CoreStates Bank, N.A. v. Huls America, Inc.
| Citation | 176 F.3d 187 |
| Decision Date | 11 May 1999 |
| Docket Number | No. 97-1784,97-1784 |
| Parties | , Bankr. L. Rep. P 77,927 CORESTATES BANK, N.A., Appellant v. HULS AMERICA, INC. |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
Walter Weir, Jr., (Argued), Weir & Partners, Philadelphia, PA, Counsel for Appellant.
David J. D'Aloia, Vincent F. Papalia, (Argued), Adam S. Ravin, Saiber, Schlesinger, Satz & Goldstein, LLC, Newark, NJ, Edward J. DiDonato, DiDonato & Winterhalter, Philadelphia, PA, Counsel for Appellee.
Before: BECKER, Chief Judge, STAPLETON and WEIS, Circuit Judges.
This appeal by CoreStates Bank, N.A. ("CoreStates") requires us to consider the putative claim preclusive effect of the Bankruptcy Judge's denial of CoreStates's objections to a Chapter 11 bankruptcy reorganization plan confirmation. Both CoreStates and appellee Huls America, Inc. ("Huls") had extended substantial credit to the debtor, United Chemical Technologies, Inc. ("UCT"), a chemical separation science company, to facilitate the purchase by UCT of a manufacturing facility from Huls. They then entered into a Subordination Agreement in order to clarify their respective rights to receive payment from UCT. Under the Agreement, UCT's debts to Huls were subordinated to CoreStates's. Huls also agreed that it would not retain any payment by UCT, including those paid under a bankruptcy plan, until UCT had paid off its indebtedness to CoreStates in full.
After UCT filed for bankruptcy, but before the Plan of Reorganization was finally confirmed, UCT paid to Huls some $600,000 as called for by the Plan. CoreStates demanded that Huls pay this sum over to it. CoreStates filed objections to the Plan on the grounds, inter alia, that the Plan entitled Huls to receive $600,000 immediately, asserting that this proposed payment unfairly discriminated between creditors. CoreStates did not contend to the Bankruptcy Judge that the $600,000 had to be paid over to it pursuant to the Subordination Agreement.
Subsequently, CoreStates filed the present suit in the District Court, alleging that Huls is obligated by the Subordination Agreement to turn the $600,000 over to CoreStates. The issue on appeal is whether CoreStates has a right to receive the funds, when both CoreStates's and Huls's rights in the bankruptcy estate, and CoreStates's objection based on the payment in particular, were settled in the confirmation proceeding. The District Court concluded that CoreStates's claim was precluded because CoreStates could have raised its claim based on the Agreement in the bankruptcy proceeding alongside its objection, but failed to do so. See Corestates Bank, N.A. v. Huls America, Inc., No. Civ. A. 96-8119, 1997 WL 560193 (E.D.Pa. Aug.28, 1997).
This case is difficult because it falls within the interstices of the law of judgments. As discussed below, a Bankruptcy Judge's order rejecting a creditor's objection to a bankruptcy reorganization plan acts as a final judgment for preclusion purposes. In this case, CoreStates objected to the Plan because it would result in the immediate payment of $600,000 to Huls, and its objection seems to subsume the Subordination Agreement, even though it was not advanced in terms. As a result, both issue preclusion and claim preclusion might have some relevance to the present litigation, which concerns whether Huls is obligated by the Subordination Agreement to turn the $600,000 over to CoreStates. We think that claim preclusion provides the more appropriate framework, however, because we are unsure that the Subordination Agreement was raised with sufficient clarity in the reorganization proceeding to give rise to issue preclusion.
Claim preclusion bars a party from litigating a claim that it could have raised or did raise in a prior proceeding in which it raised another claim based on the same cause of action. Agreeing with three other circuits (two are of the contrary view), we conclude that the doctrine applies regardless of the type of bankruptcy jurisdiction--core or non-core--within which the current claim would fall. Moreover, we believe that the facts of this case--particularly where the parties were formerly creditors in a bankruptcy proceeding--fall within the rubric of claim preclusion, albeit at the margin.
