IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 98-51085

IN THE MATTER OF: INTELOGIC TRACE, INC., DEBTOR

RANDOLPH N. OSHEROW, TRUSTEE,

Appellant,

versus

ERNST & YOUNG, LLP,

Appellee.

Appeal from the United States District Court for the

Western District of Texas

January 25, 2000

Before GARWOOD, SMITH, and BENAVIDES, Circuit Judges.

GARWOOD, Circuit Judge:

Plaintiff-Appellant Randolph N. Osherow (“Trustee”), the bankruptcy

trustee of Chapter 7 debtor Intelogic Trace, Inc. (“IT”), brought this

action in state court against Defendant-Appellee Ernst & Young, LLP

(“Ernst & Young”), alleging, inter alia

, negligence and professional

malpractice arising from serv ices Ernst & Young performed during IT’s

previous Chapter 11 bankruptcy proceeding. The case was removed to the

bankruptcy court under 28 U.S.C. § 1452. The Trustee now appeals on

behalf o f IT the bankruptcy court’s decision, subsequently affirmed by

the district court, granting summary judgment in favor of Ernst & Young1 The Trustee filed similar claims against another professional

services provider, Buccino & Associates. On identical grounds, the

lower courts granted Buccino & Associates’s motion for summary judgment;

pursuant to a settlement agreement entered into pending this appeal, the

Trustee has dismissed with prejudice all claims against Buccino &

Associates.

2 on the basis that the Trustee’s claims were barred by r es judicat a . We

affirm. 1

FACTS AND PROCEEDINGS BELOW

In 1994, IT, a software and technical services provider in the

computer industry, began experiencing cash flow difficulties and

consequently initiated bankruptcy proceedings under Chapter 11 on August

5, 1994. On September 2, 1994, the bankruptcy court approved the

emp loyment of Ernst & Young to assist IT in accounting related matters

during the bankruptcy. Ernst & Young’s services fell into two main

areas: first, the performance of the annual audit of IT’s July 1994

financial statements, including the completion of IT’s Form 10K to be

filed with the Securities and Exchange Commission; and seco nd,

consultation and negotiation with the Internal Revenue Service in

connection with an ongoing examination of I T. IT pursued a fast-track

reo rganization and emerged from Chapter 11 through a confirmed plan on

December 8, 1994.

Pursuant to the confirmed plan, Kevin Collins (“Collins”) became

chairman of IT’s Board of Directors (“the Board”). Collins testified

that, despite all the Board’s efforts and the services provided to IT,

by December 23, 1994 the Board “had serious concerns about the company’s

numbers and the state of the company’s liquidity.”

On January 8, 1995, Ernst & Young filed in the bankruptcy court an2 Collins testified that “Phil Freeman had expressed to the board

his concern that [raising] extensive objections to fees

. . . on the

basis of some sort of nonperformance or anything–some sort of a problem

that existed, would create a circumstance with the judge

. . . that

would be very unhelpful for the company.”

3 application for $217,237 in fees and $1,743 in expenses incurred in

connection with IT’s Chapter 11 reorganization. Other service providers

filed similar applications, and a hearing was set for January 23, 1995.

Upon recei pt of notice of the fee application, the Board, acutely aware

of IT’s cash flow difficulties, began to have heightened concerns about

flaws in IT’s cash projections and whether there might have been a

problem with the professional work in preparing these projections. In

fact, Collins in his deposition stated that “by mid-January we

considered the cash situation to be critical.”

Despite these concerns, the Board, acting on the advice of its

General Counsel Philip Freeman (“Freeman”), 2 affirmatively decided not

to raise these concerns at the fee hearing before the bankruptcy court.

Collins testified that the Board and Freeman did not want the bankruptcy

court to become aware of problems with the reorganization plan that had

been confirmed only one month ago. Although the Board had not come to

any firm conclusions regarding whether malpractice occurred at this

time, Collins testified that the Board knew the numbers were flawed,

“had some questions about whether the company got its money’s worth for

some of the professional fees,” and held “very, very possible concerns

. . . about w hether there might have been a problem with the

professional work.” Instead of contesting the fees at the hearing on

the basis of their quality, the Board decided, as Collins stated in his

deposition, to use its concerns and suspicions as “a negotiating chip4

that we could have to get the fees reduced.”

