Providence Hall Associates v. Wells Fargo Bank, N.A.
Filing
PUBLISHED AUTHORED OPINION filed. Originating case number: 1:14-cv-00352-LO-IDD. [999772319]. [14-2378]
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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-2378
PROVIDENCE HALL ASSOCIATES LIMITED PARTNERSHIP,
Plaintiff - Appellant,
v.
WELLS FARGO BANK, N.A., successor in interest to Wachovia
Bank, N.A.,
Defendant - Appellee.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria.
Liam O’Grady, District
Judge. (1:14−cv−00352−LO−IDD)
Argued:
December 8, 2015
Decided:
March 11, 2016
Before WILKINSON, NIEMEYER, and DIAZ, Circuit Judges.
Affirmed by published opinion. Judge Diaz wrote the opinion, in
which Judge Wilkinson and Judge Niemeyer joined.
ARGUED: Gary M. Bowman, Roanoke, Virginia, for Appellant.
Jeffrey L. Tarkenton, WOMBLE CARLYLE SANDRIDGE & RICE, LLP,
Washington, D.C., for Appellee. ON BRIEF: B. Chad Ewing, WOMBLE
CARLYLE SANDRIDGE & RICE, LLP, Charlotte, North Carolina, for
Appellee.
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DIAZ, Circuit Judge:
Providence
Hall
Associates
(“PHA”)
appeals
the
district
court’s dismissal of its lawsuit against Wells Fargo Bank.
PHA
contends that the district court erroneously gave res judicata
effect to various sale orders issued during PHA’s Chapter 11
bankruptcy.
We conclude that the elements of res judicata are
satisfied and therefore affirm.
I.
PHA is a Virginia-based limited partnership that, prior to
its bankruptcy, owned a handful of properties in several states.
It entered three transactions with Wells Fargo’s predecessor-ininterest:
credit,
(1) a
and
$2.5
(3) an
million
loan,
(2) a
interest-rate-swap
$500,000
agreement,
line
whereby
of
PHA
exchanged a fixed interest rate for a floating one based on the
one-month U.S. Dollar London Interbank Offered Rate (“LIBOR”).
The
loan
and
clause—meaning
both—and
were
the
a
line
of
default
secured
on
by
credit
contained
either
amounted
deeds
of
trust,
a
to
cross-default
a
default
mortgages,
on
and
assignments of rent for certain PHA real estate holdings.
PHA subsequently defaulted on the loans and, as a result,
filed
a
petition
for
Chapter
11
bankruptcy
in
March
2011.
Shortly thereafter, Wells Fargo informed PHA that an event of
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default
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took
place
under
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the
interest-rate-swap
agreement,
triggering $317,850 in termination damages.
Wells Fargo filed a proof of claim in the Chapter 11 case
for
nearly
$3
million.
PHA
objected,
complaint, which it later amended.
filing
an
adversary
In that amended complaint,
PHA alleged that Wells Fargo falsely represented that it “would
forbear
collection
of
the
principal
balance
of
the
$500,000
[line of credit],” J.A. 69, ultimately causing PHA to default
and enter bankruptcy.
Meanwhile, the United States Trustee had moved to convert
the bankruptcy case to a Chapter 7 proceeding or dismiss it
altogether
based
on
PHA’s
reports.
Wells
Fargo
failure
filed
a
to
file
memorandum
monthly
in
financial
support
of
the
motion, repeating the United States Trustee’s allegations and
contending
that,
among
principals
used
Wells
other
inappropriate
Fargo’s
“distributions” to themselves.
arguments
of
the
United
cash
J.A. 123.
States
Trustee
actions,
collateral
PHA’s
to
pay
After reviewing the
and
Wells
Fargo,
the
bankruptcy court opted to appoint Marc Albert as a Chapter 11
trustee rather than dismiss the bankruptcy case or convert it
into a Chapter 7 proceeding.
Trustee Albert took a number of steps to bring PHA out of
bankruptcy—most important here, obtaining court approval to sell
two of the bankruptcy estate’s properties to satisfy the debts
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owed to Wells Fargo.
