Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-4_06-ap-04073/USCOURTS-canb-4_06-ap-04073-0/pdf.json

Parties Involved:
James D. Golladay
Plaintiff
William Broach
Defendant
Daniel M. Linchey
Defendant

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re No. 00-40480 TR

Chapter 7

ENVIRODYNE CORPORATION,

Debtor.

___________________________/

JAMES D. GOLLADAY, A.P. No. 06-4073 AT

Plaintiff,

vs.

WILLIAM BROACH, Trustee; 

DANIEL M. LINCHEY,

Defendants.

___________________________/

MEMORANDUM OF DECISION

In this adversary proceeding, Creditor James D. Golladay

(“Golladay”) asserts claims against William Broach, the chapter 7

trustee, (the “Trustee”) and his counsel Daniel M. Linchey

(“Linchey”) (referred to sometimes collectively as “Defendants”) for

negligence, breach of fiduciary duty, and negligent

misrepresentation. Defendants move to dismiss the claims with

Signed: July 06, 2006

________________________________________

LESLIE TCHAIKOVSKY

U.S. Bankruptcy Judge

________________________________________

Entered on Docket 

July 07, 2006

GLORIA L. FRANKLIN, CLERK 

U.S BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

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prejudice. For the reasons stated below, their motion will be

granted.

SUMMARY OF FACTS

Envirodyne Corporation (“Enviroydyne”) filed a voluntary

petition seeking relief under chapter 11 of the Bankruptcy Code on

January 26, 2000. John Thomas Coburn (“Coburn”), Envirodyne’s

president and sole shareholder, filed a voluntary chapter 11 petition

the next day. Both Envirodyne and Coburn continued to operate during

the chapter 11 cases as debtors in possession. No reorganization

plan was ever confirmed in either chapter 11 case, and on May 1,

2001, orders were entered converting both cases to chapter 7 of the

Bankruptcy Code. 

Broach was appointed as the chapter 7 trustee in the Envirodyne

case. Broach was authorized by Court order to employ Linchey as his

general bankruptcy counsel. Various disputes arose between Broach

and the chapter 7 trustee of the Coburn estate–-Lois Brady (“Brady”)-

-concerning which estate owned which scheduled asset. The principal

assets in controversy were a condominium in Mexico (the “Mexican

Condo”), a judgment against Donna Pinion (the “Pinion Receivables”),

and two race cars, a T-70 Lola (the “T-70 Race Car”), and a T-162

Lola (the “T-162 Race Car”). In March 2003, Broach filed an

application for approval of a compromise of those disputes in the

Envirodyne case (the “Trustees’ Compromise”). 

Golladay filed an objection to the Trustees’ Compromise.

Thereafter, Broach and Golladay entered into a settlement of

Golladay’s objection (the “Golladay Compromise”). The Golladay

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Compromise was approved by the Court pursuant to an order entered on

September 9, 2003. Thereafter, Golladay withdrew his objection to

the Trustees’ Compromise, and the Trustees’ Compromise was approved

by the Court pursuant to an order entered on September 30, 2003.

Broach filed his final report and final application for

compensation in the Envirodyne case on August 6, 2004. Linchey filed

his firm’s final fee application on or about the same date. Orders

approving the final report and the fee applications were entered on

September 13, 2004. On October 30, 2004, a final decree was entered,

and the Envirodyne case was closed. 

On March 1, 2006, on Golladay’s motion, the Envirodyne case was

reopened to permit Golladay to prosecute a previously filed adversary

proceeding against Broach and Linchey: i.e., the above-captioned

adversary proceeding. On April 3, 2006, the Defendants filed a

motion to dismiss the complaint. On April 17, 2006, the parties

appeared at a status conference in the proceeding. The Court

continued the status conference to May 18, 2006 when the motion to

dismiss was scheduled to be heard. The Court gave Golladay until May

4, 2006 to file an opposition to the motion and Defendants until May

11, 2006 to file a reply. No further briefs were filed. However, on

May 16, 2006, Golladay filed an amended complaint. The parties

appeared at the May 18, 2006 hearing, and the matter was argued at

some length. At the conclusion of the hearing, the motion was taken

under submission. 

