Branch Banking and Trust Company v. R & S St. Rose Lenders, LLC

Filing 14

ORDER that the ruling of the bankruptcy court is AFFIRMED in part and REVERSED in part. This matter is REMANDED to the bankruptcy court for further proceedings consistent with this opinion. Signed by Judge James C. Mahan on 10/1/2014. (Copies have been distributed pursuant to the NEF - copy mailed to Bankruptcy Court - SLD)

1
2
3
4

UNITED STATES DISTRICT COURT

5

DISTRICT OF NEVADA

6

***

7
8

BRANCH BANKING AND TRUST
COMPANY,

ORDER
Plaintiff(s),

9
v.

10
11

Case No. 2:14-CV-939 JCM

R & S ST. ROSE LENDERS LLC,
Defendant(s).

12
13
14

Presently before the court is the bankruptcy appeal of Branch Banking and Trust Co. v.

15

R&S St. Rose Lenders, LLC, case number 2:14-cv-00939-JCM. Appellant Branch Banking and

16

Trust Company (“appellant”) filed an opening brief. (Doc. # 8). Appellee R&S St. Rose

17

Lenders, LLC (“appellee”) filed an answering brief in opposition, (doc. # 9), and appellant filed

18

a reply brief, (doc. # 12).

19

I.

Background

20

R&S St. Rose, LLC (“R&S”) and R&S St. Rose Lenders (“R&S Lenders”) were both

21

formed in 2005 by Forouzan, Inc. and RPN LLC, which are owned by Saiid Forouzan Rad and

22

R. Phillip Nourafchan. (Doc. # 8-33). R&S Lenders was established to help R&S finance the

23

purchase of certain real property (“the property”). (Doc. # 8-33).

24

Branch Banking and Trust Company (“BB&T”) is the successor-in-interest to Colonial

25

Bank and Commonwealth Land Title Insurance Company (“Commonwealth”). (Doc. # 8-33).

26

R&S obtained a $29 million dollar loan from Colonial Bank to finance the purchase of the

27

property, and the FDIC later assigned this loan to BB&T. The loan was secured by a first deed

28

of trust on the property, which was recorded on August 26, 2005.

James C. Mahan
U.S. District Judge

1

R&S later signed a promissory note to borrow $12 million1 from R&S Lenders for

2

additional funding to purchase the property. R&S Lenders recorded a second deed of trust on the

3

property on September 16, 2005.

4

In July 2009, Colonial Bank sued R&S and R&S Lenders in state court asserting priority

5

of its first deed of trust. BB&T was later substituted into the action after the FDIC closed

6

Colonial Bank and transferred its loan to BB&T. (Doc. # 8). BB&T asserted claims for

7

contractual subrogation, equitable subrogation, replacement, equitable and promissory estoppel,

8

unjust enrichment, misrepresentation, and civil conspiracy. (Doc. # 8).

9

After a ten-day bench trial, the state court ruled against BB&T and dismissed its claims,

10

holding that BB&T produced inadequate proof that it was Colonial Bank’s successor-in-interest.

11

(Docs. # 8, 9). In doing so, the state court adjudicated BB&T’s priority claims with regard to

12

R&S Lenders’ promissory note. (Doc. # 8).

13

By 2009, R&S was in default on its loan from Colonial Bank. (Doc. #8-33). On April 4,

14

2011, R&S and R&S Lenders both voluntarily filed for chapter 11 bankruptcy. On August 2,

15

2011, R&S Lenders filed proof of claim number 12 (“the POC”) in R&S’s bankruptcy case,

16

asserting a secured claim for $12 million based on its promissory note. (Doc. # 8-4).

17

On September 24, 2013, BB&T filed an objection to the POC, arguing for disallowance

18

of the claim on two grounds. BB&T argued first, that the amount of the claim was inflated, and

19

second, that there was a lack of consideration for the debt. (Doc. # 8-19). In its response, R&S

20

Lenders argued that BB&T’s objection should fail because (1) the state court had already

21

litigated the amount of the claim, invoking collateral estoppel principles, and (2) BB&T failed to

22

rebut the prima facie validity of the POC. (Doc. # 8-26).

