Corestates Bank v. Huls America Inc

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
5-11-1999
Corestates Bank v. Huls America Inc
Precedential or Non-Precedential:
Docket 97-1784
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Filed May 11, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 97-1784
CORESTATES BANK, N.A.,
Appellant
v.
HULS AMERICA, INC.
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civ. No. 96-cv-08119)
District Judge: Honorable Harvey Bartle, III
Argued: July 17, 1998
Before: BECKER, Chief Judge, STAPLETON and WEIS,
Circuit Judges.
(Filed May 11, 1999)
WALTER WEIR, JR., ESQUIRE
(ARGUED)
Weir & Partners
100 So. Broad Street
Suite 1200 - Land Title Building
Philadelphia, PA 19110
Counsel for Appellant
DAVID J. D'ALOIA, ESQUIRE
VINCENT F. PAPALIA, ESQUIRE
(ARGUED)
ADAM S. RAVIN, ESQUIRE
Saiber, Schlesinger, Satz &
Goldstein, LLC
One Gateway Center, 13th Floor
Newark, NJ 07102-5311
EDWARD J. DiDONATO, ESQUIRE
DiDonato & Winterhalter
1818 Market Street, 29th Floor
Philadelphia, PA 19103
Counsel for Appellee
OPINION OF THE COURT
BECKER, Chief Judge.
This appeal by CoreStates Bank, N.A. ("CoreStates")
requires us to consider the putative claim preclusive effect
of the Bankruptcy Judge's denial of CoreStates's objections
to a Chapter 11 bankruptcy reorganization plan
confirmation. Both CoreStates and appellee Huls America,
Inc. ("Huls") had extended substantial credit to the debtor,
United Chemical Technologies, Inc. ("UCT"), a chemical
separation science company, to facilitate the purchase by
UCT of a manufacturing facility from Huls. They then
entered into a Subordination Agreement in order to clarify
their respective rights to receive payment from UCT. Under
the Agreement, UCT's debts to Huls were subordinated to
CoreStates's. Huls also agreed that it would not retain any
payment by UCT, including those paid under a bankruptcy
plan, until UCT had paid off its indebtedness to CoreStates
in full.
After UCT filed for bankruptcy, but before the Plan of
Reorganization was finally confirmed, UCT paid to Huls
some $600,000 as called for by the Plan. CoreStates
demanded that Huls pay this sum over to it. CoreStates
filed objections to the Plan on the grounds, inter alia, that
the Plan entitled Huls to receive $600,000 immediately,
2
asserting that this proposed payment unfairly discriminated
between creditors. CoreStates did not contend to the
Bankruptcy Judge that the $600,000 had to be paid over to
it pursuant to the Subordination Agreement.
Subsequently, CoreStates filed the present suit in the
District Court, alleging that Huls is obligated by the
Subordination Agreement to turn the $600,000 over to
CoreStates. The issue on appeal is whether CoreStates has
a right to receive the funds, when both CoreStates's and
Huls's rights in the bankruptcy estate, and CoreStates's
objection based on the payment in particular, were settled
in the confirmation proceeding. The District Court
concluded that CoreStates's claim was precluded because
CoreStates could have raised its claim based on the
Agreement in the bankruptcy proceeding alongside its
objection, but failed to do so. See CoreStates Bank, N.A. v.
Huls America, Inc., No. Civ. A. 96-8119, 1997 WL 560193
(E.D. Pa. Aug. 28, 1997).
This case is difficult because it falls within the interstices
of the law of judgments. As discussed below, a Bankruptcy
Judge's order rejecting a creditor's objection to a
bankruptcy reorganization plan acts as a final judgment for
preclusion purposes. In this case, CoreStates objected to
the Plan because it would result in the immediate payment
of $600,000 to Huls, and its objection seems to subsume
the Subordination Agreement, even though it was not
advanced in terms. As a result, both issue preclusion and
claim preclusion might have some relevance to the present
litigation, which concerns whether Huls is obligated by the
Subordination Agreement to turn the $600,000 over to
CoreStates. We think that claim preclusion provides the
more appropriate framework, however, because we are
unsure that the Subordination Agreement was raised with
sufficient clarity in the reorganization proceeding to give
rise to issue preclusion.
Claim preclusion bars a party from litigating a claim that
it could have raised or did raise in a prior proceeding in
which it raised another claim based on the same cause of
action. Agreeing with three other circuits (two are of the
contrary view), we conclude that the doctrine applies
regardless of the type of bankruptcy jurisdiction-- core or
3
non-core -- within which the current claim would fall.
Moreover, we believe that the facts of this case--
particularly where the parties were formerly creditors in a
bankruptcy proceeding -- fall within the rubric of claim
preclusion, albeit at the margin.
Although our holding is largely fact-bound, insofar as we
bring it within the claim preclusion jurisprudence we are
obliged to flesh out its doctrinal aspect. We note in this
regard the limiting effects on these precepts of the internal
elements of the claim preclusion test itself, set forth in
Board of Trustees of Trucking Employees Welfare Fund, Inc.
v. Centra, 983 F.2d 495, 504 (3d Cir. 1992), and of the
statutory constraints on the scope of bankruptcy
jurisdiction. First, claim preclusion applies only if the
current claim would have been within the jurisdiction of the
court hearing the prior bankruptcy proceeding. A claim, in
order to fall within the bankruptcy jurisdiction, must at
least be one that "could conceivably have any effect on the
estate being administered in bankruptcy." Pacor, Inc. v.
Higgins, 743 F.2d 984, 994 (3d Cir. 1984). Second, except
possibly in certain unusual circumstances, claim
preclusion applies only if the party to be precluded raised
a claim, such as an objection to a reorganization plan, in a
prior proceeding. Finally, claim preclusion applies only if
the events underlying the current claim are essentially
similar to those underlying the claim made in the
bankruptcy proceeding. If the current claim alleged to be
precluded does not meet these three requirements it will
not be precluded.
