Yust v. Henkel (In re Henkel)

• Decision Date: 19 April 2013
• Docket Number: Bankruptcy No. 11–15578.,Adversary No. 11–01215.
• Parties: In re Daniel W. HENKEL, Debtor. Nicholas Yust, Plaintiff v. Daniel W. Henkel, Defendant. Daniel W. Henkel, Counter–Claimant v. Nicholas Yust, Counter–Defendant.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio

490 B.R. 759

In re Daniel W. HENKEL, Debtor.

Nicholas Yust, Plaintiff

v.Daniel W. Henkel, Defendant.

Daniel W. Henkel, Counter–Claimant

v.Nicholas Yust, Counter–Defendant.

Bankruptcy No. 11–15578.

Adversary No. 11–01215.

United States Bankruptcy Court,

S.D. Ohio,

Western Division.

April 19, 2013.

Stacy A. Cole, Jeffrey Joseph Hanneken, Zachary D. Prendergast, Graydon Head & Ritchey LLP, Cincinnati, OH, Plaintiff/Counter–Defendant.

Reuel D. Ash, Ulmer & Berne, LLP, Cincinnati, OH, for Defendant, Counter–Claimant.

MEMORANDUM OPINION GRANTING PLAINTIFF'S MOTION TO DISMISS COUNTERCLAIMS AND DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

BETH A. BUCHANAN, Bankruptcy Judge.

Prior to the petition date, the creditor obtained a default judgment in state court against the debtor's company for breach of contract and against the debtor and his company for fraud related to a construction contract. The debtor appealed the entry of the default judgment to the state appellate court, which court affirmed the judgment. The creditor filed this adversary proceeding seeking a determination that the default judgment is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2) and (6).

In connection with his answer to the non-dischargeability complaint, the debtor filed counterclaims against the creditor for breach of contract and unjust enrichment. The creditor asks this court to dismiss the debtor's counterclaims for breach of contract and unjust enrichment on the basis that the debtor had an opportunity to raise these claims as part of the state court action but failed to do so; therefore, the debtor is now precluded from doing so in this non-dischargeability action. The creditor further seeks summary judgment on his § 523(a)(2) claim on the grounds that the debtor is precluded from relitigating the issue of fraud before this court based on the state court's finding of fraud in the default judgment.

This court finds that the debtor is precluded, under the doctrine of claim preclusion, from asserting the counterclaims in this non-dischargeability action because the default judgment is a final decision on the merits by the state court that involves the same parties and the same nucleus of facts and the debtor could have raised the counterclaims in the state court action. The creditor, however, is not entitled to summary judgment on his § 523(a)(2) claim under the doctrine of issue preclusion. While the default judgment satisfies three of the four requirements for issue preclusion, this court is unable to determine from the default judgment, in considering the state court record as a whole, the extent of the state court's finding of fraud or the amount of damages attributed to such fraud. Construing the facts in the light most favorable to the debtor, the creditor has failed to meet his burden to establish that the issue of fraud was actually and directly litigated in the state court to the degree of specificity needed to warrant summary judgment on the grounds of preclusion.

I. Background

This matter is before this Court on Nicholas Yust's (“ Yust”) Motion to Dismiss Counterclaims [Docket Number 14] (the “ Motion to Dismiss ”), Daniel W. Henkel's (the “ Debtor ” or “Henkel”) Objection to Plaintiff's Motion to Dismiss Counterclaims [Docket Number 17] and Yust's Reply in Support of His Motion to Dismiss Counterclaims [Docket Number 18].

Also before this Court is Yust's Motion for Summary Judgment [Docket Number 19] (the “ Motion for Summary Judgment ”), the Debtor's Memorandum in Response [Docket Number 21], Yust's Reply Memorandum in Support [Docket Number 23], Yust's Notice of Filing Copy

of Judgment Entry Affirming State Court Judgment in Its Entirety and Supplemental Memorandum

[Docket Number 30] and Debtor's Response to Plaintiff's Notice of Filing of Copy of Judgment Entry Affirming State Court Judgment [Docket Number 31].A. State Court Action

The debt at issue in this adversary proceeding arose by way of a default judgment (the “ Default Judgment ”) issued by the Hamilton County, Ohio Court of Common Pleas (the “ State Court ” and the “ State Court Action ”) on May 20, 2011 stemming from a complaint (“ State Court Complaint ”) by Yust against the Debtor and the Debtor's business, Henkel Design–Build, Inc. (“ Henkel Design ”). In the State Court Complaint, Yust alleges that he and Henkel Design entered into a contract (the “ Contract ”) pursuant to which Henkel Design,¹ as the general contractor, was to make certain improvements to Yust's gallery and production facility for his metal art and sculpture business. The price agreed upon in the Contract was $172,500.00, to be financed by a construction loan obtained by Yust through Huntington National Bank (the “ Bank ”). Yust alleges that Henkel Design submitted four draw requests for approval and payment. The first three draw requests were paid from the construction loan in the aggregate amount of $69,404 but the fourth draw request, in the amount of $128,623, was rejected by the Bank.²

