Opinion ID: 545531
Heading Depth: 2
Heading Rank: 2

Heading: Res Judicata--Count V

Text: 18 The district court correctly concluded that, because the prior action was brought in federal court, federal rules of res judicata apply. 5 See Matter of Energy Coop., Inc., 814 F.2d 1226, 1230 (7th Cir.), cert. denied, 484 U.S. 928, 108 S.Ct. 294, 98 L.Ed.2d 254 (1987). As the district court also correctly noted, three elements are prerequisite to the application of res judicata: (1) an identity of the parties or their privies; (2) an identity of the causes of action; and (3) a final judgment on the merits. Conner v. Reinhard, 847 F.2d 384, 394 (7th Cir.), cert. denied, 488 U.S. 856, 109 S.Ct. 147, 102 L.Ed.2d 118 (1988). 19 Although on appeal Levit strenuously contests the conclusion of the district court on the identity of parties element, we agree with the district court that Levit, by continually arguing before the district court that Todd (in his individual capacity) was a party to the adversary proceeding, has waived any right to argue that Todd was not a party to the adversary proceeding. 6 Barnett, 93 B.R. at 973; see, e.g., Gray v. Lacke, 885 F.2d 399, 409 (7th Cir.1989) (failure to present an argument to the district court waives the argument on appeal), cert. denied, --- U.S. ----, 110 S.Ct. 1476, 108 L.Ed.2d 613 (1990).
20 Res judicata cannot apply to bar Levit's claim if Levit would not have had the opportunity to litigate fully his RICO claim against Todd in the adversary proceeding. 7 Our colleagues in the Fifth Circuit recently have considered the potential res judicata effect of bankruptcy proceedings upon a creditor who later sought to assert a RICO claim against certain principals of the debtor's parent corporation. See Howell Hydrocarbons, Inc. v. Adams, 897 F.2d 183 (5th Cir.1990). Particularly instructive for our purposes is the Howell court's analysis of the statutory scheme that defines the scope of the bankruptcy courts' jurisdiction. See id. at 189; see also 28 U.S.C. Sec. 157. This jurisdictional scheme was enacted in response to the Supreme Court's decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), which held unconstitutional the jurisdictional regime under the Bankruptcy Reform Act of 1978 on the ground that it impermissibly delegated Article III judicial power to non-Article III judges. Under the new jurisdictional regime, bankruptcy courts 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. 28 U.S.C. Sec. 157(b)(1) (emphasis supplied). The bankruptcy courts also may hear noncore proceedings that are related to a case under title 11, Sec. 157(c)(1) (emphasis supplied), but cannot determine such a related proceeding unless all parties consent, Sec. 157(c)(2). In the absence of such consent, the bankruptcy court may only hear the related proceedings and propose findings of fact and conclusions of law that are subject to de novo review by the district court. Section 157(c)(1). After examining this jurisdictional scheme, the Howell court concluded that previously unasserted claims could be barred by res judicata only if these claims would have been core proceedings in the bankruptcy court. 897 F.2d at 189-90. Only under these circumstances, reasoned the court, could it conclude that the claims should have been asserted in the bankruptcy court. Id. at 189; see also I.A. Durbin, Inc. v. Jefferson Nat'l Bank, 793 F.2d 1541, 1548 n. 8 (11th Cir.1986) (noting that only core proceedings in bankruptcy may be given res judicata effect). We agree with the reasoning of the Howell court. Thus, Levit's RICO claim against Todd individually is barred only if the claim would have been a core proceeding in the bankruptcy court.
21 The starting point for determining whether an action is a core proceeding is 28 U.S.C. Sec. 157(b)(2), which contains a nonexclusive list of matters that are considered core proceedings. 8 Trustee Levit's RICO claim against Todd, a third party relative of the debtor, does not readily fit into any of these categories. Although many proceedings could be considered to fall within the broad terms of the section's two catch-all provisions, 9 both courts and commentators have noted that expansive interpretations of these provisions may produce results that render superfluous the more specific statutory categories and run afoul of the mandate in Marathon. 10 22 Few courts have considered whether a RICO claim asserted under circumstances similar to those before us would constitute a core proceeding in bankruptcy. Of the bankruptcy and district courts that have considered similar issues, the weight of authority appears to support classification of such a claim as a noncore, related proceeding. 11 The court in Howell Hydrocarbons, Inc. v. Adams, 897 F.2d 183 (5th Cir.1990), also concluded that the RICO claims before it would not have constituted core proceedings. The facts of Howell, however, are distinguishable from the present facts. Howell involved the claims of an individual creditor against third parties in an action that did not affect the value of the estate. By contrast, here, because the present suit involves a claim by the bankruptcy trustee, the value of the estate could be affected by the outcome of the action. Such a potential effect on the estate may well place Levit's RICO claim within this circuit's definition of related to jurisdiction under section 157(c)(1): a proceeding that  'affects the amount of property available for distribution or the allocation of property among creditors.'  Home Ins. Co. v. Cooper & Cooper, Ltd., 889 F.2d 746, 749 (7th Cir.1989) (quoting In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987)). However, the important question for our purposes is whether such a claim is a core proceeding. 23 Relatively few circuit cases (and none from this circuit) provide general guidance for determining when a matter that does not readily fit within the enumerated statutory categories is a core proceeding. A leading case among those few that have offered such general guidance is In re Wood, 825 F.2d 90 (5th Cir.1987). The Wood court adopted the following test for determining whether a matter was a core proceeding: 24 [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. 25 Id. at 97. The court also contrasted core and related proceedings: 26 If the proceeding does not invoke a substantive right created by the federal bankruptcy law and is one that could exist outside of bankruptcy it is not a core proceeding; it may be related to the bankruptcy because of its potential effect, but under section 157(c)(1) it is an otherwise related or non-core proceeding. 27 Id. (emphasis in original); see also In re Davis, 899 F.2d 1136, 1140-41 (11th Cir.1990) (adopting the Wood court's test for core proceedings); Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1156 n. 9 (3d Cir.1989) (citing with approval the Wood formulation). But see In re Ben Cooper, Inc., 896 F.2d 1394, 1398-1400 (2d Cir.1990) (generally espousing a broad interpretation of core proceedings and declining to follow Wood to the extent of any conflict), cert. granted, --- U.S. ----, 110 S.Ct. 3269, 111 L.Ed.2d 779 (1990); St. Paul Fire and Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir.1989) (reasoning that proceedings that have the effect of bringing property into the estate of the debtor are core proceedings); In re Arnold Print Works, Inc., 815 F.2d 165, 168 (1st Cir.1987) (espousing broad interpretation of core proceedings). We believe that the approach of Wood and its progeny reflects most precisely the constitutional policy concerns expressed by the Supreme Court in Marathon and by Congress in the Bankruptcy Amendments and Federal Judgeship Act of 1984. 28 Under the Wood test, Levit's RICO claim against Todd in his individual capacity is not a core proceeding. First, the claim does not invoke a substantive right created by federal bankruptcy law. Instead, it invokes rights created under the federal RICO statute. 12 Second, this is a claim that could exist outside of the bankruptcy context. Although Levit's claim is for damages resulting from the post-petition diversion of trust funds, the same claim for the same damages over the same time period could have been prosecuted in federal district court. Thus, we conclude that, because Levit's RICO claim against Todd would not have been a core proceeding in bankruptcy, Levit was not required to assert his RICO claim in the adversary proceeding. Therefore, we reverse the judgment of the district court for Todd on Count V.