23

Meanwhile, BB&T sought to appeal the state court decision on its claims against R&S

24

and R&S Lenders. (Doc. # 8). The bankruptcy court modified the automatic stay in R&S’s

25
26
27
28
James C. Mahan
U.S. District Judge

1

The parties’ briefs and prior court rulings in this case are inconsistent in referencing this
amount as either $12 million or $12,300,000. R&S Lenders’ proof of claim asserts a secured
claim for $12 million. Accordingly, the court will reference this amount as $12 million, although
certain cited portions of prior rulings in the case refer to the amount as $12,300,000.
-2-

1

bankruptcy to allow BB&T to appeal the decision. On February 14, 2014, the Nevada Supreme

2

Court affirmed the trial court’s ruling. (Doc. # 8-26).

3

On June 3, 2014, the bankruptcy court overruled BB&T’s objection to the POC, holding

4

that “BB&T may not relitigate that Lenders loaned $12,300,000 to the Debtor in September

5

2005,” because “[t]hat factual and legal issue was determined by the State Court and affirmed by

6

the Nevada Supreme Court.” (Doc. # 8-34). The court further held that BB&T did not produce

7

sufficient evidence to rebut the prima facie validity of the POC. (Doc. # 8-34). BB&T appealed

8

the bankruptcy court order to this court. (Doc. # 1).

9

The instant appeal raises two issues: (1) whether the bankruptcy court erred by applying

10

issue preclusion to bar BB&T from disputing the amount of R&S Lenders’ proof of claim; and

11

(2) whether the bankruptcy court erred by finding that BB&T did not overcome the prima facie

12

validity of R&S Lenders’ proof of claim.

13

II.

Legal Standard

14

Under title 28 U.S.C. section 158(a), a district court has jurisdiction to hear appeals “from

15

final judgments, orders and decrees . . . of bankruptcy judges.” 28 U.S.C. § 158(a); In re Rains,

16

428 F.3d 893, 900 (9th Cir. 2005). The district court reviews a bankruptcy court’s conclusions

17

of law de novo. In re Greene, 583 F.3d 614, 618 (9th Cir. 2009).

18

Further, the district court reviews the bankruptcy court’s findings of fact for clear error.

19

Id. The court must accept the bankruptcy court’s findings of fact “unless, upon review, the court

20

is left with the definite and firm conviction that a mistake has been committed by the bankruptcy

21

judge.” Id. Finally, the bankruptcy court’s evidentiary rulings are reviewed for abuse of

22

discretion. In re Kim, 130 F.3d 863, 865 (9th Cir. 1997).

23

A. Issue preclusion

24

In evaluating issue preclusion, a bankruptcy court must apply the law of the state

25

rendering the alleged preclusive judgment. In re Cantrell, 329 F.3d 1119, 1123 (9th Cir. 2003).

26

In Nevada, collateral estoppel requires that four factors are met: “(1) the issue decided in the

27

prior litigation must be identical to the issue presented in the current action; (2) the initial ruling

28

must have been on the merits and have become final; . . . (3) the party against whom the

James C. Mahan
U.S. District Judge

-3-

1

judgment is asserted must have been a party or in privity with a party to the prior litigation; and

2

(4) the issue was actually and necessary litigated.” Five Star Capital Corp. v. Ruby, 194 P.3d

3

709, 713 (Nev. 2008) (internal citation and quotation marks omitted). The party invoking issue

4

preclusion has the burden of proving an earlier judgment’s preclusive effect. Bower v. Harrah’s

5

Laughlin, Inc., 215 P.3d 709, 718 (Nev. 2009).

