Grella v. Salem Five Cent Sav. Bank
| Decision Date | 15 September 1994 |
| Docket Number | No. 94-1674,94-1674 |
| Citation | 42 F.3d 26 |
| Parties | 32 Collier Bankr.Cas.2d 1303, 26 Bankr.Ct.Dec. 402, Bankr. L. Rep. P 76,225 Paul J. GRELLA, Trustee, Appellant, v. SALEM FIVE CENT SAVINGS BANK, Appellee. First Circuit. Heard |
| Court | U.S. Court of Appeals — First Circuit |
Kevin P. Sweeney, with whom Alexander L. Cataldo, Timothy E. McAllister and Cuddy Bixby, Boston, MA, were on brief, for appellant.
Kevin J. Simard, with whom Isaac H. Peres and Riemer & Braunstein, Boston, MA, were on brief, for appellee.
Before TORRUELLA, Chief Judge, COFFIN and CAMPBELL, Senior Circuit Judges.
This appeal raises an issue frequently debated in bankruptcy courts around the country, but never yet addressed by this court--namely, the permissible scope of a hearing on a motion for relief from the automatic stay under Sec. 362 of the Bankruptcy Code. 1 Paul J. Grella, trustee in bankruptcy ("Trustee") for debtor The Beverly Corporation (the "Debtor"), appeals the district court's affirmance of the bankruptcy court's grant of summary judgment against Trustee in favor of creditor Salem Five Cents Savings Bank (the "Bank") 163 B.R. 4. Because we find that the bankruptcy court erred in entering summary judgment against the Trustee and barring him on principles of res judicata and collateral estoppel from pursuing a counterclaim against the Bank, we reverse, and remand to the bankruptcy court for further proceedings consistent with this opinion.
On January 26, 1988, the Debtor signed a $1,000,000 promissory note in favor of the Bank. The Debtor later collaterally assigned various promissory notes and mortgages (the "Seventeen Notes") to the Bank to secure that debt. Among the Seventeen Notes was a $290,000 note from the Wellesley Mortgage Corporation (the "Wellesley Note").
On September 4, 1992, the Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code, activating the automatic stay provisions of Sec. 362. On December 18, 1992, the Bank filed a Motion for Relief from the Automatic Stay pursuant to Sec. 362(d)(1), seeking an order allowing the Bank to exercise its contractual and state law rights and remedies against the Debtor with respect to the Seventeen Notes. 2 In its Motion for Relief, the Bank claimed to have a "perfected security interest" in the Seventeen Notes because it was "in sole and exclusive possession" of the originals. The Bank did not state or allege any other details regarding its security interest. The Bank asserted, as a basis for relief, that the Debtor was unable to provide the Bank with adequate protection for its collateral position.
In his Response to the Bank's Motion for Relief from Stay, the Trustee did not contest the Bank's Motion, but merely stated that he had not had sufficient time to review the pertinent files and determine the existence of any possible defenses to the Bank's claims. The Trustee then requested that a preliminary hearing on the Motion be scheduled, after sufficient time to review the files.
After a hearing on the Bank's Motion for Relief from Stay on January 14, 1993, 3 the Bankruptcy Court granted the Motion and issued an order lifting the automatic stay as to the Bank, and allowing the Bank to exercise "any and all of its contractual and state law rights and remedies" with respect to the Seventeen Notes. In neither the hearing nor the order did the bankruptcy court make any findings about the status of the Bank's security interest in the Seventeen Notes.
Having obtained relief from stay, the Bank filed a Complaint on February 19, 1993, requesting a determination of its secured status under Sec. 506(a), 4 and a turnover and accounting of funds by the Trustee as to the Seventeen Notes. In support of its Complaint, the Bank alleged only that it had a "perfected security interest" in the Notes because it was "in sole and exclusive possession" of them. Again, the Bank offered no other details or arguments regarding its interest in the Notes.
On March 29, 1993, the Trustee answered the Bank's Complaint (the "Answer"), denying the Bank's allegation that it had a perfected security interest in the Seventeen Notes because of its exclusive possession. The Trustee asserted as an affirmative defense that the Bank did not perfect its security interest in the Wellesley Note prior to 90 days before the Debtor filed its bankruptcy petition. The Answer also included a Counterclaim, alleging that the Bank's interest in the Wellesley Note is avoidable as a preferential transfer. 5
On April 8, 1993, the Bank answered the Trustee's counterclaim (the "Reply"). The Bank asserted, inter alia, on the grounds of estoppel, waiver and collateral estoppel, that the Trustee was barred from pursuing his preference counterclaim because he failed to file or pursue any objection to the Bank's Motion for Relief from Stay.
