Energy Co-op., Inc., Matter of

• Decision Date: 10 June 1987
• Docket Number: No. 86-1243,86-1243
• Citation: 814 F.2d 1226
• Parties: 17 Collier Bankr.Cas.2d 193, Bankr. L. Rep. P 71,730 In the Matter of ENERGY COOPERATIVE, INC., a Delaware corporation, Bankrupt- Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1226

814 F.2d 1226

17 Collier Bankr.Cas.2d 193, Bankr. L. Rep. P 71,730

In the Matter of ENERGY COOPERATIVE, INC., a Delaware

corporation, Bankrupt- Appellant.

No. 86-1243.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 3, 1986.

Decided March 24, 1987.

As Modified on Denial of Rehearing June 10, 1987.

Ronald Barliant, Miller, Shakman, Nathan & Hamilton, Chicago, Ill., for bankrupt-appellant.

Pamela S. Hollis, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for appellee.

Before CUDAHY, EASTERBROOK and RIPPLE, Circuit Judges.

CUDAHY, Circuit Judge.

Energy Cooperative, Inc. ("ECI") appeals the dismissal of its suit against Phillips Petroleum Company ("Phillips") to recover more than $7.3 million which ECI claims is a voidable preference under section 547(b) of the Bankruptcy Code. 11 U.S.C. Sec. 547(b) (1982). We conclude that this cause of action is barred by res judicata and accordingly affirm the decision of the district court.

I.

ECI operated a petroleum refinery in East Chicago, Indiana. In the course of its business, ECI traded petroleum products pursuant to "exchange agreements" with other oil companies, including the defendant-appellee, Phillips. Under these exchange agreements, ECI

agreed to deliver various types of crude oil, refined oil and/or other oil and petroleum products to various suppliers, refineries and/or distributors at various locations throughout [t]he United States ... in exchange for the respective agreements of such suppliers, refineries and/or distributors to deliver such crude oil, refined oil and/or other oil and petroleum products to ECI.

In re Energy Cooperative, Inc., No. 81-B-005811 (Bankr.N.D.Ill. June 19, 1981) (the "Compromise Authorization Order").

ECI filed a voluntary petition in bankruptcy under chapter 11 of the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq. (1982), ¹ on May 15, 1981. The company operated as debtor-in-possession under chapter 11 until May 31, 1984 when the case was converted to a proceeding under chapter 7.

On June 19, 1981, the bankruptcy court entered an order authorizing ECI to compromise, settle and collect balances that were owed to it under its pre-bankruptcy exchange agreements. Compromise Authorization Order. The court found that, due to falling oil prices, swift settlement of the exchange agreements was in the best interests of ECI and its creditors. Id. at 7. The order provided, in relevant part, as follows:

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED:

1. That the Debtor be, and it hereby is, authorized, without any appraisal or further notice to, hearing, or approval by, this Bankruptcy Court, or any creditors, entities, or parties in interest:

(i) to effect and authorize the taking by the Exchange Partners of various set-offs arising from any business dealings of ECI with the Exchange Partners, to which the Exchange Partners may be entitled;

(ii) to negotiate and agree with each of the Exchange Partners upon a final settlement and liquidation of the obligations remaining under each respective Exchange Agreement; and

(iii) where appropriate, to adjust and compromise any disputed amounts or obligations owing under the Exchange Agreements; provided, that the Debtor shall make no adjustment, compromise or settlement of any amounts or obligations owing under the Exchange Agreements, which adjustment, compromise or settlement, if it had been made prior to the commencement of this reorganization case, could be avoided by the Debtor or a trustee pursuant to applicable provisions of the Bankruptcy Code[.]

Id. at 9-10. Subparagraph (iii) was modified on July 23, 1981 by order of the bankruptcy court to clarify its scope and extent. In re Energy Cooperative, Inc., No. 81-B-005811 (Bankr.N.D.Ill. July 23, 1981). The amendment of this provision became effective, nunc pro tunc, as of June 19, 1981, and provided:

(iii) where appropriate, to adjust and compromise any disputed amounts or obligations owing under the Exchange Agreements, provided, however, that the Debtor has no authority to settle, adjust or compromise any claim, cause or right, which claim, cause or right could form the basis of any cause of action which may be brought pursuant to any avoiding or recovery provisions of the Bankruptcy Code.

Id. at 3.

Acting pursuant to the Compromise Authorization Order, ECI attempted to collect an exchange account balance due from Phillips. ² The parties did not dispute the amount owed, only the form of payment. Phillips declined to pay ECI in cash, claiming that under the terms of their exchange agreement, ECI was only entitled to delivery of product. ECI then filed a complaint in bankruptcy court alleging that Phillips owed ECI $1,564,666.97 for petroleum that ECI had over-delivered to Phillips under the exchange agreement. Complaint to Recover Exchange Balance p 6. ECI subsequently agreed to accept delivery of product in settlement of this action, and the suit was dismissed on ECI's motion on September 22, 1982. In re Energy Cooperative, Inc., No. 81-B-05811 (Bankr.N.D.Ill. Sept. 22, 1982). The order dismissing the suit stated that the proceeding was dismissed "with prejudice" and did not provide that ECI reserved the right to litigate any other issues arising from its exchange agreement in subsequent suits involving Phillips.

