Corona Commerce Center v. Superior Court CA4/2

• Court: California Court of Appeal
• Decided: January 15, 2016
• Docket: E063470
• Status: Unpublished

Opinion

Filed 1/15/16 Corona Commerce Center v. Superior Court CA4/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION TWO

CORONA COMMERCE CENTER, L.P.,

Petitioner, E063470

v. (Super.Ct.No. RIC1117414)

THE SUPERIOR COURT OF OPINION RIVERSIDE COUNTY,

Respondent;

EDWARD M. THOMAS et al.,

Real Parties in Interest.

ORIGINAL PROCEEDINGS; petition for writ of mandate. Daniel A. Ottolia,

Judge. Petition is granted.

Law Offices of Stuart A. Katz, and Stuart A. Katz; Tullius Law Group, and

Jennifer R. Tullius for Petitioner.

No appearance for Respondent.

1 Law Offices of Linda E. O’Brien, and Linda E. O’Brien for Real Parties in

Interest.

The question before this court is whether a debtor can file for bankruptcy, obtain a

court order fixing a creditor’s right to recovery at far less than the amount claimed

pursuant to a specific bankruptcy statute, exit bankruptcy via a voluntary dismissal, and

still claim the benefit of the order for reduced recovery when the creditor sues for the full

amount due? We find the debtor cannot do so.

STATEMENT OF FACTS

The facts of the matter are not complex. Petitioner Corona Commerce

Center, L.P. (Corona) leased commercial property to Thomas Management, Inc. in 2005

for a 10-year term. Edward and Wendy Thomas, defendants in the matter below and

real parties in interest here, guaranteed payment of rent on behalf of Thomas

Management, Inc. (TMI).

The complaint alleges that TMI defaulted in 2011 and claims unpaid rent of

$303,266.81. TMI then filed for bankruptcy. Hence, Corona elected to proceed against

the Thomases as guarantors.

After the complaint was filed, apparently in September 2012, the Thomases filed a

Chapter 11 proceeding in the Bankruptcy Court, and the California action was

accordingly stayed.

2 On or about July 11, 2014, however, the Thomases dismissed the bankruptcy,

which had the effect of terminating the stay of the California action. Thereafter, in

January 2015, Corona moved for summary judgment or adjudication of its right to the

unpaid rent claimed.

In this motion Corona explained that TMI’s obligation to Corona was fixed at

$96,153.34 pursuant to title 11 United States Code section 502(b)(6) (see infra) and TMI

had eventually paid Corona 10 percent of that sum as a pro-rata distribution to its

creditors. Corona also acknowledged that the Thomases had obtained an order under the

same statute in their bankruptcy, which resulted in an order that their obligations to

Corona were $96,153.34 less credit for the amount paid by TMI, for a reduced total of

$86,538. As the Thomases had paid the latter amount, Corona claimed only the

remaining amount of its original claim, as augmented by expenses, interest, etc. and

reduced by rents received from a new tenant, for a current total of $230,641.61.

Implicit in these calculations was Corona’s position that because the Thomases

had not completed bankruptcy, but had dismissed the petition, the bankruptcy court’s

application of title 11 United States Code section 502(b)(6) to fix the Thomases’

obligation to Corona was ineffective.

The Thomases in response below argued that the bankruptcy order is in fact

binding and prevents any further recovery. The Thomases also raised challenges to the

competency of Corona’s evidence which the trial court apparently rejected. However, it

3 agreed with the Thomases’ contention that the bankruptcy court order that limited the

Thomases’ liability was binding on Corona through a theory of collateral estoppel.

This petition followed.

DISCUSSION

Title 11 United States Code section 502 governs objections to claims filed by a

creditor of the bankrupt. It allows an objection to be made on the basis that a lessor’s

claim for damages for the termination of a real property lease “exceeds—[¶] (A) the

rent reserved by such lease, without acceleration, for the greater of one year, or

15 percent, not to exceed three years, of the remaining term of such lease, following the

earlier of—[¶] (i) the date of the filing of the petition, and [¶] (ii) the date on which such

lessor repossessed or the lessee surrendered, the leased property; plus [¶] (B) any unpaid

rent due under such lease, without acceleration, on the earlier of such dates.” (11 U.S.C.

