McGirr et al v. Rehme et al
Filing
192
OPINION AND ORDER Resolving all pending motions. GRANTING 151 Plaintiffs' Motion for a Scheduling Order, Revised 26f Plan due by 8/17/2018 and a Telephonic Scheduling Conference is set for 8/29/2018 at 3:30 pm; DENYING AS MOOT 162 Eric Goe ring's Motion to Intervene and Appoint Receiver; GRANTING 170 Plaintiffs' Motion for Leave to File a Second Amended Complaint; GRANTING 174 Trustees' Motion to Nullify Substitution; DENYING AS MOOT 179 Plaintiffs' Motion for a Status Conference; GRANTING 180 Motion to Substitute Party by Trustee; DENYING WITHOUT PREJUDICE 99 Plaintiffs' Motion for Partial Summary Judgment; GRANTING 126 Plaintiffs' Motion to Compel Production of Documents. Signed by Judge Robert H. Cleland on 8/3/2018. (lgw)
UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
CONNIE MCGIRR, et al.,
Plaintiffs,
v.
Case No. 16-464
THOMAS F. REHME, et al.,
Defendants.
_______________________________________/
OPINION AND ORDER RESOLVING ALL PENDING MOTIONS
On April 21, 2017, the court granted Plaintiffs’ Motion for a Preliminary Injunction
and ordered Defendants to refrain from assigning, distributing, disbursing, transferring,
or taking any action on any assets beyond basic expenses. (Dkt. # 113.) Defendants
appealed that order, arguing that it amounted to an improper exercise of jurisdiction
over the Assignee who was managing many of the Defendants’ assets pursuant to a
proceeding in Ohio Probate Court. While that appeal was pending in the Sixth Circuit
Court of Appeals, the Ohio Probate proceeding was stayed through a peremptory writ
issued by the Ohio Supreme Court and was subsequently dismissed.
Meanwhile, the parties continued to file numerous motions with this court and
contested which of the motions the court had jurisdiction to resolve during the pendency
of Defendants’ appeal. With the Sixth Circuit now having issued an opinion affirming this
court’s injunctive order, the parties’ jurisdictional arguments are moot, and this court will
address all pending motions. See McGirr v. Rehme, No. 17-3519, ___ F.3d __, 2018
WL 2437184 (6th Cir. May 31, 2018).
I. BACKGROUND1
This case involves a previously settled mass tort action concerning the diet drug
“fen-phen.” Some of the plaintiffs in that case instituted an action in Kentucky state court
against their attorney, now Defendant, Stanley Chesley. They alleged that he wrongfully
retained money they were due from the settlement. That action resulted in a $42 million
dollar judgment against Chesley jointly and severally, see Mildred Abbott et al. v.
Stanley M. Chesley, et al., No. 05-CI-00436 (Ky. Cir. Ct. Aug. 1, 2014), affirmed
Chesley v. Abbott, 524 S.W.3d 471 (Ky. Ct. App. 2017), which Plaintiffs have had little,
if any, luck in collecting. Sometime thereafter, Defendant Chesley was disbarred. See
Kentucky Bar Assn. v. Chesley, 393 S.W.3d 584 (Ky. 2013). Consequently, in 2013,
Chesley executed a Wind-up Agreement to close his wholly owned law firm, Waite,
Schneider, Bayless, & Chesley, Co., LPA (“WSBC”). In the agreement, he named
WSBC’s secretary, Thomas Rehme, as trustee of the firm’s assets for the purpose of
terminating operations. The Kentucky Circuit Court concluded that the Wind-up
Agreement was a “sham” and ordered Chesley to transfer his interest in WSBC to
Plaintiffs, but he never did so. See Chesley, 524 S.W.3d at 477; State ex rel. McGirr v.
Winkler, 93 N.E.3d 928, 932 (Ohio 2017).
A. Procedural History
Plaintiffs filed this action against Chesley, WSBC, and Rehme. Plaintiffs do not
1
In its opinion affirming this court, the Sixth Circuit provided a detailed factual
background of this case. The court will not reiterate all of the detailed facts here, but
incorporates them by reference. See McGirr, 2018 WL 2437184 at *1-5.
2
seek enforcement of their Kentucky state court judgment, rather, they have filed a
separate complaint against Defendants for fraudulent transfer. (See Dkt. # 10, Pg. ID
330.) They allege that Defendants fraudulently transferred funds to shield Chesley from
the Kentucky state court judgment against him.
In the early stages of this case, an Ohio federal court in a related class action
lawsuit approved the payment of attorneys’ fees from Duke Energy International, Inc. to
Defendant WSBC. See Dkt. # 266 of Williams v. Duke Energy, No. 08-46 (S.D. Ohio
Oct. 21, 2015). This court concluded that there was a substantial risk of irreparable
harm to Plaintiffs if the fee award was given directly to WSBC; therefore, the court
ordered that the funds be held on deposit with the court during the pendency of this
litigation. (Dkt. # 10; Dkt. # 48, Pg. ID 1011.)
