Affirmed in part, dismissed in part by unpublished PER CURIAM opinion.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
Bryant William Reed pled guilty, pursuant to a plea agreement, to conspiracy to commit Hobbs Act robbery, in violation of 18 U.S.C. §§ 1951, 2 (2006); using and carrying a firearm during and in relation to a crime of violence, in violation of 18 U.S.C. § 924(c) (2006); and possession of ammunition after having been convicted of a crime punishable by more than one year of imprisonment, in violation of 18 U.S.C. § 922(g) (2006). Prior to sentencing, the Government moved for a downward departure pursuant to U.S. Sentencing Guidelines Manual § 5K1.1 (2008). The district court sentenced Reed to a total of 260 months of imprisonment, which was below the Guidelines range.
On appeal, counsel filed a brief pursuant to Anders v. California, 386 U.S. 738, 87 S.Ct. 1396, 18 L.Ed.2d 493 (1967), in which she states that there are no meritorious issues for appeal, but questions whether the sentence is procedurally unreasonable because the district court failed to adequately explain how the sentence provided Reed with individualized sentencing based on accurate facts. In his pro se supplemental brief, Reed asserts that counsel was ineffective and that he did not commit a robbery and is not guilty of the § 924(c) charge, but pled guilty on counsel's advice. The Government has moved to dismiss Reed's appeal based upon a waiver of appellate rights in his plea agreement.
This court reviews the validity of a waiver de novo, United States v. Brown, 232 F.3d 399, 402-03 (4th Cir. 2000), and will uphold a waiver of appellate rights if the waiver is valid and the issue being appealed is covered by the waiver. United States v. Blick, 408 F.3d 162, 168 (4th Cir. 2005). A waiver is valid if the defendant's agreement to the waiver was knowing and voluntary. United States v. Mann, 961 F.2d 493, 496 (4th Cir. 1992); United States v. Wessells,' 936 F.2d 165, 167 (4th Cir. 1991).
To determine whether a waiver is knowing and intelligent, this court examines "the totality of the circumstances, including the experience and conduct of the accused, as well as the accused's educational background and familiarity with the terms of the plea agreement." United States v. General, 278 F.3d 389, 400 (4th Cir. 2002) (internal quotation marks omitted). Generally, if a district court fully questions a defendant regarding the waiver of appellate rights during the Fed.R.Crim.P. 11 colloquy, the waiver is valid. Wessells, 936 F.2d at 167-68. In this case, Reed does not assert that his waiver was not voluntary, and our review of the record leads us to conclude that Reed's waiver of his right to appeal was knowing and voluntary and should be enforced to preclude any review of potential sentencing error. Reed's waiver does not, however, include a waiver of his right to appeal his conviction, or to assert claims of ineffective assistance of counsel.
Our review of the record leads us to conclude that the claims that can be discerned from Reed's pro se supplemental brief do not entitle him to relief. To the extent he claims ineffective assistance of counsel, such claims are generally not cognizable on direct appeal. United States v. King, 119 F.3d 290, 295 (4th Cir. 1997). Rather, to allow for adequate development of the record, a defendant must bring his claim in a 28 U.S.C.A. § 2255 (West Supp. 2010) motion. See id.; United States v. Hoyle, 33 F.3d 415, 418 (4th Cir. 1994). An exception exists when the record conclusively establishes ineffective assistance. United States v. Richardson, 195 F.3d 192, 198 (4th Cir. 1999); King, 119 F.3d at 295. In this case, the record does not conclusively show that counsel's performance was deficient. To the extent that Reed claims he is actually innocent of the § 924(c) charge, his claim is squarely contradicted by his statements in the plea hearing, his signature on the plea agreement, and his allocution at sentencing.
Accordingly, we deny the Government's motion to dismiss in part and affirm Reed's conviction. We grant the motion to dismiss with regard to any potential sentencing error that may be revealed by our review pursuant to Anders. In accordance with Anders, we have reviewed the entire record in this case and have found no meritorious issues for appeal that are not encompassed by the appeal waiver. This court requires that counsel inform Reed, in writing, of the right to petition the Supreme Court of the United States for further review. If Reed requests that a petition be filed, but counsel believes that such a petition would be frivolous, then counsel may move in this court for leave to withdraw from representation. Counsel's motion must state that a copy thereof was served on Reed.