CoreStates's claim clearly meets these three
requirements. First, it could have raised its claim under the
Subordination Agreement during the confirmation
proceeding along side its objections, both as a legal and as
a factual matter. The claim based on the Subordination
Agreement fell within the non-core "related to" bankruptcy
jurisdiction, if not the core jurisdiction. In addition, since
UCT paid Huls the money before the Plan was confirmed,
CoreStates's claim accrued before the confirmation
proceeding concluded. Second, CoreStates filed an objection
to the confirmation of UCT's Plan of Reorganization that
was argued at length before the Bankruptcy Judge and the
4
District Court by both CoreStates and Huls. This objection
put into controversy the entire amount that Huls was to
receive in full satisfaction of its claims against UCT. Third,
CoreStates's objection to the confirmation of the Plan
involved the same underlying factual issues as CoreStates's
present claim. We therefore conclude that the District Court
correctly found that CoreStates's claim was precluded;
hence we will affirm.
I. Facts & Procedural History
This case arises out of a series of events culminating in
the bankruptcy reorganization of UCT. See CoreStates
Bank, N.A. v. United Chem. Techs., Inc., 202 B.R. 33 (E.D.
Pa. 1996). In 1993, UCT purchased from Huls a facility that
manufactured specialty chemicals.1 This purchase was
funded in part by loans and extensions of credit from
CoreStates, totaling about $1.1 million.2 Huls also provided
financing for the purchase and, after the sale, continued to
supply products to UCT on credit terms. As a condition of
the financing, CoreStates, UCT and Huls executed a
Subordination Agreement ("the Agreement"). The Agreement
provided, in part, that Huls would subordinate its claims to
CoreStates's and would not retain any payment by UCT
until UCT's indebtedness to CoreStates had been paid off in
full. It further provided that, if any bankruptcy proceeding
was filed by or against UCT, Huls would hold any payments
it received pursuant to that proceeding as trustee for the
benefit of CoreStates and deliver such payments
immediately to CoreStates.
As a consequence of an explosion at UCT's new facility,
UCT filed for Chapter 11 protection in October 1995. UCT
filed its first Plan of Reorganization in February 1996. This
plan met with resistance from a number of interested
parties, including Huls and CoreStates. Following further
negotiations, UCT submitted a First Amended Plan of
Reorganization in March 1996. The Amended Plan had the
_________________________________________________________________
1. During the pendency of this litigation, Huls America changed its name
to Creanova, Inc. We continue to refer to the defendant herein as Huls.
2. During the pendency of this litigation, CoreStates merged into First
Union Corp. We continue to refer to the plaintiff herein as CoreStates.
5
consent of all interested parties except CoreStates, which
objected to it.
Under the Amended Plan, CoreStates was to receive a
cash payment of $550,497 on the Plan's effective date, and
repayment of remaining lines of credit and mortgages with
interest over periods ranging from five to fifteen years.
CoreStates would also retain all its liens and security
interests, except for certain machinery and equipment
liens. Huls, a creditor with a priority junior to CoreStates,
was to receive a $600,000 cash payment in full satisfaction
of its more than $3.2 million in claims, approximately $2.3
million of which was secured. Nothing in the Amended Plan
purported to modify or nullify the Agreement as between
CoreStates and Huls.
CoreStates filed an action in the form of objections to the
Amended Plan. These objections did not refer to the
Agreement. CoreStates did, however, specifically object on
the grounds that under the Plan Huls was entitled to
receive $600,000 immediately. CoreStates argued that this
proposed payment to Huls unfairly discriminated between
creditors.
On June 5, 1996, the Bankruptcy Judge rejected
CoreStates's objections. One week later, he held a
confirmation hearing. Just prior to the hearing, counsel for
CoreStates informed counsel for Huls that CoreStates
intended to enforce Huls's obligation to turn over the
proceeds that it would receive under the Plan. At the
confirmation hearing, Huls raised the issue with the court,
and a brief colloquy ensued, although no papers were filed.
The court did not formally resolve the issue, however, and
proceeded to confirm the Plan over CoreStates's objection.
CoreStates appealed the order confirming the Amended
Plan to the District Court. See CoreStates, 202 B.R. 33.
Among other issues, CoreStates argued that the
Bankruptcy Judge improperly rejected its objection by
wrongly "[d]etermining that [Huls] was permitted to receive
payments . . . before [CoreStates] was paid, in
contravention of the Subordination Agreement," thereby
violating 11 U.S.C. S 510(a) and the "fair and equitable"
requirement of 11 U.S.C. S 1129(b)(1) & (2). In fact, Huls
6
itself filed a brief in opposition to CoreStates's appeal, and
CoreStates filed a reply brief responding almost exclusively
to Huls's arguments. The District Court refused to consider
this argument. It found that CoreStates had not raised the
Agreement as a basis for objecting to the Amended Plan in
the Bankruptcy Court, and therefore was not entitled to
raise it before the District Court. See CoreStates, 202 B.R.
at 48. The Court also rejected CoreStates's more general
contention that the $600,000 payment unfairly
discriminated against it, which Huls discussed at length in
its brief. For other reasons, however, the court reversed the
confirmation of the Plan. See 202 B.R. at 58.
On August 12, 1996, prior to the ruling of the District
Court, UCT paid to Huls the $600,000 sum called for by
the Amended Plan.3 On September 6, CoreStates made a
written demand on Huls for the money. In that letter,
CoreStates asserted that, as a result of the District Court's
vacatur of the Amended Plan, there was no confirmed plan
and therefore Huls was required to pay the money over to
CoreStates per the Agreement. Huls refused.
