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The plaintiffs in this action are a group of special purpose companies that acquired various commercial properties and financed these acquisitions with loans. The loans required the plaintiffs, as borrowers, to obtain residual value insurance that guaranteed payment of the outstanding loan to the lenders if the borrowers defaulted on the loan at maturity. The defendants are insurers under these policies and related entities. The parties took the dispute to final judgment in Michigan and Idaho and filed a new lawsuit in Delaware seeking the relief they were denied in Michigan and Idaho.
IN PVP Aston LLC, et al. v. Financial Structures Limited, et al., CA No. N21C-09-095 AML CCLD, Superior Court of Delaware (March 31, 2023) the court was faced with a requirement of collateral estoppel – that is – once you lose in one court, you cannot go to another court for a other court results in the same matter.
A “final judgment” is final
At the end of the term of the loans, the plaintiffs did not make the balloon payment and the defendants therefore paid the insured value to the lenders. In exchange for these payments, the lenders assigned the loans and related documents to the defendants. The policies also required the borrowers to assign all title and title 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 that the parties’ agreement was otherwise unenforceable.
The question ultimately dispositive of the pending motions is whether the doctrine of collateral estoppel bars plaintiffs from litigating the issues already decided in Michigan and Idaho.
The parties and the Loan Purchase
Plaintiffs are thirty-four special purpose entities that obtained commercial loans (each, a “Loan”) from multiple lenders or agents of lenders (each, a “Lender”) to finance the sale and leaseback of properties previously owned by Rite-Aid Pharmacy (each, a “Property”). The Loans were evidenced and secured by a mortgage, notes and related instruments for each property (the “Loan Documents”). Each Loan required a significant “balloon” payment when the Loan matured in 2020 or 2021.
The defendant is Financial Structures Limited (“FSL”) and its special purpose subsidiary.
Applications to other courts
This litigation is not the only dispute between various borrowers and FSL, the lenders and their subsidiaries. In addition to the two pending actions 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 title to the properties. What is important to Defendants’ motion to dismiss is that decisions in two of these states address the same claims and legal theories that Plaintiff seeks to advance in this case. Specifically, during the period between the filing of plaintiffs’ first complaint and their amended complaint, courts in Michigan and Idaho issued decisions rejecting the theories and contract constructions advanced by plaintiffs in Delaware. Defendants have moved to dismiss the Amended Complaint based on these decisions.
Claims in Amended Complaint
On December 22, 2021, plaintiffs moved for partial summary judgment. The court stayed consideration of this motion while ruling on defendants’ motion to dismiss the original complaint. After the court dismissed that complaint in part and plaintiffs filed their amended complaint, defendant again moved to dismiss.
Plaintiff’s Amended Complaint must be dismissed in its entirety because all of Plaintiff’s 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 tried or could have been tried. Under the collateral doctrine, once an issue has been actually and necessarily decided by a court of competent jurisdiction, that decision is determinative in subsequent suits based on another cause of action involving a party to the earlier dispute.
The issues previously decided are identical to the issues presented in this action.
The first question for security reasons is whether the questions are identical. The identity depends on whether the claims made in the second proceeding are necessarily inconsistent with the previously tried issues.
The courts in Michigan and Idaho both disagreed with the borrowers’ position that the parties intended the insurer’s right to a loan to be conditional on an appraisal being performed. The Michigan Court also rejected the plaintiff’s attempt to recover tort because the policy provides that “the [Insurer] has no responsibility for [the Plaintiff] except to make payment to the additional insured pursuant to this policy.” The Idaho court similarly found the breach of contract claim moot. Additionally, after finding that the ICA was enforceable, the Idaho court rejected the contention that FSL allegedly did not sell enforceable agreements.
The previous measures have finally been assessed on their merits.
Under Delaware law, a Delaware court will give judgments of another state court the same preclusive effect as a court in that state. The collateral estoppel laws in Idaho and Michigan are largely 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 safety stop. Michigan and Idaho law control the issue of finality for this Court’s security measures analysis, and Michigan and Idaho also follow the majority rule.
The borrowers in Michigan and Idaho had a full and fair opportunity to litigate the issues in these actions.
Finally, it is clear that the parties had a full and fair opportunity to litigate the issues raised in the Michigan and Idaho actions. The decisions handed down by these courts describe the procedural history of the cases and reflect that the parties had an opportunity to fairly present their positions. These courts have fully analyzed and considered the parties’ multifaceted arguments. The Michigan borrower requested reconsideration of the April 22, 2022 decision but did not claim that it had lacked an opportunity to fully litigate the issues. Rather, it argued that the court erred in its analysis of the law to plug the equity upon redemption.
The defendants’ motion to dismiss is granted. Accordingly, plaintiffs’ motion for partial summary judgment is denied.
The old children’s motto of trying again when you fail does not apply to litigation. The insurers in this case were entitled to their right of subrogation to demand payment of the loan and obtain title to the property. Once plaintiffs lost in Idaho and Michigan, they were barred from bringing the same claims in Delaware and were barred 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 serving as an insurance consultant specializing in insurance coverage, insurance claims management, 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 attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and email@example.com
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