Source: https://caselaw.findlaw.com/va-supreme-court/1153887.html
Timestamp: 2019-04-24 22:57:35+00:00

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Ran NIZAN v. WELLS FARGO BANK MINNESOTA NATIONAL ASSOCIATION, f/k/a Norwest Bank Minnesota National Association, Trustee, etc.
Present: HASSELL, C.J., KEENAN, KOONTZ, KINSER, LEMONS, and AGEE, JJ., and LACY, Senior Justice.1 Gary A. Bryant (John D. McIntyre, Willcox & Savage, on briefs), Norfolk, for appellant. Robert F. Redmond, Jr. (Robert C. Rice; Alden J. Eldredge; Shawn A. Copeland; Williams Mullen Clark & Dobbins; Carrell Rice & Rigsby, on brief), Richmond, for appellee.
In this appeal we consider the judgment of the Circuit Court of the City of Petersburg entered against Ran Nizan and in favor of Wells Fargo Bank Minnesota National Association (“Wells Fargo”). Nizan appeals the circuit court's judgment that the funds Wells Fargo received through a settlement agreement with another entity cannot affect the amount of damages for which Nizan is liable to Wells Fargo as the result of a defaulted loan. For the reasons set forth below, we will reverse the judgment of the circuit court.
Nizan and Avram Cimerring were business partners regarding certain apartment complexes through their ownership of Lee Hall, L.L.C. To facilitate financing of the apartments, Nizan and Cimerring executed a guaranty (“the Guaranty”) of an Amended and Restated Deed of Trust Note (“the Note”) made payable to HSA/Wexford Bancgroup, L.L.C., as lender, from Lee Hall, L.L.C., as borrower. Four apartment complexes served as collateral under deeds of trust for the Note. Although HSA/Wexford was payee of the Note, the loan was funded by UBS PaineWebber, Inc., (“UBS”), which then acquired the Note. UBS later assigned the Loan 2 to Merrill Lynch Mortgage Investors, Inc., Real Estate Investment Mortgage Conduit 3 (“the REMIC Trust”) as part of a securitized mortgage loan pool. Wells Fargo serves as trustee for the REMIC Trust, and its participation in this case is in that capacity.
In September 2004, UBS and Wells Fargo signed a settlement agreement and mutual release (“UBS Settlement”), which resolved the Texas litigation. While the terms of the UBS Settlement were confidential, public documents introduced by Nizan in the circuit court indicate UBS paid $19.375 million to the REMIC Trust in “liquidation proceeds.” 7 Pursuant to the Pool and Servicing Agreement between Wells Fargo and Orix, the UBS Settlement proceeds were required to be classified as payment upon one or more of the promissory notes held in the REMIC Trust. Consequently, Wells Fargo “treated [approximately $13.4 million from the UBS Settlement] as having been received in respect of” the Lee Hall Loan for purposes of accounting in the REMIC Trust.
After the bankruptcy court lifted the stay in February 2005, proceedings in the circuit court under Wells Fargo's motion for judgment recommenced.8 Nizan sought additional discovery from Wells Fargo in the circuit court regarding the UBS Settlement. He maintained that Wells Fargo was barred from obtaining a “double recovery” from both him and UBS for the same damages represented by payments on the Lee Hall Loan. Nizan contended further discovery was necessary to determine whether, or to what extent, Wells Fargo had already received payment in the UBS Settlement for the same damages that Wells Fargo sought to recover from him under the Guaranty for the Lee Hall Loan.
In response, Wells Fargo filed a motion for a protective order and made an oral motion in limine so as to bar further discovery. Wells Fargo contended that the date for concluding discovery had passed prior to Nizan's bankruptcy and that the details of the UBS Settlement were irrelevant to its claims against Nizan. Wells Fargo asked the circuit court to adopt the rationale articulated in an order entered by the United States Bankruptcy Court for the Southern District of Texas, In re Cyrus II Partnership, No. 05-39857 (Bankr.S.D.Tex.2005) (“Cyrus”).