UCT filed a Second Amended Plan on September 19. The
Second Amended Plan altered the Amended Plan only with
respect to CoreStates. It restored some of CoreStates's
existing liens, which had been eliminated under the
Amended Plan. It did not, however, purport to change
either CoreStates's rights vis a vis Huls or the payment
Huls was to receive. CoreStates objected to the Second
Amended Plan as well. It stated a number of grounds for
objecting, but did not invoke the Subordination Agreement,
except by generalized incorporation. The Bankruptcy Judge
again confirmed the Plan over CoreStates's objections.
CoreStates did not appeal the confirmation of the Second
Amended Plan.
In December 1996, CoreStates filed the present diversity
action in the District Court, which had jurisdiction under
28 U.S.C. S 1332. Huls moved to dismiss the complaint for
_________________________________________________________________
3. CoreStates had previously requested a stay of the Amended Plan in
order to prevent UCT from paying Huls the $600,000. This request was
based in part on the Agreement. The Bankruptcy Court denied the
request without addressing the Agreement.
7
failure to state a claim under Fed. R. Civ. P. 12(b)(6), or, in
the alternative, for judgment on the pleadings under Fed.
R. Civ. P. 12(c). CoreStates responded with a motion for
summary judgment. The District Court granted Huls's
motion for judgment on the pleadings and denied
CoreStates's motion for summary judgment. See
CoreStates, 1997 WL 560193, at *4. The court held that the
doctrine of claim preclusion barred CoreStates's claim,
reasoning that the claims CoreStates raises in the present
case could have been raised during the UCT bankruptcy
proceeding. See 1997 WL 560193, at *3-*4. CoreStates
timely appeals from this decision. We have jurisdiction
pursuant to 28 U.S.C. S 1291.
This court exercises plenary review over a district court's
order granting a motion for judgment on the pleadings
pursuant to Fed. R. Civ. P. 12(c). See Kruzits v. Okuma
Mach. Tool, Inc., 40 F.3d 52, 54 (3d Cir. 1994). Under Rule
12(c), a district court cannot grant judgment on the
pleadings, and we may not affirm such a grant, "unless the
movant clearly establishes that no material issue of fact
remains to be resolved and that he is entitled to judgment
as a matter of law." Kruzits, 40 F.3d at 54 (quoting
Jablonski v. Pan Am. World Airways, Inc., 863 F.2d 289,
290 (3d Cir. 1988) (quoting Society Hill Civic Assn. v.
Harris, 632 F.2d 1045, 1054 (3d Cir. 1980) (citation
omitted))).
II. Claim Preclusion and Bankruptcy Proceedings
The central issue in this appeal is the claim preclusive
effect of the Bankruptcy Judge's final order of confirmation,
over CoreStates's objection, on CoreStates's claim against
Huls. In the confirmation proceeding, CoreStates objected
to the Plan as unfair in part because it provided for the
immediate payment of $600,000 to Huls, a junior creditor.
CoreStates's present claim is that the Subordination
Agreement requires Huls to pay to CoreStates the $600,000
Huls received pursuant to the now-confirmed
Reorganization Plan. A strong argument can be made that
CoreStates's unfairness objection so clearly implicated the
Agreement that the issue that divides the parties in the
present case was effectively raised and litigated in the
8
bankruptcy proceeding, so that we are dealing here with
issue preclusion rather than claim preclusion.4 Since the
District Court and the parties have treated this case as
involving primarily claim preclusion, however, and claim
preclusion is the most clearly applicable doctrine, we begin
with a review of the basic law of claim preclusion.
In Board of Trustees of Trucking Employees Welfare Fund,
Inc. v. Centra, 983 F.2d 495 (3d Cir. 1992), we explained
that claim preclusion (or res judicata as it is also called)
"gives dispositive effect to a prior judgment if a particular
issue, although not litigated, could have been raised in the
earlier proceeding. Claim preclusion requires: (1) afinal
judgment on the merits in a prior suit involving; (2) the
same parties or their privities; and (3) a subsequent suit
based on the same cause of action." Centra, 983 F.2d at
504 (emphasis added; citations omitted). If these three
factors are present, a claim that was or could have been
raised previously must be dismissed as precluded.
We have elaborated on the third element of the Centra
test, both in general and in the context of bankruptcy
proceedings. In deciding whether two suits are based on the
same "cause of action," we take a broad view, looking to
whether there is an "essential similarity of the underlying
events giving rise to the various legal claims." United States
v. Athlone Indus., 746 F.2d 977, 984 (3d Cir. 1984); see
also Restatement (Second) of Judgments S 24 cmt. a ("The
present trend is to see claim in factual [as opposed to legal]
terms and to make it coterminous with the transaction
regardless of the number of substantive theories . .. that
may be available to the plaintiff . . . ."); id. cmt. b ("In
general, the expression [``transaction'] connotes a natural
grouping or common nucleus of operative facts."). Because
a "bankruptcy case" is fundamentally different from the
typical civil action, however, comparison of a bankruptcy
proceeding with another proceeding is not susceptible to
_________________________________________________________________
4. Another way of looking at it might be that CoreStates's claim should
be barred by reason of S 1141 of the Bankruptcy Code, 11 U.S.C.
S 1141(a), which provides that a confirmed plan is binding on all
creditors, including feuding creditors such as CoreStates and Huls, who
litigated the fairness of the Plan as affected by the disputed payment.
