Cuene v. Peterson (In re Peterson)

604 B.R. 751

IN RE: Daniel Scott PETERSON dba DC Boatlift, Dock & Trailer LLC, Debtor.

Herbert J. Cuene, Jr. and DC Docks and Boatlifts, Inc., Plaintiffs,

v.Daniel Scott Peterson, Defendant.

Case No. 18-29081-beh

Adversary No. 18-2259-beh

United States Bankruptcy Court, E.D. Wisconsin.

Signed July 9, 2019

Curtis R. Czachor, Czachor, Polack & Borchardt Law, LLC, Green Bay, WI, for Plaintiffs.

Daniel Scott Peterson, Sturgeon Bay, WI, pro se.

DECISION ON PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

Beth E. Hanan, United States Bankruptcy Judge

In October 2012, plaintiff Herbert Cuene purchased a business known as DC Boatlift Dock & Trailer from defendant Daniel Peterson. The parties' subsequent business relationship was anything but smooth sailing. Within a year Peterson sued Cuene and his new business (renamed "DC Docks and Boat Lifts, Inc.") in state court, seeking, among other things, replevin of personal property that Peterson alleged was not included in the sale. Cuene counterclaimed, asserting several causes of action including intentional misrepresentation and theft. Cuene succeeded on his counterclaim and was awarded a default judgment of over $400,000.

Cuene then attempted to collect on his judgment by executing against several parcels of real estate owned by Peterson. Peterson, in turn, asserted that the property was not owned by him , but by various trusts to which he had transferred the property for estate planning purposes—meaning the property could not be reached by his creditors to satisfy judgments against him. The Door County Circuit Court disagreed. It found that the trusts at issue were nothing more than Peterson's alter egos, and therefore the real property titled to them could be reached by Peterson's creditors. Shortly after Cuene tried to execute against some of this real property, Peterson filed a Chapter 7 bankruptcy.

Cuene filed a proof of claim in the bankruptcy for over $450,000. He also brought this adversary proceeding seeking an order either denying Peterson a discharge under 11 U.S.C. § 727(a)(4)(A) or, alternatively, holding that the debt owed to Cuene is non-dischargeable under 11 U.S.C. § 523(a)(2)(B) and/or (a)(6). Cuene has asked this Court to grant him summary judgment on his causes of action under sections 727(a)(4)(A) and 523(a)(2)(B). Peterson objects.

For the reasons set forth below, the Court concludes that there are no genuine issues of material fact and that Cuene is entitled to judgment as a matter of law on his claim under section 727(a)(4)(A). The Court therefore grants summary judgment to Cuene on Count III of the complaint. The Court also holds, in the alternative, that issue preclusion applies with respect to the state court default judgment against Peterson, and that, as a result, all elements of Cuene's claim under section 523(a)(2)(B), other than "reasonable reliance," have been established as a matter of law.

The Court has jurisdiction under 28 U.S.C. § 1334 and the Eastern District of Wisconsin's July 16, 1984, order of reference entered under 28 U.S.C. § 157(a). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(I) and (J). This decision constitutes the Court's findings of fact and conclusions of law under Fed. R. Bankr. P. 7052.

FACTS

The following facts, taken from the parties' summary judgment briefing and other public records of which the Court may take judicial notice,¹ are either undisputed, or not subject to reasonable dispute. They describe two separate state court actions, one of which was appealed, together spanning five years.

A. The 2013 Door County Litigation

On April 24, 2013, Peterson, through an attorney, filed a lawsuit against the plaintiffs in the Circuit Court for Door County, Wisconsin, Case No. 13-CV-81. Two other entities were also plaintiffs – EZ Marketing Trust and DC Boatlift Dock & Trailer LLC. In response, Cuene and DC Docks and Boat Lifts, Inc. filed an answer and counterclaim. The parties engaged in discovery through 2015. Without his counsel, Peterson filed an amended complaint, alleging he had been assigned all rights owned by EZ Marketing Trust and DC Docks and Boat Lifts against Cuene et al. Peterson appeared at several hearings in the case, including a September 23, 2014 status conference, a November 25, 2014 hearing on Cuene's motion to compel discovery (which the circuit court judge, Peter Diltz, granted), a March 3, 2015 hearing on Cuene's motion for leave to file a second amended counterclaim (which the judge also granted), and a May 1, 2015 hearing on Peterson's attorney's motion to withdraw as counsel (which the judge also granted).

