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Commonwealth Land Title Insurance Co. v. The Creditor Group

United States District Court, D. Nevada

October 17, 2017

Commonwealth Land Title Insurance Company, Appellant
v.
The Creditor Group, Appellee

          ORDER REVERSING BANKRUPTCY COURT DECISION

          Jennifer A. Dorsey, U.S. District Judge

         Appellant Commonwealth Land Title Insurance Company files this appeal seeking reversal of the bankruptcy court's 2014 order sustaining appellee The Creditor Group's objection to Commonwealth's bankruptcy claim against R&S St. Rose Lenders, LLC (Lenders). The bankruptcy court determined that Commonwealth's claim was barred by the doctrine of claim preclusion as the result of a related state-court action, and Commonwealth appealed. Because no res judicata defense applies to Commonwealth's claims, I reverse that decision.

         Background

         In 2005, two companies, Lenders and R&S Rose, LLC (R&S), were formed by Saiid Forouzan Rad and R. Phillip Nourafchan (the owners) to facilitate the purchase of 38 acres of real property in Henderson, Nevada.[1] R&S was formed to enter into a land-banking arrangement with developer Centex Homes. Lenders was formed to borrow funds from individual lenders and then loan those funds to R&S to buy the property.

         To finance the property, R&S obtained an approximately $29 million loan from Colonial Bank, which was secured by a first-position deed of trust against the property. Soon after, the owners signed a promissory note in favor of Lenders, secured by a second-position deed of trust. In 2007, the owners sought a new loan from Colonial for another $43 million when Centex unexpectedly backed out of the sale. The new loan would be used to pay off Colonial's first loan and improve the property for future sale. However, due to Lender's 2005 deed of trust, the owners did not meet Colonial's equity requirement to qualify for the loan. To qualify, the owners allegedly made several representations that they would subordinate or reconvey their second-position deed, putting Colonial's deed of trust for the 2007 loan in first position. Purportedly in reliance on these representations, Colonial approved the new loan. Commonwealth, allegedly relying on the same representations, issued a title policy with Colonial as the beneficiary, insuring what was believed to be a first-position deed of trust. The owners, however, never reconveyed the Lenders deed of trust, so the 2007 Colonial deed of trust was not placed in first position.

         In 2009, Colonial filed a state-court action against Lenders alleging that its 2007 deed of trust had priority over the owners' 2005 deed.[2] Soon afterward, Colonial was placed in receivership by the Federal Deposit Insurance Corporation (FDIC) and Branch Banking & Trust Company (BB&T) purchased Colonial's assets. BB&T then filed an amended complaint in the state-court action as Colonial's successor-in-interest, alleging six causes of action: (1) declaratory relief- contractual subrogation; (2) declaratory relief/quiet title - replacement; (3) equitable/promissory estoppel; (4) unjust enrichment; (5) fraudulent misrepresentation; and (6) civil conspiracy.[3] In 2010, after a bench trial on the issue, the state court granted judgment in favor of Lenders on BB&T's first four claims, holding that "BB&T failed to meet[] its burden of proof to establish that the Colonial Bank loan, note[, ] and deed of trust at issue in this case were ever assigned to BB&T."[4] The state court also included several "findings of fact, " indicating that the court believed that no fraudulent misrepresentations were made to Colonial.[5] BB&T then voluntarily dismissed without prejudice its fraudulent misrepresentation and civil-conspiracy claims.[6]

         The Supreme Court of Nevada affirmed the judgment in 2013, concluding that the lower court's "decision was not clearly erroneous because BB&T failed to carry its evidentiary burden to prove its ownership of the [2007] loan, "[7] and it denied a request for en banc reconsideration in 2014.[8]

         While BB&T was appealing the state-court action, Lenders and R&S filed separate Chapter 11 bankruptcy proceedings.[9] BB&T filed a proof of claim in Lenders' proceeding in an unsecured amount of approximately $38 million for the fraudulent-misrepresentation and civil-conspiracy claims that BB&T had voluntarily dismissed from the state-court action.[10] The Creditor Group filed objections to BB&T's claim. The bankruptcy court issued an order disallowing BB&T's claim under the doctrine of issue preclusion based on the judgment entered against it in state court. That order was reversed by the District Court of Nevada in 2015 after it found that the misrepresentation and civil-conspiracy claims were not actually and necessarily litigated by the state court.[11]

         Commonwealth also filed a proof of claim in the unsecured amount of approximately $43 million for fraud, misrepresentation, and negligence, based on same representations made to Colonial. Commonwealth contends that those misrepresentations induced it to issue the title policy, and that its fraud and misrepresentation claims are independent from similar claims raised and voluntarily dismissed by BB&T in the state-court action. Again, the Creditor Group objected, arguing that the claims were precluded. The bankruptcy court sustained the Creditor Group's objection, finding that Commonwealth is in privity with BB&T, and the doctrine of claim preclusion barred its claim by virtue of BB&T's involvement in the state-court action. Commonwealth appeals that determination here.

