Opinion ID: 3011098
Heading Depth: 1
Heading Rank: 3

Heading: jurisdiction

Text: over proceedings merely related to bankruptcy cases to non-Article III bankruptcy judges violated the Constitution. This decision rested on the notion that non-Article III judges may only hear cases involving public, congressionally created rights, but not claims based on private commonlaw rights. See 458 U.S. at 80-84 (citing Crowell v. Benson, 285 U.S. 22, 51-65 (1932)). The protections afforded a debtor under the Bankruptcy Code are congressionally created public rights. The debtor's breach of 13 argue that section 157 is constitutionally problematic in light of Northern Pipeline, some courts and commentators have questioned whether claim preclusion can apply to non-core claims that could have been raised in a bankruptcy proceeding. More specifically, the Fifth and Seventh Circuits have held that a subsequent claim is not barred by a confirmation order from a bankruptcy proceeding in which the present claim could have been raised only under section 157's non-core related jurisdiction. See Barnett v. Stern, 909 F.2d 973, 978-79 (7th Cir. 1990); Howell Hydrocarbons, Inc. v. Adams, 897 F.2d 183, 189 (5th Cir. 1990); see also George A. Martinez, The Res Judicata Effect of Bankruptcy Court Judgments: The Procedural and Constitutional Concerns, 62 Mo. L. Rev. 9 (1997). Ordinarily, a party will not be precluded from raising a claim by a prior adjudication if the party did not have the opportunity to fully and fairly litigate the claim. See Restatement (Second) of Judgments S 26(1)(c). The courts in Barnett and Howell reasoned that, because a bankruptcy judge could not, under section 157(c)(1), finally adjudicate a non-core claim, a party to such a confirmation proceeding would not have an opportunity to fully and fairly litigate a claim related to the bankruptcy case. Accordingly, they concluded that a confirmation order does not have a claim preclusive effect on a claim that would have been brought under non-core related jurisdiction and adjudicated within the constraints of section 157(c). See Barnett, 909 F.2d at 979; Howell, 897 F.2d at 189. _________________________________________________________________ contract claim, along with the other claims the debtor brought, however, involved only private common-law rights, and thus could not be adjudicated in a non-Article III court. In response to the Northern Pipeline decision, Congress enacted the jurisdiction provisions currently set forth in 28 U.S.C. SS 157 & 1334. See Bankruptcy Amendments & Federal Judgeship Act of 1984, Pub. L. No. 98-353, 98 Stat. 344. As seen above, these provisions differ from those at issue in Northern Pipeline primarily in that they limit a bankruptcy judge's ability to issue final orders and judgments in cases brought under the non-core related jurisdiction. See 28 U.S.C. S157(c). 14 We disagree, believing that an order rejecting an objection to a reorganization plan in a bankruptcy proceeding has a claim preclusive effect on a claim that could have been brought in that proceeding by the objector, even if only under the non-core related bankruptcy jurisdiction. Our conclusion in this regard is consistent with those of the Second, Sixth and Ninth Circuits. See, e.g., Robertson v. Isomedix, Inc. (In re Intl. Nutronics, Inc.), 28 F.3d 965 (9th Cir. 1994); Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 482-83 (6th Cir. 1992); Sure-Snap Corp. v. State St. Bank & Trust Co., 948 F.2d 869, 873 (2d Cir. 1991); see also Ralph E. Avery, Chapter 11 Bankruptcy and Principles of Res Judicata, 102 Com. L.J. 257, 286-88 (1997). These courts have observed that, even though a bankruptcy judge could not conclusively determine a non-core proceeding, the bankruptcy judge and the district court together could do so, and this was sufficient to permit full and fair litigation of the non-core claim. Accordingly, these courts have concluded that a confirmation order could have claim preclusive effect even on non-core related claims that could have been raised alongside an objection in the confirmation proceeding. See Robertson, 28 F.3d at 969; Sanders, 973 F.2d at 482. We thus conclude that the restrictions on a bankruptcy judge's judicial power with respect to non-corerelated claims do not limit the effect of the doctrine of claim preclusion. This depends on our interpretation of section 26 of the Restatement (Second) of Judgments. See Venuto v. Witco