Chief Judge Roger L. Efremsky • Clerk of Court Edward Emmons
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA
A hearing was held on September 1, 2000 on the motion for summary judgment filed by Coldwell Banker, Inc. ("Coldwell Banker") and Jim McCahon ("McCahon" and, collectively with Coldwell Banker, "defendants"). Joseph W. Carcione, Jr., Esq. and Gary W. Dolinski, Esq. appeared for plaintiffs Silvano Vial and Marisa Armanino-Vial ("Debtors"). Victoria B. Naidorf, Esq. appeared for defendants. At issue is whether this present adversary proceeding for misrepresentation and emotional distress related claims by Debtors against defendants is barred as res judicata by this court's earlier fee award to defendants entered over Debtors' objection on grounds of misrepresentation. For the reasons set forth below, the court concludes that this action is barred by the doctrine of res judicata and grants defendants' motion for summary judgment.
II. FACTS (1)
A. The Prior "Suit"
Debtors filed for relief under Chapter 13 of the Bankruptcy Code on April 25, 1996. The case was converted to Chapter 11 on July 25, 1996, with Debtors acting as debtors in possession. On January 14, 1997, Debtors entered into an "Exclusive Listing Agreement" whereby defendants would receive a 6% commission upon the sale of Debtors' residence at 84 Euclid Avenue, Atherton, California (the "Residence"); the list price was $1.695 million. This court approved the appointment of defendants as Debtors' real estate broker on February 18, 1997, but prohibited defendants from representing any buyer in the sale. Debtors accepted an offer naming "Jim Baskin or nominee" as buyer for $1.6 million on March 24, 1997, and this court approved the sale on April 28, 1997 to Baskin's nominees, Mr. and Mrs. Phelps. Debtors claim they showed the Residence to Mr. Baskin on behalf of the Phelps prior to signing the listing agreement.
On May 8, 1997, Debtors sought to disqualify defendants as their agents on grounds of misrepresentation by filing a "Declaration of Maria and Silvano Vial to Disqualify Coldwell Banker as Agent to [sic] Sale of Vial Property at 84 Euclid Ave. Athercon CA." Following a status conference on the same date, this court entered a supplemental order on May 15, 1997, ordering that the brokerage commission otherwise due upon closing be withheld and placed in an interest bearing "Commission Account," pending a future hearing set for June 26, 1997 under Bankruptcy Code § 330 (2).
On May 29, 1997, pursuant to the May 15, 1997 order, defendants filed a Motion for an Order To Enforce Court Approved Payment of Real Estate Commission and Order Distribution of Escrow Funds to Coldwell Banker. On July 21, 1997, Debtors filed an opposition and sought to disqualify defendants as their broker on grounds that (1) defendants effectively represented the buyers in the transaction in violation of this court's order of February 18, 1997, (2) defendants dissuaded other buyers by misleading them as to the location and status of the Residence, (3) defendants misrepresented the buyers' identity and intent to purchase the Residence as a "spec home,"(4) defendants breached an oral agreement to exclude commissions on a sale to a prior potential purchaser, and (5) defendants breached their fiduciary duty by failing to disclose their pre-existing relationship with the buyers. A section 330 hearing was held on July 25, 1997, and this court approved the commission of $96,000 plus accrued interest, holding that (1) defendants did not make misrepresentations to Debtors, (2) there was insufficient evidence that defendants discouraged other buyers, and (3) Debtors failed to prove an agreement to exclude prior potential purchasers.
B. The Present Suit
On April 28, 1998, Debtors filed suit in the Superior Court, State of California, County of San Mateo against defendants for breach of fiduciary duty, intentional misrepresentation, negligent misrepresentation, fraudulent concealment, false promise, intentional infliction of emotional distress, negligent infliction of emotional distress, and loss of consortium. Debtors claim these causes of action arose in connection with the sale of the Residence because (1) defendants did not act exclusively for Debtors but instead also represented the buyers under the transaction; (2) defendants discouraged other potential buyers; (3) defendants did not disclose the identity of Mr. Baskin's nominees, Mr. and Mrs. Phelps; (4) defendants concealed that Baskin was a real estate developer; (5) defendants breached an oral agreement not to seek a commission if the Residence were sold to a prior potential buyer; and (6) defendants breached a promise to exercise diligence in obtaining the best possible price.
On December 2, 1998, defendants removed the state court proceeding to this court as an adversary proceeding. (3) Defendants filed a motion for summary judgment on June 28, 2000, claiming that this suit is barred as res judicata. On July 17, 2000, Debtors filed a motion for leave to amend their complaint. A hearing was held on September 1, 2000, at which time the court notified the parties of a recent decision, Osherow v. Earnst & Young LLP (In re Intelogic Trace, Inc.), 200 F.3d 82 (5th Cir. 2000), and gave them opportunity to submit letter briefs concerning the case by September 15, 2000, which they did.
