In re: Giles Duane Spellman
Filing
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OPINION ON APPEAL FROM BANKRUPTCY COURT by Judge Percy Anderson: The Court reverses the Bankruptcy Court's order on the objection to Appellant Bradley R. Kirk & Associates' claim. (Made JS-6. Case Terminated.) (gk)
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UNITED STATES DISTRICT COURT
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CENTRAL DISTRICT OF CALIFORNIA
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In re GILES DUANE SPELLMAN,
Debtor,
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Appellant,
CV 15-507 PA
OPINION ON APPEAL FROM
BANKRUPTCY COURT
Bradley R. Kirk & Associates, Inc.,
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No.
v.
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Bankruptcy Case No. 2:12-bk-19871-WB
Giles Duane Spellman,
Appellee.
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Before the Court is an appeal filed by Bradley R. Kirk & Associates (“Kirk”). Kirk
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challenges an order issued on January 2, 2015, by the Bankruptcy Court sustaining in part
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and denying in part the Objection to Claim filed by debtor Giles Duane Spellman
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(“Spellman”). Pursuant to Rule 78 of the Federal Rules of Civil Procedure and Local Rule
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7-15, the Court finds that this matter is appropriate for decision without oral argument.
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I.
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Background
Spellman is the beneficiary of a trust established by his now-deceased grandfather,
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Giles J. Spellman (“Giles Sr.”). That trust contains spendthrift provisions limiting
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Spellman’s ability to spend the trust proceeds until he turns 35 in November 2017.
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(Excerpts of Record (“ER”) 791.) In 2006, members of Spellman’s family initiated probate
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litigation challenging the Giles Sr. trust’s receipt of a bequest from another relative. (ER
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436.) Spellman eventually retained Kirk to represent him in the probate matter and signed
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two agreements with Kirk, one dated May 9, 2007, and the second dated June 11, 2007. (ER
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697-704.) The second agreement provided that Kirk would receive a contingency fee of
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33% of all amounts and property Spellman eventually received from the Giles Sr. trust. (ER
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701.)
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The probate dispute was settled in September 2009. (ER 245.) As part of that
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settlement, Kirk sought to remove the spendthrift provision from the Giles Sr. trust. (ER
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245, 332.) Spellman claims that it was at this point in 2009 that he first learned that Kirk
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would claim 33% of the proceeds of the trust, and that with the removal of the spendthrift
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provision, approximately $200,000 in legal fees would be due immediately. (ER 245.)
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Spellman objected to this arrangement and soon after informed Kirk that Spellman no longer
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wished for Kirk to represent him. (ER 245-46.) Kirk initiated a fee arbitration through the
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California Bar in November 2009, but the Bar eventually dismissed that arbitration because
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the probate matter remained unresolved. (ER 246.) Kirk filed a lawsuit against Spellman in
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December 2009 to collect his unpaid fees. (Id.)
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At around the time Spellman’s relationship with Kirk unraveled, a new trustee was
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appointed as trustee of the Giles Sr. trust. (ER 791.) Despite having been told by Spellman
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that he no longer wished for Kirk to represent him, Kirk continued working on the probate
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matter and eventually submitted an Ex Parte Application in August 2010 seeking court
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approval of the settlement and removal of the spendthrift provision. (ER 247.) The probate
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court granted the application. (ER 267-68.) Kirk and Spellman then participated in a fee
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arbitration conducted by JAMS in December 2010. (ER 247.) Spellman was represented by
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an attorney during the arbitration proceeding. (Id.) The arbitrator, a retired superior court
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judge, found in favor of Kirk and awarded him 33% of the Giles Sr. estate. (ER 360-68.)
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In January 2011, the trustee successfully sought the probate court’s approval to set
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aside the removal of the spendthrift trust provision that Kirk had obtained. (ER 791.)
