922 F.2d 895 (1st Cir. 1990), 90-1311, In re Medomak Canning

Docket Nº:90-1311, 90-1312.
Citation:922 F.2d 895
Party Name:In re MEDOMAK CANNING, Debtor. Dennis G. BEZANSON, Trustee, Plaintiff, Appellee, v. BAYSIDE ENTERPRISES, INC., et al., Defendants, Appellees. Cara Corporation, Cross-Claim Plaintiff, Appellant. In re MEDOMAK CANNING, Debtor. Dennis G. BEZANSON, Trustee, Plaintiff, Appellee, v. BAYSIDE ENTERPRISES, INC., et al., Defendants, Appellees. Acme Engineeri
Case Date:December 28, 1990
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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922 F.2d 895 (1st Cir. 1990)

In re MEDOMAK CANNING, Debtor.

Dennis G. BEZANSON, Trustee, Plaintiff, Appellee,

v.

BAYSIDE ENTERPRISES, INC., et al., Defendants, Appellees.

Cara Corporation, Cross-Claim Plaintiff, Appellant.

In re MEDOMAK CANNING, Debtor.

Dennis G. BEZANSON, Trustee, Plaintiff, Appellee,

v.

BAYSIDE ENTERPRISES, INC., et al., Defendants, Appellees.

Acme Engineering Company, Cross-Claim Plaintiff, Appellant.

Nos. 90-1311, 90-1312.

United States Court of Appeals, First Circuit

December 28, 1990

Heard Aug. 1, 1990.

Rehearing Denied Jan. 24, 1991.

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[Copyrighted Material Omitted]

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Gregory W. Swope with whom Sheehan, Phinney, Bass & Green, P.A., Manchester, N.H., was on brief, for Cara Corp.

Christopher Kennedy with whom Sidney St. F. Thaxter and Curtis Thaxter Stevens Broder & Micoleau, Portland, Me., were on brief, for Acme Engineering Co.

Stuart W. Tisdale, Jr., with whom Richard E. Poulos and Poulos, Campbell & Zendzian, P.A., Portland, Me., were on brief, for defendants, appellees.

Before CAMPBELL and SELYA, Circuit Judges, and BOWNES, Senior Circuit Judge.

LEVIN H. CAMPBELL, Circuit Judge.

Appellants Acme Engineering Company ("Acme") and Cara Corporation ("Cara") appeal from an order of the district court affirming the bankruptcy court's dismissal of their cross-claim against Bayside Enterprises, Inc. ("Bayside") and Poultry Processing, Inc. ("PPI"). 111 B.R. 371. The bankruptcy court ruled that appellants' cross-claims asserting equitable subordination against appellees were barred by the doctrine of res judicata, because the Chapter 7 Trustee in bankruptcy for Medomak Canning Company ("Medomak") had earlier compromised the estate's equitable subordination claims in a court-approved settlement. We affirm.

I. FACTS AND PROCEDURES BELOW

Medomak is the debtor in a bankruptcy proceeding under 11 U.S.C. Chapter 7. Along with other asserted interests in Medomak's assets, Bayside and PPI held mortgages on certain of its real property. Acme possessed a mechanic's lien on the same property, but as a result of its former attorneys' failure to name Bayside and PPI as defendants in the state court action establishing the lien, Acme's mechanic's lien was junior to the mortgages of Bayside and PPI. Funds from the court-approved sale of the property were sufficient only to satisfy Bayside's and PPI's mortgage indebtedness, rendering Acme's claim unsecured. 1 Cara obtained a post-judgment attachment lien on the same property in a state court action against Medomak and filed a secured proof of claim. As the lien was obtained within the 90-day preference period, however, it appears to be avoidable. 11 U.S.C. Sec. 547(b)(4)(A). Cara concedes in any event that the lien could not be satisfied from the sale proceeds of the property if Bayside's and PPI's mortgages were given effect.

