GAB Enterprises, Inc. v. Rocky Gorge Development, LLC , 221 Md. App. 171 ( 2015 )

REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 2575
September Term, 2012
GAB ENTERPRISES, INC.
v.
ROCKY GORGE DEVELOPMENT, LLC,
et al.,
Graeff,
Berger,
Nazarian,
JJ.
Opinion by Nazarian, J.
Filed: January 29, 2015
* Judge Timothy E. Meredith, Judge Andrea
M. Leahy, and Judge Kevin F. Arthur did not
participate, pursuant to Md. Rule 8-605.1, in
the Court’s decision to report this opinion.
“A bad beginning makes a bad ending,”1 and in this case, the parties’ difficult
relationship at the beginning of this development project presaged its eventual demise. In
2003, Rocky Gorge Homes, LLC (“Rocky Gorge”) and GAB Enterprises, Inc. (“GAB”)
created RGHGAB at Frederick, LLC (“RGHGAB”), to buy, develop, and sell property in
Frederick County. Like many others, this deal failed to predict the catastrophic collapse of
the real estate market about five years later, which left RGHGAB holding a figurative bag
that contained a nearly $9 million promissory note guaranteeing property worth less than $3
million. In an effort to salvage its interest, and after some back-and-forth with GAB,
RGHGAB formed another corporation, Waverley View Investors, LLC (“Waverley”), to
purchase the promissory note at a much-reduced price. But GAB says that it wished to
acquire the property itself, and initiated involuntary bankruptcy proceedings against
RGHGAB (the “Bankruptcy Proceeding”) that sought to force Waverley out and obtain the
note for its own. Those efforts did not succeed, but did generate a written opinion explaining
the issues the Bankruptcy Court was and was not deciding in ruling against GAB.
GAB tried again in the Circuit Court for Frederick County in a nine-count complaint
(the “Circuit Court Proceeding”) alleging that the CEO of Rocky Gorge, Christopher
Dorment, fraudulently formed Waverley to eradicate GAB’s interest in RGHGAB. The
circuit court granted Rocky Gorge’s Motion to Dismiss and for Summary Judgment on the
ground that the previous findings of the Bankruptcy Court barred GAB’s claims under the
doctrine of collateral estoppel. We disagree that the Bankruptcy Court decision resolved the
1
Euripides, Aeolus, fragment 32.
claims Rocky Gorge brings in this case, so we reverse the dismissal, as well as the circuit
court’s decision to grant summary judgment on other contested counts, and remand for
further proceedings.
I. BACKGROUND
We start with the Note that set the process in motion, then watch the parties’ business
relationship unravel as the property’s value plummeted, then chronicle the two phases of
litigation that bring everyone before us.
1. Purchase (RGHGAB) and Repurchase (Waverley) of the Note
Rocky Gorge, as an 80% member, and GAB, as a 20% member, formed RGHGAB
as a Maryland limited liability company on November 10, 2003. The Chairman and CEO of
Rocky Gorge at the time was (and by all indications still is) Christopher Dorment. His wife,
Rosemary, plays a role later on, but was not a member of Rocky Gorge. GAB acted through
its President, Gary Berman. RGHGAB was formed to purchase a promissory note on a loan
secured by a 93-acre tract of land in Frederick (the “Property”), then foreclose. Under the
RGHGAB Operating Agreement (the “Operating Agreement”), RGHGAB would develop
the Property. The Operating Agreement tasked Rocky Gorge with obtaining financing and
required all parties to “use good faith and best efforts in all dealings.”
2
The parties secured the financing with a Promissory Note dated January 30, 2004 (“the
Note”2 ), made by Rocky Gorge and held by BB&T Bank (“BB&T”). The original principal
amount of $2.75 million tracked the principal amount in an accompanying Indemnity Deed
of Trust. A recital to the Note contained Mr. Dormant’s personal guaranty of full repayment
and GAB’s guaranty of partial repayment in the event of a default. As time went by, the
principal amount of the Note was amended, ballooning to nearly $9 million as of September
12, 2007, and the maturity date ultimately was extended to January 15, 2010. GAB claims
that it continued to guarantee partial repayment of the Note only because of “Mr. Dorment’s
re-affirmation that he had, and would retain, sufficient assets to secure each modification of
the Note.”
In the meantime, the parties ran into trouble, not just because the property value fell
as the amount due under the Note rose, but also because Mr. Dorment and Mr. Berman seem
never to have agreed on the terms of the Operating Agreement. As early as 2005, GAB filed
suit against Rocky Gorge, claiming that it violated the Operating Agreement by trying to sell
some of the Property. The parties ultimately settled that dispute and executed a Second
Amendment to the Operating Agreement, under which GAB obtained additional
development rights. There was a second round of litigation in 2008 and 2009, after a dispute
2
Although the parties both discuss the formation of the Note at length, we do not see
a copy of the Note itself in the record. (They refer either to a later 2010 note in the record that
memorializes the 2004 transaction, or the Bankruptcy Court’s opinion discussing it.) The
parties don’t dispute the formation or validity of the Note, however, or that the original
borrower on it was Rocky Gorge, rather than RGHGAB or any of the individuals.
3
between the parties about a payment to RGHGAB on the Note from BB&T for nearly
$150,000. According to the Complaint in this case, Rocky Gorge ultimately was ordered by
an arbitrator to repay the funds to BB&T, but never did so. It is not clear from the record
what, if any, action GAB undertook in response.
