Summary
explaining that "[i]f the [defendant] intended to keep its promises of retirement benefits at the time it made them—regardless of whether the promises were legal or illegal—no fraud could have occurred"
Summary of this case from Hall v. Rag-O-Rama, LLCOpinion
NO. 2016-CA-000127-MR
06-16-2017
CARL REESOR and STEPHANIE LEE-WILLIAMS APPELLANTS v. THE CITY OF AUDUBON PARK APPELLEE
BRIEF FOR APPELLANTS: Thomas E. Clay Andrew Thomas Lay Louisville, Kentucky ORAL ARGUMENT: Thomas E. Clay BRIEF FOR APPELLEE: Jeffrey C. Mando Jennifer L. Langden Covington, Kentucky ORAL ARGUMENT: Jeffrey C. Mando
NOT TO BE PUBLISHED APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE CHARLES L. CUNNINGHAM, JUDGE
ACTION NO. 15-CI-003983 OPINION
AFFIRMING
** ** ** ** **
BEFORE: KRAMER, CHIEF JUDGE; MAZE AND STUMBO, JUDGES. KRAMER, CHIEF JUDGE: The above-captioned appellants contend the Jefferson Circuit Court erred in dismissing their claims of fraudulent misrepresentation against appellee, the City of Audubon Park ("City"). For the reasons discussed below, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
The issue presented in this appeal is whether the "claim splitting" prohibition of res judicata was a valid basis for dismissing a claim of fraudulent inducement filed by the appellants after other claims the appellants filed in a prior lawsuit—asserting breach of contract and promissory estoppel based upon identical facts and circumstances—had already been dismissed on the merits. The background and procedural posture of this case is largely summarized in the appellants' brief. In relevant part, it is as follows:
As this case was dismissed in the context of a CR[] 12 motion, all facts as alleged in the Complaint are accepted as true and relied upon in this appeal. Appellants Carl Reesor (hereafter "Reesor") and Stephanie Lee-Williams (hereafter "Williams") were long time employees of the Appellee, the City of Audubon Park (hereafter, the "City"). Reesor was employed as the Chief of Police for almost 30 years and Williams as the City Clerk for 10 years.
Prior to 2003, the City maintained a retirement plan for its employees by which the employees would receive a lump sum payment of $1,000.00 per year the employee had worked for the City. In 2003, the City amended its retirement plan to a system by which an employee would be paid retirement benefits based upon a percentage of the wages the employee earned in his/her last year of employment and his/her years of service for the City. The 2003 amendment to the City's retirement plan was drafted by then City of Audubon Park City Attorney, Patrick McElhone.
Patrick McElhone was present at the November 17, 2003 City Council Meeting at which Municipal Order Number 1, Series 2003, amending the retirement system was discussed at length and unanimously voted upon by the City Council for passage. Among the City Council members who unanimously voted to amend the City's
retirement plan to the plan set forth in Municipal Order Number 1, Series 2003, was current Mayor Dorn Crawford.
Municipal Order Number 1, Series 2003, ordered that "the Mayor of the City shall then enter into a contractual agreement with such employee for the following retirement program." The Order then described the retirement benefits which the City would be contractually offering to its employees. The contract described in Municipal Order Number 1, Series 2003, was offered by the City to Appellants Carl Reesor and Stephanie Lee-Williams, by which the City represented to Reesor and Williams that the City was offering them a valid and enforceable contract for the provision of retirement benefits.
Appellants relied upon the representations of the City in offering them retirement benefits by entering into the contracts offered by the City and by continuing in the employment of the City. In 2009, the City planned to amend the retirement benefits it was offering its employees.
The amendments to the City's retirement plan were drafted by City Attorney Patrick McElhone. At the February 17, 2009 City Council Meeting, Patrick McElhone presented the amendments to the City's Personnel Civil Service Policy Manual, including the amended retirement plan, to the City Council.
The City Council voted unanimously to pass the 2009 amendment to the City's retirement plan it would be offering its employees. The contract described in Municipal Order Number 1, Series 2009, was offered by the City to Appellants Carl Reesor and Stephanie Lee-Williams, by which the City continued to represent to Reesor and Williams that the City was offering them a valid and enforceable contract for the provision of retirement benefits.
