Opinion
Civil Action No. DKC 2004-2643.
December 20, 2004
MEMORANDUM OPINION
This case is before the court on appeal from the order of visiting United States Bankruptcy Judge John C. Akard granting the motion for summary judgment by Appellee KH Funding, Inc. and denying the motion to alter or amend judgment by Appellant Martin Baltrotsky. Oral argument is deemed unnecessary because the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument. See Fed.R.Bankr.P. 8012. For the reasons that follow, the court will affirm both the bankruptcy court's grant of Appellee's motion for summary judgment and denial of Appellant's motion to alter or amend.
I. Background
The following facts are undisputed. Debtor Appellant Martin Baltrotsky filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on August 11, 1998. At that time, Appellant owned several pieces of real property, including those located at (1) 1801 Arcola Avenue, Silver Spring, Maryland, (2) 5100 Bradley Boulevard, Bethesda, Maryland, and (3) 9110 Georgia Avenue, Silver Spring, Maryland (collectively, "the Properties").
On June 4, 2001, Appellant secured a loan for $650,000 from Appellee KH Funding, Inc. in order to refinance existing liens on the Properties. Pursuant to a Refinance Deed of Trust, Appellant granted Appellee a first priority lien on the Properties. On July 26, 2002, by order of the bankruptcy court, the case was converted from Chapter 11 to Chapter 7, after which Steven H. Greenfeld was appointed Chapter 7 trustee (the "Trustee") for the estate.
On April 23, 2003, the Trustee filed an adversary proceeding to set aside the liens which Appellee received in connection with the loan made to Appellant. See Paper 1, Attachment ("Att.") 73, Ex. A ("Trustee Complaint"). In its Complaint, the Trustee alleged: (1) the loan should be avoided pursuant to 11 U.S.C. § 549 as an unauthorized post-petition transfer; (2) Appellee violated various provisions of the Truth in Lending Act ("TILA"), see 15 U.S.C. §§ 1635, 1640; and (3) Appellee violated various provisions of the Home Ownership and Equity Protection Act ("HOEPA"), see 15 U.S.C. § 1639, 1640. All matters between the Trustee and Appellee were ultimately resolved pursuant to the terms of a Consent Order entitled "Stipulation and Consent Order (i) Compromising and Settling All Disputes at Issue in Adversary Proceeding; and (ii) Granting Relief From the Automatic Stay." See Paper 1, Att. 74 ("Consent Order"). The Consent Order was executed by the Trustee and Appellee on September 15, 2003, and subsequently approved and entered by the bankruptcy court on October 9, 2003.
By the express terms of the Consent Order, the parties agreed that Appellee's deed of trust lien on the Properties was valid and enforceable and not subject to avoidance on any grounds. The Order specifically ratified the liens nunc pro tunc to the date of the loan and relieved Appellee from the automatic stay of § 362 of the Bankruptcy Code so that it may foreclose on the Properties. See Consent Order at 3. However, Appellee agreed to forbear foreclosing on the Properties
until the later of (i) the date on which the Court enters this Stipulation and Consent Order; or (ii) the sixtieth (60) day following the date of this Stipulation and Consent Order (the "Forbearance Period"). . . .Id. at 4. During the Forbearance Period, Appellant was given the opportunity to secure financing to replace Appellee's lien. Pursuant to the Consent Order, if Appellant obtained replacement financing in an amount equal to or greater than $800,000 and "if such financing actually clos[ed] prior to the expiration of the Forbearance Period," Appellee agreed to accept a reduced payoff of $700,000 plus a second priority lien in the amount of $30,000. See id. However, the Consent Order further provided that if Appellant obtained a commitment for such replacement financing "capable of closing within the Forbearance Period," Appellant was required to disclose all material terms of the financing commitment to Appellee in writing at least two weeks prior to the closing date in order to give Appellee the right to extend replacement financing pursuant to the same or better terms. Id. at 4-5. At no time, either before or after the expiration of the Forbearance Period, did Appellant provide Appellee with any notice of intent to refinance as required under the Consent Order. Accordingly, the foreclosure sales were scheduled to take place on December 24, 2003.
On December 19, 2003, Appellant filed this adversary proceeding. See Paper 1, Att. 3. His complaint is virtually identical to the Trustee's Complaint which was settled in accordance with the prior Consent Order. Subsequently, on December 22, 2003, two days before the scheduled foreclosure sales, Appellant filed a voluntary petition under Chapter 13 of the Bankruptcy Code. The following day, upon learning of Appellant's open and pending Chapter 7 case, Judge Keir entered an order consolidating the two bankruptcy cases under the Chapter 7 case. On December 24, the foreclosure sales were conducted as scheduled.
On January 27, 2004, Judge Keir denied Appellant's motion to vacate the consolidation order.
