[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________ FILED
U.S. COURT OF APPEALS
No. 05-12327 ELEVENTH CIRCUIT
JULY 18, 2006
________________________
THOMAS K. KAHN
CLERK
D.C. Docket Nos. 03-3269-CV-CAP-1
01-83470-BKC-CR
In Re:
ATLANTA RETAIL, INC.,
f.k.a. Wolf Camera, Inc.,
Debtor.
-------------------------------------------------------------------------------------
EASTMAN KODAK COMPANY,
Plaintiff-Appellant,
versus
ATLANTA RETAIL, INC., f.k.a. Wolf
Camera, Inc., etc.
WACHOVIA BANK, NATIONAL ASSOCIATION,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
_________________________
(July 18, 2006)
Before BIRCH and CARNES, Circuit Judges, and TRAGER*, District Judge.
_____________________
*Honorable David G. Trager, United States District Judge for the Eastern District of New York
sitting by designation.
TRAGER, District Judge:
This appeal raises the question: under what circumstances will a creditor be
barred from later bringing an action against a co-creditor based upon state law
claims if, during the pendency of a bankruptcy, it failed to raise such claims.
Plaintiff-appellant Eastman Kodak Company ("Kodak") appeals the decision
of the United States District Court for the Northern District of Georgia, which
affirmed an August 22, 2003 order of the Bankruptcy Court. That order enjoined
Kodak from continuing to seek relief against Wachovia Bank f/k/a First Union
National Bank ("Wachovia") in the United States District Court for the Western
District of New York for violations of state law ("New York action"). The
bankruptcy court held, and the district court affirmed, that Kodak was precluded
from bringing the New York action by the doctrine of res judicata as a result of
orders issued by the bankruptcy court in a bankruptcy filed by Atlanta Retail, Inc.,
f/k/a Wolf Camera, Inc., et al. ("Wolf" and "Wolf bankruptcy").
We hold that res judicata does not bar the New York action because Kodak
could not have received a full remedy in the contested Wolf bankruptcy
proceedings and because the same nucleus of operative fact was not presented in
the two actions. Moreover, res judicata does not require a creditor to raise an
independent state law claim against a co-creditor in an adversary bankruptcy
2
proceeding unless the resolution of that claim explicitly becomes an essential part
of the bankruptcy plan. Here, Kodak's claim against Wachovia in no way impacted
on the confirmation of the Wolf bankruptcy plan. Accordingly, the judgment of
the district court is reversed and the injunction is vacated.
Background
(1)
Kodak had a long-standing business relationship with Wolf, supplying film
and other photography-related goods. In the 1990’s Kodak provided financing as
secured lender to enable Wolf to expand, thereby increasing Kodak’s sales.
In September 1998, Kodak and Wachovia, which acted as another secured
lender to Wolf, entered into an agreement ("the Subordination Agreement") under
which Kodak's loans were subordinated to Wolf’s other secured creditors including
Wachovia ("pre-petition lenders"). At the same time, Wachovia and Kodak made a
separate agreement ("the Intercreditor Agreement") to use their best efforts to
promptly notify each other of occurrences "which may significantly affect the other
Secured Creditor with regard to the ability of [Wolf] to meet its obligations . . .."
In late 1999 Kodak began discussions with Wolf about an additional $30
million loan for a further expansion of the business. Like Kodak's other loans, it
3
was contemplated that this new loan was also to be subordinated to the loans of the
other pre-petition lenders. In its pleadings in the New York action, Kodak alleges
that Wachovia was aware of these negotiations and their stated purpose and,
indeed, that it encouraged the loan. However, Wachovia did so without disclosing
its plan that Wolf would use the money to meet its financial obligations to
Wachovia.
Kodak also claims that it was not aware at the time that Wolf was nearing a
breach of its financial obligations with Wachovia and the other pre-petition
lenders. Kodak alleges that on March 2, 2000, Wachovia and Wolf’s other pre-
petition lenders entered into an agreement with Wolf under which Wolf’s covenant
defaults would be forestalled until the Kodak loan was completed, unless Wolf
failed to receive the loan by April 2000, at which point the defaults would accrue.
Kodak further alleges that it was never informed of this agreement as well – as
required by the Intercreditor Agreement – and only became aware of the alleged
breach of the Intercreditor Agreement during the pendency of the bankruptcy.
Wachovia did not share this information, Kodak alleges, because Wachovia knew
that Kodak would never have loaned the money to Wolf for the purpose of paying
Wachovia's loan, rather than for expansion purposes.
In March 2000, Kodak did make the $30,000,000 loan to Wolf with the
4
express condition that the loan fund the development of Wolf's business. Included
in the loan agreement was the following clause:
Wolf covenants to Kodak that it will use the proceeds of the New
Term Loan to fund new photo retail store development, new photo
retail store acquisitions and upgrading the capability of existing and
acquired photo retail stores.
