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CBST Acquisition, LLC v. PNC Bank, N.A.

United States District Court, S.D. Ohio, Western Division

June 25, 2019

PNC BANK, N.A., et al., Defendants.

          Dlott, J.


          Stephanie K. Bowman United States Magistrate Judge.

         Plaintiff CBST Acquisition, LLC (“CBST”) initiated this lawsuit on January 2, 2019 against PNC Bank, N.A. and National City Bank n/k/a PNC Financial Services Group, Inc. (collectively “PNC”). The PNC Defendants have moved to dismiss the complaint. (Doc. 8). This case has been referred to the undersigned magistrate judge for preliminary consideration and disposition of all pretrial and post-judgment motions and procedures, whether dispositive or not. (Doc. 2). Pursuant to that referral, the undersigned now recommends that this case be dismissed.

         I. Standard of Review

         In evaluating the pending motion under Rule 12(b)(6), this Court must “construe the complaint in the light most favorable to the nonmoving party, accept the well-pled factual allegations as true, and determine whether the moving party is entitled to judgment as a matter of law.” Commercial Money Ctr., Inc. v. Illinois Union Ins. Co., 508 F.3d 327, 336 (6th Cir. 2007). At the same time, this Court

need not accept the plaintiff's legal conclusions or unwarranted factual inferences as true. Gregory v. Shelby County, 220 F.3d 433, 446 (6th Cir. 2000). To state a valid claim, a complaint must contain direct or inferential allegations respecting all the material elements under some viable legal theory. Mezibov v. Allen, 411 F.3d 712, 716 (6th Cir. 2005), cert. denied, 547 U.S. 1111, 126 S.Ct. 1911, 164 L.Ed.2d 663 (2006).

Id., 508 F.3d at 336-37. While the determination of whether Plaintiff's allegations state any claim rests primarily upon the allegations of its complaint, “matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint, also may be taken into account.” Amini v. Oberlin Coll., 259 F.3d 493, 502 (6th Cir. 2001) (internal quotation and citation omitted); accord Luis v. Zang, 533 F.3d 619, 632 (6th Cir. 2016). Without converting PNC's motion to one for summary judgment, [1] the undersigned considers the allegations in the instant complaint in light of matters of public record (including multiple related cases) and CBST's own exhibits.

         II. Background and Key Allegations in CBST's Complaint

         PNC's motion to dismiss characterizes the instant civil lawsuit as “the most recent of six lawsuits filed to date by [Orlando] Carter or his associates - this time, on behalf of his company, CBST - in a blatant attempt to collaterally attack his 2009 conviction for bank fraud, mail fraud, bankruptcy fraud and making false statements and oaths.” (Doc. 8 at 2, citing United States of America v. Orlando Carter, No. 1:08-cr-51).

         Carter was the majority owner of Dynus Corporation (“Dynus”). CBST, the named Plaintiff in this case, is a limited liability company that appears to have been operated as a subsidiary of Dynus that is consistently referred to by Carter as “my company.” (See Complaint, Doc. 1-1 at 10, Exhibit G).[2] CBST's complaint alleges: “CBST Acquisition LLC is the company owned by the Debtor [Carter] as referenced by PNC's Senior Corporate Counsel John Wirthlin….” (Doc. 1 at ¶60; see also id. at ¶64, alleging that “CBST informed PNC, ” through a letter from Carter to Wirthlin, that PNC's description in a creditor's claim filed in Bankruptcy Court in 2006 against Carter for “Funding of lease induced by fraud of Debtor and Debtor's company” was without factual support). In an affidavit attached to the complaint in another recent civil case filed by CBST, Carter similarly states “”I am the owner and founder of CBST Acquisition LLC.” See No. 1:18-cv-162-SJD-KLL (Doc. 1 at 10, Affidavit of Orlando Carter).

         The undersigned agrees that the current lawsuit by CBST should be dismissed based in part upon judicial notice of prior litigation, including but not limited to Carter's criminal conviction. However, the undersigned stops short of construing CBST's civil complaint as yet another form of collateral attack by Carter on his criminal conviction, as if this were a motion filed under 28 U.S.C. § 2255. Instead, the undersigned recommends that PNC's motion to dismiss be granted based upon records that contradict and render wholly incredible many of the allegations in CBST's latest complaint, including an allegation that CBST only recently “discovered” its claims. See generally Rule 201, Fed.R.Evid. Based upon irrefutable notice attributable to CBST, ten of CBST's claims are barred by applicable statutes of limitations. The remaining allegations are legally insufficient to state any claim, for the same reasons stated in prior cases in which virtually identical claims have been dismissed by this Court. In addition, because Carter and CBST are in privity, the undersigned alternatively recommends dismissal of this lawsuit based upon the doctrines of issue preclusion and/or claim preclusion.

