Opinion ID: 1316495
Heading Depth: 1
Heading Rank: 11

Heading: The Effect Of An Automatic Stay On The Operation Of Res Judicata And Collateral Estoppel

Text: We have found thus far that the elements of both res judicata and collateral estoppel are satisfied in this case. [18] There is an identity of claims in the New York and West Virginia actions, there was a final adjudication in the New York action as to Jordache, Avi, and Ralph Nakash, and Joseph was in privity with his brothers in the New York action. The question remains, however, what effect the automatic stay has on the operation of res judicata and collateral estoppel. Our research has failed to disclose any New York cases that address the issue whether a debtor party who is automatically stayed from participating in a previous action in which there was a final judgment as to his co-defendants is precluded by res judicata or collateral estoppel from relitigating the same claims or issues in a subsequent proceeding. Among other courts there is a split of opinion on this issue. In Terry, supra, the court reasoned: As for whether McLean would be collaterally estopped from later litigating issues decided in this case while the automatic stay keeps it an inactive litigator, it would seem the same policy behind the stay that prevents claims from being decided against a debtor directly, while in bankruptcy, should also prevent those claims from being decided against it indirectly, by means of suit against a virtual representative, i.e., one whose interests are intimately aligned with the debtor's, and who still adequately represent those interests. Terry, 81 B.R. at 396, fn. 1 (citations omitted). Likewise in In re Replogle, 929 F.2d 836, 837 fn. 1 (1st Cir.1991), the issue is addressed briefly in a footnote where the court states, Although Replogle was a party to the foreclosure action, and the bankruptcy judge had notice, the automatic stay issued in the Chapter 13 proceedings, 11 U.S.C. § 362, meant that the New York decision was not res judicata as to Replogle. In Hallisey v. Deca Corp., 140 N.H. 443, 445, 667 A.2d 343, 344 (1995), the court stated: The record suggests that the defendant remained a party to the action against DeCarolis. The court did not proceed with the claim against the defendant corporation once it had initiated bankruptcy proceedings, however, because of the automatic stay a bankruptcy filing provides. See 11 U.S.C. § 362(a)(1) (1994); In re Replogle, 929 F.2d 836, 837 n. 1 (1st Cir.1991) (automatic stay meant that foreclosure decision was not res judicata as to bankrupt who remained a party). Consequently, no final judgment against the corporation could have been entered upon which res judicata could be grounded. Cf. Germain v. Germain, 137 N.H. 82, 84, 623 A.2d 760, 761 (1993) (where judgment entered with respect to some but not all parties, appeal of order is generally interlocutory); Petition of Donovan d/b/a Donovan Group Home, 137 N.H. 78, 81, 623 A.2d 1322, 1324 (1993) (res judicata improper where no final judgment because appeal pending). Other courts, however, have reached the opposite result. In In Re K.G.L. Contracting Services, Inc., 52 B.R. 235 (Bankr. S.D.Fla.1985), the bankruptcy court for the Southern District of Florida held, without comment, that a debtor in bankruptcy who was a nonactive litigant in a previous proceeding due to an automatic stay was in privy with its co-defendants and therefore bound by the principle of res judicata. The case of In Re Regal Const. Co. Inc., 28 B.R. 413 (Bankr.D.Md.1983) is instructive because of the similarity of its facts to the instant case. In Regal, Meade Concrete Pipe Co. filed a civil suit against Regal Construction Company, Inc. (Regal) and its surety, Fidelity and Deposit Company to recover payment of monies due to Meade. Regal subsequently filed a counterclaim against Meade. Soon thereafter, Regal filed a voluntary petition under Chapter 11 of the Bankruptcy Code. Accordingly, Meade's claim against Regal was stayed. Regal did not proceed with its counterclaim nor did it seek to have the stay lifted as to Meade's claim. The case proceeded to trial solely upon the complaint against Regal's surety and resulted in a judgment for the full amount of damages claimed by Meade. Subsequently, Regal instituted a proceeding against Meade to recover money damages from Meade for an alleged breach of a contract. The abandoned counterclaim in the first proceeding and Regal's complaint in the second proceeding presented substantially the same issues. One of the questions presented to the bankruptcy court was whether the application of res judicata