On February 6, 2004, Appellee filed a motion to dismiss, or, in the alternative, for summary judgment. See Paper 1, Att. 73. On March 22, 2004, Appellant filed a motion for leave to file an amended complaint, together with the amended complaint, which the court granted on March 30. In his amended complaint, Appellant once again reasserted the claims brought by the Trustee in its earlier complaint filed in April 2003. In addition, Appellant claimed (1) the foreclosure sale violated the automatic stay of 11 U.S.C. § 362, effective immediately upon his filing the Chapter 13 petition on December 22, (2) the prior Consent Order should be invalidated because he signed it under duress, and (3) Appellee breached the Consent Order by refusing to cooperate with Appellant during the Forbearance Period. See Paper 1, Att. 22 ("Amended Complaint"). After several extensions of time, Judge Akard held a hearing on May 3 on Appellee's motion to dismiss, or, in the alternative for summary judgment. On May 26, Judge Akard issued an Order and accompanying Memorandum of Decision granting Appellee's motion for summary judgment, finding that Appellant lacked standing to bring the claims already brought and settled by the Trustee and that Appellant's other claims lacked merit, and, accordingly, that Appellee was entitled to judgment as a matter of law. Id., Att. 56, 57. After Appellant's motion to alter or amend judgment was denied, see Paper 1, Att. 63, Appellant filed an appeal to this court.
II. Standard of Review
On appeal from the bankruptcy court, the district court acts as an appellate court and reviews the bankruptcy court's findings of fact for clear error and conclusions of law de novo. See In re Deutchman, 192 F.3d 457, 459 (4th Cir. 1999).
III. Analysis
Based on the parties' non congruent statements in their briefs regarding the issues on appeal, compare Paper 4 (Appellant's Brief), with Paper 5 (Appellee's Brief), and because this case comes to the court on appeal from the bankruptcy court's grant of Appellee's motion for summary judgment and dismissal of the adversary proceeding, the court will analyze each ground for the bankruptcy court's judgment. As the court sees it, the issues on appeal are as follows: (1) whether the bankruptcy court erred when it held Appellee did not violate a Chapter 13 stay; (2) whether the bankruptcy court erred when it found that the Consent Order was not subject to rescission on grounds of duress or undue influence; (3) whether the bankruptcy court erred when it found Appellee did not breach the Consent Order; (4) whether the bankruptcy court erred when it held Appellant lacked standing to raise the three claims already brought and settled by the Trustee; and (5) whether the bankruptcy court erred in granting summary judgment to Appellee.
A. The Chapter 13 Filing
Appellant contends that the bankruptcy court erred as a matter of law when it found that the filing of the Chapter 13 petition did not have the effect of placing an automatic stay pursuant to § 362 on the foreclosure sale of the Properties. See Paper 4 at 11-13. Appellant argues that he had the right to file a Chapter 13 petition and that the accompanying automatic stay was not lifted either explicitly or implicitly by virtue of the order consolidating the two cases. See id. Appellant's argument, however, mischaracterizes the basis on which the bankruptcy court made its ruling and ignores fundamental concepts of bankruptcy law.
Section 541(a)(1) of the Bankruptcy Code provides that the commencement of a bankruptcy case creates an estate which is comprised of "all legal or equitable interests of the Debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1); see In re FCX, Inc., 853 F.2d 1149, 1153 (4th Cir. 1988). "At that time, `the debtor's interests in property vest in the bankruptcy estate, and the debtor surrenders the right to dispose of or otherwise control the estate property.'" Miller v. Pacific Shore Funding, 287 B.R. 47, 49-50 (D.Md. 2002) (quoting Richman v. Garza, No. 96-2156, 1997 WL 360644, at *1 (4th Cir. July 1, 1997)); see also 8A C.J.S. Bankruptcy § 105 ("The commencement of a bankruptcy case creates an estate, which is an entity distinct from the debtor.").
Therefore, when Appellant filed his first voluntary petition for reorganization under Chapter 11 in 1998, a Chapter 11 bankruptcy estate was created consisting of, inter alia, the Properties involved in this proceeding. While Appellant's case remained under Chapter 11, Appellant, as a "debtor in possession," had the same rights and powers of a Chapter 11 trustee pursuant to § 1107. See 11 U.S.C. §§ 1101, 1107(a). However, when the case was converted to a liquidation under Chapter 7, Appellant no longer was a debtor in possession under Chapter 11, and, thus, he no longer had the rights of a trustee under § 1107. As a result of the conversion, a Chapter 7 Trustee was appointed under § 702 and charged with the responsibility of "collect[ing] and reduc[ing] to money the property of the estate for which such trustee serves, and clos[ing] such estate as expeditiously as is compatible with the best interests of parties in interest." Id. § 704(1).
Section 1107(a) of the Bankruptcy Code provides:
Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.11 U.S.C.A. § 1107.
