Federated Management Co. v. Latham & Watkins, No. 99AP-1322 (Ohio App.
Dist.10 08/22/2000)
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IN THE COURT OF APPEALS OF OHIO TENTH APPELLATE DISTRICT
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No. 99AP-1322
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Ohio
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August 22, 2000
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FEDERATED MANAGEMENT CO. ET AL., PLAINTIFFS-APPELLANTS,
v.
LATHAM & WATKINS ET AL., DEFENDANTS-APPELLEES.
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Beus Gilbert, P.L.L.C., Leo R. Beus, Nicholas J. DiCarlo, and Timothy
G. Kasparek; McFadden, Winner and Savage, and Mary Jane McFadden, for
appellants. Porter, Wright, Morris & Arthur, L..L.P., and Mark K.
Merkle; Schulte, Roth & Zabel, L.L.P., Alan R. Glickman; Marc E.
Elovitz and Stephen P. Davidson, for appellees Latham & Watkins.
Zeiger & Carpenter, John W. Zeiger, Steven W. Tigges, and Ronald E.
Laymon, for appellees Kegler, Brown, Hill & Ritter, L.P.A.
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The opinion of the court was delivered by: Brown, J.
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(REGULAR CALENDAR)
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OPINION
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APPEAL from the Franklin County Court of Common Pleas.
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Plaintiffs-appellants, Federated Management Co., Federated Research
Corp., Federated Advisors, Federated Investment Counseling (collectively
referred to as "Federated"), Oaktree Capital Management,
L.L.C. ("Oaktree"), TCW Funds Management, Inc., TCW Asset
Management Company, Trust Company of the West (collectively referred to
as "TCW"), W.R. Huff Asset Management Co., L.L.C.
("Huff"), and numerous other trustees, appeal a judgment of
the Franklin County Court of Common Pleas granting a motion for summary
judgment in favor of Latham & Watkins ("Latham") and
Kegler, Brown, Hill & Ritter, L.P.A. ("Kegler"),
defendants-appellees.
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On May 17, 1994, Mid-American Waste Systems, Inc. ("MAW"),
an integrated solid-waste management company and a publicly-traded
company, issued 12.25 percent senior subordinated notes
("notes") in the aggregate principal amount of $175 million
("note offering") pursuant to a prospectus of the same date.
Federated, Oaktree, TCW and Huff are investment advisers, investment
managers, and/or attorneys-in-fact who filed suit on behalf of certain
trustees and/or beneficial owners of the notes.
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Approximately two years later, on January 21, 1997, MAW filed for bankruptcy
in the United States Bankruptcy Court for the District of
Delaware. The parties in the present case, among others, were creditors
in the bankruptcy proceedings. Appellants sought recovery for the
loss in the value of their notes. Appellees sought recovery for legal
fees arising out of their various services for MAW.
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On January 24, 1997, appellants filed an action in the Franklin County
Court of Common Pleas, ("Federated I") claiming that the note
offering contributed to MAW's bankruptcy. Appellants' complaint
named MAW's former management, MAW's accountants, the note offering
underwriters, and various other MAW financial advisors, as defendants.
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In the Delaware bankruptcy proceedings, appellants did not
assert any claims against appellees in the bankruptcy court or in
Federated I. On September 17, 1997, the bankruptcy court entered
an order confirming a joint liquidating plan of reorganization for MAW.
The reorganization plan allowed appellants an unsecured claim in the
aggregate amount of $210,378,952. On January 20, 1999, the
court-appointed plan administrator for MAW filed an action against
appellees, as well as other defendants, in New York, asserting the same
claims as in the present case.
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On February 10, 1999, appellants filed the present action against
appellees in the Franklin County Court of Common Pleas. In their
complaint, appellants made the following averments: (1) Latham provided
legal services to MAW from June 1990 until MAW filed for bankruptcy
on January 21, 1997; (2) Latham also acted as counsel to MAW for various
other matters; (3) Kegler provided legal services to MAW from the time
of its organization in 1986 until MAW filed for bankruptcy; and
(4) Kegler acted as MAW's outside general counsel during this period and
as MAW's counsel for all of its public offerings and securities work.
