Long v. Piercy (In re Piercy)

21 F.4th 909

IN RE Lester Dan PIERCY, Jr.; Dolores J. Piercy; Joseph Shane Piercy, Debtors.

M. Dustin Long, Plaintiff-Appellant,

v.Lester Dan Piercy, Jr.; Dolores J. Piercy; Joseph Shane Piercy, Defendants-Appellees.

Nos. 21-5017/5018/5019

United States Court of Appeals, Sixth Circuit.

Argued: October 20, 2021

Decided and Filed: December 29, 2021

ARGUED: Mark A. Cowan, SWANSON & COWAN, LLP, Morristown, Tennessee, for Appellant. Ryan E. Jarrard, QUIST, FITZPATRICK & JARRARD, PLLC, Knoxville, Tennessee, for Appellees. ON BRIEF: Mark A. Cowan, SWANSON & COWAN, LLP, Morristown, Tennessee, for Appellant. Ryan E. Jarrard, QUIST, FITZPATRICK & JARRARD, PLLC, Knoxville, Tennessee, for Appellees.

Before: GILMAN, THAPAR, and NALBANDIAN, Circuit Judges.

RONALD LEE GILMAN, Circuit Judge.

M. Dustin Long obtained a state-court judgment against his business partners Dolores, Joseph, and Lester Piercy. When the Piercys subsequently filed for bankruptcy, Long initiated adversary proceedings against them, seeking a declaration that the state-court judgment was nondischargeable under 11 U.S.C. § 523(a)(4) because the Piercys' conduct constituted either (1) embezzlement or (2) defalcation while acting in a fiduciary capacity.

The bankruptcy court granted summary judgment in favor of the Piercys, holding that Long was collaterally estopped from arguing that the debt arose from embezzlement because the state-court judgment was based only on breach of contract, and that there was no fiduciary relationship that would support a claim under the defalcation prong because there was no express trust created by the parties. The district court affirmed. For the reasons set forth below, we REVERSE the judgment of the district court with instructions to REMAND the case to the bankruptcy court for further proceedings consistent with this opinion.

I. BACKGROUND

A. Factual background

Long went into business with the Piercys through their company, Goins Hollow Quarry, LLC, to operate a rock quarry in Grainger County, Tennessee. According to the agreement signed by Long and the Piercys, each of the four individuals would receive 25% of the profit from the sale of the rock after the owner of the quarry, Hinkle Contracting Company, LLC, was paid a royalty fee. The agreement was silent, however, as to whether the term "profit" meant gross profit after payment of the royalty or net profit after payment of the royalty plus the deduction of all other costs of production.

Long sensed that his first two monthly checks from the quarry operation were for significantly less than what he had expected based on the profit that he understood the operation to be generating. He later learned that this was because the Piercys were calculating the profit percentages after deducting both the royalty fee due to Hinkle Contracting and the other production expenses that the Piercys had incurred. Although the Piercys had agreed to provide and operate all of the equipment needed to weigh, crush, and process the rock, Long had personally secured the deal with Hinkle Contracting and had agreed to haul away the processed rock. This division of labor and respective contributions to the enterprise are why Long believed that the four individuals were all supposed to receive equal shares of the total gross profit.

When Long complained about the alleged underpayment, the Piercys padlocked him off the quarry property and threatened to call the sheriff to have Long arrested for trespassing if he returned. The Piercys then stopped paying Long altogether.

B. The Tennessee state-court action

Long responded by filing suit in the Chancery Court for Grainger County, Tennessee, alleging that the Piercys had wrongfully diverted funds from him. The complaint, however, did not name any specific cause of action. It instead sought (1) "a judgment against [the Piercys], jointly and severally, in the amount of $492,060, less any amounts paid before trial, with prejudgment interest at 10%"; (2) a sworn accounting; (3) an injunction that would allow Long the right to use the partnership equipment and to have full access to the partnership's business records; (4) court costs and discretionary costs to be taxed against the Piercys; (5) an attorney's fee award; and (6) any other appropriate relief. Long later amended his complaint to seek an accounting and judicial supervision for the dissolution and winding up of his partnership with the Piercys pursuant to Tennessee Code Annotated §§ 61-1-405(b) and 61-1-801(5).