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In both of his sale motions under 11
U.S.C. § 363(b), (f), Trustee Albert requested that the proceeds
(minus certain expenses) be distributed to Wells Fargo.
183,
231.
Additionally,
both
motions
recognized
J.A.
PHA’s
obligations to Wells Fargo under the two loans and the interestrate-swap agreement.
21, 224.
See, e.g., J.A. 170–72, 174–75, 177, 219–
The bankruptcy court granted the motions, noting in
its orders that PHA was in debt to Wells Fargo, J.A. 376, 386–
88,
and
that
the
balance
of
the
sale
proceeds
distributed to Wells Fargo, J.A. 380, 388.
should
be
In the final sale
order, the court explicitly stated that sale proceeds should be
paid to Wells Fargo “up to the amount of the WFB Obligations,”
J.A.
388,
where
“WFB
Obligations”
was
a
defined
term
from
Trustee Albert’s sale motion representing PHA’s debts arising
out of the two loans and the swap agreement, J.A. 220.
Around the time Trustee Albert moved to sell the bankruptcy
estate’s properties in satisfaction of PHA’s outstanding debts
to
Wells
Fargo,
he
also
consented
to
the
dismissal
without
prejudice of PHA’s adversary complaint.
By November 2012, the proceeds of the sales had satisfied
PHA’s debts to Wells Fargo.
Consequently, Victor Guerrero—an
equity holder and principal of PHA—filed a motion to dismiss the
Chapter 11 proceeding, which the bankruptcy court granted with
Trustee Albert’s consent.
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More than a year later, PHA filed suit in Virginia state
court, which Wells Fargo removed to federal court.
Along with
repeating the claims made in the bankruptcy adversary complaint,
PHA alleged new theories of lender liability.
Relevant here,
PHA claimed that the interest-rate-swap transaction was a “sham”
because “the LIBOR rate was illegally rigged and manipulated.”
Appellant’s Br. at 7–9; see also J.A. 12–14.
Wells Fargo filed a motion to dismiss, which the district
court granted on res judicata grounds, giving preclusive effect
to the bankruptcy court’s sale orders.
The court then denied
PHA’s motion for reconsideration.
This appeal followed.
II.
We review de novo the district court’s dismissal based on
res judicata.
Brooks v. Arthur, 626 F.3d 194, 200 (4th Cir.
2010).
“Under the doctrine of res judicata, or claim preclusion,
‘[a] final judgment on the merits of an action precludes the
parties or their privies from relitigating issues that were or
could have been raised in that action.’”
Pueschel v. United
States, 369 F.3d 345, 354 (4th Cir. 2004) (quoting Federated
Dep’t Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981)).
elements must be satisfied for res judicata to apply.
5
Three
“[T]here
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must be: (1) a final judgment on the merits in a prior suit;
(2) an identity of the cause of action in both the earlier and
the later suit; and (3) an identity of parties or their privies
in the two suits.”
Id. at 354–55.
Along with these “three
formal elements” of res judicata, “two practical considerations
should be taken into account.”
467, 473 (4th Cir. 2003).
Grausz v. Englander, 321 F.3d
First, we consider whether the party
or its privy knew or should have known of its claims at the time
of the first action.
See id. at 473–74.
Second, we ask whether
the court that ruled in the first suit was an effective forum to
litigate the relevant claims.
We
turn,
address
followed
the
by
three
the
See id. at 474.
core
two
res
judicata
“practical
requirements
considerations”
in
from
Grausz.
A.
The
district
court
recognized
the
first
res
judicata
requirement—that the sale orders are final orders on the merits—
as “the clearest hurdle for Wells Fargo to overcome.”
J.A. 38.
Nevertheless, the court determined that Wells Fargo prevailed,
primarily relying on cases from the Fifth, Sixth, and Seventh
Circuits, which concluded that bankruptcy sale orders were final
orders on the merits.
