Court Opinion

ID: 1045816
Source: CourtListenerOpinion
Date Created: 2013-10-08 02:30:16.771997+00
Date Added: 2024-06-11T13:02:36.953946
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                           AT KNOXVILLE
                                October 1, 2012 Session

  DELWIN L. HUGGINS, JOHN P. KONVALINKA, as TRUSTEE for an
UNDISCLOSED BENEFICIARY and in the NAME of DELWIN HUGGINS
as a NOMINAL PARTY v. R. ELLSWORTH McKEE and ALTERNATIVE
     FUELS, LLC, a TENNESSEE LIMITED LIABILITY COMPANY

                Appeal from the Chancery Court for Hamilton County
                 No. 071061     Jon Kerry Blackwood, Senior Judge

            No. E2012-00080-COA-R3-CV-FILED-NOVEMBER 28, 2012

This appeal arises from a dispute over setoff claims related to a bankruptcy proceeding.
Delwin Huggins (“Huggins”) sued R. Ellsworth McKee (“McKee”) and Alternative Fuels,
LLC (“AF”) (McKee and AF as “the Defendants,” collectively) in the Chancery Court for
Hamilton County (“the Trial Court”). Huggins filed for bankruptcy. Konvalinka later
purchased the claims asserted by Huggins in this lawsuit. The Defendants filed a motion for
judgment on the pleadings, arguing that, even if Konvalinka’s claim for damages was
successful, McKee had an offset far in excess of these damages which rendered any further
proceedings useless. The Trial Court agreed with the Defendants and dismissed the case.
We affirm, in part, and, reverse, in part, the judgment of the Trial Court.

 Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed, in
                   part, and, Reversed, in part; Case Remanded

D. M ICHAEL S WINEY, J., delivered the opinion of the Court, in which H ERSCHEL P . F RANKS,
P.J., and C HARLES D . S USANO, JR., J., joined.

John P. Konvalinka, Chattanooga, Tennessee, pro se appellant.

Bruce C. Bailey; Anthony A. Jackson; and, Jeffrey W. Maddux; Chattanooga, Tennessee, for
the appellees, R. Ellsworth McKee and Alternative Fuels, LLC.
                                          OPINION

                                         Background

               AF was a business that developed alternative fuel sources. Specifically, AF
dealt in methane gas for the generation of electricity. Both Huggins and McKee apparently
have ownership interests in AF. In December 2007, Huggins filed a complaint against the
Defendants. In his complaint, Huggins alleged that McKee effectively shut him out of AF
resulting in his claimed damages. In February 2008, the Defendants filed an answer and
McKee filed a counterclaim seeking at least $1,500,000 alleging that Huggins was
incompetent and drove AF into the ground.

               In July 2009, Huggins filed for bankruptcy. In April 2010, the U.S. Bankruptcy
Court for the Eastern District of Tennessee (“the Bankruptcy Court”) entered an agreed order
approving Konvalinka’s purchase of the claims asserted by Huggins against the Defendants,
and Konvalinka subsequently was joined in the Trial Court as a plaintiff in this case. In May
2011, the Defendants filed a motion to amend answer and counterclaim, requesting to be
allowed to amend their answer and McKee’s counterclaim to assert a setoff against
Konvalinka. Also in May 2011, the Trial Court entered an order granting the Defendants’
motion to amend. The Trial Court, addressing Konvalinka’s arguments, stated, in part:

       The cases cited by the Trustee appear to invoke exceptions to the general rule,
       but are not applicable to this case since they involve foreclosure, sales of assets
       under 11 U.S.C. § 363(f), or other sales of assets free and clear of liens and
       claims. In the present case, Mr. Konvalinka stands in the shoes of Mr.
       Huggins after buying Mr. Huggins’ interest in this lawsuit; he does not stand
       in any better position than Mr. Huggins, and did not buy Mr. Huggins’ interest
       free and clear of Mr. McKee’s defenses and rights against Mr. Huggins. If Mr.
       Huggins had continued to pursue this lawsuit, he would have been subject to
       Mr. McKee’s counterclaim for setoff. Simply because Mr. Konvalinka
       purchased Mr. Huggins’ interest as Plaintiff in this pending lawsuit, Mr.
       Konvalinka may not now avoid Mr. McKee’s counterclaim for setoff.