On October 14, 1982, ECI filed a complaint against Phillips which forms the basis of the suit before us. ³ ECI seeks recovery of $7,320,762.00 that it transferred to the defendant on account of debts owed by ECI under their exchange agreement. Complaint to Recover Preferential Transfer p 6. The theory of ECI's present suit is that the money transferred by ECI was a preference under section 547(b) of the Bankruptcy Code, 11 U.S.C. 547(b) (1982), and the transfer was, therefore, voidable by ECI. Id. p 9. Phillips subsequently moved to dismiss the proceeding as res judicata, contending that the dismissal of the earlier suit to collect the exchange account balance barred any further litigation arising out of Phillips' exchange agreement with ECI.

On November 7, 1985, the district court, which had assumed jurisdiction by withdrawing the reference of this case to the bankruptcy court, granted Phillips' motion on the basis of both res judicata and equitable estoppel. In re Energy Cooperative, Inc., Nos. 81-B-5811, 82-A-3736, 85-C-3556 (N.D.Ill. Nov. 7, 1985) ("Transcript of Proceedings"). With respect to equitable estoppel, the court found that ECI never claimed during the pendency of the account balance suit that it was entitled to recover the $7.3 million that it had previously transferred to Phillips. Accordingly, if Phillips had been made aware that ECI intended to assert this preference claim, it would have recognized its status as a creditor of ECI and would never have transferred $1.5 million of petroleum products to the bankrupt in the account balance settlement. The court found that the present suit was also barred by res judicata because the alleged preference arose out of the same exchange agreement that was the subject of the earlier suit. On January 29, 1986, the district court denied the trustee's motion to vacate its earlier ruling granting Phillips' motion to dismiss. In re Energy Cooperative, Inc., Nos. 85-C-3556, 81-B-5811, 82-A-3736, mem. op. (N.D.Ill. Jan. 29, 1986) ("mem. op."). This appeal followed.

II.

Because the prior litigation was brought in federal court, the federal rule of res judicata determines whether the account balance suit bars ECI from maintaining this action. See Restatement (Second) of Judgments Sec. 87 (1982); 18 C. Wright, A. Miller, E. Cooper, Federal Practice and Procedure Sec. 4466 (1981); Degnan, Federalized Res Judicata, 85 Yale L.J. 741, 769 (1976).

For res judicata to apply, three requirements must be met: (1) an identity of the parties or their privies; (2) an identity of the causes of actions; and (3) a final judgment on the merits. Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 2427, 69 L.Ed.2d 103 (1981); see also Car Carriers, Inc. v. Ford Motor Co., 789 F.2d 589, 595 n. 9 (7th Cir.1986); 1B J. Moore, J. Lucas, T. Currier, Moore's Federal Practice paragraphs 0.410, 0.411 (2d ed. 1984). The only disputed requirement in this case is whether there is a sufficient identity of the causes of action.

The district court, in dismissing ECI's suit, applied the "operative facts" or "same transaction" test to define "cause of action," Transcript of Proceedings at 5-6, which is the dominant definition applied in this circuit. Under this test, a "cause of action" consists of " 'a core of operative facts' which give rise to a remedy." Car Carriers, 789 F.2d at 593 (quoting Alexander v. Chicago Park Dist., 773 F.2d 850, 854 (7th Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 1492, 89 L.Ed.2d 894 (1986)); see also Mandarino v. Pollard, 718 F.2d 845, 849 (7th Cir.1983), cert. denied, 469 U.S. 830, 105 S.Ct. 116, 83 L.Ed.2d 59 (1984); Harper Plastics, Inc. v. Amoco Chemicals Corp., 657 F.2d 939, 944 (7th Cir.1981).

ECI contends that we should apply an ostensibly narrower definition of "cause of action" than that applied by the district court. According to ECI, to determine whether two suits arose out of a common core of operative facts, the appropriate question is whether the same evidence could support both claims. Appellant's Brief at 23-25. ECI also argues that we should apply a second test, apart from the operative facts test, under which the similarity of the claims is assessed with emphasis on the source of the rights and injuries at issue. Id. at 30. To support its position, ECI relies primarily on cases applying Illinois res judicata law, which employ these narrower formulations of the standard for claim preclusion. See, e.g., Redfern v. Sullivan, 111 Ill.App.3d 372, 376, 67 Ill.Dec. 166, 444 N.E.2d 205, 208 (4th Dist.1982); City of Elmhurst v. Kegerreis, 392 Ill. 195, 205-06, 64 N.E.2d 450, 454 (1945). ⁴

As...