Opinion ID: 3011098
Heading Depth: 1
Heading Rank: 2

Heading: Claim Preclusion and Bankruptcy Proceedings

Text: The central issue in this appeal is the claim preclusive effect of the Bankruptcy Judge's final order of confirmation, over CoreStates's objection, on CoreStates's claim against Huls. In the confirmation proceeding, CoreStates objected to the Plan as unfair in part because it provided for the immediate payment of $600,000 to Huls, a junior creditor. CoreStates's present claim is that the Subordination Agreement requires Huls to pay to CoreStates the $600,000 Huls received pursuant to the now-confirmed Reorganization Plan. A strong argument can be made that CoreStates's unfairness objection so clearly implicated the Agreement that the issue that divides the parties in the present case was effectively raised and litigated in the 8 bankruptcy proceeding, so that we are dealing here with issue preclusion rather than claim preclusion.4 Since the District Court and the parties have treated this case as involving primarily claim preclusion, however, and claim preclusion is the most clearly applicable doctrine, we begin with a review of the basic law of claim preclusion. In Board of Trustees of Trucking Employees Welfare Fund, Inc. v. Centra, 983 F.2d 495 (3d Cir. 1992), we explained that claim preclusion (or res judicata as it is also called) gives dispositive effect to a prior judgment if a particular issue, although not litigated, could have been raised in the earlier proceeding. Claim preclusion requires: (1) afinal judgment on the merits in a prior suit involving; (2) the same parties or their privities; and (3) a subsequent suit based on the same cause of action. Centra, 983 F.2d at 504 (emphasis added; citations omitted). If these three factors are present, a claim that was or could have been raised previously must be dismissed as precluded. We have elaborated on the third element of the Centra test, both in general and in the context of bankruptcy proceedings. In deciding whether two suits are based on the same cause of action, we take a broad view, looking to whether there is an essential similarity of the underlying events giving rise to the various legal claims. United States v. Athlone Indus., 746 F.2d 977, 984 (3d Cir. 1984); see also Restatement (Second) of Judgments S 24 cmt. a (The present trend is to see claim in factual [as opposed to legal] terms and to make it coterminous with the transaction regardless of the number of substantive theories . .. that may be available to the plaintiff . . . .); id. cmt. b (In general, the expression [`transaction'] connotes a natural grouping or common nucleus of operative facts.). Because a bankruptcy case is fundamentally different from the typical civil action, however, comparison of a bankruptcy proceeding with another proceeding is not susceptible to _________________________________________________________________ 4. Another way of looking at it might be that CoreStates's claim should be barred by reason of S 1141 of the Bankruptcy Code, 11 U.S.C. S 1141(a), which provides that a confirmed plan is binding on all creditors, including feuding creditors such as CoreStates and Huls, who litigated the fairness of the Plan as affected by the disputed payment. 9 the standard res judicata analysis. Rather, we scrutinize the totality of the circumstances in each action and then determine whether the primary test of Athlone, i.e., essential similarity in the underlying events, has been satisfied. Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419 n.5 (3d Cir. 1988). The principle of claim preclusion applies to final orders overruling objections to a reorganization plan in bankruptcy proceedings just as it does to any other final judgment on a claim. See Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II, Ltd.), 898 F.2d 1544, 1552 (11th Cir. 1990) (Because the claims raised in the Wallises' adversary complaint were already raised, or could have been raised, in their objection to confirmation, we hold that the doctrine of claim preclusion bars them from relitigating those claims.); see also Katchen v. Landy, 382 U.S. 323, 334 (1966) (The normal rules of res judicata and collateral estoppel apply to the decisions of bankruptcy courts.); Donaldson v. Bernstein, 104 F.3d 547, 554 (3d Cir. 1997) ([A] confirmation order is res judicata as to all issues decided or which could have been decided at the hearing on confirmation. (quoting In re Szostek, 886 F.2d 1405, 1408 (3d Cir. 1989))); Crop-Maker Soil Servs. v. Fairmount St. Bank, 881 F.2d 436, 440 (7th Cir. 1991) (Public policy supports res judicata generally, but in the bankruptcy context in particular.); cf. 11 U.S.C.S 1141(a) ([T]he provisions of a confirmed plan bind . . . any creditor . . . whether or not the claim or interest of such creditor . . . is impaired under the plan and whether or not such creditor . . . has accepted the plan.). Accordingly, we ordinarily would simply apply these rules. CoreStates suggests two reasons why we should not.5 We address these in turn. _________________________________________________________________ 5. CoreStates also submits that claim preclusion should not apply because the bankruptcy proceeding did not modify or adjudicate its rights under the Agreement. This argument misapprehends the fundamental nature of the doctrine of claim preclusion, which applies whether or not the particular issue was actually raised or decided by the prior court. See Agrilectric Power Partners, Ltd. v. General Elec. Co., 20 F.3d 663 (5th Cir. 1994). The continued effectiveness of the contract is simply irrelevant. Of course, if CoreStates's claim had not accrued before the Bankruptcy Judge confirmed UCT's Plan of Reorganization, then whether the Plan had modified the Agreement would be important. 