Sherry Holdings, LLC, and Sherry Groves, Individually v. Robert Hefley
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NOT DESIGNATED FOR PUBLICATION
ARKANSAS COURT OF APPEALS
DIVISION I
No. CA07-1154
Opinion Delivered
SHERRY HOLDINGS, LLC, and
SHERRY GROVES, INDIVIDUALLY
APPELLANTS
November 5, 2008
APPEAL FROM THE CARROLL
COUNTY CIRCUIT COURT,
[NO. CIV06-145ED]
V.
HONORABLE ALAN D. EPLEY,
JUDGE
ROBERT HEFLEY
APPELLEE
REVERSED AND REMANDED
LARRY D. VAUGHT, Judge
This is an appeal from a summary judgment quieting title in appellee Robert Hefley
to a parcel of land that was the subject of a prior lawsuit between Hefley and appellant Sherry
Groves. We reverse and remand.
On May 16, 2001, Groves bought the property in Carroll County from Afton
Campbell and Hefley. She paid $15,000 at closing and gave a promissory note for $86,000,
secured by a mortgage, which was filed. The interest conveyed by the deed was expressly
subject to the mortgage that Hefley and Campbell had previously given to First National Bank
of Green Forest. An escrow agent held a quitclaim deed from Groves to Campbell and Hefley
as additional security in the event of Groves’s default.
On October 15, 2002, Groves transferred the property by means of a warranty deed
to Jurgen and Peggy Schroeder. On October 3, 2003, the Schroeders deeded the property to
Sherry Holdings, LLC, a limited liability corporation created by Groves, and of which she was
the sole owner. Groves filed an action seeking damages for breach of contract and warranty
of title in the Carroll County Circuit Court, No. CIV-2003-158, against Campbell, Hefley,
and a title insurance company on November 10, 2003, alleging that they knew at the time
of the sale that she intended to develop the property for profit and that an easement for ingress
and egress, which was conveyed in the deed, was important for her plans to succeed. Groves
further alleged that, in September 2003, she had agreed to sell the property to Juergen
Schroeder and Peggy Schroeder, contingent upon the use of the easement, and that, upon
discovering that it was not available, the Schroeders had canceled the deal. Groves asked for
her lost profits. In the alternative to damages, Groves asked for rescission, restitution, and
cancellation of her mortgage.
In their answer, Hefley and Campbell stated that they had received another easement
in March 2002 and that they and Groves had signed an agreement to waive interest a few days
later. They filed a counterclaim against Groves for breach of contract for the amount due on
the note.
On April 13, 2005, the trial court sent a letter opinion to the parties in which he
granted summary judgment to the title company because “The plaintiff, Sherry Groves, no
longer has an interest in the property. The Warranty deed from the Schroeders (First America
Exhibit 6) conveyed the property to a legal entity named Sherry Holdings, L.L.C.” On April
15, 2003, appellant Sherry Holdings, LLC, attempted to join as a plaintiff in a second
amended complaint filed in Case No. CIV-2003-158, stating that Groves was its sole member
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and that it was a third-party beneficiary of the contracts between Groves and the defendants.
Requesting damages, appellants alleged that, at the time of closing, Campbell, Hefley, and the
title company had a duty to disclose the pending lawsuit to Groves before the sale. In the
alternative, they asked for rescission, damages, and a lien on the property to secure the
payment of damages, after which Sherry Holdings would tender a conveyance of the property.
On May 13, 2005, the court entered an order striking the second amended complaint,
including Sherry Holdings’ attempt to enter as a plaintiff, and appellants’ response to the
appellees’ motions for summary judgment because they were not timely filed. On June 29,
2005, the court entered an order granting summary judgment to Campbell, Hefley, and the
title company.
On March 20, 2006, Hefley and Campbell filed a motion for specific performance
alleging that, according to the note, Groves was in default and owed $66,000 and that,
pursuant to the mortgage, they were entitled to a quitclaim deed from Groves in lieu of
foreclosure. They asked the court to direct Groves to give them a quitclaim deed or, in the
alternative, asked that the court issue an order divesting Groves of all interest in the property
and vesting title in them. In response, Groves denied that they were entitled to a quitclaim
deed but admitted that, according to the court’s prior orders, she owed them $66,000. She
alleged that she had reduced the principal due from $101,000 to $66,000 and that she had a
$35,000 equitable interest in the property.