Although our holding is largely fact-bound, insofar as we bring it within the claim preclusion jurisprudence we are obliged to flesh out its doctrinal aspect. We note in this regard the limiting effects on these precepts of the internal elements of the claim preclusion test itself, set forth in Board of Trustees of Trucking Employees Welfare Fund, Inc. v. Centra, 983 F.2d 495, 504 (3d Cir.1992), and of the statutory constraints on the scope of bankruptcy jurisdiction. First, claim preclusion applies only if the current claim would have been within the jurisdiction of the court hearing the prior bankruptcy proceeding. A claim, in order to fall within the bankruptcy jurisdiction, must at least be one that "could conceivably have any effect on the estate being administered in bankruptcy." Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984). Second, except possibly in certain unusual circumstances, claim preclusion applies only if the party to be precluded raised a claim, such as an objection to a reorganization plan, in a prior proceeding. Finally, claim preclusion applies only if the events underlying the current claim are essentially similar to those underlying the claim made in the bankruptcy proceeding. If the current claim alleged to be precluded does not meet these three requirements it will not be precluded.
CoreStates's claim clearly meets these three requirements. First, it could have raised its claim under the Subordination Agreement during the confirmation proceeding along side its objections, both as a legal and as a factual matter. The claim based on the Subordination Agreement fell within the non-core "related to" bankruptcy jurisdiction, if not the core jurisdiction. In addition, since UCT paid Huls the money before the Plan was confirmed, CoreStates's claim accrued before the confirmation proceeding concluded. Second, CoreStates filed an objection to the confirmation of UCT's Plan of Reorganization that was argued at length before the Bankruptcy Judge and the District Court by both CoreStates and Huls. This objection put into controversy the entire amount that Huls was to receive in full satisfaction of its claims against UCT. Third, CoreStates's objection to the confirmation of the Plan involved the same underlying factual issues as CoreStates's present claim. We therefore conclude that the District Court correctly found that CoreStates's claim was precluded; hence we will affirm.
This case arises out of a series of events culminating in the bankruptcy reorganization of UCT. See Corestates Bank, N.A. v. United Chem. Techs., Inc., 202 B.R. 33 (E.D.Pa.1996). In 1993, UCT purchased from Huls a facility that manufactured specialty chemicals. 1 This purchase was funded in part by loans and extensions of credit from CoreStates, totaling about $1.1 million. 2 Huls also provided financing for the purchase and, after the sale, continued to supply products to UCT on credit terms. As a condition of the financing, CoreStates, UCT and Huls executed a Subordination Agreement ("the Agreement"). The Agreement provided, in part, that Huls would subordinate its claims to CoreStates's and would not retain any payment by UCT until UCT's indebtedness to CoreStates had been paid off in full. It further provided that, if any bankruptcy proceeding was filed by or against UCT, Huls would hold any payments it received pursuant to that proceeding as trustee for the benefit of CoreStates and deliver such payments immediately to CoreStates.
As a consequence of an explosion at UCT's new facility, UCT filed for Chapter 11 protection in October 1995. UCT filed its first Plan of Reorganization in February 1996. This plan met with resistance from a number of interested parties, including Huls and CoreStates. Following further negotiations, UCT submitted a First Amended Plan of Reorganization in March 1996. The Amended Plan had the consent of all interested parties except CoreStates, which objected to it.
Under the Amended Plan, CoreStates was to receive a cash payment of $550,497 on the Plan's effective date, and repayment of remaining lines of credit and mortgages with interest over periods ranging from five to fifteen years. CoreStates would also retain all its liens and security interests, except for certain machinery and equipment liens. Huls, a creditor with a priority junior to CoreStates, was to receive a $600,000 cash payment in full satisfaction of its more than $3.2 million in claims, approximately $2.3 million of which was secured. Nothing in the Amended Plan purported to modify or nullify the Agreement as between CoreStates and Huls.
CoreStates filed an action in the form of objections to the Amended Plan. These objections did not refer to the Agreement. CoreStates did, however, specifically object on the grounds that under the Plan Huls was entitled to receive $600,000 immediately. CoreStates argued that this proposed payment to Huls unfairly discriminated between creditors.
On June 5, 1996, the Bankruptcy Judge rejected CoreStates's objections. One week later, he held a confirmation hearing. Just prior to the hearing, counsel for CoreStates informed counsel for Huls that CoreStates intended to enforce Huls's obligation to turn over the proceeds that it would receive under the Plan. At the confirmation hearing, Huls raised the issue with the court, and a brief colloquy ensued, although no papers were filed. The court did not formally resolve the issue, however, and proceeded to confirm the Plan over CoreStates's objection.
CoreStates appealed the order confirming the Amended Plan to the District Court. See Corestates, 202...
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