DISALVO v DISALVO, 9856166
U.S. 9th Circuit Court of Appeals
DISALVO v DISALVO
9856166
In re SALVATORE W.
DISALVO,
Nos. 98-56166
Debtor.
98-56229
98-56230
JODI DISALVO, BAP No.
Appellant-Cross-Appellee, CC-96-01975-PeJoTc
CC-96-01660-PeJoTc
v.
OPINION
SALVATORE W. DISALVO,
Appellee-Cross-Appellant.
On Appeals from the United States Bankruptcy
Appellate Panel for the Ninth Circuit
Perris, Jones and Tchaikovsky, Judges, Presiding
Argued and Submitted
February 8, 2000--Pasadena, California
Filed July 14, 2000
Before: Harry Pregerson and Kim McLane Wardlaw,
Circuit Judges, and Milton I. Shadur, District Judge.1
Opinion by Judge Shadur
SUMMARY
The summary, which does not constitute a part of the opinion of the court,
is copyrighted C 2000 by West Group.
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Bankruptcy/Debtor in Possession
The court of appeals affirmed in part, and reversed in part,
a decision of the Bankruptcy Appellate Panel. The court held
that a Chapter 11 debtor who pursued his rights as debtor-in-
possession defending against an adversary proceeding in
bankruptcy court was barred by the doctrine of claim preclu-
sion from advancing additional debtor-in-possession claims in
the same forum.
The judgment of dissolution of the marriage of Salvatore
and Jodi DiSalvo included an equalizing award of $100,000
in Jodi's favor, evidenced by a $100,000 note and secured by
a trust deed on the spouses' former marital residence. When
Salvatore failed to make payments on the note, Jodi's attor-
neys attempted to collect it by various methods, but did not
foreclose under the trust deed. Salvatore filed a Chapter 11
bankruptcy, in which he served as debtor-in-possession. Jodi
then brought an adversary proceeding to have the $100,000
indebtedness declared nondischargeable. The Bankruptcy
Court (BC) extinguished both the security interest in the real
estate and the $100,000 debt, and awarded Salvatore attor-
ney's fees as the prevailing party. The Bankruptcy Appellate
Panel (BAP) reversed that judgment, and remanded for recon-
sideration of the attorney's fees award. Meanwhile, Salvatore,
as debtor-in-possession, brought an action claiming that the
prepetition efforts of Jodi and her lawyers to collect on the
$100,000 debt had constituted an abuse of process and that
Jodi's efforts had also amounted to a tortious violation of the
California statutory one-action rule, which requires a creditor
whose debt is secured by a real property trust deed to proceed
first against the security before seeking to enforce the debt
against the debtor personally. The BC dismissed both of Sal-
vatore's claims as barred on claim preclusion grounds. The
BAP reversed the Bankruptcy Court's dismissal of Salva-
tore's abuse of process claim against Jodi, and affirmed the
Bankruptcy Court's dismissal of Salvatore's claim against
Jodi for the assertedly tortious statutory violation.
Salvatore appealed the BAP's reversal of the BC's extin-
guishment of the $100,000 debt, and its affirmance of the dis-
missal of his abuse of process claim. Jodi appealed the BAP's
reversal of the BC's dismissal of Salvatore's abuse of process
claim against her. By the time of oral argument in the appeal,
Salvatore's Chapter 11 plan had been confirmed and fully
implemented.
[1] A party appearing in an action in one capacity, individ-
ual or representative, is not thereby bound by or entitled to the
benefits of the rules of res judicata in a subsequent action in
which he or she appears in another capacity.
[2] In the Chapter 11 context a debtor and debtor-in-
possession are not to be treated as separate legal entities.
[3] Further, a Bankruptcy Rule expressly authorized Salva-
tore, while having been sued in the nondischargeability litiga-
tion as an individual, to proceed in that litigation as debtor-in-
possession as well.
[4] Because Salvatore was able to, and did, pursue his
rights as debtor-in-possession in the nondischargeability liti-
gation, he was barred by the doctrine of claim preclusion from
advancing the debtor-in-possession claims of abuse of process
and tortious violation of statute in the same forum.
[5] Since Salvatore had been discharged from bankruptcy
and the appeal time from that final discharge had run before
resolution of this appeal, the $100,000 debt he owed Jodi was
no longer an enforceable obligation.
[6] Salvatore's appeal from the BAP's reversal of the BC's
extinguishment of the $100,000 debt was moot.