6

Whether a previously litigated issue is identical depends on whether (1) there is a

7

substantial overlap in evidence, (2) the same rule of law applies, (3) the pre-trial and discovery in

8

the prior litigation could have anticipated and embraced the issue as presented in the current

9

litigation, and (4) the claims in each case are closely related. Resolution Trust Corp. v. Keating,

10

186 F.3d 1110, 1116 (9th Cir. 1999). “To give preclusive effect to an issue, it must be clear that

11

the issue was actually adjudicated.” Univ. of Nevada v. Tarkanian, 879 P.2d 1180, 1191 (Nev.

12

1994).

13

“Whether the issue was actually litigated turns on whether the common issue was

14

necessary to the judgment in the earlier suit.” Frei ex rel. Litem v. Goodsell, 305 P.3d 70, 72

15

(Nev. 2013). In Nevada, an issue is not “actually litigated” if resolution of the issue is not

16

included in findings of fact supported by evidence. See In re Sandoval, 232 P.3d 422, 424-25

17

(Nev. 2010); see also Restatement (Second) of Judgments § 27 cmt. d (1982) (“When an issue is

18

properly raised . . . and is submitted for determination, . . . the issue is actually litigated . . . .”).

19

B. Prima facie validity

20

A proof of claim executed and filed in accordance with the bankruptcy rules of procedure

21

constitutes prima facie evidence of the claim’s validity and amount. Fed. Bank. R. P. 3001(f). A

22

proof of claim is accepted unless a party in interest objects. 11 U.S.C. § 502(a). Any dispute

23

over the validity of a proof of claim is governed by state law. In re Johnson, 756 F.2d 738, 741

24

(9th Cir. 1985).

25

A party objecting to a proof of claim has the burden to “produce evidence and show facts

26

tending to defeat the claim by probative force equal to that of the allegations of the proofs of

27

claim themselves.” In re Holm, 931 F.2d 620, 623 (9th Cir. 1991). A proof of claim is “strong

28
James C. Mahan
U.S. District Judge

-4-

1

enough to carry over a mere formal objection without more.” Id. (emphasis omitted). However,

2

the claimant retains the ultimate burden of persuasion. Id.

3

III.

Discussion

4

This court has jurisdiction over the instant appeal because it is taken from a final order

5

issued by the bankruptcy judge overruling appellant’s objection to appellee’s proof of claim. See

6

Lundell v. Anchor Const. Specialists, Inc., 223 F.3d 1035, 1038 (9th Cir. 2000).

7

A. Issue preclusion

8

BB&T claims that the bankruptcy court erred by improperly adopting findings from the

9

Nevada district court proceeding to establish that R&S Lenders loaned $12 million to R&S. It

10

contends that the state court action litigated only the priority dispute and thus the bankruptcy

11

court erred by applying issue preclusion regarding the amount of the alleged loan. It argues that

12

the bankruptcy court should not have relied on the state court decision “without looking beyond

13

the findings of fact to determine what was actually and necessarily litigated.” (Doc. # 12).

14

R&S Lenders responds that the current issue involves whether it loaned $12 million to

15

R&S. (Doc. # 9). It argues that because all of the claims in the state court action centered on its

16

deed of trust, “the validity of the loan memorialized in the Promissory Note had to have been

17

litigated . . . .” (Doc. # 9). However, this does not address appellant’s contention that the amount

18

of the deed of trust was not actually litigated by the state court.

19

Pursuant to the standard above, issue preclusion applies only where an issue in a prior

20

case was “actually and necessarily litigated,” meaning that it was “necessary to the judgment in

21

the earlier suit.” Five Star, 194 P.3d at 713; Goodsell, 305 P.3d at 72.

22

Notably, the trial court’s order includes a finding of fact that “R&S also borrowed

23

$12,300,000 from St. Rose Lenders.” (Doc. # 8-26). Further, the order states that the trial

24

court’s findings of fact are “[b]ased upon the testimony and documentary evidence presented

25

during the hearing.” (Doc. # 8-26). The court also referenced the document and book numbers

26

of the deed of trust in the county official records. (Doc. # 8-26).

