The legal doctrine of "res judicata" can apply to a bankruptcy order confirming a plan of reorganization. The term "res judicata" means that the matter has already been determined. Res Judicata generally applies if the following four requirements are met:
- the parties are identical in both legal actions;
- the previous judgment was rendered by a court of competent jurisdiction;
- the court issued a final judgment on the merits; and
- both cases involve the same cause of action.
In a bankruptcy case, the first two elements are met when it is undisputed that the parties appearing before the court were the same parties that appeared in the bankruptcy court and the reorganization plan was entered by a court of competent jurisdiction.
The third requirement is met when the court issues a final judgment in the bankruptcy case.
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Information Center for Res Judicata
- What is Res Judicata?
- Can a Creditor Remove an Automatic Stay?
- What Happens After I File My Reorganization Plan?
Relief from the stay is provided in § 362(d) of the Bankruptcy Code. This provision allows the bankruptcy court to lift the stay pertaining to certain creditors it presents adequate grounds for relief. A hearing on a "motion for relief from stay" is supposed to be a quick action issued in a summary proceeding.
For this reason, a hearing on the motion for relief from a stay does not require a full adjudication on the merits of claims, defenses, or counterclaims of a bankruptcy case. Instead, the court makes a simple determination as to whether a creditor has a colorable claim to the property of the estate. The hearing on the contested matter has a limited scope.
On the other hand, actions to decide the validity of a lien require a full adjudication on verified pleadings that are litigated during adversary proceedings. When the court lifts the stay, the creditor is then permitted to prosecute the claim in court. In the subsequent litigation, the debtor is not precluded from raising defenses or counterclaims. As a result, the decision to lift the stay is not an adjudication of the validity or avoidability of the claim.
When the plan of reorganization has been confirmed, the confirmation does not constitute an adjudication of the validity of a creditor's lien. Disputes that require an adversary proceeding include actions to determine the validity, priority, or extent of a lien.
The dispute over a lien is distinguishable from determinations of a claim allowance or lien valuation when the basis of the lien itself is placed in issue. For this reason, an adversary proceeding is required when a secured claim is challenged because of questions concerning the validity of a lien, its priority, or its extent.
When the challenge questions the validity or existence of a lien, the issue is not resolved by the confirmation process, and an adversary proceeding is required. The confirmation process is not an adversary proceeding, and it is only a contested matter if an objection is made. For this reason, the only question before the court during the confirmation is related to the amount due on account of creditor's claim and the value of a lien securing a claim.
This article was last updated on Monday, February 12, 2018.