Pidcock v. Schwab et al
Memorandum Opinion and Order: Plaintiff/appellant's appeal is denied. (Doc. No. 1 .) The bankruptcy court's order (and accompanying memorandum of decision) granting defendants/appellees' motion for summary judgment, and order denying plaintiff/appellant's motion to strike defendants/appellees' affirmative defenses, are affirmed. Judge Sara Lioi on 3/28/2017. (P,J)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
JOHN B. PIDCOCK, as creditor trustee
of the other Schwab Industries Inc.
JERRY A. SCHWAB, et al.,
CASE NO. 5:16-cv-317
JUDGE SARA LIOI
MEMORANDUM OPINION AND
This matter is before the Court on the appeal of plaintiff/appellant1 John B. Pidcock, as
creditor trustee (“Pidcock” or “creditor trustee”) of Schwab Industries, Inc. Creditor Trust
pursuant to 28 U.S.C. § 158(a)(1) and Bankruptcy Rule 8003 from two orders entered by the
United States Bankruptcy Court, Northern District of Ohio, Adversary Case No. 12-06022
(“Adversary Case”): (1) the order, and related memorandum of decision (“MOD”), of the
bankruptcy court granting summary judgment in favor of defendants/appellees (Doc. Nos. 20-12
and 20-11,2 respectively); and (2) the order of the bankruptcy court denying plaintiff/appellant’s
Appellant creditor trustee is the plaintiff in the adversary proceeding.
The MOD is found at In re SII Liquidation Co., No. 10-60702, 2016 WL 197570 (Bankr. N.D. Ohio Jan. 15, 2016)
(“Schwab”), and when referring to the MOD herein, the Court will refer to the Westlaw citation rather than the
motion to strike defendants/appellees’ affirmative defenses (Doc. No. 20-7 [“Order”]). (Doc. No.
1[“Appeal”] at 2.)3
For the reasons that follow, the bankruptcy court’s orders are affirmed.
This case has a long history. The Court will briefly recite enough history here to provide
context, with more detail provided later in the opinion as necessary for the Court’s analysis.
Schwab Industries, Inc. (“Schwab Industries”) was a family owned concrete business
headquartered in Dover, Ohio, with operations in Ohio and Florida. Schwab, 2016 WL 197570,
at *1. The three defendants/appellees in the instant action—Jerry Schwab, Donna Schwab, and
David Schwab (the “Schwabs”)—owned Schwab Industries4 and were directors of the company.
An economic downturn led to a Chapter 11 bankruptcy filing on February 28, 2010 by
Schwab Industries and its affiliates (“debtors”). United States Bankruptcy Court, Northern
District of Ohio Case No. 10-60702 (“Bankruptcy Case”). The debtors were unable to secure
sufficient post-petition financing to permit reorganization, and their assets were liquidated
through an auction sale in the Bankruptcy Case. Id. Cement Resources, LLC (“CR”) was the
stalking horse bidder,5 but debtors’ assets were ultimately sold to Oldcastle Materials, Inc.
(“Oldcastle”) and Resource Land Holdings, LLC (“RLH”). Id. The sale to Oldcastle and RLH
was approved by the bankruptcy court after a hearing, and a sale order was entered May 28,
All references to page numbers are to the page identification numbers generated by the Court’s electronic filing
Another family member—Mary Lynn Schwab—was also an owner of Schwab Industries, but was dismissed as a
defendant from this action. Schwab, 2016 WL 197570, at *1 n.3.
The initial bidder with whom the debtor negotiates a purchase agreement is called the “stalking horse” bidder.
2010. The sale order found that “the sale was made in good faith and that the purchase price was
fair and reasonable, [and made] findings that dealt directly with Debtors’ conduct during the sale
process.” Id. at *5.
During the Bankruptcy Case, Pidcock served as a financial advisor to the Official
Committee of Unsecured Creditors (“Committee”). Id. at *1 n.1. Pidcock brings this Adversary
Case as creditor trustee, alleging that the Schwabs, as directors and shareholders of Schwab
Industries, breached their fiduciary duties and harmed the estate. Specifically, Pidcock alleges
that the Schwabs elevated their personal interests over the interests of the debtors and creditors
during the bankruptcy sale of debtors’ assets by negotiating side agreements with CR and
Oldcastle for post-sale management positions and compensation, which diminished the sale
value of the assets. Id. at *2.6
The Schwabs moved for summary judgment, arguing that adversary claims are barred by
res judicata, and the bankruptcy court granted the motion. Pidcock appealed and filed his
appellant’s brief (Doc. No. 18 [“Brief”]). Appellees filed a redacted and unredacted opposition
brief (Doc. Nos. 20 and 22 [“Opp’n”], respectively), as did the creditor trustee with respect to his
reply brief7 (Doc. Nos. 25 and 26 [“Reply”], respectively).
The Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(c)(1)(B). The
bankruptcy court’s order granting summary judgment to defendants/appellees is a final
appealable order pursuant to 28 U.S.C. § 158(a)(1). In re Midway Motor Sales, Inc., 407 B.R.
Pidcock also claims that the Schwabs breached their fiduciary duty by failing to obtain a $3 million dollar refund
of insurance premiums, which Pidcock contends was not addressed by the bankruptcy court in the MOD. (Brief at
464.) The bankruptcy court did, however, identify the insurance policies in connection with the Schwabs’ alleged
self-dealing: “[I]n exchange for a $3 million contribution, [the Schwabs] would receive a fifteen percent (15%)
equity stake in Cement Resources[.]” Schwab, 2016 WL 197570, at *3.
The Court’s references herein to the opposition and reply briefs are to the unredacted versions.
442 (Table), 2009 WL 1940719, at *1 (6th Cir. July 6, 2009) (“An order granting summary
judgment is a final order.”) (citation omitted).
