RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 17a0168p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
ELIZABETH A. OSBORN (16-2221 & 16-6225); LINDA ┐
G. HOLT, JUDITH E. PREWITT, and CYNTHIA L. ROEDER │
(16-2221/6225/6226/6227), │
Plaintiffs-Appellees, │
│
> Nos. 16-6221/6225/6226/6227
v. │
│
│
JOHN M. GRIFFIN, ESTATE OF DENNIS B. GRIFFIN, and │
DENNIS B. GRIFFIN REVOCABLE TRUST - 2012 (16- │
6221 & 16-6226); MARTOM PROPERTIES, LLC (16- │
6225 & 16-6227), │
Defendants-Appellants. │
┘
Appeal from the United States District Court
for the Eastern District of Kentucky at Covington.
Nos. 2:11-cv-00089; 2:13-cv-00032—William O. Bertelsman, District Judge.
Argued: April 27, 2017
Decided and Filed: July 28, 2017
Before: MERRITT, BATCHELDER, and CLAY, Circuit Judges.
_________________
COUNSEL
ARGUED: Gregory G. Garre, LATHAM & WATKINS LLP, Washington, D.C., for
Appellants. Janet P. Jakubowicz, BINGHAM GREENEBAUM DOLL LLP, Louisville,
Kentucky, for Appellee Osborn. Kent Wicker, DRESSMAN BENZINGER LA VELLE PSC,
Louisville, Kentucky, for Appellees Holt, Prewitt, and Roeder. ON BRIEF: Gregory G. Garre,
Melissa Arbus Sherry, Benjamin W. Snyder, Matthew J. Glover, LATHAM & WATKINS LLP,
Washington, D.C., Heather A. Waller, LATHAM & WATKINS LLP, Chicago, Illinois, for
Griffin Appellants. Joseph M. Callow, Jr., Thomas F. Hankinson, Jacob D. Rhode, KEATING
MUETHING & KLEKAMP PLL, Cincinnati, Ohio, for Martom Appellant. Janet P.
Jakubowicz, Benjamin J. Lewis, BINGHAM GREENEBAUM DOLL LLP, Louisville,
Kentucky, for Appellee Osborn. Kent Wicker, DRESSMAN BENZINGER LA VELLE PSC,
Nos. 16-6221/6225/6226/6227 Osborn, et al. v. Griffin, et al. Page 2
Louisville, Kentucky, Eva Christine Trout, TROUT LAW OFFICE PLLC, Lexington, Kentucky
for Appellees Holt, Prewitt, and Roeder.
CLAY, J., delivered the opinion of the court in which BATCHELDER, J., joined.
MERRITT, J. (pp. 56–65), delivered a separate dissenting opinion.
_________________
OPINION
_________________
CLAY, Circuit Judge. Defendants John M. Griffin, the Estate of Dennis B. Griffin, the
Dennis B. Griffin Revocable Trust, and Martom Properties, LLC (“Defendants”), appeal from
the judgment entered by the district court on April 26, 2016, requiring Defendants to pay roughly
$584 million in wrongful profits disgorgement and prejudgment interest to Plaintiffs Elizabeth
A. Osborn, Linda G. Holt, Judith E. Prewitt, and Cynthia L. Roeder (“Plaintiffs”). Plaintiffs,
four sisters, essentially allege that Defendants, two of their brothers and a related entity called
Martom Properties, cheated them out of stock and real property related to the family’s business
that they should have inherited under the terms of their parents’ estate plans. The district court
agreed with Plaintiffs after a bench trial, finding that Defendants’ conduct in managing the
family business and their parents’ estates and trusts violated their fiduciary duties to Plaintiffs
under Kentucky law. Defendants appeal, raising a litany of challenges to the district court’s
jurisdiction, legal conclusions, remedy, and decision to conduct a bench trial. The district court
exercised subject matter jurisdiction over Plaintiffs’ state law claims pursuant to 28 U.S.C.
§ 1367, and we have jurisdiction over this appeal pursuant to 28 U.S.C. § 1291. For the reasons
set forth below, we AFFIRM the district court’s judgment.
BACKGROUND
I. Factual History
A. Parties and Other Griffin Family Members
This litigation concerns a multi-million dollar inheritance dispute among the children of
John L. Griffin (“John”), a long-deceased Kentucky businessman. During his lifetime, John and
his wife Rosellen Griffin (“Rosellen”) had twelve children. Plaintiffs are four of the couple’s
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daughters: Elizabeth Osborn, Linda Holt, Cynthia Roeder (“Cyndi”), and Judith Prewitt
(“Judy”). Id. Mirroring the parties and the district court, we refer to Elizabeth Osborn as
“Betsy,” and the remaining three sisters as the “Holt Plaintiffs.”
Defendants are, in effect, two of John and Rosellen’s sons—Dennis B. Griffin1 and John
M. Griffin (“Griffy”)—plus an entity they created called Martom Properties, LLC (“Martom”).
The Griffins were a patriarchal family. “The Griffin children were taught that the older
siblings were in charge and that the younger siblings had to respect them.” (R. 856, Findings of
Fact and Conclusions of Law, ¶ 4.) In practical effect, this meant that Dennis and Griffy—the
eldest brothers—wielded the respect of and exercised authority over the younger children,
including Plaintiffs.
B. Griffin Industries
In 1943, John founded Griffin Industries, a rendering company that primarily hauls away
animal carcasses and other waste and converts this material into useful products. Griffin
Industries was a family business in the truest sense of the term. “All [of] the Griffin children
worked in the business after school and in summers, with the girls doing primarily office work
and the boys working in the plants.” (Id. ¶ 5.) “When the girls married, their husbands usually
worked in the company.” (Id.) Over the second half of the twentieth century, Griffin Industries
grew into a prosperous enterprise with operations in several states. Eventually, when the
children were all adults, four of them (including Dennis and Griffy) worked full-time at Griffin
Industries, while the others did not.
In the 1960s and 1970s, John purchased several real estate parcels in Kentucky that were
used by Griffin Industries in its operations. These properties were titled in John’s name. In
1981, Griffin Industries purchased Craig Protein, another rendering company based in Georgia.
John personally held 1,000 shares of Craig Protein stock. At its core, this dispute concerns the
ownership of: (i) John and Rosellen’s Griffin Industries stock; (ii) John’s real estate; and
(iii) John’s Craig Protein stock.
1
Dennis died in 2015, and his estate and trust were substituted as defendants in his place. For simplicity’s
sake, we refer to Dennis’ estate and trust as “Dennis.”
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C. John’s and Rosellen’s 1967 Estate Plans
In 1967, both John and Rosellen prepared separate wills and revocable trusts. Rosellen’s
will specified that when she died, all of her Griffin Industries stock would pass first to John, and
then to her trust (along with the remainder of the residue of her estate). Rosellen named the First
National Bank of Cincinnati (later known as Star Bank) as her trustee, and her trust instruments
provided that all assets of the trust would be divided among her eleven then-living children.
The district court described John’s estate plan as follows:
[John] executed a Last Will and Testament in 1967, which provided that all his
chattel property would pass to [Rosellen] and, if she predeceased him, to his
eleven children in equal amounts. A first codicil in 1967 bequeathed his stock to
[Rosellen], then to his 1967 Trust if she predeceased him. [John’s] second
codicil, executed in 1974, bequeathed his stock to [Rosellen], with the stock to be
purchased by Griffin Industries if she predeceased him. In 1974, [John] executed
a third codicil changing his alternate beneficiary to his children, equally. In 1975,
[John] executed a fourth codicil that left his stock to [Rosellen], except for any
stock purchased by Griffin Industries. If [Rosellen] predeceased [him], then the
stock would be distributed equally to his children. A fifth codicil was executed in
1981 that made no changes to the distribution of the stock.
[John] also created a Trust in 1967 which, under a First Amendment executed on
October 2, 1978, provided that its assets would be distributed among seven of the
children when they turned thirty (or, if deceased, their living issue, if any): Cyndi,
Marty, Tommy, Linda, Judy, Janet, and Betsy. These children were the seven
who were not then working full-time for Griffin Industries. A further amendment
in 1981 did not alter the distribution of the trust’s assets.
(Id. ¶¶ 11–12.)
In sum, from the late 1960s to the early 1980s, both John’s and Rosellen’s respective
estate plans expressed a clear and consistent desire to bequeath their property equally to their
eleven living children. There was only one deviation from this intention. In the early 1980s,
John recognized that because Griffin Industries was a Subchapter S corporation, “the four
working children were receiving more income from Griffin Industries tha[n] the seven non-
working children.” (Id. ¶ 13.) John wanted to “adjust this result” by making additional stock
gifts to the non-working children to restore equality amongst his heirs. (Id.) John’s intention
was that if Rosellen predeceased him, “the non-working children would end up with more shares
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than the working children” to account for the fact that the working children received direct
income from Griffin Industries. (Id. ¶ 14.)
D. Disputed Griffin Industries Stock Transactions
The events that gave rise to this lawsuit began in the mid-1980s. In 1983, John suffered a
massive stroke that left him partially paralyzed and unable to speak, write, care for himself,
drive, or walk without assistance. After the stroke, John had a functional IQ of 67, and the
mental age of an eight-year-old. Dennis recognized his father’s infirmity, and told one of his
sisters to not let John “sign anything because you know he doesn’t understand.” (Id. ¶ 23.)
Exacerbating the family upheaval, Rosellen died in 1985 of Parkinson’s disease. At the
time of Rosellen’s death, she owned roughly 13% of Griffin Industries’ stock. In accordance
with the terms of her estate plan, her stock passed to John, who owned roughly 53% of Griffin
Industries’ stock, giving him a combined total of 66% of the company.
In September 1985, Dennis and Griffy successfully petitioned a Kentucky probate court
to: (i) make them executors of Rosellen’s estate; and (ii) give them power of attorney over John.
On November 14, 1985, John executed a Third Amendment to his 1967 Trust that made Dennis
and Griffy his trustees. Four days later, he transferred his 53% of Griffin Industries’ stock to his
trust.
Dennis and Griffy then effectuated the following elaborate series of stock transactions
using their authority as trustees of John’s trust and executors of Rosellen’s estate:
John’s six sons (but none of his daughters) purchased all of Rosellen’s Griffin Industries
shares;
John’s trust sold 5% of his shares to his grandchildren’s trusts, who in turn gave his six
sons (but none of his daughters) the opportunity to buy-back the shares at 60% of their
value;
John disclaimed all interest in the shares Rosellen had left to him;
John’s six sons purchased all of the remaining Griffin Industries shares in John’s trust.
The net result of these machinations was that the six sons obtained ownership of all of John and
Rosellen’s shares, while the daughters received no stock beyond what they already owned
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through various gifts in the 1960s and 1970s. The sons thereafter controlled roughly 87% of
Griffin Industries’ stock.
After planning these maneuvers, Dennis called a pair of family meetings in November
1985 to discuss his mother’s estate. At the meetings, Dennis lied to his siblings by claiming that
Griffin Industries was on the verge of bankruptcy (it was actually profitable), and that their
parents’ estate plans called for the six sons to own all of the parents’ Griffin Industries stock.
Dennis did not show any of his sisters his mother’s estate or trust documents, and when one of
the sisters (Linda) tried to ask about her mother’s will, Dennis told her “to shut up and sit down.”
(Id. ¶ 40.) Reflecting the patriarchal nature of the family, Plaintiffs trusted and “relied on Dennis
and Griffy to handle their parents’ estate matters.” (Id. ¶ 45.)
On two subsequent occasions, Linda visited Dennis and asked to view Rosellen’s estate
documents. Each time, Dennis became angry and abusive, and refused to show her the relevant
documents.
E. Betsy’s 1990 Lawsuit
One of the sisters—Betsy—proved more insistent than Linda. In the late 1980s, she
learned that Dennis planned to transfer some of the Griffin Industries stock to his children.
When Betsy asked Dennis how he had the legal authority to do this, Dennis became angry “and
told her that stock ‘didn’t concern’ her.” (Id. ¶ 67.) When Betsy asked Griffy about the
transfers, he lied, telling Betsy that he was not familiar with Rosellen’s estate plan, and “that if
she didn’t like what [Dennis and Griffy] were doing, she should ‘sue them.’” (Id.)
On January 20, 1990, Betsy wrote a letter to Dennis and Griffy informing them that she
had read their mother’s will, and that under the will’s terms she was entitled to one-eleventh of
Rosellen’s Griffin Industries stock. None of the Holt Plaintiffs saw or reviewed this letter.
After Dennis and Griffy rebuffed her, Betsy filed a federal lawsuit against Dennis and
Griffy in the Eastern District of Kentucky. The suit challenged Dennis and Griffy’s 1986 stock
machinations, and also asserted a derivative claim on behalf of all Griffin Industries shareholders
(nominally including the Holt Plaintiffs).
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Dennis responded to the suit by berating Betsy in front of her family members, alleging
that the suit had no merit and was purely motivated by greed. Dennis told the Holt Plaintiffs that
the suit did not involve them, and declined to give any details about the nature of the suit. The
Holt Plaintiffs believed what Dennis told them about Betsy and the suit, and stopped speaking
with Betsy until the mid-2000s. Prior to the present lawsuit, the Holt Plaintiffs never learned the
nature of or participated in that suit.
On November 30, 1991, John executed both a Sixth Codicil to his will (“Sixth Codicil”),
and a Fourth Amendment to his trust (“Fourth Amendment”), both of which: (i) retroactively
approved Dennis and Griffy’s 1986 stock transactions; and (ii) provided that the remainder of
John’s property would be split equally by his five living daughters upon his death. These estate
changes came shortly after John underwent a doctor’s examination which revealed his low
functional IQ and mental age. On January 20, 1992, John purportedly executed an affidavit
which also retroactively approved Dennis and Griffy’s stock sales.
Eventually, in 1993, Betsy negotiated a settlement agreement with Dennis and Griffy that
gave her a large number of Griffin Industries shares, plus roughly $100,000 to cover past
distributions. However, because there was an outstanding derivative claim, Dennis and Griffy
were required to separately settle with the other Griffin Industries shareholders, including the
Holt Plaintiffs. Dennis called the Holt Plaintiffs into his office and ordered them to sign a
document. He did not explain that the document was a settlement agreement, and when Cyndi
asked if she could read it, Dennis refused. The Holt Plaintiffs executed a final settlement with
Dennis and Griffy on September 10, 1993 that settled their derivative claims and released all
possible tort claims against Dennis and Griffy for $10,000. Dennis lied to the Holt Plaintiffs and
told them that they had received as much compensation as Betsy received for her claims, and that
Betsy got “very damn little” from the 1990 lawsuit. (Id. ¶ 112.) The Holt Plaintiffs were never
told the terms of Betsy’s settlement.
F. Disputed Real Estate and Craig Protein Stock Sales
John died on April 9, 1995, and Dennis and Griffy became the executors of his estate. At
the time of his death, John’s estate still possessed the Craig Protein stock (the Georgia company
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John bought in 1981), as well as the real estate assets he purchased before his stroke. In
accordance with the terms of John’s Sixth Codicil and Fourth Amendment, these assets should
have been divided equally amongst his five daughters. Nevertheless, Dennis and Griffy sought
legal advice about how to acquire this property without either obtaining the prior consent of their
sisters, or violating Kentucky’s prohibition against self-dealing by fiduciaries.
Eventually, Dennis and Griffy settled on the following plan: First, they directed two of
their younger brothers (“Marty” and “Tommy”) to buy the Craig Protein stock at a substantially
undervalued price. Later, in 2002, Marty and Tommy traded the Craig Protein stock back to
Griffin Industries in exchange for Griffin Industries stock. The Griffin Industries stock they
acquired netted them more than $30 million in distributions over the succeeding years. Dennis
and Griffy never offered their sisters the opportunity to buy the Craig Protein stock, because they
wanted the stock to remain in the hands of their brothers.
Dennis and Griffy then created a new corporation, Defendant Martom,2 which purchased
all of John’s real estate, and then leased the property back to Griffin Industries. Although Dennis
and Griffy owned no shares in Martom, they effectively controlled Martom through their
ownership of Griffin Industries, as Martom had no employees of its own and was staffed entirely
by Griffin Industries personnel. Marty and Tommy—Martom’s owners—each testified that they
exercised virtually no management or control over Martom.
The net result of these transactions was that Dennis and Griffy maintained effective
control and ownership over all of the Craig Protein stock and Martom real estate. “The proceeds
from the sale of the Craig Protein stock to Marty and Tommy and the real properties to Martom
were paid into [John’s] estate and Trust and were distributed to the five sisters equally.” (Id.
¶ 142.) Thus, although the sisters received the proceeds of these transactions, they never had the
opportunity to take the stock or real-estate in-kind—something that wound up costing them
millions of dollars.
2
Martom is a mashup of the names Marty and Tommy.
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G. Genesis of This Litigation
Griffin Industries prospered greatly throughout the 1990s and 2000s. In 2010, Griffin
Industries was purchased by a company called Darling International for $840 million. While the
merger was closing, Cyndi was mistakenly faxed a document listing Griffin Industries’
shareholders and detailing the amount of stock each shareholder owned. Cyndi was shocked to
discover that she and her other sisters owned substantially less stock in the company than their
brothers (as well as Betsy, due to the 1993 settlement).
During the due diligence for the merger, Griffy became aware that he and Dennis had
forgotten to transfer one of their father’s properties (“Cold Spring”) to Martom during their 1995
real estate transactions. Using his power as John’s trustee, he conveyed the overlooked real
estate parcel to Griffin Industries for $1.
Betsy learned of Griffy’s Cold Spring transaction, and on April 27, 2011, filed suit
against Dennis and Griffy in the Eastern District of Kentucky. Betsy spoke to Linda, Judy, and
Cyndi about Dennis and Griffy’s various self-dealing transactions at a Christmas party in
December of 2011. After learning why they possessed so little Griffin Industries stock, Linda,
Judy, and Cyndi filed their own lawsuit in the Eastern District of Kentucky on March 8, 2013.
The Holt Plaintiffs’ suit alleged various state and federal law causes of action against Dennis,
Griffy, and Martom. Betsy and the Holt Plaintiffs’ respective lawsuits were consolidated into the
instant action.
II. Procedural History
Because the district court record is particularly voluminous, we will summarize the
proceedings below.
