United States Court of Appeals
For the First Circuit
MICHAEL PERRY AND CONDOMINIUM HOUSING, INC.,
STEVEN BLUM, AS TRUSTEE OF MOORINGS NOMINEE TRUST, ET AL.,
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nancy Gertner, U.S. District Judge]
Thompson, Selya and Dyk,* Circuit Judges.
Michael S. Gardener, with whom Laurence A. Schoen, Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Michael A. Collora,
Ingrid S. Martin, and Dwyer & Collora, LLP were on brief, for
Matthew H. Feinberg, with whom Matthew A. Kamholtz, Daniel
Klubock, and Feinberg & Kamholtz, were on brief, for appellees.
October 1, 2010
Of the Federal Circuit, sitting by designation.
SELYA, Circuit Judge. This appeal requires us to sort
through a complicated set of commercial machinations and evaluate
the soundness of an equitable accounting through which the lower
court divided the surplus proceeds of a multi-million-dollar
foreclosure sale. To solve this conundrum, we must answer three
loosely related questions. The first concerns the applicability of
the doctrine of judicial estoppel, the second concerns the way in
which the methodology for calculating the equity of redemption fits
within the framework of a judicial accounting, and the third
concerns the propriety of a post-trial joinder of additional
defendants. After careful consideration of these questions, we
reject the district court's proposed application of the doctrine of
judicial estoppel but uphold its treatment of the equity of
redemption and its joinder order. When all is said and done, we
affirm in part, reverse in part, vacate the judgment, and remand
for further proceedings consistent with this opinion.
Although there is a long, convoluted, and sometimes
Machiavellian history involving the protagonists, we relate here
only those facts relevant to the issues presented on appeal. We
supplement this account in connection with our discussion of
particular issues. Throughout, we accept the district court's
factual findings to the extent that they are not clearly erroneous.
Limone v. United States, 579 F.3d 79
, 94 (1st Cir. 2009); Cumpiano
[End Page 2]
v. Banco Santander P.R., 902 F.2d 148
, 152 (1st Cir. 1990); Fed. R.
Civ. P. 52(a).
Michael Perry and Stephen Yellin each hold a fifty
percent interest in Condominium Housing, Incorporated (CHI), which
owned a large apartment complex in Boston, Massachusetts, known as
"the Fenmore." CHI purchased the Fenmore from Harold Brown in
1985. The purchase price included two promissory notes, with an
aggregate face value of approximately $11,000,000 (the Notes),
executed by Perry and Yellin as co-makers. The Notes were secured
by first and second mortgages on the property.
Over time, Perry and Yellin made payments on the Notes.
But when the Boston real estate market cratered in the late 1980s,
they defaulted on several obligations, including not only the Notes
but also an array of loans from their primary lender, Capitol Bank
(which, among other things, held a third mortgage on the Fenmore).
By 1990, Perry and Yellin owed Capitol Bank more than $7,000,000.
They negotiated a settlement with the bank in July of that year,
but the settlement proved to be illusory. The bank subsequently
repudiated it, and Perry and Yellin were forced to sue for specific
performance in a Massachusetts state court.
During the currency of that suit, the Federal Deposit
Insurance Corporation (FDIC) took over Capitol Bank as its receiver
and liquidating agent. The FDIC sought to collect Perry's and
Yellin's indebtedness to the bank, claiming that they owed roughly
[End Page 3]
$19,000,000 in principal and accrued interest on various loans. As
part of its collection effort, the FDIC disavowed the earlier
settlement and, in January of 1999, filed an amended counterclaim
in the state court suit.
The amended counterclaim named as defendants Perry,
Yellin, and a number of their relatives. These additional
defendants (whom we shall call the "Perry Parties" and the "Yellin
Parties") were allegedly involved in Perry's and Yellin's real
estate enterprises as "straws." In due season, the FDIC removed
the state court action to the federal district court. See 12
U.S.C. ┬§ 1819(b)(2)(B).
Brown's fortunes also had been adversely affected by the
slumping real estate market. In 1991, he filed for bankruptcy.
The bankruptcy proceedings dragged on and, in August of 1996, he
submitted an affidavit to the bankruptcy court in which he
represented that the Notes had an unpaid balance of $902,662 and
were uncollectible. The bankruptcy court granted Brown a discharge
from bankruptcy in September of 1996 and permitted him to retain
ownership of the Notes.
CHI went into bankruptcy in April of 1996. After Brown
emerged from his own bankruptcy, he intervened in CHI's bankruptcy
and requested relief from the automatic stay, 11 U.S.C. ┬§ 362, so
that he could foreclose on the Fenmore. Brown represented that the
Notes had a principal balance of $902,662 and past-due interest of
[End Page 4]
$950,620. The bankruptcy court granted Brown's motion to lift the
stay in December of 1996. Instead of foreclosing, however, Brown
agreed to sell the Notes to Yellin for $950,000. Yellin
effectuated this purchase behind Perry's back and through a straw:
Steven Blum, in his capacity as trustee of Moorings Nominee Trust.
The sole beneficiary of the trust was North Shore Renewal, Inc., a
shell corporation wholly owned by Yellin's wife, Elaine. Yellin,
acting through Blum, then took control of the Fenmore as a
mortgagee-in-possession and began collecting rents.
In June of 1997, Perry, on behalf of CHI, sued the
Yellins and Blum, individually and as trustee of Moorings Nominee
Trust, in a Massachusetts state court. The suit alleged an
alphabet of wrongdoing, including breach of fiduciary duty, fraud,
and conversion, stemming from the purchase of the Notes. In
October of 1998, after Perry failed to attend a pretrial
conference, the state court dismissed the suit for want of
prosecution. CHI v. Blum, No. 97-3007 (Mass. Dist. Ct. Oct. 7,
1998) (unpublished order).
