Opinion ID: 1188848
Heading Depth: 1
Heading Rank: 5

Heading: the district court properly granted summary judgment on the counterclaim in favor of the bank based on the doctrine of res judicata

Text: The Shireys challenge the trial court's ruling that the bankruptcy order and the proceedings that precipitated the order are sufficient to invoke the application of the doctrine of res judicata as a bar to their third amended counterclaim. Specifically, the Shireys contend that the Bank has not demonstrated that the bankruptcy order meets the three requirements of res judicata, as set out in Magic Valley Radiology, P.A. v. Kolouch, 123 Idaho 434, 437, 849 P.2d 107, 110 (1993), including party identity, identity of issues, and final judgment.
The Shireys assert that they were not a party or in privity with a party in the bankruptcy litigation. We hold that the Shireys were privities to the bankruptcy action as registered creditors represented by the trustee, a party to the stipulation and order relieving the Bank from the automatic stay. See In re Met-L-Wood Corp., 861 F.2d 1012, 1017 (7th Cir.1988); In re Dominelli, 820 F.2d 313, 317 (9th Cir.1987); In re Medomak Canning, 922 F.2d 895, 901 (1st Cir.1990). In In re Met-L-Wood Corp., 861 F.2d 1012 (7th Cir.1988), the circuit court applied the doctrine of res judicata to bar a fraud challenge by the trustee to a bankruptcy court order authorizing the sale of assets in a prior Chapter 11 case to the extent that the unsecured creditors were represented in the prior case. The court also ruled that the challenge was not barred to the extent that it was on behalf of creditors not represented in the prior case. Id. at 1017. The court based its holding on the simple rule that a trustee is the creditors' representative and a judgment for or against the trustee is res judicata in a suit on the same claim by a creditor, provided that no conflict of interest made the trustee's representation inadequate. In In re Dominelli, 820 F.2d 313, 317 (9th Cir.1987), the ninth circuit ruled that a trustee in a Chapter 7 proceeding was in privity with a junior lienholder and that a stipulation signed by the trustee on behalf of the bankrupt estate and approved by the bankruptcy court waiving a usury defense to a senior lienholder's claim was binding on the junior lienholder. The court held that res judicata barred the junior lienholder's subsequent action for damages based on the same usury defense against the competing secured creditor. Id. In In re Medomak Canning, 922 F.2d 895 (1st. Cir.1990), the court held that a compromise agreement between the trustee, as the fiduciary representative of the creditors, and adverse creditors, subordinating appellant creditors' interest in a secured item of property and authorizing the sale of the property, was binding on the appellants. The court stressed that the appellants had notice of the hearing on the compromise and objected thereto. The court stated that privity may be established by identification of interests, even where representation of those interests is not authorized. Id at 901. The court held that the doctrine of res judicata barred the appellants from asserting any claim to the property at a separate adversary hearing to determine priorities. Id. The purpose underlying the invocation of privity between a trustee and creditors is illuminated in Sanders Confectionery Products v. Heller Financial, 973 F.2d 474 (6th Cir.1992). The Sanders court began by stating that creditors are to be considered parties to a bankruptcy court order for res judicata purposes. Sanders, 973 F.2d at 480-81. The court recognized that the bankruptcy code contains a strong preference for final resolution of all claims involving the debtor, and that releasing creditors from the bonds of res judicata would allow them to launch collateral attacks on confirmed plans, undermining the necessary ability of bankruptcy courts to settle all of the claims against the debtor. Id. at 481. Based on the above analysis it is clear that the fact that the Shireys did not sign the stipulation relieving the Bank from the automatic stay is irrelevant because the trustee, with whom they were in direct privity, signed it.
