Case Title: FWB Bank v. Richman

Citation: 354 Md. 472

Docket Number: 109/98

State: maryland

Court: Maryland Supreme Court

Date: 1999-06-15T00:00:00Z

Document:
FWB Bank et al.  v. Ilene H. Richman et vir.
No.  109, Sept.  Term, 1998
Res judicata; borrower not precluded from proceeding with fraud claim in State court because of
failure to raise claim in earlier bankruptcy proceeding.
0
Circuit Court for Montgomery County
Civil No.  86522
IN THE COURT OF APPEALS OF MARYLAND
No.  109
September Term, 1998
______________________________________
FWB BANK ET AL.
v.
ILENE H. RICHMAN ET VIR.
______________________________________
Bell, C.J.
Eldridge
Rodowsky
Chasanow
Wilner
Cathell
Bloom (retired, specially assigned),
   JJ.
______________________________________
Opinion by Wilner, J.
______________________________________
Filed:   June 15, 1999
This dispute arises from a loan transaction.  The parties have litigated in the Circuit
Court for Montgomery County and in the United States Bankruptcy Court for the District of
Maryland.  The question is whether the borrowers — the Richmans — may pursue their
remaining claims in the circuit court.  The Court of Special Appeals held that they may,
Richman v. FWB, 122 Md. App. 110, 712 A.2d 41 (1998), and we shall affirm that
determination.
BACKGROUND
Origin Of The Dispute
On September 22, 1989, Edward and Ilene Richman, respondents here, borrowed
$500,000 from petitioner, First Women’s Bank of Maryland (FWB), to finance the purchase
and development of certain land in Haymarket, Virginia.  The note required repayment
within 18 months — by March 21, 1991 — but it contained a provision allowing the maturity
date to be extended until September 21, 1991, if the Richmans were not in default, requested
the extension in writing, and paid a 1% extension fee.  The original note was secured by a
deed of trust on 9.2 acres of property and the assignment of certain partnership interests.  It
appears that $350,000 of the loan was used to pay for the purchase of the property and the
balance of $150,000 to create an interest reserve fund, to carry the property for two years.
The deed of trust created a first lien on 1.8 acres and a second lien on 7.4 acres.
In February, 1991, after the bank allegedly threatened not to grant even the extension
to September, which the note called for, the parties commenced negotiations regarding an
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extension of the loan beyond September 21, 1991.  Those negotiations produced a new
arrangement that took effect in March, 1991, although there is some dispute over when the
various documents evidencing the new arrangement were signed and a great deal of dispute
over some of the circumstances leading to them.  Under a Modification and Restatement of
Deed of Trust Note, the maturity of $448,585 was extended until March 1, 1992, with the
right of the Richmans to an additional six-month extension if they were not in default,
requested the extension in writing, and paid an extension fee of 1.5%.  The Modification
agreement required the Richmans to make monthly principal payments of $2,000,
commencing April 1, 1991, together with interest on the unpaid principal balance at the rate
of 2% above prime.  A condition of the new arrangement was that the Richmans deposit
$50,000 with the bank, to secure the monthly payments of principal and interest.  In an
affidavit, Ms. Richman acknowledged the right of the bank to withdraw $5,500 per month
from that reserve account.
Under the new arrangement, the bank released its second lien on the 7.4 acres in
return for other security.  One item of new security — the one that lies at the heart of this
dispute — was a hypothecation agreement signed on March 15, 1991, under which the
Richmans pledged to the bank a securities account they had with Shearson Lehman Brothers,
to the extent of $125,000.  That account was to serve as additional collateral for the loan.
In the hypothecation agreement, the Richmans warranted that they had the authority to
execute the agreement and that they would cause the signatory authority on the account to
be transferred to the bank upon the declaration of a default and a written request from the
 Although the basis for this policy is not directly set forth in the record, U.S. Bankruptcy
1
Court Judge Duncan Keir, in one of his rulings, indicated that Shearson Lehman had made a margin
loan and did not wish to give FWB (or any bank) a security interest that might take precedence over
its interest in the collateral.
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bank.  The dispute itself arose from the fact that Shearson Lehman had an internal policy of
not permitting the hypothecation of accounts to a bank, and, in conformance with that policy,
it refused to honor the hypothecation.  The hypothecation agreement contained an
acknowledgment to be executed by Shearson Lehman, which, when the agreement was sent
to it by FWB, the firm declined to sign.   The bank later contended that the Richmans were
1
aware, when they signed the hypothecation agreement, that Shearson Lehman would refuse
to honor the hypothecation, that the bank was unaware of that policy, and that it was thereby
defrauded by the Richmans into releasing its lien on the 7.4 acres.  The Richmans, on the
other hand, contend that they were unaware of the Shearson Lehman policy but that the bank
had discovered it prior to effecting the extension, and that the bank nonetheless insisted on
the hypothecation in order to create a condition that could not be fulfilled and thus engineer
a default.  The issue, in colloquial terms, was who knew what when?
The Litigation: Procedural History
On January 29, 1992, FWB filed suit in the Circuit Court for Montgomery County
against the Richmans for breach of the modified deed of trust note, breach of the
hypothecation agreement, and fraud.  It appears that the bank used the $50,000 reserve fund
to pay the monthly installments until, in December, 1991, that fund was depleted.  When the
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Richmans failed to make further payments and the bank was unable to obtain the assets in
the Shearson Lehman account, it called a default and filed the suit.  It sought a judgment of
$420,617, representing an unpaid principal balance of $407,585 plus accrued interest and
late charges.