(Second Am. and Restated Loan and Purchase Agreement, dated Mar. 14, 2000,
between Kodak and Wolf, ¶ 3.3).
On March 28, 2000, the money was transferred from Kodak to Wolf. On the
same day, in accordance with the alleged secret agreement between Wolf and the
pre-petition lenders, the money was transferred again, this time to Wachovia and
the other pre-petition lenders in order to pay some of Wolf's debts. It appears to be
undisputed that none of the money was used to finance an expansion of the
business as contemplated in the loan agreement.
On June 21, 2001, Wolf voluntarily filed for Chapter 11 bankruptcy. On the
same date, Wolf also filed an emergency debtor in possession motion ("DIP
Motion"), requesting permission to receive financing from Wachovia and the other
pre-petition lenders in the amount of $10,000,000, permission to continue to use
the cash collateral from the loans from the pre-petition lenders, and for the court to
provide protection to the pre-petition lenders. Kodak did not file an objection to
this motion, but the Official Committee of Unsecured Creditors ("Unsecured
5
Creditors") did object. Thereafter, Wachovia filed proofs of claim and included
both the Subordination Agreement and the Intercreditor Agreement as evidence
that Kodak’s claims were subordinate to those of the pre-petition lenders.
The bankruptcy court granted the DIP motion ("Final Order"). Wolf
borrowed approximately $8,000,000 from Wachovia and the other pre-petition
lenders. The court granted this loan first priority, and also granted a superior
security interest to the pre-petition lenders compared to the remainder of Wolf’s
creditors, which included Kodak. Wolf owed these pre-petition secured creditors
approximately $77,600,000 in addition to the amount it owed Kodak.
On August 23, 2001, Wolf filed a motion seeking approval for Ritz Camera
Centers, Inc. ("Ritz") to purchase nearly all of Wolf’s assets ("Sale Motion").
Approximately a month later on September 13, 2001, Wolf and Wachovia filed an
Amended Joint Motion to Approve Stipulation with Respect to Distribution of
Proceeds from Sale of Assets of Debtors ("Stipulation Motion"). The Unsecured
Creditors objected to both the Sale and Stipulation Motions. Kodak only opposed
the Sale Motion.
Kodak did not object to the fact that its claims were subordinate to the pre-
petition lenders. Instead Kodak argued that Wolf could not sell its assets to Ritz
"free and clear" of its liens. See 11 U.S.C. § 363(f)(3). Kodak argued that because
6
the proposed sale price of $84,700,000 could not cover the combined claims of
Wachovia and Kodak that the sale could not be considered free and clear if the
statute was read to require the repayment of the face value of all liens rather than
their market value. The bankruptcy court rejected this argument, holding that
Kodak waived its right to object to the sale in the Intercreditor Agreement. The
bankruptcy court also rejected Kodak’s legal argument holding that the market
determined the value of the liens. As Kodak’s claims were subordinate and there
were insufficient funds to pay the priority claims, the bankruptcy court found that
Kodak’s claims were in fact valueless.
In addition, the bankruptcy court also found against the Unsecured Creditors
and granted the Stipulation Motion ("Stipulation Order"). It also gave permission
for the sale ("Sale Order"). Under the Sale Order, the proceeds of the sale were
distributed first to the post-petition lenders, then $20,000,000 for pre-petition
debts, and then $25,000,000 for administrative expenses, with any balance to the
remainder of the pre-petition debts.
After the sale, which was approved by the bankruptcy court on September
21, 2001, the Unsecured Creditors filed an adversary action challenging
Wachovia’s and the other pre-petition lenders’ claims, arguing that certain of their
liens in Wolf's assets were not perfected. Kodak did not take part in this action.
7
Rather, Kodak filed one of its own in the United States Bankruptcy Court for the
Western District of New York. Kodak filed this proceeding against Wachovia
alone, arguing that Wachovia and the other pre-petition lenders' claims should be
equitably subordinated to Kodak’s claims. It also filed claims for breach of
contract, fraud and tortious interference with a contract. All of these claims were
based on Kodak’s claim that it was fraudulently induced by the pre-petition lenders
to provide the $30,000,000 loan to Wolf even though they knew, and so contracted
with Wolf, that the loan would be used to pay their loans rather than for the
contemplated expansion. Wachovia and the pre-petition lenders filed a motion to
dismiss.
In the meantime, the Unsecured Lenders, Wolf and the pre-petition lenders
had agreed on the terms of a settlement of the Unsecured Lenders' adversary
proceeding. A motion was filed under Rule 9019 of the Federal Rules of
Bankruptcy Procedure for approval of this settlement. Kodak made a limited
objection to this motion, but did not object to the settlement itself. Kodak only
objected "to the extent the language of the Stipulation could be construed as
barring any and all claims against the Pre-Petition Lenders, including claims held
by third parties independent of the Debtors or their estates[.]"
