Fed. Nat'l Mortg. Ass'n v. Quicksilver LLC, 1:13-cv-987

• Decision Date: 10 December 2015
• Docket Number: 1:13-cv-987
• Citation: 155 F.Supp.3d 535
• Court: U.S. District Court — Middle District of North Carolina
• Parties: Federal National Mortgage Association, Plaintiff, v. Quicksilver LLC; Michael A. Falk; Harry S. Falk; and Michael A. Falk, as Trustee of the Trust Dated 10-26-1989, Having the Tax ID Number 65-6043718 (AKA “The Charlotte Falk Irrevocable Trust”), Defendants.

155 F.Supp.3d 535

Federal National Mortgage Association, Plaintiff,

v.Quicksilver LLC; Michael A. Falk; Harry S. Falk; and Michael A. Falk, as Trustee of the Trust Dated 10-26-1989, Having the Tax ID Number 65-6043718 (AKA “The Charlotte Falk Irrevocable Trust”), Defendants.

1:13-cv-987

United States District Court, M.D. North Carolina.

Signed December 10, 2015

John Patrick Haywood, Rachel Scott Decker, Carruthers & Roth, PA, Greensboro, NC, Robert Burns McNeill, Zipporah Basile Edwards, Horack Talley Pharr & Lowndes, Charlotte, NC, for Plaintiff.

Amiel J. Rossabi, Gavin J. Reardon, Rossabi Black Slaughter, P.A., Greensboro, NC, for Defendants.

MEMORANDUM OPINION AND ORDER

LORETTA C. BIGGS, District Judge.

Plaintiff Federal National Mortgage Association (“Fannie Mae”) brings this as a diversity action against Defendants Quicksilver LLC (“Quicksilver”), Michael A. Falk, Harry S. Falk, and Michael A. Falk as trustee of the Charlotte Falk Irrevocable Trust (“Falk Trust”), alleging various state law claims arising out of the refinancing of a loan for commercial property. Before the Court is Defendants' Motion to Dismiss. (ECF No. 12.) For the reasons below, Defendants' motion is granted in part and denied in part.

I. BACKGROUND¹

Michael Falk and Harry Falk are the sole member/managers of Quicksilver. (Compl. ¶ 17, ECF No. 1.) Michael Falk is also the sole trustee of the Falk Trust. (Id. ¶ 12.) In the early 1990s, the Falks purchased certain commercial property as directors of a company called Quicksilver Corporation. (See id. ¶¶ 13–14.) They then created Quicksilver, which acquired the property from Quicksilver Corporation. (Id. ¶¶ 17–18.) To pay off Quicksilver Corporation's purchase money loan, Quicksilver borrowed money from Wachovia Bank and the Falk Trust. (Id. ¶¶ 19–20.) Both loans were secured by deeds of trust on the property, executed by Harry Falk as member/manager of Quicksilver. (Id. ¶¶ 19, 22.) Quicksilver then defaulted on its loan from the Falk Trust. (Id. ¶ 25.) Several years later, in 1999, Quicksilver borrowed additional funds from Wachovia, also secured by a deed of trust on the property. (Id. ¶¶ 26–27.) As a condition of this loan, Quicksilver and the Falk Trust agreed to subordinate the Falk Trust's deed of trust (the “Falk Deed”) to Wachovia's deed of trust, ensuring that Wachovia's lien had priority over the Falk Trust's lien. (Id. ¶¶ 26, 28.)

In 2001, Quicksilver refinanced the 1999 Wachovia loan with a government-guaranteed loan that was immediately assigned to Fannie Mae.² (See id. ¶¶ 29, 40, 42.) As a condition of the loan, Fannie Mae requested a first lien deed of trust superior to all other liens on the property. (Id. ¶ 31.) The Falks were allegedly aware of this condition and made multiple written representations throughout the loan application and closing process that the loan would be secured by a first lien deed of trust on the property. (Id. ¶¶ 32–33.) Among other documents, the Falks executed a note (the “Fannie Mae Note”) and a deed of trust (the “Fannie Mae Deed”) in connection with the loan. (Id. ¶¶ 34, 37.) The Fannie Mae Deed included a provision stating, “Borrower represents and warrants ... that the Mortgaged Property is unencumbered.” (Id. ¶ 34.) Two other documents also represented that the Fannie Mae Deed was a “first lien” on the property. (Id. ¶ 35.) In reliance on these written representations, the loan proceeds were disbursed. (Id. ¶ 39.) At the time of the written representations, however, the Falk Deed was still an encumbrance of record on the property. (Id. ¶ 36.)

In 2008, the Falks transferred their ownership interests in Quicksilver to the Falk Trust. (Id. ¶ 43.) As a result of the transfer, the Falk Trust became the sole owner of Quicksilver, its borrower. (Id. ¶ 44.) Quicksilver was still in default on the Falk Trust's note (the “Falk Note”) at the time and subsequently defaulted on the Fannie Mae Note as well. (Id. ¶¶ 44–45.) Fannie Mae demanded payment of all outstanding sums due, but Quicksilver failed to pay. (Id. ¶ 45.)