Central to this dispute is a compromise agreement (the "Compromise") reached between the Trustee and the appellees. This agreement was embodied in a Joint Application for Approval of Compromise that was presented to the bankruptcy court for consideration and ultimately approved by it. The Compromise agreement states: "The Trustee, Bayside and PPI claim that all of the above alleged secured claims [including the Acme mechanic's lien and the Cara attachment but excluding Bayside's and PPI's mortgages] are unsecured based on the value of the collateral securing the said claims." Pursuant to the settlement, Bayside and PPI agreed to pay a lump sum to the estate and to voluntarily

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subordinate their remaining claims (other than the mortgages) to all other allowed unsecured claims. In exchange, the Trustee agreed to release "any and all" of his own claims against Bayside and PPI. 2

The Compromise further provided that Bayside's and PPI's mortgages would be allowed as a secured claim and paid "upon entry of a final order by the bankruptcy court determining the validity, extent, priority, allowability and/or amount of all the claimed secured claims specified in Paragraphs III. E and F below." Among these were the Acme mechanic's lien and Cara attachment. Paragraph F repeats that the Trustee shall file a complaint to determine the validity, nature, extent, priority, allowability, and/or amount of claims, including those of Acme and Cara.

Pursuant to Bankruptcy Rule 9019, the bankruptcy court notified Acme and Cara of the hearing seeking the court's approval of the Compromise. Cara did not appear at the hearing nor did it object to the Compromise. Acme appeared and filed a written objection stating that, to the extent the application for approval of the Compromise assumed that Bayside's and PPI's claims had priority over Acme's claims, Acme objected:

on the grounds that Acme has consistently maintained and continues to maintain that its claims have priority over the claims of Bayside and PPI.

Acme claims priority over Bayside and PPI in that Acme holds a mechanics lien on the real property of Medomak Canning. (See Exhibit A.) ... Because of Acme's claim of priority to the real property it is inappropriate for the bankruptcy court to approve the ... Compromise until the application is clarified to reflect that the priorities of all parties are to be determined via the Trustee's complaint.

While Acme thus claimed priority over Bayside and PPI, and sought a hearing on priorities upon the Trustee's complaint, Acme did not then assert equitable subordination as the basis for its claimed senior status but rather relied solely upon its mechanic's lien. The bankruptcy court overruled Acme's objection but stated in the order approving the Compromise:

... Acme Engineering Company's objection is addressed favorably by [the Compromise] in that [The Compromise] does not determine the said creditors' priority or right to proceeds of the sale of the Debtor's real and personal property; rather the validity, nature, extent, priority, allowability and amount of the claim of the various creditors shall be subsequently determined in an action to be brought by the Trustee.

After the bankruptcy court so clarified the Compromise terms, Acme withdrew its objection.

As provided in the Compromise, the Trustee subsequently commenced this separate adversary proceeding seeking determination of the various creditors' claims. Cara moved to add appellees Bayside and PPI as cross-claim defendants, for the purpose, Cara said, of complaining that Bayside's and PPI's claims should be equitably subordinated to Cara's claim. Appellees did not object to this motion, and it was granted. The Trustee's motion for an order authorizing establishment of escrow for the benefit of Cara's and Acme's disputed claims was also granted. Cara then filed its complaint against Bayside and PPI, stating its claim for equitable subordination. Acme similarly cross-claimed against appellees, asserting that Bayside and PPI were equitably estopped from claiming that their mortgages had priority over Acme's interest. Acme's subsequent motion to amend its cross-claim to add an equitable subordination claim was allowed to the extent it related to the establishment of a valid secured lien with priority over the valid secured claims of appellees, but was denied to the extent Acme sought to recover as an unsecured creditor.

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Thereafter, appellees moved for dismissal of appellants' equitable subordination claims, asserting that the bankruptcy court's order approving the Compromise was res judicata on the equitable subordination claims. The bankruptcy court considered and granted the motion to dismiss as a motion for summary judgment pursuant to Fed.R.Civ.P. 12(c). 3 The district court affirmed.

II. THE DISTRICT COURT'S OPINION

In upholding the bankruptcy court's determination that the Compromise and Order of Approval were res judicata as to Acme and Cara's subsequent equitable subordination cross-claims, the district court reasoned as follows:

(1) The court found that the Joint Application and Compromise indicated:

the Trustee had investigated potential claims of preferential transfers, fraudulent transfers, and equitable subordination against Appellees, but...

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