In late 1997, Yellin, acting through Blum, commenced
foreclosure proceedings with respect to the Fenmore. The FDIC,
which held junior mortgages on the property as the receiver for
Capitol Bank, responded by bringing an action in the federal
district court. In the action, the FDIC sought to enjoin any
foreclosure sale. The district court granted a preliminary
[End Page 5]
injunction blocking the foreclosure sale. Later, it consolidated
the action in which it had granted the injunction with the action
that the FDIC had removed from the state court.
In 2002, Yellin and the Yellin Parties settled with the
FDIC for $5,000,000. Under the terms of the settlement, the FDIC
permitted Yellin, acting through Blum, to foreclose on the Fenmore
and use the first $5,000,000 of the foreclosure proceeds to fund
the settlement. The district court thereafter dissolved the
existing injunction and Blum foreclosed on the Fenmore. The
apartment complex was sold at auction for $9,450,000 (ironically,
to Brown). The FDIC and the Yellin Parties then jointly moved to
dismiss all claims inter sese. The district court granted that
motion on June 10, 2002.1
Following the foreclosure sale, Perry, on behalf of
himself and CHI, cross-claimed against Blum for an accounting of
both the foreclosure proceeds and all rents collected between 1996
and 2002. Perry alleged that, as an equal partner in CHI, he was
entitled to one-half of the Fenmore's equity of redemption.
In February and March of 2005, the district court held a
bench trial on the cross-claim. The Notes were secured by first
and second mortgages on the Fenmore, so Blum, as the noteholder and
as a straw for Yellin, had a priority claim to the foreclosure
The FDIC settled separately with the Perry Parties in
November of 2005. The settlement totaled $6,625,000.
[End Page 6]
proceeds. Not surprisingly, then, one of the main issues at trial
concerned the amount due on the Notes. Blum contended that
$7,494,435 was due. Perry contended that the amount due was much
less. The district court determined that Blum was estopped from
asserting that the amount due was anything other than what Brown,
Blum's predecessor-in-interest, had represented in the bankruptcy
court, namely, $1,853,282. Perry v. Blum (Perry I), No. 99-12194,
slip op. at 30 (D. Mass. Oct. 31, 2008).2 Even though the trial
had ended years earlier, the court granted Perry's motion to join
the Yellins as reach-and-apply defendants. Id., slip op. at 36.
Before the court actually made a final accounting, Blum
and the Yellins moved for reconsideration of Perry I, arguing that
the court had erred in applying judicial estoppel and in joining
the Yellins after trial. The court denied the motion, Perry v.
Blum (Perry II), No. 99-12194, slip op. at 2 (D. Mass. June 2,
2009). The court then prepared the accounting and entered judgment
for Perry against Blum and the Yellins in the sum of $4,347,126,
plus pre-judgment interest. The appendix to this opinion
delineates the manner in which the court calculated this amount.
The district court also addressed Perry's argument that the
Notes were discharged (and, thus, the amount due was zero). The
court held that this argument was barred by res judicata: the
dismissal of CHI's state court action precluded Perry from
litigating the discharged claim. Perry I, slip op. at 20-27. This
ruling is not challenged on appeal.
[End Page 7]
Blum and the Yellins moved to alter or amend the
judgment, Fed. R. Civ. P. 59(e), protesting that the court had
erred in excluding from its calculation of the equity of redemption
an offset for the $5,000,000 payment that the Yellins had made to
the FDIC ? an offset that would have had the effect of reducing
Perry's award by $2,500,000. The district court denied the motion,
reasoning that it would be inequitable to allow Yellin to settle
his personal debts by using foreclosure proceeds that otherwise
would have to be split with Perry. Perry v. Blum (Perry III), No.
99-12194 (D. Mass. June 18, 2009) (unpublished order). Blum and
the Yellins filed a timely motion of appeal from both the final
judgment and the denial of their Rule 59(e) motion.
Like a milking stool, this appeal rests on three legs.
The appellants (Blum and the Yellins) insist that the district
court erred in (i) invoking judicial estoppel, (ii) miscalculating
the equity of redemption, and (iii) adding the Yellins as
defendants after the trial had ended. We discuss each of these
arguments separately. Before doing so, however, we pause to make
a point about choice of law.
Due to the FDIC's involvement, this case had its roots in
federal question jurisdiction. 12 U.S.C. ┬§ 1819(b)(2)(A); 28
U.S.C. ┬§ 1331. But the FDIC has departed from the scene, and the
remaining claims are cognizable only under supplemental
[End Page 8]
jurisdiction. 28 U.S.C. ┬§ 1367. Where, as here, a federal court
proceeds under supplemental jurisdiction, it is obliged to apply
federal procedural law and state substantive law. Hoyos v.
Telecorp Commc'ns, Inc., 488 F.3d 1
, 5 (1st Cir. 2007). To the
extent that procedural issues loom, the Federal Rules of Civil
Procedure provide the beacon by which we must steer.
Most of the components of the appellants' asseverational
array raise substantive questions and, thus, require us to apply
Massachusetts law. Withal, one of the issues presents a thorny
problem of classification, which this court has not resolved: Is
judicial estoppel procedural (and, thus, governed by federal law)
or substantive (and, thus, governed by state law)?
This is an interesting Rubik's cube, but we need not
provide a definitive answer here. The parties and the district
court all assumed that federal standards of judicial estoppel
governed, and the case has been briefed and argued on the same
assumption. In such circumstances, we may hold the parties to
their plausible choice of law, whether or not that choice is
correct. See Thore v. Howe, 466 F.3d 173
, 181 n.1 (1st Cir. 2006);
Alt. Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23
, 32 (1st
Cir. 2004). We follow that prudential course and apply federal law
in discussing this issue.