The court would grant Debtors leave to amend their complaint only if the motion for summary judgment is denied; thus, the following analysis will assume that Debtors' complaint is so amended.
Generally, once a claim is presented for adjudication and a valid and final judgment is rendered on the merits, the litigants and their privies are thereafter barred from re-litigating the same claim, including matters which could and should have been litigated in the first suit. See, e.g., Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414 (1980) ("[u]nder res judicata, a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action"); Commissioner v. Sunnen, 333 U.S. 591, 597, 68 S.Ct. 715, 719 (1948) ("when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound 'not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose'"), quoting Cromwell v. County of Sac., 94 U.S. 351, 352 (1876).
Here, in the prior section 330 hearing during Debtors' Chapter 11 case, Debtors raised claims of misrepresentation and breach of oral contract in connection with defendants' conduct in their capacity as sales agent and broker for the sale of the Residence. This court, having proper jurisdiction under 28 U.S.C. § 1334, made a valid and final ruling on Debtors' claims. Debtors' instant suit seeks recovery against the same defendants and arises out of the same transaction, namely, the sale of the Residence. The only real issue is whether Debtors' instant claims could and should have been raised in the prior section 330 hearing.
A. The Prior Section 330 Hearing Was a Proper and Effective Forum for Asserting Debtors' Claims.
Debtors claim that the prior section 330 hearing was an improper forum for raising the claims sought here because it was a contested matter under Rule 9014 where, unlike adversary proceedings, counterclaims cannot be raised. Hence, Debtors argue that the matters raised here are not ones that "could and should have been litigated in the first suit." Debtors' argument is unpersuasive.
To be an effective forum for res judicata purposes, the forum must have provided the claimant with "a [full and] fair opportunity procedurally, substantively and evidentially to pursue his claim" in the prior suit. Blonder-Tongue Labs v. University of Ill. Foundation, 402 U.S. 313, 333 (1971), quoting Eisel v. Columbia Packing Co., 181 F. Supp. 298, 301 (D.Mass. 1960). In the highly analogous Osherow case, the court held that a debtor's failure to object (4) to its accountants' fees for bankruptcy-related services in a section 330 hearing barred the debtor from subsequently asserting in an adversary proceeding a malpractice claim arising from the same services. See Osherow, 200 F.3d at 384-91. The court found that a fee hearing provided an "effective forum for [the debtor] to present its [malpractice] claims" against its accountants and management consultants. Id. at 390. In concluding that section 330 hearings provide adequate opportunity to raise and litigate such claims, the court noted that (1) Rule 3007 converts an objection to a claim into an adversary proceeding if the objection is joined with a demand for relief under Rule 7001, (2) Rule 9014 permits the bankruptcy court at any stage in a contested matter to direct that one or more rules in Part VII of the Rules (which incorporate several portions of the Federal Rules of Civil Procedure) apply, and (3) the bankruptcy court has power to stay a fee hearing and permit time for discovery and development. See id.
Debtors argue that Osherow should be distinguished and limited to its particular facts, citing the following paragraph of the decision:
The particular facts of this case direct our decision: the [debtor]'s general awareness of the background facts underlying the present claims before the fee hearing, the [debtor]'s having realized the real possibility of a link between its flawed numbers and [its accountant]'s services, the [debtor]'s deliberate choice not to voice its concerns regarding the quality of services at the fee hearing, and the bankruptcy court's order awarding fees to [debtor's accountants].
Id. at 391 (footnote omitted).
Debtors omit an important footnote to this passage:
We do not suggest that the absence of such factors would preclude giving res judicata effect to a prior court judgment awarding recovery for personal professional service; we speak here only to the context of a bankruptcy court contested matter order, where in our view some level of actual or constructive awareness on the part of the party sought to be so barred by the order properly carries a greater significance than it might in other contexts.
Id. at 391 n.6.
