Perry v. Blum

• Court: U.S. Court of Appeals — First Circuit
• Writing for the Court: SELYA
• Citation: Perry v. Blum, 629 F.3d 1 (1st Cir. 2010)
• Decision Date: 01 October 2010
• Docket Number: No. 09-1977,09-1977
• Parties: Michael PERRY and Condominium Housing, Inc., Plaintiffs, Appellees, v. Steven BLUM, as Trustee of Moorings Nominee Trust, et al., Defendants, Appellants.

629 F.3d 1

Michael PERRY and Condominium Housing, Inc., Plaintiffs, Appellees,

v.Steven BLUM, as Trustee of Moorings Nominee Trust, et al., Defendants, Appellants.

No. 09-1977.

United States Court of Appeals, First Circuit.

Heard July 28, 2010.

Decided Oct. 1, 2010.

Michael S. Gardener, with whom Laurence A. Schoen, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Michael A. Collora, Ingrid S. Martin, and Dwyer & Collora, LLP were on brief, for appellants.

Matthew H. Feinberg, with whom Matthew A. Kamholtz, Daniel Klubock, and Feinberg & Kamholtz, were on brief, for appellees.

Before THOMPSON, SELYA and DYK,^* Circuit Judges.

SELYA, Circuit Judge.

This appeal requires us to sort through a complicated set of commercial machinations and evaluate the soundness of an equitable accounting through which the lower court divided the surplus proceeds of a multi-million-dollar foreclosure sale. To solve this conundrum, we must answer three loosely related questions. The first concerns the applicability of the doctrine of judicial estoppel, the second concerns the way in which the methodology for calculating the equity of redemption fits within the framework of a judicial accounting, and the third concerns the propriety of a post-trial joinder of additional defendants. After careful consideration of these questions, we reject the district court's proposed application of the doctrine of judicial estoppel but uphold its treatment of the equity of redemption and its joinder order. When all is said and done, we affirm in part, reverse in part, vacate the judgment, and remand for further proceedings consistent with this opinion.

I. BACKGROUND

Although there is a long, convoluted, and sometimes Machiavellian history involving the protagonists, we relate here only those facts relevant to the issues presented on appeal. We supplement this account in connection with our discussion of particular issues. Throughout, we accept the district court's factual findings to the extent that they are not clearly erroneous. Limone v. United States, 579 F.3d 79, 94 (1st Cir.2009); Cumpiano v. Banco Santander P.R., 902 F.2d 148, 152 (1st Cir.1990); Fed.R.Civ.P. 52(a).

Michael Perry and Stephen Yellin each hold a fifty percent interest in Condominium Housing, Incorporated (CHI), which owned a large apartment complex in Boston, Massachusetts, known as "the Fenmore." CHI purchased the Fenmore from Harold Brown in 1985. The purchase price included two promissory notes, with an aggregate face value of approximately $11,000,000 (the Notes), executed by Perry and Yellin as co-makers. The Notes were secured by first and second mortgages on the property.

Over time, Perry and Yellin made payments on the Notes. But when the Boston real estate market cratered in the late 1980s, they defaulted on several obligations, including not only the Notes but also an array of loans from their primary lender, Capitol Bank (which, among other things, held a third mortgage on the Fenmore). By 1990, Perry and Yellin owed Capitol Bank more than $7,000,000. They negotiated a settlement with the bank in July of that year, but the settlement proved to be illusory. The bank subsequently repudiated it, and Perry and Yellin were forced to sue for specific performance in a Massachusetts state court.

During the currency of that suit, the Federal Deposit Insurance Corporation (FDIC) took over Capitol Bank as its receiver and liquidating agent. The FDIC sought to collect Perry's and Yellin's indebtedness to the bank, claiming that they owed roughly $19,000,000 in principal and accrued interest on various loans. As part of its collection effort, the FDIC disavowed the earlier settlement and, in January of 1999, filed an amended counterclaim in the state court suit.

The amended counterclaim named as defendants Perry, Yellin, and a number of their relatives. These additional defendants (whom we shall call the "Perry Parties" and the "Yellin Parties") were allegedly involved in Perry's and Yellin's real estate enterprises as "straws." In due season, the FDIC removed the state court action to the federal district court. See 12 U.S.C. § 1819(b)(2)(B).

Brown's fortunes also had been adversely affected by the slumping real estate market. In 1991, he filed for bankruptcy. The bankruptcy proceedings dragged on and, in August of 1996, he submitted an affidavit to the bankruptcy court in which he represented that the Notes had an unpaid balance of $902,662 and were uncollectible. The bankruptcy court granted Brown a discharge from bankruptcy in September of 1996 and permitted him to retain ownership of the Notes.