 

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DISCUSSION

A. APPLICABLE LAW

Defendants characterize their motion as a motion to dismiss for

failure to state a claim. See Fed. R. Civ. Proc. 12(b)(6), made

applicable to this proceeding pursuant to Fed. R. Bankr. Proc.

7012(b). Normally, such motions are limited to consideration of the

allegations in the complaint. Conley v. Gibson, 355 U.S. 41, 78

S.Ct. 99 (1957). However, Defendants ask the Court to take judicial

notice of various documents. Certain of the documents are critical

to the Court’s decision. 

A court may take judicial notice of matters outside the

pleadings in considering a motion under Rule 12(b)(6) as long as they

are matters of public record. See Molloy v. Primus Automotive

Financial Services, 247 B.R. 804, 814 n.8 (C.D. Cal. 2000). However,

some of the documents of which Defendants ask the Court to take

judicial notice–-i.e., the settlement agreement between Broach and

Golladay–-do not appear to be matters of public record. Therefore,

this motion to dismiss should be considered a motion for summary

judgment. See Jacobson v. AEG Capital Corp., 50 F.3d 1493, 1496 (9th

Cir. 1995). 

In determining whether to grant a motion for summary judgment,

the Court must determine whether there is any genuine issue as to a

material fact. See Fed. R. Civ. Proc. 56(c), made applicable to this

proceding by Fed. R. Bankr. Proc. 7056. If not, the Court may enter

judgment based on the parties’ legal rights. Although Golladay did

not file a declaration in opposition to the motion, at the hearing,

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he did not contest the authenticity of the settlement agreement.

Moreover, the Court permitted him to make numerous factual

representations which the Court has taken into consideration in

ruling on this motion. 

B. DECISION

The original complaint filed by Golladay asserted two claims for

relief: i.e., negligence and breach of fiduciary duty. The claims,

which were not separately stated, alleged that Defendants: 

1. Negligently allowed Envirodyne’s assets, consisting of the

Mexican Condo and the T-70 Race Car, to be transferred to the Coburn

estate, despite evidence provided by Golladay that Envirodyne owned

them;

2. Failed to timely renew the judgment supporting the estate’s

right to the Pinion Receivables; 

3. Withheld payment from and halted the efforts of a private

investigator hired to locate various Envirodyne assets;

4. Failed to provide Golladay with “legal action, warrants,

advice, or other means against...[Coburn enabling him to recover the

T-70 Race Car and other assets];

5. Failed “to provide...[Golladay or pursue] themselves, legal

action against...[Coburn] who illegally occupied...[the Mexican

Condo] and openly collected rents from same”;

6. Refused to communicate with Golladay and his lawyer, thereby

impeding Golladay’s efforts in recovering assets awarded him by the

Court so as to minimize his damages. 

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The amended complaint incorporated by reference the contents of

the original complaint and added two additional claims: i.e., for

negligent misrepresentation and to set aside the Golladay Compromise.

In the amended complaint, Golladay alleged that Broach negligently

misrepresented that the T-70 Race Car had been recovered. Golladay

alleged that he entered into the Golladay Compromise in reliance on

this misrepresentation. In addition, he alleged that, in entering

into the Golladay Compromise, he assumed that Broach would supply him

with whatever legal documents were necessary to prove his entitlement

to the Mexican Condo and the T-70 Race Car. The amended complaint

alleged that Broach failed to supply him with these documents despite

having been asked to do so. As a result, according to Golladay,

Coburn was able to “pocket an estimated $140,000 in rents from

the...condominium” and to sell it for another $200,000. 

Defendants move to dismiss the claims asserted in the original

complaint on two grounds. First, they contend that Golladay released

these claims when he entered into the Golladay Compromise. Second,

they contend that the claims are barred by the doctrine of res

judicata by virtue of Golladay’s failure to object to Defendants’

final fee applications. 