On January 17, 1995, Collins sent a memo to Stan Springel, a

turnaround specialist for IT, expressing these concerns and the decision

not to raise issues regarding the competency of the services provided

by Ernst & Young and others. Collins’s memo states in part:

“I wou ld appreciate it if you would consider this

matter and discuss as appropriate w ith Phil Freeman so Phil

or you can to talk to Buccino and/or E+Y this week.

. . . We now know the budget numbers were flawed in important

respects. This led to a serious understatement of working

capital requirements, the Board’s recommendation that you be

engaged and the unforeseen need f or the collateral

liquidation proceeds of $1.4 million to fund operations.

These are serious ramifications.

There may be negative reaction on the part of the judge

to the assertion that Buccino’s sho rtcomings caused damage

to the company. In this regard steps have been taken by

management to preserve liquidity despite the problems brought

on by Buccino’s number s; consequently there is a good

argument that the problem has not had the effect of changing

the company’s ‘fitness’ for coming out of bankruptcy.

Ernst & Young; $218,980

- The Audit Committee of the

Board has not yet had an opportunity to e xamine the

performance of E+Y. I observe that the sudden deterioration

of the company’s financial position raises questions as to

the veracity of E+Y’s audited numbers at the very time the

company is being asked to pay them $218,000 in fees. I

understand that the fees may not be related to the audit, but

in my mind this arrangement does not seem right and as in the

case of Buccino I wonder if Phil’s suggested adjustments go

far enough.”

Freeman implemented the Board’s strategy of using concerns over the

quality o f the professional services to negotiate lower fees and

reported in a January 18, 1995 memo to the Board that he was successful

in reducing Ernst & Young’s fees: “I am pleased to advise that we had

negotiated a fee reduc tion with Ernst & Young of $37,000 from their fee

application for $218,980. In return we will unqualifiedly support their

fee application. I am awaiting responses from other fee applicants.”5

On January 23, 1995, the bankruptcy court held a hearing for all

the service providers’ fee applications. At the hearing, Freeman was

present on behalf of IT and did not oppose Ernst & Young’s application,

subject to the $37,000 reduction. Following an examination of Tom

Richter, a partner of Ernst & Young, the bankruptcy court found the fees

to “have passed muster,” without objection by Freeman. Two days later,

the bankruptcy court approved an allowance of $180,237 for fees and

$1,243 for expenses for Ernst & Young.

Despite the efforts of IT’s management and its professional

services providers, but consistent with the Board’s above- mentioned

concerns, IT’s financial problems continued under the reorganization

plan. On March 16, 1995, IT filed a second voluntary Chapter 11

petition. This second Chapter 11 proceeding was later converted into

the instant Chapter 7 liquidation with Randolph N. Osherow appointed as

trustee.

After Ernst & Young had filed in the instant bankruptcy a claim for

the unpaid fee awarded it in the prior bankruptcy, the Trustee, on

November 7, 1996, filed this suit against Ernst & Young in a Texas state

court, alleging the following causes of action, all in respect to Ernst

& Youn g’s functioning as IT’s accountant in the initial Chapter 11: (1)

violation of the duty to exercise ordinary care and diligence; (2)

negligence; (3) gross negligence; (4) professional negligence; (5)

breach of warranty; (6) breach of contract; and (7) deceptive trade

practices. The Trustee alleged that “EY [Ernst & Young] owed a duty to

IT to perform all necessary and reasonable accounting services on behalf6

of IT as set forth in its application [referring to the application in

the initial Chapter 11 for the bankruptcy court to approve IT’s

retaining of Ernst & Young “as accountant for the debtor in possession”]

and EY failed in such duties and failed to provide the services as

represented.” The Trustee’s particular focus was that Ernst & Young

failed to adequately contact IT’s customers respecting prepayment of

contracts. This led to flaws in the construction of financial

pro jections and an operating plan for IT, eventually resulting in IT’s

cash shortfall and collapse.