J.A. 39 (citing Winget v. JP Morgan Chase
Bank, N.A., 537 F.3d 565 (6th Cir. 2008); Bank of Lafayette v.
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Baudoin (In re Baudoin), 981 F.2d 736 (5th Cir. 1993); Gekas v.
Pipin (In re Met-L-Wood Corp.), 861 F.2d 1012 (7th Cir. 1988)). 1
While PHA concedes that the sale orders are “final,” it
presents
a
litany
of
arguments
merits.”
that
Appellant’s Br. at 33.
they
are
not
“on
the
We are unconvinced, concluding
as the district court did that the first prong of res judicata
is satisfied.
1.
We begin by turning to the cases from our sister circuits
upon
which
the
district
court
relied.
We,
too,
find
them
persuasive and reject PHA’s attempts to distinguish them.
In Met-L-Wood, the debtor in a Chapter 11 proceeding filed
a
motion
granted.
seller
to
sell
bankruptcy
861 F.2d at 1015.
of
estate
property
estate
assets,
which
the
court
While § 363(b)(1) requires that the
give
notice
unsecured creditors did not receive notice.
1
to
creditors,
Id. at 1017.
some
After
Other cases have held or explained in dicta that
bankruptcy sale orders can give rise to res judicata.
See,
e.g.,
Silverman
v.
Tracar,
S.A.
(In
re
Am.
Preferred
Prescription, Inc.), 255 F.3d 87, 92 (2d Cir. 2001) (citing two
cases, including Met-L-Wood, that gave res judicata effect to
sale orders to support the proposition that “some orders of
bankruptcy courts, entered in the course of Chapter 11
proceedings prior to confirmation . . . are entitled to res
judicata effect”); Robertson v. Isomedix, Inc. (In re Int’l
Nutronics,
Inc.),
28
F.3d
965,
969–71
(9th
Cir.
1994)
(concluding that a bankruptcy court order confirming a sale
barred antitrust claims under res judicata principles).
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the sale, the bankruptcy case was converted into a Chapter 7
proceeding, and a trustee was appointed.
trustee
then
judicial
“investigated
sale
skullduggery
and
of
the
circumstances
eventually
two
Id. at 1015.
decided
kinds.”
Id.
that
Seeking
The
surrounding
there
to
the
had
been
remedy
said
skullduggery on behalf of unsecured creditors, the trustee filed
suit in federal district court against the debtor-corporation,
its owner, and others involved in the judicial sale, alleging
various common law and statutory claims.
The
Seventh
Circuit
concluded
Id. at 1016.
that
properly dismissed the trustee’s suit.
the
district
Id. at 1018.
court
The court
explained that to the extent the trustee’s claims were derived
from
his
representation
of
the
unsecured
creditors
who
had
notice of the judicial sale, res judicata barred the trustee’s
lawsuit from moving forward.
extent
the
trustee’s
Id. at 1016–17.
claims
were
derived
But, to the
from
unsecured
creditors who had not received notice of the judicial sale, res
judicata
proved
no
bar
because
this
subset
of
unsecured
creditors were not parties to the sale proceeding.
Id. at 1017.
Nevertheless,
claims
otherwise
the
barred
court
because
held
that
the
sale
the
trustee’s
proceeding
was
in
were
rem,
“transfer[ring] property rights, and property rights are rights
good against the world, not just against parties to a judgment
or persons with notice of the proceeding.”
8
Id.
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In Baudoin, the plaintiffs and their wholly owned company
filed for Chapter 7 bankruptcy based on an inability to meet
loan obligations to a particular creditor bank.
737–38.
The
plaintiffs’
personal
981 F.2d at
bankruptcies
consolidated, and a trustee was appointed.
Id. at 738.
were
Upon
the trustee’s motion, two properties securing the plaintiffs’
debt were sold at auction, leading to the plaintiffs’ discharge
from bankruptcy.
the
creditor
Id.
bank,
Three years later, the plaintiffs sued
alleging
that
company . . . into bankruptcy.”
it
“forced
them
and
their
Id.
