Highland Construction management Services LP v. Wells Fargo Bank NA

Filing 18

MEMORANDUM OPINION. Signed by District Judge Leonie M. Brinkema on 03/20/2017. (dvanm, )

IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division
E^RE:

HIGHLAND CONSTRUCTION

MANAGEMENT SERVICES, LP
Debtor.
HIGHLAND CONSTRUCTION

MANAGEMENT SERVICES, LP, et al.

l:16-cv-1503 (LMB/IDD)

Appellants,

11-1413-RGM (Chapter 11)
Adv. Proc.No. 15-01030-RGM

WELLS FARGO F/B/0

JEROME GUYANT IRA,

Appellee.
MEMORANDUM OPINION

Before the Court is Highland Construction Management Services and Joseph Lee Bane,
Jr.'s (collectively "appellants") appeal from a bankruptcy court order granting summary

judgment in favor of Wells Fargo Bank NA flhlo Jerome Guyant IRA ("appellee") [Dkt. No. 1]
in an adversary proceeding contesting the appellee's claim for $1,396,657.52 pursuant to a
judgment order from a Virginia state court. The bankruptcy court determined that the state court
judgment regarding the debt owed by appellants was res iudicata and therefore that appellants'
could not challenge the nature and scope of that obligation. For the reasons that follow, the
bankruptcy court's order will be affirmed.
1.

BACKGROUND

Highland Construction Management Services ("Highland") is a limited partnership which
owns interests in entities that invest in and develop real estate. Appellants Br. at 8. Joseph Lee

Bane, Jr. ("Bane") isa trustee for the irrevocable trust that serves as the general partner of
Highland. Id Jerome Guyant ("Mr. Guyant") was a member ofmost ofthe limited liability
companies in which Highland held aninterest. Id. The Guyant Individual Retirement Accoimt

("the Guyant IRA"), ofwhich Wells Fargo isthe trustee, served as Highland's principal lender
before Highland's bankruptcy. Id' Based on the terms ofthe loans, the Guyant IRA was a lender
of "lastresort," charging loan origination fees of twenty percent and interest of twenty percent.
JA353.

On December 22, 2005, Highland executed a promissory note for $650,000 in favor of

the Guyant IRA to secure a revolving credit line. JA 165. That note was modified by anallonge
on October 13,2006, which increased the amount of credit to $850,000. JA 166. A second

allonge, effective as of July 1,2007, stated thatthe outstanding principal balance on the note was
$850,000 andthe outstanding interest was $177,750. JA 173-74. The second allonge extended
thedue date for repayment of the loan and made changes to the interest rates and other terms. JA

079. The third allonge, executed in November 2008, increased the amount of credit to $1.4
million and extended thepayment date for all unpaid principal andinterest imtil December 1,
2008. JA 080,180-81. In the third allonge, the parties agreed that, as of September 30,2008, the

outstanding principal balance was $981,822.08, which included $81,822.08 in unpaid interest
and an additional loan fee of $50,000. JA 181. Highland defaulted on the note when it failed to

pay the principal and interest due by December 1, 2008. JA 080. At thattime, the principal
amount due on the loan was $1,082,000. Id The debt owed by Highland to the Guyant IRA has

' Intheir complaint, the appellants acknowledge that, "[tlhere is anidentity of interest between
the [Guyant] IRA and [Mr.] Guyant." JA 002.

beenthe subject of two state court casesandthree priordisputes before the bankruptcy court.
The history of these proceedings is summarized below.

Efforts to collectthe debt began in the Circuit Court for Loudoun Countyon March 24,

2010withthe filing of Weils Fargo Bank. N.A. Wofo Jerome Guvant IRAv. Highland
Construction Management Services. LP, in which the Guyant IRA suedHighland, andBane as

guarantor, for $1,082,000 in outstanding principal and $257,595.56 in interest, as well as for a
declaratory judgment as to the perfected status of the Guyant IRA's security interest in the debt.
JA 062. Following a bench trial. Judge James H. Chamblin awarded the GuyantIRA a

$1,082,000 judgment against Highland and Bane, along with interest, attorney's fees, andcosts.
JA 035-37. The Judgment Order also declared that the Guyant IRA had a perfected security
interest in certain assets of Highland to secure payment of the judgment. Id

