Providence Hall Assocs. Ltd. v. Wells Fargo Bank, N.A., 14–2378.

CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)
Citation816 F.3d 273
Docket NumberNo. 14–2378.,14–2378.
Parties PROVIDENCE HALL ASSOCIATES LIMITED PARTNERSHIP, Plaintiff–Appellant, v. WELLS FARGO BANK, N.A., successor in interest to Wachovia Bank, N.A., Defendant–Appellee.
Decision Date11 March 2016

ARGUED:Gary M. Bowman, Roanoke, Virginia, for Appellant. Jeffrey L. Tarkenton, WOMBLE CARLYLE SANDRIDGE & RICE, LLP, Washington, D.C., for Appellee. ON BRIEF:B. Chad Ewing, WOMBLE CARLYLE SANDRIDGE & RICE, LLP, Charlotte, North Carolina, for Appellee.

Before WILKINSON, NIEMEYER, and DIAZ, Circuit Judges.

Affirmed by published opinion. Judge DIAZ

wrote the opinion, in which Judge WILKINSON and Judge NIEMEYER joined.

DIAZ

, Circuit Judge:

Providence Hall Associates ("PHA") appeals the district court's dismissal of its lawsuit against Wells Fargo Bank. PHA contends that the district court erroneously gave res judicata effect to various sale orders issued during PHA's Chapter 11 bankruptcy. We conclude that the elements of res judicata are satisfied and therefore affirm.

I.

PHA is a Virginia-based limited partnership that, prior to its bankruptcy, owned a handful of properties in several states. It entered three transactions with Wells Fargo's predecessor-in-interest: (1) a $2.5 million loan, (2) a $500,000 line of credit, and (3) an interest-rate-swap agreement, whereby PHA exchanged a fixed interest rate for a floating one based on the one-month U.S. Dollar London Interbank Offered Rate ("LIBOR"). The loan and the line of credit contained a cross-default clause—meaning a default on either amounted to a default on both—and were secured by deeds of trust, mortgages, and assignments of rent for certain PHA real estate holdings.

PHA subsequently defaulted on the loans and, as a result, filed a petition for Chapter 11 bankruptcy in March 2011. Shortly thereafter, Wells Fargo informed PHA that an event of default took place under the interest-rate-swap agreement, triggering $317,850 in termination damages.

Wells Fargo filed a proof of claim in the Chapter 11 case for nearly $3 million. PHA objected, filing an adversary complaint, which it later amended. In that amended complaint, PHA alleged that Wells Fargo falsely represented that it "would forbear collection of the principal balance of the $500,000 [line of credit]," J.A. 69, ultimately causing PHA to default and enter bankruptcy.

Meanwhile, the United States Trustee had moved to convert the bankruptcy case to a Chapter 7 proceeding or dismiss it altogether based on PHA's failure to file monthly financial reports. Wells Fargo filed a memorandum in support of the motion, repeating the United States Trustee's allegations and contending that, among other inappropriate actions, PHA's principals used Wells Fargo's cash collateral to pay "distributions" to themselves. J.A. 123. After reviewing the arguments of the United States Trustee and Wells Fargo, the bankruptcy court opted to appoint Marc Albert as a Chapter 11 trustee rather than dismiss the bankruptcy case or convert it into a Chapter 7 proceeding.

Trustee Albert took a number of steps to bring PHA out of bankruptcy—most important here, obtaining court approval to sell two of the bankruptcy estate's properties to satisfy the debts owed to Wells Fargo. In both of his sale motions under 11 U.S.C. § 363(b)

, (f), Trustee Albert requested that the proceeds (minus certain expenses) be distributed to Wells Fargo. J.A. 183, 231. Additionally, both motions recognized PHA's obligations to Wells Fargo under the two loans and the interest-rate-swap agreement. See, e.g., J.A. 170–72, 174–75, 177, 219–21, 224. The bankruptcy court granted the motions, noting in its orders that PHA was in debt to Wells Fargo, J.A. 376, 386–88, and that the balance of the sale proceeds should be distributed to Wells Fargo, J.A. 380, 388. In the final sale order, the court explicitly stated that sale proceeds should be paid to Wells Fargo "up to the amount of the WFB Obligations," J.A. 388, where "WFB Obligations" was a defined term from Trustee Albert's sale motion representing PHA's debts arising out of the two loans and the swap agreement, J.A. 220.

Around the time Trustee Albert moved to sell the bankruptcy estate's properties in satisfaction of PHA's outstanding debts to Wells Fargo, he also consented to the dismissal without prejudice of PHA's adversary complaint.

By November 2012, the proceeds of the sales had satisfied PHA's debts to Wells Fargo. Consequently, Victor Guerrero—an equity holder and principal of PHA—filed a motion to dismiss the Chapter 11 proceeding, which the bankruptcy court granted with Trustee Albert's consent.

