Littlefield v. Union State Bank, Hazen, N.D.

• Decision Date: 26 May 1993
• Docket Number: No. 920141,920141
• Citation: 500 N.W.2d 881
• Parties: Gail LITTLEFIELD and Corinne "Koko" Karlin, individually and d/b/a Brandy Partnership, Plaintiffs and Appellants, v. UNION STATE BANK, HAZEN, NORTH DAKOTA; and Charles Stroup and Harvey Huber, individually and as officers of the Union State Bank of Hazen; and Edward W. Grunett, Defendants and Appellees. Civ.
• Court: North Dakota Supreme Court

Page 881

500 N.W.2d 881

62 USLW 2031

Gail LITTLEFIELD and Corinne "Koko" Karlin, individually and d/b/a Brandy Partnership, Plaintiffs and Appellants, v. UNION STATE BANK, HAZEN, NORTH DAKOTA; and Charles Stroup and Harvey Huber, individually and as officers of the Union State Bank of Hazen; and Edward W. Grunett, Defendants and Appellees.

Civ. No. 920141.

Supreme Court of North Dakota.

May 26, 1993.

Larry W. Quast (argued), Beulah, for plaintiffs and appellants.

Bruce H. Carlson (argued) of McNair, Larson & Carlson, Ltd., Fargo, for defendants and appellees Union State Bank, Charles Stroup and Harvey Huber.

William A. Herauf (argued) of Reichert, Buresh, Herauf & Ficek, P.C., Dickinson, for defendant and appellee Edward W. Grunett.

LEVINE, Justice.

Gail Littlefield and Corrine Karlin (plaintiffs), individually and doing business as Brandy Partnership, appeal from a summary judgment dismissing their claims against Edward Grunett, Union State Bank, and Charles Stroup and Harvey Huber, individually and as officers of the Bank (collectively referred to as defendants). We affirm.

In 1985, the plaintiffs were employees, officers and directors of Brandy Corporation, a firm that provided temporary employees for other businesses. Prior to September 1985, the Bank had loaned Brandy Corporation money for its operating expenses. The plaintiffs alleged that in the summer of 1985, the Bank orally agreed to loan them $51,000 to purchase the stock of the corporation's majority stockholder, Kim Hollapa, and to cover the corporation's operating expenses. In September 1985, the plaintiffs and Hollapa executed a buy-out agreement and plaintiffs became the sole shareholders of the corporation. According to the plaintiffs, the Bank thereafter informed them that it would not complete the loan and instructed them to contact Grunett, the corporation's accountant, for advice. The plaintiffs alleged that Grunett advised them to "borrow" money from the Internal Revenue Service by not paying the corporation's employee withholding taxes. According to the plaintiffs, they had sufficient collateral to secure a loan from other sources, but they took Grunett's advice and did not pay the taxes due, resulting in the IRS filing tax liens against the corporation in May and September 1986.

On January 16, 1987, the corporation filed a Chapter 11 petition in bankruptcy, listing Grunett as an unsecured creditor with a "disputed" claim of $7,000 for accounting fees and the Bank as a secured creditor with a secured claim of $28,600 in accounts receivable. The corporation filed a "Schedule B-2" of its personal property; the schedule did not list any "[c]ontingent and unliquidated claims of [any] nature, including counterclaims of the debtor." Nor did the "Schedule B-3" filed by the corporation list any "[p]roperty of any kind not otherwise scheduled." The corporation's "statement of financial affairs" indicated that it had "[d]iscussed [a]ccountant [p]roblems and procedures to correct problem" with its bankruptcy attorney. The corporation's reorganization plan did not identify any potential claim for relief against the defendants. The bankruptcy court confirmed the reorganization plan on September 23, 1987. The corporation's bankruptcy proceeding was closed on December 28, 1987. Meanwhile, the plaintiffs formed "Brandy Partnership" and continued in the same business.

In February 1990, the plaintiffs sued the defendants, alleging that the Bank's failure to complete the loan and Grunett's bad advice caused the insolvency of the corporation and the need to seek the protection of the bankruptcy court. The plaintiffs alleged breach of an agreement to make the loan, breach of contract, breach of a fiduciary relationship, constructive fraud, negligence and duress. The district court granted Grunett's motion for summary judgment, concluding that the two-year statute of limitations for professional malpractice barred the plaintiffs' action against him. The court later granted the remaining defendants' motion for summary judgment, concluding, inter alia, that the plaintiffs' action belonged to the corporation, not the shareholders, and was precluded because it was not disclosed in the corporation's bankruptcy proceeding. The plaintiffs appealed.

The plaintiffs seek reversal of the summary judgment, claiming there remain genuine issues of material fact. The defendants respond that the plaintiffs' action is barred because it was not disclosed in the corporation's bankruptcy proceeding.

Our review is guided by well-established standards for summary judgment. Summary judgment is a procedural device for promptly and expeditiously disposing of a controversy without a trial if there is no genuine issue of material fact, or if the law is such that the resolution of any factual dispute will not alter the result. Fibelstad v. Grant County, 474 N.W.2d 54 (N.D.1991); Ebach v. Ralston, 469 N.W.2d 801 (N.D.1991).

