In re: Korley B. Sears

Filing 13

ORDER that the bankruptcy court's judgment is affirmed Judgment shall be entered by a separate document. Ordered by Senior Judge Richard G. Kopf. (MKR)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
IN THE MATTER OF:
KORLEY B. SEARS,
Debtor.

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Case No. 4:14CV3206
BK 10-40277 (Chapter 11)

MEMORANDUM AND ORDER
This is an appeal from a judgment entered by the United States Bankruptcy
Court for the District of Nebraska on August 29, 2014, in a Chapter 11 proceeding (In
re Sears, Bankruptcy Case No. 10-40277, Doc. 405). The bankruptcy court granted
summary judgment in favor of the appellees/claimants, Rhett R. Sears and Rhett R.
Sears Revocable Trust (collectively, “Rhett”), Ronald H. Sears and Ronald H. Sears
Trust (collectively, “Ron”), and Dane Sears (“Dane”), and allowed their claims over
the objections of the debtor/appellant, Korley B. Sears (“Korley”). Having carefully
reviewed the parties’ briefs and the designated record on appeal,1 I conclude that the
bankruptcy court’s judgment should be affirmed.
I. Background
The facts of the case, as summarized by the bankruptcy court in a memorandum
and order that was also entered on August 29, 2014, are as follows:
The claimants in this case, who are members of the debtor’s
family, sold their interests in AFY, Inc., a company that operated a cattle
feedyard, to the corporation and to Korley Sears in 2007 in exchange for
promissory notes from Korley and a security interest in the shares. In
1

I find that oral argument is not needed because the facts and legal arguments are adequately
presented in the briefs and record and the decisional process would not be significantly aided by oral
argument. See Fed. R. Bankr. P. 8019(b)(3).

2010, AFY and Korley each filed for bankruptcy protection. The
claimants filed proofs of claim for more than $5.3 million in AFY’s
bankruptcy case for the amounts owed to them for the sale of their stock.
AFY’s two shareholders, Korley and Robert Sears, objected to the
claims, arguing that only Korley and not AFY was liable for the debt.
After a hearing on affidavit evidence, the claim objections were
overruled. The court found that the contract for the sale of the claimants’
interest clearly and unambiguously showed that both AFY and Korley
were the purchasers. The claimants’ proof of claim was entitled to prima
facie validity, and no evidence was presented to challenge either AFY’s
liability on the debt or the amount of the claims. There also was no
evidence to support Robert and Korley’s theory that the claimants had
breached the contract, thereby excusing AFY’s performance and
liability. On appeal, the Bankruptcy Appellate Panel affirmed the
decision of the bankruptcy court, holding that AFY was liable for the
debt under the unambiguous terms of the stock sale contract, the amount
of the debt was undisputed, and Robert and Korley’s defenses were
unavailing. Sears v. Sears (In re AFY, Inc.), 463 B.R. 483 (B.A.P. 8th
Cir. 2012). Robert and Korley then appealed to the Eighth Circuit, which
dismissed the appeal without reaching the merits after finding that
neither of them had standing to appeal because they held, at most, only
a derivative interest and were not “persons aggrieved” as they would not
be directly and adversely affected pecuniarily by the bankruptcy court’s
order. Sears v. Sears (In re AFY, Inc.), 733 F.3d 791 (8th Cir. 2013). The
rulings left intact the substance of the underlying bankruptcy court
orders.
(In re Sears, Bankruptcy Case No. 10-40277, Doc. 403, at CM/ECF p. 1). The
claimants filed similar proofs of claim in Korley’s bankruptcy case.
In AFY’s bankruptcy case, Korley and Robert Sears (“Robert”) filed the
following objections to the claims of Ron, Rhett, and Dane:
1.

Claims Nos. 8, 9, and 10 of Ron, Rhett, and Dane (collectively
“Sears Family Claimants”) are unenforceable against AFY or its
property and do not state any claims for which relief can be
granted.
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2.

By Claims Nos. 8, 9, and 10, the Sears Family Claimants seek to
recover from AFY’s estate based on the Resolution for Stock
Redemption contained in AFY’s 2008 Minutes of its annual
meeting (the “Resolution”) being an enforceable contract. The
Resolution is not an enforceable contract.

3.

The Claims of the Sears Family Claimants are based upon the
Sears Family Claimants being third party beneficiaries of the
Resolution. The Sears Family Claimants are at most incidental
beneficiaries of the Resolution and not creditor third party
beneficiaries of the Resolution.

4.

Alternatively, even if the Resolution is an enforceable contract in
which the Sears Family Claimants are creditor third party
beneficiaries, which Robert and Korley expressly deny, the Sears
Family Claimants materially breached the Sears Family
Claimant’s implied duties of good faith and fair dealing in the
performance and enforcement of that contract, thus excusing AFY
from any performance and discharging AFY from any liability.
Such duties of good faith and fair dealing required the Sears
Family Claimants not to do anything that injured the right of AFY
to receive the benefit of such contract. The Sears Family
Claimants breached such duties by opposing all the efforts of AFY
to effect a Chapter 11 plan and by collaborating with the Chapter
11 Trustee that the Sears Family Claimants had caused to be
appointed.

5.

Alternatively, even if the Resolution resulted in the Sears Family
Claimants being creditor third party beneficiaries under an
enforceable contract, which Robert and Korley expressly deny, the
Sears Family Claimants materially breached the contract by
unjustifiably preventing, hindering, making impossible the
performance by AFY of its obligations under the contract by
opposing all efforts of AFY to effect a Chapter 11 plan, and by
collaborating with the Chapter 11 Trustee that the Sears Family
Claimants had caused to be appointed.

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6.

By Claims Nos. 8, 9, and 10, the Sears Family Claimants seek to
recover from AFY’s estate based upon a Stock Sales Agreement
under which the Sears Family Claimants sold their shares of stock
in AFY to Korley. AFY purchased no shares of stock in AFY
under the Stock Sales Agreement and received none from the
Sears Family Claimants. Moreover, after the closing of the Stock
Sales Agreement, the Stock Sales Agreement was no longer an
enforceable agreement either because it was merged into the
promissory notes described below in Paragraph 7, or otherwise.

7.

By Claims Nos. 8, 9, and 10, the Sears Family Claimants seek to
recover from AFY’s estate based on Promissory Note(s) dated
June 22, 2007 in the original principal amounts of their respective
Claims. AFY was not a party to any of those Promissory Notes
and did not sign on any of those Promissory Notes. The Nebraska
Uniform Commercial Code in §3-401 provides that a person is not
liable on notes such person did not sign, nor was AFY obligated
under the Stock Sales Agreement to sign any of those notes.

8.

The parol evidence rule, which is a rule of substantive law, not
evidence, bars any claim that AFY is liable on any of the
Promissory Notes.

9.

The Statute of Frauds in Neb. Rev. Stat. 36[-]202(2), bars proof
that AFY is liable on any of the Promissory Notes.

10.

The Sears Family Claimants hold no security interest or liens on
any right of Korley to enforce the Resolution.

11.

Allowance of Claims Nos. 8, 9, and 10, which are for stock in
AFY and not for goods or services furnished to AFY, but are for
sales of equity in AFY, would pay equity ahead of debt, or would
pay some equity ahead of other equity. That is contrary to
bankruptcy law.

12.

As of the time of the Resolution in 2008, the directors and
shareholders of AFY intended to redeem from Korley the shares
Korley owned and retire shares Korley had purchased in 2007
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from the Sears Family Claimants. The directors and members of
AFY had no intention to confer any enforceable rights or benefits
on the Sears Family Claimants.
13.

The principal purpose of any contract that resulted from the
Resolution was frustrated by the acts and omissions of the Sears
Family Claimants, and when any contract resulting from the
Resolution was made, neither AFY, Robert, Korley, nor Ron,
Rhett, or Dane contemplated the subsequent events, including
without limitation, withdrawal of AFY’s operating line of credit,
a bankruptcy case, conversion of AFY’s Chapter 11 case to
Chapter 7, or liquidation of AFY’s bankruptcy estate.

