A stipulation of dismissal with prejudice won’t invoke res judicata to bar someone in privity from later asserting the same claims against defendants who profited from dismissal, for reasons explained by the Sixth Circuit.
The debtor borrowed almost $7 million from a lender. In the loan agreement, the debtor agreed to take down no more loans from anyone else until the $7 million was repaid.
In violation of the loan agreement, the individual who owned the debtor caused other companies he owned to lend an additional $6 million to the debtor. Later in chapter 11, the debtor confirmed a plan giving ownership of the debtor to the lender of the $7 million.
In bankruptcy court after confirmation, the debtor sued the individual who was the former owner and the companies that made loans to the debtor in violation of the lender’s loan agreement. The complaint included claims for fraudulent misrepresentation by the former owner and for tortious interference on the part the former owner’s other companies.
The parties dismissed the adversary proceeding in bankruptcy court with prejudice. Later, however, the new owner (who was the lender before bankruptcy) sued the former owner and his companies in federal district court for some of the claims that were dismissed for, to wit, fraudulent misrepresentation by the former owner and tortious interference by the former owner’s other companies.
Raising res judicata as a defense, the defendants filed a motion to dismiss. The district court granted the motion and dismissed the new owner’s suit.
The Sixth Circuit reversed in an opinion by Circuit Judge Ronald Lee Gilman. (In his February 8 opinion, Judge Gilman used the term “res judicata.” These days, courts mostly say “claim preclusion.” We shall use “claim preclusion.”)
On the merits, Judge Gilman began by listing the constituent parts of claim preclusion. They are: (1) a final decision on the merits; (2) the second action involves the same parties or their privies; (3) the second action involves issues actually litigated or that should have been litigated; and (4) an identity of the causes of action.
The parties agreed that the stipulation of dismissal was a final decision on the merits. Judge Gilman decided that the pivotal claims had not been “actually litigated” in bankruptcy court, so he was not required to address the other two elements of claim preclusion.
On the issue of “actually litigated,” Judge Gilman cited Sixth Circuit precedent to say that a “stipulated dismissal goes only to the first element of res judicata; it does not mean that the claims were ‘actually litigated’ or ‘should have been litigated.’” Again quoting his own circuit, he said, “An issue is actually litigated when it ‘is properly raised, by the pleadings or otherwise, and is submitted for determination, and is determined.’”
Probing the procedural status of the case on appeal, Judge Gilman said that the lender’s claims “were never determined by the bankruptcy court; rather, the dismissal was effective by virtue of the parties’ stipulation, without any contestation or litigation and without any judicial action.” As further evidence, he cited the Wright, Miller & Cooper treatise for saying that a stipulated dismissal “‘ordinarily should not of itself count as the actual adjudication of any issue.’”
Although the lenders’ claims were not actually litigated, the question remained as to whether the lender should have litigated the claims in bankruptcy court.
To answer the question, Judge Gilman observed that the lender, as a creditor, would have been suing the defendants, who were also the debtor’s creditors. That being the case, he said there would have been no “related to” jurisdiction for the lender to join as a plaintiff in the adversary proceeding in bankruptcy court. There was no “related to” jurisdiction because the outcome of the lender’s claims would have had no conceivable effect on the debtor’s estate.
Because there would have been no jurisdiction for the lender to sue in bankruptcy court, Judge Gilman concluded that the claims could not have been litigated. Having decided that the third element of claim preclusion was not shown, Judge Gilman reversed the judgment dismissing the lender’s claims and remanded.
A stipulation of dismissal with prejudice won’t invoke res judicata to bar someone in privity from later asserting the same claims against defendants who profited from dismissal, for reasons explained by the Sixth Circuit.
The debtor borrowed almost $7 million from a lender. In the loan agreement, the debtor agreed to take down no more loans from anyone else until the $7 million was repaid.
In violation of the loan agreement, the individual who owned the debtor caused other companies he owned to lend an additional $6 million to the debtor. Later in chapter 11, the debtor confirmed a plan giving ownership of the debtor to the lender of the $7 million.