§ 502(b)(6).) Thus, a lessor such as Corona whose lease included a full acceleration

clause extending years into the future from the time of default or bankruptcy filing,

cannot recover all sums due under the lease. The purpose of the statute is to allow the

landlord fair compensation for the breached lease while preventing a claim for future

unpaid rent from eating up a disproportionate part of a bankrupt’s estate. (In re Gantos,

Inc. (Bankr. W.D. Mich. 1995) 176 B.R. 793, 795.)

There is no question that if the Thomases had completed bankruptcy proceedings

and been discharged, Corona’s current claim would be barred. The issue here is not quite

so simple.

4 In the bankruptcy action, in which Corona had vigorously participated in

opposition to the Thomases’ attempt to limit its recovery, the court entered a dismissal

order which simply grants their motion to dismiss. It is not entirely clear what the court

intended. In their motion to dismiss, the Thomases only sought the relief of dismissal.

After Corona objected, the Thomases filed a reply in which they specifically asked the

court to rule that its order limiting Corona’s recovery would be “binding and conclusive

on all parties notwithstanding the dismissal of this case” and offered an order including

language to this effect. That the court did not sign this order, but signed one simply

granting dismissal, suggests that it believed that it would be inappropriate to attempt to

determine the effect of its rulings in a state court action. However, even if the order

granting dismissal was intended to include all relief sought by the Thomases, we would

not be obliged to accept it as controlling. We also note that decisions of the lower federal

courts are not binding on California courts even on issues of federal law. Furthermore,

such a gratuitous statement unrelated to the action or ruling the court was making (the

dismissal) is clearly dicta. (People v. Superior Court (Moore) (1996) 50 Cal.App.4th

1202, 1211.) Finally, trial courts do not generally create binding precedent in any event.

(In re Marriage of Boswell (2014) 225 Cal.App.4th 1172, 1176, in dicta.) Hence, we

consider the issue afresh.

We agree that we have found no case directly holding that a dismissal effectively

dissolves earlier orders and that there are cases, as cited by real parties in interest, that

hold that in the circumstances of those cases, some orders made during the pendency of a

5 bankruptcy remain binding even if the proceeding is dismissed. None, however, is on

point with this case, as we will explain.

The Thomases cite Bevan v. Socal Communications Sites, LLC (9th Cir. 2003) 327

F.3d 994 (Bevan) for its statement that rulings on claims remain binding despite the later

dismissal of proceedings. The ruling involved in Bevan was one fully allowing a

creditor’s claim, and the Ninth Circuit noted that despite the dismissal, this order “would

have a res judicata effect that the Bevans would have to confront now that their estate has

revested in them.”1 (Id. at p. 997.) The Bevan court cited in this respect its earlier

decision in Siegel v. Federal Home Loan Mortgage Corporation (9th Cir. 1998) 143 F.3d

525 (Siegel), which barred a debtor’s attempt to sue a lender for wrongful foreclosure

because the debtor had not challenged the lender’s proofs of claim filed in the bankruptcy

action, and the bankruptcy court, based on these proofs, allowed the lender to foreclose.

Siegel states that the debtor could have raised the issues concerning the lender’s alleged

misdeeds as a defense to its claims in the bankruptcy proceeding, and also notes that the

tort claims would undermine the rights granted to the creditor by the bankruptcy court.

Hence, res judicata applied. (Id. at pp. 529-530.) In Siegel, the debtor completed

bankruptcy and was discharged, and thus (unlike Bevan) is not analogous to this case.

1 In Bevan, supra, 327 F.3d 994, the debtors appealed an order allowing a creditor’s claim in a convoluted factual setting. They apparently argued on appeal that their dismissal of the bankruptcy mooted the appeal because it cancelled out the approval order. The appellate court disagreed with this position, but went on to reverse the approval order on other grounds.

6 Real parties in interest, and the trial court, also rely on Nathanson v. Hecker

(2002) 99 Cal.App.4th 1158 (Nathanson), which was a dismissal case. There, the

Heckers, in a civil suit for damages, refused to respond to Nathanson’s discovery request

and, when Nathanson filed a motion to compel, the Heckers filed for bankruptcy.

(Nathanson at p. 1161.) Nathanson then filed a claim for $200,000 in the bankruptcy

court; the Heckers objected and the matter was litigated actively. The bankruptcy court

allowed Nathanson’s claim in the amount of $169,282.36. The bankruptcy was then

dismissed, apparently due to the Heckers’ failure to cooperate with the trustee. (Ibid.)