         Notwithstanding the extremely close relationship between Carter and Dynus/CBST and the facts underlying Carter's conviction, CBST denies that its most recent case is predicated on any of the prior cases, arguing that it is entitled to file this civil suit in its own right as “a distinct and separate legal entity from Carter.” (Doc. 12 at 2). At the same time, CBST repeatedly refers to prior cases both directly and indirectly, including the criminal case against Carter and related civil cases. (See Complaint, Doc. 1 at ¶¶ 5, 7, 32, 38, 40-45, 48, 52, 59, 78, 83-86, 89-90, 103-108, 110).

         The undersigned finds the following eight allegations to be central to CBST's current complaint: (1) a $4 million loan between National City Bank (a/k/a “the Bank”) and Dynus/CBST never existed, based upon PNC's recent inability to produce documentation to confirm the existence of that loan;[3] (2) the Bank changed the amount of a 2003 Note without CBST's consent from $250, 000 to $4 million and misled the U.S. Attorney (and others) regarding the existence of the $4 million debt; (3) the Bank wrongfully sent CBST a demand letter for $4 million; (4) the Bank wrongfully filed two claims in bankruptcy court against Carter in 2006, stating that CBST owed PNC $18.3 million and/or $8.8 million; (5) the Bank engaged in “fraudulent concealment” of relevant facts until February 2018; (6) the Bank “currently” is trying to collect the $4 million debt together with another $18.3 million debt from CBST; (7) the Bank failed to apply two payments made by CBST from a Fifth Third Bank account in 2004 to the original $250, 000 Note; (8) CBST “recently” sought financing that was denied “based on PNC's false claims…regarding outstanding debts allegedly originated and owed by CBST.” Based on these central allegations and supported by 13 pages of exhibits, CBST's 29-page complaint sets forth sixteen counts, including 14 causes of action plus two additional counts seeking an emergency temporary restraining order and a declaratory judgment.[4]

         Most of CBST's current claims have been previously litigated by Carter and his associates, including by CBST itself. The prior cases provide evidence of constructive notice to CBST of its claims more than a decade ago, in contradiction to CBST's implausible contrary allegations of recent discovery. The prior cases also contain legal analysis of the same claims that the undersigned finds at least persuasive, if not binding.

         A. Judicial Notice of the Existence of Related Cases

         In August 2009, a jury convicted Orlando Carter of eleven fraud and fraud-related federal offenses. See No. 1:08-cr-51 (Doc. 75). Carter unsuccessfully appealed his conviction, and has filed multiple (equally unsuccessful) post-conviction motions. Over the years, Carter and others also have filed numerous civil suits that relate to Carter's conviction.[5] See e.g., Related Case Memorandum filed in Civil Case 1:18-cv-162 on December 13, 2018, Civil Cases 1:17-cv-508, 1:18-cv-162, 1:18-cv-400, 1:18-cv-825; see also Carter v. United States, Civil No. 1:16-cv-530; Carter v. United States, Civil No. 1:17-cv-248; Rogers v. PNC Bank, No. 1:18-cv-889; Carter v. PNC Financial Servs. Grp., Inc., No. 3:18-cv-283 (appeal of dismissal of adversary proceeding in bankruptcy court). Some of Carter's motions and lawsuits have been filed pro se, while others have been filed through the same counsel who represents CBST in this civil case. All direct and collateral challenges to Carter's underlying conviction to date have been denied, and nearly all related civil cases filed to date also have been dismissed. But see Carter v. PNC Bank, No. 18-cv-706-SJD-KLL (still-pending case that alleges, similar to the instant complaint, that PNC created a fraudulent $18.3 million debt that Carter is now obligated to pay).

         Because of the intertwined nature of the proceedings, the undersigned devotes significant time to summarizing the prior cases, beginning with Carter's criminal and bankruptcy proceedings, and followed by a discussion of related civil cases.

         1. United States v. Carter, Criminal No. 1:08-cr-51

         Carter's criminal case and post-conviction proceedings refute CBST's allegations in this civil case that the $4 million guaranty never existed, and - importantly - that CBST had no notice of that alleged loan or of PNC's demand for repayment.

