Richman v. FWB Bank

HOLLANDER, Judge. The protracted history of this case stems from a 1989 loan agreement between llene and Edward Richman (the “Rich-mans”), appellants, and FWB Bank (“FWB” or the “Bank”), appellee. 1 The dispute spawned extensive litigation in federal and State courts. In particular, we focus on an opinion and order dated February 24, 1997, issued by the Circuit Court for ¹¹⁴ Montgomery County. Based on the doctrine of res judicata, the circuit court granted summary judgment in favor of appellees FWB, Joseph Betz, and Leonard Sloan, and granted a motion to dismiss filed by the other appellees.

In analyzing whether the circuit court was legally correct, we must necessarily consider several opinions and orders issued by the United States Bankruptcy Court and the United States District Court, both for the District of Maryland. Appellants present several questions for our review, which we have combined and reformulated: I. Did the circuit court err in determining that appellants’ State law claims were barred by the doctrine of res judicata?

II

Did the circuit court err in determining that the bankruptcy proceeding had a preclusive effect upon the circuit court proceeding when the complaint for turnover was not a “core” proceeding?

III

Did the circuit court err in concluding that appellants were in privity with the Chapter 7 bankruptcy trustee for purposes of analyzing the preclusive effect of the bankruptcy proceeding? For the reasons set forth below, we answer Question I in the affirmative. Therefore, we need not address the remaining questions. Accordingly, we shall reverse the judgments and remand for further proceedings.

FACTUAL SUMMARY 2 On March 7, 1988, llene Richman contracted to purchase over nine acres of land in Haymarket, Virginia for commercial real estate development. She sought to procure financing for the project from FWB. 3 On September 22, 1989, the Rich- ¹¹⁵ mans entered into a loan agreement (the “Loan Agreement”) with FWB, by which the Bank agreed to lend appellants $500,000.00 (the “Loan”) for an eighteen month term. The Loan was evidenced by a Deed of Trust Note (the “Note”) dated September 22, 1989, and was secured by a Deed of Trust and Security Agreement of the same date. The Note was to mature on March 15, 1991, but it contained an extension clause that provided: (c) The Maturity Date may be extended for an additional six (6) month period provided Borrower is not in default hereunder and further provided Borrower notifies Note-holder in writing requesting such extension of the Maturity Date and pays Noteholder an extension fee equal to one percent (1%) of the sum of the outstanding principal balance at least thirty (30) days prior to the Maturity Date.

In the fall of 1990, Betz, a loan officer for FWB, allegedly informed Ms. Richman that FWB had determined not to extend the Loan Agreement, which appellants considered an anticipatory breach of contract. Nevertheless, appellants negotiated with FWB for an extension of the Loan Agreement and, in early 1991, Betz advised Ms. Richman that FWB would agree to extend the Loan, but only if the Richmans pledged additional collateral as security, reduced the size of the Loan, and established an interest reserve account. The collateral was to include the hypothecation of appellants’ Shearson, Lehman Brothers, Inc. (“Shearson”) stock account (the “Shearson Account”), the condominium of appellants’ son, and appellants’ interest in a limited partnership. Appellants agreed to the use of these assets as collateral for the extension of the Loan.

In accordance with the parties’ agreement to extend the Loan, appellants executed a document entitled “MODIFICATION AND RESTATEMENT OF DEED OF TRUST ¹¹⁶ NOTE” (the “Modification Agreement”) on or about May 1, 1991. 4 Pursuant to the Modification Agreement, appellant paid $25,000.00 toward the principal balance of the Loan, and the Loan was restated at $448,585.05. The terms included a maturity date of March 1, 1992 and an extension clause. At closing, appellants also executed the Hypothecation Agreement providing for a pledge of their Shearson Account in FWB’s favor to the extent of $125,000. At the time, appellants’ Shearson Account contained stocks, bonds, and a small amount of cash; the net value of the assets in the account apparently exceeded $180,000.

Appellants also deposited $50,-000.00 in an interest reserve account, from which FWB was to withdraw monthly interest payments. With regard to the Shearson Account, FWB prepared the Hypothecation Agreement, which stated, in part: In consideration of and to induce FWB Bank (the “Bank”) to extend the Maturity Date of that certain loan in the amount of Four Hundred Forty-Eight Thousand Five Hundred Eighty-Five Dollars and Five Cents ($448,585.05) (the “Loan”) to Edward Richman and llene H. Richman (hereinafter collectively called the “Borrower”), and to partially release that certain [D]eed of Trust and Security Agreement, dated September 22, 1989, as modified, securing the Loan, the Borrower hereby: 1. pledges with the Bank and grants the Bank a security interest in the property described in Exhibit A attached hereto ... as security for the payment of all indebtedness ... of the Borrower to the Bank.... Exhibit A provided: All of the Borrower’s right, title and interest in and to any amounts on deposit in the account held by the Borrower with Shearson Lehman Brothers, Inc. designated Account ¹¹⁷ No. 6282588026038, together with all interest now or hereafter earned thereon and the proceeds thereof, to the extent of $125,000.00. The Hypothecation Agreement also included a one page acknowledgment to be executed by Shearson.

Although the Hypothecation Agreement was executed by appellants and the Bank promptly sent it to Shearson for signature, Shearson never executed the acknowledgment, because it had an internal policy not to hypothecate such accounts in favor of any bank. One of the central disputes in this case concerns the parties’ knowledge of Shearson’s policy, with each side claiming ignorance for itself but insisting that the other side knew of the policy before commencing or consummating the negotiations to modify the Loan Agreement. Appellants allege that, prior to their execution of the Modification Agreement, FWB learned of Shearson’s policy and deliberately concealed it from appellants. The Richmans maintain that appellees engineered appellants’ default by fraudulently inducing them to agree to the modification on terms that appellees knew the Richmans could not satisfy.

