Richman v. FWB Bank

Decision Date01 September 1997
Docket NumberNo. 988,988
Citation712 A.2d 41,122 Md.App. 110
PartiesIlene H. RICHMAN, et vir., v. FWB BANK, et al. ,
CourtCourt of Special Appeals of Maryland
Mark L. Shaffer (Baise & Miller, P.C., on the brief), Washington, DC, for appellants

Thomas D. Murphy (James A. Mood, Jr., on the brief), Rockville, for appellees.

Argued before HOLLANDER and SALMON, JJ., and PAUL E. ALPERT, Judge (retired), Specially Assigned.

HOLLANDER, Judge.

The protracted history of this case stems from a 1989 loan agreement between Ilene and Edward Richman (the "Richmans"), appellants, and FWB Bank ("FWB" or the "Bank"), appellee. 1 The dispute spawned extensive litigation in federal and State courts. In particular, we focus on an opinion and order dated February 24, 1997, issued by the Circuit Court for Appellants present several questions for our review, which we have combined and reformulated:

Montgomery County. Based on the doctrine of res judicata, the circuit court granted summary judgment in favor of appellees FWB, Joseph Betz, and Leonard Sloan, and granted a motion to dismiss filed by the other appellees. In analyzing whether the circuit court was legally correct, we must necessarily consider several opinions and orders issued by the United States Bankruptcy Court and the United States District Court, both for the District of Maryland.

I. Did the circuit court err in determining that appellants' State law claims were barred by the doctrine of res judicata?

II. Did the circuit court err in determining that the bankruptcy proceeding had a preclusive effect upon the circuit court proceeding when the complaint for turnover was not a "core" proceeding?

III. Did the circuit court err in concluding that appellants were in privity with the Chapter 7 bankruptcy trustee for purposes of analyzing the preclusive effect of the bankruptcy proceeding?

For the reasons set forth below, we answer Question I in the affirmative. Therefore, we need not address the remaining questions. Accordingly, we shall reverse the judgments and remand for further proceedings.

FACTUAL SUMMARY 2

On March 7, 1988, Ilene Richman contracted to purchase over nine acres of land in Haymarket, Virginia for commercial real estate development. She sought to procure financing for the project from FWB. 3 On September 22, 1989, the Richmans (c) The Maturity Date may be extended for an additional six (6) month period provided Borrower is not in default hereunder and further provided Borrower notifies Noteholder in writing requesting such extension of the Maturity Date and pays Noteholder an extension fee equal to one percent (1%) of the sum of the outstanding principal balance at least thirty (30) days prior to the Maturity Date.

entered into a loan agreement (the "Loan Agreement") with FWB, by which the Bank agreed to lend appellants $500,000.00 (the "Loan") for an eighteen month term. The Loan was evidenced by a Deed of Trust Note (the "Note") dated September 22, 1989, and was secured by a Deed of Trust and Security Agreement of the same date. The Note was to mature on March 15, 1991, but it contained an extension clause that provided:

In the fall of 1990, Betz, a loan officer for FWB, allegedly informed Ms. Richman that FWB had determined not to extend the Loan Agreement, which appellants considered an anticipatory breach of contract. Nevertheless, appellants negotiated with FWB for an extension of the Loan Agreement and, in early 1991, Betz advised Ms. Richman that FWB would agree to extend the Loan, but only if the Richmans pledged additional collateral as security, reduced the size of the Loan, and established an interest reserve account. The collateral was to include the hypothecation of appellants' Shearson, Lehman Brothers, Inc. ("Shearson") stock account (the "Shearson Account"), the condominium of appellants' son, and appellants' interest in a limited partnership. Appellants agreed to the use of these assets as collateral for the extension of the Loan.

In accordance with the parties' agreement to extend the Loan, appellants executed a document entitled "MODIFICATION AND RESTATEMENT OF DEED OF TRUST With regard to the Shearson Account, FWB prepared the Hypothecation Agreement, which stated, in part:

                NOTE" (the "Modification Agreement") on or about May 1, 1991. 4  Pursuant to the Modification Agreement, appellant paid $25,000.00 toward the principal balance of the Loan, and the Loan was restated at $448,585.05.  The terms included a maturity date of March 1, 1992 and an extension clause.  At closing, appellants also executed the Hypothecation Agreement providing for a pledge of their Shearson Account in FWB's favor to the extent of $125,000.  At the time, appellants' Shearson Account contained stocks, bonds, and a small amount of cash;  the net value of the assets in the account apparently exceeded $180,000.  Appellants also deposited $50,000.00 in an interest reserve account, from which FWB was to withdraw monthly interest payments
                