         Carter was indicted on May 7, 2008 by a grand jury on charges that related to multiple schemes occurring primarily between 2004 and 2006, including: (1) a scheme to defraud Long Beach Mortgage Company by submitting or causing to be submitted a false residential mortgage application; (2) a scheme to defraud Fifth Third Bank by submitting false financial statements to support a line of credit for Carter's business, Dynus Corporation and/or CBST, and (3) a scheme to commit bankruptcy fraud by concealing cash transfers to a bank account controlled by Carter's fiancé. See United States v. Carter, Case No. 1:08-cr-51, 2013 WL 12213387, at *1 (S.D. Ohio Sept. 30, 2013). On December 31, 2004, Jim Smith, then president of Dynus, sought a $4 million loan from National City Bank, supposedly on behalf of Butler County so that Butler County could lease equipment from Dynus for the installation of a fiber optic network.

Smith was ostensibly authorized to borrow money on Butler County's behalf by the county auditor, Mary Kay Rogers. In truth, however, Rogers had no authority to designate Smith…. National City was leery of the transaction, …[and] only agreed to extend the loan on the condition that within thirty days Dynus provide it with an opinion of counsel letter from Butler County stating that the transaction had been reviewed and that the county was authorized to enter into it. If Dynus failed to provide the opinion of counsel letter…, it promised to repay the loan….
National City wired the loan proceeds to Dynus on December 31, 2004. Dynus [fraudulently] booked the proceeds as a revenue from the “sale” of the fiber optic network to Butler County…. Later in 2005, Carter, Smith and others at Dynus knowingly concealed the existence of the guaranty from Dynus's external auditors… [who] approved Dynus's financial statements. Then Dynus, with Carter's knowledge and approval, used the fraudulent financial statements to obtain money from Fifth Third Bank through a line of credit. Carter, in turn, used the money Dynus received from Fifth Third to fund an extravagant personal lifestyle.
Dynus could not and did not provide the opinion of counsel letter National City required. National City, therefore, demanded that Dynus repay the $4, 000, 000. Butler County, meanwhile, had been completely unaware that Dynus had supposedly borrowed $4, 000, 000 on its behalf. When, through an inadvertent computer error, the responsible officials in Butler County became aware of this transaction, they denied to National City that the fiber optic network project had been authorized and that the county was liable to repay the loan.

United States v. Carter, Case No. 1:08-cr-51, 2013 WL 12213387, at **1-2 (S.D.Ohio, Sept. 30, 2013); see also United States v. Carter, No. 18-3080 (6th Cir. April 26, 2018) (Order summarizing basis for Carter's conviction, copy filed as Doc. 222 in No. 1:08-cr-51). Unlike Carter, Rogers and Smith both pleaded guilty. See, e.g., United States v. Smith, No. 1:07-cr-04; United States v. Rogers, No. 1:08-cr-02.

         At trial, Carter maintained that he was unaware of the $4 million loan guaranty that Smith had provided to the Bank on behalf of Dynus and/or CBST. See Carter v. United States, 2014 WL 2955107 at **3-4 (S.D. Ohio Aug. 13, 2014) (Beckwith, J., Order denying post-conviction relief). However, the government put on evidence that National City had demanded the opinion of counsel letter or the return of the loan proceeds both in a face-to-face meeting with Carter, and in written correspondence directed to him. Id. The trial judge described the government's evidence against Carter as “nearly overwhelming, ” and noted that the evidence “firmly demonstrated…that Carter …participated in defrauding both Butler County and National City Bank and that his involvement in using falsified documents to obtain loan proceeds from National City Bank was consistent with the charge that he used false or misleading documents to obtain money from Fifth Third Bank.” Id. at *5-6.

[T]he evidence at trial showed that Carter knew about the guaranty, that Carter knew that National City Bank was demanding return of the loan proceeds, and that Carter acted in concert with Smith and Verbruggen to conceal this information from the auditors because it would have negatively affected the audit results. He then knowingly submitted the fraudulent annual financial statement to obtain the line of credit for Dynus, as well as other loans, from Fifth Third Bank. … Carter clearly did not deal with Fifth Third Bank in a[n] honest and forthright matter. The accounting and legal minutia that Carter now raises about the guaranty do not undermine the fraudulent manner in which he obtained funds from Fifth Third Bank.

Id., 2014 WL 3955107 at *7.

