Corestates Bank v. Huls America Inc

Opinions of the United

1999 Decisions States Court of Appeals

for the Third Circuit

5-11-1999

Corestates Bank v. Huls America Inc

Precedential or Non-Precedential:

Docket 97-1784

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Filed May 11, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NO. 97-1784

CORESTATES BANK, N.A.,

Appellant

v.

HULS AMERICA, INC.

On Appeal From the United States District Court

For the Eastern District of Pennsylvania

(D.C. Civ. No. 96-cv-08119)

District Judge: Honorable Harvey Bartle, III

Argued: July 17, 1998

Before: BECKER, Chief Judge, STAPLETON and WEIS,

Circuit Judges.

(Filed May 11, 1999)

WALTER WEIR, JR., ESQUIRE

(ARGUED)

Weir & Partners

100 So. Broad Street

Suite 1200 - Land Title Building

Philadelphia, PA 19110

Counsel for Appellant

DAVID J. D'ALOIA, ESQUIRE

VINCENT F. PAPALIA, ESQUIRE

(ARGUED)

ADAM S. RAVIN, ESQUIRE

Saiber, Schlesinger, Satz &

Goldstein, LLC

One Gateway Center, 13th Floor

Newark, NJ 07102-5311

EDWARD J. DiDONATO, ESQUIRE

DiDonato & Winterhalter

1818 Market Street, 29th Floor

Philadelphia, PA 19103

Counsel for Appellee

OPINION OF THE COURT

BECKER, Chief Judge.

This appeal by CoreStates Bank, N.A. ("CoreStates")

requires us to consider the putative claim preclusive effect

of the Bankruptcy Judge's denial of CoreStates's objections

to a Chapter 11 bankruptcy reorganization plan

confirmation. Both CoreStates and appellee Huls America,

Inc. ("Huls") had extended substantial credit to the debtor,

United Chemical Technologies, Inc. ("UCT"), a chemical

separation science company, to facilitate the purchase by

UCT of a manufacturing facility from Huls. They then

entered into a Subordination Agreement in order to clarify

their respective rights to receive payment from UCT. Under

the Agreement, UCT's debts to Huls were subordinated to

CoreStates's. Huls also agreed that it would not retain any

payment by UCT, including those paid under a bankruptcy

plan, until UCT had paid off its indebtedness to CoreStates

in full.

After UCT filed for bankruptcy, but before the Plan of

Reorganization was finally confirmed, UCT paid to Huls

some $600,000 as called for by the Plan. CoreStates

demanded that Huls pay this sum over to it. CoreStates

filed objections to the Plan on the grounds, inter alia, that

the Plan entitled Huls to receive $600,000 immediately,

2

asserting that this proposed payment unfairly discriminated

between creditors. CoreStates did not contend to the

Bankruptcy Judge that the $600,000 had to be paid over to

it pursuant to the Subordination Agreement.

Subsequently, CoreStates filed the present suit in the

District Court, alleging that Huls is obligated by the

Subordination Agreement to turn the $600,000 over to

CoreStates. The issue on appeal is 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. The District Court

concluded that CoreStates's claim was precluded because

CoreStates could have raised its claim based on the

Agreement in the bankruptcy proceeding alongside its

objection, but failed to do so. See CoreStates Bank, N.A. v.

Huls America, Inc., No. Civ. A. 96-8119, 1997 WL 560193

(E.D. Pa. Aug. 28, 1997).

This case is difficult because it falls within the interstices

of the law of judgments. As discussed below, a Bankruptcy

Judge's order rejecting a creditor's objection to a

bankruptcy reorganization plan acts as a final judgment for

preclusion purposes. In this case, CoreStates objected to

the Plan because it would result in the immediate payment

of $600,000 to Huls, and its objection seems to subsume

the Subordination Agreement, even though it was not

advanced in terms. As a result, both issue preclusion and

claim preclusion might have some relevance to the present

litigation, which concerns whether Huls is obligated by the

Subordination Agreement to turn the $600,000 over to

CoreStates. We think that claim preclusion provides the

more appropriate framework, however, because we are

unsure that the Subordination Agreement was raised with

sufficient clarity in the reorganization proceeding to give

rise to issue preclusion.

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. Agreeing with three other circuits (two are of the

contrary view), we conclude that the doctrine applies

regardless of the type of bankruptcy jurisdiction-- core or

3

non-core -- within which the current claim would fall.

Moreover, we believe that the facts of this case--

particularly where the parties were formerly creditors in a

bankruptcy proceeding -- fall within the rubric of claim

preclusion, albeit at the margin.

Although our holding is largely fact-bound, insofar as we

bring it within the claim preclusion jurisprudence we are

obliged to flesh out its doctrinal aspect. We note in this

regard the limiting effects on these precepts of the internal

elements of the claim preclusion test itself, set forth in

Board of Trustees of Trucking Employees Welfare Fund, Inc.

v. Centra, 983 F.2d 495, 504 (3d Cir. 1992), and of the

statutory constraints on the scope of bankruptcy

jurisdiction. First, claim preclusion applies only if the

current claim would have been within the jurisdiction of the

court hearing the prior bankruptcy proceeding. A claim, in

order to fall within the bankruptcy jurisdiction, must at

least be one that "could conceivably have any effect on the

estate being administered in bankruptcy." Pacor, Inc. v.

Higgins, 743 F.2d 984, 994 (3d Cir. 1984). Second, except

possibly in certain unusual circumstances, claim

preclusion applies only if the party to be precluded raised

a claim, such as an objection to a reorganization plan, in a

prior proceeding. Finally, claim preclusion applies only if

the events underlying the current claim are essentially

similar to those underlying the claim made in the

bankruptcy proceeding. If the current claim alleged to be

precluded does not meet these three requirements it will

not be precluded.

CoreStates's claim clearly meets these three

requirements. First, it could have raised its claim under the

Subordination Agreement during the confirmation

proceeding along side its objections, both as a legal and as

a factual matter. The claim based on the Subordination

Agreement fell within the non-core "related to" bankruptcy

jurisdiction, if not the core jurisdiction. In addition, since

UCT paid Huls the money before the Plan was confirmed,

CoreStates's claim accrued before the confirmation

proceeding concluded. Second, CoreStates filed an objection

to the confirmation of UCT's Plan of Reorganization that

was argued at length before the Bankruptcy Judge and the

4

District Court by both CoreStates and Huls. This objection

put into controversy the entire amount that Huls was to

receive in full satisfaction of its claims against UCT. Third,

CoreStates's objection to the confirmation of the Plan

involved the same underlying factual issues as CoreStates's

present claim. We therefore conclude that the District Court

correctly found that CoreStates's claim was precluded;

hence we will affirm.

I. Facts & Procedural History

This case arises out of a series of events culminating in

the bankruptcy reorganization of UCT. See CoreStates

Bank, N.A. v. United Chem. Techs., Inc., 202 B.R. 33 (E.D.

Pa. 1996). In 1993, UCT purchased from Huls a facility that

manufactured specialty chemicals.1 This purchase was

funded in part by loans and extensions of credit from

CoreStates, totaling about $1.1 million.2 Huls also provided

financing for the purchase and, after the sale, continued to

supply products to UCT on credit terms. As a condition of

the financing, CoreStates, UCT and Huls executed a

Subordination Agreement ("the Agreement"). The Agreement

provided, in part, that Huls would subordinate its claims to

CoreStates's and would not retain any payment by UCT

until UCT's indebtedness to CoreStates had been paid off in

full. It further provided that, if any bankruptcy proceeding

was filed by or against UCT, Huls would hold any payments

it received pursuant to that proceeding as trustee for the

benefit of CoreStates and deliver such payments

immediately to CoreStates.

As a consequence of an explosion at UCT's new facility,

UCT filed for Chapter 11 protection in October 1995. UCT

filed its first Plan of Reorganization in February 1996. This

plan met with resistance from a number of interested

parties, including Huls and CoreStates. Following further

negotiations, UCT submitted a First Amended Plan of

Reorganization in March 1996. The Amended Plan had the

_________________________________________________________________

1. During the pendency of this litigation, Huls America changed its name

to Creanova, Inc. We continue to refer to the defendant herein as Huls.

2. During the pendency of this litigation, CoreStates merged into First

Union Corp. We continue to refer to the plaintiff herein as CoreStates.

5

consent of all interested parties except CoreStates, which

objected to it.

Under the Amended Plan, CoreStates was to receive a

cash payment of $550,497 on the Plan's effective date, and

repayment of remaining lines of credit and mortgages with

interest over periods ranging from five to fifteen years.

