Second Circuit Has “Serious Doubts” as to Whether Federal Claim Preclusion “Can Ever Be Used Offensively to Compel a Judgment”

In Thermal Surgical, LLC v. Brown, No. 24-127 (2d Cir. Aug. 8, 2025), the Second Circuit expresses “serious doubts as to whether [federal claim] preclusion can ever be used offensively to compel a judgment rather than resist a claim,” though it winds up vacating and remanding the decision here on other grounds.

Plaintiff Thermal Surgical filed an action in 2015 against Brown, a former sales representative, for tort and breach of contract. Brown filed for Chapter 7 bankruptcy in 2016. “Thermal Surgical filed a proof of claim [in the bankruptcy proceeding] seeking $315,000 due to Brown’s alleged breaches. Neither Brown nor the bankruptcy trustee ultimately objected to Thermal Surgical’s proof of claim. After Brown waived his right to discharge, the bankruptcy court entered an order allowing Thermal Surgical’s proof of claim in full.”

The bankruptcy trustee ultimately distributed $12,620.47 to Thermal Surgical. And when the bankruptcy stay was lifted, the company filed a new action against Brown for the unpaid balance of the claim. The district court “concluded that claim preclusion” applied to the bankruptcy order and “entered judgment for Thermal Surgical for the balance of the allowed claim.”

The Second Circuit vacates and remands. Because the first judgment was entered in federal bankruptcy court, the court applies federal preclusion rules to determine the preclusive effect of the order.

While agreeing that the bankruptcy order was a final judgment on the merits, the Second Circuit addresses the question of whether claim preclusion may be invoked by a plaintiff to compel entry of an order in its favor in a later proceeding.

“Thermal Surgical’s position is at odds with our general understanding of claim preclusion as a defensive tool.” The U.S. Supreme Court has never definitively ruled on the issue, while “[l]ooking to our sister circuits, we have found no decision blessing the use of claim preclusion to bar defense of a claim rather than to preclude an affirmative claim.”  In Lucky Brand Dungarees, Inc. v. Marcel Fashions Group, Inc., 590 U.S. 405, 413 n.2 (2020), the Supreme Court suggested that “[t]here may be good reasons to question any application of claim preclusion to defenses,” but decided the case on other grounds (identity of claims).

Offensive claim preclusion “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 . . . . [H]ere, Thermal Surgical is not seeking to enforce a money judgment already issued against Brown; it’s seeking to secure a money judgment based on the bankruptcy court’s allowance of its claim.”

“Based on the above authority, we reiterate 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.”

“Some future case 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. We need not decide that question categorically in order to resolve this case.  the panel bases its reversal instead on the ground that application of claim preclusion would be unfair in this particular case.”

“Brown’s incentives to litigate Thermal Surgical’s claims in the bankruptcy proceeding were quite different from his incentives in the district court.” Among other considerations, “[a]n allowed claim in bankruptcy is not an enforceable money judgment that can be attached to a debtor’s future assets [citing Fed. R. Civ. P. 69(a)(1)]. Especially where, as here, the claims against a debtor cumulatively exceed the debtor’s assets, a debtor may have little incentive to contest individual claims.”

“Moreover, the record suggests that after Thermal Surgical filed its proof of claim, the parties negotiated an agreement in the adversary proceeding pursuant to which they asked the bankruptcy court to enter a judgment for Thermal Surgical in the amount of $300,000. Thereafter, and before the bankruptcy court ruled on the proposed settlement, Brown waived the bankruptcy discharge and the bankruptcy court dismissed the adversary action pursuant to the parties’ stipulation. It would be odd to conclude that even though the bankruptcy court did not approve a money judgment for Thermal Surgical as apparently contemplated in a proposed settlement of the adversary action, Brown should have expected that the bankruptcy court’s allowance of Thermal Surgical’s claim had the identical effect.”