United States District Court, S.D. New York
December 27, 2013
In re: LAWRENCE B. SALANDER, and JULIE D. SALANDER, Debtors. WELLS FARGO BANK, NATIONAL ASSOCIATION, f/k/a Wachovia Bank N.A., Appellant,
FIRST REPUBLIC BANK and JULIE D. SALANDER, Appellees
For Appellant: Andrew B. Helfand, Jacob Ginsburg, Helfand & Helfand, New York, New York.
For Appellee First Republic Bank: J. Christopher Shore, Julie M. Winters, White & Case LLP, New York, New York.
OPINION AND ORDER
CATHY SEIBEL, U.S.D.J.
Before the Court are two related appeals of Wells Fargo Bank, National Association f/k/a Wachovia Bank, N.A. (" Wells Fargo" ). (Nos. 13-CV-2356, 13-CV-2357.) First, Wells Fargo appeals from the Bankruptcy Court's May 24, 2012 Consent Order Holding Debtor Julie D. Salander in Contempt (the " Consent Order" ). (WF Mem. ¶ 1.) Wells Fargo also appeals from the Bankruptcy Court's June 8, 2012 Memorandum Decision and June 15, 2012 Order (collectively, the " 2012 Memorandum
Decision and Order" ) prohibiting Wells Fargo from asserting a forgery claim, or any other claims belonging to the Debtors' estate, in state court. ( Id.) For the reasons that follow, the appeal of the Consent Order is DISMISSED and the 2012 Memorandum Decision and Order is AFFIRMED.
I set forth only the facts relevant to the disposition of these matters below.
A. Mortgages and Bankruptcy Proceedings
On February 27, 2003, Lawrence Salander and his wife, Julie Salander (" Ms. Salander" or " Debtor" ) (collectively, the " Debtors" ), executed a note in favor of First Republic Bank (" First Republic" ) (the " FRB Note" ) in the sum of $1,400,000 plus interest, as well as a mortgage (the " FRB Mortgage" ), which secured their obligations under the FRB note. (FRB Mem. 3.) The FRB Mortgage, which was recorded on May 13, 2003, gave First Republic a first priority mortgage on the Debtors' Millbrook, New York property (the " Millbrook Property" ). ( Id.)
Using the same Millbrook Property as collateral, on December 14, 2005, the Debtors obtained a mortgage loan from Wells Fargo, which was recorded on March 16, 2006, and another on January 19, 2007, which was recorded on February 9, 2007. ( Id.)
On November 2, 2007, the Debtors filed a joint petition for relief under Chapter 11 of the United States Bankruptcy Code. ( Id. at 4.) On April 17, 2008, the bankruptcy case was converted to Chapter 7, and on April 18, 2008, the Bankruptcy Court appointed a Chapter 7 trustee (the " Trustee" ). ( Id.) On October 31, 2008, a meeting of creditors was held pursuant to 11 U.S.C. § 341; the Debtors, Debtors' counsel, the Trustee, and counsel for First Republic attended. (WF Mem. ¶ 28.) At this meeting, the Trustee examined Ms. Salander and showed her several First Republic documents bearing a signature purporting to be Ms. Salander's -- apparently none relating directly to the FRB Mortgage on the Millbrook Property, but several relating to other loans from First Republic -- which she denied signing. ( Id. ¶ ¶ 29-32.)
B. Settlement Agreement
First Republic filed a proof of claim against the Debtors in the amount of $46,067,000, arising from the Millbrook Property mortgage and myriad other instruments, and asserting a security interest in all the personal property and assets owned by the Debtors and several of their businesses, as well as the Millbrook Property and real property located in Manhattan. (FRB Mem. 4.) After extensive negotiations, however, the parties settled, and on October 21, 2009, the Bankruptcy Court entered an order (" Settlement Order" ) approving the settlement agreement (the " Settlement Agreement" ) between First Republic and the Trustee of the Debtors' estate. (WF Mem. ¶ 42.) Although Wells Fargo had filed an objection to the Motion to Approve the Settlement Agreement in which it argued that there was insufficient disclosure, ( see id . ¶ ¶ 36-37), that objection was withdrawn prior to issuance of the Settlement Order, ( id. ¶ 36; FRB Mem. 5).
