Court Opinion

ID: 3184944
Source: CourtListenerOpinion
Date Created: 2016-03-11 21:04:47.44101+00
Date Added: 2024-06-11T11:11:05.494032
License: Public Domain

PUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                             No. 14-2378

PROVIDENCE HALL ASSOCIATES LIMITED PARTNERSHIP,

                Plaintiff - Appellant,

           v.

WELLS FARGO BANK, N.A., successor in interest to Wachovia
Bank, N.A.,

                Defendant - Appellee.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria.   Liam O’Grady, District
Judge. (1:14−cv−00352−LO−IDD)

Argued:   December 8, 2015                 Decided:   March 11, 2016

Before WILKINSON, NIEMEYER, and DIAZ, Circuit Judges.

Affirmed by published opinion. Judge Diaz wrote the opinion, in
which Judge Wilkinson and Judge Niemeyer joined.

ARGUED: Gary M. Bowman, Roanoke, Virginia, for Appellant.
Jeffrey L. Tarkenton, WOMBLE CARLYLE SANDRIDGE & RICE, LLP,
Washington, D.C., for Appellee. ON BRIEF: B. Chad Ewing, WOMBLE
CARLYLE SANDRIDGE & RICE, LLP, Charlotte, North Carolina, for
Appellee.
DIAZ, Circuit Judge:

      Providence        Hall    Associates       (“PHA”)     appeals      the    district

court’s dismissal of its lawsuit against Wells Fargo Bank.                               PHA

contends that the district court erroneously gave res judicata

effect to various sale orders issued during PHA’s Chapter 11

bankruptcy.       We conclude that the elements of res judicata are

satisfied and therefore affirm.

                                           I.

      PHA is a Virginia-based limited partnership that, prior to

its bankruptcy, owned a handful of properties in several states.

It entered three transactions with Wells Fargo’s predecessor-in-

interest:     (1) a      $2.5    million     loan,        (2) a   $500,000       line     of

credit,     and   (3) an       interest-rate-swap          agreement,         whereby    PHA

exchanged a fixed interest rate for a floating one based on the

one-month U.S. Dollar London Interbank Offered Rate (“LIBOR”).

The   loan   and    the    line    of    credit      contained       a    cross-default

clause—meaning      a    default    on   either       amounted      to    a    default    on

both—and     were     secured      by    deeds       of    trust,    mortgages,          and

assignments of rent for certain PHA real estate holdings.

      PHA subsequently defaulted on the loans and, as a result,

filed   a    petition      for    Chapter       11   bankruptcy      in       March   2011.

Shortly thereafter, Wells Fargo informed PHA that an event of

                                            2
default     took       place     under      the      interest-rate-swap              agreement,

triggering $317,850 in termination damages.

      Wells Fargo filed a proof of claim in the Chapter 11 case

for   nearly      $3    million.          PHA       objected,    filing         an    adversary

complaint, which it later amended.                      In that amended complaint,

PHA alleged that Wells Fargo falsely represented that it “would

forbear    collection          of   the    principal      balance          of   the    $500,000

[line of credit],” J.A. 69, ultimately causing PHA to default

and enter bankruptcy.

      Meanwhile, the United States Trustee had moved to convert

the bankruptcy case to a Chapter 7 proceeding or dismiss it

altogether     based      on    PHA’s      failure      to     file    monthly        financial

reports.       Wells     Fargo      filed       a   memorandum        in    support     of    the

motion, repeating the United States Trustee’s allegations and

contending     that,       among      other          inappropriate          actions,        PHA’s

principals        used     Wells          Fargo’s       cash     collateral            to     pay

“distributions” to themselves.                      J.A. 123.     After reviewing the

arguments    of    the    United      States         Trustee    and    Wells         Fargo,   the

bankruptcy court opted to appoint Marc Albert as a Chapter 11

trustee rather than dismiss the bankruptcy case or convert it

into a Chapter 7 proceeding.