Appellant argues that the filing of the Chapter 13 petition on December 22, 2003 had the effect of placing an automatic stay on any proceedings regarding the Properties, specifically the foreclosure sales occurring on December 24. However, as the principles cited above make clear, the Properties were undoubtedly assets of the Chapter 7 bankruptcy estate, not the Chapter 13 estate that was created upon the filing of the second petition. As the bankruptcy court below held, "[t]he only assets which would be affected by the [Appellant's] Chapter 13 filing would be assets he owned at that time." See Paper 1, Att. 56 at 8. In other words, the automatic stay created by the filing of the Chapter 13 petition would only be applicable to actions involving property included within the Chapter 13 estate. See id.
This view comports with what has become known as the "single estate rule" which holds that a debtor cannot maintain simultaneous bankruptcy cases because "[a] debtor possesses only one estate for purposes of trusteeship." Assocs. Fin. Servs. Corp. v. Cowen, 29 B.R. 888, 894 (Bankr.S.D.Ohio 1983). Although ordinarily serving as the basis for dismissing a debtor's subsequent bankruptcy petition filed while another bankruptcy case is still open and pending, see, e.g., In re Turner, 207 B.R. 373 (B.A.P. 2nd Cir. 1997); In re Lord, 295 B.R. 16 (Bankr.E.D.N.Y. 2003); In re Pickering, 195 B.R. 759, 766 (Bankr.D.Mo. 1996); In re Fulks, 93 B.R. 274, 276 (Bankr.M.D.Fla. 1988); In re Smith, 85 B.R. 872, 874 (Bankr.W.D.Okla. 1988); In re Heywood, 39 B.R. 910, 911 (Bankr.W.D.N.Y. 1984), the rule has application here as well. Under this rule, "`property cannot be an asset of both [2] estates simultaneously.'" See In re Studio Five Clothing Stores, Inc., 192 B.R. 998, 1006 (Bankr.C.D.Cal. 1996) (quoting In re Grimes, 117 B.R. 531, 536 (B.A.P. 9th Cir. 1990)); see also In re Berg, 45 B.R. 899, 903 (B.A.P. 9th Cir. 1984).
Although the Fourth Circuit precedent is lacking regarding the single estate rule, many bankruptcy courts have addressed the issue.
As mentioned above, upon the commencement of the Chapter 11 case, the Properties became part of the bankruptcy estate. When Appellant's case was converted to a Chapter 7 liquidation, the Properties became part of the Chapter 7 estate administered by the Trustee, where they remained at the time Appellant filed his Chapter 13 petition. Because a bankruptcy estate continues to exist until the case is closed, see 11 U.S.C. §§ 554(c), 350, or dismissed, see id. § 349(b)(3) (dismissal "revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title"), Appellant's Chapter 7 estate undoubtedly still existed at the time the Chapter 13 petition was filed.
Furthermore, the Properties remained in the Chapter 7 estate throughout as it is clear that the Trustee never abandoned them pursuant to § 554, nor is there any indication that they were exempted under § 522. Accordingly, the Properties were still included in the Chapter 7 estate and "the debtor [Appellant] retain[ed] no interest in such property which could be conveyed to the bankruptcy estate of any subsequent case." In re Strohscher, 278 B.R. 432, 437 (Bankr.N.D.Ohio 2002). Therefore, the bankruptcy court did not err when it found that because the Properties were part of the Chapter 7 estate at the time Appellant filed his Chapter 13 petition, "there was no automatic stay with respect to the foreclosure on The Properties created by his Chapter 13 filing." See Paper 1, Att. 56 at 8; see also In Re Saylors, 869 F.2d 1434, 1438 (11th Cir. 1989) ("The property of [Debtors'] chapter 13 estate is distinct from the property of the chapter 7 estate that preceded it. Consequently, each stay also is distinct.") (internal citations omitted). Because no material issues of fact are in dispute with respect to this claim, Appellee was entitled to summary judgment as a matter of law.
Section 554 provides three ways in which property may be abandoned by the Trustee, none of which occurred. See 11 U.S.C. § 554(a)-(c). In fact, after expressing concern that the Trustee may have abandoned the Properties, Appellant's own counsel filed a letter with the bankruptcy court informing it that the Trustee had not abandoned the Properties. See Paper 1, Att. 35. Moreover, in a sworn affidavit, the Trustee himself states he "never caused the bankruptcy estate's interest in the Properties to be abandoned," and "[a]t no time did [he] convey to the Debtor [Appellant] any equitable or other rights in the Properties." See id., Att. 40 at ¶¶ 4, 5 ("Affidavit of Steven H. Greenfeld").
Section 522 determines what property "an individual debtor may exempt from property of the estate. . . ." 11 U.S.C. § 522(b). As the Supreme Court has stated, "An exemption is an interest withdrawn from the estate (and hence from the creditors) for the benefit of the debtor." Owen v. Owen, 500 U.S. 305, 308 (1991) (emphasis added); see also In re Greathouse, 295 B.R. 562, 564 (Bankr.D.Md. 2003) ("Exemption of property from the bankruptcy estate, as permitted under Section 522(b), causes the exempted interest in property to exit the bankruptcy estate and be returned to the debtor free of administration by the Trustee.") (emphasis added).