Thereafter, Rehme, still acting as trustee for WSBC, created Trustee Inc. and
caused WSBC to transfer its assets to Trustee Inc., which proceeded to transfer the
assets to Eric Goering. Rehme then commenced a bankruptcy-like action (known as
Assignment for the Benefit of Creditors “ABC”) in Hamilton County Probate Court in
Ohio. In the ABC action, Goering was designated as the Assignee over all of WSBC’s
assets for disbursement to WSBC’s creditors. Plaintiffs are judgment creditors of
Defendant Chesley rather than Defendant WSBC, and therefore were not included in
the ABC action.
Upon Plaintiffs’ motion in this court and following extensive briefing and hearings,
the court entered a temporary restraining order prohibiting, among other actions, the
assignment, disbursement, distribution, transfer, or any action related to any asset of
3
WSBC, outside of basic office expenses. (Dkt # 75, Pg. ID 1842.) The court later issued
a preliminary injunction containing the same terms. (Dkt. # 113.) The injunction
essentially froze WSBC’s financial transactions. To this end, neither WSBC nor
Assignee Goering has been permitted to direct any money owed to WSBC or manage
its assets, liabilities, or debts.
Defendants appealed the court’s injunctive order to the Sixth Circuit. While that
appeal was pending, the Ohio Supreme Court dismissed the Ohio ABC action on the
grounds that the action was a “vexatious abuse of process” intended to shelter
Defendant Chesley’s assets from Plaintiffs. See State ex rel. McGirr v. Winkler, 93
N.E.3d 928, 933 (Ohio 2017). The Sixth Circuit subsequently affirmed this court’s
injunctive order concluding that “Chesley and his co-defendants have proven apt at
moving money around to evade the plaintiffs” and the court’s injunction “serves an
important purpose—‘to allow a victory by [the plaintiffs] to be meaningful.’” See McGirr,
2018 WL 2437184 at *9. (quoting AIG Aviation, Inc. v. Boorom Aircraft, Inc., 1998 WL
69013, at *3 (6th Cir. 1998)) (brackets in original).
II. DISCUSSION
Currently, ten motions are pending on the court’s docket—the parties continued
to file motions during the pendency of Defendants’ appeal in the Sixth Circuit despite
the court’s jurisdictional uncertainty. The motions now include: (1) Plaintiffs’ Motion for
Partial Summary Judgment (Dkt. # 99), (2) Plaintiffs’ Motion for Appointment of a
Receiver (Dkt # 116), (3) Assignee Eric Goering’s Motion to Intervene and for the
Appointment of a Receiver (Dkt. # 162), (4) Plaintiffs’ Renewed Motion to Appoint a
4
Receiver (Dkt. # 178, # 190), (5) Plaintiffs’ Motion for Leave to File a Second Amended
Complaint (Dkt. # 170), (6) Plaintiffs’ Motion to Compel Production of Documents (Dkt. #
126), (7) Plaintiffs’ Motion for a Scheduling Order (Dkt. # 151), (8) Plaintiffs’ Motion for a
Status Conference (Dkt. # 179), (9) Motion to Nullify Substitution of Trustees (Dkt. #
174), and (10) Motion to Substitute Trustee (Dkt. # 180). Additionally, the proposed
intervener and Plaintiffs filed a Notice of Agreed Order Appointing Receiver. (Dkt. #
165.) The court directed Defendants to file a response indicating whether they agreed to
the “Agreed Order.” (Dkt. # 166.) Defendants subsequently filed a response opposing
the proposed receivership. (Dkt. # 167.)
The court will address each motion.
A. Plaintiffs’ Motion for a Scheduling Order (Dkt. # 151) and Motion for a Status
Conference (Dkt. # 179)
In January 2017, the parties submitted a Rule 26(f) report that offered widely
divergent views on the scope and timing of discovery. (Dkt. # 94.) In March 2017, before
the court was able to resolve their disagreements, Plaintiffs filed a motion for summary
judgment. (Dkt. # 99.) Defendants then requested an extension of their allotted time to
respond to the motion in order to pursue discovery pursuant to Federal Rule of Civil
Procedure 56(d). (Dkt. # 103.) The court granted that motion. (Dkt. # 110.) However, no
discovery deadline was established because the court concluded that the case may be
a “proceeding ancillary to a proceeding in another court,” see L.R. 16.2(viii); Dkt. # 91,
which is an exception to Rule 16(b)’s scheduling order requirement. Due to the
existence of several related state court proceedings and the issues on appeal to the
5
Sixth Circuit, the court refrained from entering a scheduling order at that time.
Given that related proceedings and appeals in Kentucky state court, Colorado
state court, Ohio Probate court, and the Sixth Circuit Court of Appeals have all
concluded, Plaintiffs have filed a motion for a scheduling order (Dkt. # 151) and
Defendants have not opposed it. Plaintiffs have also filed a motion for a status
conference. (Dkt. # 179.)