      Trustee Albert took a number of steps to bring PHA out of

bankruptcy—most important here, obtaining court approval to sell

two of the bankruptcy estate’s properties to satisfy the debts

                                                3
owed to Wells Fargo.            In both of his sale motions under 11

U.S.C. § 363(b), (f), Trustee Albert requested that the proceeds

(minus certain expenses) be distributed to Wells Fargo.                               J.A.

183,    231.          Additionally,     both          motions       recognized      PHA’s

obligations to Wells Fargo under the two loans and the interest-

rate-swap agreement.          See, e.g., J.A. 170–72, 174–75, 177, 219–

21, 224.        The bankruptcy court granted the motions, noting in

its orders that PHA was in debt to Wells Fargo, J.A. 376, 386–

88,    and     that   the    balance   of       the    sale       proceeds   should    be

distributed to Wells Fargo, J.A. 380, 388.                         In the final sale

order, the court explicitly stated that sale proceeds should be

paid to Wells Fargo “up to the amount of the WFB Obligations,”

J.A.    388,    where   “WFB    Obligations”          was     a    defined   term     from

Trustee Albert’s sale motion representing PHA’s debts arising

out of the two loans and the swap agreement, J.A. 220.

       Around the time Trustee Albert moved to sell the bankruptcy

estate’s properties in satisfaction of PHA’s outstanding debts

to    Wells    Fargo,   he    also   consented        to    the     dismissal    without

prejudice of PHA’s adversary complaint.

       By November 2012, the proceeds of the sales had satisfied

PHA’s debts to Wells Fargo.                 Consequently, Victor Guerrero—an

equity holder and principal of PHA—filed a motion to dismiss the

Chapter 11 proceeding, which the bankruptcy court granted with

Trustee Albert’s consent.

                                            4
     More than a year later, PHA filed suit in Virginia state

court, which Wells Fargo removed to federal court.      Along with

repeating the claims made in the bankruptcy adversary complaint,

PHA alleged new theories of lender liability.      Relevant here,

PHA claimed that the interest-rate-swap transaction was a “sham”

because “the LIBOR rate was illegally rigged and manipulated.”

Appellant’s Br. at 7–9; see also J.A. 12–14.

     Wells Fargo filed a motion to dismiss, which the district

court granted on res judicata grounds, giving preclusive effect

to the bankruptcy court’s sale orders.    The court then denied

PHA’s motion for reconsideration.

     This appeal followed.

                               II.

     We review de novo the district court’s dismissal based on

res judicata.   Brooks v. Arthur, 626 F.3d 194, 200 (4th Cir.

2010).

     “Under the doctrine of res judicata, or claim preclusion,

‘[a] final judgment on the merits of an action precludes the

parties or their privies from relitigating issues that were or

could have been raised in that action.’”       Pueschel v. United

States, 369 F.3d 345, 354 (4th Cir. 2004) (quoting Federated

Dep’t Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981)).     Three

elements must be satisfied for res judicata to apply.     “[T]here

                                5
must be: (1) a final judgment on the merits in a prior suit;

(2) an identity of the cause of action in both the earlier and

the later suit; and (3) an identity of parties or their privies

in the two suits.”          Id. at 354–55.          Along with these “three

formal elements” of res judicata, “two practical considerations

should be taken into account.”               Grausz v. Englander, 321 F.3d
467, 473 (4th Cir. 2003).          First, we consider whether the party

or its privy knew or should have known of its claims at the time

of the first action.        See id. at 473–74.           Second, we ask whether

the court that ruled in the first suit was an effective forum to

litigate the relevant claims.           See id. at 474.

     We    address   the   three    core     res   judicata    requirements   in

turn,     followed   by    the    two   “practical        considerations”   from

Grausz.

                                        A.

     The     district     court    recognized      the    first   res   judicata

requirement—that the sale orders are final orders on the merits—

as “the clearest hurdle for Wells Fargo to overcome.”                   J.A. 38.

Nevertheless, the court determined that Wells Fargo prevailed,

primarily relying on cases from the Fifth, Sixth, and Seventh

Circuits, which concluded that bankruptcy sale orders were final

orders on the merits.        J.A. 39 (citing Winget v. JP Morgan Chase

Bank, N.A., 537 F.3d 565 (6th Cir. 2008); Bank of Lafayette v.

