OPINION OF THE COURT
We are asked in this case to decide whether a Bankruptcy Court order allowing a creditor to seize a debtor’s bank account is entitled to res judicata effect in a subsequent state proceeding alleging that a portion of the funds in the account were state tax procеeds that should not have been part of the bankruptcy estate. Because plaintiff and its subrogor had notice of the bankruptcy action and failed to alert the court that the funds at issue were tax receipts held in trust, we conclude that plaintiff cannot now challenge defendant’s сourt-approved seizure of the funds.
I
Herkimer Wholesale Company, Inc. was a distributor of cigarettes and other goods. In order to sell cigarettes, Herkimer had to affix each package with a cigarette tax stamp obtained from the State of New York (see Tax Law § 471 [2]). As a licensed tax stаmp agent, Herkimer purchased stamps directly from the State, either by cash payment or on credit, and later collected the taxes when it sold the cigarettes (see Tax Law § 472 [1]). Herkimer usually bought tax stamps on credit and was required to remit the taxes to the State within 30 days after purchasing the stamps. State law provides that any tax proceeds obtained by a licensed agent from the sale of cigarettes are to be held in trust for the State and such monies are not the property of the agent (see 20 NYCRR 532.2 [a], [b]). Herkimer also had to post a bond as security for unpaid stamps (see Tax Law § 472 [1]). To sаtisfy this requirement, Herkimer obtained a $2.2 million bond issued by plaintiff the Insurance Company of the State of Pennsylvania (ICSP).
A short time later, several of Herkimer’s unsecured creditors initiated a chapter 7 involuntary bankruptcy proceeding in federal Bankruptcy Court. This automatically stayed HSBC’s attempt to foreclose on Herkimer’s assets in state court. HSBC therefore intervened in the bankruptcy proceeding and obtained an order that prohibited Herkimer from transferring any of its property except in the ordinary course of business. The Bankruptcy Court also ordered that Herkimer’s cash аssets be deposited with HSBC in a “cash collateral account.”
In an effort to save its business, Herkimer persuaded the Bankruptcy Court to convert the chapter 7 liquidation action into a chapter 11 reorganization proceeding. In November 1997, Herkimer filed a list of its 20 largest unsecured creditors with the court, identifying the State of New York as its largest unsecured creditor ■ (Herkimer owed the State approximately $2 million in cigarette stamp taxes). This characterization was erroneous, however, because the taxes collected by Herkimer were being held in trust for the Statе
(see
20 NYCRR 532.2 [b]) and should not have been part of Herkimer’s bankruptcy estate
(see 11
USC § 541 [d];
Begier v IRS,
ICSP soon became aware of the tax dеficiency and informed the State that Herkimer’s bond was cancelled. The bond issuer also asked the State not to provide Herkimer with additional tax stamps on credit. Thereafter, Herkimer received tax stamps only if it paid the State cash.
An agreement was eventually reached between Herkimer, HSBC and some of the unsecured creditors that allowed Herkimer to continue operating its business as a “debtor-in-possession.” The Bankruptcy Court approved the arrangement, directing that the cash collateral account be held jointly by
Herkimer then requested that the State Department of Taxation and Finance advise HSBC whether the bank could obtain a security interest in Herkimer’s cigarette inventory or unused tax stamps. The Department informed HSBC that it would be unable to “acquire a secured interest in cigarette tax stamps whether affixed to cigarettes or not” because only licensed tax stamp agents, like Herkimеr, may serve as the State’s “fiduciaries and [they] must account to the State for any unused or unpaid for stamps.” The Department cited
Lincoln First Commercial Corp. v New York State Tax Commn.
(
This precipitated the filing of a proof of claim in Bankruptcy Court by the State of New York in December 1997 for approximately $2.2 million, representing unpaid cigarette taxes, penalties and interest. Although the State requested priority status for its claim, it incorrectly described the money Herkimer owed as a “debt” rather than as sovereign tax revenue being held in trust by the State’s agent.
The State also sought to recover $2.2 million from ICSP—the maximum exposure on the bond. ICSP filed its own contingent proof of claim in the bankruptcy proceeding in February 1998. This claim similarly indicated that the money owed was premised on unpaid taxes but designated the claim as unsecured and nonpriority. Because the State and ICSP never informed Bankruptcy Court that the tax proceeds were being held in trust by Herkimer and should have been excluded frоm the bankruptcy estate, the court continued to treat the monies as the property of Herkimer subject to creditors’ claims.
