Winmark Ltd. P'ship v. Miles & Stockbridge

DAVIS, Judge. This is an appeal from an April 27, 1995 Memorandum Opinion and Order of the Circuit Court for Baltimore City (Heller, J.) granting a motion to dismiss or, in the alternative, a motion for summary judgment. Although multiple questions ¹⁵¹ are presented for our review on this appeal, we need only address one issue, which we restate as follows: Did the circuit court err in granting summary judgment on the ground that appellants’ professional malpractice claim against appellees is barred under the doctrine of judicial estoppel? We respond to this question in the negative, and therefore, affirm the grant of summary judgment. 1 FACTS This appeal involves a borrower’s claim of legal malpractice resulting from a law firm’s dual representation of the borrower and lender during loan restructuring or “workout” negotiations for two commercial loans.

Appellants are WinMark Limited Partnership (WinMark), Jay A. Winer (Winer), and Mark Sapperstein (Sapperstein). Winer and Sapperstein are WinMark’s general partners. Appellees are the law firm of Miles & Stockbridge (firm) and two of the firm’s attorneys and principals, Richard E. Levine (Levine) and Jeffrey H. Seibert (Seibert). On September 7, 1994, appellants filed in the Circuit Court for Baltimore City a complaint against appellees for legal malpractice.

The complaint contains two counts: ¹⁵² Count I, for professional negligence, and Count II, for breach of contract. As the essential facts are not really in dispute, the following factual recitation is taken from appellants’ complaint. WinMark was formed in 1987 for the purpose of developing and managing two office buildings on two adjoining parcels of land—the “front” parcel and the “back” parcel—in Odenton, Maryland. In June 1988, WinMark borrowed $2,070,000 from Sovran Bank (bank) 2 for construction of an office building on the front parcel (the construction loan).

The building, the front parcel, and an assignment of rents were the security for the construction loan. In addition, Winer and Sapperstein personally guaranteed payment of the loan. In May 1990, in a separate transaction, WinMark borrowed $800,000 from the bank, secured by the undeveloped back parcel (the land loan). The maturity date for the land loan was May 17,1990.

The bank, however, extended the maturity date to November 16, 1991. Winer and Sapperstein were personal guarantors of the land loan as well. By a waiver dated May 15, 1990, WinMark consented to the firm representing both WinMark and the bank for the limited purpose of closing the land loan (after WinMark and the bank had already reached an agreement to all basic terms of the land loan). The waiver provided that, in the event of a default, the bank shall have the right to retain the firm in proceedings against WinMark.

In the fall of 1991, with the November 16, 1991 land loan maturity date approaching, WinMark initiated “workout” negotiations with the bank. Because WinMark was unable to pay the land loan at maturity, it requested an extension of the maturity date. In addition, WinMark desired to restructure the construction loan to take advantage of lower interest rates and to alleviate concern over WinMark’s continued ability to service the construction loan. ¹⁵³ Notwithstanding that WinMark was unable to pay the land loan at maturity and had doubts over its ability to service the construction loan, the firm represented both WinMark and the bank during the workout negotiations. Furthermore, the firm and Levine rendered legal advice to Winer and Sapperstein regarding their potential liability as personal guarantors of the loans and as general partners of WinMark.

According to appellants, the firm and Levine had a conflict because the interests of appellants and the bank were directly adverse to each other. Moreover, the firm and Levine never disclosed to appellants the possible effects of such conflict, including its affect on the firm’s duty of loyalty and confidentiality. Nor did it obtain a written waiver of the conflict after making a full disclosure. During the course of the workout negotiations, appellants supplied voluminous and detailed financial data at the bank’s request.