Conversely, appellees assert that the Rich-mans fraudulently induced FWB to extend the Loan and release its lien on a portion of the Virginia property, by agreeing to provide the Shearson Account as collateral, knowing that Shearson would not abide by the Hypothecation Agreement. The interest reserve account, opened pursuant to the Modification Agreement, was quickly depleted. Further, when appellants failed to make payments of principal and interest due on the Loan balance for December 1991 and January 1992, FWB was unable to obtain the assets in the Shearson Account that were the subject of the Hypothecation Agreement. Consequently, in January 1992, the Bank called the Loan.

The acceleration of the Note obligated appellants immediately to pay all principal, interest, and other fees due on the Note. Appellants contend that “[t]his scenario ultimate ¹¹⁸ ly led to the bankruptcy of the Richmans,” because it precipitated their “financial collapse.” On January 29, 1992, FWB instituted suit in the Circuit Court for Montgomery County (“Suit I”) against the Rich-mans, alleging breach of contract, fraud, and default on the Note. FWB also filed an “Application for Writ of Attachment Before Judgment.” On the same date, the circuit court issued a Writ of Garnishment Before Judgment against the Shearson Account (Hyatt, J.). Thereafter, on February 27, 1992, the debtors moved to dissolve the garnishment.

At a hearing on March 12, 1992, the circuit court (Cave, J.) indicated that it had “serious problems with the precise animal we have ridden in on the Court today.” Nevertheless, the court determined not to dismiss the garnishment. Instead, it converted the garnishment to an ex parte injunction that appellants could then move to vacate. Prior to filing their answer to Suit I, appellants filed a voluntary petition for bankruptcy on May 29, 1992, in the United States Bankruptcy Court for the District of Maryland, under Chapter 11 of the United States Bankruptcy Code. On that same date, appellants also filed a Suggestion of Bankruptcy in Suit I, which resulted in a stay of that case.

On September 3, 1992, FWB filed an adversary proceeding (the “Discharge Action”) within the bankruptcy proceeding, by which it sought to preclude the discharge of appellants’ debt, pursuant to 11 U.S.C. § 523 (a)(2)(A). 5 The facts alleged by FWB in the Discharge Action were virtually identical to those alleged by it in Suit I. In sum, the Bank contended that appellants had fraudulently induced FWB to enter into the Modification Agreement, knowing that Shearson would not honor the Hypothecation Agreement. ¹¹⁹ The bankruptcy court (Derby, J.) granted appellants’ motion to lift the automatic stay with respect to Suit I on December 22, 1992, so that appellants could proceed in State court with their lender liability claims. Appellants immediately filed their answer to Suit I, along with a counterclaim against FWB and a third party complaint against Betz and Sloan 6 (hereinafter, we shall refer to these claims collectively as a “counterclaim”; any reference to Suit I will hereinafter also include the counterclaim). The Richmans alleged that FWB breached the original Loan Agreement by refusing to honor the contractual terms providing for an extension. 7 Moreover, they claimed that appellees fraudulently induced them to enter the Modification Agreement. In this regard, they asserted that appellees knew that Shearson would not agree to the Hypothecation Agreement, and failed to disclose this information to appellants.

Appellants also filed a five-count counterclaim in the Discharge Action (the “federal counterclaim”). The first four counts of the federal counterclaim were identical to the counterclaim lodged by appellants in Suit I. 8 Count I alleged ¹²⁰ breach of contract with respect to the Loan Agreement. Appellants asserted a claim for fraud in Count II. Count III alleged a violation of Maryland Code, Financial Institutions Article.

In Count IV, appellants asserted a claim for tortious interference with economic relations. Count V was based on federal law, and alleged a claim of discrimination in violation of a Equal Credit Opportunity Act, 15 U.S.C. § 1691 (c). On March 4, 1993, the bankruptcy court (Derby, J.) held a hearing on four pending motions, including the Richmans’ motion for summary judgment as to the Discharge Action and FWB’s motion to dismiss the federal counterclaim. When the court reconvened on April 22, 1993, to deliver an oral opinion, it granted summary judgment in favor of appellants with respect to the Discharge Action, finding no basis for the fraud claim asserted by the Bank.

With respect to Count V of the Richmans’ federal counterclaim, the bankruptcy court ruled that it was untimely filed. Further, the court said: We are then left with an adversary proceeding that is no longer founded on federal law or on the Bankruptcy Code, but rather has four counts of a counter-complaint based on state law. This complaint is also pending in the state courts and this Court has previously granted a Motion for Lift Stay in order to allow the state court proceeding to proceed in the Circuit Court for Montgomery County. The remaining counts relevant here to this adversary [proceeding] are the counter-claims for anticipatory breach of contract; fraudulent inducement; the Maryland Financial Institutions Article for prohibitive [sic] activities of anti ¹²¹ competative, unfair and deceptive practices; and Count 4, for intentional interference with business relations.

We’re dealing with state law cause[s] of action. We’re dealing with theories under state law which the state court is both more familiar with and better able to deal with. There is a pending action and this Court has granted relief from stay to allow that pending action to go forward. The rights of the parties can be fully litigated before the state court.

Consequently, with respect to these remaining four counts of the counter-claim — these four state law causes of action, this Court will abstain and not 'tule on those counts and will defer to the state court for resolution of those particular issues as well as any state law fraud issues. Since what I have ruled upon is the fraud necessary to establish the cause of action under Section 523(a)(2)(A) of the United States Bankruptcy Code. Having acted on the federal causes of action and having abstained with respeet to the state law claims, I will based on the abstention dismiss the counter-claims. Thus concluding this case as far as the Bankruptcy Court is concerned.

(Emphasis added). On the same day, April 22, 1993, Judge Derby signed three separate orders that are of particular importance. In one, the court granted appellants’ motion for summary judgment as to FWB’s Discharge Action, and dismissed the Discharge Action. In another, the bankruptcy court dismissed Count V of appellants’ federal counterclaim, on the ground that it was barred by the statute of limitations.