             In November 2011, the Bankruptcy Court entered an order holding that
Konvalinka lacked standing to object to a proposed compromise in Huggins’s bankruptcy

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proceeding.1 The Bankruptcy Court subsequently entered an order granting and approving
a compromise and settlement, stating in relevant part:

        ORDERED that for the purpose of the Trustee’s distribution to unsecured
        creditors only, R. Ellsworth McKee’s Proof of Claim, Claim No. 2, will be
        treated as follows:

                 (a)      Mr. McKee’s claim is subordinated in right of payment to the
                          extent of $16,117,938 of Claim No. 2, to the claims of
                          remaining unsecured creditors who properly filed claims within
                          the time set out in the Trustee’s Notice of Need to File Proof of
                          Claim Due to Recovery or Anticipated recovery of Assets,

                 (b)      Along with the remaining unsecured creditors, Mr. McKee will
                          receive his pro rata share of the Trustee’s distribution to
                          unsecured creditors based on an $8,000,000 unsecured claim;
                          and,

                 (c)      Mr. McKee’s partial subordination is only for the purpose of the
                          Trustee’s distribution to unsecured creditors and shall not affect
                          the validity of Mr. McKee’s Proof of Claim for $24,117,938,
                          which shall be allowed.

             In December 2011, McKee2 filed a motion for judgment on the pleadings in
the Trial Court, rooted in the Bankruptcy Court’s order and McKee’s setoff claim.
According to McKee’s motion: “Mr. Konvalinka’s claim for damages, even if successful,
which is vigorously disputed, allows a maximum recovery of approximately $480,000,
against which Mr. McKee would be entitled to offset more than $24,000,000. Thus, further

        1
          The Bankruptcy Court’s opinion may be found at In Re Huggins, 460 B.R. 714 (Bankr. E.D. Tenn.
2011). According to the Bankruptcy Court, “Here, the interests of the trustee—who is a party to the
proposed settlement—and the interests of John Konvalinka—who is not a party to the proposed settlement
and is not a creditor in this case—diverge.” Id. at 719. The Bankruptcy Court further predicted: “Because
John Konvalinka is not a party to the bankruptcy case and because there is a direct conflict between his
interests and those of the trustee and he thus lacks privity with the trustee, the state court will not likely apply
res judicata to preclude Mr. Konvalinka from contesting Mr. McKee's claim of a right of setoff.” Id. at 720.

        2
         McKee is the movant on the motion for judgment on the pleadings, but the memorandum in support
of the motion refers to the motion as being by the Defendants.

                                                        -3-
proceedings in this case are useless and Mr. McKee is entitled to judgment on the
pleadings.”3 In January 2012, the Trial Court entered its order in favor of the Defendants,
stating in relevant part:

              It appearing to the Court that the defendant has been allowed to amend
       the answer and counterclaim to assert the defense of set off with his allowed
       proof of claim in bankruptcy against the plaintiff; that the plaintiff John P.
       Konvalinka therefore assumes the same shares as the plaintiff Delwin
       Huggins; that the bankruptcy court has determined that the claim of Delwin
       Huggins is $24,227,538.00; that plaintiff’s damages of proof would be
       $479,000.00 and that the judgment of the bankruptcy court is res judicata in
       these proceedings.

                                                ***

                     IT IS THEREFORE ORDERED that this case is dismissed with
       cost assessed against the plaintiff . . . .

Konvalinka appeals to this Court.

                                            Discussion

               Though not stated exactly as such, Konvalinka raises four issues on appeal: 1)
whether the Trial Court erred in holding that the Defendants were entitled to assert the setoff
claim against Konvalinka; 2) whether the Trial Court erred in holding that the Bankruptcy
Court’s order permitting McKee’s claim against Huggins’s bankruptcy estate was entitled
to res judicata effect; 3) whether the Trial Court erred in dismissing Konvalinka’s claims
based on its conclusion regarding the amount of damages recoverable from McKee; and, 4)
whether the Trial Court erred in dismissing Konvalinka’s claims against AF.

              The Trial Court dismissed this case as a judgment on the pleadings. As the
Trial Court considered matters outside the pleadings, we, however, will apply the standard
for summary judgment to this case. Tenn. R. Civ. P. 12.03. Our Supreme Court reiterated
the standard of review in summary judgment cases as follows:

       3
        The Defendants attached a number of exhibits to the memorandum of law accompanying the motion
for judgment on the pleadings. These exhibits included, among other things, deposition excerpts and
discovery responses.