II. ISSUES ON APPEAL
1. Whether the bankruptcy court’s application of the res judicata doctrine to bar
Appellant’s claims was based on an overly-rigid interpretation of Sixth Circuit
precedent as applied to bankruptcy sale orders.
2. Whether the bankruptcy court erred in ruling that Appellant’s claims were
barred by res judicata under circumstances where (i) Appellant’s claims were
transactionally distinct from the claims at issue in the sale-approval process, and
(ii) Appellant did not have a full and fair opportunity to litigate his claims in the
sale-approval process because Appellees’ multi-million dollar side deals were
concealed from the bankruptcy court and creditors.8
3. Whether the bankruptcy court erred in ruling that the “plausibility” pleading
standard of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v.
Iqbal, 556 U.S. 662 (2009), does not apply to affirmative defenses.
(Brief at 425-26 (footnote added).)
III. APPEAL OF ORDER GRANTING SUMMARY JUDGMENT
A. Standard of Review
Under Bankr. R. 7056, Fed. R. Civ. P. 56 governs motions for summary judgment in
adversary proceedings in bankruptcy court. A grant of summary judgment by the bankruptcy
court is reviewed de novo, using the same Rule 56 standard as used by the bankruptcy court.
Williams v. Mehra, 186 F.3d 685, 689 (6th Cir. 1999) (en banc).
With respect to issue 2, Pidcock contends that the bankruptcy court incorrectly applied the Sixth Circuit precedent
of Winget v. JP Morgan Chase Bank, 537 F.3d 565 (6th Cir. 2008) in concluding that the adversary case was barred
by res judicata. In Winget, various businesses owned by plaintiff were sold in bankruptcy pursuant to Section 363 of
the Bankruptcy Code. Winget later sued to extinguish his personal liability (guaranty) to lenders that had advanced
credit to plaintiff’s businesses on the grounds that the lenders’ pre-sale conduct devalued the businesses. The district
court dismissed the complaint, holding that Winget’s claims were barred by res judicata. Winget, 537 F.3d at 567.
Summary judgment is proper if “the movant shows that there is no genuine dispute as to
any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). When reviewing a motion for summary judgment, the evidence, all facts, and any
inferences that may be drawn from the facts, must be viewed in the light most favorable to the
nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.
Ct. 1348, 89 L. Ed. 2d 538 (1986). To prevail, the non-movant must show sufficient evidence to
create a genuine issue of material fact. Klepper v. First Am. Bank, 916 F.2d 337, 342 (6th Cir.
1990). A mere scintilla of evidence is insufficient; “there must be evidence on which the jury
could reasonably find for the [non-movant].” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252,
106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). Entry of summary judgment is appropriate “against a
party who fails to make a showing sufficient to establish the existence of an element essential to
that party’s case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v.
Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986).
Under this standard, the bankruptcy court’s legal determinations are reviewed de novo,
Behlke v. Eisen (In re Behlke), 358 F.3d 429, 433 (6th Cir. 2004). Findings of fact, however, are
not set aside unless clearly erroneous. In re Aubiel, 534 B.R. 300, 302 (B.A.P. 6th Cir. 2015).
B. Res Judicata
Appellant does not take issue with the four elements applied by the bankruptcy court to
establish res judicata:
(1) a final decision on the merits by a court of competent jurisdiction, (2) a
subsequent action between the same parties or their privies, (3) an issue in the
subsequent action which was litigated or should have been litigated in the prior
action, and (4) an identity of the causes of action.” Howe v. City of Akron, [801
F.3d 718, 742] (6th Cir. 2015) (other citations omitted). As the proponents of the
doctrine, Defendants bear the burden of proof. TolTest, Inc. v. N. Am. Specialty
Ins. Co., 362 F. App’x 514, 516 (6th Cir. 2010) (unpublished) (citing Winget v. JP
Morgan Chase Bank, 537 F.3d 565, 572 (6th Cir. 2008)).
Schwab, 2016 WL 197570, at *5-6.
The first two elements were not disputed by the parties before the bankruptcy court (id. at
*6), and Pidcock maintains that only elements 3 and 4 of the bankruptcy court’s res judicata
analysis are challenged on appeal.9 (See Brief at 436.)
C. Element 3 - Should Breach of Fiduciary Duty Claims Regarding Self-Dealing Have Been
Brought During the Sale Process
This prong of res judicata aims to “compel litigants to bring all related claims in a
single lawsuit.” Heike, 573 Fed. App’x [476,] 481[6th Cir. 2014] (citing Wilkins
v. Jakeway, 183 F.3d 528, 532 n.4 (6th Cir. 1999)). According to the Sixth
Circuit, the key focus is not whether the claim is compulsory, but “whether the
claim should have been considered during the prior action.” Sanders
Confectionery, 973 F.2d 474, 484 [(6th Cir. 1992)].
Schwab, 2016 WL 197570, at *7.
“To determine whether an issue should have been litigated in an earlier lawsuit, the Sixth
Circuit says that ‘[w]here the two causes of action arise from the same transaction, or series of
transactions, the plaintiff should have litigated both causes in the first action and may not litigate
the second issue later.’” SII Liquidation Co., No. 10-60702, 2014 WL 5325930, at *9 (Bankr.
N.D. Ohio Oct. 17, 2014) (“Goddard”) (quoting Holder v. City of Cleveland, 287 F. App’x 468,
471 (6th Cir. 2008) (further citation omitted)). The issue, then, is whether the adversary claims
Pidcock’s brief is, unfortunately, confusingly organized. Section A.1.a. is completely misplaced, as it constitutes
an overview – an introduction, if you will – as to why the third and fourth Winget factors for testing res judicata do
not apply. It is true that the bankruptcy court’s decision “was largely based on its . . . perception that the Sixth
Circuit’s decision in Winget v. JP Morgan Chase Bank, N.A.., 537 F.3d 565 (6th Cir. 2008), mandated dismissal of
the case on res judicata grounds[,]”(Brief at 436), but beyond that, Pidcock’s very detailed attempt to distinguish
Winget does no more than needlessly complicate the argument. This Court need only analyze the third and fourth res
judicata factors of the Winget test (i.e., the only factors challenged by Pidcock) to determine whether the bankruptcy
court was correct in its analysis.
regarding the Schwabs’ self-dealing to the detriment of the estate should have been brought
during the sale process in the Bankruptcy Case.