Appellants also averred that appellees affirmatively misled and
fraudulently concealed MAW's true financial condition from its
independent outside directors, shareholders, creditors, the Securities
and Exchange Commission, and appellants. Appellants claimed that
appellees directly or indirectly misled several groups, including
appellants, regarding MAW's financial situation and the value of its
assets by material misrepresentations and omissions in the preparation
and dissemination of false and fraudulent public filings. Appellants
alleged that the public filings, including prospectuses, registration
statements, Form 10-Ks, Form 10-Qs, and Form 8-Ks, materially affected
and artificially inflated the financial condition of MAW and induced the
appellants to purchase the notes, which were worth significantly less
than represented. Appellants specifically asserted claims for common law
fraud, negligent misrepresentation, and aiding and abetting common law
fraud.
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On April 15, 1999, Kegler filed a motion for summary judgment in the
present case, arguing that appellants' claims are barred pursuant to res
judicata because they did not assert them against appellees in MAW's
reorganization plan in the bankruptcy proceedings. On April 30,
1999, Latham filed a motion to dismiss, asserting the same res judicata
argument. On April 16, 1999, Latham also filed a motion to dismiss in
the New York action based, in part, upon res judicata.
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On May 14, 1999, appellants filed a motion in the Delaware bankruptcy
court requesting a ruling on the issue of whether their claims against
appellees in the trial court were barred by res judicata. Appellants
also filed a motion in the bankruptcy court attempting to prevent
the New York court from deciding the issue of res judicata. On September
7, 1999, the bankruptcy court overruled both of appellants'
motions, finding that the bankruptcy court did not have exclusive
jurisdiction over the res judicata issues raised by appellees.
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On October 7, 1999, the Franklin County Court of Common Pleas granted
appellees' motion for summary judgment based upon res judicata, treating
Latham's motion to dismiss as a motion for summary judgment. In finding
appellants' current action was barred by res judicata, the trial court
found that: (1) there was a final decision rendered on the merits in the
MAW bankruptcy action; (2) both parties in the present action
were also parties in the MAW bankruptcy action as creditors; (3)
appellants' claims against appellees should have been raised in the MAW bankruptcy
proceedings because the claims would have affected the bankruptcy
estate; and (4) the claims involved in both actions arose out of the
same transactions because appellants alleged in the present case that
appellees' actions contributed to MAW's bankruptcy. Therefore,
the trial court found the final confirmation order issued by the bankruptcy
court in the MAW case operated as a final judgment, and the doctrine of
res judicata barred relitigation of appellants' claims against appellees
in the current case.
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On January 6, 2000, the New York court also granted appellees' motion
to dismiss based upon res judicata. The New York Supreme Court found
that there was a final judgment in the bankruptcy proceedings
involving the same parties and that the claims in the New York case
should have been brought forth in the bankruptcy proceedings
because they were "integrally related" to the bankruptcy.
The New York court further stated that its "determination is in
accord with the ruling in Ohio to the same effect ***."
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Appellants now appeal the judgment of the trial court, asserting the
following assignment of error:
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THE TRIAL COURT ERRED IN ITS DECISION AND ENTRY OF OCTOBER 7, 1999, BY
GRANTING DEFENDANT KEGLER, BROWN, HILL & RITTER & CO. L.P.A.'S
MOTION FOR SUMMARY JUDGMENT AND DEFENDANT LATHAM & WATKINS' MOTION
TO DISMISS AND DISMISSING PLAINTIFFS' COMPLAINT BASED ON THE DOCTRINE OF
RES JUDICATA. (Footnote omitted.)
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Appellants assert in their sole assignment of error that the trial
court erred in granting Kegler's motion for summary judgment and
Latham's motion to dismiss. The trial court construed Latham's motion to
dismiss as a motion for summary judgment and ruled on it accordingly.
Therefore, our analysis is under only the summary judgment analysis.
Pursuant to Civ.R. 56, summary judgment is appropriate when (1) there is
no genuine issue of material fact; (2) the moving party is entitled to
judgment as a matter of law; and (3) reasonable minds can come to but
one conclusion and that conclusion is adverse to the nonmoving party,
said party being entitled to have the evidence construed most strongly
in his favor. Zivich v. Mentor Soccer Club, Inc. (1998), 82 Ohio St.3d
367, 369-370. "When reviewing a trial court's ruling on summary
judgment, the court of appeals conducts an independent review of the
record and stands in the shoes of the trial court." Mergenthal v.
Star Banc Corp. (1997), 122 Ohio App.3d 100, 103.