B. Duress and Undue Influence
Appellant argues that the Consent Order settling the claims between the Trustee and Appellee and entered by the bankruptcy court on October 9, 2003 should be vacated on the grounds that he was improperly influenced by the Trustee's attorney, Mr. Borison, to sign the Consent Order, and that such signing came under duress and undue influence. Specifically, Appellant asserts that he believed Mr. Borison represented him, and, accordingly, that he would have Appellant's best interests in mind when negotiating the Consent Order between the Trustee and Appellee. However, because Mr. Borison represented the Trustee, Appellant asserts Mr. Borison's advice to him regarding the Consent Order was conflicted, amounted to undue influence, and is grounds for rescission. See Paper 4 at 13-14. The bankruptcy court disagreed, finding that "Mr. Borison's relationships with the Debtor form no basis for setting aside the Consent Order." See Paper 1, Att. 56 at 19. This court agrees and affirms this conclusion.
"Mutual assent is an essential element with respect to the formation of a valid contract." Young v. Anne Arundel County, 807 A.2d 651, 692 (Md.Ct.Spec.App. 2002) (citing Creel v. Lilly, 729 A.2d 385 (Md. 1999)). As the Fourth Circuit has stated in an unpublished opinion, "A consent order . . . is the product of a settlement — a contract — between the parties. If there is no assent by a party, then there is obviously no contract." In re Reflections, No. 94-2080, 54 F.3d 774, 1995 WL 295502, at **2 (4th Cir. May 16, 1995). Further, a contract is voidable and subject to rescission if it can be shown that it was unconscionable or procured through fraud, duress, or undue influence. Young, 807 A.2d at 692. This stems from the fundamental principle that "[w]hen a party's agreement to contract is `forced or involuntary, he will not be bound by that commitment.'" Id. (citing Blum v. Blum, 477 A.2d 289, 294 (Md.Ct.Spec.App. 1984)).
First, the bankruptcy court "assumed . . . for the purposes of the [summary judgment] motion" that Appellant's signature to the Consent Order was secured under duress by Mr. Borison, but held, nevertheless, that Appellant was not injured by the duress. See Paper 1, Att. 56 at 15. The bankruptcy court did not cite to, nor has this court found, any authority for the proposition that a contract signed under duress by one of the parties is only subject to rescission if that duress somehow causes injury. It is not the injurious nature of an agreement signed under duress which may warrant its rescission but rather the lack of mutual assent by the parties in its formation. See Young, 807 A.2d at 692. Nevertheless, the bankruptcy court's conclusion that the Consent Order should not be vacated will be affirmed even if its reasoning was partially flawed.
Although the bankruptcy court "assum[ed] that the [Appellant] Debtor's signature was secured by duress," there is simply no basis for that conclusion in the record. "To establish duress there must be a wrongful act which strips the individual of the ability to utilize his free will." Young, 807 A.2d at 692. The Restatement also provides guidance as to the concept of duress. It provides, "If a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim." The Restatement (Second) of Contracts (1981) § 175(1). Similarly, "Undue influence is equivalent to that which constrains the will or destroys the free agency of the person and substitutes in its place the will of another." 28 Williston on Contracts § 71:50 (4th ed. 2004). To the extent that the bankruptcy court's "assumption" was a conclusion of law, this court finds it was erroneous.
There is nothing in the record to suggest that Appellant signed the Consent Order under any conditions evidencing a lack of free will. Furthermore, in his sworn affidavit, Mr. Borison attests that on September 15, 2003 he met with Appellant and explained to him the specific contents of each paragraph of the Consent Order and that he represented the Trustee, not Appellant. Paper 1, Att. 74 at ¶ 5 ("Borison Affidavit"). Moreover, the bankruptcy court noted that there is no entry of appearance by Mr. Borison or any member of his firm as attorney for debtor and that Mr. Borison's employment as counsel for the Trustee was approved by the bankruptcy court on February 25, 2003, prior to the filing of the Trustee Complaint in which Mr. Borison represented the Trustee. See Paper 1, Att. 56 at 19.
