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Federal National Mortgage Association v. Quicksilver LLC

United States District Court, M.D. North Carolina

October 1, 2014



THOMAS D. SCHROEDER, District Judge.

This action arises out of a refinancing loan for commercial property located in North Carolina (the "disputed property"). Plaintiff Federal National Mortgage Association ("Fannie Mae") alleges fraud, negligent misrepresentation, unfair and deceptive trade practices, breach of contract, breach of warranty, and piercing of the corporate veil against Defendants Quicksilver LLC ("Quicksilver"), Michael A. Falk, Harry S. Falk, and Michael A. Falk as trustee of the trust dated 10-26-1989, also known as the Charlotte Falk Irrevocable Trust ("the Trust"). Various dismissal motions by Defendants are before the court. (Doc. 12.) For the reasons set forth below, the court will stay the action for ninety days pending the potential disposition of a very closely related State court action between many of the parties herein that may resolve, or at least make more manageable, the issues now before the court.


Central to the dispute between the parties is the priority of their respective liens on the disputed property. The details of the State court litigation can be found in Falk v. Fannie Mae , 738 S.E.2d 404, 406-07 ( N.C. Ct. App. 2013) (the "State court action"). For comprehensibility, the court will summarize the proceedings thus far in this court and the North Carolina State courts.

Quicksilver sought refinancing with Fannie Mae of its debt on the disputed property.[2] Before refinancing, there were two outstanding deeds of trust on the property: a senior lien by Wachovia, and a junior lien by the Trust. Fannie Mae alleges that Quicksilver defaulted on its loan from the Trust virtually from the loan's inception. (Compl. ¶¶ 24-25.) The trustee of the Trust is Michael Falk, who is also one of the two members and managers of Quicksilver. The other member and manager of Quicksilver is Harry Falk, Michael's son.

Fannie Mae alleges that, in the refinancing negotiations, the Falks represented that Fannie Mae would receive a first lien on the property, having priority over the lien of the Trust. (Id. ¶¶ 30-32.) However, when Quicksilver signed a deed of trust on the property in favor of Fannie Mae, the Trust's lien still existed and was never subordinated to Fannie Mae's. (Id. ¶¶ 36-41.) Later, the Falks transferred their ownership interests in Quicksilver to the Trust, making the Trust both the beneficiary of the deed of trust and the sole owner of the borrower, Quicksilver. (Id. ¶¶ 43-44.)

Quicksilver, wholly owned by the Trust, ultimately defaulted on its loan from Fannie Mae. (Id. ¶ 45.) After an unsuccessful demand for payment, Fannie Mae foreclosed on the property and purchased it at a public foreclosure sale. (Id. ¶ 46.) After the sale, the Trust initiated foreclosure proceedings in North Carolina State court. The Trust also filed a declaratory judgment action seeking a declaration that it held a valid first lien on the property. (Id. ¶ 48.) Fannie Mae sought to halt the foreclosure, and ultimately a North Carolina superior court granted summary judgment in favor of Fannie Mae, holding that the Trust's deed of trust had expired under N.C. Gen. Stat. § 45-37(b). (Compl. ¶ 50); see Falk , 738 S.E.2d 404, 408.

The Trust appealed that decision in the State court action to the North Carolina Court of Appeals. (Compl. ¶ 51.) On March 5, 2013, the court of appeals reversed the trial court. (Id.) The court of appeals held that the Trust's lien had expired under the statute, but that the statute was unconstitutional as applied to the Trust's lien. Falk , 738 S.E.2d at 408-10. This ruling made the Trust's lien senior to Fannie Mae's.

After Fannie Mae lost in the North Carolina Court of Appeals, it filed this federal action against Quicksilver, the Falks individually, and Michael Falk as trustee of the Falk Trust. The Falks, in their individual capacities, were not parties to the State court litigation. See Falk , 738 S.E.2d at 405-06. Fannie Mae alleges six causes of action: fraud as to the Falks, negligent misrepresentation as to the Falks and Quicksilver, unfair and deceptive trade practices as to the Falks and Quicksilver, breaches of the Key Principal Agreement (as to the Falks) and Fannie Mae Note (as to Quicksilver), breach of warranty as to Quicksilver, and "alter ego liability/piercing the corporate veil" as to the Trust. (Compl. ¶¶ 52-111.) Federal jurisdiction is premised on diversity of citizenship pursuant to 28 U.S.C. § 1332(a)(1). (Id. ¶¶ 1-7.) Fannie Mae seeks damages in excess of $75, 000, punitive damages, treble damages pursuant to N.C. Gen. Stat. § 75-16, and attorneys' fees. (Id. at 20-21.) Fannie Mae's claims in this court assume the validity of the Trust's lien and are premised on Defendants' fraud and other wrongful actions during the loan process. (See id. ¶¶ 52-111.)

After losing before the North Carolina Court of Appeals in the State court action, Fannie Mae sought a writ of discretionary review from the North Carolina Supreme Court. Although the parties have not advised the court, it is now apparent that the North Carolina Supreme Court has set the case for oral argument next week, on October 6, 2014.


Defendants' motion seeks, among other things, a stay of all proceedings. Specifically, Defendants seek to have the court abstain under the doctrine of Colorado River Water Conservation District v. United States , 424 U.S. 800 (1976). The court declines to abstain under Colorado River at this time. However, given the pendency of the State court proceedings before the North Carolina Supreme Court, this court will stay the case under its own inherent powers to do so in control of its docket.

As the Supreme Court of the United States has made clear, federal district courts have an inherent power to stay proceedings before them. This "power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants." Landis v. North Am. Co. , 299 U.S. 248, 254 (1936). When duplicative proceedings are pending in various courts, a stay does not depend on a showing that two lawsuits are the same "and the issues identical." Id . Although parallel proceedings are required under Colorado River abstention, the inherent power recognized in Landis has not been abrogated by the Colorado River doctrine. See Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp. , 460 U.S. 1, 21 n.23 (1983).

A court's decision to grant a stay "calls for the exercise of judgment, which must weigh competing interests and maintain an even balance." Landis 254-55; accord Maryland v. Universal Elections, Inc. , 729 F.3d 370, 375 (4th Cir. 2013) ("The grant or denial of a request to stay proceedings calls for an exercise of the district court's judgment to balance the various factors relevant to the expeditious and comprehensive disposition of the causes of action on the court's docket.'" (quoting United States v. Ga. P. Corp. , 562 F.2d 294, 296 (4th Cir. 1977)). When a district court considers a stay, "it should record the basis for its decision, including ...

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