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In Dresher v. Burt (1996), 75 Ohio St.3d 280, the Supreme Court of
Ohio explained the respective burdens of parties when a motion for
summary judgment is filed. The Supreme Court stated that the moving
party, on the ground the nonmoving party cannot prove its case, has the
initial burden of informing the trial court of the basis for the motion
and identifying those portions of the record that demonstrate the
absence of a genuine issue of material fact on the essential elements of
the nonmoving party's claim. The moving party cannot discharge its
initial burden under the rule with a conclusory assertion that the
nonmoving party has no evidence to prove its case. Kulch v. Structural
Fibers, Inc. (1997), 78 Ohio St.3d 134, 147; Dresher, supra, at 293.
Rather, the moving party must specifically refer to the "pleadings,
depositions, answers to interrogatories, written admissions, affidavits,
transcripts of evidence in the pending case, and written stipulations of
fact, if any," which affirmatively demonstrate that the nonmoving
party has no evidence to support the nonmoving party's claims. Civ.R.
56(C); see, also, Dresher, supra, at 296. Once the moving party
satisfies its initial burden by affirmatively demonstrating that the
nonmoving party lacked the evidence to support its claims, the nonmoving
party is required to set forth specific facts showing that there is
indeed a genuine issue. Id. at 293. In accordance with Civ.R. 56(E),
"a non-movant may not rest on the mere allegations or denials of
his pleading, but must set forth specific facts showing there is a
genuine issue for trial." Chaney v. Clark Cty. Agricultural Soc.,
Inc. (1993), 90 Ohio App.3d 421, 424.
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The trial court found that appellants' claims against appellees were
barred by the doctrine of res judicata. The doctrine of res judicata
states that an existing final judgment or decree between the parties to
litigation is conclusive as to all claims that were or might have been
litigated in the first lawsuit. Rogers v. Whitehall (1986), 25 Ohio
St.3d 67. A judgment in bankruptcy court bars a subsequent suit
if: (1) the prior judgment was a final judgment rendered by a court of
competent jurisdiction; (2) both cases involve the same parties; (3) the
subsequent action raises an issue that was actually litigated or that
should have been litigated; and (4) the same cause of action is at issue
in both cases. Latham v. Wells Fargo Bank, N.A. (C.A.5, 1990), 896 F.2d
979, 983; see, also, Ohio Dept. of Human Serv. v. Kozar (1995), 99 Ohio
App.3d 713, 716, citing Quality Ready Mix, Inc. v. Mamone (1988), 35
Ohio St.3d 224. The application of the doctrine of res judicata is not
limited to points of law actually and directly at issue in the prior
action. See Joe Horisk's Salvage Pool Sys. of Ohio v. Strongsville
(1993), 91 Ohio App.3d 121, 128, citing National Amusements, Inc. v.
Springdale (1990), 53 Ohio St.3d 60.
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Res judicata applies between federal court and state court judgments.
Rogers, supra. A judgment rendered by a federal court of competent
jurisdiction is given res judicata effect in the courts of Ohio. Rogers,
supra. The doctrine of res judicata also applies to proceedings in bankruptcy
court. Jungkunz v. Fifth Third Bank (1994), 99 Ohio App.3d 148, 151. A bankruptcy
plan confirmed by a bankruptcy court has the effect of a judgment
rendered by a state or district court. Id. Thus, "[a]ny attempt by
the parties [to the bankruptcy] to relitigate any of the matters
that were raised or could have been raised (in the bankruptcy
proceeding) therein is barred under the doctrine of res judicata."
In re Brady, Texas, Mun. Gas Corp. (C.A.5, 1991), 936 F.2d 212, 215.
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As one federal court has explained, "[r]estraining litigious
plaintiffs from taking more than 'one bite of the apple' has been our
avowed purpose since the common law doctrine of res judicata first
evolved." Sure-Snap Corp. v. State Street Bank and Trust Co.
(C.A.2, 1991), 948 F.2d 869, 870. Further, "[b]ecause of spiraling
litigation costs, increasingly congested courts -- especially bankruptcy
courts -- and expanding theories of recovery, such as lender liability,
it is more imperative than ever that the doctrine of res judicata be
applied with unceasing vigilance." In re Baudoin (C.A.5, 1993), 981
F.2d 736, 740.
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The first element required by res judicata to bar a subsequent suit
following a judgment in bankruptcy court is that the judgment was
a final judgment rendered by a court of competent jurisdiction. In the bankruptcy
context, an order confirming a plan of reorganization constitutes a
judgment and a final adjudication on the merits of a bankruptcy
proceeding. In re Baudoin, supra, at 742; Stoll v. Gottlieb (1938), 305
U.S. 165, 169-171; In re Chattanooga Wholesale Antiques, Inc. (C.A.6,
1991), 930 F.2d 458, 463. The bankruptcy court issued an order
confirming a bankruptcy plan in the MAW bankruptcy in
1997, constituting a final judgment on the merits by a court of
competent jurisdiction. Therefore, in the present case, the first
element for res judicata has been satisfied.