Pidcock maintains that the answer is “no” because the bankruptcy court erroneously
applied Winget in analyzing the third prong of the res judicata analysis, and because he did not
have a full and fair opportunity to bring these claims during the sale process.
1. CR’s and Oldcastle’s negotiations with the Schwabs
The creditor trustee contends the adversary claims could not be brought during the
Bankruptcy Case due to the Schwabs’ “affirmative concealment of the breadth of the
negotiations with both Cement Resources and Oldcastle.” Schwab, 2016 WL 197570, at *8.
Affirmative concealment may prevent the application of res judicata to bar subsequent litigation,
but mere silence is not enough. “[P]roof of something akin to fraudulent concealment is
necessary.” Id. (citing Browning v. Levy, 283 F.3d 761, 770 (6th Cir. 2002)). The elements of
fraudulent concealment are:
(1) wrongful concealment of action, (2) failure to discover the operative facts of
the claim until after the statute of limitation runs, and (3) exercise of due diligence
until discovery of the operative facts. Carrier Corp. v. Oyi, 673 F.3d 430 (6th Cir.
2012) (citation omitted).
Applying Winget, the bankruptcy court concluded that the Schwabs’ negotiations with
CR and Oldcastle were not affirmatively concealed. Pidcock contends that the bankruptcy court
incorrectly applied Winget in reaching this conclusion.
Negotiations with CR were not concealed
The bankruptcy court found the record established that the Schwabs’ negotiations with
CR were known by the parties to the sale process and to Pidcock during the Bankruptcy Case.
See id. at *2 and *8. For example, the Committee filed objections in the bankruptcy case
regarding the bid procedure and appointment of CR as the stalking horse bidder, citing CR’s
negotiations with the Schwabs and other possible interference by the debtors with the
competitive bidding process. Following a hearing, however, the parties submitted an agreed
order stating that “[t]he objections of the Committee of Unsecured Creditors and [other creditor]
are resolved.” Id. at *3 (quoting the record). During the sale process, the Committee renewed its
objections regarding self-dealing, calling the CR bid “suspect,” [and] stating “Debtors’ insiders
[the Schwabs] have a strong incentive to support the Cement Resources bid notwithstanding the
fact that it may cause significant harm to unsecured creditors, and that their business judgment is
hopelessly conflicted.” Id. at *4 (quoting the record). The allegations in the first amended
complaint in the Adversary Case—that the Schwabs’ self-dealing with CR for their own personal
gain breached their fiduciary duty and resulted in a reduction of the sale price and devaluation of
the estate (see Doc. No. 20-4 ¶¶ 1-4)—are essentially the same as the objections made by the
Committee during the Bankruptcy Case (see e.g. Doc. No. 20-45 ¶¶ 8-9, 27; Doc. No. 20-67 ¶¶
3, 4, 6, 20, 30, 31).
Applying Winget, the bankruptcy court concluded that, even though Pidcock and the
Committee may not have known particular details of the negotiations between the Schwabs and
CR, they were aware of the self-dealing nature of the negotiations “with ample time to, at a
minimum, maintain its objection or make further inquiry. Consequently, the court cannot find
affirmative concealment with regard to the Cement Resources deal.” Schwab, 2016 WL 197570,
at *8 (“The Winget case is instructive at this point because Winget argued he did not have all the
facts to bring the claim during the bankruptcy case. The Sixth Circuit rejected the argument,
finding ‘the claims Winget brings in the Complaint are largely identical to the arguments Winget
made in its objection to the Sale Order, which it later withdrew.’ [Winget, 537 F.3d at 580]”).
Negotiations with Oldcastle
The bankruptcy court came to the same conclusion regarding Oldcastle’s negotiations
with the Schwabs. Finding that the Oldcastle discussions may not have been as open as the CR
negotiations, the bankruptcy court nevertheless concluded the record established that the
Committee and Pidcock were aware of the existence and nature of the discussions between
Oldcastle and the Schwabs. Id. The bankruptcy court cited the testimony of Pidcock as an
Most damning for Plaintiff is his own admission he knew, around May 21, 2010,
that the Schwabs had been communicating with Oldcastle about side agreements:
Q: And it states on page 2 of the letter10 that Old Castle (sic) had
discussions with the Schwab family regarding their going forward role
with the business operations of Old Castle and has entered into
discussions with certain members of the Schwab family about the
possibility of retaining some or all of them after the closing of the sale.
And then it continues that Oldcastle has had discussions regarding future
consideration in exchange for value including vehicles and other
physical assets owned by the Schwab family that are used in the debtors’
business operations and non-compete agreements. And you read this on
or around May 21, 2010, right?
(Depo. of John B. Pidcock, pp. ECF 207-1, pp. 109:21–110:10.)
His testimony indicates that he inquired about the specifics of the deal, which no
A: They wouldn’t disclose any of the terms because nothing was agreed
to. It’s not atypical for in a transaction to have some transition
agreements with current management. So it’s not surprising that they
would have these conversations. I would be surprised that they didn’t
The letter referred to here is the cover letter to Oldcastle’s bid for debtors’ assets.
have these conversations, however, what we didn't know was what the
makeup of the agreements would be, what they would look like,
typically it’s salary, noncompete, that type of thing.
(Id. at 111:4–13) Not only does he admit that he was aware that Defendants were
in discussions, he also indicated such discussions were not uncommon.
