                                                                                                                           Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-23-2000

East Min. & Chem Co v. Mahan
Precedential or Non-Precedential:

Docket 99-3320




Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2000

Recommended Citation
"East Min. & Chem Co v. Mahan" (2000). 2000 Decisions. Paper 173.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/173


This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2000 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
Filed August 23, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 99-3320

EASTERN MINERALS & CHEMICALS CO.;
CARY W. AHL, SR.,
       Appellants

v.

GARY H. MAHAN

On Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Civil No. 97-cv-01941)
District Judge: Hon. William W. Caldwell

Argued February 3, 2000
Before: MANSMANN, NYGAARD and RENDELL,
Circuit Judges

(Filed August 23, 2000)

       Dale E. Lapp, Esq. [ARGUED]
       244 Butler Avenue
       Lancaster, PA 17601
        Counsel for Appellants

       James J. Kutz, Esq. [ARGUED]
       Kathleen Misturak-Gingrich, Esq.
       Eckert, Seamans, Cherin & Mellott
       213 Market Street, 8th Floor
       Harrisburg, PA 17101
        Counsel for Appellees
OPINION OF THE COURT

RENDELL, Circuit Judge.

Eastern Minerals & Chemicals Co., a creditor of Delta
Carbonate Inc., appeals an order of the District Court
precluding it from seeking recovery from Delta's sole
shareholder, Gary Mahan, on an alter ego theory because
Eastern should have pursued this claim in the context of
Delta's bankruptcy case. We conclude that the District
Court misapplied claim preclusion in this bankruptcy
setting. Therefore, we will reverse the District Court's order
granting Mahan's motion for summary judgment.

Eastern also appeals the District Court's denial of its
motion to amend its complaint to add a RICO count against
Mahan and to join other defendants believed to be jointly
and severally liable. The District Court did not abuse its
discretion in denying Eastern's motion, and therefore we
will affirm as to that order.

We have jurisdiction to hear this appeal under 28 U.S.C.
S 1291. We exercise plenary review over a district court's
order granting summary judgment. See New Jersey
Turnpike Authority v. PPG Indus., Inc., 197 F.3d 96, 104 (3d
Cir. 1999).

Facts and Procedural History

Eastern was party to a sales agency contract with
Bestone, Inc., a business in York, Pennsylvania that mined
a quarry and produced calcium carbonate. In 1989, Delta
acquired Bestone's assets and assumed Bestone's
contracts, including the Eastern contract. Delta, which is
solely owned by Mahan, was one of a group of companies
owned or partially owed by Mahan, including Millington
Quarry, Inc. and PenRoc, Inc. In January 1994, Delta and
PenRoc both filed petitions for relief under chapter 11 of the
Bankruptcy Code,1 and Delta liquidated its assets in the
context of its chapter 11 case.
_________________________________________________________________

1. The cases were administratively, but not substantively, consolidated.

                                2
Eastern actively participated in Delta's bankruptcy case
by challenging various actions and decisions of Delta,
consulting with other creditors, and exploring alternatives
for maximizing its return. Eastern opposed Delta's proposed
rejection of its sales agency contract with Eastern pursuant
to 11 U.S.C. S 365 and sought reconsideration of the
Bankruptcy Court's approval of the rejection, which also
included a request for acknowledgment of an equitable lien
on certain contracts. App. 437a-439a. Based on the
rejection of its contract, Eastern filed a proof of claim for
over $2.2 million in Delta's bankruptcy case, to which Delta
objected. As discussed below, Eastern ultimately agreed by
consent order to reduce its claim to $900,000. App. 674a.

Eastern was quite aggressive in challenging Delta and its
dealings with affiliated entities at every turn of the
bankruptcy case and repeatedly asserted that Delta had
been used for the benefit of the affiliated companies,
primarily Millington, to the detriment of Delta's creditors.
Eastern circulated a draft application to disqualify Delta's
counsel, asserting that he could not properly represent
Delta in light of his representation of PenRoc, had not
disclosed facts relevant to his representation as debtor's
counsel, actively concealed facts, and arranged for
employment of special counsel that was not disinterested
by virtue of its prepetition claim against Delta. App. 405a.
It also attempted to disqualify Delta's special counsel,
asserting that counsel was a prepetition creditor of Delta
and thus was not disinterested, and that counsel had an
actual conflict of interest based on its representation of
Millington. App. 452a-454a. Not only did Eastern object to
Delta's request for appointment of appraisers and
consultants in connection with the valuation and sale of
Delta's assets, alleging that they were not disinterested
because they previously had performed services for
Millington, App. 27a, but it also objected to a proposed sale
of Delta's assets, alleging that the sale was not proposed in
good faith and that such a sale should go forward only in
the context of a confirmed plan of reorganization. App.
254a-255a.