In 2011, Fannie Mae foreclosed on the property. (Id. ¶¶ 45–46.) As the highest bidder at the foreclosure sale, Fannie Mae obtained title to the property “[s]ubject to any and all matters superior to the lien of the [Fannie Mae Deed].” (Substitute Trustee's Deed 2, ECF No. 1-15; see Compl. ¶ 46, ECF No. 1.) The Falk Trust then demanded over $3.5 million from Fannie Mae to pay off the Falk Note, which had accrued interest on a principal amount of $600,000. (Compl. ¶ 47, ECF No. 1.) Fannie Mae declined to pay. (Id. )

Later in 2011, the Falk Trust filed suit in state court against Fannie Mae and others, seeking a declaration that the Falk Deed was “a valid and enforceable lien” on the property. (State Compl. ¶ 43, ECF No. 14-4; see Compl. ¶ 48, ECF No. 1.) Fannie Mae filed an answer, counterclaims, and a third-party complaint against the Falk Trust and Quicksilver, seeking a declaration that the Fannie Mae Deed was a first priority lien on the property, that Fannie Mae's foreclosure extinguished any lien created by the Falk Deed, and that Fannie Mae held title to the property free and clear of any lien created by the Falk Deed. (State Countercls. 15, ECF No. 13-7.) The trial court granted summary judgment in favor of Fannie Mae, concluding that the Falk Deed had expired under North Carolina law. (Compl. ¶ 50, ECF No. 1.) The North Carolina Court of Appeals reversed the decision of the trial court, holding that the Falk Trust held a valid lien, even after Fannie Mae's foreclosure, and had the right to foreclose on the property. Falk v. Fannie Mae , 225 N.C.App. 685, 738 S.E.2d 404, 411 (2013), rev'd , 367 N.C. 594, 766 S.E.2d 271 (2014). The North Carolina Supreme Court later reversed the Court of Appeals, holding that a state statute “acted to terminate the [Falk Deed] and permitted Fannie Mae to foreclose on the property unencumbered.” Falk v. Fannie Mae , 367 N.C. 594, 766 S.E.2d 271, 280 (2014).

In 2013, while the state court action was pending before the North Carolina Supreme Court, Fannie Mae filed suit in this Court. Fannie Mae's Complaint asserts six claims. Claim 1 alleges that the Falks engaged in fraud during the loan application and closing process by representing that the property was unencumbered and that the Fannie Mae Deed would be a first lien on the property. (Compl. ¶¶ 52–66, ECF No. 1.) Claim 2 alleges that the Falks and Quicksilver engaged in negligent misrepresentation during the loan application and closing process by representing that the property was unencumbered and that the Fannie Mae Deed would be a first lien on the property. (Id. ¶¶ 67–77.) Claim 3 alleges that the Falks' and Quicksilver's acts of fraud, misrepresentation, and omission constitute unfair and deceptive trade practices under Section 75–1.1 of the North Carolina General Statutes. (Id. ¶ 78–83.) Claim 4 alleges that the Falks and Quicksilver, pursuant to the Fannie Mae Note and a separate contractual agreement, are liable for the loss and damages Fannie Mae suffered as a result of the Falks' fraud and misrepresentations and are liable for the repayment of all indebtedness for transferring the Falks' interests in Quicksilver to the Falk Trust. (See id. ¶¶ 84–95.) Claim 5 alleges that Quicksilver breached warranties of title in the Fannie Mae Deed by failing to defend Fannie Mae against the Falk Trust's challenges to Fannie Mae's title. (See id. ¶¶ 96–103.) Claim 6 alleges that the Falk Trust is liable for all claims against Quicksilver through piercing the corporate veil. (See id. ¶¶ 104–11.)

Defendants moved to dismiss this action for lack of subject-matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure or for failure to state a claim under Rule 12(b)(6). (Defs.' Mot. 1–2, ECF No. 12.) Alternatively, Defendants moved to stay the case. (Id. at 2.) On October 1, 2014, this Court entered a stay pending resolution of the state court litigation by the North Carolina Supreme Court. (See Am. Order 5, 11, ECF No. 19; Order 2, ECF No. 21.) The stay was lifted on February 27, 2015, after which the parties submitted supplemental briefing on the issue of whether the state court resolution precludes part or all of the present action under the doctrine of res judicata. (See Defs.' Res Judicata Br., ECF No. 25; Pl.'s Res Judicata Br., ECF No. 26.) Defendants' Motion to Dismiss is now ripe for review.

II. STANDARD OF REVIEW

A. Rule 12(b)(1) : Lack of Subject-Matter Jurisdiction

Subject-matter jurisdiction relates to the court's power to hear a case. Holloway v. Pagan River Dockside Seafood, Inc. , 669 F.3d 448, 453 (4th Cir.2012) (citing Arbaugh v. Y & H Corp. , 546 U.S. 500, 514, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006) ). A motion under Rule 12(b)(1), which governs dismissal for lack of subject-matter jurisdiction, raises the question of “whether [the plaintiff] has a right to be in the district court at all and whether the court has the power to hear and dispose of [the] claim.” Id. at 452. The burden of establishing subject-matter jurisdiction is on the plaintiff. Evans v. B.F. Perkins Co. , 166 F.3d 642, 647 (4th Cir.1999). When evaluating a Rule 12(b)(1) motion to dismiss, the court may consider evidence outside the pleadings and should grant the motion “only if the material jurisdictional facts are not in dispute and the moving party is entitled to prevail as a matter of law.” Id. (quoting Richmond, Fredericksburg & Potomac R.R. Co. v. United States , 945 F.2d 765, 768 (4th Cir.1991) ). Once the court determines it lacks subject-matter jurisdiction over a claim, it must dismiss that claim. See Jones v. Calvert Grp., Ltd. , 551 F.3d 297, 301 (4th Cir.2009). Irrespective of whether the parties raise the issue of subject-matter jurisdiction, the court has an independent obligation to ensure it possesses jurisdiction before proceeding. Constantine v. Rectors & Visitors of George Mason Univ. , 411 F.3d 474, 480 (4th Cir.2005).

B. Rule 12(b)(6) :...