Since this is rather long-winded summary of the 29 page opinion, and the facts are rather convoluted, reading the opinion is important.  The Court’s question presented is the following: "Under what circumstances will a creditor be barred from later bringing an action against a co-creditor based upon state law claims if, during the pendency of a bankruptcy, it failed to raise such claims."

In re Atlanta Retail, Inc. (fka Wolf Camera, Inc.); Eastman Kodak Company v. Atlanta Retail Inc., No 05-12327 (11th Cir. July 18, 2006).

Prior to the filing of Debtor’s Chapter 11 petition, Kodak and Wachovia were both lenders of the Debtor (operating as Wolf Camera, a retailer with numerous locations).  In September 1998, Kodak and Wachovia executed  a Subordination Agreement under which Kodak’s loans  were subordinated to Wolf’s other secured creditors, including Wachovia.  They also executed a separate Intercreditor Agreement whereby each agreed to notify the other of occurrences "which may significantly affect the other Secured Creditor with regard to the ability of (Wolf) to meet its obligations.  In 1999, Kodak and Wolf began discussing a new $30 million loan (which would also be subordinate to Wachovia) to be used for the expansion of Wolf’s business.  In March 2000, Kodak made the loan which was expressly conditioned upon its use for expanding the business. 

The crux of the current dispute is Kodak’s allegations that Wolf was nearing a breach of its other obligations, Wachovia was aware of the imminent breach and Kodak’s proposed loan, and Wachovia withheld the information from Kodak so that Kodak would lend Wolf the money and that the funds would be used to pay Wachovia’s debt.  In fact, the Kodak loan proceeds were used to pay off some of Wolf’s debts and none of the proceeds were used for business expansion.

Wolf filed a Chapter 11 petition in June 2001 and requested DIP financing from Wachovia and other lenders, of $10 million.  Kodak did not object, and the request was approved.  In August 2001, Wolf filed a motion seeking approval to sell substantially all of its assets to Ritz Camera, and with Wachovia, filed a Joint Motion to Approve Stipulation with Respect to Distribution of Proceeds  ("Stipulation Motion").  Kodak only opposed the Sale Motion, arguing that the sale should not be free and clear of its liens.  The Bankruptcy Court denied the objection, finding that Kodak waived its right to object in the Intercreditor Agreement, and that Kodak’s claim was essentially valueless. 

Kodak then filed an action against Wachovia in the Western District of New York, alleging equitable  subordination , breach of contract, fraud and tortuous interference, all based upon Kodak’s allegations that it was fraudulently induced to make the $30 million loan.  In the meantime, back in Georgia, the debtor and lenders requested approval to settle an adversary filed by unsecured creditors, wherein the validity of certain liens were challenged.  Kodak objected, but only to the extent the language of the Stipulation could be construed as barring any claims against the pre-petition lenders held by third parties other than the debtor.  Kodak did not raise its allegations against Wachovia, although the debtor argued that all claims of subordination needed to be addressed to make the settlement enforceable.  The settlement was approved. 

In August 2002, Kodak dismissed the NY action.  On the same day, it filed another action in NY Supreme Court, alleging the same state law claims against Wachovia, but omitting the subordination claim.  This case was removed to the Western District of New York on diversity grounds.

In January 2003, Wolf’s liquidating Plan was confirmed.  The Plan did state that Kodak’s claims were subordinated to the other pre-petition lenders, but it did not prohibit suits against third parties – only the debtor.  Kodak did not receive any of its $30 million loan, and Wachovia only received, reportedly, $23 million.  Thus, even if Wachovia’s claim was equitably subordinated, Kodak would still not have received the full amount sought in the NY action. 

In October 2002, Wolf and Wachovia filed an action against Kodak in Bankruptcy Court in Georgia, seeking to enjoin the NY action on the basis of res judicata.  The Bankruptcy Court rejected Kodak’s argument that it was an intercreditor dispute and instead viewed it as an attack on the Subordination Agreement and the Court’s prior orders. See Order. 297 B.R. 299 (Bankr. N.D. Ga. 2003).  The BR Court enjoined the NY lawsuit based upon the preclusive affect of these orders, and the District Court affirmed. 

The Eleventh Circuit reversed.  Res judicata could not apply because two elements could not be satisfied.  One, Kodak could not have received full relief in the first action (GA Bankruptcy Court), and two, the contested bankruptcy proceedings and state court case do not involve the same nucleus of operative facts or "transaction or occurrence."

Kodak could not have received the full relief it now seeks in the NY action in the GA Bankruptcy Court.  If  Kodak had objected to any of the motion described above, it would have done Kodak little good.  The result would have been their denial, not the equitable subordination of Wachovia’s claims to Kodak’s.  Objecting to the Plan, which did not provide for equitable subordination, would not have provided Kodak with the relief requested in the NY action and even if Wachovia’s claim had been subordinated, Wachovia’s recovery ($23 million) was less than the amount requested by Kodak.  Moreover, Kodak would not have been granted state law damages in any of the contested matters addressed by the Bankruptcy Court orders. 

Additionally, the Circuit rejected the argument that res judicata applies because Kodak could have filed an adversary within the context of the Bankruptcy case.   Kodak’s allegations in the NY case are based upon Wachovia’s pre-petition conduct and these issues were not placed before the Bankruptcy Court in the context of the motions and orders addressed therein.  Their evaluation was not required for any of the contested matters.  Therefore, these matters did not involve the same nucleus of operative facts or "transaction or occurrence" as the NY action.  Finally, the confirmed Plan did not include a release of claims against any party other than the debtor, and such a release would have been legally questionable if it did exist.  Therefore, Kodak’s NY action could proceed (insofar as the Georgia courts were concerned).