Court Opinion

ID: 9692547
Source: CourtListenerOpinion
Date Created: 2023-08-25 15:57:00.616764+00
Date Added: 2024-06-11T18:19:35.287419
License: Public Domain

JONES, Bankruptcy Judge,
concurring in part; dissenting in part.
I respectfully dissent. I would affirm the bankruptcy court. The Debtor’s, claim against Jody DiSalvo is barred by the doctrine of claim preclusion. I would also affirm the bankruptcy court’s dismissal of the abuse of process claim against the attorneys on the basis that it fails to state a claim for which relief can be granted. I concur in affirming the bankruptcy court’s dismissal of the claim for “tortious violation of § 726(a).”
As to the claim against Jody DiSalvo, the majority bases its reversal on a distinction between the debtor and the debtor in possession that other courts have correctly deemed “artificial and fictitious.” In re Allen, 135 B.R. 856, 868 (Bankr.N.D.Iowa 1992) (following NLRB v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984)). The majority concludes that because the “debtor appeared in the earlier action [the dischargeability complaint] in his individual capacity, not in his capacity as debtor in possession representing the interests of the estate,” the debtor and the debtor in possession are not the same parties and therefore claim preclusion does not apply. This conclusion appears to be based on the captions of the two complaints. The majority’s analysis elevates form over substance, and revives the “separate entity” theory rejected by the Supreme Court.
Contrary to the majority’s conclusion here, the Supreme Court in Bildisco concluded that the debtor in possession is not a separate entity from the debtor. The Court noted:
Obviously if [the DIP] were a wholly “new entity,” it would be unnecessary for the Bankruptcy Code to allow it to reject exec-utory contracts, 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” *772which 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 employed absent the bankruptcy filing.
Bildisco, 465 U.S. at 528, 104 S.Ct. 1188. Subsequent case law has not limited Bildisco to the context of executory contracts. In the Ninth Circuit case In re Teerlink Ranch, Ltd., 886 F.2d 1233 (9th Cir.1989), the debtor TRL argued that when as debtor in possession it paid a prepetition debt, it was paying a debt on behalf of another entity and thus became a judicial lien creditor under § 544(a). The Ninth Circuit rejected this argument. Following Bildisco, the court sensibly concluded that despite the debtor’s additional title as debtor in possession, TRL was “still the same old debtor satisfying the same old debt.” Id. at 1235-36. Consistent with other courts dealing with this issue,10 the Ninth Circuit was persuaded by substance rather than form.
The majority distinguishes these decisions because of a general rule of civil practice that when a defendant is sued in a personal capacity, any claims against the plaintiff that the defendant has in a representative capacity are not compulsory counter-claims. In the ordinary non-bankruptcy, trustee-fiduciary context this general rule makes sense. Here, however, the distinction simply deals with Mr. DiSalvo’s dual status as debtor and as debtor in possession. The Supreme Court in Bildisco tells us that the debtor and debt- or in possession are the same entity. In this context, the distinction between the debtor and the debtor in possession is substantively meaningless.
Following the approach of Bildisco and Teerlink, in this case the same entity was before the court in the first action as in the second. Both actions took place in the bankruptcy court post-petition. We have the same debtor, with the same facts, with the same claim that should have been brought in the first proceeding. Therefore, the debtor’s claim should be barred by claim preclusion.
Further, the court in the first action not only found the debt to be dischargeable, but also ordered the claim extinguished. The majority concedes that “[t]he court’s determination that the debt was extinguished, rather than simply discharged, benefitted the debtor individually and the estate.” The fact that the extinguishment of the $100,000 claim benefitted the estate demonstrates that the first action “was in fact tried and decided as one that involved the representative capacity of the party.” Majority Op. at 768 (citing Federal Practice and Procedure § 4454 at 459). While we have reversed the sanction of extinguishment of the debt, the issue of debt extinguishment clearly involved the interest of the estate. An award of attorney’s fees would also have benefitted the estate. Thus, not only is the majority’s “separate entity” theory itself unwarranted by prior decisions, the theory should not apply to the facts of this case. Interests of the estate were in fact litigated and decided in the first action.
The majority suggests that the test for res judicata purposes is not whether the same entity is before the court, but whether the same interests are represented, warning that the court must look “at the substance, not the form, of the interests represented.” Majority Op. at 768 (citing Moore’s Federal Practice § 131.40[2][a] at 131-131). Although the majority provides distinctions as to form, in my view the interests represented in the two actions are substantively identical. Therefore, I would affirm the bankruptcy court’s ruling dismissing the claims against *773defendant Jody DiSalvo on the grounds of claim preclusion.
As for the abuse of process claim against Jody DiSalvo’s attorneys, I would also affirm the bankruptcy court’s dismissal for failure to state a claim for which relief can be granted. The majority concludes that a violation of Cal. Civ. PROC. Code § 726(a)11, if proven, is a wrongful use of process. I respectfully disagree.
The majority has cited no decision holding that § 726(a) may give rise to an abuse of process claim. Case law is clear that § 726(a) is an election of remedies statute that provides its own sanction. The California Supreme Court has explained:
If the debtor does not raise the section as an affirmative defense, he may still invoke it as a sanction against the creditor on the basis that the latter by not foreclosing on the security in the action brought to enforce the debt, has made an election of remedies and waived the security.
Walker v. Community Bank, 10 Cal.3d 729, 111 Cal.Rptr. 897, 900, 518 P.2d 329 (1974). Accord In re Madigan, 122 B.R. 103, 105-06 (9th Cir. BAP 1991) (explaining § 726(a) in terms of “the election of remedies doctrine” and stating that the purpose of the statute “is to prevent the creditor from enforcing its rights by more than one remedy”); Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners (In re Prestige Ltd. Partnership-Concord), 205 B.R. 427, 434 (Bankr. N.D.Cal.1997) (citing Walker); see also In re Sunnymead Shopping Ctr. Co., 178 B.R. 809, 815 (9th Cir. BAP 1995) (stating that a creditor who first obtains a monetary judgment without pursuing foreclosure on the security “will be deemed to have forfeited its right to further pursue its security interest”). If the creditor elects to proceed against the debt, it loses its security interest and also risks losing the underlying debt. Security Pac. Nat’l Bank v. Wozab, 51 Cal.3d 991, 275 Cal.Rptr. 201, 208 & 210, 800 P.2d 557 (1990). Under § 726(a), the creditor elects a remedy and takes the consequences.
Here, the defendant has undergone the sanction of losing its security interest. Incurring this sanction and proceeding on the debt does not give rise to an abuse of process claim. In its analysis of the claim of “tor-tious violation of § 726(a)” the majority correctly recognizes that “[sjevere sanctions already exist for such a violation.” The same analysis is proper here. It would be improper to allow an abuse of process claim when a creditor elects to forgo its security and undergoes the sanctions inherent in the statute. In my view the creditor’s election of this remedy cannot be considered a “use of the process not proper in the regular conduct of the proceeding.” Oren Royal Oaks Venture v. Greenberg, Bernhard, Weiss & Karma, Inc., 42 Cal.3d 1157, 232 Cal.Rptr. 567, 574, 728 P.2d 1202 (1986) (quoting Templeton Feed & Grain v. Ralston Purina Co., 69 Cal.2d 461, 72 Cal.Rptr. 344, 347, 446 P.2d 152 (1968)).
The majority cites two authorities to support its conclusion that a violation of § 726(a) establishes a wrongful use of process: Pimentel v. Houk, 101 Cal.App.2d 884, 226 P.2d 739 (1951), and a footnote from Templeton Feed, 72 Cal.Rptr. at 347 n. 4, 446 P.2d 152. Neither case supports the majority’s contention. Pimentel does not deal with § 726(a), or for that matter, any other statute. Pi-mentel simply holds that the plaintiff-appellant did not have an abuse of process claim where he made no allegation of any kind that the defendant-creditor’s writ of attachment was improperly issued. Pimentel, 226 P.2d at 740. Few would disagree with this benign holding.
The facts of Templeton Feed also do not involve § 726(a). In that case the creditor, through a claim and delivery action, seized 35,000 turkeys from a ranch when it apparently knew that it held no security interest in the turkeys. The debtor brought an abuse of process action. The court’s only mention of § 726(a) is its response to the creditor’s defense that, hypothetically, it could have properly achieved the same result in an attachment proceeding. The court stated that a creditor “would have no right to use the' attachment process without first foreclosing on the deeds of trust.” 72 Cal.Rptr. at 347 n. 4, 446 P.2d 152 (citing Cal. Civ. Proo. Code *774§§ 587 [repealed], 726). The court’s rejection of the creditor’s hypothetical defense does not mean that § 726(a) is the basis for an abuse of process claim.12 Templeton Feed must be read in light of the California Supreme Court’s interpretation of § 726(a) in Walker v. Community Bank and its progeny. Those cases are clear that the creditor that proceeds on the debt is electing a remedy that submits it to the severe sanction of a waiver of its security interest and if appropriate,- possible extinguishment of the debt. The creditor suffered those sanctions in this case. No further claim arises from § 726(a).
In my view, an election of remedies under § 726(a) will not give rise to an abuse of process claim. It would indeed be ironic if the statute designed to limit the collection process to one action, and providing its own sanctions for a violation, became the breeding ground for a second generation of litigation. I would affirm the bankruptcy court’s dismissal of the abuse of process claim against the attorneys on the ground of failure to state a claim for which relief can be granted.