On May 16, 2006, the circuit court found Groves in default and stated that, according
to the mortgage, Hefley and Campbell could elect between two remedies: delivery of the
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quitclaim deed or foreclosure of the mortgage. Campbell and Hefley elected to receive a
quitclaim deed and asked that the original quitclaim deed from Groves to them, which was
being held in escrow, be delivered. They also requested that the court require Groves
to execute a new Quit Claim that conveys the property from Sherry Groves, in her
own right individually, and Sherry Holdings, LLC to Campbell and Hefley, to remove
any clouds or encumbrances on the property. Sherry Holdings, LLC is the entity that
currently holds title to the property as a result of transactions between Sherry Groves
and the Schroeders.
In its order entered on June 16, 2006, the court directed the clerk to deliver the
original quitclaim deed to Campbell and Hefley. It also ordered Groves to execute a quitclaim
deed individually “and her entity, Sherry Holdings, LLC to Campbell and Hefley, to remove
any clouds or encumbrances on the property. . . .” On Groves’s motion, the court set this
order aside on July 20, 2006.
On October 6, 2006, the court entered an order dismissing the counterclaim against
Groves with prejudice, stating that Campbell and Hefley had made a binding election of the
remedy of specific performance; that the quitclaim deed from Groves to them had been
delivered by the clerk and filed; and that no issues remained to be decided.
Hefley then filed the quiet-title action from which this appeal was taken, No. CIV2006-145, against Sherry Holdings on November 3, 2006. He recited the history of action
No. CIV-2003-158; stated that Groves was the sole member of Sherry Holdings, which had
paid nothing for the conveyance from the Schroeders; and asked that the cloud on his title be
removed. Sherry Holdings responded by denying that Hefley had acquired title to the
property because “Sherry Groves was a stranger to the title to the property at the time her
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conveyance was recorded” and pled the doctrines of res judicata, collateral estoppel, and
election of remedies. Sherry Holdings filed a counterclaim against Hefley and Campbell,
asserting that, pursuant to the doctrines of res judicata and collateral estoppel, their election
of specific performance in the earlier action rendered the mortgage a nullity. It also alleged
that the quitclaim deed from Groves to Campbell and Hefley was a nullity because Groves
did not hold title when it was recorded.
On February 26, 2007, Hefley filed a fourth amended petition to quiet title with a
motion to join Groves as a necessary party. He alleged that Groves had engaged in fraud in
causing the Schroeders’ conveyance to Sherry Holdings and in failing to inform him when
she filed the earlier lawsuit that the conveyance had occurred. He stated: “Sherry Groves and
Sherry Holdings, LLC are in reality one and the same person and that Sherry Holdings, LLC
is the alter ego of Sherry Groves and that the actions of one binds the other and the fiction
of the LLC should be set aside and held for naught.” Hefley added a fraudulent-transfer claim
against Groves for causing the Schroeders to make the conveyance to Sherry Holdings. He
asked that the deed from the Schroeders to Sherry Holdings be set aside and that title be
confirmed in him. In response, appellants asserted that Hefley had no title to cloud.
Appellants moved for summary judgment on March 19, 2007. In their reply to
Hefley’s response, they stated:
Hefley has claimed the right to pierce the corporate veil of Sherry Holdings,
LLC. There is nothing under the law of Arkansas or Tennessee which makes a singlemember LLC or a single-shareholder corporation inherently evil. The single-member
status of Sherry Holdings, LLC, however, does establish that the LLC is in privity with
Sherry Groves, and that the claim-preclusion aspect of res judicata now bars Hefley
from attempting to pursue remedies against the LLC, even though Hefley now seeks
to raise new legal issues and seeks to assert additional remedies.
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The court dismissed Campbell from this action on March 29, 2007.
In an order filed on July 13, 2007, the circuit court granted summary judgment to
Hefley, stating:
2. That upon conclusion of oral argument the Court finds that this matter
sounds in law and there are no issues involving the theories of unjust enrichment or
for specific performance of a contract. The Court believes that the issue presented is
what interest is conveyed by a deed which recites that the conveyance is subject to a
pre-existing mortgage or mortgages when the mortgagor has defaulted.
