Autumn Wind Lending, LLC v. Siegel

92 F.4th 630

AUTUMN WIND LENDING, LLC, Plaintiff-Appellant, v. ESTATE OF John J. SIEGEL, deceased,BY AND THROUGH the Executor or Personal Representative;CECELIA FINANCIAL MANAGEMENT, LLC;Halas Energy, LLC; Oasis Aviation LLC, Defendants-Appellees.

No. 23-5476

United States Court of Appeals, Sixth Circuit

Decided and Filed: February 8, 2024

Appeal from the United States District Court for the Western District of Kentucky at Louisville. No. 3:22-cv-00255—Rebecca Grady Jennings, District Judge.

ON BRIEF: Robert M. Hirsh, Michael A. Kaplan, Rasmeet K. Chahil, LOWENSTEIN SANDLER LLP, New York, New York, for Appellant. David M. Cantor, William P. Harbison, Joseph H. Haddad, SEILLER WATERMAN, LLC, Louisville, Kentucky, for Appellees.

Before: COLE, GILMAN, and LARSEN, Circuit Judges.

OPINION

RONALD LEE GILMAN, Circuit Judge.

Insight Terminal Solutions, LLC (Insight) brought an adversary proceeding in bankruptcy court against all the defendants named in this lawsuit, alleging claims that were dismissed with prejudice by the bankruptcy court based upon the parties' stipulation to do so. Autumn Wind Lending, LLC (Autumn Wind) was not itself a party to the adversary proceeding, but it became the parent company of Insight prior to Insight initiating its lawsuit in the bankruptcy court.

The question before us is whether the doctrine of res judicata bars Autumn Wind from now bringing these same claims against the same defendants who were absolved of liability to Insight as part of the bankruptcy court proceedings. For the reasons set forth below, we REVERSE the judgment of the district court dismissing Autumn Wind's claims on the basis of res judicata and REMAND the case for further proceedings consistent with this opinion.

I. BACKGROUND

In September 2018, Autumn Wind and Insight entered into a loan and security agreement (the Agreement). Autumn Wind initially agreed to lend Insight $6,800,000, and later amended the Agreement to lend an additional $300,000. Insight represented to Autumn Wind, as part of the Agreement, that it did not have any existing indebtedness, and it agreed not to incur any future debt while the loan was outstanding without Autumn Wind's consent.

Insight failed to repay the loan when it matured in June 2019. Shortly thereafter, Insight filed for bankruptcy in the United States Bankruptcy Court for the Western District of Kentucky.

John J. Siegel, now deceased, was the manager of Insight prior to its bankruptcy. He also served as the manager of three family enterprises, Cecelia Financial Management, LLC (Cecelia), Halas Energy, LLC (Halas), and Oasis Aviation, LLC (Oasis), each of which filed a proof of claim in the bankruptcy proceedings. Cecelia claimed $6,044,190.20 for money loaned, Halas claimed $37,828.57 as reimbursement charges, and Oasis claimed $6,737.73 for travel expenses. Each claim represented debts that Insight had incurred in violation of its Agreement with Autumn Wind.

In April 2020, Autumn Wind submitted a Chapter 11 reorganization plan to the bankruptcy court, which the court confirmed. The confirmed plan transferred all equity interest in Insight to Autumn Wind, thus making Insight a wholly owned subsidiary of Autumn Wind. Insight then filed an adversary complaint in the bankruptcy court in April 2021. The adversary complaint primarily sought recharacterization, disallowance, and/or reduction of the proofs of claims filed. But Insight also sought damages based on allegations of fraudulent misrepresentation by Siegel and tortious interference by Siegel, Cecelia, Halas, and Oasis. All parties later stipulated, in September 2021, to dismiss the fraudulent-misrepresentation and tortious-interference claims with prejudice.

Although Autumn Wind was never a party to the bankruptcy adversary proceeding, it was the parent company of Insight for the entirety of the proceeding. Autumn Wind nevertheless brought a separate suit in the United States District Court for the Southern District of New York in February 2022, asserting fraud against Siegel and tortious interference against Siegel, Cecelia, Halas, and Oasis (collectively, the Defendants). The lawsuit was transferred to the United States District Court for the Western District of Kentucky, and Autumn Wind later filed an amended complaint naming the executor of Siegel's estate after Siegel died.

In June 2022, the Defendants jointly moved to dismiss the complaint, arguing that Autumn Wind's claims were barred by the res judicata effect of the bankruptcy court's adoption of Autumn Wind's reorganization plan. The district court denied the motion. Meanwhile, the bankruptcy court partially granted Insight's motion for summary judgment by disallowing the proofs of claim filed by Halas and Oasis, but it held a bench trial on Cecelia's proof of claim. On the same day that the district court denied the Defendants' motion to dismiss, the bankruptcy court entered a final judgment against Insight that allowed the Cecelia claim. The bankruptcy court's final judgment incorporated the September 2021 stipulation between the parties to dismiss with prejudice Insight's fraudulent-misrepresentation and tortious-interference claims against the Defendants.

Soon thereafter, the Defendants filed a motion in the district court for reconsideration of their denied motion to dismiss, arguing that Autumn Wind's claims were now barred by the res judicata effect of the bankruptcy court's final judgment. The district court agreed. It then dismissed the complaint, concluding that the Defendants had met their burden of proving that all the elements of res judicata had been satisfied. This timely appeal followed.

II. ANALYSIS

A. The entry of final judgment in the bankruptcy court does not preclude Autumn Wind's claims

"Pursuant to the doctrine of res judicata, 'a final judgment on the merits bars further claims by parties or their privies based on the same cause of action.' " Bragg v. Flint Bd. of Educ., 570 F.3d 775, 776 (6th Cir. 2009) (quoting Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979)). Autumn Wind argues that the district court erred in concluding that the doctrine applies to Autumn Wind's present lawsuit. Specifically, Autumn Wind contends that its claims are not barred because only one of the elements of res judicata is met.

We review de novo the district court's application of res judicata. Browning v. Levy, 283 F.3d 761, 772 (6th Cir. 2002). "The party asserting the defense of res judicata bears the burden of proof." Winget v. JP Morgan Chase Bank, N.A., 537 F.3d 565, 572 (6th Cir. 2008). To succeed on a res judicata defense, the proponent must prove each of the following elements:

1. A final decision on the merits in the first action by a court of competent jurisdiction; 2. The second action involves the same parties, or their privies, as the first; 3. The second action raises an issue actually litigated or which should have been litigated in the first action; 4. An identity of the causes of action.

Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 480 (6th Cir. 1992) (internal citations omitted).

Autumn Wind and the Defendants agree that the first element is satisfied because the parties stipulated to the dismissal of Insight's tortious-interference and fraud claims with prejudice, but they dispute the remaining elements. The failure to prove any element renders the application of res judicata inappropriate. Browning, 283 F.3d at 771. Because we conclude that the Defendants cannot establish the third element, Autumn Wind's claims are not barred by res judicata. We will therefore address only the third element.

That element requires a showing that "[t]he second action raises an issue actually litigated or which should have been litigated in the first action." Sanders, 973 F.2d at 480. Autumn Wind argues that it could not have brought its claims in the adversary proceeding because the bankruptcy court lacked subject-matter jurisdiction to hear them. Before reaching the question of whether Autumn Wind should have brought claims in its own name in the bankruptcy court, however, we consider the effects of Insight's September 2021 stipulated dismissal of its claims with prejudice. If, after all, as the district court concluded, Insight is a privy of Autumn Wind, then Autumn Wind would be bound by any res judicata effect of Insight's actions.

We conclude that Insight's stipulated dismissal with prejudice does not bar Autumn Wind's present claims despite the district court's observation that a stipulated dismissal with prejudice "operates as a final adjudication on the merits." See Warfield v. AlliedSignal TBS Holdings, Inc., 267 F.3d 538, 542 (6th Cir. 2001). Contrary to the district court's understanding, the stipulated dismissal goes only to the first element of res judicata; it does not mean that the claims were "actually litigated" or "should have been litigated." See Sanders, 973 F.2d at 480. "An issue is actually litigated when it 'is properly raised, by the pleadings or otherwise, and is submitted for determination, and is determined.' " In re Leonard, 644 F. App'x 612, 616 (6th Cir. 2016) (quoting Restatement (Second) of Judgments § 27 cmt. d (Am. L. Inst. 1982)).

The issues underlying Insight's purported claims against Siegel, Cecelia, Halas, and Oasis were never determined by the bankruptcy court; rather, the dismissal was effective by virtue of the parties' stipulation, without any contestation or litigation and without any judicial action. See Exact Software N. Am., Inc. v. DeMoisey, 718 F.3d 535, 540 (6th Cir. 2013) (quoting Green v. Nevers, 111 F.3d 1295, 1301 (6th Cir. 1997)) (highlighting that stipulations of dismissal are " 'self-executing' and do 'not require judicial approval' "); see also Levi Strauss Co. v. Abercrombie & Fitch Trading Co., 719 F.3d 1367, 1372-73 (Fed. Cir. 2013) (noting that a stipulated dismissal with prejudice counts as an adjudication on the merits but does not count as the...