Providence Hall Associates v. Wells Fargo Bank, N.A. , 816 F.3d 273 ( 2016 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-2378
PROVIDENCE HALL ASSOCIATES LIMITED PARTNERSHIP,
Plaintiff - Appellant,
v.
WELLS FARGO BANK, N.A., successor in interest to Wachovia
Bank, N.A.,
Defendant - Appellee.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Liam O’Grady, District
Judge. (1:14−cv−00352−LO−IDD)
Argued: December 8, 2015 Decided: March 11, 2016
Before WILKINSON, NIEMEYER, and DIAZ, Circuit Judges.
Affirmed by published opinion. Judge Diaz wrote the opinion, in
which Judge Wilkinson and Judge Niemeyer joined.
ARGUED: Gary M. Bowman, Roanoke, Virginia, for Appellant.
Jeffrey L. Tarkenton, WOMBLE CARLYLE SANDRIDGE & RICE, LLP,
Washington, D.C., for Appellee. ON BRIEF: B. Chad Ewing, WOMBLE
CARLYLE SANDRIDGE & RICE, LLP, Charlotte, North Carolina, for
Appellee.
DIAZ, Circuit Judge:
Providence Hall Associates (“PHA”) appeals the district
court’s dismissal of its lawsuit against Wells Fargo Bank. PHA
contends that the district court erroneously gave res judicata
effect to various sale orders issued during PHA’s Chapter 11
bankruptcy. We conclude that the elements of res judicata are
satisfied and therefore affirm.
I.
PHA is a Virginia-based limited partnership that, prior to
its bankruptcy, owned a handful of properties in several states.
It entered three transactions with Wells Fargo’s predecessor-in-
interest: (1) a $2.5 million loan, (2) a $500,000 line of
credit, and (3) an interest-rate-swap agreement, whereby PHA
exchanged a fixed interest rate for a floating one based on the
one-month U.S. Dollar London Interbank Offered Rate (“LIBOR”).
The loan and the line of credit contained a cross-default
clause—meaning a default on either amounted to a default on
both—and were secured by deeds of trust, mortgages, and
assignments of rent for certain PHA real estate holdings.
PHA subsequently defaulted on the loans and, as a result,
filed a petition for Chapter 11 bankruptcy in March 2011.
Shortly thereafter, Wells Fargo informed PHA that an event of
2
default took place under the interest-rate-swap agreement,
triggering $317,850 in termination damages.
Wells Fargo filed a proof of claim in the Chapter 11 case
for nearly $3 million. PHA objected, filing an adversary
complaint, which it later amended. In that amended complaint,
PHA alleged that Wells Fargo falsely represented that it “would
forbear collection of the principal balance of the $500,000
[line of credit],” J.A. 69, ultimately causing PHA to default
and enter bankruptcy.
Meanwhile, the United States Trustee had moved to convert
the bankruptcy case to a Chapter 7 proceeding or dismiss it
altogether based on PHA’s failure to file monthly financial
reports. Wells Fargo filed a memorandum in support of the
motion, repeating the United States Trustee’s allegations and
contending that, among other inappropriate actions, PHA’s
principals used Wells Fargo’s cash collateral to pay
“distributions” to themselves. J.A. 123. After reviewing the
arguments of the United States Trustee and Wells Fargo, the
bankruptcy court opted to appoint Marc Albert as a Chapter 11
trustee rather than dismiss the bankruptcy case or convert it
into a Chapter 7 proceeding.
Trustee Albert took a number of steps to bring PHA out of
bankruptcy—most important here, obtaining court approval to sell
two of the bankruptcy estate’s properties to satisfy the debts
3
owed to Wells Fargo. In both of his sale motions under 11
U.S.C. § 363(b), (f), Trustee Albert requested that the proceeds
(minus certain expenses) be distributed to Wells Fargo. J.A.
