Court Opinion

ID: 5125925
Source: CourtListenerOpinion
Date Created: 2021-11-15 19:00:41.888578+00
Date Added: 2024-06-11T08:22:53.283777
License: Public Domain

Case: 21-50274     Document: 00516092866         Page: 1    Date Filed: 11/15/2021

           United States Court of Appeals
                for the Fifth Circuit                              United States Court of Appeals
                                                                            Fifth Circuit

                                                                          FILED
                                                                  November 15, 2021
                                  No. 21-50274                       Lyle W. Cayce
                                                                          Clerk

   In the Matter of BVS Construction, Incorporated

                                                                           Debtor,

   BVS Construction, Incorporated, Debtor,

                                                                       Appellant,

                                      versus

   Prosperity Bank, Creditor,

                                                                         Appellee.

                  Appeal from the United States District Court
                       for the Western District of Texas
                            USDC No. 6:20-CV-261

   Before Clement, Southwick, and Willett, Circuit Judges.
   Edith Brown Clement, Circuit Judge:
         BVS Construction, Inc. (“BVS”) filed a voluntary Chapter 11 petition
   for bankruptcy on January 2, 2019. In the ensuing proceeding, one of BVS’s
   secured creditors, Prosperity Bank (“Prosperity”), filed a proof of claim for
   $1,333,695.84. BVS filed a claim objection, arguing that Prosperity’s claim
   was for the wrong amount. The bankruptcy court held a hearing and
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   concluded that the doctrines of res judicata, judicial estoppel, and judicial
   admission barred BVS’s claim objection on the ground that it was ultimately
   based on the alleged impropriety of Prosperity’s claim against BVS’s from its
   prior bankruptcy in 2015.
           The district court affirmed the bankruptcy court’s order overruling
   BVS’s claim objection and allowing Prosperity’s claim.                      BVS timely
   appealed. For the following reasons, we AFFIRM.
                                               I.
           BVS is a Texas-based concrete and construction company owned by
   Ricky Joe Palasota, Sr. and his wife. In November of 2014, BVS and Mr.
   Palasota separately filed voluntary Chapter 11 petitions for bankruptcy in the
   United States Bankruptcy Court for the Western District of Texas. In
   September of 2015, BVS and Mr. Palasota filed an amended “joint” plan of
   reorganization (the “2015 Plan”). 1 The 2015 Plan set out, in detail, the
   amounts BVS owed to its creditors. Of relevance here, the 2015 Plan
   described the amounts BVS owed to one of its secured creditors, Prosperity,
   on five separate promissory notes—which Prosperity rolled into one note
   prior to BVS’s and Mr. Palasota’s bankruptcy petitions. The 2015 Plan
   provided as follows:
           Prosperity shall have an Allowed Secured Claim in the amount
           of $1,812,472.43 (the “Prosperity Claim”). The Prosperity
           Claim shall be paid based upon a 120 month amortization with
           interest at the rate of 5% per annum. Commencing on the

           1
            Prosperity correctly observes in its brief that, although BVS’s and Mr. Palasota’s
   “separate bankruptcy cases were never formally combined or jointly administered, BVS
   and Palasota each filed an identical ‘Joint’ Plan of Reorganization on September 15, 2015.”
   This opinion will refer to them collectively as the “2015 Plan.”