Debtors claim that, unlike the debtors in Osherow, they did not make a deliberate choice not to voice objections at the fee hearing. As noted by the omitted footnote, however, the deliberate choice not to object at the fee hearing was not the sine qua non of the Osherow decision. Read properly, the self-imposed limitation of the Osherow opinion is a confinement to a bankruptcy court contested matter where the party to be barred had actual or constructive awareness of the grounds for an objection. Specifically, the Osherow debtor's actual or constructive knowledge of the grounds for an objection brought the matter into the category claims that it "should and could have raised" at the hearing. Similarly, Debtors were on sufficient notice to raise an objection, as evidenced by a declaration filed May 8, 1997, wherein they declared, among other things:
On the day of signing of escrow..., we find out that the buyer was not the buyer we had been led to believe, but was in fact the same person who had been shown the same property "prior" to the listing agreement. We had been told misrepresenting facts all along; we were lied about [§]...who the buyer was [§]...[and] what the intention of the purchase of the property was[.] ...[McCahon] misrepresented to enduce [sic] our assent and omitted material facts. He knew that if true facts were known they would have altered the transaction in question...[and] we would have behaved differently. ...[T]here was misrepresentation, concealment, conflict of interest, concealment of important material facts and relevant information, [and] undue influence...."
Declaration of Maria and Silvano Vial to Disqualify Coldwell Banker as Agent to Sale of Vial Property at 84 Euclid Ave. Athercon CA. p. 2.
B. The Applicable Definition of "Claim" Is the Transactional Definition.
Debtors argue that they assert a different claim here than the claim asserted in the prior hearing. Debtors argue that the "primary rights" definition of "claim" should be applied instead of the transactional definition, citing International Evangelical Church of the Soldiers of the Cross of Christ v. Church of the Soldiers of the Cross of Christ, 54 F.3d 587, 591 (9th Cir. 1995). Under that definition, Debtors argue, their claims for infliction of emotional distress, loss of consortium, and other claims constitute a violation of a different primary right. Debtors are mistaken; the standard applicable here is the transactional definition and Debtors' instant claims constitute the same claims asserted in the prior hearing because they both arise from the same transaction -- the sale of the Residence and defendants' alleged conduct as their broker.
Courts have differed in defining what constitutes a "claim" for res judicata purposes. California courts have adopted the so-called "primary rights" definition, holding that a claim consists of all the effects and consequences of a violation of a single primary right, having regard primarily to the harm suffered by the claimant. See Branson v. Sun-diamond Growers, 24 Cal.App.4th 327, 341 n. 6, 29 Cal.Rptr.2d 314, 321 n. 6 (Cal.Ct.App. 1994); Takahashi v. Board of Trustees of Livingston Union School District, 783 F.2d 848, 851 (9th Cir. 1986) (applying California res judicata law to find that prior California state court proceeding barred instant federal civil rights action); Argarwal v. Johnson, 25 Cal.3d 932, 955, 160 Cal.Rptr. 141, 155 (Cal. 1979). Other courts and the Second Restatement of Judgments have adopted the transactional definition, holding that a claim consists of all legal rights arising from a single transaction or occurrence, having regard to whether (1) the facts are related in time, place, origin, or motivation, (2) the facts form a convenient trial unit, and (3) treatment of the facts as a unit conforms to the parties' expectations or business understandings or usage. See Restatement of Judgments 2d (A.L.I. 1982) § 24; Container Transport Internat'l, Inc. v. U.S., 468 F.2d 926, 928-29 (Ct. Cl. 1972); Miller v. U.S., 438 F. Supp. 514, 521-22 (E.D. Pa. 1977); Rush v. City of Maple Heights, 167 Ohio St. 221, 235, 147 N.E.2d 599, 607 (Ohio 1958).
The Supreme Court has held that federal courts must apply federal res judicata law in defining the preclusive effect of prior federal question federal court decisions. See Blonder-Tongue Labs, 402 U.S. at 324 n. 12; Heiser v. Woodruff, 327 U.S. 726, 733, 66 S.Ct. 853, 856 (1946); Gunter v. Atlantic Coast Line R.R., 200 U.S. 273, 290-91, 26 S.Ct. 252, 259 (1906); 18 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 4466, pp. 617-19 (2d ed. 1996). Such a rule is sound because, as noted by the Supreme Court, it prevents the dilution of federal adjudicative power over federal questions:
[A] right claimed under the Federal Constitution, finally adjudicated in the federal courts, can never be taken away or impaired by state decisions. ...Any other conclusion strikes down the very foundation of the doctrine of res judicata, and permits the state court to deprive a party of the benefit of its most important principles, and is a virtual abandonment of the final power of the Federal courts to protect all who come before them relying upon rights guaranteed by the Federal Constitution and established by the judgments of the Federal courts.Deposit Bank v. Frankfort, 191 U.S. 499, 517-20, 24 S.Ct. 154, 160-62 (1903). (5)
When defining the preclusive effect of prior federal question rulings, federal courts have adopted some form of a transactional definition of "claim." See, e.g., American Standard, Inc. v. Crane Co., 60 F.R.D. 35, 41 (S.D.N.Y. 1973) ("all claims which [one] could reasonably foresee could arise out of the same transaction"); Lambert v. Conrad, 536 F.2d 1183, 1186 (7th Cir. 1976) (claims which "pertain to the same disputed facts and arise out of the same operative facts"); Williamson v. Columbia Gas & Elec. Corp., 186 F.2d 464, 470 (3d Cir. 1950) (res judicata invoked where "acts complained of and the demand for recovery are the same...[and t]he only thing that is different is the theory of recovery"), cert. denied, 341 U.S. 921; Coggins v. Carpenter, 468 F.Supp 270, 280 (E.D.Pa. 1979) (the same "liability creating conduct"). Indeed, federal courts have used transactional definitions when defining the preclusive effect of a prior bankruptcy ruling. See, e.g., In re A. Musto Co. v. Satran, 477 F. Supp. 1172, 1176 (D. Mass. 1979) ("whether the facts underlying the claims are identical"); Osherow, 200 F.3d at 386 ("we apply the transactional test of the Restatement (Second) of Judgments"). Accordingly, the applicable standard here is the transactional definition of "claim." Debtors' reference to the International Evangelical Church case is misplaced because the prior suit in International Evangelical Church was a California state court proceeding, not a federal question federal court proceeding. See International Evangelical Church, 54 F.3d at 588.