Appellants relied upon the representations of the City in offering them retirement benefits by entering into the
contracts offered by the City and by continuing in the employment of the City. The retirement plan offered by the City to the Appellants described above was in place at the time of the Appellants' respective resignation and retirement from the City's employ.
The City of Audubon Park paid Appellant Stephanie Lee-Williams the promised retirement plan payments from September, 2013, until February, 2014, continuing to represent to the Appellants that the City had offered them, and entered into, a valid and enforceable contract for the provision of retirement benefits. The City of Audubon Park paid Appellant Carl Reesor the promised Retirement Plan payments from January, 2012, until February, 2014, continuing to represent to the Appellants that the City had offered them, and entered into, a valid and enforceable contract for the provision of retirement benefits.
On or about March 10, 2014, City of Audubon Park Mayor Dorn Crawford, who had originally voted to establish the retirement benefits offered by the City, sent a letter to Carl Reesor stating that the City would no longer be paying Mr. Reesor his agreed upon retirement plan benefits. In addition, Mayor Crawford demanded that Reesor return the retirement plan funds he had received "to date."
On or about March 10, 2014, City of Audubon Park Mayor Dorn Crawford, who had originally voted to establish the retirement benefits offered by the City, sent a letter to Stephanie Lee-Williams stating that the City would no longer be paying Ms. Lee-Williams her agreed upon retirement plan benefits. In addition, Mayor Crawford demanded that Lee-Williams return the retirement plan funds she had received "to date."
Since February, 2014, the Appellants have not been paid the agreed upon retirement plan benefits. On April 2, 2014, the Plaintiffs filed a civil suit in Circuit Court in Jefferson County, Kentucky, alleging claims for violations of Kentucky's wage and hour act, breach of contract, and promissory estoppel against the City. In
response to the Appellants' claims that the City had breached its obligations to pay the Appellants the agreed upon retirement payments, the City responded in its Answer and Counterclaim with averments and defenses including the following:
(a) The former Mayor lacked the authority to bind the City to the Retirement Agreements upon which Plaintiffs' claims are premised.
(b) The Retirement Plan, and therefore the Retirement Agreements upon which Plaintiffs' claims are premised, were void ab initio because KRS[] 65.156(6) forbids a municipality of the fifth class from maintaining a defined benefit retirement plan.
(c) The Retirement Agreements upon which the Plaintiffs' claims are premised were void ab initio as against the public policy of this Commonwealth.
On July 10, 2015, the Jefferson Circuit Court granted summary judgment to the City on the Appellants' claims against the City, holding in part, "The Retirement Agreements were not simply contracts that were incidentally or indirectly related to an illegal transaction, they were expressly forbidden by statute."
Thereafter, Appellants filed this claim on August 5, 2015, alleging claims for fraudulent inducement and punitive damages. In their first complaint, (hereafter designated as "Reesor I") Appellants [. . .] pleaded the position that the contracts which they entered with the City were valid and enforceable. In the instant case (hereafter designated as "Reesor II"), Appellants [. . .] pleaded the opposite that the contracts represented by the City to be valid and enforceable were "determined by the Jefferson Circuit and the aforementioned acts of the City to be false."
The City moved to dismiss the Appellants' claims in Reesor II alleging that they were barred by the doctrine of res judicata. In its Order dismissing the Appellants' fraud claim the Jefferson Circuit Court stated, "[t]o be
precise, the claim herein is barred not so much by res judicata but rather by the rule prohibiting claimants from splitting causes of action." This appeal followed.(Internal record citations omitted.)
Kentucky Rule of Civil Procedure.
Kentucky Revised Statute.
STANDARD OF REVIEW
Our review concerns the circuit court's decision to dismiss the appellants' claims on the basis of CR 12.02(f), i.e., failure to state a claim. In that respect,
[i]t is well established that a court should not dismiss an action for failure to state a claim unless the pleading party appears not to be entitled to relief under any set of facts which could be proven in support of his claim. In ruling on a motion to dismiss, the pleadings should be liberally construed in the light most favorable to the plaintiff, all allegations being taken as true. Therefore, the question is purely a matter of law. Accordingly, the trial court's decision will be reviewed de novo.Morgan v. Bird, 289 S.W.3d 222, 226 (Ky. App. 2009) (internal citations and quotations omitted).