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          Effective Date, the Debtor, BVS, shall make 59 equal payments
          of $19,224.72 and one payment on the 60th month of all
          outstanding principal and interest. The payments shall be due
          on the 15th day of each month. The Debtor shall receive credit
          on the Prosperity Claim for all amounts paid post-petition pre-
          confirmation on the Prosperity Claim.
          BVS and Prosperity agree that the “Effective Date” was November
   8, 2015. Mr. Palasota, in his individual capacity and on behalf of BVS, signed
   the 2015 Plan, to which no objection was filed. On September 25, 2015, the
   bankruptcy court confirmed the 2015 Plan; neither Mr. Palasota nor BVS
   appealed that order.
          For thirty-eight straight months following the Effective Date of the
   2015 Plan, BVS made payments to Prosperity according to the terms of the
   2015 Plan, which Prosperity applied to BVS’s principal and interest
   obligations. But BVS did not make all fifty-nine monthly payments as
   required by the 2015 Plan, nor did it make the sixtieth “balloon payment,”
   which was to equal the amount outstanding on the claim after BVS made its
   fifty-nine monthly payments. BVS stopped making its monthly payments
   after making the first thirty-eight because in January of 2019, it again filed for
   bankruptcy.
          In the second bankruptcy, Prosperity filed a proof of claim in the
   amount of $1,333,695.84.       According to Prosperity, this claim amount
   accounted for every payment it had received from BVS as of the petition date
   of the second bankruptcy. BVS filed a claim objection, and Prosperity filed a
   response. In March of 2020, the bankruptcy court held a hearing on the
   dispute.
          At the hearing, BVS argued that the amount of Prosperity’s claim in
   the second bankruptcy was incorrect because (a) it was calculated based on

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   an incorrect claim amount in the 2015 Plan, and (b) it failed to account for
   certain payments that BVS made to Prosperity on the claim from July to
   October of 2015 and May to November of 2019. Prosperity argued that it was
   BVS and Mr. Palasota that proposed the 2015 Plan that the bankruptcy court
   ultimately confirmed, and that BVS failed to object to Prosperity’s claim in
   the 2015 Plan or otherwise seek direct appeal after the bankruptcy court
   confirmed the 2015 Plan. Prosperity maintained that the 2015 Plan set out its
   claim against BVS in detail, and that BVS clearly had no legitimate objection
   to that amount, as evidenced by its failure to object or appeal and by its
   subsequent payments to Prosperity pursuant to the 2015 Plan. Finally,
   Prosperity claimed that it applied the payments BVS made from July to
   October of 2015 to “accrued interest,” and that its ledger reflected the
   payments it received from BVS between May and November of 2019.
          At the conclusion of the hearing, the bankruptcy court orally
   overruled BVS’s claim objection and allowed Prosperity’s claim of
   $1,333,695.84. It found that the 2015 Plan, which BVS and Mr. Palasota
   proposed, described BVS’s debt to Prosperity in great detail and that neither
   BVS nor Mr. Palasota objected to or disputed Prosperity’s claim amount in
   that plan. It further found that BVS made payments pursuant to the 2015
   Plan for thirty-eight straight months and that BVS did not make the sixtieth
   “balloon payment.” Based on these findings, it concluded that the doctrines
   of res judicata, judicial estoppel, and judicial admission barred BVS’s claim
   objection in the second bankruptcy to the extent it was premised on the
   impropriety of Prosperity’s claim in the 2015 Plan.
         BVS timely filed a notice of appeal in the United States District Court
   for the Western District of Texas. The district court affirmed the judgment
   of the bankruptcy court and dismissed the appeal. BVS timely appealed.

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                                          II.
            “This Court ‘review[s] the decision of a district court, sitting as an
   appellate court, by applying the same standards of review to the bankruptcy
   court’s findings of fact and conclusions of law as applied by the district
   court.’” In re Renaissance Hosp. Grand Prairie Inc., 713 F.3d 285, 294 (5th
   Cir. 2013) (quoting In re Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003)). Sitting
   as an appellate court, the district court reviews a bankruptcy court’s factual
   findings for clear error and its conclusions of law de novo. Gerhardt, 348 F.3d
   at 91.
                                         III.
            BVS argues for the first time on appeal that the bankruptcy court
   lacked subject matter jurisdiction to allow Prosperity’s claim in the second
   bankruptcy. We disagree. The bankruptcy court has jurisdiction over core
   proceedings, which include the allowance or disallowance of claims against
   the debtor’s estate. This argument is addressed in subsection A.
            BVS also argues that the district court erred by affirming the
   bankruptcy court’s order overruling its claim objection and allowing
   Prosperity’s claim in the amount of $1,333,695.84. We disagree. The
   bankruptcy court correctly concluded that res judicata precludes BVS’s
   claim objection, to the extent it is based on the argument that Prosperity’s
   claim in the 2015 Plan was for the wrong amount. This argument is addressed
   in subsection B.
            Relatedly, BVS argues that Prosperity’s claim, even if allowed, is for
   the wrong amount. We disagree. The bankruptcy court’s allowance of
   Prosperity’s claim of $1,333,695.84, rather than for some lower amount as
   urged by BVS, is a factual determination reviewed for clear error. Based on
   the evidence in the record, the bankruptcy court did not clearly err. This
   point is addressed in subsection C.

