L & S Industries, Inc., Matter of

• Decision Date: 15 April 1993
• Docket Number: No. 91-3663,91-3663
• Citation: 989 F.2d 929
• Parties: Bankr. L. Rep. P 75,197 In the Matter of: L & S INDUSTRIES, INCORPORATED, Debtor-Appellee. Appeal of: Elaine T. WILLIAMS, Executor of the Estate of Gary Williams.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 929

989 F.2d 929

Bankr. L. Rep. P 75,197

In the Matter of: L & S INDUSTRIES, INCORPORATED, Debtor-Appellee.

Appeal of: Elaine T. WILLIAMS, Executor of the Estate of

Gary Williams.

No. 91-3663.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 23, 1992.

Decided March 24, 1993.

As Amended April 15, 1993.

Ralph E. Brown (argued), David M. Giangrossi, Schuyler, Roche & Zwirner, Chicago, IL, Judith L. Borden, Milwaukie, OR, for plaintiff-appellant.

James Geis (argued), Chicago, IL, for appellee.

Before FLAUM and RIPPLE, Circuit Judges, and KAUFMAN, Senior District Judge. ^*

FLAUM, Circuit Judge.

Toward the end of 1980, Gary Williams agreed to sell his one-half interest in L & S Industries to the company and to Lawrence Stefan. L & S Industries executed a promissory note to cover its $750,000 obligation to Williams. Stefan and his wife Judith guaranteed the obligations of L & S Industries by delivering to Williams a guaranty on the L & S promissory note. About a year after this transaction, L & S Industries filed for protection under Chapter 11 of the Bankruptcy Act. In order to pursue collection on the note, Williams initiated the first adversary complaint against L & S Industries in the bankruptcy court. L & S Industries responded by filing counterclaims and affirmative defenses against Williams. Neither of the Stefans was named in the first complaint.

In 1983, Williams filed suit against the Stefans in state court in order to enforce the guaranty. L & S Industries intervened in the state court action. Both the Stefans and the company asserted the same counterclaims and affirmative defenses as had been asserted in the first adversary proceeding. The bankruptcy proceeding was converted to Chapter 7, and the trustee replaced L & S Industries in the bankruptcy and state proceedings.

Early in 1988, Williams's Executor filed a motion for summary judgment in the first adversary proceeding. ¹ Because the assets of the estate had been virtually exhausted, the trustee moved to abandon the counterclaims and affirmative defenses. The bankruptcy court dismissed the counterclaim with prejudice, ordered the trustee to abandon any claims pending on behalf of L & S Industries in any other court, and allowed the Executor's claim against L & S Industries on the note. After the first adversary proceeding was closed, Williams moved in state court for a dismissal of the Stefans' counterclaims and affirmative defenses on the basis of res judicata. The state court considered the motion twice. First, the state court ruled that all defenses derivative of the claims of L & S Industries should be struck, although the court did not attempt to determine which of the defenses were derivative and which were personal. On subsequent consideration, the state court continued the motion with respect to any derivative claims, still without distinguishing the derivative from the personal claims.

In 1990, the Executor returned to the bankruptcy court and initiated a second adversary proceeding by filing for declarative and injunctive relief. She requested the bankruptcy court to enjoin the Stefans from asserting their counterclaims and affirmative defenses in state court. The Stefans answered and filed a motion for abstention. In its decision the bankruptcy court denied the motion for a preliminary injunction and elected to abstain from consideration of the permanent injunction, 122 B.R. 987, and the Executor appealed. The district court affirmed the decision of the bankruptcy court, 133 B.R. 119, as do we.

I.

This appeal raises a challenging question regarding the standard of review governing the denial of a motion for a preliminary injunction. ² Numerous opinions of this court have elaborated the appropriate judicial methodology for reviewing the grant or denial of a preliminary injunction. See, e.g., Thornton v. Barnes, 890 F.2d 1380 (7th Cir.1989); Ping v. National Education Ass'n, 870 F.2d 1369 (7th Cir.1989); Lawson Products, Inc. v. Avnet, Inc., 782 F.2d 1429 (7th Cir.1986); American Hospital Supply Corp. v. Hospital Products, Ltd., 780 F.2d 589 (7th Cir.1986); Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380 (7th Cir.1984). While the particular semantic characterization of the standard of review has alternated between formulaic and functional, the flexible nature of the inquiry has been constant.