Eastern attached to its objection to the sale of Delta's
assets a draft complaint seeking equitable subordination of

                               3
certain claims of Millington and its primary lender
Chemical Bank to the claims of Eastern and other
unsecured creditors under section 510 of the Bankruptcy
Code. App. 272a.2 The committee of unsecured creditors
("Committee") also sought leave of court tofile a complaint
on behalf of the estate requesting, inter alia , equitable
subordination of the claims of Millington and Chemical
Bank.3 Both complaints allege that Millington and Chemical
Bank obtained liens on Delta's assets without any lawful
basis and improperly received $4.3 million in postpetition
payments from Delta. App. 380a.4 Eastern did not seek to
subordinate any claim held by Mahan himself,5 although
the complaint included a description of how Mahan
allegedly engaged in conduct causing Delta to prefer
Millington over Delta's other creditors. App. 289a. These
complaints were never filed, and there was never afinal
judgment on the merits of the putative equitable
subordination dispute.
_________________________________________________________________

2. A court may subordinate an allowed claim for purposes of distribution
under principles of equitable subordination. 11 U.S.C. S 510(c). Most
courts have required a showing that the claimant engaged in inequitable
conduct resulting in injury to creditors or unfair advantage to the
claimant, and that equitable subordination of the claim is not
inconsistent with the provisions of the Bankruptcy Code. See Citicorp
Venture Capital, Ltd. v. Committee of Creditors Holding Unsecured Claims,
160 F.3d 982, 986-987 (3d Cir. 1998) (citing United States v. Noland,
517 U.S. 535 (1996)).

3. The Committee's request was based on the improbability that Delta, as
debtor-in-possession, would file such a complaint itself; an affidavit of
the chairperson of the creditors' committee asserted that "in light of the
fact that one of the proposed defendants, Gary Mahan, is the 100%
shareholder of the Debtor and at least a 51% shareholder of another
proposed defendant, Millington, it is unrealistic to expect the Debtor to
be able to bring the actions set forth in the complaint." App. 369a. The
Committee's draft complaint named Mahan as an additional defendant,
but not with respect to the equitable subordination count.

4. The Committee's draft complaint further alleges that Millington and
Chemical Bank "demonstrated a callous disregard for the rights of the
Debtor and its unsecured creditors and have proceeded to improve their
position without regard to the such parties, the facts, or the law." App.
380a.

5. Mahan had a claim against Delta, which ultimately was extinguished
pursuant to Delta's chapter 11 plan. App. 232a.

                               4
Eastern ultimately agreed to reduce its $2.2 million claim
to $900,000 and withdrew its opposition to the sale of
Delta's assets, and consented to the amendment of Delta's
liquidating chapter 11 plan to provide a fund to pay
unsecured creditors a portion of their claims. Eastern's pro
rata distribution was slightly more than $380,000,
approximately 42% of its $900,000 claim.

In October 1997, after Delta's bankruptcy case was
closed, Eastern filed a complaint in the York County Court
of Common Pleas naming Mahan as defendant. Eastern
sought to recover $580,783.13, the remaining 58% of the
$900,000 claim that Eastern did not receive from Delta by
piercing the corporate veil on an alter ego theory. App. 649a.6
Eastern alleged that Mahan caused Delta to be
undercapitalized, "pilfered" corporate opportunity, and
acted to further his own personal ends, thereby abusing
corporate privilege and breaching his fiduciary duty and his
duty of loyalty.7 App. 650a, 668a. The complaint provides
_________________________________________________________________

