David Schwartz v. J.J.F. Management Services, 922 F.3d 558

Background

David Schwartz, owner of a Rent‑A‑Wreck franchise territory, obtained a contempt award ($83,620.80) against Rent‑A‑Wreck of America, Inc. (RAWA) for bad‑faith conduct that interfered with his franchise business. RAWA appealed previously and lost on franchise issues.
RAWA and its broker Bundy American, LLC filed (and later had dismissed) a bankruptcy petition shortly after the contempt order; the bankruptcy court found the filings were not in good faith.
Schwartz sought to garnish two RAWA deposit accounts at Wells Fargo to collect the contempt judgment. Wells Fargo confirmed the accounts held sufficient funds.
J.J.F. Management (RAWA’s parent/insider) moved to claim the garnished funds as a third‑party under Maryland Rule 2‑643(e), asserting (1) a pre‑petition promissory note and Deposit Account Control Agreements (DACAs) purporting to perfect a security interest and (2) a debtor‑in‑possession (DIP) financing order entered in bankruptcy that purportedly created a perfected postpetition security interest.
The district court treated J.J.F.’s filing as a Rule 2‑643(e) third‑party claim, required J.J.F. to prove a bona fide entitlement, found the evidentiary record inadequate (no proof funds were ever advanced; suspicious timing of DACAs; insider relationship; bad‑faith bankruptcy), denied the claim, and ordered protection of its contempt orders.
On appeal, the Fourth Circuit affirmed: Maryland law allows denial of a Rule 2‑643(e) motion where a claimant cannot demonstrate a bona fide ownership claim; the DIP Order was not given preclusive effect because the validity of J.J.F.’s interest was not actually litigated in bankruptcy and the bankruptcy was tainted by bad‑faith conduct.

Issues

Issue	Plaintiff's Argument (J.J.F.)	Defendant's Argument (Schwartz)	Held
Whether a court may deny a Rule 2‑643(e) third‑party motion if claimant cannot prove a bona fide ownership interest	Rule 2‑643(e) does not preclude recognition of J.J.F.’s perfected security interests; J.J.F. has priority if interests are valid	Third‑party must prove a bona fide ownership claim before displacing a judgment creditor’s garnishment	Maryland law permits denial; court may require bona fide proof and did not clearly err in denying J.J.F.
Validity/priority of pre‑petition financing and DACAs as a perfected security interest in the deposit accounts	The 2006 promissory note and DACAs (signed 2018) create a secured, perfected interest superior to Schwartz	The record contains no proof funds were ever advanced; timing and conduct suggest sham to defeat garnishment	District court did not clearly err in finding insufficient evidence of an actual loan or bona fide claim
Validity/priority of DIP financing (bankruptcy court DIP Order) as creating perfected postpetition security interests	The DIP Order established J.J.F.’s automatically perfected postpetition security interests and found the financing was in good faith	The bankruptcy was procured in bad faith, the DIP was negotiated among insiders, and no money is proven to have been advanced	Court did not clearly err rejecting J.J.F.’s claimed DIP interest given lack of evidence, bad‑faith bankruptcy, and insider relationship
Whether the DIP Order has preclusive effect (claim or issue preclusion) on the validity/priority of J.J.F.’s interest	The DIP Order’s findings and approval of financing should preclude relitigation of J.J.F.’s interest	The DIP Order did not actually adjudicate validity; statements were based on debtor stipulations and preserved rights of parties in interest	Res judicata does not apply; DIP Order did not actually litigate or decide the validity/priority issue, so no preclusive effect

Key Cases Cited

Pierce v. Underwood, 487 U.S. 552 (U.S. 1988) (standards for appellate review of mixed questions of law and fact)
Salve Regina Coll. v. Russell, 499 U.S. 225 (U.S. 1991) (de novo review of state law determinations)
In re Varat Enters., 81 F.3d 1310 (4th Cir. 1996) (res judicata principles in bankruptcy context)
Grausz v. Englander, 321 F.3d 467 (4th Cir. 2003) (who is a party in interest for res judicata in bankruptcy)
Spartan Mills v. Bank of Am. Illinois, 112 F.3d 1251 (4th Cir. 1997) (DIP order may bar later challenges where bankruptcy court converted provisional statements into findings and set procedural deadlines)
In re TMT Procurement Corp., 764 F.3d 512 (5th Cir. 2014) (skepticism about DIP lender good faith when lender is an insider)
Drury v. Pashen, 175 A.2d 771 (Md. 1961) (third party bears burden to prove ownership of levied property)