In re Knights Athletic Goods, Inc.
| Decision Date | 05 June 1991 |
| Docket Number | No. 90-1012-C.,90-1012-C. |
| Citation | 128 BR 679 |
| Parties | In re KNIGHTS ATHLETIC GOODS, INC., Debtor. William B. SORENSON, Jr., Trustee of the Bankruptcy Estate of Knights Athletic Goods, Inc., Plaintiff, v. BOARD OF COUNTY COMMISSIONERS OF SALINE COUNTY, KANSAS, Defendant. |
| Court | U.S. District Court — District of Kansas |
Daniel K. Diederich, Salina, Kan., for plaintiff.
William B. Sorensen, Jr., Morris, Laing, Evans, Brock & Kennedy, Wichita, Kan., trustee of the Bankruptcy Estate of Knights Athletic Goods, Inc.
Michael A. Montoya, Achterberg & Neustrom, Salina, Kan., for defendant.
This case comes before the court upon the Board of County Commissioners of Saline County, Kansas' (County) appeal from the decision of the bankruptcy court. This is the second appeal during this bankruptcy case. In the first appeal, In re Knights Athletic Goods, Inc., 98 B.R. 553 (D.Kan. 1989), Judge Kelly reversed the decision of the bankruptcy court. The bankruptcy court had overruled the county's objection to the disbursement of funds, finding that the County's property tax claim in the amount of $7,018.68 did not have priority over the SBA's secured claim. Judge Kelly concluded that the filing of the bankruptcy petition effected a voluntary surrender of property from the debtor, Knights Athletic Goods (Knights), to the bankruptcy estate, thereby creating a lien in favor of the County which attached to the property for the unpaid taxes. Under 15 U.S.C. § 646 and Kansas law, "the County's lien had preference over all other claims against the property, including the perfected security interest of the SBA." 98 B.R. at 556.
Following Judge Kelly's decision, the trustee filed a complaint to avoid a statutory lien pursuant to 11 U.S.C. § 545(1)(A). The bankruptcy court held that "the trustee is entitled to avoid the County's tax lien and that it may preserve the lien pursuant to 11 U.S.C. § 551 for the benefit of the estate." The County timely appeals.
The facts are stipulated. The parties also agree that this case presents three issues of law:
Having considered the stipulated facts, briefs of counsel and applicable law, the court is now prepared to rule.
1. On March 20, 1980, Knights executed a promissory note in the amount of $250,000 to Planters State Bank and Trust Company (Bank).
2. On that same day, Knights granted a security interest to the Bank. The security interest covered debtor's current and after-acquired business machinery, equipment, furnishing, furniture, inventory, contract rights, accounts receivable and general intangibles.
3. The Bank perfected the security interest that same day by filing a financing statement with the Secretary of State.
4. Knights failed to pay personal property taxes assessed January 1, 1985, and January 1, 1986.
5. The security agreement and financing statement were assigned to the Small Business Administration (SBA) on February 27, 1986.
6. Debtor filed a petition for relief in bankruptcy pursuant to Chapter 7 on April 22, 1987. The bankruptcy estate assets included retail inventory, furnishings and equipment.
7. On May 27, 1987, the bankruptcy court entered an order authorizing the sale of personal property on limited notice.
8. The trustee sold the retail inventory, furnishings and equipment of the debtor for the aggregate sum of $14,340.50.
9. The County filed a proof of claim in the bankruptcy proceedings on July 2, 1987, for the unpaid personal property taxes.
10. On September 21, 1987, the trustee filed a motion for authorization to disburse funds.
11. On October 10, 1987, the County filed an objection to the disbursement of funds, claiming that its property tax claim in the amount of $7,018.68 had priority over the secured claim of the SBA.
12. On August 12, 1988, the bankruptcy court overruled the County's objection. The trustee has distributed all of the proceeds from the sale except for the disputed sum of $7,018.68.
13. The County appealed the bankruptcy court's decision to federal district court in Civil Case No. 88-1537-K.
14. The parties agreed that 15 U.S.C. § 646, which requires a reference to applicable state law, controlled the action.
15. The federal district court reversed the bankruptcy court and held that the filing of the bankruptcy petition effected a voluntary surrender of property from the debtor to the bankruptcy trustee, thereby invoking a lien for personal property taxes pursuant to K.S.A. 79-2020.
