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Swarey v. Stephenson

Court of Special Appeals of Maryland

April 1, 2015

ISRAEL SWAREY, et ux.,
v.
KERRY STEPHENSON, et al

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Appeal from the Circuit Court for St. Mary's County, David Densford, Judge.

Argued by: Ian Stumpf (JR Howell & Associates on the brief) all of Washington D.C., for Appellant.

Argued by: Bryan T. Dugan (Dugan, McKissick & Longmore on the brief) all of Lexington Park, MD, for Appellee.

Eyler, Deborah S. Leahy, Thieme, Raymond G., Jr. (Retired, specially assigned) JJ.

OPINION

Page 539

[222 Md.App. 74] Leahy, J.

Israel and Linda Swarey (" the Swareys" or " Appellants" ) fell prey to purportedly false asseverations about investment opportunities in undercapitalized shell companies owned and operated by Todd B. Parriott, Phillip Parriott, and Kerry Stephenson (" Appellees" ). The Swareys allege that in searching for secure sources of retirement income in 2008, they were induced by Appellees to invest substantial sums in real estate projects that never developed and companies that were either bankrupt, without assets, or had ceased to exist. Ultimately, the Swareys lost $3.7 million, including their home--a house that Mr. Swarey, once a builder by trade, had built himself.

On May 18, 2011, the Swareys filed a 21-count complaint in the Circuit Court for St. Mary's County, Maryland, alleging, inter alia, fraud, embezzlement, elder abuse, conspiracy to commit fraud, violations of the Consumer Protection Act, and violation of the federal Racketeer Influenced and Corrupt Organizations Act (" RICO" ), 18 U.S.C. § § 1961 to 1968. The Swareys' complaint named six defendants in addition to the Appellees.[1]

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[222 Md.App. 75] Appellees Todd and Phillip Parriott removed the case to federal court on December 15, 2011. Upon removal, the Parriotts filed separate motions to dismiss for lack of personal jurisdiction, and Appellee Stephenson filed an answer to the complaint. The federal court dismissed the RICO claim and remanded the remaining state law claims back to the circuit court.

On remand, the circuit court determined that the defendants associated with First Universal Lending, LLC (" FUL" )--Nicholas Andrews, N. Andrews LLC, Sean Zausner, David Zausner, and David Feingold (collectively referred to as the " FUL Defendants" )--were never properly served with the complaint and summons under Maryland Rule 2-121. Those determinations by the circuit court were not appealed and are not properly before this Court. As discussed infra, an automatic bankruptcy stay barred pursuit of the claims against Desert Capital REIT, Inc. (" Desert Capital" ), the only defendant that is a Maryland resident. The Swareys' Notice of Appeal limits itself to Appellees, and stems from three orders of the circuit court dismissing the complaints against all Appellees for lack of personal jurisdiction, and for insufficiency of service of process as to Appellee Stephenson.

The Swareys present the following issues in their briefing, which we have rephrased and combined for clarity:

I. Did the circuit court err in concluding that Appellee Stephenson was not properly served, and therefore, must be dismissed from the action?
II. Did the circuit court err in granting the Appellees' motions to dismiss for lack of personal jurisdiction?

In view of the uncontested particulars that upon removal of the case to federal court, Appellee Stephenson was properly [222 Md.App. 76] served with federal summons and answered the complaint, including all state law claims, we hold that he waived the defense of insufficiency of service of process and was barred from raising it for the first time upon remand back to the circuit court. We also find the circuit court abused its discretion in failing to give the Swareys an opportunity to obtain responses to their discovery requests, specifically aimed at determining the quality and quantity of Appellees' contacts with Maryland for the purpose of long-arm jurisdiction, prior to granting Appellees' motions to dismiss. Accordingly, we reverse the judgments of the circuit court and remand for further proceedings.

BACKGROUND[2]

In 2008, Mr. Swarey was 69 years old. Prompted by a television advertisement, Mr. Swarey attended a financial planning seminar on how to invest in real estate tax sales. During this seminar, Mr. Swarey spoke to a representative of Strategic Wealth Management about participating in some real estate development projects. Through this contact, Mr. Swarey was put in touch with the Appellees and their related entities: Desert Capital, Consolidated Mortgage LLC, and R& D Properties. Soon thereafter, the Swareys

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were contacted by First Universal Lending, LLC and encouraged to secure a $2,000,000.00 non-purchase money loan, secured by their primary residence (the " FUL loan" ), for the purpose of making investments with Appellees.