As the bankruptcy court correctly pointed out, Appellant was not a party to the Trustee's suit against Appellee. That complaint was brought pursuant to the Trustee's avoidance powers under § 549 of the Bankruptcy Code, as well as its general powers as the "representative of the bankrupt's estate . . . to sue or be sued." Detrick v. Panalpina, Inc., 108 F.3d 529, 535 (4th Cir. 1997) (citing In re Richman, 104 F.3d 654, 657 (4th Cir. 1997)). Accordingly, Appellant was not a party to the Consent Order which settled the adversary proceeding between the Trustee and Appellee. The Consent Order is undisputably an agreement between the Trustee and Appellee KH Funding, as is made clear in the opening paragraph which states, "Steven H. Greenfeld, Chapter 7 trustee (the "Trustee") for the estate of Martin Baltrotsky (the "Debtor"), and KH Funding, Inc. ("KH Funding"), by their respective undersigned counsel, hereby stipulate and agree as follows. . . ." See Consent Order at 1. As the bankruptcy court noted, "for reasons which are not apparent on the record," the parties gave Appellant "something to which he was not entitled — namely, a limited right to secure financing of The Properties" during the Forbearance Period. See Paper 1, Att. 56 at 13. In other words, the Trustee and Appellee as the sole parties to the adversary proceeding could have entered into a stipulation and consent agreement with respect to the Properties included in the Chapter 7 estate without consulting Appellant, but, nevertheless, agreed to grant him a limited time to secure replacement financing for the Properties. Although this may have made Appellant a third-party beneficiary to the Consent Order, giving him certain contractual rights under the Consent Order, it does not make him a party to the agreement so that he can challenge it on the basis that his signature was provided under duress or under improper influence. Simply put, neither his consent, nor his signature were necessary for the Trustee and Appellee to enter into a valid and enforceable Stipulation and Consent Order settling the claims between the Trustee, as representative of the estate, and Appellee. Accordingly, the bankruptcy court did not err when it found that no basis existed for vacating the Consent Order, and Appellee was entitled to judgment as a matter of law.
Appellant's status as a third-party beneficiary is discussed more fully infra as it relates to his "Breach of Consent Order" claim.
C. Breach of Consent Order
Appellant argues that Appellee breached its obligation under the Consent Order to cooperate in refinancing the Properties during the Forbearance Period. See Paper 1, App. 22 ("Amended Complaint"). His argument relies on his construction of the Consent Order as it relates to the Forbearance Period. He argues that the Consent Order allowed him until December 8, 2003 to procure replacement financing and that Appellee did not cooperate during that period. Appellee argues that the Forbearance Period ended on November 14, 2003, and, accordingly, after that period it was no longer obligated under the Consent Order to accept any replacement financing proposals.
First, it is clear that Appellant does have the right to challenge both the construction of, and Appellee's conduct pursuant to, the Consent Order as a third-party beneficiary to that agreement. As discussed supra, the Consent Order was an agreement between the Trustee and Appellee settling the claims brought by the Trustee on behalf of the estate. In essence, the parties agreed that Appellee's lien on the Properties was "valid and not subject to avoidance on any grounds, including, without limitation, the grounds raised in the [Trustee's] Complaint." See Consent Order at 3. It further lifted the automatic stay of 11 U.S.C. § 362 "to permit [Appellee] KH Funding to exercise its non-bankruptcy law rights and remedies with respect to the Properties." Id. In the event that Appellee sold the Properties at foreclosure, it agreed to "remit first from the proceeds of such sales, the total amount of $25,000 to the Trustee, which sum shall be administered by the Trustee for the benefit of the Debtor's bankrupt estate." Id. at 4.
However, the parties agreed to give the Appellant something to which he was not entitled — a limited right to secure replacement financing for the Properties within a specified time. Appellee agreed to forbear from exercising any of its rights during this period. Under Maryland law, "In determining whether a party is a third party beneficiary to a contract, the controlling issue is whether the contract's terms, in light of the surrounding circumstances, reveal an intent to make [a] promise to the third party in fact if not in form." College of Notre Dame of Maryland, Inc. v. Morabito Consultants, Inc., 752 A.2d 265, 276 (Md.Ct.Spec.App. 2000). It is clear from the plain language of the Consent Order that as part of its terms, Appellee promised to forbear from exercising its rights for a limited period to allow Appellant to "seek to obtain replacement financing with respect to the Properties." See Consent Order at 4. As the Maryland Court of Appeals has stated, "[A] third party beneficiary contract arises when two parties enter into an agreement with the intent to confer a direct benefit on a third party, allowing the third party to sue on the contract despite the lack of privity." Flaherty v. Weinberg, 492 A.2d 618, 622 (Md. 1985). Accordingly, because the Consent Order between the Trustee and Appellee conferred upon Appellee the right to obtain replacement financing during the Forbearance period, he is a third-party beneficiary and can challenge its construction and Appellee's performance.
Appellant contends that Appellee breached the Consent Order because it failed to cooperate with him during the Forbearance Period. The critical issue, thus, is when the Forbearance Period terminated. The Consent Order provided that Appellant
shall forebear from exercising any of its non-bankruptcy law rights and remedies with respect to the Properties until the later of (i) the date on which the Court enters this Stipulation and Consent Order; or (ii) the sixtieth (60) day following the date of this Stipulation and Consent Order (the "Forbearance Period"). . . .