The court will order the parties to meet and confer to develop a revised Rule 26(f)
plan that accounts for the needs of this case including any outstanding discovery and
motion practice. The proposed scheduling order should first and foremost account for
this order granting Plaintiffs’ motion for leave to file a second amended complaint
(discussed below) by setting a deadline for Defendants’ answer or other response
allowed under the Federal Rules of Civil Procedure as well as any time needed for
discovery on the new claims. When crafting a proposed schedule, the parties should
also be cognizant that the court previously denied (without prejudice pending the Sixth
Circuit’s decision on appea) Defendant Chesley’s motion to transfer all sequestered
funds to the IRS (Dkt. # 101), Defendants Rehme and WSBC’s motion for summary
judgment (Dkt. # 105), and Plaintiffs’ motion to strike expert affidavit (Dkt. # 122). The
parties should also be mindful of the court’s ruling on Defendants’ Rule 56(d) motion
and that the court will dismiss without prejudice Plaintiffs’ motion for summary judgment
(as discussed below) to allow for adequate discovery.
In sum, the case schedule moving forward should provide a timeline for
addressing all of these issues should the parties believe they are still pertinent to the
6
dispute. After reviewing the parties’ proposal, the court will either adopt it by order or
hold a conference with the parties to discuss and finalize a scheduling order.
B. Plaintiffs’ Motion for Leave to File a Second Amended Complaint (Dkt. # 170)
Plaintiffs request leave to file a second amended complaint based on recent
proceedings in Ohio State court. (Dkt. # 170.) Specifically, the Supreme Court of Ohio
dismissed the probate ABC action filed by Defendant Rehme on the grounds that the
action was a “vexatious abuse of process” intended to shelter Defendant Chesley’s
assets from Plaintiffs. See State ex rel. McGirr v. Winkler, 93 N.E.3d 928, 933 (Ohio
2017). Plaintiffs’ amended complaint alleges that Defendants Rehme and WSBC
improperly transferred WBSC’s assets to Trustee Inc. and Eric Goering through a series
of assignments. Georing then filed the ABC action in Ohio Probate court, which
triggered all the protections afforded by the bankruptcy court and allowed him to serve
as Assignee over the assets. Plaintiffs’ proposed amended complaint seeks to add
Trustee Inc. and Georing to their claims of conspiracy against Defendants, as well as to
add claims for punitive damages against Defendants Chesley, Rehme, and WSBC
based on this conduct. (Id. at 6445.)
According to Federal Rule of Civil Procedure 15(a)(2), after the time allotted
under Rule 15(a)(1) has expired, “a party may amend its pleading only with the
opposing party’s written consent or the court’s leave. The court should freely give leave
when justice so requires.” Although the rule embodies a liberal amendment policy, leave
to amend may be appropriately denied “when there is ‘undue delay, bad faith or dilatory
motive on the part of the movant, repeated failure to cure deficiencies by amendments
7
previously allowed, undue prejudice to the opposing party by virtue of allowance of the
amendment, futility of amendment, etc.’” Brown v. Chapman, 814 F.3d 436, 443 (6th
Cir. 2016) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)).
“[T]he party requesting leave to amend must ‘act with due diligence if it wants to
take advantage of the Rule’s liberality.’” Parry v. Mohawk Motors of Mich., Inc., 236 F.3d
299, 306 (6th Cir. 2000) (quoting U.S. v. Midwest Suspension & Brake, 49 F.3d 1197,
1202 (6th Cir. 1995). Delay becomes undue when it places an unwarranted burden on
the court, or is prejudicial, placing an unfair burden on the opposing party. See
Bridgeport Music, Inc. v. Dimension Films, 410 F.3d 792, 806 (6th Cir. 2005) (quoting
Morse v. McWhorter, 290 F.3d 795, 800 (6th Cir. 2002)).
Plaintiffs request leave to amend their complaint to add claims and parties based
on events that transpired after the filing of their first amended complaint; namely,
Defendants’ initiation of and actions concerning the Ohio Probate case. Plaintiffs have
not unreasonably delayed filing their claims nor have they acted in bad faith or with a
dilatory motive. Their proposed claims arise out of Defendants’ actions taken during the
course of this litigation. The Ohio Supreme Court found of “a pattern of misuse of the
judicial process in Ohio by Chesley and WSBC to obstruct collection efforts and conceal
Chesley’s ongoing control of WSBC.” See McGirr, 93 N.E.3d at 933. The court finds no
reason why leave to amend should not be freely given here and further, is convinced
that justice requires Plaintiffs be granted leave to amend their complaint to include
allegations of fraudulent transfer related to the Ohio Probate Court ABC action.
8
C. Plaintiffs’ Motion for Partial Summary Judgment (Dkt. # 99)
Plaintiffs filed a motion for partial summary judgment on their fraudulent
conveyance claim. They argue that there is no genuine issue of material fact that
Defendant Chesley’s transfer of WSBC to Defendant Rehme, and Rehme’s subsequent
transfer of WSBC to Trustee Inc. and Goering, constitute fraudulent transfers. (Dkt. #
99.)