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The second requirement for res judicata is that the bankruptcy
action and the present action involve the same parties. In the present
case, the trial court found that both parties in the present action were
also parties in the bankruptcy action. We agree. Numerous courts
have held that in the context of bankruptcy matters, not only
formally named parties, but all participants in the bankruptcy
proceedings, are barred by res judicata from asserting matters they
could have raised in the bankruptcy proceedings. See Micro-Time
Management Sys., Inc. v. Allard & Fish, P.C. (C.A.6, 1993), 983 F.2d
1067, 114 S.Ct. 287 (citing Met-L-Wood Corp. v. Pipin (C.A.7, 1988), 861
F.2d 1012, 1016); see, also, In re Brown (C.A.6, 1998), 219 B.R. 191
(citing Micro-Time).
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Appellants and appellees would be considered participants in the bankruptcy
proceedings. Courts have specifically held that creditors in a bankruptcy
proceeding are considered "parties" for purposes of res
judicata. Sanders Confectionery Products, Inc. v. Heller Financial, Inc.
(C.A.6, 1992), 973 F.2d 474, 481. Thus, appellants, as creditors of MAW,
were parties to the bankruptcy proceeding. See id. Likewise,
appellees, as both creditors and attorneys for MAW, were parties to the
proceeding. See id.; Met-L-Wood, supra, at 1018 (trustees' claim against
debtor's attorneys was barred by the bankruptcy court's
confirmation order). Therefore, the second requirement for invoking res
judicata has been satisfied.
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The third requirement for invoking res judicata is that the present
action raises an issue that was actually litigated or that should have
been litigated in the bankruptcy action. Appellants argue that
they could not have litigated the present claims in the bankruptcy
action because the claims do not implicate the priority of distribution
of MAW's assets. Appellants also assert that the present claims "do
not involve property of the estate, fairness within the bankruptcy
process, claim position, or the administration of the estate.
[Appellants'] fraud claims are simply not related in any way to MAW's bankruptcy
case; rather, they are independent claims ***." Appellees counter
that the present claims could have been raised in the bankruptcy
proceedings because they had a conceivable effect on MAW's estate.
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A bankruptcy court's jurisdiction extends over four types of
matters: (1) Title 11 cases; (2) proceedings that arise under Title 11;
(3) proceedings that arise in a case under Title 11; and (4) proceedings
related to a case under Title 11. See Section 1334(a), (b), Title 28,
U.S. Code. In the present case, it is necessary only to determine
whether the matter is at least "related to" the bankruptcy
proceeding.
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A bankruptcy court's "related to" jurisdiction is
very broad, "including nearly every matter directly or indirectly
related to the bankruptcy." In re Mann v. Alexander Dawson,
Inc. (C.A.9, 1990), 907 F.2d 923, 926, n. 4. Thus, a proceeding is
related to a case under Title 11 if it "could conceivably have any
effect on the estate being administered in bankruptcy" such
that "'it is possible that [the] proceeding may impact on the
debtor's rights, liabilities, options, or freedom of action or the
handling and administration of the bankrupt estate.'" Halper v.
Halper (C.A.3, 1999), 164 F.3d 830, 837 (quoting In re Guild and Gallery
Plus, Inc. (C.A.3, 1996), 72 F.3d 1171, 1181 (other citations and
quotations omitted); see, also, United States Trustee v. Gryphon at the
Stone Mansion, Inc. (C.A.3, 1999), 166 F.3d 552, 556. "A key word
in [this test] is conceivable. Certainty, or even likelihood, is not a
requirement. Bankruptcy jurisdiction will exist so long as it is
possible that a proceeding may impact on the debtor's rights,
liabilities, options, or freedom of action or the handling and
administration of the bankrupt estate." In re Guild, at 1181.
Further, the matter need not directly involve the debtor, as long as it
"could alter the debtor's rights [or] liabilities," although
an "extremely tenuous connection" will not suffice. In re
Wolverine Radio Co. (C.A.6, 1991), 930 F.2d 1132, 1142.