That order also expressly provided: “[The] court conclud[ed] ... that the court should abstain from the remaining State law counts.... ” Finally, Judge Derby entered an order dismissing the first four counts of appellants’ federal counterclaim in the Discharge Action, without prejudice. The order said, in pertinent part: ¹²² [N]o counts [of the counterclaim] under federal law remaining, the only remaining matters being Counts I through IV of the counterclaim under State law, the stay having been lifted to allow State case to proceed, the [court] having concluded it should abstain in favor of the pending State court proceeding as to the State law counts. Ordered, That as to Counts I through IV of the counterclaim, this court abstains, and this adversary proceeding is hereby dismissed. On April 23, 1993 — -just one day after the bankruptcy court delivered its oral opinion dismissing appellants’ federal counterclaim — the Richmans filed an adversary action within the bankruptcy proceeding.

Styled a Complaint for Turnover (the “Turnover Action”), appellants named both FWB and Shear-son as defendants in an action. Alleging that the Shearson Account was property of the estate, they sought to have the proceeds of the Shearson Account turned over to the bankruptcy estate, to be used for payment of appellants’ creditors. Appellants claimed that “FWB never had a perfected security interest in the Shearson account and the Shearson Lehman account is not FWB collateral.” In addition, in paragraph 12, the Richmans specifically referred to the bankruptcy court’s ruling of April 22, 1993, in which it determined that appellants had not committed fraud. By Consent Order, Shearson was dismissed as a party after remitting $113,409.23 to the registry of the bankruptcy court on August 20, 1993.

In its amended answer and counterclaim filed in the Turnover Action, FWB claimed that it had a perfected security interest in the proceeds of the Shearson Account as of May 15, 1991, when Shearson received the Hypothecation Agreement. Alternatively, the Bank claimed it had such an interest as of January 31, 1992, when Shearson was served with the Writ of Attachment issued by the circuit court. The parties subsequently filed cross motions for summary judgment in the Turnover Action. As best we can determine from excerpts in the Record Extract, FWB opposed appel ¹²³ lants’ motion on grounds that seemingly conflict with the position it asserts before us and that it advanced to the circuit court in regard to the motion for summary judgment now in issue.

The Bank urged the court not to proceed until Suit I was resolved, stating: The Richmans sought and obtained relief from the automatic stay to pursue the Circuit Court of Montgomery County action giving rise to the attachment of the Shearson Account. Until su£h time as there is a determination in the Circuit Court, any action with regard to the Shearson Account in this Court is premature. The Richmans themselves sought to have this dispute adjudicated in the Circuit Court for Montgomery County and, therefore, have voluntarily subjected themselves to the jurisdiction of that court for the purposes of determining the relative claims associated with the Shearson Account. Until there has been a final adjudication in the Circuit Court, no action can be taken with the Shearson Account.

(Emphasis added). Judge Derby agreed with FWB. He denied the motions in the Turnover Action in a Memorandum Opinion of February 23, 1994. There, Judge Derby reiterated that the bankruptcy court would “abstain[] from hearing this matter until after the litigation between the parties now pending in the Circuit Court for Montgomery County, Maryland is concluded.... ” (Emphasis added).

Interestingly, the bankruptcy court revisited the history of the proceedings in its opinion. The court noted that it had granted relief from stay so that the Richmans could “file and prosecute to judgment [in State court] a multi-count counterclaim against FWB bank and a third party complaint.” The court also explained that it had previously dismissed as unfounded FWB’s complaint seeking to prevent appellants’ discharge based on fraud. Additionally, the court recounted that, in the Discharge Action, it had dismissed the one count of the Richmans’ federal counterclaim that was based on federal law, and then “abstained from the four remaining State law causes ¹²⁴ of action alleged in Debtors’ counterclaim in favor of the pending action in the Circuit Court for Montgomery County.” As to the particular motions that were then before him in the Turnover Action, Judge Derby said: Debtors argue the court’s prior ruling, namely, that granted Debtors summary judgment because FWB Bank had failed to show the present intent to defraud required to deny dischargeability under Section 523(a)(2)(A) of the federal Bankruptcy Code, constitutes law of the case that an attachment by the State court before judgment was not justified. This argument fails to acknowledge that the attachment before judgment was issued by the State Circuit Court for Montgomery County under State law, and that this court has granted relief from the automatic stay in favor of the circuit court to determine the State causes of action between the parties.

As a matter of comity, and because this court has elected to abstain in favor of a pending case in the state courts, this court should not, and will not, meddle in the state court process. FWB Bank argues in support of its cross motion for summary judgment that it has a perfected security interest dating from when levy was made on January 31, 1992 of the attachment on original process. The attachment, it emphasizes, was treated by the circuit court as a preliminary injunction. Debtors argue that at best the lien dates from entry of the injunction after the March 12, 1992 hearing, if indeed the injunction created a lien.

Since March 12, 1992 was within 90 days before Debtors filed their bankruptcy case on May 29, 1992, it constitutes an avoidable preference. These circuit court orders were only preliminary to protect the res. This court has deferred to the circuit court to determine the State law claims. Although the bankruptcy court presently has physical custody of the account to protect it pending resolution of the State law claims, the bankruptcy court should not modify what the State court has done or be asked to overrule a State court order under ¹²⁵ State law.

The fact is that the State court did not dissolve the garnishment, but rather treated it as an ex parte injunction on the same terms. If clarification is desired, it should be sought from the Circuit Court for Montgomery County. It has revisory powers over its own orders. Further, since the Bankruptcy Court has deferred to the State courts to determine liability, it is premature to interpret the significance of the circuit court’s preliminary orders since they will be moot if Debtors prevail, and they may be subject to revision by the circuit court before it renders a final decision.

