In re Medomak Canning, Civ. No. 89-0192-P.
| Decision Date | 01 March 1990 |
| Docket Number | Civ. No. 89-0192-P. |
| Citation | 111 BR 371 |
| Parties | In re MEDOMAK CANNING, Debtor. Dennis G. BEZANSON, Trustee, Plaintiff, v. BAYSIDE ENTERPRISES, INC., et al., Defendants/Appellees. ACME ENGINEERING CO., Cara Corporation, Cross-Claim Plaintiffs/Appellants, v. BAYSIDE ENTERPRISES, INC., Poultry Processing, Inc. and Bernard J. Lewis, Cross-Claim Defendants/Appellees. |
| Court | U.S. District Court — District of Maine |
Daniel W. Sklar, Gregory W. Swope, Manchester, N.H., for Cara Corp.
Sideney S. Thaxter, Christopher Kennedy, Portland, Me., for Acme Engineering.
Richard E. Poulos, Portland, Me., for Bayside Enterprises.
Appellants appeal an order of the United States Bankruptcy Court for the District of Maine which dismissed their cross-claims against Appellees. 101 B.R. 399. In their cross-claims Appellants seek to equitably subordinate Appellees' secured liens against the bankruptcy estate to their own liens. The Bankruptcy Court entered summary judgment for Appellees, holding that Appellants' cross-claims were barred by the doctrine of res judicata, due to an earlier judicially approved compromise between the Chapter 7 Trustee and Appellees.
Appellants argue on appeal that (1) the compromise explicitly reserved in them the right to bring their claims of equitable subordination against Appellees; (2) they were not parties to the compromise and therefore the consent judgment is not res judicata to them, and (3) Appellees waived the defense of res judicata. For the reasons set out below, this Court rejects each of these contentions and affirms the order of the Bankruptcy Court.
This controversy involves the proper distribution of the sale proceeds of the Debtor's real and personal property to the creditors of the Debtor. Appellees asserted liens in the sale proceeds and the Trustee disputed their interests. The Trustee and Appellees eventually agreed to a settlement and submitted a Joint Application for the Approval of Compromise to the Bankruptcy Court. As part of the compromise, the Trustee agreed to release "any and all" claims he had against Appellees, with one exception. The compromise provided that the "extent, priority, allowability and amount of the claims of the various creditors shall be subsequently determined in an action to be brought by the trustee." In exchange for the Trustee's release, Appellees agreed to a number of concessions, including the payment of $250,000 to the estate and the voluntarily subordination of all of their unsecured claims to the claims of the general creditors.
The Bankruptcy Court approved the compromise after notice and a hearing. Appellants Cara Corporation ("Cara") and Acme Engineering Company ("Acme"), creditors of the estate, were given notice of the hearing. Cara did not appear at the hearing and did not object to the compromise; Acme appeared and made an objection, seeking clarification that Appellees would be parties to the later action to determine priority of all claims. Acme contended that its mechanic's lien had priority over the liens of Appellees. The Bankruptcy Court overruled Acme's objection on the ground that the priority of all claims to the estate, including those of Appellees, would be determined in the later action. In approving the Joint Application, the Bankruptcy Court made an explicit finding that the compromise was in the best interests of the estate and its creditors.
On September 24, 1987 the Trustee instituted the present action, in accordance with the terms of the compromise, to determine the nature, extent, validity, priority, amount and allowability of the various creditors' claims. Cara moved to add a third-party defendant on December 24, 1987, asserting a claim of equitable subordination against Appellees. Acme filed a cross-claim against Appellees on October 29, 1987, asserting equitable estoppel, and moved on June 30, 1988 to amend its cross-claim to include a claim of equitable subordination. Acme's motion to amend was granted in part by the Bankruptcy Court.
In April 1989 Appellees moved to dismiss Appellants' cross-claims on the ground that the claims were barred by res judicata and lack of standing. The Bankruptcy Court agreed that the cross-claims were barred by res judicata and granted Appellees' motion, treating it as one for summary judgment. Appellants appeal that order.
