Lockard, Matter of

• Decision Date: 05 September 1989
• Docket Number: No. 88-2529,88-2529
• Citation: 884 F.2d 1171,19 BCD 1244
• Parties: , Bankr. L. Rep. P 73,165 In the Matter of John E. LOCKARD d/b/a J.W.L. Construction, Debtor. O'MALLEY LUMBER COMPANY, d/b/a O'Malley Building Materials, Appellant, v. John W. LOCKARD, d/b/a J.W.L. Construction, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1171

884 F.2d 1171

19 Bankr.Ct.Dec. 1244, Bankr. L. Rep. P 73,165

In the Matter of John E. LOCKARD d/b/a J.W.L. Construction, Debtor O'MALLEY LUMBER COMPANY, d/b/a O'Malley Building Materials, Appellant, v. John W. LOCKARD, d/b/a J.W.L. Construction, Appellee.

No. 88-2529.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 15, 1989.

Decided Sept. 5, 1989.

Charles W. Lowe, Davis & Lowe, P.C., Phoenix, Ariz., for appellant.

John A. Weil, Engler, Engler, Weil & Nelson, Yuma, Ariz., for appellee.

Appeal from the United States District Court for the District of Arizona.

Before HUG, HALL and O'SCANNLAIN, Circuit Judges.

CYNTHIA HOLCOMB HALL, Circuit Judge:

This appeal involves issues of the jurisdiction of the bankruptcy court to decide a claim against a contractor's license bond executed by a non-debtor third-party surety, Allied Fidelity Insurance Company ("Allied"), and collateralized with commercial real property of the debtor, John E. Lockard, d/b/a J.W.L. Construction ("Lockard"), where a creditor has commenced a state court action to proceed against the bond prior to the debtor's filing of bankruptcy. The creditor in this case, O'Malley Lumber Company ("O'Malley"), timely appeals an order by which the district court denied O'Malley's appeal from an order of the Bankruptcy Court for the District of Arizona.

The bankruptcy court ruled that O'Malley was collaterally estopped from relitigating a prior state court determination that the surety bond was "property of the estate," as defined in 11 U.S.C. Sec. 541 (1982), and that O'Malley's state court action against Allied was subject to the automatic stay of 11 U.S.C. Sec. 362(a) (1982 & Supp.1986). ¹ The district court agreed with the bankruptcy court's rulings, but also held that O'Malley's failure to object to the Disclosure Statement and Plan of Reorganization, which were filed by Lockard and approved/confirmed by the bankruptcy court in the Chapter 11 proceedings, was an additional reason to deny O'Malley's appeal.

I

On July 24, 1985, O'Malley commenced an action against Lockard and Allied in the Superior Court of Maricopa County, Arizona, seeking to recover under the terms of a surety bond that licensed construction contractors are required by statute, Ariz.Rev.Stat.Ann. Sec. 32-1152 (West 1986 & Supp.1988), to file with the registrar of contractors. ² The following day, Lockard filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.

Upon receiving notice of the bankruptcy filing, O'Malley agreed to dismiss the state court action against Lockard but elected to proceed with its claim against Allied. On October 11, 1985, Superior Court Judge Rebecca Albrecht heard argument and took under advisement Lockard's Motion to Dismiss the Complaint, and O'Malley's Motion for Summary Judgment against Allied.

In an unsigned minute entry order ("MEO") of October 15, 1985, Judge Albrecht denied Lockard's Motion to Dismiss, stayed the state court action as to both Lockard and Allied, and declined to rule on O'Malley's Motion for Summary Judgment. Judge Albrecht's MEO, in relevant part, reads as follows:

The court has reviewed the memoranda filed in support of the Motion to Dismiss and the Motion for Summary Judgment. Based upon the court's review of the matter, it appears to this court that the surety bond is an asset of the bankrupted estate under the Chapter XI proceedings and, therefore, this cause of action is stayed as to the insurance company, as well as the defendants individually.

In a further passage from the MEO, Judge Albrecht retained the case on her inactive calendar with the apparent purpose of allowing O'Malley sufficient time to seek and obtain stay relief from the bankruptcy court.

Meanwhile in bankruptcy court, Lockard had filed a Motion for Sanctions or in the Alternative for a Stay Order, which was denied by Judge Ollason after a hearing on October 25, 1985. At Judge Ollason's suggestion, O'Malley filed a motion to lift the stay (Adversary "D") which was denied, after a hearing on January 31, 1986, in a ruling from the bench that was never embodied in a formal written order. During that hearing, Judge Ollason stated that he was denying O'Malley's motion because the issues had been previously determined by the state Superior Court, and because the state court was correct as a matter of law.

