Varat Enterprises, Inc., In re

• Decision Date: 23 April 1996
• Docket Number: No. 95-1950,95-1950
• Citation: 81 F.3d 1310
• Parties: In re VARAT ENTERPRISES, INC., Debtor. FIRST UNION COMMERCIAL CORPORATION, Plaintiff-Appellant, v. NELSON, MULLINS, RILEY AND SCARBOROUGH, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1310

81 F.3d 1310

28 Bankr.Ct.Dec. 1262

In re VARAT ENTERPRISES, INC., Debtor FIRST UNION COMMERCIAL CORPORATION, Plaintiff-Appellant, v. NELSON, MULLINS, RILEY AND SCARBOROUGH, Defendant-Appellee.

No. 95-1950.

United States Court of Appeals Fourth Circuit.

Argued Dec. 4, 1995.

Decided April 23, 1996.

Appeal from the United States District Court for the Western District of North Carolina, at Charlotte. Graham C. Mullen, District Judge. (CA-94-78, BK-93-30411).

ARGUED: John Michael Booe, Petree Stockton, Charlotte, North Carolina, for Appellant. George Barry Cauthen, Nelson, Mullins, Riley & Scarborough, L.L.P., Greenville, South Carolina, for Appellee. ON BRIEF: Teresa DeLoatch, Petree Stockton, Charlotte, North Carolina, for Appellant. Robert W. Foster, Jr., A.M. Quattlebaum, Jr., Nelson, Mullins, Riley & Scarborough, L.L.P., Greenville, South Carolina, for Appellee.

Before MURNAGHAN and MICHAEL, Circuit Judges, and MICHAEL, Senior United States District Judge for the Western District of Virginia, sitting by designation.

Affirmed by published opinion. Judge MURNAGHAN wrote the opinion, in which Judge MICHAEL and Senior Judge MICHAEL joined.

OPINION

MURNAGHAN, Circuit Judge:

The present dispute arises from a voluntary bankruptcy petition filed by Varat Enterprises, Inc. ("Varat"), a clothing manufacturer located in South Carolina. Prior to the bankruptcy filing, the South Carolina law firm of Nelson, Mullins, Riley & Scarborough ("Nelson, Mullins") had represented Varat in various legal matters. Specifically, Nelson, Mullins obtained for Varat an arbitration award of $356,944.94 against Fitigues, Inc., in 1992. ¹ Beginning in late 1991, Varat began experiencing financial difficulties and fell behind on its monthly payments to Nelson, Mullins for services rendered. After Varat filed for bankruptcy, the law firm ultimately asserted a secured claim which the bankruptcy and district courts ruled valid. First Union Commercial Corporation ("First Union"), Varat's largest creditor, now seeks to dispute Nelson, Mullins's claim.

BACKGROUND

On March 15, 1993, Varat filed a voluntary petition for relief pursuant to Chapter 11 of the U.S. Bankruptcy Code, 11 U.S.C. §§ 101 et seq., in the Western District of North Carolina. Shortly thereafter, Nelson, Mullins filed an unsecured proof of claim asserting that Varat owed it $80,296.36 in legal fees and costs. After Varat filed a disclosure statement and a proposed plan of reorganization, Nelson, Mullins objected, claiming that the statement and plan--neither of which specifically addressed the owed attorneys fees--misclassified its claim as unsecured and impaired. The firm also filed an amended proof of claim asserting that its outstanding fees and costs were secured by virtue of an equitable lien on the 1992 Fitigues arbitration award which had in the meantime been affirmed. ² Varat did not object to Nelson, Mullins's amended claim. Instead, Varat filed an amended disclosure statement and plan of reorganization, inserting two new provisions: Paragraphs 2.8 and 8.8. Paragraph 2.8 established a classification for pre-petition, secured claims brought against Varat by its attorneys as follows:

2.8 Class 8: Attorney Lien Claims. This class is not impaired. Class 8 claims are the pre-petition claims, if any, against the Company by its attorneys that are secured under applicable non-bankruptcy law by a non-avoidable lien in the amount due the Company under any settlement agreement, arbitration award, or judgment. The Company will pay each allowed Class 8 claim out of the proceeds of the settlement agreement, arbitration award, or judgment to which the holder's lien attaches upon receipt of such proceeds.

Paragraph 8.8 specifically addressed the Fitigues matter, providing that "[t]he Arbitration Award, less the allowed amount of the Class 8 claim, if any, shall be paid to [First Union]." Believing that Class 8 specifically allowed its claim, Nelson, Mullins subsequently withdrew its objection at a September 16, 1993, hearing on the amended disclosure statement and supported the amended reorganization plan.