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Although only one ground was necessary to satisfy the third
requirement for res judicata, the trial court found that the present
proceedings were "related to" the bankruptcy action for
the following three reasons: (1) if appellants prevailed in the present
action, the administration of the MAW bankruptcy estate would
have to be modified in order to prevent an unlawful double recovery; (2)
if appellants had raised their claims against appellees in the bankruptcy
proceedings, appellees could have sought contribution from MAW, thereby
affecting the bankruptcy distribution; and (3) if appellants had
raised their claims against appellees in the bankruptcy
proceedings, appellees and other creditors could have objected to the bankruptcy
reorganization plan. We find the second reason relating to contribution
to be the most compelling in demonstrating that the present action was
"related to" the bankruptcy proceeding and, therefore,
that it should have been litigated during the prior action in bankruptcy.
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With regard to the issue of contribution, appellants claimed that
appellees directly or indirectly misled them regarding MAW's financial
situation and the value of its assets by material misrepresentations and
omissions in the preparation and dissemination of false and fraudulent
public filings. Appellees countered that all of the financial
information they used in producing the investment-related filings and
documents detailing MAW's financial condition was provided by MAW and,
thus, the present claims should have been brought against them in the bankruptcy
proceedings so that they could have sought contribution from MAW for any
liability they incurred as a result of appellants' claims. Therefore,
appellees assert this would have conferred sufficient "related
to" jurisdiction upon the bankruptcy court because a
potential claim for contribution could have arisen against MAW as a
result of appellants' action.
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In contending that contribution from the debtor does not provide a
sufficient "related to" nexus in order to bring an action
under the jurisdiction of the bankruptcy court, appellant relies
largely on Pacor v. Higgins (C.A.3, 1984), 743 F.2d 984, overruled on
other grounds by Things Remembered, Inc. v. Petrarca (1995) 516 U.S.
124, 134-135. In Pacor, the plaintiff brought a state court action for
work-related exposure to asbestos against the product's supplier, Pacor.
Pacor filed a third-party complaint impleading the original asbestos
manufacturer, Johns-Manville Corporation. After Johns-Manville entered
Chapter 11 bankruptcy proceedings, Pacor sought to remove the
entire controversy to bankruptcy court. The Third Circuit held
that the action between Pacor and Johns-Manville was removable, but that
the original action against Pacor was not related to a case in bankruptcy
and therefore could not be removed. The Third Circuit stated that the
original action against Pacor was, "[a]t best, *** a mere precursor
to the potential third party claim for indemnification by Pacor against
Manville." Pacor, at 995. The court further held that because all
issues with regard to Manville's possible liability would be resolved in
a later action, "there would be no automatic creation of liability
against Manville on account of a judgment against Pacor" and
"[t]here would *** be no effect on administration of the estate,
until such time as Pacor may choose to pursue its third party
claim." Id. at 995. Thus, the court in Pacor found there could be
no "related to" jurisdiction without "automatic"
liability for indemnification or contribution against the debtor.
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However, other federal courts have construed the bankruptcy
court's "related to" jurisdiction more liberally than Pacor.
These courts have found that a claim between two non-debtors that will
"potentially" or "possibly" affect the bankruptcy
estate's liabilities produces an effect on the estate sufficient to
confer "related to" jurisdiction. See Kocher v. Dow Chemical
Co. (C.A.8, 1997), 132 F.3d 1225 (potential indemnification claims
against debtor by non-debtor defendants in separate action could
conceivably affect debtor's bankruptcy estate and thus are
"related to" the bankruptcy case); see, also, Owens
Illinois, Inc. v. Rapid American Corp (In re Celotex Corp) (C.A.4,
1997), 124 F.3d 619, 626 ("Notably, the Pacor test does not require
certain or likely alteration of the debtor's rights, liabilities,
options or freedom of action, nor does it require certain or likely
impact upon the handling and administration of the bankruptcy
estate. The possibility of such alteration or impact is sufficient to
confer jurisdiction"); Kaonohi Ohana, Ltd. v. Sutherland (C.A.9,
1989), 873 F.2d 1302, 1306-1307; National Union Fire Ins. Co. v. Titan
Energy, Inc. (C.A.8, 1988), 837 F.2d 325, 329; Carr v. In re Michigan
Real Estate Ins.Trust (E.D.Mich.1988), 87 B.R. 447.
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The obvious difference between the "automatic" liability
requirement enunciated in Pacor and the rulings in the above-cited cases
is the degree of certainty required to demonstrate that the action will
have an effect on the bankruptcy proceeding -- via recovery
against the debtor for indemnity or contribution as a result of the
underlying proceeding, or otherwise. For the reasons set forth below, we
believe that given the broad jurisdiction of the bankruptcy court as
outlined above in In re Mann, Halper, and In re Guild, the
interpretation more congruous with this granting of extensive
jurisdiction comes from those cases that do not require a demonstration
of "automatic" liability through indemnification and
contribution.