8
At the July 16, 2002 hearing on the Rule 9019 motion the debtor argued that
all questions of subordination, including Kodak’s adversary proceeding, had to be
resolved in the bankruptcy court in order for the settlement to stand. Kodak did
not use this forum to raise the allegations it made in the New York action. It did
argue that the fraud claims in the New York action were based on newly
discovered evidence that had not been available at the time of the earlier orders.
The bankruptcy court granted the Rule 9019 motion, approving the settlement
("Settlement Order").
After this hearing, on August 2, 2002, rather than responding to Wachovia’s
motion to dismiss the case in the Bankruptcy Court for the Western District of New
York, Kodak voluntarily dismissed the action. On the same day, Kodak filed a
new case ("New York action") in the New York Supreme Court, alleging the same
state law claims as in its prior suit, but excluding the equitable subordination claim.
On Wachovia’s motion, the case was removed to the U.S. District Court for the
Western District of New York on diversity grounds.
Wolf filed its Disclosure Statement and Plan of Liquidation on August 30,
2002. The bankruptcy court endorsed the plan on January 7, 2003. The plan did
confirm that Kodak's loans were subordinate to the pre-petition lenders. However,
the plan did not prohibit any suits against third parties – only against the debtor.
9
Although the record provided does not show the specific amounts that each
party received, it is undisputed that Kodak did not receive any portion of its $30
million loan from the distribution. While Wachovia and the other pre-petition
creditors did receive some amount (at oral argument an estimate of $23 million
was suggested), there is no question that Wachovia's recovery was less than the
total amount owed to Kodak. Therefore, even if Kodak had taken Wachovia's
place through equitable subordination, it would not have received the full amount
sought in the New York action.
(2)
On October 11, 2002, Wolf and Wachovia filed suit against Kodak in the
Georgia bankruptcy court seeking an injunction against Kodak's New York action
on the basis of res judicata and – a now abandoned argument – of collateral
estoppel. The bankruptcy court entered an order barring the suit on the basis of res
judicata on August 22, 2003. The bankruptcy court rejected Kodak's argument that
the New York action was only an intercreditor dispute and instead focused on the
contractual relationships between Kodak, Wachovia and Wolf. It framed the New
York action as an attack on its previous orders and an attempt to make the
Subordination Agreement unenforceable. The bankruptcy court stated that the
10
Subordination Agreement was found enforceable "in the process of determining
the validity, extent and priority of the claims against the Debtors." In re Atlanta
Retail, Inc., 297 B.R. 299, 305 (Bankr. N.D. Ga. 2003). The bankruptcy court
identified the orders approving the sale of Wolf to Ritz, the order approving the
Rule 9019 motion, and the order approving the final plan of liquidation as the prior
orders, as having a preclusive effect. Id. The order was affirmed by the U.S.
District Court for the Northern District of Georgia. Eastman Kodak Co. v. Atlanta
Retail, Inc. et al, 03-cv-3269 (N.D. Ga. Mar. 25, 2005).
In appealing this order, Kodak makes five arguments, only three of which
need be addressed.1 First, Kodak argues that this is not the same "cause of action"
because the bankruptcy court did not consider the evidence relevant to its state law
claim; in particular, Wachovia's withholding of information about the revision of
its debt agreement with Kodak. Kodak relies on this court's decision in Kaiser
Aerospace & Elec. Corp. v. Teledyne Indus., Inc. (In re Piper Aircraft Corp.), 244
1
Kodak also argues that the bankruptcy court should not have granted the injunction
because res judicata should have been raised as an affirmative defense before the state court.
See Alabama v. United States Army Corps of Engineers, 424 F.3d 1117 (11th Cir. 2005),
petition for cert. filed, 74 U.S.L.W. 3517 (U.S. Mar. 6, 2006) (limiting the court's powers under
the All Writs Act). Since we now decide that the bankruptcy and district courts' decision to
enjoin Kodak's state law claim should be reversed, there is no need to address Kodak's
alternative argument that the defense of res judicata would have been more properly raised
before the state court. Kodak further argues that the "same party" requirement of res judicata
was not met because Kodak never filed an action directly against Wachovia. See discussion
infra note 3.
11
F.3d 1289, 1297-1301 (11th Cir. 2001) for this point, arguing that the bankruptcy
and district courts did not properly apply the case. Kodak argues that the
bankruptcy court did not, and was not required, to consider whether a breach of
contract between the two lenders had occurred when it made its rulings and,
therefore, Kaiser is controlling.