The court granted Defendants’ request to conduct discovery prior to summary
judgment proceedings pursuant to Rule 56(d). While the parties have engaged in some
discovery since that time, it is unclear whether that discovery is complete or has been
sufficient to allow Defendants to respond to the pending summary judgment motion.
Additionally, the landscape of this case has changed dramatically since Plaintiffs’
original filing of their complaint and will change again with the filing of their amended
complaint. To allow both parties a fair opportunity to be heard, the court will deny
Plaintiffs’ summary judgment motion without prejudice, will review the revised Rule 26(f)
plan that the court has directed the parties’ to develop, and will set a briefing schedule
for dispositive motion practice that accounts for any outstanding discovery Defendants
might reasonably need.
D. Plaintiffs’ Motion to Compel Production of Documents (Dkt. # 126)
Plaintiffs ask this court to enter an order compelling third party Clark, Schaefer,
Hackett & Co (“CSH”) to produce documents requested pursuant to two subpoenas
duces tecum. CSH provides accounting services for Defendants Chesley and WSBC.
The first subpoena requests production of:
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All communications and records in all forms, including but not limited to,
federal, state and local income tax returns, K-1's, gift tax returns, financial
statements, emails and work papers, related to Chesley Family
Foundation, Chesley Family Partnership, Chesley Family Partners, LLC,
Chesley Family Partners, an Ohio general partnership, 2004 Chesley
Family GrantorTrust, 2007 Chesley Family Partners Trust, and/or The
Stanley and Susan Chesley Foundation, filed or dated from January 1
2005 to present.
(Dkt. # 126-1, Pg. ID 6196.) The second subpoena requests production of:
All communications and records in all forms, including but not limited to,
notes correspondence, agreements, federal tax liens, federal and state
income tax returns, tax transcripts, gift tax returns, extension requests,
acceleration assessments, notices or requests, (Jeopardy, termination,
quick or prompt), financial statements, emails and work papers related to
Stanley M. Chesley, the firm [WSBC] and any other entity in which Stanley
Chesley or [WSBC] has held an interest in thru December 31, 2018. This
request includes all such communication with agents or attorneys. This
request excludes all documents previously provided by CSH.
(Dkt. # 126-2, Pg. ID 6200.) CSH has raised six objections to the first subpoena: (1) it
was improperly served by certified mail, (2) notice of the subpoena was not given to
other parties before CSH was served with it, (3) the subpoena is addressed to CSH as
an entity instead of specific persons, (4) the subpoena does not give CSH reasonable
time to comply, (5) compliance with the subpoena would create an undue burden and
expense to CSH, and (6) compliance with the subpoena puts CSH at risk to incur
criminal penalties. (Dkt. # 126-3, Pg. ID 6201–02.) CSH restates the second through
fifth of these objections with regard to the second subpoena, and additionally objects
that the second subpoena is vague and ambiguous. (Dkt. # 126-4, Pg. ID 6210–11.)
1. Standard: Rule 45
Federal Rule of Civil Procedure 45 governs the subpoena process and requires:
10
(4) Notice to Other Parties Before Service. If the subpoena commands the
production of documents, electronically stored information, or tangible
things or the inspection of premises before trial, then before it is served on
the person to whom it is directed, a notice and a copy of the subpoena
must be served on each party.
Fed. R. Civ. P. 45 (a)(4). Regarding service, Rule 45 states:
(b) Service.
(1) By Whom and How; Tendering Fees. Any person who is at least 18
years old and not a party may serve a subpoena. Serving a subpoena
requires delivering a copy to the named person and, if the subpoena
requires that person's attendance, tendering the fees for 1 day's
attendance and the mileage allowed by law. Fees and mileage need not
be tendered when the subpoena issues on behalf of the United States or
any of its officers or agencies.
(2) Service in the United States. A subpoena may be served at any place
within the United States.
Fed. R. Civ. P. 45(b). Rule 45 goes on to explain:
(B) Objections. A person commanded to produce documents or tangible
things or to permit inspection may serve on the party or attorney
designated in the subpoena a written objection . . .
If an objection is made, the following rules apply:
(i) At any time, on notice to the commanded person, the serving
party may move the court for the district where compliance is required for
an order compelling production or inspection.
(ii) These acts may be required only as directed in the order, and
the order must protect a person who is neither a party nor a party's officer
from significant expense resulting from compliance.
(3) Quashing or Modifying a Subpoena.
(A) When Required. On timely motion, the court for the district
where compliance is required must quash or modify a subpoena that:
(i) fails to allow a reasonable time to comply;
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(ii) requires a person to comply beyond the geographical limits
specified in Rule 45(c);
(iii) requires disclosure of privileged or other protected matter, if no
exception or waiver applies; or
(iv) subjects a person to undue burden.
Fed. R. Civ. P. 45 (d)(2)(B)(i)–(ii) and (d)(3)(A)(i)–(iv).