6. The " `classical' piercing of the corporate veil is an equitable remedy
whereby a court disregards `the existence of the corporation to make the
corporation's individual principals and their personal assets liable for
the
debts of the corporation.' " In re Blatstein, 192 F.3d 88, 100 (3d Cir.
1999) (quoting In re Schuster, 132 B.R. 604, 607 (Bankr. D. Minn. 1991)
(citations omitted)). We have commented that "Pennsylvania, like New
Jersey, does not allow recovery unless the party seeking to pierce the
corporate veil on an alter ego theory establishes that the controlling
corporation wholly ignored the separate status of the controlled
corporation and so dominated and controlled its affairs that its separate
existence was a mere sham. . . . In other words, both Pennsylvania and
New Jersey require a threshold showing that the controlled corporation
acted robot- or puppet-like in mechanical response to the controller's
tugs on its strings or pressure on its buttons." Culbreth v. Amosa (Pty)
Ltd., 898 F.2d 13, 14-15 (3d Cir. 1990) (per curiam). See generally
Lumax Indus., Inc. v. Aultman, 669 A.2d 893, 895 (Pa. 1995) (listing
factors for disregarding the corporate form as "undercapitalization,
failure to adhere to corporate formalities, substantial intermingling of
corporate and personal affairs and use of the corporate form to
perpetrate a fraud"); Ashley v. Ashley, 393 A.2d 637, 641 (Pa. 1978)
("[w]e have said that whenever one in control of a corporation uses that
control, or uses the corporate assets, to further his or her own personal
interests, the fiction of the separate corporate entity may properly be
disregarded").

7. The alter ego theory comes into play in piercing the corporate veil
when one seeks to hold liable an individual owner who controls the

                               5
the following summary of the factual basis for Eastern's
action:

       By way of conclusory overview . . . Eastern contends
       that Mahan invested heavily in Delta in the late '80s,
       realized his investment was in trouble by the end of
       1991, and spent the next several years designing and
       implementing a course of conduct calculated to shift
       the risk of loss from himself and other affiliated alter
       egos of Delta, to Eastern and other trade creditors.
       Mahan's manipulation began with garden variety
       pilfering of corporate opportunity and breach of
       fiduciary obligation, continued with highly
       inappropriate conversion of his equity investment to
       secured indebtedness at a time when the company was
       both undercapitalized and insolvent, and culminated in
       his use and abuse of the federal bankruptcy system to
       assure for himself and other alter egos, the benefit of
       the unconscionable advantage he had taken. Along the
       way he routinely ignored verbal commitments and
       acted in knowing and intentional violation of written
       agreements. Self dealing, misrepresentation, and deceit
       were the order of the day. Mahan continuously and
       unabashedly used Delta and other affiliated entities as
       the means for the achievement of personal ends.
       Especially as pertains to Eastern, an involuntary
       creditor of Delta, giving regard and effect to the
_________________________________________________________________

corporation. See S.T. Hudson Engineers v. Camden Hotel Dev. Assoc.,
747 A.2d 931, 936 (Pa. Super. 2000); Miners, Inc. v. Alpine Equip. Corp.,
722 A.2d 691, 695 (Pa. Super. 1998) (citing Kaplan v. First Options of
Chicago, Inc., 19 F.3d 1503, 1521 (3d Cir. 1994), aff 'd, 514 U.S. 938
(1995)). Factors considered under Pennsylvania law, for example, with
respect to the alter ego theory include, but are not limited to, the
following: "[T]he failure to observe corporate formalities; non-payment of
dividends; insolvency of debtor corporation; siphoning the funds from
corporation by dominant shareholders; non-functioning of other officers
and directors; absence of corporate records; whether the corporation is
a mere facade for the operations of a common shareholder or
shareholders; and gross undercapitalization." Wheeling-Pittsburgh Steel
Corp. v. Intersteel, Inc., 758 F. Supp. 1054, 1059 (W.D. Pa. 1990) (citing
Galgay v. Gangloff, 677 F. Supp. 295, 300 (M.D. Pa. 1987)). See also
United States v. Pisani, 646 F.2d 83, 88 (3d Cir. 1981).

                               6
       corporate form of organization would result in
       perpetration of fraud, illegality, or injustice, would
       defeat public policy, and would render the entire theory
       of corporate existence useless.

App. 650a-651a. Specifically, Eastern's complaint contends
that Delta was severely undercapitalized and that Mahan
engaged in a pattern of improper conduct:

       Among other things, prior to the filing of the
       Bankruptcy Case, Mahan (i) set up a competing
       company, violating the corporate opportunity doctrine,
       (ii) caused Delta to prefer Millington over other
       creditors, in violation of fiduciary responsibility, when
       he granted a blanket security interest in
       unencumbered assets in 1992, (iii) caused Delta to pay
       Millington, Rockcrest and other Affiliated Entities
       management, development, and administrative fees
       that were not bona fide fees; (iv) caused Delta to violate
       along with Penroc [sic.], the restrictive covenant
       assumed by Delta in connection with the Bestone
       transaction, and (v) caused Delta to mislead creditors
       with conflicting UCC filings and descriptions subject to
       Millington's security interest. During the pendency of
       the Bankruptcy Case, through his company's attorney,
       Mahan (i) treated the Affiliated Entities as though they
       were alter egos of each other and himself, (ii) misled
       gullible Committee counsel and the Bankruptcy Court
       to believe that Millington held a secured position
       justifying a post-petition payment (before plan
       confirmation) in the amount of $4.7 million, when in
       fact it did not, and (iii) made every decision entrusted
       to Delta as debtor-in-possession with a view toward
       promoting his own self interest, not the interest of the
       estate generally.