16. The federal district court judgment was not appealed and became final.
17. On April 14, 1989, the trustee filed a complaint to avoid a statutory lien pursuant to 11 U.S.C. § 545(1)(A).
18. On May 11, 1989, the County filed its answer.
19. On December 28, 1989, the bankruptcy court held that the County's lien was avoidable under 11 U.S.C. § 545(1)(A). The court also held that the trustee may preserve the lien pursuant to 11 U.S.C. § 551 for the benefit of the bankruptcy estate.
20. The County timely appeals.
On appeal from the bankruptcy court, the district court sits as an appellate court. See 28 U.S.C. § 1334(a). Findings of fact are not to be set aside unless clearly erroneous; conclusions of law are reviewed de novo. Virginia Beach Federal Sav. and Loan Ass'n v. Wood, 901 F.2d 849, 851 (10th Cir.1990); In re Schneider, 864 F.2d 683, 865 (10th Cir.1988); see Bankruptcy Rules 7052 and 8013.
Whether the lien avoidance challenge is barred by the doctrine of res judicata or collateral estoppel?
The County contends that the trustee's lien avoidance challenge is barred by the doctrine of res judicata or collateral estoppel. The trustee contends that the issue was not decided by Judge Kelly and that the doctrines of res judicata and collateral estoppel are inapplicable.
The Tenth Circuit recently discussed the doctrines of res judicata (claim preclusion) and collateral estoppel (issue preclusion) in Northern Natural Gas Co. v. Grounds, 931 F.2d 678 (10th Cir.1991).
Federal courts have traditionally adhered to the related doctrines of res judicata and collateral estoppel. In our system of jurisprudence the usual rule is that, once decided in a court of competent jurisdiction, merits of a legal claim are not subject to redetermination in another forum. Kremer v. Chemical Const. Corp., 456 U.S. 461, 485 102 S.Ct. 1883, 1899, 72 L.Ed.2d 262 (1982); Stokke v. Southern Pacific, 169 F.2d 42, 43 (10th Cir.1948). Under res judicata, or claim preclusion, a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in the prior action. Cromwell v. County of Sac, 94 U.S. 4 Otto 351, 352-53 24 L.Ed. 195 (1876). Under collateral estoppel, or issue preclusion, once a court has decided an issue of fact or law necessary to its judgment, that decision may preclude relitigation of the issue in a suit on a different cause of action involving a party to the first case. Montana v. United States, 440 U.S. 147, 153 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979). Res judicata and collateral estoppel relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication. Id. at 153-154 99 S.Ct. at 973-74.
In Ten Mile Indus. Park v. Western Plains Service Corp., 810 F.2d 1518 (10th Cir.1987), the Tenth Circuit commented:
Under certain circumstances, a litigant who was not a party to a federal case may use estoppel offensively in a subsequent federal suit against a party who lost on the decided issue in the first case. Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322 at 326-31, 99 S.Ct. 645 at 649-51 58 L.Ed.2d 552. "Under collateral estoppel, once a court has decided an issue of fact or law necessary to its judgment, that decision may preclude relitigation of the issue in a suit on a different cause of action involving a party to the first case." Allen v. McCurry, 449 U.S. 90 at 94, 101 S.Ct. 411 at 414 66 L.Ed.2d 308. However, the concept of collateral estoppel may be used only when the party against whom the earlier decision is asserted had a full and fair opportunity to litigate that issue in the earlier case. Id. at 95, 101 S.Ct. at 415.
810 F.2d at 1523. Collateral estoppel is binding on the bankruptcy court and precludes relitigation of factual issues if: (1) the issue to be precluded is the same as that involved in the prior state action; (2) the issue was actually litigated by the parties in the prior action; (3) the prior court's determination of the issue was necessary to the resulting final and valid judgment. In re Wallace, 840 F.2d 762, 765 (10th Cir.1988).
The court has thoroughly reviewed Judge Kelly's decision in In re Knights and, in short, concludes that the issue of lien avoidance was not decided in that case. The trustee was not a party to the previous contested matter. Moreover, the lien avoidance claim could not have been raised in the prior contested matter. Contested matters are governed by Fed.R.Bankr.P. 9014. A claim for lien avoidance must be brought as an adversary proceeding. Fed. R.Bankr.P. 7001. See D-1 Enterprises, Inc. v. Commercial State Bank, 864 F.2d 36 (5th Cir.1989) ().
The issue of lien avoidance is not barred by either res judicata or collateral estoppel.
Whether K.S.A. 79-2020 is a statutory lien which the trustee can avoid?
The trustee in bankruptcy is granted certain powers which are intended to benefit the bankruptcy estate as a whole. One example of these powers is...
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