By late 2009, the Property’s value had dropped far below the increasing amount due
under the Note. Although the record does not contain specific evidence of why no
development occurred throughout this time (we surmise that the parties were occupied
watching the Property decline in value and feared throwing good money after bad),
RGHGAB found itself with no funds and a need for further financing. Mr. Berman declined
to make further contributions, although he suggested turning to his father, Malcolm Berman,
for funding. It seems, though, that whatever conditions the senior Mr. Berman wished to
impose, Mr. Dorment found them unfavorable and pursued further funds on his own.
We will discuss below, and in detail, the findings of the United States Bankruptcy
Court for the District of Maryland (the “Bankruptcy Court”) in the litigation that underlay
the Circuit Court’s dismissal of this case. The Bankruptcy Court’s eventual decision
provides, however, a succinct narrative of the next phase of the parties’ relationship:3
[a]t all times [Mr.] Dorment advised [Mr.] Berman of the
situation facing the venture. This was required in that Section
5.3 of the Operating Agreement required [Mr. Berman’s]
3
The Bankruptcy Court mistakenly referred to Mr. Berman in places as “Robert”
Berman rather than “Gary” Berman. We correct that error where it appears and harmonize
the varied spellings of “Waverley.”
4
agreement to dissolve or terminate the venture, to do anything
in contravention of the agreement, to do any act that would
make it impossible to carry on the ordinary business of the
venture, or to possess or assign rights in company property or
assign rights in company property other than for a company
purpose.
By a letter dated November 12, 2009, [Mr.] Dorment
advised [Mr.] Berman of his intention to buy [the Note] at a
discount and that he was seeking fresh equity capital and that
this would require ceding of control of the project and dilution
of their equity stakes. How he could cede control of the project
without the consent of [Mr.] Berman is unclear.
(Emphasis added.)
On February 3, 2010, Mr. Dorment proposed to Mr. Berman that they form a new
entity to take on the Note. Even the Bankruptcy Court, looking back, could not discern how
Mr. Dorment intended to do this without Mr. Berman’s consent, but Mr. Dorment apparently
had “concluded that the only practical course of action would be for a new entity to buy [the
Note], and ‘if the Managing Member reaches that conclusion, the Managing Member would
proceed ahead with the goal of protecting the interests of the Company even if the minority
member objected.’”
At this point, BB&T had extended the Note’s maturity date of January 15, 2010. But
when Mr. Dorment sought to enter a forbearance agreement with BB&T on March 30, 2010,
Mr. Berman—“true to his uncooperative nature,” as the Bankruptcy Court put it—“refused
to sign the agreement.” Mr. Dorment’s continuing efforts to marshall support from Mr.
5
Berman or his father were unavailing.4 Mr. Dorment then obtained a commitment from
another bank that would let Waverley buy the note from BB&T. Under the new deal, Mr. and
Mrs. Dorment would serve as personal guarantors, the obligation would be secured further
by the Note, and Waverley would act as the purchaser. Rocky Gorge assigned the note
purchase agreement to Waverley, completing the transaction (in which, by the way, Waverley
agreed to release all prior guarantees, including GAB’s) on September 17, 2010. Then, in
October 2010, Waverley undertook to foreclose on the Property.
GAB resisted these efforts almost immediately. On October 28, 2010, it filed a Motion
to Stay the Sale of Property and Dismiss Foreclosure Action in the Circuit Court for
Frederick County (the “Motion to Stay”). Although we now know that the interests of the
GAB and RGHGAB ended up adverse to one another, at the time GAB sought the stay
derivatively on behalf of RGHGAB. The details don’t matter here, but the short story is that
after this Court denied RGHGAB’s (i.e., GAB’s) appeal of the Circuit Court’s denial of the
Motion to Stay, Waverley resumed its efforts to foreclose.
4
The Bankruptcy Court refers to a July 2010 meeting in which Mr. Dorment tried to
propose terms for Malcolm Berman to buy the Note. “At no time did Malcolm discuss
anything but generalities and never was anything put in writing by him in regard to his
advancing money for the project. Following the meeting, [Mr.] Dorment sent Malcolm a
Term Sheet that he found unacceptable.” E-mails between Mr. Dorment and Mr. Berman
that were introduced as attachments to the Complaint demonstrated the parties’ antipathy
toward one another and chronic distrust.
6
2. The Bankruptcy Proceeding
Undaunted, GAB looked to another forum, and filed a Petition for Involuntary
Bankruptcy (Chapter 7) in the Bankruptcy Court on January 11, 2011. The Petition was
unusual: GAB listed no other petitioning creditors in the Petition and characterized its own
claim as a loan in the amount of nearly $440,000. The filing brought the foreclosure
proceeding to an abrupt halt because of the automatic stay that issued from the Bankruptcy
Court, so Waverley sought relief from the stay on February 22, 2011, arguing (in the “Motion
for Relief”) that it should be permitted to foreclose on the Property as a secured creditor.
GAB opposed the Motion for Relief, alleging that Mr. Dorment “secretly created Waverley
for the purpose of improperly transferring [RGHGAB’s] assets and other corporate
opportunities to Waverley, and wiping out the interests in [RGHGAB’s] property of not only
GAB but also [of RGHGAB’s] other creditors.” As far as we can tell, the Motion for Relief
was not addressed directly by the Bankruptcy Court.