As part of the Settlement Agreement, First Republic agreed to reduce its claim and narrow the scope of its security interests in the estate's property. (FRB Mem. 5.) In exchange, the Trustee, on behalf of the Debtors, released any and all claims against First Republic " arising from or related to the Estate." ( Id.) In particular, the Settlement Agreement:
Resolve[d] all claims, demands and causes of action that may be or have been asserted, directly or indirectly, against First Republic by the [Debtors], the Trustee and the Estate . . . and releases, discharges and acquits First Republic . . . from any and all claims . . . of any kind, character, or nature whatsoever whether known or unknown, foreseen or unforeseen, liquidated or unliquidated, fixed or contingent, . . . in law, at equity, whether for tort, fraud, contract, violations of federal or state securities laws or otherwise . . . .
(App. Ex. A, at 145-46.) Neither the Debtors nor Wells Fargo appealed the Settlement Order. (FRB Mem. 5.)
C. Enforcement of the Settlement Agreement
On December 13, 2010 -- after the Settlement Order was entered and the Trustee abandoned the Millbrook Property -- First Republic initiated foreclosure proceedings. ( Id.) On February 7, 2011, Ms. Salander filed a verified answer with cross-claims and counterclaims alleging that the documents underlying First Republic's lien and mortgage on the Millbrook Property were fraudulent and thus that the FRB Mortgage was void ab initio . ( Id.)
First Republic subsequently brought a motion before the Bankruptcy Court asking the Court to enforce the Settlement Order by precluding such claims, which it argued had been property of the estate and released by the Settlement Agreement. ( Id. at 6.) Both Ms. Salander and Wells Fargo opposed First Republic's motion, and Wells Fargo cross-moved to, among other things, vacate or modify the Settlement Order pursuant to Rule 60(b) of the Federal Rules of Civil Procedure. ( Id.)
On April 14, 2011, the Bankruptcy Court issued an Order (the " 2011 Order" ) concluding that Ms. Salander's fraud claims were property of the Estate and were settled by the Trustee. ( Id.) The Bankruptcy Court accordingly determined that those claims and defenses no longer existed and Ms. Salander could not raise them in the foreclosure proceedings. ( Id.) With respect to Wells Fargo, the Bankruptcy Court found that Wells Fargo could have attended the October 31, 2008 meeting of creditors or investigated the Debtors itself, but chose not to do so, or to pursue any objection to the Settlement Order. ( Id. at 7.) Concluding that the Trustee used his business judgment to settle Ms. Salander's forgery claims, the Bankruptcy Court determined that the Settlement Agreement was enforceable against the Debtors and accordingly granted First Republic's motion to enforce. ( Id. at 6-7.) Wells Fargo did not appeal. ( Id. at 7.)
D. Foreclosure Action
Pursuant to the 2011 Order, Ms. Salander filed an amended answer in the Foreclosure Action, which withdrew her counterclaims and affirmative defenses. ( Id.) First Republic subsequently filed for Summary Judgment. ( Id.)
On March 23, 2012, Wells Fargo, which had not timely answered First Republic's Complaint in the Foreclosure Action, filed a cross-motion to compel First Republic to accept its Answer and Counterclaims. ( Id.) Wells Fargo sought, among other things, to: (1) equitably subordinate the FRB Mortgage to Wells Fargo's mortgages; (2) obtain priority over First Republic under N.Y. Real Property Law § 291; and (3) recover damages for First Republic's alleged unjust enrichment. (App. Ex. A, at 16-19.) Wells Fargo's counterclaims were based on Ms. Salander's fraud and forgery claims. (FRB Mem. 8.) Ms. Salander subsequently filed a Memorandum of Law in Opposition to First Republic's summary judgment motion, in which she again raised the fraud claims contained in her original answer and counterclaims. ( Id.) On April 9, 2012, First Republic's counsel sent a letter to Wells Fargo and Ms. Salander requesting that they withdraw their opposition and warning them that First Republic would bring the matter to the Bankruptcy Court's attention if they were not withdrawn. ( Id.)