Pursuant to 28 U.S.C. § 1452, Ernst & Young removed this case to

the bankruptcy court supervising IT’s Chapter 7 liquidation. Ernst &

Young, subsequently, moved for summary judgment on the basis that the

Trustee’s claims were barred by res jud icata

, collateral estoppel , or

waiver. Concluding that the Trustee’s claims were barred by r es

judicata

, the bankruptcy court granted Ernst & Young’s motion. The

district court affirmed the bankr uptcy court’s order. In Re Intelogic

Trace Inc. , 226 B.R. 382 (W.D. Tex. 1998). We affirm.

DISCUSSION

The Trustee argues that the district court erred in affirming the

bankruptcy court’s summary judgment order finding res judicata barred

this a ction. This Court reviews the grant of summary judgment d e novo

,

applying the same standards as the district court. S ee MerrittCampbell, Inc. v. RxP Prods., Inc

. , 164 F.3d 957, 961 (5th Cir. 1999).

Summary judgment is proper only where, viewing the evidence in the light

most favorable to the n onmoving party, the court determines that there

is no gen uine issue of material fact and judgment is proper as a matter3 Section 24 of the Restatement provides in relevant part as

follows:

“(1) When a valid and final judgment rendered in an action

extinguishes the plaintiff’s claim pursuant to the rules of

merger or bar

. . ., the claim extinguished includes all

rights of the plaintiff to remedies against the defendant

with respect to all or any part of the transaction, or series

of connected transactions, out of which the action arose.”

R ESTATEMENT (S ECOND ) OF J UDGMENTS § 24 (1982).

Comment c to section 24 further explains as follows:

“Transaction may be single despite different harms,

substantive theories, measures or kinds of relief . . ..

That a number of different l egal theories casting liability

on an actor may apply to a given episode does not create

multiple transact ions and hence multiple claims. This

remains true although the several legal theories depend on different shadings of the facts, or would emphasize different

elements of the facts, or would call for different measures

of liability or different kinds of relief.” I d. § 24 cmt.

c.

The Trustee notes that in deciding whether the same causes of action are

asserted in a subsequent suit, this Circuit has examined whether the

7 of law. See id .; F ED

. R. C IV

. P. 56(c).

This Circuit’s test for determining whether a claim is barred by

the doctrine of res judicata, or claim preclusion, is as follows:

“‘For a prior judgment to bar an action on the basis of res judicata

, the parties must be identical in both suits, the

prior judgment must have been rendered by a court of

competent jurisdiction, there must have a final judgment on

the merits and the same cause of action must be involved in

both cases.’” Nilsen v. City of Moss Point, Miss.

, 701 F.2d

556, 5 59 (5th Cir. 1983) ( e n banc ) (quoting Kemp v. Birmingham News Co. , 608 F.2d 1049, 1052 (5th Cir. 1979)).

The parties agree that the first three elements are satisfied; they

disagree on the final element which we now address.

To determine whether the Chapter 11 fee application hearing and

this suit involved the same cause of action, we apply the transactional

test of the Restatement (Second) of Judgments. 3 S ee Ni lsen , 701 F.2d atprimary right and duty or wrong is the same in each action. S ee Kemp

v. Birmingham News Co. , 608 F.2d 1049, 1052 (5th C ir. 1979); St evenson

v. International Paper Co.

, 516 F.2d 103, 109 (5th Cir. 1975). This

Circuit, however, sitting en banc in Nilsen v. City of Moss Point,

Miss.

, 701 F.2d 556, 560 n.4 (5th Cir. 1983) , stated that the

Restatement’s transactional test “represents the modern view” and is

preferable to the test enunciated in Kemp

.

8 560. The critical issue under this determination is whether the two

actions under consideration are based on “the same nucleus of operative

facts.” In re Howe , 913 F.2d 1138, 1144 (5th Cir. 1990).

