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Providence Hall Assocs. L.P. v. Wells Fargo Bank, N.A.

United States Court of Appeals, Fourth Circuit

March 11, 2016

WELLS FARGO BANK, N.A., successor in interest to Wachovia Bank, N.A., Defendant - Appellee

Argued December 8, 2015.

Page 274

Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. (1:14-cv-00352-LO-IDD). Liam O'Grady, District Judge.


Gary M. Bowman, Roanoke, Virginia, for Appellant.

Jeffrey L. Tarkenton, WOMBLE CARLYLE SANDRIDGE & RICE, LLP, Washington, D.C., for Appellee.


B. Chad Ewing, WOMBLE CARLYLE SANDRIDGE & RICE, LLP, Charlotte, North Carolina, for Appellee.

Before WILKINSON, NIEMEYER, and DIAZ, Circuit Judges. Judge Diaz wrote the opinion, in which Judge Wilkinson and Judge Niemeyer joined.


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DIAZ, Circuit Judge:

Providence Hall Associates (" PHA" ) appeals the district court's dismissal of its lawsuit against Wells Fargo Bank. PHA contends that the district court erroneously gave res judicata effect to various sale orders issued during PHA's Chapter 11 bankruptcy. We conclude that the elements of res judicata are satisfied and therefore affirm.


PHA is a Virginia-based limited partnership that, prior to its bankruptcy, owned a handful of properties in several states. It entered three transactions with Wells Fargo's predecessor-in-interest: (1) a $2.5 million loan, (2) a $500,000 line of credit, and (3) an interest-rate-swap agreement, whereby PHA exchanged a fixed interest rate for a floating one based on the one-month U.S. Dollar London Interbank Offered Rate (" LIBOR" ). The loan and the line of credit contained a cross-default clause--meaning a default on either amounted to a default on both--and were secured by deeds of trust, mortgages, and assignments of rent for certain PHA real estate holdings.

PHA subsequently defaulted on the loans and, as a result, filed a petition for Chapter 11 bankruptcy in March 2011. Shortly thereafter, Wells Fargo informed PHA that an event of default took place under the interest-rate-swap agreement, triggering $317,850 in termination damages.

Wells Fargo filed a proof of claim in the Chapter 11 case for nearly $3 million. PHA objected, filing an adversary complaint, which it later amended. In that amended complaint, PHA alleged that Wells Fargo falsely represented that it " would forbear collection of the principal balance of the $500,000 [line of credit]," J.A. 69, ultimately causing PHA to default and enter bankruptcy.

Meanwhile, the United States Trustee had moved to convert the bankruptcy case to a Chapter 7 proceeding or dismiss it altogether based on PHA's failure to file monthly financial reports. Wells Fargo filed a memorandum in support of the motion, repeating the United States Trustee's allegations and contending that, among other inappropriate actions, PHA's principals used Wells Fargo's cash collateral to pay " distributions" to themselves. J.A. 123. After reviewing the arguments of the United States Trustee and Wells Fargo, the bankruptcy court opted to appoint Marc Albert as a Chapter 11 trustee rather than dismiss the bankruptcy case or convert it into a Chapter 7 proceeding.

Trustee Albert took a number of steps to bring PHA out of bankruptcy--most important here, obtaining court approval to sell two of the bankruptcy estate's properties

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to satisfy the debts owed to Wells Fargo. In both of his sale motions under 11 U.S.C. § 363(b), (f), Trustee Albert requested that the proceeds (minus certain expenses) be distributed to Wells Fargo. J.A. 183, 231. Additionally, both motions recognized PHA's obligations to Wells Fargo under the two loans and the interest-rate-swap agreement. See, e.g., J.A. 170-72, 174-75, 177, 219-21, 224. The bankruptcy court granted the motions, noting in its orders that PHA was in debt to Wells Fargo, J.A. 376, 386-88, and that the balance of the sale proceeds should be distributed to Wells Fargo, J.A. 380, 388. In the final sale order, the court explicitly stated that sale proceeds should be paid to Wells Fargo " up to the amount of the WFB Obligations," J.A. 388, where " WFB Obligations" was a defined term from Trustee Albert's sale motion representing PHA's debts arising out of the two loans and the swap agreement, J.A. 220.

Around the time Trustee Albert moved to sell the bankruptcy estate's properties in satisfaction of PHA's outstanding debts to Wells Fargo, he also consented to the dismissal without prejudice of PHA's adversary complaint.

By November 2012, the proceeds of the sales had satisfied PHA's debts to Wells Fargo. Consequently, Victor Guerrero--an equity holder and principal of PHA--filed a motion to dismiss the Chapter 11 proceeding, which the bankruptcy court granted with Trustee Albert's consent.

More than a year later, PHA filed suit in Virginia state court, which Wells Fargo removed to federal court. Along with repeating the claims made in the bankruptcy adversary complaint, PHA alleged new theories of lender liability. Relevant here, PHA claimed that the interest-rate-swap transaction was a " sham" because " the LIBOR rate was illegally rigged and manipulated." Appellant's Br. at 7-9; see also J.A. 12-14.

Wells Fargo filed a motion to dismiss, which the district court granted on res judicata grounds, giving preclusive effect to the bankruptcy court's sale orders. The court then denied PHA's motion for reconsideration.

This appeal ...

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