IN RE: MCCLURE PROPERTIES, INC Debtor. MCCLURE PROPERTIES, INC Plaintiff,
FIFTH THIRD BANK, C2C REALTY, LLC, and WILLIAM T. HOLMES, SUCCESSOR TRUSTEE, Defendants.
Case No. 10-1810Ad
Proc. No. 10-146
UNITED STATES BANKRUPTCY COURTFOR THE NORTHERN DISTRICT OF WEST VIRGINIA
Filed & Entered: April 4, 2011
IN RE: MCCLURE PROPERTIES, INC Debtor. MCCLURE PROPERTIES, INC Plaintiff, v. FIFTH THIRD BANK, C2C REALTY, LLC, and WILLIAM T. HOLMES, SUCCESSOR TRUSTEE, Defendants.
Case No. 10-1810Ad v. Proc. No. 10-146
UNITED STATES BANKRUPTCY COURTFOR THE NORTHERN DISTRICT OF WEST VIRGINIA
Filed & Entered: April 4, 2011
Patrick M. Flatley United States Bankruptcy Judge
McClure Properties, Inc. (the "Debtor"), filed a two count adversary complaint against Fifth Third Bank and William T. Holmes (collectively, the "Bank"). Count I seeks to set aside a trustee's foreclosure sale, conducted by Mr. Holmes, on the grounds that the foreclosure sale price was so low as to shock the conscience. Count II of the complaint seeks to avoid the foreclosure sale as being a fraudulent transfer under West Virginia law, W. Va. Code § 40-1A-4(a).
The Bank requests entry of a judgment on the pleadings on both counts of the Debtor's complaint. The Bank asserts that both counts should be dismissed on the grounds that the causes of action are subject to claim preclusion, the price received at a regularly conducted foreclosure sale cannot be fraudulent, and the claims against it are time-barred under the applicable statute of
For the reasons stated herein, the court will dismiss Count II of the Debtor's complaint asserting a cause of action under W. Va. Code § 40-1A-4(a), but will deny the remainding relief sought by the Bank.
Under Fed. R. Ci v. P. 12(c), Fed. R. Bankr. P. 7012, "after the pleadings are closed - but early enough not to delay trial - a party may move for a judgment on the pleadings. " In reviewing a motion for a judgment on the pleadings, the court "assumes the facts alleged in the relevant pleadings to be true, and . . . draws all reasonable inferences therefrom. " Volvo Constr. Equip. N. Am Inc. v. CLM Equip. Co 386 F. 3d 581, 591 (4 Cir. 2004). Inferences are drawn in favor of the non-moving party. Burbach Broad. Co. v. Elkins Radio Corp 278 F. 3d 401, 406 (4 Cir. 2002).
On May 26, 2006, the Debtor borrowed $2, 240, 000 from the Bank for the purpose of constructing and opening a gas station and convenience store. The property is located at 1434-36 Third Street, Huntington, West Virginia, and as of April 6, 2006, the Bank's appraiser opined that the property had a $1, 800, 000 value "as is" and a $2, 800, 000 value "as completed. " The Bank's loan was secured by a deed of trust on the property, and the Debtor's principal, Victor McClure, guaranteed the note.
The Debtor operated the property as a gas station and convenience store for a time, but the Bank alleges that the Debtor defaulted on its debt obligations to it. On March 27, 2008, the Bank filed a complaint in the United States District Court for the Southern District of West Virginia, based on the court's diversity jurisdiction, seeking to recover on the note and guaranty. One of the Bank's attorneys in the District Court action was Mr. Holmes. On May 2, 2008, the Bank filed an amended complaint, seeking recovery on the same causes of action, and on August 20, 2008, the Debtor filed its answer to the District Court lawsuit.