. See, e.g., U.S. through ASCS v. Gerth, 991 F.2d 1428, 1436 (8th Cir.1993) ("If the debtor and the debtor-in-possession are the same entity for purposes of an executory contract under § 365, we see no logical reason to consider them different entities when examining an executory contract for purposes of setoff In re Allen, 135 B.R. 856, 868 (Bankr.N.D.Iowa 1992) ("This Court believes that the language of Bildisco is unambiguous and intended to put a stop to the rather artificial and fictitious distinctions between the debtor-in-possession and the debtor."); In re Ontario Locomotive & Indus. Ry. Supplies, Inc., 126 B.R. 146, 147 (Bankr.W.D.N.Y.1991) (stating that “the [Bildisco ] Court would appear to have laid to rest the ‘separate entity’ doctrine for all time” and noting that even the dissent in Bildisco agreed with the rejection of the separate entity theory); In re Mohawk Indus., Inc., 82 B.R. 174, 177 (Bankr.Mass.1987) ("The Supreme Court has rejected the new entity theory.”).

. Hereafter referred to as § 726(a).

. Templeton Feed in footnote 4 cites Cal. Civ. Proc. Code § 537 (the repealed section regarding attachment) and § 726. The California Code's current wrongful attachment chapter specifically does not limit common law theories of recovery. Cal. Civ. Proc. Code § 490.060 (West 1979 & Supp.1998). However, the chapter regarding foreclosure of mortgages which includes § 726(a) has no similar provision allowing for common law theories of recovery. See Cal Civ Proc. Code §§ 725a-730.5 (West 1979 & Supp. 1998).