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                                         A.
          BVS argues that the bankruptcy court exceeded its subject matter
   jurisdiction by allowing Prosperity’s claim in the second bankruptcy. It
   argues that, although the 2015 Plan directed BVS to make payments to
   Prosperity for the amounts owed on the five underlying promissory notes, in
   reality BVS is not liable for the full claim amount because the Palasotas are
   individually liable for the debt under some of the notes. The Palasotas, BVS
   explains, individually executed Note Nos. 1, 3, and 4, which make up a
   substantial portion of the debt owed to Prosperity. But, BVS argues, neither
   the 2015 Plan, nor the five underlying promissory notes, shifted liability for
   all the debt from the Palasotas to BVS. Nor did the 2015 Plan otherwise
   authorize the bankruptcy court to allow Prosperity’s claim against BVS as to
   the entire amount owed—including the amounts owed on Note Nos. 1, 3, and
   4 specifically. Thus, the bankruptcy court lacked subject matter jurisdiction
   to allow the same.
          Prosperity rejoins that this argument does not implicate the
   bankruptcy court’s subject matter jurisdiction. And in any event, it argues,
   the 2015 Plan does impose liability on BVS to make payments to Prosperity
   for the entire amount of the debt owed under the promissory notes.
          We agree with Prosperity. “Bankruptcy judges may hear and enter
   final judgments in ‘all core proceedings arising under title 11, or arising in a
   case under title 11.’” Stern v. Marshall, 564 U.S. 462, 474 (2011) (quoting 28
   U.S.C. § 157(b)(1)). Core proceedings include, inter alia, “allowance or
   disallowance of claims against the estate.” 28 U.S.C. § 157(b)(2)(B). The
   issue in this case is whether and to what extent Prosperity has a secured claim
   against BVS in the second bankruptcy. The bankruptcy court answered both
   questions in the affirmative, allowing Prosperity’s claim against BVS for
   $1,333,695.84. Thus, it allowed a claim against the estate—an action that

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   without question falls within the bankruptcy court’s jurisdiction under
   § 157(b)(1) and (2)(B).
          To be sure, BVS and Prosperity disagree about whether the
   bankruptcy court properly allowed Prosperity’s claim, and whether it did so
   in the right amount—Prosperity argues that it did, and BVS argues that it did
   not. But whether the bankruptcy court’s allowance of Prosperity’s claim was
   proper is an entirely different question from whether it had the jurisdiction to
   do so. The propriety of the bankruptcy court’s determination to allow or
   disallow a claim against the debtor’s estate is simply not a jurisdictional
   inquiry.
          Accordingly, the bankruptcy court did not lack subject matter
   jurisdiction to allow Prosperity’s claim of $1,333,695.84 against BVS in the
   second bankruptcy.
                                          B.
          The bankruptcy court did not err in determining that res judicata bars
   BVS from objecting to Prosperity’s claim in the second bankruptcy, to the
   extent its objection is premised on the impropriety of Prosperity’s claim
   amount in the 2015 Plan.
          In general, a bankruptcy court’s order is “entitled to the effect of res
   judicata.” Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1051 (5th Cir. 1987)
   (citing Southmark Props. v. Charles House Corp., 742 F.2d 862, 869 (5th Cir.
   1984)). The elements of res judicata are well settled in the Fifth Circuit and
   are as follows: “(1) the parties are identical or in privity; (2) the judgment in
   the prior action was rendered by a court of competent jurisdiction; (3) the
   prior action was concluded by a final judgment on the merits; and (4) the
   same claim or cause of action was involved in both actions.” Petro-Hunt,