On June 18, 2009, while the District Court action was pending, Mr. Holmes, exercising his power as successor trustee under the deed of trust, sold 1434-36 Third Street to Dennis Johnson for
$460, 000, and all the personal property for $17, 245. After the sale, Mr. Johnson directed that the trustee's deed be in favor of C2C Realty, LLC. The Bank applied the proceeds of the foreclosure sale to the Debtor's loan balance.
On July 9, 2010, the District Court issued its memorandum opinion and order on a motion for summary judgment filed by the Bank. The District Court held that the Debtor and Mr. McClure were in default of the May 2006 loan agreement in the principal sum due, plus accrued but unpaid interest, and were liable for all late fees, fines, expenses and advances that had accrued on the note. Due to a discrepancy in the amount claimed to be due, the District Court afforded the Bank additional time to file an accounting and explanation of the amount due within 14 days, with any response due within 7 days thereafter.
On July 23, 2010, the Bank provided its accounting, stating that $2, 376, 236. 23 was owed under the note. On July 26, 2010, the Debtor filed its Chapter 11 bankruptcy petition, which stayed further action against the Debtor in the District Court case. Rather than respond to the Bank's accounting, Mr. McClure requested that the District Court stay the case and/or grant him an additional 60 days to respond to the Bank's accounting. The District Court denied that request on August 3, 2010, giving Mr. McClure until August 6, 2010, to file his response. No response was timely filed, and the District Court entered a final judgment against Mr. McClure on August 30, 2010, in the amount of $2, 376, 236. 23.
The Bank requests entry of a judgment on the pleadings contending that the Debtor's causes of action against it for inadequate foreclosure sale price and fraudulent transfer are: (A) precluded on the basis that the Debtor should have raised the inadequacy of the foreclosure sale price in the District Court action; (B) meritless on the grounds that the price received at a foreclosure sale cannot be fraudulent as a matter of law; and (C) barred by the applicable statute of limitations.
A. Claim Preclusion
The Bank asserts that the Debtor's causes of action against it to avoid Mr. Holmes's June 18, 2009 foreclosure sale should have been raised by the Debtor in the District Court action, but they were not. On that basis, the Bank contends that it is too late for the Debtor to attempt to avoid the
foreclosure sale in the bankruptcy court.
Claim preclusion prohibits a party from relitigating a previously adjudicated cause of action, and entirely bars a new lawsuit on the same cause of action. For the doctrine to apply a party must establish that: (1) there is a final judgment on the merits in a previous lawsuit, (2) the claims in the subsequent litigation are substantially the same as those in the previous litigation, and (3) an identity of parties or their privies exists in the two suits. Pension Benefit Guar. Corp. v. Beverley, 404 F. 3d 243, 248 (4 Cir. 2005).
When new causes of action arise after the initiation of the complaint in the first action, however, those new claims are not the subject of the existing lawsuit and a party is not barred from raising the new causes of action in a subsequent lawsuit based on the party's failure to seek an amendment to the pleadings in the previous lawsuit to assert the new causes of action. E. g Maharaj v. BankAmerica Corp 128 F. 3d 94, 97 (2d Cir. 1997) ("If, after the first suit is underway, a defendant engages in actionable conduct, plaintiff may - but is not required to - file a supplemental pleading setting forth defendant's subsequent conduct. Plaintiff's failure to supplement the pleadings of his already commenced lawsuit will not result in a res judicata bar when he alleges defendant's later conduct as a cause of action in the second suit. "); Young-Henderson v. Spartanburg Area Mental Health Center, 945 F.2d 770 774 (4 Cir. 1991) (doubting that claims could be precluded by an earlier judgment when the claims could not have been brought at the time the original complaint was filed); Spiegel v. Continental Illinois Nat'l Bank, 790 F.2d 638 646 (7Cir. 1986) ("In view of the fact that the two newly-alleged predicate acts of mail fraud occurred after the filing of Spiegel I, we agree with the district court's ruling that 'the doctrine of res judicata does not bar Spiegel II to the extent it is based on acts which occurred after Spiegel I was filed. '"); 18 Moore's Federal Practice - Civil § 131. 221 (2011) ("A subsequent action that . . . alleges new facts . . . that establish independent grounds for a claim against the defendants in the previous action, is not prohibited by claim preclusion . . . . ").