Consent Order at 4. In other words, Appellee agreed to not exercise its legal rights until either (i) the date on which the bankruptcy court entered the Consent Order, or (ii) sixty days after the date the Consent Order was executed, whichever is later. The date on which the bankruptcy court entered the Consent Order was October 9, 2003. The date of the Consent Order, i.e., the date it was executed was September 15, 2003. The sixtieth day following September 15, 2003 was November 14, 2003. November 14, 2003 is unquestionably later than October 9, 2003. Accordingly, the forbearance period ended on November 14, 2003.
In essence, this provision operated to give Appellant at least 60 days from the date of execution to seek replacement financing. In order to take advantage of this limited right, however, such replacement financing was required to "actually close prior to the expiration of the Forbearance Period." See id. Thus, under the operative terms of the Consent Order, financing was required to close by November 14, 2003. Furthermore, if Appellant received a commitment for replacement financing "capable of closing within the Forbearance Period," he was required to "disclose all of the material terms of such [replacement] financing commitment to [Appellee], in writing to [Appellee's] undersigned counsel at least two weeks prior to the closing date." Id. at 5. This latter requirement was imposed so that Appellee itself could "extend replacement financing to [Appellant] pursuant to the same or better terms, provided that [Appellee] notif[ied] the Trustee and [Appellant] in writing, at least one week prior to the closing date, of its intention to extend such financing." Id.
Indeed, Appellant would have had even longer than 60 days had the court not entered the Order until after the sixtieth day in light of the fact that it was the later date which terminated the period.
The bankruptcy court found, and the record clearly demonstrates, that Appellant met none of these conditions. The President of Appellee KH Funding attests in a sworn affidavit that by the close of business on November 14, 2003, the last day of the Forbearance Period, Appellee had received no notice, written or otherwise, of Appellant's intention to close on any replacement financing. See Paper 1, Att. 73, Ex. C ("Harris Affidavit"). In fact, Appellant's own supporting materials demonstrate that he did not meet any of the conditions required to obtain replacement financing. The record demonstrates that on November 3, 2003, Mr. Brian Shulman, a mortgage broker, called Appellee's counsel and informed him that he believed his company could "close the loan." See Paper 1, Att. 32, Ex. D-1 ("Shulman Affidavit"). First, because the Forbearance Period was scheduled to terminate on November 14, 2003, and the Consent Order called for such financing to "actually close prior to the expiration of the Forbearance Period," Appellant was required to submit "all of the material terms" of such potential financing "in writing" by at the very latest November 1, i.e., two weeks prior to the end of the Forbearance Period and, thus, the time allotted for closing. Mr. Shulman's phone call, although indicating an ability to "close the loan," is a far cry from what was required under the Consent Order. Additionally, Appellant has attached an affidavit from an attorney he retained in November 2003, in which the attorney states that on December 3, 2003, he spoke with Appellee's counsel about arranging further steps to complete proposed financing. See id., Ex. D-2 at ¶ 3 ("Anderson Affidavit"). This conversation took place well after the Forbearance Period ended on November 14, and thus, well after the date such replacement financing was required to close. At most, the record demonstrates that Appellee had sporadic communications with parties regarding the potential refinancing of the Properties, but that these conversations occurred after the time had passed for notifying Appellee of an intent to refinance, and, in some cases, after the time the Forbearance Period had terminated. Accordingly, Appellee did not breach the Consent Order and the bankruptcy court did not err in granting summary judgment to Appellee. D. Section 549 Avoidance, TILA, and HOEPA Claims
Appellant contends, contrary to the plain language of the Consent Order, that the Forbearance Period terminated on the sixtieth (60) day after the Order was entered, i.e., sixty days from October 9, or December 8. First, as discussed supra, the Consent Order is clear as to when the Forbearance Period was to terminate. Accordingly, Appellant's argument that any ambiguity must be construed against Appellee is inapposite. Moreover, even if Appellant's argument was persuasive, he offers no evidence that by November 24, 2003, two weeks prior to December 8, he had provided to Appellee in writing all the material terms of a financing commitment capable of closing by December 8.
The bankruptcy court held that Appellant lacked standing to bring the § 549, TILA, and HOEPA claims because those claims belonged to the estate, and, accordingly, only the Trustee had standing to bring them. See Paper 1, Att. 56 at 16. Additionally, the court noted that these matters had in fact been brought and resolved by the Trustee in the prior adversary proceeding, which resulted in the Consent Order, and, thus, Appellant was barred from raising them a second time. The court agrees.
