County Fuel Co., Inc. v. Equitable Bank Corp.

• Decision Date: 02 November 1987
• Docket Number: No. 86-1618,86-1618
• Parties: COUNTY FUEL COMPANY, INC., Plaintiff-Appellant, v. EQUITABLE BANK CORPORATION, d/b/a The Equitable Trust Company, a/k/a Equitable Bank, N.A., Defendant-Appellee, and Stegman & Company, a/k/a Stegman & Associates, Professional Association, Defendant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 290

832 F.2d 290

COUNTY FUEL COMPANY, INC., Plaintiff-Appellant, v. EQUITABLE BANK CORPORATION, d/b/a The Equitable Trust

Company, a/k/a Equitable Bank, N.A., Defendant-Appellee,

and

Stegman & Company, a/k/a Stegman & Associates, Professional

Association, Defendant.

No. 86-1618.

United States Court of Appeals, Fourth Circuit.

Argued March 2, 1987.

Decided Nov. 2, 1987.

Kevin M. McGeady (Edward L. Blanton, Jr.; Blanton & McCleary, Towson, Md., on brief) for plaintiff-appellant.

Donald James McCartney (Smith, Somerville & Case, Baltimore, Md., on brief) for defendant-appellee.

Before PHILLIPS and WILKINSON, Circuit Judges, and YOUNG, United States District Judge for the District of Maryland, sitting by designation.

JAMES DICKSON PHILLIPS, Circuit Judge:

County Fuel Company (County Fuel), a Chapter 11 debtor, appeals the dismissal on res judicata grounds of its claim against Equitable Bank Corporation (Equitable), a secured creditor which had earlier filed in the bankruptcy proceeding an uncontested claim based upon the same transaction giving rise to County Fuel's claim. Because the district court thought that the bankruptcy court's allowance of Equitable's uncontested claim against County Fuel constituted a final judgment on the merits as to County Fuel's later asserted claim based on the same transaction, it dismissed County Fuel's claim on res judicata grounds. We affirm the judgment of dismissal, but on different grounds of claim preclusion than that relied upon by the district court.

I

Equitable and County Fuel entered into a commercial financing security agreement on April 9, 1979, in which Equitable agreed to make loans to County Fuel in return for a security interest in all of County Fuel's accounts receivable then existing and later acquired. Equitable extended loans to County Fuel over a period of time pursuant to the agreement.

A June 29, 1981 letter from Equitable to County Fuel demanded payment of the full balance of the loan, $197,682, within five business days. When County Fuel failed to pay, Equitable brought legal proceedings in a state court to obtain access to the accounts receivable. The state court granted Equitable's request for an injunction requiring County Fuel to deposit all receivables into a special account. County Fuel responded on July 6, 1981, by filing a petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland. It also moved the bankruptcy court to quash the state court's order, alleging that the bankruptcy court had exclusive jurisdiction over the dispute raised in the state court.

On January 8, 1982, Equitable filed a proof of claim for the secured balance of the loan in the bankruptcy proceedings, see 11 U.S.C. Sec. 501. County Fuel, by this time a debtor-in-possession, never objected to this proof of claim, except insofar as the claim included a request for attorney fees. On February 16, 1982, Equitable filed a complaint for declaratory relief and requested the bankruptcy court to lift the automatic stay imposed by 11 U.S.C. Sec. 362. The court lifted the stay on March 29, 1982, thus permitting Equitable to proceed against its collateral. The United States District Court for the District of Maryland affirmed the bankruptcy court's decision to lift the automatic stay, and Equitable eventually received payment in full, plus interest and attorney fees incurred in the efforts to collect its secured claim. In its "Objection to Inferred Claim," filed August 24, 1982, County Fuel contested Equitable's claim for attorney fees but stated: "The secured claim for pre-petition secured debts incurred as receivables financing for working capital are not objected to and in fact have been paid in full."

County Fuel then filed an action in state court on April 30, 1984, seeking damages for Equitable's breach of an alleged oral promise not to call the secured loan as long as existing accounts receivable offered adequate security for the amount of the debt outstanding. The state action also included a claim, not involved in the present appeal, against County Fuel's accountant, Stegman and Company, P.A., for professional malpractice. On motion of Stegman, the action was removed to the bankruptcy court and later transferred sua sponte by the bankruptcy court to the district court pursuant to a standing order referring all non-core proceedings to the district court.

Equitable then moved in the district court under Fed.R.Civ.P. 12(b)(6) to dismiss the claims against it on grounds of res judicata. The court accepted Equitable's argument that County Fuel's state claim and the claim filed by Equitable in bankruptcy were part of the same cause of action, and that the merits of that cause of action had been adjudicated finally by the automatic allowance of Equitable's unobjected-to claim in the bankruptcy proceeding. The court noted that County Fuel could have objected in the bankruptcy proceedings to Equitable's filed proof of claim, raising as a defense the same claim upon which it had now based its removed state claim for affirmative relief, but had failed to do so.

This appeal followed.

II

It is doubtful that in strict contemplation County Fuel's removed state claim was, as the district court thought, barred under res judicata principles by County Fuel's failure to assert it as a basis for affirmative relief along with an objection to Equitable's claim in the bankruptcy proceeding. It certainly lay with County Fuel both to object to Equitable's claim as a matter of defense and to join with its objection a counterclaim for declaratory relief that the claim was defeated or at least made premature by the alleged oral agreement. See 3 Collier on Bankruptcy, Sec. 502.01, p. 502-15 (15th ed. 1987). But the better and decidedly majority view is that the failure to interpose such an available "counterclaim" does not, as a matter of res judicata, bar its subsequent assertion as an independent claim for relief. See Restatement (Second) Judgments Sec. 22(a). ¹ Furthermore, as defendant contends, it is doubtful that the "automatic allowance" under 11 U.S.C. Sec. 502(a) of a claim not objected to constitutes a "final judgment" of the type that gives rise to "bar" or "claim preclusion" under strict res judicata principles. See Restatement (Second) Judgments Secs. 13, 19, comment a. Under relevant bankruptcy law, objections may be made and allowed after automatic allowance of a claim, see Advisory Committee Note to Bankruptcy Rule 3007, and indeed a claim allowed by order may be later disallowed upon reconsideration. 11 U.S.C. Sec. 502(j). Additionally, the "automatic allowance" provided by Sec. 502(a) was not "final" for purposes of appellate review, another test, though not decisive, of its "finality" for res judicata purposes. See Restatement (Second) Judgments Sec. 13, comment b.

Consequently, we think that the district court was not technically...