejected. Panos called a shareholder meeting to appoint a new board of directors, which was held November 13, 2009. After the shareholder meeting, Panos again tried to convince Schmidt to buy back iBeam for $50,000 plus assumption of the debts and other considerations. Panos warned Schmidt that if he did not meet these demands, Panos would "bankrupt iBeam, sell off the assets, and screw everyone else." (Tr., 140–41, Ex. 89.) Schmidt declined to buy back iBeam.

At the board of directors meeting immediately following the shareholder meeting, Panos' attorneys introduced resolutions terminating the employment of Schmidt and his wife, Brenda Schmidt. Panos continued to maintain control over iB3.

In 2010 Plaintiffs filed suit against Panos, Panos Industries, LLC, and iB3 ("State Court Proceeding") in the Common Pleas Court of Franklin County, Ohio ("State Court"). A trial was held in May 2013. Plaintiffs' claims for indemnification, breach of contract, breach of fiduciary duty, fraud, negligent misrepresentation, promissory estoppel and unjust enrichment were submitted to the jury, which returned verdicts in favor of Plaintiffs on all claims except promissory estoppel. The jury also found that that Panos had exercised such complete control over iB3 that it was proper to pierce the corporate veil to hold Panos liable for the fraudulent, illegal, or similarly unlawful acts of the company.

The jury awarded damages against Panos and Panos Industries, jointly and severally, in the total amount of $890,760, and against Panos and iB3, jointly and severally, in the total amount of $306,439. The jury also imposed punitive damages of $500,000 on Panos individually, payable to Schmidt only; no punitive damages were awarded to Brenda Schmidt or Paul Bursey. Panos moved for a directed verdict and later for judgment notwithstanding the verdict, both of which were denied.

On September 5, 2013, the State Court issued its Final Judgment Entry (the "Judgment"), in which it adopted the jury's verdicts and granted Plaintiffs' request for attorney's fees in the amount of $677,133 and prejudgment interest in the total amount of $338,926. The Judgment against Panos, whether individually or jointly and severally with either Panos Industries or iB3, totaled $2,713,258.¹

Panos filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on October 24, 2013. Plaintiffs initiated this adversary proceeding, filing a complaint on February 3, 2014, later amended on April 9, 2014 ("Amended Complaint") (Doc. 10). The Amended Complaint seeks a determination that Panos' debt arising from the

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Judgment (the "Debt") is nondischargeable under 11 U.S.C. § 523(a)(2)(A), (4), (6), and (19) and that Panos should be denied a discharge under 11 U.S.C. § 727(a)(2), (3), (4), and (5).²

Of these eight counts, only three are before the Court at this time. Plaintiffs' Motion seeks summary judgment excepting the Debt from discharge under 11 U.S.C. § 523(a)(2)(A), (6) and (19). Plaintiffs assert that the facts supporting each of these three counts were conclusively established in the State Court Proceeding, that the doctrine of issue preclusion bars the relitigation before this Court of issues already determined in the State Court, and that they are therefore entitled to judgment in their favor as a matter of law.

III. Standard of Review for Motions for Summary Judgment

Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, provides that the Court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A party seeking...