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Although the indemnity and contribution claims by appellees against
MAW's bankruptcy estate cannot be said to have been successful to
a "certainty" or "automatically" at the bankruptcy
proceedings, in testing "related to" jurisdiction, as
explained above, an effect is not required to a "certainty."
Rather, jurisdiction will attach on a finding of any "conceivable
effect." See Wood v. Wood (In re Wood) (C.A.5, 1987), 825 F.2d 90,
94 ("Although we acknowledge the possibility that this suit may
ultimately have no effect on the bankruptcy, we cannot conclude,
on the facts before us, that it will have no conceivable effect.")
(Emphasis sic); In re Titan Energy, supra, at 330 ("[E]ven a
proceeding which portends a mere contingent to tangential effect on a
debtor's estate meets the broad jurisdictional test [for 'related to'
jurisdiction]"); Vol. 1 Collier on Bankruptcy § 3.01[4][c]
at 3-26 (15th Ed. Rev. 2000) ("'[A]utomatic' liability of the
estate is not the sine qua non for related to jurisdiction; all that is
necessary is that there could 'conceivably' be some effect upon the
estate as a consequence of the litigation in question"). The
"automatic" liability analysis set forth in Pacor does not
comport with this well-established rule of law that certainty is not
required in order to meet the "related to" jurisdiction and
that merely any "conceivable effect" is sufficient.
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Further, several courts have specifically disagreed with and declined
to follow Pacor and its "automatic" liability requirement. See
In re Salem Mortg. Co. (C.A.6, 1986), 783 F.2d 626, 635 ("*** the
statute does not require a finding of definite liability of the estate
as a condition precedent to holding an action related to a bankruptcy
proceeding. *** Congress intended a grant of broad jurisdiction under
the bankruptcy laws"); In re Chateaugay Corp. (S.D.N.Y. Oct
8, 1997), 213 B.R. 633, 640 ("Clearly, the 'automatic liability'
language in Pacor is inconsistent with this Circuit's 'any conceivable
effects' test. *** Rather, in order to meet the 'any conceivable
effects' test, an indemnity claim against the debtor must have a
reasonable legal basis"); In re Dow Corning Corporation (C.A.6,
1996), 86 F.3d 482, 491 ("It has become clear following Pacor that
'automatic' liability is not necessarily a prerequisite for a finding of
'related to' jurisdiction").
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In addition, the Third Circuit itself, the same circuit that decided
Pacor, later retreated from this "automatic liability"
requirement in In re Marcus Hook Development Park, Inc. (C.A.3, 1991),
943 F.2d 261, 264-265. The Third Circuit's departure from this
requirement has also been recognized by at least two other courts. See
In re Foundation for New Era Philanthropy (Bankr.E.D.Pa. Oct 15, 1996),
201 B.R. 382, 392, n. 10 ("decisions in the Third Circuit since
Pacor, particularly In re Marcus Hook Dev. Park, Inc., 943 F.2d at
264-265, suggest that 'automatic' liability is not a prerequisite for a
finding of 'related to' jurisdiction"); In re Dow Corning Corp.,
supra, at 491.
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Because Pacor goes beyond the any "conceivable effects"
test, we decline to follow its "automatic" liability
requirement. We also find that appellees had a potential contribution
claim against MAW. All of the financial information appellees used in
producing the investment-related filings and documents detailing MAW's
financial condition was provided by MAW, and, thus, they could have
conceivably sought contribution from MAW for any liability they incurred
as a result of appellants' claims. See, also, R.C. 2307.32 (allowing
joint and several liability and the right of contribution among
tortfeasors in tort actions). Therefore, for the preceding reasons, we
find that because appellees' claims for contribution could have had a
conceivable effect upon MAW's bankruptcy estate, the present
action should have been litigated in the bankruptcy proceedings.
The third requirement for res judicata has been met.
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The fourth requirement for invoking res judicata is if the same cause
of action can be at issue in both cases. In making this determination,
we must consider whether the claims arose out of the same transaction or
series of transactions, or whether the claims arose out of the same core
of operative facts. See In re Justice Oaks II, Ltd. (C.A.11, 1990), 898
F.2d 1544, 1551-1552. Identity of causes of action means an
"identity of the facts creating the right of action and of the
evidence necessary to sustain each action." Westwood Chemical Co.,
Inc. v. Kulick (C.A.6, 1981), 656 F.2d 1224, 1227.