Second, Kodak argues that it could not have brought its state claims against
Wachovia in the bankruptcy court because its breach of contract was not "related
to" the underlying bankruptcy claim – the resolution of Wolf’s estate. Therefore,
the bankruptcy court lacked jurisdiction to hear the case.
Third, again relying on Kaiser, Kodak argued that it lacked an adequate
procedural vehicle to bring the state breach of contract claim before the bankruptcy
court. 244 F.3d at 1303-04. Kodak further claims that all of the bankruptcy court's
orders were issued on contested matters rather than as adversary proceedings.
Kodak argues that because the procedural framework for each type of proceeding
is different, the orders issued as contested matters could not preclude Kodak’s
claims, which would have had to have been raised as adversary proceedings.
Kaiser, 244 F.3d at 1304.
In response, Wachovia agrees with Kodak that Kaiser is controlling, but
focus on its differences from the case at hand. In particular, it cites the contractual
12
relationships between Kodak, Wachovia and Wolf in comparison to the absence of
any relationship between Kaiser and the debtor in the Piper bankruptcy. Wachovia
argues that this court in Kaiser relied on this lack of any relationship between the
debtor and the plaintiff in finding that Kaiser did not have standing to raise the
contested claims in the bankruptcy proceeding. Wachovia argues that, here, the
district court was correct in finding that Kodak was sufficiently involved and the
contractual relationships were sufficiently discussed in the bankruptcy that Kodak
was required to bring its state law claims during the bankruptcy. It also argues that
the fact that Kodak originally filed its case as an adversary action in the Western
District of New York was essentially an admission that the case could be tried
before a bankruptcy court.
Wachovia further argues that the bankruptcy court's orders were final orders
deserving of the application of res judicata. It argues that Kodak could have raised
its objections during the course of the litigation of these orders and its tactical
refusal to raise its fraud claim does not protect it from the effects of res judicata.
Wachovia further argues that the bankruptcy court properly exercised its discretion
in granting the injunction.
Lastly, Wachovia asks the court to rely on equitable and judicial estoppel to
enjoin the action if the lower court is not upheld.
13
Discussion
(1)
Res Judicata
Res judicata, or more properly claim preclusion, is a judicially made
doctrine with the purpose of both giving finality to parties who have already
litigated a claim and promoting judicial economy; it bars claims that could have
been litigated as well. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979).
Questions of law raised by the application of res judicata are reviewed de novo.
Kaiser Aerospace & Elec. Corp. v. Teledyne Indus., Inc. (In re Piper Aircraft
Corp.), 244 F.3d 1289, 1295 (11th Cir. 2001) (applying de novo review to a
bankruptcy court's decision based on res judicata); In re Justice Oaks II, Ltd., 898
F.2d 1544, 1550 (11th Cir. 1990). In order to establish that a case is barred under
the doctrine of res judicata, this court has held that all four of the following
elements must be present:
First, the prior judgment must be valid in that it was
rendered by a court of competent jurisdiction and in
accordance with the requirements of due process.
Second the judgment must be final and on the merits.
Third, there must be identity of both parties or their
privies. Fourth, the later proceeding must involve the
same cause of action as involved in the earlier
proceeding.
14
In re Justice Oaks II, 898 F.2d at 1550 (internal citations omitted). "When all of
the requirements of claim preclusion are satisfied, 'the judgment or decree upon the
merits in the first case is an absolute bar to the subsequent action or suit between
the same parties . . . not only in respect of every matter which was actually offered
and received to sustain the demand, but also as to every [claim] which might have
been presented.'" Justice Oaks II, 898 F.2d at 1552 (quoting Baltimore S.S. Co. v.
Phillips, 274 U.S. 316, 319, 47 S.Ct. 600, 602 (1927).
As in Kaiser, there is no real question that the bankruptcy court was a court
of competent jurisdiction 2 and that, at the very least, its confirmation order was
final and on the merits. See Justice Oaks II, 898 F.2d at 1549 (finding order
endorsing confirmation plan final, but order confirming settlement not to be final
and on the merits). However, it is clear that res judicata does not apply because at
least two of the elements are lacking here.3 Kodak could not have received full
relief in the first action, and the contested bankruptcy proceeding and the state
2
Wachovia argues that Kodak challenged the jurisdiction of the bankruptcy court in its
brief. It did not. Rather, Kodak addressed a separate issue: whether it could have brought the
claim before the bankruptcy court. This issue is discussed below.
3
As previously mentioned Kodak argues that the identity of parties requirement is also
lacking. Kodak challenges the district court's characterization of the claims among the creditors
as interpleader suits. Rather, Kodak argues, its claim against co-creditor Wachovia more
properly should be analogized to a permissive cross claim rather than a compulsory
counterclaim. As we conclude that res judicata is not applicable on other bases, there is no need
to discuss this point.