[End Page 9]
A. Judicial Estoppel.
The appellants insist that the district court erred in
invoking judicial estoppel to preclude them from showing that the
amount due on the Notes was anything other than what Brown had
represented in a prior bankruptcy proceeding. We review for abuse
of discretion a district court's application of judicial estoppel.
Global NAPs, Inc. v. Verizon New Engl. Inc., 603 F.3d 71
, 91 (1st
Cir. 2010). Within that rubric, we accept the trial court's
findings of fact unless they are clearly erroneous, see Limone, 579
F.3d at 94; Cumpiano, 902 F.2d at 152, and evaluate its answers to
abstract questions of law de novo, see San Juan Cable LLC v. P.R.
Tel. Co., 612 F.3d 25
, 29 (1st Cir. 2010). We treat a material
mistake of law as a per se abuse of discretion. Rosario-Urdaz v.
Rivera-Hern├índez, 350 F.3d 219
, 221 (1st Cir. 2003).
The doctrine of judicial estoppel is equitable in nature.
It operates to prevent a litigant from taking a litigation position
that is inconsistent with a litigation position successfully
asserted by him in an earlier phase of the same case or in an
earlier court proceeding. InterGen N.V. v. Grina, 344 F.3d 134
144 (1st Cir. 2003). The purpose of the doctrine is to protect the
integrity of the judicial process. It is typically invoked when a
litigant tries to play fast and loose with the courts. New
Hampshire v. Maine, 532 U.S. 742
, 749-50 (2001); Alt. Sys.
[End Page 10]
Concepts, 374 F.3d at 33; Patriot Cinemas, Inc. v. Gen. Cinema
Corp., 834 F.2d 208
, 212 (1st Cir. 1987).
The contours of judicial estoppel are hazy. But even
though its elements cannot be reduced to a scientifically precise
formula, New Hampshire, 532 U.S. at 750, courts generally require
the presence of three things before introducing the doctrine into
a particular case. First, a party's earlier and later positions
must be clearly inconsistent. Id.; Alt. Sys. Concepts, 374 F.3d at
33. Second, the party must have succeeded in persuading a court to
accept the earlier position. New Hampshire, 532 U.S. at 750; Alt.
Sys. Concepts, 374 F.3d at 33. Third, the party seeking to assert
the inconsistent position must stand to derive an unfair advantage
if the new position is accepted by the court. New Hampshire, 532
U.S. at 751; Alt. Sys. Concepts, 374 F.3d at 33.
Ordinarily, the party against whom judicial estoppel is
invoked must be the same party who made the prior (inconsistent)
representation. See InterGen, 344 F.3d at 144 (explaining that
judicial estoppel "prevents a litigant from pressing a claim that
is inconsistent with a position taken by that litigant" in the same
or an earlier proceeding); Brewer v. Madigan, 945 F.2d 449
(1st Cir. 1991) (explaining that judicial estoppel prevents "a
party from taking a position inconsistent with one successfully and
unequivocally asserted by that same party in a prior proceeding").
Courts normally refuse to apply judicial estoppel to one party
[End Page 11]
based on the representations of an unrelated party. See, e.g.,
Parker v. Wendy's Int'l, Inc., 365 F.3d 1268
, 1272 (11th Cir.
2004); Bethesda Lutheran Homes & Servs., Inc. v. Born, 238 F.3d 853
, 858 (7th Cir. 2001); Tenn. ex rel. Sizemore v. Surety Bank,
200 F.3d 373
, 381-82 (5th Cir. 2000); see also 18B Charles Alan
Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and
Procedure ┬§ 4477, at 618-19 (2d ed. 2002). Nevertheless, courts
sometimes have allowed judicial estoppel when the estopped party
was responsible in fact for the earlier representation, see, e.g.,
Ladd v. ITT Corp., 148 F.3d 753
, 756 (7th Cir. 1998), or when the
estopped party was the assignee of a litigation claim or assumed
the original party's role, see 18B Wright et al., supra, ┬§ 4477, at
In the case at hand, the district court determined that
the appellants (Blum and the Yellins) should be judicially estopped
from asserting that the amount due on the Notes was $7,494,435
because a third party, Brown, had represented in his own bankruptcy
proceeding that the unpaid balance was a mere $902,662, and had
represented in CHI's bankruptcy that the total amount due on the
Notes (including accrued interest) was $1,853,282. Perry I, slip
op. at 30. The court bound the appellants to Brown's earlier
representations primarily on the theory that the appellants, as
purchasers of the Notes, were subject to any defenses that Perry
and CHI could have asserted against Brown himself. Id. at 31 &
[End Page 12]
n.15.3 The court reasoned that because Brown would be judicially
estopped from contradicting his prior representations anent the
amount due on the Notes, his assignees should be similarly
estopped. Id. at 32-36. The appellants say that Brown's
representations cannot be imputed to them and that, therefore,
judicial estoppel was incorrectly invoked.