With the complaint, FWB filed an application for writ of attachment of the Shearson
Lehman account.  In an accompanying memorandum, FWB alleged that Ms. Richman had
substantially depleted the funds in the account, thereby depriving the bank of its security
interest, and that, if the attachment were not allowed, the Richmans would further deplete
the account.  Notwithstanding the lack of a supporting affidavit, the court entered an
immediate garnishment order and waived the requirement of a bond.  Shearson Lehman
answered the order and admitted the account, with a balance of $107,600 — less than the
$125,000 pledged to the bank.  The Richmans moved to dissolve the garnishment,
contending, among other things, that FWB had not made out a case of fraud and that it was
improperly using a prejudgment attachment in place of an injunction designed to maintain
the status quo.  After a hearing, the court, on March 12, 1992, denied the motion to dissolve
the attachment, for fear that if it released the account, the Richmans might, indeed, deplete
it, but announced that it would treat the attachment as an ex parte injunction, which the
Richmans could move to dissolve.
Rather than proceeding further in the circuit court at that point, the Richmans filed
a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code.  That filing,
on May 29, 1992, immediately stayed all proceedings in the circuit court.  On September 3,
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1992, FWB filed a petition to discharge the loan debt from the Chapter 11 proceeding on the
ground that the Richmans fraudulently induced the bank to release its lien on the 7.2 acres
and modify the note.  That petition is not in the record before us, but, from its description
by bankruptcy court Judge Stephen Derby, we gather that it alleged that the bank was
induced to alter its position by the Richmans’ agreement to hypothecate the Shearson
Lehman account in the amount of $125,000 when the Richmans knew that Shearson Lehman
would not agree to a hypothecation.  The Bankruptcy Code, 11 U.S.C. § 523(a)(2)(A),
provides, in relevant part, that a discharge under § 1141 does not discharge an individual
debtor from any debt for money or an extension, renewal, or refinancing of credit to the
extent obtained by false pretenses, a false representation, or actual fraud.  We shall refer to
the proceeding triggered by FWB’s petition as the discharge action.
On December 22, 1992, Judge Derby entered an order lifting the automatic stay with
respect to the circuit court case, in order to permit (1) the Richmans to file an answer and
pursue a counterclaim and third party complaint, and (2) FWB “to pursue its claims as
necessary to reduce them to a sum certain.”  A week later, pursuant to that authority, the
Richmans filed an answer, counterclaim, and third party complaint in the circuit court action.
With respect to the bank’s action, the Richmans generally denied the accusatory allegations
and asserted the affirmative defenses of unclean hands, fraud, misrepresentation, set off, and
waiver.
In their counterclaim against the bank and a third party action against two officers of
the bank, Leonard Sloan and Joseph Betz, the Richmans alleged that Betz had advised them
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in October, 1990, that the bank would not honor their right under the September, 1989, note
to extend the loan, thereby effecting an anticipatory breach of the agreement, that he then
relented and agreed to an extension if the Richmans made a substantial payment on the loan,
pledged additional collateral, and created an interest reserve account, that Betz had
investigated the assignability of the new collateral and had learned that the Shearson Lehman
account could not be hypothecated in the manner demanded, that the Richmans had no
knowledge of that condition and were not informed of it by Betz, that Sloan was aware of
Betz’s conduct, that through Betz and Sloan FWB knew that the Richmans would be in
immediate default of the new agreement because of their inability to hypothecate the
account, that the bank never intended to abide by the extension agreement but intended
instead to call an immediate default, and that the Richmans had been wrongfully induced into
agreeing to the extension.
Upon those allegations, the Richmans sued for breach of contract — the failure by
FWB to honor its obligation to extend the 1989 agreement in accordance with its terms, for
concealing the material fact that the Shearson Lehman account could not be hypothecated,
for making false, misleading, or deceptive statements in violation of Maryland Code, § 5-
807(a)(1) and (4) of the Financial Institutions Article, and for intentional interference with
the Richmans’ future business and economic relations.  As relief, the Richmans sought
compensatory and punitive damages and an order enjoining FWB, Sloan, and Betz from
interfering with the Richmans’s business and their business  relationships and transactions.
Although in Count II they averred that the “Extension Note should be rescinded,” they did
 There are a number of relevant documents that are not in the record or the record extract.
2
Other relevant documents are in the record but not the extract, or, conversely, are in the extract but
not the record.  We remind counsel of their obligations under Maryland Rules 8-413 and 8-501(c).
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not ask for that specific relief; nor did they ask that the hypothecation agreement be
rescinded or declared void.  They prayed a jury trial on all issues in the action.
At some point, the Richmans filed a similar counterclaim in the discharge action in
the bankruptcy court, adding to it a claim under the Federal Equal Credit Opportunity Act.
That counterclaim, which is a critical document in this appeal, is not in the record, nor are
the motions for summary judgment apparently filed by the parties.2
On April 22, 1993, Judge Derby entered a number of rulings in the discharge action.
He first granted the Richmans’ motion for summary judgment with respect to FWB’s claim,
finding (1) insufficient evidence that the Richmans knew, when they signed the extension
agreement, that the Shearson Lehman account could not be hypothecated, and thus
insufficient evidence of an intent by the Richmans to defraud the bank, and (2) the evidence
showed a belief by the Richmans that FWB would investigate the additional collateral.  With
respect to the Richmans’ counterclaim, Judge Derby dismissed on statue of limitations
grounds the Equal Credit Opportunity Act claim.  He then observed that the remaining four
claims were based on State law, that the Richmans had filed the same claims in their
counterclaim and third party complaint in the circuit court, and that he had lifted the stay
with respect to that action.  Because those remaining claims in the discharge action thus “can
be fully litigated before the state court,” he decided that the Bankruptcy Court “will abstain
 The theory of avoidability, as later described by Judge Derby when ruling on the complaint,
3
was that any rights that FWB might have in the account based on the attachment could not have
accrued until March 12, 1992, when the circuit court decided to treat the attachment as an ex parte
injunction, and that, as the petition in bankruptcy was filed within 90 days thereafter, any lien right
acquired by FWB would be an avoidable preference.
