Kentucky Petroleum Operating LTD v. Golden et al
MEMORANDUM OPINION AND ORDER: 1) The defendants' motion for summary judgment, R. 28, R. 34, is GRANTED. Signed by Judge Amul R. Thapar on 1/21/2014.(RC)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
MAX L. GOLDEN, et al.,
Civil No. 12-164-ART
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Defendants Max L. Golden and Andrew N. Golden have moved for summary
judgment in this matter.1 R. 28; R. 34. They argue that the doctrines of claim and issue
preclusion require the Court to grant summary judgment on the plaintiff’s remaining
claims against them. See R. 34. While the doctrine of claim preclusion does not apply to
this case, issue preclusion does, because KPO’s complaint involves previously arbitrated
issues. Accordingly, the Court will grant their motion for summary judgment.
In 2011, plaintiff Kentucky Petroleum Operating Ltd. (“KPO”) entered into
separate agreements with Macar and 7921 (the “Macar Agreement” and the “7921
Agreement”) for the purchase and sale of oil and gas wells, leasehold interests, easements,
and related equipment in Laurel County, Kentucky. R. 1-2 at 2–3. KPO and 7921 also
signed a management agreement (the “Management Agreement”), requiring 7921 to
Defendants Macar Investments, LLC, and 7921 Energy, LLC, also joined in this motion for summary
judgment. See R. 28 at 1; R. 34 at 1. The Court previously granted summary judgment in favor of Macar
and 7921. R. 32 at 5. Accordingly, only the Goldens remain as movants.
supervise certain interests subject to the Macar and 7921 Agreements. Id. at 3. The
Goldens are principals of both Macar and 7921. Id. at 3, 6. When the relationship
between KPO and the defendants soured, Macar and 7921—but not the Goldens—
instituted an arbitration proceeding against KPO. R. 4-1. Soon thereafter, KPO filed suit
against all four defendants in the Laurel Circuit Court, claiming common law fraud and
breach of contract. R. 1-2. The defendants removed the case to this Court. R. 1. On their
motion, R. 4; R. 5, the Court stayed this action pending arbitration. R. 13.
During the arbitration, 7921 and Macar claimed that KPO had breached their
various agreements and owed them money, overriding royalty interests, and carried
working interests. R. 28-1 at 2. KPO raised several defenses, including lack of arbitral
jurisdiction, fraud and misrepresentation, and breach of contract. Id. The arbitrator
rejected most of KPO’s theories. Id. at 2–3. He then determined that KPO and Kentucky
Petroleum Operating, LLC, a related entity, had breached the Macar and 7921
Agreements. Id. at 5; R. 28-4 at 1–2 (clarifying that the original arbitration award applied
to both KPO and Kentucky Petroleum Operating, LLC). The arbitrator granted Macar and
7921 damages and interests in certain wells and leases. R. 28-1 at 5–6.
The defendants immediately moved to lift the stay of this proceeding. R. 24.
When the Court granted their motion, R. 26 at 2, they moved for summary judgment, R.
28. This motion requested two forms of relief. First, Macar and 7921 asked the Court to
enter judgment on the arbitration award under the Federal Arbitration Act, 9 U.S.C. § 1, et
seq. Id. at 8–10. The Court granted this relief in a separate order and dismissed Macar
and 7921 from this case.2 R. 32 at 5. Second, the Goldens sought summary judgment on
KPO’s fraud claims against them, arguing that the arbitration award has a preclusive
effect on this proceeding.
R. 28 at 10–14.
The Court ordered the parties to file
supplemental briefing on this issue, R. 32 at 5, which it now resolves in favor of the
Before determining whether the arbitration award precludes KPO from pursuing its
claims against the Goldens in federal court, the Court would normally decide which
jurisdiction’s laws govern this question. Arbitration awards do not receive recognition
under the federal full faith and credit statute. 28 U.S.C. § 1738; McDonald v. City of West
Branch, 466 U.S. 284, 287–88 (1984). Thus, judicially fashioned preclusion rules control
the decision whether to accord an arbitration award preclusive effect. McDonald, 466
U.S. at 288. A federal court sitting in diversity employs the choice-of-law rules of the
forum state—Kentucky, in this instance—to answer res judicata questions. Ventas, Inc. v.
