| [1] | UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT |
| [2] | No. 99-3320 |
| [3] | Third Circuit |
| [4] | August 23, 2000 |
| [5] | EASTERN MINERALS & CHEMICALS CO.; CARY W. AHL, SR., APPELLANTS V. GARY H. MAHAN |
| [6] | On Appeal from the United States District Court for the Middle
District of Pennsylvania (D.C. Civil No. 97-cv-01941) District Judge:
Hon. William W. Caldwell |
| [7] | Dale E. Lapp, Esq. [argued] 244 Butler Avenue Lancaster, PA 17601
Counsel for Appellants James J. Kutz, Esq. [argued] Kathleen Misturak-Gingrich,
Esq. Eckert, Seamans, Cherin & Mellott 213 Market Street, 8th Floor
Harrisburg, PA 17101 Counsel for Appellees |
| [8] | Before: Mansmann, Nygaard and Rendell, Circuit Judges |
| [9] | The opinion of the court was delivered by: Rendell, Circuit Judge |
| [10] | Argued February 3, 2000 |
| [11] | Filed August 23, 2000 |
| [12] | OPINION OF THE COURT |
| [13] | Eastern Minerals & Chemicals Co., a creditor of Delta Carbonate
Inc., appeals an order of the District Court precluding it from seeking
recovery from Delta's sole shareholder, Gary Mahan, on an alter
ego theory because Eastern should have pursued this claim in the context
of Delta's bankruptcy case. We conclude that the District Court
misapplied claim preclusion in this bankruptcy setting. Therefore, we
will reverse the District Court's order granting Mahan's motion for
summary judgment. |
| [14] | Eastern also appeals the District Court's denial of its motion to
amend its complaint to add a RICO count against Mahan and to join other
defendants believed to be jointly and severally liable. The District
Court did not abuse its discretion in denying Eastern's motion, and
therefore we will affirm as to that order. |
| [15] | We have jurisdiction to hear this appeal under 28 U.S.C. S 1291. We
exercise plenary review over a district court's order granting summary
judgment. See New Jersey Turnpike Authority v. PPG Indus., Inc., 197
F.3d 96, 104 (3d Cir. 1999). |
| [16] | Facts and Procedural History |
| [17] | Eastern was party to a sales agency contract with Bestone, Inc., a
business in York, Pennsylvania that mined a quarry and produced calcium
carbonate. In 1989, Delta acquired Bestone's assets and assumed
Bestone's contracts, including the Eastern contract. Delta, which is
solely owned by Mahan, was one of a group of companies owned or
partially owed by Mahan, including Millington Quarry, Inc. and PenRoc,
Inc. In January 1994, Delta and PenRoc both filed petitions for relief
under chapter 11 of the Bankruptcy Code,*fn1
and Delta liquidated its assets in the context of its chapter 11 case. |
| [18] | Eastern actively participated in Delta's bankruptcy case by
challenging various actions and decisions of Delta, consulting with
other creditors, and exploring alternatives for maximizing its return.
Eastern opposed Delta's proposed rejection of its sales agency contract
with Eastern pursuant to 11 U.S.C. S 365 and sought reconsideration of
the Bankruptcy Court's approval of the rejection, which also included a
request for acknowledgment of an equitable lien on certain contracts.
App. 437a-439a. Based on the rejection of its contract, Eastern filed a
proof of claim for over $2.2 million in Delta's bankruptcy case, to
which Delta objected. As discussed below, Eastern ultimately agreed by
consent order to reduce its claim to $900,000. App. 674a. |
| [19] | Eastern was quite aggressive in challenging Delta and its dealings
with affiliated entities at every turn of the bankruptcy case and
repeatedly asserted that Delta had been used for the benefit of the
affiliated companies, primarily Millington, to the detriment of Delta's
creditors. Eastern circulated a draft application to disqualify Delta's
counsel, asserting that he could not properly represent Delta in light
of his representation of PenRoc, had not disclosed facts relevant to his
representation as debtor's counsel, actively concealed facts, and
arranged for employment of special counsel that was not disinterested by
virtue of its prepetition claim against Delta. App. 405a. It also
attempted to disqualify Delta's special counsel, asserting that counsel
was a prepetition creditor of Delta and thus was not disinterested, and
that counsel had an actual conflict of interest based on its
representation of Millington. App. 452a-454a. Not only did Eastern
object to Delta's request for appointment of appraisers and consultants
in connection with the valuation and sale of Delta's assets, alleging
that they were not disinterested because they previously had performed
services for Millington, App. 27a, but it also objected to a proposed
sale of Delta's assets, alleging that the sale was not proposed in good
faith and that such a sale should go forward only in the context of a
confirmed plan of reorganization. App. 254a-255a. |
| [20] | Eastern attached to its objection to the sale of Delta's assets a
draft complaint seeking equitable subordination of certain claims of
Millington and its primary lender Chemical Bank to the claims of Eastern
and other unsecured creditors under section 510 of the Bankruptcy Code.