First, it is clear that these claims, which all stem from the lien placed on the Properties as a result of Appellee's loan to Appellant, properly belong to the Chapter 7 estate. The Fourth Circuit has stated that, "[a]s a general matter, in a Chapter 7 proceeding, the trustee alone has standing to raise issues before the bankruptcy court and to prosecute appeals." In re Richman, 104 F.3d 654, 657 (4th Cir. 1997). This is because under the Bankruptcy Code, the trustee "is the representative of the estate" and "has capacity to sue or be sued." 11 U.S.C. § 323(a), (b); see also Richman, 104 F.3d at 657 n. 1 (noting that "[u]pon conversion to Chapter 7 [from Chapter 11] and the appointment of the trustee, the debtors lost their rights to prosecute [the] action"); Stanley v. Sherwin-Williams Co., 156 B.R. 25, 26 (W.D.Va. 1993) (dismissing a suit brought by a Chapter 7 debtor on the grounds that the cause of action belonged to the estate on the grounds that the debtor "lack[ed] standing because the cause of action [was no longer] his to assert"). Further, "[o]nce appointed, the trustee becomes the estate's `proper party in interest, and the only party with standing to appeal the bankruptcy court's order.'" Richman, 104 F.3d at 657 (quoting In re Eisen, 31 F.3d 1447, 1451 n. 2 (9th Cir. 1994)). In light of these principles, it is clear that once Appellant converted his case to Chapter 7, and the Trustee was appointed, the Trustee alone had standing to bring these claims. Accordingly, the bankruptcy court did not err when it held that Appellant lacked standing to bring these claims.
Furthermore, although the bankruptcy court did not elaborate, it correctly concluded that Appellant was barred from raising these three claims because they "were resolved in the Consent Order." Paper 1, Att. 56 at 16. As the Fourth Circuit has instructed, this court must "look to res judicata principles developed in [Fourth Circuit] case law to determine whether an earlier federal judgment, including the judgment of a bankruptcy court, bars a claim asserted in a later action." Grausz v. Englander, 321 F.3d 467, 472 (4th Cir. 2003) (citing Keith v. Aldridge, 900 F.2d 736, 739 (4th Cir. 1990)). Generally, later claims are precluded when:
1) the prior judgment was final and on the merits, and rendered by a court of competent jurisdiction in accordance with the requirements of due process; 2) the parties are identical, or in privity, in the two actions; and, 3) the claims in the second matter are based upon the same cause of action involved in the earlier proceeding.In re Varat Enters., Inc., 81 F.3d 1310, 1315 (4th Cir. 1996) (citing Kenny v. Quigg, 820 F.2d 665, 669 (4th Cir. 1987)). All three criteria are present in the instant case.
First, under Fourth Circuit law, there is no question that a consent order, entered into by the parties to settle claims and ultimately approved by a court operates, for claim preclusion purposes, as a final judgment on the merits. See Keith, 900 F.2d at 740 ("There is no question that the judgment in Keith I, though a consent judgment, was, for claim preclusion purposes, a final one on the merits."); Young-Henderson v. Spartanburg Area Mental Health Ctr., 945 F.2d 770, 773 (4th Cir. 1991) ("There is no question that the Consent Order of 1986 operated as a final judgment on the merits."). Here, the Trustee and Appellee entered into a Consent Order "to settle all of their disputes in connection with the Loan and the Complaint" filed by the Trustee as representative of the estate. See Consent Order at 1. That Consent Order stipulated that Appellee's "deed of trust lien on the Properties [was] valid and not subject to avoidance on any grounds, including, . . . the grounds raised in the [Trustee] Complaint." Id. at 3. After review by the bankruptcy court, it entered the Order on October 9, 2003. See id. Accordingly, it satisfies the first requirement for claim preclusion as a final judgment on the merits. See Nash County Bd. of Ed. v. Biltmore Co., 640 F.2d 484, 487 (4th Cir. 1981) ("[A] consent judgment `is as conclusive and final as to any matter determined as one rendered in invitum after contest and trial. And such a judgment cannot be impeached collaterally in another proceeding.'") (quoting Rector v. Suncrest Lumber Co., 52 F.2d 946, 948 (4th Cir. 1931)).
Second, there is sufficient identity or privity of parties in the prior adversary proceeding and the current proceeding to support a claim preclusion defense. In Grausz, a Chapter 11 debtor brought a malpractice suit against the law firm that represented him in a prior bankruptcy case. The law firm argued that the bankruptcy court's final legal fee order issued in the prior proceeding barred the malpractice claim under principles of res judicata. 321 F.3d at 472. Grausz argued there was not a sufficient identity of interest between himself and the Trustee to support claim preclusion. He asserted "the trustee, as the representative of the estate, was the party in interest" opposite the law firm, and that "he had no interest in the outcome of the fee proceeding." Id. at 472-73.
The Fourth Circuit disagreed, stating, "In the bankruptcy context a party in interest is one who has a pecuniary interest in the distribution of assets to creditors." Id. at 473. Because Grausz undoubtedly "had a pecuniary interest in the outcome of the fee applications," the court held he was a party in interest to the prior proceeding and that there was sufficient "identity of parties in the fee proceeding and the malpractice case" to support the second requirement for claim preclusion.
