We decide here whether an award of fees in bankruptcy to a debtor’s attorney will act as a bar under claim preclusion principles to a later suit filed by the debtor alleging professional malpractice arising from the bankruptcy representation. Peter and Paula Iannochino, the debtors in this action, filed a malpractice suit in the Massachusetts courts two years after their former attorneys, defendants Carl Aframe and Stephen Rodolakis, had received a fee award from the bankruptcy court. After their complaint was removed to the bankruptcy court, the court granted the defen
I. Background
As this case comes before us following summary judgment, we summarize the relevant facts in the light most favorable to the non-movants, the Iannochinos. In 1979, the Iannochinos began operation of a copy center on Main Street in Worcester, Massachusetts, as franchisees of Kwik Kopy. Despite occasional disputes, the relationship was relatively stable through 1988. Then, the Iannochinos gradually fell behind on their obligations under the franchise agreement. By 1991, the past due amount had grown to $49,000, but the Ian-nochinos entered into an agreement with Kwik Kopy to resolve the issue.
During that same year, the Iannochinos began to expand their business by entering into a contract with Clark University to open a second copy center on the Clark campus. Although the written contract is silent on the issue, the Iannochinos claimed that Clark agreed to deal with them exclusively for all of its copying work, an arrangement the Iannochinos estimated would allow the Clark copy center to gross between $325,000 and $375,000 per year. In return, the Iannochinos obligated themselves to make various payments, either to Clark directly or to third parties on its behalf, for such things as royalties and rent. Shortly after the execution of the written contract with Clark, the Iannochinos executed a second franchise agreement with Kwik Kopy to cover the Clark copy center.
Business at this center was initially good, though gross revenues did not meet the Iannochinos’ expectations. The Ianno-chinos blamed the poor revenues on Clark, concluding that it was not abiding by the exclusivity agreement and was instead using other providers for its copying services. By mid-1993, sales were so poor that the Iannochinos closed the Clark copy center. Shortly thereafter, Clark filed suit against the Iannochinos, alleging that the closure of the store was a breach of contract. The Iannochinos, acting through counsel, 1 answered the complaint and filed a counterclaim alleging that Clark breached the exclusivity agreement.
By this time, however, the Iannochinos’ problems were not limited to the now closed Clark copy center. Between June and September of 1993, the Iannochinos sought the advice of an accountant to assist them with other business problems that included cash flow difficulties at their Main Street store. The accountant suggested that the Iannochinos consider filing for Chapter 13 bankruptcy protection. In September, the Iannochinos first approached Rodolakis, ostensibly for legal advice regarding the Clark University lawsuit and counterclaim. At that time, Ro-dolakis was a partner with Aframe in the law firm of Aframe & Rodolakis. The Iannochinos retained Rodolakis as their attorney shortly after this first meeting, granting him a $6,000 security interest in their car to secure his services.
For the next three months, the Ianno-chinos’ financial problems worsened. Ro-dolakis advised the Iannochinos that they could unilaterally reject their franchise agreements with Kwik Kopy and begin operations under a new corporate name, Action Press, after removing all Kwik Kopy signs and materials from their Main Street store. The Iannochinos followed
It was in this context that Rodolakis advised the lannochinos to file a Chapter 13 bankruptcy petition. Rodolakis informed the lannochinos that they might be able to reject the franchise agreements— and in particular, the non-compete provisions of those contracts — on the basis that they were executory contracts. The lan-nochinos agreed to file for bankruptcy, and in late December, after receiving Kwik Kopy’s letter, they filed a Chapter 13 petition. In addition to their potential liability for breach of the non-compete provision, the lannochinos also owed Kwik Kopy $79,383.82. Rodolakis did not, however, initiate negotiations with Kwik Kopy prior to filing for bankruptcy, either to settle this past due amount or otherwise attempt to resolve the problems between the lan-nochinos and Kwik Kopy.