In examining these competing contentions, we take the
underlying substantive law ? the law of negotiable instruments ?
from Massachusetts. Under Massachusetts law, negotiable
instruments, such as the Notes, are governed by Article III of the
Uniform Commercial Code (U.C.C.). See Mass. Gen. Laws ch. 106,
┬§ 3-102. The U.C.C. states that a noteholder's right to enforce a
note is subject to certain defenses. Id. ┬§ 3-305(a). These
defenses include those enumerated in section 3-305(a)(1) (often
termed "real defenses"), defenses specifically listed elsewhere in
Article III, and defenses "that would be available if the person
entitled to enforce the instrument were enforcing a right to
The district court also mentioned approvingly the Fifth
Circuit's decision in In re Coastal Plains, Inc., 179 F.3d 197
Cir. 1999), for the proposition that a third party's
misrepresentation may be used to estop an unrelated party. Perry
II, slip op. at 11. Coastal Plains did not involve unrelated
parties, see 179 F.3d at 203, 213, and in any event, its authority
on this specification is suspect. See, e.g., Biesek v. Soo Line
R.R. Co., 440 F.3d 410
, 412-13 (7th Cir. 2006) (declining to follow
Coastal Plains); In re Riazuddin, 363 B.R. 177
, 188 & n.53 (B.A.P.
10th Cir. 2007) (same). Indeed, the Fifth Circuit itself has
distinguished Coastal Plains, based on its unique facts. See Kane
v. Nat'l Union Fire Ins. Co., 535 F.3d 380
, 387 (5th Cir. 2008).
[End Page 13]
payment under a simple contract" (often termed "personal
defenses"). Id. If a noteholder qualifies as a holder in due
course, his right to enforce the note is subject only to real
defenses. Id. ┬§ 3-305(b).
The appellants do not presume to be holders in due
course. See Perry II, slip op. at 12. Thus, they are subject to
the axiom that the rights of a transferee who is not a holder in
due course rise no higher than the rights of the transferor. See
2 James J. White & Robert S. Summers, Uniform Commercial Code ┬§ 17-
11, at 226 (5th ed. 2008). It follows that the appellants, as
transferees, are subject to the trilogy of defenses described in
section 3-305(a) to the same extent that those defenses would have
been available against the transferor (Brown). See id.; see also
25 Herbert Lemelman, Massachusetts Practice ┬§ 3:150, at 428 (3d ed.
2002) (stating in essence that a holder who is not a holder in due
course is treated under Massachusetts law as the assignee of a
This does not mean, however, that the transferor and the
transferee are to be treated as one and the same for all purposes.
Of particular pertinence for present purposes, judicial estoppel
does not fit comfortably within any of the trilogy of defenses
described in section 3-305(a). Judicial estoppel is certainly not
a "real defense" within the provision of the statute, nor is it a
defense specifically listed anywhere in Article III of the U.C.C.
[End Page 14]
This leaves only the category of "personal defenses."
Personal defenses typically are thought to be "those
based on common law contract principles." Mass. Gen. Laws ch. 106,
┬§ 3-305(a) cmt. 2; see FDIC v. Wood, 758 F.2d 156
, 160 (6th Cir.
1985) ("'Personal' defenses, such as failure of consideration and
usury . . . are defenses or claims stemming from the underlying
transaction."). Judicial estoppel does not fit seamlessly into the
taxonomy of personal defenses, as it is not a defense aimed
directly at either the validity or the enforceability of a
contract. Rather, it is a judge-made doctrine designed to protect
the integrity of the judicial system. See New Hampshire, 532 U.S.
at 749. This seeming incongruence gives us some pause about trying
to ram the square peg of judicial estoppel into the round hole of
Still, we recognize that the boundaries of judicial
estoppel are hazy. It is conceivable that cases may arise in which
the doctrine can be considered a personal defense, used to prevent
a noteholder from playing fast and loose with the courts through,
say, engaging a straw to assert a payoff amount contradictory to
one earlier put forth by the noteholder himself. See G-I Holdings,
Inc. v. Reliance Ins. Co., 586 F.3d 247
, 262 (3d Cir. 2009) ("We
will apply [judicial estoppel] to neutralize threats to judicial
integrity however they may arise."); cf. FDIC v. Gulf Life Ins.
Co., 737 F.2d 1513
, 1518 (11th Cir. 1984) (suggesting that, for
[End Page 15]
negotiable instruments, general estoppel may constitute a personal
defense, "to which a holder in due course would be impregnable").
The combinations of possible circumstances are infinitely varied,
and a flat holding that judicial estoppel can be circumvented
simply by transferring property to a third party would be folly.
See generally Sandstrom v. ChemLawn Corp., 904 F.2d 83
, 87-88 (1st
Cir. 1990) (emphasizing utility of judicial estoppel as a means of
preventing a party from obtaining an unfair advantage).
Here, however, we need not grapple with the admittedly
difficult question of whether judicial estoppel may ever qualify as
a personal defense. In our view, the district court's application
of judicial estoppel suffers from a different infirmity: Perry has
failed to satisfy the second requirement for judicial estoppel. He
has not shown that the bankruptcy court actually accepted Brown's
representation of the value of the Notes.
The party proposing an application of judicial estoppel
must show that the relevant court actually accepted the other
party's earlier representation. See Gens v. Resolution Trust
Corp., 112 F.3d 569
, 572 (1st Cir. 1997) ("Judicial estoppel is not
implicated unless the first forum accepted the legal or factual
assertion alleged to be at odds with the position advanced in the
current forum . . . ." (emphasis in original)). "Acceptance" in
this context is a term of art. In order to satisfy this
prerequisite, a party need not show that the earlier representation
[End Page 16]
led to a favorable ruling on the merits of the proceeding in which
it was made, but must show that the court adopted and relied on the
represented position either in a preliminary matter or as part of
a final disposition. See, e.g., Pennycuff v. Fentress Cnty. Bd. of
Educ., 404 F.3d 447
, 453 (6th Cir. 2005); Karaha Bodas Co. v.
Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274
294 (5th Cir. 2004); see also Global NAPs, 603 F.3d at 90 (finding
that court accepted party's first representation by relying on it
in granting temporary restraining order); Alt. Sys. Concepts, 374
F.3d at 34 (explaining that because court relied on party's initial
position in denying motion to dismiss, party "derived a direct (if
temporary) benefit from its original position").