When the Debtors signed the loan documents, they became obligated to the holders of the debt. [UBS] was never a maker of the note. UBS allegedly breached an independent obligation that it had to Orix. When it settled its breach by the payment of $19.4 million, UBS could have negotiated that it would have paid more to Orix for the transfer of the note to UBS. Or, UBS could have paid less and left the note with Orix. [UBS's] breach was independent of the Debtors' payment obligation. If UBS had acquired the note as part of its settlement (i.e., UBS had paid $19.4 million and received the note from Orix), the Debtors would have no conceivable argument that the Debtors would be entitled to a credit for UBS's payment. The transaction that occurred was wholly independent of the Debtors' obligation to pay on the note. Because [UBS] paid less and left the note with Orix, the Debtors allege that they are entitled to a credit. Logic dictates that the amount owed by the Debtors should not be affected by the structure of a settlement between third parties.
Cyrus, slip op. at 3.
After a hearing, the circuit court granted the protective order and barred further discovery by Nizan as to the UBS Settlement by an order entered April 14, 2006 (“the Protective Order”). At the time of the ruling, the circuit court stated that additional discovery was not necessary for the parties to adequately argue their positions regarding the relevance of the UBS Settlement, and Nizan's defense of double recovery.
The UBS settlement and the manner in which the proceeds of such settlement were allocated are not relevant to Nizan's obligation as Guarantor to repay the entire amount due on the Lee Hall Loan, and Wells Fargo's recovery under the Guaranty does not constitute or operate as a double recovery.
Finding no further issues remaining in the case, the circuit court entered judgment in favor of Wells Fargo, and held Nizan liable “in the amount of $6,619,005.86 as of September 23, 2002” in addition to interest at a rate of 13.2 percent per year. We awarded Nizan this appeal.
Before analyzing Nizan's assignments of error, we first address Wells Fargo's argument that under the Uniform Commercial Code (“UCC”), as applicable in Virginia, Nizan can only be relieved of his obligation to pay the Note if he is discharged from that obligation under the provisions of Code § 8.3A-601. That statute provides that discharge occurs “as stated in this title or by an act or agreement with the party which would discharge an obligation to pay money under a simple contract.” Wells Fargo asserts that Nizan's liability was not discharged by any means described in Title 8.3A, nor by agreement with Wells Fargo. It further asserts that its “act” of “characterizing ․ the UBS Settlement [as a] write-off [of] the Lee Hall Loan ․ does not operate as a discharge.” Therefore, Wells Fargo contends Nizan remains obligated to pay the Note and cannot assert an “extra-statutory ‘equitable discharge’ ” means of relief via the defense of double recovery.
Whether an equitable defense such as double recovery can be asserted against the holder of a negotiable instrument under the UCC is an issue of first impression in Virginia. Code § 8.3A-601, on which Wells Fargo relies, addresses the means by which an obligation to pay a promissory note can be discharged under the UCC. However, Nizan does not assert that his obligation has been discharged. Instead, he has raised the defense of double recovery.
We have analyzed the common law defense of “double recovery” in several contexts, including as a defense to recovery of damages in contract-based actions. See, e.g., Cox v. Geary, 271 Va. 141, 150, 624 S.E.2d 16, 21 (2006); Klaiber v. Freemason Assocs., 266 Va. 478, 488-89, 587 S.E.2d 555, 560-61 (2003). This Court has recognized that a party with two valid causes of action is entitled to “seek compensation in each, [but is], nonetheless, estopped from collecting the full amount [of damages] in the second action if they were partially paid therefor in the first.” Katzenberger v. Bryan, 206 Va. 78, 85, 141 S.E.2d 671, 676 (1965). We based this “proposition[ ] upon basic principles of fairness and justice.” Id. We have also recognized that the holder of a promissory note may not “obtain a judgment against the [obligor] for the balance due on the note [when doing so] would be inequitable and allow him a double recovery.” Joyner v. Graybeal, 204 Va. 543, 546, 132 S.E.2d 467, 469 (1963) (pre-UCC).
[u]nless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause supplement its provisions.