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and not rule on those counts and will defer to the state court for resolution of those particular
issues as well as any state law fraud issues.”  Based on the dismissal of the ECOA claim and
the abstention with regard to the State claims, he dismissed the discharge action, “[t]hus
concluding this case as far as the Bankruptcy Court is concerned.”  His order implementing
that ruling was entered on April 25, 1993.
The next day, the Richmans filed in the Bankruptcy Court a complaint against FWB
and Shearson Lehman for turnover of the Shearson Lehman account to the bankruptcy estate.
We shall refer to that proceeding as the turnover action.  The Richmans averred that the
account was the property of the estate and necessary to a successful reorganization, that
FWB had never perfected a security interest in the account, that because the circuit court had
treated the attachment of the Shearson Lehman account as an injunction and, under
injunction practice, the FWB lien could not relate back to service of the attachment, any
rights that FWB may have in the account were avoidable by the Richmans, and that, based
on Judge Derby’s ruling the day before that there was no fraud on the part of the Richmans,
there was no basis for an attachment on original process in any event.   Shearson Lehman
3
paid the balance then in the account — $113,409 — into the registry of the Bankruptcy
Court and was dismissed.  FWB and the Richmans each filed a motion for summary
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judgment in the turnover action.  FWB claimed a security interest or lien on two grounds:
the attachment/garnishment/injunction, and the various agreements comprising the extension,
under which the account was pledged to the bank.
On February 23, 1994, Judge Derby denied the cross-motions for summary judgment.
In an accompanying memorandum opinion, he recited the history of the litigation in both the
circuit court and the bankruptcy court, noting that he had lifted the automatic stay so that the
parties could proceed with their State law claims in the circuit court.  He rejected the
Richmans’ contention that his earlier ruling in the discharge action constituted the law of the
case with regard to any fraud claim by FWB, again pointing out that that was a State law
matter and that he had elected to abstain in favor of the pending circuit court case.  The
circuit court’s action regarding the motion to dissolve the garnishment was “only preliminary
to protect the res,” and Judge Derby declined to interpret the significance of the order
treating the garnishment as an injunction, which also was a State law matter.  He deferred
as well with respect to the effect of the hypothecation agreement, preferring to let the State
court rule first.  Judge Derby concluded his opinion with the statement that, “[w]hen the
State court has made its rulings on the claims of the parties against each other under State
law, the bankruptcy court will then apply those rulings to complete the administration of this
estate under bankruptcy law.”  That determination was reflected as well in the court’s order,
in which the court “abstains from hearing this matter until after the litigation between the
 The heart of the problem leading to these parallel proceedings was identified by Judge Derby
4
in his memorandum opinion:  “The dispute is being pressed simultaneously in the State courts and in
the Bankruptcy Court, depending on which forum a party perceives to be more sympathetic on a
particular issue.”  That kind of forum shopping, unfortunately, did not abate.
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parties now pending in the Circuit Court for Montgomery County, Maryland is concluded.”4
The matter then returned to the circuit court where, on August 2, 1994, the court,
through Judge Durke Thompson, (1)  granted the Richmans’ motion for summary judgment
as to Count III of FWB’s complaint — the count alleging that the bank was fraudulently
deceived by the Richmans into believing that the Shearson Lehman account could be
hypothecated, and (2) dissolved the attachment/garnishment/injunction relating to that
account.  The summary judgment was based on Judge Derby’s conclusion in the discharge
action that FWB had not presented sufficient evidence of an intent to defraud, a
determination that the court found collaterally estopped the bank from proceeding further
with what the court regarded as the same claim.  The attachment/injunction/garnishment
relating to the account itself was dissolved on a number of grounds.  To the extent that the
order constituted an attachment, the court noted that FWB had filed neither a supporting
affidavit nor a bond, both of which were required.  It pointed out that the funds were then
in the registry of the bankruptcy court in any event and were in no danger of dissipation.  To
the extent that the order was treated as an ex parte injunction, under the rules relating to such
injunctions, it expired after 10 days and was never renewed.
The game of Federal/State ping pong continued next in the bankruptcy court.  On
August 15, 1994, Bankruptcy Judge Duncan Keir, who had assumed responsibility over the
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case from Judge Derby, held a hearing on a number of matters, including the Richmans’
continuing effort to have the funds formerly in the Shearson Lehman account turned over to
the estate.  The circuit court’s dissolution of the attachment/garnishment/injunction, they
argued, established that FWB had no interest in the account and collaterally estopped the
bank from contending otherwise in the bankruptcy action.  Judge Keir found to the contrary,
at least in part.  He agreed that the circuit court’s latest ruling resolved the issue of whether
FWB had any lien on the account by virtue of the attachment/garnishment/injunction, but he
found that the State court had not determined, and perhaps had no jurisdiction to determine,
whether FWB had a perfected security interest by virtue of the various agreements between
the parties.  In that regard, he stated:
“The other ruling which could bear on this issue would be the
ruling on the actual liability of the debtor to the lender.