         Discussion

         A. Standard of review

          I review the bankruptcy court's decision for abuse of discretion and apply a two-part test.[12] I consider de novo whether the court applied the correct legal standard.[13] I review "the determination of whether issue or claim preclusion applies de novo as mixed questions of law and fact in which legal questions predominate."[14] But I review the bankruptcy court's findings of fact for clear error.[15] A fact finding is only clearly erroneous "if it was without adequate evidentiary support or was induced by an erroneous view of the law."[16] I "may not simply substitute [my] view" for that of the bankruptcy court.[17] Finally, I may affirm on any basis supported by the record.[18]

         B. Issues presented on appeal

          Commonwealth raises four issues on appeal. It argues that the bankruptcy court erred in (1) sustaining the objection to its claim; (2) applying res judicata in connection with sustaining the objection; (3) finding that the claim was based on the same claims that were or could have been brought in the state-court action; and (4) finding that Commonwealth was in privity with the parties to the state-court action. Although the bankruptcy court relied only on the doctrine of claim preclusion to sustain the Creditor Group's objection, the Creditor Group argues that Commonwealth's claim is also barred by issue preclusion and urges me to affirm on that basis as well. The Creditor Group also argues that I can affirm because Commonwealth's fraudulent-misrepresentation claim fails as a matter of law.

         C. Claim preclusion

          To determine whether a claim is barred by issue or claim preclusion based on a state-court ruling, I look to the laws of the state in which the prior judgment was entered.[19] Under Nevada Law, claim preclusion applies when: "(1) the parties or their privies are the same, (2) the final judgment is valid, and (3) the subsequent action is based on the same claims or any part of them that were or could have been brought in the first case."[20] A "claim" under Nevada law encompasses all claims that arise out of a single set of facts.[21]

         1. Privity

         Commonwealth was not a party to BB&T's state-court action, so the binding effect of any judgment depends on Commonwealth being in privity with BB&T. In Nevada, "[a] privy is one who, after rendition of the judgment, has acquired an interest in the subject matter affected by the judgment through or under one of the parties as by inheritance, succession, or purchase."[22] It has also been defined as one "who is directly interested in the subject matter, and had a right to make defense, or to control the proceeding, and to appeal from the judgment."[23] The Nevada Supreme Court recently expanded the definition of privy when it adopted the Restatement (Second) of Judgments § 41, which states: "A person who is not a party to an action but who is represented by a party is bound by and entitled to the benefits of a judgment as though he were a party."[24] "A party's representation of a nonparty is 'adequate' for preclusion purposes only if, at a minimum: (1) the interests of the nonparty and [its] representative are aligned and (2) either the party understood [itself] to be acting in a representative capacity or the original court took care to protect the interests of the nonparty."[25]

         The bankruptcy court held that Commonwealth was in privity with BB&T as its insurer under the title policy. The title policy gives Commonwealth the right:

to institute and prosecute any action or proceeding or to do any other act which in its opinion may be necessary or desirable to establish the title to the estate or interest or the lien of the insured mortgage, as insured, or to prevent the loss or damage to the insured. [Commonwealth] may take any appropriate action under the terms of this policy, whether or not it shall be liable hereunder, and shall not thereby concede liability or waive any provision of this policy. If [Commonwealth] shall exercise its right under this paragraph, it shall do so diligently.[26]

         The bankruptcy court determined that the relationship outlined by this section of the policy was sufficient to show that Commonwealth had the right to intervene in the state-court action to bring its own misrepresentation and negligence claims. But that is too expansive a reading of what the title policy allows. It permits Commonwealth to institute actions to establish title or prevent damage to the insured; it does not give Commonwealth the right to join its own misrepresentation claims against Lenders or the owners. The fact that Commonwealth hired and paid for BB&T's counsel in the state-court action, as permitted under a different section of the title policy, [27] does not alter this finding. Those attorneys were hired to represent BB&T's interests, not Commonwealth's.

         Commonwealth's interest was also not adequately represented by BB&T in the state-court action. There is no evidence that Commonwealth authorized BB&T to act on its behalf in a fiduciary or representative capacity for Commonwealth's misrepresentation claims. BB&T's case was brought to establish priority of title over Lender's deed of trust. While Commonwealth has an interest in the subject matter of that litigation, it is distinct from Commonwealth's own interest in redressing the misrepresentations by Lenders and its owners. Indeed, BB&T's decision to voluntarily dismiss a misrepresentation claim similar to the one Commonwealth is attempting to pursue through bankruptcy proceedings demonstrates that Commonwealth and BB&T's interests were not identical. While I can imagine instances where an insurer could be in privity with its insured-like when the insurer attempts to re-litigate the priority of ...


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