CoreStates would also retain all its liens and security

interests, except for certain machinery and equipment

liens. Huls, a creditor with a priority junior to CoreStates,

was to receive a $600,000 cash payment in full satisfaction

of its more than $3.2 million in claims, approximately $2.3

million of which was secured. Nothing in the Amended Plan

purported to modify or nullify the Agreement as between

CoreStates and Huls.

CoreStates filed an action in the form of objections to the

Amended Plan. These objections did not refer to the

Agreement. CoreStates did, however, specifically object on

the grounds that under the Plan Huls was entitled to

receive $600,000 immediately. CoreStates argued that this

proposed payment to Huls unfairly discriminated between

creditors.

On June 5, 1996, the Bankruptcy Judge rejected

CoreStates's objections. One week later, he held a

confirmation hearing. Just prior to the hearing, counsel for

CoreStates informed counsel for Huls that CoreStates

intended to enforce Huls's obligation to turn over the

proceeds that it would receive under the Plan. At the

confirmation hearing, Huls raised the issue with the court,

and a brief colloquy ensued, although no papers were filed.

The court did not formally resolve the issue, however, and

proceeded to confirm the Plan over CoreStates's objection.

CoreStates appealed the order confirming the Amended

Plan to the District Court. See CoreStates, 202 B.R. 33.

Among other issues, CoreStates argued that the

Bankruptcy Judge improperly rejected its objection by

wrongly "[d]etermining that [Huls] was permitted to receive

payments . . . before [CoreStates] was paid, in

contravention of the Subordination Agreement," thereby

violating 11 U.S.C. S 510(a) and the "fair and equitable"

requirement of 11 U.S.C. S 1129(b)(1) & (2). In fact, Huls

6

itself filed a brief in opposition to CoreStates's appeal, and

CoreStates filed a reply brief responding almost exclusively

to Huls's arguments. The District Court refused to consider

this argument. It found that CoreStates had not raised the

Agreement as a basis for objecting to the Amended Plan in

the Bankruptcy Court, and therefore was not entitled to

raise it before the District Court. See CoreStates, 202 B.R.

at 48. The Court also rejected CoreStates's more general

contention that the $600,000 payment unfairly

discriminated against it, which Huls discussed at length in

its brief. For other reasons, however, the court reversed the

confirmation of the Plan. See 202 B.R. at 58.

On August 12, 1996, prior to the ruling of the District

Court, UCT paid to Huls the $600,000 sum called for by

the Amended Plan.3 On September 6, CoreStates made a

written demand on Huls for the money. In that letter,

CoreStates asserted that, as a result of the District Court's

vacatur of the Amended Plan, there was no confirmed plan

and therefore Huls was required to pay the money over to

CoreStates per the Agreement. Huls refused.

UCT filed a Second Amended Plan on September 19. The

Second Amended Plan altered the Amended Plan only with

respect to CoreStates. It restored some of CoreStates's

existing liens, which had been eliminated under the

Amended Plan. It did not, however, purport to change

either CoreStates's rights vis a vis Huls or the payment

Huls was to receive. CoreStates objected to the Second

Amended Plan as well. It stated a number of grounds for

objecting, but did not invoke the Subordination Agreement,

except by generalized incorporation. The Bankruptcy Judge

again confirmed the Plan over CoreStates's objections.

CoreStates did not appeal the confirmation of the Second

Amended Plan.

In December 1996, CoreStates filed the present diversity

action in the District Court, which had jurisdiction under

28 U.S.C. S 1332. Huls moved to dismiss the complaint for

_________________________________________________________________

3. CoreStates had previously requested a stay of the Amended Plan in

order to prevent UCT from paying Huls the $600,000. This request was

based in part on the Agreement. The Bankruptcy Court denied the

request without addressing the Agreement.

7

failure to state a claim under Fed. R. Civ. P. 12(b)(6), or, in

the alternative, for judgment on the pleadings under Fed.

R. Civ. P. 12(c). CoreStates responded with a motion for

summary judgment. The District Court granted Huls's

motion for judgment on the pleadings and denied

CoreStates's motion for summary judgment. See

CoreStates, 1997 WL 560193, at *4. The court held that the

doctrine of claim preclusion barred CoreStates's claim,

reasoning that the claims CoreStates raises in the present

case could have been raised during the UCT bankruptcy

proceeding. See 1997 WL 560193, at *3-*4. CoreStates

timely appeals from this decision. We have jurisdiction

pursuant to 28 U.S.C. S 1291.

This court exercises plenary review over a district court's

order granting a motion for judgment on the pleadings

pursuant to Fed. R. Civ. P. 12(c). See Kruzits v. Okuma

Mach. Tool, Inc., 40 F.3d 52, 54 (3d Cir. 1994). Under Rule

12(c), a district court cannot grant judgment on the

pleadings, and we may not affirm such a grant, "unless the

movant clearly establishes that no material issue of fact

remains to be resolved and that he is entitled to judgment

as a matter of law." Kruzits, 40 F.3d at 54 (quoting

Jablonski v. Pan Am. World Airways, Inc., 863 F.2d 289,

290 (3d Cir. 1988) (quoting Society Hill Civic Assn. v.

Harris, 632 F.2d 1045, 1054 (3d Cir. 1980) (citation

omitted))).

II. Claim Preclusion and Bankruptcy Proceedings

The central issue in this appeal is the claim preclusive

effect of the Bankruptcy Judge's final order of confirmation,

over CoreStates's objection, on CoreStates's claim against

Huls. In the confirmation proceeding, CoreStates objected

to the Plan as unfair in part because it provided for the

immediate payment of $600,000 to Huls, a junior creditor.

CoreStates's present claim is that the Subordination

Agreement requires Huls to pay to CoreStates the $600,000

Huls received pursuant to the now-confirmed

Reorganization Plan. A strong argument can be made that

CoreStates's unfairness objection so clearly implicated the

Agreement that the issue that divides the parties in the

present case was effectively raised and litigated in the

8

bankruptcy proceeding, so that we are dealing here with

issue preclusion rather than claim preclusion.4 Since the

District Court and the parties have treated this case as

involving primarily claim preclusion, however, and claim

preclusion is the most clearly applicable doctrine, we begin

with a review of the basic law of claim preclusion.

In Board of Trustees of Trucking Employees Welfare Fund,

Inc. v. Centra, 983 F.2d 495 (3d Cir. 1992), we explained

that claim preclusion (or res judicata as it is also called)

"gives dispositive effect to a prior judgment if a particular

issue, although not litigated, could have been raised in the

earlier proceeding. Claim preclusion requires: (1) afinal

judgment on the merits in a prior suit involving; (2) the

same parties or their privities; and (3) a subsequent suit

based on the same cause of action." Centra, 983 F.2d at

504 (emphasis added; citations omitted). If these three

factors are present, a claim that was or could have been

raised previously must be dismissed as precluded.

We have elaborated on the third element of the Centra

test, both in general and in the context of bankruptcy

proceedings. In deciding whether two suits are based on the

same "cause of action," we take a broad view, looking to

whether there is an "essential similarity of the underlying

events giving rise to the various legal claims." United States

v. Athlone Indus., 746 F.2d 977, 984 (3d Cir. 1984); see

also Restatement (Second) of Judgments S 24 cmt. a ("The

present trend is to see claim in factual [as opposed to legal]

terms and to make it coterminous with the transaction

regardless of the number of substantive theories . .. that

may be available to the plaintiff . . . ."); id. cmt. b ("In

general, the expression [`transaction'] connotes a natural

grouping or common nucleus of operative facts."). Because

a "bankruptcy case" is fundamentally different from the

typical civil action, however, comparison of a bankruptcy

proceeding with another proceeding is not susceptible to

_________________________________________________________________

4. Another way of looking at it might be that CoreStates's claim should

be barred by reason of S 1141 of the Bankruptcy Code, 11 U.S.C.

S 1141(a), which provides that a confirmed plan is binding on all

creditors, including feuding creditors such as CoreStates and Huls, who

litigated the fairness of the Plan as affected by the disputed payment.

9

the standard res judicata analysis. "Rather, we scrutinize

the totality of the circumstances in each action and then

determine whether the primary test of Athlone, i.e.,

essential similarity in the underlying events, has been

satisfied." Oneida Motor Freight, Inc. v. United Jersey Bank,

848 F.2d 414, 419 n.5 (3d Cir. 1988).

The principle of claim preclusion applies to final orders

overruling objections to a reorganization plan in bankruptcy

proceedings just as it does to any other final judgment on

a claim. See Wallis v. Justice Oaks II, Ltd. (In re Justice

Oaks II, Ltd.), 898 F.2d 1544, 1552 (11th Cir. 1990)

("Because the claims raised in the Wallises' adversary

complaint were already raised, or could have been raised,

in their objection to confirmation, we hold that the doctrine

of claim preclusion bars them from relitigating those

claims."); see also Katchen v. Landy, 382 U.S. 323, 334

(1966) ("The normal rules of res judicata and collateral

estoppel apply to the decisions of bankruptcy courts.");

Donaldson v. Bernstein, 104 F.3d 547, 554 (3d Cir. 1997)

("[A] confirmation order is res judicata as to all issues

decided or which could have been decided at the hearing on

confirmation." (quoting In re Szostek, 886 F.2d 1405, 1408

(3d Cir. 1989))); Crop-Maker Soil Servs. v. Fairmount St.