Corp., 117 F.3d 754, 758-59 (3d Cir. 1997) (relying on section 26 in analyzing federal law of claim preclusion). Section 26 provides, in pertinent part: When any of the following circumstances exists, the [doctrine of claim preclusion] does not apply to extinguish the claim, and part or all of the claim subsists as a possible basis for a second action by the plaintiff against the defendant: . . . . The plaintiff was unable to rely on a certain theory of the case or to seek a certain remedy or form of relief in 15 the first action because of the limitations on the subject matter jurisdiction of the courts or restrictions on their authority to entertain multiple theories or demands for multiple remedies or forms of relief in a single action, and the plaintiff desires in the second action to rely on that theory or to seek that remedy or form of relief. Restatement (Second) of Judgments S 26(1)(c). Claim preclusion should therefore apply only where the jurisdiction in which the first judgment was rendered was one which put no formal barriers in the way of a litigant's presenting to a court in one action the entire claim, including any theories of recovery or demands for relief that might have been available to him under applicable law. Restatement S 26 cmt. c. The comments to the Restatement discuss two primary types of cases in which this limitation applies. First, they discuss a case in which the first judgment is in a state court, and the plaintiff then brings a second action in federal court under a statute that gives federal courts exclusive jurisdiction. In such a case, the Supreme Court has held that the later federal action is not barred by claim preclusion. See Marrese v. American Acad. of Orthop. Surgs., 470 U.S. 373 (1985); Restatement S 26 cmt. c, illus. 2. Second, the Restatement explains that a later action is not barred by a prior action when the court hearing the first action had personal jurisdiction over the defendant only as to the theory of the first action, but not for that on which the second action is predicated. See Restatement S 26 cmt. c. We think the exceptions set forth in section 26(1)(c) of the Restatement are inapplicable to the case at bar. A bankruptcy judge's jurisdiction over a non-core related claim is not limited in the sense of that section. Section 26(1)(c) applies to limitations on the types of theories, remedies, or relief available if a claim is brought in a particular forum. But bringing a non-core related claim before a bankruptcy judge does not in any way limit the available theories, remedies, or relief. Cf. Celotex Corp. v. Edwards, 514 U.S. 300, 309 n.7 (1995) (rejecting the argument that a bankruptcy judge does not have the power 16 to issue an injunction barring an action in a different district court). A bankruptcy judge is perfectly capable of recommending, and the district court of awarding, judgment based on any theory, remedy, or relief, just as if the claim had been brought originally before a district court, or even a state court of general jurisdiction, outside of a bankruptcy proceeding. The Fifth and Seventh Circuits' main concern seems to be that since a bankruptcy judge cannot conclusively reward relief in a non-core proceeding, the judge does not have jurisdiction over non-core claims. See Howell, 897 F.2d at 189 (Moreover, the bankruptcy court would not have had jurisdiction over the [non-core `related'] claims against the defendants.). This concern, however, misses the basic point that, like magistrate judges, bankruptcy judges have no jurisdiction over any cases. In any bankruptcy proceeding, jurisdiction over the case rests with the district court; proceedings are only referred to the bankruptcy judges for consideration. See Sanders, 973 F.2d at 483 (Although the bankruptcy court would not have subject matter jurisdiction over a non-core related proceeding, the action would still be within the district court's jurisdiction.). In addition, the district courts retain the power to withdraw the reference at any time. See 28 U.S.C. S 157(d). Likewise, even assuming that the bankruptcy judge has jurisdiction in some sense, the restraints that section 157(c) imposes on the judge's power to dispose of a non- core claim do not bring it within the ambit of section 26(1)(c) of the Restatement. Jurisdiction is different from judicial power.12 A limitation on judicial power is not a _________________________________________________________________ 