The Trustee argues that this action does not meet the transactional

test because the fee application hearing addressed whether Ernst & Young

“provide[d] the time, incur[red] the expenses, or charge[d] the

appropriate hourly rate set forth in its fee application,” while this

mal practice claim is largely based upon what Ernst & Young did not do,

rather than what it did do. Specifically, the Trustee refers to Ernst

& Young’s alleged failure to contact customers respecting prepayment of

their contracts with IT, resultin g in flaws in constructing IT’s

financial projections and operating plan. The Trustee claims the flawed

financial projections and operating plan resulted in irreversible cash

flow problems fo r IT, leading to its second bankruptcy petition. We do

not agree with the Trustee’s conclusion that the transactional test is

not met.

The central transaction involved in both Ernst & Young’s fee

application and the Trustee’s present claim was the provision of

accounting service s during the Chapter 11 reorganization. Fee awards

for professio nals employed by the bankruptcy estate are governed by 11

U.S.C. § 330. The 1994 amendments to section 330, which became

effective October 22, 1994, provide in part as follows:9 “In determining the amount of reasonable compensation

to be awarded, the court shall consider the nature, the

extent, and the value of such services, taking into account

all relevant factors, including—

(A) the time spent on such services;

(B) the rates charged for such services;

(C) whether such services were necessary to the

administration of, or beneficial at the time at which the

ser vice was rendered toward the completion of, a case under

this title;

(D) whether the services were performed within a

reasonable amount of time commensurate with the complexity,

impor tance, and nature of the problem, issue, or task

addressed; and

(E) whether the compensation is reasonable based on the

customary compensation charged by comparably skilled

practitioners in cases other than cases under this title.”

11 U.S.C. § 330(a)(3).

Accordingly, an award of fees for professionals, such as Ernst & Young,

employed by a bankruptcy estate represents a determination of “the

nature, the extent, and the value of such services.” 11 U.S.C. §

330(a)(3); see also In re Temple Retirement Community , 97 B.R. 333, 337

(Bankr. W.D. Tex. 1989) (“[T]his court holds with numerous other courts

that it ‘has the independent authority and responsibility to determine

the reasonableness of all fee requests, regardless of whether objections

are filed.’”) (citations omitted).

In fact, the bankruptcy court’s preliminary remarks at the January

23, 1995 fee hearing reflect the importance of these factors in awarding

fees to the professionals employed by IT, including Ernst & Young:

“Most of you who have been in this court before know

that my primary interest is not such in the niggling auditing

details of tenths-of-an-hour time reporting and so and so

forth, although that’s important. It’s not so much focused

on that as it is focused on the bigger picture. What sort

of ba ng did the estate get for its buck? What kind of

results did w e get? Is the amount of the services—amount of

fees charged for the nature of the services rendered given

the results achieved reasonable? Turns out that’s the

standard that Congress has adopted in the new amendments to

the Bankruptcy Code as well, so that gives me some comfort10

that I might be on the right track.”

By granting Ernst & Young’s fee application, the bankruptcy court

implied a finding of quality and value in Ernst & Young’s services.

Similarly, the Trustee’ s claims in the present suit arise from Ernst &

Young’s alleged omissions in rendering the very same services considered

by the bankru ptcy court in the fee application hearing. The Trustee’s

malpractice claims, challenging the sufficiency and value of Ernst &

Young’s services, “inevitably involve[] the nature of the services

performed for the debtor’s estate and the fees awarde d under

superintendence of the bankruptcy court; [they] cannot stand alone.”

In re Southmark Corp. , 163 F.3d 925 at 931 (5th Cir.), cert. denied , 119

S.Ct. 2339 (1999).

Therefore, we conclude that the award of professional fees and the

Trustee’s malpractice claims concern “the same nucleus of operative

facts” and meet the transactional test. Accordingly, there is an

identity of claims between the fee application hearing and this

malpractice suit.