Bank, 881 F.2d 436, 440 (7th Cir. 1991) ("Public policy

supports res judicata generally, but in the bankruptcy

context in particular."); cf. 11 U.S.C.S 1141(a) ("[T]he

provisions of a confirmed plan bind . . . any creditor . . .

whether or not the claim or interest of such creditor . . . is

impaired under the plan and whether or not such creditor

. . . has accepted the plan."). Accordingly, we ordinarily

would simply apply these rules. CoreStates suggests two

reasons why we should not.5 We address these in turn.

_________________________________________________________________

5. CoreStates also submits that claim preclusion should not apply

because the bankruptcy proceeding did not modify or adjudicate its

rights under the Agreement. This argument misapprehends the

fundamental nature of the doctrine of claim preclusion, which applies

whether or not the particular issue was actually raised or decided by the

prior court. See Agrilectric Power Partners, Ltd. v. General Elec. Co., 20

F.3d 663 (5th Cir. 1994). The continued effectiveness of the contract is

simply irrelevant. Of course, if CoreStates's claim had not accrued before

the Bankruptcy Judge confirmed UCT's Plan of Reorganization, then

whether the Plan had modified the Agreement would be important.

10

III. Claim Preclusion: Non-Core Claims and Claims

Between Creditors

CoreStates's submissions raise legitimate questions as to

the extent to which claim preclusion applies to bankruptcy

orders and judgments. The thrust of its contentions is in

the nature of a caveat that, because bankruptcy

jurisdiction is so comprehensive, and a bankruptcy

proceeding potentially can be so broad, its preclusive effect

should be limited. We address two questions CoreStates

poses about the claim preclusive effect of a bankruptcy

judge's orders rejecting objections to reorganization plans:

whether the doctrine should preclude claims that would

have fallen within the non-core "related" -- as opposed to

the core -- bankruptcy jurisdiction, and whether it should

apply to the claims of a creditor who objects to a

bankruptcy reorganization plan. We believe that these

suggested limitations on the application of claim preclusion

are unnecessary, and that claim preclusion should apply

regardless of the jurisdictional basis of the present claim

and between all parties to a bankruptcy case.

A. Claim Preclusion and Non-Core Claims

The first question is whether claim preclusion should

apply if CoreStates's claim falls within the non-core

"related" bankruptcy jurisdiction. The jurisdiction of a court

hearing a Chapter 11 bankruptcy reorganization case is

broad. This jurisdiction is delineated in 28 U.S.C. SS 157 &

1334. Title 28 initially grants jurisdiction over all aspects of

a bankruptcy case to the district courts. See 28 U.S.C.

S 1334.6 Section 157(a) then permits the district courts to

_________________________________________________________________

6. Section 1334 provides as follows:

(a) Except as provided in subsection (b) of this section, the

district courts shall have original and exclusive jurisdiction of

all

cases under title 11.

(b) Notwithstanding any Act of Congress that confers exclusive

jurisdiction on a court or courts other than the district courts,

the

district courts shall have original but not exclusive jurisdiction

of all

civil proceedings arising under title 11, or arising in or related

to

cases under title 11.

11

automatically refer any proceedings over which they have

jurisdiction under S 1334 to the bankruptcy courts.7 See,

e.g., Bankruptcy Administration Orders (E.D. Pa. July 25,

1984, Nov. 8, 1990) (using the District Court's full

authority to refer cases to bankruptcy judges under

S157(a)). Section 157(b)(1) provides that "[b]ankruptcy

judges may hear and determine all cases under title 11 and

all core proceedings arising under title 11, or arising in a

case under title 11, referred under subsection [157(a)], and

may enter appropriate orders and judgments . . . ."

Along with those listed in the statute,8 "a proceeding is

core under section 157 if it invokes a substantive right

provided by title 11 or if it is a proceeding that, by its

nature, could arise only in the context of a bankruptcy

case." Torkelsen v. Maggio (In re Guild & Gallery Plus, Inc.),

72 F.3d 1171, 1178 (3d Cir. 1996) (quoting In re Marcus

Hook Dev. Park, Inc., 943 F.2d 261, 267 (3d Cir. 1991)

(citations omitted)). Bankruptcy judges may also hear non-

core proceedings that are otherwise related to a bankruptcy

case. See S 157(c)(1) ("A bankruptcy judge may hear a

proceeding that is not a core proceeding but that is

otherwise related to a case under title 11.").

A claim is a non-core "related" claim if its

outcome . . . could conceivably have any effect on the

estate being administered in bankruptcy. Thus, the

proceeding need not necessarily be against the debtor

or against the debtor's property. An action is related to

bankruptcy if the outcome could alter the debtor's

rights, liabilities, options, or freedom of action (either

positively or negatively) and which in any way impacts

upon the handling and administration of the bankrupt

estate.

_________________________________________________________________

7. Section 157(a) provides: "Each district court may provide that any or

all cases under title 11 and any or all proceedings arising under title 11

or arising in or related to a case under title 11 shall be referred to the

bankruptcy judges for the district."

8. Section 157(b)(2) presents a nonexclusive list of core proceedings,

including "determinations of the validity, extent, or priority of liens."

S 157(b)(2)(K).

12

Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)

(emphasis and citations omitted). In non-core claims,

however, the bankruptcy judge may not enter final orders

or judgments, but must submit proposed findings of fact

and conclusions of law to the district court for entry of

judgment, see 28 U.S.C. S 157(c)(1),9 unless all the parties

consent to the bankruptcy judge's entering judgment, see

S 157(c)(2).10

This distinction between core and non-core proceedings

dates to the Supreme Court case of Northern Pipeline

Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).

The principles of Northern Pipeline are familiar, and are

described in the margin.11 Although CoreStates does not

_________________________________________________________________

9. Section 157(c)(1) provides, in pertinent part:

In [a non-core] proceeding, the bankruptcy judge shall submit

proposed findings of fact and conclusions of law to the district

court, and any final order or judgment shall be entered by the

district judge after considering the bankruptcy judge's proposed

findings and conclusions and after reviewing de novo those matters

to which any party has timely and specifically objected.

10. Section 157(c)(2) provides:

Notwithstanding the provisions of paragraph (1) of this

subsection,

the district court, with the consent of all the parties to the

proceeding, may refer a proceeding related to a case under title 11

to a bankruptcy judge to hear and determine and to enter

appropriate orders and judgments . . . .

11. A Chapter 11 debtor brought claims before a bankruptcy judge

against a creditor for breach of contract and warranty,

misrepresentation, coercion, and duress, under the jurisdictional

provisions of the 1978 Bankruptcy Reform Act. Those provisions granted

bankruptcy courts jurisdiction over all "civil proceedings arising under

title 11, or arising in or related to cases under title 11." 458 U.S. at

54

(quoting 28 U.S.C. S 1471(b) (1976 ed. Supp. IV)) (emphasis and

alteration in original). The Court concluded that this grant of

jurisdiction

over proceedings merely "related to" bankruptcy cases to non-Article III

bankruptcy judges violated the Constitution. This decision rested on the

notion that non-Article III judges may only hear cases involving public,

congressionally created rights, but not claims based on private common-

law rights. See 458 U.S. at 80-84 (citing Crowell v. Benson, 285 U.S. 22,

51-65 (1932)). The protections afforded a debtor under the Bankruptcy

Code are congressionally created public rights. The debtor's breach of

13

argue that section 157 is constitutionally problematic in

light of Northern Pipeline, some courts and commentators

have questioned whether claim preclusion can apply to

non-core claims that could have been raised in a

bankruptcy proceeding. More specifically, the Fifth and

Seventh Circuits have held that a subsequent claim is not

barred by a confirmation order from a bankruptcy

proceeding in which the present claim could have been

raised only under section 157's non-core "related"

jurisdiction. See Barnett v. Stern, 909 F.2d 973, 978-79

(7th Cir. 1990); Howell Hydrocarbons, Inc. v. Adams, 897

F.2d 183, 189 (5th Cir. 1990); see also George A. Martinez,

The Res Judicata Effect of Bankruptcy Court Judgments:

The Procedural and Constitutional Concerns, 62 Mo. L. Rev.

9 (1997).