C. Debtors' Proposed Amendments to Their Complaint Do Not Raise a New Claim.
Debtors claim that their proposed amendments to their complaint defeat application of the res judicata doctrine. Specifically, they propose to add (1) a factual allegation that they did not learn of McCahon's preexisting business relationship with the purchasers until after this court's July 25, 1997 ruling that defendants are entitled to their commission, and (2) a new cause of action for fraudulent inducement of contract. Again, Debtors' arguments are unpersuasive.
Federal courts have held that the mere addition of facts and/or new theories of recovery will not create a new claim for res judicata purposes. See, e.g., Ley v. Boron Oil Co., 454 F. Supp. 448, 450 (W.D. Pa. 1978) ("plaintiff is not entitled to another day in court if he merely proposes a different theory of recovery based upon the same 'liability creating conduct' of the defendant which gave rise to the first action"); Williamson v. Columbia Gas & Electric Corp., 186 F.2d 464, 470 (3d Cir. 1950), cert. denied, 341 U.S. 921, 71 S.Ct. 743; Cemer v. Marathon Oil Co., 583 F.2d 830, 832 (6th Cir. 1978); Seamon v. Bell Telephone Co. of Pa., 576 F. Supp. 1458, 1460 (W.D. Pa. 1983); Coggins, 468 F. Supp at 280 ("merely adding some facts, naming additional defendants or proposing a different theory of recovery will not convert one cause of action into a second cause of action if both actions involve the same liability-creating conduct"); Walworth Co. v. United Steelworkers of America, 443 F. Supp. 349, 351 (W.D. Pa. 1978); Denckla v. Maes, 313 F. Supp. 515, 522-23 (E.D. Pa. 1970).
The fact remains that Debtors' present suit seeks recovery from the same defendants over the same transaction--the sale of the Residence. By now alleging fraudulent inducement of contract, what Debtors only change here is the theory of recovery. Debtors' fraudulent inducement claim rests on substantially the same facts alleged in the prior section 330 hearing, namely, that defendants (1) misrepresented the identity of the buyers, (2) did not act exclusively for Debtors but effectively represented the buyers, and (3) failed to disclose a prior relationship with the buyers.
D. The Equitable Doctrine of Clean Hands Is Not Applicable.
Debtors argue that defendants "do not have the requisite 'clean hands' for equitable relief by the res judicata doctrine." Supplemental Opposition to Motion of Coldwell Banker Defendants for Summary Judgment, p. 4:19-20. Debtors mischaracterize the res judicata doctrine as an equitable doctrine instead of a legal one; the doctrine is not designed to do equity between parties, but rather to preserve judicial resources, promote finality and closure, and encourage reliance on adjudication by preventing inconsistent results. See Federated Department Stores v. Moitie, 452 U.S. 394, 401, 101 S.Ct. 2424, 2429 (1981) ("[t]he doctrine of res judicata serves vital public interests beyond any individual judge's ad hoc determination of the equities in a particular case"); Heiser v. Woodruff, 327 U.S. at 733 ("we are aware of no principle of law or equity which sanctions the rejection by a federal court of the salutary principle of res judicata, which is founded upon the generally recognized public policy that there must be some end to litigation and that when one appears in court to present his case, is fully heard, and the contested issue is decided against him, he may not later renew the litigation in another court").
