Sally Pratt v. VENTAS, INC., a/k/a Vencor, Inc.

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2004 FED App. 0113P (6th Cir.)
File Name: 04a0113p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
SALLY PRATT, et al.,
Plaintiffs-Appellants/
Cross-Appellees,
v.
VENTAS, INC., a/k/a Vencor,
Inc., et al.,
Defendants-Appellees/
Cross-Appellants,
JOHN DOES, #1 through #5,
Defendant-Appellee.
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Nos. 02-5632/5638
Appeal from the United States District Court
for the Western District of Kentucky at Louisville.
No. 01-00317—John G. Heyburn II, Chief District Judge.
Argued: March 18, 2004
Decided and Filed: April 20, 2004
2 Pratt, et al. v.
Ventas, Inc., et al.
Nos. 02-5632/5638
*W illiam W Schwarzer, Senior United States District Judge for the
Northern District of California, sitting by designation.
Before: COLE and GILMAN, Circuit Judges;
SCHWARZER, Senior District Judge.*
_________________
COUNSEL
ARGUED: James M. Morris, MORRIS & MORRIS,
Lexington, Kentucky, for Appellants. David B. Tachau,
TACHAU, MADDOX, HOVIOUS & DICKENS, Louisville,
Kentucky, for Appellees. ON BRIEF: James M. Morris,
Sharon K. Morris, MORRIS & MORRIS, Lexington,
Kentucky, for Appellants. David B. Tachau, John D. Dyche,
TACHAU, MADDOX, HOVIOUS & DICKENS, Louisville,
Kentucky, for Appellees.
_________________
OPINION
_________________
RONALD LEE GILMAN, Circuit Judge. Sally Pratt and
others (Plaintiffs) filed various state-law claims against a
large health care provider, Vencor, Inc., which subsequently
spun off a subsidiary with the same name as the parent
company, and then changed the name of the parent company
to Ventas, Inc. When “New Vencor,” the subsidiary, filed for
Chapter 11 bankruptcy in the Bankruptcy Court for the
District of Delaware, Ventas agreed to make substantial
financial contributions towards New Vencor’s reorganization.
In exchange, New Vencor’s Reorganization Plan granted
Ventas a full release from Plaintiffs’ claims. The bankruptcy
court entered a Confirmation Order approving the Plan, which

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permanently enjoined Plaintiffs from pursuing their claims
against Ventas.
Ignoring the injunction, Plaintiffs sued Ventas in the district
court below, which subsequently dismissed their case for lack
of subject matter jurisdiction. Plaintiffs then filed a motion
to vacate the Confirmation Order in the Delaware bankruptcy
court. Because Supreme Court precedent requires us to
accord preclusive effect to the Delaware bankruptcy court’s
conclusion that it had jurisdiction over this matter, Plaintiffs
are barred by res judicata from continuing their suit in this
court. We therefore AFFIRM the judgment of the district
court.
I. BACKGROUND
A. Factual background
Two lower court opinions, one in Delaware and the other in
Kentucky, have summarized the relevant facts of the present
case. See In re Vencor, Inc., 284 B.R. 79 (Bankr. D. Del.
2002), and Pratt v. Ventas, Inc., 273 B.R. 108 (W.D. Ky.
2002). Because the principal issues on appeal are questions
of law, we abstract the following undisputed facts from the
lower courts’ opinions:
Prior to May, 1998, Ventas operated, inter alia, several
nursing homes under the name Vencor, Inc. (“Old
Vencor”). On May 1, 1998, Old Vencor changed its
name to Ventas and spun off its nursing home operations
to a newly incorporated entity named Vencor, Inc. (“New
Vencor”). Ventas retained ownership of the real estate
and became New Vencor’s landlord at many of the
facilities. . . . On September 13, 1999, New Vencor and
several of its affiliates filed for relief under chapter 11 of
the Bankruptcy Code.
In re Vencor, Inc., 284 B.R. at 81.
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Each of the named Plaintiffs in this case had filed a state
court suit against one of the Vencor entities prior to or
soon after the commencement of its bankruptcy
proceedings. In September 1996, Plaintiff Sally Pratt
filed suit against “old” Vencor . . . for age discrimination
and wrongful termination. In March 1998, Plaintiff
Valiza Nystrom filed suit against Vencor Hospitals Texas
. . . for constructive discharge. In October 1998, Mark
Dayman, Executor of the Estate of Liesel Dayman, filed
suit against “new” Vencor . . . for negligence. In
November 1999, Plaintiff Robert McCray, pursuant to a
Power of Attorney for Lee Ona Lee, sued Vencor
Nursing Centers East . . . for negligence.
Pratt, 273 B.R. at 110. Finally, Nystrom’s attorney Mark
Byrne filed suit against Vencor for tortious interference with
his prospective contractual advantage with his client. Id. at
n.2.
After New Vencor filed for bankruptcy, it filed motions
pursuant to 11 U.S.C. § 362 for an automatic stay in each of
Plaintiffs’ respective state-court actions. Pratt, Damon, and
McCray responded by filing proofs of claim in the bankruptcy
court. On December 14, 2000, a Reorganization Plan for
New Vencor was proposed, and notice of the Plan was mailed
to each of the Plaintiffs who had filed a proof of claim. The
bankruptcy court confirmed the Plan in a Confirmation Order
issued on March 19, 2001, with the Plan becoming effective
on April 20, 2001. A key component of the Plan was
summarized as follows:
As part of that Plan, Ventas agreed to contribute $40
million to the funding of a settlement with the United
States and agreed to amendments of certain leases which
it had with [New Vencor], thereby reducing [New
Vencor’s] rental obligations. In exchange, Ventas was
given a release of [Plaintiffs’ personal injury and other]