Obviously if the debtor doesn’t owe the lender any money, then
the lender doesn’t have a security interest because there is
nothing to secure.  But I do not read Judge Derby’s order as
referring to the state court the issue concerning the consensual
lien rights of the parties, i.e., their, in effect, ownership rights to
this fund.  That has not been ruled on.  There is no disposition
of this issue.  Accordingly, the fund remains subject to the
claims of [FWB] whether they are with or without merit.”
Whether or not as a result of that ruling, the plan of reorganization was not approved,
and the bankruptcy was converted to a Chapter 7 proceeding.  Michael Wolff was appointed
as trustee and thus succeeded the Richmans as the plaintiff in the turnover action.  At some
point thereafter, both the Richmans and FWB entered into negotiations with the trustee for
the sale of the Richmans’ State court claims against FWB.  At first, a tentative agreement
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was reached with FWB, but it was opposed by the Richmans and was rejected by Judge Keir.
We are informed that the Richmans succeeded in reaching an agreement with the trustee and
that, on October 27, 1995, the Richmans purchased their claim from the trustee for $125,000.
The sale, the Richmans tell us in their brief, was completed on November 2, 1995.  Although
there is no clear evidence in the record confirming the sale and its approval by Judge Keir,
other than a brief mention of it by FWB’s counsel in a proceeding before Judge Thompson,
the assertion of it contained in the Richmans’ brief is not disputed, so we shall assume that
it is accurate.
In January, 1995, the Richmans filed a new action in the circuit court, naming as
defendants five officers or directors of FWB.  The allegations made against those defendants
were essentially the same as made against Messrs. Sloan and Betz in the third party action
filed by the Richmans in December, 1992, and they asked for the same relief.  The two
actions were immediately consolidated.  On March 7, 1995, Judge Keir held a hearing in the
turnover action on the remaining issue regarding the Shearson Lehman account, as presented
in the cross-motions for summary judgment — whether, as a result of the various
agreements, particularly the hypothecation agreement, FWB had a perfected security interest
in the securities when the bankruptcy petition was filed.  During that hearing, former counsel
for the Richmans, who no longer were parties to the action but were permitted to participate
in the hearing, noted that, for purposes of that proceeding, the Richmans were conceding that
the hypothecation agreement had been signed by them and delivered to FWB, but that they
were reserving their right to argue in State court that fraud existed in the obtention by FWB
 When the bankruptcy proceeding was converted from Chapter 11 to Chapter 7, counsel for
5
the Richmans were allowed to continue as special counsel to the trustee.  The relationship between
the attorneys and the trustee was not a harmonious one, as noted by the Court of Special Appeals.
See Richman v. FWB, supra, 122 Md. App.  at 128-30, 712 A.2d at 49-50.  
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of that agreement and that the agreement may not be enforceable for that reason.   Judge Keir
5
responded that the issue of fraud had not been raised in the turnover action.  He stated that
the issue was whether FWB had a perfected security interest by virtue of the agreements and:
“I don’t believe that a ruling by this Court on that is (a)
precluded by any further assertions of fraud which the parties
may have in some state court proceeding because it has not been
raised in this adversary; and secondly, I make no rulings as to
what effect any ruling of this Court would have on the state
court action as that would be determined by the court in the
action in which preclusion would be asserted by some party, not
the court whose action might be alleged to be the basis for such
assertion.”
On  April 25, 1995, Judge Keir filed a memorandum opinion in which he rejected
each of the arguments made by the Richmans and granted FWB’s motion for summary
judgment.  Judge Keir concluded that, by virtue of the hypothecation agreement, FWB had
perfected a security interest in the Shearson Lehman account in accordance with the
Maryland Uniform Commercial Code.  He did not purport to rule upon any of the fraud
claims made by the Richmans.  His analysis and determination were solely on the basis of
the relevant provisions of the commercial code.
The Richmans and their former counsel filed a motion for reconsideration, which is
not in the record extract, but in which they apparently complained that Judge Keir had ruled
upon an issue that Judge Derby had expressly reserved for determination by the State court.
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In a memorandum opinion filed July 21, 1995, Judge Keir denied the motion.  He concluded
that neither the Richmans nor their former attorneys had standing to file the motion.  As to
the Richmans, Judge Keir held:
“The debtors are not parties of record despite their interest in the
outcome.  Such interest alone is insufficient.  Apparently, the
debtors chose not to seek the status of parties in the action,
having failed to file any motion for joinder or intervention.
Their belated attempt to take part in or control of the proceeding
must fail.”
The court’s ruling on standing effectively disposed of the motions.  Nonetheless,
Judge Keir addressed the substance of the motion, which he characterized as an argument
that he had erred in granting FWB’s motion for summary judgment because, as a result of
Judge Derby’s February 23, 1994 order, the enforceability of the hypothecation agreement
remained at issue in the circuit court litigation and that Judge Keir’s ruling was therefore
“premature.”  Judge Keir disagreed.  He noted that, although a fraudulent inducement claim
had been made in the State court case, the debtors had never made that claim in the
bankruptcy court as a defense to the hypothecation agreement, and thus to FWB’s assertion
of a security interest in the Shearson Lehman account.  In that regard, he observed that, to
the extent that Judge Derby’s February, 1994 order contemplated a further determination by
the State court before further proceedings in the bankruptcy court, in August and November,
1994, the Richmans and the trustee represented to the court that the stay/abstention decided
upon by Judge Derby should be lifted:
“Thereafter, in the prosecution of the issue of whether or not
FWB held a perfected security interest in the Shearson Account
 As with so many other relevant documents in this case, neither the motion to intervene nor
6
Judge Williams’s October  memorandum opinion are to be found in the record before us.
