Court Opinion

ID: 2971804
Source: CourtListenerOpinion
Date Created: 2015-09-22 16:40:19.051064+00
Date Added: 2024-06-11T11:21:30.036353
License: Public Domain

RECOMMENDED FOR FULL-TEXT PUBLICATION
                                   Pursuant to Sixth Circuit Rule 206
                                         File Name: 05a0007p.06

                       UNITED STATES COURT OF APPEALS
                                     FOR THE SIXTH CIRCUIT
                                       _________________

                                                          X
                                                           -
 In Re: COMMONWEALTH INSTITUTIONAL

                                                Debtor. -
 SECURITIES, INC.,
                                                           -
                                                           -
                                                               No. 03-5050

                                                           ,
                                                            >
 EXCEL ENERGY, INC.,                                       -
                                    Plaintiff-Appellant, -
                                                           -
                                                           -
                                                           -
          v.
                                                           -
                                                           -
 R. GENE SMITH, et al.,
                                 Defendants-Appellees. -
                                                           -
                                                           -
                                                           -
                                                          N
                           Appeal from the United States District Court
                        for the Western District of Kentucky at Louisville.
                     No. 02-00008—Charles R. Simpson, III, District Judge.
                                     Argued: September 22, 2004
                                 Decided and Filed: January 7, 2005
                      Before: MARTIN, COLE, and GIBBONS, Circuit Judges.
                                         _________________
                                              COUNSEL
ARGUED: Donald L. Cox, LYNCH, COX, GILMAN & MAHAN, Louisville, Kentucky, for Appellant.
Paul J. Hershberg, SEILLER & HANDMAKER, Louisville, Kentucky, Denise M. Helline, RUCK,
WILSON, HELLINE & BROCKMAN, Louisville, Kentucky, for Appellees. ON BRIEF: Donald L. Cox,
William H. Mooney, LYNCH, COX, GILMAN & MAHAN, Louisville, Kentucky, for Appellant. David
M. Cantor, SEILLER & HANDMAKER, Louisville, Kentucky, Denise M. Helline, RUCK, WILSON,
HELLINE & BROCKMAN, Louisville, Kentucky, for Appellees.
                                         _________________
                                             OPINION
                                         _________________
        BOYCE F. MARTIN, JR., Circuit Judge. Excel Energy, Inc., appeals the district court’s affirmance
of the bankruptcy court’s decision to disallow its Proof of Claim against the Estate of Commonwealth

                                                   1
No. 03-5050             In re Commonwealth Institutional Securities, Inc.                                  Page 2

Institutional Securities, Inc. The district court found that the bankruptcy court correctly concluded that
Commonwealth was not a seller of securities for purposes of Kentucky securities law, and that Excel never
pleaded broker-dealer liability against Commonwealth. For the reasons that follow, we AFFIRM the district
court’s judgment.
                                                       I.
       In March of 1992, Excel purchased a number of shares in Performance Nutrition, Inc., through
Commonwealth. The next month, Excel realized that Performance Nutrition was not NASDAQ-listed and
was neither registered nor exempt from registration under Kentucky Blue Sky Laws. The sale, therefore,
was not authorized under Kentucky law.
         Thus, in February of 1995, Excel filed a complaint in state court against Commonwealth, R. Gene
Smith (Commonwealth’s managing director and majority shareholder), and Gerald Brenzel
(Commonwealth’s president). In its complaint, Excel introduced Commonwealth as “at all times relevant
to this Complaint . . . registered as a broker/dealer under Kentucky Blue Sky Law (KRS Chapter 292).” The
complaint stated these claims:
       Count I:        The actions of the Defendant Commonwealth in selling Performance
                       Nutrition Stock to Excel violated KRS 292.340, entitling the Plaintiff to
                       damages.
       Count II:       Pursuant to KRS 292.480(2), Brenzel is jointly and severally liable with and
                       to the same extent as Commonwealth for damages.
       Count III:      Pursuant to KRS 292.480(2), Smith is jointly and severally liable with and
                       to the same extent as Commonwealth for damages.
Section 292.340 provides:
       It is unlawful for any person to offer or sell any security in this state, unless the security is
       registered under this chapter, or the security or transaction is exempt under this chapter, or
       the security is a covered security.
Section 292.480(1) provides:
       Any person who offers or sells a security in violation of KRS 292.340 . . . or by means of
       any untrue statements . . . is liable to the person buying the security from him.
Section 292.480(2) provides:
       Every person who directly or indirectly controls a seller liable under subsection (1), every
       partner, officer or director . . . or employee of such seller who materially aids in the sale and
       every broker-dealer or agent who materially aids in the sale is also liable . . . to the same
       extent as the seller unless the non-seller [proves] he did not know . . . the facts by reason of
       which the liability is alleged to exist.
Section 292.340 defines the prohibited act; sections 292.480(1) and (2) define who may be held liable by
their participation in the prohibited act. According to these provisions, one can violate, for our purposes,
section 292.340 by participating in a sale of unauthorized securities in two ways: 1) as a seller, under section
292.480(1), or 2) under section 292.480(2) as a broker-dealer or agent who materially aids in the sale, to
the extent that the seller is liable. Excel’s complaint demanded “judgment against each of Commonwealth,
Brenzel, and Smith, jointly and severally, under KRS 292.480(1) and (2) in the amount of the consideration
paid for the unregistered securities sold by Commonwealth.”
No. 03-5050             In re Commonwealth Institutional Securities, Inc.                              Page 3