App. 272a.*fn2 The committee of
unsecured creditors ("Committee") also sought leave of court
tofile a complaint on behalf of the estate requesting, inter alia ,
equitable subordination of the claims of Millington and Chemical Bank.*fn3
Both complaints allege that Millington and Chemical Bank obtained liens
on Delta's assets without any lawful basis and improperly received $4.3
million in post-petition payments from Delta. App. 380a.*fn4
Eastern did not seek to subordinate any claim held by Mahan himself,*fn5
although the complaint included a description of how Mahan allegedly
engaged in conduct causing Delta to prefer Millington over Delta's other
creditors. App. 289a. These complaints were never filed, and there was
never afinal judgment on the merits of the putative equitable
subordination dispute. |
| [21] | Eastern ultimately agreed to reduce its $2.2 million claim to $900,000
and withdrew its opposition to the sale of Delta's assets, and consented
to the amendment of Delta's liquidating chapter 11 plan to provide a
fund to pay unsecured creditors a portion of their claims. Eastern's pro
rata distribution was slightly more than $380,000, approximately 42% of
its $900,000 claim. |
| [22] | In October 1997, after Delta's bankruptcy case was closed, Eastern
filed a complaint in the York County Court of Common Pleas naming Mahan
as defendant. Eastern sought to recover $580,783.13, the remaining 58%
of the $900,000 claim that Eastern did not receive from Delta by
piercing the corporate veil on an alter ego theory. App. 649a.*fn6
Eastern alleged that Mahan caused Delta to be undercapitalized,
"pilfered" corporate opportunity, and acted to further his own
personal ends, thereby abusing corporate privilege and breaching his
fiduciary duty and his duty of loyalty.*fn7
App. 650a, 668a. The complaint provides the following summary of the
factual basis for Eastern's action: |
| [23] | By way of conclusory overview . . . Eastern contends that Mahan
invested heavily in Delta in the late '80s, realized his investment was
in trouble by the end of 1991, and spent the next several years
designing and implementing a course of conduct calculated to shift the
risk of loss from himself and other affiliated alter egos of Delta, to
Eastern and other trade creditors. Mahan's manipulation began with
garden variety pilfering of corporate opportunity and breach of
fiduciary obligation, continued with highly inappropriate conversion of
his equity investment to secured indebtedness at a time when the company
was both undercapitalized and insolvent, and culminated in his use and
abuse of the federal bankruptcy system to assure for himself and other
alter egos, the benefit of the unconscionable advantage he had taken.
Along the way he routinely ignored verbal commitments and acted in
knowing and intentional violation of written agreements. Self dealing,
misrepresentation, and deceit were the order of the day. Mahan
continuously and unabashedly used Delta and other affiliated entities as
the means for the achievement of personal ends. Especially as pertains
to Eastern, an involuntary creditor of Delta, giving regard and effect
to the corporate form of organization would result in perpetration of
fraud, illegality, or injustice, would defeat public policy, and would
render the entire theory of corporate existence useless. App. 650a-651a. |
| [24] | Specifically, Eastern's complaint contends that Delta was severely
undercapitalized and that Mahan engaged in a pattern of improper
conduct: |
| [25] | Among other things, prior to the filing of the Bankruptcy Case, Mahan
(i) set up a competing company, violating the corporate opportunity
doctrine, (ii) caused Delta to prefer Millington over other creditors,
in violation of fiduciary responsibility, when he granted a blanket
security interest in unencumbered assets in 1992, (iii) caused Delta to
pay Millington, Rockcrest and other Affiliated Entities management,
development, and administrative fees that were not bona fide fees; (iv)
caused Delta to violate along with Penroc [sic.], the restrictive
covenant assumed by Delta in connection with the Bestone transaction,
and (v) caused Delta to mislead creditors with conflicting UCC filings
and descriptions subject to Millington's security interest. During the
pendency of the Bankruptcy Case, through his company's attorney, Mahan
(i) treated the Affiliated Entities as though they were alter egos of
each other and himself, (ii) misled gullible Committee counsel and the
Bankruptcy Court to believe that Millington held a secured position
justifying a post-petition payment (before plan confirmation) in the
amount of $4.7 million, when in fact it did not, and (iii) made every
decision entrusted to Delta as debtor-in-possession with a view toward
promoting his own self interest, not the interest of the estate
generally. App. 669a-670a. |
| [26] | In December 1997, the action was removed to the United States District
Court for the Middle District of Pennsylvania. |
| [27] | Mahan filed a motion to dismiss Eastern's complaint on several
grounds, including the affirmative defense of claim preclusion. App.