App. 669a-670a. In December 1997, the action was
removed to the United States District Court for the Middle
District of Pennsylvania.

Mahan filed a motion to dismiss Eastern's complaint on
several grounds, including the affirmative defense of claim
preclusion. App. 12a. The District Court found that the first
element of claim preclusion -- that the first suit was a final

                                7
judgment on the merits -- was satisfied by the entry of the
plan confirmation order in Delta's bankruptcy case. The
second element of claim preclusion -- that thefirst suit was
between the same parties or their privies -- similarly was
held to be satisfied. The District Court concluded that it
could not determine from the complaint whether the third
element was satisfied, namely, whether Eastern's action
against Mahan was based on the same cause of action as
Delta's confirmation order, and therefore denied the motion
to dismiss, but considered the issue on summary judgment
shortly thereafter.

In the context of the summary judgment motion, Mahan
argued that the record -- including Eastern's draft
complaint seeking equitable subordination in Delta's
bankruptcy case, which the District Court noted"parallels
the material averments of the complaint in the instant
case" -- demonstrated that Eastern knew all of the facts
supporting its instant cause of action against Mahan while
Delta's bankruptcy case was unfolding. Slip Op. at 4.
Mahan also argued that there was ample precedent for the
Bankruptcy Court to exercise jurisdiction over alter ego
claims. Eastern contended that the chapter 11 plan had not
specifically provided for the extinguishment of Eastern's
claim against Mahan, that there would have been no
subject matter jurisdiction, and that barring his claim
would burden bankruptcy courts with every claim creditors
may have against third parties.

Although the District Court correctly set forth the third
element of claim preclusion at the outset, e.g. , that the later
claim is based on the same cause of action as the prior
claim, the Court ultimately re-stated the test incorrectly
when it concluded that "it appears that claim preclusion
should bar the instant action because it is based on a
cause of action that could have been raised in the
bankruptcy proceedings, but for whatever reason, was not."
Slip Op. at 5. In other words, the District Court's claim
preclusion ruling is not predicated on a finding that
Eastern's instant claim against Mahan is based on the
same cause of action as a claim raised by Eastern in
Delta's bankruptcy. Interestingly, the District Court later
expressed second thoughts regarding this ruling, but that

                                8
is not before us.8 The District Court also rejected Eastern's
concerns regarding the lack of subject matter jurisdiction
over Eastern's claim.

Urging us to affirm the District Court's ruling that
Eastern's complaint against Mahan is barred, Mahan
emphasizes that Eastern knew all the facts necessary to
assert its present claim during Delta's bankruptcy, and
that Eastern's present claim against Mahan arises out of
the same cause of action that Eastern raised in Delta's
bankruptcy case.9 Eastern argues that the District Court
erred by applying the claim preclusion test to bar the
second action even if the prior proceeding did not involve
the same cause of action, that it is not pursuing the same
cause of action that was at issue in Delta's bankruptcy
case, and that the District Court's ruling, if affirmed, would
_________________________________________________________________

8. In a separate RICO lawsuit brought by Eastern against Mahan, the
District Court denied summary judgment on the basis of claim
preclusion on October 21, 1999. The Judge stated he believed he had
erred in granting Mahan's motion for summary judgment on Eastern's
complaint at issue here:

       [W]e have concluded that we erred in the No. 97-1941
       memorandum. . . . Our ruling in No. 97-1941 was based on an
       unstated, but erroneous, premise -- that an alter ego of the debtor
       was the debtor for all intents and purposes. . . .[N]either Mahan
nor
       Millington, even as an alter ego of Delta, can be considered the
       debtor and entitled to force their creditors to pursue their claims
       against them in the Delta bankruptcy. To the contrary, section
       524(e) would prohibit them from invoking Delta's discharge in
       bankruptcy. . . . . No. 97-1941 was an alter ego action against
       Mahan alone for Delta's breach of the sales agency agreement. That
       case was erroneously dismissed on the basis of claim preclusion.

Slip Op. 99-0366 at 23-28 (emphasis added) (appended to Reply Brief for
Appellants).