More than a year later, PHA filed suit in Virginia state court, which Wells Fargo removed to federal court. Along with repeating the claims made in the bankruptcy adversary complaint, PHA alleged new theories of lender liability. Relevant here, PHA claimed that the interest-rate-swap transaction was a "sham" because "the LIBOR rate was illegally rigged and manipulated." Appellant's Br. at 7–9; see also J.A. 12–14.

Wells Fargo filed a motion to dismiss, which the district court granted on res judicata grounds, giving preclusive effect to the bankruptcy court's sale orders. The court then denied PHA's motion for reconsideration.

This appeal followed.

II.

We review de novo the district court's dismissal based on res judicata. Brooks v. Arthur, 626 F.3d 194, 200 (4th Cir.2010)

.

"Under the doctrine of res judicata, or claim preclusion, [a] final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action.’ " Pueschel v. United States, 369 F.3d 345, 354 (4th Cir.2004)

(quoting Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981) ). Three elements must be satisfied for res judicata to apply. "[T]here must be: (1) a final judgment on the merits in a prior suit; (2) an identity of the cause of action in both the earlier and the later suit; and (3) an identity of parties or their privies in the two suits." Id. at 354–55. Along with these "three formal elements" of res judicata, "two practical considerations should be taken into account." Grausz v. Englander, 321 F.3d 467, 473 (4th Cir.2003). First, we consider whether the party or its privy knew or should have known of its claims at the time of the first action. See id. at 473–74. Second, we ask whether the court that ruled in the first suit was an effective forum to litigate the relevant claims. See id. at 474.

We address the three core res judicata requirements in turn, followed by the two "practical considerations" from Grausz .

A.

The district court recognized the first res judicata requirement—that the sale orders are final orders on the merits—as "the clearest hurdle for Wells Fargo to overcome." J.A. 38. Nevertheless, the court determined that Wells Fargo prevailed, primarily relying on cases from the Fifth, Sixth, and Seventh Circuits, which concluded that bankruptcy sale orders were final orders on the merits. J.A. 39 (citing Winget v. JP Morgan Chase Bank, N.A., 537 F.3d 565 (6th Cir.2008)

; Bank of Lafayette v. Baudoin (In re Baudoin), 981 F.2d 736 (5th Cir.1993) ; Gekas v. Pipin (In re Met–L–Wood Corp.), 861 F.2d 1012 (7th Cir.1988) ).1

While PHA concedes that the sale orders are "final, " it presents a litany of arguments that they are not "on the merits. " Appellant's Br. at 33. We are unconvinced, concluding as the district court did that the first prong of res judicata is satisfied.

1.

We begin by turning to the cases from our sister circuits upon which the district court relied. We, too, find them persuasive and reject PHA's attempts to distinguish them.

In Met–L–Wood, the debtor in a Chapter 11 proceeding filed a motion to sell bankruptcy estate assets, which the court granted. 861 F.2d at 1015

. While § 363(b)(1) requires that the seller of estate property give notice to creditors, some unsecured creditors did not receive notice. Id. at 1017. After the sale, the bankruptcy case was converted into a Chapter 7 proceeding, and a trustee was appointed. Id. at 1015. The trustee then "investigated the circumstances surrounding the judicial sale and eventually decided that there had been skullduggery of two kinds." Id. Seeking to remedy said skullduggery on behalf of unsecured creditors, the trustee filed suit in federal district court against the debtor-corporation, its owner, and others involved in the judicial sale, alleging various common law and statutory claims. Id. at 1016.

The Seventh Circuit concluded that the district court properly dismissed the trustee's suit. Id. at 1018

. The court explained that to the extent the trustee's claims were derived from his representation of the unsecured creditors who had notice of the judicial sale, res judicata barred the trustee's lawsuit from moving forward. Id. at 1016–17. But, to the extent the trustee's claims were derived from unsecured creditors who had not received notice of the judicial sale, res judicata proved no bar because this subset of unsecured creditors were not parties to the sale proceeding. Id. at 1017. Nevertheless, the court held that the trustee's claims were otherwise barred because the sale proceeding was in rem, "transfer[ring] property rights, and property rights are rights good against the world, not just against parties to a judgment or persons with notice of the proceeding." Id.

In Baudoin, the plaintiffs and their wholly owned company filed for Chapter 7 bankruptcy based on an inability to meet loan obligations to a particular creditor bank. 981 F.2d at 737–38

. The plaintiffs' personal bankruptcies were consolidated, and a trustee was appointed. Id. at 738. Upon the trustee's motion, two properties securing the plaintiffs' debt were sold at auction, leading to the plaintiffs' discharge from bankruptcy. Id. Three years later, the plaintiffs sued the creditor bank, alleging that it "forced them and their...

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