Collateral Estoppel Prevents New Litigation
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The plaintiffs in this action are a group of special-purpose entities that acquired various commercial properties and funded those acquisitions with loans. The loans required the plaintiffs, as borrowers, to obtain residual value insurance policies guaranteeing payment of the outstanding loan to the lenders if the borrowers did not satisfy the loan at maturity. The defendants are the insurers under those policies and related entities. The parties litigated the dispute to final judgment in Michigan and Idaho and filed a new suit in Delaware seeking the remedies they were not allowed to receive in Michigan and Idaho.
In PVP Aston LLC, et al v. Financial Structures Limited, et al., C. A. No. N21C-09-095 AML CCLD, Superior Court of Delaware (March 31, 2023) the court was faced with a claim of collateral estoppel – that is – once you lose in one court you cannot go to another court for a different result on the same issue.
A “Final Judgment” is Final
At the end of the loans’ terms, the plaintiffs did not pay the balloon payment, and the defendants therefore paid the lenders the insured value. In exchange for those payments, the lenders assigned the loans and related documents to the defendants. The insurance policies likewise required the borrowers to transfer all title and ownership interest in the properties to the defendants, but the plaintiffs refused to do so. Instead, they took the position that the insurers and lenders breached the parties’ agreement or the parties’ agreement was otherwise unenforceable.
The question that ultimately is dispositive for purposes of the pending motions is whether the collateral estoppel doctrine bars the plaintiffs from relitigating the issues already decided in Michigan and Idaho.
FACTUAL BACKGROUND
The Parties and the Loan Purchases
Plaintiffs are thirty-four special-purpose entities that obtained commercial loans (each, a “Loan”) from several lenders or agents of lenders (each, a “Lender”) to finance the sale and leaseback of properties formerly owned by Rite-Aid drugstores (each, a “Property”). The Loans were evidenced and secured by a mortgage, note, and related instruments for each Property (the “Loan Documents”). Each Loan required a considerable “balloon” payment when the Loan matured in 2020 or 2021.
Defendants are Financial Structures Limited (“FSL”) and its special-purpose subsidiaries.
Filings in other Courts
This litigation is not the only dispute between various Borrowers and FSL, the Lenders, and their affiliates. In addition to the two actions pending in Delaware, litigation has arisen in several states where the subject properties are located, as FSL, its nominees, or third-party purchasers have asserted ownership and possession rights in the properties. Importantly for the purposes of Defendants’ motion to dismiss, decisions in two of those states address the same claims and legal theories Plaintiffs seek to advance in this case. Specifically, during the period between the filing of Plaintiffs’ initial Complaint and their Amended Complaint, courts in Michigan and Idaho issued decisions that rejected the theories and contractual constructions Plaintiffs advanced in Delaware. Defendants have moved to dismiss the Amended Complaint on the basis of those decisions.
Claims in Amended Complaint
On December 22, 2021, Plaintiffs moved for partial summary judgment. The Court stayed consideration of that motion while it resolved Defendants’ motion to dismiss the Original Complaint. After the Court partially dismissed that complaint and Plaintiffs filed their Amended Complaint, Defendants again moved to dismiss.
ANALYSIS
Plaintiffs’ Amended Complaint Must Be Dismissed In Its Entirety Because All Plaintiffs’ Claims Are Barred Under The Collateral Estoppel Doctrine.
Collateral estoppel, also known as issue preclusion, refers to the preclusive effect of a judgment on the merits of an issue that was previously litigated or that could have been litigated. Under the collateral estoppel doctrine, once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.
The Issues Previously Decided Are Identical To The Issues Presented In This Action.
The first question for collateral estoppel purposes is whether the issues are identical. Identicality depends on whether the contentions raised in the second proceeding are necessarily inconsistent with the previously adjudicated issues.
The Michigan and Idaho courts both disagreed with the Borrowers’ position that the parties intended the Insurer’s right to a Loan assignment to be conditioned on the performance of an appraisal. The Michigan Court also rejected Plaintiff’s effort to recover breach of contract damages because the Policy provides that “the [Insurer] shall have no liability to [the Plaintiff] except to make payment to the Additional Insured in accordance with this Policy.” The Idaho Court similarly found that the breach of contract claim was futile. In addition, having concluded the ICA was enforceable, the Idaho Court rejected the claim that FSL allegedly sold unenforceable agreements.
The Prior Actions Have Been Finally Adjudicated On The Merits.
Under Delaware law, a Delaware court will give the judgments of another state court the same preclusive effect as would a court in that state. Collateral estoppel law in Idaho and Michigan is substantially the same as the law in Delaware. Delaware follows the majority rule that an appeal does not render a judgment non-final for purposes of res judicata or collateral estoppel. Michigan and Idaho law control the question of finality for purposes of this Court’s collateral estoppel analysis, and Michigan and Idaho also follow the majority rule.
The Michigan Plaintiff And Idaho Borrowers Had A Full And Fair Opportunity To Litigate The Issues In Those Actions.
Finally, it is apparent that the parties had a full and fair opportunity to litigate the issues addressed in the Michigan and Idaho actions. The decisions issued by those courts describe the cases’ procedural history and reflect that the parties had the opportunity to fairly present their positions. Those courts fully analyzed and considered the parties’ multifaceted arguments. The Michigan Borrower moved for reconsideration of the April 22, 2022 decision but did not argue that it had lacked an opportunity to fully litigate the issues. Rather, it argued the Court erred in its analysis of the law regarding clogging the equity of redemption.
Defendants’ Motion to Dismiss is Granted. Accordingly, Plaintiffs’ Motion for Partial Summary Judgment is Denied As Moot.
The old children’s motto that says one must try and try again when they fail does not apply to litigation. The insurers in this case were entitled to their subrogation rights to require payment of the loan and get title to the property. Once the plaintiffs’ lost in Idaho and Michigan they did not have the right to bring the same claims in Delaware and were prevented by the application of the collateral source doctrine.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com
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