Next, the Trustee in the Bankruptcy Proceeding filed a First Amended Complaint for
Equitable Subordination and Equitable Disallowance on May 9, 2011 (the “Bankruptcy
Complaint”) against Rocky Gorge and Waverley.5 The Trustee asserted that Mr. Dorment,
Rocky Gorge, and Waverley had “engaged in inequitable conduct” and improperly engaged
5
The Trustee filed the action, not GAB, but the Bankruptcy Complaint named no
interested parties other than those we have named above and GAB was the only party that
stood to benefit from any subordination of Waverley’s claim. The Bankruptcy Court refers
in its opinion to six other unsecured creditors, but the details aren’t before us.
7
in self-dealing that harmed RGHGAB and its creditors (including only GAB by name). The
complaint sought equitable subordination of Rocky Gorge and Waverley’s claims against
RGHGAB and equitable disallowance of these claims.
The Bankruptcy Court held a trial that spanned three days in October and November
2011, and on April 24, 2012 issued a Memorandum of Decision (the “Memorandum”) and
entered Judgment for Waverley and Rocky Gorge dismissing the Bankruptcy Complaint. The
Court found broadly that Mr. Dorment’s decision to assign the Note to Waverley caused no
harm to any of the creditors—GAB or any of the six creditors that lacked priority claims. It
approached the question three different ways:
First, the Bankruptcy Court found at the outset “a total absence of harm by the actions
complained of to the one creditor holding a secured claim [i.e.,Waverley6 ] or the [remaining]
holders of claims without priority.” (Emphasis added.) A cause of action for equitable
subordination in involuntary bankruptcy requires harm to creditors (citing In re: Kreisler,
546 F.3d 863, 866-67 (7th Cir. 2008)), and as the Bankruptcy Court saw it,“[t]his project was
so far indebted to [Waverley] that there was no scenario under which the Trustee’s
constituent body, the holder of unsecured claims, could receive any distribution whatsoever.”
The Bankruptcy Court qualified its decision by pointing out that “Rocky Gorge might have
a fiduciary relationship to GAB, but that is not what this adversary proceeding concerns.”
6
The Court explained that Waverley was “the present holder of a secured claim in the
sum of $9,642,437.46 sought to be subordinated.”
8
Second, the court denied GAB’s claim for equitable subordination. GAB had sought
to subordinate Waverley’s claim and transfer its lien to the Trustee; it also sought equitable
subordination of Rocky Gorge’s claim. Under 11 U.S.C.A. § 510 (2004), which codifies the
doctrine, a court may “subordinate . . . all or part of an allowed claim to all or part of another
allowed claim.” Id. § 510(c)(1). But again, equitable subordination requires a showing of
injury to other creditors, and, again, the Bankruptcy Court found that “no harm was caused
to the creditor body by [Mr.] Dorment forming a group to acquire the Note in and of itself.”
(Emphasis added.) The court cautioned once more that “there could well be a cause of action
in what is essentially this two-party dispute between [Mr.] Berman and [Mr.] Dorment
operating through their legal entities. But resolution of the potential dispute is for another
day in another jurisdiction.” (Emphasis added.)
Third, the Trustee sought not just to subordinate, but also to disallow Waverley’s and
Rocky Gorge’s claims, which as the Bankruptcy Court noted is available “‘only ‘in extreme
instances—perhaps very rare—where it is necessary as a remedy.’” (quoting Adelphia
Recovery Trust v. Bank of America, N.A., 390 B.R. 80, 99 (S.D.N.Y. 2008)). The Bankruptcy
Court again found that there was “nothing in the nature of inequitable conduct or unfairness
on [Mr.] Dorment’s part. The creditors . . . were then at least $5 million under water and
suffered no change in position as a result of the transfer of the Note to parties friendly to
[Mr.] Dorment.” The court further found “as a fact that the primary motivation of [Mr.]
Dorment was to limit his liability on the guaranty and secondarily to protect the venture.”
9
Once again, the court was careful to point out that “[Mr.] Berman, as a partner-creditor, may
have a claim against his co-venturer. However, the court finds nothing in the behavior of
[Mr.] Dorment or his co-venturers in Waverley to mandate the awesome punishment of
equitable disallowance being imposed on them.”
GAB appealed the Bankruptcy Court’s decision to the United States District Court for
the District of Maryland, but dismissed the appeal pursuant to a stipulation by the parties on
September 21, 2012.
3. The Circuit Court Proceeding
On September 28, 2012, GAB filed the nine-count complaint that initiated this case
(the “Complaint”). GAB named Rocky Gorge, Mr. Dorment, his wife Rosemary, and
Waverley as defendants (collectively the “Defendants”), and alleged that Mr. Dorment
“secretly created [Waverley] for the purpose of improperly transferring RGHGAB’s assets
to Waverley and thus wiping out GAB’s interest in RGHGAB,” and that all the Defendants,
even Mrs. Dorment, were part of this “fraudulent scheme.” The Complaint listed counts in
intentional misrepresentation, constructive fraud, negligent misrepresentation, and breach of
fiduciary duty against Rocky Gorge and Mr. Dorment (Counts I, II, III, and VIII
respectively); fraudulent conveyance claims against Mr. and Mrs. Dorment (Counts IV and
V); tortious interference and civil conspiracy claims against all Defendants (Counts VI and
IX); and a breach of contract claim against Rocky Gorge (Count VII). GAB sought
compensatory damages of $7.5 million and punitive damages of $5 million against each
10
defendant and also asked the court to set aside GAB’s guaranty on the Note and certain
unidentified asset transfers between Mr. and Mrs. Dorment.