12a. The District Court found that the first element of claim preclusion
-- that the first suit was a final judgment on the merits -- was
satisfied by the entry of the plan confirmation order in Delta's
bankruptcy case. The second element of claim preclusion -- that thefirst
suit was between the same parties or their privies -- similarly was held
to be satisfied. The District Court concluded that it could not
determine from the complaint whether the third element was satisfied,
namely, whether Eastern's action against Mahan was based on the same
cause of action as Delta's confirmation order, and therefore denied the
motion to dismiss, but considered the issue on summary judgment shortly
thereafter. |
| [28] | In the context of the summary judgment motion, Mahan argued that the
record -- including Eastern's draft complaint seeking equitable
subordination in Delta's bankruptcy case, which the District Court
noted"parallels the material averments of the complaint in the
instant case" -- demonstrated that Eastern knew all of the facts
supporting its instant cause of action against Mahan while Delta's
bankruptcy case was unfolding. Slip Op. at 4. Mahan also argued that
there was ample precedent for the Bankruptcy Court to exercise
jurisdiction over alter ego claims. Eastern contended that the chapter
11 plan had not specifically provided for the extinguishment of
Eastern's claim against Mahan, that there would have been no subject
matter jurisdiction, and that barring his claim would burden bankruptcy
courts with every claim creditors may have against third parties. |
| [29] | Although the District Court correctly set forth the third element of
claim preclusion at the outset, e.g. , that the later claim is based on
the same cause of action as the prior claim, the Court ultimately
re-stated the test incorrectly when it concluded that "it appears
that claim preclusion should bar the instant action because it is based
on a cause of action that could have been raised in the bankruptcy
proceedings, but for whatever reason, was not." Slip Op. at 5. In
other words, the District Court's claim preclusion ruling is not
predicated on a finding that Eastern's instant claim against Mahan is
based on the same cause of action as a claim raised by Eastern in
Delta's bankruptcy. Interestingly, the District Court later expressed
second thoughts regarding this ruling, but that is not before us.*fn8
The District Court also rejected Eastern's concerns regarding the lack
of subject matter jurisdiction over Eastern's claim. |
| [30] | Urging us to affirm the District Court's ruling that Eastern's
complaint against Mahan is barred, Mahan emphasizes that Eastern knew
all the facts necessary to assert its present claim during Delta's
bankruptcy, and that Eastern's present claim against Mahan arises out of
the same cause of action that Eastern raised in Delta's bankruptcy case.*fn9
Eastern argues that the District Court erred by applying the claim
preclusion test to bar the second action even if the prior proceeding
did not involve the same cause of action, that it is not pursuing the
same cause of action that was at issue in Delta's bankruptcy case, and
that the District Court's ruling, if affirmed, would mean that the entry
of a confirmation order in a chapter 11 bankruptcy case bars every claim
that might have been asserted in the bankruptcy.*fn10 |
| [31] | Under the doctrine of claim preclusion, a final judgment on the merits
of an action involving the same parties (or their privies) bars a
subsequent suit based on the same cause of action. See Gillman v.
Continental Airlines (In re Continental Airlines), 203 F.3d 203, 208 (3d
Cir. 2000); Arab African Int'l Bank v. Epstein, 10 F.3d 168, 171 (3d
Cir. 1993). Eastern's focus, and accordingly ours as well, is the third
element.*fn11 |
| [32] | Before embarking on our analysis, it is important to identify what is
not at issue. No one disputes that Eastern was an active participant in
Delta's bankruptcy case, and filed a number of motions and objections
claiming inequitable conduct on the part of various entities controlled
by Mahan. Equally clear is that Eastern did not raise the precise claim
that is the subject of this complaint, namely, that Mahan's conduct
warrants piercing Delta's corporate veil and holding Mahan liable on an
alter ego theory. The parties also acknowledge that claim preclusion
does not bar all unasserted claims that theoretically could have been
raised, but only those based on the same cause of action that was
actually asserted previously. See Brief for Appellee at 33 ("Mahan
has never argued that all possible causes of action must be raised in a
bankruptcy such as Delta's. What he argued, and proved, is that claims
which are known and asserted in a bankruptcy proceeding cannot later be
asserted elsewhere."); Brief for Appellant at 18 ("in the
absence of actual assertion of a cause of action in the bankruptcy
proceeding, claim preclusion does not follow"). See generally Huls,
176 F.3d at 191 ("Claim preclusion bars a party from litigating a
claim that it could have raised or did raise in a prior proceeding in
which it raised another claim based on the same cause of action.")