Further, it was Debtors that requested the bankruptcy court to abstain in favor of the circuit court to determine the nonbankruptcy causes of action. Therefore, it would be unseemly to allow Debtors to alter their chosen forum at this juncture to pursue some perceived benefit. The parties also disagree on the legal effect of the Hypothecation Agreement covering the Shearson Account. Again, that issue should await the circuit court’s disposition of the case pending before it.

When the State court has made its rulings on the claims of the parties against each other under State law, the bankruptcy court will then apply those rulings to complete the administration of this estate under bankruptcy law. (Emphasis added). In a separate Order of February 23, 1994, Judge Derby stated, in part: ORDERED, that this Court abstains from hearing this matter until after the litigation between the parties now pending in the Circuit Court for Montgomery County, Maryland is concluded; and it is further ORDERED that this order is without prejudice to the reactivation of this adversary proceeding, including the filing of new motions for summary judgment, after the litigation between the parties now pending in the Circuit Court for Montgomery County, Maryland has concluded. (Emphasis added).

Subsequently, on April 29, 1994, appellants moved for partial summary judgment as to FWB’s fraud claim in Suit I, on ¹²⁶ the ground that the bankruptcy court had determined that there was no evidence of fraud by appellants concerning the loan transaction. They also sought to dissolve the injunction of March 12, 1992, as to the Shearson Account. After a hearing in circuit court, Judge Thompson issued a well reasoned Memorandum Opinion and Order dated July 29, 1994. Based on collateral estoppel, he entered partial summary judgment in favor of the Richmans as to FWB’s fraud claim based on the Hypothecation Agreement.

The circuit court said, in part: The Court is satisfied that Judge Derby rendered a final decision on the fraud issue [in his April 22, 1993 ruling]. Judicial economy will best be served by preventing relitigation of an issue competently decided in a prior adjudication. Upon consideration of the Defendants’ motion, the arguments of counsel, and Judge Derby’s oral opinion, the Court finds that the elements of collateral estoppel are satisfied and that the issue of intent to deceive, which was not factually supported in the bankruptcy proceeding, will bar [FWB] from proceeding with its common law fraud claim in this Court. The circuit court also granted appellants’ motion to dissolve the garnishment, noting that FWB had failed to furnish the requisite affidavit or bond.

Although the court indicated that it was not clear why the attachment before judgment had been converted to an ex parte injunction on March 12, 1992, it nonetheless was satisfied that it had expired. Therefore, it also granted appellants’ motion to dissolve the injunction. In the meantime, in May 1994, FWB filed another adversary proceeding in bankruptcy court, seeking to enjoin the debtors from proceeding with the State litigation pending confirmation of FWB’s proposed plan of reorganization. Although an evidentiary hearing was held in bankruptcy court on June 7,1994 before Judge Keir, the record extract does not reveal the court’s disposition as to the motion. ¹²⁷ A hearing was held in bankruptcy court on August 15, 1994, before Judge Duncan Keir, concerning confirmation of the plan for reorganization and the motion to convert the case to a Chapter 7 proceeding. 9 Applying collateral- estoppel, Judge Keir rejected FWB’s claim of a lien against the Shearson Account, because of the circuit court’s disposition of the Bank’s attachment before judgment.

Nevertheless, he said: However, the separately stated issue in the adversary proceeding just enumerated that [FWB] has a lien upon the fund based upon a perfected security interest was not determined and is not precluded by the ruling of the state court. The Court finds this because first of all it was not before the state court. It was not a necessary issue raised by either party to that court for the determination of the liability arising from the alleged fraud and disposed of now as an issue, and the liability asserted generally under the notes because that liability would not rise or fall on the determination of whether there was a security interest securing in part or in whole the notes, nor raised and needed to be raised by the debtor in alleging wrongful practices by the lender. Therefore it is clear that the state court did not intend to rule on the issue and it may well be that the state court would have exceeded its jurisdiction had it done so.

The money is property of the estate to the extent of the interest of the debtor under § 541(a) of the Bankruptcy Code and absent an expressed order by this Court lifting the stay, this Court has primary jurisdiction over issues concerning estate property. I read Judge Derby’s order. What Judge Derby did in [the Turnover Action] in denying cross motions and then going further is abstain pending certain rulings by the state court. One of those rulings has occurred.

There is no [attachment before judgment]. The other ruling which could bear on this issue would be the ruling on the actual liability of the debtor to the lender. ¹²⁸ Obviously if the debtor doesn’t owe the lender any money, then the lender doesn’t have a security interest because there is nothing to secure. But I do not read Judge Derby’s order as referring to the state court the issue concerning the consensual lien rights of the parties, ie., their, in effect, ownership rights to this fund. That has not been ruled on.

There is no disposition of this issue. Accordingly, the fund remains subject to the claims of [FWB] whether they are with or without merit. (Emphasis added). On August 15, 1994, appellants’ bankruptcy case was converted to a Chapter 7 proceeding.

As a result, Michael G. Wolff was appointed as the Chapter 7 trustee, thereby succeeding appellants as the plaintiff in the Turnover Action. Moreover, the estate succeeded to the debtors’ claims against appellees. Appellants maintained, however, that their personal claims did not belong to the Bankruptcy estate. 10 The law firm of Gordon & Simmons had been approved as “Special Counsel” to appellants when they filed their State claims against FWB. When the case was converted to a Chapter 7 proceeding, they continued as Special Counsel to the Trustee; in particular they were retained to represent the estate in the State litigation.

Nevertheless, the record reveals a rather strained relationship between Wolff and Roger Simmons, Esquire. In late 1994, for example, the trustee and appellants apparently agreed to a sale of assets by the trustee to the debtors, subject to bankruptcy court approval. In the Notice of Filing ¹²⁹ Joint Motion To Authorize Sale of Assets by Trustee to Debtors, the trustee represented that the “estate is selling to the Debtors all assets EXCEPT litigation of FWB’s claim against the estate, and the Debtors’ counter-claim, pending in the Circuit Court for Montgomery County, Maryland. The Trustee believes that the Debtors’ Counter-claim against FWB is the estate’s most valuable asset.” By letter of December 23, 1994, Wolff advised Simmons that the Rich-mans’ counterclaims in Suit I were not assets to be included in the sale to the debtors.