183, 231. Additionally, both motions recognized PHA’s
obligations to Wells Fargo under the two loans and the interest-
rate-swap agreement. See, e.g., J.A. 170–72, 174–75, 177, 219–
21, 224. The bankruptcy court granted the motions, noting in
its orders that PHA was in debt to Wells Fargo, J.A. 376, 386–
88, and that the balance of the sale proceeds should be
distributed to Wells Fargo, J.A. 380, 388. In the final sale
order, the court explicitly stated that sale proceeds should be
paid to Wells Fargo “up to the amount of the WFB Obligations,”
J.A. 388, where “WFB Obligations” was a defined term from
Trustee Albert’s sale motion representing PHA’s debts arising
out of the two loans and the swap agreement, J.A. 220.
Around the time Trustee Albert moved to sell the bankruptcy
estate’s properties in satisfaction of PHA’s outstanding debts
to Wells Fargo, he also consented to the dismissal without
prejudice of PHA’s adversary complaint.
By November 2012, the proceeds of the sales had satisfied
PHA’s debts to Wells Fargo. Consequently, Victor Guerrero—an
equity holder and principal of PHA—filed a motion to dismiss the
Chapter 11 proceeding, which the bankruptcy court granted with
Trustee Albert’s consent.
4
More than a year later, PHA filed suit in Virginia state
court, which Wells Fargo removed to federal court. Along with
repeating the claims made in the bankruptcy adversary complaint,
PHA alleged new theories of lender liability. Relevant here,
PHA claimed that the interest-rate-swap transaction was a “sham”
because “the LIBOR rate was illegally rigged and manipulated.”
Appellant’s Br. at 7–9; see also J.A. 12–14.
Wells Fargo filed a motion to dismiss, which the district
court granted on res judicata grounds, giving preclusive effect
to the bankruptcy court’s sale orders. The court then denied
PHA’s motion for reconsideration.
This appeal followed.
II.
We review de novo the district court’s dismissal based on
res judicata. Brooks v. Arthur, 626 F.3d 194, 200 (4th Cir.
2010).
“Under the doctrine of res judicata, or claim preclusion,
‘[a] final judgment on the merits of an action precludes the
parties or their privies from relitigating issues that were or
could have been raised in that action.’” Pueschel v. United
States, 369 F.3d 345, 354 (4th Cir. 2004) (quoting Federated
Dep’t Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981)). Three
elements must be satisfied for res judicata to apply. “[T]here
5
must be: (1) a final judgment on the merits in a prior 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.” Id. at 354–55. Along with these “three
formal elements” of res judicata, “two practical considerations
should be taken into account.” Grausz v. Englander, 321 F.3d
467, 473 (4th Cir. 2003). First, we consider whether the party
or its privy knew or should have known of its claims at the time
of the first action. See id. at 473–74. Second, we ask whether
the court that ruled in the first suit was an effective forum to
litigate the relevant claims. See id. at 474.
We address the three core res judicata requirements in
turn, followed by the two “practical considerations” from
Grausz.
A.
The district court recognized the first res judicata
requirement—that the sale orders are final orders on the merits—
as “the clearest hurdle for Wells Fargo to overcome.” J.A. 38.
Nevertheless, the court determined that Wells Fargo prevailed,
primarily relying on cases from the Fifth, Sixth, and Seventh
Circuits, which concluded that bankruptcy sale orders were final
orders on the merits. J.A. 39 (citing Winget v. JP Morgan Chase
Bank, N.A., 537 F.3d 565 (6th Cir. 2008); Bank of Lafayette v.
6
Baudoin (In re Baudoin), 981 F.2d 736 (5th Cir. 1993); Gekas v.
Pipin (In re Met-L-Wood Corp.), 861 F.2d 1012 (7th Cir. 1988)). 1
While PHA concedes that the sale orders are “final,” it
presents a litany of arguments that they are not “on the
merits.” Appellant’s Br. at 33. We are unconvinced, concluding
as the district court did that the first prong of res judicata
is satisfied.
1.
We begin by turning to the cases from our sister circuits
upon which the district court relied. We, too, find them
persuasive and reject PHA’s attempts to distinguish them.
