A recent issue surfaced in a Chapter 13 bankruptcy case related to a mortgage claim. The debtor had filed a previous bankruptcy case during which she had objected to the mortgage creditor’s claim. A hearing was set, but before the hearing, the mortgage creditor had reduced its claim, and the Court had entered an order on the agreed reduction. This left an allowed claim for the mortgage creditor in the amount of its Proof of Claim amount less the agreed reduction.
In a subsequently filed bankruptcy case by the same debtor, the same mortgage creditor filed a claim. After review of that claim, it became clear that not only had the mortgage creditor ignored the court-ordered agreed deduction, but it filed a claim that was larger than the claim in the previous case for the same timeframe – some $75,000 larger!
Which raises the issue of the preclusive effects of claims and orders on claims objections in future bankruptcy cases.
Generally, the doctrine of res judicata, or claim preclusion, applies in bankruptcy proceedings. See, e.g., In re Greenberg, 626 B.R. 554 (2021). Pursuant to the doctrine of res judicata, a final judgment on the merits bars further claims by parties or those in privity with them based on the same cause of action. In re Marino, 181 F.3d 1142, 1144 (9th Cir. 1999) (quoting Marin v. HEW, Health Care Financing Agency, 769 F.2d 590, 593 (9th Cir. 1985)). Claim preclusion “prohibits lawsuits on ‘any claims that were raised or could have been raised’ in a prior action.” Stewart v. U.S. Bankcorp, 297 F.3d 953, 956 (9th Cir. 2002) (quoting Owens v. Kaiser Fdn. Health Plan, Inc., 244 F.3d 708, 713 (9th Cir. 2001) (emphasis in original)).
For res judicata to apply, there must be “(1) an identity of claims, (2) a final judgment on the merits, and (3) identity or privity between parties.” Owens, 244 F.3d at 713 (quoting Western Radio Servs. Co. v. Glickman, 123 F.3d 1189, 1192 (9th Cir. 1997)).
Issue preclusion bars relitigation of an issue if four elements are met: (1) the issue sought to be precluded must be the same as that involved in the prior action; (2) the issue must have been actually litigated; (3) it must have been determined by a valid and final judgment; and (4) the determination must have been essential to the final judgment. See, e.g., In re Berr, 172 B.R. 299, 306 (B.A.P. 9th Cir. 1994)).
An order entered in a debtor’s prior bankruptcy case pursuant to which a creditor would receive payment on a claim in an amount corresponding to the proof of claim filed by that creditor, as adjusted by any court order, is considered res judicata. See, e.g., In re Sandia Resorts, Inc., 557 B.R. 217 (2016). This bars both the debtor and the creditor from objecting to the established claim amount in a future case. Id.
Note that not all bankruptcy court orders relating to claim objections are final judgments on the merits, which is required for the application of claim or issue preclusion. See Greenberg, 626 B.R. at 565. For instance, if a bankruptcy court order is found to have determined a claim objection to be moot, it may not have a preclusive effect (In re Sears, 536 B.R. 286 (2015)). Similarly, a withdrawal of a claim without prejudice usually has no preclusive effect in future litigation.
In the case of res judicata, the order in the bankruptcy case needs to be final. See Matter of Bravo, 658 B.R. 337 (2024). A bankruptcy court’s order sustaining or overruling a debtor’s objection to a claim is considered a final order for purposes of appeal. See, e.g., Greenberg, 626 B.R. at 566.
Note also that res judicata is a double-edged sword. Courts have also held that debtors who fail to object to claims during their bankruptcy, thereby implicitly accepting the liability asserted by the claimant, are barred by res judicata from trying to take an inconsistent position and challenge the validity of that claim through separate, subsequent litigation. See, e.g., In re Haskins, 563 B.R. 177 (2017).
In summary, the preclusive effect of an order in a bankruptcy case on a claims objection on a future bankruptcy filing of the same debtor with respect to the same debt appears to be pretty clear. Debtors and their counsel should always compare claims filed by the same creditors in subsequently filed cases.
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