(In re AFY, Inc., Bankruptcy Case No. 10-40875, Doc. 366, at CM/ECF pp. 2-4).
In overruling these objections, the bankruptcy court stated:
The Sears Family Members filed their claims for sums due
pursuant to a June 20, 2007, Stock Sale Agreement. The claim is made
as both a direct obligation under the agreement and related
documentation, and as third-party beneficiaries of an agreement between
AFY and Korley Sears.
Robert and Korley’s objection to the Sears Family Members’
claims was filed “on Behalf of AFY’s Estate, Themselves, and Their
Estates.” They believe that the Sears Family Members’ claims should be
disallowed in their entirety because, according to Robert and Korley,
AFY is not liable for any sums due under the Stock Sale Agreement.
Specifically, only Korley signed the promissory notes resulting from the
Stock Sale Agreement. Robert and Korley feel that the Stock Sale
Agreement should be interpreted on its face and that parol evidence
should not be used. As an alternative theory, Robert and Korley argue
that even if AFY had some liability to the Sears Family Members under
the agreement, they breached their implied duties of good faith and fair
dealing in the performance and enforcement of that contract, thus
excusing AFY from performance and liability. The asserted breach was
by opposing the early efforts of AFY in this Chapter 11 case and
collaborating with the Chapter 11 trustee.
-5-

The trustee has not joined in Robert and Korley’s objection.
As a threshold matter, it is clear that Robert and Korley do not
have standing as purported shareholders of AFY to make objections on
behalf of AFY’s estate. The trustee has been appointed to administer the
bankruptcy estate and is the only person authorized to take action on
behalf of the estate. On the other hand, Robert and Korley may act in
their individual capacities. A party in interest, including a creditor and
an equity security holder “may raise and may appear and be heard on any
issue in a case under this chapter.” 11 U.S.C. § 1109(b). Accordingly,
Robert and Korley have standing to object to the Sears Family Members’
claims on their own behalf.
Addressing the merits of the objection, the proof of claim attaches
a June 20, 2007, Stock Sale Agreement, which agreement is signed by,
among others, the Sears Family Members as sellers and AFY, Inc. (by
Robert A. Sears as president and Korley B. Sears as vice president), and
Korley B. Sears, as buyers. The first paragraph of the agreement
identifies each of the sellers and the number of shares of AFY that each
seller is selling. Paragraph 2 states in its entirety:
2. Buyers. The Buyers purchasing all interests described in
paragraph 1 from the Sellers are AFY, Inc., a Nebraska
corporation formerly known as Ainsworth Feed Yards
Company, Inc., and Korley B. Sears.
Paragraph 4 describes the sale price “to be paid by Buyers to
Sellers . . .” and the manner in which the payment will be made.
Paragraph 7.1 provides in pertinent part that “the Buyer(s) shall
execute, for each Seller, a Promissory Note, and a Pledge and Security
Agreement.”
As it turned out, the promissory notes executed pursuant to
paragraph 7.1 of the agreement were executed only by Korley, and not
by AFY.

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Interestingly, all parties assert that the Stock Sale Agreement is
clear and unambiguous on its face. The Sears Family Members point out
the foregoing provisions which identify AFY, Inc. as a buyer along with
Korley. Mr. Strasheim [the attorney representing Korley Robert] argues
that the agreement requires the “Buyer(s)” to execute a promissory note,
and only Korley executed a note. Therefore, he believes the agreement
is clear that AFY is not a buyer since it did not execute a note.
I agree with the claimants that the contract is clear and
unambiguous, and that AFY is a “Buyer” under the Stock Sale
Agreement. In fact, it is hard to imagine a contract being more clear and
unambiguous than this one which, in paragraph 2, defines “Buyers” as
“AFY, Inc., a Nebraska corporation formerly known as Ainsworth
Feedyards Company, Inc., and Korley B. Sears.” It is not necessary to
look to extrinsic documents, such as the promissory notes and corporate
resolutions, to determine that AFY is a buyer under the contract having
liability for the purchase price. Also attached to the proof of claim were
certain minutes of a 2008 annual meeting of the shareholders of AFY.
Those shareholder minutes clearly establish a subsequent agreement to
redeem the shares involved in the transaction, but do not alter who is
contractually liable to pay to the sellers the purchase price for the shares
under the Stock Sale Agreement.
Accordingly, the proof of claim filed by the Sears Family
Members is entitled to prima facie validity. Dove-Nation v. eCast
Settlement Corp. (In re Dove-Nation), 318 B.R. 147, 152 (B.A.P. 8th Cir.
2004); Fed. R. Bankr. P. 3001(f). Robert and Korley’s objection fails to
overcome the presumption of validity. Absolutely no evidence was
presented to support the theory that AFY is not liable for the purchase
price. Further, absolutely no evidence was presented to dispute the
balance due to each of the claimants. Finally, no evidence was presented
to support the assertion that the Sears Family Members had or breached
any duty in failing to support Robert and Korley’s efforts and in
supporting the efforts of the trustee. McDaniel v. Riverside Cnty. Dep’t
of Child Support Servs. (In re McDaniel), 246 B.R. 531, 533 (B.A.P. 8th
Cir. 2001) (“substantial evidence” is required to rebut proof of claim’s
presumptive validity); Vomhof v. United States, 20 B.R. 191, 192 (D.

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Minn. 1997) (“Substantial evidence to support an objection requires
financial information and factual arguments, not legal rhetoric.”)
(In re AFY, Inc., Bankruptcy Case No. 10-40875, Doc. 493, at 4-5) (emphasis in
original; footnote omitted).2
On appeal, the Bankruptcy Appellate Panel “agree[d] with the bankruptcy
court’s determination that Robert and Korley failed to overcome the presumptive
validity of the proofs of claim filed by the Sears Family Members,” In re AFY, Inc.,
463 B.R. 483, 489 (B.A.P. 8th Cir. 2012), and concluded that “[t]he plain language
of the Stock Sales Agreement imposes liability on the Debtor for the deferred
purchase price and the Debtor’s liability was not discharged under any of the defenses
submitted by Robert and Korley,” id. Regarding AFY’s liability, the panel stated:
The parties agree that the Stock Sale Agreement is the controlling
document, that it is unambiguous and that Nebraska law governs. The

2

Korley filed a claim in AFY’s bankruptcy case which was objected to by Rhett, Ron, and
Dane. The bankruptcy court sustained the objections and denied the claim, stating:
Korley filed a proof of claim, No. 26 on the claims register, in the amount of
$5,325,291.16 [the aggregate amount claimed by Rhett, Ron, and Dane]. Korley
asserts it is a contingent claim under which he believes he is entitled to recover the
purchase price for the shares from AFY instead of from the Sears Family Members.
Korley presents absolutely no legal basis as to why he would be able to do so....
The bottom line is that, on its face, the proof of claim filed by Korley fails to present
or identify any basis to find that AFY is indebted to Korley in such amount. Absent
such supporting information, the claim is not entitled to prima facie validity.
(In re AFY, Inc., Bankruptcy Case No. 10-40875, Doc. 493, at CM/ECF p. 5). On appeal, the
Bankruptcy Appellate Panel “agree[d] with the bankruptcy court’s assessment that on its face,
Korley’s proof of claim provided absolutely no legal basis for liability by the Debtor.” In re AFY,
Inc., 463 B.R. 483, 489 (B.A.P. 8th Cir. 2012). The panel stated that “[a]lthough the alleged basis
for Korley’s Claim No. 26 is difficult to decipher, Robert and Korley describe it as a contingent
claim by which ‘if there was a contract by the corporate resolution to redeem the stock of Korley,
he has greater rights to payment by [the Debtor] on the claims aggregating $5,325,291.16 than do
[the Sears Family Members].’” Id.

