LOUISVILLE, Ky. -- A federal appeals court on Friday overturned a $3 million judgment against a Kentucky businessman and a disbarred attorney, concluding that a judge overstepped legal bounds in granting the damages in a fraud case.
The U.S. 6th Circuit Court of Appeals upheld a decision that businessman Ronald Stone no longer owed money to Randall Scott Waldman and attorney Bruce Atherton of Louisville. It also concluded that U.S. Bankruptcy Judge Joan Lloyd had no authority to award damages in the case and that U.S. District Judge John G. Heyburn II erred in upholding the penalties.
The case stems from a business deal between Stone, who owned Stone Tool and Machine, Inc., and Waldman. Stone's company owed Fifth Third Bank more than $1 million in 2003, a debt secured by mortgages and liens on the business and Stone's home. Fifth Third Bank is the principal unit of Fifth Third Bancorp.
Stone's attorney, Atherton, introduced his client to Waldman as a potential investor in the business. Judge Raymond M. Kethledge wrote that Stone was unaware of Atherton's debt to Waldman, which he lacked the funds to repay.
"Atherton planned to settle up with Waldman by helping him to exploit Stone," Kethledge wrote. "Without Stone's knowledge, Atherton gave (the business's) proprietary business data to Waldman to review."
Stone Tool and Machine filed for bankruptcy in 2004. Atherton then allowed deadlines to pass, giving Fifth Third Bank an opportunity to foreclose on the business assets in state court and gather judgments against Stone and the company, Kethledge wrote.
Waldman then offered the bank a deal _ he would pay $900,000 to Fifth Third Bank in exchange for the bank's rights as a creditor of Stone and the business. Waldman and Atherton approached Stone with a deal that would give Waldman control over Stone Tool and Machine, but allow Stone to hold a 40 percent ownership in the new business and have a job for at least five years in exchange for Waldman paying off Stone's debts.
Stone agreed and, at Atherton's insistence, signed away the company without reading the paperwork. Waldman then took the assets to his newly acquired company to complete the deal with Fifth Third Bank and become Stone's largest creditor.
In October 2006, Stone obtained a copy of the documents he signed and realized he wasn't a partial owner. After a fist-fight with Waldman, Stone resigned from the company with all his debts still in place.
Waldman then sought garnishments against Stone in an effort to collect on the judgment initially won by the bank. Stone filed for personal bankruptcy, alleging that Waldman defrauded him. Stone also sued Atherton, who was disbarred for his part in the scheme.
Lloyd, who found the behavior by Waldman and Stone "inexcusable," dismissed Stone's financial debts to Waldman and awarded the $3 million in damages. Heyburn in 2011 upheld the decision. Lloyd said Atherton's actions were "nothing less than reprehensible."
Kethledge, joined by judges Jane Branstetter Stranch and James S. Gwin, found that the dismissal of the debt was allowable.
"We therefore hold that the bankruptcy court here was authorized to enter final judgment on Stone's disallowance claims," Kethledge wrote.
But, Lloyd, followed by Heyburn, overstepped the bankruptcy court's bounds by granting damages.
In a separate case, Atherton pleaded guilty in 2010 to conspiracy to commit wire fraud by aiding a Pennsylvania scheme to drain the assets of companies offered for sale. He spent 10 months in federal prison and was released in 2011. Prosecutors say he opened shell accounts in Louisville to hold funds diverted from four companies.
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