9
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 Motor Freight, Inc. v. United Jersey Bank,
848 F.2d 414, 419 n.5 (3d Cir. 1988).
The principle of claim preclusion applies to final orders
overruling objections to a reorganization plan in bankruptcy
proceedings just as it does to any other final judgment on
a claim. See Wallis v. Justice Oaks II, Ltd. (In re Justice
Oaks II, Ltd.), 898 F.2d 1544, 1552 (11th Cir. 1990)
("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."); see also Katchen v. Landy, 382 U.S. 323, 334
(1966) ("The normal rules of res judicata and collateral
estoppel apply to the decisions of bankruptcy courts.");
Donaldson v. Bernstein, 104 F.3d 547, 554 (3d Cir. 1997)
("[A] confirmation order is res judicata as to all issues
decided or which could have been decided at the hearing on
confirmation." (quoting In re Szostek, 886 F.2d 1405, 1408
(3d Cir. 1989))); Crop-Maker Soil Servs. v. Fairmount St.
Bank, 881 F.2d 436, 440 (7th Cir. 1991) ("Public policy
supports res judicata generally, but in the bankruptcy
context in particular."); cf. 11 U.S.C.S 1141(a) ("[T]he
provisions of a confirmed plan bind . . . any creditor . . .
whether or not the claim or interest of such creditor . . . is
impaired under the plan and whether or not such creditor
. . . has accepted the plan."). Accordingly, we ordinarily
would simply apply these rules. CoreStates suggests two
reasons why we should not.5 We address these in turn.
_________________________________________________________________
5. CoreStates also submits that claim preclusion should not apply
because the bankruptcy proceeding did not modify or adjudicate its
rights under the Agreement. This argument misapprehends the
fundamental nature of the doctrine of claim preclusion, which applies
whether or not the particular issue was actually raised or decided by the
prior court. See Agrilectric Power Partners, Ltd. v. General Elec. Co., 20
F.3d 663 (5th Cir. 1994). The continued effectiveness of the contract is
simply irrelevant. Of course, if CoreStates's claim had not accrued before
the Bankruptcy Judge confirmed UCT's Plan of Reorganization, then
whether the Plan had modified the Agreement would be important.
10
III. Claim Preclusion: Non-Core Claims and Claims
Between Creditors
CoreStates's submissions raise legitimate questions as to
the extent to which claim preclusion applies to bankruptcy
orders and judgments. The thrust of its contentions is in
the nature of a caveat that, because bankruptcy
jurisdiction is so comprehensive, and a bankruptcy
proceeding potentially can be so broad, its preclusive effect
should be limited. We address two questions CoreStates
poses about the claim preclusive effect of a bankruptcy
judge's orders rejecting objections to reorganization plans:
whether the doctrine should preclude claims that would
have fallen within the non-core "related" -- as opposed to
the core -- bankruptcy jurisdiction, and whether it should
apply to the claims of a creditor who objects to a
bankruptcy reorganization plan. We believe that these
suggested limitations on the application of claim preclusion
are unnecessary, and that claim preclusion should apply
regardless of the jurisdictional basis of the present claim
and between all parties to a bankruptcy case.
A. Claim Preclusion and Non-Core Claims
The first question is whether claim preclusion should
apply if CoreStates's claim falls within the non-core
"related" bankruptcy jurisdiction. The jurisdiction of a court
hearing a Chapter 11 bankruptcy reorganization case is
broad. This jurisdiction is delineated in 28 U.S.C. SS 157 &
1334. Title 28 initially grants jurisdiction over all aspects of
a bankruptcy case to the district courts. See 28 U.S.C.
S 1334.6 Section 157(a) then permits the district courts to
_________________________________________________________________
6. Section 1334 provides as follows:
(a) Except as provided in subsection (b) of this section, the
district courts shall have original and exclusive jurisdiction of
all
cases under title 11.
(b) Notwithstanding any Act of Congress that confers exclusive
jurisdiction on a court or courts other than the district courts,
the
district courts shall have original but not exclusive jurisdiction
of all
civil proceedings arising under title 11, or arising in or related
to
cases under title 11.
11
automatically refer any proceedings over which they have
jurisdiction under S 1334 to the bankruptcy courts.7 See,
e.g., Bankruptcy Administration Orders (E.D. Pa. July 25,
1984, Nov. 8, 1990) (using the District Court's full
authority to refer cases to bankruptcy judges under
S157(a)). Section 157(b)(1) provides that "[b]ankruptcy
judges 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, referred under subsection [157(a)], and
may enter appropriate orders and judgments . . . ."
Along with those listed in the statute,8 "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." Torkelsen v. Maggio (In re Guild & Gallery Plus, Inc.),
72 F.3d 1171, 1178 (3d Cir. 1996) (quoting In re Marcus
Hook Dev. Park, Inc., 943 F.2d 261, 267 (3d Cir. 1991)
(citations omitted)). Bankruptcy judges may also hear non-
core proceedings that are otherwise related to a bankruptcy
case. See S 157(c)(1) ("A bankruptcy judge may hear a
proceeding that is not a core proceeding but that is
otherwise related to a case under title 11.").
A claim is a non-core "related" claim if its
outcome . . . could conceivably have any effect on the
estate being administered in bankruptcy. Thus, the
proceeding need not necessarily be against the debtor
or against the debtor's property. An action is related to
bankruptcy if the outcome could alter the debtor's
rights, liabilities, options, or freedom of action (either
positively or negatively) and which in any way impacts
upon the handling and administration of the bankrupt
estate.
_________________________________________________________________
7. Section 157(a) provides: "Each district court may provide that any or
all cases under title 11 and any or all proceedings arising under title 11
or arising in or related to a case under title 11 shall be referred to the
bankruptcy judges for the district."
8. Section 157(b)(2) presents a nonexclusive list of core proceedings,
including "determinations of the validity, extent, or priority of liens."
S 157(b)(2)(K).