        On October 19, 1995, Commonwealth filed a voluntary Chapter 7 petition in bankruptcy. Excel
subsequently filed its Proof of Claim against Commonwealth and attached a copy of its state court
complaint. As a result of the Chapter 7 petition, Excel’s state court action against Commonwealth was
stayed.
        State litigation on Excel’s section 292.480 claims continued against the other defendants. Smith
filed a motion for summary judgment, arguing that even if he controlled Commonwealth, he was not liable
because Commonwealth served merely as a broker, and not a seller, of the unregistered stock.
        The state trial court concluded that Smith could not be liable under section 292.480(1) because
Commonwealth was not a “seller,” finding that “a stock broker who merely executes a trade and has no
other interest in the stock other than his commission is not a ‘seller’ as that section is used in [Kentucky
Revised Statutes] 292.480(1).”
        The state court also found that Smith was being sued under section 292.480(2) as a “person who
directly or indirectly controls a seller.” The court determined that Smith could not be liable unless he
controlled Commonwealth and Commonwealth was a seller. Because the court resolved that
Commonwealth was not a seller, the court necessarily concluded that Smith could not be liable.
        The state court then considered whether Smith (but not Commonwealth) could be liable under
section 292.480(2) as one who materially aided the sale. The court interpreted Excel to argue that anyone
who executed a trade, such as Smith, would be a seller. The court recognized that the statute identifies a
broker-dealer as a “non-seller,” and, because it interpreted Excel to argue that Smith was a seller,
consequently dismissed Excel’s argument against him for broker-dealer liability. Based on its findings, the
court granted the summary judgment motion. Excel appealed the ruling to the Kentucky Court of Appeals
and, following that court’s dismissal, to the Kentucky Supreme Court.
        In the meantime, Smith and Commonwealth’s Chapter 7 Trustee filed a joint motion for summary
judgment in the bankruptcy court requesting disallowance of Excel’s Proof of Claim on the basis of
collateral estoppel. The bankruptcy court determined that the issue before it—“whether Commonwealth
was a ‘seller’ of unregistered security for purposes of Kentucky Blue Sky Law”—was resolved in the state
court action and, therefore, the issue was subject to collateral estoppel. The bankruptcy court found that
all elements of collateral estoppel were met, with the exception of the finality of the state court action. It
deferred granting summary judgment until the Kentucky Supreme Court ruled on Excel’s appeal, and issued
an order holding its ruling in abeyance.
        Subsequently, the Kentucky Supreme Court affirmed the dismissal of Excel’s appeal, and denied
Excel’s subsequent for rehearing. The bankruptcy court then entered the order granting summary judgment
in favor of Commonwealth.
        Excel filed a motion to alter, amend, or vacate the order, arguing that the doctrine of collateral
estoppel did not apply to Excel’s claim against Commonwealth for seller liability, and that there was still
the outstanding issue as to Commonwealth’s broker-dealer liability. In denying the motion, the bankruptcy
court held that the issue of seller liability was collaterally estopped and that Excel had never raised a claim
of broker-dealer liability against Commonwealth.
        Excel appealed the bankruptcy court’s decision to the district court, claiming that 1) the bankruptcy
court erred in applying the doctrine of collateral estoppel on the issue of Commonwealth’s seller liability,
2) the bankruptcy court erred in failing to read the broker-dealer claim for liability, under section
292.480(2), into its state court pleadings, and 3) Smith was judicially estopped from raising the collateral
estoppel defense. The district court denied each claim, and Excel timely appealed.
No. 03-5050             In re Commonwealth Institutional Securities, Inc.                              Page 4

