Kapp v. Naturelle, Inc.

Decision Date19 December 1979
Docket NumberNo. 79-1163,79-1163
Citation611 F.2d 703
PartiesBankr. L. Rep. P 67,286 In the Matter of Ellis Victor Kapp, Bankrupt. Ellis Victor KAPP, Appellee, v. NATURELLE, INC., Pearlduck, Inc., Hess Hair Milk Laboratories, Inc., The Stephen Company, Zena Clark Co., Amerace Corp., Master Appliance, Walter Sporn Co., Kee Industries, Barbara D. Stevens Co., Select Beauty Brands, Yale Mfg. Co., and The Nestle Le Mur Co., corporations, Appellants.
CourtU.S. Court of Appeals — Eighth Circuit

William J. Pfeiffer, Aberdeen, S.D., for appellants; Joseph G. Rimlinger, Aberdeen, S.D., on brief.

J. Bruce Blake, Sioux Falls, S.D., on brief for appellee.

Before STEPHENSON and McMILLIAN, Circuit Judges, and HANSON, Senior District Judge. *

STEPHENSON, Circuit Judge.

Plaintiff-bankrupt Ellis Victor Kapp brought this action to have the claims of thirteen judgment creditors, defendants-appellants herein, disallowed in his personal bankruptcy. The bankruptcy judge ruled that the debts in question were corporate debts and not those of Kapp individually and disallowed the claims. On appeal the district court affirmed the bankruptcy court. The creditors now appeal, contending for reversal that Kapp lacked standing to prosecute this action, that relitigation of the issue of Kapp's personal liability for the debts was barred by res judicata and laches, and that, in any event, the evidence was insufficient to support the court's contention that Kapp was not personally liable. We reverse and remand.

From 1952 to 1965 Kapp owned and operated a barber and beauty supply company in Aberdeen, South Dakota, as a sole proprietorship. In 1965 the business was incorporated under the name of Aberdeen Barber Supply Company. However, the company order blanks and invoices continued as before to bear the name of Aberdeen Barber Supply. 1 Kapp became president and one of the three directors of the new corporation. 2

In the early 1970's the company suffered financial reverses and fell behind in the payment of its obligations. In 1973, 1974 and 1975, thirty-four manufacturers and distributors of barber and beauty products to the company, all represented by the same attorney, obtained default judgments against the company in state court. The last thirteen of these obtained default judgments against Kapp individually as well as against the company.

In 1977 both the company and Kapp filed for bankruptcy. The claims of the thirty-four judgment creditors were allowed in the corporate bankruptcy. The corporate assets were, however, insufficient to satisfy the judgments. Therefore, the thirteen creditors who had obtained judgments against Kapp individually filed proof of their claims in the Kapp bankruptcy. Kapp thus brought this action to disallow these claims, asserting that the debts were corporate debts for which he had incurred no personal liability. At a hearing on the matter before the bankruptcy judge, Kapp admitted with respect to the thirteen judgments in question that he was served with process both as an individual and on behalf of the corporation and that he received notice that default judgments were entered against him personally as well as against the corporation. He further admitted that he made no attempt in state court to have the judgments set aside.

The bankruptcy judge made an independent examination of the evidence and concluded that the creditors never had any transactions with Kapp individually, that they had no claims or causes of action against Kapp, and that the state court judgments were rendered on claims against the corporation only. Evidence cited in support of these conclusions included the Articles of Incorporation of Aberdeen Barber Supply Company and a Certificate of Incorporation issued by the Secretary of State of South Dakota, the fact that all purchase orders, invoices, and confirmations of orders were in the name of Aberdeen Barber Supply and none in Kapp's name, and the fact that prior to the thirteen judgments in question, twenty-one similar judgments were taken by the same attorney against the corporation only. Accordingly, the bankruptcy judge held that equity required that the claims be disallowed in the Kapp bankruptcy and ordered that the state court judgments be discharged and satisfied of record.

On appeal for review of this order, the district court held that the findings of the bankruptcy judge were not clearly erroneous and affirmed. The thirteen judgment creditors timely appealed that decision to this court. Our jurisdiction is predicated on section 24a of the Bankruptcy Act, 11 U.S.C. § 47(a) (1976). 3