Code § 8.1A-103. Thus, unless a particular provision of the UCC displaces the defense of double recovery, that defense would be available in a UCC-based claim. Code § 8.3A-601 does not touch upon, much less displace, the defense of double recovery.
Therefore, under the provisions of Code § 8.1A-103, the defense of double recovery may be applicable in UCC-based actions as “a principle of law and equity” not displaced. For purposes of this opinion, it is unnecessary to address the corollary issue of whether a person who successfully asserts the defense of double recovery is thereby “discharged” from the underlying debt under Code § 8.3A-601.9 Accordingly, Wells Fargo's argument under Code § 8.3A-601 fails. We now turn to the merits of Nizan's assignments of error.
Wells Fargo responds that the circuit court did not err because the prohibition of double recovery only applies when “recovery is sought for the ‘very same items of damage,’ ” which did not occur in the case at bar. It asserts that the “ ‘item of damage’ for which Nizan is liable to Wells Fargo is payment of the amount due on a negotiable instrument,” while the “ ‘item of damage’ for which UBS was liable was the amount the Trust overpaid in its purchase of the pool of loans-that is, an adjustment in the purchase price.” Wells Fargo submits that the circuit court “properly recognized the distinction between the injuries [Wells Fargo] sustained as a result of UBS's action and those sustained by Nizan's failure to pay his obligations.” It contends that UBS could have repurchased the Note as part of the Settlement Agreement, but did not do so; instead, Wells Fargo “remain[ed] the holder entitled to enforce” the obligation to pay the balance due on the Note. Lastly, Wells Fargo asserts that under Lanasa v. Willey, 251 Va. 231, 234 n. 4, 467 S.E.2d 786, 788 n. 4 (1996), a person who is obligated to pay a promissory note must do so “according to its terms” and cannot assert a defense of double recovery to prevent the holder from enforcing the terms of the note. Id.
Initially, we note that Wells Fargo's reliance on Lanasa is misplaced. In that case, two individuals signed a promissory note, and the holder of the note sought to enforce the note against Willey, one of the makers. Willey argued that the holder should be limited to collecting one-half of the note balance because the holder could collect the remainder due under the note from the other maker. Willey contended that permitting the holder “to recover the full amount of the [n]ote would facilitate a double recovery.” Lanasa, 251 Va. at 234 n. 4, 467 S.E.2d at 788 n. 4. This Court rejected that argument, stating, “Willey's sole obligation in this matter is as a maker of the note. She and the other maker[ ] are ‘jointly and severally liable in the capacity in which they sign,’ and, if she pays the note, she will be entitled to receive contribution from the other maker[ ].” Id. Clearly, what Willey argued in Lanasa was not the same “double recovery” defense that Nizan makes here. While Willey sought to have her joint and severable obligation reduced based on the co-liability of other obligors under the promissory note, Nizan seeks to have his obligation reduced based on Wells Fargo's alleged recovery for the same damages it now seeks to recover against him.
Among the factual representations Nizan made to the circuit court in support of the defense of double recovery were: (1) Wells Fargo sued UBS seeking “repurchase” of, inter alia, the Lee Hall note; (2) Wells Fargo's expert witness in the UBS litigation used the “repurchase price,” rather than “investor damages” as the basis for calculating damages relative to the Lee Hall Loan; (3) Wells Fargo represented to the courts in Cyrus and Trust for Certificate Holders of Merrill Lynch Mortgage Investors, Inc. v. Love Funding Corp., 499 F.Supp.2d 314, 2007 U.S. Dist. Lexis 13566, No. 04 Civ. 9890(SAS) (S.D.N.Y. Feb. 27, 2007), that guarantors of other loans that were part of the UBS Settlement were not entitled to “credit” from the UBS Settlement proceeds because those proceeds were allocated to the Lee Hall Loan; and (4) Wells Fargo allocated some of the proceeds from the UBS Settlement to the Lee Hall Note for REMIC Trust purposes, and notified certificate holders of the REMIC Trust that the Lee Hall Loan had a zero balance following this allocation.
