In re Atlanta Retail, Inc.

• Decision Date: 18 July 2006
• Docket Number: No. 05-12327.,05-12327.
• Citation: 456 F.3d 1277
• Parties: In re: ATLANTA RETAIL, INC., f.k.a. Wolf Camera, Inc., Debtor. Eastman Kodak Company, Plaintiff-Appellant, v. Atlanta Retail, Inc., f.k.a. Wolf Camera, Inc., etc. Wachovia Bank, National Association, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

456 F.3d 1277

In re: ATLANTA RETAIL, INC., f.k.a. Wolf Camera, Inc., Debtor Eastman Kodak Company, Plaintiff-Appellant, v. Atlanta Retail, Inc., f.k.a. Wolf Camera, Inc., etc. Wachovia Bank, National Association, Defendants-Appellees.

No. 05-12327.

United States Court of Appeals, Eleventh Circuit.

July 18, 2006.

Kenneth A. Shapiro, Mitchell & Shapiro, LLP, Atlanta, GA, Philip D. Anker, Wilmer, Cutler, Pickering, Hale & Dorr, LLP, Washington, DC, Daniel W. Sklar, Nixon Peabody, LLP, Manchester, NH, for Eastman Kodak Co.

Jeffrey W. Kelley, Ezra H. Cohen, Troutman Sanders, Wendy L. Hagenau, Powell Goldstein, LLP, Atlanta, GA, Jay Teitelbaum, Wendy S. Walker, Morgan, Lewis & Bockius, LLP, New York City, for Defendants-Appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before BIRCH and CARNES, Circuit Judges, and TRAGER^*, District Judge.

TRAGER, District Judge:

This appeal raises the question: under what circumstances will a creditor be barred from later bringing an action against a co-creditor based upon state law claims if, during the pendency of a bankruptcy, it failed to raise such claims.

Defendant-appellant Eastman Kodak Company ("Kodak") appeals the decision of the United States District Court for the Northern District of Georgia, which affirmed an August 22, 2003 order of the Bankruptcy Court. That order enjoined Kodak from continuing to seek relief against Wachovia Bank f/k/a First Union National Bank ("Wachovia") in the United States District Court for the Western District of New York for violations of state law ("New York action"). The bankruptcy court held, and the district court affirmed, that Kodak was precluded from bringing the New York action by the doctrine of res judicata as a result of orders issued by the bankruptcy court in a bankruptcy filed by Atlanta Retail, Inc., f/k/a Wolf Camera, Inc., et al. ("Wolf" and "Wolf bankruptcy").

We hold that res judicata does not bar the New York action because Kodak could not have received a full remedy in the contested Wolf bankruptcy proceedings and because the same nucleus of operative fact was not presented in the two actions. Moreover, res judicata does not require a creditor to raise an independent state law claim against a co-creditor in an adversary bankruptcy proceeding unless the resolution of that claim explicitly becomes an essential part of the bankruptcy plan. Here, Kodak's claim against Wachovia in no way impacted on the confirmation of the Wolf bankruptcy plan. Accordingly, the judgment of the district court is reversed and the injunction is vacated.

Background

(1)

Kodak had a long-standing business relationship with Wolf, supplying film and other photography-related goods. In the 1990's Kodak provided financing as secured lender to enable Wolf to expand, thereby increasing Kodak's sales.

In September 1998, Kodak and Wachovia, which acted as another secured lender to Wolf, entered into an agreement ("the Subordination Agreement") under which Kodak's loans were subordinated to Wolf's other secured creditors including Wachovia ("pre-petition lenders"). At the same time, Wachovia and Kodak made a separate agreement ("the Intercreditor Agreement") to use their best efforts to promptly notify each other of occurrences "which may significantly affect the other Secured Creditor with regard to the ability of [Wolf] to meet its obligations ...."

In late 1999 Kodak began discussions with Wolf about an additional $30 million loan for a further expansion of the business. Like Kodak's other loans, it was contemplated that this new loan was also to be subordinated to the loans of the other pre-petition lenders. In its pleadings in the New York action, Kodak alleges that Wachovia was aware of these negotiations and their stated purpose and, indeed, that it encouraged the loan. However, Wachovia did so without disclosing its plan that Wolf would use the money to meet its financial obligations to Wachovia.

Kodak also claims that it was not aware at the time that Wolf was nearing a breach of its financial obligations with Wachovia and the other pre-petition lenders. Kodak alleges that on March 2, 2000, Wachovia and Wolf's other pre-petition lenders entered into an agreement with Wolf under which Wolf's covenant defaults would be forestalled until the Kodak loan was completed, unless Wolf failed to receive the loan by April 2000, at which point the defaults would accrue. Kodak further alleges that it was never informed of this agreement as well — as required by the Intercreditor Agreement — and only became aware of the alleged breach of the Intercreditor Agreement during the pendency of the bankruptcy. Wachovia did not share this information, Kodak alleges, because Wachovia knew that Kodak would never have loaned the money to Wolf for the purpose of paying Wachovia's loan, rather than for expansion purposes.