Specifically, on or about October 28, 1991, Winer supplied a personal financial statement (October statement) to the bank reflecting his net worth to be $2,538,000 as of September 30, 1991. The October statement included assets that Winer held jointly with his wife amounting to a value of approximately $500,000. On November 11, 1991, at the direction of the firm and Levine, Winer provided an updated financial statement (November statement) to the bank deleting those jointly held assets. By letter dated November 13, 1991, the bank, represented by the firm, advised WinMark that, as a result of the November statement, WinMark’s request for an extension on the land loan was denied.

The bank also demanded payment by the November 16, 1991 maturity date. The bank further suggested that the November statement was not consistent with financial statements submitted in 1988 at the time the construction loan was made. Appellants contend that the bank viewed the financial statement problem as an event of default. According to appellants, however, the bank had always been aware that Winer held assets jointly with his wife.

For example, prior to the settlement of the construction loan, Winer received $1,000,000 from the settlement of another ¹⁵⁴ project. As the bank was aware, Winer began to convert this cash into various investments. The bank imposed no restriction on how these investments were to be held. In fact, Winer acquired two certificates of deposit from the bank, one of which was jointly held.

Indeed, the applicable loan documents did not prevent Winer or any other guarantor from transferring assets to any other person. At this point, appellants contend that their positions and that of the bank were directly adverse to each other. In fact, the disagreement regarding the financial statements eventually resulted in litigation between appellants and the bank. The firm, however, “incredibly” continued to represent both sides, rather than immediately withdraw its representation. “More importantly, [the firm] and Levine failed to investigate and properly advocate the issues surrounding the financial statements on behalf of the [appellants].

Infact [sic], the [appellants] aver that because of the conflict of interest of [the firm] in representing both the lender and borrower at this crucial stage, it was impossible for [the firm] to render independent, professional legal representation on behalf of both the [appellants], on one hand, and the Bank, on the other hand.” According to appellants, it was imperative that the financial statement dispute be resolved promptly, because it affected the bank’s willingness to extend the land loan and to restructure the construction loan. Allegedly, the firm and Levine advised the bank that, if litigation ensued, it would discontinue representing appellants. As a result of this conflict, the firm and Levine never advised or recommended litigation alternatives to appellants as a means of resolving their dispute with the bank, such as obtaining declaratory relief on the issues of default or materiality with respect to the financial statements, or filing for Chapter 11 protection. “Ultimately, with other counsel representing the [appellants], these litigation alternatives resolved matters between [appellants] and the Bank.” Appellants point to a November 14, 1991 memorandum to file (memo) written by A. David Horseman, a vice president of ¹⁵⁵ the bank, as evidence of the firm’s inherent conflict of interest and of the firm’s failure to provide adequate representation to appellants. The memo indicated that Horseman advised Win-er by letter that all prior financial statements were incorrect because they included jointly held assets.

In addition, the memo states that Levine contacted Horseman to ask about the bank’s position, and to inform the bank that the firm would not represent appellants if the bank initiated adversarial proceedings against appellants. Moreover, the memo states that Levine instructed Winer to correct his financial statement, but that Winer “did not understand that the misrepresentation was a problem.” Appellants contend that, based on the contents of the memo, it is evident that Levine failed to advocate appellants’ position that (i) the financial statements neither aver nor deny that Win-er is the sole owner of the assets listed, (ii) the Bank was aware when it extended the financing that some of Winer’s assets were, and other assets might be, held by Winer jointly with his wife, (iii) the stocks were not acquired until after the loans were made, and the Bank was previously made aware of how these assets were held, (iv) there are no restrictions preventing Winer, as a guarantor, from transferring assets, (v) the Bank’s Construction Loan was adequately collateralized, and (vi) because Winer continued to have significant other assets, even assuming, arguendo, that the financial statements submitted to the Bank in 1988 omitted to clarify jointly held assets, such omission does not constitute an event of default under the applicable loan documents and is not material. Moreover, according to appellants, when a default under the land loan was imminent, the firm did not represent the bank exclusively pursuant to the May 15, 1990 waiver, but, instead, chose to continue representing both parties—even though the firm’s loyalties clearly resided with the bank. “The failure by [the firm] and Levine to zealously represent the [appellants] is further evidenced by the fact that, subsequent to the Bank’s November 13, 1991 letter advising [appellants] that the Land ¹⁵⁶ Loan would not be extended, [the firm] and Levine continued to represent [appellants] but failed completely to take any meaningful action whatsoever.” Essentially, appellants complain that the firm and Levine never advised of litigation alternatives, never advocated appellants’ position with respect to the financial statements, never contacted appellants to develop a strategy or proposal for dealing with the bank, and never conducted meetings with the bank to attempt to resolve the issues. “Clearly, [appellants] were deprived of independent and zealous representation____ [Appellants] aver that if [appellees] had properly advocated and advanced their position regarding the financial statements, the [appellants] and the Bank would likely have been able to resolve matters amicably and quickly.” On November 16, 1991, the land loan matured without a resolution of many of the issues existing between appellants and the bank. During this time, the firm continued to represent both parties.