We dispense with oral argument because the facts and legal contentions are adequately presented in the materials before the court and argument would not aid the decisional process.
AFFIRMED IN PART, AND DISMISSED IN PART.
are legally unrelated to a corporate entity may be held responsible for that entity's liabilities, at least in the absence of specific statutory authority.
The Plaintiff has also not directed the Court to
any legal authority that would refute the arguments made by Warren and Simons on appeal that strangers to a corporate entity may not be held liable through judicial veil-piercing for that entity's obligations. Nor does the Plaintiff contest the fact that Brearly was incorporated, owned, and controlled (aside from the transaction in question) by one man, Peter Abbey, against whom neither the Plaintiff nor the Kentucky Defendants have brought any claims.
Where a statute so authorizes, however, a non-director may be treated as akin to a director. See Customs Excise Comm'rs v. Holland (In re Paycheck Servs., 3 Ltd.), [2009] EWCA Civ 625 (C.A.) [¶¶ 45-47] (describing the liability of a "de facto" director under the Insolvency Act 1986 §§ 212, 251); see also R. v. K, [2005] EWCA Crim 619 (C.A.) [¶¶ 16-26] (concluding that the legal ownership or control of a corporation may be disregarded for purposes of applying the Proceeds of Crime Act 2002 § 80(3)).
This legal question was insufficiently addressed by the parties during the Adversary Proceeding. The Bankruptcy Court observed that "[n]o case has been cited where someone else's corporate shell was used in a scheme like the one at bar." Id. at 643. In the absence of legal guidance from the parties regarding how English law would address this question, the Bankruptcy Court concluded that "the use of an unrelated shell corporation appears more abusive than the use of an entity that is owned by those in control." Id. The court reasoned that "[u]se of someone else's shell entity would appear to permit those in control to disclaim responsibility and repudiate agreements more easily" than could a parent corporation with respect to its subsidiary or affiliate. Id. This appeal to equity, however, runs counter to the principles of English law described above that prohibit piercing the corporate veil on the basis of equity alone.
A comparison to veil-piercing in the United States may be instructive. U.S. courts proceed from the assumption that, when the corporate veil is pierced, it is done in order to hold liable someone with a legal interest in the corporate entity. Nonetheless, many U.S. jurisdictions, including New York, have recognized a doctrine of "equitable ownership" whereby persons who are not formally affiliated with a corporation by law may nevertheless be held liable on a veil-piercing theory. "New York courts have recognized for veil-piercing purposes the doctrine of equitable ownership, under which an individual who exercises sufficient control over the corporation may be deemed an `equitable owner,' notwithstanding the fact that the individual is not a shareholder of the corporation."Freeman v. Complex Computing Co., Inc., 119 F.3d 1044, 1051 (2d Cir. 1997) (citing Guilder v. Corinth Constr. Corp., 651 N.Y.S.2d 706, 707 (App. Div. 3d Dep't 1997)); see also Lally v. Catskill Airways, Inc., 603 N.Y.S.2d 619, 621 (App. Div. 3d Dep't 1993). Under New York's "equitable ownership" test, however, it must be shown that the defendant "exercised considerable authority over the corporation to the point of completely disregarding the corporate form and acting as though its assets were his alone to manage and distribute." Freeman, 119 F.3d at 1051 (quoting Lally, 603 N.Y.S.2d at 621); see also Guilder, 651 N.Y.S.2d at 707. But, even if UK law recognized an "equitable ownership" theory of liability similar to that recognized in many American jurisdictions, the factual findings of the Bankruptcy Court do not support a finding that the UK Defendants — to the exclusion of Abbey, Marrache, and all others — "exercised [such] considerable authority over [Brearly] to the point of completely disregarding the corporate form and acting as though its assets were [theirs] alone to manage and distribute." Freeman, 119 F.3d at 1051 (citation omitted).