CHI went into bankruptcy in April of 1996. After Brown emerged from his own bankruptcy, he intervened in CHI's bankruptcy and requested relief from the automatic stay, 11 U.S.C. § 362, so that he could foreclose on the Fenmore. Brown represented that the Notes had a principal balance of $902,662 and past-due interest of $950,620. The bankruptcy court granted Brown's motion to lift the stay in December of 1996. Instead of foreclosing, however, Brown agreed to sell the Notes to Yellin for $950,000. Yellin effectuated this purchase behind Perry's back and through a straw: Steven Blum, in his capacity as trustee of Moorings Nominee Trust. The sole beneficiary of the trust was North Shore Renewal, Inc., a shell corporation wholly owned by Yellin's wife, Elaine. Yellin, acting through Blum, then took control of the Fenmore as a mortgagee-in-possession and began collecting rents.

In June of 1997, Perry, on behalf of CHI, sued the Yellins and Blum, individually and as trustee of Moorings Nominee Trust, in a Massachusetts state court. The suit alleged an alphabet of wrongdoing, including breach of fiduciary duty, fraud, and conversion, stemming from the purchase of the Notes. In October of 1998, after Perry failed to attend a pretrial conference, the state court dismissed the suit for want of prosecution. CHI v. Blum, No. 97-3007 (Mass.Dist.Ct. Oct. 7, 1998) (unpublished order).

In late 1997, Yellin, acting through Blum, commenced foreclosure proceedings with respect to the Fenmore. The FDIC, which held junior mortgages on the property as the receiver for Capitol Bank, responded by bringing an action in the federal district court. In the action, the FDIC sought to enjoin any foreclosure sale. The district court granted a preliminary injunction blocking the foreclosure sale. Later, it consolidated the action in which it had granted the injunction with the action that the FDIC had removed from the state court.

In 2002, Yellin and the Yellin Parties settled with the FDIC for $5,000,000. Under the terms of the settlement, the FDIC permitted Yellin, acting through Blum, to foreclose on the Fenmore and use the first $5,000,000 of the foreclosure proceeds to fund the settlement. The district court thereafter dissolved the existing injunctionand Blum foreclosed on the Fenmore. The apartment complex was sold at auction for $9,450,000 (ironically, to Brown). The FDIC and the Yellin Parties then jointly moved to dismiss all claims inter sese. The district court granted that motion on June 10, 2002. ¹

Following the foreclosure sale, Perry, on behalf of himself and CHI, cross-claimed against Blum for an accounting of both the foreclosure proceeds and all rents collected between 1996 and 2002. Perry alleged that, as an equal partner in CHI, he was entitled to one-half of the Fenmore's equity of redemption.

In February and March of 2005, the district court held a bench trial on the cross-claim. The Notes were secured by first and second mortgages on the Fenmore, so Blum, as the noteholder and as a straw for Yellin, had a priority claim to the foreclosure proceeds. Not surprisingly, then, one of the main issues at trial concerned the amount due on the Notes. Blum contended that $7,494,435 was due. Perry contended that the amount due was much less. The district court determined that Blum was estopped from asserting that the amount due was anything other than what Brown, Blum's predecessor-in-interest, had represented in the bankruptcy court, namely, $1,853,282. Perry v. Blum ( Perry I ), No. 99-12194, slip op. at 30 (D.Mass. Oct. 31, 2008).² Even though the trial had ended years earlier, the court granted Perry's motion to join the Yellins as reach-and-apply defendants. Id., slip op. at 36.

Before the court actually made a final accounting, Blum and the Yellins moved for reconsideration of Perry I, arguing that the court had erred in applying judicial estoppel and in joining the Yellins after trial. The court denied the motion, Perry v. Blum ( Perry II ), No. 99-12194, slip op. at 2 (D. Mass. June 2, 2009). The court then prepared the accounting and entered judgment for Perry against Blum and the Yellins in the sum of $4,347,126, plus pre-judgment interest. The appendix to this opinion delineates the manner in which the court calculated this amount.

Blum and the Yellins moved to alter or amend the judgment, Fed.R.Civ.P. 59(e), protesting that the court had erred in excluding from its calculation of the equity of redemption an offset for the $5,000,000 payment that the Yellins had made to the FDIC—an offset that would have had the effect of reducing Perry's award by $2,500,000. The district court denied the motion, reasoning that it would be inequitable to allow Yellin to settle his personal debts by using foreclosure proceeds that otherwise would have to be split with Perry. Perry v. Blum ( Perry III ), No. 99-12194 (D. Mass. June 18, 2009) (unpublished order). Blum and the Yellins filed a timely motion of appeal from both the final judgment and the denial of their Rule 59(e) motion.

II. ANALYSIS

Like a milking stool, this appeal rests on three legs. The appellants (Blum and the Yellins) insist that the district court erred in (i) invoking judicial estoppel, (ii) miscalculating the equity of redemption, and (iii) adding the Yellins as defendants after the trial had ended. We discuss each of thesearguments...