Id. at *8-9 (footnote added).
At the sale hearing, the bankruptcy court questioned Oldcastle’s counsel regarding his
client’s negotiations with the Schwabs, to which counsel responded:
And we saw in the [CR] bid that they were negotiating to give
employment agreements to management as well as an equity piece in the
acquiring entity to Debtors’ management. So we said okay. It looks like
management is favoring that bid because they are doing that. We have no
choice but to propose the same thing to management, at least, to equalize
the playing field. So my client prepared some management agreement
and a performance agreement and submitted it to the Schwabs . . . I don't
believe they’ve responded to the agreement.
(Transcript of Hearing held 5/28/10 at 60:7-18, Main Case ECF No. 1118)
Id. at *9.
Based on this record, the bankruptcy court found that:
[t]he sum of the above leads the court to the inescapable conclusion that the
negotiations with Oldcastle were not concealed. Although the specific terms were
not known, there is no indication that anyone pressed the issue or made diligent
efforts to ascertain the terms. The court cannot find that affirmative concealment
bars application of res judicata, nor that concealment was a bar to bringing these
claims earlier in this case.
2. The bankruptcy court did not err in applying Winget to find there was no affirmative
concealment of the Schwabs’ discussions with CR or Oldcastle
Pidcock contends that the facts in Winget are distinguishable from the Adversary Case,
and the bankruptcy court erroneously applied Winget to conclude that the Schwabs’ side
agreement negotiations were not affirmatively concealed. The Court disagrees.
First, the creditor trustee argues that, in Winget, the plaintiff knew all of the material facts
supporting his claim one year before the sale in the bankruptcy case, and filed an objection to the
sale motion regarding the alleged wrongful conduct of the lenders. Winget later withdrew the
objection, however, and the bankruptcy court approved the sale of the assets. (Brief at 436-38.)
Unlike Winget, appellant contends the “material facts” regarding Oldcastle’s negotiations11 with
the Schwabs were concealed from the Committee, and the facts that were known were provided
only about one week before the bankruptcy sale.
The Committee simply did not know there were any insider side deals. The
objections filed by the Committee (BK Doc. Nos. 378,12 43413) did not include
any objections with respect to the Oldcastle negotiations or side agreements
simply because at the time, the Committee was completely unaware of those facts.
(Brief at 441 (footnotes added).)
The Court focuses its analysis the information available to the Committee regarding the negotiations between the
Schwabs and Oldcastle (who was the successful buyer in the bankruptcy sale) because, as appellant concedes, the
Committee’s knowledge regarding CR’s negotiations with the Schwabs “is irrelevant to this analysis because
Cement Resources was not the winning bidder.” (Brief at 441 n.4.)
May 9, 2010 objection of the Committee to debtors’ motion for revised bidding procedure. (Doc. No. 20-45.)
May 21, 2010 objection of the Committee regarding sale process and sale to CR because of, among other reasons,
concerns that the Schwabs’ negotiations regarding continuing management roles post-sale may cause harm to
unsecured creditors. (Doc. No. 20-67 at 5450-51.)
It is true that the Committee’s objections addressed CR, not Oldcastle, but that is because
those objections were filed before Oldcastle’s bid on May 21, 2010, in which Oldcastle disclosed
its negotiations with the Schwabs:
Oldcastle has had discussions with the Schwab family regarding their goingforward role with the business operations of Oldcastle, and has entered into
discussions with certain members of the Schwab family about the possibility of
retaining some or all of them after the closing of the sale. In addition, Oldcastle
has also had discussions with the Schwab family regarding future consideration in
exchange for certain value, including vehicles and other physical assets owned by
the Schwab family that are used in the Debtors’ business operations and noncompete agreements. No final arrangement, however, has been reached between
Oldcastle and the Schwab family.
(Doc. No. 20-71 at 5481.)
Oldcastle’s bid shows that the Schwabs’ discussions with Oldcastle were largely the same
as their discussions with CR – that is, self-dealing in nature. The negotiations between Oldcastle
and the Schwabs were also described at the sale hearing by Oldcastle’s counsel, who stated that
management and performance agreements had been submitted to the Schwabs, but they had not
yet responded. Schwab, 2016 WL 197570, at *3-4 (quoting sale hearing transcript).
When questioned by the bankruptcy court at the sale hearing, debtors’ counsel advised
the bankruptcy court that, although he did not know specific details, counsel did know that the
Schwabs had discussions with both CR and Oldcastle. Id. at *4. Counsel for the Committee,
Aaron Hammer (“Hammer”), also attended the sale hearing on May 28, 2010, stating that the
Committee members had been very involved throughout the entire process. Even in light of the
Committee’s knowledge of discussions between Oldcastle and the Schwabs concerning post-sale
compensation and involvement in the businesses, Hammer advised the bankruptcy court at the
sale hearing that:
today, your Honor, I believe is that crowning moment where the right result is
before your Honor. Tremendous amount of time and brain power has been put
into a process that brings us here before you today. With Oldcastle having been
the highest and best bidder, the Committee can support the Debtor’s auction and
sale process under the terms that will be presented to you in the proposed Sale
Order. That includes the factual findings as to good faith conduct and fairness in
the entire process. And we’re comfortable with that Sale Order. . . . There stands a
nice prospect for a decent recovery for unsecured creditors and for the estate to be
left in good shape post-closing.
(Doc. No. 20-47 at 4982-83.)
The kind of concealment of material facts that will bar the application of res judicata
must be affirmative—“‘mere silence or unwillingness to divulge wrongful activities is not
sufficient.’” Browning, 283 F.3d at 770 (quoting Helmbright v. Martins Ferry, No. 94–4089,
1995 WL 445730, at *1 (6th Cir. July 26, 1995)). “‘There must be some trick or contrivance
intended to exclude suspicion and prevent inquiry.’” Id. (quoting Pinney Dock and Transport Co.
v. Penn Cent. Corp., 838 F.2d 1445, 1467 (6th Cir. 1988)). The concealment must be of the sort
that would “deceive a reasonably diligent plaintiff[.]” In re Polyurethane Foam Antitrust Litig.,
152 F. Supp. 3d 968, 980 (N.D. Ohio 2015) (regarding affirmative concealment that must be
shown to toll a limitations period) (citing Browning, 283 F.3d at 770).