As the description of English law on veil-piercing demonstrates, however, American and English law have diverged in their treatment of this doctrine. Thus, there can be limited reliance on analogous American law principles in the absence of a careful examination of the extent to which they may be inconsistent with English law.
For a second and entirely separate reason, the record in this case does not permit the piercing of Brearly's corporate veil. The factual findings cannot support veil-piercing because of the key distinction in English law between using the corporate form to evade or conceal existing legal obligations or wrongs on the one hand, and using it to insulate oneself from future or contingent liabilities on the other. The evidence, even when construed in the light most favorable to the Plaintiff, reveals that, at the time Brearly was introduced into the transaction, the UK Defendants had not yet incurred any legal obligations to Tyson or the Kentucky Defendants with respect to sale of the International Rights. See In re Tyson, 412 B.R. at 630-32. Nor was Brearly's existence concealed from the parties; although the Bankruptcy Court did appear to conclude that Brearly was introduced into the transaction in bad faith, id. at 642, there is no evidence in the record to suggest that either Tyson or the Kentucky Defendants were unaware that Brearly was their contractual counterparty under the July 26 Assignment and Distribution Agreement, respectively. As such, if they had doubts about the UK Defendants' good faith, Tyson and the Kentucky Defendants could have refused to deal with Brearly and/or the UK Defendants. Even if Brearly was a "perfect set-up" and "came in handy" for the UK Defendants,id., English law provides that a party is entitled to take advantage of the Salomon principle in order to limit its future liabilities, even where the corporate entity to be interposed is nothing more than a mere shell or fiction. To paraphrase Adams: "[w]hether or not [the UK Defendants' use of Brearly was] desirable" as a matter of public policy, "the right to use a corporate structure in this manner is inherent in [English] corporate law." Adams, [1990] Ch. at 544.
The Court makes no finding in this Opinion, however, concerning the reasonableness of Tyson's or the Kentucky Defendants' reliance for the purposes of analyzing the Plaintiff's tort claims.
E. Plaintiff's Fraud and Unjust Enrichment Claims
In the Adversary Proceeding, the Plaintiff also asserted a fraud claim against Warren and Simons and an unjust enrichment claim against the four UK Defendants. The Bankruptcy Court determined, applying New York choice-of-law principles, that Kentucky law governed these claims. The Bankruptcy Court concluded, however, that "the only damages that Plaintiff could assert from [his] fraud claim are the same contract damages that are being imposed on the UK Defendants by virtue of the piercing of Brearly's corporate veil." In re Tyson, 412 B.R. at 645. Likewise, because relief on the veil-piercing claims was granted, the Bankruptcy Court concluded that "there is no cause to resort to the equitable doctrine of unjust enrichment to fashion a remedy in this case against Sports Network." Id. at 640. The Bankruptcy Court thus declined to rule in the alternative regarding whether the Plaintiff would recover for fraud or unjust enrichment if veil-piercing had not been available.
This finding was proper and has not been challenged on appeal.See Fieger v. Pitney Bowes Credit Corp., 251 F.3d 386, 397 n. 1 (2d Cir. 2001) (observing that New York conflict-of-law principles recognize "depecage," or the application of different jurisdictions' laws to different claims for relief).
The Bankruptcy Court revisited the question of a fraud recovery during post-trial motion practice. Ruling from the bench, the court held that "[b]oth plaintiff and cross claimants have failed to establish each of the six issues that must be proved in order to sustain a fraud complaint under Kentucky law." The court further concluded that "[t]his failure of proof is not cured by the Court's finding, which it reiterates, that the U.K. defendants used Brearly for improper and indeed fraudulent purposes. That finding, however, does not entitle any plaintiff to a recovery sounding in common-law fraud." Read in context, however, this ruling may have merely reflected the court's judgment that the Plaintiff and Kentucky Defendants could not prove additional damages beyond that permitted on a contractual recovery.