On November 5, 2012, the Defendants moved to dismiss and for summary judgment.
They argued that GAB had had more than one opportunity to litigate the issues raised here
before—not just in Bankruptcy Court, but in the 2005 and 2009 litigation—and that the
issues and claims raised by GAB had already been decided. They also argued at length that
GAB’s claims were not its to bring derivatively, but belonged to RGHGAB under the
Operating Agreement, and they attacked the underlying substance of the remaining counts.
The trial court held a hearing on February 12, 2013 that centered primarily on the
collateral estoppel effect of the Bankruptcy Court’s decision. As counsel for Rocky Gorge
put it, the “overarching theme in the Bankruptcy Court was . . . that somehow Waverley had
obtained [the Note] through inequitable [conduct]” and that RGHGAB should have allowed
GAB the opportunity to purchase the Note instead. Specifically, Rocky Gorge argued that
the Bankruptcy Court “specifically decided” (1) that there was an absence of harm to
RGHGAB and its creditors (GAB included); and (2) that there was no inequitable conduct
on Mr. Dorment’s part, which Rocky Gorge claimed should preclude GAB from proceeding
against the Defendants in circuit court.7
7
At the time, GAB’s counsel agreed to dismiss Count VIII, as the trial court suggested
there was no independent cause of action for breach of fiduciary duty, but reserved the right
to subsume such a claim within the remaining counts.
11
Counsel for GAB countered that the Bankruptcy Judge had made clear that he was
deciding the Bankruptcy Proceeding only and expressly anticipated that “the circuit court”
would resolve the parties’ differences anew. Moreover, as GAB saw it, the Bankruptcy Court
had focused on the factual issues about Mr. Dorment, not as they related to GAB but as they
related to the creditors overall, because the Bankruptcy Judge was tasked with determining
the specific question of whether the claims of other creditors (i.e., Waverley) could be
equitably subordinated to GAB’s claim. GAB highlighted one portion of the Bankruptcy
Court’s October 22, 2012, Order approving the sale of the Property that expressly left GAB’s
claims against its partners unresolved:
Notwithstanding any provision of this Order Approving Sale to
the contrary, . . . this specific Order Approving Sale shall not
impact or prejudice [Mr. Berman’s or GAB’s] direct claims
against any non-debtor third party.
At the February 12 hearing, GAB’s counsel cited another statement from the
Bankruptcy Judge that ostensibly narrowed the effect of his holding, which led the circuit
court judge to ask the following question about the scope of the order:
THE COURT: Is it the rulings that bar [the circuit court
proceeding] or the findings of fact that [bar] it—
[COUNSEL FOR GAB:] Well, I think it would be—
THE COURT: And there’s a distinction—
[COUNSEL FOR GAB:] Yes
***
12
THE COURT: . . . a finding of fact is not his ruling. . . . [I]n
order to make the ruling he found some facts. And [Rocky
Gorge’s] earlier argument was it’s the fact that [the Bankruptcy
Judge] found this and this as a matter of fact bars these claims.
[COUNSEL FOR GAB:] Well—
THE COURT: Which is basically a collateral estoppel right
there.
[COUNSEL FOR GAB:] —right, . . . I don’t think that [the
Bankruptcy Judge] made findings of fact that would have that
effect because he said that his findings of fact that everything he
did there would not have that [effect]. . . . [The Bankruptcy
Judge] did not make findings that relate to all aspects of our
claims for sure, no matter how you look at this.
(Emphasis added.) The trial court continued to press GAB’s counsel about the findings of
fact that the Bankruptcy Court did make, appearing especially concerned with that court’s
finding that there was “no inequitable conduct or unfairness” on Mr. Dorment’s part. As the
trial judge asked counsel for GAB, “if you make the finding of fact for a certain purpose,
isn’t that still a finding of fact binding on the parties?”
The trial court’s inclinations at the hearing were borne out in the Order it ultimately
issued on February 21, 2013, in which it accepted Rocky Gorge’s collateral estoppel
argument:
[T]he Court find[s] that the primary focus of the Defendants’
argument for Summary Judgment [is] collateral estoppel in that
[the Bankruptcy Judge] found a “total absence of harm to the
creditors,” to include [GAB], and that [the Bankruptcy Judge]
found “a lack of any inequitable conduct or unfairness” on the
part of [Rocky Gorge], and that these findings are binding upon
the parties in this matter, and . . . these findings of fact are
13
dispositive as to Counts I, II, III, VI and VII of the . . .
Complaint; and
[T]he Court further find[s] that [Rocky Gorge’s] argument for
Dismissal applies to Counts IV and V, in that [GAB] failed to
state a claim upon which relief can be granted, and [GAB]
conceding that there are no additional facts to allege; and upon
the Court’s finding that [GAB’s] allegation that [Mr. Dorment]
failed to keep sufficient liquidity in his assets to guarantee the
loan, is an action to be brought by the secured party, rather than
by [GAB].
GAB had agreed to dismissal of Count VIII, and the trial court granted summary judgment
as to the conspiracy claim in Count IX because it could not survive without a finding of
liability on at least one of the underlying counts. The court also dismissed Counts IV and V
of the Complaint (based on Rocky Gorge’s having filed a motion to dismiss in connection
with those counts, and not a summary judgment motion).
