In a brief, 4-page decision released May 26, 2016, Judge Gross of the Delaware Bankruptcy Court granted a motion for summary judgment, barring state court litigation in California on the grounds of res judicata. Judge Gross’ opinion is available here (the “Opinion”).
The Creditors (the state court plaintiffs) seek damages from landslides and soil movement which affected their homes. The Creditors commenced the California Action against Debtor and others in May, 2009. Opinion at *1. Following the Debtor’s bankruptcy filing in 2013, the Plaintiffs severed and stayed the claims against the Debtor, filing a proof of claim for the estimated total cost of repair attributable to the Debtor. Opinion at *1. In fact, the proof of claim was allowed and distributions were made by the Trustee.
Judge Gross quoted EDP Med. Computer Sys. v. United States, 480 F. 2d 621, 625 (2d Cir. 2007) for the principle that “a bankruptcy court order allowing an uncontested proof of claim constitutes a ‘final judgment’ and thus a predicate for res judicata.” Opinion at *2. Judge Gross held that the allowance of the claim, and distribution made pursuant to the same, had the effect of adjudicating the litigation in favor of the Plaintiffs, thus estopping them from continuing the California litigation.
While it is true that payment of a claim is rarely – strike that – almost never as satisfying as a 100% payment, the code doesn’t allow for general unsecured claimants to receive anything more than their pro-rata distributions. In this instance, the Plaintiffs were lucky enough to be able to avoid the cost of litigating their claim against the Debtor in state court, but unlucky that their litigation target was a debtor in bankruptcy. Nickels are never as satisfying as dollars.