12
Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)
(emphasis and citations omitted). In non-core claims,
however, the bankruptcy judge may not enter final orders
or judgments, but must submit proposed findings of fact
and conclusions of law to the district court for entry of
judgment, see 28 U.S.C. S 157(c)(1),9 unless all the parties
consent to the bankruptcy judge's entering judgment, see
S 157(c)(2).10
This distinction between core and non-core proceedings
dates to the Supreme Court case of Northern Pipeline
Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).
The principles of Northern Pipeline are familiar, and are
described in the margin.11 Although CoreStates does not
_________________________________________________________________
9. Section 157(c)(1) provides, in pertinent part:
In [a non-core] proceeding, the bankruptcy judge shall submit
proposed findings of fact and conclusions of law to the district
court, and any final order or judgment shall be entered by the
district judge after considering the bankruptcy judge's proposed
findings and conclusions and after reviewing de novo those matters
to which any party has timely and specifically objected.
10. Section 157(c)(2) provides:
Notwithstanding the provisions of paragraph (1) of this
subsection,
the district court, with the consent of all the parties to the
proceeding, may refer a proceeding related to a case under title 11
to a bankruptcy judge to hear and determine and to enter
appropriate orders and judgments . . . .
11. A Chapter 11 debtor brought claims before a bankruptcy judge
against a creditor for breach of contract and warranty,
misrepresentation, coercion, and duress, under the jurisdictional
provisions of the 1978 Bankruptcy Reform Act. Those provisions granted
bankruptcy courts jurisdiction over all "civil proceedings arising under
title 11, or arising in or related to cases under title 11." 458 U.S. at
54
(quoting 28 U.S.C. S 1471(b) (1976 ed. Supp. IV)) (emphasis and
alteration in original). The Court concluded that this grant of
jurisdiction
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 common-
law 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-core"related"
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 have"opposing
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
before the Bankruptcy Judge.15
1. Bankruptcy Jurisdiction
The question before us is whether a creditor's rights as
against another creditor under a subordination agreement
_________________________________________________________________
15. We note that CoreStates's appellate counsel, when pressed by the
panel at oral argument, conceded with the benefit of hindsight, but
without abandoning his legal position, that the claim based on the
Subordination Agreement probably should have been raised by trial
counsel during the bankruptcy proceeding.
25
fall within the bankruptcy jurisdiction. Our circuit
precedent suggests that the enforcement of a subordination
agreement between creditors may not qualify as a core
proceeding. "[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." See Torkelsen, 72 F.3d at
1178. One could reasonably suppose that CoreStates's
claim meets this standard because it in effect concerns the
extent and priority of Huls's interest in the bankruptcy
estate. In fact, the Second Circuit seems to have reached
just this conclusion. In Resolution Trust Co. v. Best
Products Co. (In re Best Products Co.), 68 F.3d 26 (2d Cir.
1995), which involved a dispute over the enforcement of a
contractual subordination agreement between creditors of a
Chapter 11 debtor, the court found that while enforcing
subordination agreements is "not listed as a core
proceeding, the power to prioritize distributions has long
been recognized as an essential element of bankruptcy
law." Id. at 31. Furthermore, the court reasoned:
[T]he Subordination Agreement . . . sets forth the
relative priority of Best's obligations. Moreover, the fact
that Best filed briefs and argued in favor of enforcing
the Subordination Agreement in both the district court
and this court belies the claim that Best had no
interest in the controversy. Determination of the
priority rights of various creditors to assets of the
Debtor was necessary to administer the estate and was
not merely a dispute between two creditors.
Id. at 32.
But an argument could also be made that the core
jurisdiction standard is not satisfied here. Even if that is
true, however, the claim based on the Subordination
Agreement easily satisfies the requirements for the non-core
"related to" bankruptcy jurisdiction. See Pacor, 743 F.2d at
994. Pacor only requires that "the outcome of that
proceeding could conceivably have any effect on the estate
being administered in bankruptcy" in order to invoke non-
core "related to" jurisdiction. See Torkelsen, 72 F.3d at
1180-81 (quoting Pacor, 743 F.2d at 994). The court in
Pacor further observed that "the proceeding need not
26
necessarily be against the debtor or against the debtor's
property. An action is related to bankruptcy if the outcome
could alter the debtor's rights, liabilities, options, or
freedom of action (either positively or negatively) and which
in any way impacts upon the handling and administration
of the bankrupt estate." 743 F.2d at 994. We have further
noted that the "key word in [the Pacor test] is conceivable.
Certainty, or even likelihood, is not a requirement.
Bankruptcy jurisdiction will exist so long as it is possible
that a proceeding may impact on the debtor's rights,
liabilities, options, or freedom of action or the handling and
administration of the bankruptcy estate." Torkelsen, 72
F.3d at 1181 (quoting Marcus Hook, 943 F.2d at 264)
(alteration in original).
Although CoreStates submits that the dispute is entirely
between itself and Huls -- and thus does not impact the
debtor at all -- we believe it clear that the resolution of this
dispute conceivably would have impacted upon the debtor's
options in crafting a plan that met with Huls's approval and
thereby affected the handling of the bankruptcy estate. If
Huls had known that the $600,000 the Reorganization Plan
set aside for it was not going to be there "up front," Huls
might not have consented to the Plan. Indeed, we cannot
overlook that Huls gave up a claim for over $3,000,000 in
debt, most of which was secured, in exchange for a cash
payment of $600,000. Although junior to CoreStates's, we
gather that Huls's largely secured claim had real value and
was not simply pie in the sky. Without Huls's consent, UCT
might have had a much more difficult time having the Plan
confirmed. Likewise, if CoreStates had litigated its rights
under the Agreement in the bankruptcy proceeding and
lost, it might have fought more strenuously against
ultimate confirmation of the Plan, rather than, for example,
choosing not to appeal the second confirmation order. We
conclude that CoreStates's claim is of the type that falls
within the non-core "related," if not the core, jurisdiction of
a court sitting in bankruptcy proceedings.