Despite its attempts to emerge from bankruptcy, Herkimer became unable to comply with the debtor-in-possession arrangement and had to surrender all оf its collateral. The Bankruptcy Court issued an order dissolving the stay and, since HSBC’s secured claim had priority over the other unsecured creditor
In the meantime, ICSP continued to refuse to honor the State’s demand on Herkimer’s bond. This resulted in the State commencing an action against ICSP in state Supreme Court in December 2000 to enforce the guaranty. ICSP asserted as a defense that its rights as a subrogee had been impaired by the State’s failure to advise the Bankruptcy Court that the tax stamp revenue in Herkimer’s possession was sovereign property distinct from the assets available to creditors. ICSP also initiated a third-party action against HSBC for allegedly misappropriating the tax proceeds with knowledge that these funds were being held in trust and were excludable from Herkimer’s estate. Supreme Court granted summary judgment to the State on the bond claim and to HSBC on the third-party complaint. The Appellate Division affirmed, explaining that the third-party action was premature because ICSP had not paid on the bond and, thus, had not yet acquired subrogee status
(see State of New York v Insurance Co. of State of Pa.,
In light of this judicial determination, ICSP paid on the bond, satisfying the taxes, penalties and interest owed to the State, and then initiated this lawsuit against HSBC in February 2004. Among other defenses, HSBC asserted that res judicata barred the relief sought in this action because neither the State nor ICSP had informed the Bankruptcy Court that Herkimer was in possession of tax trust funds, which caused the court to treat the monies as part of Herkimer’s collateral available to satisfy creditors. Both parties moved for summary judgment and Supreme Court granted ICSP’s motion as to liability. The Appellate Division, with one Justice dissenting in part, modified by dismissing one cause of action but otherwise affirmed, rejecting
II
The doctrine of res judicata, or claim preclusion, is designed to “relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication”
(Allen v McCurry,
The dispute in this case primarily concerns the fourth element—whether ICSP has raised the same causes of action that were at issue in the bankruptcy рroceeding. ICSP argues that it has not because HSBC’s alleged misappropriation occurred after the Bankruptcy Court issued its decision dissolving the stay and allowing HSBC to foreclose the collateral bank account. Thus, ICSP contends, the propriety of HSBC’s conduct could
Federal res judicata law applies to not only issues actually litigated, but also to “issues that . . . could have been raised” in the prior action
(Federated Department Stores, Inc. v Moitie,
It is readily apparent (as ICSP admits) that neither the State nor ICSP—both of which formally intervened in the bankruptcy action—submitted proper claims to the Bankruptcy Court indicating that Herkimer’s bank account included tax proceeds thаt were the sovereign property of the State of New York and, hence, were not available to satisfy creditors’ claims against Herkimer’s assets. Doing so certainly would not have been burdensome since the State simply had to declare that its money was being held in trust by Herkimer, or ICSP could have checked a box on its claim form indicating that the funds should be prioritized as tax proceeds owed to the state government. No excuse has been offered for this oversight and ICSF as the State’s subrogee that stood by while the other parties involved in the bankruptcy treated the funds as Herkimer’s property, must bear the brunt of the neglect
(cf. EDP Med. Computer Sys., Inc. v United States,
Accordingly, the order of the Appellate Division, insofar as appealed from, should be reversed, with costs, defendant’s motion to dismiss the complaint in its entirety granted and the certified question answered in the negative.
Chief Judge Kaye and Judges Cipabick, Read, Smith, Pigott and Jones concur.
Order, insofar as appealed from, reversed, with costs, defendant’s motion for summary judgment dismissing the complaint in its entirety granted and certified question answered in the negative.
Notes
. The original loans and restructured agreement were actually issued by Marine Midland Bank, a predecessor of HSBC, but for purposes of this opinion, we make no distinction between these financial institutions.
. Even after Herkimer’s prоperty was sold, HSBC was left with an uncollectible deficiency of more than $3 million.
. We cite federal cases for the general contours of the doctrine because there are authorities suggesting that a court should apply the rules of res judicata followed in the jurisdiction that rendered the earlier court decision (see
e.g. Marrese v American Academy of Orthopaedic Surgeons,
. For this reason, we reject ICSP’s argument that the Bankruptcy Court’s order allowing HSBC to fоreclose on the bank account had no effect on the status of the tax proceeds because the order applied only to “collateral.” Although it is true that tax proceeds cannot be collateral because they are not the property of the debtоr, that fact is irrelevant here because all legal conclusions—whether erroneous or correct—are treated identically for purposes of res judicata (see
e.g. Federated Department Stores, Inc. v Moitie,
. In light of our determination, HSBC’s additional argument in favor of reversal is academic.