FEDERAL NATIONAL MORTGAGE ASSOCIATION v. QUICKSILVER LLC et al

Filing 19

Amended MEMORANDUM ORDER as set out herein.. Signed by JUDGE THOMAS D. SCHROEDER on 10/1/2014. (Solomon, Dianne)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

FEDERAL NATIONAL MORTGAGE
ASSOCIATION,
Plaintiff,
v.
QUICKSILVER LLC; MICHAEL A.
FALK; HARRY S. FALK; and
MICHAEL A. FALK, as TRUSTEE OF
THE TRUST DATED 10-26-1989,
HAVING THE TAX ID NUMBER 656043718 (AKA “THE CHARLOTTE
FALK IRREVOCABLE TRUST”),
Defendants.

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1:13cv987

AMENDED MEMORANDUM ORDER 1
This action arises out of a refinancing loan for commercial
property located in North Carolina (the “disputed property”).
Plaintiff Federal National Mortgage Association (“Fannie Mae”)
alleges fraud, negligent misrepresentation, unfair and deceptive
trade practices, breach of contract, breach of warranty, and
piercing of the corporate veil against Defendants Quicksilver
LLC (“Quicksilver”), Michael A. Falk, Harry S. Falk, and Michael
A. Falk as trustee of the trust dated 10-26-1989, also known as
the Charlotte Falk Irrevocable Trust (“the Trust”).
dismissal motions by Defendants are before the court.

1

Various
(Doc.

This memorandum order amends the memorandum order entered on
September 30, 2014 (Doc. 18) and thus constitutes the current,
controlling decision in the case.

12.)

For the reasons set forth below, the court will stay the

action for ninety days pending the potential disposition of a
very

closely

parties

related

herein

that

State
may

court

action

resolve,

or

between
at

least

many

of

make

the
more

manageable, the issues now before the court.
I.

BACKGROUND
Central to the dispute between the parties is the priority

of their respective liens on the disputed property.

The details

of the State court litigation can be found in Falk v. Fannie
Mae, 738 S.E.2d 404, 406–07 (N.C. Ct. App. 2013) (the “State
court action”).

For comprehensibility, the court will summarize

the proceedings thus far in this court and the North Carolina
State courts.
Quicksilver sought refinancing with Fannie Mae of its debt
on the disputed property. 2

Before refinancing, there were two

outstanding deeds of trust on the property: a senior lien by
Wachovia, and a junior lien by the Trust.

Fannie Mae alleges

that Quicksilver defaulted on its loan from the Trust virtually
from the loan’s inception.

(Compl. ¶¶ 24–25.)

The trustee of

the Trust is Michael Falk, who is also one of the two members
and managers of Quicksilver.

The other member and manager of

Quicksilver is Harry Falk, Michael’s son.
2

The refinancing was originally with Lend Lease Mortgage Capital,
L.P., which immediately assigned its interest to Fannie Mae.
(See
Compl. ¶¶ 29, 40.)

2

Fannie Mae alleges that, in the refinancing negotiations,
the Falks represented that Fannie Mae would receive a first lien
on the property, having priority over the lien of the Trust.
(Id. ¶¶ 30–32.)

However,

when

Quicksilver

signed

a

deed

of

trust on the property in favor of Fannie Mae, the Trust’s lien
still existed and was never subordinated to Fannie Mae’s.
¶¶ 36–41.)

Later,

the

Falks

transferred

their

(Id.

ownership

interests in Quicksilver to the Trust, making the Trust both the
beneficiary of the deed of trust and the sole owner of the
borrower, Quicksilver.
Quicksilver,

(Id. ¶¶ 43–44.)

wholly

owned

by

the

defaulted on its loan from Fannie Mae.

Trust,

ultimately

(Id. ¶ 45.)

After an

unsuccessful demand for payment, Fannie Mae foreclosed on the
property and purchased it at a public foreclosure sale.
¶ 46.)