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   L.L.C. v. United States, 365 F.3d 385, 395 (5th Cir. 2004) (citing In re
   Southmark Corp., 163 F.3d 925, 934 (5th Cir. 1999)).
          It is undisputed that the first three requisites of res judicata are
   satisfied here. BVS and Prosperity were both parties to the first bankruptcy
   proceeding, the bankruptcy court had jurisdiction to issue the judgment
   confirming the 2015 Plan, and the judgment confirming the 2015 Plan was a
   final judgment on the merits. See, e.g., Eubanks v. F.D.I.C., 977 F.2d 166, 170
   (5th Cir. 1992) (“It has long been recognized that a bankruptcy court’s order
   confirming a plan of reorganization is given the same effect as a district
   court’s judgment on the merits for claim preclusion purposes.”). The parties
   dispute only the fourth element: whether the second bankruptcy proceeding
   constitutes a new cause of action.
          We conclude that it does not. BVS’s claim objection is barred by res
   judicata because (a) Prosperity’s claim in the second bankruptcy—as it
   relates to whether Prosperity’s claim in the 2015 Plan was for the right
   amount—arises out of the same transaction that was the subject of the 2015
   Plan; and (b) BVS could have made this argument in the first bankruptcy, but
   it did not. We explain the bases for these two conclusions in parts 1 and 2,
   below. The effect of this holding is that BVS is bound, on res judicata
   grounds, by Prosperity’s claim in the 2015 Plan.
                                         1.
          The Fifth Circuit employs the transactional test to determine whether
   two suits involve the same cause of action for purposes of res judicata. See In
   re Howe, 913 F.2d 1138, 1144 (5th Cir. 1990) (citing Nilsen v. City of Moss
   Point, 701 F.2d 556, 560 (5th Cir. 1983) (en banc)). Under the transactional
   test, the inquiry focuses not on the contours of “the relief requested or the
   theory asserted,” but instead on “whether [the] plaintiff bases the two
   actions on the same nucleus of operative facts.” Id. “[R]es judicata ‘bars all

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   claims that were or could have been advanced in support of the cause of action
   on the occasion of its former adjudication . . . .’” Id. (quoting Nilsen, 701
   F.2d at 560).
          BVS argues that the first and second bankruptcies involve different
   causes of action because it now disputes whether Prosperity has any claim at
   all, whereas in the first bankruptcy it did not make that claim. More
   specifically, BVS claims that it already satisfied its obligations to Prosperity
   based on: (a) the payments it made to Prosperity under certain forbearance
   agreements prior to the first bankruptcy, plus (b) the payments it made
   between July and October of 2015, the payments it made pursuant to the 2015
   Plan, and the payments it made between May and November of 2019.
          Prosperity argues that this is not a separate cause of action at all. It
   argues that its claim in the second bankruptcy is tied directly to the amount
   of its claim in the first bankruptcy, both of which arose from the same facts
   that were available to both parties prior to and during the first bankruptcy
   proceeding. And because BVS did not object to Prosperity’s claim in the
   2015 Plan or later object to the plan’s confirmation—a plan that BVS itself
   proposed—Prosperity argues that BVS is barred from maintaining that claim
   objection now. It further argues that it properly credited BVS for every
   payment it received prior to the petition date of the second bankruptcy.
          We agree with Prosperity. Our decisions in Eubanks and Howe are
   instructive as to what constitutes an identity of claims for res judicata
   purposes in similar circumstances. In Eubanks, we considered, inter alia,
   whether a Chapter 11 plan of reorganization had res judicata effect on the
   debtor’s lender liability claims subsequently brought in a separate action
   against certain creditor banks. Eubanks, 977 F.2d at 168–69. The debtor
   based his lender liability claims on a loan transaction initially intended to
   support a renovation project. Id. at 168, 172. The project ultimately failed