In the August 2009 Opinion, the Bankruptcy Court implies that the Plaintiff's fraud claim was asserted against all four UK Defendants and that the unjust enrichment claim was brought against Sports Network alone. The Plaintiff's operative complaint, however, asserts a fraud claim against Warren and Simons and an unjust enrichment claim against all four UK Defendants.
Because the Bankruptcy Court erred in piercing Brearly's corporate veil, a question emerges whether the Plaintiff could recover the same money judgment, in full or in part, on his claims of fraud or unjust enrichment. As this Court sits in an appellate capacity pursuant to 28 U.S.C. § 158(a)(1), it declines to make the first determination as to this question. Thus, without expressing any opinion as to the proper outcome, the Court remands this case to the Bankruptcy Court so that it may consider, in the first instance, whether the Plaintiff may recover on his fraud and unjust enrichment claims.
Certain other arguments made by Warren on appeal, including that the Bankruptcy Court erred by failing to apply the Statute of Frauds and that the Bankruptcy Court incorrectly interpreted the July 26 Assignment, need not be addressed in light of this Opinion's disposition of the veil-piercing claim and its remand to the Bankruptcy Court for further proceedings.
F. Warren's Claim for Attorney's Fees
Finally, Warren asserts that, in the event that he prevails on appeal, he is entitled to his attorney's fees under English law. Under English practice, a prevailing party is ordinarily awarded its "costs," including attorney's fees. See, e.g., APL Co. Pte. Ltd. v. UK Aerosols Ltd., 582 F.3d 947, 957 (9th Cir. 2009) ("Under the English rule, attorneys' fees are generally awarded to the prevailing party."); RLS Assocs., LLC v. United Bank of Kuwait PLC, 464 F. Supp. 2d 206, 210 (S.D.N.Y. 2006) ("RLS") ("Under the English rule, the prevailing party can generally recover its attorneys' fees from the losing party."). In commercial litigation, an award of costs is normally entered against the party who is held indebted to the other. See A.L. Barnes Ltd. v. Time Talk (UK) Ltd., [2003] EWCA Civ 402 (C.A.) ("Time Talk") [¶ 28] ("In what may generally be called commercial litigation . . . the disputes are ultimately about money. In deciding who is the successful party the most important thing is to identify the party who is to pay money to the other. That is the surest indication of success and failure."). The determination of such an award, however, rests within the discretion of the court.
See Civil Procedure Rules 1998, R. 44.3(1) ("The court has discretion as to — (a) whether costs are payable by one party to another; (b) the amount of those costs; and (c) when they are to be paid"); id. R. 44.3(2) ("If the court decides to make an order about costs — (a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but (b) the court may make a different order."); see also Hullock v. E. Riding of Yorkshire County Council, [2009] EWCA Civ 1039 [¶ 19] (C.A.) ("Costs are in the discretion of the trial judge."); Lamont v. Burton, [2007] EWCA Civ 429 [¶ 20] (C.A.) ("The court has a wide discretion under rule 44.3 to make whatever costs order it considers appropriate in the particular circumstances of the case, taking account of the various factors specified in the rule."); Multiplex Constrs. (UK) Ltd. v. Cleveland Bridge UK Ltd., [2008] EWHC 2280 (Q.B.D.) (Jackson, J.) ("Multiplex") [¶ 72] (summarizing principles for guiding a court's discretion in awarding attorney's fees).
The Bankruptcy Court addressed this same question from the opposite perspective during post-trial motion practice, when the Kentucky Defendants sought an award of their attorney's fees under English law. The Bankruptcy Court declined to award them attorney's fees on two separate grounds. First, the Bankruptcy Court determined, citing Time Talk and Multiplex, that "English law places great emphasis on the monetary recovery obtained by a party in determining whether such party is a prevailing party entitled to attorneys' fees as part of costs under English law." Because the Kentucky Defendants did not obtain any net monetary recovery under the Judgment, the Bankruptcy Court concluded that they were not entitled to costs under English law.
