Opinion ID: 1649623
Heading Depth: 2
Heading Rank: 3

Heading: PMI's Claims

Text: ¶ 27. PMI contends that it suffered damages from its loss of ownership of the motel property and from its outlays for attorney's fees and costs in the bankruptcy and related matters. Mallery argues that claim preclusion applies to PMI's negligence claim against the firm because the trustee in PMI's bankruptcy could have pursued PMI's claim, but it did not. Mallery contends that the order closing the bankruptcy operates as a final judgment on PMI's claim. ¶ 28. Claim preclusion prevents relitigation of the same claim when: (1) there is an identity of parties or their privies in the prior lawsuit; (2) there is an identity of claims for relief that were brought, or should have been brought; and (3) a final judgment on the merits in a court of competent jurisdiction resolved the first lawsuit. Kruckenberg v. Harvey, 2005 WI 43, ¶ 21, 279 Wis. 2d 520, 694 N.W.2d 879; Northern States Power, 189 Wis. 2d at 551. Claim preclusion is `designed to draw a line between the meritorious claim on the one hand and the vexatious, repetitious and needless claim on the other hand.' Northern States Power, 189 Wis. 2d at 550 (quoting Purter v. Heckler, 771 F.2d 682, 689-90 (3d Cir. 1985)). Key objectives of the doctrine of claim preclusion are to promote judicial economy and to conserve the resources the parties would expend in repeated and needless litigation of issues that were, or that might have been resolved in a single prior action. Hanlon v. Town of Milton, 2000 WI 61, ¶ 20, 235 Wis. 2d 597, 612 N.W.2d 44 (citation omitted). At some point, litigation over a controversy must come to an end. DePratt v. West Bend Mut. Ins. Co., 113 Wis. 2d 306, 311, 334 N.W.2d 883 (1983). ¶ 29. Mallery's major argument for the application of claim preclusion centers on the third prong of the claim preclusion. It contends that because PMI's negligence claim was a core proceeding in the bankruptcy, the bankruptcy court's judgment closing the bankruptcy estate was a final judgment on the merits in a court of competent jurisdiction. Mallery also contends that even if PMI's claim was not a core proceeding, claim preclusion applies. PMI contends that its negligence claim against Mallery was not a core proceeding and even if it were, the claim was abandoned by the trustee in bankruptcy, which caused it to revert to PMI. ¶ 30. Bankruptcy courts have full judicial authority over the bankruptcy petition itself and may hear and determine ... all core proceedings ... and may enter appropriate orders and judgments with regard to core proceedings. 28 U.S.C. § 157(b)(1) (2002); [8] see also Dunmore v. United States, 358 F.3d 1107, 1114 (9th Cir. 2004). They also have the limited power to hear a proceeding that [is related to the bankruptcy but] is not a core proceeding [and] submit proposed findings of fact and conclusions of law to the district court for de novo review. 28 U.S.C. § 157(c)(1); see also Dunmore, 358 F.3d at 1114. However, unless the parties consent to an expansion of the bankruptcy court's authority, it is the district court that enters the final order and judgment in non-core proceedings. Id. The United States Code provides a non-exclusive list of what constitutes a core proceeding. [9] ¶ 31. In this case, we need not decide whether PMI's claim is core because we conclude that PMI is correct in its contention that the bankruptcy trustee abandoned PMI's claim against Mallery for the negligent provision of legal services. 11 U.S.C. § 554 provides the statutory basis for abandonment of property by a bankruptcy trustee. It states in relevant part: (a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. . . . (c) Unless the court orders otherwise, any property scheduled under section 521(l) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor .... As the United States Court of Appeals for the Seventh Circuit has recently explained: The Bankruptcy Code provides that after notice and a hearing, the trustee, either on his own volition or under order by the bankruptcy court, may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. 11 U.S.C. § 554(a). In addition, property that the bankruptcy court orders the trustee to abandon is deemed abandoned, § 554(b), and likewise property that has been scheduled, § 521(l), but not otherwise administered at the time of the closing of a case. § 554(c). Morlan v. Universal Guar. Life Ins. Co., 298 F.3d 609, 618 (7th Cir. 2002). Morlan explains the requirements for abandonment of a claim as: (1) notice and hearing; (2) property of the estate that is burdensome to the estate or is of inconsequential value or benefit to the estate; (3) property that has been scheduled; but (4) not otherwise administered at the time of closing of the bankruptcy estate. Id. at 618. PMI's claim against Mrozek meets these parameters. ¶ 32. On March 27, 1996, PMI's bankruptcy trustee, Randi L. Osberg, gave notice in a report filed with the court that there were no assets in the estate that were not either inconsequential in value or burdensome to the estate. Trustee Osberg stated further, This report shall be considered as an