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   and forced the debtor into bankruptcy, and one of the banks made a claim
   against the debtor’s estate, which was uncontested and allowed as part of the
   plan of reorganization. Id. In considering whether the plan of reorganization
   had res judicata effect on the debtor’s subsequent lender liability claims, we
   concluded that it did because “the loan transaction at the heart of the [lender
   liability] litigation was also the source of [the bank’s] claim against the
   [debtor’s] estate.” Id. at 172. Because the debtor’s lender liability suit
   “put[] into issue the same facts which would determine, inter alia, the
   treatment and amount of the debt owed to [the bank],” we held that there
   was an identity of claims between the confirmation order and the debtor’s
   lender liability action. Id. at 172–73.
          A similar principle informed our earlier decision in Howe. There, the
   debtors filed for voluntary Chapter 11 relief, and a creditor filed a proof of
   claim based on amounts the debtors owed on two promissory notes secured
   by mortgages on their home and real property. Howe, 913 F.2d at 1140. Five
   years after the confirmation of the plan of reorganization, the debtors brought
   lender liability claims against the creditor. Id. In considering whether the
   plan of reorganization had res judicata effect on the debtors’ lender liability
   claims, we determined that it did because “[t]he loan transaction at the heart
   of the [lender liability] litigation was also the source of [the creditor’s] claim
   against the estate.”      Id. at 1144.         Thus, we held, the two actions
   “constitute[d] the same claim . . . for res judicata purposes[]” because the
   debtors’ lender liability allegations were “based on the same nucleus of
   operative facts that informed their earlier bankruptcy proceedings.” Id. at
   1144–45.
          Applying the principles set forth in Eubanks and Howe, the question
   here becomes whether the transactions at the heart of BVS’s claim objection
   in the second bankruptcy were the source of Prosperity’s claim in the first
   bankruptcy.     That is, whether BVS’s claim objection in the second

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   bankruptcy is based on the same transaction or series of transactions that gave
   rise to the terms of the 2015 Plan as it relates to the amount of Prosperity’s
   claim. We hold that it is.
          The record reflects that BVS’s claim objection in the second
   bankruptcy depends entirely on, and necessarily arises out of, the subject
   matter that formed the basis of Prosperity’s claim in the first bankruptcy—
   specifically, the amounts BVS owed to Prosperity on the underlying
   promissory notes. In fact, the basis of Prosperity’s claim in the second
   bankruptcy is identical to the basis of its claim in the first bankruptcy: that it
   (still) has a claim against BVS for the amounts BVS owed it on the underlying
   promissory notes. The only reason that Prosperity’s claim amount is any
   different in the second bankruptcy than the first is because Prosperity
   reduced its claim from the first bankruptcy by all the amounts it received
   from BVS prior to the petition date of the second bankruptcy. Prosperity’s
   ledger, admitted into evidence in the bankruptcy court’s hearing, reflects this
   fact. Thus, following the reasoning in Eubanks and Howe, BVS’s claim
   objection in the second bankruptcy arises out of the same transaction that was
   the subject of the 2015 Plan.
                                          2.

          Even if all four elements of res judicata are present, res judicata does
   not bar litigation of a claim unless the party against whom it is invoked “could
   or should have brought its claim in the former proceeding.” Eubanks, 977
   F.2d at 173 (citing Howe, 913 F.2d at 1145).
          The law in the Fifth Circuit is settled that “[q]uestions of the
   propriety or legality of the bankruptcy court confirmation order are indeed
   properly addressable on direct appeal. . . .” and that a litigant is “foreclosed
   from that avenue of review [if] it chose not to pursue it.” Republic, 815 F.2d
   at 1050 (emphasis added). BVS’s claim objection in the second bankruptcy

