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Rearick v. Elderton State Bank

Superior Court of Pennsylvania

July 23, 2014

MARK A. REARICK, Appellant
v.
ELDERTON STATE BANK, Appellee

Argued March 5, 2014

Page 375

Appeal from the Order of the Court of Common Pleas, Armstrong County, Civil Division, No.: 1615-2012. Before PANCHIK, J.

Aurelius P. Robleto, Pittsburgh, for appellant.

Donna M. Doblick, Pittsburgh, for appellee.

BEFORE: SHOGAN, J., OLSON, J., and WECHT, J. Olson, J. concurs in the result.

OPINION

Page 376

WECHT, J.

Mark A. Rearick appeals the trial court's order sustaining the preliminary objections of Elderton State Bank (" ESB" ) on the basis of res judicata, arising from a prior judgment of foreclosure entered in favor of ESB and against Rearick. The trial court agreed with ESB that Rearick's claims in the instant action, in substance, constituted affirmative defenses or counterclaims relative to the foreclosure action. With one minor exception, we disagree. Consequently, we affirm the trial court's order in part, reverse in part, and remand for further proceedings.

The trial court's brief account of the facts as pleaded by Rearick sets the stage:

In or about 2006, Rearick executed a series of loan documents with ESB pursuant to which Rearick borrowed substantial funds to support a real estate development project known as the " Saltwork Project" in Elderton, Pennsylvania. Rearick ultimately borrowed approximately $1.2 million in funds from ESB, secured by several parcels of real property located in or around the Elderton area. Then, in 2009, Rearick executed additional loan documents pursuant

Page 377

to which he and his company[,] MKR Rentals, Inc.,[1] agreed to pay ESB the principal sum of $3,415,000, secured by the Saltwork Project and the several parcels of real property owned by Rearick.
After a series of re-negotiations and re-organizations of the debt agreements between Rearick and ESB, Rearick defaulted on the loans. He agreed to execute deeds in lieu of foreclosure for 10 parcels of property that secured the loans. The Saltwork Project ultimately was sold at auction on October 29, 2010. ESB then instituted a mortgage foreclosure action against Rearick in which it sought to foreclose on a property [2] that secured the Saltwork Project. 1Rearick asserted several defenses to ESB's action, including one for estoppel based on ESB's alleged failure to use commercially reasonable measures to resell properties that previously had been conveyed by Rearick in lieu of foreclosure. Due in large part to Rearick's failure to respond to ESB's Motion for Summary Judgment in the foreclosure action, we granted summary judgment in ESB's favor on or about June 11, 2012. We further entered judgment against Rearick in the amount of $3,006,305.62, which represented the outstanding balance on the loan documents, together with any additional amounts authorized by the mortgage and note.
1 Elderton State Bank v. Mark A. Rearick and the United States of America, No. 2011-0984-Civil, Court of Common Pleas of Armstrong County, Pennsylvania.
Rearick filed his Complaint in the instant action on or about October 24, 2012. He brings claims against ESB for breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, alter ego, and negligence, all of which relate directly to ESB's handling of its Saltwork Project financing arrangements with Rearick. ESB filed the instant Preliminary Objections to Rearick's Complaint on or about December 13, 2012.

Trial Court Opinion (" T.C.O.), 5/9/2013, at 1-3.

While scrupulously accurate on the facts as far as it goes, this summary omits certain relevant details of Rearick's allegations: Rearick alleges that ESB first starved the Saltwork Project by inducing Rearick to expand the original scope of the project, only later to refuse to lend Rearick the funds necessary to complete the project. ESB later agreed to provide most of the necessary funds only after availing itself of a federal partial securitization program for the development, thus limiting its exposure to only ten percent of the total debt. It did so only after forcing Rearick to accept an investment from a third party cherry-picked by ESB, who allegedly had a substantial shareholder interest in ESB and wrested control of the project from Rearick at ESB's behest.