Wolff admonished Simmons, stating: “As Trustee of the estate, I expect you to continue as its counsel and that the counterclaims will be fully prosecuted in the Circuit Court for Montgomery County. I urge you to request that the Court set a trial date in the case for the earliest possible date.” At that point, Suit I was scheduled for trial on June 19,1995. Skipping briefly ahead, when FWB and Wolff engaged in settlement negotiations, Simmons, on behalf of the Richmans, and as special counsel to the trustee, opposed the trustee’s position. As part of the negotiations, Wolff and FWB filed a joint motion on March 3, 1995 to remove Suit I from the circuit court’s trial calendar of June 19, 1995.

The court granted the motion that day, apparently because, on its face, the motion appeared to have the consent of both sides. Thereafter, appellants, through Simmons, moved to reconsider and to vacate the order granting the postponement of trial. An obviously angry Simmons detailed numerous concerns about the conduct of the trustee and FWB’s counsel. The Bank, Betz, and Sloan filed an equally vitriolic response, in which they asserted that they were “stunned at the chutzpah displayed by Roger Simmons.” Wolff replied by letter.

That did not end the matter, however; Simmons filed a reply to both. Nonetheless, the court denied appellants’ motion. Simmons also wrote to the U.S. Trustee on March 3, 1995, complaining about Wolff. In his letter, he disputed FWB’s interest in properties it was to contribute to the settlement with the trustee, such as the funds from the Shearson Account.

He also complained that Wolff sought the postpone ¹³⁰ ment of Suit I. Judge Keir later noted that, ultimately, Simmons could not represent the trustee due to a conflict of interest. Returning to our chronological review, Judge Keir conducted a status conference concerning the Turnover Action on November 3, 1994. 11 After asking opposing counsel to correct him if he was wrong, Wolff informed Judge Keir that the State court had “resolved the issue that it had to resolve which is that there was not a perfected lien against the funds, the collateral. What is left is a bankruptcy issue as to whether there is a consensual lien and whether that lien is now avoidable by the trustee to get those funds.” Judge Keir responded: “The issue of consensual lien is not before the state court action?” Wolff replied: “That’s my understanding. It has only been raised in the bankruptcy court....” Wolff apparently was referring to the fact that the State court, by that point, had decided that FWB was not entitled to the prejudgment attachment on the Shearson Account.

Indeed, Judge Keir had so noted in his oral ruling of August 15, 1994. In any event, Judge Derby had deferred to the State court all of the State claims set forth in appellants’ federal counterclaim, and they clearly had not been resolved by November 3, 1994. On January 27, 1995, appellants filed suit in the Circuit Court for Montgomery County (“Suit II”) against Joan Schonholtz, Nella C. Manes, Miriam Cutler, Thomas Howlin, and Steven Colliatie. In Count I, they alleged fraud and sought recission of the “Extension Note.” Count II claimed intentional interference with business and economic relations.

By order of the same date, the circuit court consolidated Suit I and Suit II. Judge Keir held a hearing on March 7, 1995, with regard to FWB’s renewed motion for summary judgment in the Turnover Action and the Chapter 7 trustee’s motion for summary ¹³¹ judgment in that matter. The hearing concerned the Shear-son Account, for which FWB alleged it held a perfected security interest; the trustee, as successor in interest to the debtor-in-possession, disputed FWB’s position. 12 The court articulated its understanding of the issue before it, stating: The question is at the time the hypothecation agreement was signed, and including its delivery to Shearson, was there (a) created, and (b) perfected, a security interest. Although the court indicated that appellants no longer had standing because of the Chapter 7 status of the proceedings, he permitted their counsel to argue.

The Richmans’ attorney said: First I’d like to make it clear that we’re not conceding for purposes other than this hearing on summary judgment that there was a knowing grant of security interest. The fact of whether fraud existed in the creation of that loan and the documentation of that loan was referred by this court to the state court for a determination, so that for this proceeding we have agreed that — we have stipulated that the hypothecation agreement was signed and delivered to the bank, we are not for state court purposes for the circuit court case admitting that — let me say this correctly — we are reserving our rights to argue that fraud existed in obtaining this document and therefore the document may not be enforceable. Judge Keir replied: I hear you but I don’t believe the allegation of fraud is before this Court in this adversary proceeding any longer. Now what the effect of that in the state court, I make no ruling upon.

But if memory serves me correctly, and I know there has been more than one adversary proceeding here and more than one state court suit filed, but as I ¹³² recollect the one that pertained to this Shearson account balance issue, there was an adversary filed here, money paid into the registry of the court. Judge Derby stayed further proceedings in this adversary and permitted the matter to go forward in state court for determination of the [Attachment Before Judgment] injunctive relief that had been granted in the state court stating that that was a state court order the legitimacy or survival of which should be decided by the granting court. That the state court then did and removed as a basis for the claim of lien by FWB the [Attachment Before Judgment] order. I believe that it did so finding that there wasn’t the basis of fraud necessary to get an [Attachment Before Judgment] under state law.

I’m not telling you what the — and I’m making no finding about what the length in state court of the preclusive doctrine might be. That’s not before me. There was then a hearing before this Court and this judge in which FWB, when this Court asked for a status conference because now the stay issued by Judge Derby on this adversary appeared to be satisfied in its predicate act, i.e., the state court had adjudicated that issue, FWB raised its alternative theory, if you wish to label it that, of a consensual lien — and it has been briefed before this Court by the parties — on the issue of whether the consensual lien granted prior to the [Attachment Before Judgment] action in the form of this hypothecation agreement is or is not a perfected lien which would survive the avoidance powers of the trustee under Section 544. That’s where we are today.