By contrast, we find that Nizan's first and second factual representations noted above were relevant to determining whether Wells Fargo had recovered damages under the Lee Hall Loan of the same character as that sought from Nizan. The first and second representations, if proven at trial, could be sufficient to make a prima facie case of double recovery. We reach this conclusion upon review of the principles set out in Katzenberger and Cox.
[T]he purchasers of real property filed a motion for judgment against an attorney who had examined and certified title to the parcel of property they had contracted to purchase. At the time the suit was filed, the purchasers had already settled a claim against the sellers of the property for breach of the warranty of title.
While the [purchasers], by settling their contract action against the [sellers] were not barred from seeking further recovery in their tort action against the [attorney], they were not entitled to secure a double recovery. While they had two separate causes of action and were entitled to seek compensation in each, they were, nonetheless, estopped from collecting the full amount in the second action if they were partially paid therefor in the first case. These propositions are applicable to this case ․ upon basic principles of fairness and justice.
But the [purchasers] alleged substantially the same elements of damages in their action against the [sellers] and in their action against the [attorney].
It thus appears that, in the satisfaction made by the [sellers] and in the verdict rendered against the [attorney], there may have been a duplication in [one element of damages claimed in each case]. [I]f it was shown that a portion of the settlement was applicable to the very same items of damages which the [purchasers] sought against the [attorney], the [purchasers'] recovery could have been reduced by the extent of the duplication.
206 Va. at 85-86, 141 S.E.2d at 676-77. Because all evidence relating to the settlement was excluded, we reversed the judgment of the circuit court and remanded the cause for a new trial. Id. at 86-87, 141 S.E.2d at 677.
In Cox, the plaintiff filed a motion for judgment against his former attorneys for malpractice, and sought damages arising from his wrongful conviction and imprisonment. 271 Va. at 146-47, 624 S.E.2d at 19. Prior to filing suit, the plaintiff had received “compensation from the Commonwealth [for] his wrongful incarceration.” Id. at 145, 624 S.E.2d at 18. The plaintiff did “not argue that the type of injuries for which the General Assembly compensated him differ[ed] from the type of injuries he” alleged against his former attorneys. Id. at 148, 624 S.E.2d at 20. We held that the plaintiff did “not seek to recover from the Attorneys an element of damage different from the damages provided by” the General Assembly's action. The injuries and damages were the same and the plaintiff was only entitled to one recovery for those injuries and damages. Id. at 151, 154, 624 S.E.2d at 22-23.
Nizan's first and second factual representations thus raise the potential connection of damages Wells Fargo sought and recovered from UBS to the damages Wells Fargo now seeks against Nizan. It would be a question of fact, or mixed question of law and fact, at a trial on the merits as to whether the UBS payment in the UBS Settlement was a payment on the Note or some other type of damages such as the “investor damages” Wells Fargo recites. Based on our jurisprudence regarding the defense of double recovery, if some of the proceeds from the UBS Settlement were indeed a payment or partial payment by UBS of the Note, then a valid argument would be set forth that the damages recovered from UBS and sought from Nizan are the same damages: payment of the Note. If Nizan proves the factual representations at trial, he may have presented a prima facie claim of double recovery.
The circuit court thus erred in ruling as a matter of law, at this stage of the proceedings, that the damages recovered as part of the UBS Settlement could not be the same damages Wells Fargo seeks against Nizan. The circuit court also erred, at this stage of the proceedings, in preventing Nizan from presenting further evidence as to whether Wells Fargo could recover damages from Nizan if the proceeds from the UBS Settlement compensated Wells Fargo for the same damages under the Lee Hall Loan.
Nizan also contends the circuit court erred by determining “Wells Fargo was entitled to more than one recovery of the amounts due under the Note because Mr. Nizan and UBS did not have joint or common liability to Wells Fargo.” Neither the Amended Final Order nor the Protective Order recite that holding; however, the Protective Order recites as a basis for the order “ the reasons set forth from the bench on ․ February 22, 2006.” The Amended Final Order references the language of the Protective Order.
I indicated that I thought Cyrus was persuaded [sic], and I think still think it's persuaded [sic], although not controlling.
