Peoples National Bank, N.A. v. Mehlman et al

Filing 40

MEMORANDUM AND ORDER...IT IS HEREBY ORDERED that Defendants' motion to dismiss is DENIED. (Doc. No. 19 .) IT IS FURTHER ORDERED that Defendants' motion for limited expedited discovery is DENIED. (Doc. No. 21 .) Signed by District Judge Audrey G. Fleissig on 10/21/2015. (NEB)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION

PEOPLES NATIONAL BANK, N.A.,
Plaintiff,
v.
DEBRA J. MEHLMAN, et al.,
Defendants.

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Case No. 4:15CV00996 AGF

MEMORANDUM AND ORDER
This diversity matter is before the Court on Defendants’ motion to dismiss the
case, under Federal Rule of Civil Procedure 12(b)(6). The lawsuit arises out of two loans
made by Plaintiff Peoples National Bank, N.A., in 2007 and in 2008, in the total amount
of approximately $3.6 million to Defendant Mark S. Mehlman Realty Inc. (“MSM”).
Both loans were guaranteed by Defendant Mark Mehlman. Defendants argue that this
lawsuit is barred because it is based upon documents, and information derived therefrom,
that Plaintiff is precluded from using pursuant to the terms of a protective order entered in
a related state court action. They argue further that one count is barred by the doctrine of
res judicata. For the reasons set forth below, the motion to dismiss shall be denied.
BACKGROUND
In 2009, MSM defaulted on the two loans noted above, and in 2011, Plaintiff filed
suit in Missouri state court against MSM and Mark Mehlman for breach of the loan
agreements. On January 15, 2013, Plaintiff obtained a judgment against these two

Defendants for approximately $1.3 million for money owed on the loans. During the
course of post-judgment discovery, the parties to the state court action signed a Stipulated
Protective Order which the state court entered on May 14, 2014. The Protective Order
provided in pertinent part as follows:
This Protective Order shall govern all documents and other products
of discovery, all information derived therefrom, and all copies, excerpts, or
summaries thereof, including electronically stored or saved data or
information, obtained by the parties pursuant to documents produced in
response to requests for production, including electronically stored or saved
data or information, answers to interrogatories, documents subpoenaed and
transcripts and video and audio recordings of depositions (hereinafter
“Discovery Material”).
Discovery Material and all copies of Discovery Material shall be
used only for purposes of this litigation and not for any other purposes
whatsoever.
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“Confidential Discovery Material” cannot be disclosed or divulged to any
person other than those specifically set out in the Protective Order.
(Doc. No. 19-1.)
Defendants assert, and Plaintiff does not dispute, that numerous documents were
produced to Plaintiff pursuant to the Protective Order, including but not limited to
income tax returns, bank statements, trust documents related to the trust of Debra
Mehlman (Mark Mehlman’s wife), documents relating to ownership interests in nonparty closely held limited liability companies and income derived therefrom; documents
reflecting salary and commission information for non-party employees of closely held
limited liability companies; and documents reflecting the internal operations of non-party
closely held limited liability companies.
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On August 20, 2014, Plaintiff filed a motion in the state collection action to
designate certain documents it had received in post-judgment discovery as nonconfidential so that Plaintiff could use them in other litigation. Plaintiff noted that
“[p]er the terms of the Protective Order, . . . [Plaintiff] may not be able to use the
Discovery Materials for any other lawsuit but this one.” (Doc. No. 19-2). On
June 22, 2015, the state court denied the motion, stating that “the parties agreed on
how designations of confidential information would be made and on restrictions
on its use, as well as the use of other ‘discovery material,’ including that it shall be
used only for purposes of this litigation and not for any other purposes
whatsoever.” (Doc. No. 19-3.)
Two days later, on June 24, 2015, Plaintiff filed the present action against Mark
Mehlman; MSM; Debra Mehlman, individually and as trustee of her trust; Mehlman
Homes Realty, LLC; Mark S. Mehlman Homes, LLC; and Mark Mehlman’s sons Scott
Mehlman and Blair Mehlman. Plaintiff alleges in Count I against Mark Mehlman that
Mark Mehlman fraudulently induced Plaintiff to extend the loans, and in Counts II
through VII that all Defendants engaged in fraudulent transfers to prevent Plaintiff from
collecting the $1.3 million judgment. Plaintiff alleges in the complaint that Plaintiff
“only discovered Defendants’ bad acts and Defendants’ concealment of same when it
undertook . . . post-judgment discovery,” and that “absent an agreement among the
parties, [Plaintiff] will not use information designated as ‘confidential’ in the Collection
Lawsuit in this lawsuit . . . .” (Doc. No. 1 at 5.)