Ultimately, Rearick could not sustain his debt load, and he defaulted. ESB foreclosed on the Saltwork Project as well as the personal assets Rearick had used to secure the debt. Eventually, the Saltwork Project and Rearick's other properties were sold at auction. The investor whom ESB introduced to Rearick allegedly purchased the Saltwork Project at auction for a mere fraction of the development's actual

Page 378

value. In sum, Rearick contends that ESB, with whom he had had a lengthy business relationship that was not confined to this development, forced Rearick to accept untenable obligations while shielding itself and the third-party investor from any material exposure. Indeed, Rearick maintains, ESB was made whole and the investor ended up with the Saltwork Project for a song, while Rearick forfeited numerous properties as well as his entire interest in the Saltwork Project.

The trial court granted ESB's preliminary objections on res judicata grounds, concluding that the substance of Rearick's claims all could, and therefore should, have been raised in the earlier foreclosure action. The court noted that res judicata will apply only when the two actions at issue share the following elements: (1) identity of the thing sued upon; (2) identity of the cause of action; (3) identity of the parties; and (4) identity of the capacity of the parties. See T.C.O. at 6 (citing Dempsey v. Cessna Aircraft, 439 Pa.Super. 172, 653 A.2d 679, 681 (Pa. Super. 1995)). Furthermore, the scope of res judicata " includes not only matters actually litigated but also all matters that should have been litigated" in the prior action. Id. (quoting Carroll Twp. Auth. v. Mun. Auth. of the City of Monongahela, 102 Pa.Cmwlth. 363, 518 A.2d 337, 340-41 (Pa. Cmwlth. 1986)); see Hopewell Estates, Inc., v. Kent, 435 Pa.Super. 471, 646 A.2d 1192, 1194 (Pa. Super. 1994). The trial court found that elements (3) and (4) undisputedly were satisfied. T.C.O. at 6.

With regard to the remaining elements of the res judicata test, the trial court noted that identity exists when " the primary rights asserted and wrongs alleged in both actions are the same." Id. at 7 (citing Kelly v. Kelly, 2005 PA Super. 394, 887 A.2d 788, 792 (Pa. Super. 2005)). Thus, in assessing identity, the court may consider whether the factual allegations in both actions are the same, whether the same evidence is necessary to prove each action, and whether both actions seek compensation for the same damages. Id. (citing Kelly, 887 A.2d at 792). Moreover, " [a] party cannot escape the application of res judicata merely by adopting a different method of presenting his case or re-styling his action under a different heading." Id. (citing Kelly, 887 A.2d at 792). The trial court found that " all of Rearick's claims . . . involve[d] the very same issues, subject matter, transactions, and alleged damages that were involved in the prior mortgage foreclosure action." Id.

Rearick's claims in this action all center on the same relationship, the same loan documents, the same properties, and the same Saltwork Project that were involved in the prior foreclosure action. Although Rearick has re-styled his actions to include claims for breach of duties allegedly owed by ESB to Rearick outside the scope of the loan documents, we find that these claims are mere repetitions of the affirmative and legal defenses that Rearick could have, and should have, asserted in the first action. . . . Rearick's claims in this case also would seek the very same damages already awarded to ESB in the prior action: the value of the properties securing the Saltwork Project. Although Rearick does not specifically plead these damages, he necessarily is seeking recompense of the properties' value in this action, in one form or another.

Id. at 8-9 (emphasis in original). Because the trial court's disposition of this case was sufficient to sustain ESB's preliminary objections, the trial court did not address the balance of ESB's alternative objections.[3]

Page 379

This appeal followed.[4]

Before this Court, Rearick raises the following issues:

1. Did the trial court err when it concluded that Mr. Rearick was required to bring the causes of action he asserts in this case as defenses to the mortgage foreclosure action that [ESB] had previously brought against Mr. Rearick?
2. Did the trial court err when it concluded that Mr. Rearick's claims in this action constitute affirmative defenses in [ESB's] prior foreclosure action and not permissible counterclaims and that Mr. Rearick's failure to assert those claims in the prior mortgage foreclosure case barred him from asserting them in this case?
3. Did the trial court err when it concluded that Mr. Rearick's claims are barred by the ...

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