(emphasis added). |
| [33] | The issue facing us, therefore, is whether the claim currently being
asserted by Eastern against Mahan is based on the same cause of action
as the claims actually asserted by Eastern in Delta's bankruptcy such
that its instant claim should have been asserted in that forum. Mahan
says it is; Eastern says it is not. |
| [34] | Our case law often suggests that we consider whether there is an
"essential similarity of the underlying events" to determine
whether the prior and current claim arise from the same cause of action
and cite to United States v. Athlone Industries, Inc., 746 F.2d 977, 984
(3d Cir. 1984). Although we stated this test in Athlone, we did not
actually apply it, ultimately holding instead that the district court
erred in dismissing the action because "the suits involved
different statutes, different acts, different wrongs, and necessitated
different evidence to support the different material facts
alleged." Id. at 986. See also Lewison Bros. v. Washington Savings
Bank (In re Lewison Bros.), 162 B.R. 974, 981 (Bankr. D.N.J. 1993)
(explaining that Athlone instructed that courts determine whether suits
involve the same causes of action by comparing the acts and demand for
relief, theory of recovery, necessary evidence, and alleged material
facts). Furthermore, the "essential similarity" test, when
literally construed, is ideally suited for litigation that has been
generated by discrete events, such as a car accident or commercial
transaction gone awry; indeed, claim preclusion is typically invoked
when issues surrounding a discrete incident or transaction have been
litigated previously in a civil action. However, the claim at risk of
being precluded in this case is based on conduct that allegedly took
place over the course of several years. Although some of the underlying
events and relationships are described in terms that are similar (and
indeed sometimes nearly identical) in both Eastern's complaint against
Mahan and various documents Eastern circulated in Delta's bankruptcy
case (e.g., the draft equitable subordination complaint), the similarity
of certain events in and of itself does not trigger a bar of Eastern's
subsequent complaint against Mahan. Surely the mere existence of
overlapping facts and events in this setting is not sufficient to
foreclose Eastern's current claim. To properly apply the affirmative
defense of claim preclusion, we must take a closer look. |
| [35] | Claim preclusion is complicated in this case not only because the
instant claim involves a multifaceted factual scenario and extensive
course of events, but also because the prior litigation involved an
expansive and complex chapter 11 bankruptcy case. A bankruptcy case is
not a discrete lawsuit. It is commenced by the filing of a petition for
relief, which then provides a forum in which any number of adversary
proceedings, contested matters, and claims will be litigated. Claim
preclusion only bars claims arising from the same cause of action
previously raised, not every conceivable claim that could have been
brought in the context of a bankruptcy case over which the court would
have had jurisdiction.*fn12 |
| [36] | Claim preclusion doctrine must be properly tailored to the unique
circumstances that arise when the previous litigation took place in the
context of a bankruptcy case.*fn13
Difficult as it may be to define the contours of a cause of action in a
bankruptcy setting, we conclude that a claim should not be barred unless
the factual underpinnings, theory of the case, and relief sought against
the parties to the proceeding are so close to a claim actually litigated
in the bankruptcy that it would be unreasonable not to have brought them
both at the same time in the bankruptcy forum.*fn14
Here, that is not the case. |
| [37] | Eastern's participation in Delta's bankruptcy case, as previously
described, was undoubtedly active and aggressive. Yet, Eastern never
litigated any cause of action against Mahan that sought what its current
claim would accomplish. The claim most closely resembling the current
action was Eastern's draft equitable subordination complaint, which was
never actually filed and which sought to subordinate the claims of
Millington and Chemical Bank, not Mahan. Characterizing Millington's
claim as equity or capital rather than "debt," Eastern's draft
complaint essentially took the position that Millington should not have
creditor status in Delta's bankruptcy, but instead should stand in line
behind Delta's other creditors. Unlike that draft equitable
subordination complaint, Eastern's instant complaint seeks recovery from
Mahan and focuses not on whether Millington should have equivalent
creditor status or whether Delta's assets were properly used to
collateralize obligations of Millington to Chemical Bank, but rather on
whether Mahan should be personally liable for the debt due to Eastern
based on his conduct in using Delta as his "mere
instrumentality" and "alter ego" for his individual
benefit.*fn15 Although some of the
descriptions of certain events and particular relationships are common
to both claims, the theory of the case and relief sought in Eastern's
instant complaint are markedly different from those underlying the draft
complaint to subordinate the claims of Millington and Chemical Bank that
Eastern considered filing in bankruptcy court. |