In rendering his decision, Judge Chamblin walked through the lending history between

appellants, Mr. Guyant, and the Guyant IRA, fi-om theoriginal note to the default in 2008. JA
160-92. A focal point of debate between the parties was the significance of a December 2006
transfer of interestin Ashbury Hillsides, LLC ("Ashbury"), which owned real estate near

Hillsboro, Virginia. JA 0003. As of December 2006, Highland held a 47% interest in Ashbury.
Appellants Br. at 9. On December 13, 2006, Highland conveyed a 42% interestto Mr. Guyant,

who wanted to acquire tax credits held by Ashbury. JA 200.^ According to the Assignment of
Interest, the assignment was based on a purchase agreement betweenHighland and Mr, Guyant
and the first installment of the purchase agreement was a $400,000 wire transfer from Mr.

Guyant to Highland on December 13, 2006. Id No additional consideration is identified in the

^Highland retained a 5% interest inAshbury. Appellants Br. at9. Mr. Guyant had a preexisting
interest of 3% and the transfer increased his total ownership interest to 45%. JA 172,176.

assignment document and no written purchase agreement appears to have been created; instead
the parties formed an oral agreement. JA 333.

Based on the evidence presented at trial, Judge Chamblin found that the terms of the oral

agreement were as follows: Highland agreed to transfer to Mr. Guyant a 42% interest, along with
the associated tax benefits. JA 170-72. In exchange, the parties agreed that Mr. Guyant would

lend Highland $400,000 and waive the $80,000 origination fee for thatloan. Id. In addition, Mr.
Guyantwould apply any proceeds realizedfrom the 42% interest in Ashbury first to repay Mr.
Guyantfor the $400,000 loan to Highland and then to reduce Highland's debt to the GuyantIRA.

Id.^ In other words, the beneficial interest from the 42% ownership stake in Ashbury remained
withHighland. JA 316. Judge Chamblin concluded thatMr. Guyant performed his obligations by
crediting proceeds received from Ashbury's sale of property ($176,400 on April 9, 2007) and the
sale of tax credits ($470,400 on October 7, 2007) to Highland's $400,000 debt to him and then to

the Guyant IRA. JA 172,175-76. Bothof these credits were incorporated intoJudge Chamblin's
calculation regarding the outstanding debt. JA 176-77.

In their affirmative defenses. Highland and Bane arguedthat "Highland [was] entitledto
a setoff and/or recoupment in connection with Plaintiff s purported purchase of 42% interest in

Ashbury [] in an amountto be determined." JA 136. Highland characterized the $400,000
payment not as a loan but as a down paymentfor the 42% interest. JA 169-70. Consistent with its
affirmative defense, Highland argued that all the proceeds from these two transactions (the sale

^As explained by the bankruptcy court. Judge Chamblin essentially concluded that there was no
fixed price for the Ashbury investment or for the 42% interest transferred to Mr. Guyant. JA 364.
Instead, the parties agreed that "Mr. Guyant would pay the actual value obtained when
Ashbury's assets were sold," by crediting the liquidation proceeds to Highland's debts. I^ Under
this understanding of the agreement, the time for performance was the time "when the
distribution was to made," i.e. the time when the asset was sold. JA 367.

of land and sale of tax credits) should have been applied against Highland's debt to the Guyant
IRA. JA 143-44. The court rejected these contentions, finding that the Guyant IRA's explanation
was consistent with the transaction history, and in its October 5,2010 order entered a judgment
against Highland and Bane, jointly and severally, for $1,082,000 in principal, $82,435.13 in
unpaid interest, $45,068.06 in attorney's fees and costs, and $5,000 in expert witness fees. JA
035-37. On February 28, 2011, Highland filed a voluntary petition for Chapter 11 bankruptcy

relief in the bankruptcy court for the Eastern District of Virginia, Alexandria Division. See In re
Highland Construction Manaeement Services. LP, Case No. 11-11413.

While the first state case was pending, on May 10, 2010, Highland filed its own civil
action against Mr. Guyant in the same court. Highland Construction Management Services. LP v.