Lockard's bankruptcy case proceeded under Chapter 11, and on July 15, 1986, Lockard filed a Disclosure Statement and Plan of Reorganization. ³ Although counsel for O'Malley received copies of the Plan of Reorganization and the Disclosure Statement, they filed no objections and did not appear at the hearings at which these documents were considered. Bankruptcy Judge Sarah Curley entered a written order confirming the Plan of Reorganization on February 20, 1987. On February 23, 1987, however, O'Malley filed a timely Motion Requesting Court Stay Entry of an Order Confirming Plan and Alternatively for Reconsideration of Order Confirming Plan. The bankruptcy court has deferred ruling on O'Malley's motion pending resolution of this appeal.

On April 1, 1987, O'Malley sought a status hearing on both its Adversary "D" motion and a motion to lift the stay that had been filed on May 1, 1986 (Adversary "E"). On July 26, 1987, Chief Bankruptcy Judge Mooreman entered an order in which he refused to lift the stay and denied all relief requested in Adversary "E," ruling that O'Malley was seeking to relitigate the same issues Judge Ollason had resolved in Lockard's favor in his "final" order of January 31, 1986.

O'Malley sought review of Judge Mooreman's order in the district court. By order dated April 6, 1988, the Honorable Paul G. Rosenblatt affirmed, ruling that the bankruptcy court correctly gave collateral estoppel effect to the state court's determination that the bond appeared to be an asset of the bankruptcy estate. O'Malley timely appeals from the district court order.

II

The questions of law presented by this appeal are subject to de novo review. In re American Mariner Industries, Inc., 734 F.2d 426, 429 (9th Cir.1984) (bankruptcy court's conclusions of law are subject to de novo review); see also In re Castlerock Properties, 781 F.2d 159, 161 (9th Cir.1986) (questions of bankruptcy court's jurisdiction are reviewed de novo). Questions regarding the availability of collateral estoppel and res judicata are also reviewed de novo. See Robi v. Five Platters, Inc., 838 F.2d 318, 321 (9th Cir.1988) (district court ruling on availability of res judicata, both as to claim preclusion and as to issue preclusion, is reviewed de novo). Compare Eilrich v. Remas, 839 F.2d 630, 632 (9th Cir.1988), cert. denied --- U.S. ----, 109 S.Ct. 60, 102 L.Ed.2d 38 (1988) (availability of collateral estoppel is a mixed question of law and fact which the Court of Appeals reviews de novo but, if collateral estoppel is available, decision to give preclusive effect is reviewed for abuse of discretion).

III

We must first decide whether the courts below correctly gave collateral estoppel effect to the unsigned minute entry order in which Maricopa County Superior Court Judge Albrecht stated that the bond "appeared" to be property of the estate. ⁴ Federal courts, including the bankruptcy courts, are required by statute to give full faith and credit to state judicial proceedings. 28 U.S.C. Sec. 1738 (1982); Piatt v. MacDougall, 773 F.2d 1032, 1034 (9th Cir.1985) (en banc); In re Gilman, 59 B.R. 234, 237 (Bankr.D.Ariz.1986). See also Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75, 81, 104 S.Ct. 892, 896, 79 L.Ed.2d 56 (1984). This statutory requirement has been interpreted to mean that a federal court must give a state court judgment the same preclusive effect it would receive in that state. Migra, 465 U.S. at 81, 104 S.Ct. at 896. Accordingly, we look to the Arizona law of issue preclusion to decide whether the bankruptcy court erred in giving preclusive effect to the state court determination of the legal status of the surety bond. See Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 379-82, 105 S.Ct. 1327, 1331-33, 84 L.Ed.2d 274 (1985).

The general rule of collateral estoppel, or issue preclusion, is stated in section 27 of the Restatement (Second) of Judgments (1982) ("Restatement") as follows:

When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.

The Arizona courts have accepted the general principles set forth in section 27, see Gilbert v. Bd. of Medical Examiners of Ariz., 155 Ariz. 169, 174-75, 745 P.2d 617, 622-23 (Ct.App.1987), and have adopted a test of "issue preclusion" that is very similar to that of the Restatement:

The elements necessary to invoke collateral estoppel are: the issue is actually litigated in the previous proceeding, there is a full and fair opportunity to litigate the issue, resolution of such issue is essential to the decision, there is a valid and final decision on the merits, and there is a common identity of the parties.

155 Ariz. at 174, 745 P.2d at 622. As the parties have noted, the "final judgment" requirement is somewhat more relaxed for purposes of "issue preclusion" than it is for purposes of "claim preclusion":

[F]or purposes of issue preclusion (as distinguished from merger and bar), 'final judgment' includes any prior adjudication of an issue in another action that is determined to be sufficiently firm to be accorded conclusive effect.

Restatement at Sec. 13. The Arizona courts have also indicated their acceptance of the finality principles of the Restatement. See Tucson Steel Div. v. Industrial Comm'n of Ariz., 154 Ariz. 550, 552, 744 P.2d 462, 466 (Ariz.Ct.App.1987).

Whether a judgment is "sufficiently firm" as to be "final"...