15
court claim do not involve the same nucleus of operative fact or "transaction or
occurrence." See Ragsdale v. Rubbermaind, Inc., 193 F.3d 1235, 1239, n. 8 (11th
Cir. 1999) (applying a transactional approach to determining the nucleus of
operative fact in each action), citing Restatement (Second) of Judgments § 24.
a. Res Judicata and the Availability of Relief in Contested Proceedings
Under the most basic principles of res judicata, Kodak did not have to sue
Wachovia in a forum where it could not receive full relief. Kaiser, 244 F.3d at
1303; see also Restatement (Second) of Judgments § 26 (1)(c). Wachovia has
argued that Kodak could have raised its claims regarding Wachovia's alleged fraud
in the context of one of the five contested proceedings before the bankruptcy court
by challenging the enforcement of the Subordination Agreement. It urges that the
bankruptcy court could have decided to grant equitable subordination of Kodak's
claim at any point while considering these motions. This argument fails here
because Kodak could not have received its full requested relief under any of these
orders.
As in Kaiser, it is not clear that Kodak's challenge to any of the orders would
have resulted in any additional benefit to Kodak. Thus, in Kaiser, it was found that
the plaintiff did not have to raise objections to the bankruptcy plan's confirmation
16
because, even if successful, the objections would only have resulted in defeating
the confirmation, not providing the relief Kaiser sought under state law. 244 F.3d
at 1303. Likewise, here, if Kodak had challenged any of the five motions, it would
have done Kodak little good. The result would only be their denial, not the
equitable subordination of Wachovia's claims to Kodak.
In each of the five orders, either the relief was not available within the
context of the claims, or the contested proceeding was not the appropriate
procedural device to achieve any kind of relief. The Settlement Order, which
approved the final resolution of the Unsecured Creditor's claims, did not touch
upon Kodak's claims and specifically stated that it did not resolve the claims in the
New York action. The four remaining orders, the Final Order (confirming the DIP
plan), the Sale and Stipulation Orders (endorsing the sale to Ritz and the division
of profits) and the final confirmation order, did endorse the Subordination
Agreement by setting the priority of the lenders. As Kodak does not challenge the
validity or enforcement of the Subordination Agreement itself, but instead alleges a
violation of it, the only conceivable means for Kodak to receive relief under these
orders would be to seek equitable subordination of the parties.4 However, in order
4
Wachovia now argues that the bankruptcy court determined that the Subordination
Agreement could not be further contested. This is not at all clear from the record. The
bankruptcy judge stated:
So any effect of the order, as I read this stipulation, I'm not making
17
to receive such relief, a party must file an adversary proceeding unless the plan
itself provides for subordination. Fed. R. Bankr. P. 7001 (8). The plan here did
not allow for subordination. Therefore, filing objections at the contested
proceedings would not have provided Kodak with the requested relief.
More significantly, even if equitable subordination were available, the
amount Wachovia received from the bankruptcy would not be sufficient to meet
Kodak's losses. When Kodak filed suit, all of the pre-petition lenders had only
received $21.7 million. Wachovia was only entitled to a fraction of this amount.
Although the full record of the current distribution amount is not before this court,
both sides conceded in oral argument that the total amount that Wachovia itself
received from the bankruptcy as one of the many pre-petition lenders was not
sufficient to satisfy Kodak's claim. In other words, even if Kodak had taken
any comment about the suit . . . in Rochester. I'm not making any
comment about whether the venue was appropriate. I'm not
making any comment about whether it's timely. It's simply not
before the Court this morning. And at some point in time, there's
going to be a hearing in Rochester or here, and the Court will . . .
hear you out fully . . . in any position with regard to that litigation
when it comes before this Court. It may be that [it is heard in
Rochester] but that's simply not before the Court this morning.
(RB-874-27, 34 (Tr. 07-16-02)). The Bankruptcy Judge's subsequent order banning the New
York action was based more on the argument that Kodak's claims could have been raised during
the Wolf bankruptcy. In re Atlanta Retail, Inc., 297 B.R. 299 (Bankr. N.D. Ga. 2003).
Nevertheless, as stated, the issue is not the validity of the Subordination Agreement, which
Kodak does not contest, but whether Wachovia violated it as well as the Intercreditor
Agreements.
18
Wachovia's place in the bankruptcy through equitable subordination, its claim
against Wachovia would not have been satisfied.
In addition, not only would Kodak not be made whole by equitable
subordination of Wachovia’s claims, Kodak also could not have been granted state
law damages in the context of the contested proceedings. Any suit Kodak filed to
"recover money or property" against a person other than the debtor would have to
be filed as an adversary proceeding, rather than be raised within the context of a
contested proceeding. Fed. R. Bankr. P. 7001 (1). Here, as in Kaiser, "the defeat
of the plan . . . would not necessarily have resolved . . . claims for damages –
including potential consequential and punitive damages." 244 F.3d at 1303-04.
