ROYAL MEADOWS STABLES v. COLONIAL FARM CR., ACA

• Decision Date: 08 May 1997
• Docket Number: Civil Action No. 2:96CV1236.
• Citation: 207 BR 1003
• Court: U.S. District Court — Eastern District of Virginia
• Parties: ROYAL MEADOWS STABLES, INC., Appellant, v. COLONIAL FARM CREDIT, ACA, Appellee.

207 B.R. 1003 (1997)

ROYAL MEADOWS STABLES, INC., Appellant, v. COLONIAL FARM CREDIT, ACA, Appellee.

Civil Action No. 2:96CV1236.

United States District Court, E.D. Virginia, Norfolk Division.

May 8, 1997.

Dean Worley Sword, Jr., Portsmouth, VA, for Royal Meadows Stables, Inc.

Carl Edward Eason, Jr., Pretlow, Eason & Pretlow, Suffolk, VA, for Colonial Farm Credit, ACA.

Debera F. Conlon, Office of U.S. Trustee, Norfolk, VA, U.S. Trustee.

MEMORANDUM OPINION AND ORDER

JACKSON, District Judge.

INTRODUCTION

This case comes before the Court pursuant to 28 U.S.C. § 158(a) as an appeal from the bankruptcy court's order of November 21, 1996, granting Appellee's motion for summary judgment on the basis of res judicata. One issue is presented to this Court on appeal: whether Appellant's breach of contract claim is barred by the doctrine of res judicata.¹ For the reasons that follow, the Court AFFIRMS the bankruptcy court's holding that Appellant's breach of contract claim is barred by the doctrine of res judicata.

I. FACTUAL AND PROCEDURAL BACKGROUND

Appellant Royal Meadows Stables, Inc., ("Royal Meadows") filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code on July 15, 1993. An Order for Relief was entered under that Chapter on that date. On the date of filing, Appellee Colonial Farm Credit, ACA, ("CFC") was a secured creditor of Royal Meadows. On August 24, 1993, CFC filed two proofs of claim in the bankruptcy proceeding: one in the amount of $359,487.35 and one in the amount of $100,991.25, stating that these claims were secured by certain real estate owned by debtor-in-possession Royal Meadows.² Royal Meadows did not file any objections to either of the two proofs of claims.

During August 1993, Royal Meadows began negotiations with Warren Birdsong for the sale of 146 of the available 166 acres of the Suffolk property to Birdsong ("Birdsong property"). On September 15, 1993, Royal Meadows executed a sales contract with Birdsong to sell the Birdsong property for the purchase price of $400,000.00

Royal Meadows then filed with the bankruptcy court a notice of intent to sell and a hearing was held on November 16, 1993. CFC did not object to the sale to Birdsong, but a junior secured creditor did object.³ At the hearing, Royal Meadow represented that $400,000.00 was the best offer it had received for the sale of the property. The court overruled the junior creditor's objection and entered an order approving the sale to Birdsong. Notably, the motion to approve the sale did not seek, and the order did not provide for, a sale free and clear of liens under § 363(f)⁴, even though the sales contract between Royal Meadows and Birdsong stated that the purchase offer was "subject to removal of liens by Bankruptcy Court, if necessary to convey clear title."

Pending at the time of the hearing was CFC's November 2, 1993 motion to modify the automatic stay imposed by 11 U.S.C. § 362. Royal Meadows failed to appear and contest this motion and the bankruptcy court ordered CFC relief from the stay effective December 31, 1993. When the closing with Birdsong did not occur by that date, CFC directed the Trustee under the Royal Meadow deeds of trust to institute foreclosure proceedings on the entire Suffolk property and a foreclosure sale was scheduled for January 21, 1994.

Birdsong consummated the sale with Royal Meadows on January 20, 1994. The parties agree that CFC was paid the sum of $394,813.24 on or about January 20, 1994. However, Royal Meadows alleges that CFC negotiated this sum certain as full and final satisfaction of both its claims and agreed to release its liens from the Suffolk property, but that CFC has refused to release its liens or cancel the notes. Royal Meadows further contends that CFC has subsequently assigned and transferred the notes and its claims back to Lloyd C. March, and that March refuses to release his lien on the remaining portion of the real property. CFC asserts that if the remaining parcel of real property is encumbered by a lien held by March, it is because March continues to have a secured claim because the balance owing on the notes were not paid in full from the proceeds of the sale of the Birdsong property.