ANALYSIS
As indicated, the appellants contend the circuit court erred in dismissing their fraudulent inducement claims on the basis of the claim splitting prohibition of res judicata. Their arguments involve two exceptions to this prohibition. For the sake of clarity, and before delving any deeper into their arguments, some context is necessary. We will begin with a brief review of what the claim splitting prohibition of res judicata is, and of the two exceptions to this prohibition implicated in this appeal.
Generally speaking, the doctrine of res judicata provides that a final judgment on the merits of an action precludes the parties or their privies from re-litigating issues that were or could have been raised in a prior action. See Bus v. Elliott, 142 S.W.3d 137, 139-140 (Ky. 2004); see also City of Louisville v. Louisville Prof'l. Firefighters Ass'n., 813 S.W.2d 804, 806 (Ky. 1991) (explaining res judicata applies when three requirements are met: "First, there must be identity of the parties. Second, there must be identity of the two causes of action. Third, the action must be decided on its merits." (Quoting Newman v. Newman, 451 S.W.2d 417, 419 (Ky. 1970) (emphasis added)). So long as its elements are met, the rule applies "even though the plaintiff is prepared in the second action (1) To present evidence or grounds or theories of the case not presented in the first action, or (2) To seek remedies or forms of relief not demanded in the first action." Dennis v. Fiscal Court of Bullitt County, 784 S.W.2d 608, 610 (Ky. App. 1990) (quoting Restatement (Second) of Judgments § 25).
Reesor I, as the appellants have labeled it, remains pending in the Court of Appeals. The parties do not argue that this posture affects whether, for purposes of res judicata, Reesor I has been "decided on its merits." In any event, it does not. See, e.g., Roberts v. Wilcox, 805 S.W.2d 152, 153 (Ky. App. 1991) (explaining collateral estoppel (a subset of res judicata) precluded a plaintiff convicted of the reckless homicide of his wife from receiving the proceeds of her life insurance policy, per KRS 381.280, despite the fact that his conviction remained the subject of an appeal); Small v. Reeves, 25 Ky.L.Rptr. 729, 76 S.W. 395, 397 (1903) (explaining a judgment that remains unreversed and unmodified, despite its pendency in the Court of Appeals, remains "in full force and effect, constituting a bar to the institution of the second suit between the same parties upon the same issues.")
The claim splitting prohibition of res judicata is simply the aspect of the doctrine which requires the court to determine the dimension or scope of the "cause of action" in the prior suit (i.e., to decide if the second action involves issues which should have been litigated in the first action, but were not, and are therefore precluded). And, like the Restatement, Kentucky takes a transactional approach to determining whether there is a sufficient identity of the causes of action—an approach which looks beyond the legal theories asserted to see if the claims stem from the same underlying factual circumstances. See, e.g., Dennis v. Fiscal Court of Bullitt County, 784 S.W.2d 608, 610 (Ky. App. 1990), explaining:
See Watts By and Through Watts v. K, S & H, 957 S.W.2d 233, 236, (Ky. 1997) (describing the rule against splitting causes of action as "a subsidiary of the doctrine of res judicata"); Dennis v. Fiscal Court of Bullitt County, 784 S.W.2d 608 610 (Ky. App. 1990)) (applying the rule against splitting claims in a res judicata context); Kirchner v. Riherd, 702 S.W.2d 33, 34 (Ky. 1985) (same); Hays v. Sturgill, 302 Ky. 31, 193 S.W.2d 648, 650 (1946) (same).
This factual approach to determining the scope and dimension of a "cause of action" is also consistent with the common meaning of that phrase, which is "a group of operative facts giving rise to one or more bases for suing; a factual situation that entitles one person to obtain a remedy in court from another person[.]" BLACK'S LAW DICTIONARY 214 (7th ed. 1999).
The issue in the instant action therefore is whether appellant's federal and state actions are the same for res judicata purposes. The Restatement (Second) of Judgments § 24, comment a, speaks to this issue as follows:
The present trend is to see claim in factual terms and to make it conterminous with the transaction regardless of the number of substantive theories, or variant forms of relief flowing from those theories, that may be available to the plaintiff; regardless of the number of primary rights that may have been invaded; and regardless of the variations in the evidence needed to support the theories or rights. The transaction is the basis of the litigative unit or entity which may not be split.