Following initial motion practice and extensive discovery, the parties filed several cross-
motions for summary judgment. After hearing oral argument on the various motions, the district
court issued a summary judgment order on September 29, 2014. Osborn v. Griffin, 50 F. Supp.
3d 772 (E.D. Ky. 2014).
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In its summary judgment order, the district court dismissed all of Plaintiffs’ various state
and federal claims except for their claims for breach of fiduciary duties under Kentucky law;
however, the district court largely found in Plaintiffs’ favor with respect to the fiduciary duty
claims. The district court concluded that there were genuine disputes of material fact as to
whether Dennis and Griffy breached their fiduciary duties with respect to the 1986 stock
transactions. Id. at 794–97. The district court further determined that there was no genuine
dispute of material fact that Defendants breached their fiduciary duties with respect to: (i) the
Craig Protein stock sale; (ii) the Martom real estate conveyances; and (iii) Griffy’s decision to
convey the Cold Spring property to Griffin Industries for $1 dollar in connection with the 2010
merger. Id. at 800–03. The district court determined that the only triable issues with respect to
these claims were on Defendants’ various affirmative defenses. Id.
The parties then proceeded to a bench trial. On March 21, 2016, the district court issued
findings of fact and conclusions of law that rejected each of Defendants’ affirmative defenses
and held Defendants liable for breaches of fiduciary duties. In essence, the district court found
that all of the disputed stock sales and real estate conveyances were self-dealing transactions in
violation of Defendants’ fiduciary duties and Kentucky law. The district court further found that
Defendants had abused their position of trust with their sisters and covered up their misdeeds to
prevent the sisters from learning of their claims. The court determined that under Kentucky law,
this abuse of trust excused Plaintiffs’ failure to bring their claims within the applicable statute of
limitations. Finally, the district court accepted the testimony and methodology of Plaintiffs’
damages expert, finding his reasoning sound, and noted that Defendants had failed to offer their
own expert to contradict his testimony.
The district court entered judgment on April 26, 2016, awarding Plaintiffs roughly $584
million in equitable disgorgement of wrongful profits and prejudgment interest. This award
consisted of: (i) $10,355,925 to each Plaintiff stemming from Defendants’ Craig Protein stock
sales, including prejudgment interest running from May 1995 until April 2016; (ii) $1,959,397 to
each Plaintiff stemming from Defendants’ Martom real estate sales, including prejudgment
interest running from July 1995 until April 2016; and (iii) $178,128,949 to each of the Holt
Plaintiffs stemming from Defendants’ illicit Griffin Industries stock transactions, including
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prejudgment interest running from January 1986 until April 2016. Defendants were held jointly
and severally liable for the entire award, and the award assessed prejudgment interest at a rate of
8% compounded annually.
After post-trial motion practice did not alter the district court’s judgment, Defendants
filed timely notices of appeal.
DISCUSSION
I. Subject Matter Jurisdiction
A. Standard of Review
“We review de novo the existence of subject-matter jurisdiction.” Watson v. Cartee,
817 F.3d 299, 302 (6th Cir. 2016).
B. Probate Exception
The district court originally asserted federal question jurisdiction over this dispute
because Plaintiffs alleged a federal RICO claim. See 18 U.S.C. § 1962, 1964(c). However, the
district court granted summary judgment dismissing the RICO claim, leaving only Kentucky tort
claims for breach of fiduciary duties. Osborn, 50 F. Supp. 3d at 809. The district court asserted
supplemental jurisdiction over these remaining state law claims pursuant to 28 U.S.C. § 1367(a).
This use of § 1367(a) was proper because the state law claims were part of the same Article III
case or controversy as the federal RICO claim, and the parties do not argue otherwise. See, e.g.,
Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 558 (2005).
Where the parties disagree is whether the district court was divested of subject matter
jurisdiction by the so-called “probate exception” to federal jurisdiction. Under the probate
exception, federal courts are prohibited from exercising jurisdiction over certain conflicts
involving property subject to a state court probate proceeding. See generally Charles A. Wright
& Arthur R. Miller, et al., 13E Federal Practice and Procedure § 3610 (3d ed. 2017 supp.).
The Supreme Court has held that this exception is “of distinctly limited scope.” Marshall
v. Marshall, 547 U.S. 293, 310 (2006). The exception is “essentially a reiteration of the general
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principle that, when one court is exercising in rem jurisdiction over a res, a second court will not
assume in rem jurisdiction over the same res.” Id. at 311. It “reserves to state probate courts the
probate or annulment of a will and the administration of a decedent’s estate; it also precludes
federal courts from endeavoring to dispose of property that is in the custody of a state probate
court. But it does not bar federal courts from adjudicating matters outside those confines and
otherwise within federal jurisdiction.” Id. at 311–12. Thus, the probate exception generally does
not apply when a plaintiff: (i) “seeks an in personam judgment against [the defendant], not the
probate or annulment of a will;” and (ii) does not “seek to reach a res in the custody of a state
court.” Id. at 312.
We have further limited the probate exception’s reach. In Wisecarver v. Moore, we held
“that causes of action alleging breach of fiduciary duties . . . do not necessarily fall within the
scope of the probate exception.” 489 F.3d 747, 751 (6th Cir. 2007) (collecting cases). We
reasoned that “the principles underlying the probate exception are not implicated when federal
courts exercise jurisdiction over claims seeking in personam jurisdiction based upon tort liability
because the claims do not interfere with the res in the state court probate proceedings or ask a
federal court to probate or annul a will.” Id.
We then distinguished the sorts of remedies implicated by the probate exception from the
remedies outside of its reach. We held that the probate exception bars a plaintiff from seeking:
“(1) an order enjoining Defendants’ disposition of assets received from [the decedent’s] estate,
(2) an order divesting Defendants of all property retained by them [from the estate] . . . and (3) a
declaration that [the decedent’s] probated will be declared invalid[.]” Id. We also held that the
probate exception bars a plaintiff from seeking “money damages equal to the amount of the
probate disbursements[.]” Id. n.1. We reasoned that granting such relief “is precisely what the
probate exception prohibits because it would require the district court to dispose of property in a
manner inconsistent with the state probate court’s distribution of the assets.” Id. at 751.
However, we further held that plaintiffs may, without implicating the probate exception:
(i) challenge inter vivos transfers; and (ii) seek disgorgement of monies improperly removed
from the decedent’s estate during his or her lifetime. Id.
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Defendants argue that the district court should have invoked the probate exception and
declined to hear this case because: (i) Plaintiffs sought money damages equal to the value of the
property probated pursuant to John’s will, violating Wisecarver; and (ii) the 1986 Griffin
Industries stock sales were ratified in John’s will, and therefore Plaintiffs’ claims challenging
those sales necessarily sought to invalidate the will.
We disagree, for several reasons. First, we note that John’s Griffin Industries stock was
not part of any res distributed by a probate court. The October 20, 1995 Inventory and
Appraisement Form prepared by Dennis and Griffy for John’s probate proceedings shows that
John’s estate did not hold any Griffin Industries stock at the time of his death. As we have
recounted, John did not possess this stock in 1995 because Dennis and Griffy transferred it out of
his estate in the mid-1980s.
We thus agree with the district court that, with respect to John’s Griffin Industries stock,
Plaintiffs sought and obtained “compensation for the value of property allegedly wrongfully
transferred out of their father’s estate by [D]efendants in breach of their fiduciary duties.”
(R. 612, PageID #28041 (emphasis added, footnote omitted).) We have expressly held that such
relief does not implicate the probate exception. See Wisecarver, 489 F.3d at 751 (holding that
“the removal of [contested] assets from [the decedent’s] estate during his lifetime removes them
from the limited scope of the probate exception”). The reasoning for this rule is simple: property
that a party removes from a decedent’s estate prior to his death is not part of the res that is
distributed by the probate court. Thus, ordering a defendant to disgorge the profits acquired
from such property does not require either setting aside the decedent’s will, or redistributing
assets that were parceled out by the probate court.
That John’s Sixth Codicil and Fourth Amendment—which purported to ratify Dennis and
Griffy’s 1986 stock transactions—were included in the estate documents submitted to the
probate court does not change this analysis. The mere fact that assets are tangentially mentioned
in probated estate and trust documents is irrelevant. See Lefkowitz v. Bank of N.Y., 528 F.3d 102,
108 (2d Cir. 2007) (After Marshall, the “probate exception can no longer be used to dismiss
widely recognized torts such as breach of fiduciary duty . . . merely because the issues intertwine
with claims proceeding in state court.” (citation, quotation marks, and alteration omitted)).
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Federal jurisdiction is only destroyed when a plaintiff seeks to set aside a will or appropriate
assets that were distributed by a probate court (or their cash equivalents). Marshall, 547 U.S. at
311–12; Wisecarver, 489 F.3d at 751 n.1. Accepting Defendants’ arguments and dismissing this
suit because Plaintiffs sought the value of assets that Defendants took out of John’s estate merely
because those assets were mentioned in John’s estate plan would require expanding the probate
exception beyond its “distinctly limited scope.” Marshall, 547 U.S. at 310.
Second, with respect to Rosellen’s Griffin Industries stock, John’s Craig Protein stock,
and the real estate acquired by Martom, the district court correctly found that Plaintiffs did not
“seek money damages equal to the amount of the probate disbursements.” Wisecarver, 489 F.3d
at 751 n.1. Rather, the district court ordered Defendants to disgorge the profits they obtained
from their wrongful conduct, and used those funds to compensate their sisters—the victims of
Defendants’ scheme. These wrongful profits were significantly greater than the value of John
and Rosellen’s assets at the time their estates were probated, confirming that the district court’s
monetary award was not just a proxy for the value of probated assets. See S.E.C. v. Cavanagh,
445 F.3d 105, 117 (2d Cir. 2006) (explaining that a “district court order of disgorgement forces a
defendant to account for all profits reaped through his [wrongful conduct] and to transfer all such
money to the court, even if it exceeds actual damages to victims”); see also id. (“Upon awarding
disgorgement, a district court may exercise its discretion to direct the money toward victim
compensation . . . .”).
While the probate exception prevents a federal court from de facto redistributing probated
property by granting a plaintiff its equivalent cash value, Wisecarver, 489 F.3d at 751 n.1, it does
not prevent a court from disgorging the profits that a defendant obtains through his wrongful
possession of such property. Thus, for example, if a defendant forges a will to bequeath himself
a lottery ticket worth $1 dollar, and obtains the ticket through probate proceedings, a federal
court can neither set aside the will, nor order the defendant to pay a plaintiff $1 in compensatory
damages. But, if the defendant wins the lottery, a federal court can use any equitable authority it
possesses under the relevant substantive law it is applying to force the defendant to disgorge his
lottery winnings. The probate exception is narrowly focused on preventing federal courts from
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upending probate proceedings; any profits a defendant may obtain after acquiring probated assets
are “matters outside [its] confines.” Marshall, 547 U.S. at 311–12.
Third, none of the relief sought by Plaintiffs required invalidating John’s will. Plaintiffs
do not argue that the will should be set aside; they merely argue that the will was not sufficient to
ratify Defendants’ breaches of their fiduciary duties under Kentucky law. Put differently,
Plaintiffs accept (as they must) the validity of John’s will, but argue that the will is insufficient
proof that John intended to ratify Defendants’ wrongful conduct. This distinction is decisive, as
federal courts are only prohibited from setting aside a will, and not from determining its legal
effect on an affirmative defense. Id.; see also Markham v. Allen, 326 U.S. 490, 494 (1946)
(holding that the probate exception does not prevent a federal court from exercising “its
jurisdiction to adjudicate rights in [probated] property where the final judgment does not
undertake to interfere with the state court’s possession”).
In sum, the probate exception does not apply here because Plaintiffs: (i) sought “an in
personam judgment against [Defendants], not the probate or annulment of a will;” and (ii) did
not “seek to reach a res in the custody of a state court.” Marshall, 547 U.S. at 311. We therefore
hold that the district court properly exercised subject matter jurisdiction over this dispute.
II. Challenges to Liability
A. Standard of Review
On an appeal from a judgment entered after a bench trial, we review the district court’s
legal conclusions de novo, and its factual findings for clear error. Moorer v. Baptists Mem.
Health Care Sys., 398 F.3d 469, 478–79 (6th Cir. 2005); James v. Pirelli Armstrong Tire Corp.,
305 F.3d 439, 448 (6th Cir. 2002); Schroyer v. Frankel, 197 F.3d 1170, 1173 (6th Cir. 1999).
“A ‘finding is clearly erroneous when although there is evidence to support it, the reviewing
court on the entire evidence is left with the definite and firm conviction that a mistake has been
committed.’” United States v. Atkins, 843 F.3d 625, 632 (6th Cir. 2016) (quoting Anderson v.
City of Bessemer City, 470 U.S. 564, 573 (1985)). “Under this standard, if ‘the district court’s
account of the evidence is plausible in light of the record viewed in its entirety, the court of
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appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it
would have weighed the evidence differently.’” Id. (quoting Anderson, 470 U.S. at 573–74).
B. Statute of Limitations
Kentucky has a five-year statute of limitations for breach of fiduciary duty claims. See
Ky. Rev. Stat. § 413.120(2), (6). Neither party disputes that all of Defendants’ breaches of their
fiduciary duties occurred in the 1980s and 1990s—more than five years before these
consolidated lawsuits were filed in 2011 and 2013, respectively. However, Kentucky equitably
tolls its statute of limitations whenever the defendant’s wrongful conduct prevents a plaintiff
from discovering her claims. Ky. Rev. Stat. § 413.190(2). The parties dispute the applicability
of this tolling provision.
Before we discuss the parties’ arguments, it is helpful to separate out the district court
findings that are not at issue in this appeal. The district court found that Plaintiffs should have
discovered their claims through the exercise of reasonable diligence by the early 1990s. Osborn,
50 F. Supp. 3d at 806–08. The district court also found that Defendants failed to “disclose all the
material facts regarding [their] handling of their parents’ estate plans or their fiduciary breaches”
despite having “an affirmative duty to make full disclosures to their sisters[.]” (R. 856, ¶ 213.)
Neither party challenges these findings, although as we discuss later, Defendants deny having
had any fiduciary duties to Plaintiffs.
Instead, the parties’ statute of limitations dispute is cabined to a single legal issue: when a
defendant violates his fiduciary duties to a plaintiff by failing to disclose facts relevant to the
plaintiff’s cause of action, does the statute of limitations run from the time when the plaintiff
should have known about the breach, or the time when the plaintiff actually learns about the
breach? Defendants argue that the limitations period began running when Plaintiffs should have
learned about their claims in the early 1990s, and therefore assert that the claims are time-barred.
Plaintiffs argue, and the district court concluded, that the limitations period began running in
2010 when Plaintiffs actually learned about Defendants’ wrongful conduct. We agree with
Plaintiffs and the district court.
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Kentucky’s equitable tolling statute provides as follows:
When a cause of action mentioned in KRS 413.090 to 413.160 accrues against a
resident of this state, and he by absconding or concealing himself or by any other
indirect means obstructs the prosecution of the action, the time of the continuance
of the absence from the state or obstruction shall not be computed as any part of
the period within which the action shall be commenced. But this saving shall not
prevent the limitation from operating in favor of any other person not so acting,
whether he is a necessary party to the action or not.
Ky. Rev. Stat. § 413.190(2) (emphasis added). Ordinarily, this statute only tolls the statute of
limitations when a defendant commits an affirmative act that conceals his wrongdoing. Munday
v. Mayfair Diagnostic Lab., 831 S.W.2d 912, 915 (Ky. 1992). However, “where the law imposes
a duty of disclosure, a failure of disclosure may constitute concealment under KRS
413.190(2)[.]” Id.
Two parallel rules govern the application of Kentucky’s equitable tolling statute in cases
where the defendant conceals his wrongdoing. Typically, the limitations period begins to run
when: (i) the defendant’s wrongful concealment is revealed to the plaintiff; or (ii) the plaintiff
“should have discovered his cause of action by reasonable diligence.” Emberton v. GMRI, Inc.,
299 S.W.3d 565, 575 (Ky. 2009). “When a confidential relationship exists between the parties,
however, the statute does not begin to run until actual discovery of the fraud [or] mistake.”
Hernandez v. Daniel, 471 S.W.2d 25, 26 (Ky. 1971). “The rationale of the actual notice
requirement is that persons in a confidential relationship do not have the reason or occasion to
check up on each other that would exist if they were dealing at arm’s length.” McMurray v.
McMurray, 410 S.W.2d 139, 141–42 (Ky. 1966).
The seminal case applying Kentucky’s equitable tolling statute in the context of a
confidential relationship is Security Trust Co. v. Wilson, 210 S.W.2d 336 (Ky. 1948). In Security
Trust, the plaintiff’s uncle and guardian wrongfully appropriated property the plaintiff inherited
from her deceased father. Id. The plaintiff brought suit decades after the wrongful transfer, and
the defendant argued that the claims were time barred. Id. at 337. The Kentucky Court of
Appeals, at that time Kentucky’s highest court, disagreed, holding that a fiduciary relationship
existed between the plaintiff and her uncle, and the uncle’s failure to disclose the wrongful
transfer tolled the statute of limitations. Id. at 339.
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In explaining the rationale for its holding, the Kentucky Court of Appeals focused on the
close family relationship between the plaintiff and her uncle. The court cited the prevailing rule
from other jurisdictions that:
Where a confidential relationship exists between the parties, failure to discover
the facts constituting fraud may be excused. In such a case so long as the
relationship continues uprepudiated [sic], there is nothing to put the injured party
on inquiry, and he cannot be said to have failed to use diligence in detecting the
fraud. Thus it has been held that a complainant is not chargeable with want of
diligence in not discoverning [sic] the fraud of his guardian in concealing the
receipt and existence of property where such guardian was his step-father, in
whose family, and as whose child he was brought up, and in whom he had
implicit confidence, there being no reason to suspect that a fraud was being
practiced.
Id. at 338 (first and third emphases added; citation and internal quotation marks omitted).
Applying these principles, the court reasoned “that considering the fact that [the defendant] was
the uncle of the plaintiff . . . such a fiduciary relationship existed between the [uncle] and this
plaintiff that it would have been embarrassing for her to have questioned her uncle’s integrity, or
have demanded that he show her the bonds which he said were in his possession[.]” Id. at 339.
