Porter Capital Corporation v. Haley et al
MEMORANDUM OPINION Signed by Judge William M Acker, Jr on 5/8/14. (SAC )
2014 May-08 PM 02:37
U.S. DISTRICT COURT
N.D. OF ALABAMA
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
PORTER CAPITAL CORPORATION,
SOBCON CONCRETE COMPANY, INC., }
CIVIL ACTION NO.
The above-styled matter comes to this court upon the objection
of Porter Capital Corporation (“plaintiff” or “Porter”), to the
memorandum opinion and order entered on October 9, 2013, by the
Bankruptcy Court for the Northern District of Alabama, Western
Division, as amended on February 14, 2014.
As will hereinafter
appear, these opinions were recast by the Bankruptcy Court as a
“report and recommendation”.
The pertinent facts and procedural
posture of the case are thoroughly and comprehensively recounted in
the Bankruptcy Court’s opinions, and will not here be repeated,
except to the extent necessary to explain this court’s reasons for
recommendation of the Bankruptcy Court that Porter recover nothing
from Sobcon Concrete Company, Inc. (“defendant” or “Sobcon”).
The controversy arose out of the voluntary bankruptcy of
Rodney Haley, d/b/a Custom Steel (“debtor” or “Haley”), BK 1170573.
Haley was a steel manufacturer.
He had a factoring
agreement with Porter that, as factor, financed Haley’s operation.
Porter filed a claim against Haley’s bankruptcy estate, alleging
that Haley had fraudulently breached the factoring agreement.
Central to Porter’s claim of fraudulent breach by Haley was its
claim that the breach was occasioned by and/or was participated in
by Sobcon, one of Haley’s customers.
While pursuing Haley, Porter
filed an adversary proceeding in the Bankruptcy Court against
Sobcon, seeking a money judgment against Sobcon for the same losses
it allegedly sustained at the hands of Haley. Both claims involved
disputed invoices sent by Haley to Sobcon.
During the bankruptcy
proceeding, Porter, pursuant to 28 U.S.C. § 157(c)(1), agreed that
the Bankruptcy Court had jurisdiction over the Sobcon claim, just
as it did over Porter’s contention that its fraud claim against
Haley was non-dischargeable.
Porter’s claim against Sobcon was
more than simply “related to” the bankruptcy proceeding.
period of more than three years, Porter amended its claim against
Sobcon four times, never challenging the Bankruptcy Court’s right
to decide its said claim against Sobcon.
On June 23, 2011, the Supreme Court of the United States
decided Stern v. Marshall, 131 S.Ct. 2594 (2011), in which a fivejustice
bankruptcy, even if “related to” a core proceeding, could not be
finally adjudicated by a bankruptcy judge, who is not an Article
III judge, even with the consent of the parties.
The question of the dischargeability of Porter’s claim against
Haley, and Porter’s claim against Sobcon, were treated by the
Bankruptcy Court, and by the parties themselves, as “inextricably
intertwined” and as a single “case”.
factual and legal issues.
They involved the same
After lengthy discovery and a lengthy
trial, the Bankruptcy Court rejected Porter’s contention that its
claim against Haley was non-dischargeable because of the debtor’s
fraud, and simultaneously, if only purportedly, found that Sobcon
was not liable to Porter.
There has been no appeal from the final order denying Porter’s
right to pursue Haley post-bankruptcy. In other words, the finding
of Haley’s dischargeability is indisputably final and binding on
As stated, Porter’s claim that Haley’s debt to it was nondischargeable was based upon its contention that a number of
Haley’s invoices to Sobcon were fraudulent.
The Bankruptcy Court
expressly found that Porter failed to meet its burden of proving
that the disputed invoices were fraudulent. Porter spent much time
and effort attempting to prove that Sobcon participated in Haley’s
There was no direct contractual relationship between Sobcon and
Porter out of which any duty by Sobcon to Porter would arise,
although Sobcon did on occasion remit directly to Porter payments
of Haley’s invoices.
In its amended opinion of February 14, 2014, the Bankruptcy
Court converted its purported finding of October 9, 2013, in favor
of Sobcon into a report and recommendation.
The Bankruptcy Court
On July 17, 2012, Porter Capital filed
its Opposition to Defendant’s [Sobcon’s]
Motion to Dismiss. (AP Doc. 61).
Opposition provided, in pertinent part, that:
5. . . . The overlapping nature of the matters
in the case are not mere “common issues of
fact”: the existence or nonexistence of claims
against Sobcon, in effect, means the existence
or nonexistence of liabilities against the
Debtor, thus affecting the amount of money in
7. The nature of the suit and the inextricably
intertwined questions of law and fact between
the claims against Sobcon and the claims
against the Debtor militate in favor of this
Court’s exercising its jurisdiction. . . .