Back in the civil action, Nathanson moved for summary judgment on the basis of

the bankruptcy court’s order as establishing the validity of its claim in the amount

specified. The Heckers then argued that the dismissal of the bankruptcy prevented the

order from having any res judicata effect. However, the appellate court disagreed, citing

inter alia the decision in Siegel. (Nathanson, supra, 99 Cal.App.4th at p. 1163.)

Corona, on the other hand, relies on Mirzai v. Kolbe Foods, Inc. (In re Mirzai)

(C.D. Cal. 2001) 271 B.R. 647 (Mirzai). There, the creditor recovered a state court

judgment against Mirzai and then filed a proof of claim in the bankruptcy court. Mirzai

objected that the creditor was a suspended corporation with no standing. (See Rev. &

Tax. Code, § 23302.) The bankruptcy court agreed and disallowed the claim. Mirzai

then dismissed the bankruptcy. (Mirzai, at p. 650.)

After additional proceedings in state courts, resulting generally unfavorably to

Mirzai, the latter again filed for bankruptcy, seeking to enjoin the creditor from enforcing

7 the judgment. The basis was the disallowance of the claim in the first bankruptcy.

(Mirzai, supra, 271 B.R. at p. 651.) However, the district court, sitting in bankruptcy,

found that the disallowance of a claim had no preclusive effect if the bankruptcy was

dismissed rather than proceeding to discharge. It held bluntly that “Mirzai was not

entitled to the benefits of bankruptcy without confirmation of a plan or discharge.” (Id. at

p. 654.) The court also commented that a disallowance based on a procedural ground

(such as the corporate creditor’s suspension) was not a judgment on the merits entitled to

preclusive effect. (Ibid.)2

We now examine the precise effect of these decisions. In Bevan, which appears to

state a rule favorable to real parties in interest, the pertinent statements of the court are

only that once a claim is allowed by the bankruptcy court, its validity is not affected by

the dismissal of the proceeding. Siegel, although it involved a discharge and does not

consider the issues before us, makes the same point—that the debtor is bound by an order

on a claim.

Nathanson also presents the situation in which a debtor attempts to avoid the

effect of a ruling on the merits of a claim by relying on a subsequent dismissal. The

validity of the creditor’s claim had been fully litigated and the bankruptcy court evidently

found that, as a matter of fact, the debtor owed the creditor a specified amount. The

2 See also In re Case (Bankr. D.S.D. 1983) 27 B.R. 844, 847: “Congress did not envision a fresh start for debtors that do not proceed to discharge.”

8 opinion also supports the view that the dismissal was prompted, or related to, the debtor’s

desire to avoid the effect of the ruling.

Here, in contrast, the order of the bankruptcy court fixing the amount which

Corona could collect was based on the application of a specific law integral to the

administration of bankruptcy proceedings. It did not represent findings on contested

issues of fact which could appropriately be given res judicata effect. It did not determine

that real parties in interest only owed Corona “X” dollars, but rather that Corona could

only collect “X” dollars from a bankrupt.

Furthermore, real parties in interest are not trying to avoid the effect of an

unfavorable ruling. Rather, they are trying to retain the benefits of a favorable ruling

without actually having gone through bankruptcy. In Nathanson, the court’s refusal to

find that the dismissal of bankruptcy voided all previous orders was necessary to prevent

injustice. The exact opposite is true here: equity requires that the dismissal must be

construed to include the Thomases’ implicit abandonment of the benefits offered by the

bankruptcy laws. To this extent it is Mirzai is that relevant and persuasive.

First, title 11 of the United States Code section 502 does not exist in a vacuum. It

is not a mechanism by which any debtor who owes money for future rents can receive a

determination that only a limited amount of the money due can actually be recovered by

the landlord. As we briefly discussed above, the purpose of the statute is not to leave

more money in the hands of the debtor, but to prevent a landlord’s claim for unpaid

future rents from devouring the bankrupt’s estate to the detriment or exclusion of other

9 creditors. Section 502 simply serves as a tool the bankruptcy court uses to effect a fair

allocation of available assets among the creditors.

Second, where the debtor attempts to use a ruling as a shield, we agree with Mirzai

that a debtor is not entitled to the benefits of a bankruptcy court order if the debtor fails to

pursue the bankruptcy to a discharge. The completion of a bankruptcy proceeding offers

the debtor the benefits of a “fresh start,” but also imposes obligations and restrictions3 as

well as the social and economic stigma. The Thomases undertook no legal obligations as

a result of the bankruptcy proceeding and need not identify themselves as bankrupts.