After

the

sale,

the

Trust

proceedings in North Carolina State court.

initiated

(Id.

foreclosure

The Trust also filed

a declaratory judgment action seeking a declaration that it held
a valid first lien on the property.

(Id. ¶ 48.)

Fannie Mae

sought to halt the foreclosure, and ultimately a North Carolina
superior court granted summary judgment in favor of Fannie Mae,
holding that the Trust’s deed of trust had expired under N.C.
Gen. Stat. § 45-37(b).

(Compl. ¶ 50); see Falk, 738 S.E.2d 404,

408.

3

The Trust appealed that decision in the State court action
to the North Carolina Court of Appeals.

(Compl. ¶ 51.)

On

March 5, 2013, the court of appeals reversed the trial court.
(Id.)

The court of appeals held that the Trust’s lien had

expired

under

the

unconstitutional

statute,

as

applied

S.E.2d at 408–10.

but
the

to

that

the

Trust’s

statute

lien.

was

Falk,

738

This ruling made the Trust’s lien senior to

Fannie Mae’s.
After

Fannie

Mae

lost

in

the

North

Carolina

Court

of

Appeals, it filed this federal action against Quicksilver, the
Falks

individually,

Trust.

The

and

Falks,

in

Michael
their

Falk

as

individual

parties to the State court litigation.
405–06.
the

trustee

of

the

capacities,

were

Falk
not

See Falk, 738 S.E.2d at

Fannie Mae alleges six causes of action: fraud as to

Falks,

Quicksilver,

negligent
unfair

misrepresentation

and

deceptive

trade

as

to

the

practices

Falks
as

to

and
the

Falks and Quicksilver, breaches of the Key Principal Agreement
(as

to

breach

the

Falks)

and

of

warranty

Fannie
as

Mae

to

Note

(as

Quicksilver,

to
and

Quicksilver),
“alter

liability/piercing the corporate veil” as to the Trust.
¶¶ 52–111.)

ego

(Compl.

Federal jurisdiction is premised on diversity of

citizenship pursuant to 28 U.S.C. § 1332(a)(1).

(Id. ¶¶ 1–7.)

Fannie Mae seeks damages in excess of $75,000, punitive damages,
treble

damages

pursuant

to

N.C.
4

Gen.

Stat.

§ 75-16,

and

attorneys’ fees.

(Id. at 20–21.)

Fannie Mae’s claims in this

court assume the validity of the Trust’s lien and are premised
on Defendants’ fraud and other wrongful actions during the loan
process.

(See id. ¶¶ 52–111.)

After losing before the North Carolina Court of Appeals in
the

State

court

action,

Fannie

Mae

discretionary

review

from

the

North

Although

parties

have

not

advised

the

sought

Carolina
the

a

writ

Supreme

court,

it

of

Court.
is

now

apparent that the North Carolina Supreme Court has set the case
for oral argument next week, on October 6, 2014.
II.

ANALYSIS
Defendants’ motion seeks, among other things, a stay of all

proceedings.

Specifically, Defendants seek to have the court

abstain under the doctrine of Colorado River Water Conservation
District

v.

United

States,

424

U.S.

800

(1976).

declines to abstain under Colorado River at this time.

The

court

However,

given the pendency of the State court proceedings before the
North

Carolina

Supreme

Court,

this

court

will

stay

the

case

under its own inherent powers to do so in control of its docket.
As the Supreme Court of the United States has made clear,
federal

district

courts

proceedings before them.

have

an

inherent

power

to

stay

This “power to stay proceedings is

incidental to the power inherent in every court to control the
disposition of the causes on its docket with economy of time and
5

effort for itself, for counsel, and for litigants.”
North

Am.

Co.,

proceedings

are

299

U.S.

pending

248,
in

254

various

(1936).

When

courts,

a

Landis v.
duplicative

stay

does

not

depend on a showing that two lawsuits are the same “and the
issues

identical.”

required

under

recognized

in

River doctrine.