The showing of judicial acceptance must be a strong one.
See SBT Holdings, LLC v. Town of Westminster, 547 F.3d 28
, 37 & n.8
(1st Cir. 2008) (rejecting judicial estoppel argument because
record was unclear as to whether court accepted plaintiff's prior
position); cf. United States v. Pakala, 568 F.3d 47
, 60 (1st Cir.
2009) (upholding judicial estoppel when it was "clearly obvious"
that the original trial court, in granting a motion, "necessarily
adopted" the position that the movant later sought to contradict);
United Nat'l Ins. Co. v. Spectrum Worldwide, Inc., 555 F.3d 772
779 (9th Cir. 2009) (authorizing judicial estoppel when trial court
"clearly accepted and relied upon [the party's] assertions" when it
denied preliminary injunction). The need for a strong showing
[End Page 17]
derives from the maxim that "[j]udicial estoppel is applied with
caution to avoid impinging on the truth-seeking function of the
court because the doctrine precludes a contradictory position
without examining the truth of either statement." Teledyne Indus.,
Inc. v. NLRB, 911 F.2d 1214
, 1218 (6th Cir. 1990); accord Lowery v.
Stovall, 92 F.3d 219
, 224 (4th Cir. 1996) ("The insistence upon a
court having accepted the party's prior inconsistent position
ensures that judicial estoppel is applied in the narrowest of
It follows that a proponent of judicial estoppel must
affirmatively show, by competent evidence or inescapable inference,
that the prior court adopted or relied upon the previous
inconsistent assertion. See United Steelworkers of Am. v. Ret.
Income Plan for Hourly-Rated Emps. of ASARCO, Inc., 512 F.3d 555
563-64 (9th Cir. 2008) (finding that failure to demonstrate
judicial acceptance precludes application of estoppel where "the
district court never held" the notion urged by the party) (emphasis
in original); United States v. Levasseur, 846 F.2d 786
, 794 (1st
Cir. 1988) (rejecting "illogical surmise" about what prior court
might have accepted as a basis for judicial estoppel). Perry has
not made the requisite showing here.
There are only two possible actions taken by the
bankruptcy court that Brown's representation might have affected.
First, in Brown's bankruptcy proceeding, the court allowed him to
[End Page 18]
retain the Notes after he stated the amount due and represented
that the Notes were uncollectible. Second, in the CHI bankruptcy
(in which Brown intervened), the court lifted the automatic stay,
allowing Brown to foreclose on the Fenmore. There is no evidence
that either action was premised on Brown's statements about the
amount owed on the Notes, and it is implausible to infer any such
We examine these two actions in reverse order. It defies
logic to deduce that the bankruptcy court granted Brown relief from
the automatic stay on the basis of the amount owed on the Notes.
A larger figure would not have supported keeping the stay in place
? if anything, a greater amount owed would have created an
additional incentive for the court to allow the foreclosure to
Similarly, it is utterly speculative to suggest that the
bankruptcy court, in approving Brown's global settlement and
allowing him to retain the Notes, accepted each and every one of
his figures. Generally speaking, settlement "neither requires nor
implies any judicial endorsement of either party's claims or
theories." In re Bankvest Capital Corp., 375 F.3d 51
, 60 (1st Cir.
2004) (quoting Bates v. Long Island R.R. Co., 997 F.2d 1028
(2d Cir. 1993)). So viewed, an unexplained settlement does not
provide the prior success necessary for judicial estoppel. See
C & M Props., LLC v. Burbidge, 377 B.R. 677
, 685 (D. Utah 2007)
[End Page 19]
(noting that "[t]he the fact that [debtor] obtained confirmation of
its [plan] does not demonstrate that the bankruptcy court was
misled" and thus finding that second element of judicial estoppel
was not satisfied), vacated on other grounds by In re C & M Props.,
L.L.C., 563 F.3d 1156
, 1168 (10th Cir. 2009).
Perry surmises, but offers no semblance of proof, that a
bankruptcy court would treat uncollectible notes worth over
$7,000,000 differently than uncollectible notes worth roughly
$1,000,000. It is, of course, possible that, in particular
circumstances, a bankruptcy court might indulge in such
differential treatment. Here, however, the surmised inference is
simply not plausible. By definition, an uncollectible note is an
uncollectible note (and, thus, worthless). In any event, either of
these figures pales in comparison to $134,105,736 ? the sum of the
claims of Brown's creditors at the time of the settlement. In this
case, then, the variation in amount is a distinction that makes no
We note that one court has treated settlements in ordinary
litigation and those arising in the context of bankruptcy
proceedings differently. Reynolds v. Comm'r, 861 F.2d 469
(6th Cir. 1988) (explaining that bankruptcy may give rise to
greater judicial acceptance of the parties' positions because the
court there "is charged with an affirmative obligation to apprise
itself of the underlying facts and to make an independent judgment
as to whether the compromise is fair and equitable"). We need not
comment upon the correctness of this approach as Perry has offered
nothing more than speculation to suggest that the bankruptcy court
was motivated by the amount due on the Notes, rather than their
uncollectible status. Cf. id. at 473-74 (noting that the accepted
representation "was essential to the bankruptcy judge's approval of
[End Page 20]
For what it may be worth, Brown himself neither
explicitly nor implicitly contradicted his original representation
as to the amount due on the Notes. He placed that figure at
$902,662 and later sold the Notes for a figure in the same ballpark
? $950,000. These events do not support a suggestion that he was
attempting to defraud or mislead the bankruptcy court. This is
potentially important because judicial estoppel is not meant to be
a trap for the unwary and should be employed sparingly when "there
is no evidence of intent to manipulate or mislead the courts."
Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355
365 (3d Cir. 1996).
To say more on this issue would be to paint the lily.
Conjecture, without more, cannot support the application of
judicial estoppel. See SBT Holdings, 547 F.3d at 37 & n.8. Put
another way, remote possibilities are not enough. Consequently, we
hold that the district court committed legal error (and, thus,
abused its discretion) in judicially estopping the appellants,
based on a third party's earlier representation, from attempting to
prove that the amount due on the Notes was more than $1,853,282.
In an effort to repair this hole in the fabric of their
argument, Perry and CHI urge that the appellants should be
judicially estopped based on Yellin's prior representation. The
the parties' compromise") (emphasis supplied).
[End Page 21]
district court rejected this alternative theory, Perry II, slip op.
at 10, and so do we.
The salient facts are as follows. In 1997, Perry, on
behalf of CHI, sued the appellants in a Massachusetts state court.
He moved for a preliminary injunction to prevent foreclosure on the
Fenmore. As part of his opposition, Yellin filed an affidavit
indicating, in its background recitals, that the amount due on the
Notes was $1,900,000. The state court denied Perry's motion.
Perry did not appeal the denial, and the court subsequently
dismissed the case for want of prosecution.
In the court below, Perry and CHI advanced an alternative
claim of judicial estoppel premised on Yellin's affidavit. The
district court did not bite, reasoning that the state court "took
no action in reliance on [the $1.9 million] figure" and "ultimately
dismissed the case for lack of prosecution." Id. Perry and CHI
challenge this holding. Noting that the state court accepted the
filing of Yellin's affidavit and denied the preliminary injunction,
they say that no more was exigible to ground a subsequent claim of
judicial estoppel. We do not agree.
Based on the facts recounted above, the first element
needed for judicial estoppel is satisfied. The representation
about the Notes' value, as expressed by the appellants in the
district court, is inconsistent with the earlier representation
that Yellin made in the state court.
[End Page 22]
Once again, however, the second element is more
problematic. There is absolutely no basis for believing that the
state court adopted or relied on the $1,900,000 figure contained in
Yellin's affidavit. The absence of any evidence to that effect is
fatal. See SBT Holdings, 547 F.3d at 37 & n.8; Levasseur, 846 F.2d
Perry and CHI suggest that the state court may have
relied on Yellin's representation in denying the motion for
preliminary injunction. But this suggestion is woven entirely out
of gossamer strands of speculation and surmise. In addition, the
suggestion is counterintuitive. Perry and CHI sought the
preliminary injunction to prevent foreclosure on the Fenmore, and
the amount of the indebtedness had virtually nothing to do with the
question raised in that motion. In other words, whether the
balance owed was $1,900,000 or $7,000,000 or some figure in between
had no apparent bearing on whether the foreclosure should (or
should not) be enjoined. Cf. Ross-Simons of Warwick, Inc. v.
Baccarat, Inc., 102 F.3d 12
, 15 (1st Cir. 1996) (listing factors
relevant to preliminary injunction inquiry). There is simply no
plausible basis for supposing that Yellin's representation about
the amount due factored into the state court's decisional calculus.
B. Equity of Redemption.
Given our previous conclusion, see supra Part II(A), the
district court's accounting will have to be reworked. Once the
[End Page 23]
amount due on the Notes is established and subtracted ? after all,
the Notes were secured by first and second mortgages on the Fenmore
and, thus, give rise to a high-priority equitable lien on the
foreclosure proceeds ? the question becomes how the court should
treat the $5,000,000 paid to settle the FDIC's claims against the
Yellin Parties. The appellants argue that this payment
extinguished the third and fourth mortgages and, thus, should be
offset before calculating the equity of redemption. The district
court made no such offset. The appellants assign error to this
step in the progression.
The calculation of an equitable accounting is, within
broad limits, committed to the district court's discretion. Tamko
Roofing Prods., Inc. v. Ideal Roofing Co., 282 F.3d 23
, 39 (1st
Cir. 2002). Accordingly, "we will not disturb [such a calculation]
unless it rests on clearly erroneous findings of fact, incorrect
legal standards, or a meaningful error in judgment." Id.; see In
re Blinds to Go Share Purchase Litig., 443 F.3d 1
, 8 (1st Cir.
2006) ("Because the district court 'is in a considerably better
position to bring the scales into balance than an appellate
tribunal,' we will not normally find an abuse of discretion unless,
upon whole-record review, we are convinced that the district court
committed a significant error in judgment." (quoting Rosario-Torres
v. Hern├índez-Col├│n, 889 F.2d 314
, 323 (1st Cir. 1989) (en banc))).
[End Page 24]
As co-owners of the foreclosed Fenmore, Perry and Yellin
are jointly entitled to the equity of redemption. Stripped of
rhetorical flourishes, the appellants' contention is that
calculating this figure is a purely mechanical exercise, which
requires that payments made to extinguish liens on the property be
subtracted before the co-owners can divide the remaining
foreclosure surplus. Building on this foundation, the appellants
posit that the district court erred in refusing to offset the
$5,000,000 payment that they made to the FDIC because that payment
extinguished the third and fourth mortgages on the Fenmore.