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proceeds, the estate could have asserted any defense to the
alleged perfected security interest.  The estate raised, briefed
and argued only the defense of failure to obtain and perfect a
security interest under the Uniform Commercial Code but did
not assert any defense that the contract was obtained by fraud.
The fact that such allegations may have existed in separate state
court suits pending at the same time, did not present that issue
before this court, nor was that issue brought before this court by
Judge Derby’s February 23, 1994 Order, or precluded from
being so brought as discussed above.”
(Emphasis added.)
Judge Keir regarded the debtors as belatedly raising a new defense to the validity and
enforceability of the hypothecation agreement and, on the basis of that defense, asking the
court to send the matter back to the circuit court.  Failure to raise the defense earlier did not,
he concluded, constitute a ground for post-judgment relief under F.R.B.P. 9024(b).
Aggrieved, the Richmans appealed the denial of their motion for reconsideration to
the U.S. District Court.  Apparently recognizing the standing problem, they moved to
intervene in the turnover action as of right for purposes of appealing Judge Keir’s decision.
The court denied that motion in October, 1995,  and in a Memorandum Opinion and Order
6
filed November 30, 1995, the district court affirmed Judge Keir’s ruling.  Judge Williams
agreed with Judge Keir that, once the proceeding was converted to a Chapter 7 proceeding,
the Richmans were no longer parties to the turnover action and had no standing in it.  Judge
Williams further agreed that, as the estate had not raised the issue of fraudulent inducement
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in the turnover action, there was no error in the bankruptcy court’s declining to consider it
in a post-judgment action.  The Richmans then sought review in the U.S. Court of Appeals
for the Fourth Circuit, which affirmed the district court.  Matter of Richman, 104 F.3d 654
(4th Cir. 1997).  The appellate court dealt only with the standing issue and made, essentially,
two holdings.  First, the court concluded that the Richmans were not parties to the turnover
action, following conversion to Chapter 7, because they failed to intervene timely in that
action while it remained in the bankruptcy court.  Second, it held that Judge Williams did not
err in denying their motion to intervene as of right at the district court level.  They had no
right of intervention because (1)  of their failure to intervene in the bankruptcy court, and (2)
their interest in the account was adequately represented by the trustee.  The appellate court
did not address the merits of Judge Keir’s ruling on FWB’s claim or on his determination
that the issue of fraudulent inducement had not been raised in the bankruptcy court.
In December, 1995, following Judge Williams’s affirmance of Judge Keir’s decision,
FWB, Sloan, and Betz moved for summary judgment in the circuit court action and the
defendants in the second, consolidated, action moved to dismiss the complaint against them.
The basis of the motion for summary judgment was that three of the four counts in the
Richmans’ counterclaim and third party action were premised on alleged fraud in obtaining
the hypothecation of the Shearson Lehman account and that, because that issue had been
conclusively determined by the bankruptcy court, the Richmans were precluded by both res
judicata and collateral estoppel from relitigating the question of fraud.  In the bank’s view,
implicit in Judge Keir’s conclusion that FWB properly obtained a security interest in the
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account was a finding that no fraud was committed in the obtention of that interest, for the
existence of fraud would have vitiated the instrument creating the security interest.  Although
the bank acknowledged that, once the bankruptcy was converted to Chapter 7,  the Richmans
were not technically parties in the turnover proceeding, it maintained that they had had their
“day in court.”
The Richmans threw up a barrage of arguments against the application of res judicata.
First, they asserted that the doctrine was not applicable because (1) a fraud claim would have
been in the nature of a counterclaim to FWB’s assertion that it had a perfected security
interest in the account and, under both Federal and State procedure, the filing of a
counterclaim was permissive, rather than mandatory, and (2) application of res judicata in
this situation would intrude upon the liberal joinder rules under both Federal and State law.
The court rejected those arguments.  It concluded that a fraud claim would not have been in
the nature of a counterclaim — that the turnover action was instituted by the Richmans and
it was incumbent upon them to advance any theory they had to warrant the relief they sought
and defeat FWB’s claim of a security interest.  Relying principally on Kent County Bd. of
Educ. v. Bilbrough, 309 Md. 487, 525 A.2d 232 (1987), the court found no merit in the
joinder argument.  Applying the “transactional” test, the court concluded that a plaintiff must
assert all claims arising out of a particular transaction against a particular defendant or be
barred from asserting them later.
Next, the Richmans contended that there was no identity of parties or identity of
issues.  As to the former, they noted that Sloan and Betz were not parties to the bankruptcy
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action and that, once the proceeding was converted to Chapter 7, neither were they.  The
court concluded, however, that Sloan and Betz were sufficiently in privity with FWB and
that the Richmans were sufficiently in privity with the trustee.  The conversion to Chapter
7, the court held, did not change the nature of the proceeding in any fundamental way:  the
goal of recovering the Shearson Lehman account for the bankruptcy estate remained the
same.  In that regard, the court determined that the Richmans did not seek the asset for their
personal use but only to pay off creditors, which was also the trustee’s interest.  The identity
of issues argument was based on the assertion that the fraud claim was not raised in the
bankruptcy proceeding because of Judge Derby’s abstention on that claim — his
determination that it proceed in the State court.  The circuit court concluded, however, that
Judge Derby’s April, 1993 order was entered in the discharge action, not the turnover action,
and that his subsequent order of February, 1994, which was entered in the turnover action,
was not entered until a year after the turnover action was filed, and it therefore could not
have precluded the Richmans from raising the fraud issue in that action.  Moreover, the court
noted that Judge Derby’s order merely abstained from hearing a fraud claim until after
resolution of the pending State court action; it did not preclude the Richmans from raising
that issue in the bankruptcy proceeding.  The court acknowledged that the fraud claim was
never actually litigated in the bankruptcy court but held that res judicata was applicable
because that claim could have been raised and determined in that court.  Accordingly, the
court granted the motions by FWB and the individual defendants for summary judgment and
to dismiss and entered judgments in their favor.