Ordinarily, a party will not be precluded from raising a

claim by a prior adjudication if the party did not have the

opportunity to fully and fairly litigate the claim. See

Restatement (Second) of Judgments S 26(1)(c). The courts in

Barnett and Howell reasoned that, because a bankruptcy

judge could not, under section 157(c)(1), finally adjudicate

a non-core claim, a party to such a confirmation proceeding

would not have an opportunity to fully and fairly litigate a

claim "related to" the bankruptcy case. Accordingly, they

concluded that a confirmation order does not have a claim

preclusive effect on a claim that would have been brought

under non-core "related" jurisdiction and adjudicated

within the constraints of section 157(c). See Barnett, 909

F.2d at 979; Howell, 897 F.2d at 189.

_________________________________________________________________

contract claim, along with the other claims the debtor brought, however,

involved only private common-law rights, and thus could not be

adjudicated in a non-Article III court.

In response to the Northern Pipeline decision, Congress enacted the

jurisdiction provisions currently set forth in 28 U.S.C. SS 157 & 1334.

See Bankruptcy Amendments & Federal Judgeship Act of 1984, Pub. L.

No. 98-353, 98 Stat. 344. As seen above, these provisions differ from

those at issue in Northern Pipeline primarily in that they limit a

bankruptcy judge's ability to issue final orders and judgments in cases

brought under the non-core "related" jurisdiction. See 28 U.S.C. S157(c).

14

We disagree, believing that an order rejecting an

objection to a reorganization plan in a bankruptcy

proceeding has a claim preclusive effect on a claim that

could have been brought in that proceeding by the objector,

even if only under the non-core "related" bankruptcy

jurisdiction. Our conclusion in this regard is consistent

with those of the Second, Sixth and Ninth Circuits. See,

e.g., Robertson v. Isomedix, Inc. (In re Intl. Nutronics, Inc.),

28 F.3d 965 (9th Cir. 1994); Sanders Confectionery Prods.,

Inc. v. Heller Fin., Inc., 973 F.2d 474, 482-83 (6th Cir.

1992); Sure-Snap Corp. v. State St. Bank & Trust Co., 948

F.2d 869, 873 (2d Cir. 1991); see also Ralph E. Avery,

Chapter 11 Bankruptcy and Principles of Res Judicata, 102

Com. L.J. 257, 286-88 (1997). These courts have observed

that, even though a bankruptcy judge could not

conclusively determine a non-core proceeding, the

bankruptcy judge and the district court together could do

so, and this was sufficient to permit full and fair litigation

of the non-core claim. Accordingly, these courts have

concluded that a confirmation order could have claim

preclusive effect even on non-core "related" claims that

could have been raised alongside an objection in the

confirmation proceeding. See Robertson, 28 F.3d at 969;

Sanders, 973 F.2d at 482.

We thus conclude that the restrictions on a bankruptcy

judge's judicial power with respect to non-core"related"

claims do not limit the effect of the doctrine of claim

preclusion. This depends on our interpretation of section 26

of the Restatement (Second) of Judgments. See Venuto v.

Witco Corp., 117 F.3d 754, 758-59 (3d Cir. 1997) (relying on

section 26 in analyzing federal law of claim preclusion).

Section 26 provides, in pertinent part:

When any of the following circumstances exists, the

[doctrine of claim preclusion] does not apply to

extinguish the claim, and part or all of the claim

subsists as a possible basis for a second action by the

plaintiff against the defendant:

. . . .

The plaintiff was unable to rely on a certain theory of

the case or to seek a certain remedy or form of relief in

15

the first action because of the limitations on the

subject matter jurisdiction of the courts or restrictions

on their authority to entertain multiple theories or

demands for multiple remedies or forms of relief in a

single action, and the plaintiff desires in the second

action to rely on that theory or to seek that remedy or

form of relief.

Restatement (Second) of Judgments S 26(1)(c). Claim

preclusion should therefore apply only where "the

jurisdiction in which the first judgment was rendered was

one which put no formal barriers in the way of a litigant's

presenting to a court in one action the entire claim,

including any theories of recovery or demands for relief that

might have been available to him under applicable law."

Restatement S 26 cmt. c.

The comments to the Restatement discuss two primary

types of cases in which this limitation applies. First, they

discuss a case in which the first judgment is in a state

court, and the plaintiff then brings a second action in

federal court under a statute that gives federal courts

exclusive jurisdiction. In such a case, the Supreme Court

has held that the later federal action is not barred by claim

preclusion. See Marrese v. American Acad. of Orthop.

Surgs., 470 U.S. 373 (1985); Restatement S 26 cmt. c, illus.

2. Second, the Restatement explains that a later action is

not barred by a prior action when the court hearing the

first action had personal jurisdiction over the defendant

only as to the theory of the first action, but not for that on

which the second action is predicated. See Restatement

S 26 cmt. c.

We think the exceptions set forth in section 26(1)(c) of the

Restatement are inapplicable to the case at bar. A

bankruptcy judge's jurisdiction over a non-core "related"

claim is not limited in the sense of that section. Section

26(1)(c) applies to limitations on the types of theories,

remedies, or relief available if a claim is brought in a

particular forum. But bringing a non-core "related" claim

before a bankruptcy judge does not in any way limit the

available theories, remedies, or relief. Cf. Celotex Corp. v.

Edwards, 514 U.S. 300, 309 n.7 (1995) (rejecting the

argument that a bankruptcy judge does not have the power

16

to issue an injunction barring an action in a different

district court). A bankruptcy judge is perfectly capable of

recommending, and the district court of awarding,

judgment based on any theory, remedy, or relief, just as if

the claim had been brought originally before a district

court, or even a state court of general jurisdiction, outside

of a bankruptcy proceeding.

The Fifth and Seventh Circuits' main concern seems to

be that since a bankruptcy judge cannot conclusively

reward relief in a non-core proceeding, the judge does not

have jurisdiction over non-core claims. See Howell, 897

F.2d at 189 ("Moreover, the bankruptcy court would not

have had jurisdiction over the [non-core `related'] claims

against the defendants."). This concern, however, misses

the basic point that, like magistrate judges, bankruptcy

judges have no jurisdiction over any cases. In any

bankruptcy proceeding, jurisdiction over the case rests with

the district court; proceedings are only referred to the

bankruptcy judges for consideration. See Sanders, 973 F.2d

at 483 ("Although the bankruptcy court would not have

subject matter jurisdiction over a non-core related

proceeding, the action would still be within the district

court's jurisdiction."). In addition, the district courts retain

the power to withdraw the reference at any time. See 28

U.S.C. S 157(d).

Likewise, even assuming that the bankruptcy judge has

jurisdiction in some sense, the restraints that section

157(c) imposes on the judge's power to dispose of a non-

core claim do not bring it within the ambit of section

26(1)(c) of the Restatement. Jurisdiction is different from

judicial power.12 A limitation on judicial power is not a

_________________________________________________________________

12. See American Hardwoods, Inc. v. Deutsche Credit Corp. (In re

American Hardwoods, Inc.), 885 F.2d 621, 624 (9th Cir. 1989) ("Subject

matter jurisdiction and power are separate prerequisites to the court's

capacity to act. Subject matter jurisdiction is the court's authority to

entertain an action between the parties before it. Power . . . is the

scope

and forms of relief the court may order in an action in which it has

jurisdiction."); Holly's, Inc. v. City of Kentwood (In re Holly's, Inc.),

172

B.R. 545, 554 n.9 (Bankr. W.D. Mich. 1994), affd., 178 B.R. 711 (W.D.

Mich. 1995); Gray v. Hall, 265 P. 246, 251 (Cal. 1928) ("Jurisdiction has

17

limitation on jurisdiction. Section 157(c) only limits a

bankruptcy judge's power to grant relief, not jurisdiction

over a proceeding requesting such relief. Since section 26(c)

of the Restatement speaks only of jurisdiction, it does not

limit the preclusive effect of a confirmation of a

reorganization plan over objection on a subsequent claim

that could have been brought during the confirmation

proceeding as a non-core "related" claim. See Restatement

S 24 cmt. g (limits on the power of a court to grant a

remedy do not affect the claim preclusive effect of its

judgments). Accordingly, we agree with the Second, Sixth

and Ninth Circuits that a prior confirmation order has

claim preclusive effect with respect to a claim that could

have been brought as a non core "related" proceeding

during the confirmation proceeding.

This is not to say, of course, that claim preclusion will

apply to all claims with any factual connection to issues

raised in the bankruptcy proceeding. Under section 26 of

the Restatement, the claim must fall within the bankruptcy

jurisdiction. Accordingly, claim preclusion will only apply if

the claim is at least "related to" the bankruptcy case, 28

U.S.C. SS 157 & 1334, i.e., if it "could conceivably have any

effect on the estate being administered in bankruptcy,"

Pacor, 743 F.2d at 994 (emphasis and citations omitted). A

party to a bankruptcy would not be precluded from later

bringing a claim that could not conceivably have had any

effect on the bankruptcy estate.