                                                 -4-
             The scope of review of a grant of summary judgment is well
      established. Because our inquiry involves a question of law, no presumption
      of correctness attaches to the judgment, and our task is to review the record to
      determine whether the requirements of Rule 56 of the Tennessee Rules of Civil
      Procedure have been satisfied. Hunter v. Brown, 955 S.W.2d 49, 50-51 (Tenn.
      1997); Cowden v. Sovran Bank/Cent. S., 816 S.W.2d 741, 744 (Tenn. 1991).

              A summary judgment may be granted only when there is no genuine
      issue of material fact and the moving party is entitled to judgment as a matter
      of law. Tenn. R. Civ. P. 56.04; Byrd v. Hall, 847 S.W.2d 208, 214 (Tenn.
      1993). The party seeking the summary judgment has the ultimate burden of
      persuasion “that there are no disputed, material facts creating a genuine issue
      for trial . . . and that he is entitled to judgment as a matter of law.” Id. at 215.
      If that motion is properly supported, the burden to establish a genuine issue of
      material fact shifts to the non-moving party. In order to shift the burden, the
      movant must either affirmatively negate an essential element of the
      nonmovant’s claim or demonstrate that the nonmoving party cannot establish
      an essential element of his case. Id. at 215 n.5; Hannan v. Alltel Publ’g Co.,
      270 S.W.3d 1, 8-9 (Tenn. 2008). “[C]onclusory assertion[s]” are not sufficient
      to shift the burden to the non-moving party. Byrd, 847 S.W.2d at 215; see also
      Blanchard v. Kellum, 975 S.W.2d 522, 525 (Tenn. 1998). Our state does not
      apply the federal standard for summary judgment. The standard established
      in McCarley v. West Quality Food Service, 960 S.W.2d 585, 588 (Tenn. 1998),
      sets out, in the words of one authority, “a reasonable, predictable summary
      judgment jurisprudence for our state.” Judy M. Cornett, The Legacy of Byrd
      v. Hall: Gossiping About Summary Judgment in Tennessee, 69 Tenn. L. Rev.
      175, 220 (2001).

              Courts must view the evidence and all reasonable inferences therefrom
      in the light most favorable to the non-moving party. Robinson v. Omer, 952
S.W.2d 423, 426 (Tenn. 1997). A grant of summary judgment is appropriate
      only when the facts and the reasonable inferences from those facts would
      permit a reasonable person to reach only one conclusion. Staples v. CBL &
      Assocs., Inc., 15 S.W.3d 83, 89 (Tenn. 2000). In making that assessment, this
      Court must discard all countervailing evidence. Byrd, 847 S.W.2d at 210-11.
      Recently, this Court confirmed these principles in Hannan.

Giggers v. Memphis Housing Authority, 277 S.W.3d 359, 363-64 (Tenn. 2009).

                                              -5-
              We first address whether the Trial Court erred in holding that the Defendants
were entitled to assert the setoff claim again Konvalinka. We have previously discussed
setoffs:

       The fundamental philosophy of all setoffs and recoupments is that a party
       being sued for money may claim entitlement to money from the party bringing
       the suit, permitting the adjudication of countervailing claims in one suit.

              A set-off is a counterdemand which a defendant holds against a
              plaintiff, arising out of a transaction extrinsic of plaintiff's cause
              of action. It is the right which exists between two parties, each
              of whom under an independent contract owes an ascertained
              amount to the other, to set-off their respective debts by way of
              mutual deduction, so that in any action brought for the larger
              debt the residue only, after deduction, may be recovered. The
              right of set-off is a common-law right, which belongs to every
              creditor, to apply unappropriated monies of his debtor, in his
              hands, in extinguishment of debts due to him. It allows parties
              that owe mutual debts to each other to assert amounts owed,
              subtract one from the other, and pay only the balance.

       80 C.J.S. Set-off and Counterclaim § 3 (2000) (footnotes omitted).

                                              ***

              A setoff must be a valid claim for which the defendant might have sued
       the plaintiff and recovered. In other words, a setoff claim must be sufficient
       to support an independent action by the defendant against the plaintiff. An
       essential requirement to a right of setoff is that the demands, or claims, are
       mutual, that is subsisting between the same parties. Additionally, the
       reciprocal claims “must be of the same grade and nature or be due in the same
       capacity or right.” The right to setoff is available to assert claims only to
       liquidated damages or those capable of being ascertained by calculation.

