GAB Enterprises, Inc. v. Rocky Gorge Development, LLC

NAZARIAN, J. “A bad beginning makes a bad ending,” 1 and in this case, the parties’ difficult relationship at the beginning of this development project presaged its eventual demise. In 2003, Rocky Gorge Homes, LLC (“Rocky Gorge”) and GAB Enterprises, Inc. (“GAB”) created RGHGAB at Frederick, LLC (“RGHGAB”), to buy, develop, and sell property in Frederick County. Like many others, this deal failed to predict the catastrophic collapse of the real estate market about five years later, which left RGHGAB holding a figurative bag that contained a nearly $9 million promissory note guaranteeing property worth less than $3 million. In an effort to salvage its interest, and after some back-and-forth with GAB, RGHGAB formed another corporation, Waverley View Investors, LLC (“Waverley”), to purchase the promissory note at a much- ¹⁷⁴ reduced price.

But GAB says that it wished to acquire the property itself, and initiated involuntary bankruptcy proceedings against RGHGAB (the “Bankruptcy Proceeding”) that sought to force Waverley out and obtain the note for its own. Those efforts did not succeed, but did generate a written opinion explaining the issues the Bankruptcy Court was and was not deciding in ruling against GAB. GAB tried again in the Circuit Court for Frederick County in a nine-count complaint (the “Circuit Court Proceeding”) alleging that the CEO of Rocky Gorge, Christopher Dorment, fraudulently formed Waverley to eradicate GAB’s interest in RGHGAB. The circuit court granted Rocky Gorge’s Motion to Dismiss and for Summary Judgment on the ground that the previous findings of the Bankruptcy Court barred GAB’s claims under the doctrine of collateral estoppel.

We disagree that the Bankruptcy Court decision resolved the claims Rocky Gorge brings in this case, so we reverse the dismissal, as well as the circuit court’s decision to grant summary judgment on other contested counts, and remand for further proceedings. I. BACKGROUND We start with the Note that set the process in motion, then watch the parties’ business relationship unravel as the property’s value plummeted, then chronicle the two phases of litigation that bring everyone before us. 1. Purchase (RGHGAB) and Repurchase (Waverley) of the Note Rocky Gorge, as an 80% member, and GAB, as a 20% member, formed RGHGAB as a Maryland limited liability company on November 10, 2003. The Chairman and CEO of Rocky Gorge at the time was (and by all indications still is) Christopher Dorment.

His wife, Rosemary, plays a role later on, but was not a member of Rocky Gorge. GAB acted through its President, Gary Berman. RGHGAB was formed to purchase a promissory note on a loan secured by a 93-acre tract of land in Frederick (the “Property”), then foreclose. ¹⁷⁵ Under the RGHGAB Operating Agreement (the “Operating Agreement”), RGHGAB would develop the Property. The Operating Agreement tasked Rocky Gorge with obtaining financing and required all parties to “use good faith and best efforts in all dealings.” The parties secured the financing with a Promissory Note dated January 30, 2004 (“the Note” 2 ), made by Rocky Gorge and held by BB & T Bank (“BB & T”).

The original principal amount of $2.75 million tracked the principal amount in an accompanying Indemnity Deed of Trust. A recital to the Note contained Mr. Dormant’s personal guaranty of full repayment and GAB’s guaranty of partial repayment in the event of a default. As time went by, the principal amount of the Note was amended, ballooning to nearly $9 million as of September 12, 2007, and the maturity date ultimately was extended to January 15, 2010. GAB claims that it continued to guarantee partial repayment of the Note only because of “Mr. Dorment’s re-affirmation that he had, and would retain, sufficient assets to secure each modification of the Note.” In the meantime, the parties ran into trouble, not just because the property value fell as the amount due under the Note rose, but also because Mr. Dorment and Mr. Berman seem never to have agreed on the terms of the Operating Agreement.

As early as 2005, GAB filed suit against Rocky Gorge, claiming that it violated the Operating Agreement by trying to sell some of the Property. The parties ultimately settled that dispute and executed a Second Amendment to the Operating Agreement, under which GAB obtained additional development rights. There was a second round of litigation in 2008 and 2009, after a dispute between the parties about a payment to RGHGAB on the Note from BB & T for nearly ¹⁷⁶ $150,000. According to the Complaint in this case, Rocky Gorge ultimately was ordered by an arbitrator to repay the funds to BB & T, but never did so.