Instead, they appear to have used the bankruptcy solely to get an adjudication that they

were reducing Corona’s claim (ineffectively, as we hold) in order to enable them to offer

more in settlement to other creditors so that they could avoid bankruptcy. This was

inequitable, and we refuse to countenance it.

Third, the bankruptcy court’s order was not a determination on the merits that the

Thomases only owed Corona $86,538. Thus, under Mirzai it would not be entitled to

preclusive effect in any case. Rather, it was simply a determination that for the purposes

of the bankruptcy, a specific statute (11 U.S.C. § 502) limited the amount that could be

recovered.

3 See title 11 United States Court section 727(a)(8)(9), limiting the debtor’s ability to seek subsequent bankruptcy relief for a period of years.

10 Real parties in interest point to title 11 of the United States Code section 349(b)

which governs, at least to some extent, the effect of a dismissal on prior orders.4 As real

parties in interest point out, an order under section 502(b)(6) is not among the orders

listed as being vacated by the dismissal. As we have seen, an order allowing a claim is

not automatically vacated by a dismissal, and this is consistent with the omission of such

an order from section 349(b)(2). But Mirzai and Case, concluded that the purposes of

title 11 United States Code section 349 are not served by considering the list of “vacated”

orders as exclusive. Rather, because the overall intent of the statute is to return matters to

the status quo ante,5 certain orders which inure to the benefit of the debtor and the

detriment of one or more creditors must also be held ineffective if the debtor does not

complete the bankruptcy proceeding. With this approach we agree.

We recognize that our decision may leave the Thomases in a worse position than if

they had completed the bankruptcy in that their settlement with the other creditors may

have been affected by their belief that the order under title 11 of the United States Code

4 In relevant part that statute provides that “(b) . . . a dismissal of a case . . . [¶] (1) reinstates—[¶] (A) any proceeding or custodianship superseded under section 543 of this title . . . ; [¶] (B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title . . . or preserved under section 510(c)(2), 522(i)(2), or 551 of this title . . . ; and [¶] (C) any lien voided under section 506(d) of this title . . . ; [¶] (2) vacates any order, judgment, or transfer ordered under section 522(i)(1), 542, 550, or 553 of this title . . . ; and [¶] (3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.”

5 It will be noted that in general, the quoted provisions of section 349 return to the debtor all property originally in the estate, validate transfers which were found suspect in the bankruptcy proceedings, and un-do forced transfers.

11 section 502(b)(6) fixed their obligations to Corona.6 However, on the record it is

impossible to speculate on the overall fairness of the settlement or whether Corona’s

share of the bankruptcy estate would, had the proceeding been completed, have been

lesser or greater. We simply decide the issue presented to us, and hold that where a

debtor later seeks dismissal of a bankruptcy proceeding, any order limiting a landlord’s

recovery under section 502(b)(6) of title 11 of the United States Code is necessarily

vacated by the dismissal and does not bind the creditor in a civil action.

This does not quite end the matter, however, because it is not clear from the record

whether the court found, or would have found, that Corona’s proofs of the actual amounts

due, disregarding the bankruptcy order, were sufficient to support judgment. Hence, we

will remand and direct the court to reconsider real parties in interest’s arguments in this

respect before entering an appropriate order otherwise in conformity with this opinion.

DISPOSITION

The petition for writ of mandate is granted. Let a peremptory writ of mandate

issue, directing the Superior Court of Riverside County to vacate its order denying

petitioner’s motion for summary judgment. The court shall then determine whether

Corona, by admissible evidence, carried its burden of showing the amounts due and/or

whether real parties in interest raised a triable issue of fact in any such respect. If the trial

6 We also recognize that if real parties in interest’s financial circumstances are, or remain, in such a parlous state, they may respond to this decision by filing anew in the bankruptcy court, potentially leading to the same order under section 502(b)(6) of title 11 of the United States Code.

12 court determines that Corona is entitled to summary judgment in an established monetary

amount, it shall so order. If it finds triable issues of fact on the amount due, it may deny

the motion for summary judgment, but this opinion shall be law of the case in any

subsequent proceeding. (See People v. Murtishaw (2011) 51 Cal.4th 574, 597-598.)

Petitioner to recover its costs.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

CODRINGTON J. We concur:

HOLLENHORST Acting P. J.

KING J.