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Court Dismisses California Bankruptcy Debtor’s Adversary Proceeding, Finding It Barred by Prior Orders

Calvin Teo (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html), CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/) or CC BY-SA 2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/2.5-2.0-1.0)], via Wikimedia CommonsThe American justice system provides people with a variety of options for seeking resolution of disputes and asserting their rights when they believe they have been wronged. Bankruptcy courts operate at the federal level, but sometimes they must consider issues primarily involving state law. If a claim has already been resolved in another court, however, the doctrine of res judicata might preclude it from the bankruptcy court’s consideration. A California federal court recently considered a debtor’s appeal of a bankruptcy court’s order dismissing claims on this basis. In re Koebel, No. 2:15-cv-01222, opinion (C.D. Cal., Jan. 27, 2016).

Most lawsuits occur in state courts at the county level. Federal courts have jurisdiction over claims involving specific questions of federal law, as well as certain disputes between parties from different states. Bankruptcy cases must take place in the federal court system, but a bankruptcy proceeding is different from most types of lawsuits. The relationship between debtors and creditors in a bankruptcy case is not necessarily analogous to plaintiffs and defendants, but disputes can and do arise between the two.

Bankruptcy law provides multiple procedures for addressing disputes. Creditors can object to various actions by a debtor, and a debtor can file a motion to disallow a creditor’s claim. Any interested party can file an adversary proceeding, which functions like a lawsuit alongside the pending bankruptcy case. The debtor’s appeal in Koebel involved a succession of proceedings and a question of res judicata.

Once a court has adjudicated a particular claim, or a particular issue of fact, the doctrine of res judicata bars the claimant from bringing that claim or raising that issue in a future legal proceeding. If a person sues someone for breach of contract, for example, and receives a final adjudication from a court, res judicata bars them from suing the same person for the same breach of contract claim again, whether the prior adjudication was in their favor or not. Additionally, if a court makes a final ruling on a question of fact, neither party can re-litigate that question again, even on a different claim.

The debtor in Koebel took out a loan secured by a deed of trust and a lien on real property in 2008. After the lienholder initiated foreclosure in 2011, the debtor filed suit in state court to stop it. That case was dismissed, so he filed a lawsuit in federal court, which was also dismissed.

In 2012, the debtor filed a Chapter 13 bankruptcy petition. He moved the court to disallow the proof of claim filed by the lienholder, but the court denied the motion. He then filed an adversary proceeding against the lienholder, alleging “that the mortgage claim was void due to fraud” and that any amount claimed was either “unsecured or disallowed in its entirety.” Koebel, opinion at 4.

The bankruptcy court dismissed the adversary proceeding with prejudice. The debtor appealed to the district court, which affirmed the dismissal. It held that the dismissal of the state court lawsuit was a “final judgment on the merits” on the same cause of action brought in each subsequent proceeding. Id. at 8. The court therefore found that res judicata barred the adversary proceeding.

Bankruptcy attorney Devin Sawdayi represents Los Angeles individuals and families who have found themselves in financial distress. We help our clients use the Chapter 7 and Chapter 13 bankruptcy processes to repair and rebuild their finances with dignity and respect. To schedule a confidential consultation with a dedicated advocate for financial recovery, contact us today online, at (310) 475-9399, or at (800) 474-6050.

More Blog Posts:

Federal Judge Gives Debtors Additional Time to Perfect Appeal in California Chapter 7 Bankruptcy Case, Los Angeles Bankruptcy Lawyer Blawg, September 28, 2014

Supreme Court Decision Affirming Discharge of Student Loan Debt Prompts Possible Revisions to Chapter 13 Procedures, Los Angeles Bankruptcy Lawyer Blawg, January 12, 2014

Debtor’s Adversary Proceeding in Chapter 7 Bankruptcy Dismissed on Procedural Grounds; Appeal Dismissed as Untimely, Los Angeles Bankruptcy Lawyer Blawg, November 13, 2013

Photo credit: Calvin Teo (Own work) [GFDL, CC-BY-SA-3.0 or CC BY-SA 2.5-2.0-1.0], via Wikimedia Commons.