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claims arising from operation of the nursing homes prior
to May 1, 1998.
In re Vencor, Inc., 284 B.R. at 81. The terms of the Plan thus
incorporated an injunction proscribing suits against New
Vencor and Ventas for “any alleged improprieties committed
in connection with [New] Vencor’s bankruptcy, prior to the
date of confirmation.” Pratt, 273 B.R. at 111.
B. Procedural background
Plaintiffs filed suit in the United States District Court for
the Western District of Kentucky, alleging that Ventas
obtained the releases in the Confirmation Order through
fraudulent means. They argued that in overseeing New
Vencor’s bankruptcy proceedings, the bankruptcy court
lacked jurisdiction over Plaintiffs’ third-party action against
Ventas. As a consequence, Plaintiffs contended that the
Confirmation Order’s injunction barring suit against Ventas
had no preclusive effect on Plaintiffs’ suit filed in the federal
district court in Kentucky. Ventas responded by filing a
motion to dismiss the complaint pursuant to Rules (9)(b) and
12(b)(6) of the Federal Rules of Civil Procedure.
Relying on the Supreme Court’s decision in Celotex Corp.
v. Edwards, 514 U.S. 300 (1995), the district court held that
Plaintiffs were barred from collaterally attacking the
Confirmation Order issued by the Delaware bankruptcy court.
Pratt, 273 B.R. at 116. The district court subsequently
granted Ventas’s motion based upon a lack of subject matter
jurisdiction. It also expressly declined to consider whether
the bankruptcy court exceeded its statutory authority in
granting injunctive relief to Ventas. Id. The court concluded
that it could “not properly exercise appellate review over
these earlier bankruptcy proceedings.” Id. ((quoting 28
U.S.C. § 158(a): “An appeal . . . shall be taken only to the
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district court for the judicial district in which the bankruptcy
court is serving.”) (emphasis in Pratt))
Plaintiffs were encouraged to pursue their claim in the
Delaware bankruptcy court, in the United States District
Court for the District of Delaware, and if necessary, in the
United States Court of Appeals for the Third Circuit. Id. The
complaint was initially dismissed with prejudice, but the
district court later modified the order to make it “without
prejudice,” presumably so that Plaintiffs could raise their
claims against Ventas in the proper forum.
Each side appealed the district court’s decision, but this
court held both appeals in abeyance while Plaintiffs pursued
the merits of their claims in the Delaware bankruptcy court.
The bankruptcy court subsequently held that there was no
basis for Plaintiffs’ assertion that it lacked jurisdiction to
grant the releases to Ventas contained in New Vencor’s Plan.
In re Vencor, Inc., 284 B.R. at 86. Plaintiffs did not appeal
this latter decision.
On December 6, 2002, this court lifted the stay on the
present appeal of the district court’s decision in Pratt v.
Ventas, 273 B.R. 108 (W.D. Ky. 2002). This matter is now
ripe for disposition.
II. ANALYSIS
A. Standard of review
This court reviews whether the district court properly
dismissed a claim pursuant to Rule 12(b)(6) of the Federal
Rules of Civil Procedure using a de novo standard. Sistrunk
v. City of Strongsville, 99 F.3d 194, 197 (6th Cir. 1996). A
motion to dismiss may be granted “only if it is clear that no
relief could be granted under any set of facts that could be
proved consistent with the allegations.” Id. (citation omitted).