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As we have indicated, the Court of Special Appeals had a different view and reversed.
That court determined that the Richmans’ fraud claims “were never litigated in the prior
bankruptcy action, nor, with propriety, could they have been.”  Richman v. FWB, supra, 122
Md. App. at 147, 712 A.2d at 59.  The discharge and turnover actions, it held, were not
separate actions but were both part of the same bankruptcy case, and thus Judge Derby’s
abstention orders were relevant in the turnover action.  The heart of the appellate ruling was
its determination that:
“Judge Derby’s orders of April 1993 indisputably fostered [the
Richmans’] belief that the bankruptcy court would not entertain
[their] State fraud counts, whether in the Discharge Action or
the Turnover Action.  At the very least, in considering whether,
‘with propriety,’ [the Richmans] were able to litigate their State
claims in federal court, it was certainly reasonable for [them] to
believe that they were required by Judge Derby to pursue their
fraud claims in State court.”
Id. at 156, 712 A.2d at 63.  Although agreeing with FWB and the other defendants that Judge
Derby’s orders did not actually forbid the Richmans from raising a fraud claim in the
bankruptcy court, the Court of Special Appeals noted that Judge Derby “could not have been
clearer in articulating that the bankruptcy court would not consider [the Richmans’] fraud
claims” and in directing them “to pursue their State claims in the circuit court.”  Id.  at 160,
712 A.2d at 65.  It concluded that the Richmans “suffered a judicial one-two punch: in
federal court, they were told to litigate in State court; in State court, they were told that they
should have litigated in federal court.  Res judicata has no place here.”  Id.  at 167, 712 A.2d
at 69.
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DISCUSSION
The petition for certiorari filed by FWB and the individual defendants raised three
questions, two of which were premised on the assertion that the Court of Special Appeals
improperly rejected “specific factual findings” of the Bankruptcy Court and the U. S. District
Court.  The “findings” referred to consisted of Judge Keir’s pronouncement in ruling on the
Richmans’ motion for reconsideration that the issue of fraud had not been raised in the
turnover action and would therefore not be addressed by him.  The third question attacks the
intermediate appellate court’s holding that the discharge and turnover actions were not
independent actions.  Those issues are recast somewhat in petitioner’s brief.  
Although at various times during the course of this dual-track litigation, issues of res
judicata, collateral estoppel, and collateral attack have been raised, the issues framed by
petitioners in this appeal really involve only the doctrine of res judicata, or claim preclusion.
It is clear, and not disputed, that the fraud claim that the Richmans seek to litigate now in the
circuit court was never addressed or resolved on its merits by the bankruptcy court; nor did
that court ever directly resolve any factual dispute that would be dispositive on the merits of
that claim.  The preclusion defense stems entirely from the assertion that the fraud claim was
not properly presented by the Richmans in the bankruptcy court when it could and should
have been so presented.  Like the Court of Special Appeals, we find no merit in that
assertion; it ignores what, in fact, was before the bankruptcy court during the several stages
of the litigation.
Preliminarily, we reject FWB's efforts to ground a res judicata claim in Judge Keir's
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denial of the Richmans' motion for reconsideration and the affirmance of that denial in the
U. S. District Court and the U.S. Court of Appeals for the Fourth Circuit.  The record shows
that Judge Keir denied the motion on the ground that the Richmans did not have standing at
the time they filed the motion for reconsideration to raise the issue of whether FWB
fraudulently induced the formation of the hypothecation agreement.  Although Judge Keir
noted that the Richmans might have raised fraud earlier in the turnover action, he made no
ruling as to when they could have raised that issue, only that they could not raise it for the
first time in support of a motion for reconsideration.  It was that ruling that was affirmed on
appeal. 
The basic rule of claim preclusion in this context is not difficult:  “A valid and final
personal judgment rendered in favor of the defendant bars another action by the plaintiff on
the same claim.”  RESTATEMENT (SECOND) OF JUDGMENTS § 19 (1982).  As we pointed out
in deLeon v. Slear, 328 Md. 569, 580, 616 A.2d 380, 385 (1992), the traditional principle
of res judicata has three elements:  “(1) the parties in the present litigation should be the
same or in privity with the parties to the earlier case; (2) the second suit must present the
same cause of action or claim as the first; and (3) in the first suit, there must have been a
valid final judgment on the merits by a court of competent jurisdiction.”  Although all three
elements were in dispute at various points in the litigation, the second element is the one
principally before us — whether the fraud claim sought to be litigated in the circuit court is
the same as the claim presented in the bankruptcy action.