It is not clear from the record what, if any, action GAB undertook in response. By late 2009, the Property’s value had dropped far below the increasing amount due under the Note. Although the record does not contain specific evidence of why no development occurred throughout this time (we surmise that the parties were occupied watching the Property decline in value and feared throwing good money after bad), RGHGAB found itself with no funds and a need for further financing. Mr. Berman declined to make further contributions, although he suggested turning to his father, Malcolm Berman, for funding.

It seems, though, that whatever conditions the senior Mr. Berman wished to impose, Mr. Dorment found them unfavorable and pursued further funds on his own. We will discuss below, and in detail, the findings of the United States Bankruptcy Court for the District of Maryland (the “Bankruptcy Court”) in the litigation that underlay the Circuit Court’s dismissal of this case. The Bankruptcy Court’s eventual decision provides, however, a succinct narrative of the next phase of the parties’ relationship: 3 [a]t all times [Mr.] Dorment advised [Mr.] Berman of the situation facing the venture. This was required in that Section 5.3 of the Operating Agreement required [Mr. Berman’s] agreement to dissolve or terminate the venture, to do anything in contravention of the agreement, to do any act that would make it impossible to carry on the ordinary business of the venture, or to possess or assign rights in company property or assign rights in company property other than for a company purpose.

By a letter dated November 12, 2009, [Mr.] Dorment advised [Mr.] Berman of his intention to buy [the Note] at a discount and that he was seeking fresh equity capital and ¹⁷⁷ that this would require ceding of control of the project and dilution of their equity stakes. How he could cede control of the project without the consent of [Mr.] Berman is unclear. (Emphasis added.) On February 3, 2010, Mr. Dorment proposed to Mr. Berman that they form a new entity to take on the Note. Even the Bankruptcy Court, looking back, could not discern how Mr. Dorment intended to do this without Mr. Berman’s consent, but Mr. Dorment apparently had “concluded that the only practical course of action would be for a new entity to buy [the Note], and ‘if the Managing Member reaches that conclusion, the Managing Member would proceed ahead with the goal of protecting the interests of the Company even if the minority member objected.’ ” At this point, BB & T had extended the Note’s maturity date of January 15, 2010.

But when Mr. Dorment sought to enter a forbearance agreement with BB & T on March 30, 2010, Mr. Berman — “true to his uncooperative nature,” as the Bankruptcy Court put it — “refused to sign the agreement.” Mr. Dorment’s continuing efforts to marshall support from Mr. Berman or his father were unavailing. 4 Mr. Dorment then obtained a commitment from another bank that would let Waverley buy the note from BB & T. Under the new deal, Mr. and Mrs. Dorment would serve as personal guarantors, the obligation would be secured further by the Note, and Waverley would act as the purchaser. Rocky Gorge assigned the note purchase agreement to Waverley, completing the transaction (in which, by the way, Waverley agreed to release all prior guarantees, including GAB’s) on September 17, 2010. ¹⁷⁸ Then, in October 2010, Waverley undertook to foreclose on the Property. GAB resisted these efforts almost immediately. On October 28, 2010, it filed a Motion to Stay the Sale of Property and Dismiss Foreclosure Action in the Circuit Court for Frederick County (the “Motion to Stay”).

Although we now know that the interests of the GAB and RGHGAB ended up adverse to one another, at the time GAB sought the stay derivatively on behalf of RGHGAB. The details don’t matter here, but the short story is that after this Court denied RGHGAB’s (i.e., GAB’s) appeal of the Circuit Court’s denial of the Motion to Stay, Waverley resumed its efforts to foreclose. 2. The Bankruptcy Proceeding Undaunted, GAB looked to another forum, and filed a Petition for Involuntary Bankruptcy (Chapter 7) in the Bankruptcy Court on January 11, 2011. The Petition was unusual: GAB listed no other petitioning creditors in the Petition and characterized its own claim as a loan in the amount of nearly $440,000.