B. Claim Preclusion Between Creditors

CoreStates contends that claim preclusion cannot apply

to claims between creditors in a bankruptcy confirmation

proceeding. It relies on the fact that a party in a civil action

is not precluded from litigating a claim simply because it

had an opportunity to raise the claim as a cross-claim in a

_________________________________________________________________

often been said to be `the power to hear and determine.' It is in truth

the

power to do both or either -- to hear without determining or to

determine without hearing."); see also In re Specialty Equip. Cos., 3 F.3d

1043, 1045 (7th Cir. 1993) (distinguishing between challenges to a

court's jurisdiction and challenges to its power).

18

prior suit to which it was a party. See United States v.

Berman, 884 F.2d 916, 923 n.9 (6th Cir. 1989); Peterson v.

Watt, 666 F.2d 361, 363 (9th Cir. 1982); 6 Charles Alan

Wright et al., Federal Practice & ProcedureS 1431, at 236

(2d ed. 1990) ("A party who decides not to bring his claim

[as a cross-claim] will not be barred by res judicata . . .

from asserting it in a later action, as he would if the claim

were a compulsory counterclaim . . . ."); cf. Charter Oak Fire

Ins. Co. v. Sumitomo Marine & Fire Ins. Co., 750 F.2d 267,

270 (3d Cir. 1984) (noting that, under Pennsylvania law,

claim preclusion bars the litigation of a claim that actually

was raised as a cross-claim in a prior proceeding).

CoreStates is of course correct 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. The question is, whether, for claim

preclusion purposes, a creditor's, such as CoreStates's,

objection to a reorganization plan can state a claim against

another creditor, such as Huls, whose rights under the

proposed plan the objection concerns. We conclude that in

particular circumstances, such as those present here, it

can.

A cause of action is defined by its factual contours. As

noted above, two claims involve the same cause of action if

there is "an essential similarity of the underlying events

giving rise to the various legal claims." Athlone, 746 F.2d at

984; see also Restatement (Second) of Judgments S 24

cmts. a, b. Because a "bankruptcy case" is fundamentally

different from the typical civil action, however, comparison

of a bankruptcy proceeding with another later proceeding is

not susceptible to the standard res judicata analysis.

"Rather, we scrutinize the totality of the circumstances in

each action and then determine whether the primary test of

Athlone, i.e., essential similarity in the underlying events

has been satisfied." Oneida, 848 F.2d at 419 n.5.

As noted above, claim preclusion traditionally has not

acted as a bar to the later litigation of a claim by a party

who has not actively raised a claim based on the same

cause of action in a prior proceeding.13 See Peterson, 666

_________________________________________________________________

13. The Restatement provides two limited exceptions to this rule, in

addition to the case discussed in the text where the defendant interposes

19

F.2d at 363; cf. Restatement (Second) of Judgments S 22(1)

("Where the defendant may interpose a claim as a

counterclaim but he fails to do so, he is not thereby

precluded from subsequently maintaining an action on that

claim [with certain exceptions]."); id. S 38 cmt. a ("Where no

[cross- or counter-] pleadings have been interposed, the

possibility of merger and bar by definition does not arise.").

Where a party interposes such a claim, however, the party

becomes a plaintiff for claim preclusion purposes. See

Restatement (Second) of Judgments S 23 cmt. a ("A

defendant who interposes a counterclaim is, in substance,

a plaintiff, as far as the counterclaim is concerned. . . .").

Accordingly, claim preclusion applies to the claims of a

party who asserts any claim in an action, even where the

party is not the original plaintiff. See Fowler v. Vineyard,

405 S.E.2d 678 (Ga. 1991); 18 Wright et al., supra, S 4450,

at 425 ("Preclusion should apply according to ordinary

rules between any parties who tried a claim between

themselves.").

A party who raises an objection to a reorganization plan

in a confirmation proceeding has interposed a claim in the

sense just discussed. Under 11 U.S.C. S 1128(b), "[a] party

_________________________________________________________________

a counterclaim. See Restatement (Second) of Judgments S 22(2). First, a

defendant cannot bring a claim in a later proceeding if it could have

been brought as a compulsory counterclaim in an earlier proceeding to

which a compulsory counterclaim statute or rule applied. See S 22(2)(a).

This exception will not ordinarily apply to bankruptcy confirmation

orders, however, because a confirmation proceeding is a contested

matter to which no compulsory counterclaim rule applies. See Fed. R.

Bankr. P. 3020(b)(1), 9014. Second, a defendant in a case that proceeds

to judgment cannot bring a later claim if "[t]he relationship between the

counterclaim and the [later] claim is such that successful prosecution of

the second action would nullify the initial judgment or would impair

rights established in the initial action." See S 22(2)(b). Under this

latter

exception, 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.

See,

e.g., Sure-Snap, 948 F.2d at 874-76. Since we can decide this case

without considering these exceptions, we need not and do not decide

whether and how they apply to bankruptcy plan confirmation orders.

20

in interest may object to the confirmation of a plan." A

claim is a "[m]eans by or through which claimant obtains

possession or enjoyment of [a] privilege or thing." Black's

Law Dictionary 247 (6th ed. 1990). By asserting an

objection, a creditor asserts its privilege of having its

interests in the bankruptcy estate settled in a plan that

satisfies the requirements of S 1129. Furthermore, an

objection requires the bankruptcy judge to adjudicate

whether a proposed plan of reorganization meets the

requirements of S 1129.

We also observe that, procedurally, an objection to a plan

may possess all the hallmarks of a claim. An objection

requires the bankruptcy judge to adjudicate whether a plan

meets the requirements for confirmation. See 11 U.S.C.

S 1129. Such an objection must be filed with the court and

served on all parties to the confirmation proceeding. See

Fed. R. Bankr. P. 3020(b)(1). The filing of an objection gives

rise to a contested matter, see Fed. R. Bankr. P. 3020(b)(1),

in which the many of the familiar rules of civil procedure

apply, including the rules of discovery, see Fed. R. Bankr.

P. 9014. A confirmation order rejecting objections is a final

adjudication sufficient to preclude later claims. See Stoll v.

Gottlieb, 305 U.S. 165, 170-71 (1938); Szostek, 886 F.2d at

1409-10.

Furthermore, we think that an objection can be a claim

against other creditors, as well as the debtor, for claim

preclusion purposes. A claimant may be bound under the

doctrine of claim preclusion by a judgment on a claim

against another party not named as its adversary if they are

adversaries in fact. See Sullivan v. Easco Corp., 662 F.

Supp. 1396, 1408 (D. Md. 1987); 18 Wright et al., supra,

S 4450, at 420; cf. Restatement (Second) of Judgments S 38

("Parties who are not adversaries to each other under the

pleadings in an action involving them and a third party are

bound by and entitled to the benefits of issue preclusion

with respect to issues they actually litigate fully and fairly

as adversaries and which are essential to the judgment

rendered."). Parties are adversaries if they have"opposing

interests, . . . interests for the preservation of which

opposition is essential." Black's Law Dictionary, supra, at

53.

21

An objection frequently puts into question the interests of

specific non-objecting creditors under a proposed plan. In

order to preserve these interests, these non-objecting

creditors then have the right to oppose the objections in a

hearing.14 We think it beyond cavil that these non-objecting

creditors -- whose rights in the estate may be affected by

the objection -- are fairly denominated adversaries of the

objecting creditor. Accordingly, we think that claim

preclusion should bar an objecting creditor such as

CoreStates from litigating in a later proceeding claims

against a non-objecting creditor in the circumstances

present here.

The Eleventh Circuit reached a similar conclusion in

Wallis. There, creditors objected to a plan on the grounds

that a certain lender had engaged in unfair conduct in

obtaining a security interest in the bankruptcy estate, and

also that the lender's security interest was really a

partnership interest. These objections were rejected. The

creditors later brought a separate claim against the lender

alleging that the lender engaged in fraud and that the

lender was not a secured creditor. The court held that these

claims were barred by claim preclusion.

The Wallises' objection was overruled, and they failed

to appeal the order. The Wallises' adversary complaint

essentially brings an impermissible collateral attack on

the order confirming the plan. Because the claims

raised in the Wallises' adversary complaint were

already raised, or could have been raised, in their

objection to confirmation, we hold that the doctrine of

claim preclusion bars them from relitigating those

claims.

Wallis, 898 F.2d at 1552 (footnote omitted).

_________________________________________________________________

14. For example, one creditor might object to a reorganization plan on

the ground that another creditor had become secured as a result of

fraud, and therefore its interest should be treated as unsecured. If the

bankruptcy judge sustained the objection and refused to confirm the

plan, any future proposed plan would presumably be prohibited from

treating the second creditor as secured. Accordingly, that creditor would

have standing and good reason to oppose the objection.

