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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

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IN RE:

COASTAL PLAINS, INC.

Debtor.

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INDUSTRIAL CLEARINGHOUSE, INC.,

et al.,

APPELLANTS,

V.

JEFFREY MIMS, individually

and as Trustee of the Estate of Coastal

Plains, Inc.,

APPELLEE.

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CIVIL ACTION NO: 

3:05-CV-0761-B

 (Consolidated with:

3:05-CV-0773-B

3:05-CV-0774-B

3:05-CV-0799-B

3:05-CV-0815-B)

MEMORANDUM ORDER

Before the Court is a consolidated appeal by Industrial Clearinghouse, Inc. (“Industrial”),

Coastal Plains, Inc. (“Coastal Plains”), R. Wayne Duke (“Duke”), Dallas Valve and Instrument

Company (“Dallas Valve”), and Intercontinental Bearing Company (“Intercontinental”), collectively

“Appellants,” from a final judgment and related orders of the bankruptcy court. Having conducted

plenary review of the bankruptcy court’s judgment, the Court AFFIRMS that judgment for the

following reasons.

 

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 The background facts are derived from Appellants’ Brief, Appellee’s Brief, and on undisputed facts 1

gleaned from the parties’ court papers and corresponding attachments. Where there may be a dispute over

a stated fact the Court has so indicated by claiming the fact as one stated by that party to be true.

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I. FACTUAL AND PROCEDURAL BACKGROUND1

A. The Coastal Plains Bankruptcy

This appeal results from appellant Coastal Plains’s filing of Chapter 11 bankruptcy.

(Appellants’ Brief at 14) In 1985, Coastal Plains, a vendor and distributor of industrial parts, was

experiencing financial problems and employed the law firm of Jackson Walker, L.L.P. to help the

company formulate a restructuring plan. (Id. at 13) Integral to this plan was a transaction with

Coastal Plains’s largest supplier, Browning Manufacturing, in which Coastal Plains would sell its

inventory back to Browning and then reacquire the inventory on a consignment basis. (Id. at 14)

Browning breached this agreement by refusing to pay for the returned inventory and refusing to

provide the promised consignment inventory. (Id.) Because of this, Coastal Plains filed for

bankruptcy on April 22, 1986. (Id.)

Jackson Walker also represented Coastal Plains during the course of its Chapter 11

proceeding. (Appellants’ Brief at 14) Shortly after filing for bankruptcy, Coastal Plains filed an

adversary proceeding against Browning, pleading causes of action for breach of contract, conversion,

and tortious interference (the “Browning claims”) and requesting injunctive relief as well. (Id. at 15)

The court ordered Browning to return the inventory to Coastal Plains but did not rule on the other

claims. (Id.) 

On June 6, 1986, Coastal Plains filed its Schedules and Statement of Financial Affairs that

Jackson Walker had helped prepare, but the claims against Browning were not listed. (Appellants’

 

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Brief at 16) In September 1986, Westinghouse Credit Corporation (“Westinghouse”), which had

a super-priority lien on Coastal Plains’s property, requested that the court lift the automatic stay and

allow it to foreclose on Coastal Plains’s assets. (Id.) In mid-September, Jackson Walker entered a

Stipulation of Facts for Coastal Plains which again made no mention of the Browning claims. (Id.)

The company’s general intangible assets were stated as worth less than $20,000. (Id.) In early

October, Westinghouse foreclosed on the assets ofCoastal Plains and bought them in the foreclosure

sale. (Id. at 17) 

Meanwhile, in September 1986, Jackson Walker began to represent the liquidating agent for

Coastal Plains’s assets--Industrial. (Appellants’ Brief at 17) R. Wayne Duke was the CEO of both

Coastal Plains and Industrial. (Id.) Industrial questioned Jackson Walker about how to ensure its

acquisition of the Browning claims when it purchased the assets of Coastal Plains from

Westinghouse; Jackson Walker, however, neglected to advise the company to identify the claims in

the bankruptcy proceeding or to take any other action to preserve an interest in the claims. (Id.)

Industrial then purchased Coastal Plains’s assets from Westinghouse, including, it believed, the

Browning claims. (Id.) Because Coastal Plains retained no assets after this series of purchases and

would not have been able to reorganize under Chapter 11, Jackson Walker moved to dismiss the

bankruptcy case in early January 1987. (Id.) Instead of dismissing the case, the bankruptcy court

chose to convert the proceeding into a Chapter 7 bankruptcy and appointed a trustee. (Id.)

