Bankruptcy Foils Suit Against Wells Fargo (Court Says Borrower Gets Single Bite of the Apple)

A three judge federal appeals panel tossed a lawsuit by a borrower against Wells Fargo. Last month the U.S. 4th Circuit Court of Appeals upheld the dismissal of a lawsuit originally filed in state court. The case impacts other borrowers who want to sue their bank but waited until after their bankruptcy was complete.


Providence Hall Associates (“Providence”) is a Virginia limited partnership that held properties in several states. In 2006, Providence borrowed $2.5 million from Wachovia and obtained an additional $500,000 line of credit. As part of the loan terms, Wachovia required Providence to enter into a complex “interest rate swap” agreement. If Providence wanted to borrow from Wachovia, they had to agree to the swap agreement.


Providence says no one from the bank explained how the interest rate swap would work, however. There wasn’t even a term sheet for the swap. Term sheets are typical for most commercial loans, they identify all the basic terms of a loan and form the basis of the loan documents.


Despite the lack of a term sheet for the swap, Wachovia claimed that the interest rates for the swaps would be offered at “market rates.” If you see are beginning to see a problem in the making, it gets worse. Providence says they never signed an agreement for the swaps and it appears they were right. Later when a dispute arose and the case headed court, the bank was unable to produce a copy signed by Providence.


The loans were written in 2006 at the height of the real estate market. In 2011, Providence defaulted. In an effort to save their properties, Providence filed for bankruptcy protection.


Wells Fargo demanded almost $3 million dollars including $317,850 in “termination charges.” Providence fought back and blamed its bankruptcy on Wells Fargo. They say the bank promised a forbearance agreement. (By this point, Wells Fargo had acquired Wachovia.)


The court appointed a trustee that later obtained court permission to sell off two of Providence’s properties and pay off the loan. The court signed off on the trustee’s plan to pay off the debts and get Providence out of bankruptcy. Providence remained in business, although with fewer assets. The bankruptcy was dismissed.


One year later in 2014, Providence sued Wells Fargo in a Virginia state court. Providence accused Wells Fargo of bank fraud. As part of its lender liability claims, Providence claimed the interest rate swap was a sham and was based on the LIBOR rate (which we all now know was rigged.)


Unfortunately, Providence’s state court lawsuit was promptly removed to federal court where it was dismissed. Theoretically, borrowers should be treated the same whether their case is in federal or state court. Most lender liability lawyers would argue that federal courts are often more sympathetic to big banks.


Is there really a difference? Probably yes. Even though Providence filed its lawsuit in state court, the case was successfully removed to federal court. In the six lender liability claims found in the complaint, one was based on the federal Bank Holding Act. The existence of just one federal claim makes it much easier for banks to remove lawsuits from state courts and into federal courts.


A federal trial court judge in Virginia dismissed the complaint and said that because the bankruptcy court had entered sale orders over two of the properties and set the amount owed to Wells Fargo, Providence was barred from later suing Wells Fargo in any court, state or federal.


U.S. common law recognizes a legal concept known as “res judicata” or “claims preclusion” That doctrine essentially says that you only get one bite at the apple. Whatever claims you may have should all be brought at once.


As applied here, the decision is a big win for banks and a terrible blow for borrowers. At the time of the bankruptcy, Providence was trying to stay in business. The entire LIBOR scandal wasn’t even public knowledge at the time it filed for bankruptcy protection.


There are lessons to be learned here. If you make a protective bankruptcy filing, be prepared to litigate all your claims in that forum. The decision of the 4th Circuit in this case is binding in five states; Virginia, West Virginia, North Carolina, South Carolina and Maryland. It carries precedential value in other jurisdictions, however.


For the doctrine to be enforceable, there must be an adjudication or final decision on the merits of the case. Is a bankruptcy sale order really an adjudication? Not everyone agrees that it was but at least in 5 states, that is now the law of the land.


The other lesson is to think about your claims. Just one federal claim in a state court complaint can get your case removed to federal court. Just as borrowers often favor state courts, lenders like federal courts.




Suing banks is no easy task. Very few lawyers handle these cases. We do, our lawyers sue banks.


There are many lender liability lawyers but most a) represent banks and b) work at larger firms that typically charge very high rates. We are the exception. As national boutique firms, we can offer much more reasonable rates and sometimes handle cases on a hybrid or alternative basis. We understand the complexities of these cases and the tactics of big banks.


Have a claim against a bank? Give us a call. We represent individuals, businesses and borrowers - - never banks. For more information, contact attorney Chris Katers at [hidden email] or by phone at (414) 777-0778. The author of this post, attorney Brian Mahany, can be reached at [hidden email].


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