The Shireys also assert that their counterclaims in this cause of action, grounded in fraud, do not arise out of the same transaction as the claims in the bankruptcy action, and, therefore, preclude application of res judicata for lack of subject matter identity. We hold that the claims in both actions arise out of the same transaction, thus satisfying the second element predicating the invocation of res judicata. In Diamond v. Farmers Group, 119 Idaho 146, 804 P.2d 319 (1990), this Court reaffirmed the transactional approach to claim preclusion, stating [a] valid and final judgment rendered in an action extinguishes all claims arising out of the same transaction or series of transactions out of which the cause of action arose. Diamond, at 150, 804 P.2d at 323. The `sameness' of a cause of action for purposes of application of the doctrine of res judicata is determined by examining the operative fact underlying the two lawsuits. Id at 149, 804 P.2d at 322. In this case, the operative facts underlying the bankruptcy order and the instant cause of action are comprised in the dairy sale agreement. In the bankruptcy case, the Bank petitioned for relief from a stay imposed by the filing of a bankruptcy petition by the Allens in order to exercise their rights against the collateral as defined in the dairy sale agreement. In the instant case, the Shireys seek to enforce their alleged rights against the collateral as defined in the dairy sale agreement. Given that the underlying operative facts are the same for both cases, all claims that could have been brought in the first action are now barred assuming, of course, the identity of parties and final judgment elements are also met. The claims contained in the Shireys' third amended counterclaim should have been raised in the bankruptcy court. The bankruptcy proceedings themselves inherently posed the very issue at the heart of the Shireys' counterclaim. The fundamental purpose of a Chapter 7 bankruptcy is to identify the creditors, determine the amounts due, ascertain if the claims are secured or unsecured and their priority, and dispose of the assets of the estate accordingly. Any claim by the Shireys that their interest was superior to the Bank's or wrongfully denied by the Bank was uniquely addressable to that forum. Regarding the Shireys' claims for fraudulent misrepresentation and conversion, the law in Idaho is that an action for relief on the grounds of fraud will not be deemed to have accrued until discovery, by the aggrieved party, of the facts constituting the fraud. I.C. § 5-218(4). [A]ctual knowledge of fraud will be inferred if the allegedly aggrieved party could have discovered it by the exercise of due diligence. Kawai Farms v. Longstreet, 121 Idaho 610, 614, 826 P.2d 1322, 1326 (1992), quoting Nancy Lee Mines, Inc. v. Harrison, 95 Idaho 546, 547, 511 P.2d 828, 829 (1973). More specific to the facts of this case, before a claim of fraud can be dismissed on a motion for summary judgment based on res judicata, a court must first answer the question of whether there is more than one conclusion as to whether the party alleging the fraud has exercised due diligence in discovering the fraud. Id. See also Magic Valley Radiology, P.A. v. Kolouch, 123 Idaho 434, 437, 849 P.2d 107, 110 (1993). It is clear that the Shireys did not exercise due diligence in discovering the nature of the Bank's action in the bankruptcy court. Therefore, no material question of fact exists precluding the granting of summary judgment. Cf. Kawai Farms, 121 Idaho at 614, 826 P.2d at 1326. The Shireys argue that the facts did not come to light until after the bankruptcy court order issued, and could not have been discovered by the Shireys prior to that date. However, the record shows that the Shireys were notified of the stipulation agreement prior to execution of the foreclosure and should have availed themselves of the opportunity at that time to contest such execution in the bankruptcy court.
The Shireys also argue that the application of res judicata is inappropriate because the precise point or question in this action was not finally resolved and decided in the bankruptcy action. See Marshall v. Underwood, 38 Idaho 464, 466, 221 P. 1105, 1105 (1923). This is not the proper test for the finality of judgment element predicating the application of the doctrine of res judicata. Well-established law in Idaho states that [I]n an action between the same parties upon the same claim or demand, the former adjudication concludes parties and privies not only as to every matter offered and received to sustain or defeat the claim but also as to every matter which might and should have been litigated in the first suit. Joyce v. Murphy Land & Irrigation Co., 35 Idaho 549, 553, 208 P. 241, 242-43 (1922) (quoted with approval in Magic Valley Radiology, P.A. v. Kolouch, 123 Idaho 434, 436-37, 849 P.2d 107, 109-10 (1993); Kawai Farms, Inc. v. Longstreet, 121 Idaho 610, 614, 826 P.2d 1322, 1326 (1992), and Diamond v. Farmers Ins., 119 Idaho 146, 148, 804 P.2d 319, 321 (1990)). The rule pronounced in Marshall in the text cited by the Shireys was later clarified in Village of Heyburn v. Security S. & T. Co., 55 Idaho 732, 756, 49 P.2d 258, 269 (1935) (Budge, J., dissenting). Justice Budge distinguished cases where the issue arises upon the same claim or demand from those based upon a different claim or demand. In the former, in an action between the same parties upon the same claim or demand, the Joyce rule applies. In the second type, an action between the same parties upon a different claim or demand, the Marshall rule applies, and the judgment in the prior action operates as an estoppel only as to those precise matters which were in fact decided. Id. The ninth circuit has defined a final bankruptcy decision as one that `ends the litigation on the merits and leaves nothing for the court to do but [execute the] judgment'. In re Landmark Hotel & Casino, Inc., 872 F.2d 857, 860 (9th Cir.1989) (quoting In re Martinez, 721 F.2d 262, 265 (9th Cir.1983)). That court further has held that an order that grants relief from the automatic stay is final for purposes of appeal. In re Kemble, 776 F.2d 802, 805 (9th Cir.1985). See also In re American Mariner Indus., Inc., 734 F.2d 426, 429 (9th Cir.1984) (an order that denies relief from the automatic stay is final for purposes of appeal). In this case, the order for relief from the automatic stay in favor of the Bank clearly qualifies as a final order as defined by federal case precedent. Moreover, the central thesis underlying all of the Shireys' claims in the counterclaim was that the Bank's security interest in the collateral was inferior to the Shireys' and by selling the collateral the Bank violated the Shireys' rights. This theory, which challenges the disposition of the security interests made by the bankruptcy court by lifting the stay, is a core matter which could have and should have been resolved by the bankruptcy court. The Shireys' claim to the collateral and counterclaims that the Bank breached an agreement with the Shireys concerning the collateral, wrongfully converted the collateral, and violated the Shireys' rights, should have been litigated in the bankruptcy court before the Bank was relieved of the stay or, at the very latest, before the Bank sold the collateral, and thus are barred under the doctrine of res judicata. The Shireys' avenue for relief leads to the federal district court in the form of an appeal from the bankruptcy court order, not to our doors.