Id.

Colorado
Landis

has

Although
River
not

parallel

abstention,
been

the

abrogated

proceedings
inherent
by

the

are

power

Colorado

See Moses H. Cone Mem’l Hosp. v. Mercury Const.

Corp., 460 U.S. 1, 21 n.23 (1983).
A court’s decision to grant a stay “calls for the exercise
of judgment, which must weigh competing interests and maintain
an even balance.”

Landis 254–55; accord Maryland v. Universal

Elections, Inc., 729 F.3d 370, 375 (4th Cir. 2013) (“The grant
or denial of a request to stay proceedings calls for an exercise
of the district court’s judgment ‘to balance the various factors
relevant to the expeditious and comprehensive disposition of the
causes of action on the court’s docket.’” (quoting United States
v. Ga. Pac. Corp., 562 F.2d 294, 296 (4th Cir. 1977)).

When a

district court considers a stay, “it should record the basis for
its decision, including the factors it considered,” in order to
make “an adequate record of the decisional process.”

Muhammad

v. Warden, Baltimore City Jail, 849 F.2d 107, 113 (4th Cir.
1988).

6

The Fourth Circuit has not enumerated the factors that a
district court should consider in an application for a stay, but
many courts have noted at least three important considerations:
“it must be clear that [1] the interests of justice require it,
[2] that adjudication of the claim would be a waste of judicial
effort, and [3] that the plaintiff will not be substantially
harmed by the delay.” 555 M Mfg., Inc. v. Calvin Klein, Inc., 13
F. Supp. 2d 719, 724 (N.D. Ill. 1998) (citing Hess v. Gray, 85
F.R.D. 15, 27 (N.D. Ill. 1979)).
These three factors are met in this case.
only

brought

interests

of

State-law
justice

claims

in

support

a

its
stay

Fannie Mae has

federal
because,

lawsuit.
if

the

The
North

Carolina Supreme Court were to reverse the judgment of the North
Carolina Court of Appeals, many of Fannie Mae’s claims in this
case would be subject to dismissal for lack of injury.

Fannie

Mae

entire

has

explicitly

staked

out

the

position

that

the

federal lawsuit is predicated on “the North Carolina Court of
Appeals’ Opinion [being] the controlling law with respect to the
priority and validity” of the Trust’s lien.

(Doc. 14 at 8.)

Fannie Mae has acknowledged the possibility that reversal by the
North Carolina Supreme Court could affect the viability of its
claims.

(Id.

at

9.)

While

such

a

possibility

was

merely

speculative when Fannie Mae filed its complaint with this court,
this has

become

a

real

possibility
7

since

the

North

Carolina

Supreme Court agreed to hear the appeal.

For this same reason,

there is a significant risk that a decision by this court would
prove to be a waste of judicial resources if the Trust’s lien is
dissolved by the Supreme Court of North Carolina.
Fannie Mae will also not suffer substantial harm by a stay
of the federal court proceedings.

The stay in this case is

narrow and definite, see infra, and it is Fannie Mae that both
filed

the

federal

complaint

Carolina Supreme Court.

and

sought

review

by

the

North

This duplication of judicial resources

is, at least in part, the making of Fannie Mae.

Moreover,

because the State court proceedings only involve related issues
and not the same claims as this case, the risk of preclusion is
not

nearly

as

substantial

as

in

the

Colorado

River

context,

where a stay or dismissal of the federal case means that “the
state

court’s

judgment

on

the

issue

would

be

res

judicata.”

Moses H. Cone Mem’l Hosp., 460 U.S. at 10; cf. Cottrell v. Duke,
737 F.3d 1238, 1249 (8th Cir. 2013) (holding that Colorado River
standard is appropriate where a stay has the same effect as a
dismissal

because

of

res

judicata

effects

of

State

court

judgment).
Other

factors,

specific

to

this

case,

warrant

a

stay.