HCP, Inc., 647 F.3d 291, 303 n.4 (6th Cir. 2011) (citing Taveras v. Taveraz, 477 F.3d
767, 783 (6th Cir 2007)); see also Lewis v. Circuit City Stores, Inc., 500 F.3d 1140, 1147
(10th Cir. 2007). That is, the federal court asks whether Kentucky, as the forum state,
would apply its own law or that of another state in determining the preclusive effect of the
This case presents a particularly difficult choice-of-law problem.
contracts—the 7921, Macar, and Management Agreements—are at issue. R. 4-2; R. 4-3;
Macar and 7921 have since returned as parties to this case due to its consolidation with a related matter.
See R. 35.
R. 4-4. The parties picked Texas law to govern all disputes arising out of two of these
agreements, R. 4-3 at 18; R. 4-4 at 9, and Kentucky law to govern the third, R. 4-2 at 17.
Important elements of each transaction relate to both Texas and Kentucky. See R. 34 at 2;
R. 36 at 3–4.
The Court, however, need not prognosticate how Kentucky courts would resolve
this quandary because both Texas and Kentucky courts would reach the same conclusions
concerning claim and issue preclusion. Therefore, the Court will leave these tricky
choice-of-law matters for another day and will turn now to the real question: whether
KPO may proceed with its fraud claims in federal court.
Broadly speaking, claim
preclusion (traditionally known as res judicata) refers to “the preclusive effect of a
judgment in foreclosing litigation of matters that should have been raised in an earlier
suit.” Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 376 n.1 (1985).
Issue preclusion (traditionally known as collateral estoppel) refers to “the effect of a
judgment in foreclosing relitigation of a matter that has been litigated and decided.”
Id. In this case, because the Goldens were neither parties to the arbitration nor privies to
a party, they cannot prevail on their claim preclusion argument. However, since the
arbitrator thoroughly considered KPO’s fraud claims, the doctrine of issue preclusion
prevents the parties from relitigating that question in federal court.
Kentucky and Texas have adopted similar tests to determine whether claim
preclusion is appropriate. In Kentucky, (1) there must be an identity of parties between
the two actions; (2) there must be an identity of the two causes of action, and (3) the prior
action must have been decided on the merits. Miller v. Admin. Office of Courts, 361
S.W.3d 867, 872 (Ky. 2011). In Texas, claim preclusion requires proof of: (1) a final
judgment on the merits by a court of competent jurisdiction; (2) the identity of the parties;
and (3) a second action based on claims that were raised or could have been raised in the
first action. Maxson v. Travis Cnty. Rent Account, 21 S.W.3d 311, 315–16 (Tex. Ct. App.
1999). To satisfy the identity requirement in either state, the Goldens must show that they
were actual parties to the arbitration or in privity with Macar and 7921. See Moorhead v.
Dodd, 265 S.W.3d 201, 203 (Ky. 2008) (“Claim preclusion bars subsequent litigation
between the same parties or their privies.”); Maxson, 21 S.W.3d at 315 (explaining that
claim preclusion is available to “those in privity with” the parties to a prior proceeding).
But the Goldens cannot make this showing. First, they were not actual parties to
the arbitration. See R. 28-1 at 1 (listing only 7921 and Macar as parties); R. 28-4 (same).
Second, in neither Texas nor Kentucky do the Goldens qualify as Macar and 7921’s
Begin with Texas: Texas law considers a nonparty in privity under three
circumstances: (1) where he controlled an action even if he was not a party to it; (2)
where his interests were represented by a party to the action; or (3) where he is a
successor in interest, deriving his claims through a party to the prior action. Amstadt v.
U.S. Brass Corp., 919 S.W.2d 644, 653 (Tex. 1996). The Goldens, as the sole managing
members of Macar and 7921, claim to have exerted control over the arbitration
proceeding. R. 34 at 7, 12. It certainly stands to reason that they took an active role in the
arbitration, given their exclusive authority over the companies. Cf. J.M.S. & Assocs., Inc.
v. Eastman Kodak Co., 156 F.3d 1230, at *3 (6th Cir. 1998) (unpublished table decision)
(finding control-related privity between an owner and his company under Michigan and
federal law). But Texas courts have held that actions taken by an individual as a corporate
representative at trial do not amount to “control” sufficient for privity, where the
subsequent suit is against the same person in his individual capacity. McNeil Interests,
Inc. v. Quisenberry, 407 S.W.3d 381, 389 (Tex. Ct. App. 2013) (citing Restatement
(Second) of Judgments § 36(2) for the proposition that “[a] party appearing in an action in
one capacity, individual or representative, is not thereby . . . entitled to the benefits of the
rules of res judicata in a subsequent action in which he appears in another capacity.”).
Through its fraud claims, KPO seeks recovery against the Goldens in their individual
capacities. See R. 36 at 7; see also Sanchez v. Mulvaney, 274 S.W.3d 708, 711–12 (Tex.