                                         6
Baudoin (In re Baudoin), 981 F.2d 736 (5th Cir. 1993); Gekas v.

Pipin (In re Met-L-Wood Corp.), 861 F.2d 1012 (7th Cir. 1988)). 1

       While PHA concedes that the sale orders are “final,” it

presents       a       litany   of   arguments      that    they     are   not    “on    the

merits.”          Appellant’s Br. at 33.            We are unconvinced, concluding

as the district court did that the first prong of res judicata

is satisfied.

                                           1.

       We begin by turning to the cases from our sister circuits

upon       which       the   district   court     relied.      We,     too,   find      them

persuasive and reject PHA’s attempts to distinguish them.

       In Met-L-Wood, the debtor in a Chapter 11 proceeding filed

a   motion        to    sell    bankruptcy    estate       assets,    which      the   court

granted. 861 F.2d at 1015.        While § 363(b)(1) requires that the

seller       of     estate      property     give    notice     to    creditors,        some

unsecured creditors did not receive notice.                        Id. at 1017.        After

       1Other cases have held or explained in dicta that
bankruptcy sale orders can give rise to res judicata.          See,
e.g.,   Silverman   v.   Tracar,   S.A.   (In  re  Am.    Preferred
Prescription, Inc.), 255 F.3d 87, 92 (2d Cir. 2001) (citing two
cases, including Met-L-Wood, that gave res judicata effect to
sale orders to support the proposition that “some orders of
bankruptcy courts, entered in the course of Chapter 11
proceedings prior to confirmation . . . are entitled to res
judicata effect”); Robertson v. Isomedix, Inc. (In re Int’l
Nutronics,   Inc.),   28 F.3d 965,   969–71  (9th   Cir.   1994)
(concluding that a bankruptcy court order confirming a sale
barred antitrust claims under res judicata principles).

                                              7
the sale, the bankruptcy case was converted into a Chapter 7

proceeding, and a trustee was appointed.                              Id. at 1015.            The

trustee      then    “investigated           the     circumstances         surrounding        the

judicial      sale       and     eventually          decided       that    there      had    been

skullduggery        of     two    kinds.”            Id.      Seeking      to    remedy      said

skullduggery on behalf of unsecured creditors, the trustee filed

suit in federal district court against the debtor-corporation,

its owner, and others involved in the judicial sale, alleging

various common law and statutory claims.                          Id. at 1016.

       The    Seventh       Circuit      concluded           that    the     district       court

properly dismissed the trustee’s suit.                            Id. at 1018.        The court

explained that to the extent the trustee’s claims were derived

from   his     representation           of     the    unsecured       creditors        who   had

notice of the judicial sale, res judicata barred the trustee’s

lawsuit from moving forward.                        Id. at 1016–17.             But, to the

extent       the    trustee’s          claims        were     derived        from     unsecured

creditors who had not received notice of the judicial sale, res

judicata      proved       no     bar    because           this     subset      of    unsecured

creditors were not parties to the sale proceeding.                               Id. at 1017.

Nevertheless,        the       court    held    that        the    trustee’s     claims      were

otherwise      barred       because       the        sale    proceeding         was    in    rem,

“transfer[ring] property rights, and property rights are rights

good against the world, not just against parties to a judgment

or persons with notice of the proceeding.”                          Id.

                                                8
      In Baudoin, the plaintiffs and their wholly owned company

filed for Chapter 7 bankruptcy based on an inability to meet

loan obligations to a particular creditor bank. 981 F.2d at

737–38.          The      plaintiffs’            personal       bankruptcies          were

consolidated, and a trustee was appointed.                          Id. at 738.       Upon

the trustee’s motion, two properties securing the plaintiffs’

debt were sold at auction, leading to the plaintiffs’ discharge

from bankruptcy.         Id.   Three years later, the plaintiffs sued

the   creditor    bank,    alleging      that      it    “forced      them    and   their

company . . . into bankruptcy.”              Id.