E. Consent Order and 2012 Memorandum Decision and Order
In response, on April 19, 2012, Ms. Salander filed a motion before the Bankruptcy Court seeking a declaration that her conduct in the foreclosure action did not violate the 2011 Order and clarification as to the effect of the 2011 Order on the rights of Wells Fargo. ( Id.) Shortly thereafter, Wells Fargo filed a " Protective Response" arguing that its state court pleadings did not violate either the 2011 Order or the Settlement Order. ( Id. at 9.) The same day, First Republic filed a cross-motion for an order holding Ms. Salander in contempt and a motion to compel Wells Fargo to comply with the 2011 Order. ( Id.)
At a hearing held on May 15, 2012, the Bankruptcy Court found Ms. Salander in
contempt of its 2011 Order. (App. Ex. A., at 560-62.) First Republic and counsel for Ms. Salander subsequently negotiated an order allowing Ms. Salander to purge the contempt finding. (FRB Mem. 9.) The negotiations resulted in the Consent Order, which the Bankruptcy Court entered on May 24, 2014. (App. Ex. A, at 476-80.) The Consent Order, among other things, (1) barred Ms. Salander from commencing or continuing any claims against First Republic related to its mortgage on the Millbrook Property, ( id. at 477-78), (2) stipulated that the FRB Mortgage was valid and enforceable, ( id. at 478), and (3) ratified the FRB Mortgage, ( id.).
On June 8, 2012, the Bankruptcy Court issued a Memorandum Decision addressing First Republic's motion to compel Wells Fargo to comply with the 2011 Order. ( Id. at 502-516.) The Bankruptcy Court found that Wells Fargo was precluded from asserting any derivative claims against First Republic -- i.e., Ms. Salander's forgery claim or any other estate claims -- in the foreclosure proceedings. ( Id. at 502.) It concluded, however, that if the state court determined that Wells Fargo had any direct claims against First Republic -- i.e., claims on which it could prevail without showing injury to Ms. Salander -- Wells Fargo was entitled to assert those claims in the Foreclosure Action. ( Id. at 514-15.) The Bankruptcy Court issued an Order on June 15, 2012 (the " 2012 Order" ) consistent with its June 8 Memorandum Decision. ( Id. at 517-18.)
F. Termination of Foreclosure Action
On January 14, 2013, the state court granted First Republic's Motion for Summary Judgment in the Foreclosure Action and denied Wells Fargo's cross-motion to compel First Republic to accept its untimely answer. (FRB Mem. 11.) In denying Wells Fargo's cross-motion, the court found that even if its answer had been timely, Wells Fargo's counterclaims and defenses based on the forgery and fraud claims were barred by res judicata and that its remaining affirmative defenses lacked merit. ( Id.)
* * *
Wells Fargo now appeals from the Consent Order and 2012 Memorandum Decision and Order, primarily arguing that: the in pari delicto doctrine -- here based on First Republic's alleged participation in a fraud scheme perpetrated by Lawrence Salander -- prevented any pre-petition claims against First Republic from passing to the estate; therefore the Trustee (who stood in the shoes of the Debtors) was barred from settling Ms. Salander's forgery claim against First Republic; and thus the fraud and forgery defenses and counterclaims Wells Fargo wished to assert against First Republic in the Foreclosure Action should have been available to it. (WF Mem. ¶ 1.)
