In re Morales

• Decision Date: 22 August 2011
• Docket Number: CASE NO. 10-02531 BKT
• Parties: In re: RICHARD FIGUEROA MORALES XXX-XX-4782 Debtor(s)
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Puerto Rico

IN RE: RICHARD FIGUEROA MORALES XXX-XX-4782 Debtor(s)

CASE NO. 10-02531 BKT

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO

FILED & ENTERED ON: August 22, 2011

Dated: August 23, 2011

OPINION AND ORDER

This contested matter is before the court upon Debtor's objection to claim #9 [Dkt. No. 45] filed by RICHARD FIGUEROA MORALES ("Debtor"), Creditor's Answer to Objection to Claim 9 [Dkt. No. 51] filed by OPERATING PARTNERS CO., INC. ("Creditor") and debtor's reply to Creditor's answer to debtor's objection to claim [Dkt. No.57].

I. Procedural Background

On October 15, 2010, Creditor filed Proof of Claim Number 9 as a secured claim in the amount of $8,925.00 for attorney's fees in connection with a September 1, 2009 default judgment in the Commonwealth of Puerto Rico, Superior Court in Arecibo. On January 25, 2011, Debtor filed the instant Objection to Proof of Claim against Creditor alleging that the attorney's fees stated are excessive and unreasonable and therefore not owed.

Debtor alludes to the "equitable principles in the administration of bankruptcy proceedings" to impugn the reasonableness of the attorney's fees awarded to Creditor in the state court judgment while arguing that it isimpossible that the matter required such exorbitant attorney's fees given that the judgment was rendered on default and no litigation actually took place. Debtor further alleges that the requirements of Bankruptcy Rule 3001(d) are not met in that Creditor failed to detail the billable hours worked and thus prove that their claim is a perfected security.

Creditor argues that the Arecibo Court's determination with respect to the prepetition attorney's fees is binding on the Bankruptcy Court since the foreclosure judgment delivered by the state court has a preclusive effect. For the reasons set forth below, the Objection to the Proof of Claim filed by the debtor is DENIED.

This Court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§1334 and 157(a) and the General Order of referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of Puerto Rico dated July 19, 1984 (Torruella, C.J.). This is a core proceeding in accordance with 28 U.S.C. §157(b).

II. Applicable Law & Discussion

A. Claim preclusion

The issue before this court relates to the preclusive effect, if any, of a prepetition state court judgment rendered on default. All federal courts must give preclusive effect to a state court judgment when the courts of the state from which the judgment was rendered would do so. Judicial judgments shall be given the same full faith and credit in every court within the United States and its territories and possessions as they have by law or usage in the courts of such state, territory or possession from which they are taken. 28 U.S.C.S. § 1738. For this reason, the preclusive effect of a state court judgment in a federal proceeding depends on the state's own law. Cruz v. Melecio, 204 F.3d 14, 18 (1st Cir. 2000).

Under Puerto Rico law, it has been established that the party asserting claim preclusion or res judicata must establish: (1) the existence of a prior judgment on the merits which is "final and unappealable,"; (2) the perfectidentity of thing or cause, and (3) the perfect identity of parties and the capacity in which they acted. Boateng v. Interamerican University, Inc., 210 F.3d 56 (1st Cir. 2000). Creditor argues that all these factors are present in the case at bar, that res judicata therefore applies to the Commonwealth court's default judgment, and that consequently, the objection raised by Debtor regarding the attorney's fees must be denied. We agree.

To determine whether claim preclusion is appropriate, each element of the claim preclusion doctrine must be analyzed with reference to the facts of every particular case. The element of "party identity" does not merit much discussion because it is clearly the same two parties. As to identity of the cause of action, the court must consider whether the debtor's counterclaims herein should have been raised as counterclaims in the foreclosure proceeding. In Neca Mtg. Corp. v. A & W Developers S.E., 137 D.P.R. 860, 867, 1995 Juris P.R. No. 10, 1995 WL 905586 (1995), the Puerto Rico Supreme Court held that if a defendant fails to file a compulsory counterclaim, said cause of action is waived and the facts and claims that constitute said cause of action are deemed adjudicated by the ensuing judgment, barring the defendant from later initiating a claim based on the same events. In those circumstances, the court held that the doctrine of res judicata would apply in connection with the issues that could have been raised in the counterclaim but were not. Jd. Rule 11.1 of Puerto Rico's Rules of Civil Procedure defines compulsory counterclaims as those that arise out of the same act, omission or event that motivated the complaint filed by the adverse party. 31 P.R. Stat. Ann., Ap. III

The last element necessary to establish claim preclusion, the existence of a "prior final judgment on the merits," may raise certain doubts with regards to judgments rendered on default. Creditor relies on a case from the Bankruptcy Court for the District of Massachusetts which considered this issue and held:

"While this element requires slightly more attention, it is no more of an obstacle than the other elements of claim preclusion. The Supreme Judicial Court of Massachusetts has unequivocally held that even a default judgment is entitled to finality. See MacEachern v. S.S. White Dental Mfg. Co., 304 Mass. 419, 23 N.E.2d1020 (1939) (stating that when a defendant to an action has a full and fair opportunity to defend its position in a court having jurisdiction, and sufficient notice has been provided, the defendant should not be permitted to raise defenses in a subsequent proceeding that could have, or should have, been raised in the first instance); see also Riehle v. Margolies, 279 U.S. 218, 225, 49 S. Ct. 310, 313, 73 L. Ed. 669 (1929) ("[a] judgment of a court having jurisdiction of the parties and of the subject-matter operates as res judicata, in the absence of fraud or collusion, even if obtained upon a default."); SMA Life Assurance Co. v. Sanchez-Pica, 960 F.2d 274, 275 (1st Cir. 1994), cert. denied, 506 U.S. 872, 113 S. Ct. 207, 121 L. Ed. 2d 147 (1992); Carteret Sav. & Loan Assn. v. Jackson, 812 F.2d 36, 38 (1st Cir. 1987); Koziol v. H. P. Hood, Inc. (In re Koziol), 18 B.R. 1014, 1017 n. 2 (1982) (stating that "[a] default judgment is nevertheless a final judgment, since the defaulted party has lost the right to appear or defend." (citations omitted)). Adopting a view that a default judgment is anything other than final would undermine the utility of such a judgment and reward those who chose to ignore judicial proceedings. See, Carteret Sav. & Loan 812 F.2d at 38 (stating that if a default judgment were not considered final it "would be of uncertain value, and represent simply one step toward resolving the dispute between the parties...the judgment creditor would remain faced with a prospect of [future] litigation")." In re Brennan, 275 B.R. 172 (Bankr. D. Mass. 2002) emphasis ours.

In Brennan, the court concluded its opinion by pointing out that "The Debtor, with full knowledge of the state court proceeding, allowed a default to enter against him despite his participation as a witness in the case. The Debtor has not attempted to challenge the personal or subject matter jurisdiction of the Massachusetts Superior Court, nor has he alleged fraud in the procurement of the default judgment. Rather, in an effort to collaterally attack that judgment, the Debtor has raised defenses that would have been, and should have been, properly...