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parties disagree, however, regarding whether the Debtor is liable under
the agreement. According to Robert and Korley, the “the unambiguous
Stock [Sale] Agreement on which [the Sears Family Members] base their
claim[s] does not provide that [the Debtor] has any ... liability.” The
Sears Family Members maintain, however, that the Stock Sale
Agreement plainly provides that the Debtor is liable for the deferred
purchase price.
We review the bankruptcy court’s interpretation of the
unambiguous contract de novo and we do not consider extrinsic evidence
of intent. See ABC Elec., Inc. v. Neb. Beef Ltd., 249 F.3d 762, 766–67
(8th Cir. 2001); Davenport Ltd. P’ship v. 75th & Dodge I, L.P., 279 Neb.
615, 780 N.W.2d 416, 422 (2010) (“A contract written in clear and
unambiguous language is not subject to interpretation or construction
and must be enforced according to its terms.”). The fact that each party
claims the Stock Sale Agreement unambiguously supports its position
does not preclude us from finding unambiguity. Neb. Pub. Power Dist.
v. MidAmerican Energy Co., 234 F.3d 1032, 1041 (8th Cir. 2000)
(citation omitted); Davenport, 780 N.W.2d at 422 (“A court interpreting
a contract must first determine as a matter of law whether the contract is
ambiguous.”).
The bankruptcy court agreed with the parties that the Stock Sale
Agreement is unambiguous. It also agreed with the Sears Family
Members that the Debtor was liable as the “Buyer” under the agreement.
We agree with the bankruptcy court. In the plainest of language,
Paragraph 2 defines the Debtor as one of the buyers. In Paragraph 4, it
explains that the purchase price is “to be paid by Buyers to Sellers....”
Likewise, the Debtor signed the Stock Sale Agreement as a buyer.
Among other arguments, Robert and Korley maintain that by
using the term “Buyer(s),” the Stock Sale Agreement did not require
both Korley and the Debtor to sign promissory notes and it only imposes
liability for the purchase price on the person or entity who does sign a
promissory note. [FN3. One of the other arguments made by Robert and
Korley is that the reading of the Stock Sale Agreement requested by the
Sears Family Members requires this Court to look at Paragraphs 2 and
4 in isolation and would change the meaning of the agreement as a
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whole. We disagree. Paragraphs 2 and 4, imposing liability on the
Debtor, are consistent with the agreement in its entirety.] Paragraph 7 of
the Stock Sale Agreement explains that “Buyer(s) shall execute, for each
Seller, a Promissory Note and a Pledge and Security Agreement.”
According to Robert and Korley, the Debtor is not liable to the Sears
Family Members because only Korley, and not the Debtor, executed
promissory notes.
We disagree. The four corners of the Stock Sale Agreement
unambiguously provide that the Debtor is liable thereunder. Nowhere
does the agreement state that a party will be released from liability if it
fails to sign a promissory note. The arguments by Robert and Korley
amount to an attempt to create an ambiguity in a document that they have
already admitted to be unambiguous, which we will not allow.
Moreover, it is curious that Robert and Korley asked the bankruptcy
court and this Court to refer to extrinsic evidence, the promissory notes,
to interpret an unambiguous contract.
We note further that Robert and Korley did not provide evidence
to dispute the balance owed to each of the Sears Family Members. The
bankruptcy court properly allowed the claims in the amount for which
they were filed.
Id. at 489-90.
The Bankruptcy Appellate Panel also discussed two defenses that were asserted
by Korley and Robert.3 It first discussed certain post-petition breaches that allegedly
were committed by the claimants:
Robert and Korley maintain that any liability of the Debtor under
the Stock Sale Agreement was discharged as a matter of law based on the
Sears Family Members’ alleged breach of their implied duties of good
faith and fair dealing and Ron Sears’s and Rhett Sears’s alleged express
duties of loyalty to the Debtor set forth in the Stock Sale Agreement. As
3

Other defenses alleged by Korley and Robert in their statement of issues were not argued
and were deemed waived.

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grounds for such breaches, Robert and Korley cite to post-bankruptcy
support by the Sears Family Members of the Trustee’s efforts in
assuming executory contracts and closing purchase agreements that were
commenced pre-petition. They also refer to the Sears Family Members’
“opposition to the Chapter 11 case of AFY,” their sponsorship of the
Debtor’s liquidation and their support for other efforts of the Trustee.
Assuming, for the sake of argument, that these duties existed in the first
instance, Robert and Korley have failed to show how they were breached
in a way that would merit disallowance of the claims. They cite to only
post-petition actions of the Sears Family Members as breaches of their
duties. But claims in bankruptcy, such as the claims of the Sears Family
Members that are at issue here, are determined as of the bankruptcy
petition date. See 11 U.S.C. § 502(b) (“the court ... shall determine the
amount of such claim ... as of the date of the filing of the petition ...”)
(emphasis added). Moreover, it would defy logic to hold that a claimant
would act in bad faith simply by trying to enforce his claim and assist a
case trustee in procuring payment of it.
Id. at 490-91. Second, the panel discussed a “supervening frustration” theory:
Robert and Korley also maintain that any liability of the Debtor
under the Stock Sale Agreement was discharged as a matter of law
because “the principal purpose upon which the Stock Sale Agreement
was based was frustrated and the basic assumption on which the Stock
[Sale] Agreement was made did not occur.” They allege that the Stock
Sale Agreement is unenforceable because the parties entered into it under
the assumption that the Debtor’s operations would continue as a going
concern and that the payment for the stock would come from the
Debtor’s cash flow and earnings. Due to the country’s unforeseen
recession and the withdrawal by the Debtor’s lender of an operating line
of credit, the Debtor did not continue to operate as a going concerns.
[FN5. Robert and Korley presented their supervening frustration theory
to the bankruptcy court. The bankruptcy court did not discuss the defense
in its written opinion, so we must assume it rejected that theory. We
agree with the bankruptcy court’s decision.]
Under the theory of discharge by “supervening frustration,” a
party no longer has the duty to perform under a contract “unless the
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language or the circumstances indicate to the contrary” in circumstances
“[w]here, after a contract is made, a party’s principal purpose is
substantially frustrated without his fault by the occurrence of an event
the non-occurrence of which was a basic assumption on which the
contract was made.” Restatement (Second) of Contracts § 265 (1981)
(quoted in Cleasby v. Leo A. Daly Co., 221 Neb. 254, 376 N.W.2d 312,
318–19 (1985)); see also American Prairie Constr. Co. v. Hoich, 594
F.3d 1015, 1026 (8th Cir.2010) (citing Restatement (Second) of
Contracts § 265).
Robert and Korley claim that the parties would not have entered
into the Stock Sale Agreement if the stock purchase price was not going
to be paid out of the Debtor’s cash flow and earnings, and they cite to a
declaration of Robert as support for their argument. Notwithstanding
Robert’s declaration, Robert and Korley failed to satisfactorily prove a
supervening frustration defense. Applying the theory of commercial
frustration to the situation here would be akin to allowing any party to
be relieved of his contractual duties simply because he is no longer able
to pay them, and would mean a debtor is freed from his obligations each
time he is unable to reorganize. That is simply not the law. We also note
that the Stock Sale Agreement itself recognizes the possibility of the
Debtor’s bankruptcy when it requires in Paragraph 7.1 that the
promissory notes must provide for immediate payment upon the
Debtor’s bankruptcy.
Id. at 491.
Korley and Robert then appealed to the Court of Appeals, but the appeal was
dismissed for lack of standing. The Eighth Circuit explained that AFY is “the only
party directly and adversely affected by the bankruptcy court’s order allowing Claims
8, 9, and 10,” and that “[a]ny effect on appellants is indirect, based on their status as
shareholders of AFY.” In re AFY, 733 F.3d 791, 793 (8th Cir. 2013). “Shareholders
may not appeal a bankruptcy court decision where they assert only a derivative
interest.” Id. (internal quotes and citation omitted). The Court of Appeals therefore
“dismiss[ed] appellant’ appeal from the bankruptcy court’s order overruling
appellants’ objections to Claims 8, 9, and 10.” Id.
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The question of Korley and Robert’s standing to appeal was raised earlier
before the Bankruptcy Appellate Panel, which concluded that Korley had standing to
appeal to the panel from the bankruptcy court’s order because he claimed to be a
potential creditor of AFY. The panel stated:
The Sears Family Members argue that, if we affirm the bankruptcy
court’s disallowance of Korley’s Claim No. 26 (which we do), Robert
and Korley will lack standing to appeal the bankruptcy court’s allowance
of the Sears Family Members’ claims because Robert and Korley will
not be directly affected by the bankruptcy court's decision.
The issue of standing is not material to the outcome of this matter
because, even if Robert and Korley have standing, we affirm the
bankruptcy court’s decision to allow the Sears Family Members’ claims.
Nevertheless, Korley has standing to challenge the allowance of the
Sears Family Members’ claims. Until we considered the disallowance of
Korley’s Claim No. 26 as a part of this appeal, there was a possibility
that Korley would be a claimant of the Debtor’s estate. [FN6. We do not
need to consider whether Robert had standing because Korley also
participated in this appeal.]
In re AFY, Inc., 463 B.R. at 491-92. Korley did not attempt to appeal further from the
bankruptcy court’s disallowance of his Claim No. 26.
In the present case, Korley raised the following objections to the proofs of claim
filed by Rhett, Ron, and Dane:
(A)