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Among the reasons cited by the probate court for setting aside the removal of the spendthrift
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provision were: (1) Kirk had not notified the trustee prior to presenting the request to
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modify the Giles Sr. trust; (2) at the time Kirk sought the modification, he had already
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initiated the collection action against Spellman and therefore had a conflict of interest with
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his client; and (3) the removal of the spendthrift provision was contrary to Spellman’s
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wishes. (ER 799-801.)
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Kirk petitioned the Orange County Superior Court to confirm the arbitration award.
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In March 2011, the Orange County Superior Court granted Kirk’s petition and entered a
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Judgment confirming the arbitrator’s award and ordering Spellman to pay Kirk $214,447.88.
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(ER 140-41.)
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Spellman filed a Chapter 13 bankruptcy petition on March 20, 2012. (ER 001.) Kirk
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filed a Proof of Claim on July 12, 2012, seeking the $214,447.88 awarded by the arbitrator,
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plus interest, and an Amended Proof of Claim seeking the same amount. (ER 026-29 &
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033-36.) Spellman filed an Objection to Proof of Claim challenging Kirk’s entitlement to
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his claim and contending that the amount of the Judgment confirming the arbitration award
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exceeded the reasonable value of the services provided by Kirk. (ER 040-41.) The
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Bankruptcy Court eventually conducted a trial on Kirk’s Proof of Claim in September 2014,
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and announced its ruling at a hearing on December 2, 2014. (ER 744-57.)
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The Bankruptcy Court concluded that principles of res judicata and claim preclusion
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did not apply to the Judgment confirming the arbitration award, and that instead, 11 U.S.C. §
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502(b)(4), allowed the Bankruptcy Court to determine the reasonable value of the legal
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services provided by Kirk and confirm only that amount as an allowable claim against
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Spellman. (Id.) In reviewing Kirk’s claim, and applying a Lodestar to determine the
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reasonable value of Kirk’s legal services, the Bankruptcy Court allowed $43,875 of Kirk’s
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claim and rejected the balance of the claim. (ER 749.) The Bankruptcy Court issued an
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Order on Objections to Claim on January 2, 2015, allowing Kirk an unsecured claim of
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$43,875. (ER 758-59.) Kirk filed a Notice of Appeal challenging that order on January 16,
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2015. (ER 920-26.) The Bankruptcy Court entered an Order Confirming Spellman’s
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Chapter 13 Plan on January 13, 2015. (ER 917-19.)1/
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II.
Jurisdiction
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This Court possesses appellate jurisdiction over the Bankruptcy Court’s final order
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determining an objection to a claim. 28 U.S.C. § 158(a); In re Garner, 246 B.R. 617, 619
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(B.A.P. 9th Cir. 2000); see also In re Condor Systems, Inc., 125 F. App’x 797, 799 (9th Cir.
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2005).
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III.
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Standard of Review
The Bankruptcy Court’s ruling on an objection to a claim may raise legal or factual
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issues. In re Allen, 472 B.R. 559, 564 (B.A.P. 9th Cir. 2012). The Bankruptcy Court’s legal
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conclusions are reviewed de novo and factual findings are reviewed for clear error. Id. “A
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court’s factual determination is clearly erroneous if it is illogical, implausible, or without
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support in the record.” In re Retz, 606 F.3d 1189, 1196 (9th Cir. 2010). The Bankruptcy
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Court’s decision may be affirmed on any ground finding support in the record. Elliott v.
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Four Seasons Properties (In re Frontier Properties, Inc.), 979 F.2d 135, 1364 (9th Cir. 1992).
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IV.
Discussion
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Kirk contends that the Bankruptcy Court erred when it applied 11 U.S.C. § 502(b)(4)
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to reduce his attorneys’ fees from those awarded in the arbitration proceeding and confirmed
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by the Orange County Superior Court, to the “reasonable value” of those services. Instead,
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according to Kirk, the Orange County Superior Court’s Judgment confirming the arbitration
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award was entitled to full faith and credit pursuant to 28 U.S.C. § 1738.