2. Could CoreStates Have Sued Huls While the
Bankruptcy Confirmation was Still Pending?
Of course, even if an issue is of a type that theoretically
could be raised in a bankruptcy case, claim preclusion only
27
applies if the particular claim at issue actually could have
been brought in the particular bankruptcy proceeding. On
the aspect of this consideration relevant here, if the claim
asserted in a later proceeding between co-creditors could
not have been raised during the bankruptcy proceeding
because the cause of action had not yet accrued, the
plaintiff is not precluded from asserting it in the later
proceeding. See Labelle Processing Co. v. Swarrow, 72 F.3d
308, 314 (3d Cir. 1995) ("[N]ew facts (i.e. events occurring
after the events giving rise to the earlier claim) may give
rise to a new claim, which is not precluded by the earlier
judgment."); Centra, 983 F.2d at 505. Whether a claim
could have been brought in a bankruptcy confirmation
proceeding depends on whether the claim is based on pre-
confirmation or post-confirmation acts. "Claims for post-
confirmation acts are not barred by the res judicata effect
of the confirmation order. . . . Creditors whose claims arise
from and after confirmation are not barred by the event of
confirmation from asserting such claims, except to the
extent that they arise from pre-confirmation acts."
Donaldson, 104 F.3d at 555 (citations and internal
quotations omitted).
The District Court concluded that the present cause of
action arose out of pre-confirmation events and could have
been raised in the bankruptcy proceeding:
The first amended plan of reorganization dated March
27, 1996 and known to all interested parties several
months before the initial confirmation order, provided
for the $600,000 remittance to Huls rather than
CoreStates. In addition, UCT actually paid the
$600,000 to Huls in August, 1996, before the final
amended plan was confirmed by the bankruptcy
judge's order of October 1, 1996. CoreStates also put
Huls on notice as early as June 12, 1996 that it was
obligated to turn over the funds to CoreStates. June 12
was before Huls received the $600,000 and before the
final confirmation order. This is simply not a case
where CoreStates's claim to the funds in issue was
unknown before the bankruptcy proceeding ended.
CoreStates, 1997 WL 560193, at *4 (emphasis added).
28
Our reading of the pleadings confirms the District Court's
conclusion. Because (a) UCT gave the $600,000 to Huls; (b)
CoreStates was aware of this; and (c) CoreStates had
demanded the money, all before the confirmation order was
issued, we conclude that CoreStates's cause of action based
on the Subordination Agreement had accrued before the
confirmation was finalized. The key fact here is that UCT
paid the $600,000 to Huls before the confirmation of the
Second Amended Plan. CoreStates's cause of action could
not accrue until Huls received money from UCT, since Huls
could not breach the Agreement until it received money
from UCT and then refused to turn it over to CoreStates. If
Huls had not received the $600,000 payment until after the
Plan was confirmed, CoreStates could not have raised its
claim under the Agreement in the bankruptcy proceeding
and it would not be precluded from raising it now. In the
present case, however, Huls received money from UCT and
in fact failed to turn it over to CoreStates in response to
CoreStates's demands, all before the final confirmation of
the Second Amended Plan. Therefore, we agree with the
District Court's conclusion that CoreStates could have
raised its present claim in the bankruptcy proceeding.
B. The Centra Factors
Even if CoreStates could have raised its present claim
before the Bankruptcy Judge, claim preclusion only applies
if the current claim meets the requirements of Centra.
"Claim preclusion requires: (1) a final judgment on the
merits in a prior suit involving; (2) the same parties or their
privities; and (3) a subsequent suit based on the same
cause of action." Centra, 983 F.2d at 504. CoreStates
agrees that the parties in the former and present
proceedings are the same, and the law supports this
conclusion. See First Union Comm. Corp. v. Nelson, Mullins,
Riley & Scarborough (In re Varat Enters., Inc.), 81 F.3d
1310, 1316 n.6 (4th Cir 1996). As noted above and as
CoreStates also concedes, it is settled that orders of a
bankruptcy judge rejecting objections and confirming a
plan of reorganization are final judgments to which the
doctrine of claim preclusion applies. See Stoll, 305 U.S. at
170-71; Szostek, 886 F.2d at 1408. This does not entirely
29
settle the matter, however, because a question remains
whether CoreStates raised its claim to the $600,000 in the
bankruptcy proceeding and whether the claim was one
against Huls.
Raising an objection to a reorganization plan can be a
claim for claim preclusion purposes. See supra section
III.B. Furthermore, we think CoreStates's objection was a
claim against Huls. The objection put Huls's rights in the
bankruptcy estate into question. The $600,000 payment
was all Huls was entitled to receive under the
Reorganization Plan. A challenge to that payment amounted
to a challenge to Huls's position in the scheme of
distribution the Plan envisioned. In addition, Huls clearly
felt that it had an interest in the issue worth preserving,
since it opposed the objection extensively throughout the
bankruptcy proceedings. Furthermore, Huls filed a brief in
opposition to CoreStates's appeal in the District Court, and
CoreStates filed a reply brief dealing almost solely with
Huls's arguments. Accordingly, the Bankruptcy Judge's
dismissal of CoreStates's objection and the subsequent
confirmation of the Plan constitute a final judgment on
CoreStates's claim against Huls. We thus disagree with the
dissent that CoreStates did not assert a claim against Huls
in the bankruptcy proceeding.
The more significant question, then, is whether
CoreStates's present cause of action is essentially the same
as that which it raised in its objection to the Plan. We think
it is apparent that the objection and CoreStates's present
claim addressed the same factual issue: who should receive
and retain the $600,000 UCT was prepared to pay.