The court thus held that the uncle’s failure to disclose his misappropriation of her assets “tolled
the running of the statute of limitations” notwithstanding the plaintiff’s failure to discover the
wrongdoing. Id. at 340.
Defendants argue that Security Trust only applies to cases where the plaintiff has no
reason whatsoever to suspect that the defendant has engaged in any wrongdoing. Instead,
Defendants argue that the Court should follow the rule ostensibly set forth in Adams v. Ison,
249 S.W.2d 791, 793 (Ky. 1952), where the Kentucky Court of Appeals stated that the statute of
limitations “begins to run . . . when the fraud or concealment . . . should have been discovered by
the exercise of reasonable diligence by the injured [party].”
Defendants’ interpretation misreads Adams. In that case, a doctor negligently left a piece
of rubber tubing inside of a patient during surgery. Id. When the patient discovered the tubing,
the doctor told him not to worry because the tubing would eventually degrade within the body.
Id. The tubing did not erode over the course of twenty years, causing the patient to lose one of
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his lungs. Id. When the plaintiff later brought suit, the defendant argued that his cause of action
was barred by the statute of limitations.
The Kentucky Court of Appeals disagreed, holding that the limitations period was tolled
after the doctor concealed the degree of the plaintiff’s injury by advising him that the rubber tube
was not harmful. Id. The court once again placed special emphasis on the “intimate”
relationship between the plaintiff and the defendant:
The relationship of a patient to his physician is by its very nature one of the most
intimate. Its foundation is the theory that the physician is learned, skilled and
experienced in the afflictions of the body about which the patient ordinarily
knows little or nothing but which are of the most vital importance to him.
Therefore, the patient must necessarily place great reliance, faith and confidence
in the professional word, advice and acts of his doctor. It is the physician’s duty
to act with the utmost good faith and to speak fairly and truthfully at the peril of
being held liable for damages for fraud and deceit. 41 Am.Jur., Physicians and
Surgeons, Secs. 70, 73, 74; 70 C.J.S., Physicians and Surgeons, § 36; Cf. Walden
v. Jones, 289 Ky. 395, 158 S.W.2d 609, 141 A.L.R. 105. Since the relationship of
physician and patient begets confidence and reliance, a liberal attitude should be
taken in behalf of the patient. No degree of deceit or fraud by the doctor to avoid
legal liability for malpractice by enabling himself to set up the shield of the
statute of limitations should be permitted. Schmucking v. Mayo, 183 Minn. 37,
235 N.W. 633; Groendal v. Westrate, 171 Mich. 92, 137 N.W. 87, Ann.Cas.
1914B, 906; Hudson v. Shoulders, 164 Tenn. 70, 45 S.W.2d 1072. We have so
held in cases where the relationship was that of mother and son, Loy v. Nelson,
201 Ky. 710, 258 S.W. 303 and guardian and ward. Security Trust Co. v. Wilson,
307 Ky. 152, 210 S.W.2d 336.
Id. at 793–94 (emphasis added). Notably, the court did not run the statute of limitations from the
time the plaintiff reasonably should have discovered his cause of action—the instant the doctor
confirmed his malpractice. Instead, the court applied its rule from Security Trust that the
limitation period should be tolled when a defendant abuses a confidential relationship to prevent
the plaintiff from discovering her cause of action. Id.
This case closely parallels Security Trust. As in Security Trust, Plaintiffs and Defendants
were in a close family relationship that would have made it difficult for Plaintiffs to question
their brothers’ integrity or demand a detailed accounting of the brothers’ business activities. The
parties’ family dynamics were such that Plaintiffs trusted their brothers implicitly, and generally
deferred to their business judgment. Moreover, Defendants reacted aggressively and
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disparagingly whenever Plaintiffs tried to inquire into Defendants’ management of the family
business and their parents’ assets. Under these circumstances, Kentucky law excuses Plaintiffs’
failure to discover Defendants’ wrongful conduct.3 Security Trust, 210 S.W.2d at 338 (“Where a
confidential relationship exists between the parties, failure to discover the facts constituting fraud
may be excused.” (citation omitted)).
Martom separately argues that equitable tolling cannot apply to Plaintiffs’ claims against
it, because it was never in a fiduciary relationship with Plaintiffs. We reject this argument.
The district court found that Martom was created by Griffy and Dennis to wrongfully circumvent
Kentucky’s law against self-dealing. Kentucky law places persons and entities that aid or abet a
tort in the same position as the primary tortfeasor. See Steelvest, Inc. v. Scansteel Serv. Ctr.,
807 S.W.2d 476, 486 (Ky. 1991); cf. Miles Farm Supply, LLC v. Helena Chem. Co., 595 F.3d
663, 666 (6th Cir. 2010) (explaining that Kentucky follows § 876 of the Second Restatement of
Torts, which imposes aiding and abetting liability on parties that knowingly assist in a
tortfeasor’s breach of fiduciary duties). Because Martom participated in Griffy and Dennis’
wrongdoing, equitable principles prevent it from invoking the statute of limitations. Emberton,
299 S.W.3d at 573 (noting that Kentucky’s equitable tolling statute does not permit an
“inequitable resort to a plea of limitations” (quoting Adams, 249 S.W.2d at 793)).
C. Effect of Betsy’s 1990 Lawsuit
Defendants next argue that the Holt Plaintiffs’ claims are barred by: (i) the release
provision in the 1993 settlement agreement they signed terminating Betsy’s derivative claims
against Dennis and Griffy; and (ii) the doctrine of collateral estoppel.4 Once again we disagree.
3
Defendants cite Ham v. Sterling Emergency Servs. of the Midwest, Inc., 575 F. App’x 610, 614 (6th Cir.
2014), for the proposition that a party “is not obstructed or misled under [Section 413.190(2)] if the exercise of
reasonable diligence would allow him to pursue his claim,” even where the obstructive conduct is “remain[ing]
silent when the duty to speak or disclose is imposed by law.” (citation and internal quotation marks omitted).
However, Ham is distinguishable because it did not involve a confidential fiduciary relationship between family
members. Kentucky law did not require the Holt Plaintiffs to disbelieve their brothers’ representations and accuse
them of fraud in order to preserve their claims.
4
All parties concede that the 1993 settlement prevents Betsy from bringing any claims related to the 1986
stock transactions.
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The district court refused to enforce the release provision in the 1993 settlement
agreement because it found that Defendants violated their fiduciary duties to the Holt Plaintiffs
by misrepresenting the nature of Betsy’s 1990 lawsuit, failing to disclose their own wrongdoing,
and misleading the Holt Plaintiffs into signing an inequitable settlement agreement. The district
court also rejected Defendants’ collateral estoppel argument because it determined that the Holt
Plaintiffs were not adequately represented in Betsy’s lawsuit. The district court found that
Betsy’s position was adverse to the Holt Plaintiffs—at one point during the settlement
negotiations, Betsy rejected a proposal that the Holt Plaintiffs receive a portion of Griffin
Industries’ stock because doing so would have diluted her own share. Because the Holt Plaintiffs
thus did not have a full and fair opportunity to litigate their rights in the 1990 lawsuit, the district
court found that the suit could not bar their claims in this lawsuit.
On appeal, Defendants attack the district court’s determination on two grounds. First,
Defendants argue that the district court already determined in the 1990 lawsuit that Betsy was an
adequate representative for the Holt Plaintiffs, and aver that the district court’s prior
determination should govern in this case as well. Second, Defendants argue that they ceased
having fiduciary duties to the Holt Plaintiffs once Betsy brought the derivative suit, because the
Holt Plaintiffs and Defendants then became adverse parties.
Much like the district court, we do not find Defendants’ arguments persuasive. We have
reviewed the record from the 1990 lawsuit, and the district court never determined that Betsy
was an adequate representative of the Holt Plaintiffs’ interests. Instead, the district court
expressly reserved that issue for trial, and the issue was never litigated further because Betsy’s
settlement terminated the proceedings. We cannot find support for Defendants’ representations
to the contrary. Because there is no real question that the Holt Plaintiffs were not adequately
represented in the prior suit—Betsy’s litigation conduct shows that she was not trying to
maximize recovery for her sisters—Defendants cannot invoke collateral estoppel against them.
See Moore v. Commonwealth, 954 S.W.2d 317, 319 (Ky. 1997) (collateral estoppel requires that
the party have had “a full and fair opportunity to litigate” the prior suit).
Moreover, Defendants cite no authority for their dubious claim that they ceased having
any fiduciary duties to the Holt Plaintiffs once Betsy filed her 1990 derivative lawsuit. Under
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Kentucky law, fiduciary duties continue as long as the parties enjoy a confidential relationship.
See Steelvest, 807 S.W.2d at 486. The record is clear that Defendants continued to have a
confidential relationship with the Holt Plaintiffs even after Betsy filed the 1990 lawsuit; indeed,
the Holt Plaintiffs signed the 1993 settlement agreement precisely because they continued to
trust Dennis and Griffy implicitly. Moreover, it would create an entirely untenable rule if we
were to accept Defendants’ arguments. If the filing of a shareholder derivative suit relieved
management of all of its fiduciary duties to the corporation and its shareholders, then
management could plunder a corporation’s assets with impunity every time a derivative suit is
filed against them. This outcome would, of course, undermine the very purpose animating the
law of fiduciary duties, which is to assure that fiduciaries do not betray the trust reposed in them.
In arguing to the contrary, the dissent posits that Defendants had no “brotherly ‘fiduciary
duty’ to discourage settlement” with their sisters because “the parties were engaged on opposite
sides of a lawsuit in which the sisters claimed serious wrongdoing by the brothers.” Post at 57
(Opinion of Merritt, J.). This formulation misstates key facts regarding the 1993 lawsuit. The
“sisters,” plural, did not sue Defendants in 1993—Betsy did, and her settlement with Defendants
unquestionably prevents her from recovering any additional sums related to Defendants’ illicit
stock transactions. See supra, note 4. Linda, Cyndi, and Judy, by contrast, were only nominal
parties to the lawsuit because Betsy brought a derivative claim on behalf of all Griffin Industries
shareholders. The district court found that these sisters did not discover the nature of Betsy’s
lawsuit until 2010 because Defendants hid and lied about Betsy’s claims, and that Defendants
browbeat them into signing a settlement agreement that they had not read and did not understand.
Thus, contrary to the dissent’s insinuations, our holding is not that adverse parties always
continue to owe fiduciary duties to one another during litigation, or that Defendants were not
permitted to settle with the Holt Plaintiffs. Rather, it is that fiduciaries are not relieved of their
duty of loyalty towards their beneficiaries just because those beneficiaries are unknowingly
swept up in a third party’s shareholder derivative lawsuit against the fiduciaries. If Defendants
wished to settle with the Holt Plaintiffs, they were required to follow settled agency principles
and make sure that the Holt Plaintiffs understood the rights that they were signing away. See
Restatement (Second) of Contracts § 173 (1981) (“If a fiduciary makes a contract with his
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beneficiary relating to matters within the scope of the fiduciary relation, the contract is voidable
by the beneficiary, unless (a) it is on fair terms, and (b) all parties beneficially interested manifest
assent with full understanding of their legal rights and of all relevant facts that the fiduciary
knows or should know.”). Any other rule would permit widespread misbehavior by fiduciaries
subject to active derivative lawsuits, even though most of the shareholder-beneficiaries had no
role in initiating the suit—a truly damaging and illogical result.
Our conclusion that Dennis and Griffy continued to owe fiduciary duties to the Holt
Plaintiffs after Betsy’s 1990 lawsuit was filed makes clear that the brothers’ failure to disclose
the nature of the lawsuit and the 1993 settlement to the Holt Plaintiffs rendered the settlement’s
release provision invalid. Numerous cases establish that contractual releases between a fiduciary
and a beneficiary are unenforceable if the fiduciary fails to make sufficient disclosures to allow
the beneficiary to fairly determine whether to release her claims. See, e.g., Masterson v.
Pergament, 203 F.2d 315, 322 (6th Cir. 1953) (“A release obtained by a fiduciary through
concealment or misrepresentation is of no effect.”); Mazak Corp. v. King, 496 F. App’x 507, 511
(6th Cir. 2012) (Like “the vast majority of state and federal courts,” Kentucky law requires that a
“release must be set aside if the fiduciary failed to make a full disclosure of all relevant facts to
the beneficiary.”); Hale v. Moore, 289 S.W.3d 567, 582–83 (Ky. Ct. App. 2008) (holding that
release signed by beneficiaries was invalid where the beneficiaries “were not fully apprised of
the consequences of signing the [release] by” their fiduciaries).
Accordingly, we hold that the 1993 settlement agreement and the doctrine of collateral
estoppel do not bar Plaintiffs’ claims.
D. Arguments That Defendants Did Not Breach Their Fiduciary Duties
1. Liability for Sales of John’s Griffin Industries Stock
i. Choice of Law
Defendants argue that they could not have breached any fiduciary duties with respect to
the 1986 sale of their father’s Griffin Industries stock from his revocable trust, because they did
not owe any fiduciary duties to Plaintiffs at all. John’s revocable trust contains a choice of law
Nos. 16-6221/6225/6226/6227 Osborn, et al. v. Griffin, et al. Page 24
clause specifying that the trust is governed by Ohio law. Under Ohio law, trustees of revocable
trusts owe fiduciary duties only to the trust’s settlor, and not to any of its beneficiaries, unless the
settlor becomes incapacitated or dies. See Ohio Rev. Code § 5806.03(A); Puhl v. U.S. Bank,
N.A., 34 N.E.3d 530, 536 (Ohio Ct. App. 2015) (“[T]he duties of the trustee are owed exclusively
to the settlor during the settlor’s lifetime.”). John did not die until 1995, and the district court
made no express finding that he became incapacitated; accordingly, Defendants arguably had no
fiduciary duties to Plaintiffs under Ohio law when the 1986 stock sales occurred. Therefore,
Defendants argue that the district court’s judgment must be vacated insofar as it penalized them
for improper sales they made as John’s trustees.
We reject Defendants’ argument because we conclude that Kentucky courts would apply
Kentucky law to this dispute notwithstanding the trust’s Ohio choice of law clause. Federal
courts exercising supplemental jurisdiction must apply the forum state’s choice of law rules to
select the applicable state substantive law. See Felder v. Casey, 487 U.S. 131, 151 (1988); see
also Palm Beach Golf Ctr.-Boca, Inc. v. John G. Sarris, D.D.S., P.A., 781 F.3d 1245, 1260 (11th
Cir. 2015); McCoy v. Iberdrola Renewables, Inc., 760 F.3d 674, 684 (7th Cir. 2014). Under
Kentucky law, the “meaning and effect of the terms of a trust . . . are determined by . . . (1) [t]he
law of the jurisdiction designated in the terms [of the trust instrument] unless the designation of
that jurisdiction’s law is contrary to a strong public policy of the jurisdiction having the most
significant relationship to the matter at issue[.]” Ky. Rev. Stat. § 386B.1-050(1) (emphasis
added).
We have uncovered no Kentucky cases applying or rejecting a choice of law clause in a
trust, and the parties have not cited any such cases. We are thus left without any binding
authority to guide us in determining whether applying Ohio law to this dispute would be
“contrary to a strong public policy of the jurisdiction having the most significant relationship to
the matter at issue.” Id. However, Kentucky has numerous cases dealing with the applicability
of contractual choice of law clauses. Because such clauses serve an identical purpose whether
they appear in trust instruments or contracts, these cases are highly relevant in fashioning our
Erie guess as to which state’s law Kentucky courts would apply to this case. See Erie R.R. Co. v.
Tompkins, 304 U.S. 64, 78 (1938).
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In the contractual context, we have recognized that “Kentucky courts will not
automatically honor a choice-of-law provision, to the exclusion of all other considerations.”
Wallace Hardware Co. v. Abrams, 223 F.3d 382, 393 (6th Cir. 2000). As we have noted on
numerous occasions, Kentucky courts have an extremely strong and highly unusual preference
for applying Kentucky law even in situations where most states would decline to apply their own
laws. See, e.g., id. at 391 (“On at least two occasions, we likewise have noted this provincial
tendency in Kentucky choice-of-law rules.”); Adam v. J.B. Hunt Transp., Inc., 130 F.3d 219, 230
(6th Cir. 1997) (noting that “Kentucky does take the position that when a Kentucky court has
jurisdiction over the parties, ‘[the court's] primary responsibility is to follow its own substantive
law.’” (alteration in original) (quoting Foster v. Leggett, 484 S.W.2d 827, 829 (Ky. 1972)));
Johnson v. S.O.S. Transp., Inc., 926 F.2d 516, 519 n. 6 (6th Cir. 1991) (“Kentucky’s conflict of
law rules favor the application of its own law whenever it can be justified.”); Harris Corp. v.
Comair, Inc., 712 F.2d 1069, 1071 (6th Cir. 1983) (“Kentucky courts have apparently applied
Kentucky substantive law whenever possible . . . . [I]t is apparent that Kentucky applies its own
law unless there are overwhelming interests to the contrary.” (emphasis in original) (discussing
Breeding v. Mass. Indem. & Life Ins. Co., 633 S.W.2d 717 (Ky. 1982))); see also Paine v. La
Quinta Motor Inns, Inc., 736 S.W.2d 355, 357 (Ky. Ct. App. 1987) (noting that Kentucky courts
“are very egocentric or protective concerning choice of law questions”), overruled on other
grounds by Oliver v. Schultz, 885 S.W.2d 699 (Ky. 1994).
In Wallace Hardware, we made an Erie guess that Kentucky courts would enforce
contractual choice of law provisions unless “the chosen state has no substantial relationship to
the parties or the transaction.” 223 F.3d at 397 (citation and internal quotation marks omitted).
Subsequently, the Kentucky Supreme Court has confirmed that it will apply its own law to a
dispute with ties to Kentucky, even in spite of an otherwise-valid choice of law clause. See
Schnuerle v. Insight Commc’ns Co., 376 S.W.3d 561, 566–67 (Ky. 2012) (applying Kentucky
law in spite of a New York choice of law provision because “Kentucky had the greater interest
in, and the most significant relationship to, the transaction and the parties”). Thus, we have had
to admit that our Erie guess in Wallace Hardware was wrong, and that Kentucky’s most-
substantial-relationship test trumps even an otherwise-valid choice of law clause when the
dispute is centered in Kentucky. See Hackney v. Lincoln Nat’l Fire Ins. Co., 657 F. App’x 563,
Nos. 16-6221/6225/6226/6227 Osborn, et al. v. Griffin, et al. Page 26
570 (6th Cir. 2016) (“Thus, as several federal district court decisions have noted, Wallace
Hardware’s assumption about the Kentucky Supreme Court’s application of [choice of law
clauses] has now proven faulty.”).