Jerome Guvant."^ asserting in Count I that Mr. Guyant had breached the agreement tobuy the
42% Ashbury interest for $1,737,345.00 ($1.7 million was the appraised value of the Ashbiiry
property) and that the $400,000 fi"om Mr. Guyant to Highland was a down payment so Mr.
Guyant still owed Highland $1,337,345. JA 195-96. Alternatively, Count 11 asserted Quantum
Meruit/Uniust Enrichment under the theory that Mr. Guyant was unjustly enriched by receiving

extensive tax deductions available to him as a result of the transaction. According to Highland,
the value of the interest conveyed was $2,225,217 which, after crediting Mr. Guyant for the

$400,000 wire transfer, reduced Mr. Guyant's debt to Highland to $1,825,217. JA 196-97.
Highland removed the action to the bankruptcy court, but it was subsequently remanded back to

the Circuit Court. Appellee Br. at 8. In his defense in that proceeding, Mr. Guyant asserted

This state case was brought against Mr. Guyant in his individual capacity, not the Guyant IRA;
however, appellants conceded in the bankruptcy court that there was identity between Mr.
Guyant and the Guyant IRA, and the bankruptcy court agreed with this conclusion. JA 356,358.

collateral estoppel and res iudicata. citing the prior state case's holding regarding the terms ofthe
Ashbury transaction. JA 205.

Judge Chamblin presided over the second state court case inwhich he reached the same
conclusion as he had in the first case: that the $400,000 represented a loan fi*om Mr. Guyant to

Highland, who received the benefit ofthe $80,000 loan fee being waived, and, in exchange, Mr.

Guyant received the benefit ofthe tax deductions that were ofno value to Highland and agreed
to apply the proceeds from the 42% interest inAshbury first to reduce the $400,000 loan from
Mr. Guyant and then to reduce Highland's debt to the Guyant IRA. JA 209. As to the breach of
contract claim alleged in Count I, thecourt found that Highland was unable to carry itsburden of

proving that the terms ofthe agreement were as it alleged. JA 208. With respect to Count II, the
court found thatthere was adequate consideration and qimntum meruit did notapply. JA 209.

Highland filed a Motion for Reconsideration and a Motion for aNew Trial. Following a hearing,
both motions were denied. JA 214-27.^

During the course of the second litigation. Highland presented evidence andargument

regarding a quasi-estoppel theory asto the tax deductions. Id^ Judge Chamblin stated that the tax
issues were 'Very interesting" but concluded that they were notdispositive and instead focused
on the terms of the transfer of interest in Ashbury. JA 207-09. Although Judge Chamblin asked

Highland about the sources ofthe quasi-estoppel cases cited inits briefs, he never stated that he
^During thehearing. Judge Chamblin observed that there was anopen issue about whether
Highland was entitled to receive distributions based onthe 42% interest conveyed to Mr. Guyant
after Highland's debts to the Guyant IRA were paid in full. JA221. Appellants have attempted to
resurrect that issue in the current adversary proceeding by arguing that it opens the door to

relitigating determinations of alleged credits. JA 001-13. Bothparties agree that no payments
have been made on thejudgment, JA 342-43; therefore, what might happen afterthe debtto the
Guyant IRAis paid in full is immaterial to these proceedings. Moreover, the Guyant IRA

represented to iie bankruptcy court that ifthe judgment order were ever fully paid, any
additional profits from the 42% interest in Ashbury would go to Highland. JA 324.

would not apply the doctrine because the Virginia Supreme Court had yet to rule on it, id;

instead he concluded that quasi-estoppel was not relevant to the case, JA 223-24.^ Highland
appealed Judge Chamblin's decisionto the Supreme Courtof Virginia, which found that there
was no reversible error and refused the petition for appeal. JA 270

After Highland filed its Chapter 11 petition, Wells Fargo timely filed a Proof of Claim on
behalf of the Guyant IRA, citing the Virginia state court judgment. JA 032-33. Since that filing,

the parties have litigated three disputes in the bankruptcy courtabout the Guyant IRA's claim.
The first dispute, which arose as an objection, not in an adversary proceeding, dealt with whether
the Guyant IRA's claim was secured or, as Highland argued, an unsecured debt subservient to
the debtor's status as a judicial lien creditor. The bankruptcy court rejected Highland's argument
and was affirmed by both this court, JA 272-74, and the Fourth Circuit, JA 275-76. In the second
dispute, which arose in the context of an adversary proceeding. Highland attacked the pre-

judgment attachment of proceeds from an investment that servedas a security for its debt to the
Guyant IRA.

