Mbank v. Jorma Lankinen ( 2016 )

STATE OF MICHIGAN
COURT OF APPEALS
MBANK, f/k/a PENINSULA BANK, UNPUBLISHED
July 21, 2016
Plaintiff/Counter-Defendant-
Appellee,
v No. 323845
Marquette Circuit Court
JORMA LANKINEN and KATHLEEN LC No. 13-051149-CZ
LANKINEN,
Defendants/Counter-Plaintiffs-
Appellants.
Before: GLEICHER, P.J., and SAWYER and M. J. KELLY, JJ.
PER CURIAM.
The parties before us on appeal have a long and storied history. The most recent chapter
arises from the circuit court’s summary dismissal of Jorma and Kathleen Lankinen’s
countercomplaint alleging that mBank “clogged the equity” in their home to prevent redemption
following foreclosure. The circuit court found this claim barred by collateral and judicial
estoppel. This issue was not actually litigated and determined by a final order in an earlier
proceeding, so neither estoppel doctrine applies. Accordingly, we vacate the circuit court’s
dismissal and remand for continued proceedings.
I. BASIC FACTS
The Lankinens owned a parcel of real property in Marquette as tenants by the entireties.
They received loans from mBank and its predecessors, secured by four separate mortgages on
the property.1 The Lankinens defaulted on all but the first of the loans and the bank foreclosed
against the property. The sheriff sold the property at auction and mBank purchased it for
$208,231.76, subject to the first mortgage. The Lankinens had six months to redeem the
property, which gave them until September 12, 2009.
1
The loans, in order of priority, were for $310,529, $40,000, $160,000, and $185,122.
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On September 8, 2009, the Lankinens entered into a lease agreement with mBank, giving
the Lankinens possession of the property until December 7, 2010, with a monthly rental payment
of $2,250. mBank contemporaneously granted Lankinen Builders, L.L.C., an entity controlled
by Jorma Lankinen, an “option to purchase” the property for $311,000. The entity paid the bank
$200,000 for the option. If Lankinen Builders exercises the option, the Lankinens and Mr.
Lankinen’s corporation will have paid $511,000 plus more than $160,000 in rent to mBank.2
On February 2, 2010, Jorma petitioned for bankruptcy in the United States Bankruptcy
Court, Western District of Michigan. Kathleen was not a party to the petition. Jorma disclosed
the lease and option to purchase in the bankruptcy proceedings, and the option was listed as an
asset on the bankruptcy trustee’s final report. Jorma did not, however, list any current or
potential cause of action concerning the subject property. The trustee found that Jorma’s was a
“no asset” estate and discharged his debts of over $500,000. The bankruptcy court closed the
estate in December 2011.
Six days earlier, the Lankinens had filed suit against mBank in the Marquette Circuit
Court, alleging that the bank had clogged their equitable right of redemption. Specifically, they
alleged that they redeemed the property by paying mBank $220,250; that the bank “improperly
refused to accept the funds as consideration for the redemption;” and that the bank “wrongfully
represented to [them] that, in order to remain in possession of the Property, they would have to
enter into [the lease and option to purchase].” mBank responded with a motion for summary
disposition, asserting that the Lankinens lacked standing to press their claim. The circuit court
agreed, ruling that “[p]laintiff lacks standing to bring any action based on the unscheduled, non-
abandoned equity interest” in their home.
Jorma immediately returned to the bankruptcy court and successfully moved to reopen
the proceedings. He filed an amended asset schedule listing a “potential” economic interest in
his home “pursuant to a cause of action . . . for clogging.” The bankruptcy court authorized the
trustee to sell the claim to the Lankinens for $2,000, with the condition that the trustee would
take 50% of any cash settlement or 30% of any awarded equity.
Meanwhile, mBank instituted an eviction action. The Lankinens met the bank’s
complaint with a “clogging” counterclaim. mBank again sought summary dismissal of the
Lankinen’s clogging claim, this time on collateral and judicial estoppel grounds. The circuit
court described “[t]he basis for the Court[’]s dismissal in Lankinen I” as “the lack of listing of
the asset and the failure to reopen the bankruptcy.” The court conceded, “Both of those have
now been accomplished.” Even so, the court summarily dismissed the countercomplaint.
Quoting from Barger v City of Cartersville, 348 F3d 1289, 1297 (CA 11, 2003), the
circuit court found a strong case of bad faith or lack of inadvertence on Jorma’s part:
2
It appears that the Lankinens still remain in residence under an extension of this agreement, but
began paying $2,500 monthly in 2014.
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Allowing [a debtor] to back-up, re-open the bankruptcy case, and amend his
bankruptcy filings, only after his omission has been challenged by an adversary,
suggests that a debtor should consider disclosing potential assets only if he is
caught concealing them. This so-called remedy would only diminish the
necessary incentive to provide the bankruptcy court with a truthful disclosure of
the debtor’s assets. As such, Barger’s disclosure upon re-opening the bankruptcy
estate deserves no favor. [Quotation marks and citations omitted by circuit court.]
