UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 00-50842
In The Matter of:
LEWIS MILLER SMYTH, III,
Debtor;
W. PATRICK DODSON; BRUCE REPPERT; United States of America,
ex rel. OFFICIAL UNSECURED CREDITORS COMMITTEE, for the Benefit
of the Bankruptcy Estate,
Appellants,
VERSUS
KEN HUFF, Trustee; KEN HUFF, Individually,
Appellees.
Appeal from the United States District Court
for the Western District of Texas
(SA-00-CV-507)
August 7, 2001
Before SMITH, DUHÉ and WIENER, Circuit Judges.
PER CURIAM:1
Appellants in this case are creditors of the bankruptcy estate
of Lewis Miller Smyth, III. They brought this adversary proceeding
against Ken Huff (“Huff”) in his capacities as both trustee and
accountant to the estate. The bankruptcy court granted summary
1
Pursuant to 5TH CIR. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
judgment to Huff because it determined that all of Appellants’
claims were barred under the doctrine of res judicata, since they
had been fully adjudicated in prior proceedings. The district
court affirmed. Having reviewed the applicable law and the record
in this case, we believe that both the bankruptcy and district
courts were correct, and we now AFFIRM.
BACKGROUND
We summarize only the facts relevant to the issues in dispute
in this appeal. Huff was appointed to serve as trustee in the
Smyth bankruptcy, and with court approval, he appointed himself
accountant for the trustee. In February 1997, Huff filed an
application for a final decree closing the bankruptcy, as well as
a motion for payment of trustee commission under 11 U.S.C. § 326.2
W. Patrick Dodson (“Dodson”), one of the estate’s creditors and an
Appellant in the instant appeal, filed objections to both of Huff’s
motions the following March. Dodson asserted that Huff caused the
estate to pay taxes, penalties and interest which were not due,
2
Section 326 states in pertinent part: “(a) In a case under
chapter 7 or 11, the court may allow reasonable compensation under
section 330 of this title of the trustee for the trustee’s services
. . . .”
Section 330 governs the compensation of trustees and other
professionals, and states in pertinent part: “(a)(1) After notice
to the parties in interest and the United States Trustee and a
hearing, and subject to sections 326, 328, and 329, the court may
award to a trustee [or] a professional person . . . – (A)
reasonable compensation for actual, necessary services rendered .
. . .”
2
neglected to deduct thousands of dollars in administrative
expenses, and that therefore the estate had not been fully
administered and should not be closed. In an evidentiary hearing
held in June 1997, Dodson argued that Huff was inept and negligent
in the preparation of the estate’s tax returns, and that Huff had
not “done the job any prudent CPA would have done in representing
the estate.” The bankruptcy court then ordered that the estate be
closed, but it denied payment of compensation to Huff. The
district court and the Fifth Circuit affirmed. See Dodson v. Huff
(In re Smyth), 207 F.3d 758 (5th Cir. 2000).3
On April 23, 1999, Dodson and other creditors of the estate
filed the present adversary proceeding against Huff. They alleged
causes of action against Huff, as trustee, for lack of good faith
and fair dealing, gross negligence, negligence, and breach of
warranty and contract. They also alleged causes of action against
Huff, as the trustee’s accountant, for negligence and professional
3
Apparently, the basis of Dodson’s appeal of the bankruptcy
court’s actions was that Huff should be held to personally
reimburse the estate for damages resulting from his accounting
errors. In affirming the district court’s rejection of Dodson’s
claims, we stated:
The district court held that, with the exception of the
fees incurred for late filing of tax returns [as to which
Huff conceded error,] there was insufficient evidence in
the record to support a finding that the Trustee was even
negligent, much less grossly negligent. This finding was
not clearly erroneous.
Dodson, 207 F.3d at 762. We find this description of the prior
judgment very significant in our determination that Appellants’
instant suit is barred by res judicata.
3
malpractice. The bankruptcy court granted Huff’s motion for
summary judgment on the basis that all of the claims were barred
under the res judicata doctrine by its earlier orders closing the
estate and denying compensation to Huff. Furthermore, the court
determined that the negligence, gross negligence, and malpractice
claims were barred by the Texas two-year statute of limitations.