The Fifth Circuit concluded that res judicata precluded the
plaintiffs’ suit.
Id. at 739.
In doing so, the court looked
to, among other considerations, “the important interest in the
finality
of
judgments
in
a
bankruptcy
case.”
Id.
(quoting
Hendrick v. H.E. Avent, 891 F.2d 583, 587 n.9 (5th Cir. 1990)).
Specifically,
the
court
explained
that
the
goals
of
“[r]estraining litigious plaintiffs from taking more than ‘one
bite of the apple,’” and ensuring “that bite is to be taken as
expeditiously and economically as possible” were to be given
great
weight,
particularly
in
costs” and docket congestion.
light
of
“spiraling
litigation
See id. at 739–40 (quoting Sure-
Snap Corp. v. State St. Bank & Trust Co., 948 F.2d 869, 870 (2d
Cir. 1991)).
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Finally, in Winget, the bankruptcy court ordered the sale
of the Chapter 11 debtors’ assets, with the proceeds of the sale
going to an outstanding balance on a credit agreement.
at 571.
537 F.3d
Winget, who owned the debtor-companies and guaranteed
their debt, later sued various parties, asserting that those
parties
intentionally
assets
through
conduct taking place before the bankruptcy proceeding.
Id. at
568–69, 579.
devalued
the
companies’
The Sixth Circuit held that Winget’s claims were
barred by res judicata.
Id. at 577–81.
In concluding that the
sale order was a final order on the merits, the court looked to
Baudoin
and
Met-L-Wood,
as
well
as
finality that underpins res judicata.
the
policy
of
promoting
See id. at 578–79.
PHA’s attempts to meaningfully distinguish these cases are
unavailing.
held
that
objected
As for Winget, PHA argues that the Sixth Circuit
the
sale
(though
he
order
was
withdrew
on
this
the
merits
objection)
because
with
Winget
the
same
lender liability claim that he later brought in the district
court.
Appellant’s Br. at 32 (citing Winget, 537 F.3d at 580);
id. at 35–36.
But the passage of Winget that PHA cites does not
relate to the question of whether a sale order is a final order
on the merits.
Instead, the Sixth Circuit discussed Winget’s
objection to show that he was not “unaware of all of the facts
needed to bring the claims before the bankruptcy court at the
time
of
th[e]
proceeding.”
Winget,
10
537
F.3d
at
580.
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Accordingly,
PHA’s
reliance
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on
this
factual
PHA
distinction
contends
is
misplaced.
With
regard
to
Baudoin,
that
it
is
distinguishable because the debtors never objected to the sale
orders or the creditor’s claim in the bankruptcy court, unlike
PHA, which objected to Wells Fargo’s proof of claim.
see how this helps PHA.
orders
“are
final
We fail to
As the Baudoin court explained, sale
judgments
on
the
merits
for
res
judicata
purposes, ‘even though the order neither closes the bankruptcy
case nor disposes of any claim.’”
Hendrick,
891
F.2d
at
586).
981 F.2d at 742 (quoting
It
is
irrelevant
whether
an
objection was made.
As for Met-L-Wood, PHA argues that the court did not hold
that
“the
trustee’s . . . claims
seeking
damages
seller and purchaser” were barred by res judicata.
15.
against
the
Reply Br. at
This is arguably true because the trustee’s claims were
derived in part from unsecured creditors who were not party to
the sale proceeding, and therefore the court could not resolve
the
entire
case
on
res
judicata
grounds.
But,
the
Seventh
Circuit subsequently treated the res judicata analysis in Met-LWood as a holding.
See Matrix IV, Inc. v. Am. Nat’l Bank &
Trust Co. of Chi., 649 F.3d 539, 549 (7th Cir. 2011) (“We held
in [Met-L-Wood] that a bankruptcy trustee was barred from filing
a
RICO
suit
against
the
debtor
11
and
others
involved
in
a
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bankruptcy asset sale after the sale had been confirmed; res
judicata applied . . . .” (emphasis added)).