In the instant case, there can be no question that Kentucky has the most significant
relationship to John’s revocable trust. See Restatement (Second) of Conflict of Laws §§ 270, 6
(1971). John, his business, his trustees, most of his assets, and most of his trust’s beneficiaries
were all centered in Kentucky. The trust’s only apparent ties to Ohio are that: (i) it was created in
Ohio; and (ii) John’s lawyers were in Cincinnati, Ohio. Thus, Kentucky has a far more
significant relationship to the trust than does Ohio. The only remaining question is whether
Kentucky has a “strong” enough public policy to overcome the default presumption that Ohio
law applies per the terms of the trust’s choice of law provision. Ky. Rev. Stat. § 386B.1-050(1).
We believe that Kentucky courts would apply Kentucky law in determining the fiduciary
duties created by John’s trust. Kentucky’s public policy of protecting trust beneficiaries against
self-dealing trustees is so strong that Kentucky has enacted a separate statutory provision
confirming that none of its other statutes governing trusts “in any way relieve a fiduciary who
breaches his trust and causes any loss thereby of his liability under his bond, or of any civil or
criminal liability provided for by law.” Ky. Rev. Stat. § 386.150. Moreover, as stated earlier,
Kentucky also has an unusually strong preference for applying its own laws, even in the face of
valid choice of law provisions. When these factors are weighed together, we believe that
Kentucky courts would not apply Ohio law, particularly since doing so might relieve Defendants
of liability for wrongful conduct that occurred in Kentucky, where the effects of this litigation
will be mostly felt.5
5
Kentucky is alone in our Circuit in its refusal to regularly honor choice of law provisions. See Wise v.
Zwicker & Assocs., P.C., 780 F.3d 710, 715 (6th Cir. 2015) (choice of law provisions generally enforceable under
Ohio law); Town of Smyrna v. Mun. Gas Auth. of Ga., 723 F.3d 640, 645–46 (6th Cir. 2013) (same for Tennessee);
Johnson v. Ventra Grp., Inc., 191 F.3d 732, 739 (6th Cir. 1999) (same for Michigan). Nevertheless, we must
faithfully apply Kentucky’s choice of law policy even though other states may have given more deference to the
choice of law provision in John’s trust. Because Kentucky has by far the greatest interest in the subject matter of
this lawsuit, we believe that Kentucky courts would apply their own law in adjudicating this dispute, and we thus
follow suit.
Nos. 16-6221/6225/6226/6227 Osborn, et al. v. Griffin, et al. Page 27
Applying Kentucky law, we must reject Defendants’ argument that they did not have any
fiduciary duties to their sisters stemming from their positions as trustees of John’s trust. Under
Kentucky law, “a trustee has a specific duty, inherent to the trust relationship, to provide
information relating to the trust and [] this specific duty extends to [the trust’s] conditional or
contingent beneficiaries,” such as Plaintiffs. JP Morgan Chase Bank, N.A. v. Longmeyer,
275 S.W.3d 697, 701 (Ky. 2009). Moreover, fiduciary duties also attach where two parties are in
“a confidential relationship” such that one party “repos[es] a certain degree of trust and
confidence in” the other. Steelvest, 807 S.W.2d at 486. Thus, in this case, Defendants were in a
fiduciary relationship with Plaintiffs for two reasons: (i) Defendants were trustees of John’s trust,
and Plaintiffs were among the trust’s contingent beneficiaries; and (ii) Defendants assumed
responsibility for managing the family’s financial affairs, and encouraged Plaintiffs to trust that
they would fairly administer their father’s assets. We therefore hold that the choice of law
provision in John’s trust does not shield Defendants from liability.
ii. Liability Analysis
Defendants argue that even if Kentucky law applies, they did not breach their fiduciary
duties to their sisters because John ratified the 1986 stock sales in the Fourth Amendment and
Sixth Codicil to his trust and will, respectively. Those two instruments made clear that John’s
sons would get all of his interest in Griffin Industries, and that his daughters would receive any
cash left in his estate. Defendants argue that John had all of the information necessary to ratify
the past transactions because of his “life experience” and general knowledge of how he wanted
to divide up his estate.
The district court took a contrary view. As recited earlier, under Kentucky law, trustees
have “a specific duty, inherent to the trust relationship, to provide information relating to the
trust and [] this specific duty extends to conditional or contingent beneficiaries.” JP Morgan
Chase, 275 S.W.3d at 701. The district court found that Defendants violated this duty by failing
to notify their sisters (the trust’s contingent beneficiaries) of the stock transactions.
The district court further found that the Fourth Amendment and Sixth Codicil were
insufficient to ratify Defendants’ breaches of their fiduciary duties. Under Kentucky law,
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ratification of an agent or fiduciary’s wrongful “conduct requires two elements: 1) an after-the-
fact awareness of the conduct; and 2) an intent to ratify it.” Saint Joseph Healthcare, Inc. v.
Thomas, 487 S.W.3d 864, 875 (Ky. 2016). Whether the principal’s “‘conduct is sufficient to
indicate consent’ to ratification ‘is a question of fact[.]’” Pannell v. Shannon, 425 S.W.3d 58, 84
(Ky. 2014) (citation omitted). “Conduct that can be otherwise explained may not effect
ratification.” Restatement (Third) of Agency § 4.01(2) cmt. d (2006). The district court
explained its finding that John lacked intent to ratify as follows:
Based on the totality of the evidence, including [John’s] pre-stroke estate
documents, and the credibility of the witnesses, the Court concludes that, even in
the absence of the 1985 Plan, [John] would not have sold his stock to his sons
during his lifetime. Rather, as was its impression at summary judgment, the Court
concludes that [John’s] purported ratifications of those sales—in the Sixth Codicil
to his will, the Fourth Amendment to his Trust, and the affidavit he purportedly
executed on January 20, 1992 — were orchestrated by Dennis and Griffy, with
the assistance of counsel, “to obtain [John’s] post hoc imprimatur on the prior
sales that defendants orchestrated for purposes of retaining control of the
Company.” (Doc. 590 at 51). This conclusion is supported by the fact that these
actions were taken during the pendency of—and most likely in response to—
Betsy’s 1990 lawsuit.
[]The Court further concludes that, given the testimony about [John’s] condition
after his stroke, Dr. Parsons’ evaluation, and the surrounding circumstances,
[John] did not have “full knowledge of the material facts” such that any valid
ratification occurred. See Int’l Shoe Co. v. Johnson, 252 Ky. 440, 508 (Ky. 1934)
(citations omitted).
(R. 856, ¶¶ 249–50.)
In other words, the district court found that prior to his stroke, John had manifested a
consistent intention to divide his estate equally amongst his children. After his stroke, John had
a functional IQ of roughly 67, and, at the behest of his sons, started signing estate plan changes
that conveniently benefitted the sons in litigation against his daughters. The district court found
this sequence of events suspicious, and ultimately concluded that Defendants manipulated John
into functionally disinheriting his daughters. Defendants have pointed to no facts that
convincingly rebut this version of the events, and we thus cannot hold that the district court
clearly erred. In fact, the district court’s conclusion is supported by Dennis’s own statements
that John could not understand complex issues after his stroke. Accordingly, we hold that the
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district court’s conclusion that John lacked sufficient intent to ratify Defendants’ breaches was
not clearly erroneous.
2. Liability for Sales of Rosellen’s Griffin Industries Stock
Defendants next argue that they could not have breached any fiduciary duties with
respect to the sale of Rosellen’s Griffin Industries stock, because they had no fiduciary duties to
Plaintiffs with respect to their administration of their mother’s estate. When Rosellen died in
1985, her estate plan specified that her stock would pass to John, with the residue of her estate
going to her trust. John disclaimed his interest in Rosellen’s stock, which meant that under
Rosellen’s will, her stock was supposed to flow first into her trust, and then to her children
equally. Instead of following Rosellen’s wishes, Dennis and Griffy, the executors of her estate,
sold the stock to themselves at an allegedly reduced price, and distributed the sale proceeds to
Rosellen’s trust. This was a classic case of improper self-dealing, which unquestionably violated
Defendants’ fiduciary duties to Rosellen’s estate and her trust. See, e.g., Hutchings v. Louisville
Tr. Co., 276 S.W.2d 461, 464 (Ky. 1954) (“The law does not permit a person in a fiduciary
capacity to handle the beneficiary’s property so as to further his own ends.”).
Nevertheless, Defendants argue that only the trustee managing Rosellen’s trust (Star
Bank) had the right to sue to recover property owed to Rosellen’s trust, and not any of the trust’s
beneficiaries. In support of this argument, Defendants cite Forester v. Wener, 191 S.W. 884
(Ky. 1917), and Lovell v. Nelson, 29 Ky. 247 (1831).
Neither of these cases convincingly supports Defendants’ argument. In Forester, the
Kentucky Court of Appeals briefly stated in dicta that the plaintiff beneficiary “would have no
standing in this suit to recover any part of [the property allegedly owed to the trust], because her
interest . . . is devised to trustees, and they, and not she, would be the ones to sue to recover on
it.” 191 S.W. at 885. In the very next sentence, however, the court stated that “[h]aving
determined that the [defendant] owns the income individually and not as trustee for her children,
it becomes unnecessary to consider the duties of trustees or the rights of cestui que trusts
discussed by counsel for plaintiff in his brief.” Id. (emphasis added). There is much danger in
Nos. 16-6221/6225/6226/6227 Osborn, et al. v. Griffin, et al. Page 30
drawing a sweeping rule from dicta in a century-old case where the court makes clear that it has
not fully considered the opposing party’s arguments.
Moreover, Lovell is not on point at all. In that case, the trustee conveyed a piece of real
property to a third party, and gave the third party the right to sell the land under certain
conditions. 29 Ky. at 247. In the contract with the third party, the trustee promised to
compensate the trust beneficiary if any of the land was sold. Id. The trust beneficiary sued when
the third party sold some of the land, claiming that the trustee had breached the contract with the
third party. Id. The court held that the beneficiary could not sue to enforce the contract because
it was not a party to it, and not because of any principles of trust law. Id. Even the court’s
limited contract holding in Lovell has likely been superseded by the modern law of third party
beneficiaries. See Ping v. Beverly Enters., Inc., 376 S.W.3d 581, 595–96 (Ky. 2012).
Instead, the correct rule is set out in the Second Restatement of Trusts. That treatise
states that a trust beneficiary may maintain a suit in equity against a third party for property
improperly diverted from the trust if: (i) “the trustee improperly refuses or neglects to bring an
action against the third person;” or (ii) “there is no trustee.” Restatement (Second) of Trusts
§ 282(2)–(3) (1959).
Both of these conditions are met in this case. Unquestionably, Defendants breached their
fiduciary duties to Rosellen’s trust by violating Rosellen’s will and engaging in a self-dealing
transaction to acquire her Griffin Industries stock. The trustee should have brought suit to force
Defendants to convey the shares to the trust, but neglected to do so. This omission authorized
Plaintiffs, as the trust’s beneficiaries, to sue in equity for the property owed to the trust. Id.
§ 282(2). Moreover, the record contains an affidavit from Star Bank stating its belief that the
trust was dissolved, and its duties were terminated, when all trust property was distributed in
1989. (R. 430-13, PageID #19502.) Therefore, there was no trustee anymore to sue on behalf of
the trust, and Plaintiffs were therefore authorized to bring suit themselves. Restatement (Second)
of Trusts § 282(3).
We have located no Kentucky case squarely addressing a beneficiary’s right to sue when
the trustee fails to remedy a breach of fiduciary duties. Nevertheless, we believe that the
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Kentucky Supreme Court would adopt § 282 of the Second Restatement, because that court has
cited the Second Restatement numerous times in articulating principles of Kentucky trust law.
See, e.g., Cummings v. Pitman, 239 S.W.3d 77, 81 n.2 (Ky. 2007), overruled on other grounds
by Caesar’s Riverboat Casino, LLC v. Beach, 336 S.W.3d 51 (Ky. 2011); Hoheimer v.
Hoheimer, 30 S.W.3d 176, 179 (Ky. 2000); Rakhman v. Zusstone, 957 S.W.2d 241, 244 (Ky.
1997); First Ky. Tr. Co. v. Christian, 849 S.W.2d 534, 538 (Ky. 1993); Phillips v. Lowe,
639 S.W.2d 782, 783–84 (Ky. 1982); Eitel v. John N. Norton Mem. Infirmary, 441 S.W.2d 438,
442 (Ky. 1969). Accordingly, we hold that Plaintiffs had the right to bring suit on the harm they
suffered from Defendants’ failure to convey Rosellen’s stock to her trust.
As a last-ditch argument, Defendants assert that they could not have breached their
fiduciary duties to Rosellen’s estate or her trust (and by extension, to Plaintiffs), because
Kentucky law explicitly authorizes an executor to sell estate assets unless “distribution in kind
has been demanded prior to the sale by the . . . beneficiary entitled to such distribution in kind.”
Ky. Rev. Stat. § 395.200(3). Defendants further point out that Plaintiffs never demanded
distribution in kind at the time of Rosellen’s death. This is all true enough—but while Kentucky
law might authorize executors to sell the decedent’s property in some circumstances, it most
certainly does not authorize executors or other fiduciaries to engage in self-dealing. Hutchings,
276 S.W.2d at 464. And moreover, as the district court noted, Plaintiffs never had a fair
opportunity to demand distribution in kind because Defendants hid their illicit stock transactions
and failed to inform Plaintiffs of their machinations.
In Lucas v. Mannering, the Kentucky Court of Appeals held that Kentucky law does not
invest executors “with the unqualified authority to sell” the estate’s property. 745 S.W.2d 654,
656 (Ky. Ct. App. 1987).
An executrix is a fiduciary. KRS 395.001. More accurately, an executrix is a
trustee, and funds of the estate in her hands are trust funds. Carpenter v. Planck,
304 Ky. 644, 201 S.W.2d 908 (1947); 31 Am.Jur.2d Executors and
Administrators Section 2 (1967). The executrix represents the testatrix and to a
very great extent, the heirs, legatees or distributees, for whose benefit probate
proceedings are had. 33 C.J.S. Executors and Administrators Section 142 (1942).
See Carpenter, supra.
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Id. In that case, the court held that the executrix violated her fiduciary duties by selling a piece
of real property rather than conveying it in kind to the beneficiaries, even though the
beneficiaries had never made a demand for in-kind transfer, because the record reflected “the
beneficiaries’ desire to take the property in-kind rather than the proceeds from a sale of it.” Id.
These same principles apply here. Once Plaintiffs found out about the 1986 stock
transactions, they immediately wanted the stock itself rather than the sale proceeds Defendants
gave the trust after their self-dealing transaction. Under these circumstances, we predict that
Kentucky law would not shield Defendants’ conduct.
3. Liability for Sales of Craig Protein Stock and Martom Real Estate
Defendants next argue that there was a genuine dispute of material fact as to whether they
breached their fiduciary duties with respect to the sales of Craig Protein Stock and Martom
Properties real estate. Defendants do not contest that those transactions were self-dealing, but
argue that summary judgment was inappropriate because they introduced expert evidence
suggesting that the sales were ultimately good for Plaintiffs.
As Plaintiffs rightly note, this argument deserves very little comment. Fiduciaries are
prohibited from clandestine self-dealing, period. Hutchings, 276 S.W.2d at 464; see also
Restatement (Second) of Trusts § 170(1) (“The trustee is under a duty to the beneficiary to
administer the trust solely in the interests of the beneficiary.”). Under this rule, “if the trustee
attempts to acquire an interest in the trust property without the consent of the beneficiary, the
beneficiary can avoid the transaction even though the transaction was fair.” Restatement
(Second) of Trusts § 170 cmt. w (emphasis added).
Moreover, as Plaintiffs point out, Defendants’ transactions were most certainly not fair.
The evidence in the record shows that the Craig Protein stock was substantially undervalued
when Defendants arranged for its sale. Marty and Tommy each separately bought 500 shares of
the Craig Protein stock from their brothers at $332,500. They were ultimately allowed to trade
those shares for Griffin Industries stock that returned $30,414,000 in distributions, a sizable
return on investment. Plaintiffs were never offered this opportunity because Defendants only
wanted their brothers to profit from the stock. In short, the evidence shows that Plaintiffs lost
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millions of dollars in economic value because of Defendants’ inexplicable desire to exclude their
sisters from the siblings’ inheritance. We therefore affirm the district court’s grant of summary
judgment as to Plaintiffs’ claims regarding the Craig Protein stock and Martom real estate sales.
4. Martom’s Liability
Separate from the other Defendants, Martom offers two arguments for why it cannot be
liable for Dennis and Griffy’s breaches of fiduciary duties with respect to the 1995 real estate
transactions. Specifically, Martom argues that: (i) it owed no fiduciary duties to Plaintiffs, and
did not participate in Dennis and Griffy’s wrongdoing; and (ii) even if it did, it acquired the
properties through adverse possession.
We reject these arguments as well. First, under Kentucky Law, where “one purchases
land from an executor as such, he is bound to know whether or not the latter is authorized by the
will to make the sale, and if the executor has no such power the purchaser is not an innocent or
bona fide purchaser.” Buckner v. Buckner, 215 S.W. 420, 425 (Ky. 1919) (citation omitted);
Baker v. Pierce, 812 F.2d 1406, 1987 WL 36585, at *4 (6th Cir. 1987) (unpublished table
disposition) (same).
This is consistent with the common law of trusts. As the Supreme Court has explained:
Whenever the legal title to property is obtained through means or under
circumstances ‘which render it unconscientious for the holder of the legal title to
retain and enjoy the beneficial interest, equity impresses a constructive trust on
the property thus acquired in favor of the one who is truly and equitably entitled
to the same, although he may never, perhaps, have had any legal estate therein;
and a court of equity has jurisdiction to reach the property, either in the hands of
the original wrong-doer, or in the hands of any subsequent holder, until a
purchaser of it in good faith and without notice acquires a higher right, and takes
the property relieved from the trust.’