the Contracts are not binding contracts between Rhet [sic] Sears,
Ron Sears, and Dane Sears (“RR&D”) and Korley because there
was no meeting of minds and/or no mutual assent between RR&D
and Korley;

(B)

RR&D have no enforceable claims against Korley because RR&D
did not substantially perform the Contracts by making good faith
and honest efforts to live up to their obligations under the
Contracts;
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(C)

RR&D have no enforceable claims against Korley because the
purpose of the Contracts wholly failed resulting in failure of
consideration;

(D)

Korley was discharged from all liability on the Contracts by the
doctrines of Supervening Frustration, Supervening Impossibility,
Supervening Impracticability, or any or all of them as provided
under Nebraska Law and §261, 263 and 265 of the Restatement
(Second) of Contracts;

(E)

Korley was discharged from all liability under the Contracts by
material breaches by RR&D of their express fiduciary duties,
including their duty of loyalty, under the Contracts;

(F)

Korley was discharged from all liability under the Contracts by
material breaches by RR&D of their implied duties of good faith
and fair dealing under the Contract in performing and enforcing
the Contracts; and/or

(G)

Korley was discharged from all liability under the Contracts
because RR&D prevented, hindered, or made performance
impossible by Korley under the Contracts, acted in concert to
prevent, hinder, and delay and made performance impossible by
Korley under the Contracts;

(H)

RR&D aided and abetted each other in preventing, hindering, or
making impossible performance by Korley under the Contracts;
and

(I)

if RR&D have valid claims against Korley, their proofs claims are
not properly filed in accordance with bankruptcy official forms,
rules and procedures, they do not claim the lawful amount of
principal owing under the Bankruptcy Code (“Code”), they do not
claim the lawful interest owing and may also claim unlawful
interest on interest.

(In re Sears, Bankruptcy Case No. 10-40277, Doc. 282) (reformatted as a list).

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The bankruptcy court ruled that Korley’s objections were precluded by the
decision in the AFY case, stating:
Res judicata prevents “the relitigation of a claim on
grounds that were raised or could have been raised in the
prior suit.” Banks v. Int’l Union Elec., 390 F.3d 1049, 1052
(8th Cir. 2004) (quoting Lane v. Peterson, 899 F.2d 737,
741 (8th Cir. 1990) (citation omitted)). Relitigation of a
claim is barred under res judicata where “a final judgment
was entered by a court of competent jurisdiction, if the
same parties (or their privies) and the same cause of action
are involved.” Ladd v. Ries (In re Ladd), 450 F.3d 751, 753
(8th Cir. 2006) (citation omitted). A claim is barred “if it
arises out of the same nucleus of operative facts as the prior
claim.” Banks, 390 F.3d at 1052 (quoting Lane, 899 F.2d at
742 (citations omitted)). “[W]here a plaintiff fashions a
new theory of recovery or cites a new body of law that was
arguably violated by a defendant’s conduct, res judicata
will still bar the second claim if it is based on the same
nucleus of operative facts as the prior claim.” Banks, 390
F.3d at 1052-53 (quoting Lane, 899 F.2d at 744).
Bryan v. Stanton (In re Bryan), 466 B.R. 460, 465 (B.A.P. 8th Cir.
2012).
Here, the bankruptcy court’s order overruling the objection to
claims in AFY was a final order. See, e.g., In re Thomas, 511 B.R. 89,
92 (B.A.P. 6th Cir. 2014) (“A bankruptcy court’s order overruling
debtor’s objection to claim is a final order for purposes of appeal.”).
Contrary to the debtor’s argument, the bankruptcy court had
subject-matter jurisdiction over those objections because any party in
interest may object to claims. § 502(a). Robert and Korley’s lack of
standing to appeal is entirely separate from their standing to file claims
objections and did not deprive this court of the authority to rule on those
objections.
Korley next argues that the defenses he raises to the claims in this
case are distinct from the defenses he had to the claims in AFY’s case,
-15-

so that different causes of action are involved. The evidence before the
court does not support that argument. Rather, Korley argued in the AFY
case that he, and not AFY, was liable for the amounts due under the
stock sale agreement. He now attempts to claim he did not understand
the terms of the contract when he entered into it, so there was no meeting
of the minds and the contract is not valid. In light of the position taken
by Korley when he filed this bankruptcy case listing this debt in his
schedules, when he filed a motion to modify his child support payments
because he owed more than $5 million to these claimants, and when he
argued that AFY was not liable on the debt, his arguments now are a
little hard to swallow. As the Bryan court pointed out in the res judicata
discussion cited above, old wine in new bottles – in the form of a new
theory of recovery or a new body of law allegedly violated by the
defendant – is not sufficient to clear the preclusion bar.
(In re Sears, Bankruptcy Case No. 10-40277, Doc. 403 at CM/ECF pp. 2-3).
The bankruptcy court further ruled that even if res judicata did not preclude
Korley’s objections, the claimants were entitled to summary judgment. Two related
arguments were addressed.
First, the bankruptcy court rejected Korley’s argument that the stock sale
agreement was an executory contract, stating:
An executory contract is “‘a contract under which the obligation of both
the [debtor] and the other party to the contract are so far unperformed
that the failure of either to complete performance would constitute a
material breach excusing the performance of the other.’” Kaler v. Craig
(In re Craig), 144 F.3d 593, 596 (8th Cir. 1998) (quoting Northwest
Airlines, Inc. v. Klinger (In re Knutson), 563 F.2d 916, 917 (8th Cir.
1977) (quoting V. Countryman, Executory Contracts in Bankruptcy:
Part I, 57 Minn. L. Rev. 439, 460 (1973))).
In the stock sale agreement, the claimants agreed to sell their
interests in AFY and related companies for cash and, depending on the
arrangements with each seller, either the release of a guaranty or
-16-