In Met-L-Wood, the debtor in a Chapter 11 proceeding filed
a motion to sell bankruptcy estate assets, which the court
granted. 861 F.2d at 1015. While § 363(b)(1) requires that the
seller of estate property give notice to creditors, some
unsecured creditors did not receive notice. Id. at 1017. After
1Other cases have held or explained in dicta that
bankruptcy sale orders can give rise to res judicata. See,
e.g., Silverman v. Tracar, S.A. (In re Am. Preferred
Prescription, Inc.), 255 F.3d 87, 92 (2d Cir. 2001) (citing two
cases, including Met-L-Wood, that gave res judicata effect to
sale orders to support the proposition that “some orders of
bankruptcy courts, entered in the course of Chapter 11
proceedings prior to confirmation . . . are entitled to res
judicata effect”); Robertson v. Isomedix, Inc. (In re Int’l
Nutronics, Inc.), 28 F.3d 965, 969–71 (9th Cir. 1994)
(concluding that a bankruptcy court order confirming a sale
barred antitrust claims under res judicata principles).
7
the sale, the bankruptcy case was converted into a Chapter 7
proceeding, and a trustee was appointed. Id. at 1015. The
trustee then “investigated the circumstances surrounding the
judicial sale and eventually decided that there had been
skullduggery of two kinds.” Id. Seeking to remedy said
skullduggery on behalf of unsecured creditors, the trustee filed
suit in federal district court against the debtor-corporation,
its owner, and others involved in the judicial sale, alleging
various common law and statutory claims. Id. at 1016.
The Seventh Circuit concluded that the district court
properly dismissed the trustee’s suit. Id. at 1018. The court
explained that to the extent the trustee’s claims were derived
from his representation of the unsecured creditors who had
notice of the judicial sale, res judicata barred the trustee’s
lawsuit from moving forward. Id. at 1016–17. But, to the
extent the trustee’s claims were derived from unsecured
creditors who had not received notice of the judicial sale, res
judicata proved no bar because this subset of unsecured
creditors were not parties to the sale proceeding. Id. at 1017.
Nevertheless, the court held that the trustee’s claims were
otherwise barred because the sale proceeding was in rem,
“transfer[ring] property rights, and property rights are rights
good against the world, not just against parties to a judgment
or persons with notice of the proceeding.” Id.
8
In Baudoin, the plaintiffs and their wholly owned company
filed for Chapter 7 bankruptcy based on an inability to meet
loan obligations to a particular creditor bank. 981 F.2d at
737–38. The plaintiffs’ personal bankruptcies were
consolidated, and a trustee was appointed. Id. at 738. Upon
the trustee’s motion, two properties securing the plaintiffs’
debt were sold at auction, leading to the plaintiffs’ discharge
from bankruptcy. Id. Three years later, the plaintiffs sued
the creditor bank, alleging that it “forced them and their
company . . . into bankruptcy.” Id.
The Fifth Circuit concluded that res judicata precluded the
plaintiffs’ suit. Id. at 739. In doing so, the court looked
to, among other considerations, “the important interest in the
finality of judgments in a bankruptcy case.” Id. (quoting
Hendrick v. H.E. Avent, 891 F.2d 583, 587 n.9 (5th Cir. 1990)).
Specifically, the court explained that the goals of
“[r]estraining litigious plaintiffs from taking more than ‘one
bite of the apple,’” and ensuring “that bite is to be taken as
expeditiously and economically as possible” were to be given
great weight, particularly in light of “spiraling litigation
costs” and docket congestion. See id. at 739–40 (quoting Sure-
Snap Corp. v. State St. Bank & Trust Co., 948 F.2d 869, 870 (2d
Cir. 1991)).
9
Finally, in Winget, the bankruptcy court ordered the sale
of the Chapter 11 debtors’ assets, with the proceeds of the sale
going to an outstanding balance on a credit agreement. 537 F.3d
at 571. Winget, who owned the debtor-companies and guaranteed
their debt, later sued various parties, asserting that those
parties intentionally devalued the companies’ assets through
conduct taking place before the bankruptcy proceeding. Id. at
568–69, 579. The Sixth Circuit held that Winget’s claims were
barred by res judicata. Id. at 577–81. In concluding that the
sale order was a final order on the merits, the court looked to
Baudoin and Met-L-Wood, as well as the policy of promoting
finality that underpins res judicata. See id. at 578–79.