There was no trick or contrivance that concealed Oldcastle’s discussion with the
Schwabs, or the nature of those discussions, which were essentially the same as the Schwabs’
discussion with CR.14 The Committee was highly suspicious of the Schwabs’ self-dealing with
CR, aware that such self-dealing may diminish the estate, and objected to both during the
Bankruptcy Case. “Although the specific terms were not known, there is no indication that
For example, the discussions between the Schwabs and CR included continuing in management and equity
ownership post-sale (Doc. No. 29-45 ¶ 8), and similar discussions between Oldcastle and the Schwabs were
disclosed in Oldcastle’s bid (Doc. No. 20-71 at 5481) and in open court by Oldcastle’s counsel. Schwab, 2016 WL
197570, at *3 (quoting sale hearing transcript).
anyone pressed the issue or made diligent efforts to ascertain the terms.”15 Schwab, 2016 WL
197570, at *9.
Pidcock’s argument that this case is distinguishable from Winget because Winget knew of
his adversary claims for a longer period of time before the bankruptcy sale than the claims were
known in this case is irrelevant to the affirmative concealment analysis. The record in the
Bankruptcy Case regarding the Schwabs’ discussions with Oldcastle, the objections to the
Schwabs’ self-dealing in the Bankruptcy Case, and the similarity of those objections to the
adversary claims, belies Pidcock’s affirmative concealment argument. Winget, 537 F.3d at 580.
Thus, the Court finds that the bankruptcy court did not err in applying Winget to conclude
that the Schwabs’ insider deals were affirmatively concealed in the Bankruptcy Case.
3. Breach of fiduciary claims should have been brought during the sale process
Having determined that there was no affirmative concealment, the bankruptcy court
turned to the issue of whether the adversary claims—that the debtors’ assets were sold below
their value because of the Schwabs’ pre-sale self-dealing—should have been brought during the
sale process. The bankruptcy court found this type of attack on the asset sale price similar to
Winget, where the Sixth Circuit applied res judicata to bar Winget’s claims, finding: “‘As
Winget’s claims attack the Defendants’ pre-bankruptcy actions and allege that the Defendants
deliberately devalued the assets of Deluxe prior to its bankruptcy proceeding and subsequent
sale, those claims would have had a direct effect on the assets in the bankruptcy proceeding.’”
Schwab, 2016 WL 197570, at *10 (quoting Winget, 537 F.3d at 579).
Appellant argues that the bankruptcy court found that the Committee had been kept in the dark as to the Schwabs’
negotiations with Oldcastle, with citation to the MOD. (Brief at 441-42.) The language cited, however, is not from
the court’s holding, but from dicta after the bankruptcy court rendered its decision, which begins with the sentence:
“This decision is not without moral unease.” Schwab, 2016 WL 197570, at *11.
The bankruptcy court likened Pidcock’s claims to those in Winget, because
[t]he entire premise of Plaintiff’s complaint is that the assets sold for less than
they would have but for Defendants’ actions, an attempt repudiated by Winget.
This exact issue is raised in this adversary [proceeding], with Plaintiff alleging
that but for Defendants’ side agreements, the auction of Debtors’ assets would
have resulted in a higher sale price. This is precisely the issue that was at issue
during the sale process, rendering this claim one that should have been brought at
Pidcock contends that the bankruptcy court erroneously compared his claims to Winget
because, unlike Winget, he does not seek to upset the results of the bankruptcy asset sale, and
valuation of the assets sold in bankruptcy are not required to calculate damages resulting from
the Schwabs’ breach of fiduciary duty. (Brief at 443.) As Pidcock describes it:
Appellant’s damages can [be] shown by evidence establishing (1) that the top two
bidders were reserving money to fund the insider side deals which resulted in a
lower sale price for Debtors’ assets, which the bankruptcy court already
acknowledged, Pidcock v. Schwab, 2016 Bankr. LEXIS 146, at *16 (“Were it not
for the side agreement, Cement Resources may have been able to pour more
money toward the asset purchase rather than direct money toward the individual
agreements, thereby providing a larger return to the estate. And the indications
are Oldcastle’s bid did not exceed its willing purchase price, leaving the firm
impression money remained on the table.”); and (2) that selling the Corkscrew
property in an expedited manner (which was necessary due to Appellees’
conduct) resulted in a sale price $6 million less than the most conservative
appraisal of liquidation value.
(Brief at 444 (emphasis added).)
While Pidcock may not seek to upset the bankruptcy sale, his characterization of what is
necessary to calculate damages requires a valuation of what the assets would have sold for if the
Scwhabs had not allegedly breached their fiduciary duty by self-dealing. Pidcock claims that CR
and Oldcastle may have paid more were it not for the insider deals, but even if this were the case,
how much more is unknown and theoretical. If Pidcock were to prove his breach of fiduciary
duty claims, the Court would be required to determine if CR and Oldcastle would have paid
more for debtors’ assets absent the insider deals with the Schwabs, and how much more. This
determination would require a revaluation of debtors’ assets. Had those claims been raised
during the sale process, the bankruptcy court could have determined at that time whether the
insider deals were improper and if, and how, those deals impacted the sale price and the value of
the assets to the estate.
Thus, the bankruptcy court did not err in applying Winget to conclude that the third
element of res judicata is satisfied in this case.