Ct. App. 2008) (while members of a limited liability company are not individually liable
for the company’s breach of contract, they may be subject to individual liability for their
own fraudulent or tortious acts). So, even if the Goldens took an active role in the
arbitration, perhaps by hiring an attorney or serving as Macar and 7921’s representatives,
such control “would not support a finding of privity under the Restatement (Second) of
Judgments.” McNeil Interests, 407 S.W.3d at 389–90.
Kentucky courts have reached the same result. Like Texas, Kentucky recognizes
the rule of different capacities. A very recent, though unpublished, case illustrates how a
Kentucky court would reason through this matter. In True Gospel Church of God in
Christ v. Church of God in Christ, No. 2012-CA-228, 2013 WL 3388742 (Ky. Ct. App.
July 5, 2013), the Kentucky Court of Appeals considered the preclusive effect of two
cases involving a church and its members.
The church, True Gospel Church, had
incorporated itself anew as the True Ministries Church. Id. at 1. In the first case (the
“True Ministries case”), only True Ministries Church and three of its members were
named parties. Id. In the second case (the “True Gospel case”), only “True Gospel
Church, by and through its members,” was a party. Id. The court found that True
Ministries’ membership—which was the same as True Gospel’s membership—had
controlled the litigation in the True Ministries case, but that they did so in their
representative capacity on behalf of the corporation. Id. at 3. In contrast, the True Gospel
case represented the members’ individual interests.
Therefore, adopting the
Restatement (Second) of Judgment’s rule of different capacities, the Kentucky Court of
Appeals found no privity for preclusion purposes and permitted the True Gospel case to
go forward. Id. This matter presents the identical posture. To the extent the Goldens
participated in the preceding arbitration, they acted in their representative capacities. This
suit, which lists them as parties in their individual capacities, is therefore not precluded.
Despite their lack of identity or privity with Macar and 7921, the Goldens may still
proceed with their issue preclusion argument, since neither Texas nor Kentucky requires
mutuality to invoke issue preclusion. See Miller, 361 S.W.3d at 872 (“The doctrine of
issue preclusion is properly asserted by a person who was not a party to the former action
nor in privity with such a party.” (internal quotation marks omitted)); Eagle Props., Ltd.
V. Scharbauer, 807 S.W.2d 714, 721 (Tex. 1990) (holding that only the party against
whom collateral estoppel is asserted must be a party or in privity with a party in the prior
litigation). For the reasons discussed below, the doctrine of issue preclusion requires the
Court to grant summary judgment in favor of the Goldens.
Once again, Kentucky and Texas follow highly similar approaches to issue
preclusion. In Kentucky, in order for issue preclusion to operate as a bar to further
litigation, (1) at least one party to be bound in the second case must have been a party in
the first case; (2) the issue in the second case must be the same as the issue in the first
case; (3) the issue must have been actually litigated; (4) the issue must have been actually
decided in the first case; and (5) the decision on the issue in the prior action must have
been necessary to the court’s judgment and adverse to the party to be bound. Miller, 361
S.W.3d at 872. In Texas, a party seeking to assert collateral estoppel must establish that:
(1) the issues sought to be litigated in the second action were fully and fairly litigated in
the first action; (2) those issues were essential to the judgment in the first action; and (3)
the parties were cast as adversaries in the first action (meaning that the party against
whom the doctrine is asserted was a party or in privity with a party). Sysco Food Servs.,
Inc. v. Trapnell, 890 S.W.2d 796, 801–02 (Tex. 1994). Both states’ issue preclusion tests
shake out the same way in this case: KPO may not proceed with its claim against the
Goldens in federal court.
Parties Cast As Adversaries: As the first element of Kentucky’s test and the
third element of Texas’s test, one party to be bound by the doctrine of issue preclusion
must have been party to the arbitration. Here, there is no disputing that KPO was a
defendant in the arbitration proceeding. See R. 28-1 at 1. Accordingly, the Goldens have
satisfied this element of Kentucky and Texas’s issue preclusion tests.
Full and Fair Litigation: The second and third elements of Kentucky’s test align
perfectly with the first element of Texas’s test. That is, both states require the party
seeking issue preclusion to show that, during the arbitration, the parties “actually” or
“fully and fairly” litigated the same issue that the plaintiff seeks to litigate in this case.