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B. Application of the “collateral attack” doctrine
The district court held that Plaintiffs’ suit filed in the
Western District of Kentucky was an impermissible collateral
attack on the bankruptcy court’s Confirmation Order. Pratt,
273 B.R. at 116. A “collateral attack” is a tactic whereby a
party seeks to circumvent an earlier ruling of one court by
filing a subsequent action in another court. Id. at 114 (citing
Willy v. Coastal Corp., 503 U.S. 131, 137 (1992)). As
applied to the present case, the district court below believed
that Plaintiffs’ suit against Ventas in Kentucky was an
improper attempt to circumvent the Delaware bankruptcy
court’s Confirmation Order that enjoined Plaintiffs from
pursuing their claims against Ventas.
The district court found that the Supreme Court’s decision
in Celotex Corp. v. Edwards, 514 U.S. 300 (1995), controlled
the disposition of Plaintiffs’ action. In Celotex, Bennie and
Joann Edwards won a judgment against Celotex in the
District Court for the Northern District of Texas for asbestos-
related injuries. Celotex posted a supersedeas bond to stay
the execution of the judgment pending its appeal to the Fifth
Circuit. Northbrook Property and Casualty Insurance
Company served as surety on the bond. The Fifth Circuit
affirmed the judgment for the Edwardses, but, on that very
day, Celotex filed a Chapter 11 petition for reorganization in
the Bankruptcy Court for the Middle District of Florida. An
injunction was issued by the bankruptcy court, pursuant to 11
U.S.C. § 105(a), which stayed all actions against Celotex.
The district court in Texas nevertheless permitted the
Edwardses to enforce the bond against Northbrook. Although
the Fifth Circuit affirmed the district court’s decision, it was
subsequently reversed by the Supreme Court.
Because the Supreme Court concluded that the district
court’s action would “seriously undercut[] the orderly process
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of the law,” id. at 313, it held that the Edwardses would not
be permitted to collaterally attack the Florida bankruptcy
court’s § 105 injunction in the federal courts in Texas. The
Court reasoned:
It is for the court of first instance to determine the
question of the validity of the law, and until its decision
is reversed for error by orderly review, either by itself or
by a higher court, its orders based on its decision are to
be respected. If respondents believed the Section 105
Injunction was improper, they should have challenged it
in the Bankruptcy Court, like other similarly situated
bonded judgment creditors have done. If dissatisfied
with the Bankruptcy Court’s ultimate decision,
respondents can appeal to the district court for the
judicial district in which the bankruptcy judge is serving,
see 28 U.S.C. § 158(a), and then to the Court of Appeals
for the Eleventh Circuit, see §158(d).
Celotex, 514 U.S. at 313 (quotation marks and citation
omitted).
In the present case, the district court found that Celotex was
controlling, reasoning as follows:
Like the claimants in [Celotex], Plaintiffs . . . assert that
the Bankruptcy Court exceeded its jurisdictional bounds
by enjoining post-confirmation suits against a non-debtor
third-party for its pre-confirmation action. Celotex
reaffirmed the rule that such a challenge cannot be
sustained . . . .
. . .
[I]f the Confirmation Order was issued in error—whether
the result of either fraud or lack of jurisdiction—it
remains the responsibility of the Delaware Bankruptcy