Moore v. Crawford, 130 U.S. 122, 128 (1889) (quoting 2 J. Pomeroy, Equity Jurisprudence
§ 1053, at 628–629 (1886)).
“Importantly, that a transferee was not ‘the original wrongdoer’ does not insulate him
from liability[.]” Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 251
(2000). Instead, “it has long been settled that when a trustee in breach of his fiduciary duty to
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the beneficiaries transfers trust property to a third person, the third person takes the property
subject to the trust, unless he has purchased the property for value and without notice of the
fiduciary's breach of duty. The trustee or beneficiaries may then maintain an action for
restitution of the property (if not already disposed of) or disgorgement of proceeds (if already
disposed of), and disgorgement of the third person's profits derived therefrom.” Id. at 250.
In the instant case, the district court found that: (i) Dennis and Griffy created Martom so
that they could acquire the real estate in John’s estate while skirting the law against self-dealing
transactions by executors; (ii) the Griffin Industries board agreed to the creation of Martom;
(iii) Martom was run entirely by Griffin Industries personnel; (iv) Marty and Tommy knew that
Martom was being formed as a vehicle to purchase their father’s real estate for Griffin
Industries’ use; and (v) through “their positions and ownership of Griffin Industries, Dennis and
Griffy controlled Martom from its formation to 2010.” (R. 856, ¶ 139.) The district court
therefore found that Martom—which was essentially controlled by Dennis and Griffy—was not a
bona fide purchaser for value, because it knew (as Dennis and Griffy did) that the real estate it
bought from John’s estate was being improperly conveyed. Osborn, 50 F. Supp. 3d at 802.
Defendants have offered no convincing reason why these detailed factual findings should be
ignored, and we can think of none. Accordingly, we reject Martom’s argument that it cannot be
subjected to transferee liability for Dennis and Griffy’s improper real estate transactions. Harris
Tr., 530 U.S. at 250; Buckner, 215 S.W. at 425.
Second, Martom cannot establish that it acquired adverse possession of disputed
properties under Kentucky law. One of the requirements for adverse possession is that the
possessor makes “open and notorious” use of the property. Appalachian Regional Healthcare,
Inc. v. Royal Crown Bottling Co., Inc., 824 S.W.2d 878, 880 (Ky. 1992). “To be ‘open and
notorious’ the possession must be conspicuous and not secret, so that the legal title holder has
notice of the adverse use.” Id. The district court found that Plaintiffs did not have notice of
Martom’s possession of the properties until 2010, and that Dennis and Griffy covered up their
unlawful real estate transaction. Accordingly, we hold that Martom’s use of the properties was
not “open and notorious,” even assuming that adverse possession can be a defense to an
equitable disgorgement action.
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E. Laches
Our dissenting colleague argues that the district court should have invoked the doctrine of
laches to truncate Defendants’ liability for their illegal mid-1980s stock transactions as of
September 10, 1993—the date on which the Holt Plaintiffs arguably could have discovered
Defendants’ conduct through the exercise of reasonable diligence. See Post at 58–60 (citing
Taylor v. Commonwealth, 302 S.W.2d 583, 584 (Ky. Ct. App. 1957)). Thus, the dissent
proposes remanding to the district court to reconfigure the Holt Plaintiffs’ award, excluding any
profits or interest that accrued after September 10, 1993.
We note that although Defendants put forward and litigated a laches defense before the
district court, they have not raised or briefed that issue on appeal. Ordinarily, we limit our
consideration to the issues that the parties properly preserve and put before us. See, e.g., Powers
v. Hamilton Cty. Pub. Defender Comm’n, 501 F.3d 592, 610 (6th Cir. 2007) (“Courts generally
do not decide issues not raised by the parties.” (citation omitted)). However, because the dissent
has raised the laches issue, we will exercise our discretion to address the matter, even though the
issue has been waived.
Briefly stated, the doctrine of laches “serves to bar claims in circumstances where a party
engages in unreasonable delay to the prejudice of others rendering it inequitable to allow that
party to reverse a previous course of action.” Plaza Condominium Ass’n, Inc. v. Wellington
Corp., 920 S.W.2d 51, 54 (Ky. 1996). As the dissent correctly notes, laches may sometimes act
to limit a plaintiff’s recovery “where it appears that he could have informed himself of the facts
[giving rise to the defendant’s liability] by the exercise of reasonable diligence,” and thereby
prevented the accumulation over time of excessive monetary damages. Taylor, 302 S.W.2d at
584.6
However, because laches is an equitable defense, it is subject to the limitations imposed
by the doctrine of unclean hands. See, e.g., Precision Instrument Mfg. Co. v. Automotive
6
As it is unnecessary to the resolution of this case, we need not decide whether the equitable rule
announced in Security Trust would excuse a plaintiff’s laches when she is misled by a defendant with whom she
shares a confidential relationship, as it would excuse her failure to comply with the statute of limitations. See supra,
§ II.B.
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Maintenance Mach. Co., 324 U.S. 806, 814 (1945) (“[H]e who comes into equity must come
with clean hands.”); United States v. Weintraub, 613 F.2d 612, 619 (6th Cir. 1979) (“[L]aches is
an equitable defense and . . . it can certainly be raised only by one who comes into equity with
clean hands.”); see also Parker v. Parker, No. 2012–CA–000079–MR, 2013 WL 2359661, at *2
(Ky. Ct. App. May 31, 2013) (invoking the unclean hands doctrine to disallow a laches
defense).7 “Under the ‘unclean hands doctrine,’ a party is precluded from judicial relief if that
party ‘engaged in fraudulent, illegal, or unconscionable conduct’ in connection ‘with the matter
in litigation.’” Mullins v. Picklesimer, 317 S.W.3d 569, 577 (Ky. 2010) (quoting Suter v.
Mazyck, 226 S.W.3d 837, 843 (Ky. Ct. App. 2007)). “In a long and unbroken line of cases [the
Kentucky Supreme Court] has refused relief to one, who has created by his fraudulent acts the
situation from which he asks to be extricated.” Id. (quoting Asher v. Asher, 129 S.W.2d 552, 553
(Ky. 1939)). Because a “trial courts [sic] decision to invoke the equitable defense of the unclean
hands doctrine rests within its sound discretion,” id., we review a district court’s decision to
disallow an equitable claim or defense because of unclean hands for abuse of discretion.
Performance Unlimited, Inc. v. Questar Publishers, Inc., 52 F.3d 1373, 1383 (6th Cir. 1995).
In the proceedings below, the district court invoked the unclean hands doctrine and
disallowed Defendants’ laches defense because it found that Defendants repeatedly and
flagrantly violated their fiduciary duties with respect to the administration of their parents’ estate
plans, and continued these violations even after they were sued by Betsy for their wrongful
conduct. The district court thus concluded that Defendants’ “decades-long refusal to fulfill their
fiduciary duty to deal fairly and openly with their sisters, and to see that the sisters received the
property left to them by their parents” should prevent “them from asserting any defense that
sounds in equity.” (R. 856, ¶ 219.) As we have already affirmed the district court’s findings and
legal conclusions with respect to Defendants’ liability, we cannot say that the district court
abused its discretion in determining that Defendants had unclean hands. This conclusion must
necessarily end the matter, because a defendant’s intentional wrongful conduct “is a dispositive,
7
Although the unclean hands doctrine “is typically employed by a defendant against a plaintiff who seeks
equitable relief, . . . it applies equally to a defendant who seeks equitable relief from the chancellor.” Weintraub,
613 F.2d at 619 n.22. “While it is not normally employed against a defendant merely brought to court by the suit of
another, insofar as [a defendant] seeks to invoke the powers of the [court] to bar [a plaintiff’s] claim due to laches,”
the unclean hands doctrine can foreclose the defendant’s laches argument. Id.
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threshold inquiry that bars further consideration of the laches defense . . . .” Hermes Int’l v.
Lederer de Paris Fifth Ave., Inc., 219 F.3d 104, 107 (2d Cir. 2000). We therefore decline our
dissenting colleague’s invitation to invoke laches to limit the Holt Plaintiffs’ recovery.
III. Challenges to the District Court’s Remedy
A. Daubert Challenge
1. Standard of Review
We review the district court’s decision to admit expert testimony for abuse of discretion.
See, e.g., Tamraz v. Lincoln Elec. Co., 60 F.3d 665, 668 (6th Cir. 2010). “A district court abuses
its discretion if it bases its ruling on an erroneous view of the law or a clearly erroneous
assessment of the evidence.” United States v. LaVictor, 848 F.3d 428, 440 (6th Cir. 2017)
(quoting Best v. Lowe’s Home Ctrs., Inc., 563 F.3d 171, 176 (6th Cir. 2009)). “For expert
testimony to be admissible, the court must find the expert to be: (1) qualified; (2) her testimony
to be relevant; and (3) her testimony to be reliable.” Id. at 441.
“This Court reviews a district court’s decision on disgorgement for abuse of discretion.”
S.E.C. v. Johnston, 143 F.3d 260, 262 (6th Cir. 1998), overruled on other grounds by Raymond
B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1 (2004); United States v.
Universal Mgmt. Servs., Inc., Corp., 191 F.3d 750, 762–63 (6th Cir. 1999) (“We review an
award of restitution for an abuse of discretion.”); United States v. Ford, 64 F. App’x 976, 983
(6th Cir. 2003); see also Rochow v. Life Ins. Co. of N. Am., 737 F.3d 415, 427 (6th Cir. 2013)
(explaining this Circuit’s case law regarding review of equitable disgorgement awards), vac. for
reh’g & overruled on other grounds 780 F.3d 364 (6th Cir. 2015) (en banc). “An appellate court
reviewing damages may adjust and/or correct the [trier of fact’s] award based on clear error in
calculation and based on the actual claims submitted to the [trier of fact] in closing argument.”
Arthur S. Landenderfer, Inc. v. S.E. Johnson Co., 917 F.2d 1413, 1444 (6th Cir. 1990).
2. Analysis
An equitable disgorgement award seeks to deprive the wrongdoer of his ill-gotten profits.
Universal Mgmt. Servs., 191 F.3d at 763. The district court calculated Defendants’ ill-gotten
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profits by accepting the testimony of Plaintiffs’ sole damages expert, accountant John E. Chilton.
Defendants argue that the district court should not have qualified Chilton as an expert because
his methodology was fundamentally unreliable. In particular, Defendants argue that Chilton
improperly: (i) failed to reduce Plaintiffs’ award by the amount of taxes they would have paid if
Defendants had not wrongfully deprived them of their Griffin Industries stock; (ii) manipulated
key assumptions in his analysis to maximize Plaintiffs’ award; and (iii) included sums in the
award that were not kept by Defendants, but were actually paid to innocent third parties.
After thoroughly reviewing the record and the relevant law, we conclude that none of
Defendants’ arguments establish that the district court abused its discretion in either admitting or
relying upon Chilton’s testimony.
First, Defendants and the dissent argue that Chilton should have taken into account the
unique tax structure of a Subchapter S-corporation in calculating Defendants’ profits. See Post at
61–62. Griffin Industries was an S-corporation. An S-corporation’s income taxes are paid
directly by its individual shareholders. See Maloof v. C.I.R., 456 F.3d 645, 647 (6th Cir. 2006).
Thus, an S-corporation typically distributes enough cash to its shareholders each year to pay the
taxes they owe on the S-Corporation’s earnings. Id. In calculating Defendants’ ill-gotten profits,
Chilton took into account all of the money Defendants received in disbursements from Griffin
Industries, and assessed the portion of the disbursements Plaintiffs would have received if
Defendants had not wrongfully deprived them of their shares. Defendants argue that this was
error because Defendants were required to pay most (if not all) of their disbursements to the IRS
in taxes. Defendants argue instead that Chilton should have reduced the monetary award by the
taxes Plaintiffs would have owed if they had owned the Griffin Industries shares all along.
We are not persuaded. The “general rule” is that the plaintiff’s recovery “should not be
reduced by the amount of money” saved in tax consequences avoided or incurred as a result of
the defendant’s wrongful conduct. See Burdett v. Miller, 957 F.2d 1375, 1383 (7th Cir. 1992)
(collecting cases); see also Fleischhauer v. Feltner, 879 F.2d 1290, 1301 (6th Cir. 1989)
(rejecting defendant’s argument that the plaintiff’s recovery “should be reduced by the amount of
tax benefits plaintiffs received”). In Burdett, similarly to this case, the defendant argued that the
plaintiff’s “damages for . . . breach of fiduciary duty” should “be reduced by the amount of
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money that [the plaintiff] was able to save by deducting the loss of her investment from her
income on her tax returns.” 957 F.2d at 1382–83. The Seventh Circuit rejected this argument.
Judge Posner explained the rationale behind the rule as follows:
Suppose, to take a simpler case, that [the defendant] had tortiously destroyed [the
plaintiff’s] Ming vase worth $10,000 and [the plaintiff] had deducted this amount
as a casualty loss on her federal income tax return, garnering a tax saving of
$3,000. [The defendant] could not in the ensuing tort suit deduct the $3,000 from
the damages due [the plaintiff]. The tort caused a harm of $10,000, and the fact
that the plaintiff was able to lay off a part of the harm on someone else—the
taxpayer—is not a good reason to cut down the tortfeasor’s damages. It is true
that the result is a windfall to the plaintiff, but this is better than an equivalent
windfall to the tortfeasor . . . . [T]he only important point here is that the tax
treatment of the damages award is irrelevant to the defendant’s liability; it is a
matter between the plaintiff and the government.
Id. at 1383 (emphasis added).
In Fleischhauer, this Court adopted a similar rationale to prevent the defendant from
reducing his liability “by the amount of tax benefits [the] plaintiffs received.” 879 F.2d at 1300.
The court reasoned that equitable remedies seek “deterrence, therefore, denying defendants the
benefit of offsetting tax benefits generated by their illegal [activity] is an appropriate result.” Id.
at 1301.
The same reasoning is applicable to this case. Defendants wrongfully deprived their
sisters of a sizable inheritance. The purpose behind an equitable disgorgement award is to
deprive wrongdoers of the fruits of their tortious conduct, not to compensate the victim.
Cavanagh, 445 F.3d at 117. That purpose is served by forcing Defendants to disgorge all of cash
and assets they received through breaching their fiduciary duties. Id.; Fleischhauer, 879 F.2d at
1301. The fact that Plaintiffs would have had to pay taxes on the property they were entitled to
is irrelevant. Any tax consequences for Plaintiffs’ award “is a matter between [Plaintiffs] and the
government.” Burdett, 957 F.2d at 1383.
The dissent separately argues that Chilton’s failure to factor in the taxes Plaintiffs would
have owed on their Griffin Industries disbursements in calculating Plaintiffs’ award violated
Kentucky’s rule that “[d]amages are not recoverable for loss beyond an amount that the evidence
permits to be established with reasonable certainty.” Post at 61 (quoting Pauline’s Chicken
Nos. 16-6221/6225/6226/6227 Osborn, et al. v. Griffin, et al. Page 40
Villa, Inc. v. KFC Corp., 701 S.W.2d 399, 401 (Ky. 1985)). However, as the dissent
acknowledges, this rule applies to awards of compensatory damages because those “damages are
designed ‘[t]o restore the party injured, as near as may be, to his former position.’” Id. (quoting
Hughett v. Caldwell Cty., 230 S.W.2d 92, 96 (Ky. 1950), abrogated on other grounds by Harrod
Concrete & Stone Co. v. Crutcher, 458 S.W.3d 290 (Ky. 2015)).8 No such legal damages were
awarded here; as we have explained, the district court ordered Defendants to disgorge their ill-
gotten profits in order to prevent them from benefitting from their fiduciary duty violations.
Because the district court’s equitable award was not tied to the Holt Plaintiffs’ losses, but rather
Defendants’ gains, the reasonable certainty principle was not violated. Accordingly, we hold
that it was not erroneous for Chilton (and the district court) to calculate the award without
reference to tax consequences.
Second, Defendants argue that Chilton made certain improper and inconsistent
assumptions that greatly increased his award calculations. Specifically, in calculating
Defendants’ illicit profits from the stock transactions that concentrated Griffin Industries stock in
Defendants’ hands, Chilton applied John’s estate plan as it existed in 1986, which called for the
stock to be divided equally among his eleven children. Subsequently, in calculating the profits
from the later sales of Craig Protein stock and Martom real estate, Chilton reasoned that
Plaintiffs were each entitled to one-fifth of those proceeds, because John’s Sixth Codicil and
Fourth Amendment called for such profits to be split equally among his five daughters.
Defendants argue that Chilton (and the district court) cannot have it both ways; either: (i) the
Sixth Codicil and Fourth Amendments are valid, in which case Plaintiffs cannot recover anything
at all from the 1986 Griffin Industries stock transactions, but are entitled to one-fifth of the
proceeds from the Craig Protein stock and Martom real estate sales; or (ii) the Sixth Codicil and
Fourth Amendments are invalid, in which case John’s pre-1985 estate plan should be given
effect, and each Plaintiff should only be able to recover one-eleventh shares of the property
Defendants deprived them of.
8
For example, Pauline’s Chicken concerned whether the plaintiff could recover lost profits in a breach of
contract action, 701 S.W.2d at 401, and Hughett addressed the proper way to compensate a trespass victim for the
value of lost minerals extracted from his property, 230 S.W.2d at 94. Neither of those cases addressed awards that
sounded in equity, as is the case here.
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We are not persuaded by Defendants’ argument, because it is based on a faulty premise.
Specifically, Defendants assume (consistent with their litigation position elsewhere) that the
district court invalidated the Fourth Amendment and Sixth Codicil because Defendants
manipulated their debilitated father into signing those estate changes. In fact, the court
invalidated neither change, because it lacked subject matter jurisdiction to disturb John’s estate
plan. Wisecarver, 489 F.3d at 751. Rather, the district court (and subsequently Chilton) gave
effect to John’s various estate plans by applying the plan terms in effect at the time Defendants
consummated each of their wrongful transactions. In this way, the district court and Chilton took
each transaction as a snapshot in time, and computed the assets that would have passed to
Plaintiffs under the then-existing estate plan if Defendants had fulfilled their fiduciary duties.
This procedure was not only proper, it was required, as the district court had no power to alter or
disregard John’s estate plan.