10 III. Claim Preclusion: Non-Core Claims and Claims Between Creditors CoreStates's submissions raise legitimate questions as to the extent to which claim preclusion applies to bankruptcy orders and judgments. The thrust of its contentions is in the nature of a caveat that, because bankruptcy jurisdiction is so comprehensive, and a bankruptcy proceeding potentially can be so broad, its preclusive effect should be limited. We address two questions CoreStates poses about the claim preclusive effect of a bankruptcy judge's orders rejecting objections to reorganization plans: whether the doctrine should preclude claims that would have fallen within the non-core related -- as opposed to the core -- bankruptcy jurisdiction, and whether it should apply to the claims of a creditor who objects to a bankruptcy reorganization plan. We believe that these suggested limitations on the application of claim preclusion are unnecessary, and that claim preclusion should apply regardless of the jurisdictional basis of the present claim and between all parties to a bankruptcy case.
The first question is whether claim preclusion should apply if CoreStates's claim falls within the non-core related bankruptcy jurisdiction. The jurisdiction of a court hearing a Chapter 11 bankruptcy reorganization case is broad. This jurisdiction is delineated in 28 U.S.C. SS 157 & 1334. Title 28 initially grants jurisdiction over all aspects of a bankruptcy case to the district courts. See 28 U.S.C. S 1334.6 Section 157(a) then permits the district courts to _________________________________________________________________ 6. Section 1334 provides as follows: (a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11. (b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11. 11 automatically refer any proceedings over which they have jurisdiction under S 1334 to the bankruptcy courts.7 See, e.g., Bankruptcy Administration Orders (E.D. Pa. July 25, 1984, Nov. 8, 1990) (using the District Court's full authority to refer cases to bankruptcy judges under S157(a)). Section 157(b)(1) provides that [b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection [157(a)], and may enter appropriate orders and judgments . . . . Along with those listed in the statute,8 a proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case. Torkelsen v. Maggio (In re Guild & Gallery Plus, Inc.), 72 F.3d 1171, 1178 (3d Cir. 1996) (quoting In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 267 (3d Cir. 1991) (citations omitted)). Bankruptcy judges may also hear non- core proceedings that are otherwise related to a bankruptcy case. See S 157(c)(1) (A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11.). A claim is a non-core related claim if its outcome . . . could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or against the debtor's property. An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate. _________________________________________________________________ 7. Section 157(a) provides: Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district. 8. Section 157(b)(2) presents a nonexclusive list of core proceedings, including determinations of the validity, extent, or priority of liens. S 157(b)(2)(K). 12 Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984) (emphasis and citations omitted). In non-core claims, however, the bankruptcy judge may not enter final orders or judgments, but must submit proposed findings of fact and conclusions of law to the district court for entry of judgment, see 28 U.S.C. S 157(c)(1),9 unless all the parties consent to the bankruptcy judge's entering judgment, see S 157(c)(2).10 This distinction between core and non-core proceedings dates to the Supreme Court case of Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982). The principles of Northern Pipeline are familiar, and are described in the margin.11 Although CoreStates does not _________________________________________________________________ 9. Section 157(c)(1) provides, in pertinent part: In [a non-core] proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected. 10. Section 157(c)(2) provides: Notwithstanding the provisions of paragraph (1) of this subsection, the district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments . . . . 11. A Chapter 11 debtor brought claims before a bankruptcy judge against a creditor for breach of contract and warranty, misrepresentation, coercion, and duress, under the jurisdictional provisions of the 1978 Bankruptcy Reform Act. Those provisions granted bankruptcy courts jurisdiction over all civil proceedings arising under title 11, or arising in or related to cases under title 11. 458 U.S. at 54 (quoting 28 U.S.C. S 1471(b) (1976 ed. Supp. IV)) (emphasis and alteration in original). The Court concluded that this grant of