Wayne Michael Putnam v. Hon Ernesto Scorsone Judge, Fayette Circuit Court ( 2017 )

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2016- SC- 000369- MR
WAYNE MICHAEL PUTNAM APPELLANTS
AND '
BETH DIANEl GUDEMAN
ON APPEA`L FROM COURT OF APPEALS
V. CASE NO. 2014-CA-001635-OA
FAYETTE' CIRCUIT _COURT NO. OS-CI-O 1717
HON. ERNESTO SCORSONE ` APPELLEE
JUDGE, FAYETTE CIRCUIT COURT
~ AND
. EsTATE oF JOSEPH WILLIAM PHELPS, REAL PA`RTIES IN INTEREST
MARY MARGARET PHELPS,
MELANIE MCCOOL,'AND
WILLIAM PHELPS, JR.
MEMORANDUM dPINION OF THE ¢OURT
' l`i¢u-‘Flizlvin\rc:.
This Writ action, arising from a post-judgment discovery dispute,' is
before the 'Court for the second time. Slightly over a year ago, the matter Was
before us on the issue of standing, the Court of Appeals having erroneously
concluded that Appellants Wayne Michael Putnam and Beth Diane Gudeman
had no` concrete, personal interest in the documents they had been ordered to
produce from a company in Which they have a substantial interest and Which
they control. This Court unanimously concluded that Appellants had the
requisite standing and remanded the matter for the Court of A-ppeals to
` address the merits of the writ petition. Putnam v. Scorsone, 2015-SC-000125- '
MR (Ky. Dec. 17, 2015)' (unpublished). On remand, the appellate court denied
the writ, a decision we now affirm. We begin with a statement of the
background facts drawn-from our earlier opinion.
vI. Background ‘
Appellants, Wayne Michael putnam and Beth Diane Gudeman, and a
third person, Stephen L. Whitman,ll were officers and part-owners of two sets of
corporations One set of corporations consisted of a series of pharmaceutical
companies that were dedicated to developing a potentially lucrative cancer drug
that appears to,be undergoing FDA approval These companies appear to have
been consolidated into CBA Pharma, Inc. The only asset owned by the il
company is the cancer drug. Appellants are not the only owners of Cl3A
Pharma, Inc., which has approximately 800 shareholders, though they are
trustees of a voting trust holding approximately 90% of the company's stock.
The other set of companies, consisting at present of Scientific Imaging
Technology. Enterprises, Inc., Pixelvision of Oregon, Inc., and PixelVisio`n, Inc.,
manufacture digital cameras and parts for digital cameras. These companies
were allegedly profitable through the late 1990s. The profits are alleged to have
_ been used to fund the pharmaceutical companies, which had no~revenue
because they were in the development phase.
Joseph William Phelps became involved in a series of business
1 Whitman is not part -of the litigation at this time.
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transactions with Appellants beginning in 2001, when the digital camera
companies became less profitable. Specifically, Phelps provided a series of
substantial loans to the companies, which Appellants personally
guaranteed and which were consolidated into a promissory note in 2002.
v Phelps also agreed to guarantee a substantial loan from U.S. Bank, N.A. to the
digital camera companies, and, in turn, Appellants agreed to a secondary
guarantee under which they would repay any amount that Phelps had to pay to
U.S. Bank.' The details of these transactions are immaterial, but they are
recounted in Scientijic Imaging Te_chnology Enterpn'ses, Inc. v. Phelps,' 201 l-CA-
002119-MR, 2014 WL 97393 (Ky. App. Jan. 10, 2014) (unpublished).
. In 2003, Phelps entered into an agreement with Appell`ants, and
some of their companies, under which he agreed to release the remaining debt
on the promissory note (which at that time was still almost $3,000,000) and to `
release Appellants from all their guarantees, both as to the direct loans
from Phelps and the loan from U.S. Bank. In exchange, Phelps received
2,000,000 shares of CBA Pharma, Inc. common stock.
As it turned out, Phelps was not well and had begun having symptoms of
dementia. He was diagnosed as having Lewy body dementia, a degenerative d
neurological disease similar to Alzheimer's disease and Parkinson's disease. In
light of this diagnosis and after discovering apparently unusual dealings in
Phelps's finances, in 2004, Phelps's family contacted a lawyer to examine
Phelps's relationship with Appellants and their companies.
In April 2005, the digital`camera companies defaulted on the U'.S. Bank
loan, and U. S. Bank initiated the underlying litigation. Phelps, Appellants, h
-Whitman, and the digital camera companies were named as defendants.