In March of 2008, and before the Swareys entered into the FUL loan, Mr. Swarey entered into a joint venture agreement and invested $440,000.00 in Pebble Creek JV, LLC (" Pebble Creek" ). The Pebble Creek joint venture agreement was executed by Appellee Stephenson and sent to Mr. Swarey at his home address in Maryland, where Mr. Swarey signed the [222 Md.App. 77] agreement on March 27, 2008.[3] The Swareys' $440,000.00 investment was wire-transferred to Pebble Creek from Mr. Swarey's personal account at Maryland Bank and Trust Company.

Pebble Creek was a subsidiary of R & D Properties, LLC, organized as a Nevada company and owned by Appellee Kerry Stephenson. The declared purpose of Pebble Creek was to purchase and develop 47 pre-identified residential lots in the Las Vegas area. Once acquired, the Swareys would take an income producing ownership interest in the real property. In their opposition to Appellee Todd Parriott's Motion to Dismiss, the Swareys provided numerous exhibits, including three letters from Appellee Stephenson sent to their Maryland home, advising them that development of the Pebble Creek community " continue[d] to move forward." By email, dated January 13, 2009, Appellee Stephenson assured his investors that the " community continues to move forward ... [w]e have received all approvals on the engineering and archetechural [sic] plans for all the home models and are ready to pull permits to begin the building process." But Pebble Creek never purchased or developed any property, and eventually the Swareys' $440,000.00 investment evaporated along with Pebble Creek JV, LLC when its status as a Nevada LLC was revoked.

Meanwhile, in May 2008, Mr. Swarey entered into a second joint venture agreement involving a different subsidiary of R & D Properties, LLC, owned by Appellee Stephenson. The Ann Road Industrial 007, LLC, joint venture agreement was executed by Stephenson and sent to Mr. Swarey at his home in Maryland, where he signed it on May 20, 2008. This time the Swareys invested a total of $1,150,000.00 in Ann Road [222 Md.App. 78] Industrial 007, LLC. Again, the stated purpose of the venture was to purchase and develop real estate along Ann Road in Clark County, Nevada. However, as before, no land was purchased, the company's status as a Nevada LLC was revoked, and no accounting was ever made to the Swareys for their investment.

Around this time, the loan process initiated by lender FUL was delayed because Mrs. Swarey was undergoing surgery for her recently diagnosed Renal Cell Carcinoma. Undeterred by the Swareys' hardship, the FUL loan officer, defendant Nick Andrews, allegedly pursued the loan by meeting with Mr. Swarey near the hospital on the evening before Mrs. Swarey's surgery and threatening a lawsuit if the Swareys backed out of the deal. That night, Andrews sent the FUL settlement officer to obtain a signature from an ailing, semi-conscious Mrs. Swarey granting power of attorney to Mr. Swarey, and then instructed him in executing the closing documents

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for the $2,000,000.00 loan. Mr. Swarey dutifully invested that $2,000,000.00 in the " Mid-Bar Property Project" through Appellee Todd Parriott and his Maryland investment company, Desert Capital. The Swareys were told their money would be used to purchase a certain parcel of land for construction of a high-rise condominium building. Correspondence regarding the Mid-Bar investment came through Consolidated Mortgage, LLC--the surviving entity from the merger of Appellee Phillip Parriott's Consolidated Mortgage Corporation in Nevada, with a South Dakota LLC of the same name. The Swareys allege Mid Bar was deliberately underfunded and designed to fail. When the Mid-Bar Project defaulted on the loans it received from Desert Capital, Desert Capital acquired the land in foreclosure at a greatly discounted value, and allegedly laundered away the lost equity. The land was then transferred to Mid Blue, LLC, another subsidiary of Appellee Phillip Parriott's Consolidated Mortgage, LLC. The Swareys were notified of this transfer by CM Capital Services, LLC, a subsidiary of Parriott's Delaware Company CM Group, LLC, owned by Appellee Todd Parriott.[4]

[222 Md.App. 79] In 2009, Mr. Swarey telephoned and wrote Appellees repeatedly, trying to ascertain the state of the Swareys' $3.7 million investments. By the fall of that year, all communications from Appellees and their array of subsidiary entities ceased. On May 18, 2011, the Swareys filed a complaint in the Circuit Court for St. Mary's County in the instant case.

Writs of summons were issued as to all of the defendants on August 12, 2011. On October 21 & 27, 2011, Appellees Phillip and Todd Parriott filed motions to dismiss for lack of personal jurisdiction and insufficiency of service of process. Following considerable difficulties, process was finally served on Appellees Todd Parriott and Phillip Parriott on November 20, 2011. Four days later, Desert Capital filed a Notice of Automatic Bankruptcy Stay pursuant to 11 U.S.C. § 362.