More importantly,
because we of course are not bound by Met-L-Wood regardless of
what it held, it is not particularly important to this court
whether the passage in question was dictum.
whether
we
find
the
Seventh
Circuit’s
What matters is
analysis
persuasive.
Here, we do.
PHA also argues that Met-L-Wood is distinguishable because
PHA’s claims are unrelated to the sale proceedings themselves,
while in Met-L-Wood, the trustee alleged fraud surrounding the
sale.
Reply Br. at 15–16.
We grant that this is a distinction,
but it is not a meaningful one.
To
sell
bankruptcy
estate
assets
outside
the
ordinary
course of business, the trustee of the estate or the debtor-inpossession must initiate the sale proceeding.
§§ 363(b)(1), 1107(a).
See 11 U.S.C.
Here, the trustee moved to sell property
in satisfaction of specifically identified obligations arising
out
of
PHA’s
transactions
with
Wells
Fargo.
The
bankruptcy
court approved these sales, finding them to be “in the best
interests of the Estate.”
E.g., J.A. 387; see also Rose v.
Logan, No. RDB-13-3592, 2014 WL 1236008, at *7 (D. Md. Mar. 25,
2014)
(describing
the
standard
for
approving
a
sale
of
bankruptcy estate assets); Appellant’s Br. at 22 (“The standard
for approving the sale is essentially a business judgment test,
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or whether it is in the best interests of the estate to sell the
property.” (citing 3 Collier on Bankruptcy ¶ 363.02[1][f]) (Alan
N. Resnick & Henry J. Sommer eds., 15th ed. 2005)).
The key questions thus arise: if PHA did not owe the amount
that Wells Fargo claimed it was due, why would the trustee—the
bankruptcy estate’s representative—move to sell estate assets in
full satisfaction of Wells Fargo’s claimed debt, and why would
the bankruptcy court approve the sale?
The motions to sell in
this case effectively conceded the validity of PHA’s obligations
to Wells Fargo, and the proceeds of the sales satisfied those
obligations.
It would make little sense after the sales were
made, the debt settled, and the bankruptcy proceeding closed, to
then allow PHA to challenge in a new judicial proceeding the
propriety
of
extinguished
the
debt.
transactions
To
allow
giving
such
a
rise
to
challenge
its
would
now-
achieve
little more than upending the purpose of res judicata: promoting
finality and judicial economy.
Montana v. United States, 440
U.S. 147, 153–54 (1979); see also Winget, 537 F.3d at 578–79;
Baudoin, 981 F.2d at 739–40.
Furthermore,
the
preclusive
effect
of
the
bankruptcy
court’s sale orders is consistent with the “fundamental purpose”
of
Chapter
11
bankruptcy:
“rehabilitation
of
the
debtor.”
Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co.,
L.L.C.), 403 F.3d 164, 170 (4th Cir. 2005) (quoting NLRB v.
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Bildisco & Bildisco, 465 U.S. 513, 528 (1983)).
To fulfill this
objective, “[c]entralization of disputes concerning a debtor’s
legal
obligations
is
“reorganization
uncoordinated
[to]
especially
proceed
proceedings
in
critical”
because
efficiently,
other
arenas.”
it
allows
unimpeded
Id.
by
(quoting
Shugrue v. Air Line Pilots Ass’n, Int’l (In re Ionosphere Clubs,
Inc.), 922 F.2d 984, 989 (2d Cir. 1990)).
Allowing “piecemeal
litigation” as PHA urges, after all the debts and dust of a
bankruptcy have settled, would invite precisely the inefficient
decentralized proceedings that Chapter 11 bankruptcy is designed
to avoid.
See id.
We conclude—in accord with our sister circuits as well as
the purpose of res judicata and Chapter 11 bankruptcy—that the
sale orders in this case are final orders on the merits.
2.
PHA presents a series of other arguments that we should
break ranks with our sister circuits and hold that the sale
orders fail to satisfy the first prong of res judicata.
None
are persuasive.