PHA’s attempts to meaningfully distinguish these cases are
unavailing. As for Winget, PHA argues that the Sixth Circuit
held that the sale order was on the merits because Winget
objected (though he withdrew this objection) with the same
lender liability claim that he later brought in the district
court. Appellant’s Br. at 32 (citing Winget, 537 F.3d at 580);
id. at 35–36. But the passage of Winget that PHA cites does not
relate to the question of whether a sale order is a final order
on the merits. Instead, the Sixth Circuit discussed Winget’s
objection to show that he was not “unaware of all of the facts
needed to bring the claims before the bankruptcy court at the
time of th[e] proceeding.” Winget, 537 F.3d at 580.
10
Accordingly, PHA’s reliance on this factual distinction is
misplaced.
With regard to Baudoin, PHA contends that it is
distinguishable because the debtors never objected to the sale
orders or the creditor’s claim in the bankruptcy court, unlike
PHA, which objected to Wells Fargo’s proof of claim. We fail to
see how this helps PHA. As the Baudoin court explained, sale
orders “are final judgments on the merits for res judicata
purposes, ‘even though the order neither closes the bankruptcy
case nor disposes of any claim.’” 981 F.2d at 742 (quoting
Hendrick, 891 F.2d at 586). It is irrelevant whether an
objection was made.
As for Met-L-Wood, PHA argues that the court did not hold
that “the trustee’s . . . claims seeking damages against the
seller and purchaser” were barred by res judicata. Reply Br. at
15. This is arguably true because the trustee’s claims were
derived in part from unsecured creditors who were not party to
the sale proceeding, and therefore the court could not resolve
the entire case on res judicata grounds. But, the Seventh
Circuit subsequently treated the res judicata analysis in Met-L-
Wood as a holding. See Matrix IV, Inc. v. Am. Nat’l Bank &
Trust Co. of Chi., 649 F.3d 539, 549 (7th Cir. 2011) (“We held
in [Met-L-Wood] that a bankruptcy trustee was barred from filing
a RICO suit against the debtor and others involved in a
11
bankruptcy asset sale after the sale had been confirmed; res
judicata applied . . . .” (emphasis added)). More importantly,
because we of course are not bound by Met-L-Wood regardless of
what it held, it is not particularly important to this court
whether the passage in question was dictum. What matters is
whether we find the Seventh Circuit’s analysis persuasive.
Here, we do.
PHA also argues that Met-L-Wood is distinguishable because
PHA’s claims are unrelated to the sale proceedings themselves,
while in Met-L-Wood, the trustee alleged fraud surrounding the
sale. Reply Br. at 15–16. We grant that this is a distinction,
but it is not a meaningful one.
To sell bankruptcy estate assets outside the ordinary
course of business, the trustee of the estate or the debtor-in-
possession must initiate the sale proceeding. See 11 U.S.C.
§§ 363(b)(1), 1107(a). Here, the trustee moved to sell property
in satisfaction of specifically identified obligations arising
out of PHA’s transactions with Wells Fargo. The bankruptcy
court approved these sales, finding them to be “in the best
interests of the Estate.” E.g., J.A. 387; see also Rose v.
Logan, No. RDB-13-3592, 2014 WL 1236008, at *7 (D. Md. Mar. 25,
2014) (describing the standard for approving a sale of
bankruptcy estate assets); Appellant’s Br. at 22 (“The standard
for approving the sale is essentially a business judgment test,
12
or whether it is in the best interests of the estate to sell the
property.” (citing 3 Collier on Bankruptcy ¶ 363.02[1][f]) (Alan
N. Resnick & Henry J. Sommer eds., 15th ed. 2005)).
The key questions thus arise: if PHA did not owe the amount
that Wells Fargo claimed it was due, why would the trustee—the
bankruptcy estate’s representative—move to sell estate assets in
full satisfaction of Wells Fargo’s claimed debt, and why would
the bankruptcy court approve the sale? The motions to sell in
this case effectively conceded the validity of PHA’s obligations
to Wells Fargo, and the proceeds of the sales satisfied those
obligations. It would make little sense after the sales were
made, the debt settled, and the bankruptcy proceeding closed, to
then allow PHA to challenge in a new judicial proceeding the
propriety of the transactions giving rise to its now-
extinguished debt. To allow such a challenge would achieve
little more than upending the purpose of res judicata: promoting
finality and judicial economy. Montana v. United States, 440
U.S. 147, 153–54 (1979); see also Winget, 537 F.3d at 578–79;
Baudoin, 981 F.2d at 739–40.