additional assets such as a vehicle, insurance coverage, and a head of
beef for personal use. The claimants surrendered their shares of stock in
exchange for promissory notes from Korley and AFY, Inc. The contract
also provided for AFY’s continued employment of two of the claimants.
These terms do not establish an executory contract. The claimants
fulfilled their bargain by giving up their interests in AFY. The only
unperformed part of the contract is the payment of the amounts due. To
the extent Korley asserts that the contract is executory because the
employee claimants continue to owe a duty of loyalty, it appears that
duty is owed only to AFY, not to Korley. Regardless, such a pending
duty would not be enough to render the contract executory for life, which
is the logical outcome of Korley’s argument. For exemple, [sic] the
contract provides that Dane Sears shall be a devoted, loyal AFY
employee; this duty apparently lasts until his employment with the
company ceases. There is no basis for using such a provision to hold a
contract executory for that length of time. In this case, the claimants
performed their substantive obligation of turning over their stock shares.
The only unperformed obligation remaining is owed by the debtor.
Therefore, the contract is not executory. There is even less of a basis for
finding the promissory notes and accompanying security agreements to
be executory. Again, the only performance still owed under those
documents is Korley’s obligation to pay.
(In re Sears, Bankruptcy Case No. 10-40277, Doc. 403, at CM/ECF pp. 3-4).
Second, the bankruptcy court rejected Korley’s argument that a debtor’s postpetition defenses (i.e., for alleged breaches of the stock sale agreement) can be
asserted by the bankruptcy estate under 11 U.S.C. §558. It stated:
By the same token, the debtor’s reliance on § 558 is misplaced.
That section provides that all of the defenses available to the debtor shall
inure to the benefit of the bankruptcy estate. Korley uses this section to
support his arguments concerning the post-petition contractual breaches
he wants to pursue against the claimants. However, § 558 covers only the
debtor’s pre-petition defenses. See State Bank of Florence v. Miller (In
re Miller), 459 B.R. 657, 675 (B.A.P. 6th Cir. 2011) (“[Section 558]
preserves to the Debtor defenses . . . he would have had prepetition.”);
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Beach v. Bank of America (In re Beach), 447 B.R.313, 323 (Bankr. D.
Idaho 2011) (“[W]hile § 541(a)(1) effectively transfers a debtor’s causes
of action into the Bankruptcy estate, the debtor still has access to, and
may assert, personal defenses.”).
(In re Sears, Bankruptcy Case No. 10-40277, Doc. 403, at CM/ECF p. 4).
The bankruptcy court concluded:
Korley states that he “honestly believed” when he filed his bankruptcy
petition in February 2010 and when he moved in March 2010 to reduce
the amount of child support he had been ordered to pay that he owed the
amounts indicated in the promissory notes held by the claimants.4 He
now engages in some creative obfuscation to try to avoid his liability for
those debts, but he has raised no genuine issues of material fact as to that
liability or the amounts owed.
(In re Sears, Bankruptcy Case No. 10-40277, Doc. 403, at CM/ECF p. 5).
II. Issues Presented on Appeal
Twenty issues have been identified by the appellant:
1.

Did the Bankruptcy Court erroneously grant Summary Judgment
allowing Appellees[’] Proof of Claims Nos. 2, 4, and 5 in a
Contested Matter in which there were genuine issues of material

4

In his bankruptcy schedules, filed on February 2, 2010, Korley admitted that he owed Rhett
$2,162,000.00, Ron $2,799,977.00, and Dane $ 234,100.00, and that such debts were not contingent,
unliquidated, disputed, or subject to setoff (In re Sears, Bankruptcy Case No. 10-40277, Doc. 1, at
CM/ECF pp. 8, 22-23). He also stated that AFY, Inc. was a co-debtor to Rhett, Ron, and Dane (In
re Sears, Bankruptcy Case No. 10-40277, Doc. 1, at CM/ECF p. 27). In a verified complaint filed
on April 1, 2010, in the District Court of Brown County, Nebraska, seeking a reduction in his child
support obligation, Korley swore that he had recently filed bankruptcy “schedules disclosing ... his
liabilities are from $10 to $50 million,” that his unsecured creditors included two uncles [i.e., Rhett
and Ronald], a sister, a cousin [i.e., Dane], and a grandmother [with claims of] $5,429,214,” and that
he “has lost all his non-exempt assets or will lose them” (In re Sears, Bankruptcy Case No. 1040277, Doc. 360, at CM/ECF p. 3).

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facts and in which Appellees were not entitled to judgment as a
matter of law?
2.

Did Appellees satisfy their burdens of proving all of the essential
elements of their res judicata defense or all of the essential
elements of their collateral estoppel defense to Appellant’s
Objections to Appellees[’] Proofs of Claims Nos. 2, 4 and 5?

3.

Did Appellees satisfy their burdens of proving that in a Contested
Matter in the bankruptcy case of AFY, Inc. (“AFY”), case number
10-40875 (the “AFY Contested Matter”) the bankruptcy court
entered an Order on June 8, 2011 (the “AFY Order”) (Doc #493)
which bars Appellees [sic] Objections to Proofs of Claims Nos. 2,
4, and 5 under either the doctrine of res judicata or the doctrine of
collateral estoppel?

4.

In the AFY Contested Matter did the bankruptcy court have
subject matter jurisdiction over the merits of Appellant’s
Objections to the Allowance of Appellees’ Claims Nos. 8, 9 & 10
in AFY’s Case; and if not were the bankruptcy court’s comments
in the AFY Contested Matter on the merits of Korley’s Objections
to Claims Nos. 8, 9 &10 in the AFY Contested Matter of no
preclusive effect or of any legal consequence?

5.

Did the Eighth Circuit or Eighth Circuit BAP have subject matter
jurisdiction over the merits of Appellant’s Appeal from the AFY
Order and if not are any comments on the merits of Appellant’s
Objections in AFY’s Case to Appellee’s [sic] Claim Nos. 8, 9
& 10 of no preclusive effect in this case and of no legal
consequence?

6.

In the AFY Contested Matter, did Korley have the full and fair
opportunity to litigate the Objections to Appellee’s [sic] Proofs of
Claims Nos. 8, 9 & 10 in AFY’s Case; and if not does the AFY
Order have any preclusive effect in this case?

7.

In this case were Appellee’s [sic] Proofs of Claims 2, 4 & 5
entitled to a presumption of validity and amount?
-19-

8.

In this case, was there a genuine dispute of material fact as to
whether there was a meeting of minds or mutual consent to the
Stock Sale Agreement and Three Promissory Notes (collectively
“Contract”) on which Appellee’s [sic] Proofs of Claims 2, 4 & 5
are based; and if not is the Contract enforceable against
Appellant?

9.

In this case is there a genuine dispute of material fact as to
whether Appellees failed to substantially perform the Contract by
making a good faith and honest endeavor to live up to their
contractual obligations?

10.

In this case did the purpose of the Contract wholly fail and if so is
the Contract not enforceable against Appellant due to failure of
consideration?

11.

In this case was any liability of Appellant on the Contract
discharged by supervening frustration, supervening impossibility,
or supervening impracticality?

12.

In this case was any liability of Appellant on the Contract
discharged by Appellees’ material breaches of their express
contractual duties to AFY’s management or by their fiduciary
duties as under the Contract?

13.

In this case was any liability of Appellant discharged by
Appellees, material breaches of their implied duties under the
Contract to perform their contractual obligations and to enforce
their contractual rights in good faith and with fair dealing?

14.

In this case was any liability of Appellant under the Contract
discharged because Appellees prevented Appellant[’]s
performance under the Contract?

15.

In this case did Appellees aid and abet each other in preventing
Appellant[’]s performance of the Contract?

-20-

16.

Is the Contract in this case an executory contract within the
meaning of the Bankruptcy Code; if so were Appellees bound to
continue performance of the Contract until rejected?

17.

If the Contract in this case was an executory contract was the
Contract ever rejected and if not, were Appellees creditors?

18.

In this case is there a triable issue of material fact as to the
meaning of the Contract?

19.

Apart from res judicata or collateral estoppel, in this case did
Appellees satisfy their burden to prove that with respect to
Appellee’s [sic] Proofs of Claims 2, 4 & 5, and Appellant’s
Objections to those Proofs of Claims there is no genuine dispute
of material fact and Appellees are entitled to judgment allowing
such claims as a matter of law?

20.

Apart from whether the Contract was an executory contract, in
this case are Appellee’s [sic] disloyal acts after Appellant’s
petition was filed defenses to Appellees’ claims?