“A subpoena issued under Rule 45 is subject to the general relevancy standard
applicable to discovery under Rule 26(b)(1) .” Vamplew v. Wayne State Univ. Bd. of
Governors, No. 12-14561, 2013 WL 3188879, at *2 (E.D. Mich. June 20, 2013) (quoting
Syposs v. U.S.A., 181 F.R.D. 224, 226 (W.D.N.Y. 1998)) (internal quotation omitted).
“[T]he scope of discovery under a subpoena is the same as the scope of discovery
under Rule 26.” Hendricks v. Total Quality Logistics, LLC, 275 F.R.D. 251, 253 (S.D.
Ohio 2011) (quoting Barrington v. Mortage IT, Inc., No. 07-61304-CIV, 2007 WL
4370647, at *3 (S.D. Fla. Dec. 10, 2007)). Therefore, this court must consider whether
the subpoenas’ requests are “overly broad or seek[] irrelevant information under the
same standards set forth in Rule 26(b) and as applied to Rule 34 requests for
production.” Transcor, Inc. v. Furney Charters, Inc., 212 F.R.D. 588, 591 (D. Kan.
2003).
As a general matter under Rule 26(b), “[p]arties may obtain discovery regarding
any nonprivileged matter that is relevant to any party’s claim or defense.”
Fed. R. Civ.
P. 26(b)(1). However, discovery is not permitted when “[it] is unreasonably cumulative
or duplicative, or can be obtained from some other source that is more convenient, less
12
burdensome, or less expensive [or] (ii) the party seeking discovery has had ample
opportunity to obtain the information by discovery in the action.” Fed. R. Civ. P.
26(b)(2)(C)(i)–(ii). Discovery is further prohibited when its burden or expense outweighs
its likely benefit, considering the needs of the case, the amount in controversy, the
parties’ resources, the importance of the issues at stake in the action, and the
importance of the discovery in resolving the issues. Fed. R. Civ. P. 26(b)(2)(C)(iii).
When any of these circumstances arise, the court must limit discovery “[o]n motion or
on its own.” Fed. R. Civ. P. 26(b)(2)(C).
2. Discussion: Rule 45
CHS objects to Plaintiffs’ two subpoenas on seven grounds.
First, CHS alleges that the first subpoena was not properly served, but the Proof
of Service attached to it shows that it was personally served on CSH’s office. (Dkt. #
126-1, Pg. ID 6194.) The court will overrule CHS’s objection.
Second, CHS alleges that other parties, specifically Defendants, were not given
timely notice of the subpoenas prior to service of the subpoenas on CHS. Plaintiffs’
counsel timely served Defendants’ counsel with notice of the first subpoena by email.
(Dkt. # 126-7, Pg. ID 6223.) While tardy, Plaintiffs’ counsel also served Defendants’
counsel with notice of the second subpoena by email. (Dkt. # 126-8.) Defense counsel
was also included in CHS’s email to Plaintiffs’ counsel objecting to the second
subpoena. (Dkt. # 126-4, Pg. ID 6211.) The court concludes Defendants had adequate
notice of the subpoenas and will overrule CHS’s objection.
Third, CSH makes an odd objection based on the fact that the subpoenas are
13
addressed to it as an entity instead of specific persons and then argues it “has no
obligation to poll each and every person employed by it either now or since 2005 to
ascertain whether any or all such persons possess responsive materials.” (Dkt. # 126-3,
Pg. ID 6202.) As Plaintiffs point out, this is in fact the very duty that is imposed on a
party subject to a subpoena. A subpoena issued pursuant to Rule 45 commands each
person to whom it is directed to “produce designated documents, electronically stored
information, or tangible things in that person's possession, custody, or control.” Fed. R.
Civ. P. 45(a)(1)(A)(iii). A company is a person for purposes of the Rule. See Yousuf v.
Samantar, 451 F.3d 248, 254 (D.C. Cir. 2006) (holding that federal agencies are
“persons” under Rule 45 and noting that “person” has included corporate bodies since
Rule 45’s passage in 1937). To interpret the Rule otherwise would impose an
unreasonable burden on the subpoenaing party to identify the specific individual within a
large corporation who possesses the documents sought. The party under subpoena
must locate and produce the relevant documents in its “possession, custody, or control”
absent a claim of an undue burden or other reason to quash the subpoena. Fed. R. Civ.
P. 45(a)(1)(A)(iii). The court will overrule CSH’s objection.
Fourth, CHS objects to the subpoenas on the basis that it has not been given
reasonable time to comply. While Rule 45 requires that an entity subject to a subpoena
be given reasonable time to comply, it does not specify what length constitutes a
“reasonable time.” The Rule states that objections “must be served before the earlier of
the time specified for compliance or 14 days after the subpoena is served.” Fed. R. Civ.
P. 26(d)(2)(B) (emphasis added). This requirement implies that 14 days would be a
14
reasonable time for compliance. CHS was given 14 days to respond to each subpoena.
(Dkt. # 126-1, 126-2.) Regardless, the court will provide CHS an additional 14 days to
comply with the subpoenas following entry of this order. The court will overrule CSH’s
objection. The obligation to produce the requested information has been nascent since
the subpoenas’ filings in February and March of 2017, so time beyond these 14 days is
not likely to be granted.