| [38] | Both Eastern and Mahan take the position that our decision in Huls
dictates that they prevail on their respective positions as to whether
Eastern's suit against Mahan is barred. Huls involved a lawsuit between
two lenders, CoreStates and Huls, based on a subordination agreement
between them. After the conclusion of the bankruptcy case of their
mutual borrower, United Chemical Technologies ("UCT"),
CoreStates sued Huls to recover $600,000 that Huls had received in the
case. Hulsfiled a motion for judgment on the pleadings based on the
claim preclusive effect of UCT's bankruptcy confirmation order. In UCT's
bankruptcy case, CoreStates had specifically challenged the $600,000
payment to Huls by way of formal objection as well as informal colloquy
with the parties and the court. CoreStates also had appealed the court's
entry of the confirmation order, which, although overturned on different
grounds, was ultimately followed by the successful confirmation of a
second amended plan. |
| [39] | We affirmed the District Court's decision that claim preclusion barred
CoreStates' later suit. The underlying question in Huls was whether
"CoreStates has a right to receive the funds, when both
CoreStates's and Huls's rights in the bankruptcy estate, and
CoreStates's objection based on the payment in particular, were settled
in the confirmation proceeding." Huls, 176 F.3d at 190-191. We
concluded that "CoreStates functionally raised the Subordination
Agreement in its objection to the Reorganization Plan," id. at 203,
and that CoreStates's objection in UCT's confirmation proceedings was,
in fact, a claim against Huls: |
| [40] | The objection put Huls's rights in the bankruptcy estate into
question. The $600,000 payment was all Huls was entitled to receive
under the Reorganization Plan. A challenge to that payment amounted to a
challenge to Huls's position in the scheme of distribution the Plan
envisioned. In addition, Huls clearly felt that it had an interest in
the issue worth preserving, since it opposed the objection extensively
throughout the bankruptcy proceedings. Furthermore, Huls filed a brief
in opposition to CoreStates's appeal in the District Court, and
CoreStates filed a reply brief dealing almost solely with Huls's
arguments. Accordingly, the Bankruptcy Judge's dismissal of CoreStates's
objection and the subsequent confirmation of the Plan constitute a final
judgment on CoreStates's claim against Huls. Id. at 206. |
| [41] | Noting that our holding was largely fact-bound and was the result of
"the coincidence of several unusual circumstances," we
emphasized the significance of the fact that CoreStates specifically
challenged the fairness of providing the $600,000 to Huls in the plan of
reorganization: "in the absence of extensive litigation of this
claim in the confirmation proceeding, CoreStates would not now be
prevented from bringing its suit." Id. at 206. In other words,
CoreStates actually litigated the same cause of action -- Huls'
entitlement to the $600,000 as opposed to CoreStates' -- in the plan
confirmation process that it sought to litigate thereafter. |
| [42] | Huls illustrates, in what we recognized to be a somewhat unique
factual and procedural setting, that one does not get a second bite at
the proverbial apple simply because the first bite was taken in a
bankruptcy case. See Huls, 176 F.3d at 202 (citations omitted).
Similarly, we note that care must be taken in determining whether the
first bite was actually taken such that it would preclude the second.
Huls does not stand for the proposition that nondebtors must assert all
potential claims in a bankruptcy case or be forever barred, nor does
Mahan ask us to reach such a conclusion. Rather, Huls helps us frame the
key question that the parties agree we should ask whenever the
affirmative defense of claim preclusion is raised on the basis of a
prior bankruptcy confirmation order, namely, whether the later claim
arises from the same cause of action as a claim that was actually
asserted or interposed in the earlier bankruptcy case and resolved in
the confirmation order. Here, we have concluded that it does not. *fn16 |
| [43] | For the foregoing reasons, we conclude that Eastern's suit against
Mahan is not barred and we will, therefore, reverse the District Court's
grant of summary judgment and remand for further proceedings. Denial of
Eastern's Motion to Amend |
| [44] | Eastern also appeals the District Court's denial of Eastern's motion
requesting leave to amend its complaint a second time to add RICO claims
against Mahan and to join two additional defendants.*fn17
Eastern contends that the District Court erroneously relied on Rule
16(b) of the Federal Rules of Civil Procedure without sufficient
consideration of Rules 15(a) and 42. We review the District Court's
determination for abuse of discretion. See Epstein, 10 F.3d at 174. |
| [45] | The District Court's case management conference order set the
amendment and joinder deadlines for June 30, 1998. App. 121a-122a. On
January 6, 1999, more than six months after the deadline, Eastern filed
its motion for leave to amend. App. 124a. As justification for seeking
leave to amend, Eastern stated that it had become aware of the viability
of new claims and that filing an amended complaint would conserve
judicial resources and would obviate the need for a separate action.
