When a debtor files a bankruptcy petition, the automatic stay prevents any pending litigation involving the debtor from moving forward. 11 U.S.C. § 362. Once a bankruptcy case is closed, or once a bankruptcy judge lifts the automatic stay, pending lawsuits and other proceedings may continue. A creditor in a California bankruptcy case recently raised a concern about the effect of an order from the bankruptcy court on a state court lawsuit that was still subject to the automatic stay. The legal doctrine of res judicata holds that once a court has made a final ruling on the merits of a specific claim or issue, that issue cannot be relitigated. The district court, hearing the creditor’s concern on appeal, held that the question of whether res judicata applies must be left to the state court. Restoration Homes, LLC v. Taniguchi, No. 3:15-cv-00032, order (N.D. Cal., Aug. 7, 2015).
The debtor and his wife purchased real estate in 2004. He obtained a mortgage loan modification in 2009, which lowered the total balance and the monthly payments, deferred part of the balance, and adjusted the annual interest rate. In June 2013, the creditor bought the debtor’s loan. It initiated foreclosure proceedings that October, claiming that the debtor had not made payments since July. The debtor disputed this and filed suit to enjoin the foreclosure in California state court. The court granted the debtor’s injunction, on the condition that he post a $40,000 bond. The debtor filed for bankruptcy, since he could not afford the bond.
The creditor’s proof of claim included over $53,000 in prior defaults, $47,000 in payment shortfalls, and other costs and charges. The debtor objected, claiming that the proof of claim was based on the original loan, not the 2009 loan modification. The bankruptcy court partly sustained the objection, ruling that the debtor could cure the default based on the loan modification provisions. The court’s order included a paragraph stating that the order was “without prejudice” to any “claims or defenses” in the state court case, specifically including the amounts owed to the creditor. Taniguchi, order at 3.