Memorandum of Decision Re: Chapter 13 Matters

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re FRANK SHEPARD,                                         No. 588-06282 WCM      Debtor. ___________________________/
Memorandum of Decision
     Bert Rettner obtained a large judgment against debtor Frank Shepard in 1979. During the course of enforcing the judgment over the next few years, Rettner was given a note secured by a deed of trust as a partial payment. Shepard was not the maker of the note. In 1985, Rettner nonjudicially foreclosed on the property subject to the deed of trust. Shepard thereafter took the position that under California antideficiency law Rettner no longer had an enforceable claim against him, and litigation in state court ensued.      In late 1988, the state court rejected Shepard's arguments and found that he still owed a large part of the judgment. Shepard appealed, and commenced the present Chapter 13 proceedings before briefs were due in the state appellate court.      Rettner filed an adversary proceeding against Shepard alleging that his claim was nondischargeable pursuant to section 523(a)(2) of the Bankruptcy Code. He also sought relief from the automatic stay and sanctions and objected to confirmation of the debtor's amended plan. On May 31, 1989, Bankruptcy Judge Warren Moore dismissed the adversary proceeding, denied the motions for relief from the automatic stay and sanctions, and confirmed the amended plan.      Rettner brought the instant motion for reconsideration soon after Judge Moore's decision, and while Judge Moore was still alive and holding court. However, before the motion could be heard Judge Moore lost his long battle with cancer and died. The motion was then assigned to the undersigned.      The court is mindful that it is not an appellate court and should respect the decisions rendered by Judge Moore. However, since the decisions Judge Moore made in this case are not final and the motion to reconsider was pending before him when he died, the court must step into his shoes rule as best it can. 33 Fed.Proc.L.Ed., Trials, section 77:185.      Judge Moore's reasoning is not exactly clear from the transcript of the May 31 hearing. However, it is clear that his decisions were correct. There is no basis for filing a dischargeability action under section 523(a)(2) in a Chapter 13 case, as only debts under section 523(a)(5) are excepted from the "super discharge" of Chapter 13 pursuant to section 1328(a). Multiple bankruptcy filings are not per se grounds for sanctions or other relief. In re Chisum (9th Cir.1988) 847 F.2d 597. Relief from the automatic stay may be properly denied where the secured claim is subject to dispute. United Companies Fin. Corp. v. Brantley (Bkrtcy.N.D.Fla.1980) 6 B.R. 178, 188. Nothing in the amended plan is patently improper, nor does it treat Rettner unfairly. In fact, it specifically calls for the dispute over Rettner's claim to be resolved in state court and paid in full to the extent it is deemed valid.      At the hearing on this motion, the court was of the opinion that the state court judgment was res judicata and therefore binding on the bankruptcy court notwithstanding its appeal; this is the law in many states. See, e.g., Matter of Jersey City Medical Center (3rd Cir.1987) 817 F.2d 1055, 1059n.6. However, upon further research it appears that in California a judgment has no res judicata effect when it has been appealed. 40 Cal.Jur.3d, Judgments, section 241, p. 662. The bankruptcy court is required by 28 U.S.C. section 1738 to give a state court judgment the same effect it would be given in state courts. In re Haynes (9th Cir. BAP 1989) 97 B.R. 1007, 1012. Since the judgment was not entitled to res judicata effect in other California courts, the bankruptcy court is not obligated to give it such effect.      For the foregoing reasons, there is no basis for reconsidering the decisions made on May 31. However, it does appear that some clarification is appropriate, especially in the light of subsequent events.      The underlying issue is whether the Rettner judgment has been extinguished. That issue ought to be decided on the merits by the state courts, as provided for in the plan Judge Moore confirmed. The debtor should not be permitted to relitigate an issue by appealing an adverse state court ruling and then seeking de novo determination in the bankruptcy court. In order to facilitate proper adjudication of the issues, the court will clarify the grounds for dismissal of the adversary proceeding as being solely procedural, and not based on the merits of Rettner's claim.      Once Shepard filed this bankruptcy, he took the position that his state court appeal was stayed and accordingly took no further action on it. On its own motion, the state appellate court then dismissed the appeal for lack of prosecution. While the debtor should have continued to prosecute the appeal, and was at least ostensibly authorized to do so without a court order by Bankruptcy Rule 6009, the court in Ingersoll-Rand Financial Corp. v. Miller Min. Co. (9th Cir. 1987) 817 F.2d 1424, 1426-7, held that a debtor is stayed from prosecuting his own appeal if he was a defendant in the action. Thus, while Shepard's failure to prosecute his appeal may not have been the wisest course of action, it was justified by binding case law in this circuit. Hopefully, if this point is made to the state appellate court it will reconsider its dismissal of the appeal and proceed to decide it on the merits. However, if the state appellate court will not hear the appeal on the merits the bankruptcy court will have to decide the allowability of the Rettner claim de novo, as the state court judgment was not res judicata when the bankruptcy was filed and the bankruptcy court cannot allow dismissal of a stayed appeal to make the judgment binding.      To summarize and clarify:
     1. The motion to reconsider will be denied. All of the orders made by Judge Moore on May 31 appear to be proper orders.
     2. Dismissal of the adversary proceeding will be deemed to be granted solely on the procedural grounds. Such dismissal is not a ruling on the merits of Rettner's claim.
     3. The debtor and/or Rettner shall make a diligent effort to revive and prosecute the state court appeal. If the state court agrees to hear the appeal on the merits, the bankruptcy court shall abstain from ruling on the claim, as provided for in the plan. The automatic stay shall be modified to permit prosecution of the appeal.
     4. If the state appellate court declines to hear the appeal on the merits, then the debtor shall immediately initiate proceedings to determine the validity of Rettner's claim, which shall be heard de novo by the bankruptcy court.
     Counsel for the debtor shall submit a form of order in the adversary proceeding dismissing that proceeding and a separate order in the base case incorporating the balance of this ruling. Counsel for Rettner shall approve the form of both orders as conforming to this ruling.
Dated: September 26, 1989                                                                                _______________________                                                                                                                            Alan Jaroslovsky                                                                                                                            U.S. Bankruptcy