Cuene filed his second amended counterclaim on July 29, 2015. The second amended counterclaim alleged five causes of action, for: (1) intentional misrepresentation, (2) breach of contract, (3) misrepresentation under Wis. Stat. § 100.18, (4) civil theft under Wis. Stat. § 895.446, and (5) breach of implied warranty. See ECF Doc. No. 18, at 56–63, Exhibit 13. The allegations relate to a 2012 transaction in which Cuene purchased the business known as DC Boatlift Dock & Trailer from Peterson. See id. Relevant here, Cuene's second amended counterclaim alleged that:

1. In August 2012, Peterson and Cuene entered into a contract for the sale and purchase of the business known as DC Boatlift Dock & Trailer.

2. Prior to signing the sale contract, Peterson provided Cuene income statements and tax returns.

3. As a term and condition of the sale, prior to closing, Peterson also was required to provide Cuene financial statements and tax returns, along with other documents regarding the financial performance and day-to-day operations of the business.

4. As part of the required disclosure, Peterson provided Cuene with what he represented to be:

a) A 2010 income statement of the business, and the 2010 tax return filed by the business with the IRS;

b) A 2011 income statement of the business and the 2011 tax return filed by the business with the IRS;

c) A projected business income statement for 2012; and

d) A document itemizing the inventory of the business, identifying the actual cost the business paid for each item in inventory.

5. The tax returns Peterson provided Cuene were not the actual returns filed with the IRS, and differed significantly from the actual returns, overstating net profits by over $120,000 for each year.

6. The tax returns and income statements Peterson provided to Cuene contained numbers that were fabricated with the intention of enticing a potential buyer into purchasing the business.

7. The inventory list that Peterson provided to Cuene did not include actual costs and inflated the cost value of the inventory by 10%.

8. Peterson knew the representations in the documents were untrue and made them with the intent to deceive and induce Cuene into purchasing the business.

9. Cuene believed the representations in the documents were true and relied on them to his detriment in purchasing the business at a significantly overstated value.

Id. ¶¶ 2–17.

In September 2015, Peterson, pro se , filed a motion to dismiss the second amended counterclaim. The court held a hearing on the motion on December 1, 2015 and asked the parties to brief the issue. Judge Diltz subsequently denied the motion in a March 8, 2016 decision. See ECF Doc. No. 18, at 64–65, Exhibit 14.

On April 11, 2016, Cuene filed a motion for default judgment. Judge Diltz granted the motion on April 25, 2016. The order for default judgment provided that Cuene and his business, DC Docks and Boat Lifts, Inc., were "entitled to default judgment on their second amended counterclaim jointly and severally against Daniel S. Peterson and DC Boatlift Dock & Trailer, LLC." Id. The order also provided that the court would schedule a hearing to determine the amount of damages to be awarded. Id.

The court held an evidentiary hearing on damages on August 9, 2016. Judge Donald Zuidmulder presided. The public docket for the case describes the hearing as follows: "Plaintiff Daniel S. Peterson in court. Attorney Curtis R. Czachor in court for Defendant Herbert J. Cuene, Defendant DC Docks and Boat Lifts, Inc., Third party plaintiff Herbert J. Cuene, and Third party plaintiff DC Docks and Boatlifts, Inc. Defendant Herbert J. Cuene in court. Plaintiff objects to testimony being taken, voluntarily leaves courtroom after outbursts. Testimony taken. Court takes recess. Plaintiff returns to courtroom. Court makes ruling."

At the August 9 evidentiary hearing, Cuene presented testimony, as well as the following documents:

1. Schedule C from Peterson's 2010 and 2011 tax returns, which Cuene testified Peterson provided him before closing and represented to Cuene that they were the tax returns filed with the IRS (see ECF Doc. No. 34, at 113–14, Exhibits 4 and 5);

2. A business income statement that Cuene testified Peterson provided him before closing, which purports to contain actual income figures for 2010, 2011, and income projections for 2012 (seeid. at 115, Exhibit 6);

3. Schedule C from the 2010 and 2011 tax returns that Peterson actually filed with the IRS (seeid. at 116–17, Exhibits 7 and 8);

4. Closing statements from the sale, which show a purchase price of $500,000 for the business ($230,000 for goodwill, $30,000 for a non-compete, $30,000 for equipment), and $140,000 for inventory (seeid. at 119–20, Exhibits 10 and 11); and

5. A handwritten inventory sheet prepared by Peterson purporting to identify the actual cost the business paid for each item in inventory, given to Cuene before closing (seeid. at 121, Exhibit 12).

After considering the evidence presented, Judge Zuidmulder made the following findings on the record:

Satisfied on this record that the purchase in this case was fraudulently induced; that the numbers that were presented in this closing statement are simply a figment of somebody's imagination, because they're not rooted in any documents that I can determine. So ... the measure of damages that the Court is satisfied the law establishes would be, what was the

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