GAB filed a timely Notice of Appeal on February 26, 2013.
II. DISCUSSION
Much as they have outside the courtrooms, the parties clash on virtually every judicial
decision relating to this property. As the Bankruptcy Court put it, “[t]hroughout [the] life of
the agreement, the relationship between [Mr.] Berman and [Mr.] Dorment was acrimonious
and marked by ongoing disputes almost from the start.” And admittedly, GAB has taken
every opportunity, in more than one forum, to litigate the terms of the Operating Agreement
14
and many other elements of this series of relationships.8 But applying collateral estoppel here
would hold GAB to a decision that arose in a different context, that decided different claims
for a different purpose, and that the presiding judge specifically meant not to reach.
We hold that the facial similarity of interests or issues in the two cases cannot
overcome the core substantive differences, and we reverse the trial court’s grant of summary
judgment to Rocky Gorge. In concluding that collateral estoppel does not apply, we express
no views on the merits of GAB’s claims (on which the trial judge, too, declined to opine)
beyond allowing the case to proceed past the dismissal. We also reverse the trial court’s
dismissal of the two counts against Mr. and Mrs. Dorment, because the allegations in the
Complaint sufficiently alleged the elements of a fraudulent conveyance (Counts IV and V)
that the court should not have granted Rocky Gorge’s Motion to Dismiss, and we remand the
entire case for further proceedings.
8
GAB framed the issues as follows in its Questions Presented:
1. Did the trial court err in concluding as a matter of law
that GAB’s claims were precluded pursuant to the
doctrine of collateral estoppel?
2. Did the trial court err in entering summary judgment in
favor of Appellees on Counts I, II, III, IV, V, VI, VIII,
and IX of [GAB’s] complaint?
3. Did the trial court err in concluding that GAB’s
fraudulent conveyance claims against Mr. Dorment and
Mrs. Dorment (Counts IV and V of [GAB’s] complaint)
failed to state a claim upon which relief could be
granted?
15
We review the grant of a motion to dismiss by the circuit court for legal correctness,
and “[t]he grant of a motion to dismiss is proper if the complaint does not disclose, on its
face, a legally sufficient cause of action.” Hrehorovich v. Harbor Hosp. Ctr., Inc., 93 Md.
App. 772, 785 (1992) (citation omitted). We “presume the truth of all well-pleaded facts . .
. along with any reasonable inferences derived therefrom.” Higginbotham v. Public Serv.
Comm’n, 171 Md. App. 254, 264 (2006) (citation omitted). And “[w]e will affirm the
dismissal if ‘the facts and allegations, so viewed, would nevertheless fail to afford plaintiff
relief if proven.’” Kendall v. Howard Cnty., 204 Md. App. 440, 447 (2012) (quoting
Higginbotham, 171 Md. App. at 264), aff’d, 431 Md. 590 (2013) .
We review de novo the portions of the trial court’s decision granting summary
judgment. Wooldridge v. Price, 184 Md. App. 451, 457 (2009). “The question of whether the
trial court properly granted summary judgment is a question of law and is subject to de novo
review on appeal. If no material facts are in dispute, we must determine whether summary
judgment was correctly entered as a matter of law.” Springer v. Erie Ins. Exch., 439 Md. 142,
156 (2014) (quoting River Walk Apartments, LLC v. Twigg, 396 Md. 527, 541-42 (2007)).
16
A. The Doctrine Of Collateral Estoppel Requires Identity of Essential
Issues In Prior Litigation.
Collateral estoppel has often been described as a doctrine absorbed within res
judicata; the doctrines seem to be distinguished almost as often as they are confused.9 Res
judicata holds parties to a claim that they have previously litigated, acting as an
“absolute bar to a subsequent action. It is a finality as to the
claim or demand in controversy, concluding parties and those in
privity with them, not only as to every matter which was offered
and received to sustain or defeat the claim or demand, but as to
any other admissible matter which might have been offered for
that purpose.”
John Crane, Inc. v. Puller, 169 Md. App. 1, 23 (2006) (quoting LeBrun v. Marcey, 199 Md.
223, 226-28 (1952)). Collateral estoppel, on the other hand, operates collaterally to preclude
relitigation of issues that the same parties already had litigated:
“[W]here the second action between the same parties is upon a
different claim or demand, the judgment in the prior action
operates as an estoppel only as to those matters in issue or points
controverted, upon the determination of which the finding or
verdict was rendered.”
Id. at 24 (quoting LeBrun, 199 Md. at 227 (emphasis omitted)). To determine whether GAB
is collaterally estopped from bringing the claims it raises in this case, we view the current
action against the backdrop of the prior one by asking four questions:
9
Both doctrines evolved in order to “‘avoid the expense and vexation of multiple
lawsuits, conserve judicial resources, and foster reliance on judicial action by minimizing the
possibilities of inconsistent decisions.’” Colandrea v. Wilde Lake Cmty. Ass’n, 361 Md. 371,
387 (2000) (quoting Janes v. State, 350 Md. 284 (1998)).
17
i. Was there a final judgment on the merits in the prior
litigation?
ii. Was the party against whom the plea is asserted a party
or in privity with the party to the prior adjudication?
iii. Was the issue decided in the prior litigation identical
with the issue presented in the subsequent litigation?
iv. Was the issue actually litigated essential to the judgment
in the prior action?
