     12-936-cv
     Straight-Out Promotions, LLC v. Warren

                          UNITED STATES COURT OF APPEALS
                              FOR THE SECOND CIRCUIT

                                     SUMMARY ORDER
     RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
     ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
     PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
     DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
     ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
     SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

 1            At a stated term of the United States Court of Appeals
 2       for the Second Circuit, held at the Thurgood Marshall United
 3       States Courthouse, 40 Foley Square, in the City of New York,
 4       on the 15th day of February, two thousand thirteen.
 5
 6       PRESENT: DENNIS JACOBS,
 7                              Chief Judge,
 8                AMALYA L. KEARSE,
 9                SUSAN L. CARNEY,
10                              Circuit Judges.
11
12       - - - - - - - - - - - - - - - - - - - -X
13       IN RE: MICHAEL G. TYSON, et al.,
14                Debtors,
15
16       R. TODD NEILSON, PLAN ADMINISTRATOR
17       OF THE MGT CHAPTER 11 LIQUIDATING
18       TRUST, on behalf of the MGT CHAPTER
19       11 LIQUIDATING TRUST and on behalf of
20       MICHAEL G. TYSON, an Individual,
21                Plaintiff,
22
23                    -v.-                                               12-936
24
25       STRAIGHT-OUT PROMOTIONS, LLC, and
26       CHRIS WEBB, an Individual,
27                Defendants-Cross-Claimants-
28                Appellants,

                                                  1
 1
 2            -v.-
 3
 4   FRANK WARREN, EDWARD SIMONS,
 5            Defendants-Cross-Defendants-
 6            Appellees.1
 7   - - - - - - - - - - - - - - - - - - - -
 8
 9   FOR APPELLANTS:              J. BRUCE MILLER, J. Bruce Miller
10                                Law Group, Louisville, KY.
11
12   FOR APPELLEE FRANK WARREN:   HOWARD KARASIK, Sherman, Citron
13                                & Karasik, New York, NY.
14
15        Appeal from a judgment of the United States District
16   Court for the Southern District of New York (Cote, J.).
17
18        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
19   AND DECREED that the judgment of the district court be
20   AFFIRMED.
21
22        Straight-Out Promotions, LLC and Chris Webb
23   (collectively, the “Kentucky Defendants”) appeal from the
24   judgment of the United States District Court for the
25   Southern District of New York (Cote, J.), affirming the
26   decision of the United States Bankruptcy Judge (Gropper,
27   J.), which denied their cross-claims against Frank Warren
28   and Edward Simons (collectively, the “UK Defendants”). We
29   assume the parties’ familiarity with the underlying facts,
30   the procedural history, and the issues presented for review.
31        1. The UK Defendants are related to a British shell
32   company, Brearly, that contracted with the Kentucky
33   Defendants to sell foreign rights to a prizefight between
34   Michael Tyson and an English boxer, Danny Williams.
35   Brearly’s guarantee on the foreign rights was dishonored;
36   Tyson’s estate in bankruptcy sued all of the above
37   defendants in the Bankruptcy Court of the United States
38   District Court for the Southern District of New York, and
39   the Kentucky Defendants cross-claimed against the UK
40   Defendants, relying chiefly on a default judgment that they
41   had obtained against Brearly of over $4 million. See


