Eastman Kodak Co. v. Atlanta Retail, Inc. (In Re Atlanta Retail, Inc.)

                                                                                 [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.



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