abandonment of all scheduled property of the bankruptcy estate. PMI's claim against Mallery was scheduled in the estate, as PMI had listed it as a claim in its filings with an unknown value, but the trustee had not administered it. 11 U.S.C. § 554(l). On November 26, 1996, a final decree was entered that concluded PMI's bankruptcy action. ¶ 33. When a bankruptcy trustee abandons a scheduled claim, it reverts to the debtor, as PMI's claim did under 11 U.S.C. § 554(c). As the United States Court of Appeals for the Tenth Circuit recently explained: Property abandoned under [§ 554] ceases to be part of the estate. . . . It reverts to the debtor and stands as if no bankruptcy petition was filed. Dewsnup v. Timm, 908 F.2d 588, 590 (10th Cir. 1990) (citing Brown v. O'Keefe, 300 U.S. 598, 602 (1937)). Following abandonment, `whoever had the possessory right to the property at the filing of bankruptcy again reacquires that right.' Dewsnup, 908 F.2d at 590 (citation omitted). This is also the view of the Seventh Circuit, which has explained, the effect of a trustee's abandoning a claim is to revest the ownership of it in the debtor. Morlan, 298 F.3d at 617 (citing Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1346 n.9 (7th Cir. 1987)); Catalano v. Commissioner, 279 F.3d 682, 685 (9th Cir. 2002); Miller v. Generale Bank Nederland, N.V., 217 F.3d 74, 76 (2d Cir. 2000). ¶ 34. The court of appeals did not accord merit to PMI's abandonment argument. It reasoned that the cases cited by PMI, Roberts v. Pearce Construction Co., 624 So. 2d 1009 (Ala. 1993) and Barletta v. Tedeschi, 121 B.R. 669 (N.D.N.Y. 1990), were standing cases, and therefore unsupportive of PMI's abandonment argument. The court of appeals relied heavily on Bank of Lafayette v. Baudoin, 981 F.2d 736 (5th Cir. 1993). We conclude its reliance is misplaced. ¶ 35. Abandonment did not occur in Baudoin. First, according to the opinion, the claim at issue was never scheduled in the bankruptcy. Baudoin, 981 F.2d at 739 n.4. The court reasoned: [W]e do not consider the Baudoins' earlier mentioned, vague reference to `Any possible claim against creditor for actions taken against debtors prior to bankruptcy proceeding' in their schedule of assets a sufficient scheduling of their claim against the Bank.... Id. If a claim has not been scheduled under 11 U.S.C. 521(l) in the bankruptcy, it cannot meet the criteria that 11 U.S.C. 554(c) requires as a precondition for abandonment. Morlan, 298 F.3d at 618. Second, the trustee did not give notice of intent to abandon the claim. Baudoin, 981 F.2d at 739 n.4. The court reasoned, [a] professed intent [by the trustee] to abandon cannot constitute abandonment, as 11 U.S.C. § 554(a) requires notice and a hearing prior to abandonment. Id. ¶ 36. The court of appeals in the case before us also relied on Sure-Snap Corp. v. State Street Bank & Trust Co., 948 F.2d 869 (2d Cir. 1991), for its conclusion that claim preclusion bars PMI's negligence claim against Mallery. Sure-Snap was a Chapter 11 proceeding wherein the debtor filed objections to the banks' proofs of claim. Id. at 871. The validity of the banks' liens was litigated and upheld in the bankruptcy proceeding and on appeal to the district court. Id. When the final bankruptcy hearing was held in Sure-Snap's bankruptcy, no pending claims [were] alleged against the banks. Id. Almost one year after the debtor's plan of reorganization was confirmed by the bankruptcy court, Sure-Snap brought lender liability claims against the banks. Id. at 872. The court concluded that the lender liability claims were the same cause of action that had already been litigated in bankruptcy court when Sure-Snap objected to the validity of the banks' liens, and it applied claim preclusion dismissing the action. Id. Aside from the significant differences in a Chapter 11 proceeding, where the debtor is in possession of the assets during the bankruptcy and subsequent reorganization, and a Chapter 7 proceeding, where an independent trustee is named to serve the bankruptcy estate, Sure-Snap is a garden variety claim preclusion case. Sure-Snap litigated its claims against the banks once, and it had no right to do so again in a different forum. DePratt, 113 Wis. 2d at 311. PMI has never litigated its claim against Mallery. ¶ 37. We conclude that Morlan and Dewsnup provide the better reasoned view of the effect that a trustee's abandonment of property has on a Chapter 7 debtor's ability to proceed on a scheduled claim that has not been subject to administration. An abandoned claim reverts to the debtor and stands as if no bankruptcy petition was filed. Dewsnup, 908 F.2d at 590; see also Mundell v. Mundell, 858 So. 2d 768, 771-72 (La. Ct. App. 2003) (concluding that claims that were abandoned by the trustee in bankruptcy could not form the basis for claim preclusion). Accordingly, we conclude that the order closing the bankruptcy proceeding did not operate as a final judgment on PMI's claim. Therefore, claim preclusion is not applicable to its claim against Mallery for the negligent provision of legal services, and the circuit court erred in granting summary judgment against PMI on this basis.