Second, the Bankruptcy Court observed that "there is no authority applying the English law on shifting attorneys' fees" in U.S. court proceedings absent a clear contractual agreement by the parties. In so concluding, the Bankruptcy Court implicitly applied the "American Rule" that each litigant is to bear his or her own costs of litigation, including attorney's fees. See, e.g., Oscar Gruss Son, Inc. v. Hollander, 337 F.3d 186, 199 (2d Cir. 2003) (New York law) (noting that "attorneys' fees are the ordinary incidents of litigation and may not be awarded to the prevailing party," and that any contrary intent by the parties should be made "unmistakably clear [in] the language of the contract" (citation omitted)); AIK Selective Self-Ins. Fund v. Minton, 192 S.W.3d 415, 420 (Ky. 2006) (Kentucky law) ("[W]ith the exception of a specific contractual provision allowing for recovery of attorneys' fees . . . each party assumes responsibility for his or her own attorneys' fees." (citation omitted)).
In the absence of any significant federal bankruptcy policy, a bankruptcy court applies the choice-of-law rules of the forum state. Bianco v. Erkins (In re Gaston Snow), 243 F.3d 599, 607 (2d Cir. 2001). New York's choice-of-law principles would treat the English rule regarding attorney's fees as "substantive," not procedural, and thus where English law governs a given cause of action, so too should the English rule regarding attorney's fees. RLS, 464 F. Supp. 2d at 218 ("[T]he English rule creates a quasi-right of action for `wrongful' legal costs. . . . These quasi-rights of action, which are created by the English rule for attorneys' fees, accompany every cause of action under English law.")
Given that any award of attorney's fees under English law rests in the court's discretion, and given that the Plaintiff or Kentucky Defendants may ultimately prevail in this litigation on other grounds, it is premature to determine whether, and if so to what extent, Warren should recover any award of attorney's fees for his victory on the veil-piercing claim. The Court therefore declines to reach this ground of Warren's appeal, leaving it to the Bankruptcy Court to address this question in the first instance.
III. Kentucky Defendants' Appeal
The Kentucky Defendants appeal the Bankruptcy Court's "refusal to provide them monetary relief." They assert three points of error, each in the alternative. First, the Kentucky Defendants challenge the Bankruptcy Court's refusal to recognize a default judgment obtained by Straight-Out against Brearly in Kentucky federal court on December 16, 2008 (the "Kentucky Default Judgment") as binding against the UK Defendants. Second, the Kentucky Defendants challenge the Bankruptcy Court's refusal to grant their post-trial motion for leave to amend their pleadings to assert a fraud cross-claim against the UK Defendants and/or to conform their pleadings to match the evidence at trial. Third, the Kentucky Defendants assert that the Bankruptcy Court erred in refusing to award them attorney's fees under English law. Each argument is addressed in turn below.
A. Kentucky Default Judgment
The Kentucky Defendants' first argument on appeal is that the Bankruptcy Court erred by failing to recognize and enforce the Kentucky Default Judgment. For the following reasons, the Bankruptcy Court's Judgment is vacated insofar as it denies the Kentucky Defendants a monetary recovery, and the case is remanded for further proceedings.
1. Facts and Procedural History
On August 13, 2004, shortly after the Fight, Straight-Out filed two lawsuits in the United States District Court for the Western District of Kentucky (the "Kentucky Court"). One lawsuit was filed against Brearly (the "Kentucky Litigation") alleging breach of contract and unjust enrichment for failure to pay Straight-Out its $2.7 million minimum guarantee under the Distribution Agreement. The other lawsuit was filed against Warren, Sports Leisure, and Sports Network for breach of several other contracts that are not at issue in this litigation. The same attorney appeared to represent all defendants in both actions, and the attorney successfully obtained dismissal on forum non conveniens grounds of the non-Brearly action. After the Kentucky Court denied Brearly's motion to dismiss in the Kentucky Litigation and granted Brearly several extensions of time to answer, the Kentucky Court subsequently permitted Brearly's attorney to withdraw, and Brearly thereafter defaulted. After Straight-Out moved for a default judgment, the Kentucky Court granted that motion on or about March 1, 2006 in what it termed its "Default Judgment Order," subject to the court's retention of jurisdiction over post-judgment discovery.
