Case: 21-50274 Document: 00516092866 Page: 1 Date Filed: 11/15/2021
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
November 15, 2021
No. 21-50274 Lyle W. Cayce
Clerk
In the Matter of BVS Construction, Incorporated
Debtor,
BVS Construction, Incorporated, Debtor,
Appellant,
versus
Prosperity Bank, Creditor,
Appellee.
Appeal from the United States District Court
for the Western District of Texas
USDC No. 6:20-CV-261
Before Clement, Southwick, and Willett, Circuit Judges.
Edith Brown Clement, Circuit Judge:
BVS Construction, Inc. (“BVS”) filed a voluntary Chapter 11 petition
for bankruptcy on January 2, 2019. In the ensuing proceeding, one of BVS’s
secured creditors, Prosperity Bank (“Prosperity”), filed a proof of claim for
$1,333,695.84. BVS filed a claim objection, arguing that Prosperity’s claim
was for the wrong amount. The bankruptcy court held a hearing and
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concluded that the doctrines of res judicata, judicial estoppel, and judicial
admission barred BVS’s claim objection on the ground that it was ultimately
based on the alleged impropriety of Prosperity’s claim against BVS’s from its
prior bankruptcy in 2015.
The district court affirmed the bankruptcy court’s order overruling
BVS’s claim objection and allowing Prosperity’s claim. BVS timely
appealed. For the following reasons, we AFFIRM.
I.
BVS is a Texas-based concrete and construction company owned by
Ricky Joe Palasota, Sr. and his wife. In November of 2014, BVS and Mr.
Palasota separately filed voluntary Chapter 11 petitions for bankruptcy in the
United States Bankruptcy Court for the Western District of Texas. In
September of 2015, BVS and Mr. Palasota filed an amended “joint” plan of
reorganization (the “2015 Plan”). 1 The 2015 Plan set out, in detail, the
amounts BVS owed to its creditors. Of relevance here, the 2015 Plan
described the amounts BVS owed to one of its secured creditors, Prosperity,
on five separate promissory notes—which Prosperity rolled into one note
prior to BVS’s and Mr. Palasota’s bankruptcy petitions. The 2015 Plan
provided as follows:
Prosperity shall have an Allowed Secured Claim in the amount
of $1,812,472.43 (the “Prosperity Claim”). The Prosperity
Claim shall be paid based upon a 120 month amortization with
interest at the rate of 5% per annum. Commencing on the
1
Prosperity correctly observes in its brief that, although BVS’s and Mr. Palasota’s
“separate bankruptcy cases were never formally combined or jointly administered, BVS
and Palasota each filed an identical ‘Joint’ Plan of Reorganization on September 15, 2015.”
This opinion will refer to them collectively as the “2015 Plan.”
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Effective Date, the Debtor, BVS, shall make 59 equal payments
of $19,224.72 and one payment on the 60th month of all
outstanding principal and interest. The payments shall be due
on the 15th day of each month. The Debtor shall receive credit
on the Prosperity Claim for all amounts paid post-petition pre-confirmation on the Prosperity Claim.
BVS and Prosperity agree that the “Effective Date” was November
8, 2015. Mr. Palasota, in his individual capacity and on behalf of BVS, signed
the 2015 Plan, to which no objection was filed. On September 25, 2015, the
bankruptcy court confirmed the 2015 Plan; neither Mr. Palasota nor BVS
appealed that order.
For thirty-eight straight months following the Effective Date of the
2015 Plan, BVS made payments to Prosperity according to the terms of the
2015 Plan, which Prosperity applied to BVS’s principal and interest
obligations. But BVS did not make all fifty-nine monthly payments as
required by the 2015 Plan, nor did it make the sixtieth “balloon payment,”
which was to equal the amount outstanding on the claim after BVS made its
fifty-nine monthly payments. BVS stopped making its monthly payments
after making the first thirty-eight because in January of 2019, it again filed for
bankruptcy.
In the second bankruptcy, Prosperity filed a proof of claim in the
amount of $1,333,695.84. According to Prosperity, this claim amount
accounted for every payment it had received from BVS as of the petition date
of the second bankruptcy. BVS filed a claim objection, and Prosperity filed a
response. In March of 2020, the bankruptcy court held a hearing on the
dispute.