Fifth, CHS objects on the basis that compliance with the subpoena will impose an
undue burden and expense on it. CHS argues that there is overlap between the
documents sought and those produced to Plaintiffs’ counsel under prior related
subpoenas. (Dkt. # 126-3, Pg. ID 6202.) With regard to this overlap, Plaintiffs’ counsel
has assured CHS that Plaintiffs are “not requesting any documents CHS already
produced” pursuant to earlier subpoenas. (Dkt. # 126, Pg. ID 6186, Dkt. # 126-3, Pg. ID
6205.) Moreover, the first subpoena requests documents regarding certain trust entities
that were not explicitly included in the prior related subpoenas. And the prior subpoenas
concerned only documents generated through December 31, 2015, whereas the
present subpoenas include more recent documents. CHS’s concern for overlap has
been adequately addressed and its objection will be overruled.
Sixth, CHS cites 26 U.S.C. § 7216 and argues that federal law precludes it from
complying with the subpoena insofar as the subpoena seeks tax return information.
However, the statute provides exceptions to this preclusion; one of which is when the
disclosure of the documents is required by court order. See 26 U.S.C. § 7216(b)(1)(B).
The court will enter an order compelling disclosure of the relevant tax return information;
15
thus mooting CHS’s objection.
Seventh and last, CHS objects to the second subpoena asserting it is vague and
ambiguous. Particularly, CHS takes issue with the language, “This request includes all
such communication with agents or attorneys.” (Dkt. # 126-2, Pg. ID 6200.) CHS argues
that this language “requires CSH to speculate on who or what may be an ‘agent’ of
either Mr. Chesley or his prior firm” and “can be fairly read as commanding to
production of communications with CSH's own attorney.” (Dkt. # 126-4, Pg. ID 6211)
(emphasis in original). CHS overlooks a critical modifier in the language with which it
takes issue—“such.” The word “such” indicates that the “communications with agents or
attorneys” sought refer to those communications identified in the immediately preceding
sentence—communications “related to Stanley M Chesley, the firm [WSBC] and any
other entity” in which either Chesley or WSBC has held an interest in through December
31, 2016. (Dkt. # 126-2, Pg. ID 6200.) To the extent there was confusion, it has already
been addressed. Plaintiffs’ counsel provided the following clarification to CHS:
CSH's communication with its own attorneys are not requested unless
those attorneys were not advising you but rather acting as a conduit for
communications from Mr. Chesley and/or his counsel. All other
communication related to Stanley Chesley or any related entity, agent,
assignee are requested. We do not request your speculation on who or
what is an agent and those terms are to be broadly construed.
(Dkt. # 126-3, Pg. ID 6207.) The court concludes that the second subpoena is not vague
or ambiguous and will overrule CHS’s objection.
Beyond CHS’s objections, the court is mindful that Plaintiffs have the burden to
demonstrate that the materials they seek are within the scope of Rule 26 discovery, i.e.,
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that they are “relevant to any party’s claim or defense.” Fed. R. Civ. P. 26(b)(1). CHS
conducts ongoing accounting and tax preparation services for Defendants. Contrary to
CHS’s contentions, documents created since the initiation of the Wind-up Agreement
are relevant to Plaintiffs’ claims, particularly in light of the fact that the court will grant
Plaintiffs’ motion for leave to amend its complaint to add allegations of fraudulent
transfer based on actions taken by Defendants in the last year. Additionally, the sought
discovery is important to resolving other issues in the case, especially whether the
various amounts Defendants owe to the IRS are the product of Defendants’ alleged
misconduct. Fed. R. Civ. P. 26(b)(2)(C)(iii). As discussed above, Plaintiffs have clarified
their requests in a manner that ensures they are not cumulative, duplicative, or overly
burdensome. Fed. R. Civ. P. 26(b)(2)(C)(i)–(ii). The court will grant Plaintiffs’ motion to
compel.
E. Plaintiffs’ Motions for Appointment of a Receiver (Dkt. # 116, 178, 190)
Plaintiffs filed motions requesting the appointment of a receiver to manage
WSBC’s assets. Defendants oppose the receivership. (Dkt. # 120, 121, 181, 182.)
Additionally, Eric Goering and Plaintiffs filed a Notice of Agreed Order Appointing
Receiver and propose John Pidcock of Conway MacKenzie to serve as receiver. (Dkt. #
165.) The court directed Defendants to file a response indicating whether they agreed to
the “Agreed Order.” (Dkt. # 166.) Defendants subsequently filed a response opposing
the proposed receivership; they provided no opinion as to John Pidcock as the
suggested receiver or the proposed terms of the receivership. (Dkt. # 167.)
1. Standard: Appointment of Receiver
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The Sixth Circuit has never explicitly addressed whether federal or state law
governs the appointment of a receiver by a district court where federal jurisdiction is
based on diversity, but those circuits that have addressed the issue have held that
federal law governs. See Canada Life Assur. Co. v. LaPeter, 563 F.3d 837, 842 (9th Cir.