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Court, Delaware District Court, and, if necessary, the
Third Circuit, to effect any necessary corrections.
Pratt, 273 B.R. at 116 (emphasis added).
In Celotex, the Supreme Court reaffirmed
the well-established rule that ‘persons subject to an
injunctive order issued by a court with jurisdiction are
expected to obey that decree until it is modified or
reversed, even if they have proper grounds to object to
the order.’
514 U.S. at 306 (quoting GTE Sylvania, Inc. v Consumers
Union, 445 U.S. 375, 386 (1980)) (emphasis added). The
bankruptcy court’s injunction in Celotex, therefore, was to be
honored only if it was acting “with jurisdiction.”
Accordingly, the Celotex court examined whether the Florida
bankruptcy court had jurisdiction to enjoin the Edwardses
from proceeding against the third-party surety. The Court
ultimately held that the Edwardses’ action fell within the
bankruptcy court’s jurisdiction to adjudicate matters that are
“related to” a case under Title 11. Id. at 310; see 28 U.S.C.
§ 1334(b), 28 U.S.C. § 157(a). Because the Court found that
the bankruptcy court did have jurisdiction, the Edwardses
were barred from collaterally attacking the Florida bankruptcy
court’s injunction in the federal courts of Texas.
The district court in the present case, by contrast,
“expressly decline[d] to consider whether the Bankruptcy
Court exceeded its statutory authority in granting injunctive
relief to Defendants.” Pratt, 273 B. R. at 116. As excerpted
above, the district court stated that it was the responsibility of
the Delaware bankruptcy court, the Delaware district court,
and the Third Circuit to correct any jurisdictional errors. Id.
The district court’s reliance on Celotex for the proposition
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that litigants must go through the “proper channels of the
statutorily-defined appellate process,” id. at 116, to challenge
a bankruptcy court’s judgment was perfectly appropriate. But
the district court should not have dismissed the Plaintiffs’
case under the collateral attack doctrine without first
determining that the Delaware bankruptcy court in fact had
jurisdiction to enter the Confirmation Order. Its failure to do
so, however, is harmless in light of the Plaintiffs subsequent
return to the bankruptcy court for the very purpose of
challenging that court’s authority to grant Ventas a full
release from their claims.
C. Application of res judicata
While the present appeal was held in abeyance, Plaintiffs
returned to Delaware to litigate their claim that the
bankruptcy court lacked jurisdiction to release Ventas. See In
re Vencor, Inc., 284 B.R. 79 (Bankr. D. Del. 2002). The
bankruptcy court reviewed two rounds of briefs and held two
hearings on the myriad of claims raised by Plaintiffs. Id. at
82. Following these proceedings, the court issued an opinion
with a section dedicated specifically to Plaintiffs’
jurisdictional argument. The court “conclud[ed] that the
Confirmation Order was not beyond [its] jurisdiction.” Id. at
86.
Now that the Delaware bankruptcy court has adjudicated
the issue of its jurisdiction in In re Vencor, Inc., the Plaintiffs’
right to question that decision in Kentucky is barred by both
the collateral attack and res judicata doctrines. “A party that
has had an opportunity to litigate the question of subject-
matter jurisdiction may not . . . reopen that question in a
collateral attack upon an adverse judgment.” Ins. Corp. of
Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694,
702 n.9 (1982).
Plaintiffs argue, however, that the timeliness of their
motion was the real issue before the Delaware bankruptcy

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court, not jurisdiction. At oral argument, Plaintiffs’ counsel
contended that the court’s conclusion that it was not acting in
excess of its jurisdiction was simply dicta. We read the
bankruptcy court’s discussion of Plaintiffs’ jurisdictional
issue not as dicta, however, but as an alternative holding.
After concluding that the Plaintiffs’ motion to set aside the
Confirmation Order was untimely, In re Vencor, Inc., 284
B.R. at 83-84, the court stated:
The [Plaintiffs] assert that the relief requested in their
Motion can nonetheless be granted. They argue that
Rule 60(b)(4) permits the modification of the
Confirmation Order because it was entered by this Court
beyond its jurisdiction and is, therefore, void.
Id. at 85 (emphasis added). The above-quoted language
indicates that the bankruptcy court considered the Plaintiffs’
jurisdictional claim to be an alternative basis for relief. After
examining that alternative ground, the court “conclude[d] that
there is no basis for an assertion that this Court lacked
jurisdiction to consider and grant the releases contained in the
Plan.” Id. at 86. We therefore conclude that the bankruptcy
court’s decision in In re Vencor, Inc. is a judgment on the
merits of this jurisdictional issue. See Gillespie v. U.S. Steel
Corp., 321 F.2d 518, 529-30 (6th Cir. 1963) (holding that
where a matter is argued before the court, and the court’s
opinion passes on the issue, the language is not dicta).
A judgment is “any order from which an appeal lies.” Fed.
R. Civ. P. 54(a). Because Plaintiffs did not appeal the
bankruptcy court’s decision to the district court in Delaware,
the judgment of the bankruptcy court is now final. See Chicot
County Drainage Dist. v. Baxter State Bank, 308 U.S. 371,
377 (1940) (“The court has the authority to pass upon its own
jurisdiction and its decree sustaining jurisdiction against
attack, while open to direct review, is res judicata in a
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collateral action.”); see also Trulis v. Barton, 107 F.3d 685,
691 (9th Cir. 1995) (holding that plaintiffs could not
challenge the bankruptcy court’s subject matter jurisdiction
because they failed to appeal the bankruptcy court’s
confirmation order).
The Supreme Court addressed similar circumstances in
Stoll v. Gottlieb, 305 U.S. 165 (1938). In Stoll, a bankruptcy
court confirmed a debtor’s reorganization plan that included
a release of the debtor’s bond guarantors. Gottlieb, one of the
bondholders, did not appear at the hearing on the
reorganization plan. The plan was confirmed over the
objection of other bondholders, but no one appealed the
confirmation order. Instead, Gottlieb launched a two-pronged
attack. He first instituted an action against the bond
guarantors in the Illinois state court system. Second, Gottlieb
filed a motion to vacate the bankruptcy court’s confirmation
order on the basis that it did not have jurisdiction to cancel the
bond guaranty. The bankruptcy court denied Gottlieb’s
contested motion. Back in state court, the bond guarantors
defended themselves on the ground that the bankruptcy
court’s initial confirmation order and its subsequent order
denying Gottlieb’s jurisdictional claim were res judicata. The
Supreme Court of Illinois found in favor of Gottlieb, but the
United States Supreme Court reversed, explaining:
We see no reason why a court in the absence of an
allegation of fraud in obtaining the judgment, should
examine again the question whether the court making the
earlier determination on an actual contest over
jurisdiction between the parties, did have jurisdiction of
the subject matter of the litigation. In this case, the order
upon the petition to vacate the confirmation settled the
contest over jurisdiction.
Id. at 172.