B. Adjudication of the Browning Claims

A trial on the Browning claims was set for May 1993 in federal district court; however, it was

postponed by the intervention of Coastal Plains’s trustee, claiming that the Coastal Plains bankruptcy

estate owned the claims against Browning. (Appellants’ Brief 18) The district court then referred

 

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the case back to the bankruptcy court for a determination of the ownership of the Browning claims.

(Id.) In May 1994, the bankruptcy court ruled that Industrial owned the contract claims against

Browning and that the trustee owned the tort claims. (Id.) Industrial and the trustee then entered

into a court-approved sharing agreement under which Industrial would receive 85% of any recovery

against Browning while Coastal Plains’s estate would receive 15%. (Appellants’ Brief at 18;

Appellee’s Brief at 9) In 1995, the trustee resigned and Jeffrey Mims (the “Trustee”), the current

trustee, was appointed as his successor. (R. 588) 

With ownership of the Browning claims squared away, in March 1996 the parties went to trial

on the Browning claims back in the district court. (Appellants’ Brief at 18) Industrial and the estate

of Coastal Plains won a large jury verdict, which was later reduced by the district court. (Id. at 18-

19) A judgment was entered against Browning. (Id. at 19) On appeal, the Fifth Circuit reversed

the district court and rendered a judgment in favor of Browning based upon the doctrine of judicial

estoppel. (Id. at 19) Industrial and the estate of Coastal Plains were estopped from recovering

against Browning because the Browning claims were not listed in either the bankruptcy schedules

or the Stipulation of Facts, and the bankruptcy court relied on this representation in lifting the stay

and allowing Westinghouse to foreclose on the assets of Coastal Plains. (Id.); In re Coastal Plains,

Inc., 179 F.3d 197, 208-10 (5th Cir. 1999). In light of Coastal Plains, Appellants believed that

Jackson Walker had committed malpractice in failing to disclose the Browning claims in the

bankruptcy filings. (Appellants’ Brief at 10) Sometime after January 2000, the Trustee met with

Duke and counsel for Industrial to discuss ownership of the potential claim against Jackson Walker

and how pursuit of that claim might progress. (Mims Dep. at 59-61, R. 695-696) No agreement was

reached at that meeting. (Mims Dep. at 63-64, R. 696)

 

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“Appellants” refers to Industrial, Coastal Plains, Duke, Dallas Valve and Intercontinental. 2

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C. The Closing of the Bankruptcy Estate

In March 2000, Mims filed the Trustee’s final report and proposed distribution of assets of

the estate, applied for compensation, and requested that the bankruptcy case be closed. (R. 205)

The court then gave notice of the filing and set a deadline for objections to the fee application and

proposed distribution. (R. 859) In June, the bankruptcy court approved the Trustee’s fees and the

proposed distribution of the assets. (R. 205) Shortly thereafter, Duke filed an amended Schedule

B-2 listing the Jackson Walker claim as an asset of the bankruptcy estate with an unknown value.

(R. 511) The court discharged the Trustee and closed the bankruptcy case on December 12, 2000.

(R. 205) Appellants did not object to either the fee order or the closing order, and both orders

became final. (Id.) 

D. The Instant Case Against the Trustee

The Coastal Plains bankruptcy case spawned additional related litigation, including the case

at bar - creating a somewhat convoluted procedural history. Appellants originally filed this suit 2

against the Trustee in Texas state court in November 2004 for breach of fiduciary duty and negligent

breach of fiduciary duty. (Appellants’ Brief at 11) Appellants allege that the Trustee refused to

administer their potential malpractice claim against Jackson Walker and attempted to prevent

anyone else from pursuing the claim by “trapping” it in the estate. (Appellants’ Brief at 10-11)

Appellants also maintain that the Trustee was a fiduciary of the estate and that it was part of his

fiduciary duty to pursue claims of the estate, including the Jackson Walker claim, for the estate’s

creditors. (Id. at 30, 35) The Trustee denies Appellants’ allegations of wrongdoing, stating that he

 

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Although the bankruptcy court denied the motion, it did not explain its reasoning in its 3

memorandum order entered on March 11. However, the issue of abandonment was addressed by the

bankruptcy court in a related case in late 2004, and at the time of the bankruptcy court’s denial of the Motion

for Partial Summary Judgment, the court’s ruling in the related proceeding was before this Court on appeal.