2009); Myles v. Sapta, 139 F.3d 912 (10th Cir. 1998); Nat'l P'ship Inv. Corp. v. Nat'l
Hous. Dev. Corp., 153 F.3d 1289, 1291 (11th Cir. 1998); Aviation Supply Corp. v.
R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316 (8th Cir. 1993); Chase Manhattan Bank, N.
A. v. Turabo Shopping Ctr., Inc., 683 F.2d 25, 26 (1st Cir. 1982).2
Additionally, district courts in this circuit have applied federal law when presented
with a motion for appointment of a receiver. See e.g., Vireo Sys., Inc. v. HTG Ventures,
LLC, No. 14-02359, 2016 WL 815522, at *3 (M.D. Tenn., Mar. 2, 2016); Pension Ben.
Guar. Corp. v. Evans Tempcon, Inc., No. 14-782, 2015 WL 1249716, at *3 (W.D. Mich.,
Mar. 18, 2015), aff'd, 630 F. App'x 410 (6th Cir. 2015); Citizens Bank v. Cedar
Fairmount Realty, Ltd., No. 11-1492, 2011 WL 13228872, at *4 (N.D. Ohio, Dec. 9,
2011); De Boer Structures USA, Inc. v. Shaffer Tent & Awning Co., 187 F. Supp. 2d
910, 925 (S.D. Ohio 2001); and Meyer Jewelry Co. v. Meyer Holdings, Inc., 906 F.
2
But see Macon Lumber Co. v. Bishop & Collins, 229 F.2d 305, 306–07 (6th Cir. 1956)
and In re Armstrong Glass Co., Inc., 502 F.2d 159, 163–64 (6th Cir. 1974), wherein the
Sixth Circuit held that the district court did not err in appointing a receiver under state
law. Importantly, the court was not presented with any argument that the district court
erred in applying state law; rather appellant in both cases argued only that the district
judge erred in concluding that the standard for appointment of receiver under state law
was met.
18
Supp. 428, 432 (E.D. Mich. 1995).3
Federal Rule of Civil Procedure 66 allows for a court-appointed officer to
administer an estate in accordance “with the historical practice in federal courts or with
a local rule.” The Sixth Circuit has directed this court to a number of factors to consider
in deciding whether to appoint a receiver including
whether the property at issue is in “imminent danger of ... being lost,
concealed, injured, diminished in value, or squandered,” whether the
defendant engaged in fraudulent conduct, “the inadequacy of the available
legal remedies,” the lack of less drastic equitable remedies, and the
likelihood that the appointment will do more good than harm.
Pension Ben. Guar. Corp. v. Evans Tempcon, Inc., 630 F. App'x 410, 414 (6th Cir.
2015) (quoting 12 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal
Practice and Procedure § 2983 (3d ed. 2014)). Additionally, the Sixth Circuit has
established that
A district court enjoys broad equitable powers to appoint a receiver over
assets disputed in litigation before the court. The receiver's role, and the
district court's purpose in the appointment, is to safeguard the disputed
assets, administer the property as suitable, and to assist the district court
in achieving a final, equitable distribution of the assets if necessary.
Liberte Capital Grp., LLC v. Capwill, 462 F.3d 543, 551 (6th Cir. 2006) (quoting 13
Moore's Federal Practice 66.02–.03 (3d ed.1999)).
2. Discussion: Appointment of Receiver
3
Those district court cases in this circuit purporting to apply state law to appointment of
a receiver, see e.g. Steinberg v. Young, 641 F. Supp. 2d 637, 643 (E.D. Mich. 2009),
actually rely on factors originally listed in Meyer Jewelry Co., 906 F. Supp. at 432, which
drew the factors from federal common law in an Eighth Circuit case that explicitly held
that “appointment of a receiver in a diversity case is a procedural matter governed by
federal law and federal equitable principles.” Aviation Supply Corp., 999 F.2d at 316.
19
Several factors weigh heavily in favor of receivership here, but most strongly is
whether Defendants have engaged in fraudulent conduct. Plaintiffs are suing
Defendants for alleged fraudulent transfers of the very assets a receiver would manage
if appointed. One court has already concluded that the relevant transfer agreement
governing these assets was a “sham.” See Chesley, 524 S.W.3d at 477; State ex rel.
McGirr v. Winkler, 93 N.E.3d 928, 932 (Ohio 2017).
The Sixth Circuit confirmed this court’s conclusion that Plaintiffs are likely to
succeed on the merits of their claims given the “strong evidence” that the transaction
Plaintiffs challenge was fraudulent. McGirr, 2018 WL 2437184, at *6-8 (citing Ohio Rev.
Code. § 1336.04(B)(1)-(2)).