Here, at the time the Bank filed its March 27, 2008 complaint in District Court against the Debtor and Mr. McClure - and at the time the Debtor and Mr. McClure filed their August 20, 2008 answer to the amended complaint and asserted counterclaims - no deed of trust foreclosure sale had occurred. The trustee's foreclosure sale was not held until June 18, 2009. The core facts giving rise to the Debtor's alleged causes of action in this adversary proceeding concern the June 18, 2009
foreclosure sale. The Debtor could not have asserted such causes of action as counterclaims when it answered the Bank's District Court complaint because the facts underlying those causes of action did not yet exist.
Therefore, because the Debtor's claims in this adversary proceeding are substantially different from the claims of the parties in the previous District Court action, and based on facts that did not exist at the time the District Court action was filed by the Bank, no basis exists to grant the Bank's motion for a judgment on the pleadings based on the application of claim preclusion.
B. Inadequate Price Obtained at a Foreclosure Sale
By statute, the Bank asserts, the price Mr. Holmes received from Mr. Johnson / C2C Realty at the June 18, 2009 foreclosure sale is the property's reasonably equivalent value; thus, the Debtor has no cause of action to set aside the foreclosure sale as being for an inadequate price. W. Va. Code § 40-1A-3 ("A person gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale . . . . ").
Importantly, the Debtor's complaint asserts two counts to set aside the foreclosure sale. The first is based on West Virginia common law, and the second is based on a creditor's right to set aside a transfer of the debtor's property as fraudulent when the price paid for the property is not its "reasonably equivalent value. " W. Va. Code § 40-1A-4(a)(2).
Under Count I, the Debtor asserts that West Virginia common law allows a borrower to bring an action to set aside a foreclosure sale when the price received at the sale is so low as to "shock the conscience. " E. g Rife v. Woolfolk, 289 S.E.2d 220 (W. Va. 1982) ("'A sale of real estate by a trustee will not be set aside upon the ground of inadequacy of price unless such inadequacy is so great as to shock the conscience of the chancellor. '") (quoting Pence v. Jamison, 94 S. E 383 (W. Va. 1917). To set aside a foreclosure sale for an inadequate price, "there need be no showing of fraud,
or any impropriety in the conduct of the sale . . . . " Id.
The statutory authority asserted by the Bank in support of its position that the price received for property at a foreclosure sale is deemed to be the property's reasonably equivalent value, W. Va. Code § 40-1A-3, by its own terms, only applies to a statutory cause of action to set aside a transfer of property as fraudulent under the Uniform Fraudulent Transfers Act. It does not apply to the Debtor's common law cause of action under Rife and Pence. Indeed, West Virginia courts have continued to recognize that foreclosure sales may be set aside when the price received shocks the conscience well after the 1986 enactment of § 40-1A-3. E. g Syllabus Pt. 3, Smith v. Rusmisell, 517 S.E.2d 494 (W. Va. 1999); Syllabus Pt. 2, Benavides v. Shenandoah Fed. Sa v. Bank, 433 S.E.2d 528 (W. Va. 1993).
In Count II, however, the Debtor specifically asserts that the foreclosure sale is a voidable fraudulent transfer under W. Va. Code § 40-1A-4, which requires, as an essential element of the cause of action, that the debtor not receive "a reasonably equivalent value in exchange for the transfer or obligation. " § 40-1A-4(a)(2). In turn, § 40-1A-3 provides that the price received for property at a regularly conducted, noncollusive foreclosure sale is the property's reasonably equivalent value:
For the purpose of § 40-1A-4(a)(2) . . . a person gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust or security agreement.
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