At the hearing, BVS argued that the amount of Prosperity’s claim in
the second bankruptcy was incorrect because (a) it was calculated based on
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an incorrect claim amount in the 2015 Plan, and (b) it failed to account for
certain payments that BVS made to Prosperity on the claim from July to
October of 2015 and May to November of 2019. Prosperity argued that it was
BVS and Mr. Palasota that proposed the 2015 Plan that the bankruptcy court
ultimately confirmed, and that BVS failed to object to Prosperity’s claim in
the 2015 Plan or otherwise seek direct appeal after the bankruptcy court
confirmed the 2015 Plan. Prosperity maintained that the 2015 Plan set out its
claim against BVS in detail, and that BVS clearly had no legitimate objection
to that amount, as evidenced by its failure to object or appeal and by its
subsequent payments to Prosperity pursuant to the 2015 Plan. Finally,
Prosperity claimed that it applied the payments BVS made from July to
October of 2015 to “accrued interest,” and that its ledger reflected the
payments it received from BVS between May and November of 2019.
At the conclusion of the hearing, the bankruptcy court orally
overruled BVS’s claim objection and allowed Prosperity’s claim of
$1,333,695.84. It found that the 2015 Plan, which BVS and Mr. Palasota
proposed, described BVS’s debt to Prosperity in great detail and that neither
BVS nor Mr. Palasota objected to or disputed Prosperity’s claim amount in
that plan. It further found that BVS made payments pursuant to the 2015
Plan for thirty-eight straight months and that BVS did not make the sixtieth
“balloon payment.” Based on these findings, it concluded that the doctrines
of res judicata, judicial estoppel, and judicial admission barred BVS’s claim
objection in the second bankruptcy to the extent it was premised on the
impropriety of Prosperity’s claim in the 2015 Plan.
BVS timely filed a notice of appeal in the United States District Court
for the Western District of Texas. The district court affirmed the judgment
of the bankruptcy court and dismissed the appeal. BVS timely appealed.
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II.
“This Court ‘review[s] the decision of a district court, sitting as an
appellate court, by applying the same standards of review to the bankruptcy
court’s findings of fact and conclusions of law as applied by the district
court.’” In re Renaissance Hosp. Grand Prairie Inc., 713 F.3d 285, 294 (5th
Cir. 2013) (quoting In re Gerhardt,
348 F.3d 89, 91 (5th Cir. 2003)). Sitting
as an appellate court, the district court reviews a bankruptcy court’s factual
findings for clear error and its conclusions of law de novo. Gerhardt, 348 F.3d
at 91.
III.
BVS argues for the first time on appeal that the bankruptcy court
lacked subject matter jurisdiction to allow Prosperity’s claim in the second
bankruptcy. We disagree. The bankruptcy court has jurisdiction over core
proceedings, which include the allowance or disallowance of claims against
the debtor’s estate. This argument is addressed in subsection A.
BVS also argues that the district court erred by affirming the
bankruptcy court’s order overruling its claim objection and allowing
Prosperity’s claim in the amount of $1,333,695.84. We disagree. The
bankruptcy court correctly concluded that res judicata precludes BVS’s
claim objection, to the extent it is based on the argument that Prosperity’s
claim in the 2015 Plan was for the wrong amount. This argument is addressed
in subsection B.
Relatedly, BVS argues that Prosperity’s claim, even if allowed, is for
the wrong amount. We disagree. The bankruptcy court’s allowance of
Prosperity’s claim of $1,333,695.84, rather than for some lower amount as
urged by BVS, is a factual determination reviewed for clear error. Based on
the evidence in the record, the bankruptcy court did not clearly err. This
point is addressed in subsection C.
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A.
BVS argues that the bankruptcy court exceeded its subject matter
jurisdiction by allowing Prosperity’s claim in the second bankruptcy. It
argues that, although the 2015 Plan directed BVS to make payments to
Prosperity for the amounts owed on the five underlying promissory notes, in
reality BVS is not liable for the full claim amount because the Palasotas are
individually liable for the debt under some of the notes. The Palasotas, BVS
explains, individually executed Note Nos. 1, 3, and 4, which make up a
substantial portion of the debt owed to Prosperity. But, BVS argues, neither
the 2015 Plan, nor the five underlying promissory notes, shifted liability for
all the debt from the Palasotas to BVS. Nor did the 2015 Plan otherwise
authorize the bankruptcy court to allow Prosperity’s claim against BVS as to
the entire amount owed—including the amounts owed on Note Nos. 1, 3, and
4 specifically. Thus, the bankruptcy court lacked subject matter jurisdiction
to allow the same.
Prosperity rejoins that this argument does not implicate the
bankruptcy court’s subject matter jurisdiction. And in any event, it argues,
the 2015 Plan does impose liability on BVS to make payments to Prosperity
for the entire amount of the debt owed under the promissory notes.