Following a bench trial, the chancellor rendered an oral ruling. He first found that the relevant agreement was entered into between Long and the Piercys in their individual capacities, notwithstanding the agreement being nominally between Long and Goins Hollow Quarry, LLC. The chancellor then laid out the issue before him as follows:

[T]he really big thing here is whether the percentages for profit that were to be paid to the signatories to the contract, Dustin Long, [Joseph] Shane, [Lester] Dan, and Delores [sic] Piercy, ... are to be applied to gross profit after payment of the one item. That is to say, the royalty to Hinkle, or was it net profit after payment of the royalty to Hinkle and all the other costs of production. That is the biggest issue in the case. The evidence here is, as we all know[,] ... absolutely contradictory. Mr. Long says, look, we discussed it. The deal was that they were to provide all of the machinery, the labor, the fuel, the insurance, et cetera, ... and they were to get seventy-five percent and me only twenty-five percent after the payment of the royalty. On the other hand, the Piercys say, no, the deal was that we were to get seventy-five percent of the net profit after the payment of all expenses, not just the two sixty-seven [$2.67 per ton of rock removed] in royalty to Hinkle, but all the costs of production, et cetera. So the evidence is absolutely contradictory.

The chancellor then reviewed the evidence solely to determine the meaning of the term "profit" under the partnership agreement. He ultimately ruled in Long's favor, interpreting the term to mean that Long's share was 25% of the gross profit minus only the royalty due to Hinkle Contracting. As a result, he found that Long was entitled to a judgment for the difference between what the Piercys had paid him in the two checks that he had received and what Long should have received under the proper gross-profit calculation.

But the chancellor rejected Long's claim for lost anticipated profits from the rest of the rock pile. The chancellor found that such damages were speculative, explaining that he was unable to determine why the partnership came to an end. "[Q]uite frankly," he said, "I cannot hold ... on the preponderance of the evidence that the Piercys breached it." Finally, the chancellor refused to hold any party in contempt, but he assessed costs against the Piercys.

The chancellor's decision was memorialized in a judgment entered against the Piercys in the amount of $151,670.87, which states in its entirety:

The Court conducted a bench trial in this action on September 19, 2013. In accordance with Tennessee Rule of Civil Procedure 52.01, the Court's findings of fact and conclusions of law appear in a transcript of the ruling, which has been filed with the clerk and master, and is incorporated by reference. Based on the pleadings, the testimony, the exhibits, the arguments of counsel, and the entire record, the Court finds that defendant Goins Hollow Quarry, LLC, should be dismissed, but that the plaintiff is entitled to judgment against the remaining defendants.

Therefore, the Court DISMISSES the claims against Goins Hollow Quarry, LLC, and awards M. Dustin Long JUDGMENT against defendants Delores [sic] Piercy, Shane Piercy, and Lester Dan Piercy Jr., jointly and severally, for $151,670.87 (which has been reduced by the stipulated setoffs of $9,593.34 for the defendants' counterclaim and $2,499.31 for the two checks already paid to Long).

Finally, the Court ORDERS that Long may seek contribution from the defendants if Hinkle Contracting Company, LLC, gets a judgment against him for any unpaid royalties. The Court further holds that each individual party in this action is ultimately responsible for 25% of any reclamation amounts found to be owed to Hinkle Contracting in its Davidson County action, so any party may seek contribution from the others to the extent that he or she is forced to pay more than 25% of the total amount due.

Costs are taxed to Delores [sic] Piercy, Shane Piercy, and Lester Dan Piercy Jr.

C. The bankruptcy proceedings

Despite Long's collection efforts, the Piercys did not pay the judgment. They instead proceeded in July 2018 to file respective petitions for relief under Chapter 7 of the United States Bankruptcy Code. Long responded by initiating an adversary proceeding in each case, seeking a declaration that the state-court judgment is nondischargebable under 11 U.S.C. § 523(a)(4) for debts incurred by embezzlement, or through defalcation while acting in a fiduciary capacity.

The bankruptcy court consolidated the three adversary proceedings. In November 2018, the Piercys filed a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that Long's claim was barred by the doctrine of judicial estoppel. Because the Piercys offered documents outside the pleadings in support of their motions to dismiss, the bankruptcy court, pursuant to Rule 12(d) of the Federal Rules of Civil Procedure, treated the motions as seeking summary judgment under Rule 56 of those Rules. It thus ordered the parties to supplement their arguments and provide statements of undisputed material facts as required by Rule 56(c).

The bankruptcy court denied the Piercys' motion based on judicial estoppel, but advised that because "there [was] no reference in either the Bench Decision or the Judgment itself concerning fraud," the court was "inclined to determine that res judicata applie[d] in this case...