First, PHA argues that because its adversary complaint was
dismissed
without
precluded.
The
prejudice,
dismissal
of
its
the
present
adversary
lawsuit
complaint
is
is
not
not
relevant to our analysis, as Wells Fargo does not contend that
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this dismissal gives rise to res judicata.
Instead, the sale
orders are what preclude the claims now before the court.
Second, PHA contends that because a bankruptcy court sale
order is an in rem proceeding, Met-L-Wood, 861 F.2d at 1017, it
does
not
have
a
liability claims.
res
judicata
effect
on
in
personam
lender
In support, PHA points to M.W. Zack Metal Co.
v. Int’l Navigation Corp., 510 F.2d 451 (4th Cir. 1975).
Metal, however, does not address res judicata.
Zack
As Wells Fargo
correctly points out, “Zack Metal stands for the proposition
that a party cannot file an in personam action on or otherwise
attempt to collect on an in rem judgment by means other than the
specific property at issue in the in rem lawsuit.”
Appellee’s
Br. at 23 (citing Zack Metal, 510 F.2d at 452–53).
Moreover, the circuit cases we discussed earlier belie the
notion that the in rem nature of a sale order precludes the
application of res judicata to transactionally related lender
liability claims.
A Chapter 11 sale order can give rise to res
judicata because the estate representative—the trustee or the
debtor-in-possession—has
ample
opportunity
to
assert
a
lender
liability claim before selling off estate assets in satisfaction
of debts.
and
See 18 Charles Alan Wright et al., Federal Practice
Procedure
§ 4412
(2d
ed.
2012)
(explaining
that
because
bankruptcy proceedings are “intended to resolve all claims in a
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definitive
single
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proceeding,”
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in
personam
claims
that
could
have been raised during bankruptcy should be precluded).
Third, PHA maintains that County Fuel Co. v. Equitable Bank
Corp., 832 F.2d 290 (4th Cir. 1987), precludes the application
of res judicata in this case.
There, a creditor filed a proof
of claim in a Chapter 11 proceeding for the secured balance of a
loan, and the debtor-in-possession did not object, except with
respect to a claim for attorneys’ fees.
291.
Cty. Fuel, 832 F.2d at
The creditor’s claim was therefore automatically allowed.
Id. at 291–92; see 11 U.S.C. § 502(a).
After filing its proof of claim, the creditor moved to lift
the
bankruptcy
against
its
bankruptcy
court’s
automatic
collateral.
court
granted
Cty.
the
stay
Fuel
832
lift-stay
so
it
could
F.2d
at
motion,
proceed
291.
the
The
district
court affirmed, and the creditor eventually recovered the amount
of its claim.
Id. at 291–92.
About two years later, the debtor
(County Fuel) sued the creditor, asserting that it breached an
oral promise related to the loan.
court
dismissed
the
case
on
Id. at 292.
res
judicata
The district
grounds,
giving
preclusive effect to the automatic allowance of the creditor’s
claim.
Id.
We affirmed on waiver grounds rather than res judicata,
commenting
in
dicta
that
“[i]t
is
doubtful
that
in
strict
contemplation County Fuel’s . . . claim was . . . barred under
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res judicata principles.”
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Id. at 292–93.
We gave two reasons.
First, we looked to the Restatement (Second) of Judgments § 22,
which reads:
(1) Where the defendant may interpose a claim as a
counterclaim but he fails to do so, he is not thereby
precluded from subsequently maintaining an action on
that claim, except as stated in Subsection (2).
(2) A defendant who may interpose a claim as a
counterclaim in an action but fails to do so is
precluded, after the rendition of judgment in that
action, from maintaining an action on the claim if:
(a) The counterclaim is required to be interposed
by a compulsory counterclaim statute or rule of
court, or
(b) The relationship between the counterclaim and
the plaintiff’s claim is such that successful
prosecution of the second action would nullify
the initial judgment or would impair rights
established in the initial action.
Id.
at
292
22(1), (2)(a),
[permissive]
&
n.1.