The creditors' first argument on appeal is that Kapp, as bankrupt, did not have standing to object to the allowance of the claims in question. Section 57(d) of the Bankruptcy Act, 11 U.S.C. § 93(d), and Bankruptcy Rule 306(b) provide that claims may be objected to by "parties in interest." The term "party in interest" is not defined in the Act. Courts construing the provision have reasoned that the interest must be a pecuniary interest in the estate to be distributed. Thus, since the bankrupt is normally insolvent, he is considered to have no interest in how his assets are distributed among his creditors and is held not to be a party in interest. In re Woodmar Realty Co., 241 F.2d 768 (7th Cir. 1957); In re Pramer, 131 F.2d 733 (7th Cir. 1942); Gregg Grain Co. v. Walker Grain Co., 285 F. 156 (5th Cir. 1922), Cert. denied, 262 U.S. 746, 43 S.Ct. 522, 67 L.Ed. 1212 (1923). However, when it appears that, if the contested claims are disallowed, there may be a surplus of assets to be returned to the bankrupt, the bankrupt is considered to have standing to contest the claims. 4 In re Community Neighbors, Inc., 287 F.2d 542 (7th Cir. 1961); In re Woodmar Realty Co., supra. See generally 3 Collier on Bankruptcy P 57.17(2.1) (14th ed. 1977); Annot., 64 A.L.R.2d 889 (1959). Cf., In re J. M. Wells, Inc., 575 F.2d 329 (1st Cir. 1978); Hartman Corporation of America v. United States, 304 F.2d 429 (8th Cir. 1962) (the bankrupt is not a "person aggrieved" within the meaning of 11 U.S.C. § 67(c) and lacks standing to appeal from an order of the bankruptcy court allowing or disallowing claims unless he has demonstrated a pecuniary interest in the outcome).

Kapp contends that if all disputed claims against the bankruptcy estate are disallowed, there will be a surplus, and, therefore, he is a party in interest with standing to object to the allowance of the claims. Documents filed with Kapp's petition for bankruptcy set forth his assets and liabilities and substantiate this contention. Moreover, at oral argument appellants' attorney conceded as much. We are thus satisfied that disallowance of all disputed claims would leave a surplus in the bankruptcy estate and that, therefore, Kapp has sufficient pecuniary interest to maintain this action.

Res Judicata.

The creditors' primary argument for reversal is that the thirteen pre-bankruptcy default judgments were res judicata and precluded the bankruptcy court's reconsideration of the question of Kapp's personal liability for the debts.

The law of res judicata, or "claim preclusion," 5 is well established; "a final judgment on the merits bars further claims by parties or their privies 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). Accord, Brown v. Felsen, 442 U.S. 127, 131, 99 S.Ct. 2205, 2209, 60 L.Ed.2d 767 (1979); Roach v. Teamsters Local Union No. 688, 595 F.2d 446, 449 (8th Cir. 1979). "Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding. Chicot County Dist. v. Bank, 308 U.S. 371, 378, 60 S.Ct. 317, 320, 84 L.Ed. 329 (1940)." Brown v. Felsen, supra, 99 S.Ct. at 2209. If entered by a court having jurisdiction of the parties and subject matter, and absent fraud or collusion, even a default judgment operates as res judicata and is conclusive of whatever is essential to support the judgment. Morris v. Jones, 329 U.S. 545, 550-51, 67 S.Ct. 451, 91 L.Ed. 488 (1946); Riehle v. Margolies, 279 U.S. 218, 225, 49 S.Ct. 310, 73 L.Ed. 669 (1929); Brown v. Kenron Aluminum and Glass Corp., 477 F.2d 526, 531 (8th Cir. 1973); Moyer v. Mathas, 458 F.2d 431, 434 (5th Cir. 1972); Somportex, Ltd. v. Philadelphia Chewing Gum Corp., 453 F.2d 435, 442 (3d Cir. 1971), Cert. denied, 405 U.S. 1017, 92 S.Ct. 1294, 31 L.Ed.2d 479 (1972); Woods v. Cannaday, 81 U.S.App.D.C. 281, 158 F.2d 184, 185 (D.C.Cir.1946); 1B Moore's Federal Practice P 0.409(4) (1974).

Section 63a of the Bankruptcy Act, 11 U.S.C. § 103(a), provides in relevant part that debts of the bankrupt which are based upon a judgment may be proved and allowed against his estate. As a general rule, in allowing and disallowing claims of creditors, bankruptcy courts are required to give res judicata effect to prior judgments of non-bankruptcy courts. Heiser v. Woodruff, 327 U.S. 726, 733, 737, 66 S.Ct. 853, 90 L.Ed. 970 (1946). Thus matters previously adjudicated between the same parties by a court of competent jurisdiction may not be relitigated in the bankruptcy court. It is, however, well established that bankruptcy courts are courts of equity with broad powers to disallow or subordinate claims when equitable considerations warrant. Heiser v. Woodruff, supra. See, e. g., Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939); In re Wyse, 340 F.2d 719 (6th Cir. 1965); Margolis v. Nazareth Fair Grounds & Farmers Market, Inc., 249 F.2d 221 (2d Cir. 1957). See generally In re Mobile Steel Co., 563 F.2d 692, 698-702 (5th Cir. 1977); Gleick, The Equitable Power of Bankruptcy Courts to Subordinate Claims or to Disallow Claims Entirely on Equitable Grounds, 25 J. Nat'l A.Ref.Bankr. 99 (1951). Hence, a claim which has been reduced to judgment may...

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