FOR THE NORTHERN DISTRICT OF CALIFORNIA
JAMES and IMOGENE PRAGER, No. 1-85-00517
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
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
Dated: November 30, 1987 _________________________