App. 125a. Opposing Eastern's motion, Mahan argued that Eastern had to
comply with Rule 16(b) of the Federal Rules of Civil Procedure before
seeking amendment under Rule 15(a); *fn18
because Eastern had not been diligent, Mahan contended, the amendment
should not be allowed under Rule 16(b). Slip Op. at 5. |
| [46] | Agreeing with Mahan's reasoning, the District Court concluded that
good cause had not been shown under Rule 16(b) to modify the case
management order. According to the District Court, Eastern had not
specified what led it to decide that RICO claims could be pled or why
information from independent sources could not have been obtained
earlier. Slip Op at 6. The District Court concluded that it need not
examine Eastern's Rule 15(a) argument, but nonetheless noted that there
was sufficient reason to deny Eastern's motion under Rule 15(a) due to
Eastern's unexplained delay in moving to amend. |
| [47] | We conclude that the District Court acted well within its discretion
when it denied Eastern's motion to amend the complaint six months after
the amendment and joinder deadlines had expired, and we will not disturb
the Court's ruling in this regard.*fn19 |
| [48] | For the foregoing reasons, we will REVERSE the District Court's entry
of summary judgment. We will AFFIRM the District Court's denial of
Eastern's untimely motion to amend its complaint. |
| [49] | A True Copy: |
| [50] | Teste: |
| [51] | Clerk of the United States Court of Appeals for the Third Circuit |
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| Opinion Footnotes | |
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| [52] | *fn1 . The cases were
administratively, but not substantively, consolidated. |
| [53] | *fn2 . A court may subordinate an
allowed claim for purposes of distribution under principles of equitable
subordination. 11 U.S.C. S 510(c). Most courts have required a showing
that the claimant engaged in inequitable conduct resulting in injury to
creditors or unfair advantage to the claimant, and that equitable
subordination of the claim is not inconsistent with the provisions of
the Bankruptcy Code. See Citicorp Venture Capital, Ltd. v. Committee of
Creditors Holding Unsecured Claims, 160 F.3d 982, 986-987 (3d Cir. 1998)
(citing United States v. Noland, 517 U.S. 535 (1996)). |
| [54] | *fn3 . The Committee's request was
based on the improbability that Delta, as debtor-in-possession, would
file such a complaint itself; an affidavit of the chairperson of the
creditors' committee asserted that "in light of the fact that one
of the proposed defendants, Gary Mahan, is the 100% shareholder of the
Debtor and at least a 51% shareholder of another proposed defendant,
Millington, it is unrealistic to expect the Debtor to be able to bring
the actions set forth in the complaint." App. 369a. The Committee's
draft complaint named Mahan as an additional defendant, but not with
respect to the equitable subordination count. |
| [55] | *fn4 . The Committee's draft
complaint further alleges that Millington and Chemical Bank
"demonstrated a callous disregard for the rights of the Debtor and
its unsecured creditors and have proceeded to improve their position
without regard to the such parties, the facts, or the law." App.
380a. |
| [56] | *fn5 . Mahan had a claim against
Delta, which ultimately was extinguished pursuant to Delta's chapter 11
plan. App. 232a. |
| [57] | *fn6 . The " `classical'
piercing of the corporate veil is an equitable remedy whereby a court
disregards `the existence of the corporation to make the corporation's
individual principals and their personal assets liable for the debts of
the corporation.' " In re Blatstein, 192 F.3d 88, 100 (3d Cir.
1999) (quoting In re Schuster, 132 B.R. 604, 607 (Bankr. D. Minn. 1991)
(citations omitted)). We have commented that "Pennsylvania, like
New Jersey, does not allow recovery unless the party seeking to pierce
the corporate veil on an alter ego theory establishes that the
controlling corporation wholly ignored the separate status of the
controlled corporation and so dominated and controlled its affairs that
its separate existence was a mere sham. . . . In other words, both
Pennsylvania and New Jersey require a threshold showing that the
controlled corporation acted robot- or puppet-like in mechanical
response to the controller's tugs on its strings or pressure on its
buttons." Culbreth v. Amosa (Pty) Ltd., 898 F.2d 13, 14-15 (3d Cir.
