Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-01141/USCOURTS-caed-2_05-cv-01141-1/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

In re

SPECIALIZED CLUTCH & BRAKE OF

STOCKTON, INC., a California 

corporation,

NO. CIV. S-05-01141 FCD GGH

Debtor.

SPECIALIZED CLUTCH & BRAKE OF

STOCKTON, INC.,

Appellant,

v. MEMORANDUM AND ORDER

UNITED BRAKE SYSTEMS, INC., et

al., 

Appellees.

----oo0oo----

This matter is before the court on Specialized Clutch and

Brake of Stockton’s (“Specialized”) appeal of a final judgment

and final discharge, issued May 20, 2005, by United States

Bankruptcy Court Judge Thomas C. Holman, in the Eastern District

of California, pursuant to 28 U.S.C. § 158(a). The parties

Case 2:05-cv-01141-FCD-GGH Document 15 Filed 04/13/06 Page 1 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1 Generally, stipulated judgments may not be appealed. 

However, where an appellant clearly preserves its right of

appeal, and where the purpose of a stipulated judgment is to set

an amount of damages to facilitate such an appeal, the stipulated

bankruptcy judgment is appealable. U.A. Local 342 Apprenticeship

& Training Trust v. Babcock & Wilcox Constr. Co. Inc., 396 F.3d

1056, 1058 (9th Cir. 2005). Here, the parties stipulated that

“Specialized intends to appeal from the order or judgment on this

stipulation, to the extent that such order or judgment permits

interpleading Plaintiffs to deduct the 2002 Cost Award from the

1998 Judgment, whether by way of set-off or recoupment.” (Am.

Stipulation and [Proposed] Order Regarding Payment of

Interpleader Amount, Final Discharge and Entry of Judgment,

[“Stip. Judgment”] filed May 2, 2005, at 2-3). Appellees do not

herein oppose the appealability of the stipulated judgment and

order.

2

stipulated to a judgment that preserved Specialized’s right of

appeal on certain issues.1 The stipulation was entered into by

appellant Specialized and appellees United Brake Systems (“UBS”),

Midland Brake (“Midland”), and California Equipment Corporation

(“CEC”) (sometimes collectively, “appellees”) on May 5, 2005. 

The central question on this appeal is whether UBS, Midland, and

CEC are entitled to deduct the amount of certain cost awards in

their favor from the judgments awarded to Specialized, all

arising from the same litigation, under the doctrines of

recoupment and/or set-off. 

BACKGROUND

The parties in this case have been involved in a long and

protracted bout of litigation beginning December 8, 1989 when

Specialized filed a complaint in the Superior Court of

California, County of Alameda, against UBS, Midland, and CEC. 

Specialized Clutch and Brake of Stockton, Inc. v. United Brake

Systems, Inc., Case No. 659087-3 (Super. Ct. Alameda Cty). 

Specialized asserted several causes of action against appellees

including breach of contract, misrepresentation, and violations

Case 2:05-cv-01141-FCD-GGH Document 15 Filed 04/13/06 Page 2 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2 Said section provides that “if an offer made by a

defendant is not accepted and the plaintiff fails to obtain a

more favorable judgment or award, the plaintiff shall ... pay the

defendant's costs from the time of the offer.”

3

of California’s Unfair Practices Act, California Business and

Professions Code §§ 17040, 17045. Id. Ultimately, the causes of

action were adjudicated in three separate trials in 1995, 1998,

and 2002. (Stip. Judgment at 1). In the 1995 and 1998 jury

trials, judgment was entered in favor of Specialized

(collectively, the “1998 Judgment”) in the amount of

approximately $750,000.00; the 2002 trial resulted in a defense

verdict. Prior to that trial, appellees made a settlement offer

of $650,000.00 to Specialized pursuant to California Code of

Civil Procedure § 998(c)(1).2 (Id.) Specialized rejected the

offer and thereafter lost at trial. (Id.) Pursuant to the

defense verdict and the § 998 offer, approximately $525,000.00 in

costs were awarded to UBS and Midland. (the “2002 Cost Award”). 

(Id.)