         1
            The Clerk of Court is directed to amend the caption
     of this case to conform to the listing of the parties shown
     above.
                                   2
 1   Straight–Out Promotions, LLC. v. Brearly (Int’l) Ltd., No.
 2   3:04–CV–473–H, 2008 WL 6604013 (W.D. Ky. Dec. 16, 2008), ECF
 3   No. 51; see also Straight-Out Promotions, LLC v. Warren, 467
 4   B.R. 684, 692 (S.D.N.Y. 2012). The Kentucky Defendants cite
 5   the Supreme Court’s recent res judicata guidance in Taylor
 6   v. Sturgell, 553 U.S. 880 (2008) to argue that the UK
 7   Defendants should be liable on the default judgment. “A
 8   district court’s order in a bankruptcy case is subject to
 9   plenary review, meaning that this Court undertakes an
10   independent examination of the factual findings and legal
11   conclusions of the bankruptcy court. Findings of fact are
12   reviewed for clear error, and conclusions of law are
13   reviewed de novo.” In re Kalikow, 602 F.3d 82, 91 (2d Cir.
14   2010) (quotation marks and citation omitted).
15        The district court properly ruled that “for judgments
16   in diversity cases, federal law incorporates the rules of
17   preclusion applied by the State in which the rendering court
18   sits.” Taylor, 553 U.S. at 891 n.4; see Straight-Out, 467
19   B.R. at 692 (“[I]n determining the preclusive effect of the
20   Kentucky Default Judgment, Kentucky law governs.”).
21   Kentucky courts recognize the related doctrines of claim and
22   issue preclusion. Moorhead v. Dodd, 265 S.W.3d 201, 203-204
23   (Ky. 2008). They identify four elements required to
24   establish collateral estoppel, or issue preclusion: “(1)
25   identity of issues; (2) a final decision or judgment on the
26   merits; (3) a necessary issue with the estopped party given
27   a full and fair opportunity to litigate; (4) a prior losing
28   litigant.” Moore v. Commonwealth, 954 S.W.2d 317, 319 (Ky.
29   1997). They identify three elements for claim preclusion to
30   bar future litigation: (1) “identity of the parties”; (2)
31   “identity of the causes of action”; and (3) “the [prior]
32   action must have been resolved on the merits.” Yeoman v.
33   Commonwealth, 983 S.W.2d 459, 465 (Ky. 1998).
34        As the district court ruled, there was no claim
35   preclusion because there was no identity of the parties.
36   The UK Defendants were not parties to the Kentucky action.
37   They were not in privity with Brearly because they did not
38   share an “absolute identity of legal interest.” BTC
39   Leasing, Inc. v. Martin, 685 S.W.2d 191, 198 (Ky. Ct. App.
40   1984). The district court observed that “Brearly,
41   apparently, decided that it did not have an interest in
42   defending itself in the Kentucky Action, or indeed in the
43   proceedings before the Bankruptcy Court,” whereas the UK
44   Defendants “have litigated the present action determinedly.”
45   Straight-Out, 467 B.R. at 694. The Kentucky Defendants
46   argue that Brearly “adequately represented” the interests of
47   the UK Defendants, see BTC, 685 S.W.2d at 198, but Brearly

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 1   withdrew counsel and defaulted. The UK Defendants may have
 2   controlled Brearly’s counsel, but, as the bankruptcy court
 3   found, that does not establish privity. See Straight-Out,
 4   467 B.R. at 693 (“A party’s ‘assumption of control does not
 5   make him a party to the litigation.’”) (quoting Restatement
 6   (Second) of Judgments § 39 cmt. b (1982)).
 7        The Kentucky Defendants emphasize that certain cases
 8   show that Kentucky courts use a “transactional approach” in
 9   claim preclusion cases. See Cobble v. Commonwealth of
10   Kentucky, CIV.A. 3:01CV-62-H, 2001 WL 1772020, at *2 (W.D.
11   Ky. July 24, 2001), aff’d, 46 F. Appx. 320 (6th Cir. 2002);
12   Smith v. Bob Smith Chevrolet, Inc., 275 F. Supp. 2d 808, 813
13   (W.D. Ky. 2003). But that “transactional approach” is used
14   to ascertain if the claims are identical; it does not bear
15   on common party identity.
16        As for issue preclusion, the UK Defendants had no full
17   and fair opportunity to litigate the relevant issue because
18   the judgment was entered on the basis of Brearly’s default.
19   “In the case of a judgment entered by confession, consent,
20   or default, none of the issues is actually litigated.”
21   Restatement (Second) of Judgments § 27 cmt.e (1982); see 18A
22   Charles Alan Wright & Arthur R. Miller, Federal Practice and
23   Procedure § 4442 (2d ed.) (“Judgment by default in the
24   technical sense that the issues have not been litigated does
25   not warrant issue preclusion for the very reason that the
26   issues have not been litigated or decided.”). The
27   bankruptcy court expressed its equitable misgivings about
28   enforcing a default judgment against the UK Defendants when
29   it was clear that there was nothing in the record to support
30   the underlying claims. See In re Tyson, No. 03-41900 ALG,
31   2011 WL 1841881, at *7 (Bankr. S.D.N.Y. May 13, 2011), aff’d
32   sub nom., Straight-Out Promotions, LLC v. Warren, 467 B.R.
33   684 (S.D.N.Y. 2012) (“At the trial, the evidence did not
34   support the theories underlying the Kentucky Default
35   Judgment on the issue of damages. . . .”).
36        2. The Kentucky Defendants assert that the bankruptcy
37   court should not have denied their post-trial Rule 15(b)(2)
38   and Rule 54 motions. They sought to amend their pleading to
39   include a fraud cross-claim against the UK Defendants. In
40   re Tyson, 2011 WL 1841881, at *6. As the district court
41   concluded, amendment would be futile. In Kentucky, a fraud
42   claim requires clear and convincing proof of the following
43   six elements:
44
45       (1) that the declarant made a material representation
46       to the plaintiff, (2) that this representation was
47       false, (3) that the declarant knew the representation