Although all four elements listed by the Nilsen court are present,

our inquiry is not complete. Even if the two actions are the same under

the transactional test, res judicata does not ba r this action unless IT

could and should have brought its malpractice claims in the former

proceedings. S ee In re Howe

, 913 F.2d at 1145; D-1 Enterprises, Inc.

v. Commercial State Bank

, 864 F.2d 36, 38 (5th Cir. 1989) (“Essential

to the application of the doctrine of res judicata is the principle that

the previously unlitigated claim could or should have been brought in

the earlier litigation.”). In this context, important factors in this11

analysis include whether the fee hearing was an adversary proceeding or

contested matter, the nexus between the order awarding Ernst & Young

fees and the claims now being asserted, and “the amount of time that has

elapsed since the case commenced.” I n re Howe

, 913 F.2d at 1146 n.28.

None of these factors is a litmus test for the application of res

judicata

. S ee id

. In the present context, “[t]he critical question

for res judicata purposes is whether the party could or should have

asserted the claim in the earlier proceeding.” Id

.

In reaching our determination, we consider whether and to what

extent IT had actual or imputed awareness prior to the fee hearing of

a real potential for claims against Ernst & Young such as those asserted

by the Trustee and whether the bankruptcy court possessed procedural

mechanisms that would have allowed IT to assert such claims. We believe

so and affirm the lower courts’ ruling that res judicata bars this

action.

The Trustee argues that a fact issue exists as to whether IT was

aware, prior to the January 23, 1995 fee hearing, of the basic facts

underlying these malpractice claims, thereby precluding summary judgment

on Ernst & Young’s defense of res judicata

. We disagree and find that

IT was sufficiently aware of the real possibility of there being errors

by Ernst & Young such as now alleged and of their likely consequences

before the fee hearing.

The Trustee admits that the Board knew before the fee hearing that

the figures prepared in part by Ernst & Young were inaccurate, but

maintains that the Board had not yet had an opportunity to examine Ernst

& Young’s performance and had not reached a conclusion on the quality12

of the services performed. However, the summary judgment evidence

clearly reveals that the Board ha d drawn a link between the inaccuracy

in the cash flow projections and Ernst & Young’s accounting services,

as to the adequacy of which it at least had some question.

As the courts below noted, the Trustee’s argument misses the point.

Res judicata bars claims that should have been litigated in a previous

proceeding. S ee Jones v. Sheehan, Young & Culp, P.C.

, 82 F.3d 1334,

1341 (5th Cir. 1996). In In re Howe

, 913 F.2d 1138 (5th Cir. 1990),

we addressed a situation similar to the one presented in this suit. The

Howes, who had instituted voluntary Chapter 11 bankruptcy proceedings

and negotiated a plan with their creditors, later brought lender

liabi lity claims against the primary creditors in the Chapter 11

proceedings. See id . at 1140-41. These creditors had filed proofs of

claim on promissory notes and received allo wed claims under the

negotiated plan. S ee id

. In challenging the application of r es

judicata to their claims, “[t]he Howes argue[d] that they should be

allowed to pursue their claims because, although they may have been

aware of the basic facts underlying their claims, they were not aware

of the significance of those facts.” I d

. at 1147. We rejected this

argument and found that res judicata barred the Howes’ lender liability

claims. See id

.

Like the Howes, IT had sufficient general awareness of the real

potential for claims against Ernst & Young such as those here asserted.

Although the Board may not have been aware of all the precise facts or

reached a firm conclusion on Ernst & Young’s performance, Collins’s

deposition reveals the following: prior to the fee hearing, the Board13

knew the numbers were flawed and the Board “had some questions about

whether the company got its money ’s worth for some of the professional

fees.” In addition, Collins’s memorandum stated “that the sudden

deterioration of the company’s finan cial position raised questions as

to the veracity of E+Y’s audited numbers at the very time the company

is being asked to pay them $218,000 in fees.” According to Collins,

this memorandum, which specifically referenced Ernst & Young, expressed

“concerns about the quality of professional work” received by IT. These

statements reveal that Collins, the Board, and Freeman had linked the

flawed projections and the liquidity problem with the quality of Ernst

& Young’s services. Furthermore, Collins testified that in his mind IT

“had every opportunity to address and consider the quality and nature

of the fees requested by Ernst & Young.”

