Thursday, December 05, 2013

Edwards v. Broadwater Casitas Care Center (Cal. Ct. App. - Dec. 5, 2013)

I'm about to demonstrate my shocking ignorance of federal bankruptcy law.  Because I agree with the Court of Appeal.

Plaintiff files a lawsuit and loses, and incurs an adverse cost award of (around) $20,000 and another adverse fee award of $160,000 on top of this.  She then files -- not surprisingly -- a Chapter 13 bankruptcy petition, alongside an appeal.  The bankruptcy court acts quickly, and confirms her bankruptcy plan, which includes paying a portion (eight percent) of the cost and fee award to defendants -- to which plaintiff didn't object at the bankruptcy stage.

But she still prosecutes her appeal.  At which point the defendants move to dismiss.  Claiming res judicata as a result of the bankruptcy confirmation decision.

The Court of Appeal refuses to dismiss.  I think that's right.

Justice Turner's opinion is a little confusing in parts because he says things like there's no res judicata because the validity of the claim was never "actually litigated" in the bankruptcy court.  Stuff like that conflates the two types of res judicata -- issue preclusion ("collateral estoppel"), where we do care about that requirement, as opposed to claim preclusion ("true" res judicata) where we don't.  Since we're talking about the latter here, it doesn't matter if the thing was actually litigated (which it wasn't), only if we require it to be.  So for ubergeeks like me, I think the language and analysis here is a tiny, tiny bit off.

But on the merits, yeah, I think Justice Turner is right.  Just 'cause the bankruptcy court says you need to pay $20,000 (or whatever) doesn't mean you actually have to pay it.  You still get to litigate whether you actually owe the debt.  You're not required to do that in bankruptcy court.  You can do that -- as here -- on appeal.  Which is where we'd want these things adjudicated in the first place.  It's not like the bankruptcy court has either the time or expertise to decide whether a state civil appeal is meritorious or not.  Ergo the appeal goes forward and doesn't get dismissed.  Which is precisely what the Court of Appeal holds.

So it seems like this result is right.

That said -- and, again, here I'm about to demonstrate why I don't teach bankruptcy -- I totally don't fathom how/why a bankruptcy court can/should approve a reorganization plan that involves radically nonfinal (and substantial) debts.  Take the present case.  Imagine Edwards has $180,000 in debts from the civil lawsuit, $20,000 in credit card and other debts, and $16,000 in assets.  It'd make sense to confirm a bankruptcy plan in such a setting by providing (as here) that she pays eight cents on the dollar to both -- $14,400 to the defendant in the civil suit and $1600 to the credit card company.  Boom.  Done.  Fair all around.

But look what happens if she's able to -- as the Court of Appeal permits -- continue with her appeal to try to strike the civil award.  Imagine she's successful.  Then her $180,000 debt goes away, and she still only has to pay $1600 of her $20,000 credit card debt, even though she has $14,000+ left to pay it.  Nice for the debtor, but hardly equitable.

Justice Turner's opinions gives (I think) the correct doctrinal answer to this problem, which is that plans are never actually "final" and can always be modified if assets turn out to be greater, etc.  I'm sure that's right, as the cases he cites (e.g., real property sales, sales of businesses, etc.) demonstrates.

But as a practical matter, my strong sense is that just ain't right.  A credit card company ain't going to be scanning the pages of the California Appellate Reports to see whether Edwards' appeal was successful to potentially reopen the case.  It just isn't worth it.  So Edwards is going to make out like a bandit if we don't dismiss her appeal and she's successful.  She'll have obtained the benefit of having a $180,000 debt without actually having to pay it.

That's the strongest argument in favor of dismissing the appeal.

Ultimately, however, I think this is an objection to the bankruptcy process, not what happens on the civil side.  Were I designing the bankruptcy system, or adjudicating plans, I'm not sure we should confirm plans like this one so quickly.  Maybe wait until we find out whether the appeal's successful.  Particularly when, as here, we're otherwise processing the case super quickly.  Let's first determine -- in the only place we can (the Court of Appeal) -- whether the appeal's going to be successful, and only if it's not grant defendant the type of relief they seek.  If they don't like it, they can dismiss their appeal, or their bankruptcy.  Or simply wait.  I'm not sure the urgent need for a plan outweighs the equities in a case like this.  Particularly where, as here, the disputed debt -- which we know for certain is disputed -- is a substantial portion of the debts.

But I nonetheless agree with the Court of Appeal because, as it happens, we're required to take the federal bankruptcy system as we find it.  Nothing a state appellate court can do to change was federal bankruptcy judges do, or have done.  The plan's already confirmed.  Even if it shouldn't have been.  At least in theory, it can also be reopened.  Given these realities, there's no res judicata.  Appeal goes forward.