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consulted with his own attorney as well as Appellants’ attorney, “reviewed the legal malpractice

claim, made an affirmative decision not to pursue the claim, [and] indicated on the Trustee’s Final

Report that it had a value of zero.” (Appellee’s Brief at 9-10) The Trustee asserts that his evaluation

of and decision not to pursue any potential claims against Jackson Walker constitute full

administration of those claims. (Id.) 

On December 3, 2004, the Trustee filed a Notice of Removal removing the suit from state

court directly to bankruptcy court in the Northern District of Texas. (Appellants’ Brief at 11) Postremoval, the Trustee filed a motion for judgement on the pleadings and to dismiss Appellants’ case

on numerous theories, including res judicata. (See R. 616.) On December 16, Appellants filed their

Notice Under Bankruptcy Rule 9027(e)(3), claiming that their case against the Trustee was a noncore proceeding and declining to consent to final orders or judgment by the bankruptcy judge. (R.

622) Appellants also responded to the Trustee’s Notice of Removal with Plaintiffs’ Motion for

Remand and Plaintiffs’ Motion to Strike the Removal. (See R. 76, 80.) Next, the Trustee filed a

Motion to Strike Plaintiffs’ Notice Under Bankruptcy Rule 9027(e)(3) on the grounds that it was

untimely filed on the 13th day after his filing of the Notice of Removal with the bankruptcy court.

(R. 664) Appellants followed with a Motion for Partial Summary Judgment seeking a judgment that

the Jackson Walker Claim had been abandoned by the Trustee. (R. 674-76) The Trustee answered 3

by filing a Cross-Motion for Summary Judgment, alleging, inter alia, that Appellants’ claims were

barred by the doctrine of res judicata. (R. 748)

 

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The bankruptcy court held a hearing on all the pending motions on February 17, 2005. On

March 11, 2005, the court issued a memorandum opinion containing its findings of fact and

conclusions of law determining, inter alia, that Appellants’ claims were barred by res judicata. See

Industrial Clearinghouse v. Mims (In re Coastal Plains), 126 B.R. 102, 109 (Bankr. N.D. Tex. 2005).

The bankruptcy court also found that Appellee’s removal of the case from the state court directly to

bankruptcy court was proper and accordingly denied Appellants’ Motion to Remand and Motion to

Strike Notice of Removal. See id. at 109. In addition, the court granted Appellee’s Motion to Strike

Plaintiffs’ Notice Under Bankruptcy Rule 9027(e)(3) reasoning that, as an action against the

bankruptcy trustee for breach of fiduciary duty, it constituted a core proceeding over which the

bankruptcy court had subject matter jurisdiction. Finally, the bankruptcy court found that the

“Barton Doctrine” required dismissal of the case because the Appellants had failed to seek the

bankruptcy court’s permission before filing suit in state court. See id. The memorandum opinion was

accompanied by four orders consistent with the opinion and a judgment in favor of the Trustee.

With this background, the Court turns to the appeal at issue. 

Appellants raise twelve issues on appeal which they have divided into five categories. First,

Appellants seek a review ofwhether the removal from the state court directly to the bankruptcy court

was proper or whether the bankruptcy court erred in denying their motions challenging that removal.

(Appellants’ Brief at 7-8) Second, Appellants argue that the bankruptcy court erred in holding that

the doctrine of res judicata barred their claims. (Id.) Third, Appellants contend that the court

should have granted their Motion for Partial Summary Judgment on the ground of abandonment of

the Jackson Walker claim. (Id.) Fourth, Appellants argue that their Notice Under Bankruptcy Rule

9027(e)(3) was timely and should not have been stricken. (Id. at 9, 32) Finally, Appellants assert

 

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that application of the Barton Doctrine was error because that doctrine has not been adopted by the

Fifth Circuit. (Id. at 9, 33) Because the first and second grounds relating to the propriety of removal

from state court and res judicata are dispositive of this appeal, the Court does not reach the other

issues raised by Appellants.

