In re Bellucci
| Decision Date | 27 September 1990 |
| Docket Number | Bankruptcy No. 288-06613-C-11,Adv. No. 289-0133. |
| Citation | 119 BR 763 |
| Court | U.S. Bankruptcy Court — Eastern District of California |
| Parties | In re Peter BELLUCCI, Debtor. Ralph SWIFT, Plaintiff, v. Peter BELLUCCI, Defendant. |
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Michael R. Germain, Weintraub, Genshlea, Hardy, Erich & Brown, Sacramento, Cal., for plaintiff.
Robert T. Mees, Jr., Mees & Lester, Sacramento, Cal., for defendant.
This motion for reconsideration poses two issues: (1) whether a bankruptcy court has inherent power to abstain (or defer to state courts) on grounds distinct from the statutory bankruptcy abstentions that are authorized by 11 U.S.C. § 305 and 28 U.S.C. § 1334(c); and (2) whether a bankruptcy court may lift the automatic stay provided by 11 U.S.C. § 362 sua sponte.
The ultimate inquiry is the extent to which a bankruptcy court can control its calendar in the name of wise judicial administration without asking a district court for permission each time.
The narrow questions are whether a bankruptcy court can impose a Colorado River stay of an adversary proceeding sua sponte and whether it can lift the automatic stay sua sponte to permit whatever state court action is needed for a judgment to become final. Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). The issues presented are of particular significance in a jurisdiction where res judicata does not apply until appeals are completed. In the present matter, litigating this adversary proceeding in the bankruptcy court would have the effect of adding two federal appeals as of right to the state appellate scheme and would result in an otherwise unnecessary six-week trial.
I conclude that a bankruptcy court has discretion to invoke Colorado River deference, and that such power is distinct from, and not preempted by, the statutory bankruptcy abstention provisions. 11 U.S.C. § 305; 28 U.S.C. § 1334(c). I also conclude that 11 U.S.C. § 105(a) clarifies that a bankruptcy judge can lift the automatic stay of the appeal sua sponte.
Peter Bellucci filed this chapter 11 case while his appeal from a $1.1 million judgment in favor of Ralph Swift was before a California court of appeals.1 Initially, Bellucci wanted the chapter 11 trustee (who was appointed for cause) to pursue the appeal and protested when she did not do so. Then he changed his strategy and now wants the bankruptcy court to perform the function of a state appellate court.
The estate has substantial assets, perhaps enough to pay everyone in full, including Swift. Bellucci insists that such is the case even if Swift's judgment were to be upheld in its entirety. The trustee agrees that assets are substantial but says that prospects for full payment depend upon the outcome of pending fraudulent transfer litigation.
Swift won his judgment in a civil action, filed in 1980, after a three-stage trial that consumed almost six weeks in 1983, 1987, and 1988. Although Bellucci disputes the compensatory damages, he is more vexed by the $450,000.00 in punitive damages. There has now been over a decade of "scorched earth" warfare fueled by personal animosity and obstinance on both sides. Bellucci has a history of suing everyone in his way, including the superior court judge who made the punitive damage award and the first chapter 11 trustee.2
Swift filed a proof of claim for the amount of the judgment and filed an adversary proceeding seeking to have his claim declared nondischargeable. Resolution of dischargeability of Swift's judgment ordinarily requires a separate trial in bankruptcy but would be mooted if the claim were to be paid in full.3
Bellucci objected to Swift's claim, challenging both the validity and the amount of the judgment. The issues asserted in his objection are purely appellate issues — the sufficiency of the evidence at trial and the trial court's application of California law.4 This is fundamentally an effort to have the bankruptcy court "reverse" Swift's judgment and, thereafter, retry the claim.
The adversary proceeding and the objection to claim were consolidated on motion pursuant to Federal Rule of Civil Procedure 42, to minimize cost and delay in a situation that involved common questions.5
I stayed the consolidated proceeding sua sponte once Bellucci's ultimate aim to relitigate the state court judgment became evident and upon learning that assets might be sufficient to pay everyone in full. Concurrently, I lifted the automatic stay sua sponte to permit resolution of the state court appeal.6
The stay has two facets, each supported by a different rationale. One is the stay of litigation over the amount of the claim, for which the rationale is pending state litigation that is nearing completion. That stay terminates when the appeal is decided, at which point, regardless of who wins, any subsequent proceedings are likely to take days rather than weeks. The other is the stay of the nondischargeability action because it would be mooted if payment were being made in full. That stay's duration depends upon other events that will transpire within the chapter 11 case.