This argument has a patina of plausibility. Under basic
principles of property law, the holder of the equity of redemption
does not have a property interest in foreclosure proceeds unless
and until all outstanding liens on the property have been
extinguished. See First Colonial Bank for Sav. v. Bergeron, 646
N.E.2d 758, 759 (Mass. App. Ct. 1995); see also Restatement (Third)
of Prop.: Mortgages ┬§ 7.4 (1997) ("When the foreclosure sale price
exceeds the amount of the mortgage obligation, the surplus is
applied to liens and other interests terminated by the foreclosure
in order of their priority and the remaining balance, if any, is
distributed to the holder of the equity of redemption."). A junior
lienholder has an equitable lien, transferred from the foreclosed
premises, that attaches to the foreclosure surplus. See New Haven
Sav. Bank v. Follins, 431 F. Supp. 2d 183
, 196 (D. Mass. 2006); see
[End Page 25]
also Restatement (Third) of Prop.: Mortgages ┬§ 7.4, cmt. a (1997)
(explaining that the "surplus stands in the place of the foreclosed
real estate, and the liens and interests that previously attached
to the real estate now attach to the surplus").
The appellants take these abecedarian property law
principles to mean that because they settled with the FDIC and
thereby extinguished the FDIC's equitable lien on the foreclosure
proceeds, the $5,000,000 settlement amount must come off the top
before the equity of redemption is calculated. The district court
instead treated the $5,000,000 as a part of the distribution of the
appellants' share of the equity of redemption. See Appendix.
The appellants' construct reflects a kind of tunnel
vision. It fails to take into consideration that the challenged
calculations are not entries on a closing sheet at a foreclosure
but, rather, are calculations made in the context of a judicial
accounting. This matters because an accounting is not a rote
exercise in arithmetic. To the contrary, it is an equitable
remedy, see Braunstein v. McCabe, 571 F.3d 108
, 122 (1st Cir. 2009)
(citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33
, 49 n.7
(1989)), and equitable remedies "are flexible tools to be applied
with the focus on fairness and justice." Demoulas v. Demoulas, 703
N.E.2d 1149, 1169 (Mass. 1998) (citing 1 Dan B. Dobbs, Law of
Remedies ┬§ 2.1(3), at 63 (2d ed. 1993)).
[End Page 26]
The district court understood this distinction. It
refused to offset the $5,000,000 settlement before calculating the
equity of redemption. The court based this determination on a
finding that the primary purpose of the settlement was not to
extinguish the FDIC's lien, but to release the Yellins from
personal liability on a wide range of loans (many of which were
completely unrelated to the Fenmore). See Perry III, slip op. at
1. In effect, Yellin used money that otherwise would have had to
be shared with Perry to defray his personal obligations, leaving
Perry to settle separately with the FDIC using his own resources.
See supra note 1. In the district court's words, Yellin "ha[d]
Blum conduct the Fenmore foreclosure sale and hand over the first
$5 million in proceeds to the FDIC" to satisfy Yellin's personal
obligations. See Perry III, slip op. at 1. The court found that
arrangement to be "the product of precisely the improper
relationship and underhanded dealings" that characterized the
appellants' course of conduct. Id.; see also Perry I, slip op. at
This finding is eminently supportable. The only reason
why Yellin was able to use foreclosure proceeds to fund his
personal settlement was because of his relationship with Blum, who,
as a straw for Yellin, held the senior mortgages on the Fenmore.
In performing an equitable accounting, the district court
is not a mere scrivener, charged with carrying out a ministerial
[End Page 27]
task. Instead, the court is charged with tempering arithmetic with
equity, or, as we phrased it in Rosario-Torres, 889 F.2d at 323,
"bring[ing] the scales into balance." In this context, we think
that the district court acted within the sphere of its discretion
in preventing Yellin from unjustly enriching himself, to the
detriment of his quondam partner, by what the district court
warrantably found were underhanded dealings. See 1 Dobbs, supra,
┬§ 4.3(5), at 610 (explaining that an accounting "forces the
fiduciary defendant to disgorge gains received from improper use of
the plaintiff's property or entitlements"). Accordingly, we hold
that the district court neither erred nor abused its discretion in
refusing to subtract the $5,000,000 payment before calculating the
equity of redemption.
The Yellins claim that the district court violated the
Due Process Clause by joining them as reach-and-apply defendants
after the trial had ended. A few additional facts are needed to
bring the claim into perspective.
When the FDIC originally filed a claim in the underlying
litigation, it named the Yellins, among others, as defendants. But
following the settlement of the FDIC's claims against them, the
Yellins were dropped from the suit on June 10, 2002. Two days
later, Perry brought Blum, as trustee of Moorings Nominee Trust,
back into the case by filing a cross-claim against him. The cross-
[End Page 28]
claim did not specifically name the Yellins, but it did name "John
Doe" as a reach-and-apply defendant. "John Doe" was described as
"a person or persons, or an entity or entities, to whom funds
generated by the foreclosure sale of the Fenmore have been
transferred by Blum, for less than full consideration."
Almost two years later, Perry sought to amend his cross-
claim to add the Yellins as reach-and-apply defendants. The
district court referred this motion to a magistrate judge. See
Fed. R. Civ. P. 72(a). On November 29, 2004, the magistrate judge
denied it. Perry moved unsuccessfully for reconsideration but did
not appeal that denial to the district judge.
The cross-claim was tried to the court in early 2005.
During trial, Perry again moved to join the Yellins as reach-and-
apply defendants. The district court suggested that Perry file a
written motion to conform the pleadings to the proof. See Fed. R.
Civ. P. 15(b). Perry filed such a motion on June 24, 2005. The
district court took the entire case (including the motion) under
advisement for over three years.
On October 31, 2008, the court issued its written
decision. In that rescript, the court granted the motion to join
the Yellins as reach-and-apply defendants. Perry I, slip op. at
36. The Yellins sought reconsideration, to no avail. Perry II,
slip op. at 19.
