Brown Media Corporation v. K&L Gates, LLP
854 F.3d 150
| 2d Cir. | 2017Background
- Brown Publishing filed Chapter 11; K&L Gates (with partners Fox and Moser) represented the debtor while earlier advising Brown Publishing’s managers (Roy Brown and others) about a plan to buy assets through a newly formed stalking‑horse bidder, Brown Media.
- K&L drafted the stalking‑horse APA, advised managers on structuring and financing, and billed the managers for pre‑bankruptcy advice; K&L was later retained as debtor’s counsel without disclosing the prior manager representation.
- During the sale process Huntington Bank (part of the rival PNC Bank Group) filed an Ohio foreclosure against property owned by a manager affiliate (CRJ) that was important to Brown Media’s bid; plaintiffs allege K&L delayed enforcing the bankruptcy stay to undermine Brown Media’s bid.
- An auction occurred; PNC Bank Group won most assets. Brown Media failed to close financing and lost the sale. The bankruptcy court entered sale and confirmation orders and later approved the liquidation plan.
- Plaintiffs sued K&L, Fox, and Moser in district court for breach of fiduciary duty, tortious interference, and common‑law fraud, seeking damages tied in part to the value of assets they could not acquire.
- The district court dismissed on res judicata grounds, reasoning plaintiffs could have raised these issues in the bankruptcy and that relief would effectively collaterally attack the bankruptcy sale and plan. The Second Circuit reversed and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether res judicata bars plaintiffs’ state‑law claims against debtor’s former counsel | Plaintiffs say their claims (breach of fiduciary duty, tortious interference, fraud) were not litigated in bankruptcy and could not properly be resolved there; they target K&L’s misconduct, not the sale’s fairness | Defendants say the bankruptcy orders are final and plaintiffs could/should have raised these claims (or had them adjudicated) in the bankruptcy, so res judicata bars relitigation | Court held res judicata does not bar the suit: the claims were not litigated in bankruptcy and plaintiffs were not required to raise them there because they target counsel misconduct rather than the sale participants or the plan |
| Whether plaintiffs could have (or must have) raised their claims in bankruptcy court | Plaintiffs contend the bankruptcy forum did not afford a fair or practical vehicle to litigate their claims (which seek damages against K&L), and some issues would require an adversary proceeding not part of confirmation | Defendants say bankruptcy courts have "arising in" jurisdiction over professional‑misconduct claims and so plaintiffs could have litigated there | Court held bankruptcy jurisdiction over such claims is not dispositive here and, given the record, plaintiffs were not required to raise these claims in the bankruptcy; failing to do so does not invoke res judicata |
| Whether permitting the suit would impair or invalidate the bankruptcy sale/plan | Plaintiffs assert a damages judgment against K&L would not disturb the validity of the sale or confirmation orders | Defendants warn any relief tied to the value of the assets would effectively unwind or challenge the bankruptcy orders | Court held a judgment against defendants would not invalidate or impair the sale or liquidation plan and therefore does not constitute a forbidden collateral attack |
Key Cases Cited
- Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d 227 (2d Cir.) (pleading and Rule 12(b)(6) standard)
- In re Layo, 460 F.3d 289 (2d Cir.) (res judicata in bankruptcy context; whether independent judgment would impair plan)
- Sure‑Snap Corp. v. State St. Bank & Trust Co., 948 F.2d 869 (2d Cir.) (res judicata bars claims that could have been raised in bankruptcy)
- In re Piper Aircraft Corp., 244 F.3d 1289 (11th Cir.) (bankruptcy proceedings differ for res judicata purposes)
- In re Colony Hill Assocs., 111 F.3d 269 (2d Cir.) (unsuccessful bidder standing to challenge intrinsic fairness/collusion at sale)
- Baker v. Simpson, 613 F.3d 346 (2d Cir.) (bankruptcy court jurisdiction over malpractice by court‑appointed counsel)
- Comput. Assocs. Int’l v. Altai, Inc., 126 F.3d 365 (2d Cir.) (party invoking res judicata bears burden of proof)