The district court affirmed. Dodson and the other creditors now
appeal that ruling.
DISCUSSION
We review the grant of summary judgment de novo. Osherow v.
Ernst & Young, L.L.P. (In re Intelogic Trace, Inc.), 200 F.3d 382,
386 (5th Cir. 2000). Summary judgment is proper where, considering
the evidence in the light most favorable to the nonmovant, there is
no genuine issue of material fact and the movant is entitled to a
judgment as a matter of law. Id.; Fed. R. Civ. P. 56(c).
This appeal is governed by the four-pronged res judicata test
that we stated in our opinion in Intelogic. Under that test, a
claim is barred by a prior judgment when: (1) the parties in the
prior action and the instant proceeding are identical; (2) the
prior judgment was rendered by a court of competent jurisdiction;
(3) the prior judgment was a final judgment on the merits; and (4)
the same cause of action is involved in both cases. Intelogic, 200
F.3d at 386. In considering the fourth prong of the test, we
inquire “whether the two actions . . . are based on ‘the same
4
nucleus of operative facts.’” Id. (citation omitted).4
Appellants dispute the district court’s determination that the
first and fourth factors of the res judicata test have been met in
this case. First, they argue that the parties in the two
proceedings were not identical, because in the prior proceeding:
(1) Dodson was the only creditor who filed objections to Huff’s
motions and (2) Huff did not appear in his capacity as the
trustee’s accountant. We reject both contentions. Although Dodson
was the only creditor who chose to file objections, all the
creditors were entitled to do so. That they did not does not mean
they were not parties to the bankruptcy proceeding. Moreover,
although Huff filed a motion for payment of commissions due to him
as trustee, and not for accountant’s fees, Dodson’s objections were
based on the services that Huff had rendered to the estate as its
accountant. Specifically, Dodson objected that Huff’s improper
preparation of the estate’s tax returns had caused the estate to
unnecessarily pay taxes, penalties and interest that were not due;
that Huff had neglected to take several thousand dollars worth of
deductions that would have benefitted the estate; and that Huff
filed certain returns late. Huff appeared at the June 1997 hearing
to answer these contentions. Therefore, we find that he was
present in the prior proceeding in his capacity as the trustee’s
4
This standard is based on the “transactional test” of the
Restatement (Second) of Judgments § 24 (1982). See Intelogic, 200
F.3d at 386 & n.3.
5
accountant.5
We find equally meritless Appellants’ contention that the two
proceedings under consideration in this case were not based on the
same nucleus of operative facts. In Intelogic, the debtor made an
affirmative decision not to file objections to Ernst & Young’s
application for accounting fees under 11 U.S.C. § 330, even though
the debtor suspected that Ernst & Young’s negligent accounting had
caused it significant and irreversible cash flow problems.
Intelogic, 200 F.3d at 384-86. When the trustee in bankruptcy
later filed suit against Ernst & Young for malpractice, we held
that the malpractice action and the earlier fee proceeding were
based on the same nucleus of operative facts. We explained that an
award of professional fees under § 330 “represents a determination
of ‘the nature, the extent, and the value of such services.’” Id.
5
Moreover, given Huff’s presence in the proceeding as trustee,
our precedent does not require that he also had to be present
explicitly in his capacity as accountant. See Russell v.
SunAmerica Securities, Inc., 962 F.2d 1169, 1173 (5th Cir. 1992)
(citations omitted):
To satisfy the identity element, strict identity of the
parties is not necessary. A non-party defendant can
assert res judicata so long as it is in “privity” with
the named defendant. “Privity” is recognized as a broad
concept, which requires us to look to the surrounding
circumstances to determine whether claim preclusion is
justified.
We find, given the facts and circumstances surrounding this case,
claim preclusion is more than amply justified.
6
at 387 (citations omitted).6 “By granting Ernst & Young’s fee
application, the bankruptcy court implied a finding of quality and
value in Ernst & Young’s services. Similarly, the Trustee’s claims
in the present suit arise from Ernst & Young’s alleged omissions in
rendering the very same services considered by the bankruptcy court
in the fee application hearing.” Id. Therefore, the malpractice
claims were barred.