Likewise, Appellant undoubtedly had a pecuniary interest in the prior proceeding between the Trustee and Appellee. The Trustee brought suit on behalf of the bankruptcy estate to avoid the lien on the Properties and to potentially recover damages under TILA and HOEPA. His claims had the potential of making more money available in the bankruptcy estate, and possibly reducing Appellant's liability on the loan. See Grausz, 321 F.3d at 473. Moreover, an increase in the money available in the bankruptcy estate increases the possible gain to the Appellant upon distribution of the liquidated estate. See 11 U.S.C. § 726(a)(6). Accordingly, Appellant had a pecuniary interest in the prior proceeding brought by the Trustee sufficient to create an "identity of parties" in both proceedings and to satisfy the second requirement for claim preclusion.
Appellant raised for the first time in supplemental papers filed by order of the bankruptcy court after the May 3, 2003 hearing that this pecuniary interest is sufficient to allow him to intervene pursuant to Fed.R.Civ.P. 24. See Paper 1, Att. 47 ("Plaintiff's Supplemental Opposition"). He reasserts this argument in his appellate brief. See Paper 4. First, as the Fourth Circuit has made clear, a "party in interest" is not guaranteed a right to intervene. In re Richman, 104 F.3d at 657-58 ("Even if [the Debtors] are correct in arguing that they are `parties in interest,' that status does not guarantee that they have a right to intervene."). Second, it is unclear in what proceeding Appellant seeks intervention given the fact that he filed the complaint which initiated the current proceeding and was the plaintiff below. In its opinion, the bankruptcy court did not even address this argument. See Paper 1, Att. 56. To the extent that Appellant seeks to intervene in the prior proceeding resulting in the Consent Order, the time for intervention in that proceeding has well past. The Consent Order was entered by the court on October 9, 2003 and that adversary proceeding has since been closed. Moreover, even if the court were now to entertain Appellant's "application" for intervention, he would be unable to overcome the threshold requirement, i.e., timeliness. See Fed.R.Civ.P. 24(a), (b).
Finally, there is no doubt that the final requirement for claim preclusion is met. The claims brought by Appellant are based upon the same causes of action in the prior proceeding; indeed, the § 549, TILA, and HOEPA claims are the exact same claims brought by the Trustee. Both the Trustee's claims and the Appellant's claims are based upon the transaction between Appellee and Appellant and the lien placed upon the Properties. A cursory glance at the respective complaints reveals that the language setting out these claims is virtually identical. Compare Paper 1, Att. 73 ("Trustee Complaint"), with Paper 1, Att. 22 ("Amended Complaint"). Therefore, the bankruptcy court was correct when it concluded that these three claims were resolved in the prior proceeding and Appellant was barred from raising them again. Accordingly, Appellee is entitled to summary judgment as a matter of law on these claims.
IV. Motion to Alter or Amend Judgment
The bankruptcy court's order denying Appellant's motion to alter or amend judgment is reviewed under an abuse of discretion standard. See, e.g., EEOC v. Lockheed Martin Corp., 116 F.3d 110, 112 (4th Cir. 1997); Boryan v. United States, 884 F.2d 767, 771 (4th Cir. 1989). Rule 59(e) permits a court to alter or amend a judgment within ten days for three reasons: (1) to accommodate an intervening change in controlling law; (2) to account for new evidence not available at trial; or (3) to correct a clear error of law or prevent manifest injustice. See Lockheed Martin Corp., 116 F.3d at 112 (citing Hutchinson v. Staton, 994 F.2d 1076, 1081 (4th Cir. 1993)).
Although Appellant apparently objects to the bankruptcy court's denial of his motion to alter judgment, he does not identify on what grounds he contends the bankruptcy court abused its discretion in denying his motion, nor does he present any separate arguments on appeal as to this matter. Indeed, Appellant does not even mention the court's denial of his Rule 59 motion, focusing only on the court's order granting Appellee summary judgment. However, reviewing Appellant's Rule 59 motion, which is part of the record, this court finds that none of the reasons for permitting a court to alter a judgment exist. Because the Appellant was unable to demonstrate the existence of any of these reasons, the bankruptcy court was not permitted to alter its judgment, and, thus, did not abuse its discretion when it denied his motion.
IV. Conclusion
Upon review of the record, the court agrees with the bankruptcy court's conclusion that "there is no genuine issue of any material fact and that [Appellee] KH [was] entitled to judgment as a matter of law." See Paper 1, Att. 56. Accordingly, for the foregoing reasons, the court shall affirm the bankruptcy court's grant of summary judgment in favor of Appellee KH Funding, Inc. and its denial of Appellant Baltrotsky's motion to vacate or amend judgment. A separate Order will follow.
Because the court has affirmed the bankruptcy court's order granting summary judgment to Appellee and dismissing the case, Appellee's Motion to Dismiss Appeal, paper 8, and Appellant's emergency motion for Additional Time, paper 9, will be denied as moot.