9. Mahan also asks that we reject Eastern's arguments relating to the
Bankruptcy Court's putative jurisdiction over Eastern's instant claim
against Mahan and to whether applying claim preclusion to bar
Eastern's claim would amount to an impermissible discharge of a
nondebtor in violation of 11 U.S.C. S 524(e). Based on our conclusion
that Eastern's current complaint against Mahan does not arise out of the
same cause of action as its claims raised in Delta's bankruptcy and thus
is not barred, we need not reach these issues.

                               9
mean that the entry of a confirmation order in a chapter 11
bankruptcy case bars every claim that might have been
asserted in the bankruptcy.10

Under the doctrine of claim preclusion, a final judgment
on the merits of an action involving the same parties (or
their privies) bars a subsequent suit based on the same
cause of action. See Gillman v. Continental Airlines (In re
Continental Airlines), 203 F.3d 203, 208 (3d Cir. 2000);
Arab African Int'l Bank v. Epstein, 10 F.3d 168, 171 (3d Cir.
1993). Eastern's focus, and accordingly ours as well, is the
third element.11
_________________________________________________________________

10. In light of the fact that some of Eastern's allegations stem from
events occurring during the course of Delta's bankruptcy, Eastern also
asserts that its claim against Mahan cannot be barred because it had
not yet accrued at the time of the first action. Although we do not read
the assertions in Eastern's complaint to arise only out of post-
confirmation conduct or events, we need not reach this issue.

11. Eastern does not challenge the District Court's findings with respect
to the first two elements, namely, that the Delta confirmation order,
inclusive of the settlement, was a final judgment and that it involved
both Eastern and Mahan. Although Eastern's failure to challenge the
applicability of the first two elements of claim preclusion does not
affect
the outcome of this appeal due to our conclusion that the third element
of claim preclusion is not satisfied, we question whether the District
Court too readily assumed and concluded that thefirst "dispute" in
Delta's bankruptcy case involved the same parties or their privies as
Eastern's current suit against Mahan. The District Court reasoned that
"Plaintiff 's claims against Defendant are premised on Plaintiff 's theory
that Delta was Defendant's alter ego. If Plaintiff can establish that this
was so, then Defendant was a party to Delta's bankruptcy proceedings
for preclusion purposes." App. 94a (citation omitted). Although we have
held, in a unique factual context, that a creditor's objection to a
chapter
11 plan could be considered a claim against another creditor for claim
preclusion purposes, see CoreStates Bank, N.A. v. Huls America, Inc.,
176 F.3d 187, 199-200 (3d Cir. 1999), the circumstances that gave rise
to our narrow holding in that case are not present here. Nor do we
believe it appropriate to assume solely on the basis of Eastern's current
veil piercing lawsuit that Mahan was Delta's privy, as the District Court
did in its decision denying Mahan's motion to dismiss. As to the first
element, we recognize that an order confirming a chapter 11 plan is a
final order "on the merits," but we do not decide whether those merits
can be equated to the merits of the instant dispute. Cf. Huls, 176 F.3d

                               10
Before embarking on our analysis, it is important to
identify what is not at issue. No one disputes that Eastern
was an active participant in Delta's bankruptcy case, and
filed a number of motions and objections claiming
inequitable conduct on the part of various entities
controlled by Mahan. Equally clear is that Eastern did not
raise the precise claim that is the subject of this complaint,
namely, that Mahan's conduct warrants piercing Delta's
corporate veil and holding Mahan liable on an alter ego
theory. The parties also acknowledge that claim preclusion
does not bar all unasserted claims that theoretically could
have been raised, but only those based on the same cause
of action that was actually asserted previously. See Brief for
Appellee at 33 ("Mahan has never argued that all possible
causes of action must be raised in a bankruptcy such as
Delta's. What he argued, and proved, is that claims which
are known and asserted in a bankruptcy proceeding cannot
later be asserted elsewhere."); Brief for Appellant at 18 ("in
the absence of actual assertion of a cause of action in the
bankruptcy proceeding, claim preclusion does not follow").
See generally Huls, 176 F.3d at 191 ("Claim preclusion bars
a party from litigating a claim that it could have raised or
did raise in a prior proceeding in which it raised another
claim based on the same cause of action.") (emphasis
added).

The issue facing us, therefore, is whether the claim
currently being asserted by Eastern against Mahan is
based on the same cause of action as the claims actually
asserted by Eastern in Delta's bankruptcy such that its
instant claim should have been asserted in that forum.
Mahan says it is; Eastern says it is not.