In the instant case, Appellants claim that the prior
proceeding had no bearing on the quality of Huff’s accounting
services, because Huff never applied for compensation for these
services. According to the Appellants, Dodson’s objections to the
improper and incomplete tax returns filed by Huff, the overpayment
of taxes, and his objection that Huff should have submitted amended
returns, did not encompass allegations of negligence or
malpractice. Those objections were only lodged in order to
persuade the bankruptcy court not to close the estate. They also
contend that the bankruptcy court did not evaluate “the nature, the
extent, and the value” of Huff’s services as trustee, because his
fee was based on a percentage of the disbursements he made, and
because the court actually denied him compensation.
6
Section 330 explicitly directs the bankruptcy court to
consider certain factors in determining the amount of reasonable
compensation to be awarded. These factors include the time spent
on such services, the rates charged, whether the services were
necessary or beneficial, whether they were performed in a
reasonable amount of time, and whether the compensation is
reasonable based on the customary fee of comparably skilled
practitioners. 11 U.S.C. § 330(a)(3).
7
Although Huff’s fee as trustee may have been based on a
percentage of distributions made, Appellants have not shown why the
court was not required to evaluate the reasonableness of that fee
under § 330. Moreover, although Huff did not seek compensation for
his accounting services, the bankruptcy court expressly considered
the quality of those services because they formed the basis of
Dodson’s objections to the closing of the bankruptcy and the
payment of Huff’s trustee commission. As Huff points out, and as
we noted above, Dodson’s written objections urged that Huff
“unnecessarily paid thousands of dollars in taxes to the Internal
Revenue Service for taxes which would have never been due if the
Trustee’s fiduciary income tax returns had been properly prepared.”
Moreover, Dodson tendered an expert witness at the hearing, a
certified public accountant, who testified to the penalties and
interest that were charged against the estate as a result of Huff’s
improper filings and other negligent tax practices. Indeed, the
court denied Huff’s motion for trustee commission under § 330
because, based on its evaluation of Huff’s services, it determined
that, while “Mr. Huff[] [had not] done anything to steal from the
estate or [had not] committed any malpractice,” “Mr. Huff could
have handled [the estate’s accounting] more meticulously.”
Appellants’ complaint in the present adversary proceeding
alleged negligence and malpractice due to the very same accounting
practices Dodson objected to in the prior proceeding. While it may
be true that in the instant malpractice action, Appellants are
8
raising new claims, those claims are based on the same operative
facts that were at issue in the bankruptcy proceeding. This
clearly meets the fourth prong of our res judicata test as
explained in Intelogic.7
In Intelogic, we stated that even if the four factors of the
res judicata test are met, res judicata does not bar an action
unless the plaintiff “could and should have brought [the]
malpractice claims in the former proceedings.” Id. at 388. In
applying this standard, we must consider whether and to what extent
Appellants had an “actual or imputed awareness prior to the fee
hearing of a real potential for claims” against Huff, such as those
asserted in the later malpractice suit. Id.8 Second, we must ask
“whether the bankruptcy court possessed procedural mechanisms that
would have allowed” Appellants to assert those claims. Id.
In Intelogic, we concluded that the debtor had a “general
7
We note that, even if we concluded that Appellants’ claims
against Huff as accountant were not based on the same nucleus of
operative facts at issue in the prior proceeding, most (if not all)
of their claims against him as trustee would still be barred by res
judicata. That is because, as we explained in Intelogic, the
bankruptcy court’s consideration of a trustee’s motion for
commission under §§ 326 and 330 necessarily involves an evaluation
of the nature, extent and value of a trustee’s services. 200 F.3d
at 387. By denying Huff’s motion, the court implied a finding
about the quality of his services as trustee, the subject that
forms the basis of Appellants’ present suit.
8
We also stated that in “the context of a bankruptcy court
contested matter order, . . . some level of actual or constructive
awareness on the part of the party [now asserting a malpractice
claim] properly carries a greater significance than it might in
other contexts.” Intelogic, 200 F.3d at 391 n.6.