We agree with Prosperity. “Bankruptcy judges may hear and enter
final judgments in ‘all core proceedings arising under title 11, or arising in a
case under title 11.’” Stern v. Marshall, 564 U.S. 462, 474 (2011) (quoting
28
U.S.C. § 157(b)(1)). Core proceedings include, inter alia, “allowance or
disallowance of claims against the estate.”
28 U.S.C. § 157(b)(2)(B). The
issue in this case is whether and to what extent Prosperity has a secured claim
against BVS in the second bankruptcy. The bankruptcy court answered both
questions in the affirmative, allowing Prosperity’s claim against BVS for
$1,333,695.84. Thus, it allowed a claim against the estate—an action that
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without question falls within the bankruptcy court’s jurisdiction under
§ 157(b)(1) and (2)(B).
To be sure, BVS and Prosperity disagree about whether the
bankruptcy court properly allowed Prosperity’s claim, and whether it did so
in the right amount—Prosperity argues that it did, and BVS argues that it did
not. But whether the bankruptcy court’s allowance of Prosperity’s claim was
proper is an entirely different question from whether it had the jurisdiction to
do so. The propriety of the bankruptcy court’s determination to allow or
disallow a claim against the debtor’s estate is simply not a jurisdictional
inquiry.
Accordingly, the bankruptcy court did not lack subject matter
jurisdiction to allow Prosperity’s claim of $1,333,695.84 against BVS in the
second bankruptcy.
B.
The bankruptcy court did not err in determining that res judicata bars
BVS from objecting to Prosperity’s claim in the second bankruptcy, to the
extent its objection is premised on the impropriety of Prosperity’s claim
amount in the 2015 Plan.
In general, a bankruptcy court’s order is “entitled to the effect of res
judicata.” Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1051 (5th Cir. 1987)
(citing Southmark Props. v. Charles House Corp.,
742 F.2d 862, 869 (5th Cir.
1984)). The elements of res judicata are well settled in the Fifth Circuit and
are as follows: “(1) the parties are identical or in privity; (2) the judgment in
the prior action was rendered by a court of competent jurisdiction; (3) the
prior action was concluded by a final judgment on the merits; and (4) the
same claim or cause of action was involved in both actions.” Petro-Hunt,
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L.L.C. v. United States, 365 F.3d 385, 395 (5th Cir. 2004) (citing In re
Southmark Corp.,
163 F.3d 925, 934 (5th Cir. 1999)).
It is undisputed that the first three requisites of res judicata are
satisfied here. BVS and Prosperity were both parties to the first bankruptcy
proceeding, the bankruptcy court had jurisdiction to issue the judgment
confirming the 2015 Plan, and the judgment confirming the 2015 Plan was a
final judgment on the merits. See, e.g., Eubanks v. F.D.I.C., 977 F.2d 166, 170
(5th Cir. 1992) (“It has long been recognized that a bankruptcy court’s order
confirming a plan of reorganization is given the same effect as a district
court’s judgment on the merits for claim preclusion purposes.”). The parties
dispute only the fourth element: whether the second bankruptcy proceeding
constitutes a new cause of action.
We conclude that it does not. BVS’s claim objection is barred by res
judicata because (a) Prosperity’s claim in the second bankruptcy—as it
relates to whether Prosperity’s claim in the 2015 Plan was for the right
amount—arises out of the same transaction that was the subject of the 2015
Plan; and (b) BVS could have made this argument in the first bankruptcy, but
it did not. We explain the bases for these two conclusions in parts 1 and 2,
below. The effect of this holding is that BVS is bound, on res judicata
grounds, by Prosperity’s claim in the 2015 Plan.
1.
The Fifth Circuit employs the transactional test to determine whether
two suits involve the same cause of action for purposes of res judicata. See In
re Howe, 913 F.2d 1138, 1144 (5th Cir. 1990) (citing Nilsen v. City of Moss
Point,
701 F.2d 556, 560 (5th Cir. 1983) (en banc)). Under the transactional
test, the inquiry focuses not on the contours of “the relief requested or the
theory asserted,” but instead on “whether [the] plaintiff bases the two
actions on the same nucleus of operative facts.”
Id. “[R]es judicata ‘bars all
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claims that were or could have been advanced in support of the cause of action
on the occasion of its former adjudication . . . .’” Id. (quoting Nilsen,
701
F.2d at 560).