[End Page 29]
The district court premised its order on Federal Rule of
Civil Procedure 21.5 We review an order joining a party under Rule
21 for abuse of discretion. See Cornelius v. Hogan, 663 F.2d 330
335 (1st Cir. 1981). Within that rubric, embedded legal questions
are reviewed de novo. See United States v. Platte, 577 F.3d 387
391 (1st Cir. 2009).
Rule 21 stated that "[p]arties may be dropped or added by
order of the court on motion of any party or of its own initiative
at any stage of the action and on such terms as are just."
Although the rule permits joinder at any stage of the proceedings,
joinder in a particular case must comport with the strictures of
due process. Moore v. Knowles, 482 F.2d 1069
, 1075 (5th Cir.
1973). These strictures include notice and an opportunity to be
heard at a meaningful time and in a meaningful manner. Eakins v.
Reed, 710 F.2d 184
, 186-87 (4th Cir. 1983).
For obvious reasons, joinder of a defendant after trial
is disfavored. See, e.g., Cabrera v. Mun'y of Bayamon, 622 F.2d 4
6 (1st Cir. 1980). In such a situation, concerns about possible
prejudice to the late-joined party loom large. 7 Charles Alan
Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and
Procedure ┬§ 1688.1, at 510 (3d ed. 2001).
Rule 21 was amended in 2007, but the changes were merely stylistic. See Fed. R. Civ. P. 21 advisory committee's note.
Consequently, we refer here to the rule as it stood at the time of
[End Page 30]
The case at bar, however, is highly idiosyncratic.
First, the Yellins originally were parties to the action. Second,
they were on notice of Perry's desire to add them as defendants by
reason of both his pretrial motion to do so and his mid-trial
motion to that effect. Third, in his original cross-claim, Perry
named a "John Doe" reach-and-apply defendant, describing "John Doe"
in terms that fit the Yellins to a "T." These circumstances gave
the district court an adequate basis for finding that the Yellins
had notice sufficient to satisfy the requirements of due process.
See Insituform Techs., Inc. v. CAT Contracting, Inc., 385 F.3d 1360
, 1375 (Fed. Cir. 2004) (rejecting defendant's due process
argument against post-trial joinder because plaintiffs had made
pretrial attempts to join him).
Similarly, the record permits a conclusion that the
Yellins had a meaningful opportunity to be heard. Blum was a party
all along, and the district court supportably found that he was a
stand-in for the Yellins. Perry I, slip op. at 11-12. As such,
Blum had substantially the same interests as the Yellins. Blum was
their proxy and, as befits a proxy, he and the Yellins shared the
This is not a situation in which, as in Eakins, 710 F.2d at
187, a late-joined party and a timely-joined party shared the same
counsel but had interests that were not "sufficiently identical."
In this instance, the identity of interests is palpable.
[End Page 31]
To add to the picture, the Yellins testified extensively
at the trial. Consequently, their narrative accounts of the
central issues in the case were before the court. That is an
important consideration in the due process equation. See Fromson
v. Citiplate, Inc., 886 F.2d 1300
, 1304 (Fed. Cir. 1989) (upholding
post-judgment joinder where interests of late-joined defendant and
timely-joined defendants were "virtually complete").
To cinch matters, a party who claims to be aggrieved by
a violation of procedural due process must show prejudice. See
Amouri v. Holder, 572 F.3d 29
, 36 (1st Cir. 2009); United States v.
Saccoccia, 58 F.3d 754
, 770-71 (1st Cir. 1995). The Yellins have
not identified any evidence which, had they been joined earlier,
they could have introduced; nor have they made any other showing of
This is a complicated, hard-fought case. Both sides are
represented by highly proficient counsel, but objective appraisals
of the facts are to some extent held hostage to the parties'
rancor. The district judge has demonstrated patience and skill in
sorting out what really happened and navigating through a legal
In all events, any possible prejudice can be avoided here.
If the Yellins have any evidence that bears on the accounting, the
present posture of this case affords the district court the
flexibility, when the case is returned to it, to reopen the case
and provide the Yellins with an opportunity to supplement the
[End Page 32]
minefield. We are reluctant to prolong a case that already has
lingered for a decade, but there is no other principled course
available to us. Perhaps, given the passage of time and the large
sums already spent on litigation, the parties have reached a point
at which a negotiated resolution of their remaining differences is
possible. One can only hope.
We need go no further. For the reasons elucidated above,
we conclude that the district court erred as a matter of law in
invoking the doctrine of judicial estoppel to limit the appellants'
proof as to the amount owed on the Notes. Thus, we reverse that
ruling. In turn, this holding requires vacation of the judgment.
The district court will have to determine the actual amount due on
the Notes at the relevant time and rework the accounting. We take
no view as to the amount due on the Notes; although the appellants
assert that the amount due is $7,494,435, Perry and CHI fiercely
dispute the basis for that figure.
The other rulings appealed from are affirmed, and further
proceedings in the district court shall be conducted consistent
with this opinion. On remand, the district court may take such
further evidence as it deems appropriate.
Affirmed in part, reversed in part, vacated, and remanded. All
parties shall bear their own costs.
[End Page 33]
The district court entered a judgment in favor of Perry
in the amount of $4,347,126. This amount was calculated as
Combined Proceeds from the Fenmore:
Proceeds from foreclosure sale $9,450,000
Net rents collected on the Fenmore $1,660,797
Net combined proceeds $11,110,797
Credits, Adjustments, and Amount Due on Notes:
Costs of foreclosure $154,440
Amount due on Notes as of foreclosure date $2,262,105
Total credits and adjustments $2,416,545
Equity of Redemption:
Net combined proceeds $11,110,797
Less credits and adjustments -$2,416,545
Fenmore's equity of redemption $8,694,252
Perry's 50% share $4,347,126
[End Page 34]