Courts apply the doctrine of res judicata to bar parties (or their privies) who have received a final judgment from bringing further claims based on the same cause of action. Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979). This area of the law is fraught with profuse terminology which can obscure the underlying analysis, but the basic notion is straightforward: once two parties have litigated a claim and have obtained a final judgment, or have resolved an issue necessary to a final judgment, those parties are not permitted to relitigate the same claim or issue in a new proceeding. Res judicata promotes judicial economy by preventing needless litigation, protects litigants from the cost and vexation of multiple lawsuits, and encourages reliance on adjudication. Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414, 66 L.Ed.2d 308 (1980). The party against whom the earlier decision is asserted must have had a "full and fair opportunity to litigate the claim." Kremer v. Chemical Construction Corp., 456 U.S. 461, 481 & n. 22, 102 S.Ct. 1883, 1898 & n. 22, 72 L.Ed.2d 262 (1982).
As a general matter, consent orders or judgments are given the same res judicata effect as judgments in litigated cases. Arrieta-Gimenez v. Arrieta-Negron, 859 F.2d 1033, 1041 (1st Cir.1988); In re Grenert, 108 B.R. 1, 3 (D.Me.1989). The extent of the preclusive effect of consent judgments on later actions presents special problems due to their dual nature as contracts and judicial decrees. This Court has indicated that consent orders are entitled to greater dignity than mere contracts because the court must make a judicial determination that the agreement is fair. In re: Grenert, 108 B.R. at 4. The Court of Appeals for the First Circuit has adopted the Restatement view of res judicata, which uses a transactional approach to determine the extent of the "claim" extinguished when the doctrine applies. Manego v. Orleans Board of Trade, 773 F.2d 1, 5 (1st Cir.1985); Restatement (Second) Judgments § 24. This Court has held that the transactional approach is used to determine the preclusive effect of consent agreements. See In re: Grenert, 108 B.R. at 4.
The Bankruptcy Court applied claim preclusion1 to Appellants' cross-claims, holding that the judicially approved compromise barred Appellants from asserting equitable subordination against Appellees. The rule of bar is one of fairness to the defendant, and may be imposed even though the substantive issues have not been tried, especially if the plaintiff has failed to avail himself of opportunities to pursue his remedies in the first proceeding. Restatement (Second) Judgments § 19, comment (a). The general rule of bar requires a plaintiff to correct errors in the underlying action through appeal, not through a second action on the same claim. Id.
Appellants' primary contention is that the compromise expressly contemplates their assertion of a claim of equitable subordination against Appellees. The compromise expressly releases "any and all" claims which the Trustee may have had against Appellees, with one exception: the compromise directs the Trustee to bring a later action to determine the "priority" of all claims to the estate. Appellants argue that the agreement's contemplation of a later suit to determine the priority of all claims includes their right to assert a claim of equitable subordination against Appellees.
In asserting this argument Appellants are, in essence, asking this Court to enforce the terms of the consent order. Consent orders are viewed in different ways in different contexts. See Local No. 93 International Association of Firefighters v. City of Cleveland, 478 U.S. 501, 519, 106 S.Ct. 3063, 3073, 92 L.Ed.2d 405 (1986). In an action for enforcement their contractual nature predominates. United States v. ITT Continental Baking Co., 420 U.S. 223, 238, 95 S.Ct. 926, 935, 43 L.Ed.2d 148 (1975). This Court, therefore, must construe the terms of the consent order to determine what claim, or part of a claim, was reserved for future litigation. In construing the consent order, the Court may rely on traditional aids to contract construction. Id.
Appellants apply an incorrect analysis in their construction of the Joint Application and Order of Approval, stressing the word "priority" in isolation from the entire compromise. The clause providing for a later suit to determine priority of claims must be read in the context of the agreement in which it is found. Reading the Joint Application as a whole, this Court holds that the agreement did not reserve in the Trustee (or parties in privity with the Trustee) the right to bring later claims of equitable subordination. The Joint Application indicates that the Trustee had investigated potential claims of preferential transfers, fraudulent transfers, and equitable subordination against Appellees, but concluded that it would not be in the best interest of the estate to bring those claims against Appellees.2 The Trustee entered into the Joint Application, with precisely this evaluation in consideration, to avoid litigation of those claims. Under these circumstances it would be unreasonable to construe the future litigation clause as reserving in the Trustee or Appellants the right to reassert claims of equitable subordination against Appellees. This Court holds that the Joint Application and subsequent order of approval entered by the Bankruptcy Court reserved for future...
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