The arbitration featured precisely the same issue present in this case: alleged fraud
in the inducement by the Goldens, Macar, and 7921. KPO repurposed its complaint, R. 1-
2, as part of its answer and counterclaim in the arbitration proceeding. See R. 28-2 at 3;
R. 31-1 at 2; R. 31-2 at 2. In other words, its arguments—and the very documents it used
to convey those arguments—were perfectly identical in the two proceedings. Id. KPO’s
claim that the Goldens, Macar, and 7921 committed fraud in the inducement, R. 1-2 at 3–
9, therefore appeared in both this case, as a cause of action against all four defendants, and
in the arbitration, as a defense or counterclaim against Macar and 7921. See Zea v. Valley
Feed & Supply, Inc., 354 S.W.3d 873, 878 (Tex. Ct. App. 2011) (finding that claims filed
in court and counterclaims and defenses filed during arbitration counted as the “same
issues”); Moore v. Gas & Elec. Shop, 287 S.W. 979, 980 (Ky. 1926) (applying res judicata
because the appellant’s claim perfectly echoed his counterclaim in a previous matter).
Moreover, this counterclaim was fully and fairly litigated. Despite its streamlined
procedures, arbitration offers parties a fair opportunity to litigate their claims. See Zea,
354 S.W.3d at 878 (finding that an arbitration proceeding provided a full and fair
opportunity to litigate the issue under consideration); Deshons v. Scott’s Adm’r, 260 S.W.
355, 357 (Ky. 1924) (finding that an arbitrator’s decision merits the same preclusive effect
as a decision by a court of competent jurisdiction); see also Stewart Servs., Inc. v. Tilford
Mech. Contractors, Inc., No. 2003-CA-523, 2004 WL 1046370, at *7 (Ky. Ct. App. May
7, 2004) (recognizing an arbitration award as res judicata).
Still, KPO complains that the discovery timeline during arbitration was so
compressed that it could not conduct adequate discovery on the fraud question. R. 30 at
2–3 (stating that “limited deadlines were imposed for all allegations including the breach
of contract claims and any fraud claims”).
But, as the Goldens point out in twin
affidavits, KPO had every opportunity to request a more generous discovery timeline. See
R. 31 at 3–4; R. 31-1 at 2–3; R. 31-2 at 2–3. KPO knew in advance that its fraudulent
inducement claims had bearing on the arbitration, see R. 13 at 2 (explaining that parties
must arbitrate fraudulent inducement claims concerning the contract as a whole where the
contract contains an arbitration clause), yet it chose not to conduct additional discovery or
present its arguments more forcefully. As Learned Hand once wrote, once parties have
decided to adopt arbitration, “they may not hedge it about with those procedural
limitations which it is precisely its purpose to avoid. They must content themselves with
looser approximations to the enforcement of their rights than those that the law accords
them, when they resort to its machinery.” Am. Almond Prods. Co. v. Consol. Pecan Sales
Co., 144 F.2d 448, 451 (2d Cir. 1944). In short, KPO made its own bed, and that is where
KPO must now lie.
The Arbitrator’s Decision: Finally, the arbitrator actually decided the fraud
issue, which was necessary or essential to his judgment—and this satisfies the remaining
elements of Kentucky and Texas’s issue preclusion tests. In his opinion, the arbitrator
explicitly ruled on KPO’s fraud counterclaims. R. 28-1 at 2. He did not “find fraud on
the part of either of the Goldens or anyone else acting for Macar or for 7921.” Id. While
he was “persuaded that the Goldens took advantage of” KPO, he explained that nothing in
their behavior rose to the level of fraud. Id. In short, any injury to KPO resulted from its
failure to perform the “kinds of due di[l]igence that are usually associated” with oil- and
gas-related transactions. Id.
Because KPO raised fraud as a defense to Macar and 7921’s breach of contract
claims, see id., resolving this question was clearly necessary to the arbitrator’s disposition
of this matter. KPO contests this conclusion, arguing that the arbitrator’s fraud-related
ruling was extraneous because the Goldens were not parties to the arbitration proceeding.
R. 36 at 8. KPO argues that the “arbitrator was faced with claims arising through written
contracts only” and the fraud claims “had no bearing upon the contractual issues heard by
the arbitrator.” Id. But KPO’s reliance on fraud as a defense during the arbitration
undermines its arguments against summary judgment. Had the arbitrator concluded that
the Goldens had committed fraud, the outcome of the arbitration would necessarily have
changed. The doctrine of issue preclusion therefore prevents KPO from relitigating its
fraud claims against the Goldens.
Accordingly, it is ORDERED that:
The defendants’ motion for summary judgment, R. 28; R. 34, is
This the 21st day of January, 2014.
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