Finally, Defendants argue that Chilton should not have included in his disgorgement
calculation sums that Defendants wrongfully diverted from Plaintiffs, but that were ultimately
passed on to innocent third parties, such as Plaintiffs’ children. Defendants reason that since
disgorgement is meant to recoup Defendants’ illicit profits, they should not be required to pay
sums that they did not personally benefit from.
Like Defendants’ tax argument, which proceeds from a similar premise, this argument is
not supported by the law of equitable remedies. As the Second Circuit has recently explained:
As disgorgement is designed to equitably deprive those who have obtained ill-
gotten gains of enrichment, it may be imposed upon innocent third parties who
have received such ill-gotten funds and have no legitimate claim to them. [S.E.C.
v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998)], citing SEC v. Colello, 139 F.3d
674, 677 (9th Cir. 1998). That is consistent with disgorgement’s remedial
purpose—disgorgement is imposed not to punish, but to ensure illegal actions do
not yield unwarranted enrichment even to innocent parties.
However, unjust enrichment may also be prevented by requiring the violator to
disgorge the unjust enrichment he has procured for the third party. As our case
law has indicated (and as our opinion here confirms), when third parties have
benefitted from illegal activity, it is possible to seek disgorgement from the
violator, even if that violator never controlled the funds. The logic of this . . . is
that to fail to impose disgorgement on such violators would allow them to
unjustly enrich their affiliates. Thus, ordering a violator to disgorge gain the
Nos. 16-6221/6225/6226/6227 Osborn, et al. v. Griffin, et al. Page 42
violator never possessed does not operate to magnify penalties or offer an
alternative to fines, but serves disgorgement’s core remedial function of
preventing unjust enrichment. District courts possess the equitable discretion to
determine whether disgorgement liability should fall upon third parties or
violators, a responsibility concordant with the district courts’ broad discretion to
assay disgorgement more generally.
S.E.C. v. Contorinis, 743 F.3d 296, 306–07 (2d Cir. 2014) (emphasis added).
In sum, it does not matter that Defendants gave Plaintiffs’ property to innocent third
parties; the property was not Defendants’ to dispose of. When tortfeasors unjustly enrich
themselves, courts may force them to disgorge all of their ill-gotten gains. Cavanagh, 445 F.3d
at 117. It makes no difference that Defendants have transferred the assets to innocent third
parties, just as it would make no difference if Defendants gave the assets to charity. The district
court (and by extension, Chilton) was well within its considerable discretion to order
disgorgement of these sums.
B. Burden of Proof
Defendants argue that the district court improperly shifted the burden of proof away from
Plaintiffs in calculating the appropriate disgorgement sum. Defendants argue that Chilton’s
flawed testimony was insufficient to carry Plaintiffs’ burden to establish entitlement to a remedy,
and that the district court should not have faulted them for failing to put on their own damages
expert.
This argument is premised on Defendants’ prior arguments that Chilton’s testimony was
an insufficient basis to support the district court’s equitable award. Because we reject
Defendants’ other attacks on Chilton, we reject this argument as well.
C. Prejudgment Interest
1. Standard of Review
The district court’s decision to award prejudgment interest was governed by Kentucky
law, and we review that decision for abuse of discretion. Poundstone v. Patriot Coal Co., Ltd.,
485 F.3d 891, 901 (6th Cir. 2007).
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2. Analysis
Defendants next argue that the district court erred in calculating and imposing
prejudgment interest. We disagree.
“Under Kentucky law, if the claim is liquidated, interest follows as a matter of right, but
if it is unliquidated, the allowance of interest is in the discretion of the trial court.” Hale v. Life
Ins. Co., 795 F.2d 22, 24 (6th Cir. 1986). The Kentucky Supreme Court has recently explained
that:
A damages claim is liquidated if it is “of such a nature that the amount is capable
of ascertainment by mere computation, can be established with reasonable
certainty, can be ascertained in accordance with fixed rules of evidence and
known standards of value, or can be determined by reference to well-established
market values.” [3D Enters. Contracting Corp. v. Louisville & Jefferson Cty.
Metro. Sewer Dist., 174 S.W.3d 440, 450 (Ky. 2005)] (citation omitted).
Examples include “a bill or note past due, an amount due on an open account, or
an unpaid fixed contract price.” [Nucor Corp. v. General Elec. Co., 812 S.W.2d
136, 141 (Ky. 1991)]. In contrast, an unliquidated damages claim is one which
has “not been determined or calculated, . . . not yet reduced to a certainty in
respect to amount.” Id. (citations omitted). An unliquidated claim is unspecified
and undetermined prior to a breach. In determining whether a claim is liquidated
or unliquidated, “one must look at the nature of the underlying claim, not the final
award.” 3D Enterprises, 174 S.W.3d at 450.
Ford Contracting, Inc. v. Ky. Transp. Cabinet, 429 S.W.3d 397, 414 (Ky. 2014). In general,
“[d]amages that were established by proof offered during the trial are unliquidated and not
subject to prejudgment interest.” Id. (quoting Jackson v. Tullar, 285 S.W.3d 290, 299 (Ky. Ct.
App. 2007)).
If the trial court determines that the plaintiff’s damages are liquidated, it must award
“interest at the legal rate of eight percent (8%) per annum.” Pursley v. Pursley, 144 S.W.3d 820,
828 (Ky. 2004). If the damages are unliquidated, “the trial court may award prejudgment interest
at any rate up to 8%, or it may choose to award no prejudgment interest at all, but it may not
exceed the legal rate of 8%.” Fields v. Fields, 58 S.W.3d 464, 467 (Ky. 2001). Although
“Kentucky courts rarely award prejudgment interest on unliquidated claims on equitable
grounds,” Ky. Commercial Mobile Radio Serv. Emergency Telecomms. Bd. v. TracFone
Wireless, Inc., 712 F.3d 905, 917 (6th Cir. 2013), such awards are more frequently appropriate in
Nos. 16-6221/6225/6226/6227 Osborn, et al. v. Griffin, et al. Page 44
cases where there are “allegations of bad faith.” See Journey Acquisition-II, L.P. v. EQT
Production Co., 830 F.3d 444, 462 (6th Cir. 2016) (discussing authority).
In the instant case, the district court determined that Plaintiffs’ disgorgement claims were
liquidated, and imposed prejudgment interest at 8% compounded annually. In the alternative, the
district court stated that it would have imposed the same interest award even if the claims were
unliquidated.
Plaintiffs argue that their claims were liquidated because every time Defendants
undertook one of the disputed transactions, they knew the portion of the proceeds that were
supposed to pass to Plaintiffs under John’s estate plan, and therefore the claims were reasonably
certain. However, Plaintiffs’ disgorgement claims are far afield from “a bill or note past due, an
amount due on an open account, or an unpaid fixed contract price”—the examples the Kentucky
Supreme Court has given of liquidated damages. See Nucor Corp., 812 S.W.2d at 141. Indeed,
Plaintiffs were only able to establish entitlement to their claims by providing expert testimony at
trial, a strong indication that the claims were not for liquidated sums. Ford Contracting,
429 S.W.3d at 414. We therefore hold that Plaintiffs’ claims were unliquidated.
Accordingly, we must determine whether the district court abused its discretion in
electing to award prejudgment interest on Plaintiffs’ unliquidated claims. Poundstone, 485 F.3d
at 901. Kentucky law explicitly authorized the district court to award interest at up to 8%,
Fields, 58 S.W.3d at 467, and to compound the interest annually. See Travelers Property Cas.
Co. of Am. v. Hillerich & Bradsby Co., Inc., 598 F.3d 257, 275 (6th Cir. 2010) (“Under
Kentucky law, courts have discretion to award either simple or compound prejudgment interest,
though the default is simple interest. Principles of equity are used in order to determine whether
compound interest is appropriate in a particular case, which might include unreasonable delay.”
(citation omitted)). Nevertheless, Defendants argue that the prejudgment interest award was
needlessly punitive because of its size (almost as much as the principal), and because the district
court did not appreciate its discretion to depart downward from 8%.
We disagree. The record shows that the district court gave thoughtful consideration to
the unique equities of this case in formulating its interest award. We will quote the district
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court’s analysis in full because the district court provided a succinct, but powerful summary of
what transpired here:
Before this Court is an extraordinary case, spanning decades, in which defendants
repeatedly and flagrantly violated the fiduciary duties they owed to their sisters,
who reposed great trust in their brothers.
There can be no question that prejudgment interest results in a large — very large
— recovery. But, as plaintiffs point out, this is a function of the passage of many
years since the breaches in question, during which time defendants misled their
sisters about the propriety of their actions. But for an errant mailing in 2010,
plaintiffs perhaps would never have discovered the wrongs done to them by their
brothers. It would [be] inequitable not to compensate plaintiffs for the loss of use
of millions of dollars for much of their adult lives.
(R. 1131, PageID #37716 (emphasis added).)9
Under Kentucky law, “equity and justice serve as the foundation upon which an award of
prejudgment interest rests.” Ford Contracting, 429 S.W.3d at 414. Defendants’ conduct in
manipulating their stroke-impaired father and depriving their sisters of an enormous inheritance
was highly unjust and inequitable—far more so than that of a run-of-the-mill tortfeasor. The
district court did not abuse its discretion in imposing the largest interest award permissible under
Kentucky law.
The dissent offers two arguments for reaching the opposite conclusion. First, the dissent
argues that Plaintiffs’ “damages were not ‘ascertainable’ until 2010, when the sisters filed their
claims in the district court,” and thus no prejudgment interest was permissible for any period
prior to the filing of these lawsuits.10 Post at 63 (citing Tri-State Developers, Inc. v. Moore,
343 S.W.2d 812, 817 (Ky. 1961)).
This view of the law is outdated. The rule at common law was “that prejudgment interest
[was] not awarded on unliquidated claims[.]” City of Milwaukee v. Cement Div., Nat’l Gypsum
9
One additional point bears mentioning. The district court was correct that the size of the prejudgment
interest award, which the dissent regards as noteworthy, is mostly a function of the number of years that passed
between Defendants’ conduct and the district court’s judgment. At 8% compounded annually, the interest will
always accrue rapidly. We have uncovered no Kentucky authority suggesting that tortfeasors may use wrongfully
acquired profits interest-free if they can hide their wrongdoing for many years before suit is brought.
10
Defendants failed to raise this argument in their briefing before us, and it is thus waived. We address the
dissent’s arguments for the sake of thoroughness, and not to excuse Defendants’ waiver.
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Co., 515 U.S. 189, 197 (1995). “The rationale underlying the distinction between liquidated or
reasonably ascertainable damages and unliquidated damages [was] that the defendant should not
have to pay interest when he is unable to halt the accrual of interest by paying the damages—
damages which, if unliquidated, cannot be determined prior to judgment.” Anthony E.
Rothschild, Prejudgment Interest: Survey and Suggestion, 77 Nw. U. L. Rev. 192, 197 (1982);
see also Post at 63 (making the same argument). Over time, this view of prejudgment interest
faced “trenchant criticism,” City of Milwaukee, 515 U.S. at 197, as courts and commentators
began to realize that the “distinction . . . between cases of liquidated and unliquidated damages[]
is not a sound one.” Funkhouser v. J.B. Preston Co., 290 U.S. 163, 168 (1933) (footnote
omitted); see also Dalton v. Mullins, 293 S.W.2d 470, 477 (Ky. Ct. App. 1956) (“We are not so
much disturbed as to whether the claim is liquidated or unliquidated as we are, in accordance
with the popular trend, as to whether justice and equity demand an allowance of interest to the
injured party.”). As the Supreme Court long ago explained, whether the harms are liquidated or
unliquidated, “the injured party has suffered a loss which may be regarded as not fully
compensated if he is confined to the amount found to be recoverable as of the time of [the harm]
and nothing is added for the delay in obtaining the award of damages.” Funkhouser, 290 U.S. at
168. Thus most modern courts will permit prejudgment interest on unliquidated claims—even
though, by definition, those claims were not “ascertainable” at the time of the harm—“when the
period of time between the harm and the judgment is long or when there are other circumstances
that would make it unjust not to give interest.” See Restatement (Second) of Torts § 913 cmt (1)
(1979).
Kentucky follows the modern trend and permits prejudgment interest on unliquidated
claims in an “amount” to be determined by “the trial court weighing the equitable
considerations.” Univ. of Louisville v. RAM Eng’g & Constr., Inc., 199 S.W.3d 746, 748 (Ky.
2005). In tort cases alleging “harms to pecuniary interests,” the Kentucky Supreme Court has
held that prejudgment interest, if any, runs “from the time of the accrual of the cause of action to
the time of judgment, if the payment of interest is required to avoid an injustice.” Nucor Corp.,
812 S.W.2d at 143 (quoting Restatement (Second) of Torts § 913(1)(b)). Thus, the dissent’s
argument that the district court lacked any discretion to award prejudgment interest prior to the
commencement of this lawsuit simply does not reflect the modern state of Kentucky law.
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Rather, the only question before us is whether the district court appropriately weighed the
equities of this case in deciding whether to award prejudgment interest. Id. As explained earlier,
we cannot find fault with the district court’s equitable consideration in light of Defendants’
brazenly wrongful conduct towards their sisters.
The dissent’s second argument is that the district court’s prejudgment interest award
poses serious due process concerns because its size is disproportionately large compared to the
gravity of the harm given Plaintiffs’ failure to timely discover their tort claims. Post at 64–65.
Defendants have not advanced a due process theory in their briefing before us, and thus any due
process arguments are waived. See, e.g., Kuhn v. Washtenaw Cty., 709 F.3d 612, 624 (6th Cir.
2013) (“This court has consistently held that arguments not raised in a party’s opening brief . . .
are waived.”). It is particularly prudent to enforce this waiver in light of our general preference
for declining to pass on unsettled constitutional issues whenever there are alternative grounds
available to dispose of a case. See, e.g., Bond v. United States, 134 S. Ct. 2077, 2087 (2014)
(“[I]t is “a well-established principle governing the prudent exercise of this Court’s jurisdiction
that normally the Court will not decide a constitutional question if there is some other ground
upon which to dispose of the case.” (quoting Escambia Cty. v. McMillan, 466 U.S. 48, 51 (1984)
(per curiam))); Adams v. City of Battle Creek, 250 F.3d 980, 986 (6th Cir. 2001) (“Supreme
Court precedent makes it clear that courts should avoid unnecessary adjudication of
constitutional issues. Where a statutory or nonconstitutional basis exists for reaching a decision
. . . it is not necessary to reach the constitutional issue.” (citations omitted)).
In any event, we are skeptical of the dissent’s due process argument. The dissent
speculates that the district court imposed its prejudgment interest award in part as punishment for
Defendants’ wrongful conduct, and analogizes this case to decisions where the Supreme Court
has invalidated excessive punitive damages awards. See Post at 64–65. However, “[p]re-
judgment interest statutes have a long history, dating at least from 1859 in this country, and have
been held to serve the legitimate purpose of making whole an injured party.” Roy v. Star
Chopper Co., 584 F.2d 1124, 1136 (1st Cir. 1978) (citations omitted). Despite the concept’s
longevity, we are aware of no case that has invalidated a prejudgment interest award as
excessively large under the Fifth Amendment’s Due Process Clause.
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To the contrary, several courts have upheld prejudgment interest regimes against due
process challenges, see, e.g., Arbon Steel & Serv. Co., Inc. v. United States, 315 F.3d 1332, 1334
(Fed. Cir. 2003) (upholding prejudgment interest award under rational basis review); Reyes-Mata
v. IBP, Inc., 299 F.3d 504, 508 (5th Cir. 2002) (same); S.E.C. v. Lauer, 610 F. App’x 813, 820
(11th Cir. 2015) (“The award of prejudgment interest has nothing to do with . . . due process, and
cannot be the basis of a motion under Rule 60(b)(4).”), even though the rate of interest awarded
was significantly higher than the interest available in the general economy. See, e.g., Citibank,
N.A. v. Barclays Bank, PLC, 28 F. Supp. 3d 174, 184 (S.D.N.Y. 2013) (upholding New York’s
statutory interest rate of 9% and observing that even “though 9% is higher than market rates in
the current economy, there is no constitutional mandate that the statutory interest rate follow
market rates point for point”); Oden v. Schwartz, 71 A.3d 438, 457 (R.I. 2013) (upholding
12% interest award). The rationale for these cases is that prejudgment interest is not punitive,11
“but a recognition that, had the plaintiff recovered immediately, they would had the entire
amount of money to use as they pleased,” and that it is rational for legislatures and courts to
compensate plaintiffs for having been deprived of the use of their property. Reyes-Mata,
299 F.3d at 508. We see no compelling reason why the Due Process Clause should pose any
barrier to the interest awarded in this case.
IV. The Seventh Amendment
A. Standard of Review
“Whether a party is ‘entitled to a jury trial under the Seventh Amendment is a question of
law’ which we review de novo.” Entergy Ark., Inc. v. Nebraska, 358 F.3d 528, 540 (8th Cir.
2004) (quoting Kampa v. White Consol. Indus., 115 F.3d 585, 586 (8th Cir. 1997)); Pandazides
v. Va. Bd. of Educ., 13 F.3d 823, 827 (4th Cir. 1994).
11
As the Third Circuit has explained, to “the extent [a] defendant has had the free use of the income-
producing ability of [the] plaintiff’s money without having to pay for it, he has been unjustly enriched. To divest
him of this unjustified benefit is not to penalize him, for it has been determined by the trial that it was never
rightfully his.” Feather v. United Mine Workers, 711 F.2d 530, 540 (3d Cir. 1983).
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B. Analysis
Finally, Defendants argue that the district court should have conducted a jury trial rather
than a bench trial for two reasons: (i) Plaintiffs sought and obtained money damages, which is a
classic species of legal relief; and (ii) Defendants’ statute of limitations defense was legal in
nature, and the district court was required to hold a jury trial on that defense. Once again, we are
compelled to disagree.
The Constitution’s Seventh Amendment provides that “[i]n Suits at common law, where
the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved,
and no fact tried by a jury shall be otherwise re-examined in any Court of the United States, than
according to the rules of the common law.” U.S. Const. amend. VII. The Seventh Amendment’s
jury trial guarantee applies to “suits in which legal rights [are] to be ascertained and determined,
in contradistinction to those where equitable rights alone [are] recognized, and equitable
remedies [are] administered.” Curtis v. Loether, 415 U.S. 189, 193 (1974) (quoting Parsons v.