In determining whether to grant a preliminary injunction, a district court typically considers whether the moving party (1) has an adequate remedy at law, (2) will suffer irreparable harm if the injunction is not issued, and (3) has some likelihood of success on the merits. Normally, our review of the district court's determination is tailored to the various functions that the district court performs in evaluating whether to grant or deny a preliminary injunction. As a consequence, appellate review will vary, based on the nature of the lower court decision: We apply the clearly erroneous standard to any factual determinations; necessary legal conclusions are subject to de novo review. Lawson, 782 F.2d at 1437. The same principles of flexible review would apply to the review of a bankruptcy court's ruling on a preliminary injunction.

However, in order to issue a preliminary injunction, a court sitting in bankruptcy need not meet all three requirements outlined above. The Bankruptcy Act provides the court with broad equitable powers to preserve its own jurisdiction: "The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a). Accordingly, a bankruptcy court can enjoin proceedings in other courts when it is satisfied that such proceedings would defeat or impair its jurisdiction over the case before it. In other words, the court does not need to demonstrate an inadequate remedy at law or irreparable harm. See In re Chicago, Milwaukee, St. Paul and Pacific R. Co., 738 F.2d 209, 213 (7th Cir.1984); In re Chateaugay Corp., 93 B.R. 26, 29 (S.D.N.Y.1988). Of course, the moving party must still establish a likelihood of success on the merits.

In assessing the likelihood of success for this case, our inquiry is along a somewhat different tack. The Executor is seeking a preliminary injunction in order to give its previous judgment preclusive effect against non-parties. In denying the Executor's request, the bankruptcy court ruled that the Stefans were not parties in interest to its decision in the first adversary proceeding. Thus, the principal consideration in evaluating the request for injunctive relief, which would confirm the res judicata effect in state court of the bankruptcy court's dismissal, is whether privity exists between L & S Industries and the Stefans.

Privity is an elusive concept. It is a descriptive term for designating those with a sufficiently close identity of interests. Of course, this definition reveals very little about the kinds of relationships that result in res judicata or, for that matter, the nature of our review. Opinions have varied as to whether privity is a question of fact, Vulcan, Inc. v. Fordees Corp., 658 F.2d 1106, 1109 (6th Cir.1981), cert. denied, 456 U.S. 906, 102 S.Ct. 1752, 72 L.Ed.2d 162 (1982), or a question of law. Southwest Airlines Co. v. Texas Int'l Airlines, Inc., 546 F.2d 84, 95 (5th Cir.), cert. denied, 434 U.S. 832, 98 S.Ct. 117, 54 L.Ed.2d 93 (1977) (privity "represents a legal conclusion rather than a judgmental process").

This confusion apparently stems from the fact-intensive nature of the inquiry. As one treatise has noted "[a]s the preclusive effects of judgments have been expanded to include nonparties in more and more situations, ... it has come to be recognized that the privity label simply expresses a conclusion that preclusion is proper. Modern decisions search directly for circumstances to justify preclusion."

18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure, § 4449, at 418-19 (1981). In other words, the legal authority of a party to act on behalf of a non-party in previous litigation may not be easily characterized as factual or legal. For example, a question of whether a non-party effectively agreed to be represented in previous litigation--such as by implied consent or by conduct--would involve the sort of factual inquiry by a district court that we would review for an abuse of discretion. See, e.g., Vulcan, 658 F.2d at 1109-1110. On the other hand, a question of whether representation of a non-party falls within some pre-existing relationship--as defined by statute, for example--would call for the kind of legal conclusion that we would review de novo. See, e.g., Secretary of Labor v. Fitzsimmons, 805 F.2d 682, 689 (7th Cir.1986) (en banc). The question of privity is therefore particularly amenable to a sliding-scale standard of review. Hence, because the present case requires a legal conclusion on the issue of privity between a guarantor and a trustee, our review is de novo.

II.

Because of the relationship between the Stefans and L & S Industries, the Executor reasons that the dismissal with prejudice by the bankruptcy court of the claims advanced by L & S Industries should bar the Stefans from pursuing them in state court. She contends that the counterclaims and affirmative defenses asserted by the Stefans as shareholders and guarantors belong to the corporation as the debtor and principal. Much of the support for this contention appears to lie in the fact that the claims put forward by the debtor and the Stefans are identical. The Executor concludes that privity should preclude the Stefans from bringing the same claims in another forum. This privity predated the bankruptcy proceedings and endured when L & S Industries became the debtor-in-possession. After the conversion to a Chapter 7 proceeding, the trustee stepped into the shoes of L & S Industries. As a result, the trustee would be in privity with the Stefans as well. Once the...