Brown & Sturm v. Frederick Rd. Ltd. P’ship, 137 Md. App. 150, 192 (2001) (footnote
omitted).10 The third and fourth prongs are the ones at issue here, and we conclude that the
issues litigated in the Bankruptcy Proceeding were neither essential nor identical to those
before us. The Bankruptcy Court decided the narrow issue of whether Mr. Dorment acted
with ill-will based on evidence that came before it in connection with a claim designed to
determine the rights of creditors, not to address the relative rights and obligations between
Rocky Gorge and Mr. Berman. The relationship between GAB and Mr. Dorment did not bear
on the legal issues before the Bankruptcy Judge and, as the court took pains to point out, it
did not address that relationship in deciding the equitable subordination or disallowance
questions before it.
10
Our 2001 decision in Brown & Sturm came after a prior round of litigation in that
case that gave rise to our earlier reported decision in Frederick Rd. Ltd. P’ship v. Brown &
Sturm, 121 Md. App. 384, rev’d, 360 Md. 76 (2000). Neither that decision nor the Court of
Appeals’s reversal had anything to do with the collateral estoppel question.
18
B. The Issue Before The Circuit Court Is Not Identical To The Issue
Decided By The Bankruptcy Court.
The penultimate inquiry in the test articulated in Brown & Sturm, whether the issue
in the Bankruptcy Proceeding was identical to the one here, seems simple enough. But the
answer depends on how broadly we define the scope of the prior court’s inquiry. The way
Rocky Gorge sees it, the “issues” here are identical because the conduct that the Bankruptcy
Judge “found caused no harm to GAB” is the “same conduct that GAB now claims harmed
it.” Moreover, according to Rocky Gorge, the Bankruptcy Complaint contains the “exact
same allegations” in both cases, and the Bankruptcy Judge decided them already.
At a closer look, though, we can see readily that the issues decided in the Bankruptcy
Proceeding are not like11 the issues alleged in GAB’s complaint.12 First, the Bankruptcy
11
We are reminded of a song from Sesame Street that accompanied a similar
comparative analysis:
One of these things is not like the others,
One of these things just doesn’t belong,
Can you tell which thing is not like the others,
By the time I finish my song?
See Sesame Street: Episode 1 (Children’s Television Workshop Nov. 10, 1969), music by Joe
Raposo, lyrics by Jon Stone.
12
As we frame the question, we wonder whether the second prong of the Brown &
Sturm test, which requires privity between the parties, is met. But the parties haven’t raised
the issue, and it doesn’t appear to have formed a basis of the circuit court’s decision, so we
assume that it is met without addressing the question further. See Cnty. Council of Prince
George’s Cnty. v. Offen, 334 Md. 499, 508 (1994) (“Ordinarily, an appellate court will
consider only those issues that were raised or decided by the trial court, unless the issue
concerns the jurisdiction of the court to hear the matter.” (citations omitted)).
19
Court examined the rights of RGHGAB’s creditors, not GAB’s. The real “plaintiff” in the
Bankruptcy Proceeding was not GAB but the Trustee, whose job under the Bankruptcy Code
is to value and liquidate assets of a Chapter 7 debtor and determine how to apportion the
proceeds among creditors, not to determine the relative merits of private disputes between
the debtor and any one creditor. See 11 U.S.C.A. § 704 (2004, 2014 Supp.) (explaining that
the Trustee in a Chapter 7 bankruptcy “shall collect and reduce to money the property of the
estate for which such trustee serves, and close such estate as expeditiously as is compatible
with the best interests of parties in interest”). The Trustee focused instead on establishing the
effect on creditors of harm—from any source—and the Trustee’s interests might or might not
align with GAB’s or that of any other individual creditor. See Richman v. FWB Bank, 122
Md. App. 110, 152-53 (1998) (characterizing the Trustee as the party prosecuting a turnover
action in the context of a bankruptcy proceeding); see also Adams v. Manown, 328 Md. 463,
477 (1992) (substituting trustee for debtor and noting that the “trustee in bankruptcy is the
real party in interest,” where debtor had secured a $43,000 jury verdict against a third party).
Second, the Bankruptcy Court demonstrated, both by citing to the purposes of
subordination and disallowance actions and by declining to delve into the relationship
between GAB and Rocky Gorge, that it was not determining any potential liability between
those two parties. As the court stressed in its opinion, the creditors’ “‘welfare is the primary
focus of equitable subordination law’” (quoting Adelphia Recovery Trust, 390 B.R. at 99),
and the goal of allowing equitable subordination is “‘to remedy some inequity or unfairness
20
perpetrated against the bankrupt entity’s other creditors or investors by postponing the
subordinated creation’s right to repayment until others’ claims have been satisfied.’”
(quoting In re Official Committee of Unsecured Creditors for Dornier Aviation (North
America) Inc., 453 F.3d 225, 232 (4th Cir. 2006)). By its own reckoning, the Bankruptcy
Court determined the rights of creditors vis-à-vis each other and RGHGAB, rather than
unpacking the rights of these parties vis-à-vis each other.13
GAB was competing (theoretically, at least) with other creditors either to move to the
front of the line (by equitably subordinating the claims of the remaining creditors, most
notably Waverley), or having the court disallow Waverley’s claim altogether. The Court
declined to permit equitable disallowance of Waverley’s claim:
The creditors, as creditors [is] explained above, were then at
least $5 million under water and suffered no change in position
as a result of the transfer of the Note to parties friendly to [Mr.]