Because the motion to dismiss was filed before the amended

complaint, the motion to dismiss does not specifically address the

two added claims. However, the two arguments made in support of the

motion to dismiss the two original claims apply equally to the claim

for negligent misrepresentation asserted in the amended complaint.

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Thus, the Court will address this claim as well in ruling on

Defendants’ motion below. 

Finally, Golladay’s request to set aside the order approving the

Golladay Compromise was also asserted too late to be addressed by

Defendants’ motion. However, because the proper disposition of that

request is apparent from the Court’s conclusions with respect to

Defendants’ motion, the Court will also rule on that request in this

memorandum. 

A. RELEASE PROVISIONS

The first legal ground for the Defendants’ motion to dismiss is

that, pursuant to the Golladay Compromise, Golladay released all of

the claims asserted in the original complaint. As recited above, the

Golladay Compromise was approved pursuant to an order entered on

September 9, 2003. The agreement that embodied the compromise (the

“Agreement”) recites that Golladay asserts lien rights in certain

property of the Envirodyne estate that was the subject of the

Trustees’ Compromise. It recites that Golladay and Broach have

agreed to settle their disputes by Broach assigning to Golladay the

following property:

(a) All the estate’s rights in the Mexican

Condo;

(b) All amounts collected or to be collected

from the Pinion Receivables, except for the

amount of $15,000.00, which amount shall be

retained by the Trustee free and clear of any

claims thereto by Golladay;

(c) 17.5% of the proceeds to be received by the

Trustee from sale of the T-162 after deduction

of the amount due Davenport under the Trustee’s

Settlement;

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(d) All the estate’s rights in the Other Estate

Property. Golladay specifically releases any

interest he may have in the $15,000 of the

Pinion Receivables retained by the Trustee and

the balance of the proceeds of the T-162 after

payment of the amount provided for in..(c)

hereinabove.

Agreement, page 2, para. 2. 

 The Agreement contains the following provision pursuant to which

Golladay releases his known claims against Broach and Linchey:

4. Golladay’s Release. In consideration of the

provisions of this Agreement, including the

Trustee’s Release, Golladay hereby forever

releases and discharges the Trustee, his agents,

employees, servants, representatives, attorneys,

assigns and successors, jointly and individuall,

of and from, and covenants not to seek or

commence or prosecute, or aid in the

commencement of prosecution of, any and all

rights, claims, demands, damages, actions,

causes of action of every kind and nature that

Golladay may have against the Truste and the

Debtor’s estate (“Golladay’s Release”).

Agreement, page 2, para. 4.

 The Agreement also contains a release by Golladay of unknown

claims against Broach and Linchey as follows:

6. General Release. In connection with the

Trustee’s Release and Golladay’s Release, the

Parties waive the requirements of California

Civil Code §1542, which states: “A general

release does not extend to claims which the

creditor does not know or suspect to exist in

his favor at the time of executing the release,

which if known by him must have materially

affected his settlement with the Debtor.”

Agreement, page 3, para. 6.

 Finally, in paragraph 15 of the Agreement, each party, including

Golladay, warranted that, in executing the Agreement, he had either

relied on legal advice or had voluntary decided not to seek counsel

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and fully understood the terms of the Agreement. As recited above,

Golladay was represented by legal counsel in connection with the

negotiation of the Agreement.

In November 2003, the Court approved an amendment to the

Golladay Compromise (the “Agreement Amendment”). In Paragraph B of

the Agreement Amendment, Golladay acknowledges that, when the

Golladay Compromise was negotiated, neither he nor Broach were aware

that the judgment supporting the claim to the Pinion Receivables had

expired. In light of this new knowledge, the Agreement Amendment

increases the proceeds from other assets assigned by Broach to

Golladay.

Obviously, the release provisions only cover claims that arose

before the Agreement was executed. As noted above, the original

complaint contained six factual bases for Golladay’s claims. The

amended complaint contained one additional factual basis. Thus, in

determining whether to the grant the Defendants’ motion and, if so,

with or without prejudice, the Court must determine, if possible,

when each factual basis for the claims occurred. The Court’s

conclusions are set forth below.