We reach the same conclusion as the court in Kaiser: that objections to the various
motions in the contested proceeding context did not provide "an adequate vehicle
to assert fully the claims it raises in the state court action." Id. The most basic
principles of res judicata require that full relief must have been available in the first
action in order for the second action to be barred. See Restatement (Second) of
Judgments § 26 (1)(c). Therefore, res judicata cannot apply to the contested
matters.
19
b. Res Judicata and the Adversary Proceedings.
Wachovia argues that, nevertheless, res judicata should apply despite the
fact that full relief was not available in the contested proceedings because Kodak
could have filed an adversary action within the context of the bankruptcy. Kodak
disputes that the bankruptcy court would have had jurisdiction over such an action,
claiming that the state law action was not "related to" the bankruptcy. See 28
U.S.C. § 157(c)(1). Kodak also claims that preclusion of such claims on the basis
of the bankruptcy court’s judgment resulting from only a contested proceeding
would raise Seventh Amendment concerns.5
5
Kodak argues that even if the claims were within the court’s jurisdiction they would
have been non-core proceedings requiring de novo review by a district court. See 28 U.S.C.
§ 157 (b)(2). The circuits disagree as to whether a decision in a core contested hearing can ever
have a preclusive effect over issues which can only be tried in a non-core adversary proceeding.
See e.g. Howell Hydrocarbons, Inc. v. Adams, 897 F.2d 183 (5th Cir. 1990) (finding that a
bankruptcy court's confirmation plan could not preclude a later RICO claim because the
bankruptcy court would not have jurisdiction over that claim); Barnett v. Stern, 909 F.2d 973
(7th Cir. 1990) (holding that the confirmation plan could only preclude a later claim if the later
claim were within the bankruptcy court's core jurisdiction and could be heard in a contested
proceeding); compare Sanders Confectionary Products Inc. v. Heller Financing Inc., 973 F.2d
474 (6th Cir. 1992), cert. denied 506 U.S. 1079 (1993) (holding that core bankruptcy
proceedings can preclude non-core proceedings); Sure-Snap Corp. v. State Street Bank Trust
Co., 948 F.2d 869 (2d Cir. 1991) (holding that core proceedings can preclude on the basis of res
judicata non-core proceedings before the bankruptcy court). This circuit, however, has
addressed this issue only in dicta. See I.A. Durbin v. Jefferson National Bank, 793 F.2d 1541,
1548 n.8 (11th Cir. 1986) (assuming without deciding that a contempt proceeding had res
judicata effect, but noting that if it were non-core, it would have to be reviewed by the district
court and "such proposed findings would not be entitled to res judicata effect in subsequent
litigation because there would have been no final judgment on the merits"). It is not necessary to
reach this issue because, as discussed later, the New York action was not based on the same
cause of action as the Wolf bankruptcy and, therefore, res judicata does not apply.
20
Bankruptcy courts have jurisdiction, by reference from the District Courts,
over "all cases under Title 11 and all core proceedings arising under Title 11, or
arising in a case under Title 11." 28 U.S.C. 157(a), 157(b)-(c). Neither party has
cited a case in this circuit that indicates that the bankruptcy court would have had
jurisdiction over a claim between two creditors when the outcome would not affect
the amount of money available in the bankruptcy estate. However, the bankruptcy
court would have had jurisdiction over a claim for equitable subordination as a
core proceeding determining the priority of the liens. 28 U.S.C. 157 (b)(2)(K). If
Kodak had brought an equitable subordination claim, it would appear that the
bankruptcy court would then have had jurisdiction over the state law claims as
claims "related to" the equitable subordination claim, at least where they would
directly affect the bankruptcy plan. This issue need not be addressed because the
case turns not on whether Kodak could, but whether it was required to bring an
adversary proceeding in the bankruptcy to resolve its state law claims.
Again, assuming the bankruptcy court would have had jurisdiction over the
state claims in an adversary proceeding, it does not follow that the New York
action would have been precluded. The sweeping limits of jurisdiction do not set
the boundaries of res judicata. Wachovia is correct in asserting that res judicata
applies not only to claims which were actually brought before the previous court,
21
but also to those claims "which could have been raised in that action." Kaiser, 244
F.3d at 1296. However, res judicata only requires a litigant to raise the claims in
the first proceeding "if the later litigation arises from the same cause of action." In
re Justice Oaks II, 898 F.2d at 1550 (internal citations omitted).