“the
We
failure
‘counterclaim’
explained
to
that
under
interpose . . . an
does
not,
as
a
matter
section
available
of
res
judicata, bar its subsequent assertion as an independent claim
for relief.”
Id.
to
found
this
rule
Nevertheless, we later applied an exception
in
section
22(2)(b)
of
the
Restatement,
necessitating the barring of County Fuel’s claim, because “[t]he
practical effect of a successful prosecution of County Fuel’s
claim would be to require [the creditor] to make restitution of
the amount realized upon its claim.”
Id. at 293–94.
Second, we explained in dicta that “it is doubtful that the
‘automatic allowance’ under 11 U.S.C. § 502(a) of a claim not
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objected
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to
constitutes
(1) objections
could
be
Pg: 18 of 23
a
made
‘final
after
judgment’”
automatic
because
allowance
of
a
claim, (2) automatic allowance was not “final” for purposes of
appellate
review,
and
(3) an
allowed
claim
can
later
be
Id. at 292. 2
disallowed under § 502(j).
County Fuel does not control our decision in this case,
most notably because its statements regarding res judicata are
dicta.
See Siegel v. Fed. Home Loan Mortg. Corp., 143 F.3d 525,
530–31
(9th
expressed
Cir.
doubts
1998)
about
(explaining
the
that
application
decided the case on waiver grounds).
of
County
res
Fuel
merely
judicata,
but
Additionally, while the
County Fuel court questioned the finality of an automatic claim
allowance in suggesting that res judicata did not apply, PHA
concedes the finality of the sale orders.
33.
Finally,
counterclaims
and
Judgments
is
not
acknowledges,
res
the
County
section
relevant
judicata
Fuel
22
of
to
bars
the
our
Appellant’s Br. at
court’s
discussion
Restatement
analysis
claims
that
of
(Second)
here.
could
As
have
of
PHA
been
asserted in the bankruptcy proceeding that are “based on the
same underlying transaction” as the sale orders.
2
Appellant’s
We also suggested in dicta that a lift-stay order should
not give rise to res judicata.
Cty. Fuel, 832 F.2d at 293.
While PHA does not rely on this portion of County Fuel, we later
address why lift-stay orders are distinguishable from the
bankruptcy court’s sale orders.
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Br. at 25–26 (quoting Clodfelter v. Republic of Sudan, 720 F.3d
199, 210 (4th Cir. 2013)).
Here, Trustee Albert could have
litigated the extent of PHA’s obligations to Wells Fargo rather
than
move
to
sell
estate
property
in
satisfaction
of
those
obligations, and, as explained below, PHA’s present claims are
transactionally related to the facts underlying the sale orders.
This gives rise to the preclusion of PHA’s present claims.
This brings us to PHA’s final argument respecting the first
prong of res judicata.
PHA contends that an unreported district
court decision declining to give preclusive effect to a liftstay order weighs in favor of concluding that we should not give
res judicata effect to sale orders.
Appellant’s Br. at 24–28
(citing Canterbury v. J.P. Morgan Mortg. Acquisition Corp., No.
10-cv-54, 2010 WL 5314543 (W.D. Va. Dec. 20, 2010)).
We are
unconvinced.
Not only is Canterbury not binding authority, but we do not
find it illuminating in our analysis of whether sale orders can
give rise to res judicata.
Here, unlike the lift-stay order in
Canterbury, the sale orders at issue effectively recognize and
satisfy particular debts.
It bears repeating that it would be
counterproductive to liquidate the bankruptcy estate’s property
to pay off debts owed to a creditor—bringing about the close of
bankruptcy proceedings—only to later allow claims to be brought
against that creditor regarding the now-satisfied debts.
19
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result would be the model of inefficiency, at odds with the
purpose of res judicata and Chapter 11 bankruptcy.
B.
We turn to the second prong of the res judicata analysis:
an identity of claims between the first and second suit.