After Winer told Levine in early December 1991 that it was improper for the firm to continue to represent both parties, the firm and Levine eventually withdrew their representation of appellants, but continued to represent the bank through Seibert. 3 According to appellants, appellees continued to represent the bank in the same matter without obtaining WinMark’s consent. It is WinMark’s position that the firm’s right to represent the bank, as reserved in the May 15, 1990 waiver, was relinquished when the firm elected to represent both parties after a default became imminent. “Represented by [the firm] and Seibert, the Bank became aggressive and hostile towards the [appellants].” The bank refused to consider any refinancing of the land loan and refused to restructure the construction loan unless certain conditions were met. The conditions were that WinMark ¹⁵⁷ immediately pay off the land loan, pledge an additional $500,-000 of collateral, establish a $200,000 cash escrow account, and sell the back parcel with the proceeds to be applied to the construction loan. During this time, appellants remained current under the construction loan. “Given the circumstances, it is evident that the Bank, represented by the [appellees], was using the unresolved issue concerning the financial statements to extract substantial payments and concessions from the [appellants] on behalf of the Bank as part of a scheme to intimidate the [appellants].” On January 8, 1992, the bank allegedly offered appellants two alternative proposals to resolve all outstanding issues regarding the loans.

In general, these proposals were: (1) the bank would restructure the construction loan at a market interest rate and extend the maturity for two years in exchange for $1,000,000 in additional collateral plus a lien on the back parcel; or (2) the bank would hold WinMark to the existing high-interest construction loan, notwithstanding the bank’s claim of default relating to the financial statements, in consideration of payment of the $300,000 land loan. 4 On January 24, 1992, WinMark accepted the second alternative plan, thereby apparently resolving all issues between the parties. Three days later, notwithstanding WinMark’s acceptance of the bank’s proposal and its compliance with the terms thereof (including paying off the $300,000 land loan), the bank, with appellees as counsel, notified WinMark that it considered WinMark to be in default of the construction loan by reason of the financial statement problem. The bank further informed WinMark that immediate legal action would be commenced unless appellants made certain other concessions. As a result of the bank’s failure to honor the terms of the settlement, appellants sought a preliminary injunction against the bank in the Circuit Court for Anne Arundel County.

By order dated February 26, 1992, the circuit court enjoined the ¹⁵⁸ bank from exercising its default remedies under the construction loan. Subsequent to this litigation, the bank claimed that it was entitled to attorney’s fees in excess of $200,000. Win-Mark denied that the bank was entitled to such fees in connection with WinMark’s successful litigation. The disagreement over the attorney’s fees ultimately prevented the bank and WinMark from agreeing on the terms of a refinancing arrangement for the construction loan.

Consequently, on July 20,1993, WinMark was forced to file Chapter 11 bankruptcy. On March 14, 1994, the bankruptcy court entered an order confirming WinMark’s plan of reorganization. Under the terms of the reorganization plan, WinMark was required to pay the bank approximately $300,000 in settlement of late fees, default interest, attorney’s fees and other charges. Appellants allege that appellees’ dual representation violated several rules of professional conduct.