From the time of filing until April of 1994, the dispute between the lannochinos and Kwik Kopy over the broken franchise agreement continued. Kwik Kopy sought to litigate the non-compete provision on several occasions, both in the state courts and in the bankruptcy court through adversary proceedings. These efforts were interspersed with short-lived settlements. In April, the lannochinos converted their case to a Chapter 7 proceeding. The dispute with Kwik Kopy was eventually resolved when the parties entered into an agreement allowing the lannochinos to continue operation as Action Press despite the non-compete provision, provided that they gave a local Kwik Kopy center the right of first refusal for certain jobs.
Throughout this time, the Clark University lawsuit was continuing. The lannochi-nos had originally been represented by another attorney in that matter, but that attorney withdrew and they turned to Ro-dolakis for advice about how to continue. Though Rodolakis refused to represent them in that action, he advised them not to take any action in their own defense. Instead, they were to ignore the lawsuit and their counterclaim and deal with an adverse judgment as with any other debt in bankruptcy. The lannochinos had reservations about this advice. They continued to believe that they had a valid counterclaim that should have, at the least, prevented the entry of judgment against them. Nonetheless, the lannochinos followed Rodolakis’s advice and a default judgment was entered against them.
By November of 1994, the relationship between the lannochinos and Rodolakis had deteriorated to the point that Rodolak-is petitioned the bankruptcy court for permission to withdraw as the lannochinos’ counsel. This motion was granted on December 5th. In January, Aframe filed an administrative fee application for compensation for services that the law firm of Aframe & Rodolakis had provided the lan-nochinos. The lannochinos filed an opposition to this application, alleging, among other things, that Aframe was not entitled to any fees because he was not their attorney. Despite the breakdown of their relationship and their unease about some of the advice Rodolakis had given them, the lannochinos never alleged that the services included within the application had been of poor quality or had caused either them or the estate harm.
In March, after a hearing that the lan-nochinos did not attend, the bankruptcy court allowed, in part, an award of fees to Aframe. The amount awarded, $6,420.24 in fees and $571.73 in costs, represented payment for services rendered prior to April 8, 1994, the date of the conversion from Chapter 13 to Chapter 7. No fees or costs for services performed after that date were allowed. Eventually, and some time after this award of fees, the Iannochi-
Approximately two years later, the Ian-nochinos filed the current action in Massachusetts state court. This action was removed to the bankruptcy court in November of 1996. The Iannochinos’ complaint was grounded upon the legal services the defendants had provided during the bankruptcy and alleged that, through those services, Rodolakis and Aframe had committed professional malpractice and had engaged in unfair trade practices in violation of Mass. Gen. Laws ch. 93A. The defendants moved for summary judgment in 1998. The bankruptcy court granted the motion, holding that the Ian-nochinos’ claims were barred by the res judicata effect of the 1994 order on the fee application. The Iannochinos appealed this judgment to the district court, which affirmed. Their appeal from the district court is now before us.
II. Res Judicata
Federal res judicata principles govern the res judicata effect of a judgment entered in a prior federal suit, including judgments of the bankruptcy court.
See FDIC v. Shearson-American Express, Inc.,
A. The malpractice counterclaim
As an initial matter, we must address whether the doctrine of res judicata applies to this case. The Iannochinos argue that res judicata is inappropriate here because they “have never pursued a prior remedy or suit against the defendants [or] engaged in multiple attempts to obtain relief.” Though this argument is strikingly undeveloped, it adverts to an important issue. At the time of the fee application, the Iannochinos’ malpractice claims were counterclaims and/or defenses to that application. The failure to interpose a counterclaim does not necessarily act as a bar to later actions.
See, e.g., Restatement (Second) of Judgments
§ 22(1) (1982);
see also Rowland v. Harrison,
The first of these exceptions applies to compulsory counterclaims.
See id.
§ 22(2)(a). But for the bankruptcy setting of this case, the Iannochinos’ malpractice counterclaims would be subject to this exception. A fee application in bankruptcy is akin to an action to recover a debt. Under ordinary federal rules of civil procedure, if a counterclaim “arises out of the transac
The second exception is applicable when the “relationship between the counterclaim and the plaintiffs claim is such that successful prosecution of the second action would nullify the initial judgment or would impair rights established in the initial action.”