      The Fifth Circuit concluded that res judicata precluded the

plaintiffs’ suit.         Id. at 739.            In doing so, the court looked

to, among other considerations, “the important interest in the

finality   of    judgments     in   a    bankruptcy          case.”         Id.   (quoting

Hendrick v. H.E. Avent, 891 F.2d 583, 587 n.9 (5th Cir. 1990)).

Specifically,      the     court        explained            that     the     goals    of

“[r]estraining litigious plaintiffs from taking more than ‘one

bite of the apple,’” and ensuring “that bite is to be taken as

expeditiously and economically as possible” were to be given

great   weight,   particularly          in   light      of    “spiraling      litigation

costs” and docket congestion.                See id. at 739–40 (quoting Sure-

Snap Corp. v. State St. Bank & Trust Co., 948 F.2d 869, 870 (2d

Cir. 1991)).

                                             9
       Finally, in Winget, the bankruptcy court ordered the sale

of the Chapter 11 debtors’ assets, with the proceeds of the sale

going to an outstanding balance on a credit agreement. 537 F.3d

at 571.        Winget, who owned the debtor-companies and guaranteed

their debt, later sued various parties, asserting that those

parties       intentionally     devalued      the        companies’   assets    through

conduct taking place before the bankruptcy proceeding.                              Id. at

568–69, 579.          The Sixth Circuit held that Winget’s claims were

barred by res judicata.           Id. at 577–81.             In concluding that the

sale order was a final order on the merits, the court looked to

Baudoin       and   Met-L-Wood,    as    well       as    the   policy   of   promoting

finality that underpins res judicata.                    See id. at 578–79.

       PHA’s attempts to meaningfully distinguish these cases are

unavailing.         As for Winget, PHA argues that the Sixth Circuit

held   that     the     sale   order    was    on    the     merits   because       Winget

objected       (though    he   withdrew       this       objection)   with    the     same

lender liability claim that he later brought in the district

court.     Appellant’s Br. at 32 (citing Winget, 537 F.3d at 580);

id. at 35–36.         But the passage of Winget that PHA cites does not

relate to the question of whether a sale order is a final order

on the merits.           Instead, the Sixth Circuit discussed Winget’s

objection to show that he was not “unaware of all of the facts

needed to bring the claims before the bankruptcy court at the

time     of     th[e]    proceeding.”           Winget, 537 F.3d     at     580.

                                          10
Accordingly,          PHA’s    reliance       on    this       factual    distinction       is

misplaced.

       With     regard         to     Baudoin,       PHA       contends     that     it     is

distinguishable because the debtors never objected to the sale

orders or the creditor’s claim in the bankruptcy court, unlike

PHA, which objected to Wells Fargo’s proof of claim.                           We fail to

see how this helps PHA.                    As the Baudoin court explained, sale

orders     “are      final     judgments      on    the    merits    for     res    judicata

purposes, ‘even though the order neither closes the bankruptcy

case nor disposes of any claim.’” 981 F.2d at 742 (quoting

Hendrick, 891 F.2d     at    586).         It    is    irrelevant    whether       an

objection was made.

       As for Met-L-Wood, PHA argues that the court did not hold

that    “the    trustee’s . . . claims               seeking      damages    against      the

seller and purchaser” were barred by res judicata.                           Reply Br. at

15.     This is arguably true because the trustee’s claims were

derived in part from unsecured creditors who were not party to

the sale proceeding, and therefore the court could not resolve

the    entire     case    on    res    judicata      grounds.        But,     the    Seventh

Circuit subsequently treated the res judicata analysis in Met-L-

Wood as a holding.                  See Matrix IV, Inc. v. Am. Nat’l Bank &

Trust Co. of Chi., 649 F.3d 539, 549 (7th Cir. 2011) (“We held

in [Met-L-Wood] that a bankruptcy trustee was barred from filing

a   RICO      suit    against        the    debtor       and    others    involved     in    a

                                               11
bankruptcy asset sale after the sale had been confirmed; res

judicata applied . . . .” (emphasis added)).                     More importantly,

because we of course are not bound by Met-L-Wood regardless of

what it held, it is not particularly important to this court

whether the passage in question was dictum.                       What matters is

whether     we     find   the    Seventh    Circuit’s      analysis       persuasive.