Phelps filed an answer{ and cross-claim against the other defendants alleging
fraud and that he had lacked capacity to enter into the 2003 release
§ agreement. Phelps also moved the circuit court for leave to filed a third-party v - l
complaint against the pharmaceutical companies, but that was denied. l The
motion was made and denied at least one more time in the course of the
litigation. n
Phelps died in October 2005, and his estate was substituted as a party.
l Eventually,.U.S. Bank also brought suit against Phelps's wife, Mary Margaret
‘ Phelp-s; his daughter, Melanie McCool; and his son, William Phelps, Jr.,
claiming they had participated in fraud in obtaining an extension of the
substantial loan from U. S. Bank. They'counterclaimed for abuse of procesS.
Eventually, U. S. Bank settled with the estate and the named members of
the Phelps family. The bank assigned its interest in its loan to the Phelps
family. In exch'ange, the bank was paid $675,000; and the family dropped
their counterclaims The settlement agreement also provided that 20% of any -
money recovered based on the bank's assigned rights would be paid to the
lbank. This, in effecti made the estate and the Phelps family the plaintiffs in
the underlying action, leaving Appellants, Whitrrian, and the digital camera
companies as-the defendants. v
v The case went to trial on the Phelps family's fraud and incapacity claims
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and for collection of amounts owed on the promissory note and the U.S. Bank
loan. The trial court granted a.directed verdict in the family's favor as to the
enforceability'of the loans, reserving the question of damages. The jury found
that Phelps lacked capacity to enter into the 2003 release agreement and did
not reach the fraud claim. The circuit court entered a judgment against
Appellants, Stephen Whitman, and the digital camera companies in_ an amount
exceeding $12,000,000. This judgment, except for $675,000, was affirmed by
the Court of Appeals, Scientific Ima_ging Technologgy Enter_'prises, Inc. v. Phelps,
201 1-CA-002119-MR, 2014 WL 9'7393, at * (Ky. App. Jan. 10, 2014)
(unpublished), and this Court declined discretionary review.
The Phelps family then began trying to collect from the judgment
debtors. As part of this effort, they served a series of post-judgment discovery
requests. Eventually, in 2014, the circuit court entered a discovery order
commanding
that the Judgment Debtors shall produce to the Judgment
- Creditors within .ten days of the date of entry of this Order the
following information and documents: The-name, address, type of
account, name of account and account number of any bank or
other institution at Which any business in which the Judgment
Debtors Michael Putnam and Beth Diane Gudeman have an
interest maintains any type of account; and the production of bank
' statements and accounts receivable and payable ledgers for such
businesses for the years 2001-2005 and the past year.
Such documents may be produced subject to the Agreed
Protective Order and Confidentiality Agreement submitted by the
parties. -
Concerned that this order would lead to the production of irrelevant
information about the pharmaceutical companies,' particularly CBA Pharma,
Inc. (and, apparently, sensitive information about the company that could help
its co_mpetitors), Appellants filed a petition for a writ of prohibition with the _
lCourt of Appeals seeking to bar enforcement of the order.. The Court of Appeals v
did not address whether the remedy of a writ was available under the
' procedural test laid out in Hoskins v. Maricle, 150 S.W.3d 1 .(Ky. 200'4), nor did
it address the substantive:question whether the lower court was acting _
lerroneously. In_stead, the court denied the petition on the ground that
Appellants lacked standing because they were named only in their individual
capacities, the pharmaceutical companies were not named parties, and-thus
Appellants "ha[d] not demonstrated a personal and concrete interest in the
records of CBA Pharma." As noted above, this Court vacated the order and
_ remanded for the appellate court to address the petition on the merits.
On remand, the Court of Appeals acknowledged that claims of irrelevant
discovery may be reviewed under the f‘certain special cases” exemption to the
Writ standard. On review, the appellate court found that the requested
discovery was relevant; that the protective order addressed confidentiality
concerns; and that there was no evidence of a substantial miscarriage of justice
justifying a writ. Appellants’ motion for reconsideration was denied, and this
appeal followed. z
n , ~ ,II. Analysis
As this Court has frequently stated
[a] writ of prohibition may be granted upon a showing that (1) the
lower court is proceeding or is about to proceed outside of its
jurisdiction and there is no remedy through an application to an
intermediate court; or (2] that the lower court is acting or is about
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to act erroneously, although within its jurisdiction, and there
exists no adequate remedy by appeal'or otherwise and great
injustice and irreparable injury will result if the petition is not
granted.
Hoskins, 150 S.W.3d at 10. The second class of writ, where a lower court is
acting within its jurisdiction but erroneously, is invoked in cases such as this
one where an order compelling discovery is disputed. In Grange Mut. Ins. Co. v.