On December 15, 2011, the Swareys' case was removed to the United States District Court for the District of Maryland, Southern Division. Thereafter, Appellee Stephenson was served with a federal summons and a copy of the complaint. On February 1, 2012, he filed an answer and request for jury trial. In his answer, Stephenson raised as an affirmative defense that he had no dealings as an individual with the Swareys and therefore could not be sued in his personal capacity. Appellees Todd and Phillip Parriott filed separate motions to dismiss based on lack of personal jurisdiction, improper venue, and failure to state a claim upon which relief can be granted.

In its September 20, 2012, Memorandum Opinion, the federal district court determined that the Swareys failed to state a RICO claim, because according to the complaint, the defendants' " purported actions were narrowly directed toward a single fraudulent goal: to swindle the Swarey's out of their life savings." " The alleged scheme involved a single set of victims (the Swareys), and caused a single discrete injury (the [222 Md.App. 80] Swareys' monetary loss)[.]" [5] Accordingly, the September 20,

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2012, order of the district court dismissed the RICO count as to all defendants. With the only federal count dismissed, the district court declined to exercise supplemental subject matter jurisdiction over the remaining state law claims and remanded the case to the circuit court.[6]

From here, the Swareys' remaining claims disappeared almost as quickly as their life savings. On July 31, 2013, the Circuit Court for St. Mary's County granted: (1) Appellee Todd Parriott's Motion to Dismiss for Lack of Personal Jurisdiction; (2) Appellee Phillip Parriott's Motion to Dismiss for Lack of Personal Jurisdiction; and (3) Appellee Kerry Stephenson's Motion to Dismiss for Lack of Personal Jurisdiction and Insufficiency of Service of Process.

Additional facts will be presented as they pertain to the discussion of each issue.

[222 Md.App. 81]DISCUSSION

I.

Appeal from a Final Judgment

As a threshold matter, Appellees assert that no final judgment has been entered as to all nine named defendants in the suit and, therefore, this appeal must be dismissed under Maryland Rule 8-602(a)(1). We disagree.

" The right of appeal exists from a final judgment entered by a court in the exercise of original, special, limited, statutory jurisdiction, unless in a particular case the right of appeal is expressly denied by law." Maryland Code (1973, 2013 Repl. Vol.), Courts & Judicial Proceedings Article (" CJP" ) § 12-301. An order or decision that " adjudicates fewer than all of the claims in an action . . . or that adjudicates the rights and liabilities of fewer than all the parties to the action is not a final judgment." Md. Rule 2-602(a)(1). A " 'named defendant who has not been served is not a party for the purpose of determining a final judgment' and . .., if the judgment entered by the court disposes of all claims against all persons over whom the court has acquired jurisdiction, the judgment is final without a certification under Rule 2-602(b).'" Turner v. Kight, 406 Md. 167, 172 n.3, 957 A.2d 984 (2008) (quoting State Highway Admin. v. Kee, 309 Md. 523, 529, 525 A.2d 637 (1987)). If the orders issued by the circuit court resolve all claims against the parties over whom that court has acquired jurisdiction (i.e., all parties who were properly served), the judgment is final and appealable. Higginbotham v. Pub. Serv. Comm'n of Maryland,

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171 Md.App. 254, 265, 909 A.2d 1087 (2006). Thus, the Court of Appeals has made it plain that under Rule 2-602, this Court is not deprived of jurisdiction where unresolved claims remain solely against defendants who were not served.

Of the nine named defendants in this case, there is no dispute that process was served on Appellees Todd Parriott and Phillip Parriott. The circuit court determined that Stephenson was not properly served, although the parties contest [222 Md.App. 82] this on appeal. The circuit court also determined that the five " FUL Defendants" were not properly served. The circuit court dismissed the claims against Appellees Todd Parriott, Phillip Parriott, and Kerry Stephenson in separate orders issued on July 31, 2013. Thus, the circuit court has reached a final decision regarding all defendants excluding Desert Capital. The pertinent inquiry is then whether process was served properly on Desert Capital.[7]

An affidavit by the Swareys' agent states that process was served on Desert Capital via certified mail on August 22, 2011. However, prior to that service, on April 29, 2011, Desert Capital became subject to involuntary Chapter 11 bankruptcy proceedings pursuant to 11 U.S.C. § 303. The commencement of the bankruptcy action triggered an automatic stay under 11 U.S.C. § 362(a),[8] which provides, in pertinent part:

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of--
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

(Emphasis added). As a result, if the cause of action underlying the Swareys' complaint accrued at such a time as the action could have been commenced prior to April 29, 2011, the ...


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