Three entities are involved in a successful Chapter 11 plan confirmation: the pre-bankruptcy debtor, the estate, and the post-bankruptcy business. The debtor gives way to the bankruptcy estate at the time of the initial filing, the estate gives way to the post-bankruptcy entity on confirmation of the plan, and the post-bankruptcy business survives the confirmation.

For res judicata purposes, where a Ch. 11 debtor files two successive bankruptcies, with two confirmed plans, the DIP in the second bankruptcy is not the same party as the debtor in the first bankruptcy. The DIP in the second bankruptcy is however, the successor in interest to the debtor and the reorganized debtor in the first bankruptcy.

Under certain circumstances, a successor in interest, including a DIP, can be deemed to be in privity with a debtor. For res judicata purposes, a successor in interest is deemed to be in privity if: the nonparty had a substantive legal relationship with a party, and a successor in interest has such a relationship with its predecessor. However, even though a DIP has a substantive legal relationship with the pre-bankruptcy debtor, the DIP is not simply the successor in interest to the Debtor: the DIP represents the interests of all creditors of the Debtor's bankruptcy estate. Because the DIP also represents the general creditors interests, the legal relationship between the DIP and the pre-bankruptcy debtor is incomplete, particularly when the interests of the creditors diverge from those of the debtor.

Thus, a DIP in a second (liquidating) bankruptcy is not barred by res judicata from challenging the nature of a putative lease between the debtor and a lessor. Although actions occurring in the first bankruptcy would otherwise likely have created a res judicata bar to such a challenge, the DIP in the first bankruptcy was not incented to bring such a challenge since it wanted the lease to remain in place. The DIP In the second bankruptcy had different incentives, since it was liquidating. Because of these "misaligned incentive," the second DIP did not have a "substantive legal relationship" with the first DIP of the type required for privity.