II. LEGAL STANDARD

Final judgments, orders, and decrees of a bankruptcy court may be appealed to a federal

district court. 28 U.S.C.A. § 158(a)(1) (1994 & Supp. 2005); FED. R. BANKR. P. 8001(a). The

district court functions as an appellate court and applies the same standard of review used by federal

appellate courts when reviewing the decisions of district courts. Webb v. Reserve Life Ins. Co. (In re

Webb), 954 F.2d 1102, 1103-04 (5th Cir. 1992). A district court shall only set aside a bankruptcy

court’s findings of fact if they are clearly erroneous and shall also acknowledge the bankruptcy court’s

opportunity to evaluate the credibility ofthewitnesses. FED.R.BANKR.P. 8013. “A finding is clearly

erroneous when although there is evidence to support it, the reviewing court on the entire evidence

is left with the definite and firm conviction that a mistake has been committed.” Webb, 954 F.2d at

1104 (quoting Anderson v. City of Bessemer, 470 U.S. 564, 573 (1985)). When resolving questions

of law or mixed questions of law and fact, the district court reviews the bankruptcy court’s

conclusions de novo. EOP-Colonnade v. Faulkner (In re StonebridgeTechnologies, Inc.), 430 F.3d 260,

265 (5th Cir. 2005).

III. ANALYSIS

A. The Bankruptcy Court Did Not Err in Denying Plaintiffs’ Motion to Strike Notice

 of Removal & Plaintiffs’ Motion to Remand.

Appellants argue that the bankruptcy court erred in upholding the direct removal of this case

 

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from the state court to the bankruptcy court. (Appellants’ Brief at 20) They contend that a party

cannot bypass a district court when removing a case from state court. (Appellants’ Brief at 20) In

addressing this issue, the bankruptcy court determined that the removal was proper finding the term

“district court” in the removal statute equally applicable to bankruptcy courts as units of the district

court and that standing referral orders, as permitted by 28 U.S.C. § 157(a), allow bankruptcy-related

cases to be directly removed from state court to the bankruptcy court. Industrial Clearinghouse, 326

B.R. at 107-108. 

Removal of a civil action related to a bankruptcy case is governed by 28 U.S.C. § 1452 which

provides:

A party may remove any claim or cause of action in a civil action other than a

proceeding before the United States Tax Court or a civil action by a governmental

unit to enforce such governmental unit’s police or regulatory power, to the district

court for the district where such civil action is pending, if such district court has

jurisdiction of such claim or cause of action under section 1334 of this title.

28 U.S.C.A. § 1452(a) (1994 & Supp. 2005). 

Federal courts are split on the proper interpretation of the removal statute. Section 1452 was

enacted as part of the Bankruptcy Amendments and FederalJudgeship Act of 1984 (the “1984 Act”)

to replace the prior removal statute, 28 U.S.C. § 1478. Congress passed the 1984 Act in response

to the Supreme Court’s opinion in Northern Pipeline Construction Co. v. Marathon Pipe Line Co.,which

held the Bankruptcy Act of 1978 unconstitutional because it endowed non-Article III bankruptcy

judges with Article III powers. 458 U.S. 50 (1982). The only relevant difference in wording between

the old statute and the current removal statute is that “district court” now appears in § 1452(a)

where “bankruptcy court” used to appear in § 1478(a). 28 U.S.C.A. § 1478(a) repealed by

 

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Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353 (1984); 28

U.S.C.A. § 1452(a).

The minority view is that the term “district court” means just what it says and should be

interpreted as being exclusive of the bankruptcy court. See Doyle v. Mellon Bank, 307 B.R. 462(E.D.

Pa. 2004); Sharp Elec. Corp. v. Deutsche Fin. Servs. Corp., 222 B.R. 259 (D. Md. 1998); Cornell & Co.,

Inc. v. Southeastern Pennsylvania Transp. Auth. (In re Cornell & Co., Inc.), 203 B.R. 585 (Bankr. E.D.

Pa. 1997); Centrust Sav. Bank v. Love, 131 B.R. 64 (S.D. Tex. 1991). Although Appellants contend

that these cases are applicable here, under a close reading, the actual issue being decided in many of

these cases is whether a case can be “removed” from the federal district court to the bankruptcy

court. E.g., Doyle, 307 B.R. at 463; Centrust, 131 B.R. at 65. Any discussion of removal from state

courts in these cases is dicta. See Doyle, 307 B.R. at 463; Centrust, 131 B.R. at 65. 

The majority of federal courts, on the other hand, allow state cases to be removed directly

to the bankruptcy court without first being routed through the district court. See AG Indus., Inc. v.