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In this case, the central issue in the bankruptcy proceedings
was the determination and distribution of the MAW estate. The essence of
appellants' complaint is that they were induced into investing in MAW as
a direct result of appellees' directly or indirectly misleading them
regarding MAW's financial situation and that appellees' actions
contributed to MAW's bankruptcy filing. For the following
reasons, we find that the alleged claims against appellees are
integrally related to the subject matter of the bankruptcy
proceeding and arise out of the same transaction or series of
transactions and the same core of operative facts as the bankruptcy
proceedings.
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To determine whether the causes of action are the same, we examine
whether the same transaction, evidence, and factual issues are involved
in both cases. Sure-Snap, supra, at 874. In Sure-Snap, in determining
whether there was identity of causes of action, the court stated:
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[Plaintiff's] very allegation that [defendant's] tortious conduct
negatively influenced their business's health, makes it hard-pressed to
explain how the two causes of action--the plan of reorganization and the
[tort] claims--did not comprise the same essential matter. Id. at 875.
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Several other courts have also found that allegations in a separate
complaint claiming that a defendant's tortious conduct negatively
impacted the business health of the debtor and contributed to the filing
of bankruptcy comprise the same essential matters as those
litigated in the bankruptcy proceeding. See In re Baudoin, supra;
Eubanks v. F.D.I.C. (C.A.5, 1992), 977 F.2d 166 (finding that there is
an identity of claims between the confirmation proceeding and lawsuit
because the petition alleged that the defendant's actions forced the
debtor into bankruptcy); Oneida Motor Freight, Inc. v. United
Jersey Bank (C.A.3, 1988), 848 F.2d 414, 419 n. 5 (finding that because
the complaint alleged that the defendant's breach was the catalyst to
the debtor's Chapter 11 filing, the claims raised in the lawsuit and bankruptcy
proceeding are factually and legally similar so as to apply res judicata).
|
| [48] |
Although in the present case appellants were not the debtors in the bankruptcy
action, there is no reason why the general principle enunciated in the
above-cited cases should not apply with equal force to the current case
with regard to identity of the issues. The issue for the purposes of
this fourth requirement for res judicata is whether the transaction,
evidence, and core operative facts in both proceedings are the same; the
relationship or specific identity of the parties is not at issue.
|
| [49] |
As in the above cases, appellants' complaint repeatedly claims that
appellees' fraudulent conduct in preparing financial prospectuses to
secure funding negatively impacted the business health of the debtor and
contributed to the filing of bankruptcy:
|
| [50] |
20. *** As a result, MAW had to borrow additional money to make such
improvements, committing it to a pattern of ever increasing capital
needs, all fueled by a borrowing binge which the Company could not
repay.
|
| [51] |
***
|
| [52] |
65. *** These materially false and misleading statements [by Latham]
promoted the illusion that MAW was growing and was profitable, while, in
fact, the Note Offering caused MAW to sink deeper into insolvency.
|
| [53] |
*** 68. Latham knew, misrepresented and failed to disclose or should
have known and failed to discover intentionally, willfully, recklessly
or negligently that the acts, practices, misleading statements and
omissions particularized herein would materially affect *** the
financial condition of MAW.
|
| [54] |
***
|
| [55] |
84. *** These materially false and misleading statements [by Kegler]
promoted the illusion that MAW was growing and was profitable, while, in
fact, the Note Offering caused MAW to sink deeper into insolvency.
|
| [56] |
***
|
| [57] |
87. [Kegler] knew, misrepresented and failed to disclose or should
have known and failed to discover, intentionally, willfully, recklessly
or negligently that the acts, practices, misleading statements and
omissions particularized herein would materially affect *** the
financial condition of MAW.
|
| [58] |
***
|
| [59] |
204. As a result, of the Insiders' and Advisers' conduct, aided and
substantially assisted by the conduct of Latham and [Kegler], helped
increase MAW's debt burden and artificially prolonged the life of the
Company while giving the illusion *** that MAW's financial situation was
stable.