A. Legal Standard
This Court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1) to hear appeals from final judgments, orders, and decrees of a
bankruptcy court. A district court reviews a bankruptcy court's findings of fact for clear error and reviews its legal conclusions de novo. Overbaugh v. Household Bank N.A . ( In re Overbaugh ), 559 F.3d 125, 129 (2d Cir. 2009) (per curiam); see Fed. R. Bankr. P. 8013 (district court may " affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree," and " [f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous" ). " Mixed questions of fact and law are subject to de novo review." Babitt v. Vebeliunas ( In re Vebeliunas ), 332 F.3d 85, 90 (2d Cir. 2003); see Parmalat Capital Fin. Ltd. v. Bank of Am. Corp., 639 F.3d 572, 580 (2d Cir. 2011).
1. Consent Order
First Republic argues that Wells Fargo lacks standing to appeal the Bankruptcy Court's Consent Order. (FRB Mem. 12-15.) Specifically, First Republic argues that Wells Fargo has failed to allege that it suffered a direct injury as a result of the Order and asserts only injuries sustained by Ms. Salander. ( Id. at 14-15.) Wells Fargo's response -- which is somewhat oblique -- argues that although the Settlement Agreement fixed First Republic's lien at $1,400,000, First Republic received approximately $1,800,000 in equity from the foreclosure, which caused Wells Fargo to suffer a pecuniary loss. (WF Reply Mem. ¶ 2.) It also argues that the Consent Order " gags" Ms. Salander, which prejudices Wells Fargo in proving, as part of the Foreclosure Action, that the FRB Mortgage is void. ( Id.)
Standing is a threshold question in every federal case that determines the power of the court to hear the suit. See Leibovitz v. N.Y.C. Transit Auth., 252 F.3d 179, 184 (2d Cir. 2001); Licensing by Paolo, Inc. v. Sinatra (In re Gucci), 126 F.3d 380, 387-88 (2d Cir. 1997). In addition to the requirements imposed by Article III, an appellant in a bankruptcy case must be " a person directly and adversely affected pecuniarily by the challenged order of the bankruptcy court." Sumpter v. DPH Holdings Corp. (In re DPH Holdings Corp.), 468 B.R. 603, 612 (S.D.N.Y. 2012) (internal quotation marks omitted) (" The 'aggrieved person' standard requires that an appellant show both 'injury in fact' under Article III, and that the injury suffered is direct and financial." ). The " aggrieved person" standard for bankruptcy standing " reflects the understandable concern that if appellate standing is not limited, bankruptcy litigation will become mired in endless appeals brought by the myriad of parties who are indirectly affected by every bankruptcy court order." Kabro Assocs. of West Islip, LLC v. Colony Hill Assocs . ( In re Colony Hill Assocs .), 111 F.3d 269, 273 (2d Cir. 1997) (internal quotation marks and alteration omitted); see In re Gucci, 126 F.3d at 388 (" The stringency of [the 'aggrieved person' standard] is rooted in a concern that freely granting open-ended appeals to those persons affected by bankruptcy court orders will sound the death knell of the orderly disposition of bankruptcy matters." ). As the " aggrieved person" standard is more stringent than the constitutional requirements, In re Johns-Manville Corp., 340 B.R. 49, 56 (S.D.N.Y. 2006), vacated on other grounds, 517 F.3d 52 (2d Cir. 2008); In re Combustion Eng'g, Inc., 391 F.3d 190, 214-15 (3d Cir. 2004),
Wells Fargo cannot proceed with this appeal if it cannot demonstrate that it suffered a direct financial injury as a result of the Consent Order.