Highland Construction Management Services. LP v. Wells Fargo Bank. NA,

£^/o Jerome Guvant. IRA. Adv. Proc. No. 13-1055. Highland ultimately dismissed that

proceeding with prejudice. JA 401. In the third dispute, also an adversary proceeding. Highland
challenged the Guyant IRA's status as a secured creditor with respect to the note, asserting that
financing statement did not create a valid security interest. S^ Highland Construction
Management Services, LP v. Wells Fargo Bank, NA, £/b/o Jerome Guvant. IRA. Adv. Proc. No.

^Judge Chamblin reiterated this during the hearing onthe motion for reconsideration: "This is
not a matter of me recognizing whether Virginia recognizes a quasi-estoppel doctrine. That's not
what this is about. And this is not about an unjust enrichment. It's about what was the agreement
between the parties, between Highland and Mr. Guyant." JA 021. Similarly, in the earlier state
court case. Judge Chamblin also found that quasi-estoppel was inapplicable, stating, "I don't
think this is an estoppel case." JA 187-88.

13-1289. The bankruptcy court entered judgment against Highland, finding that the issue was res

iudicata because Highland had the opportunity to litigate that issue in the first state court case.
JA438.

The instant adversary proceeding arises out ofa appellants' complaint filed on February
2,2015, in which they sought in Count I to recharacterize the Guyant IRA's $1,396,657.52 claim
"as equity obtained by Mr. Guyant when he received [42%] membership interest in Ashbury."

JA 009. Count II sought equitable subordination of the debt to claims of unsecured creditors and
Count III sought determination of an alleged credit due to Highland. JA 009-13. The Guyant IRA

filed a motion for summary judgment, asserting that all three claims were barred by res iudicata
and collateral estoppel. JA 059-76. In an order dated October 25,2016, the bankruptcy court
granted the Guyant IRA's Motion for Summary Judgment with respect to Counts I and III, and
denied the Motion as to Count II. JA 304-06.

With respect to Count I, the bankruptcy court concluded that appellants were
impermissibly "splitting causes of action" to bring their recharacterization claim, which was

barred by res iudicata. JA 370. As the court explained, in the context of bankruptcy,
recharacterization is relevant to determining priority, and, more flmdamentally, it is an argument

that debt is in fact equity. JA 370-71. Because the state court already determined the nature of
the Ashbury transaction, the bankruptcy court held that appellants' recharacterization claim was
barred by res iudicata. These issues were res iudicata as a result of the first state decision because

there was "identity of interest between [Mr.] Guyant and the [Guyant] ERA." JA 370. The
bankruptcy court also found that because Judge Chamblin made the same finding in the second
state case where Mr. Guyant was included as a party, it was res iudicata twice over. Id

Alternatively, the court found that the factual elements ofappellants' recharacterization claim
were barred by collateral estoppel. JA 371.

As to Count Ill's request for a determination ofhow to apply credits, the bankruptcy
court concluded that the state court had determined how to apply pre-judgment credits. JA 372.

Although determination ofpost-judgment credits could be resolved by the bankruptcy court, the
appellants conceded that Count III did not address post-judgment credits. Id, Instead they
disputed credits that the state court had already addressed; thus, the bankruptcy court found that
res iudicata applied. Id.

The bankruptcy court declined tofind that Count II, the equitable subordination claim,
was barred by res iudicata as a result ofthe state court proceedings because adjudicating
subordination requires assessing the interests of a group of creditors and in both state court

proceedings there was only one creditor—Mr. Guyant orthe Guyant IRA. JA 373. In addition,
the bankruptcy court found that none ofthe previous bankruptcy proceedings between the parties
createdres iudicataas to these issues. JA 374. As the court explained, the first matterarose from

an objection, not an adversary proceeding, which made ita weaker case for res iudicata and the
critical issue was the validity of the lien, which meant that subordination was notnecessarily an
issue that neededto be raised in that context. JA 374-75. In the secondbankruptcy matter, which

was adversarial, the issue was preference, which the court concluded involved a different claim.
Id. Although the third proceeding addressed thevalidity ofthe lien, the court stated that it was

not necessary to raise a subordination issue inthat context. JA 376. In the absence ofres mdicata.

the bankruptcy court ruled that Count II could proceed totrial. JA 377. The parties later agreed
to dismiss Count II without prejudice, conditioning refiling upon a reversal ofthe grant of
summary judgment as to Count I. JA 443-44.

11.