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   is undeniably a question about the propriety of Prosperity’s claim in the 2015
   Plan. Thus, BVS could have raised this issue during the first bankruptcy
   proceeding—either in the form of a direct appeal of the order confirming the
   2015 Plan, or alternatively in the form of a claim objection. But BVS did not.
           In fact, BVS admitted explicitly at the hearing that it could have
   objected to the amount of Prosperity’s claim in the 2015 Plan, or appealed
   the order confirming the 2015 Plan, but chose not to. It argued only that it
   failed to do so on the advice of counsel and because it was under the
   impression that it could later object.
           Because BVS could have objected to the amount of Prosperity’s claim
   in the first bankruptcy or directly appealed the bankruptcy court’s order
   confirming the 2015 Plan, but did neither, it is precluded from now arguing
   that Prosperity’s claim in the first bankruptcy was for the wrong amount. 2
                                             C.
           Finally, the bankruptcy court did not clearly err in determining that
   Prosperity’s claim was for the correct amount. The ultimate effect of the
   bankruptcy court’s ruling is to allow Prosperity’s secured claim of
   $1,333,695.84. Given that BVS is bound by the amount of Prosperity’s claim
   in the 2015 Plan, the only remaining question is whether Prosperity’s current
   claim of $1,333,695.84 is for the right amount. This, in turn, depends on
   whether the $1,333,695.84 claim properly accounts for all of BVS’s payments
   to Prosperity prior to the petition date of the second bankruptcy. Those
   payments can be grouped as follows: (a) post-petition, pre-confirmation

           2
             This is not to say that BVS is claim precluded from maintaining any claim
   objection in the second bankruptcy. This just means that it is barred from maintaining a
   claim objection that is premised, in part or in whole, on the impropriety of Prosperity’s
   claim from the 2015 Plan.

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   payments made between July and October 2015, and (b) 2015 Plan payments,
   beginning on November 8, 2015 (the Effective Date of the 2015 Plan) and
   ending on January 2, 2019 (the petition date of the second bankruptcy). In
   allowing Prosperity’s claim of $1,333,695.84, the bankruptcy court implicitly
   determined that Prosperity did indeed credit BVS accordingly. This is
   merely a factual determination reviewed for clear error.
          At the hearing, Prosperity offered its ledger into evidence, which the
   bankruptcy court admitted. Not only that, but it put on a witness to testify
   as to the ledger’s accuracy. Prosperity’s counsel argued that Prosperity
   applied the amounts it received from BVS from July to October of 2015 to
   accrued interest. Prosperity’s ledger appears to account for these amounts.
          Prosperity’s ledger also reflects the payments BVS made pursuant to
   the 2015 Plan. In particular, it shows the thirty-eight payments that BVS
   made, which it appears Prosperity credited to BVS’s respective principal and
   interest obligations.
          BVS also argues that Prosperity should further have reduced its claim
   by the amount in payments BVS made to Prosperity between May and
   November of 2019. But this argument is misplaced. In a bankruptcy
   proceeding, once a creditor files a proof of claim, the bankruptcy court looks
   to 11 U.S.C. § 502 to determine whether the claim is allowed. Section 502(b)
   provides that, when an objection to a claim is made, the bankruptcy court
   “shall determine the amount of such claim . . . as of the date of the filing of
   the petition.”
          BVS is correct that Prosperity’s claim does not account for the
   payments it made to Prosperity between May and November of 2019. But it
   made those payments after the petition date; thus, they were properly
   excluded from Prosperity’s claim. Even still, these payments do appear in

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   Prosperity’s ledger. They are just accounted for in the latest running
   balance, rather than in Prosperity’s proof of claim.
          Per Prosperity’s ledger, Prosperity’s claim against BVS as of the
   petition date of the second bankruptcy appears to be $1,333,695.84. The
   bankruptcy court did not clearly err in allowing the same.
                                        IV.
          For the foregoing reasons, the district court did not err by affirming
   the bankruptcy court’s order allowing Prosperity’s claim of $1,333,695.84 in
   the second bankruptcy.
          The judgment is AFFIRMED.

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