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Rainbow Ridge Resort, LLC v. Branch Banking and Trust Co.

Court of Appeals of Tennessee, Knoxville

December 28, 2016

RAINBOW RIDGE RESORT, LLC, ET AL.
v.
BRANCH BANKING AND TRUST CO.

          Session August 9, 2016

         Appeal from the Circuit Court for Sevier County No. 12CV-1365-IV O. Duane Slone, Judge

         The facts in this case implicate the doctrine of res judicata. In 2012, a real estate development limited liability company and its members filed suit in the Sevier County Circuit Court against their mortgage lender, Branch Banking and Trust Company (the bank). In that action, the developers alleged, inter alia, that the bank was guilty of fraud, breach of contract, and unjust enrichment. That suit involved four separate parcels of real property. While the case in circuit court was pending, the bank sued three individuals in the Sevier County Chancery Court, seeking a declaratory judgment regarding the priority of a security interest in one of the parcels of property at issue in the circuit court case. In the chancery court action, the bank joined the developers as parties. In response, the developers filed a counterclaim in which they repeated allegations included in the circuit court case and asserted other claims derived from the same set of facts. The two cases were later consolidated. In each case, the bank filed a Tenn. R. Civ. P. 12.02(6) motion to dismiss for failure to state a claim. The court heard both motions at a single hearing. On June 8, 2015, the trial court filed two orders - one in the circuit court suit and one by interchange in the chancery court action - granting the bank's motions. The developers appealed only the circuit court order. Unchallenged, the chancery court order became final. The bank later moved to dismiss this appeal, arguing that the doctrine of res judicata barred further litigation. We deferred a ruling on the bank's motion. We now hold that the motion has merit. Accordingly, we affirm the trial court's judgment dismissing this case. We do so based upon the doctrine of res judicata.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed; Case Remanded

          John Frank Higgins, Nashville, Tennessee, for the appellant, Rainbow Ridge Resort LLC, Wayne R. Hill, and Cornelia D. Hill.

          W. Morris Kizer and John M. Kizer, Knoxville, Tennessee, for the appellee, Branch Banking and Trust Company.

          Charles D. Susano, Jr., J., delivered the opinion of the court, in which D. Michael Swiney, C.J., and Thomas R. Frierson, II, J., joined.

          OPINION

          CHARLES D. SUSANO, JR., JUDGE

         I.

         Rainbow Ridge Resort, LLC, and its members, Wayne Hill and Cornelia Hill, husband and wife (collectively, the developers), entered into an agreement with the bank to finance the development of three parcels of property, known as the Cabin Properties. In 2006, the bank received three promissory notes from the developers secured by deeds of trust and security agreements. Separately, in 2007, the developers executed a promissory note to the bank on a fourth parcel, a 16.8 acre tract, secured by a deed of trust and security agreement. The developers state that the bank, at that time, represented that the deed of trust would encumber the 16.8 acre tract to secure payment of a $210, 000 letter of credit.

         In January 2009, the developers learned the bank claimed an $800, 000 security interest on the 16.8 acre tract. The same month, the bank informed the developers that the transferring documents for the Cabin Properties were defectively flawed. An error by the bank's agent wrongly listed the property owner on the transferring documents as "Rainbow Ridge, LLC, " rather than "Rainbow Ridge Resort, LLC." As a result, the bank did not have a security interest in the Cabin Properties. To correct the error, the bank asked the developers to participate in a reformation action. The developers agreed on the condition that the bank would extend the developer's time for performance under certain notes and release its lien on the 16.8 acre tract. The reformation action was completed by an agreed final order in December 2009. According to the developers, the bank never performed as promised. For more than a year, they communicated with bank employees about the note renewals, but the renewals were never finalized. The developers assert that, instead, "[the bank] . . . engaged in a series of misrepresentations and deliberate inactions to stall and preclude what were the ongoing negotiations" of the note renewals that would have permitted them to fulfill their obligation to the bank. In November 2012, the bank gave notice of a successor trustee's sale of the Cabin Properties.

         The day of the sale, December 13, 2012, the developers sued the bank in circuit court, alleging fraud/fraudulent inducement/fraudulent misrepresentations, breach of contract, negligent and/or intentional misrepresentation, and breach of fiduciary duty. The developers sought injunctive relief to enjoin foreclosures and punitive damages. They also sought an ex parte order to restrain and enjoin the bank from foreclosing on the deeds of trust for the Cabin Properties, which the circuit court granted. The bank filed a Tenn. R. Civ. P. 12.02(6) motion to dismiss. In response, the developers sought and were granted leave to file an amended complaint, which they did in April 2013. In it, they alleged fraud/fraudulent inducement/fraudulent misrepresentation, breach of contract, and unjust enrichment, and sought injunctive relief to enjoin the foreclosures. The amended complaint stated, in part, as follows:

In view of the fact that the errors on the documents prepared by [the bank] and/or its agents were known to [the bank] for years before the admission thereof to the [developers], and in view of the fact that the admission was not made prior thereto when [the bank] continued to cause [the developers] to become deeper and deeper in debt to [the bank] (and when [the bank] had no security interest in any of the properties as a result of the erroneous security instruments), it is more than obvious that [the bank] engaged in a well-planned scheme to defraud the [developers] and carefully chose the time to induce and trap [the developers] into agreeing to "reform the instruments" so that [the bank] could steal the most property from the [developers] and set the [developers] up for the maximum liability.