12. See American Hardwoods, Inc. v. Deutsche Credit Corp. (In re American Hardwoods, Inc.), 885 F.2d 621, 624 (9th Cir. 1989) (Subject matter jurisdiction and power are separate prerequisites to the court's capacity to act. Subject matter jurisdiction is the court's authority to entertain an action between the parties before it. Power . . . is the scope and forms of relief the court may order in an action in which it has jurisdiction.); Holly's, Inc. v. City of Kentwood (In re Holly's, Inc.), 172 B.R. 545, 554 n.9 (Bankr. W.D. Mich. 1994), affd., 178 B.R. 711 (W.D. Mich. 1995); Gray v. Hall, 265 P. 246, 251 (Cal. 1928) (Jurisdiction has 17 limitation on jurisdiction. Section 157(c) only limits a bankruptcy judge's power to grant relief, not jurisdiction over a proceeding requesting such relief. Since section 26(c) of the Restatement speaks only of jurisdiction, it does not limit the preclusive effect of a confirmation of a reorganization plan over objection on a subsequent claim that could have been brought during the confirmation proceeding as a non-core related claim. See Restatement S 24 cmt. g (limits on the power of a court to grant a remedy do not affect the claim preclusive effect of its judgments). Accordingly, we agree with the Second, Sixth and Ninth Circuits that a prior confirmation order has claim preclusive effect with respect to a claim that could have been brought as a non core related proceeding during the confirmation proceeding. This is not to say, of course, that claim preclusion will apply to all claims with any factual connection to issues raised in the bankruptcy proceeding. Under section 26 of the Restatement, the claim must fall within the bankruptcy jurisdiction. Accordingly, claim preclusion will only apply if the claim is at least related to the bankruptcy case, 28 U.S.C. SS 157 & 1334, i.e., if it could conceivably have any effect on the estate being administered in bankruptcy, Pacor, 743 F.2d at 994 (emphasis and citations omitted). A party to a bankruptcy would not be precluded from later bringing a claim that could not conceivably have had any effect on the bankruptcy estate. B. Claim Preclusion Between Creditors CoreStates contends that claim preclusion cannot apply to claims between creditors in a bankruptcy confirmation proceeding. It relies on the fact that a party in a civil action is not precluded from litigating a claim simply because it had an opportunity to raise the claim as a cross-claim in a _________________________________________________________________ often been said to be `the power to hear and determine.' It is in truth the power to do both or either -- to hear without determining or to determine without hearing.); see also In re Specialty Equip. Cos., 3 F.3d 1043, 1045 (7th Cir. 1993) (distinguishing between challenges to a court's jurisdiction and challenges to its power). 18 prior suit to which it was a party. See United States v. Berman, 884 F.2d 916, 923 n.9 (6th Cir. 1989); Peterson v. Watt, 666 F.2d 361, 363 (9th Cir. 1982); 6 Charles Alan Wright et al., Federal Practice & ProcedureS 1431, at 236 (2d ed. 1990) (A party who decides not to bring his claim [as a cross-claim] will not be barred by res judicata . . . from asserting it in a later action, as he would if the claim were a compulsory counterclaim . . . .); cf. Charter Oak Fire Ins. Co. v. Sumitomo Marine & Fire Ins. Co., 750 F.2d 267, 270 (3d Cir. 1984) (noting that, under Pennsylvania law, claim preclusion bars the litigation of a claim that actually was raised as a cross-claim in a prior proceeding). CoreStates is of course correct that, in general, a creditor who does not raise a claim against another party to the bankruptcy proceeding cannot be precluded from later asserting a claim. The question is, whether, for claim preclusion purposes, a creditor's, such as CoreStates's, objection to a reorganization plan can state a claim against another creditor, such as Huls, whose rights under the proposed plan the objection concerns. We conclude that in particular circumstances, such as those present here, it can. A cause of action is defined by its factual contours. As noted above, two claims involve the same cause of action if there is an essential similarity of the underlying events giving rise to the various legal claims. Athlone, 746 F.2d at 984; see also Restatement (Second) of Judgments S 24 cmts. a, b. Because a bankruptcy case is fundamentally different from the