AK Steel Corp. (In re AG Indus., Inc.), 279 B.R. 534 (Bankr. S.D. Ohio 2002); Eyecare of S. California

v. Urrea (In re Eyecare of S. California), 258 B.R. 765 (Bankr. C.D. Cal. 2001); Lone Star Indus., Inc.

v. Liberty Mut. Ins., 131 B.R. 269 (D. Del. 1991); Citicorp Sav. of Illinois v. Chapman (In re Chapman),

132 B.R. 153 (Bankr. N.D. Ill. 1991); In re Boyer, 108 B.R. 19 (Bankr. N.D.N.Y. 1988); Aztec Indus.,

Inc. v. Standard Oil Co. (In re Aztec Indus., Inc.), 84 B.R. 464 (Bankr. N.D. Ohio 1987); Gianakas v.

Exch. Nat’l Bank of Chicago (In re Gianakas), 56 B.R. 747 (N.D. Ill. 1985). The primary bases for the

decisions of these courts are an expanded definition of the term “district court” and the practicality

of not requiring an additional, unnecessary step in the removal process. 

The majority relies on the notion that § 1452(a) cannot be viewed in isolation. This court

 

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finds the majority’s contextual approach persuasive. Courts must look at § 1452(a) in the context

of other provisions in the Judicial Code and Federal Rules of Bankruptcy Procedure which also

govern the activities of the bankruptcy courts and the removal of bankruptcy-related cases. When

Congress reconstructed the jurisdiction of the bankruptcy courts with the 1984 Act, it made those

courts “a unit of the district courts” and classified bankruptcy judges as “judicial officer[s] of the

district court”. 28 U.S.C.A. § 151 (1994 & Supp. 2005). In addition, Congress enacted a provision

allowing the district courts to refer “any or all proceedings arising under Title 11, or arising in or

related to a case under Title 11” to the bankruptcy judges sitting in their district. 28 U.S.C.A. §

157(a) (1994 & Supp. 2005). Both of these statutes reinforce the current placement of the

bankruptcy courts in the federal judicial scheme as a subset of federal district courts that derive their

jurisdiction from the primary branch of the district court. Gianakas, 56 B.R. at 752. 

In accord with this reasoning, the Court finds that the change in wording of the removal

statute from “bankruptcy court” to “district court” did not signal a change in the procedure for filing

a notice of removal. Rather “the wording change merely reflects the fact–expressed in §§ 151 and

157–that the ‘bankruptcy court’ as such no longer exists as a distinct jurisdictional entity, but is

subsumed within ‘the district court’ apparatus.” Id. Hence, removing a case to a bankruptcy court

is the functional equivalent of removing it to the federal district court under § 1452(a).

This conclusion accords with the procedures set forth in the Bankruptcy Rules. For example,

Bankruptcy Rule 9027 instructs litigants as to the proper process for removal: “A notice of removal

shall be filed with the clerk for the district and division within which is located the state or federal

court where the civil action is pending.” FED. R. BANKR. P. 9027(a). The term “clerk” is defined as

“bankruptcy clerk, if one has been appointed, otherwise clerk of the district court.” FED. R. BANKR.

 

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 This conclusion does not appear to veer from any Fifth Circuit authority on the issue of removal 4

directly from state court to bankruptcy court. In In re Kevco, Inc., the court addressed the issue of whether

direct removal of a bankruptcy-related case from a state court to the wrong division of the Bankruptcy Court

for the Northern District of Texas required remand to the state court. Pam Capital Funding LP v. Nat’l

Gypsum Co. (In re Kevco), 113 Fed. Appx. 29, 31 (5th Cir. 2004). Noting that “[r]emoval to the wrong

division is procedural, not jurisdictional”, the Kevco court did not object to the bankruptcy court’s exercise

of jurisdiction on direct removal. Instead it merely found removal to the wrong division of the bankruptcy

court to be a harmless procedural error.

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P. 9001(3). Therefore, under the bankruptcy rules, a party wishing to remove its case to bankruptcy

court may file it with the bankruptcy clerk rather than the clerk of the district court. The language

of these rules could not be much clearer. Both Rule 9027 and Rule 9001 have been amended three

times since the passage of the 1984 Act, however they still direct parties to file notices of removal

with the clerk of the bankruptcy court so long as one has been appointed. Reading 28 U.S.C. § 1452

together with its procedural counterpart, Rule 9027, reinforces the conclusion that § 1452 and the

rest of the 1984 Act were meant to resolve constitutionally-based jurisdictional problems and not to

change the method of or procedure for removal of bankruptcy-related cases from state court.