(AP Doc. 61, ¶¶ 5 & 7). Defendant’s Motion to
Dismiss was denied on September 4, 2012. (AP
(emphasis added). (italics provided by this
It was Porter that first described the issues of Porter vis-á-vis
Haley, and of Porter vis-á-vis Sobcon, as “overlapping” and as
It was not until Sobcon’s motion to
dismiss was denied by the Bankruptcy Court that Porter amended its
complaint to allege for the first time that some of the materials
sold by Haley to Sobcon and itemized in disputed invoices had
actually been delivered to Sobcon, allegedly making Sobcon subject
to double liability for those unpaid invoices under ALA. CODE § 39A-406.
The thus amended complaint, as against both Haley and
Sobcon, reiterated Porter’s claim that Haley’s debt was nondischargeable.
Both Porter and Sobcon fully participated as
represented by counsel in all of the jointly conducted proceedings.
“inextricably intertwined” issues of Haley’s dischargeability and
of Sobcon’s liability were decided on October 9, 2013, one finally,
and one, as it has turned out, purportedly.
On February 14, 2014,
the Bankruptcy Court granted Porter’s post-judgment motion that
pointed out for the first time that its claim against Sobcon was a
non-core proceeding over which the Bankruptcy Court had no final
jurisdiction under Article III of the Constitution. The Bankruptcy
Court thereupon amended its judgment of October 9, 2013, and
reduced its finding of no liability by Sobcon to a report and
recommendation to the district court that it find in favor of
On February 14, 2014, the Bankruptcy Court was acknowledging
the effect of Stern v. Marshall, which first pronounced that
Article III overrides contrary statutory authority and forbids a
bankruptcy court from entering a final judgment in a non-core
The Bankruptcy Court could not be asked, and was not
hypothetical) of whether its findings and conclusions in the core
proceeding, over which it had jurisdiction, were res judicata of
the non-core proceeding.
Nothing, however, prevents an Article I
judge’s prior opinion from precluding an Article III judge, like
this one, from deviating from the findings in the prior Article I
opinion if all elements for res judicata were present in the prior
Understandably, the Bankruptcy Court, in light of Stern v.
Marshall, eschewed authority to rule finally on Porter’s complaint
But, as stated, the Bankruptcy Court was a court
of competent jurisdiction in the core proceeding, and to the extent
necessary to the decision in both the core proceeding and in the
conclusions in the prior core proceeding have preclusive effect and
are decisive in this court.
During the hearing conducted by this court on March 21, 2014,
dischargeability on the instant proceeding.
On April 25, 2014,
Sobcon responded to the court’s question, citing cases from the
Ninth Circuit, the Sixth Circuit, the Second Circuit, and the Tenth
Circuit, all of which clearly hold that res judicata does apply
erroneously cited I.A. Durbin, Inc. v. Jefferson Nat. Bank, 793
F.2d 1541 (11th Cir. 1986), for a minority proposition among the
Circuits that res judicata does not apply in the Eleventh Circuit
under such circumstances.
This court respectfully, but strongly,
disagrees with Sobcon’s reading of I.A. Durbin.
Circuit in that case was dealing with the possible preclusive
effect of a contempt proceeding conducted by a bankruptcy court.
The Eleventh Circuit unsurprisingly held:
Collateral estoppel or issue preclusion forecloses
relitigation of an issue of fact or law that has been
litigated and decided in a prior suit. There are several
prerequisites to the application of collateral estoppel:
(1) the issue at stake must be identical to the one
involved in the prior litigation; (2) the issue must have
been actually litigated in the prior suit; (3) the
determination of the issue in the prior litigation must
have been a critical and necessary part of the judgment
in that action; and (4) the party against whom the
earlier decision is asserted must have had a full and
fair opportunity to litigate the issue in the earlier
Id. at 1549.
The only reason res judicata was found not to apply in I.A. Durbin
was that the bankruptcy proceeding had not contained the essential
elements for res judicata. Id. The Eleventh Circuit certainly did
not mean to treat a bankruptcy court as a court whose opinions
could never provide a basis for res judicata.