Our case law often suggests that we consider whether
there is an "essential similarity of the underlying events" to
_________________________________________________________________

at 206 (holding that merits of dispute regarding competing interest in
$600,000 were specifically resolved in confirmation order); First Union
Comm. Corp. v. Nelson, Mullins, Riley and Scarborough (In re Varat
Enterprises, Inc.), 81 F.3d 1310, 1316 (4th Cir. 1996) (barring lender
from raising postconfirmation objection to secured claim of law firm
when its claim was specifically addressed and resolved in context of plan
confirmation).

                               11
determine whether the prior and current claim arise from
the same cause of action and cite to United States v.
Athlone Industries, Inc., 746 F.2d 977, 984 (3d Cir. 1984).
Although we stated this test in Athlone, we did not actually
apply it, ultimately holding instead that the district court
erred in dismissing the action because "the suits involved
different statutes, different acts, different wrongs, and
necessitated different evidence to support the different
material facts alleged." Id. at 986. See also Lewison Bros. v.
Washington Savings Bank (In re Lewison Bros.), 162 B.R.
974, 981 (Bankr. D.N.J. 1993) (explaining that Athlone
instructed that courts determine whether suits involve the
same causes of action by comparing the acts and demand
for relief, theory of recovery, necessary evidence, and
alleged material facts). Furthermore, the "essential
similarity" test, when literally construed, is ideally suited
for litigation that has been generated by discrete events,
such as a car accident or commercial transaction gone
awry; indeed, claim preclusion is typically invoked when
issues surrounding a discrete incident or transaction have
been litigated previously in a civil action. However, the
claim at risk of being precluded in this case is based on
conduct that allegedly took place over the course of several
years. Although some of the underlying events and
relationships are described in terms that are similar (and
indeed sometimes nearly identical) in both Eastern's
complaint against Mahan and various documents Eastern
circulated in Delta's bankruptcy case (e.g., the draft
equitable subordination complaint), the similarity of certain
events in and of itself does not trigger a bar of Eastern's
subsequent complaint against Mahan. Surely the mere
existence of overlapping facts and events in this setting is
not sufficient to foreclose Eastern's current claim. To
properly apply the affirmative defense of claim preclusion,
we must take a closer look.

Claim preclusion is complicated in this case not only
because the instant claim involves a multifaceted factual
scenario and extensive course of events, but also because
the prior litigation involved an expansive and complex
chapter 11 bankruptcy case. A bankruptcy case is not a
discrete lawsuit. It is commenced by the filing of a petition
for relief, which then provides a forum in which any

                               12
number of adversary proceedings, contested matters, and
claims will be litigated. Claim preclusion only bars claims
arising from the same cause of action previously raised, not
every conceivable claim that could have been brought in the
context of a bankruptcy case over which the court would
have had jurisdiction.12

Claim preclusion doctrine must be properly tailored to
the unique circumstances that arise when the previous
litigation took place in the context of a bankruptcy case.13
Difficult as it may be to define the contours of a cause of
action in a bankruptcy setting, we conclude that a claim
should not be barred unless the factual underpinnings,
theory of the case, and relief sought against the parties to
the proceeding are so close to a claim actually litigated in
the bankruptcy that it would be unreasonable not to have
brought them both at the same time in the bankruptcy
forum.14 Here, that is not the case.

Eastern's participation in Delta's bankruptcy case, as
previously described, was undoubtedly active and
aggressive. Yet, Eastern never litigated any cause of action
_________________________________________________________________

12. Claim preclusion would have a broad scope indeed if it barred every
claim over which a bankruptcy court might have had jurisdiction. See
Huls, 176 F.3d at 209 (Stapleton, J., dissenting) (noting that a broad
view of claim preclusion in the bankruptcy context would likely produce
"multitudinous protective filings of claims against nondebtors and the
needless complication of bankruptcy confirmation proceedings").

13. Indeed, the factual setting here -- involving a closely-held debtor
corporation that is part of a group of such companies controlled by one
shareholder -- raises special problems, yet is all too common. Surely it
cannot be the case that the corporation's bankruptcy becomes the
exclusive forum to address any claims a creditor might have against the
nondebtor controlling shareholder based on that shareholder's own
conduct.

14. This is, after all, essentially the test that we actually applied in
Athlone, and it is consistent with the reasoning in Huls, in which we
recognized that courts normally must scrutinize the"totality of the
circumstances" to determine whether two claims are based on the same
cause of action, although we found that the claims'"essential similarity"
was facially apparent in that particular instance. See Huls, 176 F.3d at
206. This test, of course, assumes subject matter jurisdiction over the
later claim.