typical civil action, however, comparison of a bankruptcy proceeding with another later proceeding is not susceptible to 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, 848 F.2d at 419 n.5. As noted above, claim preclusion traditionally has not acted as a bar to the later litigation of a claim by a party who has not actively raised a claim based on the same cause of action in a prior proceeding.13 See Peterson, 666 _________________________________________________________________ 13. The Restatement provides two limited exceptions to this rule, in addition to the case discussed in the text where the defendant interposes 19 F.2d at 363; cf. Restatement (Second) of Judgments S 22(1) (Where the defendant may interpose a claim as a counterclaim but he fails to do so, he is not thereby precluded from subsequently maintaining an action on that claim [with certain exceptions].); id. S 38 cmt. a (Where no [cross- or counter-] pleadings have been interposed, the possibility of merger and bar by definition does not arise.). Where a party interposes such a claim, however, the party becomes a plaintiff for claim preclusion purposes. See Restatement (Second) of Judgments S 23 cmt. a (A defendant who interposes a counterclaim is, in substance, a plaintiff, as far as the counterclaim is concerned. . . .). Accordingly, claim preclusion applies to the claims of a party who asserts any claim in an action, even where the party is not the original plaintiff. See Fowler v. Vineyard, 405 S.E.2d 678 (Ga. 1991); 18 Wright et al., supra, S 4450, at 425 (Preclusion should apply according to ordinary rules between any parties who tried a claim between themselves.). A party who raises an objection to a reorganization plan in a confirmation proceeding has interposed a claim in the sense just discussed. Under 11 U.S.C. S 1128(b), [a] party _________________________________________________________________ a counterclaim. See Restatement (Second) of Judgments S 22(2). First, a defendant cannot bring a claim in a later proceeding if it could have been brought as a compulsory counterclaim in an earlier proceeding to which a compulsory counterclaim statute or rule applied. See S 22(2)(a). This exception will not ordinarily apply to bankruptcy confirmation orders, however, because a confirmation proceeding is a contested matter to which no compulsory counterclaim rule applies. See Fed. R. Bankr. P. 3020(b)(1), 9014. Second, a defendant in a case that proceeds to judgment cannot bring a later claim if [t]he relationship between the counterclaim and the [later] claim is such that successful prosecution of the second action would nullify the initial judgment or would impair rights established in the initial action. See S 22(2)(b). Under this latter exception, even if a creditor did not proffer an objection to a plan confirmation, it would still be precluded from bringing a later claim based on the same cause of action if a judgment in its favor on the later claim would effectively nullify the effects of the confirmation order. See, e.g., Sure-Snap, 948 F.2d at 874-76. Since we can decide this case without considering these exceptions, we need not and do not decide whether and how they apply to bankruptcy plan confirmation orders. 20 in interest may object to the confirmation of a plan. A claim is a [m]eans by or through which claimant obtains possession or enjoyment of [a] privilege or thing. Black's Law Dictionary 247 (6th ed. 1990). By asserting an objection, a creditor asserts its privilege of having its interests in the bankruptcy estate settled in a plan that satisfies the requirements of S 1129. Furthermore, an objection requires the bankruptcy judge to adjudicate whether a proposed plan of reorganization meets the requirements of S 1129. We also observe that, procedurally, an objection to a plan may possess all the hallmarks of a claim. An objection requires the bankruptcy judge to adjudicate whether a plan meets the requirements for confirmation. See 11 U.S.C. S 1129. Such an objection must be filed with the court and served on all parties to the confirmation proceeding. See Fed. R. Bankr. P. 3020(b)(1). The filing of an objection gives rise to a contested matter, see Fed. R. Bankr. P. 3020(b)(1), in which the many of the familiar rules of civil procedure apply, including the rules of discovery, see Fed. R. Bankr. P. 9014. A confirmation order rejecting objections is a final adjudication sufficient to preclude later