In their terminology of solidary liability in my reading of it, while it's not inconsistent with Virginia law-in fact, the bankruptcy court referred to it as a common law version of joint liability, and that's in its language.
Nizan was not a party to this settlement, it was not made on his behalf, and there is no common liability. You've argued that common liability does not apply, but there is no common liability.
This suit by Wells Fargo against UBS was because of their misrepresentation of the value of those loans. That's a separate issue.
And I agree with Wells Fargo's analysis as to Katzenberger's applicability, and [Cox]. I do not find that they really deal with the specifics of this case or the underlying laws as it relates to this case. UBS or the guarantors did not have any common liability to Wells Fargo.
And for all the reasons stated in plaintiff's brief and for the reasons I've so stated, I do grant the motion in limine, and I will enter judgment for the plaintiff.
To the extent the circuit court based its judgment that Nizan could not assert a claim of double recovery against Wells Fargo because Nizan had no “common liability” with UBS as to the Note, the circuit court erred. Our jurisprudence is clear that the defense of double recovery arises from a claim as to the same damages, not the same basis of liability for the damages. We return to our analysis in Katzenberger to amplify this point.
[the sellers] and the [attorney] were not joint tortfeasors, they were not in privity one with the other and they were not acting in concert in any manner. Their acts which gave rise to the claims against them were separate, different and distinct. If the [purchasers] were wronged, it was because the [sellers] separately breached their covenant that they had the right to convey the land and because the [attorney] separately breached his duty to use due care in examining the title to the property. The [sellers] were strangers to the wrong allegedly committed by the [attorney] and he a stranger to the wrong allegedly committed by them.
[w]hile the plaintiffs, by settling their contract action against the [sellers] were not barred from seeking further recovery in their tort action against the [attorney], they were not entitled to secure a double recovery. While they had two separate causes of action and were entitled to seek compensation in each, they were, nonetheless, estopped from collecting the full amount in the second action if they were partially paid therefor in the first.
Katzenberger establishes that what is dispositive to a defense of double recovery is whether the damages claimed, on whatever theory of liability, are the same damages. If the element of damages is the same, it makes no difference that the potential payors are not joint tortfeasors or jointly and severally liable under the same theory of liability.
The circuit court's reliance on Cyrus is thus inapposite. In Cyrus, the bankruptcy court applied Louisiana law which “encompasses the concept of ‘solidary liability’. ‘An obligation is solidary for the obligees when it gives each obligee the right to demand the whole performance from a common obligor.’ When obligations are independent, Louisiana law does not allow the settlement of one independent obligation to affect liability on the other.” Cyrus, slip op. at 3 (citation omitted). Consequently, the bankruptcy court concluded that “there is no solidary liability here because UBS ․ and the Debtors did not have a common liability ․ under Louisiana law.” Id., slip op. at 4.
This concept of solidary liability under Louisiana law has no nexus to a claim of double recovery in Virginia and is not an element of that defense. To the extent the circuit court based its judgment on the view that common liability was a required element of a double recovery defense, that ruling was in error. In order to assert the defense of double recovery against Wells Fargo, Nizan must prove that the damages Wells Fargo received from UBS and what it seeks from Nizan are the same, not that Nizan and UBS are jointly liable under a common basis of liability or through the same cause of action.
if it determines that: (i) the discovery sought is unreasonably cumulative or duplicative ․; (ii) the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought; or (iii) the discovery is unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, limitations on the parties' resources, and the importance of the issues at stake in the litigation.
Id. “Generally, the granting or denying of discovery is a matter within the discretion of the [circuit] court and will not be reversed on appeal unless ‘the action taken was improvident and affected substantial rights.’ ” O'Brian v. Langley Sch., 256 Va. 547, 552, 507 S.E.2d 363, 366 (1998) (quoting Rakes v. Fulcher, 210 Va. 542, 546, 172 S.E.2d 751, 755 (1970)). In O'Brian, we held the circuit court erred by entering summary judgment for the plaintiffs before permitting the defendants to conduct discovery on their defense that a contract's liquidated damages provision was unenforceable. Id. at 549, 507 S.E.2d at 364. The Court then noted that although the parties signed a contract that contained a liquidated damages provision, a recognized defense to the enforceability of such a provision exists under certain circumstances. Id. at 550-51, 507 S.E.2d at 365. Because the circuit court in O'Brian “precluded any inquiry into the validity of the liquidated damages clause by denying the O'Brians' motion to compel and subsequently awarding summary judgment before hearing any relevant evidence on the issue” we reversed the court's judgment. Id. at 552, 507 S.E.2d at 366. We concluded that “the [circuit] court's actions ․ substantially affected the [defendants'] ability and right to litigate the validity of the liquidated damages clause” and the court abused its discretion in denying discovery. Id. at 552, 507 S.E.2d at 366.