Trude, 151 S.W.3d 803, 808 (Ky. 2004), this Court noted that the great and
irreparable harm element can be “put aside in ‘certain special cases . . .- [where]
~ a substantial miscarriage of justice willresult if the lower court is proceeding
erroneously, and correction of the error is necessary and appropriate in the
interest of orderly judicial administration.”’ _(citing'Bender 1). Eaton, 343
S.W.2d 799 (Ky. 1961), emphasis added)-. After concluding there would be no
adequate remedy on appeal if irrelevant discovery was ordered, the Grange Mut.
Court turned to Kentucky Rule of Civil Procedure (CR) 26.02 and the definition
n of relevancy, noting the parties “may obtain discovery regarding any matter,
not privileged, which is relevant to the subject matter involved in the pending
action.” Mor_eover, “[i]t is not ground for objection that the information sought
will be inadmissible at the trial if the information sought appears reasonably
calculated to lead to the discovery of admissible evidence.” CR 26.02. The
Court concluded that a writ was not available for the majority of the disputed
discovery requests in that case because they were sufficiently relevant to the
plaintiff’s bad faith claim against the insurance company. Certain information
' in.personnel records, regarding advertising and showing the amounts paid to
settle previous bad faith claims was deemed irrelevant and writ worthy. Id. at
818. Finally, the Grange Mut. Court noted that the insurance company had
totally failed to support its claim regarding trade secrets, having only made d
conclusory_statementswithout ever providing the documents themselves for in
camera review or even a detailed privilege log. Id. at 817-18. _
Applying these standards in this case, the Court of Appeals concluded
that Appellants direct and control CBA Pharma, a company that was involved
in the circumstances underlying the judgment if for no other reason than the
fact Appellants transferred 2,000,000 shares of CBA Pharma stock to Phelps in
exchange for the release of their debts." Appellants dispute that CBA Pharma
was involved in the underlying circumstanceslthat led to the $12 million
judgment, emphasizing that the CBA Companies2 were not borrowers or
guarantors on the underlying indebtedness They insist that the CBA
`Companies are in no different position than'would be General Motors if
Appellants had transferred or pledged GM stock to Phelps. This analogy to a
leading Fortune500 company is entirely inapt. `Although extremely 4 l
complicated, the facts leave little doubt that Appellants are intimately involved
with the various CBA Companies, their founding and their operations, past and -
present. Indeed, the Phelps family, as Judgment Creditors, currently garnish
Appellants’ wages from CBA. Pharma, which was formed in 2013. According to
the Phelps family, there is also evidence of funds shifting from the digital
k
2 Appellants use “CBA Companies” to refer to CBA Pharma, Inc., and its
predecessors
camera companies (to which Phelps loaned money and for which he guaranteed
the bank loan) to a CBA entity. Given the substantial judgment and the
Judgment Creditors’ interest in identifying Appellants:x available assets,
including any funds that may be derived from or reside in a company or
companies in which they have substantial ownership and~ controlling interest3,
we cannot say that the trial court abused its discretion in concluding that the
. requested discovery was relevant to the Judgment Creditors’ collection efforts
Even if we were less than assured about the relevancy of the requested
documents, a writ Would still be unavailable in the absence of evidence that
production of the documents would result in “a substantial miscarriage of
` justice.” Grange Mut., 151 S.W.3d at 808. Appellants profess concerns about
confidential records that could benefit competitors but, as in
Grange Mut;, they have not taken the steps to establish.that fact through in
camera production or even a detailed “privilege” log. Id. at 818. Moreover,
given the trial court’s order requiring production “subject to the Agreed
Protective Order and Confidentiality Agreement submitted by the parties” we
find Appellants’.concerns about the risk of disclosure particularly_unavailing.
l Recognizing the efficacy of a negotiated protective order/ confidentiality
agreement in no way “read[s] out” the relevance requirement in CR 26 as
3 As usual, we have a limited record in this Writ action but Appellants readily
acknowledge that while CBA Pharma has over 800 shareholders “[t]he majority of the
company’s common stock is held in voting trusts whose trustees are Mr. Putnam, Ms.
Gudeman_and Stephen Whitman.”
Appellants’ hyperbolically suggest There is no prospect of a “substantial
miscarriage of justice” under the circumstances presented.
For the foregoing reasons,' the Court of Appeals-’ Order Denying Petition
v for Writ of Prohibition is affirmed
All sitting. All concur.
COUNSEL FOR APPELLANTS:
Derise Duane Cook '
John Milton .3osbe
Duane Cook & Associates, PLC
COUNSEL FOR APPELLEE:
Ernesto Scorsone, pro se
COUNSEL FOR REAL PARTIES IN INTEREST:
Sam Preston Burchett
William Joseph Walsh, IV
Buchenberger Walsh, PLLC
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