Furthermore, the preclusive effect of the bankruptcy
court’s sale orders is consistent with the “fundamental purpose”
of Chapter 11 bankruptcy: “rehabilitation of the debtor.”
Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co.,
L.L.C.), 403 F.3d 164, 170 (4th Cir. 2005) (quoting NLRB v.
13
Bildisco & Bildisco, 465 U.S. 513, 528 (1983)). To fulfill this
objective, “[c]entralization of disputes concerning a debtor’s
legal obligations is especially critical” because it allows
“reorganization [to] proceed efficiently, unimpeded by
uncoordinated proceedings in other arenas.” Id. (quoting
Shugrue v. Air Line Pilots Ass’n, Int’l (In re Ionosphere Clubs,
Inc.), 922 F.2d 984, 989 (2d Cir. 1990)). Allowing “piecemeal
litigation” as PHA urges, after all the debts and dust of a
bankruptcy have settled, would invite precisely the inefficient
decentralized proceedings that Chapter 11 bankruptcy is designed
to avoid. See id.
We conclude—in accord with our sister circuits as well as
the purpose of res judicata and Chapter 11 bankruptcy—that the
sale orders in this case are final orders on the merits.
2.
PHA presents a series of other arguments that we should
break ranks with our sister circuits and hold that the sale
orders fail to satisfy the first prong of res judicata. None
are persuasive.
First, PHA argues that because its adversary complaint was
dismissed without prejudice, its present lawsuit is not
precluded. The dismissal of the adversary complaint is not
relevant to our analysis, as Wells Fargo does not contend that
14
this dismissal gives rise to res judicata. Instead, the sale
orders are what preclude the claims now before the court.
Second, PHA contends that because a bankruptcy court sale
order is an in rem proceeding, Met-L-Wood, 861 F.2d at 1017, it
does not have a res judicata effect on in personam lender
liability claims. In support, PHA points to M.W. Zack Metal Co.
v. Int’l Navigation Corp., 510 F.2d 451 (4th Cir. 1975). Zack
Metal, however, does not address res judicata. As Wells Fargo
correctly points out, “Zack Metal stands for the proposition
that a party cannot file an in personam action on or otherwise
attempt to collect on an in rem judgment by means other than the
specific property at issue in the in rem lawsuit.” Appellee’s
Br. at 23 (citing Zack Metal, 510 F.2d at 452–53).
Moreover, the circuit cases we discussed earlier belie the
notion that the in rem nature of a sale order precludes the
application of res judicata to transactionally related lender
liability claims. A Chapter 11 sale order can give rise to res
judicata because the estate representative—the trustee or the
debtor-in-possession—has ample opportunity to assert a lender
liability claim before selling off estate assets in satisfaction
of debts. See 18 Charles Alan Wright et al., Federal Practice
and Procedure § 4412 (2d ed. 2012) (explaining that because
bankruptcy proceedings are “intended to resolve all claims in a
15
single definitive proceeding,” in personam claims that could
have been raised during bankruptcy should be precluded).
Third, PHA maintains that County Fuel Co. v. Equitable Bank
Corp., 832 F.2d 290 (4th Cir. 1987), precludes the application
of res judicata in this case. There, a creditor filed a proof
of claim in a Chapter 11 proceeding for the secured balance of a
loan, and the debtor-in-possession did not object, except with
respect to a claim for attorneys’ fees. Cty. Fuel, 832 F.2d at
291. The creditor’s claim was therefore automatically allowed.
Id. at 291–92; see 11 U.S.C. § 502(a).
After filing its proof of claim, the creditor moved to lift
the bankruptcy court’s automatic stay so it could proceed
against its collateral. Cty. Fuel 832 F.2d at 291. The
bankruptcy court granted the lift-stay motion, the district
court affirmed, and the creditor eventually recovered the amount
of its claim. Id. at 291–92. About two years later, the debtor
(County Fuel) sued the creditor, asserting that it breached an
oral promise related to the loan. Id. at 292. The district
court dismissed the case on res judicata grounds, giving
preclusive effect to the automatic allowance of the creditor’s
claim. Id.