These contracts included, inter alia, a co-promotional rights agreement and a provision-of-services agreement to compensate Tyson's opponent, Williams, for his participation in the Fight.
After no further damages were proved, final judgment was entered on December 16, 2008. The Kentucky Default Judgment entered against Brearly totaled $4,554,191, including: (1) a principal sum of $2.7 million, which was the amount of Straight-Out's minimum guarantee under the Distribution Agreement; (2) pre-judgment interest at 8% per annum (totaling $356,580); (3) attorney's fees for prosecuting the Kentucky Litigation and obtaining the default judgment (totaling $71,875); (4) a 30% contingent attorney's fee ($938,537); (5) anticipated costs and expenses to be incurred in attempting to collect on the judgment ($87,500); and (6) post-judgment interest accruing from March 1, 2006 at the rate of 4.70% per annum, compounded annually.
Meanwhile, on August 17, 2007, the Bankruptcy Court in New York granted the Kentucky Defendants' motion to vacate the default judgment entered against them in the Adversary Proceeding. See August 2007 Opinion, 2007 WL 2379624. On September 10, 2007, the Kentucky Defendants asserted a cross-claim against the UK Defendants alleging, in pertinent part, that "[a]s the alter ego of Brearly, the [UK Defendants] are liable to Straight-Out for the liabilities of Brearly, including the amounts due under the Kentucky [Default] Judgment." Trial was held on the Kentucky Defendants' veil-piercing cross-claim concurrently with the Plaintiff's claims in March 2009.
In the August 2009 Opinion, the Bankruptcy Court declined to recognize the Kentucky Default Judgment as binding against Brearly or the UK Defendants, finding that "[t]he Kentucky Defendants overreach when they argue that the default judgment entered in the Kentucky litigation regarding Straight Out's breach of contract claim against Brearly should be determinative and conclusive on the amount of damages." In re Tyson, 412 B.R. at 639. In particular, the Bankruptcy Court suggested that the Kentucky Default Judgment was premised on an erroneous calculation of damages, given the evidence at trial that Straight-Out had assigned away "the entire amount of its $2.7 million guaranteed recovery" from Brearly through the July 26 Assignment. Id. The Bankruptcy Court concluded that "[s]ince the proceeds from the international sales of the Fight did not exceed $2.7 million, Straight Out did not establish that it has a right to a net contractual recovery based on the record in this case."Id.
After the August 2009 Opinion was issued, the Kentucky Defendants registered the Kentucky Default Judgment in the Southern District of New York pursuant to 28 U.S.C. § 1963 on August 26, 2009. Thereafter, the Kentucky Defendants again sought recognition of the Kentucky Default Judgment by the Bankruptcy Court, and in particular, sought to transform the attorney's fee component of the Kentucky Default Judgment into a monetary recovery against the UK Defendants to be included in the Bankruptcy Court's Judgment. In proceedings held on the record before the Bankruptcy Court on October 22, 2009, the Bankruptcy Court declined to subsume any part of the Kentucky Default Judgment into the Bankruptcy Court's Judgment. The Bankruptcy Court observed, inter alia, that there appeared to be no basis under Kentucky law for the Kentucky Court's decision to award attorney's fees to Straight-Out.
2. Analysis
The Kentucky Defendants argue that the Bankruptcy Court "erred by failing to give Full Faith and Credit" to the Kentucky Default Judgment. The Kentucky Defendants argue that the Bankruptcy Court should have applied the Kentucky Default Judgment against the UK Defendants by using res judicata to bar the UK Defendants from contesting the amount of damages on the Kentucky Defendants' veil-piercing claims. While recognizing that the UK Defendants were not actually parties to the supposedly preclusive Kentucky Litigation, the Kentucky Defendants assert that the UK Defendants "completely controlled the legal defense of Brearly before the Kentucky federal district court," and therefore that the UK Defendants are now bound by the Kentucky Default Judgment pursuant to Taylor v. Sturgell, 553 U.S. 880, 128 S.ct. 2161 (2008).