22

C. The Limiting Principle that the Two Claims Must Arise

out of "Same Cause of Action"

Although we have rejected these two extrinsic limitations

on the applicability of claim preclusion, our holding is

actually a narrow one. Although fact-bound, it is also well

within the confines of claim preclusion doctrine. As noted

above, claim preclusion only applies to claims that would

have been within the bankruptcy court jurisdiction, i.e.,

those that are at least "related to" the bankruptcy case. See

supra section III.A. In addition, except possibly in unusual

circumstances, it only applies to creditors who raise a claim

in the bankruptcy proceeding contrary to the interests of

another specific creditor. See supra section III.B. Finally,

the Centra test for claim preclusion provides an additional

limit on the preclusive effect of bankruptcy confirmation

orders over objections. These three intrinsic limitations

provide an appropriate and sufficient limit on the preclusive

effect of the rejection of objections to bankruptcy plans

than the putative restraints we reject above. See supra

sections III.A & B. Since we have already discussed the

jurisdictional limitations on the doctrine and the

requirement that the party to be precluded have previously

raised a claim, we need now discuss only the restraint the

Centra test provides.

Under Centra, a subsequent claim is barred only if it

arises out of "the same cause of action" as that litigated in

the first action. See Centra, 983 F.2d at 504. Where the

first case is a bankruptcy proceeding, we "scrutinize the

totality of the circumstances in each action," Oneida, 848

F.2d at 419 n.5, to ascertain whether there is an "essential

similarity of the underlying events giving rise to the various

legal claims," Athlone Indus., 746 F.2d at 984. We think the

"essential similarity" requirement sufficiently limits the

claim preclusive effect of final orders concerning objections

to bankruptcy reorganization plan confirmations.

We note that some judges and commentators have

expressed concern that claim preclusion has been applied

where the two actions are not sufficiently factually

connected. See Oneida, 848 F.2d at 422 (Stapleton, J.,

dissenting) (arguing that claim preclusion should not apply

because no matter what the judgment in the second case,

23

it could not be inconsistent with the confirmation order);

see also Martinez, supra, 62 Mo. L. Rev. at 26-27. But

where the evidence required to prove a new claim would

have been largely immaterial in a prior confirmation

proceeding, we doubt that there will be an "essential

similarity of the underlying events" as required to give rise

to claim preclusion. See Facchiano Constr. Co. v. United

States Dept. of Labor, 987 F.2d 206, 212-13 (3d Cir. 1993)

("whether the material facts alleged are the same" is a key

factor in determining whether claim preclusion applies;

claim preclusion did not apply where the two claims rested

on "different evidence"); Athlone Indus., 746 F.2d at 984

(same).

Similarly, some commentators have complained that

claims falling within the non-core, "related" bankruptcy

jurisdiction often raise factual issues "totally unrelated" to

the confirmation proceeding. See Martinez, supra, 62 Mo. L.

Rev. at 26-27. Accordingly, the argument goes, claim

preclusion should not apply, because it would be no more

efficient to try non-core "related" proceedings in conjunction

with a confirmation hearing. Of course, a confirmation

proceeding should not bar a subsequent action based on

facts totally unrelated to objections raised in the

confirmation proceeding. But we think it is wrong to

assume as a result that all non-core claims will be factually

unrelated to objections raised in the confirmation

proceeding in which they could have been brought.

In short, we conclude that where the factual

underpinnings of the subsequent claim are not essentially

the same as those of the claims raised in the confirmation

proceeding, the latter should not have a claim preclusive

effect on the former. But, as this case demonstrates, see

infra Part IV, not all non-core claims or claims between

creditors are factually unrelated to objections adjudicated

in confirmation proceedings that assertedly preclude them.

Other courts have applied claim preclusion in situations

that likewise provide excellent examples of the potential for

close factual relationships between claims in bankruptcy

proceedings and non-core claims, on the one hand, and

claims between creditors, on the other. See, e.g., Robertson,

28 F.3d at 970-71 (applying claim preclusion to non-core

24

claim); Crop-Maker, 881 F.2d at 440 (applying claim

preclusion between creditors). Accordingly, we turn to a

discussion of the application of the principles set forth

above in the admittedly unusual circumstances of the case

before us.

IV. Is the Claim Under the Subordination Agreement

Precluded on the Facts?

Applying the precepts set forth above, we conclude that

CoreStates's claim under the Subordination Agreement is

precluded.

A. Could CoreStates Have Raised its Present Claim in the

Bankruptcy Proceeding?

Claim preclusion does not apply unless the present claim

was or could have been raised in the prior proceeding. See

Centra, 983 F.2d at 504. Accordingly, we must inquire

whether CoreStates could have raised its claim before the

Bankruptcy Judge. As we have suggested above, CoreStates

functionally raised the Subordination Agreement in its

objection to the Reorganization Plan. Since it did not

formally interpose it, however, and the parties have

proceeded as though it did not, we begin with a discussion

of whether the legal issue here falls within the scope of a

bankruptcy judge's jurisdiction. We then analyze whether,

as a factual matter, that issue could have been raised in

the bankruptcy proceeding. We conclude that there was no

reason CoreStates could not have brought its current claim

before the Bankruptcy Judge.15

1. Bankruptcy Jurisdiction

The question before us is whether a creditor's rights as

against another creditor under a subordination agreement

_________________________________________________________________

15. We note that CoreStates's appellate counsel, when pressed by the

panel at oral argument, conceded with the benefit of hindsight, but

without abandoning his legal position, that the claim based on the

Subordination Agreement probably should have been raised by trial

counsel during the bankruptcy proceeding.

25

fall within the bankruptcy jurisdiction. Our circuit

precedent suggests that the enforcement of a subordination

agreement between creditors may not qualify as a core

proceeding. "[A] proceeding is core under section 157 if it

invokes a substantive right provided by title 11 or if it is a

proceeding that, by its nature, could arise only in the

context of a bankruptcy case." See Torkelsen, 72 F.3d at

1178. One could reasonably suppose that CoreStates's

claim meets this standard because it in effect concerns the

extent and priority of Huls's interest in the bankruptcy

estate. In fact, the Second Circuit seems to have reached

just this conclusion. In Resolution Trust Co. v. Best

Products Co. (In re Best Products Co.), 68 F.3d 26 (2d Cir.

1995), which involved a dispute over the enforcement of a

contractual subordination agreement between creditors of a

Chapter 11 debtor, the court found that while enforcing

subordination agreements is "not listed as a core

proceeding, the power to prioritize distributions has long

been recognized as an essential element of bankruptcy

law." Id. at 31. Furthermore, the court reasoned:

[T]he Subordination Agreement . . . sets forth the

relative priority of Best's obligations. Moreover, the fact

that Best filed briefs and argued in favor of enforcing

the Subordination Agreement in both the district court

and this court belies the claim that Best had no

interest in the controversy. Determination of the

priority rights of various creditors to assets of the

Debtor was necessary to administer the estate and was

not merely a dispute between two creditors.

Id. at 32.

But an argument could also be made that the core

jurisdiction standard is not satisfied here. Even if that is

true, however, the claim based on the Subordination

Agreement easily satisfies the requirements for the non-core

"related to" bankruptcy jurisdiction. See Pacor, 743 F.2d at

994. Pacor only requires that "the outcome of that

proceeding could conceivably have any effect on the estate

being administered in bankruptcy" in order to invoke non-

core "related to" jurisdiction. See Torkelsen, 72 F.3d at

1180-81 (quoting Pacor, 743 F.2d at 994). The court in

Pacor further observed that "the proceeding need not

26

necessarily be against the debtor or against the debtor's

property. An action is related to bankruptcy if the outcome

could alter the debtor's rights, liabilities, options, or

freedom of action (either positively or negatively) and which

in any way impacts upon the handling and administration

of the bankrupt estate." 743 F.2d at 994. We have further

noted that the "key word in [the Pacor 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 bankruptcy estate." Torkelsen, 72

F.3d at 1181 (quoting Marcus Hook, 943 F.2d at 264)

(alteration in original).

Although CoreStates submits that the dispute is entirely

between itself and Huls -- and thus does not impact the

debtor at all -- we believe it clear that the resolution of this

dispute conceivably would have impacted upon the debtor's

options in crafting a plan that met with Huls's approval and

thereby affected the handling of the bankruptcy estate. If

Huls had known that the $600,000 the Reorganization Plan

set aside for it was not going to be there "up front," Huls

might not have consented to the Plan. Indeed, we cannot

overlook that Huls gave up a claim for over $3,000,000 in

debt, most of which was secured, in exchange for a cash

payment of $600,000. Although junior to CoreStates's, we

gather that Huls's largely secured claim had real value and

was not simply pie in the sky. Without Huls's consent, UCT

might have had a much more difficult time having the Plan

confirmed. Likewise, if CoreStates had litigated its rights

under the Agreement in the bankruptcy proceeding and

lost, it might have fought more strenuously against

ultimate confirmation of the Plan, rather than, for example,

choosing not to appeal the second confirmation order. We

conclude that CoreStates's claim is of the type that falls

within the non-core "related," if not the core, jurisdiction of

a court sitting in bankruptcy proceedings.