The stay of the consolidated proceeding does not interfere with the progress of this chapter 11 case. A plan of reorganization that treats Swift's judgment as a disputed claim to be resolved later can be formulated.7 A plan can be confirmed before all claims are finally resolved.8 The stay creates no impediment to other matters in the case or to any other adversary proceedings that are pending.
Bellucci contends that I exceeded my authority in issuing the orders sua sponte and insists that he has a right to use the bankruptcy court as a state appellate court to relitigate Swift v. Bellucci in federal court.
In this case, the need to stay the consolidated proceedings and to lift the stay of the appeal arises from a quirk of California law, which denies preclusive effect to California judgments until appeals are completed:
California and federal law differ in their definition of finality for purposes of res judicata. The pendency of an appeal precludes finality under California law, but, under federal law and the law of many other states, the pendency of an appeal does not alter the res judicata effect of an otherwise final judgment.
15 A. Schwing, California Practice: Defenses in Civil Actions § 14.6 (1988) (footnote omitted). This is distinctly a minority rule.9 In most jurisdictions, the state court judgment would be res judicata on liability and damages and preclude relitigation of those issues in the bankruptcy court.10
The Full Faith and Credit Statute, 28 U.S.C. § 1738, requires that federal courts apply California law in determining the res judicata effect of a California judgment. This statute applies in bankruptcy. Comer, 723 F.2d at 737; 1B J. Moore, J. Lucas & T. Currier, Moore's Federal Practice ¶ 0.4193.-6, at 686-93 (2d ed. 1988); 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure: Jurisdiction § 4470, at n. 44 (1981 and 1990 Supp.).
A federal court cannot apply claim or issue preclusion based upon a California judgment that is on appeal because California does not apply such preclusion in its courts. Kremer v. Chemical Constr. Corp., 456 U.S. 461, 481-82, 102 S.Ct. 1883, 1897-98, 72 L.Ed.2d 262 (1982) (Title VII). Thus, Swift's judgment, because it was on appeal when the bankruptcy case was filed, is not conclusive of Swift's claim in bankruptcy.11
Principles of comity, federalism, and judicial efficiency all counsel against allowing federal trial courts to review state court judgments. Where a matter would not be within federal jurisdiction absent bankruptcy and can be timely adjudicated in state court, a distinct congressional policy favors resolution in state court. 28 U.S.C. § 1334(c)(2); Piombo Corp. v. Castlerock Properties (In re Castlerock Properties), 781 F.2d 159, 163 (9th Cir.1986).
Swift's judgment is a matter that is classically within the province of a state court. The underlying dispute was between citizens of the same state, involved questions of state law, and judgment was rendered after six weeks of trial in state court. The sole basis for federal jurisdiction is bankruptcy jurisdiction, which, in litigation over claims, is not exclusive jurisdiction. 28 U.S.C. § 1334(b).12 No overriding federal interest would be served by having a federal bankruptcy court sit as an appellate court in what amounts to a routine appeal from a state court judgment.
The judicial inefficiency demanded by the debtor also offends principles of comity and federalism. Final decisions of bankruptcy courts in determining claims are subject to two appeals as of right.13 California permits but one appeal as of right. Cal. Const., art. 6, §§ 11-12. If permitted to proceed in this court, the debtor would supplant one state appeal with three layers of federal review.
The history of this litigation (now in its second decade) teaches that these parties will leave no appeal unprosecuted.14 Extra appeals would be expensive and time consuming. Of greater concern, they would result in three federal courts passing on the rulings of a California superior court.
Comity, federalism, and judicial efficiency militate in favor of suspending the matter in the bankruptcy court so that the state courts may finish their work and in order to see whether there will be a "full payment" plan. Lifting the automatic stay against the state proceeding is only a partial answer. A concurrent stay of the bankruptcy adversary proceeding is needed to effect the purpose.
The part of my order that stays Swift's...
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