4. Pidcock had a full and fair opportunity to pursue breach of fiduciary claims
Pidcock also argues that the third prong of the res judicata analysis cannot be satisfied
because if the sale was delayed to pursue the breach of fiduciary duty claims, the debtors’ assets
may have decreased in value as a result. Thus, Pidcock contends, the Committee did not have a
full and fair opportunity to pursue those claims during the narrow time window of the sale
process, further distinguishing this case from Winget where Winget was aware of his adversary
claims one year before the sale. Cisneros v. Randall, No. 3:06-0190, 2006 WL 2037561, at *5
(M.D. Tenn. July 17, 2006) (“Although mostly invoked in the context of collateral estoppel,
courts do recognize an exception to the application of res judicata [ ] under federal common law.
As a matter of federal law, res judicata principles do not apply where the party against whom an
earlier decision is asserted did not have a full and fair opportunity to litigate the claim or issue
decided by the first court.”) (internal quotation marks omitted) (quoting Fellowship of Christ
Church v. Thorburn, 758 F.2d 1140, 1144 (6th Cir. 1985)); Abbott v. Michigan, 474 F.3d 324,
331 (6th Cir. 2007) (quoting Fellowship of Christ Church, 758 F.2d at 1144).
The bankruptcy court found that, with the information available during the sale process
regarding the Schwabs’ insider deals, there was “ample time to, at a minimum, maintain its
objection or make further inquiry.” Schwab, 2016 WL 197570, at *8. Pidcock disagrees, arguing
that bankruptcy is unlike traditional litigation and the sale process took place over a short, 60-day
time period while the parties were simultaneously involved in numerous other separate matters
related to the bankruptcy. According to Pidcock, when the Committee learned of the insider
discussions between Oldcastle and the Schwabs several days before the auction and sale hearing,
“the Committee had only two options: (1) object to the sale on the basis that it needed time to
investigate any potential Oldcastle side deal before consenting to the sale, or (2) allow the sale to
go forward. Option one would have doomed the entire bankruptcy case to failure as the lenders
had made clear that they were only willing to allow Debtors to continue operating using their
cash collateral until the end of May (effectively the date of the sale hearing, the last business day
of the month).” (Brief at 454-55.)
But, as Pidcock appears to concede, there were mechanisms available for the Committee
to raise its claims concerning breach of fiduciary duty during the bankruptcy sale proceedings.
The Committee raised objections concerning the Schwabs’ insider deals with CR during the sale
process, but chose not to do so with respect to its claims regarding Oldcastle.
The Committee’s opinion that pursuing claims regarding the Schwabs’ insider deals with
Oldcastle during the sale process would have had a negative impact on the value of the estate
may, or may not, have proven true. (See Opp’n at 5962 (“While the banks indicated an initial
unwillingness to fund the companies after May, faced with the potential of an additional,
significant monetary benefit which, according to Pidcock would have been exposed through
investigation, the banks may have relented.”).) The Committee balanced the risks and benefits as
it saw them and chose not to object to the sale to Oldcastle or make further inquiry during the
sale process. The Committee’s choice not to assert those claims during the sale process,
however, does not mean that it could not do so. See Fellowship of Christ Church, 758 F.2d at
1144 (“Appellate review of Judge Thorburn’s dissolution order was not full and fair, [plaintiffs]
contend, because it offered no opportunity to enter material evidence to factually rebut the circuit
court order. The state court defendants, however, freely chose not to move for a new trial at
which they could have submitted evidence.”); Matter of AFY, Inc., No. AP 14-4060, 2016 WL
869786, at *6 (Bankr. D. Neb. Mar. 7, 2016) (owner’s choice not to hire separate counsel for
corporation does not constitute lack of full and fair opportunity to litigate claim objections).
Thus, the Court concludes that appellant’s argument that element three of res judicata is
not satisfied because there was not a full and fair opportunity to pursue the breach of fiduciary
duty claims is without merit.
D. Element 4 - Identity of Cause of Action
The final element of res judicata requires that there be an identity of claims,
which is satisfied if the claims arose out of the same transaction or series of
transactions, or if the claims arose out of the same core of operative facts.
Winget, 537 F.3d at 580 (citations and internal quotation marks omitted).
Winget argued that his adversary claims did not arise out of the same transaction or
operative facts as the bankruptcy proceeding because the sale order did not mention the guaranty
documents upon which Winget’s claims were based. Pidcock makes a similar argument,
contending that his claims are completely different and separate from the facts necessary for
approval of the sale order because, in the sale order, “there is no mention of Appellees
individually, any of their negotiations with bidders, or their continuing role post sale.” (Brief at
460.) But, as the Sixth Circuit ruled in Winget, the Court is not required
to parse the Sale Order to determine whether the final element of res judicata is
met. Looking at the Complaint, it is clear that the factual allegations contained
therein pertain not just to the Sale Order, but to the larger transactions and facts of
Winget and the Defendants’ continuous dealings. These were the same
transactions and facts on which Winget based its objection to the Sale Order.
Winget, 537 F.3d at 581.
The bankruptcy court found that the fourth element of res judicata analysis was satisfied
because Pidcock’s claims pertain not just to the sale order, but to the larger transactions and facts
that were known and raised by Pidcock and the Committee during the Bankruptcy Case:
Debtors and Defendants were directly and intimately involved in the sale process
and were parties to the sale order. The claims now asserted by Plaintiff were
raised two times during the sale process and withdrawn. Specific findings in the
sale order negate the alleged harm now claimed. While the exact specifics of the
side deals may not have been known, there was sufficient information to put the
Committee and Plaintiff on notice and provoke additional inquiry. . . . [T]o the
extent the present claim was not actually litigated during the sale process, the
overlap in the findings supporting the sale order, including findings that the
process generated the best price for the assets and the sale was fair and
reasonable, and the allegations of this complaint suggesting Defendants’ actions
harmed the sale process, create an identity between the causes of action for res
Schwab, 2016 WL 197570, at *10.