2. Could CoreStates Have Sued Huls While the

Bankruptcy Confirmation was Still Pending?

Of course, even if an issue is of a type that theoretically

could be raised in a bankruptcy case, claim preclusion only

27

applies if the particular claim at issue actually could have

been brought in the particular bankruptcy proceeding. On

the aspect of this consideration relevant here, if the claim

asserted in a later proceeding between co-creditors could

not have been raised during the bankruptcy proceeding

because the cause of action had not yet accrued, the

plaintiff is not precluded from asserting it in the later

proceeding. See Labelle Processing Co. v. Swarrow, 72 F.3d

308, 314 (3d Cir. 1995) ("[N]ew facts (i.e. events occurring

after the events giving rise to the earlier claim) may give

rise to a new claim, which is not precluded by the earlier

judgment."); Centra, 983 F.2d at 505. Whether a claim

could have been brought in a bankruptcy confirmation

proceeding depends on whether the claim is based on pre-

confirmation or post-confirmation acts. "Claims for post-

confirmation acts are not barred by the res judicata effect

of the confirmation order. . . . Creditors whose claims arise

from and after confirmation are not barred by the event of

confirmation from asserting such claims, except to the

extent that they arise from pre-confirmation acts."

Donaldson, 104 F.3d at 555 (citations and internal

quotations omitted).

The District Court concluded that the present cause of

action arose out of pre-confirmation events and could have

been raised in the bankruptcy proceeding:

The first amended plan of reorganization dated March

27, 1996 and known to all interested parties several

months before the initial confirmation order, provided

for the $600,000 remittance to Huls rather than

CoreStates. In addition, UCT actually paid the

$600,000 to Huls in August, 1996, before the final

amended plan was confirmed by the bankruptcy

judge's order of October 1, 1996. CoreStates also put

Huls on notice as early as June 12, 1996 that it was

obligated to turn over the funds to CoreStates. June 12

was before Huls received the $600,000 and before the

final confirmation order. This is simply not a case

where CoreStates's claim to the funds in issue was

unknown before the bankruptcy proceeding ended.

CoreStates, 1997 WL 560193, at *4 (emphasis added).

28

Our reading of the pleadings confirms the District Court's

conclusion. Because (a) UCT gave the $600,000 to Huls; (b)

CoreStates was aware of this; and (c) CoreStates had

demanded the money, all before the confirmation order was

issued, we conclude that CoreStates's cause of action based

on the Subordination Agreement had accrued before the

confirmation was finalized. The key fact here is that UCT

paid the $600,000 to Huls before the confirmation of the

Second Amended Plan. CoreStates's cause of action could

not accrue until Huls received money from UCT, since Huls

could not breach the Agreement until it received money

from UCT and then refused to turn it over to CoreStates. If

Huls had not received the $600,000 payment until after the

Plan was confirmed, CoreStates could not have raised its

claim under the Agreement in the bankruptcy proceeding

and it would not be precluded from raising it now. In the

present case, however, Huls received money from UCT and

in fact failed to turn it over to CoreStates in response to

CoreStates's demands, all before the final confirmation of

the Second Amended Plan. Therefore, we agree with the

District Court's conclusion that CoreStates could have

raised its present claim in the bankruptcy proceeding.

B. The Centra Factors

Even if CoreStates could have raised its present claim

before the Bankruptcy Judge, claim preclusion only applies

if the current claim meets the requirements of Centra.

"Claim preclusion requires: (1) a final judgment on the

merits in a prior suit involving; (2) the same parties or their

privities; and (3) a subsequent suit based on the same

cause of action." Centra, 983 F.2d at 504. CoreStates

agrees that the parties in the former and present

proceedings are the same, and the law supports this

conclusion. See First Union Comm. Corp. v. Nelson, Mullins,

Riley & Scarborough (In re Varat Enters., Inc.), 81 F.3d

1310, 1316 n.6 (4th Cir 1996). As noted above and as

CoreStates also concedes, it is settled that orders of a

bankruptcy judge rejecting objections and confirming a

plan of reorganization are final judgments to which the

doctrine of claim preclusion applies. See Stoll, 305 U.S. at

170-71; Szostek, 886 F.2d at 1408. This does not entirely

29

settle the matter, however, because a question remains

whether CoreStates raised its claim to the $600,000 in the

bankruptcy proceeding and whether the claim was one

against Huls.

Raising an objection to a reorganization plan can be a

claim for claim preclusion purposes. See supra section

III.B. Furthermore, we think CoreStates's objection was a

claim against Huls. 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. We thus disagree with the

dissent that CoreStates did not assert a claim against Huls

in the bankruptcy proceeding.

The more significant question, then, is whether

CoreStates's present cause of action is essentially the same

as that which it raised in its objection to the Plan. We think

it is apparent that the objection and CoreStates's present

claim addressed the same factual issue: who should receive

and retain the $600,000 UCT was prepared to pay.

Although, as CoreStates contends, its legal claims

concerning this money may rest on somewhat different

grounds in the two proceedings, the "same cause of action"

requirement relates to the factual circumstances underlying

the claims, not their legal basis. See Athlone Indus., 746

F.2d at 984 (looking to the "essential similarity of the

underlying events giving rise to the various legal claims").

The event underlying both the objection to the Plan and the

current claim was the distribution of the $600,000. The

primary evidence of CoreStates's claim to the money in both

the bankruptcy proceeding and the present case would be

the Agreement itself.

30

Although we ordinarily "scrutinize the totality of the

circumstances" in determining whether two claims are

based on the same cause of action where the first claim

arose in a bankruptcy proceeding, see Oneida, 848 F.2d at

419 n.5, we think the "essential similarity" of CoreStates's

past and present claims is facially apparent. We thus need

not engage in any searching scrutiny of the totality of the

circumstances to conclude that CoreStates's present claim

meets the third prong of the Centra test. 16

V. Conclusion

In closing, we reiterate that CoreStates's present claims

are precluded because of the coincidence of several

unusual circumstances. First, in the bankruptcy

proceeding, CoreStates and Huls contested at length the

fairness of the Reorganization Plan to the extent it provided

for the payment of $600,000 to Huls. CoreStates's present

claim concerns who is ultimately entitled to receive this

same money. In the absence of extensive litigation of this

claim in the confirmation proceeding, CoreStates would not

now be prevented from bringing its suit. Second, UCT paid

Huls the $600,000, and CoreStates was aware of and

objected to this payment, before the bankruptcy

confirmation proceeding ended in a final confirmation of the

Plan over CoreStates's objection. Thus, CoreStates could

have brought its claim as an ancillary to the confirmation

proceeding. In what we suspect is the more usual case,

where payments are not made pursuant to reorganization

plans until they are confirmed finally, an objecting creditor

could not be expected to bring its claim alongside the

confirmation proceeding. Primarily because of these two

particular circumstances, we conclude that CoreStates's

claim is barred by the doctrine of claim preclusion. The

_________________________________________________________________

16. The dissent contends that the facts CoreStates would need to prove

in its present claim differ from those it needed to establish in its

objection to UCT's Reorganization Plan. As is clear from the text, we

disagree. Furthermore, contra the dissent, we think the precise issue in

both cases was whether Huls was entitled to receive and retain the

$600,000 payment. Huls had the absolute right to receive the payment

only in the most technical sense.

31

order of the District Court granting judgment on the

pleadings in favor of Huls will be affirmed.

32

STAPLETON, Circuit Judge, Dissenting:

I agree with the Court that principles of claim preclusion

can properly be applied with respect to claims falling within

the non-core jurisdiction, as well as the core jurisdiction, of

a Bankruptcy Court. I assume, without deciding, that the

Bankruptcy Court would have had non-core jurisdiction

over CoreStates' claim against Huls. I further agree that

principles of claim preclusion can properly be applied with

respect to crossclaims asserted between creditors in a

bankruptcy proceeding.

I am constrained to dissent, however, because the Court

reaches its conclusion that CoreStates' claim against Huls

is barred only by ignoring well-established principles of

claim preclusion. While purporting to apply those

principles, the Court proceeds to fashion an unprecedented

"entire controversy doctrine" for bankruptcy litigation.

Because the parameters of this new doctrine are so broad

and ill defined, I fear that much mischief will be done by

today's decision.