In March 2000, Kodak did make the $30,000,000 loan to Wolf with the express condition that the loan fund the development of Wolf's business. Included in the loan agreement was the following clause:

Wolf covenants to Kodak that it will use the proceeds of the New Term Loan to fund new photo retail store development, new photo retail store acquisitions and upgrading the capability of existing and acquired photo retail stores.

(Second Am. and Restated Loan and Purchase Agreement, dated Mar. 14, 2000, between Kodak and Wolf, ¶ 3.3).

On March 28, 2000, the money was transferred from Kodak to Wolf. On the same day, in accordance with the alleged secret agreement between Wolf and the pre-petition lenders, the money was transferred again, this time to Wachovia and the other pre-petition lenders in order to pay some of Wolf's debts. It appears to be undisputed that none of the money was used to finance an expansion of the business as contemplated in the loan agreement.

On June 21, 2001, Wolf voluntarily filed for Chapter 11 bankruptcy. On the same date, Wolf also filed an emergency debtor in possession motion ("DIP Motion"), requesting permission to receive financing from Wachovia and the other pre-petition lenders in the amount of $10,000,000, permission to continue to use the cash collateral from the loans from the pre-petition lenders, and for the court to provide protection to the pre-petition lenders. Kodak did not file an objection to this motion, but the Official Committee of Unsecured Creditors ("Unsecured Creditors") did object. Thereafter, Wachovia filed proofs of claim and included both the Subordination Agreement and the Intercreditor Agreement as evidence that Kodak's claims were subordinate to those of the pre-petition lenders.

The bankruptcy court granted the DIP motion ("Final Order"). Wolf borrowed approximately $8,000,000 from Wachovia and the other pre-petition lenders. The court granted this loan first priority, and also granted a superior security interest to the pre-petition lenders compared to the remainder of Wolf's creditors, which included Kodak. Wolf owed these pre-petition secured creditors approximately $77,600,000 in addition to the amount it owed Kodak.

On August 23, 2001, Wolf filed a motion seeking approval for Ritz Camera Centers, Inc. ("Ritz") to purchase nearly all of Wolf's assets ("Sale Motion"). Approximately a month later on September 13, 2001, Wolf and Wachovia filed an Amended Joint Motion to Approve Stipulation with Respect to Distribution of Proceeds from Sale of Assets of Debtors ("Stipulation Motion"). The Unsecured Creditors objected to both the Sale and Stipulation Motions. Kodak only opposed the Sale Motion.

Kodak did not object to the fact that its claims were subordinate to the pre-petition lenders. Instead Kodak argued that Wolf could not sell its assets to Ritz "free and clear" of its liens. See 11 U.S.C. § 363(f)(3). Kodak argued that because the proposed sale price of $84,700,000 could not cover the combined claims of Wachovia and Kodak that the sale could not be considered free and clear if the statute was read to require the repayment of the face value of all liens rather than their market value. The bankruptcy court rejected this argument, holding that Kodak waived its right to object to the sale in the Intercreditor Agreement. The bankruptcy court also rejected Kodak's legal argument holding that the market determined the value of the liens. As Kodak's claims were subordinate and there were insufficient funds to pay the priority claims, the bankruptcy court found that Kodak's claims were in fact valueless.

In addition, the bankruptcy court also found against the Unsecured Creditors and granted the Stipulation Motion ("Stipulation Order"). It also gave permission for the sale ("Sale Order"). Under the Sale Order, the proceeds of the sale were distributed first to the post-petition lenders, then $20,000,000 for pre-petition debts, and then $25,000,000 for administrative expenses, with any balance to the remainder of the pre-petition debts.

After the sale, which was approved by the bankruptcy court on September 21, 2001, the Unsecured Creditors filed an adversary action challenging Wachovia's and the other pre-petition lenders' claims, arguing that certain of their liens in Wolf's assets were not perfected. Kodak did not take part in this action. Rather, Kodak filed one of its own in the United States Bankruptcy Court for the Western District of New York. Kodak filed this proceeding against Wachovia alone, arguing that Wachovia and the other pre-petition lenders' claims should be equitably subordinated to Kodak's claims. It also filed claims for breach of contract, fraud and tortious interference with a contract. All of these claims were based on Kodak's claim that it was fraudulently induced by the pre-petition lenders to provide the $30,000,000 loan to Wolf even though they knew, and so contracted with Wolf, that the loan would be used to pay their loans rather than for the contemplated expansion. Wachovia and the pre-petition lenders...