BVS argues that the first and second bankruptcies involve different
causes of action because it now disputes whether Prosperity has any claim at
all, whereas in the first bankruptcy it did not make that claim. More
specifically, BVS claims that it already satisfied its obligations to Prosperity
based on: (a) the payments it made to Prosperity under certain forbearance
agreements prior to the first bankruptcy, plus (b) the payments it made
between July and October of 2015, the payments it made pursuant to the 2015
Plan, and the payments it made between May and November of 2019.
Prosperity argues that this is not a separate cause of action at all. It
argues that its claim in the second bankruptcy is tied directly to the amount
of its claim in the first bankruptcy, both of which arose from the same facts
that were available to both parties prior to and during the first bankruptcy
proceeding. And because BVS did not object to Prosperity’s claim in the
2015 Plan or later object to the plan’s confirmation—a plan that BVS itself
proposed—Prosperity argues that BVS is barred from maintaining that claim
objection now. It further argues that it properly credited BVS for every
payment it received prior to the petition date of the second bankruptcy.
We agree with Prosperity. Our decisions in Eubanks and Howe are
instructive as to what constitutes an identity of claims for res judicata
purposes in similar circumstances. In Eubanks, we considered, inter alia,
whether a Chapter 11 plan of reorganization had res judicata effect on the
debtor’s lender liability claims subsequently brought in a separate action
against certain creditor banks. Eubanks, 977 F.2d at 168–69. The debtor
based his lender liability claims on a loan transaction initially intended to
support a renovation project. Id. at 168, 172. The project ultimately failed
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and forced the debtor into bankruptcy, and one of the banks made a claim
against the debtor’s estate, which was uncontested and allowed as part of the
plan of reorganization. Id. In considering whether the plan of reorganization
had res judicata effect on the debtor’s subsequent lender liability claims, we
concluded that it did because “the loan transaction at the heart of the [lender
liability] litigation was also the source of [the bank’s] claim against the
[debtor’s] estate.” Id. at 172. Because the debtor’s lender liability suit
“put[] into issue the same facts which would determine, inter alia, the
treatment and amount of the debt owed to [the bank],” we held that there
was an identity of claims between the confirmation order and the debtor’s
lender liability action. Id. at 172–73.
A similar principle informed our earlier decision in Howe. There, the
debtors filed for voluntary Chapter 11 relief, and a creditor filed a proof of
claim based on amounts the debtors owed on two promissory notes secured
by mortgages on their home and real property. Howe, 913 F.2d at 1140. Five
years after the confirmation of the plan of reorganization, the debtors brought
lender liability claims against the creditor. Id. In considering whether the
plan of reorganization had res judicata effect on the debtors’ lender liability
claims, we determined that it did because “[t]he loan transaction at the heart
of the [lender liability] litigation was also the source of [the creditor’s] claim
against the estate.” Id. at 1144. Thus, we held, the two actions
“constitute[d] the same claim . . . for res judicata purposes[]” because the
debtors’ lender liability allegations were “based on the same nucleus of
operative facts that informed their earlier bankruptcy proceedings.” Id. at
1144–45.
Applying the principles set forth in Eubanks and Howe, the question
here becomes whether the transactions at the heart of BVS’s claim objection
in the second bankruptcy were the source of Prosperity’s claim in the first
bankruptcy. That is, whether BVS’s claim objection in the second
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bankruptcy is based on the same transaction or series of transactions that gave
rise to the terms of the 2015 Plan as it relates to the amount of Prosperity’s
claim. We hold that it is.
The record reflects that BVS’s claim objection in the second
bankruptcy depends entirely on, and necessarily arises out of, the subject
matter that formed the basis of Prosperity’s claim in the first bankruptcy—
specifically, the amounts BVS owed to Prosperity on the underlying
promissory notes. In fact, the basis of Prosperity’s claim in the second
bankruptcy is identical to the basis of its claim in the first bankruptcy: that it
(still) has a claim against BVS for the amounts BVS owed it on the underlying
promissory notes. The only reason that Prosperity’s claim amount is any
different in the second bankruptcy than the first is because Prosperity
reduced its claim from the first bankruptcy by all the amounts it received
from BVS prior to the petition date of the second bankruptcy. Prosperity’s
ledger, admitted into evidence in the bankruptcy court’s hearing, reflects this
fact. Thus, following the reasoning in Eubanks and Howe, BVS’s claim
objection in the second bankruptcy arises out of the same transaction that was
the subject of the 2015 Plan.
2.