1. Defendants negligently allowed Envirodyne’s assets to be

transferred to the Coburn estate. 

The first factual basis for Golladay’s claims restates the

factual basis for his objection to the Trustees’ Compromise.

Golladay withdrew his objection to the Trustees’ Compromise at the

time he entered into the Golladay Compromise. Thus, he was clearly

aware of this factual basis for his claims when he entered into the

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Golladay Compromise and therefore released it when he executed the

Agreement. Moreover, even if he had not known of this factual basis

for his claims, the factual basis clearly arose before Golladay

executed the Agreement. As a result, it was covered by the general

release provision. Consequently, this factual basis for Golladay’s

claims should be dismissed with prejudice.

2. Defendants failed to timely renew the judgment supporting

the Pinion Receivables.

As discussed above, the Agreement Amendment recites that,

although neither Broach nor Golladay realized it prior to entering

into the Golladay Compromise, the Pinion Judgment had already expired

by that time. Thus, this factual basis for his claims clearly

existed prior to the execution of the Agreement. Even though

Golladay did not know about this factual basis for his claim when he

signed the Golladay Agreement, he dismissed it pursuant to the

general release provision. In any event, even if he had not released

it at that time, he subsequently released it by entering into the

Agreement Amendment. See In re Dominelli, 820 F.2d 313, 316 (9th Cir.

1987)(order approving settlement considered final judgment for res

judicata purposes). Consequently, this factual basis for Golladay’s

claims should also dismissed with prejudice.

3. Defendants failed to halt efforts of private investigator

to locate Envirodyne assets.

In his oral presentation at the hearing on the motion, Golladay

conceded that this factual basis for his claims also occurred before

the execution of the Golladay Compromise. Thus, for the same reason

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as the two prior factual bases, this factual basis for his claims

should also be dismissed with prejudice.

4. Defendants failed to provide Golladay with legal documents

enabling him to recover Envirodyne’s assets.

This portion of the claim has not been stated with sufficient

specificity to permit the Court to determine whether it has been

released pursuant to the Golladay Compromise. At the hearing,

Golladay complained that Brady, the chapter 7 trustee of the Coburn

estate, had failed to provide him with a legal document sufficient to

permit him to assert control over the Mexican Condo. However, the

Court does not recall any similar allegations with respect to Broach

and Linchey. Therefore, based on the Defendants’ first basis for

their motion-–i.e., the release provisions--the Court would be

required to dismiss this portion of the claims without prejudice,

for lack of specificity. 

5. Defendants failed to take prompt legal action (or provide

Golladay with the means of doing so) with respect to the

Mexican Condo.

It is also impossible to determine from the vague nature of this

allegation whether the conduct complained of occurred before or after

the execution of the Agreement. Moreover, again, the Court is

unsure, based on Golladay’s comments at the hearing, whether he

really means to assert this claim against Broach and Linchey as

opposed to Brady. As a result, as with the prior factual basis for

Golladay’s claims, to the extent that Defendants’ motion to dismiss

is based on the release provisions, the Court would be required to

dismiss this portion of Golladay’s claim without prejudice.

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6. Defendants refused to communicate with Golladay and his

attorney, thereby impeding Golladay’s efforts to recover

assigned assets. 

By referring to the “assigned assets,” the allegations make it

clear that this factual basis for Golladay’s claims occurred after

the execution of the Agreement. As a result, Golladay could not have

released this portion of the claims in the Agreement, and the claims

may not be dismissed on the basis of the release provisions. 

7. Prior to the execution of the Golladay Compromise,

Defendants negligently represented that the T-70 race car

had been recovered. 

Conversely, these allegations make it clear that this factual

basis for Golladay’s claim occurred before the execution of the

Agreement. As a result, by executing the Agreement, Golladay

released this factual basis for his claims, and this factual basis

should be dismissed with prejudice. The fact that Golladay may not

have known about this factual basis when he executed the Agreement is

irrelevant in view of the general release provision. 