The filing brought the foreclosure proceeding to an abrupt halt because of the automatic stay that issued from the Bankruptcy Court, so Waverley sought relief from the stay on February 22, 2011, arguing (in the “Motion for Relief’) that it should be permitted to foreclose on the Property as a secured creditor. GAB opposed the Motion for Relief, alleging that Mr. Dorment “secretly created Waverley for the purpose of improperly transferring [RGHGAB’s] assets and other corporate opportunities to Waverley, and wiping out the interests in [RGHGAB’s] property of not only GAB but also [of RGHGAB’s] other creditors.” As far as we can tell, the Motion for Relief was not addressed directly by the Bankruptcy Court. Next, the Trustee in the Bankruptcy Proceeding filed a First Amended Complaint for Equitable Subordination and Equitable Disallowance on May 9, 2011 (the “Bankruptcy ¹⁷⁹ Complaint”) against Rocky Gorge and Waverley. 5 The Trustee asserted that Mr. Dorment, Rocky Gorge, and Waverley had “engaged in inequitable conduct” and improperly engaged in self-dealing that harmed RGHGAB and its creditors (including only GAB by name). The complaint sought equitable subordination of Rocky Gorge and Waverley’s claims against RGHGAB and equitable disallowance of these claims.

The Bankruptcy Court held a trial that spanned three days in October and November 2011, and on April 24, 2012 issued a Memorandum of Decision (the “Memorandum”) and entered Judgment for Waverley and Rocky Gorge dismissing the Bankruptcy Complaint. The Court found broadly that Mr. Dorment’s decision to assign the Note to Waverley caused no harm to any of the creditors — GAB or any of the six creditors that lacked priority claims. It approached the question three different ways: First, the Bankruptcy Court found at the outset “a total absence of harm by the actions complained of to the one creditor holding a secured claim [ie., Waverley 6 ] or the [remaining] holders of claims without priority.” (Emphasis added.) A cause of action for equitable subordination in involuntary bankruptcy requires harm to creditors (citing In re: Kreisler, 546 F.3d 863, 866-67 (7th Cir.2008)), and as the Bankruptcy Court saw it, “[t]his project was so far indebted to [Waverley] that there was no scenario under which the Trustee’s constituent body, the holder of unsecured claims, could receive any distribution whatsoever.” The Bankruptcy Court qualified its decision by pointing out that “Rocky Gorge might have a fiduciary relationship to GAB, but that is not what this adversary proceeding concerns.” ¹⁸⁰ Second, the court denied GAB’s claim for equitable subordination. GAB had sought to subordinate Waverley’s claim and transfer its lien to the Trustee; it also sought equitable subordination of Rocky Gorge’s claim.

Under 11 U.S.C.A. § 510 (2004), which codifies the doctrine, a court may “subordinate ... all or part of an allowed claim to all or part of another allowed claim.” Id. § 510(c)(1). But again, equitable subordination requires a showing of injury to other creditors, and, again, the Bankruptcy Court found that “no harm was caused to the creditor body by [Mr.] Dorment forming a group to acquire the Note in and of itself.” (Emphasis added.) The court cautioned once more that “there could well be a cause of action in what is essentially this two-party dispute between [Mr.] Berman and [Mr.] Dorment operating through their legal entities. But resolution of the potential dispute is for another day in another jurisdiction.” (Emphasis added.) Third, the Trustee sought not just to subordinate, but also to disallow Waverley’s and Rocky Gorge’s claims, which as the Bankruptcy Court noted is available “‘only “in extreme instances — perhaps very rare — where it is necessary as a remedy.” ’ ” (quoting Adelphia Recovery Trust v. Bank of America, N.A., 390 B.R. 80, 99 (S.D.N.Y.2008)). The Bankruptcy Court again found that there was “nothing in the nature of inequitable conduct or unfairness on [Mr.] Dorment’s part.