Plaintiffs also assert that this litigation has not deterred Defendants and that
Defendants have committed additional fraudulent transfers since the inception of this
litigation. The Ohio Supreme Court essentially agreed concluding that Defendant’s ABC
action was a “vexatious abuse of process” intended to shelter Defendant Chesley’s
assets from Plaintiffs, see State ex rel. McGirr v. Winkler, 93 N.E.3d 928, 932 (Ohio
2017), and was part of his “pattern of misuse of the judicial process . . . to obstruct
collection efforts and conceal [his] ongoing control of WSBC,” Id. at 933.4 The Sixth
Circuit concluded that Defendant “Chesley has offered no reason to trust that he will
4
See also Id. at 933-935, wherein the Ohio Supreme Court discussed at length
Chesley’s “abusive litigation tactics” in related proceedings in other courts, including this
court.
20
discontinue his years-long scheme to avoid [Plaintiffs’] $42 million judgment [against
him].” McGirr, 2018 WL 2437184, at *9. There is ample evidence of fraudulent conduct
to support an order of receivership.
If the dubious conduct of Defendants were not enough to justify receivership,
recent action by the IRS necessitates appointment of a receiver to manage WSBC’s
assets. The IRS has issued a notice of intent to levy WSBC’s $6 million in property and
property rights for alleged unpaid taxes. (Dkt. # 178-2.) Defendants, bound by the
injunctive order, have taken no steps to challenge the IRS through the filing of
objections. The court concludes that the property here is in imminent danger of being
lost or diminishing in value. Pension, 630 F. App'x at 415 (holding that order approving
stipulation to prevent the defendant’s transfer of assets was not adequate to preserve
the assets and thus appointment of receiver was warranted). Appointment of a receiver
will serve to protect the disputed assets—doing more good than harm. The court will
grant Plaintiffs’ motion and define the terms of receivership by separate court order.
F. Assignee Eric Goering’s Motion to Intervene and for the Appointment of a
Receiver (Dkt. # 162)
Given that the Ohio Probate Court ABC action has been dismissed, Eric Goering
no longer serves as the Assignee for Defendant WSBC’s assets. Additionally, because
the court will grant Plaintiffs’ motion for the appointment of a receiver, Goering’s motion
to intervene will be denied as moot.
G. Motion to Nullify Substitution of Trustees (Dkt. # 174) and Motion to Substitute
(Dkt. 180)
Several of the Plaintiffs previously filed for bankruptcy. As a result, this court
21
entered an order substituting the bankruptcy trustees for those Plaintiffs-debtors’
estates as the real parties in interest. (Dkt. # 148.) Plaintiff Pamela Marlowe has since
filed for bankruptcy. As a result, Bankruptcy Trustee Mark Little moves this court to be
substituted as the real party in interest. The court will grant the motion.
Recently, some of the bankruptcy trustees the court previously substituted in this
action have filed “No Distribution Reports” in their respective underlying bankruptcy
cases because no creditors filed proofs of claims in their bankruptcy cases.
Consequently, the claims of those estates are abandoned back to the respective
Plaintiffs-debtors of each one. Since those bankruptcy trustees are no longer parties in
interest, they ask the court to nullify the portion of the court’s previous substitution order
naming them as parties in interest in order to reinstate Plaintiffs as the real parties in
interest. (Dkt. # 174.) Defendants have no objection and concur in the motion, which will
be granted as dictated in the attached order identifying the specific Plaintiffs.
IV. CONCLUSION
Having considered the merits of each of the pending motions,
IT IS ORDERED that Plaintiffs’ Motion for a Scheduling Order (Dkt. # 151) is
GRANTED and Plaintiffs’ Motion for a Status Conference (Dkt. # 179) is DENIED AS
MOOT. The parties are DIRECTED to meet and confer to develop a revised Rule 26(f)
plan and to submit the proposed plan to the court by August 17, 2018. The proposed
plan should account for the present aspects of this case including the court’s rulings on
all recent motions. The parties are DIRECTED to appear telephonically for a scheduling
conference on August 29, 2018 at 3:30 pm.
22
IT IS FURTHER ORDERED that Plaintiffs’ Motion for Leave to File a Second
Amended Complaint (Dkt. # 170) is GRANTED.
IT IS FURTHER ORDERED that Plaintiffs’ Motion for Summary Judgment (Dkt.
#99) is DENIED WITHOUT PREJUDICE.
IT IS FURTHER ORDERED Plaintiffs’ Motion to Compel Production of
Documents (Dkt. # 126) is GRANTED. CHS is DIRECTED to produce the requested
documents to Plaintiffs by August 17, 2018.
IT IS FURTHER ORDERED that Assignee Eric Goering’s Motion to Intervene
and for the Appointment of a Receiver (Dkt. # 162) is DENIED as MOOT.
IT IS FURTHER ORDERED that Trustees’ Motion to Nullify Substitution (Dkt. #
174) is GRANTED and Motion to Substitute Party by Trustee (Dkt. # 180) is GRANTED.
s/Robert H. Cleland
ROBERT H. CLELAND
UNITED STATES DISTRICT JUDGE
Dated:
August 3, 2018
I hereby certify that a copy of the foregoing document was mailed to counsel of record
on this date, August 3, 2018, by electronic and/or ordinary mail.
s/Lisa Wagner
Case Manager and Deputy Clerk
(810) 292-6522
23
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