Alternatively, the Kentucky Defendants contend on appeal that the Bankruptcy Court has failed to comply with 28 U.S.C. § 1963, which provides:
A judgment in an action for the recovery of money or property entered in any . . . district court . . . may be registered by filing a certified copy of the judgment in any other district. . . . A judgment so registered shall have the same effect as a judgment of the district court of the district where registered and may be enforced in like manner.
28 U.S.C. § 1963. This statute has no bearing, however, on whether res judicata applies in order to bar defendants in a subsequent proceeding from contesting liability or damages based on the results of a previous proceeding. As such, the Kentucky Defendants' discussion of § 1963 does not appear relevant to their arguments that the Bankruptcy Court should have held that the UK Defendants were estopped from contesting the amount of damages to be imposed against them.
The Kentucky Defendants also argue, in the alternative, that the Bankruptcy Court should have directly enforced the Kentucky Default Judgment against the UK Defendants following the Bankruptcy Court's holding that Brearly's corporate veil would be pierced. Because the Court reverses the decision to pierce Brearly's corporate veil, however, this alternative argument is moot.
"The preclusive effect of a federal-court judgment is determined by federal common law." Taylor, 553 U.S. at ___, 128 S.ct. at 2171. "The preclusive effect of a judgment is defined by claim preclusion and issue preclusion, which are collectively referred to as `res judicata.'" Id. "Under the doctrine of claim preclusion, a final judgment forecloses `successive litigation of the very same claim, whether or not relitigation of the claim raises the same issues as the earlier suit." Id. (citation omitted). Meanwhile, "[i]ssue preclusion, in contrast, bars successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, even if the issue recurs in the context of a different claim." Id. (citation omitted). Both of these doctrines have the effect of "precluding parties from contesting matters that they have had a full and fair opportunity to litigate." Id. (citation omitted).
"A person who was not a party to a suit generally has not had a `full and fair opportunity to litigate' the claims and issues settled in that suit," and therefore, a person is not bound by a judgment "in a litigation in which he is not designated as a party or to which he has not been made a party by service of process." Id. (citation omitted). The Supreme Court has, however, enumerated six exceptions to this general "rule against nonparty preclusion." Id. at 2172. On appeal, the Kentucky Defendants assert that either of twoTaylor v. Sturgell exceptions should apply. The first proffered exception dictates that a nonparty is bound by a prior judgment if that nonparty "assumed control over the litigation in which that judgment was rendered," id. at 2173 (citation omitted), and the second dictates that a party is bound where the nonparty is a "proxy," "agent," or "designated representative" of a "person who was a party to the prior adjudication." Id.
Although the Kentucky Defendants presented their res judicata arguments to the Bankruptcy Court on summary judgment and again at trial, the August 2009 Opinion does not address this theory of recovery, instead concluding only generally that "the Kentucky Defendants overreach[ed]" in this respect. In re Tyson, 412 B.R. at 639. The Kentucky Defendants re-asserted their res judicata argument during post-trial motion practice, but the Bankruptcy Court concluded that "it would be an abuse of process for this Court simply to enforce the Kentucky [Default] [J]udgment against the U.K. defendants" given the fact that Straight-Out had "signed all of the recovery proved in this case to Tyson." The Bankruptcy Court also stated during oral argument at the summary judgment stage, in reference to the potential preclusive effect of the Kentucky Default Judgment, that "the doctrine of res judicata requires a final judgment on the merits, which we do not have in this case."