Restatement (Second) of Judgments
§ 22(2)(b) (1982). In the normal course of civil litigation, the Iannochinos’ malpractice counterclaim could not affect a prior judgment assessing fees.
See Rowland,
The “successful prosecution” of the Ian-nochinos’ malpractice claims in the action here has the potential, therefore, to provide the basis for a later order, following a motion to reconsider, forcing Aframe and Rodolakis to disgorge the fees that the bankruptcy court awarded them. Thus, the second exception in section 22 of the Restatement is applicable here. See Restatement (Second) of Judgments § 22 Rptr. Notes (1982) (noting that the exception is applicable where “a defendant, having failed to interpose a defense or counterclaim in a prior action which terminated in a judgment for plaintiff, now seeks in a subsequent action to obtain relief which, if granted, would permit recovery of the amount paid pursuant to that judgment on a restitution theory”). The Iannochinos cannot escape res judicata on the ground that their malpractice claims were only counterclaims to the fee application. 4
B. The three requirements of res judi-cata
Having determined that res judicata is generally applicable in this situation, we next evaluate whether the specific res judicata requirements are present. For the fee award to bar the Iannochinos’ malpractice claim, there must be “(1) a final judgment on the merits in an earlier suit, (2) sufficient identically between the causes of action asserted in the earlier and later suits, and (3) sufficient identicality between the parties in the two suits.”
5
Mass.
School of Law v. American Bar Assoc.,
1. Finality of the judgment
The question of whether the fee award was a final or an interim judgment presents an unusual degree of difficulty because, in contrast to most other civil litigation, finality in bankruptcy is a more elusive concept.
See In re Am. Colonial Broad. Corp.,
The Iannochinos argue that Aframe created a genuine issue of material fact by indicating on the fee application that he was seeking only an interim rather than a final award. The application begins with Aframe’s assertion that he was the attorney of the debtor in the Chapter 13 bankruptcy. By this statement, the Iannochinos contend, Aframe admitted that he was continuing to represent them. Because representation was continuing, a factfinder could reasonably conclude that there would be future requests for compensation. This conclusion is bolstered, they argue, by the reference in the application to section 331, which is the section of the bankruptcy code applicable solely to interim compensation.
Stripped of them context, these two references in the fee application render superficial support for the Iannochinos’ position. We cannot, however, simply examine isolated fragments from a fee application to create a factual dispute if none reasonably exists when the application is viewed in its full context. After examining the full circumstances surrounding the fee application, we conclude that a reasonable factfin-der could only determine that the order here was final.
In his fee application, Aframe sought reimbursement for services that extended into August, even though his application was captioned “Chapter 13” and the bankruptcy had been converted to Chapter 7 in April. The bankruptcy court, however, explicitly denied the application insofar as it sought fees for services provided after the conversion. This approach suggests that even if representation had continued, neither defendant would have been entitled to further fee awards. In the present case, however, representation did not continue. Despite Aframe’s assertion in the fee application that he was the attorney of the debtor, the only reasonable conclusion from the record is that Aframe was not the Iannochinos’ attorney at the time of the application. The Iannochinos themselves lend support to this conclusion. Their opposition to the fee application was based in part upon the assertion that they owed no fees to Aframe because, though they had hired Rodolakis, they “never retained Carl D. Aframe as counsel.” Indeed, they claimed an express understanding at the time of Rodolakis’s retention that Rodolak-is — and not Aframe — was their attorney. 7
Moreover, when read in context, the fee application does not indicate that Aframe was continuing to represent the Iannochi-nos. Aframe asserted that he was the attorney for the debtor “in this proceeding,” which the caption references as the Chapter 13 bankruptcy action. The Chapter 13 action had concluded upon the con
The mere reference to section 381 also does not undercut the finality of the order on attorney’s fees. Though the Iannochi-nos are correct that section 331 only applies to interim compensation,
9
and thus there is no reason to reference it in an application for a final award of fees, we decline to allow a mere statutory reference to determine the actual nature of the fee request, particularly when section 331 was mentioned here in conjunction with the more general, final compensation provisions of section 330.