Bakir v. Massengale, E2009-02483-COA-R3-CV, 2010 WL 3394037, at *2 (Tenn. Ct. App.
Aug. 30, 2010) (quoting Conister Trust Ltd. v. Boating Corp. of America, M1998-00949-
COA-R3-CV, 2002 WL 389864, at **18-19 (Tenn. Ct. App. March 14, 2002) (citations
omitted)), no appl. perm. appeal filed.

                                               -6-
              Konvalinka vigorously argues that no mutuality exists between him and McKee
and, therefore, McKee’s setoff as to Huggins cannot be used against him. We disagree.
When Konvalinka purchased Huggins’s claims asserted in this lawsuit, he stepped into
Huggins’s shoes, so to speak. In so doing, Konvalinka has no more rights or defenses than
did Huggins. We affirm the Trial Court in its holding that McKee could assert the setoff
against Konvalinka.

               We next address whether the Trial Court erred in holding that the Bankruptcy
Court’s order permitting McKee’s claim against Huggins’s bankruptcy estate was entitled
to res judicata effect. In Lien v. Couch, 993 S.W.2d 53 (Tenn. Ct. App. 1998), this Court
discussed the doctrine of res judicata. We stated:

               Res judicata is a claim preclusion doctrine that promotes finality in
       litigation. See Moulton v. Ford Motor Co., 533 S.W.2d 295, 296 (Tenn. 1976);
       Jordan v. Johns, 168 Tenn. 525, 536-37, 79 S.W.2d 798, 802 (1935). It bars
       a second suit between the same parties or their privies on the same cause of
       action with respect to all the issues which were or could have been litigated in
       the former suit. See Richardson v. Tennessee Bd. of Dentistry, 913 S.W.2d
446, 459 (Tenn. 1995); Collins v. Greene County Bank, 916 S.W.2d 941, 945
       (Tenn. Ct. App. 1995).

              Parties asserting a res judicata defense must demonstrate that (1) a court
       of competent jurisdiction rendered the prior judgment, (2) the prior judgment
       was final and on the merits, (3) the same parties or their privies were involved
       in both proceedings, and (4) both proceedings involved the same cause of
       action. See Lee v. Hall, 790 S.W.2d 293, 294 (Tenn. Ct. App. 1990). A prior
       judgment or decree does not prohibit the later consideration of rights that had
       not accrued at the time of the earlier proceeding or the reexamination of the
       same question between the same parties when the facts have changed or new
       facts have occurred that have altered the parties' legal rights and relations. See
       White v. White, 876 S.W.2d 837, 839-40 (Tenn. 1994).

              The principle of claim preclusion prevents parties from splitting their
       cause of action and requires parties to raise in a single lawsuit all the grounds
       for recovery arising from a single transaction or series of transactions that can
       be brought together. See Bio-Technology Gen. Corp. v. Genentech, Inc., 80
F.3d 1553, 1563 (Fed. Cir. 1996); Hawkins v. Dawn, 208 Tenn. 544, 548, 347
S.W.2d 480, 481-82 (1961); Vance v. Lancaster, 4 Tenn. (3 Hayw.) 130, 132
       (1816). The principle is subject to certain limitations, one of which is that it
       will not be applied if the initial forum did not have the power to award the full

                                              -7-
       measure of relief sought in the later litigation. See Davidson v. Capuano, 792
F.2d 275, 279 (2d Cir. 1986); Carris v. John R. Thomas & Assocs., P.C., 896
P.2d 522, 529-30 (Okla. 1995); see also Rose v. Stalcup, 731 S.W.2d 541, 542
       (Tenn. Ct. App. 1987) (holding that a subsequent action was not barred
       because the initial court did not have jurisdiction over the claim). Thus, the
       Restatement of Judgments points out:

                      The general rule [against relitigation of a claim] is largely
              predicated on the assumption that the jurisdiction in which the
              first judgment was rendered was one which put no formal
              barriers in the way of a litigant's presenting to a court in one
              action the entire claim including any theories of recovery or
              demands for relief that might have been available to him under
              applicable law. When such formal barriers in fact existed and
              were operative against a plaintiff in the first action, it is unfair
              to preclude him from a second action in which he can present
              those phases of the claim which he was disabled from presenting
              in the first.