They charge that appellees never obtained appellants’ consent for such dual representation, and were motivated by a desire to maximize firm revenues. Appellants further contend that the firm and Levine improperly used confidential information obtained from appellants in representing the bank against appellants. As a result of appellees’ conduct, “the [appellants] were deprived of the right to zealous representation and confidential communications were compromised.” In Count I of their complaint (professional negligence), appellants repeated many of the above assertions and alleged that appellees’ conduct caused the bank to seek additional concessions and collateral from appellants after the parties purportedly settled matters. In addition, appellants alleged that “[a]s a result of the negligent and malicious conduct of each of the [appellees], the [appellants] have suffered significant damages, including, without limitation, damages arising out of the legal proceedings which were required to remedy the harm caused by [appellees’] tortious conduct, as well as significant additional sums which were required to be paid to the Bank and others to remedy the harm caused by [appel ¹⁵⁹ lees].” Appellants demanded compensatory and punitive damages.

In Count II of their complaint (breach of contract), appellants alleged that appellees’ foregoing acts of misconduct amounted to a breach of the contract between the parties and have caused appellants to “have suffered significant damages, including, without limitation, damages arising out of the legal proceedings which were required to remedy the harm caused by [appellees’] breach, as well as significant additional sums which were required to be paid to the Bank and others to remedy the harm caused by [appellees].” Appellants demanded compensatory damages for the alleged breach of contract. In addition to the allegations contained in the complaint, the record reveals two other pertinent facts. One, the parties agree that, during the course of the bankruptcy proceedings, WinMark never listed its malpractice claim against appellees as an asset in its Disclosure Statement and schedules submitted under oath to the bankruptcy court. For example, on the personal property schedule, under the category “Other contingent and unliquidated claims of every nature,” the word “None” appears.

Thus, the bankruptcy court and the creditors were unaware that this potentially valid asset existed. Two, following the bankruptcy court’s confirmation of the reorganization plan, each of appellants and the bank entered into a General Release, the pertinent provisions of which read: The term “Releasees” shall mean, individually and collectively, (i) the Lender, (ii) the Lender’s predecessors, successors, subsidiaries, affiliates, assigns and parent corporations, (iii) the Lender’s officers, managers, directors, shareholders, agents, attorneys, representatives and employees, but only in their respective capacities as such.... 1. The Releasors hereby release and forever discharge the Releasees, jointly and severally, from, in respect of, or in relation to any and all manner of actions, causes of action, suits, ... of any kind whatsoever.... ¹⁶⁰ Appellees responded to appellants’ complaint with a document styled as a “Motion to Dismiss.” Appellees presented several arguments in support of their motion. Among them were the following: (1) appellants’ claims are barred by the General Release; (2) appellants’ claims are barred by judicial estoppel; (3) appellants’ claims are barred by their prior consent to appellees’ dual representation; (4) appellants failed to allege sufficient facts to support a demand for punitive damages; and (5) appellants failed to allege any facts demonstrating a causal connection between appellees’ allegedly wrongful conduct and alleged damages.

On April 27, 1995, the circuit court issued a written Memorandum Opinion and Order granting the motion and entering judgment in appellees’ favor. The circuit court’s order was based on three grounds. First, the circuit court determined that, under the plain language of the General Release, appellants released appellees from all claims of liability. Second, the circuit court ruled that appellants’ claim against appellees for professional malpractice was barred under the doctrine of judicial estoppel.

