Article courtesy of Michael Robson (Greenberg Traurig, LLP)
In re Buchanan, 31 F.4th 1091, 1092 (8th Cir. 2022)
This case arises from a dispute between Jay Buchanan and Lori Buchanan (the “Buchanans”), sole owners of Signature Electric, LLC (“Signature”), and Lund-Ross Constructors, Inc., a general contractor (“Lund-Ross”). Lund-Ross hired Signature to do electrical work on various projects. On each project, Signature contracted with suppliers. Signature submitted periodic pay applications to Lund-Ross requesting payment for work completed and supplies purchased. The Buchanans simultaneously submitted signed partial lien waivers, representing that Signature’s suppliers and subcontractors had been paid. In 2019, Signature went out of business and the Buchanans filed for Chapter 7 bankruptcy. When Signature went out of business, Signature’s suppliers filed construction liens against the properties relating to the projects for amounts Signature owed them and brought lawsuits against the owners of the projects to foreclose upon their liens. Lund-Ross was required to defend the lawsuits and indemnify the project owners. Lund-Ross alleged that these lawsuits resulted in damages of $600,043.64 due to misrepresentations Signature (by the Buchanans) made about whether it suppliers were being paid. Lund-Ross obtained a default judgment against Signature in Nebraska court for that amount. Lund-Ross also sued the Buchanans in Nebraska state court, but the lawsuit was stayed due to the Buchanans’ bankruptcy proceeding. In the Buchanans’ bankruptcy proceeding, the Buchanans listed Lund-Ross’ debt against them as disputed and contingent on their schedule, meaning that Lund-Ross was required to file a proof of claim to receive a distribution. When the Buchanans first filed for bankruptcy, Lund-Ross did not file a proof of claim because the Buchanans’ estate had not assets.
In January 2020, Lund-Ross commenced an adversary proceeding objecting to the discharge in the Buchanans’ bankruptcy of the debt that the Buchanans allegedly owed Lund-Ross. Lund-Ross invoked 11 U.S.C. § 523(a)(2), which provides that individual debtors are not discharged for debts for money which are obtained by false representation. Lund-Ross alleged the debt owed to it from the Buchanans was nondischargeable because the Buchanans made false representations in the lien waivers that Signature had paid its suppliers and subcontractors. In February 2020, the Trustee filed its notice of intent to claim assets in the bankruptcy proceeding. The Trustee claimed $25,000 in assets. Since the Buchanans’ estate now had assets, Lund-Ross filed a proof of claim in the bankruptcy proceeding. The Trustee objected to Lund-Ross’s claim on the basis that the claim alleged a corporate debt of Signature, rather than a personal debt of the Buchanans. Lund-Ross did not respond to the objection. The bankruptcy court granted the Trustee’s objection. Then, in the adversary proceeding, the Buchanans moved for summary judgment. The bankruptcy court granted the motion because it concluded that Lund-Ross did not have a valid claim for a debt owed by the Buchanans personally. The bankruptcy appellate panel affirmed. Lund-Ross then appealed.
On appeal, the United State Court of Appeals for the Eighth Circuit (the “Court”) held the following. Addressing Lund-Ross’s argument that it had a valid claim against the Buchanans personally, the Court noted that Nebraska law would control such determination. The Court found that there were sufficient grounds for Lund-Ross to have a potential claim against the Buchanans under Nebraska law which would give rise to personal liability and therefore the bankruptcy court improperly granted summary judgment. Addressing the Buchanans’ argument that Lund-Ross’s claim was precluded based upon the principle of res judicata, the Court noted that to preclude a claim in such circumstance, a party must show that “(1) the first suit resulted in a final judgment on the merits; (2) the first suit was based on proper jurisdiction; (3) both suits involve the same parties (or those in privity with them); and (4) both suits are based upon the same claims or causes of action.” The Court further noted that (1) claim preclusion did not clearly apply because the Buchanans were not a party to the proof-of-claim proceeding, Lund-Ross brought its claim against the Buchanans’ estate, not the Buchanans personally and the Buchanans did not object to, or participate in, the proof-of-claim proceeding and (2) claim preclusion was not separately raised by the Buchanans previously and consequently, the bankruptcy court did not consider the issue. As a result, the Court reversed the bankruptcy court’s grant of summary judgment to the Buchanans.