Again, I don’t believe that a ruling by this Court on that is (a) precluded by any further assertions of fraud which the parties may have in some state court proceeding because it has not been raised in this adversary; and secondly, I make no rulings as to what effect any ruling of this Court would have on the state court action as that would be determined by the court in the action in which preclusion would be asserted by some party, not the court whose action might be alleged to be the basis for such assertion. ¹³³ I understand you but I don’t think it’s relevant to the issue before this Court today. (Emphasis added). By order dated April 21, 1995, Judge Keir granted summary judgment in favor of FWB in the Turnover Action. The bankruptcy court determined that FWB “holds a perfected security interest in the proceeds paid by Shearson Lehman Brothers, Inc., into the registry of the United States Bankruptcy Court.” In his accompanying Memorandum Opinion, Judge Keir explained that the parties asked the court “to summarily decide whether FWB has a perfected security interest in the debtors’ account at Shearson.... ” After reviewing the procedural history of the litigation, he also noted that the “adversary proceeding was ... reactivated to decide the remaining issue, ie., does FWB Bank have a perfected consensual lien upon the funds placed in the registry of this court by Shear-son.” Citing 11 U.S.C. § 544 (a)(1), Judge Keir acknowledged that in order for FWB to have priority over a judicial lien executed on the Shearson Account at the time of the filing of the bankruptcy case, FWB had to demonstrate that it had a perfected lien against the proceeds of the Shearson Account when the bankruptcy petition was filed.

Otherwise, as the holder of an unperfected security interest, its rights would be subordinate to those of a judicial lien creditor, Maryland Code (1992 Vol.), Comm. Law Art., § 9-801(l)(b), and would not defeat the trustee’s rights under 11 U.S.C. § 544 (a)(1). Judge Keir also recognized that the Hypothecation Agreement was intended to create a security interest. See Md. Code, Comm.

Law § 9-102. Further, he found that the Hypothecation Agreement was “clearly sufficient” in its description to constitute a security agreement. Md.Code, Comm. Law, § 9-203.

Moreover, the court rejected the Rich-mans’ argument that the collateral amounted to “general intangibles,” for which a financing statement was required but not filed, because Shearson held securities in an account for ¹³⁴ the debtors. Based on Md.Code, Comm. Law, §§ 8-313, 8-321, 9-302(l)(f), and 9-304(1), Judge Keir concluded that when the Hypothecation Agreement was sent to Shearson, “notification caused a transfer of the security interest in the securities in the Shearson account to FWB and perfection of that security interest by such transfer.” The court also determined that it was unnecessary for Shearson to execute the Hypothecation Agreement in order to create a perfected security interest. Appellants and Gordon & Simmons as Special Counsel filed a motion for reconsideration of Judge Keir’s April 25, 1995 order granting summary judgment to FWB.

The Richmans asserted that Judge Keir’s decision contravened Judge Derby’s order of February 23, 1994, in which he abstained from resolving the cross motions for summary judgment in the Turnover Action, pending resolution of the State court issues. They also asserted that the bankruptcy court’s ruling was premature, because neither the circuit court nor the bankruptcy court had determined whether the Hypothecation Agreement was enforceable, and the question of its enforceability was at issue in State court. Although appellants only briefly mentioned their federal counterclaim, in the context of “a different adversary proceeding,” they omitted any specific reference to Judge Derby’s orders of April 1993. Nevertheless, they pointed out that their fraud claims were pending in State court because of Judge Derby’s rulings in both the Discharge Action and the Turnover Action.

Therefore, they urged that “the [Bankruptcy] Court cannot grant FWB’s Motion for Summary Judgment, which enforces the terms of the Hypothecation Agreement, before conducting an evidentiary hearing on the Richmans’ claim of fraud in the inducement of the Hypothecation Agreement.” In denying the motion to reconsider on July 21, 1995, Judge Keir concluded that none of the movants had standing. Nonetheless, the court proceeded to discuss the substance of the motion. In so doing, Judge Keir emphatically rejected appellants’ contentions, and sharply criticized their “gerrymandering strategy.” In particular, the court ruled that appellants’ ¹³⁵ fraud claim had been asserted for the first time and was therefore too late. The court said: The simple fact is that the estate at no time raised an issue in this adversary proceeding for turnover, that the Hypothecation Agreement was not enforceable because of an allegation of fraudulent inducement.

It cannot now be successfully raised for the first time in this suit on a motion for reconsideration. After a detailed review of the adversary file, with special attention given to the renewed motions for summary judgment, this court can find absolutely no reference by either party to the enforceability of the Hypothecation Agreement. (Footnote omitted). In his opinion, Judge Keir did not specifically address the April 1993 orders.

Nevertheless, he rejected any suggestion that appellants relied on Judge Derby’s order of February 23, 1994, as the basis for their failure to plead fraud in the Turnover Action. He said: Nowhere in the Order of February 23, 1994, is there any reference to such limitation of issues. That order abstains from hearing the adversary proceeding until after litigation between the parties pending in the Circuit Court for Montgomery County is concluded. It does not limit the scope of the adversary proceeding or any necessary legal issues to be brought in conjunction with the adversary proceeding.