In this regard, the circuit court reasoned that, because WinMark failed to disclose its claim against appellees in the schedules and statements filed with the bankruptcy court, appellants were estopped from asserting the claim in the current action. Third, the circuit court dismissed appellants’ complaint with respect to punitive damages because it found no allegations giving rise to the standard of “actual malice.” Finally, in concluding, the circuit court stated: [Although this Court finds no need to make a decision on [appellees’] contention that no act on their part caused any damages to [appellants], there is very little in the pleadings that indicate[s] any damage to [appellants] caused by the allegations in the Complaint. It is undisputed that the whole thrust of this Complaint is that [appellants] believe they did not receive zealous representation beginning mid-November, 1991. However, within three to four weeks they had already retained new counsel, at the request of the [appellees].

The decisions regarding litigation and bank ¹⁶¹ ruptcy that they now indicate [appellees] should have brought to their attention were exercised by new counsel. In regard to the Land Loan, it is undisputed that the Bank called the Land Loan when it was due, and despite the advocacy of new counsel, the Bank ultimately decided on January 27, 1992 that it considered WinMark in default of the Construction Loan. It is difficult to discern what actions of the [appellees] harmed the [appellants] during that small window of time between mid-November and mid-December, 1991. However, the Court need not decide the damage issue in view of its other rulings.

(Footnote omitted). From this order, appellants appeal to this Court. DISCUSSION I Before addressing the merits of this appeal, it is necessary to determine the exact nature of the circuit court’s rulings contained in its written Memorandum Opinion and Order. As noted above, on this appeal, we only are concerned with the circuit court’s determination with respect to the doctrine of judicial estoppel.

This matter is not readily apparent, because the circuit court stated that it was granting both a motion to dismiss and/or a motion for summary judgment. Upon review of the Memorandum Opinion and Order, we hold that, when the circuit court ruled that appellants’ claim for professional malpractice was barred under the doctrine of judicial estoppel, the circuit court granted summary judgment in appellees’ favor. This is because the circuit court necessarily considered matters beyond the pleadings when it determined that appellees were entitled to judgment as a matter of law. See Hrehorovich v. Harbor Hosp.

Ctr., 93 Md.App. 772, 782-85 , 614 A.2d 1021 (1992). Thus, even though styled “Motion to Dismiss,” appellees’ motion sought summary judgment as a matter of law based on the doctrine of judicial estoppel because, under that theory, it was necessary for the circuit court to look beyond ¹⁶² the complaint. “If, on a motion to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 2-501____” Maryland Rule 2-322(c) (1996). Under Maryland Rule 2-501(a), a party is permitted to “file at any time a motion for summary judgment on all or part of an action on the ground that there is no genuine dispute as to any material fact and that the party is entitled to judgment as a matter of law.” In reviewing a trial court’s grant of summary judgment, an appellate court is required to determine whether the trial court’s ruling was legally correct. Nationwide Mut.

Ins. Co. v. Scherr, 101 Md.App. 690, 694 , 647 A.2d 1297 (1994). This Court reviews the same material from the record and decides the same legal issues as the circuit court. Id. at 695 , 614 A.2d 1021 .

II The circuit court correctly granted summary judgment on the ground that appellants’ professional malpractice claim against appellees is barred under the doctrine of judicial estoppel because appellants failed to disclose this claim on the schedules and the Disclosure Statement filed with the bankruptcy court. The doctrine of judicial estoppel embodies the principle that a party should not be permitted to adopt or assume inconsistent positions during the course of litigation. In this State, the doctrine of judicial estoppel has not been the subject of extensive appellate court analysis. This is not to say, however, that Maryland courts have totally ignored the doctrine.

The Court of Appeals, for example, long ago stated: If parties in court were permitted to assume inconsistent positions in the trial of their causes, the usefulness of courts of justice would in most cases be paralyzed; the coercive process of the law, available only between those who consented to its exercise, could be set at naught by all. But the ¹⁶³ rights of all men, honest and dishonest, are in the keeping of the courts, and consistency of proceeding is therefore required of all those who come or are brought before them. It may accordingly be laid down as a broad proposition that one who, without mistake induced by the opposite party, has taken a particular position deliberately in the course of litigation, must act consistently with it; one cannot play fast and loose. Kramer v. Globe Brewing Co., 175 Md. 461, 469 , 2 A.2d 634 (1938) (quoting Bigelow on Estoppel (6th ed.) at 783, and citing Ohio & Mississippi Railway Co. v. McCarthy, 96 U.S. 258 , 24 L.Ed. 693 (1878)).