One exception, however, is that the bar on bringing any claim which might have been brought forward at the time of the prior cause of action is limited to "claims in existence at the time the original complaint is filed or claims actually asserted by supplemental pleadings or otherwise in the earlier action." Coomer v. CSX Transportation, Inc., 319 S.W.3d 366, 373 (Ky. 2010). It will not preclude a claim which had not yet ripened, or "accrued," at the time the prior cause of action was brought. Id. at 374. In Newman v. Newman, 451 S.W.2d 417 (Ky. 1970), for example, it was held that res judicata did not operate to bar an adverse possession action where the plaintiff had previously brought an action to determine the validity of a deed to the same property because, when the prior suit was commenced, the statutory period applicable to title by adverse possession had not yet run. Id. at 419.
Another exception is also illustrated in Newman. The Newman Court held that even if the plaintiff's claim of adverse possession had been ripe at the time of the prior suit, res judicata still did not operate as a bar because claims of title by adverse possession present no issues that are essentially connected with actions to construe or nullify a deed. Id. In other words, the bar on bringing any claim which might have been brought forward at the time of the prior cause of action does not apply if the prior claim was based on matters which are not germane to, implied in or essentially connected with the actual issues in the second case, even though they may affect the ultimate rights of the parties and might have been presented in the former action. Id. at 419.
This latter exception is further illustrated in Watts v. K, S & H, 957 S.W.2d 233, 238 (Ky. 1997). There, it was held that res judicata did not operate to bar a dram shop action where the plaintiff had previously brought a negligence suit against the drunk driver to whom the dram shop defendant had sold liquor. The Watts Court explained that there was no identity between the two causes of action because the first action involved the drunk driver's negligence in operating the vehicle that collided with the plaintiff, whereas the second action involved the liquor store's negligence in selling alcohol to the minor who later became drunk and collided with the plaintiff. Id. In transactional terms, the two cases did not arise from the same set of facts: the negligence action focused on the accident and the dram shop claim focused on the purchase of the alcohol. As the Watts Court noted, it would have been possible to bring both claims in the same suit, but the plaintiff was not required to do so.
With the above in mind, we will now proceed with the specifics of the appellants' arguments. The reply brief that the appellants have filed with this Court sets forth the most apt summary of why, in their view, the circuit court erred in dismissing their fraudulent inducement claims on the basis of the claim splitting prohibition of res judicata:
This Court need only take a step-by-step walkthrough of the elements set forth in UPS v. Rickert, 996 S.W.2d 464 (Ky. 1999) for fraudulent misrepresentation claims[] to understand how the Appellants' claims in this case,
Reesor II, have a separate "identify" [sic] from the claims brought in Reesor I.
The salient elements in question are the first two of a fraudulent misrepresentation, namely: (1) a misrepresentation; (2) that is false. Rickert, 996 S.W.2d at 468. Here, the misrepresentation made by the City on which the claims in Reesor II rest is that the City represented that the retirement agreements which were drafted by the City, proposed by the City, and agreed to by the City were valid and enforceable. In order for that representation to be false, there must have to be some point in time when that representation is determined to be false. That moment in time occurred on July 10, 2015, when the Jefferson Circuit Court in Reesor I held that the contracts were not valid or enforceable. No other individual, body, or authority other than the trial court could possibly have been imbued with the power to make that determination because only a court of law is empowered to determine the enforceability of a contract by construing and interpreting the contract as a matter of law. See, Frear v. P.T.A. Indus., 103 S.W.3d 99, 105 (Ky. 2003). Therefore, it is that date when the badge of falsity was placed upon the City's representation. July 10, 2015, is when the Appellants' cause of action accrued and they could bring their fraudulent misrepresentation claim.
The appellants are alluding to United Parcel Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999), which provides:
In a Kentucky action for fraud, the party claiming harm must establish six elements of fraud by clear and convincing evidence as follows: a) material representation b) which is false c) known to be false or made recklessly d) made with inducement to be acted upon e) acted in reliance thereon and f) causing injury.
In short, the appellants assert their fraudulent misrepresentation claims were based upon a legal misrepresentation, rather than a factual misrepresentation (i.e., "that the City represented that the retirement agreements which were drafted by the City, proposed by the City, and agreed to by the City were valid and enforceable"); and that their claims were either unripe or not germane to the transactional nucleus of the prior suit until the circuit court—the only authority "imbued with the power" to "determine the enforceability of a contract"—determined the enforceability of the retirement agreements.