Both parties have suggested that we look to the Third Circuit to determine
which claims to compare to the second litigation. We do not think that the Third
Circuit decisions help Wachovia because as we read the cases the inquiry is
narrowed in the context of two creditors in a bankruptcy proceeding to comparing
only the claims which were actually brought against a co-creditor to the claims in
the later litigation. See Eastern Minderals & Chemicals Co. v. Mahan, 225 F.3d
330, 337-338 (3d Cir. 2000); Corestates Bank, N.A., v. Hulls America, Inc., 176
F.3d 187, 202 (3d Cir. 1999). In any case, in this circuit, we have not narrowed the
analysis, instead looking at all the previous bankruptcy orders, regardless of
whether there were claims between the creditors during the proceedings leading to
those orders. See Kaiser, 244 F.3d at 1299-1300; In re Justice Oaks II, 898 F.2d at
1551. We follow that approach in this case.
In order to determine whether the two proceedings are based on the same
cause of action, the test is whether they "arise[] out of the same nucleus of
operative fact, or [are] based upon the same factual predicate." Kaiser, 244 F.3d at
22
1297. In order to compare the actions, it is necessary to look not only at the facts
that were before the bankruptcy court, but also the factors which the bankruptcy
court was required by statute to consider in making its previous decisions. Id. at
1299. This is "'premised on the notion that the bankruptcy court has addressed in
the confirmed plan and order only those issues that are properly within the scope of
the confirmation hearing.'" Kaiser, 244 F.3d at 1290, quoting In re Seidler, 44 F.3d
945, 948 (11th Cir. 1995) (emphasis added in Kaiser).
If the evidence crucial to the second action was never raised before the court
in the first action, it is "powerful evidence" that the two cases are not based on the
same nucleus of operative fact. Kaiser, 244 F.3d at 1297. The New York action
addresses the facts surrounding negotiation of Kodak's $30 million loan to Wolf. It
relies on evidence of Wachovia's alleged bad faith in failing to tell Kodak that it
had encouraged Wolf to enter the loan so that it may pay its debts to Wachovia and
the other pre-petition lenders. While the Subordination Agreement and the
Intercreditor Agreement were before the bankruptcy court, neither Kodak's
allegations of the breach of the "good faith" clause of the Intercreditor Agreement,
nor any evidence in support of these allegations, were ever placed before the
bankruptcy court. The two documents were before the bankruptcy court solely for
the purpose of establishing the priorities of the creditors. If Wachovia believed the
23
facts alleged in the New York action were relevant, it could have raised them by
seeking a declaratory judgment as to those allegations. See Fed. R. Bankr. 7004
(9). Indeed, as the bankruptcy unfolded, Kodak and Wachovia were not truly
adversarial, and their interests, if not aligned, were certainly not in opposition.
This, together with the fact that the evidence concerning the state law claims was
never raised as a serious issue, is powerful evidence that the claims are not based
on the same nucleus of operative fact. Kaiser, 244 F.3d at 1297.
As the facts that form the basis of Kodak's New York action were never
before the bankruptcy court, we turn to each of the orders and evaluate whether the
evidence would have had, as a matter of law, to have been considered by the
bankruptcy court in the course of determining the outcome of the orders. Kaiser,
244 F.3d at 1299.
The bankruptcy court's first order confirmed the DIP plan at the beginning of
the bankruptcy. This plan allowed Wolf to borrow money and continue to use
existing cash to run its business. In evaluating whether to allow this plan, the
bankruptcy court had to make the determination that the debtor was not able to
receive unsecured credit and that the only available credit was from a creditor who
insisted on having priority over all other creditors, including administrative
expenses. 11 U.S.C. § 364 (c)(1); (d)(1). The order also gave a limited schedule
24
for all claims against pre-petition creditors that were in the debtor's interest. The
order did not touch upon claims between co-creditors. Clearly, none of the issues
before the court in this proceeding required the court to consider the allegations of
fraud by one co-creditor (Kodak) against another (Wachovia). Therefore, this
order and the New York action are not based on the same nucleus of operative fact;
nor do they constitute the same cause of action.
The second order, the Sale Order, held that Wolf could sell its business to
Ritz. In determining whether to allow the sale, the bankruptcy court was required
to consider whether the sale was fair and agreed to by the secured creditors
(11 U.S.C. § 363 (b)) and whether the price was greater than the value of Wolf's
liens (11 U.S.C. § 363 (f)). The court also made a legal ruling that Kodak waived
its right to object to the sale in the Intercreditor Agreement. Again, these rulings
did not require the evaluation of the alleged fraud by Wachovia prior to the
bankruptcy.
The third order, the Sale Proceeds Order, endorsed a stipulation made by the
parties as to the distribution of the sale to Ritz. This proposed order did set the
priority of who would receive the proceeds of the sale. However, Kodak and the
other unsecured lenders were neither parties to nor bound by the stipulation. The
rights of unsecured lenders were specifically reserved, subject to the restrictions in
25
the Final Order. Again, none of the determinations in the Sale Proceeds Order
required the consideration of the alleged fraud.