3. The Court finds that where a deed contains language that the conveyance
is subject to a mortgage or mortgages of record the absolute title is not conveyed and
that the consequence of a default by the mortgagor leaves or vests the legal title in the
original owner. In the instant case the court finds that the conveyances made by Sherry
Groves and her grantees are not valid to divest [appellee] of title to the real property.
4. The Motion for Summary Judgment by [appellee] is hereby granted and that
title is hereby quieted in him for the above described property subject to any
mortgages of record held by the First National Bank of Green Forest, Arkansas.
Appellants then pursued this appeal.
The law is well settled that summary judgment is to be granted by a trial court only
when it is clear that there are no genuine issues of material fact to be litigated, and the party
is entitled to judgment as a matter of law. Jayel Corp. v. Cochran, 366 Ark. 175, 234 S.W.3d
278 (2006).
In their first point, appellants contend that the doctrine of res judicata, specifically, its
claim-preclusion aspect, barred Hefley from bringing this quiet-title action because the claims
he brought in this action could have been, but were not, brought in the original lawsuit. The
doctrine of res judicata has two aspects: claim preclusion and issue preclusion. See Van Curen,
supra. The purpose of the res judicata doctrine is to put an end to litigation by preventing a
party who had one fair trial on a matter from relitigating the matter a second time. Id. Under
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the claim-preclusion aspect of the doctrine of res judicata, a valid and final judgment rendered
on the merits by a court of competent jurisdiction bars another action by the plaintiff or his
privies against the defendant or his privies on the same claim or cause of action. Id. Res
judicata bars not only the relitigation of claims that were actually litigated in the first suit, but
also those that could have been litigated. Jayel Corp., supra. Where a case is based on the same
events as the subject matter of a previous lawsuit, res judicata will apply even if the subsequent
lawsuit raises new legal issues and seeks additional remedies. Id.
The essential issue in this action, therefore, is whether Groves and Sherry Holdings
were in privity for purposes of res judicata. In that context, privity of parties means a person
so identified in interest with another that he represents the same legal right. Spears v. State Farm
Fire & Cas. Ins., 291 Ark. 465, 725 S.W.2d 835 (1987). Our supreme court has never required
strict privity in the application of res judicata; instead, it has supported the idea that there must
be a “substantial identity of parties” to apply the doctrine. See Parker v. Perry, 355 Ark. 97, 131
S.W.3d 338 (2003); Terry v. Taylor, 293 Ark. 237, 737 S.W.2d 437 (1987); Wells v. Heath, 269
Ark. 473, 602 S.W.2d 665 (1980). Because the identity of parties is not a mere matter of form,
but of substance, the rule of res judicata should not be defeated by minor differences of parties.
Rose v. Jacobs, 231 Ark. 286, 329 S.W.2d 170 (1959). In Arkansas Department of Human Services
v. Dearman, 40 Ark. App. 63, 68, 842 S.W.2d 449, 452 (1992), we explained:
It has been suggested that privity is merely a word used to say that the
relationship between one who is a party and another person is close enough that
a judgment that binds the one who is a party should also bind the other person
. . .. It has also been held that the identity of parties or their privies for res
judicata purposes is a factual determination of substance, not mere form.
(Citations omitted.)
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Sherry Holdings (as a separate legal entity from the person Sherry Groves) not only
could have, but should have been included in the initial lawsuit. In fact, Sherry Holdings
attempted to intervene, but was not permitted to do so. As such, res judicata prevents Hefley
from maintaining the same cause of action against Sherry Holdings in his second suit that he
could have asserted in his first. However, the question remains whether the judgment in the
first suit is binding on Sherry Holdings.
Only if Sherry Holdings and Sherry Groves are identical parties in interest is the
question affirmatively answered. However, the resolution of this query rests on a factual
determination as to whether Sherry Holdings is a sham corporation and a simple reincarnation
of Sherry Groves. This fundamental question—the issue of piercing the corporate veil—was
raised by Hefley in his second suit. But the issue was not addressed by the trial court in its
summary-judgment determination. Because of this baseline omission and the genuine issues
of material fact presented in this suit, we reverse and remand the case for trial.
Reversed and remanded.
G LOVER and B AKER, JJ., agree.
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