Taken at face value, there are a multitude of problems with this argument. One is that in the absence of a trust or confidential relation between the parties—a relation the appellants have never alleged to have existed herein—a false representation as to the law, and by extension the legal effect of a written instrument, does not amount to fraud. Moseley v. Owensboro Mun. Hous. Comm'n, 252 S.W.2d 880, 881 (Ky. 1952); see also McDonald v. Goodman, 239 S.W.2d 97, 99 (Ky. 1951), explaining:
For a more thorough discussion on these points, see 37 Am. Jur. 2d Fraud and Deceit § 101 (discussing the general rule); 37 Am. Jur. 2d Fraud and Deceit § 102 (discussing its applicability to the legal effect of a written instrument); and 37 Am. Jur. 2d Fraud and Deceit § 103 (discussing exceptions). --------
The reasons generally advanced as the basis of the rule that fraud cannot be predicated upon misrepresentations as to matters of law are that everyone is presumed to know the law, both civil and criminal, and is bound to take notice of it. Hence, one has no right to rely on such representations or opinions and will not be permitted to say that he was misled by them.(Citation omitted.)
Another problem is that if (by the appellants' logic) it would have been impossible for anyone but a court to verify the City's "representations" as truthful until several years after those representations were made, those representations could not have formed the basis of an actionable claim of fraudulent misrepresentation. The essence of a fraudulent misrepresentation claim is that "[t]he party making the representation—at the time of making it—must know the representation is false or make it recklessly without any knowledge of its truth." PCR Contractors, Inc. v. Danial, 354 S.W.3d 610, 615 (Ky. App. 2011) (emphasis added).
However, the largest problem with the appellants' argument is that it mischaracterizes their cause of action. When the appellants entered into the retirement agreements with the City, they were not seeking legal advice, a legal interpretation of the agreements, or an opinion regarding the legal validity of the agreements. They were seeking a promise of future benefits. Taking their allegations as true for purposes of CR 12, the operative facts relative to their fraudulent misrepresentation claim are that the City promised them retirement benefits; the appellants accepted those promises; the appellants anticipated the City would fulfill its promises; and the City damaged them by failing to do so.
This, in turn, highlights why the legality of the City's promise had no relevance to when the appellants' fraudulent misrepresentation claims accrued or ripened. The tort of fraudulent misrepresentation is dependent upon intent, not the legality of the promise. If the City intended to keep its promises of retirement benefits at the time it made them—regardless of whether the promises were legal or illegal—no fraud could have occurred. See Kentucky Electric Development Co.'s Receiver v. Head, 252 Ky. 656, 68 S.W.2d 1, 3 (1934) ("An accepted rule is, a misrepresentation, to be actional, must concern an existing or a past fact, and not a future promise, prophecy, or opinion of a future event, unless declarant falsely represents his opinion of a future happening."); Major v. Christian County Livestock Market, 300 S.W.2d 246, 249 (Ky. 1957) ("One may commit 'fraud in the inducement' by making representations as to his future intentions when in fact he knew at the time the representations were made he had no intention of carrying them out[.]")
As such, the appellants' claims of fraudulent misrepresentation did not accrue when the circuit court in the prior action held that the retirement agreements were illegal. At the latest their claims accrued on or about March 10, 2014—before their prior suit—when, according to their complaint in that matter, the City informed them in a letter that it did not intend to keep its promises.
Moreover, the appellants' claims of fraudulent misrepresentation arose from the same operative facts alleged in their prior complaint. Their promissory estoppel and breach of contract claims were likewise based upon the premise that the City had promised them retirement benefits; they had accepted those promises; they had anticipated the City would fulfill those promises; and the City damaged them by failing to do so. Accordingly, the claim splitting prohibition of res judicata applied in this matter, and it properly barred the appellants' claims of fraudulent misrepresentation.
CONCLUSION
In light of the foregoing, we AFFIRM.
ALL CONCUR BRIEF FOR APPELLANTS: Thomas E. Clay
Andrew Thomas Lay
Louisville, Kentucky ORAL ARGUMENT: Thomas E. Clay BRIEF FOR APPELLEE: Jeffrey C. Mando
Jennifer L. Langden
Covington, Kentucky ORAL ARGUMENT: Jeffrey C. Mando
(Citation omitted.)