The Court holds that any claim that could have been

asserted in a bankruptcy proceeding by anyone objecting to

confirmation of a plan of reorganization against anyone who

would benefit from confirmation is barred from being

asserted in a subsequent proceeding if the facts underlying

the objections raised in the confirmation proceeding and

the subsequent claim are "essentially similar." This holding

ignores the fact that under traditional principles of claim

preclusion the scope of preclusion arising from a judgment

is determined by the claim underlying the judgment and is

limited to the rights asserted between the claimant and the

party against whom the claim is asserted.

The Court is, of course, correct that modern principles of

claim preclusion view the concept of a "claim" broadly.

When "a valid and final judgment rendered in an action

extinguishes the plaintiffs' claim pursuant to the rules of

merger or bar . . ., the claim extinguished includes all

rights of the plaintiff to remedies against the defendant with

respect to all or any part of the transaction, or series of

connected transactions, out of which the action arose."

Restatement, Judgments 2d, S 24(1).

33

Claim preclusion cannot be applied, however, without

reference to the party who asserted the claim underlying

the prior judgment. Thus, a judgment for or against a

plaintiff in a prior proceeding rarely affects the claims

assertable by other parties to that proceeding even though

they may arise out of the same transaction. In the absence

of a compulsory counterclaim rule or statute, for example,

a defendant who fails to assert a counterclaim arising out

of the same transaction is normally not barred from

pressing his claim in a subsequent proceeding. Id. S 22.1

The only narrow exception to this rule is where the plaintiff

in a prior proceeding has secured a favorable judgment on

her claim and successful prosecution of a second action

would nullify the initial judgment or would impair rights

established in the initial action against the defendant. Id.

S 22(2).2 Since a judgment in the plaintiff 's favor on a claim

_________________________________________________________________

1. Section 22 of Restatement, Judgments 2d, provides:

(1) Where the defendant may interpose a claim as a counterclaim

but he fails to do so, he is not thereby precluded from

subsequently

maintaining an action on that claim, except as stated in Subsection

(2).

(2) A defendant who may interpose a claim as a counterclaim in an

action but fails to do so is precluded, after the rendition of

judgment

in that action, from maintaining an action on the claim if:

(a) The counterclaim is required to be interposed by a compulsory

counterclaim statute or rule of court, or

(b) The relationship between the counterclaim and the plaintiff 's

claim is such that successful prosecution of the second action

would nullify the initial judgment or would impair rights

established

in the initial action.

2. As noted in the commentary to S 22(2):

For such an occasion to arise, it is not sufficient that the

counterclaim grow out of the same transaction or occurrence as the

plaintiff's claim, nor is it sufficient that the facts constituting

a

defense also form the basis of the counterclaim. The counterclaim

must be such that its successful prosecution in a subsequent action

would nullify the judgment, for example, by allowing the defendant

to enjoin enforcement of the judgment, or to recover on a

restitution

theory the amount paid pursuant to the judgment (see Illustration

9), or by depriving the plaintiff in the first action of property

rights

vested in him under the first judgment (see Illustration 10). . . .

34

establishes rights only as between the plaintiff and the

opponent of the claim, the rationale for this exception has

no application when the defendant in the subsequent suit

is not the original plaintiff. Thus, not surprisingly, there

appears to be no case in which a judgment on a plaintiff 's

claim has been held to preclude by merger or bar a claim

that would have been a crossclaim if asserted in the

original action.

While a claim preclusion analysis must thus focus on the

claimant and his or her claim, the universe of "potential

claimants" is, of course, not limited to the plaintiff in the

original action. As the majority notes, if a defendant in the

original action asserts a counterclaim or a crossclaim and

a final judgment is rendered with respect to that claim, he

becomes a claimant for purposes of claim preclusion

analysis. Id. S 23. Thus, had CoreStates asserted a claim

against Huls in the bankruptcy proceeding, principles of

claim preclusion could properly be applied with reference to

that claim. See Charter Oak Fire Ins. Co. v. Sumitomo

Marine & Fire Ins. Co., 750 F.2d 267, 270 (3d Cir. 1984).

CoreStates asserted no such claim, however.

While I agree that application of principles of claim

preclusion in the context of a bankruptcy proceeding

requires flexibility and must take into account the nature of

the bankruptcy process, those principles cannot fairly be

stretched far enough to effect a preclusion of CoreStates'

claim here. In order for claim preclusion to preclude, there

must be a final judgment in favor of a claimant into which

the precluded claim has merged or a final judgment for the

defendant that bars another action by the claimant on the

same claim. See Restatement, Judgments 2d, SS 18, 19. A

confirmation order may be viewed as a judgment in favor of

creditors on their claims against the debtor. To the extent

claims have been disallowed, it may also be viewed as a

judgment in the debtor's favor on the disallowed claims.

Moreover, there is an in rem aspect to the judgment entered

at the end of a confirmation proceeding. See 28 U.S.C.

S 1334(a). Under traditional principles of claim preclusion,

however, none of these judgments would extinguish a claim

35

between creditors who have not raised claims against each

other in the bankruptcy proceeding.3

In the bankruptcy proceeding, CoreStates asserted no

right to relief from Huls. Moreover, it claimed no right to

receive from the debtor's estate the $600,000 ultimately

received by Huls. It had no such right to assert.

Accordingly, the only way one can conclude that CoreStates

made a claim against Huls in the bankruptcy proceeding,

as the Court does, is to hold that an objection to

confirmation of a plan of reorganization constitutes a claim

against anyone who has an economic interest in having the

plan confirmed. Since virtually all non-objecting creditors

will have such an interest, this holding will require that any

party considering an objection canvass the entire universe

of creditors to determine whether it has a claim against one

of them that might conceivably be regarded as arising from

the same or similar underlying events.

The burden thus imposed will be greatly exacerbated by

the Court's broad vision of what constitutes the same or

similar underlying events. CoreStates' objection to

confirmation of the plan was not based, directly or

indirectly, on its Subordination Agreement with Huls.

Rather, to the extent it was related to Huls at all,

CoreStates' objection was based on the claim that the plan

"discriminate[d] unfairly" among a class of secured

creditors in violation of section 1129(b). The claim

CoreStates here seeks to assert is a breach of contract

claim based on allegations that it entered into a

Subordination Agreement with Huls which Huls breached

when it declined to pay $600,000 to CoreStates after it

received that amount from UCT. The Court fails to

satisfactorily explain how CoreStates' two claims can

reasonably be deemed the same cause of action for claim

preclusion purposes.

_________________________________________________________________

3. An in rem judgment, of course, is"conclusive as to interests [in the

res] but does not bind anyone with respect to personal liability."

Restatement, Judgments 2d, S 30. Here, CoreStates asserts that Huls is

personally liable to it in the amount of $600,000. It has not, and could

not, contend that it had a right to receive a $600,000 distribution from

the assets of the debtor's estate based upon its agreement with Huls.

36

The section 1129(b) claim that CoreStates included in its

objection to confirmation of the plan was based on the

respective circumstances of the members of the identified

class of secured creditors, their treatment under the

proposed plan, and the feasibility of alternative plans of

distribution. In contrast, the claim that CoreStates here

seeks to press is based on the terms of a Subordination

Agreement entered long before the bankruptcy and the fact

that Huls received $600,000 from UCT because of UCT debt

obligations to it. I perceive no "essential similarity of the

[legally relevant] underlying events giving rise to" these

claims, and, indeed, I can think of no evidence that would

be material to both claims. It would not be necessary for

CoreStates, in proving its breach of contract claim, to even

refer to the bankruptcy proceeding or the plan of

reorganization. It would suffice to show only that Huls

received monies from UCT on account of UCT's debt

obligation to Huls. The Court seeks to gloss over the

distinctiveness of these claims by asserting that"the

objection and CoreStates' present claim addressed the same

factual issue: who should receive and retain the $600,000

VCT was prepared to pay." Slip Op. at 30. The fact of the

matter, however, is that the claim asserted in the

bankruptcy proceeding had absolutely nothing to do with

whether Huls was entitled to retain the $600,000 payment

it would receive under the plan and the claim asserted here

has absolutely nothing to do with whether Huls was

entitled to receive $600,000 in the bankruptcy.

Because an objection to a plan will now be regarded as

making a claim against all who would benefit from

confirmation and because the concept of a single cause of

action will now be an elastic one, it will be extraordinarily

difficult for a creditor in the Third Circuit to determine

what crossclaims it must or need not assert. Since the

penalty for a mistaken choice is forfeiture, it is not difficult

to predict the ultimate result of the Court's holding:

multitudinous protective filings of claims against non-

debtors and the needless complication of bankruptcy

confirmation proceedings.

I would reverse the judgment of the District Court.

37

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

38