In short, for all of the foregoing reasons, this Court finds that Appellee’s removal efforts

complied with the requirements of 28 U.S.C. § 1452(a) and Bankruptcy Rule 9027. The bankruptcy 4

court did not err in finding direct removal to the bankruptcy court to be proper. Accordingly, the

bankruptcy court’s denial of Plaintiffs’ Motion to Strike Notice of Removal and Plaintiffs’ Motion to

Remand is affirmed.

B. The Bankruptcy Court Did Not Err in Ruling That Appellants’ Claims Were Barred

 by Res Judicata and Entering Judgment for Appellee.

Appellants also complain that the bankruptcy court erred in finding that their claims were

barred by res judicata. In its opinion, the bankruptcy court found that the determination of the

 

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Trustee’s fees towards the end of the Coastal Plains bankruptcy case in 2000 and the facts of the

present case against the Trustee were centered upon the same nucleus of operative fact: “the value

and nature of the Trustee’s services.” Industrial Clearinghouse, 326 B.R. at 110. Because the two

proceedings share the same nucleus of operative facts, the court found that the same cause of action

was involved in both of them and held that Appellants’ claims of breach of fiduciary duty and

negligent breach of fiduciary duty were barred by res judicata. Id. at 109. In addition, the bankruptcy

court held that the instant claims against the Trustee should have been brought at the time of the

fee determination because Appellants “had more than a general awareness of the potential for claims”

and a fee application hearing would have been an effective forum in which to address those claims.

Id. at 110-11. 

The doctrine of res judicata bars claims that have already been litigated as well as claims that

“could and should” have been brought in an earlier proceeding. Osherow v. Ernst & Young, LLP (In

re Intelogic Trace, Inc.), 200 F.3d 382, 388 (5th Cir. 2000). For a claim to be barred by res judicata,

four factors must be present: “the parties must be identical in both suits, the prior judgment must

have been rendered by a court of competent jurisdiction, there must have been 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, 559 (5th Cir. 1983) (en banc) (quoting Kemp v. Birmingham News Co., 608 F.2d

1049, 1052 (5th Cir. 1979)). Here, Appellants contend that there was no final judgment on the

merits with regard to the closing order issued by the bankruptcy court. Appellants also argue that

their breach of fiduciary duty and negligent breach of fiduciary duty claims against the Trustee do not

constitute the “same cause of action” as the bankruptcy court’s determination of his fees in 2000, so

the claims have not previously been litigated and Appellants should not be barred from pursuing

 

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 Closing orders are, of course, final judgments on the merits. The Fifth Circuit also has provided 5

examples of other bankruptcy court actions that may be considered final judgments for the purposes of res

judicata. Orders allowing or confirming a partial sale of the bankruptcy estate and orders allowing a creditor’s

proof of claim are considered final judgments on the merits “‘even though the order neither closes the

bankruptcy case nor disposes of any claim.’” Bank of Lafayette v. Baudoin (In re Baudoin), 981 F.2d 736, 742

(5th Cir. 1993) (quoting Hendrick v. Avent, 891 F.2d 583, 586 (5th Cir. 1990)).

14

them. (Appellants’ Brief at 23-32)

The Fifth Circuit has not articulated an exact standard for determining when an order by the

court in a bankruptcy proceeding constitutes a final judgment on the merits. Because of this, it is 5

necessary for the Court to look to another context in which the Fifth Circuit has provided a clear

standard for determining the finality of an order in a bankruptcy case: finality for the purposes of

appeal. This Circuit treats bankruptcy court orders differently than orders in most civil cases because

of the unique procedural posture of bankruptcy cases. For purposes of determining the finality of a

bankruptcy order, each matter that arises between the filing of the bankruptcy petition and the

issuing of a closing order is treated as a separate proceeding. Smith v. Revie (In re Moody), 817 F.2d

365, 367-68 (5th Cir. 1987). A “final” order in a bankruptcy case can be any order that “ends a

discrete judicial unit in the larger case.” Id. at 368. It is logical to apply this same standard of finality

for the purposes of res judicata, especially considering that the Federal Rules of Bankruptcy Procedure

define “judgment” as “any appealable order.” FED. R. BANKR. P. 9001(7). The First Circuit takes

this approach, allowing any bankruptcy court order that “‘completely resolve[s] all of the issues

pertaining to a discrete claim’” to satisfy the res judicata requirement of a final judgment on the

merits. Iannochino v. Rodolakis (In re Iannochino), 242 F.3d 36, 43 (1st Cir. 2001) (quoting Official

Comm. of Subordinated Bondholders v. Integrated Res., Inc., (In re Integrated Res., Inc.), 3 F.3d 49, 53

(2d Cir. 1993)). 