claims. See Stoll v. Gottlieb, 305 U.S. 165, 170-71 (1938); Szostek, 886 F.2d at 1409-10. Furthermore, we think that an objection can be a claim against other creditors, as well as the debtor, for claim preclusion purposes. A claimant may be bound under the doctrine of claim preclusion by a judgment on a claim against another party not named as its adversary if they are adversaries in fact. See Sullivan v. Easco Corp., 662 F. Supp. 1396, 1408 (D. Md. 1987); 18 Wright et al., supra, S 4450, at 420; cf. Restatement (Second) of Judgments S 38 (Parties who are not adversaries to each other under the pleadings in an action involving them and a third party are bound by and entitled to the benefits of issue preclusion with respect to issues they actually litigate fully and fairly as adversaries and which are essential to the judgment rendered.). Parties are adversaries if they haveopposing interests, . . . interests for the preservation of which opposition is essential. Black's Law Dictionary, supra, at 53. 21 An objection frequently puts into question the interests of specific non-objecting creditors under a proposed plan. In order to preserve these interests, these non-objecting creditors then have the right to oppose the objections in a hearing.14 We think it beyond cavil that these non-objecting creditors -- whose rights in the estate may be affected by the objection -- are fairly denominated adversaries of the objecting creditor. Accordingly, we think that claim preclusion should bar an objecting creditor such as CoreStates from litigating in a later proceeding claims against a non-objecting creditor in the circumstances present here. The Eleventh Circuit reached a similar conclusion in Wallis. There, creditors objected to a plan on the grounds that a certain lender had engaged in unfair conduct in obtaining a security interest in the bankruptcy estate, and also that the lender's security interest was really a partnership interest. These objections were rejected. The creditors later brought a separate claim against the lender alleging that the lender engaged in fraud and that the lender was not a secured creditor. The court held that these claims were barred by claim preclusion. The Wallises' objection was overruled, and they failed to appeal the order. The Wallises' adversary complaint essentially brings an impermissible collateral attack on the order confirming the plan. 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. Wallis, 898 F.2d at 1552 (footnote omitted). _________________________________________________________________ 14. For example, one creditor might object to a reorganization plan on the ground that another creditor had become secured as a result of fraud, and therefore its interest should be treated as unsecured. If the bankruptcy judge sustained the objection and refused to confirm the plan, any future proposed plan would presumably be prohibited from treating the second creditor as secured. Accordingly, that creditor would have standing and good reason to oppose the objection. 22 C. The Limiting Principle that the Two Claims Must Arise out of Same Cause of Action Although we have rejected these two extrinsic limitations on the applicability of claim preclusion, our holding is actually a narrow one. Although fact-bound, it is also well within the confines of claim preclusion doctrine. As noted above, claim preclusion only applies to claims that would have been within the bankruptcy court jurisdiction, i.e., those that are at least related to the bankruptcy case. See supra section III.A. In addition, except possibly in unusual circumstances, it only applies to creditors who raise a claim in the bankruptcy proceeding contrary to the interests of another specific creditor. See supra section III.B. Finally, the Centra test for claim preclusion provides an additional limit on the preclusive effect of bankruptcy confirmation orders over objections. These three intrinsic limitations provide an appropriate and sufficient limit on the preclusive effect of the rejection of objections to bankruptcy plans than the putative restraints we reject above. See supra sections III.A & B. Since we have already discussed the jurisdictional limitations on the doctrine and the requirement that the party to be precluded have previously raised a claim, we need now discuss only the restraint the Centra test provides. Under Centra, a subsequent claim is barred only if it arises out of the same