The court found that Jorma had asserted an inconsistent position in the bankruptcy
court—that the clogging cause of action was not an asset—and the bankruptcy court had adopted
that position. That the bankruptcy court later reopened the case and the cause of action was
accepted as an asset did not eliminate the existence of the bankruptcy and circuit courts’ earlier
rulings, the court determined. This was especially true, the court reasoned, as Jorma “had motive
for concealment” until called out by the circuit court.
The court also summarily dismissed Kathleen’s clogging counterclaim. Even though
Kathleen was not a party to the bankruptcy, the court found her claim estopped because she did
not appeal the circuit court’s earlier ruling.
The Lankinens now appeal.
II. ANALYSIS
Summary disposition based on the effect of a prior judgment is governed by MCR
2.116(C)(7). We review de novo a circuit court’s summary disposition ruling on this ground.
Roby v City of Mt Clemens, 275 Mich. App. 26, 28; 731 NW2d 494 (2006). We review de novo
the applicability of the legal doctrine of collateral estoppel. Estes v Titus, 481 Mich. 573, 578-
579; 751 NW2d 493 (2008). “Judicial estoppel is an equitable doctrine,” Szyszlo v Akowitz, 296
Mich. App. 40, 46; 818 NW2d 424 (2012), the applicability of which we also review de novo.
Capitol Props Group, LLC v 1247 Ctr Street, LLC, 283 Mich. App. 422, 430; 770 NW2d 105
(2009).
To establish that a party is collaterally estopped from raising a claim, the proponent must
establish that in a prior action “(1) a question of fact essential to the judgment was actually
litigated and determined by a valid and final judgment, (2) the same parties had a full and fair
opportunity to litigate the issue, and (3) there was mutuality of estoppel.” Estes, 481 Mich. at
585.
The doctrine of judicial estoppel precludes a party from raising inconsistent positions in
successive actions:
Under this doctrine, a party who has successfully and unequivocally
asserted a position in a prior proceeding is estopped from asserting an inconsistent
position in a subsequent proceeding.
Under the “prior success” model, the mere assertion of inconsistent
positions is not sufficient to invoke estoppel; rather, there must be some
indication that the court in the earlier proceeding accepted that party’s position as
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true. Further, in order for the doctrine of judicial estoppel to apply, the claims
must be wholly inconsistent. [Paschke v Retool Indus, 445 Mich. 502, 509-510;
519 NW2d 441 (1994) (quotation marks and citation omitted).]
The Lankinens’ “clogging” claim stems from an old, “established,” and “inviolate”
doctrine holding that a mortgagor’s equitable right to redeem a mortgage “cannot be waived or
abandoned by any stipulation of the parties made at the time, even if embodied in the mortgage.”
Peugh v Davis, 96 US (6 Otto) 332, 337; 24 L. Ed. 775 (1878). Restatement, Property, 3d,
Mortgages, §3.1, p 100, comment a describes: “Whatever the language of the clogging concept,
courts traditionally have been hostile to clauses and devices that purport to recognize the equity
of redemption, but whose practical effect is to nullify or restrict its operation.” In this case, the
Lankinens asserted that mBank clogged their right to redemption by accepting a partial payment
to redeem the property, but then requiring them and Jorma’s company to pay for an option to
purchase the property and pay monthly rent to remain in residence.
Contrary to the circuit court’s conclusion, collateral estoppel does not preclude litigation
of the Lankinens’ claim in this case. A question of fact essential to the judgment was not
actually litigated and determined by a valid and final judgment in a previous action. Although
the option to purchase was listed an asset of Jorma’s estate, the bankruptcy court did not consider
the validity of the option to purchase or lease agreement in that proceeding. The Lankinens filed
suit in 2011 to challenge mBank’s actions preventing redemption and actually raised the
clogging claim. The circuit court ruled that the Lankinens were estopped from raising the
clogging claim because Jorma ostensibly took a contradictory position in the bankruptcy court
(failing to name the clogging action as an asset) and yet “never sought to reopen the bankruptcy
to add these assets.” Jorma immediately followed through and did this, nullifying this concern.
Yet, the circuit court in the earlier suit never reasoned that the issue had been decided in the
bankruptcy court. And the circuit court in the earlier action never reached the merits of the issue.
Accordingly, the circuit court in this case erred in relying on collateral estoppel to dismiss
Jorma’s counterclaim.