Bedford, 3 Pet. 433, 446–47 (1830) (emphasis in original)).
“Federal courts faced with a claim of entitlement to a jury trial thus must first
“compare the case at issue to ‘18th-century actions brought in the courts of
England prior to the merger of the courts of law and equity,’” Golden v. Kelsey–
Hayes Co., 73 F.3d 648, 659 (6th Cir. 1996) (citing Chauffeurs, Teamsters
& Helpers, Local No. 391 v. Terry, 494 U.S. 558, 565 (1990)), and then “examine
the remedy sought and determine whether it is legal or equitable in nature.” Id.
Wilson v. Big Sandy Health Care, Inc., 576 F.3d 329, 332 (6th Cir. 2009).
Applying this test, we hold that a jury trial was not required for Plaintiffs’ fiduciary duty
claims. The weight of authority holds that actions seeking disgorgement of ill-gotten gains are
equitable in nature. See, e.g., Chauffeurs, 494 U.S. at 570 (“[W]e have characterized damages as
equitable where they are restitutionary, such as in ‘action[s] for disgorgement of improper
profits[.]’” (quoting Tull v. United States, 481 U.S. 412, 424 (1987))); Fifty-Six Hope Road
Music, Ltd. v. A.V.E.L.A., Inc., 778 F.3d 1059, 1075 (9th Cir. 2015) (“[T]he current law
recognizes that actions for disgorgement of improper profits are equitable in nature.”);
Cavanagh, 445 F.3d at 119–20 (collecting authorities); Roberts v. Sears, Roebuck & Co.,
617 F.2d 460, 465 (7th Cir. 1980) (observing in dicta that “[r]estitution for the disgorgement of
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unjust enrichment is an equitable remedy with no right to a trial by jury”); S.E.C. v.
Commonwealth Chem. Sec., Inc., 574 F.2d 90, 95 (2d Cir. 1978) (Friendly, J.) (holding that there
is no Seventh Amendment right to a jury trial when a plaintiff seeks disgorgement because in a
disgorgement action, “the court is not awarding damages to which [a] plaintiff is legally entitled
but is exercising the chancellor’s discretion to prevent unjust enrichment”). This is because
disgorgement “is not available primarily to compensate victims,” but rather “forces a defendant
to account for all profits reaped through” his wrongful conduct, “even if it exceeds actual
damages to victims.” Cavanagh, 445 F.3d at 117 (footnote omitted). That a district court may
exercise its equitable discretion to use disgorged funds to compensate victims—as the lower
court did here—does not render such sums legal damages, because they are not awarded to the
victims as a matter of right. Id. (“Upon awarding disgorgement, a district court may exercise its
discretion to direct the money toward victim compensation . . . .”); see also S.E.C. v. First Pac.
Bancorp, 142 F.3d 1186, 1192 (9th Cir. 1998) (“The fact that the district court directed that the
disgorged funds be returned to the defrauded investors does not change the nature of the
remedy.”). Indeed, the Supreme Court has long rejected the argument that “any award of
monetary relief must necessarily be ‘legal’ relief.” Chauffeurs, 494 U.S. at 570 (quoting Curtis,
415 U.S. at 196).
In arguing that Plaintiffs’ fiduciary duty claims sought legal relief, Defendants cite
Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 214 (2002), where the Supreme
Court held that restitution is only an equitable remedy when the plaintiff does not seek “to
impose personal liability on the defendant, but to restore to the plaintiff particular funds or
property in the defendant’s possession.” But Knudson is inapposite. As used in modern
parlance, disgorgement and restitution are distinct remedies that serve different purposes. See
William Beaumont Hosp. v. Fed. Ins. Co., 552 F. App’x 494, 498 (6th Cir. 2014) (holding that
disgorgement and restitution were separate and distinct remedies in construing an insurance
contract). As the Fifth Circuit has explained:
[D]isgorgement is not precisely restitution. Disgorgement wrests ill-gotten gains
from the hands of a wrongdoer. It is an equitable remedy meant to prevent the
wrongdoer from enriching himself by his wrongs. Disgorgement does not seek to
compensate the victims of the wrongful acts, as restitution does. Thus, a
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disgorgement order might be for an amount more or less than that required to
make the victims whole. It is not restitution.
S.E.C. v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993) (citations omitted); see also Cavanagh,
445 F.3d at 117 (disgorgement’s “emphasis on public protection, as opposed to simple
compensatory relief, illustrates the equitable nature of the remedy”); S.E.C. v. Banner Fund Int’l,
211 F.3d 602, 617 (D.C. Cir. 2000) (holding that “disgorgement is an equitable obligation to
return a sum equal to the amount wrongfully obtained, rather than a requirement to replevy a
specific asset”). Accordingly, Knudson is not on point, and does not cast doubt on the wealth of
authority holding that disgorgement is an equitable remedy.
Moreover, Knudson itself recognized that the remedy of “accounting of profits” is an
“exception” to the general rule that for an action to be equitable, it “must seek not to impose
personal liability on the defendant, but to restore to the plaintiff particular funds or property in
the defendant’s possession.” 534 U.S. at 214 & n.2. The equitable disgorgement at issue in this
case is the modern analog of the “accounting of profits” remedy.
Defendants also quote Plaintiffs’ representations during the early stages of this litigation
that they were seeking money damages, and argue that these statements show that the district
court did not actually award equitable disgorgement. However, we think that the district court
accurately characterized the remedy at issue in this case as one for equitable disgorgement. (See
R. 856, ¶ 189 (“[S]ince the only remaining claim [is] the equitable claim for breach of fiduciary
duty, seeking the equitable remedy of disgorgement, there [is] no longer a right to trial by jury
that [can] be invoked by any party.” (citation and internal quotation marks omitted)).)
“Decisions about the characterization of the wrong usually are for the trier of fact, and questions
about the nature of the remedy are for the district court in the first instance.” First Nat’l Bank of
Waukesha v. Warren, 796 F.2d 999, 1001 (7th Cir. 1986) (Easterbrook, J.). The district court
was not required to accept Plaintiffs’ representations at any point during this litigation about the
nature of the remedy they sought, and acted well within its discretion in determining that
disgorgement of profits was an appropriate remedy for Defendants’ wrongful conduct.
Additionally, our understanding that an action seeking disgorgement of profits is
equitable in nature is confirmed by the historical treatment of that remedy prior to the enactment
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of the Seventh Amendment. The term “disgorgement” is relatively new to the law; in 18th
century chancery courts, what we now call disgorgement was embodied in the remedies of
“accounting, constructive trust, and restitution.” Cavanagh, 445 F.3d at 119. These remedies
were almost universally recognized as being within the ambit of courts of equity. We repeat the
Second Circuit’s detailed compilation of authorities to underscore this point:
Commentators have observed that courts of equity now have, and have had for
centuries, jurisdiction over claims arising from improper acquisition of assets.
Lord Coke wrote that “[t]hree things are to be judged in [the] Court of
Conscience: Covin, Accident, and breach of confidence.” 4 Edward Coke,
Institutes of the Laws of England 84 (London, M. Flesher 1644) (1797 ed.
reprinted 1986) (“The third is breach of trust and confidence, whereof you have
plentiful authorities in our books.”). Blackstone expressed a similar idea: “[I]t
hath been said, that fraud, accident, and trust are the proper and peculiar objects
of a court of equity.” 3 William Blackstone, Commentaries on the Laws of
England 431 (photo. reprint 1992) (1768). Although noting that the maxim
quoted oversimplified the overlapping jurisdictions of law and equity, Blackstone
wrote that a “technical trust indeed, created by the limitation of a second use, was
forced into a court of equity . . . [and] ha[s] ever since remained as a kind of
peculium in those courts.” Id. at 431-32; see also John Beames, The Elements of
Pleas in Equity 70 (New York, O. Halsted 1st Am. ed. 1824) (including
“[m]atters of trust and confidence” among subjects of equity jurisdiction); see
also Mertens v. Hewitt Assocs., 508 U.S. 248, 257 (1993) (considering distinction
between law and equity for purposes of interpreting Employee Retirement Income
Security Act of 1974 and noting that “all relief available for breach of trust could
be obtained from a court of equity”); Lessee of Smith v. McCann, 65 U.S. (24
How.) 398, 407 (1860) (indicating that in a state maintaining distinct courts of
law and equity, “the court of chancery . . . has the exclusive jurisdiction of trusts
and trust estates,” as it did in England).
Early writings on equity recognized the Chancellor’s power to compel
disgorgement of wrongly gained assets. See Joseph Story, Commentaries on
Equity Jurisprudence as Administered in England and America 423-504 (photo.
reprint 1972) (1835) (describing remedy of “account,” by which chancery ordered
an accounting of assets so that wrongly gained profits might be recovered); id. at
487-88 (equitable restitution in cases of fraud); id. at 490-91 (disgorgement of
profits upon waste); 2 John Fonblanque, A Treatise of Equity 168 (Philadelphia,
A. Small 2d Am. ed. 1820) (“[A] trustee must, especially in equity, make good
the trust.”); see also id. at 171 n. (b) (concluding that “breach of trust” is “a case
for the consideration of courts of equity”). Modern works on restitution trace the
remedy’s history to ancient cases in equity. See Restatement of the Law of
Restitution, Quasi Contracts and Constructive Trusts, Pt. I, at 5 (1937) (“Some of
the earliest bills in chancery were bills for restitution, such as bills for the
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recovery of property obtained by fraud ....”); see also 1 Dan B. Dobbs, Law of
Remedies § 4.3(1), at 587-89 (2d ed. 1993) (discussing equitable remedies of
constructive trust and accounting for profits). That the term “disgorgement” has
entered common legal parlance only recently cannot obscure that the ancient
remedies of accounting, constructive trust, and restitution have compelled
wrongdoers to “disgorge”-i.e., account for and surrender-their ill-gotten gains for
centuries. See United States ex rel. Taylor v. Gabelli, 2005 WL 2978921, at *5
(S.D.N.Y. Nov. 4, 2005) (describing disgorgement of profits from fraud as “a
‘classic’ restitutionary remedy inherently distinct from compensable damages”
awarded at law); Dobbs, ante, at 589 (noting that in cases of constructive trust, in
which remedy need not equal actual damages, “the effect can be to give the
plaintiff the gain a defendant makes from the sale of the plaintiff’s property and
any reinvestment of the funds”).
English equity courts compelled the repayment (in effect, “disgorgement”) of ill-
gotten gains in cases decided before our independence. For example, in Garth v.
Cotton, 27 Eng. Rep. 1182, 1196, 1 Ves. Sen. 524, 546 (Lord Chancellor’s Court
1753), contingent remaindermen sought relief in equity when a life tenant and
trustees conspired to defraud the remaindermen by selling timber from the
relevant estate and dividing the proceeds among themselves. The plaintiff
remainderman, who lacked a remedy at law for now-obscure reasons related to
English land law of the time, sought an order compelling the wrongdoers to give
him the proceeds of the asserted waste of the land’s assets. Id. Lord Chancellor
Hardwick obliged, holding that “a reconveyance is just” and ordering that the
proceeds of the timber sale, plus interest, go to benefit the estate. Id. at 1199; see
also Willoughby v. Willoughby, 99 Eng. Rep. 1366, 1 Term. Rep. 763 (Lord
Chancellor’s Court 1756) (ordering, at the request of a widow cheated of her
legacy by her eldest son’s collusion with a trustee and a banker, an accounting of
the estate’s assets, the sale of the estate, and payment to the widow and her other
children from the proceeds).
American courts also awarded equitable remedies similar to modern disgorgement
in cases decided around the time of our nation’s founding. For example, in
Cadwallader v. Mason, Virginia’s High Court of Chancery considered in 1793 the
case of a mortgagor who improperly retained possession of land after the
mortgage had been satisfied. George Wythe, Decisions of Cases in Virginia by
the High Court of Chancery 58 (1795), reprinted at id. 188-89 (2d ed. 1852),
2 Va. 185. The rightful owner, who had reclaimed the land through an action at
law, sought relief in equity to recover the profits the mortgagor had reaped in the
interim. Holding that the mortgagor “may [not] thus justly enrich himself,” the
court of equity demanded that the mortgagor “account for such after-taken
profits” and give restitution to the landowner. Id. The rule against unjust
enrichment compelled an award equal to the defendant’s gain, regardless of how
much money the plaintiff actually would have earned from the land during the
mortgagor’s wrongful possession.
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A Pennsylvania case of the same vintage applied similar reasoning to award
devisees the rent collected on their land during the delay between the testator’s
death and their actual possession. See Haldane v. Fisher, 2 U.S. 176 (1792) (“If a
man receives my rent, it . . . . may . . . be recovered in equity.”); see id. at 130
(Yeates, J., concurring) (“misrepresentation or concealment” is clearly “a
sufficient foundation for chancery to decree an account to be taken of the rents
and profits”) (emphasis omitted).
Id. at 118–20 (footnotes omitted). To put matters simply, we agree with Lord Coke, Blackstone,
Justice Story, the Supreme Court, and the Second and Ninth Circuits, as well as numerous other
commentators—an action seeking disgorgement is equitable in nature, even if the district court
ultimately directs the funds to the victims of the defendant’s conduct.
Finally, we also hold that Defendants were not entitled to a jury trial on their statute of
limitations defense. Generally, “when there is a disputed issue of fact as to when a plaintiff
‘discovered or should have discovered’ his cause of action, that factual issue should be resolved
by the jury in cases in which [a party] has asked for a jury.” Elam v. Menzies, 594 F.3d 463, 467
(6th Cir. 2010). However, in this case, there were no factual issues in the bench trial regarding
when Plaintiffs discovered or should have discovered Defendants’ wrongdoing. In its summary
judgment order, the district court concluded that there was no genuine dispute that Plaintiffs
should have discovered their claims in the early 1990s through the exercise of reasonable
diligence. Osborn, 50 F. Supp. 3d at 807.
Rather, the only remaining statute of limitations issue after the district court’s summary
judgment order was whether Defendants’ violations of their fiduciary duties allowed Plaintiffs to
invoke Kentucky’s equitable tolling statute. Id. at 795–96. Application of equitable tolling
principles is, by definition, an equitable issue. See, e.g., Commonwealth v. Hasken, 265 S.W.3d
215, 226 (Ky. Ct. App. 2007) (“[T]he issue regarding the equitable tolling of the statute of
limitations was one for the circuit court to decide as a matter of law.”), superseded on other
grounds by Ky. Rev. Stat. § 95A.250 (2009).
Moreover, deciding the equitable tolling issue required an assessment of whether and to
what extent Defendants breached their fiduciary duties to Plaintiffs. Osborn, 50 F. Supp. 3d at
796. (“The record in this case is replete with material factual disputes about whether defendants
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made adequate and truthful disclosures to the plaintiffs regarding their parents’ estate plans, the
settlement of Betsy’s 1990 lawsuit, and the disputed transfers of stock and real property.”). Put
differently, the validity of Defendants’ statute of limitations defense turned on the exact same
factual issues underlying Plaintiffs’ common law fiduciary duty claims for equitable
disgorgement. Generally, defendants are not entitled to a jury trial on affirmative defenses when
those defenses turn on the same issues as the plaintiffs’ equitable claims. See, e.g., Mile High
Indus. v. Cohen, 222 F.3d 845, 857 (10th Cir. 2000) (“Our appraisal of the general nature of [the
plaintiff’s equitable] foreclosure claim and Mr. Cohen’s defenses shows [the defenses] related
directly to the basic issue of foreclosure, as initially raised in the pleadings, leaving us with the
firm conviction the issues involved here are the sort traditionally enforced in equity.”); Shubin v.
U.S. Dist. Court, 313 F.2d 250, 251–52 (9th Cir. 1963) (holding that defendants were not
entitled to a jury trial on compulsory counter-claims where the “only issue under the existing
pleadings, admissions and stipulations” was equitable, even though the claims could have raised
legal issues under other circumstances). As the Ninth Circuit has observed, an “equitable claim
may involve a legal issue of fact, or may turn on a question of fact. The existence of an issue of
fact does not per se create a ‘legal claim.’” Shubin, 313 F.2d at 251.
CONCLUSION
For the foregoing reasons, we AFFIRM the district court’s judgment.
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_________________
DISSENT
_________________
MERRITT, Circuit Judge, dissenting. The basic claims by the plaintiff sisters against
their brothers, Dennis and Griffy, have been litigated since the sisters first sued the brothers
27 years ago. I do not agree with my colleagues’ disposition of this case because: (1) the parties
settled the same basic claims in 1993; (2) even if the claims are not completely barred by the
settlement agreement, the claims are equitable in nature and the doctrine of laches should
foreclose damages after a reasonable time following the time when the sisters learned of their
brothers’ earlier breach of fiduciary duties; (3) under any circumstances, the damages ($584
million, nearly half of which are in the form of prejudgment interest at 8% compounded annually
for approximately three decades) approved by our court are excessive, unreasonable, and
probably in violation of due process.
I.
A very simple point should end this litigation: Between 1990 and 1993, the parties
before us now litigated the very same claims presented in this case now—25 years later. The
1990 action was a stockholder’s derivative suit; it claimed that the brothers engaged in fraud,
breach of fiduciary duty, and misconduct as chief officers of the corporation created by their
father. The sisters’ claims arose from the same basic facts presented in this case. The major
difference is that the corporation was much smaller 25 years ago, less valuable, and had not been
sold. The record does not reveal what the circumstances of the corporation were a generation
ago or what led to the increase in value to $840 million. The sisters and their families have
apparently already received some monies as a result of the sale.
The plaintiff sisters and the defendant brothers settled their lawsuit in September 1993,
and the parties—including each of the sisters—signed the settlement agreement. The settlement
agreement clearly releases the brothers in exchange for consideration. The brothers brought
pressure to bear on their sisters by paying them money and demonstrating anger and sorrow
about the family disagreement. In exchange for $10,000 each, the sisters released “any and all
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claims . . . of any kind or nature whatsoever which any of the Griffin siblings may have had or
may now have, regardless of whether known or unknown,” against the two brothers. The district
court immediately conducted a fairness hearing on the settlement agreement and
contemporaneously concluded that the settlement was fair. It approved the settlement and
entered judgment dismissing the plaintiffs’ claims with prejudice.