When an earlier court has actually ruled on the matter sought to be litigated in a
-22-
second court, the “same claim” analysis is usually straightforward.  It is when, as here, the
earlier court has not directly ruled upon the matter that the analysis becomes more complex,
for then the second court must determine whether the matter currently before it was fairly
included within the claim or action that was before the earlier court and could have been
resolved in that court.  It has long been established that a judgment between the same parties
or their privies upon the same cause of action is conclusive "not only as to all matters that
have been decided in the original suit, but as to all matters which with propriety could have
been litigated in the first suit."  Alvey v. Alvey, 225 Md. 386, 390, 171 A.2d 92, 94 (1961);
MPC, Inc. v. Kenny, 279 Md. 29, 32, 367 A.2d 486, 488-89 (1977).  In dealing with that
issue, we have adopted the “transactional” approach set forth in § 24 of the RESTATEMENT
(SECOND) OF JUDGMENTS:  “When a valid and final judgment rendered in an action
extinguishes the plaintiff’s claim pursuant to the rules of merger or bar . . . the claim
extinguished includes all rights of the plaintiff to remedies against the defendant with respect
to all or any part of the transaction, or series of connected transactions, out of which the
action arose.”  deLeon v. Slear, supra, 328 Md. 569, 590, 616 A.2d 380, 390; Kent County
Bd. of Educ. v. Bilbrough, supra, 309 Md. 487, 498, 525 A.2d 237-38.  In deciding whether
a factual grouping constitutes a “transaction,” the RESTATEMENT directs a pragmatic
approach, “giving weight to such considerations as whether the facts are related in time,
space, origin or motivation, whether they form a convenient trial unit, and whether their
treatment as a unit conforms to the parties’ expectations or business understanding or usage.”
RESTATEMENT, supra, § 24(2).
-23-
Under this analysis, it is clear that the issue of whether FWB fraudulently induced the
Richmans into entering into the hypothecation agreement, which underlies three of the four
counts in their circuit court actions, was, at one point, most definitely part of the claim made
in the bankruptcy court.  As we indicated, some time prior to April, 1993, the Richmans filed
precisely the same claims in the bankruptcy case as they filed in the circuit court, as a
counterclaim in the discharge action.  Those claims were never abandoned by the Richmans.
Judge Derby simply, and quite properly, decided that, since they were entirely State law
claims, they should be resolved by the State courts.  Judge Derby could not have been more
explicit in that regard:  the court, he said, “will abstain and not rule on those counts and will
defer to the state court for resolution of those particular issues as well as any state law fraud
issues.”  With that determination, he regarded the discharge action as concluded.  Certainly,
at that point, no claim of res judicata could properly be made.  The situation fell squarely
within the principle set forth in § 20(1)(b) of the RESTATEMENT, that a personal judgment for
the defendant, although valid and final, does not bar another action by the plaintiff on the
same claim when “the court directs that the plaintiff be nonsuited (or that the action be
otherwise dismissed) without prejudice.”  See Lone v. Montgomery County, 85 Md. App.
477, 584 A.2d 142 (1991).
Directly on the heels of Judge Derby’s ruling that there was insufficient evidence of
fraud on the part of the Richmans, and his consequent granting of their motion for summary
judgment in the discharge action, the Richmans filed the turnover action.  That action was
based on the assertion that the only lien that FWB could have obtained came from the
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“injunction” constructively issued in March, 1992, and that, as the bankruptcy petition was
filed within 90 days thereafter, any such lien was voidable as a preference.  Although the
Complaint for Turnover alleged generally that “FWB never had a perfected security interest
in the Shearson Lehman account” and that the account was “not FWB collateral,” the
complaint itself did not focus on any rights FWB may have obtained by virtue of the
hypothecation agreement. 
Because we are not privy to whatever answer FWB may have filed to the complaint,
as it is not in the record, it would appear, from the record we have, that fraud first became
a potential issue in July, 1993,  when FWB filed its motion for summary judgment, claiming
a security interest not only by virtue of the attachment/garnishment/injunction, but also under
the hypothecation agreement.  One way to defeat that alleged interest would be to show that
the agreement had been procured by fraud.  The fraud issue, of course, was then pending in
the circuit court and could as easily have been litigated there.  For a year, however, the
matter was not pursued in either court.
The next significant event was Judge Thompson’s August, 1994 ruling that FWB
acquired 
no 
lien 
on 
the 
Shearson 
Lehman 
account 
by 
virtue 
of 
the
attachment/garnishment/injunction.  That  apparently prompted Judge Keir to reactivate the
turnover action.  His ruling, on August 15, 1994, that, while Judge Thompson’s
determination effectively resolved the issue of whether FWB had any security interest by
virtue of the attachment/garnishment/injunction, the question of whether FWB acquired a
security interest under the hypothecation agreement remained open, placed the validity of
-25-
that agreement squarely into contention.  Certainly at that point, if not earlier, the Richmans
must have known that, if they intended to defeat the hypothecation agreement on the ground
that it was fraudulently induced, they would either have to raise that defense in the
bankruptcy action or have the issue of fraud resolved in the State court and hope that the
bankruptcy court would accept the State court finding in determining the lien issue.
Unfortunately for the Richmans, it was at that point that the bankruptcy was converted
to a Chapter 7 case and they ceased to be parties to the turnover action.  Absent permissive
intervention, which they never sought, they no longer had the right to interpose the fraud
defense.  11 U.S.C. § 323(a); In re Richman, 104 F.3d 654, 657 (4th Cir. 1997) ("As a
general matter, in a Chapter 7 proceeding, the trustee alone has standing to raise issues
before the bankruptcy court and to prosecute appeals."); Detrick v. Panalpina, Inc., 108 F.3d
529, 535, cert.  denied, ___ U.S. ___, 118 S. Ct.  52, 139 L. Ed.  2d 17 (4th Cir. 1997); In
re Eisen, 31 F.3d 1447, 1451 n.2 (9th Cir. 1994), see also Adams v. Manown, 328 Md.  463,
615 A.2d 611 (1992).  The trustee was in command of the litigation, and, as noted by the
Court of Special Appeals, the relationship between the Richmans (and their former counsel)
and the trustee was not always a harmonious one.  Indeed, during the period that FWB and
the Richmans were each negotiating with the trustee for the sale of the claim against FWB,
the Richmans and the trustee were close to being, and may have been, in a conflict situation.