See also Major v. First Va. Bank, 97 Md.App. 520, 539 , 631 A.2d 127 (1993) (“appellants ... are not playing so ‘fast and loose’ as to require the application of judicial estoppel.”). Billman v. State Deposit Ins. Fund Corp., 86 Md.App. 1 , 585 A.2d 238 (1991), is, perhaps, the best example of the application of the doctrine of judicial estoppel in Maryland.

In Billman , appellees filed two lawsuits (the “first” and “second” suit), in which appellants were included among the defendants. Id. at 18-19 , 585 A.2d 238 . Subsequently, appellees sought to consolidate the cases pursuant to Maryland Rule 2-503. Id. at 19 , 585 A.2d 238 .

Appellants strongly opposed the motion to consolidate, arguing that the two cases involved “ ‘entirely separate and discrete transactions’ and that there were no common questions of fact or law.” Id. Evidencing their vigorous opposition to consolidation was appellants’ assertion that, in seeking consolidation, appellees were “ ‘attempting to pound square pegs in round holes.’ ” Id. Appellants successfully convinced the trial court not to consolidate the cases. The first case went to trial, and the jury returned a verdict in favor of appellees.

Id. at 20 , 585 A.2d 238 . In the second suit, the trial court entered a default judgment against appellants. Id. at 8, 20 , 585 A.2d 238 . On appeal from the default judgment, appellants argued, among other things, that the second case should have been dismissed under the doctrine of res judicata because the claims in the second case could have ¹⁶⁴ been litigated in the first case.

Id. at 20-21 , 585 A.2d 238 . After reciting the above passage from Kramer , we determined that appellants were estopped from relying on this argument in light of their having successfully convinced the trial court not to consolidate the second case with the first case. Id. Although the aforementioned cases provide a basic understanding of the doctrine of judicial estoppel, those cases do not deal specifically with the operation of judicial estoppel under the facts of the instant case.

The parties do not direct us to, nor have we found, any reported Maryland cases addressing the doctrine of judicial estoppel in the specific context of a party failing to disclose a claim in bankruptcy court proceedings, and then, subsequent to the bankruptcy proceedings, attempting to assert that claim anew. We shall examine cases from other jurisdictions addressing the issue under facts similar to the instant case. The circuit court heavily relied on Southmark Corp. v. Trotter, Smith & Jacobs, 212 Ga.App. 454 , 442 S.E.2d 265 (1994), in granting summary judgment in favor of appellees. The facts of Southmark are strikingly similar to the facts of the instant case.

In Southmark, the trial court, in a legal malpractice action, granted the attorneys’ motion for summary judgment based on the client’s failure to identify its malpractice claim against the attorneys in the client’s prior Chapter 11 bankruptcy proceeding. Id. at 266. The Court of Appeals of Georgia affirmed the grant of summary judgment. Id. at 267.

In so doing, the court stated that the doctrine of judicial estoppel is designed to prevent the use of intentional self-contradiction as a means of obtaining an unfair advantage. Id. at 266-67 (quoting Allen v. Zurich Ins. Co., 667 F.2d 1162 ,. 1167 (4th Cir.1982)). Significantly, the court explained: Compliance with disclosure requirements is essential to maintaining a bankruptcy case.

In the light of the stringent' disclosure requirements under Chapter 11, the failure to disclose such information is viewed as amounting to a denial that such claims exist. This de facto denial triggers the application of several types of issue preclusion to bar subsequent attempts to prosecute such actions.... there was no ¹⁶⁵ reference to any claim against [the