The Third Circuit used a bankruptcy case to teach a lesson about issue preclusion: Don’t use a shill to object to a discovery motion under Bankruptcy Rule 2004 and then expect to have a second bite at the apple by employing Federal Rule 45 to raise the same objection yourself in the district that issues the subpoena.
The appeal arose from an “asbestos” case pending in bankruptcy court in the Western District of North Carolina. The debtor planned on forming a trust to pay existing and “future” claims. Aiming to forestall double-dipping by creditors who had already been paid for their injuries in other cases, the debtor filed a motion in the bankruptcy court under Bankruptcy Rule 2004.
The Rule 2004 motion asked the bankruptcy court to authorize discovery to be taken from 10 confirmed “asbestos” chapter 11 cases where the debtors had formed trusts to process and pay claims. The debtor wanted information about claimants who had filed claims in those cases and were also filing claims in its case.
The 2004 motion sought information from the 10 trusts and from a separate entity that we shall call the processor, which processes claims for the 10 trusts. The claimant information was highly confidential and could be disclosed to third parties only under limited circumstances.
The claimant data belonged to the trusts but was in the possession of the processor under the same confidentiality restrictions. The North Carolina debtor served the 2004 motion on both the trusts and the processor. Both were domiciled in Delaware and presumably had no presence in North Carolina.
The processor opposed the motion in North Carolina. The trusts neither appeared nor opposed the 2004 motion, despite having been served. The North Carolina court overruled the processor’s objections and granted the 2004 motion.
The debtor caused the federal court in Delaware to issue subpoenas to the trusts and the processor. Rather than comply by divulging information sought by the North Carolina debtor, the trusts went to federal district court in Delaware to quash the subpoenas and made the same objections that had been raised by the processor in North Carolina and rejected by the bankruptcy court there.
As Third Circuit Judge Kent A. Jordan said in his August 24 opinion, the arguments “were evidently more persuasive to the District Court than they had been to the Bankruptcy Court, as the District Court quashed the subpoenas.”
The North Carolina debtor appealed to the Third Circuit.
Finality and Appealability
While discovery orders typically are not final, Judge Jordan said, “we deem it final when the appellant would have no other avenue for obtaining review.”
The 2004 discovery order from North Carolina eventually could go to the Fourth Circuit, but the Fourth Circuit would have no jurisdiction to review the Delaware order quashing the subpoenas.
Judge Jordan held that the Delaware order was final and appealable because the North Carolina debtor would have no other access to appellate review.
Collateral Estoppel
The North Carolina debtor argued in the Third Circuit that collateral estoppel barred the trusts from challenging the subpoenas, even though the trusts themselves had not appeared in bankruptcy court to oppose the 2004 motion. Throughout the opinion, Judge Jordan used the term “collateral estoppel” rather than “issue preclusion,” the term more frequently used these days. So, we too will say collateral estoppel.
Judge Jordan applied the federal law of collateral estoppel because the order was made in federal court. He laid out the four constituents of collateral estoppel: (1) the identical issue previously decided; (2) a final judgment on the merits; (3) the same party or someone in privity with the party against whom the order was entered; and (4) a full and fair opportunity to litigate.
The first two issues were “clearly met,” Judge Jordan said. For the Third Circuit appeal, the questions were whether the trusts were in privity with the processor (who had opposed unsuccessfully in North Carolina) and whether the processor had a full opportunity to litigate.
Judge Jordan said there is privity when a nonparty in the prior action was “adequately represented” by someone with the “same interests” and their interests are “squarely aligned.”
Judge Jordan found that the interests of the trusts and the processor were “squarely aligned.” Finding an “understanding” in the record that the processor was acting in a “representative capacity,” he held that the trusts were in privity with the processor.
Regarding the full and fair opportunity to litigate in North Carolina, Jordan said,
[I]t is hard to avoid the impression that the Trusts chose to let the [processor] carry the fight in the first instance and keep themselves in reserve for a rearguard action. While perhaps prudent in battlefield strategy, such an approach in litigation risks issue preclusion and that risk has been realized here.
Federal Rule 45 did not preclude the invocation of collateral estoppel, even though the rule would allow the trusts to challenge the subpoena in the district court “for the district where compliance is required.”
Judge Jordan explained, “That the proper venue for a motion to quash lies in a particular district, however, does not change the fact that collateral estoppel can be a valid response to such a motion.” He cited two other circuit courts for holding that collateral estoppel is a valid foil on a motion to quash.
Judge Jordan reversed and remanded with instructions for the district court to enforce the subpoenas.
The Third Circuit used a bankruptcy case to teach a lesson about issue preclusion: Don’t use a shill to object to a discovery motion under Bankruptcy Rule 2004 and then expect to have a second bite at the apple by employing Federal Rule 45 to raise the same objection yourself in the district that issues the subpoena.
The appeal arose from an “asbestos” case pending in bankruptcy court in the Western District of North Carolina. The debtor planned on forming a trust to pay existing and “future” claims. Aiming to forestall double-dipping by creditors who had already been paid for their injuries in other cases, the debtor filed a motion in the bankruptcy court under Bankruptcy Rule 2004.