[7] Because Salvatore was not a prevailing party, his
debtor-in-possession claims barred on claim preclusion
grounds and his appeal from the $100,000 indebtedness moot,
he was not entitled to attorney fees.
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COUNSEL
Steven Karlton Kop (argued), Michael H. Weiss and Peter N.
Scolney, Weiss, Scolney, Spees, Danker & Kop, Los Angeles,
California, for appellant (Docket No. 98-56166) and appellee/
cross-appellant (Docket Nos. 98-56229 and 98-56230) Salva-
tore W. DiSalvo.
C. Casey White (argued), Tilem, White & Weintraub, Glen-
dale, California, for appellee (Docket No. 98-56166) and
appellant/cross-appellee (Docket Nos. 98-56229 and 98-
56230) Jody DiSalvo.
_________________________________________________________________
OPINION
SHADUR, District Judge:
These three appeals stem from a shift in the battlegrounds
that former spouses Salvatore DiSalvo ("Salvatore") and Jodi
DiSalvo ("Jodi") have chosen for resolution of their disputes,
moving from a state domestic relations tribunal to the federal
bankruptcy court:
1. In No. 98-56166 Salvatore appeals a May 15,
1998 decision of this Circuit's Bankruptcy Appellate
Panel ("BAP") reported at 221 B.R. 769 (cited "BAP
I at _______," omitting the B.R. volume number) that (a)
had reversed a Bankruptcy Court judgment extin-
guishing a $100,000 debt that Salvatore owed to Jodi
and (b) had remanded the action to the Bankruptcy
Court for reconsideration of the attorneys' fees that
had been awarded to Salvatore as a prevailing party
there.
2. In No. 98-56229 Jodi appeals the portion of a
June 11, 1998 BAP decision reported at 224 B.R.
763 (cited "BAP II at _______," also omitting the B.R.
volume number) that had reversed the Bankruptcy
Court's dismissal of Salvatore's abuse of process
claim against Jodi.
3. In No. 98-56230 Salvatore cross-appeals the
portion of the BAP II decision that had affirmed the
Bankruptcy Court's dismissal of Salvatore's claim
against Jodi for an assertedly tortious violation of
Cal. Code Civ. Proc. S726(a)("Section 726(a)").
We have jurisdiction over the appeals under 28 U.S.C.
S158(d), and we reject Salvatore's position in all three appeals
for the reasons stated in this opinion.
Background
When the dust settled in the parties' divorce proceeding in
1990, the Judgment of Dissolution included an equalizing
award of $100,000 in Jodi's favor, evidenced by a $100,000
note and secured by a trust deed on the spouses' former mari-
tal residence (which Salvatore retained). Bad blood obviously
continued to mar the parties' relationship (or lack of it), and
when Salvatore failed to make any payments on the note
Jodi's attorneys engaged in several efforts looking to collect
it: a writ of execution seeking to levy on Salvatore's assets,
an application to compel him to appear at a judgment debtor's
examination, an earnings withholding order seeking to garnish
his wages, a levy on his bank account and an attempted
appointment of a receiver to take possession of the stock in
his insurance agency. All of those efforts resulted in the col-
lection of the grand sum of $83, but conspicuous by its
absence was any effort by Jodi to foreclose under the trust
deed.
Because Salvatore considered that Jodi's attempt to get the
receiver appointed for his business threatened his livelihood,
he sought shelter in a Chapter 11 bankruptcy filing, in which
he served as debtor-in-possession. Jodi then brought an adver-
sary proceeding to have the $100,000 indebtedness declared
nondischargeable, but that proceeding resulted not only in her
loss of that contention but in the actual extinguishment of
both the security interest in the real estate and, indeed, the
$100,000 debt itself. Jodi's appeal of the latter determination
by the Bankruptcy Court was successful,2 for BAP I at 775
held that "extinguishing the debt would be so severe as to be
punitive and would result in a windfall to debtor, " so that
(id.):
The bankruptcy court's sanction of extinguishing the
debt was an abuse of discretion.
Meanwhile Salvatore, wearing his debtor-in-possession hat,
brought an action claiming that the prepetition efforts of Jodi
and her lawyers3 to collect on the $100,000 debt had consti-
tuted an abuse of process and that Jodi's efforts had also
amounted to a tortious violation of Section 726(a), the Cali-
fornia statutory "one-action rule" that requires a creditor
whose debt is secured by a real property trust deed to proceed
first against the security before seeking to enforce the debt
against the debtor personally. Although the Bankruptcy Court
dismissed both of Salvatore's claims as barred on claim pre-
clusion grounds (using the older vocabulary of res judicata4),
BAP II reversed that ruling in part, holding that Salvatore's
abuse-of-process claim remained viable but that his claim
grounded in Section 726(a) was not sustainable in substantive
terms.