On or about September 26, 1994, Royal Meadows filed a complaint against CFC ("1994 complaint") containing four counts:

(1) CFC accepted payoff funds and refused to release the Royal Meadows deeds of trust liens upon the Suffolk property;

(2) CFC violated the automatic stay because at the time of the January 21, 1994 foreclosure sale, March was a debtor under Chapter 11 of the Bankruptcy Code;

(3) CFC falsely represented to Royal Meadows and its agents the "amount necessary to pay the debt," creating "a situation where the remaining unsold real property is encumbered by liens now held by March, to the detriment of the debtor and various other creditors;" and

(4) CFC forced Royal Meadows to sell the property at a "sacrifice or forced sale price" which resulted in a loss to Royal Meadows.

CFC filed a response and grounds of defense to these allegations. The bankruptcy court treated CFC's response as a motion to dismiss and the Honorable Hal J. Bonney held a hearing on these issues on December 1, 1994. After oral argument, the bankruptcy court entered an order on December 22, 1994 dismissing all four counts of the 1994 complaint.

Subsequently, Royal Meadows filed an objection to the $100,991.25 proof of claim originally filed by CFC, maintaining that when CFC accepted the sum of $394,813.24, the debt owing under the notes was discharged and therefore March, as holder of the notes, held no claim against Royal Meadows. After reviewing the stipulated facts and supporting briefs, and after oral argument by counsel, the bankruptcy court issued a Memorandum Opinion on October 11, 1995, holding that the indebtedness due under the $100,000 note was not discharged, that the lien still existed upon the 20-acre parcel which was excluded from the sale to Birdsong and the claim should be allowed as a secured claim. Royal Meadows remains the owner of the remaining parcel and the Royal Meadows deeds of Trust and the McKenzie deed of trust are still of record as liens against the remaining parcel.

On or about June 25, 1996, Royal Meadows filed a second complaint against CFC, alleging that CFC had entered into a contract with Royal Meadows whereby CFC would release these two liens from the Suffolk property owned by Royal Meadows upon payment of $394,813.24 to CFC. On or about July 24, 1996, CFC filed its response and grounds of defense, denying the existence of any contract between Royal Meadows and CFC and raising the affirmative defenses of res judicata and collateral estoppel. On October 8, 1996, CFC moved for summary judgment on the grounds of res judicata and collateral estoppel. On October 30, 1996, Royal Meadows filed a memorandum in opposition to CFC's motion for summary judgment. After a hearing on October 31, 1996, the bankruptcy court granted CFC's motion for summary judgment on the basis of res judicata only, finding that the dismissal of Count 11 of the 1994 complaint was a final judgment on the merits and that Royal Meadows' breach of contract claim arises out of the identical set of facts as Count III of the 1994 complaint, alleging fraud.

Royal Meadows subsequently appealed that decision to this Court.

II. STANDARD OF APPELLATE REVIEW

A district court reviews a bankruptcy court's decisions of law de novo. L & R Associates v. Curtis, 194 B.R. 407, 409 (E.D.Va.1996) (citing In re Johnson, 960 F.2d 396, 399 (4th Cir.1992)). A district court reviews a bankruptcy court's findings of fact under a clearly erroneous standard. Fed. R. Bankr.P. 8013.

III. DISCUSSION

Federal courts have traditionally adhered to the related doctrines of "collateral estoppel" or "issue preclusion" and "res judicata" or "claim preclusion."⁵ These two doctrines serve to "relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication." Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 415, 66 L.Ed.2d 308 (1980).

The doctrine of "collateral estoppel" or "issue preclusion" states that once a court has decided an issue of fact or law necessary to its judgment, that decision is conclusive in a subsequent suit based on a different cause of action involving a party to the prior litigation. United States v. Mendoza, 464 U.S. 154, 158, 104 S.Ct. 568, 571, 78 L.Ed.2d 379 (1984) (citing Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979)). This doctrine is not at issue in this case as the bankruptcy court denied CFC's motion for summary judgment on the grounds of collateral estoppel.

"Res judicata" or "claim preclusion" is the doctrine the Court is concerned with in this case. It states that a final judgment on the merits precludes the parties or their privies from relitigating issues that were or could have been raised in that action. Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414, 66 L.Ed.2d 308 (1980); Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979); Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326 n. 5, 99 S.Ct. 645, 649 n. 5, 58 L.Ed.2d 552 (1979). Res judicata does not bar claims that did not exist at the time of the prior litigation. The standard is objective and it is the "existence of the present claim, not party awareness of it, that controls." Meekins v. United Transp. Union, 946 F.2d 1054, 1057 (4th Cir.1991).

To invoke res judicata, a party must establish three elements: (1) a final judgment on the merits in an earlier suit; (2) an identity of the cause of action in both the earlier and the later suit; and (3) an identity of parties or their privies in the two suits. Meekins, 946 F.2d at 1057; Young-Henderson v. Spartanburg Area Mental Health Center, 945 F.2d 770, 773 (...