As a general statement of the law, this observation was in error. "[I]t has long been the law that default judgments can support res judicata [i.e., claim preclusion] as surely as judgments on the merits." EDP Med. Computer Sys., Inc. v. U.S., 480 F.3d 621, 626 (2d Cir. 2007) (citing Morris v. Jones, 329 U.S. 545, 550-51 (1947)). It is not clear, however, that claim preclusion is the right framework for understanding this dispute. If the Kentucky Defendants' theory is understood instead as relying upon offensive issue preclusion, then the fact that the judgment was obtained by default will prevent recovery. The difference between claim preclusion and issue preclusion may be critical in this context, because "Judgment by default. . . . does not warrant issue preclusion for the very reason that the issues have not been litigated or decided." 18A Wright, Miller Cooper, Fed. Prac. Proc. § 4442; see Faulkner v. Nat'l Geographic Enters. Inc., 409 F.3d 26, 37 (2d Cir. 2005) (describing the requirements for applying offensive collateral estoppel).
Because the Bankruptcy Court did not clearly address the question of whether the Kentucky Default Judgment may preclude the UK Defendants from contesting liability and/or damages on the Kentucky Defendants' cross-claims pursuant to either of the proffered Taylor v. Sturgell exceptions, the Court declines to determine in the first instance whether either of these exceptions applies. On remand, the Bankruptcy Court shall determine, notwithstanding evidence that the Kentucky Court may have been mistaken in calculating the amount of damages, whether the Kentucky Defendants are entitled to use claim preclusion and/or offensive issue preclusion to enforce the Kentucky Default Judgment against the UK Defendants in the Adversary Proceeding.
B. Rule 15(b)(2) Rule 54 Motions
Second, the Kentucky Defendants assert that the Bankruptcy Court should have "[e]ither sua sponte or as a result of [their] post-Opinion motion" amended the Kentucky Defendants' pleading to include a fraud cross-claim against the UK Defendants. The Kentucky Defendants observe that "[t]he issue of fraud [was] litigated and actively contested" throughout the Adversary Proceeding based on the Plaintiff's own fraud claim against the UK Defendants and, therefore, that no unfair prejudice would result from such amendment. The Kentucky Defendants further interpret the August 2009 Opinion as making "obvious and clear findings of fact that fraud wasactually committed by the UK [] Defendants againstboth the Plaintiff and [the Kentucky Defendants] — even using the word `defrauded.'" The Kentucky Defendants assert that the court's factual findings represented "clear and convincing evidence" sufficient to satisfy the burden of proof as to each of the six elements of fraud under Kentucky law. See Flegles, Inc. v. Truserv Corp., 289 S.W.3d 544, 549 (Ky. 2009).
Following oral argument, the Bankruptcy Court concluded that the Kentucky Defendants' Rule 15(b)(2) and Rule 54 motions must be denied for at least three reasons. First, the Bankruptcy Court concluded that to add "a fraud claim or a claim for punitive damages. . . . would prejudice the defendants and would not be permitted." Second, the Bankruptcy Court found that, while the issue of fraud had indeed been litigated at trial, the Plaintiff had failed "to prove entitlement to either a fraud recovery or to punitive damages in its claim." Third, the Bankruptcy Court again found that the Kentucky Defendants had not suffered any damages because they assigned away their rights to recovery from Brearly under the Distribution Agreement.
As discussed above, however, the Bankruptcy Court may simply have been expressing its view that the Plaintiff had proven no right to damages beyond those he could recover under the breach-of-contract claim.
Although the Bankruptcy Court appears to have supported its ruling on the Rule 15(b)(2) and Rule 54 motions on independent grounds, it is nevertheless advisable to allow the Bankruptcy Court to revisit this issue on remand, given that the Bankruptcy Court must now address for the first time the Plaintiff's fraud and unjust enrichment claims. Accordingly, the Court vacates the Bankruptcy Court's denial of the Kentucky Defendants' Rule 15(b)(2) and Rule 54 motions and remands for reconsideration without expressing any view as to whether the applications should be granted.
C. Attorney's Fees
Finally, the Kentucky Defendants assert that the Bankruptcy Court erred in refusing to award them attorney's fees under English law. In light of the disposition of the veil-piercing claim, however, this aspect of the Kentucky Defendants' appeal need not be addressed and is dismissed as moot.
CONCLUSION
The October 27, 2009 final judgment of the Bankruptcy Court is vacated in part. The case is remanded for further proceedings consistent with this Opinion.
SO ORDERED: