Recently I wrote about a Fifth Circuit case where a creditor tried to escape the terms of a confirmed plan in a subsequent case. Now the Court has written an opinion about a debtor that tried to do the same thing. Fortunately the result was the same in both cases: res judicata applied. BVS Construction, Inc. v. Prosperity Bank (Matter of BVS Construction, Inc.), Case No. 21-50274 (5th Cir. 11/15/21). You can find the decision here.
What Happened
In 2014, BVS Construction and its owner, Ricky Joe Palasota, Sr. filed chapter 11 petitions. They proposed a joint plan of reorganization which stated that the claim of Prosperity Bank would be allowed in the amount of $1,812,472.43. The plan was confirmed and the Debtors began making payments. The plan was confirmed without objection. The Debtor made the plan payments for 38 months before it defaulted and then filed a second case.
In the second case, Prosperity filed a proof of claim in the amount of $1,333,695.84, which Prosperity contended was the original amount less the subsequent payments. The Debtor objected to the claim. It contended that the amount in the 2015 plan was incorrect and that Prosperity failed to account for certain payments. After a hearing, the Bankruptcy Court overruled the objection.
The Court's Ruling
On appeal to the Fifth Circuit, the Debtor argued that the Bankruptcy Court lacked jurisdiction to hear the claims objection, that the Debtor was not bound by the prior plan and that the Bankruptcy Court miscalculated the amount of the claim. The Court ruled against the Debtor on all grounds.
The jurisdictional argument was strange to say the least. In Stern v. Marshall, the Supreme Court stated that determining matters arising from the allowance of claims was at the core of bankruptcy court jurisdiction. Clearly the Bankruptcy Court had jurisdiction to rule on a claims objection.
The Court of Appeals also had no difficulty finding that the 2015 confirmation order was res judicata as to allowance of the claim. While I could go through the elements, it is clear that there was a judgment, that is the confirmation order, which addressed the amount of the claim. The judgment was not challenged on direct appeal. As a result, the Debtor could not claim King's X in a subsequent bankruptcy.
Finally, the Court found that the Bankruptcy Court correctly applied the subsequent payments to the allowed claim. Calculation of the claim was a factual determination governed by the clearly erroneous rule. The Court found that Prosperity properly accounted for each of the 38 payments made under the first plan. While the claim did not account for payments made during the second bankruptcy, this was proper. A proof of claim is filed as of the petition date. While subsequent payments will reduce the liability, they do not change the amount of the claim as of the petition date. The Court of Appeals found that Prosperity Bank's records sufficiently accounted for the payments made during the second bankruptcy.
What It Means
The lesson here is that a confirmation order is a final judgment of a court which will bind the parties. A plan contains many provisions, such as the amount of a debt or a credit to be given for surrender of property. Each of these provisions will be binding on the parties in a subsequent case. There is an important caveat. Not all court orders issued in a chapter 11 proceeding will have res judicata effect. A confirmation order is unique because it is the final judgment in a case. However, many cases will be dismissed along the way. When a case is dismissed, the various orders entered along the way also go away. However, for the rare cases that make it to confirmation, what is decided is final, even if the parties didn't pay much attention to it at the time.
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