Although, as CoreStates contends, its legal claims
concerning this money may rest on somewhat different
grounds in the two proceedings, the "same cause of action"
requirement relates to the factual circumstances underlying
the claims, not their legal basis. See Athlone Indus., 746
F.2d at 984 (looking to the "essential similarity of the
underlying events giving rise to the various legal claims").
The event underlying both the objection to the Plan and the
current claim was the distribution of the $600,000. The
primary evidence of CoreStates's claim to the money in both
the bankruptcy proceeding and the present case would be
the Agreement itself.
30
Although we ordinarily "scrutinize the totality of the
circumstances" in determining whether two claims are
based on the same cause of action where the first claim
arose in a bankruptcy proceeding, see Oneida, 848 F.2d at
419 n.5, we think the "essential similarity" of CoreStates's
past and present claims is facially apparent. We thus need
not engage in any searching scrutiny of the totality of the
circumstances to conclude that CoreStates's present claim
meets the third prong of the Centra test. 16
V. Conclusion
In closing, we reiterate that CoreStates's present claims
are precluded because of the coincidence of several
unusual circumstances. First, in the bankruptcy
proceeding, CoreStates and Huls contested at length the
fairness of the Reorganization Plan to the extent it provided
for the payment of $600,000 to Huls. CoreStates's present
claim concerns who is ultimately entitled to receive this
same money. In the absence of extensive litigation of this
claim in the confirmation proceeding, CoreStates would not
now be prevented from bringing its suit. Second, UCT paid
Huls the $600,000, and CoreStates was aware of and
objected to this payment, before the bankruptcy
confirmation proceeding ended in a final confirmation of the
Plan over CoreStates's objection. Thus, CoreStates could
have brought its claim as an ancillary to the confirmation
proceeding. In what we suspect is the more usual case,
where payments are not made pursuant to reorganization
plans until they are confirmed finally, an objecting creditor
could not be expected to bring its claim alongside the
confirmation proceeding. Primarily because of these two
particular circumstances, we conclude that CoreStates's
claim is barred by the doctrine of claim preclusion. The
_________________________________________________________________
16. The dissent contends that the facts CoreStates would need to prove
in its present claim differ from those it needed to establish in its
objection to UCT's Reorganization Plan. As is clear from the text, we
disagree. Furthermore, contra the dissent, we think the precise issue in
both cases was whether Huls was entitled to receive and retain the
$600,000 payment. Huls had the absolute right to receive the payment
only in the most technical sense.
31
order of the District Court granting judgment on the
pleadings in favor of Huls will be affirmed.
32
STAPLETON, Circuit Judge, Dissenting:
I agree with the Court that principles of claim preclusion
can properly be applied with respect to claims falling within
the non-core jurisdiction, as well as the core jurisdiction, of
a Bankruptcy Court. I assume, without deciding, that the
Bankruptcy Court would have had non-core jurisdiction
over CoreStates' claim against Huls. I further agree that
principles of claim preclusion can properly be applied with
respect to crossclaims asserted between creditors in a
bankruptcy proceeding.
I am constrained to dissent, however, because the Court
reaches its conclusion that CoreStates' claim against Huls
is barred only by ignoring well-established principles of
claim preclusion. While purporting to apply those
principles, the Court proceeds to fashion an unprecedented
"entire controversy doctrine" for bankruptcy litigation.
Because the parameters of this new doctrine are so broad
and ill defined, I fear that much mischief will be done by
today's decision.
The Court holds that any claim that could have been
asserted in a bankruptcy proceeding by anyone objecting to
confirmation of a plan of reorganization against anyone who
would benefit from confirmation is barred from being
asserted in a subsequent proceeding if the facts underlying
the objections raised in the confirmation proceeding and
the subsequent claim are "essentially similar." This holding
ignores the fact that under traditional principles of claim
preclusion the scope of preclusion arising from a judgment
is determined by the claim underlying the judgment and is
limited to the rights asserted between the claimant and the
party against whom the claim is asserted.
The Court is, of course, correct that modern principles of
claim preclusion view the concept of a "claim" broadly.
When "a valid and final judgment rendered in an action
extinguishes the plaintiffs' claim pursuant to the rules of
merger or bar . . ., the claim extinguished includes all
rights of the plaintiff to remedies against the defendant with
respect to all or any part of the transaction, or series of
connected transactions, out of which the action arose."
Restatement, Judgments 2d, S 24(1).
33
Claim preclusion cannot be applied, however, without
reference to the party who asserted the claim underlying
the prior judgment. Thus, a judgment for or against a
plaintiff in a prior proceeding rarely affects the claims
assertable by other parties to that proceeding even though
they may arise out of the same transaction. In the absence
of a compulsory counterclaim rule or statute, for example,
a defendant who fails to assert a counterclaim arising out
of the same transaction is normally not barred from
pressing his claim in a subsequent proceeding. Id. S 22.1
The only narrow exception to this rule is where the plaintiff
in a prior proceeding has secured a favorable judgment on
her claim and successful prosecution of a second action
would nullify the initial judgment or would impair rights
established in the initial action against the defendant. Id.
S 22(2).2 Since a judgment in the plaintiff 's favor on a claim
_________________________________________________________________
1. Section 22 of Restatement, Judgments 2d, provides:
(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.
2. As noted in the commentary to S 22(2):
For such an occasion to arise, it is not sufficient that the
counterclaim grow out of the same transaction or occurrence as the
plaintiff's claim, nor is it sufficient that the facts constituting
a
defense also form the basis of the counterclaim. The counterclaim
must be such that its successful prosecution in a subsequent action
would nullify the judgment, for example, by allowing the defendant
to enjoin enforcement of the judgment, or to recover on a
restitution
theory the amount paid pursuant to the judgment (see Illustration
9), or by depriving the plaintiff in the first action of property
rights
vested in him under the first judgment (see Illustration 10). . . .