My colleagues argue 25 years later that the settlement agreement is unenforceable
because the defendant brothers’ anger violated fiduciary duties that continued even after the
litigation. My colleagues apparently believe that the brothers had a fiduciary duty to encourage
the sisters to reject the settlement offer “precisely because [the sisters] continued to trust them.”
This so-called brotherly “fiduciary duty” to discourage settlement between litigating parties is
indeed strange since the parties were engaged on opposite sides of a lawsuit in which the sisters
claimed serious wrongdoing by the brothers. The law normally encourages the settlement of
lawsuits. See Fed. R. Civ. P. 16(a)(5) (concerning “facilitating settlement”); Fed. R. Civ. P. 16
advisory committee’s notes (citing extensive authorities that encourage settlement); In re NLO,
Inc., 5 F.3d 154, 157 (6th Cir. 1993). The parties here were adversaries in court, not fiduciaries.
The fact that 25 years later the corporation is worth hundreds of millions of dollars more in the
marketplace is not a valid basis for setting aside an agreed-upon and judicially approved
settlement agreement many years later. The settlement agreement 25 years ago arising from the
same basic claims should, therefore, stand as a bar to these claims. My colleagues’ rule would
make it impossible to settle breach-of-fiduciary-duty lawsuits once they are filed—a rule directly
contrary to the normal policy of the law encouraging settlement.
In deciding this case, we must remember that hundreds of thousands of settlements every
year terminate legal disputes. This court and other trial and appellate courts at the federal and
state level employ settlement lawyers who seek to settle cases. Lawyers themselves, outside of
the judicial process, settle many disputes before they become lawsuits. Settlements often depend
on significant pressures to settle brought to bear by judges, mediators, adversaries, family
members, the press and many others. Here, a federal judge intervened to conduct a fairness
hearing and to put his seal of approval on the settlement. The elder brothers may have brought
pressure to bear on their sisters—by paying them each $10,000 or by exhibiting anger or
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sorrow—but I do not find anything that would justify refusing to enforce the settlement several
decades later. There must be hundreds of thousands of cases in which similar types of pressure
induced settlement. See John Barkai & Elizabeth Kent, Let’s Stop Spreading Rumors About
Settlement and Litigation: A Comparative Study of Settlement and Litigation in Hawaii Courts,
29 Ohio St. J. Disp. Resol. 85, 135-39 (2014) (estimating between 50% and 60% of lawsuits are
settled nationwide). In my view, my colleagues’ holding here establishes a very bad precedent
that the judicial system cannot live with if applied elsewhere.
The alternative arguments below apply only if the settlement agreement is not dispositive
of the case. In my view, the settlement agreement should be enforced. In that case, the two
alternative arguments below need not be considered and should be pretermitted.
II.
The district court should have applied the doctrine of laches in this case. That doctrine
significantly reduces the long period for which the district court awarded damages, including its
award of interest at 8% compounded annually for decades.
The plaintiff sisters’ action against their brothers was an equitable proceeding for breach
of fiduciary duty arising from the brothers’ conduct as trustees of their father’s family trust after
their appointment in November 1985. In such equitable proceedings, the more flexible doctrine
of laches applies rather than the strict rules governing statutes of limitation. Kentucky’s highest
court has established the following more flexible standard for laches:
Ordinarily, actual knowledge on the part of the complainant, of the alleged
invasion of his rights of which he complains, is necessary in order to charge him
with laches. However, knowledge may in some circumstances be imputed to him
by reason of opportunity to acquire knowledge, or where it appears that he could
have informed himself of the facts by the exercise of reasonable diligence, or
where the circumstances were such as to put a man of ordinary prudence on
inquiry.
Taylor v. Kentucky, 302 S.W.2d 583, 584 (Ky. 1957) (emphasis added).
The district court’s own findings when it dismissed the plaintiff sisters’ RICO claim
should be conclusive on the issue of laches. With regard to the same conduct, the district court
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found that the sisters had an “opportunity to acquire knowledge” of the brothers’ wrongful
conduct and that the sisters had failed to exercise “reasonable diligence” regarding the warnings
that they had received regarding the brothers’ conduct as trustees. The district court concluded
that the plaintiffs had many opportunities to “acquire knowledge” of their brothers’ breach of
fiduciary duty and that they were on notice of facts that would “put a man [or woman] of
ordinary prudence on inquiry.” The district court found as a fact that “the Holt plaintiffs were
aware that [their sister] Betsy had filed a lawsuit against Dennis and Griffy just months before
the closure of [their] Mother’s probate estate.” The district court went on to say that “even
accepting plaintiffs’ contention that Dennis and Griffy dissuaded them from inquiring into the
substance of Betsy’s claims—which itself should arguably have alerted plaintiffs to the
possibility that Dennis and Griffy were being less than candid with them—it is undisputed that
plaintiffs could easily have obtained Betsy’s complaint, which was a public record from the time
of its filing . . . .” The district court found that plaintiffs were at fault because “they admittedly
took no action, however, to look into the matter further, even after defendants demanded that
they sign the 1993 settlement agreement [for Betsy’s and their own derivative case] without
disclosing its terms.”
There were additional reasons as well that the sisters should have been on notice that the
brothers were not treating them fairly. The sisters claim that Dennis threw a copy of their
mother’s will at them, refused to answer questions about their mother’s estate, and refused to let
them see the settlement documents he directed them to sign. Previously, in 1985, plaintiff
Cynthia Roeder’s husband told her and her sister, Betsy, that they were being “screwed” by the
brothers. Betsy repeatedly warned the Holt plaintiffs to obtain copies of their mother’s estate
documents. Nevertheless, the sisters remained willfully ignorant of their brothers’ conduct.
Had the sisters insisted that they be shown the 1993 settlement agreement they signed,
they would have read that the purpose of the agreement was “[t]o settle the derivative claim
against Griffin Industries in the Lawsuit and any tort claims that could have been asserted by the
Griffin Siblings against Dennis Griffin, John M. Griffin and Robert Griffin based on [their]
conduct in their capacities as officers and directors of Griffin Industries.” Similarly, the 1993
agreement provided:
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Although the Defendants deny any wrongdoing and liability to any of the Griffin
Siblings, the Defendants acknowledge that the pleadings in the Lawsuit alleged
tort claims against Dennis Griffin and John M. Griffin based on their conduct in
their capacities as officers and directors of Griffin Industries and that such
conduct is alleged to have resulted in personal injury and caused consequential
damages . . . .
These provisions of the settlement agreement make clear that Betsy’s original suit
accused Dennis and Griffy of tortious malfeasance in their capacities as directors of Griffin
Industries. It seems to me that “reasonable diligence” would have required the sisters to insist
upon being shown the text of the settlement agreement before signing it, especially in light of
Dennis and Griffy’s erratic behavior in connection with the administration of the mother’s estate.
Had the sisters examined the agreement, they would have learned of the nature of Betsy’s claims
against the brothers. Coupled with the brothers’ behavior, those facts would have been sufficient
to put a reasonable person on notice of his or her potential claims against the brothers.
If the enforcement of the settlement agreement does not end the case, I would vacate the
judgment and remand the case to the district court with instructions to apply the doctrine of
laches from September 10, 1993, the date that the Holt plaintiffs would have learned of the
substance of Betsy’s claims against Dennis and Griffy had they exercised reasonable diligence.
Specifically, I would instruct the district court that the Holt plaintiffs had a duty to inquire into
their brothers’ conduct after they signed the 1993 settlement agreement and they received checks
for $10,000 from Griffin Industries marked “derivative.” That date represents the latest possible
moment they could have reasonably relied upon their brothers’ characterizations of the dispute
with Betsy.
III.
The district court also failed to calculate the damages and the prejudgment interest in this
case with the degree of specificity required under Kentucky law. Accordingly, I would remand
the case for further fact-finding and reconsideration of both amounts if the settlement agreement
is not enforced.
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A.
With respect to its calculation of the damages associated with the defendants’ breach of
fiduciary duty, the district court erred in not reducing the plaintiffs’ recovery by the amount that
the brothers paid directly to the IRS in satisfaction of the tax liability associated with Griffin
Industries’ yearly earnings. I would remand the case for further fact-finding on that question.
“Damages are not recoverable for loss beyond an amount that the evidence permits to be
established with reasonable certainty.” Pauline’s Chicken Villa, Inc. v. KFC Corp., 701 S.W.2d
399, 401 (Ky. 1985) (quoting Restatement (Second) Contracts § 352). Kentucky’s requirement
of reasonable certainty does not require absolute mathematical precision when calculating an
award of damages, but it does require that the finder of fact take cognizance of ascertainable
facts that “eliminate virtually all the uncertain variables.” Id. This rule squares with the “bottom
principle of the law of damages” in Kentucky, which is that compensatory damages are designed
“[t]o restore the party injured, as near as may be, to his former position.” Hughett v. Caldwell
Cty., 230 S.W.2d 92, 96 (Ky. 1950), abrogated on other grounds by Harrod Concrete & Stone
Co. v. Crutcher, 458 S.W.3d 290 (Ky. 2015).
The district court’s damages calculation does not meet this standard of specificity in light
of its failure to account for disbursements that were made to Griffin Industries’ stockholders to
cover the tax liability associated with Griffin Industries’ earnings as a subchapter-S corporation.
The evidence at trial showed that Griffin Industries has elected to be taxed under Subchapter S of
Chapter 1 of the Internal Revenue Code at all relevant times. So-called “S corporations” are
taxed at the shareholder level as opposed to the corporate level. Put another way, the
S corporation does not pay taxes on its yearly earnings; rather, its shareholders are responsible
for paying the taxes associated with the corporation’s earnings. According to expert testimony at
trial and consistent with the common practice of S corporations, Griffin Industries would make
annual disbursements to its shareholders in order to cover the tax liability associated with the
corporation’s earnings for the year; the shareholders would then forward those disbursements
directly to the Internal Revenue Service. Despite the fact that the plaintiff sisters would have
been required to send all tax-related disbursements along to the IRS, the district court calculated
the damages on the basis of all disbursements made between 1985 and 2010 without accounting
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for or seeking proof regarding the portion of those disbursements that were made in satisfaction
of Griffin Industries’ tax liability. Indeed, the district court specifically refused to consider
evidence of taxes paid by Griffin Industries stockholders over the relevant time period. After a
cross-examination of the plaintiffs’ damages expert about his failure to account for the
disbursements that were made to the shareholders to satisfy their tax liability on Griffin
Industries, the district court squarely held that it “would not make any attempt to figure out
everybody’s taxes” despite the defendants’ request that the court account for the disbursements
made to cover the stockholders’ tax liability on the S corporation. The district court’s failure to
consider proof of the tax liability resulted in a windfall to the plaintiffs; they were awarded
compensation (and 8% interest over 30 years) for disbursements that would not have inured to
their benefit even absent the defendants’ breach of fiduciary duty.
I would hold that the district court’s damages award has not been established with the
“reasonable certainty” required under Kentucky law because it does not include an offset for the
money that the sisters would have been obliged to remit to the IRS. Accordingly, I would
remand the case for further fact-finding regarding the proportion of the disbursements that were
made in order to satisfy Griffin Industries’ tax liability between 1985 and 2010 if the settlement
agreement is not enforceable.
B.
The district court also abused its discretion in awarding prejudgment interest on
unliquidated damages at the highest rate authorized by law over a period of nearly thirty years.
I would reverse the district court’s decision to award prejudgment interest.
In cases involving unliquidated damages, the award of prejudgment interest rests within
the discretion of the trial court. Nucor Corp. v. Gen. Elec. Co., 812 S.W.2d 136, 145 (Ky. 1991).
Kentucky law disfavors—but does not disallow—the award of prejudgment interest in cases
involving unliquidated damages. See Ronald W. Eades, Kentucky Law of Damages § 7:9 (2017).
To that end, the highest court in Kentucky has repeatedly cautioned that it is an abuse of
discretion to award prejudgment interest on unliquidated claims for time before the damages are
“ascertainable.” Tri-State Developers, Inc. v. Moore, 343 S.W.2d 812, 817 (Ky. 1961). In broad
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strokes, damages are not “ascertainable” until the defendants have notice of the final amount of
damages associated with their alleged breach. See id. (holding damages associated with a late
and over-budget construction project were not “ascertainable” until the contractor had finished
construction on the project). This limitation on prejudgment interest is especially important
when, as here, the plaintiff has “delayed in filing suit.” Nucor Corp., 812 S.W.2d at 144
(quoting Restatement (Second) of Torts § 913 cmt. a).
Here, the damages were not “ascertainable” until 2010, when the sisters filed their claims
in the district court. The damages associated with Dennis and Griffy’s wrongdoing accrued on
an ongoing basis under the district court’s chosen remedy of “equitable disgorgement,”1 so the
precise amount of the damages in this case remained unknown until the plaintiffs filed their
claims against the defendants. In that way, the facts here are analogous to those in the Tri-State
Developers case decided by Kentucky’s highest court. In Tri-State, the Court of Appeals of
Kentucky rejected a plaintiff’s claim that the damages associated with a late and over-budget
construction project were ascertainable before the completion of the project. Tri-State
Developers, 343 S.W.2d at 817. The court supported its finding on nonascertainability by
reasoning that the defendants could not have anticipated the amount of the judgment against
them—and, consequently, their liability for prejudgment interest—until they completed the
project. See id. Similarly, the defendant brothers could not have anticipated the size of the
judgment in this case until 2010 at the very earliest. Thus, the damages in this case were not
ascertainable until 2010 and the district court’s award of hundreds of millions of dollars in
1
The idea of “equitable disgorgement” is a doctrine of a very recent vintage used in SEC fraud cases,
primarily in the Second Circuit. See SEC v. Cavanagh, 445 F.3d 105, 116-20 (2d Cir. 2006). The doctrine is used
to remove unlawful gains from insider traders because such cases do not cause damages to any discrete plaintiffs.
The theory is not applicable to cases of this kind in which there are identifiable victims with a right to recover
damages. Indeed, the theory may not even be applicable in SEC contexts for much longer in light of the Supreme
Court’s recent opinion on the matter. See Kokesh v. SEC, 137 S. Ct. 1635, 1642 n.3 (2017) (“Nothing in this
opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC
enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.”).
I am glad my colleagues are happy to stand with Lord Coke, Blackstone, Justice Story, and other
distinguished lawyers on this matter, but those famous men would never have heard of “equitable disgorgement.”
Rather, they would have understood that the Lord Chancellor retained power to award money damages in cases
involving a breach of fiduciary duty. See Colleen P. Murphy, Misclassifying Monetary Restitution, 55 SMU L. Rev.
1577, 1598-1600 (2002).
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prejudgment interest for the preceding 25 years was an abuse of discretion under Kentucky law.
I would reverse the district court’s award of prejudgment interest for the time prior to 2010.
IV.
Finally, I am skeptical of the constitutionality of the district court’s award of prejudgment
interest in excess of $250 million on a compensatory award of approximately $330 million. This
case raises due process concerns because the circumstances suggest that the award of
prejudgment interest was intended more to punish the defendants than to compensate the
plaintiffs for the time-value of the disbursements involved in this case. Indeed, the district court
recognized that applying an 8% annual return “would probably be higher” than returns on the
market over the 30 years before its judgment, noting that “a treasury bill [was then] paying one
percent.” Despite its recognition of that fact, the court awarded interest at the 8% level used by
the plaintiffs’ expert without any explanation or effort to determine “the market rate of interest”
over the same period. It seems clear that the district court intended to do more than compensate
the sisters for the time-value of their damages awards when it applied an 8% prejudgment
interest rate, so I presume the award of prejudgment interest was intended, at least in part, as a
sort of punishment for the defendants’ wrongful acts.
Civil damages awards imposed as punishment for a defendant’s wrongful actions are
subject to scrutiny under the Due Process Clause of the Fifth Amendment.2 See State Farm Mut.
Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416-18 (2003); BMW of N. Am., Inc. v. Gore, 517 U.S.
559, 574-75 (1996). Specifically, the Constitution prohibits the imposition award of “grossly
excessive or arbitrary” punitive damages. Campbell, 538 U.S. at 416-17. When assessing
whether an award of damages is grossly excessive or arbitrary, courts examine the three
“guideposts” set out in Gore: First, and most importantly, courts assess “the degree of
reprehensibility of the defendant’s conduct.” Gore, 517 U.S. at 575. Second, we examine the
ratio of the compensatory damages award to the punitive damages award. Id. Third, we
compare the punitive damages award to “civil penalties authorized or imposed in comparable
2
The Supreme Court has never expressly held that the same due process standards articulated under the
Fourteenth Amendment are applicable to the federal government under the Fifth Amendment, but the clear language
and reasoning of Gore and Campbell suggest that the same standards should govern a federal court’s award of
damages as punishment for a defendant’s wrongful conduct.
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cases.” Id. None of these factors is dispositive; rather, they are balanced against one another in
determining whether an award of punitive damages is grossly excessive.
Assuming that the same standard is applicable in a case where ostensibly compensatory
remedies are used to punish the defendant rather than to compensate the plaintiff, I am skeptical
that this award comports with due process. While it is true that the brothers’ abuse of their
sisters’ trust was wrongful, it is also true that the sisters did not exercise the diligence we expect
of reasonable people when it came to protecting their interests after they were informed of
Betsy’s grievances with Dennis and Griffy. The ratio between the compensatory damages and
the punitive damages in this case is particularly troublesome. On an award of $330 million in
damages, the plaintiffs recovered nearly the same sum in prejudgment interest. The Supreme
Court has previously noted that in cases, like this one, involving extremely high compensatory
awards, imposition of punitive damages at even a 1-to-1 ratio can be constitutionally
problematic. Campbell, 538 U.S. at 425. The final Gore factor does not weigh in favor of a
finding of unconstitutionality as Kentucky law permits imposition of a civil monetary penalty of
up to double the defendant’s gain in a case involving felony theft by deception. Ky. Rev. Stat.
§§ 514.040 (defining theft by deception), 534.030 (setting default monetary fines in felony cases)
(2017). While these factors appear to be largely in equipoise, the comparative size of the
judgment compared with the award of prejudgment interest coupled with the sisters’ failure to
exercise reasonable diligence leave me doubtful of the constitutionality of the district court’s
award of prejudgment interest.
For the reasons articulated above, I respectfully dissent.