                                                      II.
        We directly review the decision of the bankruptcy court, In re Laguna Assocs. Ltd. P’ship, 30 F.3d
734, 737 (6th Cir. 1994), reviewing de novo its conclusions of law and reviewing its findings of fact for
clear error, In re Kennedy, 249 F.3d 576, 579 (6th Cir. 2001).
1.     Collateral Estoppel—Seller Liability
        The bankruptcy court found that the issue before it—whether Commonwealth was a seller of
securities under Kentucky Blue Sky Law—was resolved by the state court and granted summary judgment
in favor of Commonwealth pursuant to the doctrine of collateral estoppel. Excel argues against application
of the doctrine.
        “The doctrine of collateral estoppel dictates that once a court has decided an issue of fact or law
necessary to its judgment, that decision may preclude re-litigation of the issue in a suit on a different cause
of action involving a party to the first case.” N.A.A.C.P., Detroit Branch v. Detroit Police Officers Ass’n,
821 F.2d 328, 330 (6th Cir. 1987). The parties agree that this issue is governed by the four factors set forth
in National Labor Relations Board v. Kentucky May Coal Company, 89 F.3d 1235, 1239 (6th Cir. 1996).
The district court engaged in a thorough analysis of the application of collateral estoppel under the four
factors, and, as to the issue of seller liability, we adopt its reasoning and conclusion.
2.     Broker-dealer Liability
       Excel argues that its complaint also alleges a claim of broker-dealer liability, under section
292.480(2), against Commonwealth, and that the district court erred in failing to read this claim into the
pleadings. We conclude that, even when we view these pleadings in the most forgiving light, we have no
choice other than to affirm the district court’s reading of the complaint.
        A plaintiff must set forth pleadings that contain a “short and plain statement of the claim showing
that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a). Even under our liberal pleading standards, a
plaintiff must at least “give the defendant fair notice of what [the] claim is and the grounds upon which it
rests,” Conley v. Gibson, 355 U.S. 41, 47 (1957), by providing “either direct or inferential allegations
respecting all the material elements to sustain a recovery.” Scheid v. Fanny Farmer Candy Shops, Inc., 859
F.2d 434, 436 (6th Cir. 1988).
        Excel’s pleadings do not satisfy even the liberal standard. The pleadings fail to allege any facts or
state any law to indicate that it was pleading a broker-dealer theory of liability. The theory holds liable
“every broker-dealer or agent who materially aids in the sale” of a security. Ky. Rev. Stat. § 292.480(2).
Excel’s pleadings do not set forth any allegations, directly or by inference, suggesting that Commonwealth
materially aided any sale. Even if we read the pleadings in the most forgiving light, we find no claim of
broker-dealer liability.
3.     Judicial Estoppel
        Under the doctrine of judicial estoppel, “where a party assumes a certain position in a legal
proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests
have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced
in the position formerly taken by him.” New Hampshire v. Maine, 532 U.S. 742, 749 (2001) (citations
omitted). Excel argues that Smith should be judicially estopped from raising the collateral estoppel issue
because, in a 1998 objection to Excel’s motion for a protective order, Smith took the position that the area
of inquiry—seller liability—had not been previously litigated.
        There is no set formula for assessing when judicial estoppel should apply. Id. at 750. However,
several considerations inform whether the doctrine is appropriate in a particular case. First, “a party’s later
No. 03-5050             In re Commonwealth Institutional Securities, Inc.                               Page 5

position must be ‘clearly inconsistent’ with its earlier position.” Id. Second, a court should review “whether
the party has succeeded in persuading a court to accept that party’s earlier position, so that judicial
acceptance of an inconsistent position in a later proceeding would create ‘the perception that either the first
or the second court was misled.’” Id. (quoting Edwards v. Aetna Life Ins. Co., 690 F.2d 595, 599 (6th Cir.
1982)). Finally, the court should evaluate whether the party advancing an inconsistent position would gain
an unfair advantage if allowed to proceed with the argument. Id. at 751.
       As to the first factor, the bankruptcy court concluded that judicial estoppel did not apply because
the court was “not bound by the state court’s discovery rulings.” Another bankruptcy judge reviewed this
claim in Excel’s later motion to amend, alter, or vacate the judgment, determining that Smith’s positions
were not inconsistent on the two occasions. The district court found the judicial estoppel argument to be
without merit because it did not find Smith’s arguments to be inconsistent.
         We agree that Smith’s arguments are not inconsistent. In his motion opposing the protective order,
Smith argued that there “was no final resolution regarding the Debtor.” Indeed, state court action against
Commonwealth was stayed pending resolution in bankruptcy. In his motion for summary judgment, Smith
argued that collateral estoppel bars Excel from relitigating the issue of whether Commonwealth was subject
to seller liability. These arguments are not inconsistent: even though litigation against Commonwealth was
unresolved pending the stay, collateral estoppel would continue to bar any court from considering whether
Commonwealth was a seller.
        Also, there was minimal risk that the bankruptcy court was misled or that there would be a
perception that it was misled. As discussed above, Smith’s arguments were not inconsistent. Moreover,
they were true; thus, there is little concern here that Smith was playing “fast and loose” with the facts of the
case in order to mislead the court or Excel. See Reynolds v. Comm’r of Internal Revenue Serv., 861 F.2d
469, 472 (6th Cir. 1988) (citing Scarino v. Central R.R., 203 F.3d 510, 513 (3d Cir. 1953)) (observing that
judicial estoppel is a rule against “playing fast and loose with the courts”).
       Based on this three-factor analysis, we conclude that the bankruptcy court did not err in refusing to
apply the doctrine of judicial estoppel.
                                                      III.
       For the foregoing reasons, we affirm the judgment of the district court.