         In addition to the federal criminal prosecutions against Carter, Smith, and Rogers, National City initiated civil litigation that sought to recover the $4 million from Butler County, the supposed “borrower” who was to have received the funds. In that separate state court litigation,

National City came to agree with Butler County that Smith was not in fact an authorized agent of the county and agreed that the county was not liable to repay the loan. Therefore, in a document dated May 26, 2006, National City released the Butler County Board of Commissioners, the Butler County Auditor, and Butler County, “together with any officer, agent, or employee of any of them, ”…from liability on the loan.

U.S. v. Carter, No. 18-cr-51, 2013 WL 12213387 at *2 (S.D. Ohio Sept. 30, 2013) (Beckwith, J.).

         On July 5, 2013, through the same counsel who represents CBST in the instant civil case, Carter filed a motion seeking a new trial based in part on a theory that the Bank's 2006 state court “release” of the $4 million loan was exculpatory and proved him innocent. This Court denied that motion for multiple reasons, including because it was “based on the factually incorrect conclusion that by releasing Butler County from the liability on the loan, National City released [Carter's company] Dynus, and therefore [Carter], from liability on the loan.” Id. at *4.

         Through the same counsel, Carter filed his first motion under 28 U.S.C. § 2255 under a new theory, suggesting that the loan guaranty by CBST was not legally valid for reasons that include but were not limited to an argument that “[t]he alleged guaranty did not even have the legal name of Dynus or its subsidiary, CBST Acquisitions, LLC on it….” (No. 1:08-cr-51, Doc. 154 at 9). Carter's first §2255 motion also argued that trial counsel was ineffective for failing to retain a forensic accountant to contest the $4 million guaranty. This Court denied the motion and the Sixth Circuit denied a certificate of appealability.

         Carter filed three more post-conviction motions challenging the existence of the $4 million loan. Carter's new line of attack alleged that Carter had discovered “new evidence” in 2015 disproving the existence of the 2004 loan, based in part on PNC's inability to produce documentation years later.[6] In its April 26, 2018 Opinion denying Carter's motion for leave to file a second or successive motion to vacate his conviction, the Sixth Circuit rejected the proposition that a failure of PNC to produce documents in 2015 proved that the fraudulent loan guaranty entered into by CBST more than a decade earlier had never existed. The Sixth Circuit explained:

At trial, the government presented the $4 million guaranty signed by James Smith as General Manager of CBS Technologies [CBST] and the demand letter from National City Bank, which were authenticated and accepted into evidence without objection. Multiple witnesses testified about the existence of the guaranty. Carter's defense at trial was that he did not know about the guaranty. Carter took a different approach in his first motion to vacate, asserting that the guaranty was invalid. In this motion and in his prior motion for an order authorizing a second or successive motion to vacate, Carter contends that the guaranty never existed because his and the OCC's requests to PNC Bank failed to turn up any documents relating to the guaranty. As we previously stated, the failure of a successor bank to produce records in response to requests about matters more than ten years in the past, viewed in light of the trial evidence demonstrating the existence of the guaranty, is insufficient “to establish by clear and convincing evidence that no reasonable factfinder would have found [Carter] guilty of the offense.” 28 U.S.C. § 2255(h)(1).

Id., No. 1:08-cr-51, Doc. 222 at 4.

         The undersigned concludes that Carter's criminal case, including post-conviction proceedings, provided constructive notice to CBST, through Carter, of the $4 million loan and demand letter not later than the criminal trial, if not earlier when the events occurred. Those facts contradict the wildly implausible allegations in CBST's current complaint that (again) challenge the existence of the 2004 loan guaranty and allege that CBST was unaware of any facts underlying its claims prior to February 2018. Accord Rogers v. United States, No. 1:18-cv-889, Doc. 4 at 12, rejecting Rogers' identical argument (quoting from In re: Orlando Carter, No. 18-3080 (6th Cir. April 26, 2018)).

         2. Civil Cases That Refute Key Allegations and Reflect Additional Notice to CBST of Claims Presented in this Case

         CBST admits that most of its claims would be time-barred but argues that the relevant statutes of limitations should be tolled based upon an allegation that CBST only recently “discovered” the existence of any possible “debt” to PNC, based in part upon a February 2018 filing in bankruptcy court. CBST adds a claim of “fraudulent concealment” against PNC to bolster its assertion that the limitations periods should be tolled. However, CBST's allegation that it only recently discovered PNC's filing of an allegedly false or fraudulent claim in bankruptcy court is contradicted by multiple records. Carter, as CBST's owner, previously filed numerous challenges to the filings by PNC in bankruptcy court, as well as civil cases challenging the existence of the 2004 $4 million loan/guaranty between PNC and CBST. Co-conspirator Mary Rogers has asserted similar claims, as has CBST itself.