Here, we do.

      PHA also argues that Met-L-Wood is distinguishable because

PHA’s claims are unrelated to the sale proceedings themselves,

while in Met-L-Wood, the trustee alleged fraud surrounding the

sale.      Reply Br. at 15–16.       We grant that this is a distinction,

but it is not a meaningful one.

      To    sell     bankruptcy    estate       assets    outside    the    ordinary

course of business, the trustee of the estate or the debtor-in-

possession must initiate the sale proceeding.                       See 11 U.S.C.

§§ 363(b)(1), 1107(a).           Here, the trustee moved to sell property

in satisfaction of specifically identified obligations arising

out   of    PHA’s   transactions     with       Wells   Fargo.      The    bankruptcy

court approved these sales, finding them to be “in the best

interests of the Estate.”             E.g., J.A. 387; see also Rose v.

Logan, No. RDB-13-3592, 2014 WL 1236008, at *7 (D. Md. Mar. 25,

2014)      (describing     the     standard       for    approving    a     sale   of

bankruptcy estate assets); Appellant’s Br. at 22 (“The standard

for approving the sale is essentially a business judgment test,

                                           12
or whether it is in the best interests of the estate to sell the

property.” (citing 3 Collier on Bankruptcy ¶ 363.02[1][f]) (Alan

N. Resnick & Henry J. Sommer eds., 15th ed. 2005)).

     The key questions thus arise: if PHA did not owe the amount

that Wells Fargo claimed it was due, why would the trustee—the

bankruptcy estate’s representative—move to sell estate assets in

full satisfaction of Wells Fargo’s claimed debt, and why would

the bankruptcy court approve the sale?                  The motions to sell in

this case effectively conceded the validity of PHA’s obligations

to Wells Fargo, and the proceeds of the sales satisfied those

obligations.         It would make little sense after the sales were

made, the debt settled, and the bankruptcy proceeding closed, to

then allow PHA to challenge in a new judicial proceeding the

propriety      of     the     transactions       giving    rise      to    its   now-

extinguished        debt.     To   allow   such    a   challenge     would   achieve

little more than upending the purpose of res judicata: promoting

finality and judicial economy.                  Montana v. United States, 440
U.S. 147, 153–54 (1979); see also Winget, 537 F.3d at 578–79;

Baudoin, 981 F.2d at 739–40.

     Furthermore,           the    preclusive     effect   of      the     bankruptcy

court’s sale orders is consistent with the “fundamental purpose”

of   Chapter    11     bankruptcy:      “rehabilitation         of   the     debtor.”

Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co.,

L.L.C.), 403 F.3d 164, 170 (4th Cir. 2005) (quoting NLRB v.

                                           13
Bildisco & Bildisco, 465 U.S. 513, 528 (1983)).                To fulfill this

objective, “[c]entralization of disputes concerning a debtor’s

legal   obligations     is    especially      critical”    because     it    allows

“reorganization        [to]    proceed        efficiently,      unimpeded         by

uncoordinated     proceedings     in     other    arenas.”       Id.     (quoting

Shugrue v. Air Line Pilots Ass’n, Int’l (In re Ionosphere Clubs,

Inc.), 922 F.2d 984, 989 (2d Cir. 1990)).                 Allowing “piecemeal

litigation” as PHA urges, after all the debts and dust of a

bankruptcy have settled, would invite precisely the inefficient

decentralized proceedings that Chapter 11 bankruptcy is designed

to avoid.    See id.

     We conclude—in accord with our sister circuits as well as

the purpose of res judicata and Chapter 11 bankruptcy—that the

sale orders in this case are final orders on the merits.

                                        2.

     PHA presents a series of other arguments that we should

break ranks with our sister circuits and hold that the sale

orders fail to satisfy the first prong of res judicata.                          None

are persuasive.