Further, the court determined that the Richmans could not have relied on the February 1994 order, because it “was entered almost one (1) year after the commencement of this adversary proceeding, i.e., the complaint, and the first Motions for Summary Judgment were filed before Judge Derby’s abstention set forth in the Order entered February 23, 1994, denying Cross Motions for Summary Judgment.” Additionally, the bankruptcy court explained that, in August 1994, at the hearing on the confirmation of the plan of reorganization, appellants advised him that the circuit court had “resolved all outstanding issues in this Turnover Action,” and urged use of the Shearson Account funds for their plan. ¹³⁶ In response, the Bank noted that all issues had not been resolved. Then, “both parties agreed that the adversary-proceeding should ... go forward on [the issue of the consensual lien”]. The court maintained that when both parties agreed that no further State court action was needed in order to resolve the Turnover Action, it scheduled a status conference, which was held in November 1994. At that time, “the remaining issue of Article 8 perfection [was scheduled] for trial.” The court added: To the extent that Judge Derby’s February 23, 1994 Order contemplated that a greater determination of matters pending before the state court would occur before the turnover adversary proceeding was reactivated, the parties in August of 1994 (which then included the debtor-in-possession) and in November, 1994 (including the trustee as successor plaintiff), represented to this court that the stay/abstention of this court’s determination of the turnover action should be lifted.

Therefore, Judge Keir specifically found that “neither party assert[ed] that any further State court action need be completed before this turnover suit should be determined.... ” With respect to appellants’ failure to plead fraud in the Turnover Action, what the bankruptcy court said is especially noteworthy: [I]n the prosecution of the issue of whether or not FWB held a perfected security interest in the Shearson Account proceeds, the estate could have asserted any defense to the alleged perfected security interest. The estate raised, briefed and argued only the defense of failure to obtain and perfect a security interest under the Uniform Commercial Code but did not assert any defense that the contract was obtained by fraud. The fact that such allegation may have existed in separate state court suits pending at the same time, did not present that issue before this court, nor was that issue brought before this court by Judge Derby’s February 23, 199If Order, or precluded from being so brought as discussed above. ¹³⁷ The issue of fraudulent inducement was first alluded to in this adversary proceeding by counsel for the debtor who was permitted the courtesy of argument on the renewed Motions for Summary Judgment. At no time did the then non-party debtor ... assert [at the hearing] invalidity of the Hypothecation Agreement as an issue before this court.

Debtor simply attempted to limit the preclusive effect which this court’s order might be given in another court and in another action. Such attempted limitation of a legal doctrine of preclusion is not a substitute for raising in any fashion a potential issue concerning the determination which each party was seeking by this court. (Emphasis added) (footnote omitted). Appellants appealed Judge Keir’s denial of the motion to reconsider to the United States District Court for the District of Maryland, which affirmed.

In its Memorandum Opinion dated November 30, 1995, that court (Williams, Jr., J.) concluded, without a hearing, that appellants lacked standing to seek post-judgment relief. The court also said: In addition, the Debtors have presented no grounds for relief from the bankruptcy court’s order. They maintain that the bankruptcy court failed to consider that the Appellee held the funds pursuant to a fraudulently obtained lien. However, as the bankruptcy court noted, despite ample opportunity, the estate did not raise that argument.

Op. at 8-12. The bankruptcy court did not abuse its discretion in finding that the Debtors could not raise this argument in a post-judgment motion. Finally, the bankruptcy court did not abuse its discretion in ruling on the motions for summary judgment. Judge Stephen Derby had previously stayed resolution of the turnover action pending the action in the Circuit Court for Montgomery County, Maryland involving the Debtors’ allegations of fraud.

However, the parties later agreed that the ¹³⁸ summary judgment motions should proceed despite the" litigation in state court. (Emphasis added). Subsequently, appellants noted an appeal to the United States Court of Appeals for the Fourth Circuit, challenging the district court’s denial of their motion to intervene as a matter of right in order to appeal Judge Keir’s decision. Richman v. First Woman’s Bank, 104 F.3d 654 (4th Cir.1997).

Noting that the case was “long” and “procedurally complex,” id. at 655-56 , the Fourth Circuit determined that appellants did not satisfy the requirements for intervention of right, because they failed to submit a timely motion to intervene in the Turnover Action, and did not establish that the Chapter 7 trustee inadequately represented their interests. Therefore, the court concluded that appellants were not parties to the underlying adversary proceeding. Nevertheless, the court observed that Judge Keir did not “expressly make any findings regarding the fraudulent inducement issue,” id. at 656 , although he “implicitly” ruled that FWB had obtained a consensual lien. Id.

Thereafter, on December 8, 1995, FWB, Betz, and Sloan filed the motion for summary judgment in Suit I. Also on December 8, 1995, the remaining appellees moved to dismiss with respect to Suit II. 13 It is these motions that are at issue in this appeal. With respect to the motion for summary judgment, appellees submitted various exhibits to their comprehensive legal memorandum, including court transcripts and opinions from the bankruptcy court. Appellees argued, inter alia, that “[t]he issue [of fraud] has been conclusively decided by the Bankruptcy Court and the finding of fact by that Court has ¹³⁹ preclusive effect on this proceeding under the principles of both res judicata and collateral estoppel.” Moreover, they contended that appellants could not relitigate fraud in State court, because it was an issue they should have raised in trying to defeat the Bank’s security interest. Thus, they asserted that Judge Keir’s finding of a perfected security interest in favor of FWB as to the Shearson Account barred appellant’s State law claims.

In their legal memorandum, appellants argued: Res judicata bars the Richmans’ fraud claims in this case as that issue was conclusively decided by the Bankruptcy Court in the Turnover Action. In that case, the ultimate issue of fact that was decided was whether FWB properly obtained a security interest in the Shearson Account which is, of course, the same factual issue that is the basis for the fraud claim. The Bankruptcy Court ruled that FWB did indeed act properly. Implicit in that decision is the critical determination that no fraud was committed on the Rich-mans, an act that would have obviously invalidated the security interest in the Shearson Account.

The concept of collateral estoppel is equally applicable to the instant case. * * * The Richmans have had their “day in court” on the issue of fraud. ... It would be both inappropriate and grossly unfair to the parties in this case to have to relitigate an issue that could have been, should have been, and was required to have been raised in the Bankruptcy Court. To allow litigation of the fraud issue in the instant case would be a classic “second bite at the apple.” The third issue is the essentialness of the factual determination to the final judgment in the prior proceeding. An allegation of fraud was totally essential to a ruling from the Bankruptcy Court on the issue of whether FWB properly obtained a lien on the Shearson account.