In the interim, between 1998 and 2002, appellees appealed

the 1998 Judgment and Specialized attempted to enforce the

Judgment. In response, UBS and Midland filed an interpleader

action in the Alameda County Superior Court to resolve certain

conflicting claims to the 1998 Judgment proceeds. United Brake

Systems, Inc. v. Specialized Clutch & Brake of Stockton, Inc.,

Case No. 836414-4 (Super. Ct. Alameda Cty, Feb. 20, 2001). 

Specialized then removed the interpleader action to bankruptcy

court, where Specialized had previously filed for Chapter 11

reorganization in 1991. In re Specialized Clutch and Brake of

Case 2:05-cv-01141-FCD-GGH Document 15 Filed 04/13/06 Page 3 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

Stockton, Inc., Case No. 91-92743 (Bankr. E.D. Cal. 1992). That

interpleader action became the complaint in this adversary

bankruptcy proceeding now on appeal. United Brake Systems, Inc.

v. Specialized Clutch and Brake of Stockton, Inc., Case No. 02-

9014 (Bankr. E.D. Cal., filed Apr. 18, 2002). Upon conclusion of

the adversary proceeding, the bankruptcy court awarded appellees

their costs and fees, approximately $7,000.00, in prosecuting the

interpleader action (the “2004 Cost Award”). (Stip. Judgment at

2.)

In rendering its final decision in the adversary proceeding,

the bankruptcy court ruled that UBS, Midland, and CEC are

entitled to recoupment and/or set-off of the amount they owe

Specialized (the 1998 Judgment) against the amount Specialized

must pay appellees (the 2002 and 2004 Cost Awards). (Memorandum

Decision, (“Bankr. Dec.”) filed July 15, 2004, at 9-10.) As

such, the amount owed to Specialized by UBS, Midland, and CEC

from the 1998 Judgment may be reduced or set-off by the amount of

the 2002 and 2004 Cost Awards against Specialized and in favor of

appellees. On appeal, Specialized contends that any reduction of

the 1998 Judgment is improper. 

STANDARD OF REVIEW

When a district court sits as an appellate court in

bankruptcy cases, it applies dual standards of review; questions

of law are subject to de novo review, and findings of fact are

subject to the clearly erroneous standard. A district court

exercises de novo review of a bankruptcy court's conclusions of

law. Aetna v. U.S. Healthcare, Inc. v. Madigan, 270 B.R. 749,

Case 2:05-cv-01141-FCD-GGH Document 15 Filed 04/13/06 Page 4 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

753 (9th Cir. BAP 2001). On the other hand, “[f]indings of fact

shall not be set aside unless clearly erroneous. . . ." 11

U.S.C. § 8013. In this case, the material facts are undisputed;

thus the court reviews de novo the bankruptcy judge’s conclusions

of law.

ANALYSIS

1. Recoupment

Recoupment is an equitable doctrine that “exempts a debt

from the automatic stay when the debt is inextricably tied” to

the claim. In re TLC Hospitals, Inc. v. United States Dept. of

Health and Human Services, 224 F.3d 1008, 1011 (9th Cir. 2000). 

Recoupment is not limited by whether the claim is pre-petition or

post-petition but rather the claim “must arise from the same

transaction or occurrence that gave rise to the liability sought

to be enforced by the bankruptcy estate.” Id. (emphasis in

original). 

The bankruptcy court found that the 1998 Judgment and the

2002 Cost Award were both “issued in the same state court action”

as the result of Specialized’s 1989 complaint, and as such, they

constituted part of the same transaction or occurrence. (Bankr.

Dec. at 8-9.) Specialized contends that the 2002 Cost Award is

substantively different from the 1998 Judgment and accordingly,

it is not part of the same transaction or occurrence. 

(Appellant’s Brief at 15.) Specialized rests this contention on

Case 2:05-cv-01141-FCD-GGH Document 15 Filed 04/13/06 Page 5 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

the facts that the 1998 Judgment was rendered pursuant to a jury

verdict but the 2002 Cost Award was rendered pursuant to

application of CCP § 998. Id. The court does not find this

distinction persuasive. 

The Ninth Circuit, interpreting the same transaction or

occurrence test broadly, has held that the crucial factor in

determining whether two events are part of the same transaction

is whether there is a logical relationship between the events. 

Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1403 (9th

Cir. 1996). In Newbery, the court examined the historical

underpinnings of recoupment and found that recoupment did not

violate fundamental principles of distributing bankruptcy estate

assets. Id. at 1399. Recoupment, since it arises from the same

transaction or occurrence, is an “arrival at a just and proper

liability” between the parties. Id. at 1400. Recoupment does

not involve preference of one creditor over another but equitably

determines the proper liabilities between the parties. Id. As

appellees emphasize, “it would be unjust to insist that one party

fulfill its obligation without requiring the same of the other

party.” (Appellee’s Brief at 9-10.) 

The bankruptcy court held, and this court agrees, that there

is a logical relationship between the events here, all of which

arose from the same transaction, the 1989 complaint, such that

recoupment is proper and the amount of the 2002 and 2004 Cost

Case 2:05-cv-01141-FCD-GGH Document 15 Filed 04/13/06 Page 6 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

Awards should be credited against the 1998 Judgment. The

judgments and cost awards arise from a single set of operative

facts and claims of Specialized. It would be inequitable to

insist that appellees pay Specialized without requiring

Specialized to meet its obligations. Therefore, the equities tip

sharply in favor of recoupment because it would be improper for

Specialized to enjoy the benefits of the 1998 Judgment without

requiring that it pay the 2002 and 2004 Cost Awards. See Newbery

Corp., supra, 95 F.3d at 1403. Applying recoupment is well

within the discretion of the bankruptcy court judge, and he did

not err in application of the doctrine to this case.

2. Set-Off

Set-off rights are recognized by the Bankruptcy Code. 11

U.S.C. § 553(a). Set-offs are proper only to the extent allowed

by other applicable law. Newbery, supra, 95 F.3d at 1399. For

set-off to apply, the debts must be mutual, and both must have

arisen pre-petition. 11 U.S.C. § 553(a). 

Specialized argues that set-off is unavailable here because

the 1998 Judgment in its favor arose pre-petition while the 2002

and 2004 Cost Awards in favor of appellees arose post-petition. 

(Id.) The court disagrees. All the awards, the 1995 and 1998

judgments in favor of Specialized and the 2002 and 2004 cost

awards in favor of appellees, arose from the 1989 complaint filed

by Specialized. (Bankr. Dec. at 8-9.) Thus, regardless of their

Case 2:05-cv-01141-FCD-GGH Document 15 Filed 04/13/06 Page 7 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

timing or nature, all of the awards resulted from the same suit

(filed pre-petition) and therefore, all arose pre-petition. See

Kadjevich v. Kadjevich, 220 F.3d 1016, 1020 (9th Cir. 2000)

(noting that the “source” of a post-petition attorneys’ fees

award was the pre-petition state-court action). A state court’s

judgment is “unitary” and all of it must be considered prepetition in nature. Id.

Moreover, the requirement of mutuality is that the same

parties owe the other something in the same capacity. Newbery,

supra, 95 F.3d at 1398-99. The requirement of mutuality in this

case is clearly fulfilled. The parties stand in the same

relationship to each other now as they have throughout the more

than fifteen-year course of this litigation. Ultimately, 

judgments and cost awards were entered in favor of one party or

the other at different stages of the same litigation. The

obligations owed are thus mutual. For these reasons, the

bankruptcy judge ruled that set-off is proper and this court

agrees with that conclusion.

CONCLUSION

For the foregoing reasons, the court affirms the bankruptcy

court's ruling that appellees are entitled to recoupment and/or

set-off of the amounts awarded them in the 2002 and 2004 Cost 

///

///

Case 2:05-cv-01141-FCD-GGH Document 15 Filed 04/13/06 Page 8 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

Awards; therefore, Specialized's appeal is DENIED.

IT IS SO ORDERED.

DATED: April 12, 2006.

/s/ Frank C. Damrell Jr. 

FRANK C. DAMRELL, Jr.

UNITED STATES DISTRICT JUDGE

Case 2:05-cv-01141-FCD-GGH Document 15 Filed 04/13/06 Page 9 of 9