See In re Yermakov,
2. Identity of the parties
The Iannochinos’ challenge to the identity of the parties is confined to Rodolakis. They note that Rodolakis had withdrawn from the case by the time of the fee application and award and that Aframe applied for the fees in his name only. Therefore, they contend, Rodolakis was not in privity with Aframe and cannot now gain any benefit from whatever res judicata effect might attach to the fee award.
The record does indicate that Rodolakis and Aframe ceased to be law partners at some point after Rodolakis stopped representing the Iannochinos and withdrew from the case. Though the precise date of that split is unclear, the fee application came from Aframe’s solo practice rather than from the firm of Aframe and Rodolakis. We can reasonably infer, therefore, favorably to the Iannochinos, that Rodolakis was not a party to the fee application. This inference, however, does not stretch as far as the Iannochinos urge. Nonparties may gain the benefit of a prior litigation if they were in privity with a party to the previous action.
See Gonzalez v. Banco Central Corp.,
Even drawing all reasonable inferences in favor of the Iannochinos, a reasonable factfinder could only conclude on this record that Aframe and Rodolakis were in privity because Aframe was acting as Rodolakis’s de facto representative in pursuit of the legal fees.
See, e.g., In re Belmont Realty Corp.,
3. Identity of the causes of action.
In determining whether “causes of action are sufficiently related to support a res judicata defense,” we have “adopted a transactional approach.”
Mass. Sch. of Law, Inc. v. American Bar Assoc.,
Before turning to a discussion of those elements, however, we note that the Fifth Circuit has found identity of cause of action upon facts that are essentially identical to those in this case.
See In re Intelogic Trace, Inc.,
a. The factual relationship between the fee application and the malpractice claim.
The Iannochinos do not mount a serious challenge to the factual similarities between the two claims. Nor could they. As the
Intelogic Trace
court noted, the bankruptcy court must undertake a comprehensive evaluation of the services listed in a fee application when determining whether to award fees. Under section 330, the bankruptcy court must consider “the nature, the extent, and the value of such services.” 11 U.S.C. § 330(a)(3)(A).
11
A bankruptcy court therefore makes an implied “finding of quality and value” in the professional services provided to the Iannochinos during the bankruptcy.
Intelogic Trace,
b. The two claims as a convenient trial unit.
We examine whether the two claims form a convenient trial unit with an eye towards the conservation of judicial resources by preventing needless duplication of litigation.
See Pom,
Of course, this substantial overlap between the proof required for each claim would not matter for the purposes of res judicata if the Iannochinos could not have brought their malpractice claim in opposition to Aframe’s fee application.
See Kale v. Combined Ins. Co. of Am.,
c. The parties’ expectations at the time of the fee application.
Finally, we examine whether treating these two claims as a single trial unit would conform to the parties’ expectations. In assessing the parties’ litigation expectations, we look to the parties’ knowledge at the time of the first suit on the underlying facts.
See Pom,
The Iannochinos point to three areas in which they claim Rodolakis gave them substandard advice: his advice to repudiate the Kwik Kopy franchise agreement, to ignore the Clark University lawsuit, and to enter into the bankruptcy. Although the Iannochinos may not have had any reason to question this advice when given, their situation at the time of the fee application necessarily changed the reasonable perception of these events. By that time, their relationship with their attorney had broken down. Indeed, Rodolakis withdrew from the case because “there [was] no effective attorney/client relationship between counsel and the Debtors.” In each instance, the advice the Iannochinos now claim was improper resulted in almost immediate negative results. After the Ian-nochinos removed all Kwik Kopy indicia from the Iannochinos’ print store and opened under another name, Kwik Kopy took aggressive actions to enforce its rights under the franchise agreement, including requesting relief on multiple occasions from the automatic stay so that it might enforce the non-compete provision of the contract. Likewise, their inaction on the Clark University lawsuit quickly resulted in a default judgment. Indeed, the record indicates that the Iannochinos were upset about the Clark lawsuit and felt that they should not ignore what they thought were their valid counterclaims to that action. Furthermore, by the time of the fee application, the bankruptcy had been converted from Chapter 13 to Chapter 7. This conversion surely brought with it a similar reevaluation of whether it had been appropriate to file for bankruptcy in the first instance. Accordingly, the Ianno-chinos knew all “the facts necessary for bringing” their malpractice claim at the time of the fee application, and we think it reasonable for Aframe and Rodolakis to expect that all concerns about the quality of their services would have been raised in response to the fee application.