In bankruptcy proceedings, 11 U.S.C.A. Sec. 521(1) requires a debtor to "file ... a schedule of assets and liabilities ... and a statement of the debtor's financial affairs." Bankruptcy Schedule B-2 requires a debtor to disclose "[c]ontingent and unliquidated claims of every nature, including counterclaims." Before the bankruptcy court may approve a reorganization plan, 11 U.S.C.A. Sec. 1125, requires a Chapter 11 debtor to file a "written disclosure statement" containing "adequate information" which would enable claim holders to make an informed judgment about the plan.

Because of these requirements, courts that have considered the effect of a debtor's failure to disclose a potential lender-liability lawsuit in a bankruptcy proceeding have universally held that the debtor is equitably estopped, judicially estopped or barred by res judicata from bringing the action after confirmation of the bankruptcy reorganization plan. Matter of Baudoin, 981 F.2d 736 (5th Cir.1993) [res judicata]; Hay v. First Interstate Bank of Kalispell, 978 F.2d 555 (9th Cir.1992) [equitable estoppel]; Eubanks v. F.D.I.C., 977 F.2d 166 (5th Cir.1992) [res judicata]; Sanders Confectionery Products, Inc. v. Heller Financial, Inc., 973 F.2d 474 (6th Cir.1992) [res judicata]; Sure-Snap Corp. v. State Street Bank and Trust Co., 948 F.2d 869 (2nd Cir.1991) [res judicata]; Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414 (3rd Cir.), cert. denied, 488 U.S. 967, 109 S.Ct. 495, 102 L.Ed.2d 532 (1988) [equitable estoppel and judicial estoppel]; In re Hoffman, 99 B.R. 929 (N.D.Iowa 1989) [equitable estoppel, judicial estoppel, and res judicata]; Cleasby v. Security Fed. Savings Bank, 243 Mont. 306, 794 P.2d 697 (1990) [equitable estoppel]; Zwemer v. Production Credit Ass'n, 792 P.2d 245 (Wyo.1990) [judicial estoppel].

Those decisions rely primarily upon the well-established requirement that a debtor seeking the benefits of bankruptcy must fulfill the companion duty of fully disclosing and scheduling all property interests and rights so that the bankruptcy court and creditors can make an informed decision about the debtor's proposed reorganization plan. Sure-Snap, supra; Oneida, supra.

In Sure-Snap, supra, the court concluded that because a corporate debtor failed to disclose possible claims against two creditor banks, or to raise the claims as a defense in the debtor's prior Chapter 11 bankruptcy proceeding, res judicata barred the corporate debtor and its officers from bringing a subsequent lender liability action against the banks. The subsequent action was barred because it involved the same parties or their privies and the same claims, which could have been brought in the bankruptcy proceeding and which may have affected the creditors' decision to vote for confirmation of the bankruptcy reorganization plan.

The federal courts' analyses of the preclusive effect of a prior bankruptcy proceeding and our law of res judicata lead us to conclude that Brandy Corporation's bankruptcy proceeding bars the plaintiffs from litigating their claims in this case. In Hofsommer v. Hofsommer Excavating, Inc., 488 N.W.2d 380, 383 (N.D.1992), we restated the elements of res judicata:

"Res judicata, or claim preclusion, ... prohibits the relitigation of claims or issues that were raised or could have been raised in a prior action between the same parties or their privies and which [were] resolved by final judgment in a court of competent jurisdiction."

A determination of whether res judicata applies is a question of law. Hofsommer, supra; Peacock v. Sundre Township, 372 N.W.2d 877 (N.D.1985).

Under 11 U.S.C.A. Sec. 1141(a), a bankruptcy court's confirmation of a reorganization plan is binding on the debtor and any creditor, and, for purposes of res judicata, confirmation is a valid, final judgment by a court of competent jurisdiction. Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134, 83 L.Ed. 104 (1938); Eubanks, supra; Matter of Baudoin, supra; see 5 Collier on Bankruptcy p 1141.01 (15th Ed.1993). Accordingly, the bankruptcy court's confirmation of Brandy Corporation's reorganization plan is a final judgment by a court of competent jurisdiction.

In resolving whether a subsequent action involves the same claims or issues as those that were raised or could have been raised in a prior proceeding, we begin with the rule that res judicata applies even though the subsequent claims may be based upon a different legal theory. Wolf v. Anderson, 422 N.W.2d 400 (N.D.1988). But, if the subsequent claims are based upon the identical factual situation as the claims in the prior proceeding, then they should have been raised in the prior proceeding. Wolf, supra; Perdue v. Knudson, 179 N.W.2d 416 (N.D.1970). It matters not that the substantive issues were not directly decided in the prior action; the key is that they were "capable of being, and should have been, raised as part of the [prior] proceeding." Hofsommer, supra, 488 N.W.2d at 385.

The plaintiffs' action here involves a lender-liability...