                               13
against Mahan that sought what its current claim would
accomplish. The claim most closely resembling the current
action was Eastern's draft equitable subordination
complaint, which was never actually filed and which sought
to subordinate the claims of Millington and Chemical Bank,
not Mahan. Characterizing Millington's claim as equity or
capital rather than "debt," Eastern's draft complaint
essentially took the position that Millington should not
have creditor status in Delta's bankruptcy, but instead
should stand in line behind Delta's other creditors. Unlike
that draft equitable subordination complaint, Eastern's
instant complaint seeks recovery from Mahan and focuses
not on whether Millington should have equivalent creditor
status or whether Delta's assets were properly used to
collateralize obligations of Millington to Chemical Bank, but
rather on whether Mahan should be personally liable for
the debt due to Eastern based on his conduct in using
Delta as his "mere instrumentality" and "alter ego" for his
individual benefit.15 Although some of the descriptions of
certain events and particular relationships are common to
both claims, the theory of the case and relief sought in
Eastern's instant complaint are markedly different from
those underlying the draft complaint to subordinate the
claims of Millington and Chemical Bank that Eastern
considered filing in bankruptcy court.

Both Eastern and Mahan take the position that our
decision in Huls dictates that they prevail on their
respective positions as to whether Eastern's suit against
Mahan is barred. Huls involved a lawsuit between two
lenders, CoreStates and Huls, based on a subordination
agreement between them. After the conclusion of the
bankruptcy case of their mutual borrower, United Chemical
Technologies ("UCT"), CoreStates sued Huls to recover
_________________________________________________________________

15. We recognize that other courts of appeals have considered whether
the claim holder has used the debtor as an alter ego when deciding
whether a claimant has engaged in inequitable conduct such that its
claim should be equitably subordinated. See, e.g., In re Lifschultz Fast
Freight, 132 F.3d 339, 345 (7th Cir. 1997). However, even if we employed
that analysis in this circuit, it would not affect the outcome here,
particularly because Eastern sought to subordinate the claim of
Millington, not Mahan.

                               14
$600,000 that Huls had received in the case. Hulsfiled a
motion for judgment on the pleadings based on the claim
preclusive effect of UCT's bankruptcy confirmation order. In
UCT's bankruptcy case, CoreStates had specifically
challenged the $600,000 payment to Huls by way of formal
objection as well as informal colloquy with the parties and
the court. CoreStates also had appealed the court's entry of
the confirmation order, which, although overturned on
different grounds, was ultimately followed by the successful
confirmation of a second amended plan.

We affirmed the District Court's decision that claim
preclusion barred CoreStates' later suit. The underlying
question in Huls was whether "CoreStates has a right to
receive the funds, when both CoreStates's and Huls's rights
in the bankruptcy estate, and CoreStates's objection based
on the payment in particular, were settled in the
confirmation proceeding." Huls, 176 F.3d at 190-191. We
concluded that "CoreStates functionally raised the
Subordination Agreement in its objection to the
Reorganization Plan," id. at 203, and that CoreStates's
objection in UCT's confirmation proceedings was, in fact, a
claim against Huls:

       The objection put Huls's rights in the bankruptcy
       estate into question. The $600,000 payment was all
       Huls was entitled to receive under the Reorganization
       Plan. A challenge to that payment amounted to a
       challenge to Huls's position in the scheme of
       distribution the Plan envisioned. In addition, Huls
       clearly felt that it had an interest in the issue worth
       preserving, since it opposed the objection extensively
       throughout the bankruptcy proceedings. Furthermore,
       Huls filed a brief in opposition to CoreStates's appeal
       in the District Court, and CoreStates filed a reply brief
       dealing almost solely with Huls's arguments.
       Accordingly, the Bankruptcy Judge's dismissal of
       CoreStates's objection and the subsequent
       confirmation of the Plan constitute a final judgment on
       CoreStates's claim against Huls.

Id. at 206. Noting that our holding was largely fact-bound
and was the result of "the coincidence of several unusual
circumstances," we emphasized the significance of the fact

                                15
that CoreStates specifically challenged the fairness of
providing the $600,000 to Huls in the plan of
reorganization: "in the absence of extensive litigation of this
claim in the confirmation proceeding, CoreStates would not
now be prevented from bringing its suit." Id. at 206. In
other words, CoreStates actually litigated the same cause of
action -- Huls' entitlement to the $600,000 as opposed to
CoreStates' -- in the plan confirmation process that it
sought to litigate thereafter.