DISCUSSION

Appellants have appealed the bankruptcy court's order granting summary judgment on
Counts I and III on the basis of res iudicata.
A. Standard of Review

On appeal, a bankruptcy court's "[findings offact are ... reviewed for clear error, and
conclusions of law de novo." Rilevv. Robev, 25 F. App'x 149,152 (4th Cir. 2002). The

conclusion that a claimis barredby res iudicata is a legal one,thus review is de novo.

Providence Hall Assocs. Ltd. P'ship v. Wells Fargo Bank. N.A.. 816 F.3d 273, 276 (4th Cir.
2016): see also Marvin v. Marvin. No. CIV.A. 3:08CV695, 2009 WL 152314, at *2 (E.D. Va.

Jan. 21,2009), affd sub nom. In re Marvin, 332 F. App'x 9 (4thCir. 2009).
B. Analysis

Although the appellants raised three questions intheir opening brief, there is effectively

only one dispute: whether res iudicata applies. ^In the Fourth Circuit, "[t]he application ofres
judicata turns on the existence ofthree factors: (1) a final judgment on the merits ina prior suit;
(2) an identity ofthe cause ofaction inboth the earlier and the later suit; and (3) an identity of
parties ortheir privies inthe two suits." Clodfelter v. Republic ofSudan, 720 F.3d 199, 210 (4th
Cir. 2013) (internal quotation marks omitted). The Fourth Circuit's test for identity as to the
cause of action "asks only if a claim made inthe second action involves a right arising out ofthe

^"The doctrine of res iudicata encompasses two concepts: 1) claim preclusion and 2) issue

preclusion, orcollateral estoppel. The rules ofclaim preclusion provide that if the later litigation
arises from the same cause of action as the first, then the judgment in the prior action bars

litigation not only ofevery matter actually adjudicated inthe earlier case, but also ofevery claim
that might have been presented. However, issue preclusion is more narrowly drawn and applies
when the later litigation arises from a different cause of action between the same parties." Orca
Yachts. L.L.C. v. Mollicam. Inc.. 287 F.3d 316, 318 (4th Cir. 2002) (internal quotation marks
omitted).

same transaction or series of connected transactions that gave rise to the claims in the first
action." Hamett v. Billman, 800 F.2d 1308,1314 (4th Cir. 1986). This test involves measuring

'the scope of [the] transaction orseries ofconnected transactions by considering pragmatic
factors such as common origin and relation, as well aswhether the acts giving rise to the claim
would be considered as partof the same unitby the parties in their business capacities." Id

(internal quotation marks omitted). Crucially, "claims may arise out ofthe same transaction or
series of transactions even if they involve different harms or different theories or measures of
relief." Id. So robust are the effects of res iudiciata that the "consequences of a final, unappealed

judgment on the merits [are not] altered by the fact that thejudgment may have been wrong or
rested on a legalprinciple subsequently overruled in another case." Federated Dep't Stores, Inc.
V. Moitie. 452 U.S. 394, 398 (1981).

Appellants do notdispute the finality of the state court judgments and they concede
identity of interests among the parties. JA 002. Indeed, appellants have gone so far as to argue
that res iudicata applies withrespect to some of the elements of their recharacterization claim.
See JA 284 ("The State courtdecision is res iudicata on [the issue of the maturity date] and

supports Highland's claim."). Therefore, the dispute focuses on the second requirement, whether
there is identity as to the cause of action.

Appellants argue that the Virginia court lacked subjectmatterjurisdictionover their
recharacterization claim, which they contend is a form of relief unique to bankruptcy

proceedings. This is incorrect. As numerous courts have acknowledged, "there is no specific
provision of the Bankruptcy Code that allows courts to recharacterize claims." In re AutoStvle
Plastics. Inc.. 269 F.3d 726, 748 (6th Cir. 2001). Rather, "[bjankruptcy courts that have applied a

recharacterization analysis have concluded that their powerto do so stems fit)m the authority

vested in the bankruptcy courts to use their equitable powers" pursuant to 11 U.SC. § 105 "which
states that bankruptcy judges have the authority to 'issue any order, process or judgment that is
necessary or appropriate to carry out the provisions' of the Code." Id Because all courts have
inherent equitable authority consistent with the scope of their jurisdiction, Porter v. Warner
Holding Co.. 328 U.S. 395,398 (1946), there is no reason to believe recharacterization is unique
to bankruptcy courts. In keeping with this reasoning, multiple state courts, including
Massachusetts and Wisconsin, have provided "a common law cause of action for debt
recharacterization." S^ Straightshot Commc'ns Inc. v. Telekenex. Inc.. No. C10-268Z, 2010