Dorment. [Mr.] Berman, as a partner-creditor, may have a
claim against his co-venturer. However, the court finds nothing
in the behavior of [Mr.] Dorment or his co-venturers in
Waverley to mandate the awesome punishment of equitable
disallowance being imposed on them.
(Emphasis added.) The standard used by the Bankruptcy Court in denying equitable relief
under bankruptcy law bore no resemblance to the legal standards that might apply in
resolving the parties’ rights and obligations to each other under Maryland corporate law and
13
“By design, bankruptcy law involves difficult choices between competing interests.”
In re Merry-Go-Round Enterprises, Inc., 180 F.3d 149, 162 (4th Cir. 1999). In a Chapter 7
proceeding, those competing interests are competing creditors, of which GAB was
theoretically one.
21
their operating documents. Put another way, the legal contours of their relationship were “not
like” the issues decided in the Bankruptcy Proceeding, so the decision there has no collateral
estoppel effect on the issues GAB raised in its circuit court complaint.
C. The Issue Before The Circuit Court Was Not Essential To The
Decision Of The Bankruptcy Court.
We explained in Puller the purpose of the last prong of the collateral estoppel test:
“[i]n order to preclude the relitigation of a factual issue in a subsequent case between the
same parties, the sine qua non is that the factual issue was actually litigated on its merits in
the earlier case.” Puller, 169 Md. App. at 26. We quoted in turn an earlier Supreme Court
decision, Ashe v. Swenson, 397 U.S. 436 (1970), that refined the “fact” distinction:
“‘Collateral estoppel’ is an awkward phrase, but it stands for an
extremely important principle in our adversary system of
justice. It means simply that when an issue of ultimate fact has
once been determined by a valid and final judgment, that issue
cannot again be litigated between the same parties in any future
lawsuit.”
169 Md. App. at 26 (quoting Ashe, 397 U.S. at 443).
There is some divergence among the cases analyzing the exact phrasing of this last
question. The Court in Brown & Sturm looked back to an opinion of this Court, Deitz v.
Palaigos, 120 Md. App. 380, 383 (1998), that in turn relied on a Court of Appeals opinion,
Murray Int’l Freight Corp. v. Graham, 315 Md. 543, 547 (1989). But more recently, the
Court of Appeals in Buruss v. Board of Cnty. Comm’rs of Frederick Cnty., 427 Md. 231
(2012), reordered the points to ask, as compared with the fourth inquiry that we quote above,
22
whether “‘the party against whom the plea is asserted [was] given a fair opportunity to be
heard on the issue?’” Id. at 250 (quoting Wash. Suburban Sanitary Comm’n v. TKU Assocs.,
281 Md. 1, 18-19 (1977)). The logic of the rule is the same whichever standard we use, and
is driven as much by common sense as anything else—if an issue didn’t matter in (read
“was essential to” per Brown & Sturm) the first round of litigation, there’s no reason to
think that the parties would have had the best chance there (read “a fair opportunity to
be heard” per Buruss) to fight it out (read “actually litigate [an issue] on its merits” per
Puller).
Here, the Bankruptcy Judge stressed that his role was not to sort out the rights and
duties as between Rocky Gorge/Mr. Dorment and GAB/Mr. Berman,14 and in fact he
specifically left the job for another day in another forum. The Court asked not whether Mr.
Dorment had acted in some way to disenfranchise Mr. Berman or GAB, or whether he
breached any duty he might owe them, but instead whether his business decision was
motivated by anything more than self-preservation and, ultimately, what effect that decision
had on creditors for purposes of a bankruptcy claim. Within that context, the Bankruptcy
Court saw Mr. Dorment’s decision as perfectly legitimate: “The Note was acquired for two
purposes, to gain control of the subject property for the benefit of the new combine and to
relieve [Mr.] Dorment of the weight of a $9 million plus guaranty.”
14
We use the terms interchangeably, not because each pair shares exactly the same
interests, but because the Bankruptcy Court paired them that way.
23
Again, the Bankruptcy Court pointed out that “Rocky Gorge might have a fiduciary
relationship to GAB, but that is not what this adversary proceeding concerns.” The
Bankruptcy Court also made plain that it did not approach the case from the perspective of
litigation in a civil court—it acknowledged that “[t]here could well be a cause of action in
what is essentially this two-party dispute between [Mr.] Berman and [Mr.] Dorment
operating through their legal entities. But resolution of the potential dispute is for another day
in another jurisdiction.” The court made the same point in the passage above about Mr.
Berman potentially having a claim against “his co-venturer,” reiterating in a later opinion that
“nothing decided by [the Bankruptcy Court] interferes with that potential action.” 15
A later hearing in the Bankruptcy Court serves as the final nail in the collateral
estoppel coffin. When a draft proposed Order (we don’t have the benefit of the “before”
version here) came before the Bankruptcy Judge, he disavowed language that, in his view,
would have had the improper effect of “putting to rest” any actions between Mr. Berman and
Rocky Gorge:
15
We can’t agree with GAB, as it argued in the circuit court, that the Bankruptcy
Judge specifically pointed to the circuit court as the likely landing spot for the next round of
litigation. Although at one point the Bankruptcy Court alluded to the action “wind[ing] up
in the Circuit,” (and here we have not that transcript but just counsel’s reading of it at the
hearing in this action), it is not clear whether he referred to an appeal of his opinion to the
United States Court of Appeals for the Fourth Circuit (after some unspecified appeal first
to the United States District Court), or a new action in the Circuit Court for Frederick
County. Either way, we find ample evidence of the Bankruptcy Judge’s intentions in the
passages we have cited and see no need to resolve this ambiguity one way or the other.