We affirmed on waiver grounds rather than res judicata,
commenting in dicta that “[i]t is doubtful that in strict
contemplation County Fuel’s . . . claim was . . . barred under
16
res judicata principles.” Id. at 292–93. We gave two reasons.
First, we looked to the Restatement (Second) of Judgments § 22,
which reads:
(1) Where the defendant may interpose a claim as a
counterclaim but he fails to do so, he is not thereby
precluded from subsequently maintaining an action on
that claim, except as stated in Subsection (2).
(2) A defendant who may interpose a claim as a
counterclaim in an action but fails to do so is
precluded, after the rendition of judgment in that
action, from maintaining an action on the claim if:
(a) The counterclaim is required to be interposed
by a compulsory counterclaim statute or rule of
court, or
(b) The relationship between the counterclaim and
the plaintiff’s claim is such that successful
prosecution of the second action would nullify
the initial judgment or would impair rights
established in the initial action.
Id. at 292 & n.1. We explained that under section
22(1), (2)(a), “the failure to interpose . . . an available
[permissive] ‘counterclaim’ does not, as a matter of res
judicata, bar its subsequent assertion as an independent claim
for relief.” Id. Nevertheless, we later applied an exception
to this rule found in section 22(2)(b) of the Restatement,
necessitating the barring of County Fuel’s claim, because “[t]he
practical effect of a successful prosecution of County Fuel’s
claim would be to require [the creditor] to make restitution of
the amount realized upon its claim.” Id. at 293–94.
Second, we explained in dicta that “it is doubtful that the
‘automatic allowance’ under 11 U.S.C. § 502(a) of a claim not
17
objected to constitutes a ‘final judgment’” because
(1) objections could be made after automatic allowance of a
claim, (2) automatic allowance was not “final” for purposes of
appellate review, and (3) an allowed claim can later be
disallowed under § 502(j). Id. at 292. 2
County Fuel does not control our decision in this case,
most notably because its statements regarding res judicata are
dicta. See Siegel v. Fed. Home Loan Mortg. Corp., 143 F.3d 525,
530–31 (9th Cir. 1998) (explaining that County Fuel merely
expressed doubts about the application of res judicata, but
decided the case on waiver grounds). Additionally, while the
County Fuel court questioned the finality of an automatic claim
allowance in suggesting that res judicata did not apply, PHA
concedes the finality of the sale orders. Appellant’s Br. at
33. Finally, the County Fuel court’s discussion of
counterclaims and section 22 of the Restatement (Second) of
Judgments is not relevant to our analysis here. As PHA
acknowledges, res judicata bars claims that could have been
asserted in the bankruptcy proceeding that are “based on the
same underlying transaction” as the sale orders. Appellant’s
2We also suggested in dicta that a lift-stay order should
not give rise to res judicata. Cty. Fuel, 832 F.2d at 293.
While PHA does not rely on this portion of County Fuel, we later
address why lift-stay orders are distinguishable from the
bankruptcy court’s sale orders.
18
Br. at 25–26 (quoting Clodfelter v. Republic of Sudan, 720 F.3d
199, 210 (4th Cir. 2013)). Here, Trustee Albert could have
litigated the extent of PHA’s obligations to Wells Fargo rather
than move to sell estate property in satisfaction of those
obligations, and, as explained below, PHA’s present claims are
transactionally related to the facts underlying the sale orders.
This gives rise to the preclusion of PHA’s present claims.
This brings us to PHA’s final argument respecting the first
prong of res judicata. PHA contends that an unreported district
court decision declining to give preclusive effect to a lift-
stay order weighs in favor of concluding that we should not give
res judicata effect to sale orders. Appellant’s Br. at 24–28
(citing Canterbury v. J.P. Morgan Mortg. Acquisition Corp., No.
10-cv-54, 2010 WL 5314543 (W.D. Va. Dec. 20, 2010)). We are
unconvinced.
Not only is Canterbury not binding authority, but we do not
find it illuminating in our analysis of whether sale orders can
give rise to res judicata. Here, unlike the lift-stay order in
Canterbury, the sale orders at issue effectively recognize and
satisfy particular debts. It bears repeating that it would be
counterproductive to liquidate the bankruptcy estate’s property
to pay off debts owed to a creditor—bringing about the close of
bankruptcy proceedings—only to later allow claims to be brought
against that creditor regarding the now-satisfied debts. Such a
19
result would be the model of inefficiency, at odds with the
purpose of res judicata and Chapter 11 bankruptcy.