         The following cases in both bankruptcy court and in this Court render incredible CBST's allegations that it only recently discovered the basis for its claims in this lawsuit.

         a. In re Carter, Bankruptcy Petition 3:06-bk-30086 and related Adversary Proceedings in Bankruptcy Court

         Carter's underlying criminal conviction included counts of bankruptcy fraud [18 U.S.C. § 157(1) & (2)] and false oaths to a bankruptcy trustee [18 U.S.C. § 152(2) & (3)], which arose out of Carter's Chapter 7 petition in U.S. Bankruptcy Court for the Southern District of Ohio, Western Division at Dayton, filed on January 18, 2006. See No. 3:06-bk-30086. On August 18, 2006, National City filed Claim 10-1 against Debtor Carter in the amount of $18, 266, 253.00 as an unsecured non-priority claim. However, that filing was superseded three days later, on August 21, 2006, when National City amended its claim to $8, 810, 805.65. (Amended Claim 10-2). The summary of the Bank's claim describes it as based on “Funding of lease induced by fraud of Debtor and Debtor's company.” The same 2006 summary description is included as an exhibit to CBST's complaint. (Doc. 1-1 at 9, Exhibit F).

         The following more detailed description was filed in bankruptcy court:

Debtor was the principal and/or president and/or majority shareholder in Dynus Corporation (“Dynus”). Dynus solicited a purported lease (the “Lease”) between Butler County, Ohio and National City Commercial Capital Corporation (“NC4”). The Lease has been judicially determined to be unenforceable.
Debtor was fully aware of the negotiation of the Lease and either participated or acquiesced in the fraud which was perpetrated upon NC4 [the Bank] by Dynus. Debtor, therefore, is personally liable to NC4 for all amounts due under the Lease. Due to the voluminous number of documents involved with the Lease, NC4 will make the Lease documents available upon request.
The amount owed by the Debtor under the Lease is as follows:

1. Amount Owed Under Lease Number 53393004

$6, 115, 649.41

Amount Owed Under Lease Number 52810004

2, 676, 192.12

2. Attorney's Fees

18, 481.40

3. Costs


$8, 810, 805.65

(Amended Claim 10-2 at 2).

         CBST, owned by Carter who entered agreements on its behalf, is deemed to have constructive notice of this claim in 2006 when it was filed in the public record, as evidenced by CBST's own exhibit. It is not credible for CBST to allege that it first discovered the claim through a 2018 filing in Carter's bankruptcy case, as though CBST had no knowledge of any earlier public filings in Carter's bankruptcy case.

         In fact, CBST arguably received notice of the $4 million loan guaranty claimed by the Bank against Carter and Dynus/CBST before Carter filed for bankruptcy in January 2006. According to an adversary proceeding that Carter filed in 2018, PNC executives threatened to sue Carter for $4 million on his company's loan guaranty, which threat “caused Carter to file bankruptcy against his will.” (Case 3:18-ap-03034, Complaint at ¶¶14-15). Carter alleged that at that time, his attorney had advised Carter that “he had investigated the purported $4, 000, 000 debt and such debt was authentic and real.” (Id. at ¶16). Carter alleged that prior to filing his bankruptcy filing, the Bank had also “informed government officials that Carter and his company” had a $4 million debt. (Id. at ¶22, emphasis added).

         Carter also received notice of the Bank's motion to extend time for objecting to discharge, in order for the Bank “to obtain initial information to begin its investigation of the Debtor's role in Dynus Corporation, to which NC4 transferred a significant sum of money on request of Debtor.” ((No. 3:06-bk-30086, Doc. 82 at 4; see also Doc. 135). And on February 4, 2008, the Chapter 7 Trustee initiated an adversary proceeding against Carter, alleging in part:

6. For an unknown period of time, Debtor engaged in various schemes personally and through companies and subsidiary companies, which were mere instrumentalities of the Debtor, aimed at obtaining funds to support his lifestyle and the lifestyles of his friends, family members and paramour(s) and which resulted in the creation of debt, the draining of equity from businesses and/or sheltering or concealment of property in which the Debtor otherwise owned a beneficial interest or control.
7. The companies used by the Debtor as instrumentalities for obtaining loans, the transfer or concealment of property and acquisition of additional businesses include, upon information and belief, the following ...

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