24
THE COURT: [T]he one message in my opinion was that there
was a cause of action without passing on the merits of it of any
kind, that I was not ruling on, that I had no jurisdiction over.
And this order appears to give me jurisdiction over that, and to
do certain things that I never intended to do.
As he elaborated, those claims “would have to be pursued in a court of competent
jurisdiction.” The judge also quipped about one attorney’s returning to state court, where he
was “more comfortable,” for further litigation.
The last of these comments was obviously meant light-heartedly, but we see in the
overall tenor of the Bankruptcy Judge’s comments a careful effort to confine his holding to
the narrow bankruptcy issues before him. He did so through written opinions, oral
discussions, and most importantly, by tailoring his findings. And the Bankruptcy Judge’s
“carve-out” statements, although not binding on us, reveal the court’s careful assessment of
whether an adjudication of this relationship mattered to (was essential to) him in the course
of his decision-making. See Restatement (Second) of Judgments § 27 (1982) (noting that a
revised comment in the Restatement departs from “emphasizing the distinction between
ultimate facts on the one hand and evidentiary facts or mediate data on the other,” and instead
“states that the question should be whether the issue was actually recognized by the parties
as important and by the adjudicator as necessary to the first judgment”).
Richman, 122 Md. App. 110, is a useful decision in a different but related context. We
held there that orders in a borrower’s bankruptcy case did not preclude state law fraud claims
under the doctrine of res judicata. In effect, Richman held that where, on more than one
25
occasion, federal judges had stated their expectation that fraud claims would be litigated in
state court, the state court action would not be barred as res judicata: “[The Bankruptcy
Judge’s] orders . . . indisputably fostered appellants’ belief that the bankruptcy court would
not entertain appellants’ State fraud counts. . . . At the very least, in considering whether,
‘with propriety,’ appellants were able to litigate their State claims in federal court, it was
certainly reasonable for appellants to believe that they were required by [the Bankruptcy
Judge] to pursue their fraud claims in State court.” Id. at 156. The Bankruptcy Court’s
efforts here to carve out the GAB/Rocky Gorge relationship from his domain accomplished
the same end.
D. The Circuit Court Erred In Dismissing Counts IV and V.
GAB argues that Counts IV and V, in which it alleged that Mr. Dorment fraudulently
transferred assets to his wife in an effort to protect those assets from GAB, sufficiently
alleged that fraud and that the circuit court erred in dismissing them. Rocky Gorge does not
address this point of appeal in its brief.
The Maryland Uniform Fraudulent Conveyances Act provides that “[e]very
conveyance made and every obligation incurred without fair consideration when the person
who makes the conveyance or who enters into the obligation intends or believes that he will
incur debts beyond his ability to pay as they mature, is fraudulent as to both present and
future creditors.” Md. Code (1975, 2013 Repl. Vol), § 15-206 of the Commercial Law
Article. “Cases interpreting the statute have expanded the realm of available remedies to
26
include suits for money judgments against the transferee where he or she ‘allows or causes
the property to depreciate in value or parts with the property without sufficient consideration
or puts it beyond the reach of the court.’” In re Rood, 482 B.R. 132, 143 (D. Md. 2012)
(quoting Damazo v. Wahby, 269 Md. 252, 257 (Md.1973)), aff’d sub nom. S. Mgmt. Corp.
Ret. Trust v. Rood, 532 F. App’x 370 (4th Cir. 2013), and aff’d sub nom. S. Mgmt. Corp. Ret.
Trust v. Jewell, 533 F. App’x 228 (4th Cir. 2013)).
We agree with GAB that its allegations of a fraudulent conveyance sufficed to
withstand a motion to dismiss. (We do not, by doing so, mean to suggest that the claim
necessarily survives a summary judgment motion, which seems more in the nature of what
Rocky Gorge argued to the trial court.) In the Complaint, GAB alleged that in early 2010,
Mr. Dorment transferred certain assets to his wife, “thereby rendering himself insolvent as
he was unable to satisfy his obligations under his personal guaranty securing the note.” GAB
claims that “without the benefit of discovery,” it cannot know the precise assets transferred.
We assume the truth of the allegations in the Complaint for purposes of reviewing a
motion to dismiss. Higginbotham, 171 Md. App. at 264. Although we recognize that
discovery did take place in the Bankruptcy Proceeding, our holding that that litigation does
not bar this litigation entitles GAB to move forward with these claims in this very different
forum. Rocky Gorge’s failure to address the point on appeal leaves that position
unchallenged, so we reverse the circuit court’s decision to dismiss on this claim as well. And
27
because our decision reaches all counts (other than Count VIII, which GAB voluntarily
dismissed at the hearing), it follows that the circuit court’s dismissal of the conspiracy claims
in Count IX warrants reversal as well.
JUDGMENT OF THE CIRCUIT COURT
FOR FREDERICK COUNTY REVERSED
AND CASE REMANDED FOR FURTHER
PROCEEDINGS CONSISTENT WITH THIS
OPINION. COSTS TO BE PAID BY
APPELLEE.
28