The fourth order, the Settlement Order, has already been found not to be a
judgment subject to res judicata. Justice Oaks II, 898 F.2d at 1549 (holding that
the authorization of a settlement is not a final decision on the merits). The only
case Wachovia cited to the contrary, Cristo v. Padgett, 223 F.3d 1324, 1339 (11th
Cir. 2000), specifically stated that while a settlement could be a final judgment for
the purposes of collateral estoppel as to issues pertaining to the confirmation of the
settlement, such an order was not final for the purposes of res judicata.
Finally, there is the confirmation order which was a final judgment. Kaiser,
244 F.3d at 1299; Justice Oaks II, 898 F.2d at 1549-50. In this order, the
bankruptcy court made the final determination of the priority of the lenders. In
doing so, it was required to consider the factors set out in 11 U.S.C. 1129 (a). See
Kaiser, 244 F.3d at 1299. This section requires the bankruptcy court to consider
the fairness of the plan to all classes of creditors and whether they have either
accepted the plan or received a fair benefit from it. Id. In making an evaluation of
the plan's fairness, the statute did not require and the bankruptcy court would not
have been aided in making that evaluation if it had the allegations of Wachovia's
fraud before it. The Confirmation Order did set the priorities of the creditors to the
26
remainder of Wolf's assets. However, the confirmation plan itself only purported
to resolve the claims against the debtor.
In some cases, confirmation plans have included releases as to third parties
and among creditors, to much criticism as potentially violating § 524(e) which
states that "discharge of a debt of the debtor does not affect the liability of any
other entity on, or the property of any other entity for, such a debt." See In re
Continental Airlines, 203 F.3d 203, 214 (3d Cir. 2000) (rejecting plan that released
non-debtors' claims against other non-debtors without consent); cf. In re Master
Mortg. Inv. Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994) (allowing such a
release with certain factors including alignment of interests of the released third
party and debtor, benefit to the debtor, agreement of the class and substantially
complete payout of all claims). Although there was no such release in this case,
the bankruptcy court articulated one of the common justifications for allowing
them: a reward for creditors such as Wachovia who cooperate with the bankruptcy
and accept less than their initial secured loans. In re Atlanta Retail, Inc., 297 B.R.
at 307. Here, however, no such release was even contemplated. Wachovia should
not receive more repose from the other creditors in the bankruptcy than it would
have received through a release, which while legally questionable, would at least
27
have the advantage of providing notice to Kodak. Participation in a bankruptcy
cannot relieve a creditor of allegations of its own fraud in another context.
In sum, the same nucleus of operative facts are not present in both cases.
The focus of the bankruptcy court, and rightly so, was the equitable distribution of
the debtor's funds and the administration of the estate. Its orders did apply the
Subordination and Intercreditor Agreements in that Kodak's claims were
subordinated to those of Wachovia and the other pre-petition creditors according to
those agreements. However, Kodak does not contest the validity or the
enforcement of these agreements. Kodak has instead brought an entirely separate
fraud claim. The evidence in support of this fraud claim, Wachovia's alleged
inducement of the loan from Kodak to Wolf, was not required to be considered in
any of the hearings before the bankruptcy court and was not. Therefore, res
judicata does not apply.
(3)
Judicial and Equitable Estoppel
Wachovia's final arguments involve the application of judicial and equitable
estoppel. Wachovia cannot expect to receive benefit from the doctrines of judicial
or equitable estoppel. Equitable estoppel provides relief for parties who have been
28
induced into behavior through another party's false representation; judicial estoppel
prevents a party from later raising completely unknown claims. See In re
Colarusso, 280 B.R. 548, 559 (Bankr. Mass. 2002); DeLeon v. Comcar Indus., 321
F.3d 1289, 1291 (11th Cir. 2003). Here, Kodak did not hide its intention to sue
Wachovia under tort law. At the time of the Rule 9019 hearing, Kodak had already
filed suit in the Bankruptcy Court for the Western District of New York and argued
during the hearing that it had the right to continue its equitable subordination
claim. Wachovia had notice of Kodak's claims at the time of the resolution of the
bankruptcy. It could have filed for a declaratory judgment to resolve any concerns
regarding Kodak's claims but chose not to do so.
Conclusion
Considering that Kodak could not have received full relief in the contested
bankruptcy proceedings and the New York action did not have the same nucleus of
operative facts as any of the issues raised in the contested proceedings, we reverse
the bankruptcy and district court's decision to preclude the New York action on the
basis of res judicata and vacate the injunction issued against Kodak proceeding
with the New York action.
REVERSED.
29