(Filing No. 4, at CM/ECF pp. 3-6).
III. Standard of Review
In bankruptcy proceedings, the district court acts as an appellate court and
applies the same standard of review as the court of appeals. Contemporary Industries
Corp. v. Frost, 564 F.3d 981, 984 8th Cir. 2009). In general, the court reviews the
bankruptcy court’s factual findings for clear error and its conclusions of law de novo.
See In re Nevel Properties Corp., 765 F.3d 846, 849 (8th Cir. 2014). The application
of res judicata is a legal conclusion that is reviewed de novo. Nolles v. State
Committee for Reorganization of School Districts, 524 F.3d 892, 901 (8th Cir. 2008).
The court also reviews the bankruptcy court’s grant of summary judgment
de novo. Ritchie Capital Management, LLC v. Stoebner, 779 F.3d 857, 860 (8th Cir.
-21-

2015). “Summary judgment was properly granted if, assuming all reasonable
inferences favorable to the non-moving party, there is no genuine [dispute] as to any
material fact and the moving party is entitled to judgment as a matter of law.” Id. at
861 (quoting In re Cochrane, 124 F.3d 978, 981-82 (8th Cir. 1997)).
Issues committed to the bankruptcy court’s discretion are reviewed for an abuse
of that discretion. In re King, 744 F.3d 565, 569 (8th Cir. 2014). “The bankruptcy
court abuses its discretion when it fails to apply the proper legal standard or bases its
order on findings of fact that are clearly erroneous.” In re Zahn, 526 F.3d 1140, 1142
(8th Cir. 2008) (quoting In re Farmland Indus., Inc., 397 F.3d 647, 651 (8th Cir.
2005)).
IV. Discussion
Issues 1 and 19 (whether the bankruptcy court erroneously granted summary
judgment in favor of the claimants) are catch-all questions that require no separate
discussion. Issues 2-6 concern the preclusive effect of the decision in AFY’s
bankruptcy case. Issues 7, 8, and 11 (i.e., whether the claims are presumptively valid,
whether there was a meeting of the minds when the stock sale agreement was
executed, and whether supervening events discharged liability) are issues that were
previously decided in AFY’s bankruptcy case. Issues 9, 12-15 and 20 involve postpetition defenses that the bankruptcy court refused to consider. Issue 10 (i.e., failure
of consideration) was not discussed by the bankruptcy court. Issues 16 and 17 concern
the executory contract question that was decided by the bankruptcy court. Issue 18
(i.e., the meaning of the contract) was not presented to the bankruptcy court.
A. Res Judicata (Issues 2-6)
The binding effect of a former adjudication, often generically
termed res judicata, can take one of two forms. Claim preclusion
(traditionally termed res judicata or “merger and bar”) “‘bars relitigation
-22-

of the same claim between parties or their privies where a final judgment
has been rendered upon the merits by a court of competent jurisdiction.’”
Plough v. West Des Moines Community Sch. Dist., 70 F.3d 512, 517 (8th
Cir. 1995) (quoting Smith v. Updegraff, 744 F.2d 1354, 1362 (8th Cir.
1984)). Issue preclusion (or “collateral estoppel”) applies to legal
or factual issues “actually and necessarily determined,” with such a
determination becoming “conclusive in subsequent suits based on a
different cause of action involving a party to the prior litigation.”
Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59
L.Ed.2d 210 (1979). The principles of res judicata generally apply to
bankruptcy proceedings. Katchen v. Landy, 382 U.S. 323, 334, 86 S.Ct.
467, 475, 15 L.Ed.2d 391 (1966).5
In re Anderberg-Lund Printing Co., 109 F.3d 1343, 1346 (8th Cir. 1997).
“Res judicata, as claim preclusion, is broader than the issue preclusion function
of collateral estoppel.” SDDS, Inc. v. State of South Dakota, 994 F.2d 486, 492 (8th
Cir. 1993). Claim preclusion “explicitly applies to claims previously litigated as well
as those which might have been litigated in the previous action,” whereas issue
preclusion “applies only to issues actually litigated.” Popp Telcom v. American
Sharecom, Inc., 210 F.3d 928, 940 n. 13 (8th Cir. 2000) (emphasis in original).
“Under the doctrine of claim preclusion, a final judgment forecloses successive
litigation of the very same claim, whether or not relitigation of the claim raises the
same issues as the earlier suit. Issue preclusion, in contrast, bars successive litigation
of an issue of fact or law actually litigated and resolved in a valid court determination
essential to the prior judgment, even if the issue recurs in the context of a different
claim.” Taylor v. Sturgell, 553 U.S. 880, 892 (2008) (internal quotes and citations
omitted). “However, both doctrines are applied only when the party against whom the
earlier decision is being asserted had a ‘full and fair opportunity’ to litigate the issue

5

The res judicata effect of a federal bankruptcy judgment is determined by federal common
law. See In re Ark-La-Tex Timber Co., Inc., 482 F.3d 319, 330 n. 12 (5th Cir. 2007); Peloro v.
United States, 488 F.3d 163, 175 n. 11 (3d Cir. 2007).

-23-

in question.” Lovell v. Mixon, 719 F.2d 1373, 1376 (8th Cir. 1983) (quoting Kremer
v. Chemical Construction Corp., 456 U.S. 461, 481 n. 22 (1982)).
“Claim preclusion will bar a subsequent suit when: ‘(1) the first suit resulted in
a final judgment on the merits; (2) the first suit was based on proper jurisdiction; (3)
both suits involved the same cause of action; and (4) both suits involved the same
parties or their privies.’” In re Anderberg-Lund Printing Co., 109 F.3d at 1346
(quoting Lovell v. Mixon, 719 F.2d 1373, 1376 (8th Cir. 1983). “[W]hether a second
lawsuit is precluded turns on whether its claims arise out of the same nucleus of
operative facts as the prior claim.” Magee v. Hamline University, 775 F.3d 1057, 1059
(8th Cir. 2015) (quoting Costner v. URS Consultants, Inc., 153 F.3d 667, 673 (8th Cir.
1998)).
The res judicata doctrine also applies to defenses. See Jefferson Smurfit Corp.
v. United States, 439 F.3d 448, 451 (8th Cir. 2006) (“Under the doctrine of claim
preclusion or res judicata, a party is prohibited from asserting ‘a claim or defense in
a later proceeding that should have been raised in an earlier proceeding’ in which
there has been a final judgment.”) (quoting McKenzie Engineering Co. v. NLRB, 373
F.3d 888, 891 (8th Cir. 2004)); Kapp v. Naturelle, Inc., 611 F.2d 703, 707 (8th Cir.
1979) (“Res judicata prevents litigation of all grounds for, or defenses to, recovery
that were previously available to the parties, regardless of whether they were asserted
or determined in the prior proceeding.”) (quoting Brown v. Felsen, 442 U.S. 127, 131
(1979)).
“Collateral estoppel ‘means simply that when an issue of ultimate fact has once
been determined by a valid and final judgment, that issue cannot again be litigated
between the same parties in any future lawsuit.’” Stoebner v. Parry, Murray, Ward &
Moxley, 91 F.3d 1091, 1094 (8th Cir. 1996) (quoting Schiro v. Farley, 510 U.S. 222,
232 (1994)). In the Eighth Circuit, the party asserting collateral estoppel must prove:

