In re Randa Coal Co.

• Decision Date: 11 June 1991
• Docket Number: Adv. No. 7-88-0189,Civ. A. No. 90-0081-B,Bankruptcy No. 7-83-01322.
• Citation: 128 BR 421
• Court: U.S. District Court — Western District of Virginia
• Parties: In re RANDA COAL COMPANY, Debtor. RANDA COAL COMPANY, Plaintiff, v. VIRGINIA IRON COAL & COKE COMPANY, and Internal Revenue Service, Appellees.

128 B.R. 421 (1991)

In re RANDA COAL COMPANY, Debtor RANDA COAL COMPANY, Plaintiff, v. VIRGINIA IRON COAL & COKE COMPANY, and Internal Revenue Service, Appellees.

Civ. A. No. 90-0081-B, Adv. No. 7-88-0189, Bankruptcy No. 7-83-01322.

United States District Court, W.D. Virginia, Big Stone Gap Division.

June 11, 1991.

Jo S. Widener, Bristol, Va., for debtor, plaintiff.

Michael Cleary, Roanoke, Va., for appellee VICC.

Jerry W. Kilgore, Asst. U.S. Atty., Abingdon, Va., Beverly Moses, U.S. Dept. of Justice, Washington, D.C., for appellee I.R.S.

MEMORANDUM OPINION

GLEN M. WILLIAMS, Senior District Judge.

Plaintiff, Randa Coal Company ("Randa"), appeals to this court from the United States Bankruptcy Court for the Western District of Virginia. This court has appellate jurisdiction over this action pursuant to 28 U.S.C.A. § 158.

PROCEDURAL AND FACTUAL BACKGROUND

On November 25, 1983, Randa filed a petition for Chapter 11 relief in bankruptcy court. At the time of the filing, Randa was a contract miner mining coal for Virginia Iron Coal & Coke Company ("VICC"). Two months into the mining operation before the bankruptcy filing, Randa hit a rock roll. Although Randa considered the mining operation to be impractical and uneconomical after the discovery of the roll, it continued to mine sinking itself deeper into debt. When Randa informed VICC that it would not continue to mine because of the above, VICC demanded that Randa continue and allegedly promised to bear the expense of cutting through the roll. It took Randa nearly two years to mine through the roll and during that time VICC assumed control over the day-to-day operations of Randa including bookkeeping. Randa was able to terminate VICC's control over its operation when it rejected the written contract between VICC and itself pursuant to a court order entered January 31, 1984.

On June 27, 1984, Randa, along with its two principal stockholders, McCall and Meade, filed a complaint as Civil Action No. 84-0223-A against VICC in this court.

On July 24, 1985, the United States Bankruptcy Court for the Western District of Virginia entered an Order confirming Randa's Chapter 11 plan. In Article 2 of the plan, Randa states that it has a pending suit in this court against VICC and any proceeds from such litigation would be used to satisfy the various claims in the Chapter 11 bankruptcy case.

On August 27, 1986, this court dismissed Civil Action No. 84-0223-A for failure to prosecute. On October 14, 1986, upon plaintiff's motion and over the objection of VICC, this court reinstated Civil Action No. 84-0223-A. Subsequently, an amended complaint was filed, but because of failure to prosecute, the case was again dismissed on March 17, 1988.

On September 1, 1988, Randa, pursuant to Rule 7001, filed Adversary Proceeding No. 7-88-0189 against VICC alleging breach of contract, subordination of claims, avoidance of preferences, fraudulent transfers, and post-petition transfers. Thereafter, VICC sought to withdraw the reference of this adversary proceeding to this court. Seven days later, this court overruled Randa's motion to reinstate Civil Action No. 84-0223-A and transfer it to bankruptcy court. On October 19, 1988, this court overruled VICC's motion to withdraw the reference in the adversary proceeding and made no ruling on VICC's motion to dismiss.

On July 12, 1989, the bankruptcy court sustained VICC's previous motion to dismiss this adversary proceeding with leave for Randa to file an amended complaint, as well as a new complaint against the Internal Revenue Service ("IRS"), a co-defendant with VICC in the original complaint.

On August 1, 1989, Randa filed an amended complaint in Adversary Proceeding No. 7-88-0189 alleging twelve claims for relief, all which were summarized by the bankruptcy court as follows:

Claim 1.

Preferential transfers of Randa\'s property to VICC during the one year period prior to the filing of the chapter 11 petition.

Claims 2, 3, 4, and 5.

Fraudulent transfers of Randa\'s property to VICC during the one year period prior to the filing of the petition.

Claim 6.

VICC\'s breach of oral contract to Randa as to expenses of mining through a rock roll, or in the alternative to provide financing for mining through the rock roll.

Claim 7.

VICC\'s breach of warranty to Randa as to the fitness of equipment that VICC sold to Randa.

Claim 8.

Objections to VICC\'s unsecured claim filed in the amount of $823,685.75. The claim does not reflect credit for payments made during the preference period. VICC should be estopped from asserting the claim because it is inconsistent with its previous conduct as an insider of Randa.