WL 4793538, at *2 (W.D. Wash. Nov. 19, 2010).
Contrary to appellants' contention, res iudicata applies to their effort to recharacterize the
debt notwithstanding the fact that a specific cause of action called "recharacterization" has not

been explicitly recognized inVirginia.® The claims brought inthe two state court proceedings
required the state court to determine whether the terms of the Ashbury transaction supported the
Guyant IRA's claim that it was owed $1,082,000 in unpaid principal or appellants' contention
that the $400,000 was a down payment on a fixed purchase price. Nothing prevented the
appellants from arguing that the Guyant IRA's claim represented a capital contribution.

Recharacterization is merely the same inquiry imder a different name, for it simply asks a
bankruptcy court to determine "whether a particular obligation is debt or equity." In re: Domier
Aviation (Tsf. Am."). Inc.. 453 F.3d 225, 231 (4th Cir. 2006). More simply, as the bankruptcy court

aptly explained, "one defense to saying hey, you owe me a million dollars is to say no, when you

8

•
•
Appellants' focus on the bankruptcy court's prediction that the Virginia Supreme Court would
adopt recharacterization if presented with the question is a red herring. The prediction was pure
speculation and was irrelevant to the court's conclusion that res iudicata applied notwithstanding
the fact that recharacterization is not formally recognized as a cause of action under Virginia law.

look at the transaction as a whole, you made a contribution to the capital of the corporation, and
it is equity in the corporation. I don't owe you anything." JA 371. Indeed, Virginia courts have

accepted this very argument, concluding that what one party described as debt was actually a
capital contribution.

Bosserman v. Bosserman, 384 S.E.2d 104, 110 (Va. Ct. App. 1989)

("[T]he evidence was sufficient to support the finding of the trial court that the alleged debt was,

in fact, capitalization ofthe corporation."). ^ Because the appellants' recharacterization argument
presents a fundamentally factual question, permitting appellants to bring a recharacterization

claim in bankruptcy court after a state court has already determined the nature of the obligation
would exalt form over substance. The imperative of res iudicata does not permit such chicanery.

To the extent that appellants suggest that they could not have raised a novel cause of

action inthe state proceedings,^® that contention is belied by their own conduct: appellants

^Intheir briefs, appellants ask the Court to certify the following question tothe Supreme Court
of Virginia: "Does a cause of action exist, pursuant to Virginia common law, to recharacterize a
creditor's claim, from debt to equity?" Appellants Br. at 19. The Court declines this invitation.
"Certification is, by its very nature, discretionary," Garietv v. Vorono. 261 F. App'x 456,462
(4th Cir. 2008), and "[cjonsiderations of comity" dictate that courts "ought not to request [a
state's highest tribunal] to answer a question of law unless and until it appears that the answer is
dispositive of the federal litigation or is a necessary and inescapable ruling in the course of the
litigation." Bovter v. C. I. R.. 668 F.2d 1382,1385 (4th Cir. 1981). Here, the question posed by
appellants is neither dispositive nor necessary because Virginia state courts can and have
determined that an obligation is equity rather than debt.
supra. Further, a future decision by

the Supreme Court of Virginia would have no bearing on whether res iudicata applies to state
court proceedings that were completed in 2010 and 2013, respectively.
Appellants argue that their claim that the alleged debt was actually equity could not have been
raised in state court until after the factual findings made by Judge Chamblin in the second state
court case "established the facts necessary to recharacterize a claim, pursuant to Domier and
Section 105 of the Bankruptcy Code." Appellants Br. at 16. Appellants recognition that the state
court made factual findings relevant to recharacterization supports rather than undermines the
conclusion that the state court was well situated to determine whether the Guyant IRA's claim
represented debt or equity. Moreover, to the extent that appellants argue that they could not have
raised a recharacterization claim in state court because the factual elements were unknown to

them before the state court rendered its decision, they are mistaken. The state court made the
factual findings necessary to substantiate its conclusion and, if presented with a
13

advanced a novel legal theory when they asked Judge Chamblin to adopt qimsi-estoppel doctrine,

relying only on federal court cases and acknowledging that quasi-estoppel was not a recognized
theory under Virginia law. JA 207. Because they could have explicitly raised their
recharacterization claim in state court, and certainly implicitly raised it, appellants cannot rely on

the untested nature ofthis legal theory in Virginia to circumvent res iudicata.^' For all these
reasons, the bankruptcy court's decision to dismiss Count I as barred byres iudicata will be
affirmed.
12