or collateral estoppel to the second action is contrary to the policies underlying the automatic stay. The bankruptcy court answered this question in the negative and explained that this issue, must be examined in the light of the facts of this case and not as an independent proposition of law. After the filing of the Chapter 11 petition and prior to the trial of the District of Columbia action between Regal's surety and Meade, Regal filed this proceeding. In short, Regal availed itself of the stay and then filed its action against Meade. Its employees participated in the District of Columbia trial. Had its surety been successful, Regal need go no further. When its surety lost, Regal claimed it was deprived of a full and fair opportunity to be heard on any issues in the District of Columbia's suit. If Regal sustained any injury from remaining on the sidelines in the District of Columbia and filing this action instead, that injury was self-inflicted. The statements of absence of fundamental fairness and countervailing policy are hollow in the mouth of Regal. It could have litigated all issues in one of two forums. When it withdrew to measure the result obtained by its surety and refile its own action cloaked in the protection of this court, it ran the risk of precisely what took place in this matter. In Re Regal Const. Co., Inc., 28 B.R. at 416. The court concluded that Regal's interests were so closely aligned with those of its surety that it was fairly represented. It should be bound by the judgment. Id., 28 B.R. at 417 (citation omitted). After careful consideration, we adopt the rule of the court in In Re Regal Const. Co., Inc. because we find it well-reasoned. We also believe that its flexible, case-by-case approach promotes fairness. This is in contrast to the narrowness and rigidity of the contrary rule. Also, in two of the three cases, cited above, in which the contrary rule is utilized, it is applied without explanation. In the third case, the stated reasons for the rule were the nonfinality of the order due to one party's automatic stay and a pending appeal. As explained previously, this rationale is not applicable to the case sub judice. Accordingly, we hold that a debtor in bankruptcy who is a party to an action but whose participation in the action is automatically stayed by the provisions of 11 U.S.C. § 362 may be precluded by the principles of res judicata and collateral estoppel from relitigating the same claims or issues of which there was a final adjudication as to his co-defendants, in a subsequent action. To summarize, we find that under New York law the elements of both res judicata and collateral estoppel are satisfied in this case. There are identity of claims, a final adjudication on the merits, and privity between Joseph Nakash and his co-defendants in the New York action so that he had a full and fair opportunity to contest the prior determination. Moreover, we find that the automatic stay as to Joseph does not prevent him from being precluded from relitigating the claims or issues adjudicated in the New York action. We conclude, therefore, that the circuit court did not err in ruling that Joseph cannot continue litigating the declaratory judgment action in West Virginia. Accordingly, we find that the circuit court did not abuse its discretion in denying the appellants' Rule 60(b) motion. This Court presumes the correctness of the circuit court's judgment, and the appellants have failed to rebut that presumption. Specifically, there is no showing that the circuit court based its October 30, 1995 order on a mistaken belief as to Joseph Nakash's status in the New York proceeding. Also, in view of our finding on the issue of privity, whether the October 17, 1995 New York order was vacated as to Joseph is not of consequence. The circuit court's rationale for finding that Joseph is precluded from continuing with the West Virginia litigation due to res judicata and collateral estoppel is not clear from its order. However, [t]his Court may, on appeal, affirm the judgment of the lower court when it appears that such judgment is correct on any legal ground disclosed by the record, regardless of the ground, reason or theory assigned by the lower court as the basis for its judgment. Syllabus Point 3, Barnett v.. Wolfolk, 149 W.Va. 246, 140 S.E.2d 466 (1965). Consequently, we find the appellants' contentions regarding the circuit court's denial of the Rule 60(b) motion to be without merit. Accordingly, we affirm the circuit court's denial of the appellants' Rule 60(b) motion as it relates to the appellants' declaratory judgment action in West Virginia.