1990) (per curiam). See generally Lumax Indus., Inc. v. Aultman, 669
A.2d 893, 895 (Pa. 1995) (listing factors for disregarding the corporate
form as "undercapitalization, failure to adhere to corporate
formalities, substantial intermingling of corporate and personal affairs
and use of the corporate form to perpetrate a fraud"); Ashley v.
Ashley, 393 A.2d 637, 641 (Pa. 1978) ("[w]e have said that whenever
one in control of a corporation uses that control, or uses the corporate
assets, to further his or her own personal interests, the fiction of the
separate corporate entity may properly be disregarded"). |
| [58] | *fn7 . The alter ego theory comes
into play in piercing the corporate veil when one seeks to hold liable
an individual owner who controls the corporation. See S.T. Hudson
Engineers v. Camden Hotel Dev. Assoc., 747 A.2d 931, 936 (Pa. Super.
2000); Miners, Inc. v. Alpine Equip. Corp., 722 A.2d 691, 695 (Pa.
Super. 1998) (citing Kaplan v. First Options of Chicago, Inc., 19 F.3d
1503, 1521 (3d Cir. 1994), aff 'd, 514 U.S. 938 (1995)). Factors
considered under Pennsylvania law, for example, with respect to the
alter ego theory include, but are not limited to, the following: "[T]he
failure to observe corporate formalities; non-payment of dividends;
insolvency of debtor corporation; siphoning the funds from corporation
by dominant shareholders; non-functioning of other officers and
directors; absence of corporate records; whether the corporation is a
mere facade for the operations of a common shareholder or shareholders;
and gross undercapitalization." Wheeling-Pittsburgh Steel Corp. v.
Intersteel, Inc., 758 F. Supp. 1054, 1059 (W.D. Pa. 1990) (citing Galgay
v. Gangloff, 677 F. Supp. 295, 300 (M.D. Pa. 1987)). See also United
States v. Pisani, 646 F.2d 83, 88 (3d Cir. 1981). |
| [59] | *fn8 . In a separate RICO lawsuit
brought by Eastern against Mahan, the District Court denied summary
judgment on the basis of claim preclusion on October 21, 1999. The Judge
stated he believed he had erred in granting Mahan's motion for summary
judgment on Eastern's complaint at issue here: [W]e have concluded that
we erred in the No. 97-1941 memorandum. . . . Our ruling in No. 97-1941
was based on an unstated, but erroneous, premise -- that an alter ego of
the debtor was the debtor for all intents and purposes. . . .[N]either
Mahan nor Millington, even as an alter ego of Delta, can be considered
the debtor and entitled to force their creditors to pursue their claims
against them in the Delta bankruptcy. To the contrary, section 524(e)
would prohibit them from invoking Delta's discharge in bankruptcy. . . .
. No. 97-1941 was an alter ego action against Mahan alone for Delta's
breach of the sales agency agreement. That case was erroneously
dismissed on the basis of claim preclusion. Slip Op. 99-0366 at 23-28
(emphasis added) (appended to Reply Brief for Appellants). |
| [60] | *fn9 . Mahan also asks that we
reject Eastern's arguments relating to the Bankruptcy Court's putative
jurisdiction over Eastern's instant claim against Mahan and to whether
applying claim preclusion to bar Eastern's claim would amount to an
impermissible discharge of a nondebtor in violation of 11 U.S.C. S
524(e). Based on our conclusion that Eastern's current complaint against
Mahan does not arise out of the same cause of action as its claims
raised in Delta's bankruptcy and thus is not barred, we need not reach
these issues. |
| [61] | *fn10 . In light of the fact that
some of Eastern's allegations stem from events occurring during the
course of Delta's bankruptcy, Eastern also asserts that its claim
against Mahan cannot be barred because it had not yet accrued at the
time of the first action. Although we do not read the assertions in
Eastern's complaint to arise only out of post-confirmation conduct or
events, we need not reach this issue. |
| [62] | *fn11 . Eastern does not challenge
the District Court's findings with respect to the first two elements,
namely, that the Delta confirmation order, inclusive of the settlement,
was a final judgment and that it involved both Eastern and Mahan.
Although Eastern's failure to challenge the applicability of the first
two elements of claim preclusion does not affect the outcome of this
appeal due to our conclusion that the third element of claim preclusion
is not satisfied, we question whether the District Court too readily
assumed and concluded that thefirst "dispute" in Delta's
bankruptcy case involved the same parties or their privies as Eastern's
current suit against Mahan. The District Court reasoned that
"Plaintiff 's claims against Defendant are premised on Plaintiff 's
theory that Delta was Defendant's alter ego. If Plaintiff can establish
that this was so, then Defendant was a party to Delta's bankruptcy
proceedings for preclusion purposes." App. 94a (citation omitted).