E. Debtors Fail to Establish Fraud on the Court.
Debtors argue that the doctrine of res judicata is inapplicable since the prior result at the section 330 hearing was procured through fraud on the court by defendants' failure to disclose the full extent of the business relationship between McCahon and Mr. Baskin. Debtors' argument is flawed.
Federal courts have long possessed an inherent authority to vacate judgments obtained through fraud upon the court. See Chambers v. NASCO, Inc., 501 U.S. 32, 44, 111 S.Ct. 2123, 2132 (1991) ("the inherent power [to punish for contempts] also allows a federal court to vacate its own judgment upon proof that a fraud has been perpetrated upon the court"), citing Hazel-Atlas Glass Company v. Hartford Empire Company, 322 U.S. 238, 245, 64 S.Ct. 997, 1001 (1944), which was overruled on other grounds in Standard Oil of Cal. v. United States, 329 U.S. 17, 18, 97 S.Ct. 31, 31 (1976) (without leave of appellate court, district court may hear Federal Rule of Civil Procedure 60(b) motions on cases reviewed on appeal).
Here, Debtors informed this court of a pre-existing business relationship between McCahon and Baskin during oral argument both at the May 8, 1997 status conference and at the July 25, 1997 section 330 hearing. Accordingly, this court's July 25, 1997 order approving defendants' commission was not tainted by defendants' failure to disclose a prior relationship, and the order was hence not procured by fraud on the court. Although the failure to disclose may have violated the disclosure requirements of Rule 2014, that issue is not before the court here.
In support of their argument, Debtors cite Gumport v. China International Trust and Investment Corporation (In re Intermagnetics America, Inc.), 926 F.2d 912 (9th Cir. 1991). Gumport is factually distinguishable from the case at bar.
In Gumport, the bankruptcy court approved the sale of the Chapter 11 debtor's inventory and leases to a third party purchaser "subject to the representations and warranties set forth in the...'Declaration of [the debtor's CEO]'...." Id. at 914. Unbeknown to the bankruptcy court, the debtor's CEO secretly jointly owned and controlled the third party purchaser, and had secretly negotiated with China International Trust and Investment Corporation ("CITIC") to sell the debtor's property at a substantially higher price. Id. The Chapter 11 trustee filed a complaint against CITIC after discovering its involvement. The district court dismissed the claims, finding them to be barred under the doctrine of res judicata by the bankruptcy court's earlier sale approval order. The Ninth Circuit Court of Appeals reversed, concluding as follows:
The district court erred in determining that the bankruptcy court's...order mandated dismissal of the [t]rustee's complaint on res judicata grounds. The bankruptcy court's order was conditioned on the veracity of the declaration of [debtor's CEO]...[who] was an officer of the court at the time he made the admittedly false declaration[.]...[U]nder the circumstances the [t]rustee should be permitted to maintain its independent action to set aside the bankruptcy court's order for fraud upon the court.... We therefore vacate the district court's summary judgment and remand...for further proceedings consistent with this [o]pinion.
Id. at 918.
Here, unlike Gumport, this court's earlier fee award order was not expressly conditioned on any affirmative representations of defendants, nor was the order issued in ignorance of the facts upon which fraud on the court is alleged (i.e., the prior relationship between McCahon and Baskin). Specifically, although the bankruptcy court in Gumport was unaware of the CEO's affiliation with the third party purchaser and its prior secret negotiation with CITIC, this court was aware that McCahon and Baskin had a pre-existing relationship at the time it issued the fee award order. Accordingly, Gumport is factually distinguishable and does not control the outcome here.
For the above reasons, Debtors' present action is barred under the doctrine of res judicata by this court's earlier fee award order. Defendants' motion for summary judgment is accordingly granted. Counsel for defendants should submit a form of order granting the motion for summary judgment and denying plaintiffs' motion to amend their complaint, together with a form of judgment in their favor. Dated: November 07, 2000 ______________________________ Dennis Montali United States Bankruptcy Judge
1. The following discussion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr. P. 7052(a).
2. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and all rule references are to the Federal Rules of Bankruptcy Procedure.
3. On August 31, 1999, the underlying bankruptcy case was dismissed, but this court (with the consent of the parties) retained jurisdiction to conclude this adversary proceeding.
4. The debtor in Osherow apparently decided not to object at the fee hearing because (1) it did not want the bankruptcy court to become aware of problems with the reorganization plan and (2) it wanted to use its concerns to negotiate a reduced fee. See Osherow, 200 F.3d at 384-85.
5. Although the rights asserted here are not constitutional, the quoted passage is nevertheless representative of all rights under federal law, viz. Bankruptcy Code