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 1       was false or made it recklessly, (4) that the declarant
 2       induced the plaintiff to act upon the
 3       misrepresentation, (5) that the plaintiff relied upon
 4       the misrepresentation, and (6) that the
 5       misrepresentation caused injury to the plaintiff.
 6
 7   Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544, 549 (Ky.
 8   2009). “The plaintiff[‘]s reliance, of course, must be
 9   reasonable.” Id.
10        For several reasons, the Kentucky Defendants could not
11   reasonably have relied upon the statements of Brearly or the
12   UK Defendants, and therefore the Kentucky Defendants cannot
13   support a fraud claim. First, the Kentucky Defendants were
14   explicitly warned “that the UK Defendants would not
15   guarantee Brearly’s obligations.” Straight-Out, 467 B.R. at
16   690. Second, the Kentucky Defendants performed no
17   appreciable due diligence on Brearly. Id. Third, their own
18   legal counsel advised them that the Distribution Agreement
19   with Brearly did “‘not guarantee a minimum payment of 2.7
20   million by irrevocable letters of credit’ and was ‘not
21   acceptable.’” In re Tyson, 2011 WL 1841881, at *6 (quoting
22   March 27, 2009, Trial Tr. at 50). The Kentucky Defendants
23   proceeded to contract with Brearly in spite of these
24   warnings.
25        The Kentucky Defendants argue that they could not have
26   reasonably learned of the fraud until it was too late,
27   citing the Kentucky rule that “where the defrauded party has
28   performed substantially before discovering the fraud, he may
29   go on with the performance and also recover damages.” See
30   Sanford Constr. Co. v. S&H Contractors, Inc., 443 S.W. 2d
31   227, 236 (Ky. 1969). However, the Kentucky Defendants did
32   not incur any significant expenses as a result of the
33   alleged fraud until after they had reached an “impasse” over
34   whether Brearly’s funds would be held in escrow or secured
35   with a letter of credit. Even if it had been reasonable for
36   the Kentucky Defendants to perform no due diligence about
37   their counter-party at the outset of their multimillion
38   dollar negotiations (a dubious proposition), the “impasse”
39   certainly should have alerted them to the risks at hand.
40   Since they failed to show clear and convincing evidence that
41   they reasonably relied upon the statements of the UK
42   Defendants, the fraud claim would have been futile. Their
43   motion to amend to assert such a claim was properly denied.
44   See, e.g., MacDraw, Inc. v. CIT Group Equip. Financing,
45   Inc., 157 F.3d 956, 962-63 (2d Cir. 1998).
46


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1        Finding no merit in the remaining arguments, the
2   judgment is AFFIRMED.
3
4
5                              FOR THE COURT:
6                              CATHERINE O’HAGAN WOLFE, CLERK
7




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