|
| [60] |
Thus, it is apparent from appellants' complaint that they were not
only alleging that appellees committed fraud but that such fraud
negatively influenced MAW's health and materially contributed to MAW's
filing bankruptcy. Therefore, given appellants' allegations in
their complaint and the underlying causes of the filing of the bankruptcy,
it is difficult to see how these two actions could be said to not have
involved the same transaction, evidence, and factual issues. We would
also note that, although in no way is it binding upon this court, the
New York Supreme Court also came to this same determination on this
issue in the following related action, stating:
|
| [61] |
Plaintiff argues that these are not the same claims and that is why
they were not brought in the bankruptcy proceeding. This
allegation is belied by the fact that similar claims against the
underwriters and accountants were specifically reserved. These claims
are integrally related to the bankruptcy proceeding for had they
been listed the court could have made certain arrangements with respect
to payment of the claims submitted by Fleet, Latham and Kegler. The
causes of action alleged herein assert that these parties contributed
along with the accountants and underwriters to increase the size of
MAW's bankruptcy by their conduct. Such an allegation is
integrally related to the bankruptcy and should have been
included, when the creditors such as Fleet, Latham and Kegler voted on
the proposed plan ***. Truesdell v. Donaldson, Lufkin & Jenrette
(Supreme Court of the State of New York, county of New York Jan. 6,
2000), Index No. 600314/99, unreported, at 11 (emphasis added).
|
| [62] |
For similar reasons as those cited by the New York Supreme Court, we
come to the same conclusion. Therefore, we find that the alleged claims
against appellees are integrally related to the subject matter of the bankruptcy
proceeding and arise out of the same transaction or series of
transactions and the same core of operative facts as the bankruptcy
proceedings.
|
| [63] |
We also note that appellants cite several cases for different general
propositions. Appellants cite In re MAI Systems, Inc. (Bankr. D. Del.
1995), 178 B.R. 50, for the proposition that no code section requires
the creditor to raise every ripe dispute it has with other creditors
prior to plan confirmation. However, neither the trial court nor this
court has held that every claim must be raised pre-confirmation. The
determinations only find that creditors must assert claims against other
creditors that are barred by res judicata, i.e., those claims that are
raised after there has been a final judgment or decree between the
parties that is conclusive as to all claims that were or might have been
litigated in the first lawsuit. Further, MAI is inapplicable to the
present case because its finding was based upon the defendant's failure
to show in its motion to dismiss "that MAI's complaint is
integrally related to MAI's plan of reorganization." Id. at 55. To
the contrary, this court and the court below have found that appellants'
complaint and the MAW bankruptcy were integrally related. The
court in MAI specifically acknowledged that "where claims in a
post-confirmation action are integrally related to the subject matter of
the bankruptcy proceeding, res judicata applies to preclude the
action." Id. Therefore, we are not persuaded by MAI.
|
| [64] |
Appellants also try to distinguish CoreStates Bank, N.A. v. Huls
America, Inc. (C.A.3, 1999), 176 F.3d 187, which was cited by the trial
court to support its decision. Appellants point to the statement in
CoreStates that "in general, a creditor who does not raise a claim
against another party to the bankruptcy proceeding cannot be
precluded from later asserting a claim." Id. at 199-200. However,
the court in CoreStates went on to note that "even if a creditor
did not proffer an objection to a plan confirmation, it would still be
precluded from bringing a later claim based on the same cause of action
if a judgment in its favor on the later claim would effectively nullify
the effects of the confirmation order." Id. at 200, n. 13, citing
Sure-Snap, supra, at 874-876. Likewise, as we have previously found,
appellants' claims could have had a conceivable effect on the
confirmation order. In this respect, the present claims would be in
contravention of the bankruptcy confirmation plan and nullified
the effect of the plan to some degree. Therefore, as the trial court
found, we find that CoreStates does not support appellants' argument in
this respect. All the elements of res judicata having been met, we hold
that the judgment in MAW's bankruptcy bars the suit filed by
appellants in the trial court against appellees.
|
| [65] |
In addition, the trial court held that given the application of res
judicata, the only way that appellants may have avoided its effect was
by an express reservation of their claims against appellees in the
confirmation order, citing Micro-Time, supra. However, appellants only
argument with regard to this finding by the trial court is that
Micro-Time was inapplicable because it dealt with the debtor's
obligations and that as creditors, appellants had no right to reserve
any claim against another creditor in MAW's bankruptcy
proceedings. Because appellants' argument only refutes the application
of this theory of recovery but does not set forth any other manner by
which they may avoid the application of res judicata in the present
case, we will not address this issue.
|
| [66] |
Accordingly, we find that the trial court did not err in granting
appellees' motion for summary judgment. Appellants' assignment of error
is overruled, and the judgment of the Franklin County Court of Common
Pleas is affirmed.
|
| [67] |
Judgment affirmed.
|
| [68] |
TYACK and PETREE, JJ., concur.
|
|