First, not only was the State court action brought long before
the federal court action, which supports an application for a
stay, the State court proceedings have progressed significantly
8

further.

Id. at 22.

The State court proceedings began first

and reached not one, but two judgments before Fannie Mae filed
suit in this court - one at the trial court level and the other
at the intermediate appellate court.
Second,
affect

a

when

later

a

prior

related

proceeding

proceeding

with

is

set

the
to

be

potential

to

resolved

on

appeal, the wise administration of justice suggests a stay is
appropriate.

For example, when a federal action will possibly

be affected by a pending decision of a federal appellate court,
many courts have found stays of the later, related actions to be
appropriate.

See, e.g., Hickey v. Baxter, No. 87-2028, 1987 WL

39020, at *1 (4th Cir. 1987) (per curiam) (“We find that the
district

court

proceedings
Supreme

acted

while

Court

in

within

awaiting
a

case

its

guidance

that

could

discretion
from

the

decide

in

staying

[United

relevant

States]
issues.”

(emphasis added)); McCrory v. North Carolina, No. 1:14CV65, 2014
WL 2048068, at *1 (W.D.N.C. May 19, 2014) (staying proceedings
pending
Couick
248008,

resolution
v.
at

Actavis,
1

of

related

Inc.,

(W.D.N.C.

case

No.

Jan.

25,

by

the

Fourth

Circuit);

3:09-CV-210-RJC-DSC,
2011)

(staying

case

2011

WL

pending

resolution of related issue by the United State Supreme Court
and explaining, “If the Supreme Court finds that state law is
preempted on the issue in question, then this Plaintiff’s claims
will likely need to be dismissed. If on the other hand, the
9

Supreme Court answers the preemption question in the negative,
the scope of the issues and arguments in this case may still be
narrowed.”).

In this case, there is little reason the outcome

should be any different when a related issue is pending in a
State appellate court, as other courts have noted.

See, e.g.,

Landis, 299 U.S. at 256 (“True, a decision in the cause then
pending in New York may not settle every question of fact and
law in suits by other companies, but in all likelihood it will
settle many and simplify them all.”); Navigators Specialty Ins.
Co. v. Med. Benefits Adm’rs of MD, Inc., No. CIV.A. ELH-12-2076,
2014 WL 1918710, at *1–2 (D. Md. May 12, 2014).
All

relevant

proceedings.

factors

in

this

case

favor

a

stay

of

The remaining issue is the contours of the stay.

As the Fourth Circuit has noted,
In considering the propriety of a stay of proceedings,
the court should be specifically mindful of the
Supreme Court’s admonition in Landis v. North American
Co., 299 U.S. 248, 256–57, 57 S. Ct. 163, 166–67, 81
L.Ed. 153 (1936), that a stay may not be “immoderate
in extent” nor “oppressive in its consequences” and
that it is “immoderate and hence unlawful unless so
framed in its inception that its force will be spent
within reasonable limits, so far at least as they are
susceptible to prevision and description.”
Muhammad, 849 F.2d at 113.

When a district court issues a stay

of “indefinite duration,” its decision can be an abuse of the
discretion accorded it.

Landis, 299 U.S. at 255.

10

Mindful of these strictures, the court will issue a limited
stay with the conditions that follow.
IT IS THEREFORE ORDERED that these proceedings are STAYED
for ninety (90) days, effective immediately.

By the end of the

ninety-day period, the parties shall submit a joint report as to
the status of the proceedings in the State court action, which
shall

include

a

recommendation

dissolve the stay.

as

to

whether

to

continue

or

Should the Supreme Court of North Carolina

issue a ruling on the State court action during the stay, the
parties shall immediately advise the court of the ruling and
explain, in each party’s view, the effect, if any, of the ruling
on the present action.

Of course, any party may move at any

time to dissolve the stay, but only after first meeting and
conferring with all other parties.

/s/
Thomas D. Schroeder
United States District Judge
October 1, 2014

11