Summary of Rulings

Based on the release provisions in the Agreement, Golladay

clearly released the claims asserted in the original and amended

complaint as to the factual bases stated in items 1, 2, 3, and 7

above. Therefore, based on the release provisions in the Agreement

alone, these factual bases for Golladay’s claims should be dismissed

with prejudice. 

The factual allegations set forth in item 4 and 5 are not

sufficiently definite for the Court to determine whether the conduct

in question occurred before the execution of the Agreement and thus

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were covered by the release provisions contained in the Agreement.

Therefore, these factual bases for Golladay’s claim would be

dismissed without prejudice based on Defendants’ first legal ground

for their motion: i.e., the release provisions. The factual

allegations set forth in item 6 clearly relate to conduct that

occurred after the execution of the Agreement. Thus, Golladay did

not release this portion of his claims, and the claim need not be

dismissed, either with or without prejudice, based on this legal

ground. 

B. RES JUDICATA 

The second basis for Defendants’ motion to dismiss applies

equally to all seven claims. Defendants contend that all of the

claims asserted by Golladay in the original and amended complaint are

barred by the doctrine of res judicata. The doctrine of res

judicata–-sometimes referred to as claim preclusion--provides that a

final judgment on the merits precludes further litigation on issues

that either were or could have been litigated in the prior

proceeding. Montana v. U.S., 440 U.S. 147, 153 (1979); Nordhorn v.

Ladish Co., 9 F.3d 1402, 1404 (9th Cir. 1993). 

In a bankruptcy case, a final fee award is considered a final

judgment on the merits. See In re Iannochino, 242 F.3d 36, 44 (1st

Cir. 2001). As recited above, Broach’s and Linchey’s final fee

applications were approved pursuant to orders entered on September

13, 2004. Golladay was sent notice of the hearing the applications

and did not file an objection. Because claims of malfeasance or

nonfeasance could have been asserted as an objection to a fee

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application, subsequent actions against a trustee or professional by

a party in interest who received notice of the applications are

barred by the doctrine of res judicata. See In re Shaw, 2000 WL

1897344 at *6 (N.D. Cal. 2000); Epstein v. Visher, 1997 WL 231108 at

*1 (N.D. Cal.). 

In determining whether the doctrine of res judicata bars pending

litigation, the Court must examine four factors as follows:

(1) whether rights or interests established in

the prior judgment would be destroyed or

impaired by the prosecution of the second

action; (2) whether substantially the same

evidence is presented in the two actions; (3)

whether the two suits involve infringement of

the same right; and (4) whether the two suits

arise out of the same transactional nucleus of

facts. 

Nordhorn, 9 F.3d at 1405. Each of these factors as applied to

Golladay’s claims is discussed below.

(1) Whether Prior Rights Established Would be Destroyed.

The right of a professional to a fee award would be impaired by

permitting a subsequent malpractice claim to be asserted. Shaw at

*5. Similarly, here, Golladay’s claims against Defendants--for

negligence, breach of fiduciary duty, and negligent representation--

would impair their fee awards. Thus, the first of the four required

factors is clearly satisfied.

(2) Whether Two Actions Would Require Substantially the Same

Evidence.

In Shaw, the party asserting the subsequent malpractice action

had objected to the fee application. The Shaw court found that the

evidence presented in support of the objection was the same evidence

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that would be offered in support of the malpractice action. Shaw at

*5. Here, Golladay did not file an objection to the fee

applications. However, all of the factual bases for the claims

asserted here could have been asserted in support of such an

objection. As noted above, for res judicata to apply, a party need

not have asserted the claim in the prior action. It is sufficient

that the party could have asserted the claim. As recited above,

Golladay received ample notice of the fee applications. He had a

full and fair opportunity to assert his claims in the context of an

objection to the fee applications. Thus, the Court concludes that

the second of the four factors is also satisfied.

(3) Whether Both Actions Involve Infringement of Same Right. 

The Court also concludes that the third factor has been

satisfied. The claims asserted by Golladay here involve the

infringement of the same right as that raised by the fee application.

The right asserted by Golladay here is the right to have the chapter

7 trustee and his counsel exercise due care in marshalling the

debtor’s assets for the benefit of the estate’s creditors. This is

the same right that he could have asserted by means of an objection

to the fee applications.

