Opinion ID: 2299567
Heading Depth: 1
Heading Rank: 3

Heading: The Litigation: Procedural History

Text: 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 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, 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 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 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 statute 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 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. [3] Shearson Lehman 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 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 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 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 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 of that agreement and that the agreement may not be enforceable for that reason. [5] Judge Keir 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. 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 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, [6] and in a Memorandum Opinion and Order 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 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 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 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. 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.