Although we have held, in a unique factual context, that a creditor's
objection to a chapter 11 plan could be considered a claim against
another creditor for claim preclusion purposes, see CoreStates Bank, N.A.
v. Huls America, Inc., 176 F.3d 187, 199-200 (3d Cir. 1999), the
circumstances that gave rise to our narrow holding in that case are not
present here. Nor do we believe it appropriate to assume solely on the
basis of Eastern's current veil piercing lawsuit that Mahan was Delta's
privy, as the District Court did in its decision denying Mahan's motion
to dismiss. As to the first element, we recognize that an order
confirming a chapter 11 plan is a final order "on the merits,"
but we do not decide whether those merits can be equated to the merits
of the instant dispute. Cf. Huls, 176 F.3d at 206 (holding that merits
of dispute regarding competing interest in $600,000 were specifically
resolved in confirmation order); First Union Comm. Corp. v. Nelson,
Mullins, Riley and Scarborough (In re Varat Enterprises, Inc.), 81 F.3d
1310, 1316 (4th Cir. 1996) (barring lender from raising postconfirmation
objection to secured claim of law firm when its claim was specifically
addressed and resolved in context of plan confirmation). |
| [63] | *fn12 . Claim preclusion would
have a broad scope indeed if it barred every claim over which a
bankruptcy court might have had jurisdiction. See Huls, 176 F.3d at 209
(Stapleton, J., dissenting) (noting that a broad view of claim
preclusion in the bankruptcy context would likely produce
"multitudinous protective filings of claims against nondebtors and
the needless complication of bankruptcy confirmation proceedings"). |
| [64] | *fn13 . Indeed, the factual
setting here -- involving a closely-held debtor corporation that is part
of a group of such companies controlled by one shareholder -- raises
special problems, yet is all too common. Surely it cannot be the case
that the corporation's bankruptcy becomes the exclusive forum to address
any claims a creditor might have against the nondebtor controlling
shareholder based on that shareholder's own conduct. |
| [65] | *fn14 . This is, after all,
essentially the test that we actually applied in Athlone, and it is
consistent with the reasoning in Huls, in which we recognized that
courts normally must scrutinize the"totality of the
circumstances" to determine whether two claims are based on the
same cause of action, although we found that the claims'"essential
similarity" was facially apparent in that particular instance. See
Huls, 176 F.3d at 206. This test, of course, assumes subject matter
jurisdiction over the later claim. |
| [66] | *fn15 . We recognize that other
courts of appeals have considered whether the claim holder has used the
debtor as an alter ego when deciding whether a claimant has engaged in
inequitable conduct such that its claim should be equitably
subordinated. See, e.g., In re Lifschultz Fast Freight, 132 F.3d 339,
345 (7th Cir. 1997). However, even if we employed that analysis in this
circuit, it would not affect the outcome here, particularly because
Eastern sought to subordinate the claim of Millington, not Mahan. |
| [67] | *fn16 . Recent decisions of other
courts bolster our interpretation as to how claim preclusion is
reasonably applied in the context of bankruptcy. For example, the Court
of Appeals for the Fifth Circuit recently concluded that a hearing
determining the fees earned by an accounting firm for services rendered
to the bankruptcy estate barred the bankruptcy trustee from later suing
the accounting firm for negligence and professional malpractice because
both disputes squarely presented the identical question of the quality
and value of thefirm's services to the bankruptcy estate. See Osherow v.
Ernst & Young, LLP (In re Intelogic Trace, Inc.), 200 F.3d 382, 387
(5th Cir. 2000). |
| [68] | *fn17 . The District Court denied
this motion on March 1, 1999, prior to granting summary judgment. |
| [69] | *fn18 . Rule 15(a), "Amended
and Supplemental Pleadings," provides that under most
circumstances, a party seeking to amend more than once may do so only by
leave of court or with the adverse party's written consent, although
"leave shall be freely given when justice so requires." FED.
R. CIV. P. 15(a). Rule 16(b) instructs courts to set time limits in
connection with pretrial conferences, and a "schedule shall not be
modified except upon a showing of good cause and by leave of the
district judge." FED. R. CIV. P. 16(b). |
| [70] | *fn19 . Eastern has withdrawn the
third issue it originally listed for appeal, namely the District Court's
denial of Eastern's request to file an outsized brief. See Reply Brief
of Appellants, at 8. |