Issues arose during the course of the Contract, ultimately giving rise to the State Court Action. Specifically, Yust alleged in the State Court Complaint that Henkel Design failed to use commercially reasonable efforts to complete the construction project resulting in the project being behind schedule and coming in at a cost significantly in excess of the Contract budget. Yust further alleged that Henkel Design submitted fraudulent draw requests ³ to Yust and the Bank which, without limitation, misrepresented which subcontractors and materialmen invoices had been paid, misrepresented or inflated the amount of subcontractor invoices and included forged change orders. Yust further asserted in the State Court Complaint that the Debtor should be personally liable for the conduct of Henkel Design based on the Debtor's control over and use of Henkel Design to defraud Yust. Based on these assertions of fact, Yust asserted causes of action in the State Court Complaint for (1) piercing the corporate veil, (2) breach of contract, (3) breach of the duties of good faith and fair dealing, (4) fraud and intentional misrepresentation, (5) negligence, (6) unjust enrichment, (7) conversion, (8) indemnity and (9) punitive damages as bases for relief.

Yust filed the State Court Complaint on July 14, 2010. Based on the Debtor's failure to answer or otherwise respond to the State Court Complaint, Yust filed a motion for default judgment on November 10, 2010. Magistrate Michael Bachman (the “ Magistrate ”) set a hearing on the motion for default judgment for December 21, 2010 (the “ Default Judgment Hearing ”). The day prior to the Default Judgment Hearing, the Debtor filed a pro se motion for extension of time to respond to the motion for default judgment so that he could hire an attorney. The Default Judgment Hearing was held nonetheless, as scheduled, on December 21, 2010. Yust and his counsel appeared at the Default Judgment Hearing but the Debtor did not.

At the Default Judgment Hearing, the Magistrate found, after reviewing the record and questioning Yust and his counsel, that the Debtor was properly served with the State Court Complaint and summons on August 20, 2010 at the Zig Zag Road and Eagles Lake Drive, Cincinnati, Ohio addresses listed for service in the record. The Magistrate also heard testimony from Yust regarding his understanding of the business structure and operations of Henkel Design, the formation of the Contract, matters leading up to Yust's termination of the Contract, matters relating to alleged fraud in connection with certain draw requests and damages associated with completing the construction project.

As relates to the issue of fraud, Yust testified that Henkel Design falsely represented in connection with the first three draw requests submitted to and paid by the Bank that subcontractors had been paid when Yust later had to directly pay several of these same subcontractors for the work already performed. Yust also testified that his signature was forged on a $950 change order dated July 16, 2009 (the “ July 2009 Change Order ”), which was also signed by the Debtor as president of Henkel Design and submitted to the Bank for payment. Lastly, Yust testified regarding a $5,718 invoice from Bolton Bros. Concrete dated November 24, 2009 (the “ Bolton Bros. Invoice ”), which Henkel Design submitted as part of the Fourth Draw Request. Yust stated that the Bolton Bros. Invoice submitted with the draw request was inflated by approximately $1,000 when compared to the original Bolton Bros. Invoice provided to him by Bolton Bros. Concrete, which original invoice was dated the same date as the invoice submitted with the draw request but reflected an invoice amount of only $4,715.

The Magistrate admitted the following exhibits into evidence at the Default Judgment Hearing, which exhibits were introduced in connection with Yust's testimony: ⁴

On February 9, 2010, the Magistrate issued a decision granting Yust's motion for default judgment (the “ Magistrate's Decision ”), which provides in relevant part:

The Court, having considered the pleadings, makes the following findings:

1. The Plaintiff and Defendant Henkel Design–Build, Inc. were parties to a contract for the construction of improvements at 3602 Eastern Avenue.

2. Defendant Henkel Design–Build, Inc. breached said contract and the Plaintiff properly terminated said contract.

3. Defendants Henkel Design–Build, Inc. and Defendant Daniel Henkel committed fraud by falsifying at least one draw request and one change order.

4. The actions of Defendants Henkel Design–Build, Inc. and Defendant Daniel Henkel demonstrate malice or aggravated or egregious fraud.

4. [sic] As a result of the breach of contract and the fraud, the Plaintiff has been damaged in the amount of $202,784.00.

It is therefore ORDERED, ADJUDGED, AND DECREED that the Plaintiff's Motion for Default Judgment is GRANTED

IT IS FURTHER ORDERED that the Plaintiff is granted judgment...