“[W]e
follow the ‘transactional’ approach” in analyzing this prong,
meaning
that
claim[]’
if
“res
it
judicata
based
is
will
the
on
bar
same
a
‘newly
articulated
underlying
transaction
[involved in the first suit] and could have been brought in the
earlier action.”
Clodfelter, 720 F.3d at 210 (quoting Laurel
Sand & Gravel, Inc. v. Wilson, 519 F.3d 156, 162 (4th Cir.
2008)).
Here, the sale orders arose out of the same nucleus of
facts
as
PHA’s
claims
in
this
case:
the
circumstances
surrounding the three agreements between PHA and Wells Fargo.
The sale orders directed the liquidation of certain properties
in
satisfaction
transactions.
of
PHA’s
arising
from
those
And, in the instant lawsuit, PHA challenges the
propriety of the transactions.
satisfied.
obligations
Accordingly, the second prong is
See Winget, 537 F.3d at 580–81 (finding that the
transactional test was met); Baudoin, 981 F.2d at 743–44 (same).
C.
We next move to the final core requirement of res judicata:
“an identity of parties or their privies in the two suits.”
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Pueschel, 369 F.3d at 354–55 (emphasis added).
PHA argues that
this prong is not satisfied because it is not the same party as
the trustee.
their
To achieve its desired result, PHA ignores the “or
privies”
stating the
language
from
the
identity-of-the-parties
res
judicata
element
as
test,
instead
requiring
that
“the parties in the prior case were identical to the parties in
the present case.”
Appellant’s Br. at 21 (citing Pueschel, 369
F.3d
at
at
354);
id.
39
(arguing
that
the
trustee
“identical to the debtor” (emphasis in original)).
must
be
This is not
the law.
Under the correct test, there is no dispute between the
parties that this prong of res judicata is satisfied, as PHA
says in both its opening and reply briefs that “[t]he trustee is
in privity with the debtor as representative of the debtor’s
bankruptcy
estate.”
Appellant’s
Br.
at
39
(emphasis
in
original); Reply Br. at 9 (emphasis in original).
D.
Grausz directs courts to assess two additional res judicata
considerations: whether the party or its privy knew or should
have known of its claims at the time of the first action and
whether the court that ruled in the first suit was an effective
forum to litigate the relevant claims.
See 321 F.3d at 473–74.
PHA’s argument with respect to these factors turns on whether
it, as a debtor who was no longer a debtor-in-possession, could
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have effectively litigated its claims against Wells Fargo.
See,
e.g., Appellant’s Br. at 36–43 (contending that the bankruptcy
court improperly barred it from participating in the bankruptcy
in violation of 11 U.S.C. § 1109(b)).
PHA’s argument is based on a faulty premise.
It is not
PHA’s actions in the bankruptcy court that now preclude it from
asserting
claims
against
Wells
Fargo.
Instead,
it
is
the
trustee’s actions as PHA’s privy that give rise to res judicata.
Thus,
the
question
before
us
is
not
whether
PHA
could
effectively litigate in the bankruptcy court in its own right,
but whether the trustee could.
If we concluded otherwise, we
would effectively alter the third res judicata prong to require
a strict identity of parties rather than an identity of the
parties or their privies.
offers
litigate
no
argument
in
the
that
This we cannot do.
the
bankruptcy
trustee
court,
could
the
not
Grausz
Because PHA
effectively
factors
are
satisfied. 3
3
PHA says that it could not have known of certain claims
related to the swap agreement during the bankruptcy proceeding
because “[t]he artificiality of the LIBOR market was not
publicly revealed until July 2012”—after the trustee was
appointed. Appellant’s Br. at 44. Since it is the trustee, not
PHA, whose actions in the bankruptcy court now bind PHA, the
relevant question is whether the trustee could have known about
the supposed “artificiality of the LIBOR market” during the
bankruptcy. The final sale order was entered in September 2012,
after the date upon which PHA says the artificiality of the
LIBOR market was publicly revealed. Thus, PHA’s argument fails.
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III.
For
the
reasons
given,
we
affirm
the
judgment
of
the
district court.
AFFIRMED
23
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