Not only are Collins’s statements revealing, but also the actions

taken at the request of the Board evince an awareness of and focus on

the general matters giving rise to the claims asserted in this suit.

On the advice of Freeman, the Board decided to use its concerns as “a

negotiating chip that [ the Board] could have to get the fees reduced,”

rather than raise them as an objection to the fee applications.

Freeman, as the negotiator, reported to the Board on January 18, 1995

that a fee reduction of $37,0 00 was reached in return for IT’s

unqualified support for Ernst & Young’s fee application. After

receiving this report, the Board sent Freeman to the fee hearing as IT’s

representative with the understandi ng that no objection regarding the

quality of Ernst & Youn g’s services would be raised, because the Board

did not want the bankruptcy court to become aware of IT’s liquidity14

problem. Using concerns and questions about the quality of Ernst &

Young’s services as a bargaining chip in negotiating down the requested

fee for the services and consciously deciding to forego raising these

concerns at the fee hearing demonstrates that IT had at least

ascertained that there was a realistic potential for the claims of the

sort now being asserted by the Trustee. S ee also Eubanks v. FDIC

, 977

F.2d 166, 174 (5th Cir. 1992).

Next, we consider whether the bankruptcy procedures afford an

opportunity to litigate these claims effectively at the fee hearing.

See Hendrick v. Avent , 891 F.2d 583, 586-87 (5th Cir. 1990); D-1

Enterprises , 864 F.2d at 40 (concluding that res judicata does not apply

where the claim sought to be barred could not have been effectively

litigated in the prior proceeding). The Trustee argues that these

malpractice claims are counterclaims that could only be raised in an

adv ersary proceeding, and that because the fee hearing was a contested

matter, and not an adversary proceeding, these claims could not have

been addressed at the fee hearing. We disagree.

We begin by recognizing that a fee application hearing is a

contested matter in the bankruptcy context; however, the nature of the

proceeding does not automatically determine whether this action is

barred by res judicata

. S ee In re Howe

, 913 F.2d at 1146 n.28.

Although the fee hearing was a contested matter, Ernst & Young’s fee

application was a claim against IT. S ee 11 U.S.C. § 101(5). Had IT

objected to the fee application and included with its objection a claim

for affirmative relief on account of alleged malpractice, the matter4 Bankruptcy Rule 3007 provides as follows:

“An objection to the allowance of a claim shall be in

writing and filed. A copy of the objection with notice of

the hearing thereon shall be mailed or otherwise delivered

to the claimant, the debtor or debtor in possession and the

tru stee at least 30 days prior to the hearing. If an

objection to a claim is joined with a demand for relief of

the kind specified in Rule 7001, it becomes an adversary

proceeding.”

15 would have become an adversary proceeding. S ee B A NKR

. R. 3007. 4 In fact,

the rule “provides no time limit for filing objections to claims,” and

the Trustee does not claim that the reorganization plan or the

bankruptcy court imposed one. 9 L A WRENCE P. K ING

, C OLLIER ON B ANKRUPTCY ¶

3007.01[5], at 3007-7 (15th ed. 1983). Furthermore, Bankruptcy Rule

9014, which governs contested matters, provides that “[t]he court may

at any st age in a particular matter direct that one or more of the other

rules in Part VII shall apply.” B A NKR

. R. 9014; see also 10 L AWRENCE P.

K ING

, C OLLIER ON B ANKRUPTCY ¶ 7000, at 7000-1 (15th ed. 1983) (“Rule 9014

itself provides that certain of the rules in Part VII apply to contested

matters and the court may direct that one or more other Part VII rules

also shall apply.”). Part VII’s rules are comparable to the Federal

Rules of Civil Procedure. S ee id

. at ¶ 7000, at 7000-2. Under Part

VII, the bank ruptcy court is to apply the Federal Rules of Civil

Pro cedure governing discovery in adversary proceedings. S ee B ANKR

. R.