3. A REMIC trust is a real estate mortgage investment conduit defined in § 860D of the Internal Revenue Code of 1986. 26 U.S.C. § 860D (2000). A mortgage qualifies as a REMIC mortgage if, at the time it was originated or contributed to the trust, it was principally secured by an interest in real property. Id. REMIC trusts are pools of mortgages in which the beneficial ownership has been sold to various investors in the form of certificates representing their undivided interest in the total mortgage pool. See, e.g., “Which loans qualify for REMIC trusts?,” Commercial Lending Litigation News (October 14, 2004). If the REMIC trust complies with Internal Revenue Service regulations, mortgage payments made to the trust may be passed through to certificate holders free of federal taxes. See Dean Weiner and K. Peter Ritter, “Real Estate Mortgage Investment Conduits and Financial Asset Securitization Investment Trusts,” Commercial Securitization for Real Estate Lawyers, Volume 1, ALI-ABA COURSE OF STUDY MATERIALS (April 2003).
4. Wells Fargo's claim against Cimerring proceeded to trial in the circuit court as scheduled. The circuit court entered judgment on February 18, 2003 in favor of Wells Fargo and against Cimerring for $6,619,005.86 in compensatory damages, with interest accruing at 13.2 percent from September 23, 2002.In September 2005, Cimerring filed a bill of complaint to obtain relief from the judgment against him. The circuit court sustained Wells Fargo's demurrer to Cimerring's bill of complaint, and he appealed that judgment to this Court. We have affirmed that judgment by an order issued this day.
5. ORIX Capital Markets, LLC, (“Orix”) brought the suit as “Master Servicer and Special Servicer of the Trust” on behalf of the REMIC Trust and Wells Fargo, as trustee.
6. According to the Mortgage Loan Purchase Agreement (“MLPA”) signed by Wells Fargo and UBS, the “Repurchase Price” was “an amount equal to the sum of” “the outstanding principal balance of [the loan] as of the date of purchase,” “all accrued and unpaid interest,” and related expenses.
9. Neither party raised any potential applicability of Code § 8.3A-305, “defenses and claims in recoupment,” in the circuit court or in argument to this Court and we express no opinion thereon.
10. Whether Wells Fargo's representations in other courts implicate some form of estoppel is not an issue before us and we express no opinion in that regard.
11. One of Wells Fargo's original arguments opposing further discovery was that the parties' discovery deadline passed before Nizan requested additional discovery into the UBS Settlement. However, this is not a relevant consideration since the UBS Settlement, and therefore knowledge of its potential relevance to the case at bar, occurred after the prior discovery deadline had passed.
12. Nothing in our opinion restricts the circuit court's oversight into the scope, means, and method of discovery into the UBS Settlement. Upon remand, the circuit court can hear the parties' arguments on this issue and provide reasonable protection for confidentiality, including in camera review, if the need be shown.
13. In view of our resolution of the other assignments of error, we do not address Nizan's fifth assignment regarding the language in the Protective Order, which “adopt[ed] in their entirety” the “reasons set forth in [Wells Fargo's] Motion for Protective Order, Reply in Support of Motion for Protective Order and Brief in Support of Court's Ruling.”To the extent that the circuit court's judgment in favor of Wells Fargo relied on any of Wells Fargo's additional trial argument opposing the applicability of the double recovery defense, none merit discussion or stand as an independent basis to sustain the circuit court's judgment at this stage of the proceedings.

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