First Union, which had made several commercial loans to Varat and its president over the years, ³ also asserted a secured claim on various company assets, including the Fitigues arbitration award. First Union's claim for $7,935,368.00 was the only secured debt listed in Varat's disclosure statements or reorganization plans. At no time prior to confirmation of the amended plan did First Union assert any objections to Nelson, Mullins's claim or Varat's disclosure statements and proposed plans of reorganization. Instead, First Union, as the lender, voted in favor of the amended plan. During the November 8, 1993, confirmation hearing which both First Union and Nelson, Mullins attended, First Union accepted Varat's plan amendments in open court. The bankruptcy court then confirmed the amended plan on November 23, 1993. No appeal was taken.

On January 12, 1994, First Union objected to Nelson, Mullins's claim for the first time, asserting that the claim was not secured. After a hearing on the objection, the bankruptcy judge ruled, in an order entered on March 1, 1994, that Nelson, Mullins's claim was secured. The judge found that the amended plan allowed Nelson, Mullins' claim as unimpaired under Class 8 and that First Union was barred from objecting to the claim after confirmation of the plan. He ordered Varat to pay Nelson, Mullins $73,896.35, the amount Varat contended that it owed. ⁴

First Union appealed the decision. A magistrate judge reviewed the case and recommended that the district court reverse the bankruptcy court's order. However, the district judge affirmed. First Union then sought reconsideration of the decision, but the district court denied the motion on March 30, 1995. First Union filed a notice of appeal to this court on April 27, 1995.

Both the bankruptcy and district courts determined that First Union was barred from objecting to Nelson, Mullins's claim after confirmation of the amended plan of reorganization. The courts found that First Union had voted in favor of the amended plan. In addition, although First Union knew Nelson, Mullins had asserted an equitable lien prior to the confirmation hearing and had ample opportunity to contest either the claim or the amended plan, it failed to raise any objections until nearly two months after confirmation. The courts further found that Nelson, Mullins reasonably relied on First Union's silence. Consequently, each court held that Varat's amended plan allowed Nelson, Mullins's claim under Class 8 and ordered the debtor to pay the law firm.

DISCUSSION

Our review of the district court's decision is plenary. First Nat'l Bank of Maryland v. Stanley (In re Stanley), 66 F.3d 664, 667 (4th Cir.1995). Like the district court, we review the bankruptcy court's findings of fact only for clear error, but consider the relevant legal questions de novo. Bankr.Rule 8013; Stanley, 66 F.3d at 667; Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 399 (4th Cir.1992). Even if we find evidence to support a particular finding of fact, we must deem it clearly erroneous if, after considering all of the evidence, we are left with the definite and firm conviction that a mistake has been committed. Green v. Staples (In re Green), 934 F.2d 568, 570 (4th Cir.1991).

First Union contends that the lower courts improperly denied its claim. First Union asserts that its objection to Nelson, Mullins's claim was timely for two reasons: first, the absence of a deadline or period of limitation within which an objection must be filed; and second, Varat's amended plan expressly provided that the bankruptcy court would retain jurisdiction even after confirmation to determine disputed, pending and new claims, thus allowing post-confirmation objections. Because the amended plan made no specific mention of Nelson, Mullins's claim, First Union argues that the claim remained subject to the objection process even after confirmation. Furthermore, First Union maintains that the lower courts erred in finding Nelson, Mullins's claim allowed despite the plan's failure to identify it as such. We disagree with First Union on all accounts. In our view, both the bankruptcy and the district judges properly ruled First Union barred from contesting Nelson, Mullins's claim.

I. First Union's Objection

A. Res Judicata

Under res judicata principles, a prior judgment between the same parties can preclude subsequent litigation on those matters actually and necessarily resolved in the first adjudication. See Restatement (Second) of Judgments, §§ 13 et seq (1982); Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414, 66 L.Ed.2d 308 (1980); Federal Deposit Ins. Corp. v. Jones, 846 F.2d 221, 234-35 (4th Cir.1988). The doctrine encompasses two concepts: claim preclusion and issue preclusion, or collateral estoppel. ⁵ Allen, 449 U.S. at 94, 101 S.Ct. at 414. Rules of claim preclusion provide that if the later litigation arises from the same cause of action as the first, then the judgment bars litigation not only of every matter actually adjudicated in the earlier case, but also of every claim that might have been presented. Nevada v. United States, 463 U.S. 110, 129-30, 103 S.Ct. 2906, 2917-18, 77 L.Ed.2d 509 (1983); Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II, Ltd.), 898 F.2d 1544, 1549 n. 3 (11th Cir.), cert. denied, 498 U.S. 959, 111 S.Ct. 387, 112 L.Ed.2d 398 (1990). Issue preclusion is more narrow and applies when the later litigation arises from a different cause of action. Nevada, 463 U.S. at 130 n. 11, 103 S.Ct. at 2918 n. 11. It operates to bar subsequent litigation of those legal and factual issues common to both actions that were "actually and necessarily determined by a court of competent jurisdiction" in the first litigation. Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979); Combs v. Richardson, ...