To explain how it has been harmed financially from the Consent Order, Wells Fargo alleges only that First Republic received more money in foreclosure than its lien was worth, and that the " gag" on Ms. Salander hampers it in the Foreclosure Action. (WF Reply Mem. ¶ 2.) Yet Wells Fargo fails to make any connection between the Consent Order and pecuniary harm to itself. Wells Fargo's chain of events asserts that the Consent Order " ratified" the FRB Mortgage, which in turn fixed First Republic's commercial lien, converted Wells Fargo's equity, and prohibited Ms. Salander from contesting the validity of FRB's lien. ( Id. ¶ 6.) In the same sentence, however, Wells Fargo acknowledges that the Consent Order did not prohibit Wells Fargo from contesting the lien. ( See id . (" The Consent Decree thus . . . 'gags' LLC member Julie against First Republic -- not [Wells Fargo] -- leaving [Wells Fargo's] liens at risk." ).) Indeed, at the May 15 hearing, Wells Fargo asserted numerous times that Wells Fargo's claims against First Republic were not derivative of the Debtors, but were direct claims belonging to Wells Fargo itself. ( See, e.g., App. Ex. A, at 538-39, 540, 549, 551.) Wells Fargo continues to assert same in its papers here. ( See WF Mem. ¶ 84 (" Wells' state court counterclaims and defenses are not derivative of the Debtor's Estate -- they are Wells' own claims -- against First Republic and remain fully viable." ).) If, as Wells Fargo argued, its priority in the Millbrook Property was not affected by the Settlement Agreement, ( see App. Ex. A, at 551 (" [Court:] So, all you've said and what you're just saying to me . . . is that your priority is not affected by this settlement. [Wells Fargo:] Correct. [Court:] And that's all you're arguing? [Wells Fargo:] Correct, Your Honor. And that the claims are not derivative, the claims are unique to Wells." )), then the Consent Order " ratifying" the Settlement Agreement did not cause the direct financial injury required to convey standing to Wells Fargo to challenge the Consent Order. In short, if Wells Fargo's claims against First Republic are direct claims rather than derivative claims of Ms. Salander, then Wells Fargo could not have been directly injured by Ms. Salander agreeing to release her fraud claims against First Republic. Indeed, nothing in the Consent Order mentions Wells Fargo or purports to adjudicate its rights. Any impairment of Wells Fargo's ability to prevail over First Republic in the Foreclosure Action is exactly the sort of indirect effect that the
" aggrieved person" standard prohibits. See In re Gucci, 126 F.3d at 388.
Because Wells Fargo cannot demonstrate a direct financial injury from the Bankruptcy Court's Consent Order, it lacks standing to appeal the decision.
2. 2012 Memorandum Decision and Order
Wells Fargo appeals the Bankruptcy Court's June 2012 Memorandum Decision and Order on several grounds, although the gravamen of Wells Fargo's complaint is that the in pari delicto doctrine and the Wagoner rule precluded the Trustee from settling Ms. Salander's forgery claim. Wells Fargo argues that because First Republic engaged in wrongdoing, Ms. Salander's fraud/forgery claim against First Republic did not pass to the estate and therefore the Trustee had no standing to settle the claim on the Debtor's behalf. (WF Mem. ¶ ¶ 67-82.) As a result, Wells Fargo argues, the Settlement Agreement is void, Wells Fargo should be free to assert any claims or defenses that are derivative of Ms. Salander, and the Bankruptcy Court orders precluding Wells Fargo from asserting such counterclaims and affirmative defenses in state court are not entitled to any weight, much less res judicata effect. ( Id. ¶ 69.)
Although the in pari delicto doctrine is a state-law affirmative equitable defense that does not raise a standing issue, see Grubin v. Rattet (In re Food Mgmt. Grp., LLC), 380 B.R. 677, 692 (Bankr. S.D.N.Y. 2008), federal courts have established a closely-related standing rule -- the Wagoner rule -- denying plaintiffs standing to bring certain claims in federal court in cases where the in pari delicto defense is implicated, see id. at 692-93. Because the in pari delicto defense and the Wagoner rule are closely intertwined, I will address them together.
