Brown v. Thermal Surgical LLC, 24-127 (2d Cir. Aug. 8, 2025)
US Court of Appeals for the Second Circuit barred offensive use of claim preclusion based on ‘fairness’ , and hinted that offensive claim preclusion might never be permitted. Second Circuit held that a creditor may not use an uncontested claim allowance in an offensive use of claim preclusion if it would be “unfair.”
In her August 8 opinion, Circuit Judge Beth Robinson stopped short of deciding whether offensive claim preclusion is never permissible. If offensive claim preclusion were squarely present, she hinted that it might never be allowed.
Uncontested Claim Allowance
The debtor had been a sales representative for his employer. After taking a job with a competitor, the former employer sued the debtor in federal district court for misappropriation of trade secrets and violation of a noncompetition agreement. The lawsuit was stayed automatically when the debtor filed a chapter 7 petition.
In bankruptcy court, the employer filed a claim for $315,000. When neither the trustee nor the debtor objected, the bankruptcy court entered an order allowing the claim for $315,000. After the trustee filed a final report to which no one objected, the employer received a distribution of almost $13,000.
Meanwhile, the debtor waived his discharge. When the automatic stay terminated, the employer moved for summary judgment in district court. Initially, the district judge denied the summary judgment motion. As Judge Robinson said, the district court “emphasized” that the employer was “attempting to use claim preclusion offensively as opposed to defensively and concluded that allowing that in this case would be unfair.”
Deciding on reconsideration that claim preclusion could be used offensively, the district court reversed position, granted summary judgment for the employer and entered judgment against the debtor for some $312,000.
The debtor appealed and won in the circuit.
Authority Wasn’t Controlling
Citing the Second Circuit, Judge Robinson said,
Claim preclusion applies in a later litigation “if an earlier decision was (1) a final judgment on the merits, (2) by a court of competent jurisdiction, (3) in a case involving the same parties or their privies, and (4) involving the same cause of action.”
Also citing the Second Circuit, Judge Robinson said that claim preclusion “applies ‘with full force’ to matters that a bankruptcy court decides.”
Urging the Second Circuit to affirm, the employer relied primarily on EDP Medical Computer Systems, Inc. v. U.S., 480 F.3d 621, 624 (2d Cir. 2007). Judge Robinson explained why EDP was not controlling.
The Internal Revenue Service had filed a claim against the corporate chapter 7 debtor in EDP. Neither the trustee nor the debtor objected to the IRS’s claim, and it was allowed. Eventually, the trustee paid the IRS’s claim in full.
After bankruptcy, the debtor sued the IRS in federal court, seeking a full refund. (The circuit’s opinion does not explain how a corporate debtor could sue after the bankruptcy was over.) The district court granted summary judgment dismissing the suit, holding that the bankruptcy court’s claim allowance had preclusive effect.
The Second Circuit affirmed, agreeing that the bankruptcy court’s order allowing the claim was a final judgment entitled to preclusive effect. Judge Robinson said that the Second Circuit “rejected the argument that claim preclusion is not available because the amended proof of claim wasn’t actually litigated on the merits.”
Observing that the IRS was invoking claim preclusion defensively, Judge Robinson said that EDP “doesn’t answer the pivotal question here: whether [the employer] can invoke claim preclusion offensively to compel a money judgment against [the debtor] based on the allowed claim.” [Emphasis in original.]
Offensive Use of Claim Preclusion?
Judge Robinson examined claim preclusion and said that the employer’s “position is at odds with our general understanding of claim preclusion as a defensive tool.” She found “no decision” among sister circuits “blessing the use of claim preclusion to bar defense of a claim rather than to preclude an affirmative claim.” Drawing from Supreme Court authority, she explained why:
[A]pplication of claim preclusion to bar a party from defending against a claim rather than barring a party from advancing a claim raises fairness concerns because claim preclusion applies to claims that could have been litigated even if they weren’t, and a party defending against a claim may have good reasons separate from the merits to forego asserting a defense in a particular circumstance. [Emphasis in original.]
See Lucky Brand Dungarees, Inc. v. Marcel Fashions Group, Inc., 590 U.S. 405, 413 n.2 (2020).
To the same effect, Judge Robinson cited the Eleventh Circuit for the idea that a claim in bankruptcy is not an attempt to recover a judgment against the debtor but is an endeavor to obtain a distribution from the bankrupt estate. The Atlanta-based court said that a proof of claim is an attempt at participating in the distribution but is not a judgment that the creditor can execute against the debtor.
Judge Robinson said that the employer was not attempting to enforce a judgment that had already been entered, but rather was “seeking to secure a money judgment based on the bankruptcy court’s allowance of its claim.”
Based on the authorities she had cited, Judge Robinson “reiterate[d] the Supreme Court’s doubts about whether claim preclusion can ever apply offensively in this way — to preclude a party from defending against a claim based on a prior judgment, rather than to preclude a party from advancing a claim.”
Fairness
Judge Robinson saw no need to decide the “broad question” of whether claim preclusion can ever be used offensively. Even if a court could apply claim preclusion offensively in “some circumstances,” she said that a court “cannot do so when it would be unfair, and applying claim preclusion to support a judgment for [the employer] here would be unfair.”
Judge Robinson adopted the fairness approach “from the Supreme Court’s application of the related doctrine of issue preclusion,” where the doctrine precludes relitigating an issue that was actually and necessarily decided.
Compared to claim preclusion, Judge Robinson said that “issue preclusion applies only if an issue has been ‘actually litigated.’” The Supreme Court, she said, “has recognized that offensive use of issue preclusion implicates different considerations than defensive application.”
Not disallowing the use of offensive issue preclusion altogether, Judge Robinson said that the Supreme Court “gave trial courts discretion to decide whether to apply offensive issue preclusion and cautioned that they should not allow the use of offensive issue preclusion where it ‘would be unfair to a defendant.’” Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 331 (1979).
The Supreme Court, Judge Robinson said, “recognized that offensive use of issue preclusion implicates different considerations than defensive application.” [Emphasis in original.] Factors bearing on fairness include whether the defendant had an incentive to litigate the prior action vigorously.
On the facts of the case on appeal, applying claim preclusion would be unfair, Judge Robinson said, because the debtor’s “incentives to litigate [the employer’s] claims in the bankruptcy proceeding were quite different from his incentives in the district court.” An allowed claim in bankruptcy is not an enforceable judgment entailing the attachment of a debtor’s property. It only permits participating in a distribution from the estate.
When claims exceed the bankruptcy estate, Judge Robinson said that “a debtor may have little incentive to contest individual claims.” Furthermore, defending against the employer’s lawsuit in district court “would not amount to a collateral attack” on the claim allowance. The debtor “merely seeks to defend against additional liability beyond the sums distributed to [the employer] in the bankruptcy proceeding.”
“Some future case,” Judge Robinson said, “may require us to consider whether claim preclusion can ever be used as a sword rather than as a shield, or at least whether that is true with respect to the effect of a bankruptcy court’s allowance of a claim.”
Having no need to “decide that question categorically in order to resolve this case,” Judge Robinson held that claim preclusion did not apply. She reversed the district court’s award of summary judgment to the employer and remanded for further proceedings.