Because our ruling on the BAP II issues also impacts in
material part on the appropriate resolution of the BAP I
appeal, we turn first to the questions posed by the BAP II
decision. We then address the BAP I issues.
Appeal Nos. 98-56229 and 98-56230
[1] In his effort to sustain both of his adversary claims
against Jodi, Salvatore seeks to invoke the familiar concept
embodied in Restatement (Second) of Judgments
S36(2)(1980):
A party appearing in an action in one capacity, indi-
vidual or representative, is not thereby bound by or
entitled to the benefits of the rules of res judicata in
a subsequent action in which he appears in another
capacity.
As Salvatore would have it, Jodi's action seeking to have his
$100,000 obligation held nondischargeable targeted him indi-
vidually (an unexceptionable proposition), while by contrast
the claims that he asserted against Jodi had to be prosecuted
on behalf of the Chapter 11 bankruptcy estate--in Salvatore's
capacity as debtor-in-possession, not in his individual capac-
ity. That being so, Salvatore says, the fact that the nondis-
chargeability lawsuit was litigated to judgment does not bar
his two claims against Jodi on preclusion grounds.
[2] Although the proposition that the claims against Jodi
had to be (and were) asserted by Salvatore as debtor-in-
possession is equally unexceptionable, that does not aid Sal-
vatore in the special environment of bankruptcy-related litiga-
tion. Though speaking in a somewhat different context, the
Supreme Court has explained in NLRB v. Bildisco & Bildisco,
465 U.S. 513, 528 (1984) that in the Chapter 11 context a
debtor and debtor-in-possession are not to be treated as sepa-
rate legal entities:
Obviously if the [debtor-in-possession] were a
wholly "new entity," it would be unnecessary for the
Bankruptcy Code to allow it to reject executory con-
tracts, since it would not be bound by such contracts
in the first place. For our purposes, it is sensible to
view the debtor-in-possession as the same "entity"
which existed before the filing of the bankruptcy
petition, but empowered by virtue of the Bankruptcy
Code to deal with its contracts and property in a
manner it could not have done absent the bankruptcy
filing.
We have said much the same thing (again, to be sure, in a
somewhat different context) in speaking of the action of a
debtor-in-possession paying a prepetition obligation of the
debtor (In re Teerlink Ranch Ltd., 886 F.2d 1233, 1236 (9th
Cir. 1989)):
Consequently, TRL as debtor in possession paying
the debt of TRL incurred prior to bankruptcy does
not put itself in the position of one who pays anoth-
er's debt and thereby gets an assignment of the debt
he paid. TRL is still the same old debtor satisfying
the same old debt.
[3] What really drives the final nail into the coffin of Salva-
tore's effort to avoid the impact of claim preclusion is the pro-
vision of Bankruptcy Rule 6009 that gives its blessing to the
same concept that was voiced in such cases as Bildisco and
Teerlink. Bankruptcy Rule 6009 expressly authorized Salva-
tore, while having been sued in the nondischargeability litiga-
tion as an individual, to proceed in that litigation as debtor-in-
possession as well. As the Seventh Circuit has recently said
on that score in Cable v. Ivy Tech State College , 200 F.3d
467, 472 (7th Cir. 1999)(emphasis in original, and citations
omitted):
In [Chapter 7] liquidation proceedings, only the
trustee has standing to prosecute or defend a claim
belonging to the estate. The same cannot be said for
trustees under the reorganization chapters. In those
regimes, the debtor has express authority to sue and
be sued. Bankruptcy Rule 6009, which applies to
Chapters 7, 11 and 13, directs that "[w]ith or without
court approval, the trustee or debtor in possession
may prosecute or may enter an appearance and
defend any pending action or proceeding by or
against the debtor, or commence and prosecute any
action or proceeding in behalf of the estate before
any tribunal." Fed. R. Bankr. P. 6009 (emphasis
added). [T]he Chapter 13 debtor has been considered
analogous to Chapter 11, which grants the debtor full
authority as representative of the estate typical of a
trustee. See 11 U.S.C. S1107.
In this instance Salvatore did exactly that, for he responded to
Jodi's nondischargeability action not only with a vigorous
defense based on the claimed dischargeability of the $100,000
debt, but also with a direct attack (which was successful at the
Bankruptcy Court level) that asserted the extinguishment of
the debt itself.