On July 7, 1993, the Trustee moved for summary judgment on his preference counterclaim. On August 3, 1993, the Bank opposed that motion and cross-moved for summary judgment on the ground that either res judicata or collateral estoppel barred the counterclaim, as the issue of the "validity" of the Bank's interest in the Notes was decided when the Bankruptcy Court granted the relief from stay. The Bankruptcy Court denied both summary judgment motions, finding genuine issues of material fact to exist regarding "the status of the holder of the note." With respect to the Bank's res judicata and collateral estoppel arguments, the Bankruptcy Court did not make a ruling, but merely said that it was a "legal issue which we can get into later."
On November 16, 1993, the Trustee filed a motion for summary judgment on the res judicata and collateral estoppel issues, arguing that the doctrines were inapplicable to the Trustee's preference counterclaim, as there had been no adjudication on the merits of the Bank's security interest during the relief from stay proceeding. On the first page of his Memorandum of Law in support of the Motion for summary judgment, the Trustee stated:
Only the note entitled "Wellesley Mort. Corp. of April 25, 1990" (the Wellesley Note) ... is presently in dispute. The other notes and mortgages ... have been determined [by the Trustee] to be perfected security interests in favor of [the Bank].
Three days later, the Trustee filed a Motion for Leave to Amend his Memorandum of Law, seeking to amend this statement of facts. The Trustee explained that the original memorandum was written some months before, and at that time the Trustee thought that there was no dispute as to sixteen of the Seventeen Notes. Sometime after the original memorandum was written, but before it was filed, the Trustee apparently determined that he did indeed dispute the Bank's interest in the other notes as well, but had neglected to edit his memorandum before filing it with the court. The Bank objected to the Trustee's Motion for summary judgment on the res judicata and collateral estoppel issues, and cross-moved for summary judgment.
After a hearing on the motions, the bankruptcy court granted summary judgment in favor of the Bank. 6 In its decision, the court stated without explanation that it was treating the Trustee's preference counterclaim as an "affirmative defense." Although the court recognized that the hearing on relief from stay was a preliminary one, the court went on to state:
The question of the validity and perfection of a security interest which is the subject of a request for relief from stay goes to the heart of the issues before the court [during a relief from stay hearing]. If the security interest were invalid or unperfected, there would be no cause for relief from stay and the request would be denied.... The Trustee could have raised the perfection issue [underlying his preference counterclaim] at the hearing on the motion for relief. If he felt that I was wrong in denying him additional time to respond, an appeal from my order was appropriate. Having had the potential for one bite at the apple, he cannot relitigate the issue at this time.
The court reasoned that the perfection issue was necessarily, implicitly decided in the relief from stay proceedings, and thus granted summary judgment in the Bank's favor "as to the entire adversary proceeding" on collateral estoppel or res judicata grounds.
On May 23, 1994, the district court issued a Memorandum and Order affirming the bankruptcy court's decision. The district court ruled that collateral estoppel bars the Trustee's preference counterclaim, and entered judgment in the Bank's favor on May 25, 1994.
In an appeal from district court review of a bankruptcy court order, we independently review the bankruptcy court's decision, applying the "clearly erroneous" standard to findings of fact and de novo review to conclusions of law. In re SPM Mfg. Corp., 984 F.2d 1305, 1310-11 (1st Cir.1993) (citations omitted). No special deference is owed to the district court's determinations. Id. at 1311.
To evaluate the bankruptcy court's decision, we must consider the doctrine of res judicata generally. We have explained that there are two different aspects of res judicata--claim preclusion and collateral estoppel (also called issue preclusion). Dennis v. Rhode Island Hosp. Trust, 744 F.2d 893, 898 (1st Cir.1984). The essential elements of claim preclusion are: (1) a final judgment on the merits in an earlier action; (2) an identity of parties or privies in the two suits; and (3) an identity of the cause of action in both suits. Aunyx Corp. v. Canon U.S.A., Inc., 978 F.2d 3, 6 (1st Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 1416, 122 L.Ed.2d 786 (1993). Once these elements are established, claim preclusion also bars the relitigation of any issue that was, or might have been, raised in respect to the subject matter of the prior litigation. Dennis, 744 F.2d at 898 (citations omitted) (emphasis in...
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