In re George, BAP No. CC-04-1319-KPAB.

• Decision Date: 09 December 2004
• Docket Number: Bankruptcy No. ND 94-12409 RR.,BAP No. CC-04-1319-KPAB.,Adversary No. ND 02-01228 RR.
• Citation: 318 B.R. 729
• Parties: In re James F. GEORGE III and Margie R. George, Debtors. James F. George III; Margie R. George, Appellants, v. City of Morro Bay, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

318 B.R. 729

In re James F. GEORGE III and Margie R. George, Debtors.

James F. George III; Margie R. George, Appellants, v. City of Morro Bay, Appellee.

BAP No. CC-04-1319-KPAB.

Bankruptcy No. ND 94-12409 RR.

Adversary No. ND 02-01228 RR.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted November 17, 2004.

Filed December 9, 2004.

COPYRIGHT MATERIAL OMITTED

James F. George, III and Margie R. George, Atascadero, CA, Pro se Appellants.

Peter E. Cummings, Hunt & Associates, Paso Robles, CA, for City of Morro Bay.

Before: KLEIN, PAPPAS^* and BRANDT, Bankruptcy Judges.

OPINION

KLEIN, Bankruptcy Judge.

This is an appeal from a judgment based on the res judicata doctrine of claim preclusion, which the court invoked to refuse to consider a new theory regarding a transaction that the parties previously had litigated to finality. Concluding that the General Rule of Bar and the General Rule Concerning Splitting, as stated in Restatement (Second) of Judgments §§ 19 and 24, combine to warrant imposition of claim preclusion, we AFFIRM.

FACTS

Appellants, James and Margie George, who in 1987 had leased nonresidential real property for thirty years from appellee, the City of Morro Bay, filed a chapter 11 case (later converted to chapter 7) in June 1994.

The Georges and the City went to war with each other in September 1994, when the City made a motion for surrender of the leasehold premises pursuant to 11 U.S.C. § 365(d)(4), sixty days having elapsed without a motion to assume or reject the lease.

The Georges belatedly sought to assume the lease, contending that the City had waived its § 365(d)(4) rights when it accepted rent post-petition.

The bankruptcy court ruled that the City was entitled to return of the premises regardless of whether rent was current.

Since then, convinced they were cheated out of their thirty-year lease, the Georges have waged the war on multiple fronts.

The Georges' campaign to retain possession of the premises lasted until the U.S. Supreme Court denied certiorari in 2000. The details were chronicled by the Ninth Circuit in George v. City of Morro Bay (In re George), 177 F.3d 885, 886-87 (9th Cir.1999), cert. denied, 528 U.S. 1135, 120 S.Ct. 978, 145 L.Ed.2d 929 (2000)("George I").

Meanwhile, the Georges counterattacked on a second front in March 1996, commencing an adversary proceeding for affirmative relief against the City and others, including the bank that took over the lease. The complaint alleged sixteen federal and state counts arising from the leasehold dispute, including theories under 42 U.S.C. § 1983, the Fifth Amendment, and RICO.

After seven years of convoluted skirmishing, the affirmative relief campaign ended with all federal counts dismissed with prejudice and the state counts dismissed without prejudice. The details appear in George v. City of Morro Bay (In re George), 322 F.3d 586, 588-91 (9th Cir.2003) ("George II").¹

In November 2002, the anti-discrimination provision of 11 U.S.C. § 525 came to the Georges' attention.² They filed a complaint seeking a declaration that "termination of the Plaintiffs' lease was void and a violation of" § 525, together with "such other relief as is proper and just."

The City's answer asserted various affirmative defenses, including statute of limitations, "res judicata" (claim preclusion), and "collateral estoppel" (issue preclusion).

At the time of trial, the bankruptcy court ruled that the complaint was time-barred and barred by rules of res judicata.

After unsuccessful post-trial motions, this appeal ensued.

JURISDICTION

The bankruptcy court had jurisdiction via 28 U.S.C. §§ 1334 and 157(b)(1). We have jurisdiction under 28 U.S.C. § 158(a)(1).

ISSUE

Whether the "General Rule of Bar" and the "General Rule Concerning Splitting" justified imposing claim preclusion to reject a new legal theory based on previously-litigated facts.

STANDARD OF REVIEW

We review rulings regarding the availability of res judicata doctrines, including claim preclusion, de novo as mixed questions of law and fact in which legal questions predominate. Robi v. Five Platters, Inc., 838 F.2d 318, 321 (9th Cir.1988); Alary Corp. v. Sims (In re Assoc'd Vintage Group, Inc.), 283 B.R. 549, 554 (9th Cir. BAP 2002). Once we determine that the doctrines are available to be applied, the actual decision to apply them is left to the trial court's discretion. Robi, 838 F.2d at 321.

DISCUSSION

This appeal turns on whether either of two bankruptcy court judgments trigger the res judicata doctrines of claim and issue preclusion, which apply in bankruptcy. Brown v. Felsen, 442 U.S. 127, 134-39, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979); Paine v. Griffin (In re Paine), 283 B.R. 33, 39 (9th Cir. BAP 2002); Alary Corp., 283 B.R. at 554-55.

