Thermal Surgical, LLC v. Brown

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
6 months 2 weeks ago

Case Type:

Consumer

Case Status:

Reversed and Remanded

Citation:

24-127 (2nd Circuit, Aug 08,2025) Published

Tag(s):

Ruling:

The U.S. Court of Appeals for the Second Circuit held a district court erred in granting a summary judgment to a plaintiff and affording preclusive effect to the plaintiff's unchallenged proof of claim filed in the defendant's completed chapter 7 case. The circuit court held applying claim preclusion was "unfair because [the defendant] had less incentive to contest the unlitigated claim in the bankruptcy proceeding." The circuit court also expressed "serious doubts as to whether claim preclusion can ever be used offensively to compel a judgment."

Procedural context:

The Second Circuit described the legal issue in the case as a question of first impression. But the district court had granted Plaintiff a judgment based in part on the Second Circuit's "prior holding that an accepted proof of claim can serve as final judgment on the merits entitled to preclusive effect" in EDP Medical Computer Systems, Inc. v. United States, 480 F.3d 621 (2d Cir. 2007). In this appeal, the Second Circuit "conclude[d] that EDP Medical doesn’t answer the decisive question here—whether [Plaintiff] can invoke the bankruptcy court’s [order allowing its proof of claim in the chapter 7 case against Defendant] offensively to preclude [Defendant] from defending against its claims."

Facts:

Defendant Jeff Brown worked as a salesman for Plaintiff Thermal Surgical, LLC. Plaintiff sued Defendant in the U.S. District Court for the District of Vermont in 2015, alleging Defendant breached his employment contract and common law duties to his employer. Before the claims were resolved but while the case was pending, Defendant filed a chapter 7 bankruptcy petition in 2016 in the U.S. Bankruptcy Court for the District of New Hampshire. Plaintiff filed a proof of claim in the bankruptcy case for $315,000 based on the misconduct alleged in the district court case. No party objected to this claim. Defendant waived his right to a discharge and the bankruptcy court entered an order allowing Plaintiff's proof of claim in full. The Chapter 7 Trustee made distributions to creditors, including over $12,000 to Plaintiff. Later, in the recommenced district court case, Plaintiff sought a summary judgment against Defendant "for the balance of the claim allowed by the bankruptcy court." Defendant (pro se) contended claim preclusion should not apply to the proof of claim. The district court denied Plaintiff's motion for summary judgment but then "reconsidered its decision and concluded that claim preclusion did apply in this context. ... The district court entered judgment for [Plaintiff] for the balance of the allowed claim." Defendant (through counsel) appealed the judgment to the Second Circuit.

Judge(s):

WALKER, ROBINSON, AND MERRIAM

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