-24-

(1) the party sought to be precluded in the second suit must have been a
party, or in privity with a party, to the original lawsuit; (2) the issue
sought to be precluded must be the same as the issue involved in the
prior action; (3) the issue sought to be precluded must have been actually
litigated in the prior action; (4) the issue sought to be precluded must
have been determined by a valid and final judgment; and (5) the
determination in the prior action must have been essential to the prior
judgment.
In re Porter, 539 F.3d 889, 894 (8th Cir. 2008) (quoting Robinette v. Jones, 476 F.3d
585, 589 (8th Cir. 2007)).
The bankruptcy court ruled that res judicata applies in this case to preclude
Korley from raising any objections to the claims of Rhett, Ron, and Dane. In other
words, the bankruptcy court determined that claim preclusion applies. On de novo
review, I agree that the four essential elements of claim preclusion are satisfied.
First of all, the bankruptcy court’s order overruling the objections and Korley
and Robert was a final order. See In re Thomas, 511 B.R. 89, 92 (6th Cir. B.A.P.
2014) (“A bankruptcy court’s order overruling debtor’s objection to claim is a final
order for purposes of appeal.”); Hernandez v. Neb. Dep’t of Health & Human Servs.
(In re Hernandez), 496 B.R. 553, 555 (8th Cir. B.A.P. 2013) (recognizing that the
bankruptcy court’s order, which found that the creditor’s claim was a priority claim
and overruled debtor’s objection, was a final order); Smith v. Pritchett (In re Smith),
398 B.R. 715, 720 (1st Cir. B.A.P. 2008) (stating that the bankruptcy court’s order
overruling an objection to a proof claim was a final order as it had the effect of
allowing the claim in the amount filed). Korley’s argument to the contrary, that the
bankruptcy court’s order was not final because it did not specify that the claims were
allowed, is not supported by any legal authority. Indeed, the Court of Appeals treated
the bankruptcy court’s order denying Korley and Robert’s objections as an order
allowing the claims of Rhett, Ron, and Dane. The fact that the order was held not to
be appealable by Korley and Robert does not effect its finality.
-25-

Second, the bankruptcy court had jurisdiction to hear and decide Korley and
Robert’s objections under 11 U.S.C. § 502(a), which provides that “[a] claim or
interest, proof of which is filed under section 501 of this title, is deemed allowed,
unless a party in interest . . . objects.” Because a “party in interest” includes “an equity
security holder,” 11 U.S.C. § 1109(b), Korley and Robert had standing to object to the
allowance of claims as shareholders of AFY, even if they lacked standing to appeal
from an adverse ruling on their objections. Korley also claimed to be a creditor, and
for that reason was determined by Bankruptcy Appellate Panel to have standing to
appeal from the bankruptcy court’s allowance of the claims of Rhett, Ron, and Dane
(and disallowance of his claim).
Third, the claims made by Rhett, Ron, and Dane in the present case arise out of
the same nucleus of operative facts as the claims they made in AFY’s bankruptcy
case, namely, their sale of stock to AFY and Korley, as joint purchasers. Korley
argues that the claims are distinct because in AFY’s bankruptcy they were “based on
the Stock Sale Agreement but without AFY’s signature on promissory notes,” whereas
“Appellees claims against Korley are based on the Stock Sale Agreement and the
signatures of Korley on the Three Promissory Notes.” (Filing No. 7, at CM/ECF p.
43). This is a distinction without a difference for res judicata purposes because Rhett,
Ron, and Dane can establish their claims in Korley’s bankruptcy case on the strength
of the stock sale agreement alone, just as they did in AFY’s bankruptcy case.
Fourth, and finally, Korley entered an appearance in AFY’s bankruptcy case as
a “party in interest” objecting to the claims of Rhett, Ron, and Dane.6 However, the
6

The fact that Korley is jointly obligated with AFY on the stock sale agreement does not
mean that he is in privity with AFY for res judicata purposes. See Restatement (Second) of
Judgments § 49, cmt. b (“A judgment against one obligor under a contract does not terminate the
claim against another obligor under the contract.”) (citing Restatement (Second) of Contracts § 291);
DKN Holdings LLC v. Faerber, 352 P.3d 378 (Cal. 2015) (“The liability of each joint and several
obligor is separate and independent, not vicarious or derivative. Thus, joint and several obligors are
not considered to be in privity for purposes of issue or claim preclusion.”) (citations omitted);
Latham v. Wells Fargo Bank, N.A., 896 F.2d 979, 984 (5th Cir.1990) (borrower’s personal lender

-26-

Eighth Circuit has held that he was not a “person aggrieved” by the allowance of such
claims and therefore did not have standing to appeal the bankruptcy court’s order.
A party’s inability to appeal is generally recognized as an exception to issue
preclusion. See Restatement (Second) of Judgments § 28(1) (“Although an issue is
actually litigated and determined by a valid and final judgment, and the determination
is essential to the judgment, relitigation of the issue in a subsequent action between
the parties is not precluded” when “[t]he party against whom preclusion is sought
could not, as a matter of law, have obtained review of the judgment in the initial
action....”); Johnson v. Watkins, 101 F.3d 792, 795 (2d Cir. 1996) (“If a party has not
had an opportunity to appeal an adverse finding, then it has not had a full and fair
opportunity to litigate that issue.”) (applying New York law); Standefer v. United
States, 447 U.S. 10, 23 n. 18 (1980) (collateral estoppel doctrine “is premised upon
an underlying confidence that the result achieved in the initial litigation was
substantially correct. In the absence of appellate review, or of similar procedures, such
confidence is often unwarranted.”).
No reason suggests itself as to why this exception should not also apply to
claim preclusion, which “is much broader, encompassing a prohibition against
relitigation of those matters which, not only, were litigated but, also, of those which
could have been litigated.” C.H. Robinson Worldwide, Inc. v. Lobrano, 695 F.3d 758,
764 (8th Cir. 2012) (quoting Williams v. City of Marksville, 839 So.2d 1129, 1131
(La.Ct.App. 2003) (emphasis in original)). In fact, the Supreme Court has indicated
that “claim preclusion is subject to the same limitation” that there be a full and fair
opportunity to litigate. Kremer, 456 U.S. at 481 n. 22.
liability claims against banks were not barred under the doctrine of res judicata, even though
borrower’s corporations, which were coborrowers, had settled their claims against the banks in their
bankruptcy proceedings); Putnam Mills Corp. v. United States, 479 F.2d 1334, 1340 (Ct.Cl.,1973)
(“The words ‘privity’ or ‘privy’ ... are not necessarily interchangeable between the contract and res
judicata contexts.”). “Privity does not exist merely because parties happen to be interested in the
same question, or in proving or disproving the same state of facts.” Headley v. Bacon, 828 F.2d
1272, 1277 n. 4 (8th Cir. 1987).

-27-

Korley contends that the Eighth Circuit’s holding that he had no standing in that
court “also means that Korley had no Appellate standing in BAP and that BAP had
no subject matter jurisdiction” (Filing No. 7, at CM/ECF p. 29). The bankruptcy
appellate panel ruled otherwise, noting that until the disallowance of his Claim No.
26 was affirmed, “there was a possibility that Korley would be a claimant of [AFY’s]
estate.” In re AFY, Inc., 463 B.R. at 491-92. Thus, although the bankruptcy court’s
decision was not reviewed by the Court of Appeals, it was reviewed, and affirmed, by
the Bankruptcy Appellate Panel.
Korley also contends he did not have a full and fair opportunity to litigate
because the bankruptcy court denied his motions for a continuance to conduct
discovery and for a hearing with live witnesses. In denying the motions, the
bankruptcy court explained:
The court generally agrees with Mr. Strasheim that an opportunity
for discovery and cross examination are important elements in any claim
objection proceeding, but the hearing on affidavit evidence should not
be eliminated. Mr. Strasheim still has over three weeks to conduct initial
discovery (and obviously has had many months to have done so).
Further, at such a hearing, the Court can determine the complexity of the
issues, the efforts of the parties to date, and whether further proceedings
are necessary or appropriate under the circumstances. Also, it gives the
parties the opportunity to properly frame the issues, reach agreement on
various matters and address any contested issues of law. Finally, contrary
to movant’s assertion that Korley Sears will be prejudiced by having to
appear, it is not necessary for him to appear at an affidavit evidence
hearing.
(In re AFY, Inc., Bankruptcy Case No. 10-40875, Doc. 386 (text only order).)
Subsequently, in denying Korley and Robert’s objections to the claims of Rhett, Ron,
and Dane, the bankruptcy court stated:
Mr. Strasheim requested the hearings be postponed to allow time
for discovery and that they be set for live testimony. While the court
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generally agrees that time for discovery and live testimony are generally
appropriate where there are disputed issues of fact, Mr. Strasheim’s
motions were denied and the hearing held to determine the extent of any
factual disputes and to determine issues of law (Fil. #386).
(In re AFY, Inc., Bankruptcy Case No. 10-40875, Doc. 493, at CM/ECF p. 2 n. 1.)
There was no abuse of discretion by the bankruptcy court. See In re Hecker, 703 F.3d
1112, 1115 (8th Cir. 2013) (“The decision to grant a continuance of a hearing is
within the discretion of the trial court and is only reversible upon showing abuse of
discretion.”); Archdiocese of Milwaukee v. Doe, 743 F.3d 1101, 1109 (7th Cir. 2014)
(bankruptcy court did not abuse its discretion in declining to permit claimant to
present oral testimony at summary judgment hearing).
In summary, by appearing as a party in AFY’s bankruptcy case, Korley has
precluded himself from raising any objections to the transactionally related claims of
Rhett, Ron, and Dane in his bankruptcy case. At a minimum, he is precluded from
relitigating the same issues. But even if res judicata principles do not apply, the
bankruptcy court properly granted summary judgment in favor of the claimants, for
the reason which will be discussed below.
B. Presumption of Validity and Amount of Claims (Issue 7)
Rule 3001(f) of the Federal Rules of Bankruptcy Procedure provides that “[a]
proof of claim executed and filed in accordance with these rules shall constitute prima
facie evidence of the validity and amount of the claim.” Korley argues that “Official
Form B10 for a proof of claim requires that when interest is included to the amount
claimed the Claimant should attach a statement that itemizes the interest,” and because
“Appellees have included interest but not attached the itemized calculation” they “did
not comply with Rule 3001[(a)], which requires that “a proof of claim shall conform
substantially to the appropriate Official Form.” (Filing No. 7, at CM/ECF pp. 56-57).
He makes no argument that the proofs of claim filed by Rhett, Ron, and Dane are