B.
We turn to the second prong of the res judicata analysis:
an identity of claims between the first and second suit. “[W]e
follow the ‘transactional’ approach” in analyzing this prong,
meaning that “res judicata will bar a ‘newly articulated
claim[]’ if it is based on the same underlying transaction
[involved in the first suit] and could have been brought in the
earlier action.” Clodfelter, 720 F.3d at 210 (quoting Laurel
Sand & Gravel, Inc. v. Wilson, 519 F.3d 156, 162 (4th Cir.
2008)).
Here, the sale orders arose out of the same nucleus of
facts as PHA’s claims in this case: the circumstances
surrounding the three agreements between PHA and Wells Fargo.
The sale orders directed the liquidation of certain properties
in satisfaction of PHA’s obligations arising from those
transactions. And, in the instant lawsuit, PHA challenges the
propriety of the transactions. Accordingly, the second prong is
satisfied. See Winget, 537 F.3d at 580–81 (finding that the
transactional test was met); Baudoin, 981 F.2d at 743–44 (same).
C.
We next move to the final core requirement of res judicata:
“an identity of parties or their privies in the two suits.”
20
Pueschel, 369 F.3d at 354–55 (emphasis added). PHA argues that
this prong is not satisfied because it is not the same party as
the trustee. To achieve its desired result, PHA ignores the “or
their privies” language from the res judicata test, instead
stating the identity-of-the-parties element as requiring that
“the parties in the prior case were identical to the parties in
the present case.” Appellant’s Br. at 21 (citing Pueschel, 369
F.3d at 354); id. at 39 (arguing that the trustee must be
“identical to the debtor” (emphasis in original)). This is not
the law.
Under the correct test, there is no dispute between the
parties that this prong of res judicata is satisfied, as PHA
says in both its opening and reply briefs that “[t]he trustee is
in privity with the debtor as representative of the debtor’s
bankruptcy estate.” Appellant’s Br. at 39 (emphasis in
original); Reply Br. at 9 (emphasis in original).
D.
Grausz directs courts to assess two additional res judicata
considerations: whether the party or its privy knew or should
have known of its claims at the time of the first action and
whether the court that ruled in the first suit was an effective
forum to litigate the relevant claims. See 321 F.3d at 473–74.
PHA’s argument with respect to these factors turns on whether
it, as a debtor who was no longer a debtor-in-possession, could
21
have effectively litigated its claims against Wells Fargo. See,
e.g., Appellant’s Br. at 36–43 (contending that the bankruptcy
court improperly barred it from participating in the bankruptcy
in violation of 11 U.S.C. § 1109(b)).
PHA’s argument is based on a faulty premise. It is not
PHA’s actions in the bankruptcy court that now preclude it from
asserting claims against Wells Fargo. Instead, it is the
trustee’s actions as PHA’s privy that give rise to res judicata.
Thus, the question before us is not whether PHA could
effectively litigate in the bankruptcy court in its own right,
but whether the trustee could. If we concluded otherwise, we
would effectively alter the third res judicata prong to require
a strict identity of parties rather than an identity of the
parties or their privies. This we cannot do. Because PHA
offers no argument that the trustee could not effectively
litigate in the bankruptcy court, the Grausz factors are
satisfied. 3
3 PHA says that it could not have known of certain claims
related to the swap agreement during the bankruptcy proceeding
because “[t]he artificiality of the LIBOR market was not
publicly revealed until July 2012”—after the trustee was
appointed. Appellant’s Br. at 44. Since it is the trustee, not
PHA, whose actions in the bankruptcy court now bind PHA, the
relevant question is whether the trustee could have known about
the supposed “artificiality of the LIBOR market” during the
bankruptcy. The final sale order was entered in September 2012,
after the date upon which PHA says the artificiality of the
LIBOR market was publicly revealed. Thus, PHA’s argument fails.
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III.
For the reasons given, we affirm the judgment of the
district court.
AFFIRMED
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