The res judicata doctrines regarding judgments of federal courts are a matter of federal common law. W. Sys., Inc. v. Ulloa, 958 F.2d 864, 871 (9th Cir.1992); Robi, 838 F.2d at 322.

The Supreme Court treats the Restatement (Second) of Judgments ("Restatement") as an authoritative statement of federal res judicata doctrines and has applied the Restatement's substitution of the terms "claim preclusion" and "issue preclusion" for "res judicata" and "collateral estoppel." E.g., New Hampshire v. Maine, 532 U.S. 742, 748, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) ("res judicata doctrines commonly termed claim and issue preclusion"); Baker v. Gen. Motors Corp., 522 U.S. 222, 233 n. 5, 118 S.Ct. 657, 139 L.Ed.2d 580 (1998); Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 77 n. 1, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984); Hiser v. Franklin, 94 F.3d 1287, 1290 (9th Cir.1996); Robi, 838 F.2d at 321-22; 18 CHARLES A. WRIGHT, ARTHUR R. MILLER & Edward H. Cooper, Federal Practice & Procedure § 4402 (2d ed.2003).

I

Issue preclusion bars relitigation only of issues that have been actually litigated, while the broader brush of claim preclusion may also bar a cause of action that never has been litigated. Alary Corp., 283 B.R. at 555. Since there has been no actual litigation of the § 525 theory, this is purely a case of intramural (i.e. within the federal courts³) claim preclusion.

The Georges litigated the question of validity of the premises surrender to finality. They also separately litigated to finality an amalgam of theories for affirmative relief arising out of the circumstances of the premises surrender dispute.

In each instance, finality occurred when the bankruptcy court entered judgment disposing of all claims. Fed.R.Civ.P. 54(b), incorporated by Fed. R. Bankr.P. 7054 & 9014; United States ex rel. Barajas v. Northrop Corp., 147 F.3d 905, 909 (9th Cir.1998) ("Barajas"); RESTATEMENT (SECOND) OF JUDGMENTS § 14 (1980).⁴

Although the pendency of appeals did not affect finality, the ultimate affirmances in George I and George II added a dimension to the finality of the bankruptcy court's judgments.

After the litigations regarding premises surrender and affirmative relief were final, the Georges discovered the anti-discrimination provision of Bankruptcy Code § 525(a) and commenced a new adversary proceeding seeking § 525 relief.

The City's answer to the § 525 complaint pleaded a number of affirmative defenses, including (using the obsolete terms res judicata and collateral estoppel) claim and issue preclusion. The court relied on preclusion as a basis for denying relief.

We need not delve into the vagaries of § 525, except to note that § 525 has been the basis for affirmative relief that might pertain if the Georges' cause had merit. See 4 COLLIER ON BANKRUPTCY (ALAN RESNICK & HENRY SOMMER EDS.) ¶ 525.06 (15th ed. rev.2003).

What matters is that, assuming (without deciding) the new theory had factual and legal merit and could trump § 365(d)(4), the § 525 issue could have been asserted defensively in the premises surrender litigation and could have been asserted offensively as an additional theory in the affirmative relief litigation, both of which resulted in valid and final judgments.

II

Claim preclusion is the consequence of applying the General Rules of Merger and of Bar and the General Rule Concerning Splitting (and their exceptions) to a valid and final personal judgment. RESTATEMENT (SECOND) OF JUDGMENTS § 17.⁵

The General Rule of Merger contemplates that a judgment in favor of a plaintiff extinguishes the entire claim, which merges into the judgment. Future actions may be maintained "on the judgment." California v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1150-51 (9th Cir.1996); RESTATEMENT (SECOND) OF JUDGMENTS § 18.⁶

Under the General Rule of Bar, a judgment in favor of a defendant ordinarily bars the plaintiff from maintaining another action on the same claim. Gilbert v. Ben-Asher, 900 F.2d 1407, 1410-11 (9th Cir.1990); RESTATEMENT (SECOND) OF JUDGMENTS §§ 19-20.⁷

What is barred by claim preclusion is another action on the same "claim," which is a Restatement term of art with a different meaning than the bankruptcy concept of a "claim." Compare RESTATEMENT (SECOND) OF JUDGMENTS § 24 ("Dimensions of `Claim'"), with 11 U.S.C. § 101(5) (defining "claim").

What constitutes the same "claim" for purposes of claim preclusion is determined under the so-called "transactional test" in the General Rule Concerning Splitting. This test focuses on the transactional nucleus of operative facts and includes all rights to remedies with respect to all or any part of the "transaction," determined pragmatically, out of which the action arose, so long as they could conveniently be tried together. W. Sys., Inc., 958 F.2d at 871; RESTATEMENT (SECOND) OF JUDGMENTS § 24.⁸

Legal theories and remedies not asserted are extinguished. Lindsay v. Beneficial Reins. Co. (In re Lindsay), 59 F.3d 942, 952 (9th Cir.1995); RESTATEMENT

(SECOND) OF JUDGMENTS § 25.⁹

The listed exceptions to the General Rule Concerning Splitting, however, import a measure of latitude as to where to draw the pragmatic line. These include an...