Success on the fraud issue would have resulted in victory for the Richmans ¹⁴⁰ in the Turnover Action. Therefore, it was integral to the Bankruptcy Court’s ruling in favor of FWB that any and all possible defenses to the bank’s interest in the Shearson Account were rejected — the most critical of which would have been the allegation of fraud on the part of FWB. In their opposition, appellants cried “ambush.” They asserted, inter alia, that “the fraud claim which [appellees] seek to preclude was expressly referred to this [circuit] court for determination in a jury trial by the Honorable Judge E. Stephen Derby of the federal bankruptcy court.” Further, they argued generally that claim preclusion embraces due process notions of fundamental fairness; they did not expect the bankruptcy court to adjudicate the issue of fraudulent inducement concurrently with the security interest issue, nor did the court need to do so. Appellants also noted that it was appellees who had earlier argued that disposition of the Turnover Action was premature, because of the pending State action.

Additionally, appellants claimed that they were entitled to their day in court, because they “adhered to the direction of the bankruptcy court” and proceeded “under the express direction of the bankruptcy court to adjudicate their fraud claims in state court.” Notwithstanding the agreement of the court and all parties that the fraud claims were to be adjudicated in State court, appellants claimed that the Bank sought “to rewrite history and to blindside the Richmans____” The circuit court held a hearing on the motions on February 5, 1996. In a Memorandum Opinion and Order dated February 24, 1997 (filed March 19, 1997), the circuit court (Thompson, J.) granted appellees’ motions. The circuit court agreed with appellees that “[f]raud is clearly the linchpin of [appellants’] case,” and recognized that “[t]he crux of FWB’s motion for summary judgment is that the issue of fraud may not be litigated in the State court case because doctrines of res judicata (or claim preclusion ... ) bar such litigation.” 14 ¹⁴¹ The court rejected appellants’ argument that they were not obligated to assert fraud in the Turnover Action because, conceptually, the contention was in the nature of a “permissive” counterclaim. Employing the transaction analysis to analyze appellants’ claims, the court concluded: The court is satisfied that the Turnover action adjudicated the respective rights to the Shearson account proceeds.

The Richmans may not now challenge such an adjudication on new grounds when they had opportunity in fact to prosecute such claims in the action that resulted in the adjudication at issue. The court is satisfied that the Rich-mans are now barred from asserting their fraud claims in the Circuit Court for Montgomery County in as much [sic] as those fraud claims involve the transactions surrounding the Shearson Lehman account. (Footnote omitted). In order to understand the basis of the circuit court’s decision, which we must review on appeal, we quote at length from the thirty-two page opinion: The Richmans instituted the Turnover action.

Furthermore, the Turnover action concerned, exactly those assets that are the subject of the Bank’s alleged fraud [emphasis in trial court opinion]. Whether the Bank presents an “offensive”-type defense to that turnover claim is irrelevant to the Richmans’ obligation to forge ahead along all possible avenues to relief. To hold back any possible allegation or claim, especially concerning the specific transaction at issue in the Turnover action, only reduces the chances of securing relief on their petition. As the instigators of litigation, they do so at their peril. [T]he court is more than satisfied that the consideration of res judicata principles in connection with the facts of this case is proper.

The Richmans fall squarely within that ¹⁴² class of plaintiff s for whom the procedural system provides ample opportunity to develop all possible theories of relief. Furthermore, the claims that the Richmans are pressing all revolve around the Shearson Account. The alleged fraud is entirely entwined with the events and circumstances concerning the Shearson Account that took place between the Richmans, the Bank and the individual defendants. The loan Modification and the questioned collateral arrangements surrounding it are certainly a single transaction.

At the very least they are a series of interrelated transactions .... Finally, the entire transaction at issue, whether it be the overall Modification of the original loan agreement or the more narrow arrangement surrounding the Shearson Account, certainly is such that it may be said to form a convenient trial unit. It would make no sense to litigate in piecemeal fashion all of the different, discrete issues that surround any deal or transaction gone bad. All of the actors that took part in the transaction were the same throughout.

The series of separate deeds that comprise the transaction took place in a relatively compacted timeframe and were restricted to a single geographic area. The situation, both temporal and spatial, is a limited and discrete one. The situation thus presented is one where it is undeniable that the dealings surrounding the Shearson Account are all related in time, space, origin and motivation. The Richmans in this case were afforded a full and fair opportunity to litigate.

As outlined above, the Bankruptcy proceeding was conducted under the modern and expansive Federal Rules of Civil Procedure. The Turnover action was not a summary procedure designed' as a quick and easy substitute for “full blown” litigation. To the contrary, the Turnover action had all the characteristics of any comprehensive lawsuit; including the opportunity to assert any and all claims by the one initiating the action, the opportu ¹⁴³ nity for the one defending the action to assert any counterclaims, and the opportunity for an appeal from the final decision. In no way could the Richmans claim that they did not have full and fair opportunity. ...

The Richmans’ assertion that lack of participation and!or privity on their part dooms FWB’s res judicata defense is faulty. The Court is not persuaded that conversion of the Richmans’ bankruptcy from Chapter 11 to Chapter 7 caused the prosecution of the Turnover action to change in any way. It certainly did not cause the nature of the proceeding to change in any way that might be called fundamental. The Turnover action was instituted by the Richmans themselves under the auspices of Chapter 11.

The ultimate goal of the Turnover action was to secure the proceeds of the Shearson Account for the bankruptcy estate. This goal, the ultimate relief sought, has not changed one iota since the installation of Mr. Wolff as trustee. The relief sought is, and has remained, the same: turnover of the Shearson monies. In this case, the Richmans and the trustee had exactly the same interest in the object of the suit.

They