         The bank again filed a Tenn. R. Civ. P. 12.02(6) motion to dismiss.

         On September 3, 2013, the bank filed a complaint in chancery court against three individuals named as the beneficiaries under a will - Lee Edward White, James Michael White, and April Bryan (collectively the beneficiaries) - and joined the developers. In the chancery court case, the bank sought a judgment solely to enforce a subordination agreement on the 16.8 acre tract that would declare deeds of trust entered by the developers in favor of the bank superior to ones they previously entered in favor of the beneficiaries. The bank stated in its complaint that it joined the developers

(a) due to their ownership of real property which is encumbered by [the bank]'s deeds of trust . . . (b) due to the fact that this action is to determine the priority of deeds of trust they executed to secure their obligations to different creditors, and (c) so that they may assert such matters as they deem appropriate to protect their respective interests herein.

         The developers responded with an answer and counterclaim. Through the counterclaim, the developers sued the bank for fraud/fraudulent inducement/fraudulent misrepresentation and unjust enrichment. They also sought declaratory relief for the court to declare the bank had no legal or equitable right to the 16.8 acre tract. Several facts given in support of the claims of fraud and unjust enrichment in the counterclaim were nearly identical to those in the developers' amended complaint in circuit court. Specifically, the counterclaim relied on the same allegation reprinted above - that the bank engaged in a "well-planned scheme to defraud the [developers], " "steal the most property from the [developers], " and "set [the developers] up for the maximum liability."

         The bank responded with a motion to dismiss the counterclaim on the doctrine of prior suit pending, stating: "The counterclaim which the [developers] have asserted herein encompasses the subject matter of the circuit court case." In July 2014, the developers responded, stating that the doctrine did not apply "as the [c]ounterclaim herein contains additional facts and allegations relating to the [s]ubordination [a]greements which are not part of the 2012 action . . . ." There is no order in the record showing that the trial court ruled on this "prior suit pending" motion. In August 25, 2014, the bank filed a separate Tenn. R. Civ. P. 12.02(6) motion to dismiss the developers' counterclaim. There, the bank stated again that in the circuit court case the developers had "previously asserted" many of the allegations made in the counterclaim.

         On March 31, 2014, the judge in the circuit court case recused himself and reassigned the case on May 21, 2014 to Judge O. Duane Slone, Circuit Judge.[1] An order of recusal had been entered by the original judge in the chancery court case on December 10, 2013. That case was also assigned to Judge Slone in an order entered June 27, 2014. On July 28, 2014, a hearing occurred on the bank's motion to dismiss the amended complaint in the circuit court action. At the same hearing, the court consolidated the two cases.[2] At that hearing, the court granted the bank's motion to dismiss the amended complaint.

         In December 2014, the trial court heard the bank's motion to dismiss the chancery court case. At that time, the court had not yet entered an order dismissing the circuit court case. During the hearing, the developers moved for and were granted permission to file a second amended complaint in the circuit court case and an amended counterclaim in the chancery court case predicated on emails that had been discovered between the developers and the bank. The developers did not file the amended counterclaim, but did file a second amended complaint that again alleged three counts - fraud/fraudulent inducement/fraudulent misrepresentation, breach of contract, and unjust enrichment, repeating many of the same allegations as in the first amended complaint. The developers also repeated the allegation that the bank carried out a "well-planned scheme to defraud the [developers]" to "steal the most property from the [developers]" and "set [the developers] up for the maximum liability, " adding now that the bank did so

after continually delaying renewal of the Notes[3] so as to manufacture a fraudulent "default" and place [the developers] into the most detrimental position possible despite the prior affirmative representation of [the bank's] management that it was not their intent to do so.

(Footnote added.) The bank, again, moved to dismiss. On April 27, 2015, the trial court held a hearing on the bank's motions to dismiss the developers' counterclaim and second amended complaint. The court granted both motions, entering two separate orders - one in circuit court and one in chancery court. Both were filed June 8, 2015.

         On June 29, 2015, the developers filed a "Notice of Appeal, " stating: "Notice is hereby given that Plaintiffs in the above styled case, hereby Appeals [sic] to Tennessee Court of Appeals for the from the [sic] final judgment from an Order Granting Defendants' Motion for Summary Judgment [sic] entered in this action on the 3rd day of June, 2015." On the face of the motion, the "above styled case" is the circuit court case. No notice of appeal was filed in the chancery court case. On December 1, 2015, the Bank filed a Tenn. R. App. P. 22 motion to dismiss the appeal, arguing:

the issues raised in this action have been adjudicated and finally settled by the Chancery Court for Sevier County, Tennessee in a counterclaim filed by the appellants in the case of Branch Banking and Trust Company v. Lee Edward White, et al. (No. 13-9-281). Accordingly, further litigation on the issues raised in this appeal is barred ...

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