In so finding, the bankruptcy court distinguished another adversary proceeding in the
Bankruptcy Case, Goddard, where res judicata did not bar that proceeding. Pidcock contends
that this case is like Goddard. Although the Schwbs’ alleged breach of fiduciary duty occurred
and was known during the sale process, Pidcock maintains that the facts necessary to determine
those claims are “completely different and separate from the facts necessary for approval of the
sale” and thus, transactionally distinct from the bankruptcy sale. (Brief at 460.) The Court
The plaintiff in the Goddard proceeding alleged that the debtors’ restructuring officer,
Laurence Goddard, breached his fiduciary duty by helping the Schwabs negotiate their insider
deals with CR and Oldcastle. Goddard argued that Pidcock’s claims were barred by res judicata
because those claims “necessarily impugn[ed] the good faith finding of the sale[.]” Goddard,
2014 WL 5325930, at *11. The bankruptcy court declined to apply the doctrine of res judicata in
Goddard, however, finding (unlike this adversary proceeding) that the second element of res
judicata was not satisfied. Id. at *12-13. The bankruptcy court also concluded in Goddard that
the third prong of res judicata was not satisfied because (unlike this adversary proceeding)
affirmative concealment prevented the Committee from asserting its breach of fiduciary claims
during the sale process.
At a minimum, Mr. Pidcock should have had knowledge that the Schwabs were
negotiating not only with both the stalking horse bidder, Cement Resources, but
also with the ultimate purchaser, OldCastle, and other bidders. The revised
bidding procedures alluded to the negotiations and the negotiations were
discussed during the sale hearing. Further, counsel for the Committee was directly
questioned about the negotiations during the sale hearing. All of this was done
before Parkland filed fee applications. . . . [But t]here are no facts that suggest, at
the time of the fee applications, Plaintiff had reason to suspect [that Goddard
breached his fiduciary duty by helping the Schwabs negotiate their insider deals”].
Id. at *11.16
Goddard is factually distinct from the instant action and those differences require a different outcome with respect
to the application of res judicata to the two actions. Contrary to appellant’s contention, Goddard does not constitute
the law of the case with respect to the application of res judicata, but arguably constitutes law of the case with
respect to the bankruptcy court’s finding that Pidcock had knowledge during the sale proceeding that the Schwabs
were negotiating insider deals with both CR and Oldcastle.
The bankruptcy court did not err in distinguishing the Goddard proceeding from this
proceeding. Here, not only were Pidcock and the Committee aware of the Schwabs’ insider deals
before the sale of debtors’ assets, the Committee asserted objections regarding the impact of
those deals on the valuation of debtors’ assets during the sale process. Pidcock’s claims in this
case for breach of fiduciary duty due to self-dealing by the Schwabs are based on the same
transactions and facts that were known in the Bankruptcy Case. Thus, there is an identity of
claims between the sale proceedings and the instant litigation, and the fourth element of res
judicata is satisfied. Winget, 537 F.3d at 581.
E. Pidcock’s Insurance Refund Claims are also Barred by Res Judicata
With respect to the adversary claim that the Schwabs breached their fiduciary duty by
failing to obtain a $3 million dollar insurance refund, this claim is also barred by res judicata. In
its objection to debtors’ motion for post-petition financing, the Committee asserted that the
Schwabs were breaching their fiduciary obligations by refusing to consummate the requirements
for the insurance refund. (See e.g. Doc. No. 20-66 ¶¶ 17-39.) The Schwabs’ failure to obtain the
insurance refund was not concealed. Pidcock and the Committee were aware during the
Bankruptcy Case of this alleged breach of fiduciary duty, and the potential adverse effect on the
estate, and should have brought those claims at that time. Thus, for the same reasons that
Pidcock’s claims for alleged breach of fiduciary duty with respect to the Schwabs’ insider deals
with CR and Oldcastle are barred by res judicata, the claims for alleged breach of fiduciary duty
with respect to the insurance refund is also barred.
F. The Court Declines to Adopt the Res Judicata Standard for Bankruptcy Cases From
Pidcock posits that the law of the Sixth Circuit is too rigid in its application of res
judicata in bankruptcy cases, and should adopt the more flexible standards of the Third Circuit
and Eleventh Circuit, which limit the application of res judicata after entry of a sale order to
claims that were actually litigated or that were essential to the sale process. (Brief at 464-65.)
Pidcock argues that this more flexible standard would better further the policies in bankruptcy
cases and not require parties to choose between slowing down the bankruptcy process to pursue
claims during those proceedings, or be barred from doing so later, by the Sixth Circuit’s strict
application of res judicata standards to bankruptcy.17 (Id.)
The Sixth Circuit, however, has specifically considered, and rejected, the Third and
Eleventh Circuit cases that Pidcock argues should be the standard in this circuit. Winget, 537
F.3d at 580-81 (Eastern Minerals & Chem. Co. v. Mahan, 225 F.3d 330, 337–38 (3d Cir. 2000)
and Eastman Kodak Co. v. Atlanta Retail, Inc. (In re Atlanta Retail, Inc.), 456 F.3d 1277, 1280
(11th Cir. 2006) discussed in context of the fourth res judicata factor). Moreover, the obligation
of this Court and the bankruptcy court is to apply the law of the Sixth Circuit to this case, not to
follow the decisions of other circuits. In re Higgins, 159 B.R. 212, 215 (S.D. Ohio 1993) (“The
general rule, of course, is that the district courts are bound by decisions of the Sixth Circuit even
if decisions from other circuits seem more persuasive.”).
For the reasons stated above, the Court concludes that the bankruptcy court did not err in
applying Sixth Circuit law to this case.
Similar issues and concerns were extensively discussed by the bankruptcy court in dicta, some of which,
unfortunately, form the basis of Pidcock’s arguments on appeal.