The creditors ... were then at least $5 million under water and suffered no change in position as a result of the transfer of the Note to parties friendly to [Mr.] Dorment.” The court further found “as a fact that the primary motivation of [Mr.] Dorment was to limit his liability on the guaranty and secondarily to protect the venture.” Once again, the court was careful to point out that “[Mr.] Berman, as a partner-creditor, may have a claim against his co-venturer. However, the court finds nothing in the behavior of [Mr.] Dorment or his co-venturers in Waverley to mandate the awesome punishment of equitable disallowance being imposed on them.” GAB appealed the Bankruptcy Court’s decision to the United States District Court for the District of Maryland, but ¹⁸¹ dismissed the appeal pursuant to a stipulation by the parties on September 21, 2012. 3. The Circuit Court Proceeding On September 28, 2012, GAB filed the nine-count complaint that initiated this case (the “Complaint”). GAB named Rocky Gorge, Mr. Dorment, his wife Rosemary, and Waverley as defendants (collectively the “Defendants”), and alleged that Mr. Dorment “secretly created [Waverley] for the purpose of improperly transferring RGHGAB’s assets to Waverley and thus wiping out GAB’s interest in RGHGAB,” and that all the Defendants, even Mrs. Dorment, were part of this “fraudulent scheme.” The Complaint listed counts in intentional misrepresentation, constructive fraud, negligent misrepresentation, and breach of fiduciary duty against Rocky Gorge and Mr. Dorment (Counts I, II, III, and VIII respectively); fraudulent conveyance claims against Mr. and Mrs. Dorment (Counts IV and V); tortious interference and civil conspiracy claims against all Defendants (Counts VI and IX); and a breach of contract claim against Rocky Gorge (Count VII).

GAB sought compensatory damages of $7.5 million and punitive damages of $5 million against each defendant and also asked the court to set aside GAB’s guaranty on the Note and certain unidentified asset transfers between Mr. and Mrs. Dorment. On November 5, 2012, the Defendants moved to dismiss and for summary judgment. They argued that GAB had had more than one opportunity to litigate the issues raised here before — not just in Bankruptcy Court, but in the 2005 and 2009 litigation — and that the issues and claims raised by GAB had already been decided. They also argued at length that GAB’s claims were not its to bring derivatively, but belonged to RGHGAB under the Operating Agreement, and they attacked the underlying substance of the remaining counts.

The trial court held a hearing on February 12, 2013 that centered primarily on the collateral estoppel effect of the Bankruptcy Court’s decision. As counsel for Rocky Gorge put it, the “overarching theme in the Bankruptcy Court was ... ¹⁸² that somehow Waverley had obtained [the Note] through inequitable [conduct]” and that RGHGAB should have allowed GAB the opportunity to purchase the Note instead. Specifically, Rocky Gorge argued that the Bankruptcy Court “specifically decided” (1) that there was an absence of harm to RGHGAB and its creditors (GAB included); and (2) that there was no inequitable conduct on Mr. Dorment’s part, which Rocky Gorge claimed should preclude GAB from proceeding against the Defendants in circuit court. 7 Counsel for GAB countered that the Bankruptcy Judge had made clear that he was deciding the Bankruptcy Proceeding only and expressly anticipated that “the circuit court” would resolve the parties’ differences anew. Moreover, as GAB saw it, the Bankruptcy Court had focused on the factual issues about Mr. Dorment, not as they related to GAB but as they related to the creditors overall, because the Bankruptcy Judge was tasked with determining the specific question of whether the claims of other creditors (i.e., Waverley) could be equitably subordinated to GAB’s claim.

GAB highlighted one portion of the Bankruptcy Court’s October 22, 2012, Order approving the sale of the Property that expressly left GAB’s claims against its partners unresolved: Notwithstanding any provision of this Order Approving Sale to the contrary, ... this specific Order Approving Sale shall not impact or prejudice [Mr. Berman’s or GAB’s] direct claims against any non-debtor third party. At the February 12 hearing, GAB’s counsel cited another statement from the Bankruptcy Judge that ostensibly narrowed the effect of his holding, which led the circuit court judge to ask the following question about the scope of the order: THE COURT: Is it the rulings that bar [the circuit court proceeding] or the findings of fact that [bar] it— ¹⁸³ [COUNSEL FOR GAB:] Well, I think it would be— THE COURT: And there’s a distinction— [COUNSEL FOR GAB:] Yes THE COURT: ... a finding of fact is not his ruling____ [I]n order to make the ruling he found some facts. And [Rocky Gorge’s] earlier argument was it’s the fact that [the Bankruptcy Judge] found this and this as a matter of fact bars these claims. [COUNSEL FOR GAB:] Well— THE COURT: Which is basically a collateral estoppel right there. [COUNSEL FOR GAB:] — right, ... I don’t think that [the Bankruptcy Judge] made findings of fact that would have that effect because he said that his findings of fact that everything he did there would not have that [effect].... [The Bankruptcy Judge] did not make findings that relate to all aspects of our claims for sure, no matter how you look at this.