Reliance on the doctrine of collateral estoppel to preclude Kathleen’s counterclaim is
especially troubling. For collateral estoppel to apply, “the same parties” must have had “a full
and fair opportunity to litigate the issue.” Estes, 481 Mich. at 585. In both the earlier and the
current circuit court actions, the judges used against Kathleen Jorma’s failure to list the clogging
cause of action as an asset in the bankruptcy proceeding. Kathleen did not file for bankruptcy
and was not a party to Jorma’s bankruptcy petition. She made no statement about the estate’s
assets or lack thereof. Accordingly, it was clear legal error to collaterally estop Kathleen from
raising her clogging claim.
Moreover, once Jorma reopened the bankruptcy action and listed his clogging suit as a
potential asset of the bankruptcy estate, the circuit court’s concern that he took a contradictory
position in a prior action was erased. Judicial estoppel should not have been applied against
either plaintiff.
The circuit court compared this case to Spohn v Van Dyke Public Schools, 296 Mich. App.
470; 822 NW2d 239 (2012). In Spohn, the plaintiff allegedly suffered sexual harassment from a
coworker from September through December 2008. Spohn and her husband filed a Chapter 13
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bankruptcy petition in November 2008. Id. at 473. Spohn did not disclose her potential sexual
harassment claim against her employer, Van Dyke Public Schools, during the bankruptcy
proceedings, despite that she had hired an attorney who was negotiating with the employer and
despite that she was quite knowledgeable of the bankruptcy process, having filed three times
before. The bankruptcy court eventually dismissed Spohn’s case because she was unable to
make payments under the Chapter 13 plan. In the meantime, Spohn filed a sexual harassment
suit against her employer. Id. at 474.
The circuit court summarily dismissed Spohn’s sexual harassment suit on judicial
estoppel grounds “because of her failure to include this potential lawsuit as an asset in the
Chapter 13 bankruptcy proceeding.” Id. at 475. In affirming the circuit court’s judgment, this
Court described that judicial estoppel “preserve[s] the integrity of the courts by preventing a
party from abusing the judicial process through cynical gamesmanship.” Id. at 479 (quotation
marks and citations omitted). “[I]n the context of bankruptcy proceedings,” the Spohn Court
adopted the test outlined in White v Wyndham Vacation Ownership, Inc, 617 F3d 472, 478 (CA
6, 2010):
to support a finding of judicial estoppel, [a reviewing court] must find that: (1)
[the plaintiff] assumed a position that was contrary to the one that she asserted
under oath in the bankruptcy proceedings; (2) the bankruptcy court adopted the
contrary position either as a preliminary matter or as part of a final disposition;
and (3) [the plaintiff’s] omission did not result from mistake or inadvertence. In
determining whether [the plaintiff’s] conduct resulted from mistake or
inadvertence, [the reviewing] court considers whether: (1) [the plaintiff] lacked
knowledge of the factual basis of the undisclosed claims; (2) [the plaintiff] had a
motive for concealment; and (3) the evidence indicates an absence of bad faith.
In determining whether there was an absence of bad faith, [the reviewing court]
will look, in particular, at [the plaintiff’s] “attempts” to advise the bankruptcy
court of [the plaintiff’s] omitted claim. [Alterations in original.]
This case is distinguishable from Spohn in an important way: Spohn made no “attempt[]”
to advise the bankruptcy court of her sexual harassment claim. The bankruptcy court dismissed
Spohn’s bankruptcy action based on her lack of cooperation in the payment plan. Here, Jorma
did “attempt[]” to notify the bankruptcy court of his clogging action. He returned to the
bankruptcy court following the circuit court’s summary dismissal of his claim and successfully
petitioned to reopen the bankruptcy to add his cause of action as an asset. The cause of action
then belonged to the bankruptcy estate, 11 USC § 541(a)(1), and the bankruptcy trustee had the
authority to pursue the clogging claim on the estate’s behalf. 11 USC § 323(b). The trustee also
had the power to sell the cause of action. 11 USC § 363(b). Consistent with that power, Jorma
negotiated with the bankruptcy trustee to purchase the clogging cause of action. Jorma then
stood in the trustee’s place as owner of the cause of action, not as pre-bankruptcy property owner
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Jorma Lankinen. As the “new” owner of the claim, Jorma is now entitled to pursue a decision on
the merits.3
And again, as Kathleen assumed no position in the bankruptcy court, the circuit court
could not hold her judicially estopped from raising a clogging claim following bankruptcy.
We vacate the summary disposition order and remand for continued proceedings. We do
not retain jurisdiction.
/s/ Elizabeth L. Gleicher
/s/ David H. Sawyer
/s/ Michael J. Kelly
3
The trustee, attorney Marcia R. Meoli, filed an amicus curiae brief in this Court urging that
judicial estoppel does not apply to bar the Lankinens’ claim and that the attorney for mBank
during the bankruptcy proceeding also bore a duty to disclose the Lankinens’ potential cause of
action.
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