Even if all four elements of res judicata are present, res judicata does
not bar litigation of a claim unless the party against whom it is invoked “could
or should have brought its claim in the former proceeding.” Eubanks, 977
F.2d at 173 (citing Howe, 913 F.2d at 1145).
The law in the Fifth Circuit is settled that “[q]uestions of the
propriety or legality of the bankruptcy court confirmation order are indeed
properly addressable on direct appeal. . . .” and that a litigant is “foreclosed
from that avenue of review [if] it chose not to pursue it.” Republic, 815 F.2d
at 1050 (emphasis added). BVS’s claim objection in the second bankruptcy
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is undeniably a question about the propriety of Prosperity’s claim in the 2015
Plan. Thus, BVS could have raised this issue during the first bankruptcy
proceeding—either in the form of a direct appeal of the order confirming the
2015 Plan, or alternatively in the form of a claim objection. But BVS did not.
In fact, BVS admitted explicitly at the hearing that it could have
objected to the amount of Prosperity’s claim in the 2015 Plan, or appealed
the order confirming the 2015 Plan, but chose not to. It argued only that it
failed to do so on the advice of counsel and because it was under the
impression that it could later object.
Because BVS could have objected to the amount of Prosperity’s claim
in the first bankruptcy or directly appealed the bankruptcy court’s order
confirming the 2015 Plan, but did neither, it is precluded from now arguing
that Prosperity’s claim in the first bankruptcy was for the wrong amount. 2
C.
Finally, the bankruptcy court did not clearly err in determining that
Prosperity’s claim was for the correct amount. The ultimate effect of the
bankruptcy court’s ruling is to allow Prosperity’s secured claim of
$1,333,695.84. Given that BVS is bound by the amount of Prosperity’s claim
in the 2015 Plan, the only remaining question is whether Prosperity’s current
claim of $1,333,695.84 is for the right amount. This, in turn, depends on
whether the $1,333,695.84 claim properly accounts for all of BVS’s payments
to Prosperity prior to the petition date of the second bankruptcy. Those
payments can be grouped as follows: (a) post-petition, pre-confirmation
2
This is not to say that BVS is claim precluded from maintaining any claim
objection in the second bankruptcy. This just means that it is barred from maintaining a
claim objection that is premised, in part or in whole, on the impropriety of Prosperity’s
claim from the 2015 Plan.
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payments made between July and October 2015, and (b) 2015 Plan payments,
beginning on November 8, 2015 (the Effective Date of the 2015 Plan) and
ending on January 2, 2019 (the petition date of the second bankruptcy). In
allowing Prosperity’s claim of $1,333,695.84, the bankruptcy court implicitly
determined that Prosperity did indeed credit BVS accordingly. This is
merely a factual determination reviewed for clear error.
At the hearing, Prosperity offered its ledger into evidence, which the
bankruptcy court admitted. Not only that, but it put on a witness to testify
as to the ledger’s accuracy. Prosperity’s counsel argued that Prosperity
applied the amounts it received from BVS from July to October of 2015 to
accrued interest. Prosperity’s ledger appears to account for these amounts.
Prosperity’s ledger also reflects the payments BVS made pursuant to
the 2015 Plan. In particular, it shows the thirty-eight payments that BVS
made, which it appears Prosperity credited to BVS’s respective principal and
interest obligations.
BVS also argues that Prosperity should further have reduced its claim
by the amount in payments BVS made to Prosperity between May and
November of 2019. But this argument is misplaced. In a bankruptcy
proceeding, once a creditor files a proof of claim, the bankruptcy court looks
to 11 U.S.C. § 502 to determine whether the claim is allowed. Section 502(b)
provides that, when an objection to a claim is made, the bankruptcy court
“shall determine the amount of such claim . . . as of the date of the filing of
the petition.”
BVS is correct that Prosperity’s claim does not account for the
payments it made to Prosperity between May and November of 2019. But it
made those payments after the petition date; thus, they were properly
excluded from Prosperity’s claim. Even still, these payments do appear in
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Prosperity’s ledger. They are just accounted for in the latest running
balance, rather than in Prosperity’s proof of claim.
Per Prosperity’s ledger, Prosperity’s claim against BVS as of the
petition date of the second bankruptcy appears to be $1,333,695.84. The
bankruptcy court did not clearly err in allowing the same.
IV.
For the foregoing reasons, the district court did not err by affirming
the bankruptcy court’s order allowing Prosperity’s claim of $1,333,695.84 in
the second bankruptcy.
The judgment is AFFIRMED.
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