Memorandum of Decision Re: Sanctions

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re JAMES and IMOGENE PRAGER,                                         No. 1-85-00517      Debtors. __________________________/
Memorandum of Decision
     On November 22, 1985, the court entered an order modifying the automatic stay in these proceedings pursuant to a stipulation entered into between the debtor and secured creditor Bellevue Corporation. Pursuant to the stipulation and order, the debtors were barred from initiating any action in federal or state court to prevent a foreclosure sale by Bellevue.      In violation of the stipulation, the debtors commenced a state court action against Bellevue after Bellevue became entitled to foreclose pursuant to the stipulation. They also tried to commence an adversary proceeding in this court seeking the same relief. In July, 1986, this court denied the request for injunctive relief and assessed sanctions in the amount of $13,095.95 for violation of the stipulation. This award does not indicate that it was made against anyone other than the debtors.      On January 30, 1987, pursuant to Bellevue's application, this court found the debtors and their counsel in contempt for continuing to prosecute the state court action. The court assessed sanctions of $500.00 per day jointly and severally against the debtors and their counsel, Richard R. Murphy, until the state court proceedings were dismissed.      Bellevue was finally able to complete its foreclosure and became the owner of the real property through the trustee's sale. It commenced an unlawful detainer action against the debtors which the debtors contested. Finally, Bellevue and the debtors reached a settlement whereby the debtors bought the property back from Bellevue for $364,749.16. Bellevue argues that this figure had nothing to do with its out-of-pocket losses, although it admits that the figure was "obviously selected with such losses in mind in order to assure a profit." The figure was considerably more than Bellevue would have been entitled to under its note if there had been no foreclosure, including interest and attorneys' fees.      The problem is that while the settlement between the debtors and Bellevue fully resolved their differences, it specifically excluded Murphy. Since the settlement Bellevue has attempted to collect the sanctions against Murphy, and he has informed the debtors that he will seek indemnification from them if he has to pay. The debtors now seek to restrain Bellevue from collecting against Murphy.      Considering all of the factors in this case, the court feels that it is inequitable to allow Bellevue to continue to collect the sanctions from Murphy. While the matters between Bellevue and the debtors were fully resolved by a purchase and sale rather than a judgment, the court in equity cannot ignore the fact that the sales price more than satisfied the obligation to Bellevue which started the problems, including costs and attorneys' fees. A litigant who has recovered an item of damages from one coconspirator may not recover the same item from another coconspirator. Zenith Radio Corp. v. Hazeltine Research (1971) 401 U.S. 321, 348. In order to do justice, a court of equity may ignore the form of a transaction and instead consider the substance. Pepper v. Litton (1939) 308 U.S. 295, 304-05.      In this case, the substance of the purchase and sale was a settlement which made Bellevue whole. The court therefore finds pursuant to FRCP 60(b)(5) and Bankruptcy Rule 9024 that the sanctions awards have been satisfied, and that it is no longer equitable that the awards have prospective application.      It should be noted that a separate method of analysis reaches the same result. While the award made in July of 1986 was arguably proper under Bankruptcy Rule 9011, at least to the extent it awarded sanctions for the attempt to seek injunctive relief from this court, this award was not made against Murphy and was therefore fully satisfied by the settlement between Bellevue and the debtors. The award made on January 30, 1987, was pursuant only to a finding of contempt; at that time, the court had no contempt power. In re Sequoia Auto Brokers Ltd., Inc. (9th Cir.1987) 827 F.2d 1281.      For the above reasons, the debtors' motion will be granted and Bellevue will be permanently enjoined from attempting to collect the sanctions awards. Counsel for the debtors shall submit an appropriate form of order.
Dated: November 30, 1987                                                                                  _________________________                                                                                                                            ALAN JAROSLOVSKY                                                                                                                            U.S. BANKRUPTCY