-29-

deficient in any other respect or do not constitute prima facie evidence of the validity
(as opposed to the amounts) of their claims.
Rule 3001(c) provides that “[i]n a case in which the debtor is an individual ...
[i]f, in addition to its principal amount, a claim includes interest ... incurred before the
petition was filed, an itemized statement of the interest ... shall be filed with the proof
of claim.” Fed. R. Bankr. P. 3001(c)(2)(A). “If the holder of a claim fails to provide
any information required by this subdivision (c), the court may, after notice and
hearing, ... preclude the holder from presenting the omitted information, in any form,
as evidence in any contested matter or adversary proceeding in the case, unless the
court determines that the failure was substantially justified or is harmless....” Fed. R.
Bankr. P. 3001(c)(2)(D)(i). The bankruptcy court did not specifically discuss the
claimants’ failure to itemize interest in their proofs of claim, but presumably
considered the omissions harmless. The evidence presented in support of the
claimants’ motion for summary judgment supports the amounts of interest claimed.
C. Formation of Contract (Issue 8)
Korley argues “the evidence shows disputed material facts whether, as Korley
contends, the Contract did not impose liability on AFY for the Deferred Price for the
stock in AFY sold to Korley as Korley contends, or the Stock Sale Agreement did
impose liability on AFY for the stock in AFY sold to Korley as Rhett, Ron & Dane
contend” (Filing No. 7, at CM/ECF pp. 43-44). This argument is meritless because
AFY’s liability was conclusively established in AFY’s bankruptcy case, and even if
AFY’s liability were open to question, it would not affect Korley’s personal liability
under the stock sale agreement.
D. Post-Petition Defenses (Issues 9, 12-15 and 20)
Under 11 U.S.C. § 502(b), a post-petition event does not serve as a basis to
disallow a proof of claim. See In re Strangis, 67 B.R. 243, 246 (Bankr. D. Minn.
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1986) (“Proper focus of the language regarding disallowance of a claim [under §
502(b)(1)], is on prepetition enforceability, not post-petition enforceability”); Zilka
v. Bononi (In re Zilka), 407 B.R. 684 (Bankr. W.D.Pa. 2009) (holding that debtor’s
post-petition waiver defense is of no effect because creditor’s claims are determined
as of the date of the bankruptcy filing under § 502(b)(1)). Korley cannot raise postpetition defenses by invoking 11 U.S.C. § 558. See In re Genuity, Inc., 323 B.R. 79,
83 (Bankr. S.D.N.Y. 2005) (finding § 558 inapplicable because debtors were not
asserting any of their pre-petition defenses); In re Papercraft Corp., 127 B.R. 346
(Bankr. W.D.Pa. 1991) (“Section 558 preserves to the Debtor its prepetition defenses
to causes of action.”); see also Fed. R. Bankr. P. 3007 (“A party in interest shall not
include a demand for relief of a kind specified in Rule 7001 in an objection to the
allowance of a claim....”).
E. Failure of Consideration (Issue 10)
Korley argues that there was a failure of consideration because after AFY filed
for bankruptcy, Rhett, Ron and Dane “caused [Joseph] Badami to be put in as Chapter
11 Trustee” and “he immediately sold the feedyard and associated farmland” (Filing
No. 7, at CM/ECF p. 54). Korley claims the sale “made any Chapter 11 plan virtually
impossible” (Filing No. 7, at CM/ECF p. 23). This argument appears to be simply
another post-petition defense which cannot be raised under § 502(b).
F. Supervening Frustration or Impracticability (Issue 11)
Korley also argues that he “was discharged from liability under the Contract
because AFY’s 49,000 head feedyard and associated farmland was necessary for his
performance under the Contract” (Filing No. 7, at CM/ECF p. 55). As discussed by
the bankruptcy appellate panel in AFY’s bankruptcy case, a party is not relieved of
his contractual duties simply because he is no longer able to pay them. Under the
theory of discharge by “supervening frustration,” a party no longer has the duty to
perform under a contract “unless the language or the circumstances indicate to the
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contrary” in circumstances “[w]here, after a contract is made, a party’s principal
purpose is substantially frustrated without his fault by the occurrence of an event the
non-occurrence of which was a basic assumption on which the contract was made.”
Restatement (Second) of Contracts § 265 (quoted in Cleasby v. Leo A. Daly Co., 376
N.W.2d 312, 318-19 (1985)). As also pointed out by the panel, “the Stock Sale
Agreement itself recognizes the possibility of [AFY’s] bankruptcy ....” In re AFY, Inc.,
463 B.R. at 491. Discharge by supervening impracticability “involves essentially the
same sorts of determinations.” Restatement (Second) of Contracts § 265, cmt. a.
G. Executory Contract (Issues 16 and 17)
The bankruptcy court fully addressed Korley’s arguments that the stock sale
agreement is an executory contract, and no additional discussion is required.
H. Contract Meaning (Issue 18)
Finally, Korley appears to object that the bankruptcy court did not make a
specific finding, like it did in AFY’s bankruptcy case, that the stock sale agreement
is unambiguous. However, he fails to identify any ambiguity. He also failed to make
such an argument to the bankruptcy court, and thereby waived the issue. See, e.g., In
re MBA Poultry, L.L.C., 291 F.3d 528, 534 n. 3 (8th Cir. 2002) (declining to address
argument not raised in the bankruptcy court).
V. Conclusion
The bankruptcy court did not err in granting summary judgment in favor of the
appellees/claimants, Rhett R. Sears and Rhett R. Sears Revocable Trust, Ronald H.
Sears and Ronald H. Sears Trust, and Dane Sears, and allowing their claims over the
objections of the debtor/appellant, Korley B. Sears.
Accordingly,
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IT IS ORDERED that the bankruptcy court’s judgment is affirmed. Judgment
shall be entered by separate document.
August 25, 2015.

BY THE COURT:
Richard G. Kopf
Senior United States District Judge

*This opinion may contain hyperlinks to other documents or Web sites. The U.S. District Court for the District
of Nebraska does not endorse, recommend, approve, or guarantee any third parties or the services or products they
provide on their Web sites. Likewise, the court has no agreements with any of these third parties or their Web sites. The
court accepts no responsibility for the availability or functionality of any hyperlink. Thus, the fact that a hyperlink ceases
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