34
establishes rights only as between the plaintiff and the
opponent of the claim, the rationale for this exception has
no application when the defendant in the subsequent suit
is not the original plaintiff. Thus, not surprisingly, there
appears to be no case in which a judgment on a plaintiff 's
claim has been held to preclude by merger or bar a claim
that would have been a crossclaim if asserted in the
original action.
While a claim preclusion analysis must thus focus on the
claimant and his or her claim, the universe of "potential
claimants" is, of course, not limited to the plaintiff in the
original action. As the majority notes, if a defendant in the
original action asserts a counterclaim or a crossclaim and
a final judgment is rendered with respect to that claim, he
becomes a claimant for purposes of claim preclusion
analysis. Id. S 23. Thus, had CoreStates asserted a claim
against Huls in the bankruptcy proceeding, principles of
claim preclusion could properly be applied with reference to
that claim. See Charter Oak Fire Ins. Co. v. Sumitomo
Marine & Fire Ins. Co., 750 F.2d 267, 270 (3d Cir. 1984).
CoreStates asserted no such claim, however.
While I agree that application of principles of claim
preclusion in the context of a bankruptcy proceeding
requires flexibility and must take into account the nature of
the bankruptcy process, those principles cannot fairly be
stretched far enough to effect a preclusion of CoreStates'
claim here. In order for claim preclusion to preclude, there
must be a final judgment in favor of a claimant into which
the precluded claim has merged or a final judgment for the
defendant that bars another action by the claimant on the
same claim. See Restatement, Judgments 2d, SS 18, 19. A
confirmation order may be viewed as a judgment in favor of
creditors on their claims against the debtor. To the extent
claims have been disallowed, it may also be viewed as a
judgment in the debtor's favor on the disallowed claims.
Moreover, there is an in rem aspect to the judgment entered
at the end of a confirmation proceeding. See 28 U.S.C.
S 1334(a). Under traditional principles of claim preclusion,
however, none of these judgments would extinguish a claim
35
between creditors who have not raised claims against each
other in the bankruptcy proceeding.3
In the bankruptcy proceeding, CoreStates asserted no
right to relief from Huls. Moreover, it claimed no right to
receive from the debtor's estate the $600,000 ultimately
received by Huls. It had no such right to assert.
Accordingly, the only way one can conclude that CoreStates
made a claim against Huls in the bankruptcy proceeding,
as the Court does, is to hold that an objection to
confirmation of a plan of reorganization constitutes a claim
against anyone who has an economic interest in having the
plan confirmed. Since virtually all non-objecting creditors
will have such an interest, this holding will require that any
party considering an objection canvass the entire universe
of creditors to determine whether it has a claim against one
of them that might conceivably be regarded as arising from
the same or similar underlying events.
The burden thus imposed will be greatly exacerbated by
the Court's broad vision of what constitutes the same or
similar underlying events. CoreStates' objection to
confirmation of the plan was not based, directly or
indirectly, on its Subordination Agreement with Huls.
Rather, to the extent it was related to Huls at all,
CoreStates' objection was based on the claim that the plan
"discriminate[d] unfairly" among a class of secured
creditors in violation of section 1129(b). The claim
CoreStates here seeks to assert is a breach of contract
claim based on allegations that it entered into a
Subordination Agreement with Huls which Huls breached
when it declined to pay $600,000 to CoreStates after it
received that amount from UCT. The Court fails to
satisfactorily explain how CoreStates' two claims can
reasonably be deemed the same cause of action for claim
preclusion purposes.
_________________________________________________________________
3. An in rem judgment, of course, is"conclusive as to interests [in the
res] but does not bind anyone with respect to personal liability."
Restatement, Judgments 2d, S 30. Here, CoreStates asserts that Huls is
personally liable to it in the amount of $600,000. It has not, and could
not, contend that it had a right to receive a $600,000 distribution from
the assets of the debtor's estate based upon its agreement with Huls.
36
The section 1129(b) claim that CoreStates included in its
objection to confirmation of the plan was based on the
respective circumstances of the members of the identified
class of secured creditors, their treatment under the
proposed plan, and the feasibility of alternative plans of
distribution. In contrast, the claim that CoreStates here
seeks to press is based on the terms of a Subordination
Agreement entered long before the bankruptcy and the fact
that Huls received $600,000 from UCT because of UCT debt
obligations to it. I perceive no "essential similarity of the
[legally relevant] underlying events giving rise to" these
claims, and, indeed, I can think of no evidence that would
be material to both claims. It would not be necessary for
CoreStates, in proving its breach of contract claim, to even
refer to the bankruptcy proceeding or the plan of
reorganization. It would suffice to show only that Huls
received monies from UCT on account of UCT's debt
obligation to Huls. The Court seeks to gloss over the
distinctiveness of these claims by asserting that"the
objection and CoreStates' present claim addressed the same
factual issue: who should receive and retain the $600,000
VCT was prepared to pay." Slip Op. at 30. The fact of the
matter, however, is that the claim asserted in the
bankruptcy proceeding had absolutely nothing to do with
whether Huls was entitled to retain the $600,000 payment
it would receive under the plan and the claim asserted here
has absolutely nothing to do with whether Huls was
entitled to receive $600,000 in the bankruptcy.
Because an objection to a plan will now be regarded as
making a claim against all who would benefit from
confirmation and because the concept of a single cause of
action will now be an elastic one, it will be extraordinarily
difficult for a creditor in the Third Circuit to determine
what crossclaims it must or need not assert. Since the
penalty for a mistaken choice is forfeiture, it is not difficult
to predict the ultimate result of the Court's holding:
multitudinous protective filings of claims against non-
debtors and the needless complication of bankruptcy
confirmation proceedings.
I would reverse the judgment of the District Court.
37
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
38