Huls illustrates, in what we recognized to be a somewhat
unique factual and procedural setting, that one does not
get a second bite at the proverbial apple simply because the
first bite was taken in a bankruptcy case. See Huls, 176
F.3d at 202 (citations omitted). Similarly, we note that care
must be taken in determining whether the first bite was
actually taken such that it would preclude the second. Huls
does not stand for the proposition that nondebtors must
assert all potential claims in a bankruptcy case or be
forever barred, nor does Mahan ask us to reach such a
conclusion. Rather, Huls helps us frame the key question
that the parties agree we should ask whenever the
affirmative defense of claim preclusion is raised on the
basis of a prior bankruptcy confirmation order, namely,
whether the later claim arises from the same cause of action
as a claim that was actually asserted or interposed in the
earlier bankruptcy case and resolved in the confirmation
order. Here, we have concluded that it does not. 16

For the foregoing reasons, we conclude that Eastern's
suit against Mahan is not barred and we will, therefore,
reverse the District Court's grant of summary judgment and
remand for further proceedings.
_________________________________________________________________

16. Recent decisions of other courts bolster our interpretation as to how
claim preclusion is reasonably applied in the context of bankruptcy. For
example, the Court of Appeals for the Fifth Circuit recently concluded
that a hearing determining the fees earned by an accounting firm for
services rendered to the bankruptcy estate barred the bankruptcy
trustee from later suing the accounting firm for negligence and
professional malpractice because both disputes squarely presented the
identical question of the quality and value of thefirm's services to the
bankruptcy estate. See Osherow v. Ernst & Young, LLP (In re Intelogic
Trace, Inc.), 200 F.3d 382, 387 (5th Cir. 2000).

                               16
Denial of Eastern's Motion to Amend

Eastern also appeals the District Court's denial of
Eastern's motion requesting leave to amend its complaint a
second time to add RICO claims against Mahan and to join
two additional defendants.17 Eastern contends that the
District Court erroneously relied on Rule 16(b) of the
Federal Rules of Civil Procedure without sufficient
consideration of Rules 15(a) and 42. We review the District
Court's determination for abuse of discretion. See Epstein,
10 F.3d at 174.

The District Court's case management conference order
set the amendment and joinder deadlines for June 30,
1998. App. 121a-122a. On January 6, 1999, more than six
months after the deadline, Eastern filed its motion for leave
to amend. App. 124a. As justification for seeking leave to
amend, Eastern stated that it had become aware of the
viability of new claims and that filing an amended
complaint would conserve judicial resources and would
obviate the need for a separate action. App. 125a. Opposing
Eastern's motion, Mahan argued that Eastern had to
comply with Rule 16(b) of the Federal Rules of Civil
Procedure before seeking amendment under Rule 15(a); 18
because Eastern had not been diligent, Mahan contended,
the amendment should not be allowed under Rule 16(b).
Slip Op. at 5.

Agreeing with Mahan's reasoning, the District Court
concluded that good cause had not been shown under Rule
16(b) to modify the case management order. According to
the District Court, Eastern had not specified what led it to
decide that RICO claims could be pled or why information
_________________________________________________________________

17. The District Court denied this motion on March 1, 1999, prior to
granting summary judgment.

18. Rule 15(a), "Amended and Supplemental Pleadings," provides that
under most circumstances, a party seeking to amend more than once
may do so only by leave of court or with the adverse party's written
consent, although "leave shall be freely given when justice so requires."
FED. R. CIV. P. 15(a). Rule 16(b) instructs courts to set time limits in
connection with pretrial conferences, and a "schedule shall not be
modified except upon a showing of good cause and by leave of the
district judge." FED. R. CIV. P. 16(b).

                               17
from independent sources could not have been obtained
earlier. Slip Op at 6. The District Court concluded that it
need not examine Eastern's Rule 15(a) argument, but
nonetheless noted that there was sufficient reason to deny
Eastern's motion under Rule 15(a) due to Eastern's
unexplained delay in moving to amend.

We conclude that the District Court acted well within its
discretion when it denied Eastern's motion to amend the
complaint six months after the amendment and joinder
deadlines had expired, and we will not disturb the Court's
ruling in this regard.19

For the foregoing reasons, we will REVERSE the District
Court's entry of summary judgment. We will AFFIRM the
District Court's denial of Eastern's untimely motion to
amend its complaint.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit
_________________________________________________________________

19. Eastern has withdrawn the third issue it originally listed for appeal,
namely the District Court's denial of Eastern's request to file an
outsized
brief. See Reply Brief of Appellants, at 8.

                                18