In consideration of and to induce FWB Bank (the "Bank") to extend the Maturity Date of that certain loan in the amount of Four Hundred Forty-Eight Thousand Five Hundred Eighty-Five Dollars and Five Cents ($448,585.05) (the "Loan") to Edward Richman and Ilene H. Richman (hereinafter collectively called the "Borrower"), and to partially release that certain [D]eed of Trust and Security Agreement, dated September 22, 1989, as modified, securing the Loan, the Borrower hereby:

1. pledges with the Bank and grants the Bank a security interest in the property described in Exhibit A attached hereto ... as security for the payment of all indebtedness ... of the Borrower to the Bank....

Exhibit A provided:

All of the Borrower's right, title and interest in and to any amounts on deposit in the account held by the Borrower with Shearson Lehman Brothers, Inc. designated Account The Hypothecation Agreement also included a one page acknowledgment to be executed by Shearson. Although the Hypothecation Agreement was executed by appellants and the Bank promptly sent it to Shearson for signature, Shearson never executed the acknowledgment, because it had an internal policy not to hypothecate such accounts in favor of any bank.

No. 6282588026038, together with all interest now or hereafter earned thereon and the proceeds thereof, to the extent of $125,000.00.

One of the central disputes in this case concerns the parties' knowledge of Shearson's policy, with each side claiming ignorance for itself but insisting that the other side knew of the policy before commencing or consummating the negotiations to modify the Loan Agreement. Appellants allege that, prior to their execution of the Modification Agreement, FWB learned of Shearson's policy and deliberately concealed it from appellants. The Richmans maintain that appellees engineered appellants' default by fraudulently inducing them to agree to the modification on terms that appellees knew the Richmans could not satisfy. Conversely, appellees assert that the Richmans fraudulently induced FWB to extend the Loan and release its lien on a portion of the Virginia property, by agreeing to provide the Shearson Account as collateral, knowing that Shearson would not abide by the Hypothecation Agreement.

The interest reserve account, opened pursuant to the Modification Agreement, was quickly depleted. Further, when appellants failed to make payments of principal and interest due on the Loan balance for December 1991 and January 1992, FWB was unable to obtain the assets in the Shearson Account that were the subject of the Hypothecation Agreement. Consequently, in January 1992, the Bank called the Loan. The acceleration of the Note obligated appellants immediately to pay all principal, interest, and other fees due on the Note. Appellants contend that "[t]his scenario ultimately On January 29, 1992, FWB instituted suit in the Circuit Court for Montgomery County ("Suit I") against the Richmans, alleging breach of contract, fraud, and default on the Note. FWB also filed an "Application for Writ of Attachment Before Judgment." On the same date, the circuit court issued a Writ of Garnishment Before Judgment against the Shearson Account (Hyatt, J.).

led to the bankruptcy of the Richmans," because it precipitated their "financial collapse."

Thereafter, on February 27, 1992, the debtors moved to dissolve the garnishment. At a hearing on March 12, 1992, the circuit court (Cave, J.) indicated that it had "serious problems with the precise animal we have ridden in on the Court today." Nevertheless, the court determined not to dismiss the garnishment. Instead, it converted the garnishment to an ex parte injunction that appellants could then move to vacate.

Prior to filing their answer to Suit I, appellants filed a voluntary petition for bankruptcy on May 29, 1992, in the United States Bankruptcy Court for the District of Maryland, under Chapter 11 of the United States Bankruptcy Code. On that same date, appellants also filed a Suggestion of Bankruptcy in Suit I, which resulted in a stay of that case.

On September 3, 1992, FWB filed an adversary proceeding (the "Discharge Action") within the bankruptcy proceeding, by which it sought to preclude the discharge of appellants' debt, pursuant to 11 U.S.C. § 523(a)(2)(A). 5 The facts alleged by FWB in the Discharge Action were virtually identical to those alleged by it in Suit I. In sum, the Bank contended that appellants had fraudulently induced FWB to enter into the Modification Agreement, knowing that Shearson would not honor the Hypothecation Agreement.

The bankruptcy court (Derby, J.) granted appellants' motion to lift the automatic stay with respect to Suit I on December 22, 1992, so that appellants could proceed in State court with their lender liability claims. Appellants immediately filed their answer to Suit I, along with a counterclaim against FWB and a third party complaint against Betz and Sloan 6 (hereinafter, we shall...

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