 

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Appellants incorrectly focus their efforts on disputing the finality of the closing order issued

by the bankruptcy court on December 12, 2000. The applicable order for the purposes of res judicata

is the Court’s June 2, 2000, Order Approving Final Account & Report Granting Application for

Compensation (the “Fee Order”). The Fee Order satisfies the final judgment on the merits

requirement because it is a final judgment on the value of the Trustee’s services to the estate, and

it ends the fee determination unit of the larger bankruptcy case. Thus, the Fee Order is considered

a “final judgment” on the merits despite the later reopening of the bankruptcy case.

Appellants also challenge the bankruptcy court’sfinding of an identity of claims between the

present case and the fee determination by the bankruptcy court in the Coastal Plains bankruptcy

case. In deciding whether a case involves the same cause of action as a previous proceeding, courts

within the Fifth Circuit employ the transactional test to determine whether the two actions “are

based on ‘the same nucleus of operative facts.’” Intelogic Trace, 200 F.3d at 386 (quoting Howe v.

Vaughan (In re Howe), 913 F.2d 1138, 1144 (5th Cir. 1990)). Appellants’ causes of action for breach

of fiduciary duty and negligent breach of fiduciary duty and the bankruptcy judge’s determination of

the Trustee’s fee award are all based upon the same nucleus of operative facts: the acts and omissions

of the Trustee during his representation of the Coastal Plains bankruptcy estate. Both proceedings

appraise the quality and value of the Trustee’s services and examine the beneficial or detrimental

effects that his acts or omissions had upon the bankruptcy estate.

The Fifth Circuit addressed the issue of identity of claims in In re Intelogic Trace, the facts of

which are highly analogous to this case. Intelogic Trace, 200 F.3d at 386-88. Intelogic Trace involved

malpractice claims brought by a bankruptcy trustee against Ernst & Young, the accounting firm that

assisted Intelogic Trace (“IT”) during its Chapter 11 bankruptcy. Id. at 384. The trustee brought

 

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many claims against Ernst & Young, alleging that the firm’s failure to contact customers about

prepaying their accounts with IT led to flawed financial projections and ultimately to the company

filing for Chapter 11 bankruptcy a second time. Id. at 385. The Fifth Circuit affirmed the holdings

of the bankruptcy and district courts that the trustee’s claims were barred by res judicata because the

trustee’s concerns about the firm’s performance should have been brought while the court was

considering Ernst and Young’s fee application. See id. The Fifth Circuit found that the “central

transaction” in both cases was the services Ernst & Young rendered to the estate during its Chapter

11 reorganization. Id. at 387. It further explained that a professional fee award “represents a

determination of ‘the nature, the extent, and the value of such services.’” Id. (quoting 11 U.S.C. §

330(a)(3)). Similarly, the Trustee’s services to the Coastal Plains estate comprise the central

transaction in this case and in the bankruptcy court’s fee determination. The bankruptcy judge

determined that the Trustee’s actions on behalf of the bankruptcy estate benefitted the estate and

were of some value when it chose to grant his request for a fee award. The conclusion in Intelogic

Trace can be extended to the present case because the negligence and breach of fiduciary duty claims

brought by Appellants against the Trustee here are analogous to the malpractice claims brought

against professionals employed by the bankruptcy estate in Intelogic Trace. 

Finally, once the four elements required for the application ofres judicata have been satisfied,

the key question is whether the claims could or should have been brought as a part of the prior

proceedings. To determine whether the claims could or should have been brought, this Court must

decide whether: 1) Appellants had “actual or imputed awareness” at the time of the fee

determination “of a real potential for claims” against the Trustee of the same type currently being

asserted; and 2) “whether the bankruptcy court possessed procedural mechanisms” through which

 

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Appellants could have pursued their claims against the Trustee. Intelogic Trace, 200 F.3d at 388.