     First, PHA argues that because its adversary complaint was

dismissed    without     prejudice,      its     present     lawsuit        is   not

precluded.      The   dismissal    of   the    adversary     complaint      is   not

relevant to our analysis, as Wells Fargo does not contend that

                                        14
this dismissal gives rise to res judicata.                         Instead, the sale

orders are what preclude the claims now before the court.

       Second, PHA contends that because a bankruptcy court sale

order is an in rem proceeding, Met-L-Wood, 861 F.2d at 1017, it

does    not   have   a   res   judicata         effect   on   in    personam       lender

liability claims.        In support, PHA points to M.W. Zack Metal Co.

v. Int’l Navigation Corp., 510 F.2d 451 (4th Cir. 1975).                            Zack

Metal, however, does not address res judicata.                        As Wells Fargo

correctly points out, “Zack Metal stands for the proposition

that a party cannot file an in personam action on or otherwise

attempt to collect on an in rem judgment by means other than the

specific property at issue in the in rem lawsuit.”                           Appellee’s

Br. at 23 (citing Zack Metal, 510 F.2d at 452–53).

       Moreover, the circuit cases we discussed earlier belie the

notion that the in rem nature of a sale order precludes the

application of res judicata to transactionally related lender

liability claims.        A Chapter 11 sale order can give rise to res

judicata because the estate representative—the trustee or the

debtor-in-possession—has         ample     opportunity        to    assert    a   lender

liability claim before selling off estate assets in satisfaction

of debts.      See 18 Charles Alan Wright et al., Federal Practice

and    Procedure     § 4412    (2d   ed.    2012)    (explaining       that       because

bankruptcy proceedings are “intended to resolve all claims in a

                                           15
single    definitive       proceeding,”       in        personam      claims      that    could

have been raised during bankruptcy should be precluded).

       Third, PHA maintains that County Fuel Co. v. Equitable Bank

Corp., 832 F.2d 290 (4th Cir. 1987), precludes the application

of res judicata in this case.                 There, a creditor filed a proof

of claim in a Chapter 11 proceeding for the secured balance of a

loan, and the debtor-in-possession did not object, except with

respect to a claim for attorneys’ fees.                        Cty. Fuel, 832 F.2d at

291.     The creditor’s claim was therefore automatically allowed.

Id. at 291–92; see 11 U.S.C. § 502(a).

       After filing its proof of claim, the creditor moved to lift

the    bankruptcy        court’s    automatic           stay     so   it    could       proceed

against    its    collateral.          Cty.       Fuel 832 F.2d      at    291.     The

bankruptcy       court    granted      the    lift-stay          motion,     the     district

court affirmed, and the creditor eventually recovered the amount

of its claim.         Id. at 291–92.         About two years later, the debtor

(County Fuel) sued the creditor, asserting that it breached an

oral promise related to the loan.                        Id. at 292.             The district

court     dismissed       the   case    on        res    judicata        grounds,        giving

preclusive effect to the automatic allowance of the creditor’s

claim.    Id.

       We affirmed on waiver grounds rather than res judicata,

commenting       in   dicta     that   “[i]t       is     doubtful         that    in    strict

contemplation County Fuel’s . . . claim was . . . barred under

                                             16
res judicata principles.”           Id. at 292–93.          We gave two reasons.

First, we looked to the Restatement (Second) of Judgments § 22,

which reads:

       (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, except as stated in Subsection (2).

       (2) A defendant who may interpose a claim as a
       counterclaim in an action but fails to do so is
       precluded, after the rendition of judgment in that
       action, from maintaining an action on the claim if:
            (a) The counterclaim is required to be interposed
            by a compulsory counterclaim statute or rule of
            court, or
            (b) The relationship between the counterclaim and
            the plaintiff’s claim is such that successful
            prosecution of the second action would nullify
            the initial judgment or would impair rights
            established in the initial action.

