Kipp Flores Architects, L.L.C. v. Mid-Continent Casualty Co.

Do ‘deemed allowed’ claims have res judicata effect in ‘asset’ cases?

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Case Type:
Case Status:
16-20255 (5th Circuit, Mar 24,2017) Published
In a "no asset" chapter 7 case, a filed proof of claim is not res judicata in other litigation, despite the "deemed allowed" language in 11 USC 502(a). "The Bankruptcy Rules plainly contemplate pretermitting claims allowance and objection procedures when there are no distributable assets." A rule to the contrary "would increase substantially [bankruptcy courts' workloads] without yielding any benefit whatsoever to the debtor or the debtor's estate.
Procedural context:
Appeal from U.S. District Court for the Southern District of Texas, which granted summary judgment in favor of the defendant insurance company, concluding that a "deemed allowed" claim from the insured's "no asset" chapter 7 bankruptcy case had no res judicata effect on the insurer in subsequent litigation.
Plaintiff/Appellant Kipp Flores Architects (KPA) provided a license for two homebuilders to use KPA's designs. The license allowed the homebuilders to build one house per license. However, the homebuilders built hundreds of homes, amassing over $63 million in gross revenues from such illegally built homes. KPA sued for copyright infringement. The two homebuilders filed separate chapter 7 bankruptcy cases, and KPA filed proofs of claim in all of them. For reasons not clear from the record, KPA got relief from stay to liquidate its claims against one of the homebuilders. The trial court awarded KPA a $3.2 million judgment against that homebuilder. After the verdict was upheld on appeal, Mid-Continent (the insurer/Appellee) paid KPA the required amount. This appeal arises from KPA's efforts to get Mid-Continent to pay additional amounts based on a proof of claim filed in the other homebuilder's "no asset" chapter 7 case. In the latter "no asset" bankruptcy case, KPA filed a claim for $63 million. No one objected, and the trustee filed a "no asset" report before the case was closed five weeks later. In separate litigation, KPA and Mid-Continent filed summary judgment motions to determine whether KPA's $63 million proof of claim in the "no asset" bankruptcy case was "deemed allowed" and binding on Mid-Continent as res judicata. The magistrate judge ruled that it was not and recommended judgment in favor of Mid-Continent. The district court granted summary judgment against KPA, and this appeal followed.

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