Summary judgment wasalso properly granted as to Count IIIbased on res iudicata. As

the bankruptcy court explained, appellants are entitled to ask for credits inbankruptcy court, but
those credits would have to be based on post-judgment payments. The amount due to the Guyant

IRA was established bythe state court judgment and all claims about pre-judgment credits are
nowres iudicata. Based on its colloquy with the parties, the bankruptcy courtunderstood "that

there [were] no post-petition payments." JA 372. Rather, what the parties were talkmg about
were "credits that Judge Chamblin has abeady addressed and incorporated into the balance due,
and taken into account in a manner in which the transaction is determined." Id Ori appeal,

appellants have made no attempt to demonstrate that the bankruptcy court's understanding was
inaccurate.

recharacterizationclaim at the outset, could have made any other necessary factual findings.

Finally, the eleven factor test enumerated bytheFourth Circuit in Domier is notcontrolling in
Virginia, so there is no basis for arguing that these findings were necessary to support a claim for
recharacterization in Virginia state court.

'' The parties extensively debated whether the current claims are res iudicata as a result of the
prior bankruptcy proceedings. The Court need notengage with this issue because resiudicata is
clear with respect to the state court proceedings.

Appellants inaccurately state that the bankruptcy court denied Count III vdthout explanation.
Appellants Br. at 6-7. To thecontrary, the court's discussion spans a full transcript page. JA37172.

Finally, appellants' contention that res iudicata does not apply to Count III because Judge
Chamblin expressly permitted claim splitting misrepresents the state court's holding. Claim

splitting "prohibits a plaintiff from prosecuting its case piecemeal, and requires that all claims
arising out of a single wrong be presented in one action." Sensormatic Sec. Corp. v. Sensormatic
Elecs. Corp.. 329 F. Supp. 2d 574, 579 (D. Md. 2004). "[A]s with the traditional res iudicata

analysis, the second suit will be barred if the claim involves the same parties or their privies and
'arises out of the same transaction or series of transactions' as the first claim." Id But, "[wjhile

claim splitting and the principles of res iudicata prohibit a [pjlaintiff from prosecuting its case
piecemeal, a party is not barred from bringing in a subsequent action those claims that could not
have been included in the original suit—even if they are related, or arise out of, the previously
filed claim." Id (internal citations omitted).

In the second state court case. Judge Chamblin did not authorize claim splitting regarding
the determination of credits due. Instead he concluded that appellants' breach of contract claim
was not ripe because no breach had yet occurred. JA 221. He added that, were a breach to occur,

appellants would be able to bring a new cause of action arising out of a related but distinct set of

facts. That said, no facts supporting a new cause of action for breach of contract were presented
to the bankruptcy court when the Motion for Summary Judgment was filed.

Quite the opposite,

appellants conceded that no post-judgment payments had been made and their argument was
about the characterization of pre-judgment credits. JA 272. Based on these representations, the

^ Appellants now seek to argue that there is a new credit at issue and point to aNovember 3,
2016 bankruptcy court order approving an agreement for Highland to purchase the remaining
Ashbury real property. Appellants Br. at 25. That order is not included in the joint appendix, the
supplemental appendix, or the bankruptcy court's docket sheet, which extends through
November 19, 2016. In any event, this appeal, which was filed on November 2, 2016, challenges
the bankruptcy court's summary judgment order entered on October 25,2016. Therefore, any
subsequent orders are not properly raised in this appeal.

bankruptcy court appropriately granted summary judgment as to Count III because it was barred
by res iudicata.
III.

CONCLUSION

Appellants had two opportunities in state court to have the debt they owe to the Guyant
IRA characterized as equity. Having twice failed to raise their recharacterization claim,

appellants are not entitled toraise it inthe bankruptcy court, nor are they entitled to relitigate
pre-judgment credits. Accordingly, it was not errorfor the bankruptcy courtto grantsummary

judgment on Counts I and III, and for these reasons the decision below will beAFFIRMED by
an appropriate Order to be issued withthis Memorandum Opinion.
Entered this

day of March, 2017.

Alexandria, Virginia

/./ / jl/^

Leonie M. BrinkenTa

United States District Judge

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