IV. APPEAL OF ORDER DENYING MOTION
TO STRIKE AFFIRMATIVE DEFENSES
A. Standard of Review
The bankruptcy court’s order denying the creditor trustees’ motion to strike
defendant/appellee’s affirmative defenses is an interlocutory order. In re Midway Motor Sales,
Inc., 2009 WL 1940719, at *1 (citations omitted). This interlocutory order, however, merges
with the bankruptcy court’s final order granting summary judgment in this case and may be
appealed by filing a timely notice of appeal of the final judgment. See id. at *2.
“Bankruptcy court orders striking affirmative defenses and dismissing cross-claims, and
disapproving a proposed settlement or compromise are reviewed for abuse of discretion. An
abuse of discretion occurs only when the court relies upon clearly erroneous findings of fact or
when it improperly applies the law or uses an erroneous legal standard.” Id. (internal quotation
marks and citations omitted). “Whether the bankruptcy court’s discretionary decision is based
upon an erroneous interpretation of the law is a legal question that is reviewed de novo.
Regardless, the decision of the bankruptcy court can be affirmed if it is correct for any reason,
including a reason not considered by that court.” In re Anderson, 377 B.R. 865, 868 (B.A.P. 6th
Cir. 2007), abrogated on other grounds by Schwab v. Reilly, 560 U.S. 770, 130 S. Ct. 2652, 177
L. Ed. 2d 234 (2010) (internal quotation marks and citations omitted).
B. Bankruptcy Court did not Err in Denying Pidcock’s Motion to Strike Affirmative
After considering the parties’ brief and entertaining oral argument on Pidcock’s motion to
strike the Schwabs’ affirmative defenses, the bankruptcy court found that “there is no controlling
authority or requirement in the Sixth Circuit or in the Ohio District Courts that the pleading
standards set forth in Bell Atl. Corp. v. Twombly, 550 U.S. 544[, 127 S. Ct. 1955, 167 L. Ed. 2d
929] (2007) and Ashcroft v. Iqbal, 556 U.S. 662[, 129 S. Ct. 1937, 173 L. Ed. 2d 868] (2009)
apply to affirmative defenses.” (Order at 4228.) The bankruptcy court therefore declined to apply
such pleading standards to affirmative defenses and denied Pidcock’s motion to strike. (Id.) On
appeal, Pidcock acknowledges that there is no clear answer because the Sixth Circuit has not yet
ruled on this issue, but urges this Court to do so on appeal because some Ohio district courts
have applied the plausibility standard of Twombly and Iqbal to affirmative defenses. (Brief at
The Sixth Circuit has not yet addressed this issue. Depositors Ins. Co. v. Estate of Ryan,
637 F. App’x 864, 869 (6th Cir. 2016). Indeed, appellant cites no cases from any circuit court
that has. The current law in the Sixth Circuit is that an affirmative defense may be pleaded in
general terms and is sufficient “‘as long as it gives plaintiff fair notice of the nature of the
defense.’” Lawrence v. Chabot, 182 F. App’x 442, 456 (6th Cir. 2006) (quoting 5 Wright &
Miller, Federal Practice and Procedure § 1274). Moreover, in a post-Twombly/Iqbal decision,
the Sixth Circuit found that the Federal Rules of Civil Procedure do not require a heightened
pleading standard for a statute of repose defense. Montgomery v. Wyeth, 580 F.3d 455, 468 (6th
This Court has previously held that “‘[a]n affirmative defense may be pleaded in general
terms and will be held to be sufficient . . . as long as it gives plaintiff fair notice of the nature of
the defense.’” Chiancone v. City of Akron, No. 5:11CV337, 2011 WL 4436587, at *2 (N.D. Ohio
Sept. 23, 2011) (quoting Lawrence, 182 F. App’x at 456); see also Jam Tire, Inc. v. Harbin, No.
3:14-cv-00489, 2014 WL 4388286, at *2-3 (N.D. Ohio Sept. 5, 2014) (rejecting a heightened
pleading standard for affirmative defenses, and noting a “majority trend” that “cut[s] against the
proposition”); Sodexo Mgmt., Inc. v. Benton Harbor Area Sch. Dist., No. 1:15-CV-878, 2016
WL 845338, at *8 (W.D. Mich. Mar. 2, 2016) (concluding that the “fair notice” standard remains
intact in the Sixth Circuit with respect to affirmative defenses, and declining to apply the
Twombly/Iqbal standard) (citing among other authority Montgomery); Farivar v. Lawson, No.
3:14-CV-76-TAV-HBG, 2017 WL 149970, at *6 n.1 (E.D. Tenn. Jan. 13, 2017) (following
Lawrence and Montgomery in declining to apply heightened pleading standard to affirmative
The Court acknowledges that some Ohio district courts have concluded that the
Twombly/Iqbal heightened pleading standard applies to affirmative defenses. See e.g. HCRI TRS
Acquirer, LLC v. Iwer, 708 F. Supp. 2d 687, 691 (N.D. Ohio 2010). The majority of courts
considering this issue, however, have concluded to the contrary. Vary v. City of Cleveland, No.
1:16-CV-00037, 2016 WL 3085311, at *1 (N.D. Ohio June 2, 2016) (“This Court follows the
majority approach in finding that the Iqbal and Twombly pleading requirements do not apply to
Accordingly, the Court finds that the bankruptcy court did not err in denying Pidcock’s
motion to strike the Schwabs’ affirmative defenses.
For all of the foregoing reasons, plaintiff/appellant’s appeal is denied. The bankruptcy
court’s order (and accompanying memorandum of decision) granting defendants/appellees’
motion for summary judgment, and order denying plaintiff/appellant’s motion to strike
defendants/appellees’ affirmative defenses, are AFFIRMED.
IT IS SO ORDERED.
Dated: March 28, 2017
HONORABLE SARA LIOI
UNITED STATES DISTRICT JUDGE
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