By arguing that the Trustee lacked standing to settle the forgery claim and thus the Bankruptcy Court lacked jurisdiction, Wells Fargo is essentially seeking to appeal the Bankruptcy Court's Settlement Order and 2011 Order (enforcing the Settlement Agreement), despite the fact that the current appeal deals only with the 2012 Memorandum Decision and Order. Under the Bankruptcy Code, a party has fourteen days after the date of entry of the order to file a notice of appeal. Fed. R. Bankr. P. 8002(a). Although Wells Fargo had the opportunity to appeal both the Settlement Order and 2011 Order, it chose not to, and it may not circumvent the rules by raising these issues in the current appeal. Further, Wells Fargo did not raise
the issue of standing or the in pari delicto doctrine in the proceedings below, and thus these arguments were waived. See Merchants Bank v. Goodyear, 228 B.R. 87, 88 (D. Vt. 1997) ( issues not raised in bankruptcy court cannot be raised in first instance on appeal). Finally, as discussed earlier, the documents on which Wells Fargo relies to establish wrongdoing on First Republic's part for purposes of the in pari delicto defense are not properly considered on this appeal. See Note 2 above.
In any event, neither the Wagoner rule nor the in pari delicto doctrine bar Ms. Salander's forgery claim from accruing to her estate. Under the Wagoner rule, " a claim against a third party for defrauding a [debtor] with the cooperation of [the debtor] accrues to creditors, not to the guilty [debtor]." Wight v. BankAmerica Corp., 219 F.3d 79, 86 (2d Cir. 2000) (alteration and internal quotation marks omitted). Because the trustee stands in the shoes of the debtor, " the Wagoner rule bars a trustee from suing to recover for a wrong that he himself essentially took part in." Id. at 87. Therefore, Wells Fargo argues, Ms. Salander's claims for forgery could not have accrued to her estate because First Republic engaged in wrongdoing. Yet that argument ignores the fact that Wells Fargo does not claim that Ms. Salander engaged in any misconduct.
There is no wrongdoing on the part of the debtor that would bar the Trustee from resolving the estate's forgery claims under the Wagoner rule, which requires the debtor and third party to act in cahoots.
Wells Fargo further contends that the Bankruptcy Court erred in concluding that Ms. Salander's forgery claim passed to her estate because the in pari delicto doctrine bars this result. (WF Mem. ¶ ¶ 77-78.) For the same reason discussed above, however, the doctrine of in pari delicto is inapplicable. The in pari delicto doctrine prevents a party from suing others for a wrong in which the party itself participated. Thus, if the debtor engaged in wrongdoing, the trustee, who " stands in the [debtor's] shoes," Air Line Pilots Ass'n, Int'l v. Am. Nat'l Bank & Trust Co . ( In re Ionosphere Clubs, Inc .), 156 B.R. 414, 436 (S.D.N.Y. 1993), may be precluded from bringing on behalf of the debtor's estate claims related to that wrongdoing. As stated above, Wells Fargo does not contend that Ms. Salander is guilty of any misconduct that could be imputed to the Trustee.
Despite the length of its opening brief, the only argument Wells Fargo proffers as to why Ms. Salander's forgery claim against First Republic was not property of the bankruptcy estate is that the in pari delicto doctrine precludes this result. ( See WF Mem. ¶ ¶ 77-78, 90-92, 110, 112-13). I find no merit in that contention, and thus it is unnecessary to review the Bankruptcy Court's determination on other grounds. But in any event, I agree with Judge Morris' reasoning as to why Ms. Salander's forgery claim was property of the estate and thus capable of being settled by the Trustee. (App. Ex. A, at 506-10.)
Accordingly, the Bankruptcy Court's determination that Wells Fargo was precluded from asserting Ms. Salander's forgery claim (or any claim belonging to the estate, for that matter) in the Foreclosure Action is affirmed.
For the reasons stated above, the appeal in No. 13-CV-2356 is DISMISSED and the Bankruptcy Court's Order in 13-CV-2357 is AFFIRMED. The Clerk of Court is respectfully directed to terminate the pending appeals. (Nos. 13-CV-2356, 13-CV-2357.)