As we have indicated, in the fall of 1995, the Richmans purchased from the trustee
their personal claim for money damages against FWB and the other defendants.  That sale
and its approval by the bankruptcy court is significant, for it effectively split the fraud issue,
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with the bankruptcy court’s blessing.  The trustee, who retained full control to raise the issue
in defense of FWB’s claim that it had a security interest in the Shearson Lehman account
proceeds, had a lesser incentive to do so.  He had received from the Richmans the full
$125,000 covered by the hypothecation agreement, so, while the estate would not gain
anything more if FWB was successful in preserving its lien, neither would it suffer any loss.
As non-parties, the Richmans had no standing to raise the fraud issue for the purpose of
defeating FWB’s lien claim.  Having purchased their personal claim, however, they, and they
alone, had standing to pursue it.  Judge Derby had already ruled that that very claim must be
litigated in the State court, and Judge Keir never overruled that determination or acted
inconsistently with it.  Indeed, the splitting of the fraud issue between the trustee and the
Richmans and the relegation of the Richmans’ claim for consequential money damages to
the State court fully explains Judge Keir’s decision and pronouncements in dealing with the
Richmans’ motion for reconsideration.  He would not allow the Richmans, who were not
then parties to the turnover action, to raise the issue of fraud in that proceeding. 
When the matter is analyzed in this chronological fashion, it becomes evident that the
only possible basis for a res judicata claim arises either from the 16-month period between
the filing of the turnover action by the Richmans in April, 1993, and the conversion of the
bankruptcy case to a Chapter 7 proceeding in August, 1994, or from a conclusion that the
Richmans were in privity with the trustee thereafter. 
The general rule, as noted in the RESTATEMENT (SECOND) OF JUDGMENTS § 34
comment b, is that “a party is bound by the determination of an issue only if he actually
-27-
participates in its adjudication.  Accordingly, issues determined before he became a party or
after he ceased to be a party are not conclusive upon him.”  (Emphasis added.)  See also,
Mid-Continent Cas. Co. v. Everett, 340 F.2d 65, 69-70 (10th Cir. 1965); Flanzbaum v. M &
M Transp. Co., 286 F.2d 500, 503 (2d Cir. 1961); Urban v. King, 995 F. Supp. 1251, 1256
(D. Kan. 1998); Wright, Miller & Cooper, FEDERAL PRACTICE AND PROCEDURE:
JURISDICTION § 4449 (1981).  Subject to the issue of privity, strict application of this
principle would preclude application of res judicata against the Richmans, for they had
ceased to be parties to the turnover action when the ultimate issues in that action were
adjudicated.  Even if we do not apply that principle strictly and look more closely at the 16-
month period when the Richmans were in control of the litigation, we need to take into
account (1) the fact that the Richmans sought to litigate their claim for consequential
damages based on FWB's alleged fraud in the discharge action and were told three times by
Judge Derby that that claim would have to be litigated in the State court, (2) the marginal
relevance of fraud as a defense to the hypothecation agreement in the turnover action until
FWB responded to the turnover complaint and clearly asserted a contract lien and Judge
Keir, in August, 1994, focused attention on that claim, and (3) the fact that the Richmans lost
control of the litigation at that point.  Under these circumstances, we do not believe that
claim preclusion may properly be based on their own failure to pursue a fraud claim in the
turnover action. 
Nor do we believe that res judicata can appropriately be based on the posited privity
between the Richmans and the trustee.  The U.S. Court of Appeals for the Fourth Circuit, in
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ruling that the Richmans were not entitled to intervene in the turnover action as of right,
concluded that they failed “to establish that whatever interest they may have possessed in the
Shearson Account was inadequately represented by the bankruptcy trustee," which was a
precondition to intervention as of right.  Matter of Richman, supra, 104 F.3d at 660.  The
Federal Court was looking at the representation issue solely in the context of a defense to
enforcement of the hypothecation agreement, however.  The matter before us is quite
different.  By the time Judge Keir decided the enforceability issue, the trustee had split the
fraud claim and sold the claim for consequential damages to the Richmans.  That issue was
not before Judge Keir, and, by virtue of its sale, the trustee no longer had any standing to
pursue it in the bankruptcy action.  As to that claim, therefore, there could be no privity.
"Privity in the res judicata sense generally involves a  person so identified in interest with
another that he represents the same legal right."  Williams v. Stefan, 133 B.R. 119, 121 (N.D.
Ill. 1991) (quoting In re Matter of Wilcher, 56 B.R. 428, 438 (N.D. Ill. 1985)).   Once the
claim for consequential damages was sold, no identity of interest existed with respect to it.
In adopting the transactional test in Kent County Bd. of Educ. v. Bilbrough, supra, 309
Md. 487, 525 A.2d 232, we noted  the principle enunciated in Comment a to § 24 of the
RESTATEMENT that equating claim with transaction “is justified only when the parties have
ample procedural means for fully developing the entire transaction in the one action going
to the merits to which the plaintiff is ordinarily confined.”  Id. at 499, 525 A.2d at 238.
Under the circumstances noted, we agree with the Court of Special Appeals that the
Richmans did not have ample procedural means for fully developing their fraud claim in the
-29-
bankruptcy case.
For these reasons, we hold that the Richmans are not barred by res judicata from
litigating their claims against FWB and the individual defendants in the circuit court.
JUDGMENT OF COURT OF SPECIAL
APPEALS AFFIRMED, WITH COSTS.