District Judge Amy Berman Jackson of Washington, D.C., explained how a 2007 amendment to Bankruptcy Rule 3007 affected the applicability of res judicata to claim objections.

Previously, Rule 3007(a) said that an objection to a claim becomes an adversary proceeding if it “is joined with a demand for relief of a kind specified by Rule 7001.”

In 2007, that provision was replaced by Rule 3007(b), which now reads, “A party in interest shall not include a demand for relief of a kind specified in Rule 7001 in an objection to the allowance of a claim, but may include the objection in an adversary proceeding.”

In the lawsuit before Judge Jackson, the plaintiff had filed a chapter 13 petition and objected successfully to a claim filed by the defendant. More precisely, the defendants had filed a proof of claim contending that the debtor owed more than $120,000 on a mortgage loan that was in default.

The bankruptcy judge sustained the debtor’s objection, ruling that the loan was not in default and that the debtor only owed about $53,000.

After resolution of the claim objection, the debtor sued the creditors in district court, seeking monetary damages for misrepresentation and harassment.

The defendants filed a motion to dismiss, arguing that the claims for damages were barred by res judicata, or claim preclusion, because the misrepresentation and harassment claims could have been but were not brought alongside the claim objection. Although Judge Jackson originally granted the motion and dismissed, she reversed course, granted rehearing, and reinstated the suit in her June 11 decision.

Judge Jackson said that the rule “and the Advisory Committee Notes make it clear . . . that certain demands for relief cannot be brought in a contested matter.”

Therefore, Judge Jackson said, the debtor “could not have brought his claims for damages when he contested defendants’ proof of claim in the bankruptcy case.” Since the claim for damages could not have been brought in the claim objection, res judicata or claim preclusion did not bar the later suit in district court.

The defendant argued that the debtor nonetheless could have brought the claim for damages in bankruptcy court in response to the claim objection.

Judge Jackson rejected the argument, saying that “the first prong of the res judicata inquiry does not look to whether a claim could have been brought in the previous court; it examines if the second claim could have been brought in the first proceeding.” [Emphasis in original.] Since claims for damages could not have been brought in the contested matter, res judicata did not apply to bar the later suit in district court.

Assuming her opinion is followed universally, Judge Jackson’s decision is important because it relieves debtors of the need for raising some affirmative claims against creditors when they object to proofs of claim. Res judicata would still apply if the counterclaims were not of the type requiring an adversary proceeding.