Collateral estoppel, or issue preclusion, is an important doctrine that protects parties from expensive and vexatious litigation where those parties have previously had a “full and fair opportunity to litigate” the issues.[1] Within the Third Circuit, “a court will bar re-litigation of an issue on collateral estoppel grounds when ‘(1) the identical issue was previously adjudicated; (2) the issue was actually litigated; (3) the previous determination was necessary to the decision; and (4) the party being precluded from relitigating the issue was fully represented in the prior action.’”[2] The Third Circuit has also considered “whether the party being precluded from litigating an issue had a full and fair opportunity to litigate in the prior action and whether there was a final and valid judgment.”[3]
This article focuses on the “valid judgment” requirement described above. The Third Circuit has previously stated that “there can be no question that bankruptcy judgments may have a res judicata or collateral estoppel effect.”[4] But what constitutes a “bankruptcy judgment”?
In Mullarkey v. Tamboer, the U.S. Court of Appeals for the Third Circuit overturned a bankruptcy court’s collateral estoppel finding based on the outcome of a previous lift-stay hearing, in part because the bankruptcy court found that “relief from a stay is obtained by a simple motion ... and it is a ‘contested matter,’ rather than an adversary proceeding.”[5] The Third Circuit stated that a lift-stay hearing is a “summary proceeding of limited effect,” and that such a hearing is “not a proceeding for determining the merits of the underlying substantive claims, defenses, or counterclaims.”[6]
While the lift-stay order was a final order at the time the bankruptcy court relied on it to support its collateral estoppel finding, the Third Circuit failed to take that fact into account when it held that the lift-stay proceeding was not a “final adjudication” that would allow for collateral estoppel. The Third Circuit also focused on the limited proof necessary to adjudicate the lift-stay motion — particularly that the movant had a “colorable claim of a lien and whether the amount of that lien exceeded the value of the property” — and the fact that the Court did not need to “reach questions of ... collu[sion] with the Bank, or questions of preferential transfers … or questions of fraudulent conveyances … or questions of commercial reasonableness of the sale under state law.”[7] Mullarkey seems to state that no relief granted by a bankruptcy court outside of the adversary proceeding context can result in collateral estoppel.
The U.S. District Court for the District of Delaware took the more reasonable approach. In In re Ameriserve Food Distribution Inc., the district court was asked to determine whether a decision made by a bankruptcy court related to Perishable Agricultural Commodities Act (PACA) claims in a different case could collaterally estop Ameriserve creditor Lamb-Weston from making similar PACA claims in the current case.[8] The district court focused extensively on whether Lamb-Weston had a “full and fair” opportunity to litigate the PACA claim issue in the prior case, ultimately concluding that they did not have such an opportunity because an expert report produced in that case had been produced much later than was reasonable.[9] But the district court specifically stated that it was “cognizant of motion practice as an accepted method of addressing issues such as these in the bankruptcy context,” and implied that but for the “fairness doctrine,” such an adjudication would have been sufficient for collateral estoppel purposes.[10]
The Ameriserve approach seems to be the more reasoned and reasonable approach to collateral estoppel questions within the Third Circuit. To follow Mullarkey’s guidance and extend its reasoning to all contested matters would allow parties two, three or even more “bites at the apple,” and would increase the burden on litigants and the judicial system. If the Third Circuit has an opportunity to revisit this issue, it should adopt the Ameriserve approach for all contested matters — keeping in mind that the other elements required for collateral estoppel, including the “fairness doctrine,” serve to protect all parties from findings made when an issue truly has not been “fully and fairly” adjudicated.
[1] Montana v. United States, 440 U.S. 147, 153-154, 99 S. Ct. 970, 59 L. Ed. 2d 210 (1979).
[2] In re Kaiser Group Int’l Inc., 375 B.R. 120, 127 (Bankr. D. Del. 2007) (quoting Raytech Corp. v. White, 54 F.3d 187, 190 (3d Cir. 1995)).
[3] In re Kaiser Group, 375 B.R. at 127 (quoting Jean Alexander Cosmetics Inc. v. L'Oreal USA Inc., 458 F.3d 244, 249 (3d Cir. 2006)).
[4] Donegal Steel Foundry Co. v. Accurate Prods. Co., 516 F.2d 583, 588 at n. 12 (3d Cir. 1975).
[5] 536 F.3d 215, 226 (3d Cir. 2008).
[6] Id. at 226-27.
[7] Id. at 227.
[8] 267 B.R. 668 (D. Del. 2001).
[9] Id.
[10] Id., at 672.