7026-37. Thus, even if IT had only informed the bankruptcy court of its

concerns and not immediately sought affirmative relief for malpractice,

the bankruptcy court could have stayed the fee hearing and permitted

time for discovery and development under the procedures available in

Part VII of the Bankruptcy Rules.

Our conclusion that the fee hearing provided an effective forum for5 In arguing against the application of r es judicata

, the Trustee

analogizes to the payment of a fee bill without court approval as not

barring a subsequent malpractice claim. Although res judicata does not

apply in such a situation, that has no

bearing on this case. Unlike the facts in this case, in the Trustee’s

hypothetical there is neither any “judgment on the merits” nor any judicial proceeding whatever when one pays a fee bill directly. Nilsen

, 701 F.2d at 558.

16 IT to present its claims is mandated by the application of r es ju dicata

in our bankruptcy precedent. S ee, e.g., In re Baudoin

, 981 F.2d 736,

744 (5th Cir. 1993) (ruling that res judicata barred lender liability

claims based on loans that had been deemed allowed claims without

objection in a previous bankruptcy); Eubanks

, 977 F.2 d at 174 (barring

a lender liability action which could have and should have been brought

as an objection to the lender’s claim in a prior bankruptcy proceeding);

Southmark Properties v. Charles House Corp. , 742 F.2d 862, 869 (5th Cir.

1984) (applyi ng res judicata to bar a claim that could have been raised

as an objection to a claim asserted in a previous bankruptcy

reorganization). The proper result under applicable Texas state law

parallels the one we reach. If Ernst & Young had brought suit in Texas

state court to recover its fees and IT had not asserted its malpractice

claims by way of counterclaim, then a subsequent suit by IT or its

successor-in-interest would be barred by res judicata

. S ee Goggin v.

Grimes

, 969 S.W.2d 135, 138 (Tex. App.—Houston[14th Dist.] 1998, no

pet.); CLS Associates, Ltd. v. A_____ B_____ , 762 S.W.2d 221, 224 (Tex.

App.—Dallas 1988, no writ). 5

This Court’s holding in In re Southmark

, 163 F.3d 925 (5th Cir.

1999), does not preclude our disposition in this case. Southmark, a

Chapter 11 debtor, filed a malpractice action against Coopers & Lybrand6 We do not suggest that the absence of such factors would preclude

giving res judicata effect to a prior court judgment awarding recovery

f or personal or professional service; we speak here only to the context

of a bankruptcy court contested matter order, where in our view some

level of actual or constructive awareness on the part of the party

sought to be so barred by the ord er properly carries a greater

significance than it might in other contexts.

17 after Coopers & Lybrand had been ordered by the bankruptcy court to

disgorge fees earned for the services that were the subject of the

malpractice action. S ee id

. at 928. We held that Southmark’s claims

were barred by collateral estoppe l , but also adverted to the

“interesting question” as to whether res judicata also barred

Southmark’s claims. Id . at 935. While noting many of the issues raised

by the parties in this case, we ultimately reserved judgment as to

whe ther res judicata can apply to bankruptcy proceedings such as a fee

hearing or a disgorgement hearing. S ee id

. (“Enough has been said to

dispel the notion that claim preclusion is obviously applicable here.”)

(emphasis added). Although it may not be obvious that res judicata bars

the Trustee’s claims here, we conclude that it does.

The Trustee suggests that, if res judicata is found to bar these

malpractice claims, every bankruptcy debtor will be forced to object to

all fee applications to prevent the application of this doctrine. We

disagree. The particular facts of this case direct our decision: the

Board’s general awareness of the background facts underlying the present

claims before the fee hearing, the Board’s having realized the real

possibility of a link between its flawed numbers and Ernst & Young’s

services, the Board’s deliberate choice not to voice its concerns

regarding the quality of serv ices at the fee hearing, 6 and the

bankruptcy court’s order awarding fees to Ernst & Young.18 CONCLUSION

As the Trustee’s claims against Ernst & Young are barred by res

judicata , we need not address whether collateral estoppel or waiver also

bar his claims. For the reasons stated, the judgment below is

AFFIRMED.