See Pom,
We are mindful that the Iannochinos were unrepresented at the time of the fee award. The Iannochinos emphasize this fact, arguing that this distinguishes them from the debtor in Intelogic Trace. Although the debtor in that case was represented at the time of the accounting firm’s fee application, that fact is not determinative. Indeed, the breakdown of the attorney/client relationship here is further evidence that the Iannochinos should have raised their malpractice claims as objections to the fee award. We reject the suggestion implicit in their argument that parties can ignore facts indicating that they should assert a malpractice claim solely because of a lack of representation.
III. Conclusion
Because all of the elements of res judi-cata are present here, the bankruptcy court was correct in holding that the Ian-nochinos’ malpractice claim was barred.
Affirmed.
Notes
. It appears from the record that neither Af-rame nor Rodolakis entered an appearance at any time in the Clark University lawsuit, though, as discussed herein, Rodolakis did offer the Iannochinos legal advice connected with the suit and their counterclaim.
. Contested matters can become adversary proceedings when "an objection to a claim is joined with a demand for relief of the kind specified in Rule 7001." See Fed. R. Bankr.P. 3007. Such relief includes demands for monetary damages. See Fed. R. Bankr.P. 7001(1).
. Section 330(a)(4) provides:
(A) Except as provided in subparagraph
(B), the court shall not allow compensation for-
(i) unnecessary duplication of services; or
(ii) services that were not-
(I) reasonably likely to benefit the debt- or's estate; or
(II) necessary to the administration of the case.
(B) In a chapter 12 or chapter 13 case in which the debtor is an individual, the court may allow reasonable compensation to the debtor’s attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.
11 U.S.C. § 330(a)(4).
. We note that even if a counterclaim would, as here, be subject to res judicata under this second exception, preclusion of that claim would nonetheless be inappropriate if the claim could not have been raised in the first proceeding.
See Kale v. Combined Ins. Co. of America,
. The Iannochinos also contend on appeal that they were denied a full and fair opportunity to litigate their claims during the fee application. They have raised this issue for the first time on appeal and therefore it is waived.
See Higgins v. New Balance Athletic Shoe, Inc.,
.We reject the Iannochinos’ suggestion that their case falls within the narrow exception to the applicability of res judicata for cases involving an "unusual hardship.”
See Rose v. Town of Harwich,
. The Iannochinos also alleged that the fee application was in violation of Rodolakis's assurances to them that he would not seek payment for his representation of them "in your Chapter 7.” The record does not offer any explanation for the bankruptcy court's refusal to award fees for the Chapter 7 services. In doing so, however, the bankruptcy court effectively enforced Rodolakis’s promise as reported by the Iannochinos.
. The Iannochinos also argue that Rodolakis’s later re-entry into the case must mean that the fee award was an interim judgment, as least as to Rodolakis. There is no merit to this contention. A reasonable factfinder could only conclude from this record that Rodolakis's re-entry was neither contemplated at the time of the fee application nor in any way a continuation of the original representation. Such an unrelated subsequent event has no bearing upon whether the award was or was not a final judgment.
. Section 331, entitled “Interim compensation,” provides:
A trustee, an examiner, a debtor's attorney, or any professional person employed under section 327 or 1103 of this title may apply to the court not more than once every 120 days after an order for relief in a case under this title, or more often if the court permits, for such compensation for services rendered before the date of such an application or reimbursement for expenses incurred before such date as is provided under section 330 of this title. After notice and a hearing, the court may allow and disburse to such applicant such compensation or reimbursement.
11 U.S.C. § 331 (1993).
. After this meeting, Rodolakis agreed to represent the Iannochinos for a second time, though this period of representation was relatively short, lasting less than six months.
. Section 330 provides in pertinent part:
(a)(3)(A) In determining the amount of reasonable compensation to be awarded, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including—
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;
(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; and
(E) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.
11 U.S.C. § 330(a)(3)(A).