27

...

28

...

James C. Mahan
U.S. District Judge

-5-

1

However, the state court decided only issues of lien priority and assignment. (Doc. # 8-

2

26). While the trial court’s findings of fact include references to the $12 million promissory

3

note, this issue was not “actually and necessarily litigated.” The trial court’s order does not

4

discuss the amount or the evidence supporting its validity. The court itself stated that it was

5

entering its findings of fact “with the intention of resolving evidentiary issues pertaining to

6

priority of liens found upon the real property at issue . . . .” (Doc. # 8-26).

7

Additionally, bankruptcy proceedings allow parties lacking privity with a loan to object

8

to the amount of a loan in an alleged claim. See 11 U.S.C. § 502(a). By contrast, the state

9

court’s finding that BB&T lacked privity with the loan from Colonial Bank to R&S led to

10

dismissal of BB&T’s claims, precluding any objections to R&S Lenders’s claim. As a result,

11

R&S Lenders has also failed to show that “the prior litigation could have . . . embraced the issue

12

as presented in the current litigation.” Keating, 186 F.3d at 1116.

13

The evidence before the court does not make it “clear that the issue was actually

14

adjudicated.” Tarkanian, 879 P.2d at 1191. R&S Lenders, in seeking to invoke issue preclusion,

15

has the burden of proving the state court’s preclusive effect. Bower, 215 P.3d at 718. Appellee

16

has not met this standard here.

17

Therefore, the court finds that the issue of the amount of R&S Lenders’ proof of claim

18

was not necessarily litigated in the state court action. Accordingly, the bankruptcy court should

19

not have applied collateral estoppel and should have allowed appellant to litigate the issue.

20

B. Prima facie validity

21

BB&T also argues that the bankruptcy court erred by finding that BB&T had not offered

22

sufficient evidence to overcome the prima facie validity of the POC. BB&T argues that because

23

the promissory note merely states that it was provided “for value received,” R&S Lenders had a

24

duty to present extrinsic evidence of its promissory note to prove that actual consideration was

25

paid. (Doc. # 12). BB&T claims that R&S Lenders’ evidence that it exchanged individual

26

investors’ money for the promissory note is insufficient. (Doc. # 12).

27

...

28

...

James C. Mahan
U.S. District Judge

-6-

1

R&S Lenders responds that the bankruptcy court did not commit clear error in this

2

regard. (Doc. # 9). It states that it attached the promissory note showing the $12 million secured

3

obligation to the filed proof of claim. It also notes that it provided documentation of its deed of

4

trust securing the promissory note and evidencing the $12 million sum owed. (Doc. # 9).
While R&S Lenders possesses the ultimate burden of persuasion, the court cannot find

5
6

that BB&T has met its burden to “produce evidence and show facts tending to defeat the claim . .

7

. .” See In re Holm, 931 F.2d at 623. The bankruptcy court considered BB&T’s evidence

8

attempting to refute the validity of the POC and rejected it. (Doc. # 8-34). BB&T has not

9

produced any additional evidence to lead the court to a different result. As such, the court will

10

affirm the bankruptcy court’s ruling with regard to the prima facie validity of the proof of claim

11

at issue.

12

IV.

Conclusion

13

Accordingly,

14

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the ruling of the

15

bankruptcy court in Branch Banking and Trust Co. v. R&S St. Rose Lenders, LLC, case number

16

2:14-cv-00939-JCM be, and the same hereby is, AFFIRMED in part and REVERSED in part,

17

consistent with the foregoing.

18
19
20
21
22

IT IS FURTHER ORDERED that this matter is hereby REMANDED to the bankruptcy
court for further proceedings consistent with this opinion.
DATED October 1, 2014.
__________________________________________
UNITED STATES DISTRICT JUDGE

23
24
25
26
27
28
James C. Mahan
U.S. District Judge

-7-