Claim 9.

VICC should be equitably subordinated due to conduct that injured other creditors of Randa and because VICC took advantage of the other creditors while its was an insider with control over Randa.

Claim 10.

VICC\'s breach of oral contract regarding the payment of Randa\'s payroll taxes to IRS.

Claim 11.

VICC to turn over to Randa certain equipment belonging to and paid for by Randa which VICC, after it obtained relief from the stay to repossess the leased property and the equipment its sold to Randa, took possession of, for which no payments have been made nor credits given.

Claim 12.

Determine that VICC is responsible for Randa\'s unpaid federal payroll tax liability owed to the IRS because VICC controlled Randa.

Soon after the filing of the above amended complaint, VICC filed a motion to dismiss. Another motion to dismiss was filed by VICC on August 23, 1989 which was heard by the bankruptcy court on October 16, 1989. The bankruptcy court, on June 11, 1990, sustained VICC's motion to dismiss Randa's Adversary Proceeding No. 7-88-0189 with prejudice as res judicata. It held that Randa was precluded from bringing the present proceeding because it would constitute the relitigation of Civil Action 84-0223-A which was dismissed twice for failure to prosecute. However, the bankruptcy court allowed Randa to file a further adversary proceeding, pursuant to Rule 7001, against the IRS to determine the validity, priority and extent of any claims or liens of the IRS.

STANDARD OF REVIEW

As a preliminary matter, the court sets forth the standard of review of the district court in its appellate capacity. A district court, when reviewing a bankruptcy court's decision, "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Bankruptcy Rule 8013, 11 U.S.C.A. (1984 and Supp.1991). A district court may not set aside a bankruptcy court's findings of fact unless clearly erroneous. Id. However, a district court may review findings of law de novo. See generally Matter of Clark Pipe and Supply Co., 893 F.2d 693, reh. denied 899 F.2d 11 (5th Cir. 1990); Matter of Bonnett, 895 F.2d 1155 (7th Cir.1990); In re Villa Madrid, 110 B.R. 919 (9th Cir.BAP 1990).

THE PRECLUSION DOCTRINES

Federal courts have utilized the doctrines of res judicata and collateral estoppel to promote judicial economy and the certainty of legal relationships. Under res judicata, parties and their privies are precluded from relitigating the same cause of action. Commissioner v. Sunnen, 333 U.S. 591, 597, 68 S.Ct. 715, 719, 92 L.Ed. 898 (1948). Also, they are precluded from relitigating issues which could have been presented for determination in a prior action. Id.; Watkins v. M & M Tank Lines, Inc., 694 F.2d 309, 311 (4th Cir.1982). Comparably, collateral estoppel precludes the relitigation of previously decided issues by the same parties and their privies in a different cause of action. Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414, 66 L.Ed.2d 308 (1980) (citing Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979).¹

RES JUDICATA

In order for res judicata to apply to a subsequent litigation, the following elements must exist:

a prior judgment was returned by a court of competent jurisdiction, the prior judgment was a final judgment on the merits, the same parties and their privies are involved in both suits, the two actions are based on the same issues and material facts, and the two proceedings presented the same cause of action.

United States v. Mumford, 630 F.2d 1023, 1027 (4th Cir.1980), cert. denied, 450 U.S. 1041, 101 S.Ct. 1759, 68 L.Ed.2d 238 (1981), citing Sunnen, supra.

Applying the above elements of res judicata in order, the court first finds that it had jurisdiction over the prior contracts claim, Civil Action No. 84-0223-A ("the previous complaint") by reason of diversity of citizenship. The plaintiffs are residents of the State of Virginia. The defendant is a resident and corporation organized in the State of Delaware. The amount in controversy exceeded the sum of $10,000. See 28 U.S.C.A. § 1332 (West 1966).²

Second, as found by the bankruptcy court, the dismissal of the previous complaint for lack of prosecution is a final judgment on the merits. Fed.R.Civ.P. Rule 41(b) provides that an order for dismissal, "other than a dismissal for lack of jurisdiction, for improper venue, or for failure to join a party under Rule 19, operates as an adjudication upon the merits." See also Kimmel v. Texas Commerce Bank, 817 F.2d 39 (7th Cir.1987); Nagle v. Lee, 807 F.2d 435, 442-43 (5th Cir.1987); Green v. Illinois Dept. of Transportation, 609 F.Supp. 1021, 1024 (D.C.Ill.1985); 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure: Jurisdiction § 4440 (1981) at 362-63.

Third, the court has no doubt that element three (3) of the res judicata doctrine is present. The plaintiffs of the previous complaint were Randa and its principal stockholders, Meade and McCall. The only defendant was VICC. In Adversary Proceeding No. 7-88-0189 ("present complaint"), the parties are identical, except that Meade and McCall are no longer plaintiffs and the IRS is added as a defendant.

Finally, there is no dispute over the bankruptcy court's findings that...