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In the present case, there are no allegations of fraud
regarding the decision handed down in In re Vencor, Inc. As
in Stoll, Plaintiffs engaged Ventas in “an actual contest over
jurisdiction,” and therefore “the order upon the petition to
vacate the confirmation settled” this issue. See also Republic
Supply Co. v. Shoaf, 815 F.2d 1046, 1053-54 (5th Cir. 1987)
(holding that where a bankruptcy court determined that it had
subject matter jurisdiction, its confirmation of a
reorganization plan that released a third-party guarantor had
res judicata effect in a subsequent suit).
We note, moreover, that the Stoll court “express[ed] no
opinion as to whether the Bankruptcy Court did or did not
have jurisdiction of the subject matter.” Id. at 171 n.8. In
fact, the Supreme Court assumed that the bankruptcy court
“did not have jurisdiction of the subject matter of the order.”
Id. at 171 (emphasis added). Whether the bankruptcy court
erred in its determination was immaterial to the Court, which
held that
we base our conclusion here on the fact that in an actual
controversy the question of the jurisdiction over the
subject matter was raised and determined adversely to the
respondent. That determination is res judicata of that
issue in this action . . . .
Id. at 177. We likewise pass no judgment on whether the
Delaware bankruptcy court erred in determining that it had
jurisdiction to enter the Confirmation Order and the releases
contained therein. For our purposes, the fact that the Delaware
bankruptcy court has decided the matter is enough to preclude
us from entertaining an identical claim in this court.
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D. Ventas’s cross-appeal
In its original order, the district court dismissed Plaintiffs’
complaint “with prejudice.” Pratt, 273 B.R. at 116. The
court subsequently amended its dismissal as being “without
prejudice” because the “order was limited solely to the
question of whether jurisdiction was proper in the Western
District of Kentucky, and did not reach the merits of the
parties’ underlying substantive claims.” In doing so, the court
explained that it had not intended to preclude Plaintiffs from
litigating their claims in an appropriate venue, i.e., the
Delaware bankruptcy court.
On its face, the motion presented by Ventas to the district
court was brought pursuant to Rule 12(b)(6), which authorizes
a dismissal for failure to state a claim. A “dismissal for failure
to state a claim under Federal Rule of Civil Procedure
12(b)(6) is a ‘judgment on the merits,’” and is therefore done
with prejudice. Federated Dep’t Stores, Inc. v. Moitie, 452
U.S. 394, 399 n.3 (1981). By contrast, “a dismissal for lack
of subject matter jurisdiction does not operate as an
adjudication on the merits for preclusive purposes.”
Holloway v. Brush, 220 F.3d 767, 778 (6th Cir. 2000) (citing
Rule 41(b) of the Federal Rules of Civil Procedure)
(quotation marks omitted). This court has explained:
The rationale behind this is that merely because one court
does not have jurisdiction over a dispute does not
necessarily mean that another court is precluded from
properly exercising jurisdiction over the matter.
Moreover, if a court does not have jurisdiction over a
matter, it cannot properly reach the merits of the case.
Wilkins v. Jakeway, 183 F.3d 528, 533 n.6 (6th Cir. 1999)
(citation omitted).
Ventas is technically correct that the district court
dismissed Plaintiffs’ claim pursuant to Ventas’s Rule 12(b)(6)

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motion and that such dismissals are presumptively “with
prejudice.” But a plain reading of the district court’s opinion
and amended order indicates that the district court’s basis for
dismissing Plaintiffs’ claim was jurisdictional in nature and
was therefore “without prejudice.” Because the district court
amended its order to be “without prejudice,” Plaintiffs were
able, while the present appeal was being held in abeyance, to
pursue their claim in the Delaware bankruptcy court.
Whether the district court erred in amending its order is
therefore moot.
III. CONCLUSION
For all the reasons set forth above, we AFFIRM the
judgment of the district court.

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