Because in the instant case the parties are the same as in the
core proceeding in the Bankruptcy Court, the doctrine of res
judicata precludes the relitigation of those same issues in this
Proving that Stern v. Marshall did not abrogate the
universal rule for applying res judicata in this context, the
Eleventh Circuit, as recently as April 7, 2014, held as follows in
Brown v. United States:
In Stern, the Supreme Court held that a bankruptcy court
violated Article III when it entered final judgment on a
bankruptcy estate’s permissive state-law counterclaim
against a creditor when the counterclaim was not resolved
in the process of ruling on the creditor’s proof of
_____ F.3d ____, 214 WL 1344463 at *15 (11th Cir. Apr. 7, 2014).
In the instant situation, Porter’s adversary proceeding against
Sobcon was (except, perhaps, for Porter’s claim under ALA. CODE § 79A-406 involving three invoices) (and to borrow a variation of the
above-quoted phrase from Brown) “resolved in the process of ruling
on the creditor’s claim of non-dischargeability”.
In Brown, the
Eleventh Circuit was clearly recognizing the obvious, namely, that
an issue that has been adjudicated by a bankruptcy court to
subsequent non-core proceeding between the same parties.
exactly what has happened in the instant case.
The core finding
that Haley was not guilty of fraud, and thus that his debt was
discharged, not only precludes Porter from pursuing his claim of
$86,141.52 against Haley, but from pursuing his claim for the same
$86,141.52 against Sobcon.
If the Bankruptcy Court had found
Haley’s debt to be non-dischargeable and if Haley had paid his debt
to Porter, Porter’s claim against Sobcon would be moot. They were,
in legal and practical effect, the same alleged debt.
as Porter admitted, “inextricably intertwined”.
The Report and Recommendation
Even if this court is not precluded by res judicata from
imposing a money judgment in favor of Porter and against Sobcon,
this court, upon a mandatory de novo consideration of the entire
record, including the objections filed by Porter, reaches the same
Bankruptcy Court found:
There was no evidence introduced as to the general record
keeping practiced by Porter Capital, but that is to be
expected as the only record keeping that really matters
is that relating to proof that an invoice submitted for
payment was legitimate. An employee of Porter Capital
testified that Porter Capital required proof of delivery
before it would advance money on a submitted invoice.
The employee further testified that an employee of Porter
Capital would call and verify delivery on every invoice
it received. While this may be the preferred policy at
Porter Capital, this court finds that it was not the
actual practice. First, if an employee called to verify
every invoice, how could Debtor possibly submit
fraudulent invoices for payment? Porter Capital would
have caught any fraudulent invoices before it advanced
money, and this lawsuit would not have been filed.
On page 18 of the Bankruptcy Court’s original opinion in the
“case”, the Bankruptcy Court found:
Porter Capital asserts that if the Disputed Invoices are
not fraudulent, then they must be legitimate and Sobcon
must have received the materials invoiced.
assertion by Porter Capital is not correct.
Capital had the burden of proving that the Disputed
Invoices were fraudulent. It did not do so. By failing
to prove that the Disputed Invoices were fraudulent,
Porter Capital did not prove that materials invoiced in
the Disputed Invoices were delivered.
On page 20 of the Bankruptcy Court’s original opinion in the
“case”, the Bankruptcy Court found:
After examining the evidence admitted and reviewing the
testimony at trial, this court is left with two equally
plausible scenarios: Either Debtor is lying and Sobcon
never ordered the materials invoiced on the Disputed
Invoices; or the employees of Sobcon are lying and Sobcon
received the materials invoiced on the Disputed Invoices.
Because neither scenario is more likely than the other,
Porter Capital has failed to meet its burden of proving
that the materials invoiced on the Disputed Invoices were
actually delivered to Sobcon. Therefore, Sobcon does not
owe Porter Capital for the 14 disputed Invoices where
delivery is an issue.
On page 23 of the Bankruptcy Court’s original opinion in the
“case”, the Bankruptcy Court found:
Sobcon did not receive the notification required by ALA.
CODE § 7-9A-406 prior to the payment on invoices 32128,
32149, and 32151 being sent to Custom Steel. Pursuant to
ALA. CODE § 7-9A-406, Sobcon could discharge its
obligation on invoices 32128, 32149, and 32151 by payment
to Custom Steel, which Sobcon did. Therefore, Sobcon has
no obligation to further pay Porter Capital for invoices
32128, 32149, and 32151.
Bankruptcy Court, reaches the same conclusions the Bankruptcy Court
recommendation is OVERRULED, and the Bankruptcy Court’s opinions of
October 9, 2013, and February 14, 2014, are hereby ACCEPTED and
ADOPTED as the opinion of this court, that is, to the extent the
same issues have not been decided by an application of the doctrine
of res judicata.
A separate final judgment will accordingly be entered.
DONE this 8th day of May, 2014.
WILLIAM M. ACKER, JR.
UNITED STATES DISTRICT JUDGE
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