       Restatement (Second) of Judgments § 26(1)(c) cmt. c (1982).

Lien, 993 S.W.2d at 55-56.

             Konvalinka argues, among other things, that, in this case, (1) no prior judgment
was issued on the merits, and (2) the same parties or their privities from Huggins’s
bankruptcy proceeding are not involved here. We disagree. The judgment of the Bankruptcy
Court was a final judgment in that it allowed McKee’s proof of claim against Huggins.
Moreover, as previously discussed, we believe that Konvalinka simply stepped into
Huggins’s shoes. This issue may not now be relitigated. While the Bankruptcy Court
predicted that our state courts would not find res judicata, ultimately, it is up to the
Tennessee state courts to make that determination. We affirm the Trial Court as to this issue.

             We next address whether the Trial Court erred in dismissing Konvalinka’s
claims based on its conclusion regarding the maximum amount of actual and punitive
damages possibly recoverable from McKee. Our Supreme Court, acknowledging the United
States Supreme Court’s guidance, has discussed what constitutes excessive punitive awards:

       To assist courts in determining whether a punitive award is grossly excessive
       and violates due process, the Court has identified three guideposts: (1) the

                                               -8-
       degree of reprehensibility of the defendant's conduct; (2) the disparity between
       the actual or potential harm suffered by the plaintiff and the punitive damages
       award; and (3) the difference between the punitive damages awarded and the
       civil penalties authorized or imposed in comparable cases. Gore, 517 U.S. at
       574–75, 116 S. Ct. 1589.

Goff v. Elmo Greer & Sons Const. Co., Inc., 297 S.W.3d 175, 191 (Tenn. 2009).

               McKee’s Proof of Claim in excess of $24,000,000 was allowed by the
Bankruptcy Court and comprises McKee’s setoff. It is undisputed that Konvalinka’s
maximum recovery of actual damages would be around $479,000. Konvalinka argues in his
brief that in addition to his actual damages of $479,000, “a reasonable jury could award
punitive damages in an amount in excess of $24,000,000 against McKee in this matter.”

              In consideration of the relevant factors, we conclude that under no
circumstances could Konvalinka recover $24,000,000 in punitive damages in this case in
such a way as to withstand a due process analysis. As pointed out by the Defendants on
appeal, “[n]o one was maimed, no one was killed, and no one suffered physical injuries.”
$24,000,000 would represent approximately a 50 to one ratio of punitive damages to
compensatory damages. Konvalinka argues that McKee’s conduct was reprehensible in that
he seized control of AF and essentially gutted the company for his own benefit at the expense
of Huggins. Even if true, we hold that punitive damages of $24,000,000, at around 50 to one,
would be completely beyond the pale in this case, and that such an award would be violative
of due process under Goff. We find Konvalinka’s issue three to be without merit.

               Finally, we address whether the Trial Court erred in dismissing Konvalinka’s
claims against AF. Konvalinka argues his complaint asks for and that he is entitled to seek
relief directly against AF. On this issue, we agree with Konvalinka. We observe that
Huggins’s original complaint requested that a receiver be appointed to take control of AF.
Huggins also requested that the court, pursuant to Tenn. Code Ann. § 48-230-105, “rectify
the wrongs committed by McKee and to compensate Huggins and AF for all losses suffered
at the hands of McKee.” We hold that Konvalinka may pursue Huggins’s claims against AF.
We emphasize that we are not making any determinations regarding the merits of
Konvalinka’s claims against AF. Rather, we merely hold that the Trial Court erred in
dismissing Konvalinka’s claims against AF at this stage of the proceedings.

                We reverse the judgment of the Trial Court as to Konvalinka’s issue 4. For
Konvalinka’s issues 1, 2, and 3 on appeal as already discussed, we hold that the Defendants
are entitled to judgment as a matter of law and thus the Trial Court did not err in dismissing
Konvalinka’s claims against McKee.

                                             -9-
                                       Conclusion

              The judgment of the Trial Court is affirmed, in part, and, reversed, in part.
This cause is remanded to the Trial Court for collection of the costs below and for further
proceedings consistent with our Opinion. Costs on appeal are assessed one-half against the
Appellant, John P. Konvalinka, and, one-half against the Appellee, Alternative Fuels, LLC.

                                                  _________________________________
                                                  D. MICHAEL SWINEY, JUDGE

                                           -10-