Here, any concerns about the Trustee’s acts or omissions definitely should have been brought as an

objection to his fee application. 

At the time the bankruptcy court was considering the Trustee’s fee application, Appellants

were aware that Mims was not pursuing claims against Jackson Walker and that he was requesting

the bankruptcy court’s approval of final distributions so that he could close the estate. On March

13, 2000, the bankruptcy court gave notice that the Trustee’s fee application had been filed and set

a deadline for objections. (R. 859) The Appellants, however, failed to object to the Trustee’s fee

application, and they made no complaints about his treatment of the Jackson Walker claim or about

any of his other actions on behalf of the bankruptcy estate. The only response was Appellant Duke’s

June 9, 2000 filing of an amended Schedule B-2 listing the Jackson Walker claim as an unliquidated

action with an unknown value. (See R. 511.) Had Appellants objected, the quality of the Trustee’s

services and his decision with regard to the Jackson Walker claim at the very least would have been

made a contested matter, but more than likely it would have been converted into an adversary

proceeding, allowing the court the opportunity to consider the actions or inactions of the Trustee

that Appellants found problematic. The Intelogic Trace court found that a fee hearing can provide

an effective forum in which to address malpractice claims against professionals who rendered service

to the bankruptcy estate. Intelogic Trace, 200 F.3d at 390. Likewise, a fee hearing would have been

an effective forum in which Appellants could have pursued their claims against the Trustee had they

taken the initiative to object to the Trustee’s fee application. Appellants’ failure to do so or otherwise

complain to the bankruptcy court about the Trustee’s actions in a timely manner forecloses them

from attempting to pursue those claims four years after the fact just because those claims have not

 

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been previously litigated. Appellants’ breach of fiduciary duty and negligence claims should have been

brought in 2000 when the Trustee’s fee award was being determined by the court, so they are barred

from pursuing those claims now by the doctrine of res judicata. Holding otherwise would leave

trustees open to creditors’ claims after the court has already approved their service.

Appellants imply that they could not have brought a claim against the Trustee while the

bankruptcy case was still open because Duke thought that the filing of a final report and the entry

of a closing order would result in the bankruptcy estate’s abandonment of the Jackson Walker claim.

(Appellants’ Brief 30) However, the law of the Fifth Circuit does not require a party to have

understood the legal implications of the facts giving rise to a claim in order for the claim to be barred

by res judicata. See In re Howe, 913 F.2d at 1147(finding lender liability plaintiffs’ “ignorance an

inadequate excuse for the failure to raise their claims in the earlier proceedings”). In Intelogic Trace,

the court only required a “sufficient general awareness ofthe real potential for claims” and barred the

company’s claims against their accounting firm even though “the Board may not have been aware

of the precise facts or reached a firm conclusion on Ernst & Young’s performance.” Intelogic Trace,

200 F.3d at 389. Although the facts of the present case are not as extreme as those of Intelogic Trace,

this Court reaches the same conclusion. Appellants knew or should have known after the Trustee

filed his fee application and final report that he had no intention of further pursuing the potential

malpractice claim against Jackson Walker. Appellants did not need to understand the ramifications

of the Trustee’s inaction to know that they did not think he was doing his job by not taking action

against Jackson Walker. This is the concern they should have raised to the court in response to the

Trustee’s fee application.

In light of the foregoing discussion, the Court finds that the bankruptcy court did not err in

 

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holding that Appellants’ claims are barred by res judicata. Because the bankruptcy court correctly

found that Appellants’ fiduciary duty claims are barred, the Court need not address the remainder

of Appellants’ issues on appeal, which focus on the merits of Appellants’ fiduciary duty claims and

the procedures used to bring them. Therefore, the bankruptcy court’s grant of summary judgment

and judgment on the pleadings in favor of Appellee is affirmed.

IV. CONCLUSION

For the reasons discussed herein, the bankruptcy court’s orders and judgment entered on

March 11, 2005 are AFFIRMED. The appeal of Industrial, Coastal, Duke, Dallas Valve, and

Intercontinental is DENIED in its entirety.

SO ORDERED.

SIGNED March 7 , 2006 th

 

_________________________________

JANE J. BOYLE

UNITED STATES DISTRICT JUDGE

 

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