(4) Whether Both Actions Arise Out of Same Nucleus of Facts.

The final factor is also clearly satisfied. The fee

applications of a chapter 7 trustee and his counsel put at issue the

quality of their services on behalf of the estate and its creditors.

This is the same nucleus of facts raised by Golladay’s claims. See

In re Coastal Plains, Inc., 338 B.R. 703, 713 (N.D. Tex. 2006)(causes

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Because the order approving the Golladay Compromise was

entered in the bankruptcy case, not in this adversary proceeding,

this request should have been made by motion in the case. However,

as a matter of judicial economy, the Court will address it in the

context of this proceeding. 

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of action for negligence and breach of fiduciary duty are based on

same nucleus of operative facts as trustee’s fee application).

Based on the foregoing, the Court concludes that all of the

claims asserted in the original and amended complaint are barred by

res judicata effect of the orders approving Broach’s and Linchey’s

final fee applications. Therefore, the claims asserted in the

original and amended complaint should be dismissed with prejudice.

C. MOTION TO SET ASIDE ENVIRODYNE COMPROMISE 

In the amended complaint, Golladay also asks the Court to set

aside the order approving the Golladay Compromise.1 He alleges that

he entered into the Golladay Compromise based on Broach’s negligent

misrepresentation that the Mexican Condo was registered in Coburn’s

name and/or was owned by Coburn. He also alleges that he was unaware

that Broach had negligently misrepresented that the T-70 Race Car had

been recovered. 

Golladay alleges further that, when he signed the Agreement, he

assumed that Broach would provide any necessary documents to prove

his entitlement to the Mexican Condo and the Race Cars. These

documents were not provided despite his request for them. Finally,

he alleges that, he signed the Agreement without realizing the effect

of a “general release” clause. Although represented by counsel in

connection with the Agreement, he notes that the attorney was acting

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on a pro bono basis. Finally, he alleges that the Court approved the

Golladay Compromise in ignorance of all these facts.

As recited above, the order approving the Golladay Compromise

was entered on September 9, 2003. Golladay did not seek to set aside

this order until the amended complaint was filed on May 16, 2006.

Clearly, Golladay learned of the factual basis for his request to set

aside the order long before the amended complaint was filed. The

Court finds that his request untimely. See Fed. R. Civ. Proc. 60(b),

made applicable to this proceeding by Fed. R. Bankr. Proc. 9024. 

Moreover, setting aside the Golladay Compromise would not

breathe life into Golladay’s claims. As discussed above, the release

provisions contained in the Agreement only require the dismissal of

some of the claims with prejudice. However, all of the claims must

be dismissed with prejudice based on the doctrine of res judicata due

to Golladay’s failure to object to the fee applications.

CONCLUSION

Defendants’ motion to dismiss will be granted in its entirety.

Most of the claims asserted in the original and amended complaint

arose before the Agreement was executed. As a result, by executing

the Agreement, Golladay released the claims even, pursuant to the

general release provision, if he did not know about them. For that

reason, the motion to dismiss those claims would have to be dismissed

with prejudice in any event. A few of the claims were or may have

been based on conduct subsequent to the execution of the Agreement.

Therefore, the motion to dismiss these claims would not be granted

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based on the release provisions or, if granted, would be granted with

leave to amend to state the claim more definitely. 

However, all of the claims are barred by the res judicata effect

of the orders approving Defendants’ final fee applications.

Therefore, the motion to dismiss must be granted with prejudice in

its entirety. Golladay’s request to set aside the Golladay

Compromise is untimely. Moreover, even if the Agreement were set

aside, the claims would still be barred by the doctrine of res

judicata. Defendants are directed to submit a proposed form of order

in accordance with this decision.

END OF DOCUMENT

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COURT SERVICE LIST

Dennis D. Davis

Goldberg, Stinnett, Meyers & Davis

44 Montgomery St., Ste. 2900

San Francisco, CA 94104

James D. Golladay

P.O. Box 1784

Grass Valley, CA 95945

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