9
awareness” of the potential for claims against Ernst & Young
because it knew at the time of the fee hearing that some of the
accountants’ figures were inaccurate, yet it made a deliberate
decision not to raise any objections in the fee proceeding in
return for Ernst & Young’s agreement to reduce its fee. We
rejected the debtor’s contention that, while it had knowledge of
certain facts, it had not yet drawn conclusions about the
significance of those facts, so it could not have had a sufficient
awareness at the time of the fee proceeding. Id. at 388-89.
Appellants in the instant case assert that at the time of the
prior proceeding, they “did not yet comprehend” that Huff may have
been negligent or guilty of malpractice. Appellants’ Brief at 22.
Although Appellants devote a considerable portion of their briefs
to explaining what they did not know, we must focus on what they
did know at the time of the bankruptcy proceeding. Appellants
complain that certain tax returns were not attached to Huff’s
motions for a final decree and payment, yet Dodson’s objections
specifically complained of IRS penalties and interest and
overpayment of taxes by Huff. Obviously, Dodson must have had
sufficient information to support these objections and his
contention at the evidentiary hearing that the estate had suffered
from Huff’s “negligence and ineptitude.” Moreover, Appellants’
expert testified that Huff did not act as a prudent CPA. Although
it is true that Appellants did not assert any malpractice claims in
the prior proceeding, the key consideration is that they had a
10
“general awareness” of facts that could have supported such claims.
In other words, even if Appellants had not drawn any legal
conclusions that Huff’s conduct amounted to negligence or
malpractice (a possibility which is belied by Dodson’s statements
at the hearing), Intelogic emphasizes that we must focus on
Appellants’ knowledge of the relevant facts. See also Howe v.
Vaughan (In re Howe), 913 F.2d 1138, 1147 (5th Cir. 1990).
Appellants next contend that they did not have a reasonable
opportunity to litigate their malpractice claims in the prior
proceeding. This is because the bankruptcy court did not convert
the proceeding into an adversary proceeding under Rule 3007 of the
Federal Rules of Bankruptcy Procedure. Moreover, they contend that
the court did not permit them to conduct an adequate investigation
of the full extent of their possible causes of action before the
evidentiary hearing.
Appellants’ arguments lack merit. In Intelogic, we pointed
out that the trustee could have objected to the fee application by
Ernst & Young, and could have included a claim for affirmative
relief for malpractice. Id. at 389-90. This action would have
converted the proceeding into an adversary proceeding under Rule
3007. Id. at 390 & n. 4. The bankruptcy court in the instant case
did not invoke Rule 3007 because Dodson and the other creditors did
not assert such claims, even though they had a general awareness of
facts that would have supported those claims. With respect to
Appellants’ discovery argument, it appears the bankruptcy court
11
actually postponed the evidentiary hearing on two occasions to
allow additional discovery. See Appellants’ Brief at 5-7;
Appellees’ Brief at 11 n.4. Moreover, none of the Appellants
requested additional time at the June hearing to conduct further
discovery or to assert affirmative claims for relief.9
In short, there is no genuine issue of material fact and
Appellants’ claims are barred as a matter of law. The bankruptcy
court did not err in granting summary judgment to Huff. Because we
have disposed of Appellants’ claims on the basis of res judicata,
we find it unnecessary to review the bankruptcy and district
courts’ determinations that Appellants’ negligence, gross
negligence, and malpractice claims were barred by the Texas two-
year statute of limitations.
AFFIRMED.
9
At times in their briefs, Appellants seem to admit that they
had knowledge of certain problems by April 23, 1997, well before
the evidentiary hearing. At other points they claim “the problems
. . . first appeared only shortly before the hearing,” Appellants’
Brief at 16, which still gave them an opportunity to ask the court
for leave to assert affirmative claims for relief and commence
further discovery.
We also note that it does not appear that Appellants ever
objected in the bankruptcy court that the first prong of our res
judicata test had not been satisfied. Nor did Appellants object to
the lack of available procedures in the bankruptcy court for the
adjudication of their malpractice claims. Instead, their written
response to Huff’s motion for summary judgment focused on the
fourth factor of the test, as well as their lack of awareness of
the potential for legal claims. Therefore, Appellants may well
have waived their other arguments.
12