cause of action as that litigated in the first action. See Centra, 983 F.2d at 504. Where the first case is a bankruptcy proceeding, we scrutinize the totality of the circumstances in each action, Oneida, 848 F.2d at 419 n.5, to ascertain whether there is an essential similarity of the underlying events giving rise to the various legal claims, Athlone Indus., 746 F.2d at 984. We think the essential similarity requirement sufficiently limits the claim preclusive effect of final orders concerning objections to bankruptcy reorganization plan confirmations. We note that some judges and commentators have expressed concern that claim preclusion has been applied where the two actions are not sufficiently factually connected. See Oneida, 848 F.2d at 422 (Stapleton, J., dissenting) (arguing that claim preclusion should not apply because no matter what the judgment in the second case, 23 it could not be inconsistent with the confirmation order); see also Martinez, supra, 62 Mo. L. Rev. at 26-27. But where the evidence required to prove a new claim would have been largely immaterial in a prior confirmation proceeding, we doubt that there will be an essential similarity of the underlying events as required to give rise to claim preclusion. See Facchiano Constr. Co. v. United States Dept. of Labor, 987 F.2d 206, 212-13 (3d Cir. 1993) (whether the material facts alleged are the same is a key factor in determining whether claim preclusion applies; claim preclusion did not apply where the two claims rested on different evidence); Athlone Indus., 746 F.2d at 984 (same). Similarly, some commentators have complained that claims falling within the non-core, related bankruptcy jurisdiction often raise factual issues totally unrelated to the confirmation proceeding. See Martinez, supra, 62 Mo. L. Rev. at 26-27. Accordingly, the argument goes, claim preclusion should not apply, because it would be no more efficient to try non-core related proceedings in conjunction with a confirmation hearing. Of course, a confirmation proceeding should not bar a subsequent action based on facts totally unrelated to objections raised in the confirmation proceeding. But we think it is wrong to assume as a result that all non-core claims will be factually unrelated to objections raised in the confirmation proceeding in which they could have been brought. In short, we conclude that where the factual underpinnings of the subsequent claim are not essentially the same as those of the claims raised in the confirmation proceeding, the latter should not have a claim preclusive effect on the former. But, as this case demonstrates, see infra Part IV, not all non-core claims or claims between creditors are factually unrelated to objections adjudicated in confirmation proceedings that assertedly preclude them. Other courts have applied claim preclusion in situations that likewise provide excellent examples of the potential for close factual relationships between claims in bankruptcy proceedings and non-core claims, on the one hand, and claims between creditors, on the other. See, e.g., Robertson, 28 F.3d at 970-71 (applying claim preclusion to non-core 24 claim); Crop-Maker, 881 F.2d at 440 (applying claim preclusion between creditors). Accordingly, we turn to a discussion of the application of the principles set forth above in the admittedly unusual circumstances of the case before us. IV. Is the Claim Under the Subordination Agreement Precluded on the Facts? Applying the precepts set forth above, we conclude that CoreStates's claim under the Subordination Agreement is precluded. A. Could CoreStates Have Raised its Present Claim in the Bankruptcy Proceeding? Claim preclusion does not apply unless the present claim was or could have been raised in the prior proceeding. See Centra, 983 F.2d at 504. Accordingly, we must inquire whether CoreStates could have raised its claim before the Bankruptcy Judge. As we have suggested above, CoreStates functionally raised the Subordination Agreement in its objection to the Reorganization Plan. Since it did not formally interpose it, however, and the parties have proceeded as though it did not, we begin with a discussion of whether the legal issue here falls within the scope of a bankruptcy judge's jurisdiction. We then analyze whether, as a factual matter, that issue could have been raised in the bankruptcy proceeding. We conclude that there was no reason CoreStates could not have brought its current claim