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Defendants argue that all claims in the present lawsuit should be dismissed under
Federal Rule of Civil Procedure 12(b)(6) because the complaint “is in blatant
contravention of the Stipulated Protective Order . . . as well as the State Court Order [of
June 22, 2015] which precludes [Plaintiff’s] use of Discovery Material for purposes of
filing another lawsuit.” In a separate motion, Defendants seek leave to engage in
discovery for the limited purpose of discovering whether Plaintiff has any independent
basis for the allegations in the present complaint, other than documents or information
which it is barred from using. As an additional ground for dismissal of Count I against
Mark Mehlman for fraud, Defendants invoke the doctrines of res judicata and “claim
splitting,” arguing that the fraud claim arises out of the same underlying occurrence as
the state court breach of contract action, namely the default on the loans made by
Plaintiff. Defendants argue that having proceeded to judgment on the loans, Plaintiff
cannot now repudiate the loans based on alleged fraudulent inducement.
Plaintiff argues that the Protective Order does not serve to immunize Defendants
from suit for fraudulent acts, and that Plaintiff can always engage in duplicative
discovery in the context of the present lawsuit. Plaintiff sets forth a list of sources of
outside discovery material in the state action upon which it asserts it bases its present
claims, such as information obtained from the Missouri Secretary of State regarding the
corporate Defendants, and argues that in any event, dismissal of the present lawsuit is not
an appropriate remedy for a violation of the Protective Order entered by a state court. In
response to Defendants’ res judicata argument, Plaintiff maintains that under Missouri

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law, a claim for fraud in the inducement of a contract is not barred by a prior action for
breach of that contract.
DISCUSSION
This Court does not believe that it has the authority to enforce the state court’s
protective order. See Caudill Seed & Warehouse Co. v. Jarrow Formulas, Inc., No.
3:13–CV–82–H, 2013 WL 3872229, at *2 (W.D. Ky. July 24, 2013) (“[T]he Court
appears to lack jurisdiction to enforce the state court issued Protective Order by striking
claims in a federal case.”); Lower Town Project, LLC v. Lawyers Title Ins. Corp., No.
10–11615, 2012 WL 666574, at *4-5 (E.D. Mich. Feb. 29, 2012); Field Turf USA, Inc. v.
Sports Const. Grp., LLC, 2007 WL 4412855, *4 n.7 (N.D. Ohio Dec. 12, 2007) (“This
Court has no authority to enforce the state court's protective order and, so, it will leave
the resolution of this question to the state court.”); Flint Hills Scientific, LLC v.
Davidchack, No. CIV. A. 00–2334–KHV, 2000 WL 33314112, at *2 (D. Kan. Mar. 27,
2000) (denying a motion to dismiss a federal complaint on the ground that it was based
on information obtained during a deposition in a state case that was covered by a
protective order entered by the state court). Thus, the motion to dismiss all claims
because they are based on information obtained during post-judgment discovery, a use
precluded by Protective Order entered by the state court, shall be denied.
The Court also concludes that res judicata does not bar Plaintiff’s claim of fraud in
the inducement against Mark Mehlman. In diversity cases such as this, “federal law
incorporates the rules of preclusion applied by the State in which the rendering court
sits.” Welk v. Fed. Nat’l Mortg. Ass’n, 561 F. App’x 577, 579 (8th Cir. 2014). The Court
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believes that under Missouri’s law of res judicata, a party who fraudulently induces
another to contract and then also refuses to perform the contract commits two separate
wrongs, and these wrongs give rise to separate causes of action. The Missouri Court of
Appeals has recognized that:
[i]t is the law that one who has been fraudulently induced into a contract
may elect to stand by that contract and sue for damages for the fraud.
When this happens and the defrauding party also refuses to perform the
contract as it stands, he commits a second wrong, and a separate and
distinct cause of action arises for the breach of contract. The same basic
transaction gives rise to distinct and independent causes of action which
may be consecutively pursued to satisfaction.
Clayton Brokerage Co. of St. Louis v. Pilla, 632 S.W.2d 300, 305-06 (Mo. Ct. App.
1982) (quoting Bankers Trust Co. v. Pac. Employers Ins. Co., 282 F.2d 106, 110 (9th Cir.
1960)); see also McDonald v. Johnson & Johnson, 776 F.2d 767, 770 (8th Cir. 1985)
(applying Minnesota law; citing cases from other states).
CONCLUSION
Accordingly,
IT IS HEREBY ORDERED that Defendants’ motion to dismiss is DENIED.
(Doc. No. 19.)
IT IS FURTHER ORDERED that Defendants’ motion for limited expedited
discovery is DENIED. (Doc. No. 21.)

AUDREY G. FLEISSIG
UNITED STATES DISTRICT JUDGE
Dated this 21st day of October, 2015.

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