(Emphasis added.) The trial court continued to press GAB’s counsel about the findings of fact that the Bankruptcy Court did make, appearing especially concerned with that court’s finding that there was “no inequitable conduct or unfairness” on Mr. Dorment’s part. As the trial judge asked counsel for GAB, “if you make the finding of fact for a certain purpose, isn’t that still a finding of fact binding on the parties?” The trial court’s inclinations at the hearing were borne out in the Order it ultimately issued on February 21, 2013, in which it accepted Rocky Gorge’s collateral estoppel argument: [T]he Court find[s] that the primary focus of the Defendants’ argument for Summary Judgment [is] collateral estoppel in that [the Bankruptcy Judge] found a “total absence of harm to the creditors,” to include [GAB], and that [the Bankruptcy Judge] found “a lack of any inequitable conduct or unfairness” on the part of [Rocky Gorge], and that these findings are binding upon the parties in this ¹⁸⁴ matter, and ... these findings of fact are dispositive as to Counts I, II, III, VI and VII of the ... Complaint; and [T]he Court further find[s] that [Rocky Gorge’s] argument for Dismissal applies to Counts IV and V, in that [GAB] failed to state a claim upon which relief can be granted, and [GAB] conceding that there are no additional facts to allege; and upon the Court’s finding that [GAB’s] allegation that [Mr. Dorment] failed to keep sufficient liquidity in his assets to guarantee the loan, is an action to be brought by the secured party, rather than by [GAB], GAB had agreed to dismissal of Count VIII, and the trial court granted summary judgment as to the conspiracy claim in Count IX because it could not survive without a finding of liability on at least one of the underlying counts. The court also dismissed Counts IV and V of the Complaint (based on Rocky Gorge’s having filed a motion to dismiss in connection with those counts, and not a summary judgment motion).

GAB filed a timely Notice of Appeal on February 26, 2013.

II

DISCUSSION Much as they have outside the courtrooms, the parties clash on virtually every judicial decision relating to this property. As the Bankruptcy Court put it, “[t]hroughout [the] life of the agreement, the relationship between [Mr.] Berman and [Mr.] Dorment was acrimonious and marked by ongoing disputes almost from the start.” And admittedly, GAB has taken every opportunity, in more than one forum, to litigate the terms of the Operating Agreement and many other elements of this series of relationships. 8 But applying collateral estoppel here ¹⁸⁵ would hold GAB to a decision that arose in a different context, that decided different claims for a different purpose, and that the presiding judge specifically meant not to reach. We hold that the facial similarity of interests or issues in the two cases cannot overcome the core substantive differences, and we reverse the trial court’s grant of summary judgment to Rocky Gorge. In concluding that collateral estoppel does not apply, we express no views on the merits of GAB’s claims (on which the trial judge, too, declined to opine) beyond allowing the case to proceed past the dismissal.

We also reverse the trial court’s dismissal of the two counts against Mr. and Mrs. Dorment, because the allegations in the Complaint sufficiently alleged the elements of a fraudulent conveyance (Counts IV and V) that the court should not have granted Rocky Gorge’s Motion to Dismiss, and we remand the entire case for further proceedings. We review the grant of a motion to dismiss by the circuit court for legal correctness, and “[t]he grant of a motion to dismiss is proper if the complaint does not disclose, on its face, a legally sufficient cause of action.” Hrehorovich v. Harbor Hosp. Ctr., Inc., 93 Md.App. 772, 785 , 614 A.2d 1021 (1992) (citation omitted). We “presume the truth of all well-pleaded facts ... along with any reasonable inferences derived therefrom.” Higginbotham v. Public Serv.

Comm’n, 171 Md.App. 254, 264 , 909 A.2d 1087 (2006) (citation omitted). And “[w]e will affirm the dismissal if ‘the facts and allegations, so viewed, would nevertheless fail to afford plaintiff relief if proven.’ ” Kendall v. Howard Cnty., 204 Md.App. 440, 447 , 41 A.3d 727 (2012) (quoting Higginbotham, 171 Md.App. at 264 , 909 A.2d 1087 ), aff'd, 431 Md. 590 , 66 A.3d 684 (2013). We review de novo the portions of the trial court’s decision granting summary judgment. Wooldridge v. Price, 184 Md. App. 451, 457 , 966 A.2d 955 (2009).