[4] In light of Bankruptcy Rule 6009 and the language of
the cited decisions, there is no room for argument on Salva-
tore's part that he was able to (and did) pursue certain rights
as debtor-in-possession in the nondischargeability litigation,
but that he could not advance the debtor-in-possession's abuse
of process and Section 726(a) claims against Jodi in the same
forum. Because every other element of claim preclusion is
indisputably present, we apply that doctrine (1) to reverse the
BAP I decision upholding the viability of the abuse of process
claim and (2) to affirm the BAP rejection of Salvatore's tort
claim grounded in Section 726(a).5
Appeal No. 98-56166
Because the issue of the extinguishment of Salvatore's
$100,000 obligation to Jodi (an issue on which Salvatore had
prevailed before the Bankruptcy Court, but then lost in BAP
II) was actively contested before us, we had made the natural
assumption that the issue involved a real money stake as
between the litigants. After all, Salvatore's Chapter 11 plan of
reorganization called for the payment of 100 cents on the dol-
lar on all of his prepetition debts, so that if the $100,000 note
fell into that category Jodi would have been entitled to pay-
ment in full. And nothing in the parties' briefs on this appeal
suggested anything else.
[5] To our surprise, then, we learned in response to our
questioning during oral argument that such was not the case--
that instead Salvatore's Chapter 11 plan had not only been
confirmed but had been fully implemented. With Salvatore
having been discharged from bankruptcy and the appeal time
from that final discharge having run, the $100,000 debt is no
longer an enforceable obligation in any event. Jodi's counsel
therefore apprised us that if we were to uphold the BAP deci-
sion the $100,000 "debt" would become relevant and avail-
able to Jodi only as an offset against any obligations that she
might still owe to Salvatore, not as the source of any affirma-
tive right on Jodi's part to collect the money--and Salvatore's
counsel confirmed that posture when we inquired of him.
[6] Because the preceding section of this opinion has
already rejected Salvatore's only potential claims against Jodi,
any declaration as to the status of the $100,000 obligation
could have no effect. That is the essence of mootness, and we
therefore dismiss as moot the portion of Salvatore's appeal
that asks us to review BAP I's reversal of the Bankruptcy
Court's judgment in Salvatore's favor as to the nonextinguish-
ment of the $100,000 indebtedness.
[7] That also signals the appropriate disposition of the other
aspect of BAP I, which had remanded to the Bankruptcy
Court the issues relating to Salvatore's possible right to an
award of attorneys' fees (initially the Bankruptcy Court had
awarded $50,000 to Salvatore in that respect). Even apart
from any question as to his substantive entitlement to a fee
award in any event, there is no way in which Salvatore may
fairly be viewed as a prevailing party in the litigation between
the parties, for (1) the $100,000 indebtedness would not have
survived under the BAP decision in any case, even had the
appeal on that subject not been dismissed here for mootness
(because it made no real-world difference) and (2) Salvatore
has lost his ability to pursue Jodi on either of his claims. We
therefore vacate both the portion of the Bankruptcy Court's
decision that had awarded attorneys' fees to Salvatore in the
first instance and the portion of the BAP decision that had
then remanded that issue to the Bankruptcy Court for redeter-
mination.
Conclusion
We AFFIRM the BAP II decision addressed in Appeal No.
98-56230 and REVERSE the BAP II decision addressed in
Appeal No. 98-56229, in the latter respect restoring the Bank-
ruptcy Court's dismissal of Salvatore's abuse of process claim
against Jodi. As to Appeal No. 98-56166, we dismiss as moot
the appeal from the BAP I decision as to the continued
enforceability of Salvatore's $100,000 debt to Jodi, and we
vacate the orders of both the Bankruptcy Court and BAP pro-
viding for any attorneys' fee award in Salvatore's favor.
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FOOTNOTES
1 Honorable Milton I. Shadur, United States District Judge for the North-
ern District of Illinois, sitting by designation.
2 As BAP I at 774 n.9 reflects, Jodi did not challenge her loss of the
security interest in the real estate.
3 Jodi's lawyers are not parties to the present appeal.
4 In part because of the tendency in some authorities to use "res judicata"
as a generic term encompassing both claim preclusion and issue preclu-
sion, we prefer to employ the more precise claim preclusion terminology
(see Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 77 n.1
(1984)).
5 We therefore need not address the substantive viability or nonviability
of either of those claims.