Id.    at    292     &    n.1.       We     explained       that       under     section

22(1), (2)(a),        “the    failure      to     interpose . . . an           available

[permissive]        ‘counterclaim’        does    not,   as      a    matter    of   res

judicata, bar its subsequent assertion as an independent claim

for relief.”        Id.      Nevertheless, we later applied an exception

to    this   rule    found    in   section       22(2)(b)   of       the   Restatement,

necessitating the barring of County Fuel’s claim, because “[t]he

practical effect of a successful prosecution of County Fuel’s

claim would be to require [the creditor] to make restitution of

the amount realized upon its claim.”                Id. at 293–94.

       Second, we explained in dicta that “it is doubtful that the

‘automatic allowance’ under 11 U.S.C. § 502(a) of a claim not

                                           17
objected      to      constitutes             a       ‘final       judgment’”        because

(1) objections       could      be    made      after      automatic     allowance        of    a

claim, (2) automatic allowance was not “final” for purposes of

appellate     review,       and      (3) an        allowed      claim      can    later        be

disallowed under § 502(j).              Id. at 292. 2

      County Fuel does not control our decision in this case,

most notably because its statements regarding res judicata are

dicta.     See Siegel v. Fed. Home Loan Mortg. Corp., 143 F.3d 525,

530–31    (9th     Cir.    1998)      (explaining           that    County    Fuel   merely

expressed    doubts       about      the   application         of    res     judicata,     but

decided the case on waiver grounds).                          Additionally, while the

County Fuel court questioned the finality of an automatic claim

allowance in suggesting that res judicata did not apply, PHA

concedes the finality of the sale orders.                           Appellant’s Br. at

33.        Finally,       the        County        Fuel      court’s       discussion          of

counterclaims       and    section      22      of    the    Restatement       (Second)        of

Judgments    is     not    relevant        to        our    analysis    here.        As    PHA

acknowledges,       res    judicata        bars      claims    that     could     have    been

asserted in the bankruptcy proceeding that are “based on the

same underlying transaction” as the sale orders.                                 Appellant’s

      2We also suggested in dicta that a lift-stay order should
not give rise to res judicata.     Cty. Fuel, 832 F.2d at 293.
While PHA does not rely on this portion of County Fuel, we later
address why lift-stay orders are distinguishable from the
bankruptcy court’s sale orders.

                                              18
Br. at 25–26 (quoting Clodfelter v. Republic of Sudan, 720 F.3d
199, 210 (4th Cir. 2013)).            Here, Trustee Albert could have

litigated the extent of PHA’s obligations to Wells Fargo rather

than   move   to   sell   estate   property   in   satisfaction   of    those

obligations, and, as explained below, PHA’s present claims are

transactionally related to the facts underlying the sale orders.

This gives rise to the preclusion of PHA’s present claims.

       This brings us to PHA’s final argument respecting the first

prong of res judicata.       PHA contends that an unreported district

court decision declining to give preclusive effect to a lift-

stay order weighs in favor of concluding that we should not give

res judicata effect to sale orders.            Appellant’s Br. at 24–28

(citing Canterbury v. J.P. Morgan Mortg. Acquisition Corp., No.

10-cv-54, 2010 WL 5314543 (W.D. Va. Dec. 20, 2010)).                   We are

unconvinced.

       Not only is Canterbury not binding authority, but we do not

find it illuminating in our analysis of whether sale orders can

give rise to res judicata.         Here, unlike the lift-stay order in

Canterbury, the sale orders at issue effectively recognize and

satisfy particular debts.          It bears repeating that it would be

counterproductive to liquidate the bankruptcy estate’s property

to pay off debts owed to a creditor—bringing about the close of

bankruptcy proceedings—only to later allow claims to be brought

against that creditor regarding the now-satisfied debts.               Such a

                                      19
result would be the model of inefficiency, at odds with the

purpose of res judicata and Chapter 11 bankruptcy.

                                               B.

     We turn to the second prong of the res judicata analysis:

an identity of claims between the first and second suit.                           “[W]e

follow the ‘transactional’ approach” in analyzing this prong,

meaning    that        “res       judicata     will    bar   a    ‘newly    articulated

claim[]’       if    it     is    based   on   the    same   underlying     transaction

[involved in the first suit] and could have been brought in the

earlier action.”                 Clodfelter, 720 F.3d at 210 (quoting Laurel

Sand & Gravel, Inc. v. Wilson, 519 F.3d 156, 162 (4th Cir.

2008)).

     Here, the sale orders arose out of the same nucleus of

facts     as        PHA’s        claims   in    this    case:      the     circumstances

surrounding the three agreements between PHA and Wells Fargo.

The sale orders directed the liquidation of certain properties

in   satisfaction            of     PHA’s      obligations       arising    from   those

transactions.             And, in the instant lawsuit, PHA challenges the

propriety of the transactions.                  Accordingly, the second prong is

satisfied.           See Winget, 537 F.3d at 580–81 (finding that the

transactional test was met); Baudoin, 981 F.2d at 743–44 (same).

                                               C.

     We next move to the final core requirement of res judicata:

“an identity of parties or their privies in the two suits.”

                                               20
Pueschel, 369 F.3d at 354–55 (emphasis added).                      PHA argues that

this prong is not satisfied because it is not the same party as

the trustee.     To achieve its desired result, PHA ignores the “or

their    privies”    language    from   the     res    judicata      test,   instead

stating the     identity-of-the-parties          element     as     requiring     that

“the parties in the prior case were identical to the parties in

the present case.”         Appellant’s Br. at 21 (citing Pueschel, 369
F.3d    at   354);   id.   at   39   (arguing    that    the    trustee      must   be

“identical to the debtor” (emphasis in original)).                     This is not

the law.

       Under the correct test, there is no dispute between the

parties that this prong of res judicata is satisfied, as PHA

says in both its opening and reply briefs that “[t]he trustee is

in privity with the debtor as representative of the debtor’s

bankruptcy     estate.”         Appellant’s      Br.    at     39     (emphasis     in

original); Reply Br. at 9 (emphasis in original).

                                        D.

       Grausz directs courts to assess two additional res judicata

considerations: whether the party or its privy knew or should

have known of its claims at the time of the first action and

whether the court that ruled in the first suit was an effective

forum to litigate the relevant claims.                 See 321 F.3d at 473–74.

PHA’s argument with respect to these factors turns on whether

it, as a debtor who was no longer a debtor-in-possession, could

                                        21
have effectively litigated its claims against Wells Fargo.                          See,

e.g., Appellant’s Br. at 36–43 (contending that the bankruptcy

court improperly barred it from participating in the bankruptcy

in violation of 11 U.S.C. § 1109(b)).

     PHA’s argument is based on a faulty premise.                         It is not

PHA’s actions in the bankruptcy court that now preclude it from

asserting      claims     against    Wells      Fargo.       Instead,    it    is   the

trustee’s actions as PHA’s privy that give rise to res judicata.

Thus,    the       question    before      us    is    not   whether     PHA      could

effectively litigate in the bankruptcy court in its own right,

but whether the trustee could.                  If we concluded otherwise, we

would effectively alter the third res judicata prong to require

a strict identity of parties rather than an identity of the

parties or their privies.               This we cannot do.              Because PHA

offers   no     argument      that   the     trustee     could   not     effectively

litigate      in    the   bankruptcy       court,     the    Grausz     factors     are

satisfied. 3

     3 PHA says that it could not have known of certain claims
related to the swap agreement during the bankruptcy proceeding
because “[t]he artificiality of the LIBOR market was not
publicly revealed until July 2012”—after the trustee was
appointed. Appellant’s Br. at 44. Since it is the trustee, not
PHA, whose actions in the bankruptcy court now bind PHA, the
relevant question is whether the trustee could have known about
the supposed “artificiality of the LIBOR market” during the
bankruptcy. The final sale order was entered in September 2012,
after the date upon which PHA says the artificiality of the
LIBOR market was publicly revealed. Thus, PHA’s argument fails.

                                           22
                                    III.

     For   the   reasons   given,    we    affirm   the   judgment    of   the

district court.

                                                                     AFFIRMED

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