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Under the Bankruptcy Code, when a party objects to a claim, the Bankruptcy Court,
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“after notice and a hearing, shall determine the amount of such claim in lawful currency of
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the United States as of the date of the petition, and shall allow such claim in such amount,
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except to the extent that . . . if such a claim is for services of an insider or attorney of the
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1/
According to the Bankruptcy Court’s Docket, Kirk has filed a Notice of Appeal of the
Order Confirming Chapter 13 Plan. (Docket No. 110 in Case No. 2:12-bk-19871-WB.)
That appeal was not briefed in this appeal and is not currently before the Court.
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debtor, such claim exceeds the reasonable value of such services.” 11 U.S.C. § 502(b)(4).
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In reaching its legal determination that § 502(b)(4) required it to reduce Kirk’s attorneys’
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fees to the “reasonable value” of those services, the Bankruptcy Court relied on the decision
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of the United States Bankruptcy Court for the Eastern District of California in In re Siller,
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427 B.R. 872 (Bankr. E.D. Cal. 2010). (ER 747.)
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In In re Siller, which presents a nearly indistinguishable legal dispute to that posed
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here, the Bankruptcy Court concluded that § 502(b)(4) “preempts state law to the extent that
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state law permits claims on account of prepetition services rendered by an insider or attorney
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for a debtor to exceed the reasonable value of services.” Id. at 883. The Bankruptcy Court
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therefore rejected the claimant’s argument that its Judgment confirming a fee arbitration
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award was entitled to full faith and credit under 28 U.S.C. § 1738.
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The Bankruptcy Court’s decision refusing to enforce the state court Judgment as
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preclusive of the amount of fees owed to the attorney in In re Siller was appealed to the
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United States District Court for the Eastern District of California. The District Court
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reversed the Bankruptcy Court’s decision and concluded that the state court Judgment
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confirming the arbitration award of attorneys’ fees was preclusive of the “reasonable value”
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of the attorney’s services. See Cotchett, Pitre & McCarthy v. Siller, Nos. CIV S-10-0779
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KJM & CIV S-10-0780 KJM, 2012 WL 1657620, at *17 (E.D. Cal. May 10, 2012) (“By
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considering both the reasonable nature of the contingent fee contracts and rejecting the claim
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that the contracts were unconscionable, and applying California’s tests for both
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determinations, the arbitrator necessarily decided that the fees were reasonable within the
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contemplation of § 502(b)(4).”).
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As did the District Court in Cotchett, this Court concludes that because there is a
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Judgment affirming the arbitration award of the amount of attorneys’ fees, the debtor is
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precluded from relitigating the reasonableness of the amount of that award. The Court
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additionally concludes that, at least where there is a state court Judgment establishing the
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amount of attorneys’ fees, § 502(b)(4) does not allow a Bankruptcy Court to ignore that
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Judgment. Instead, 28 U.S.C. § 1738 requires that such a judgment be accorded the
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Bankruptcy Court’s full faith and credit. “Since the confirmation of a private arbitration
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award by a state court has the status of a judgment, federal courts must, as a matter of full
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faith and credit, afford the confirmation the same preclusive consequences as would occur in
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state court.” In re Khaligh, 338 B.R. 817, 824 (B.A.P. 9th Cir. 2006).
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A federal court is required under 28 U.S.C. § 1738 to look to the preclusion law of
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the state court that rendered the earlier judgment or judgments to determine whether
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subsequent federal litigation is precluded. See 28 U.S.C. § 1738 (“Acts, records, and
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judicial proceedings” of “any State . . . of the United States . . . shall have the same full faith
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and credit in every court within the United States . . . as they have by law or usage in the
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courts of such State . . . from which they are taken.”). Under this statute, a federal court
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“must give to a state-court judgment the same preclusive effect as would be given that
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judgment under the law of the State in which the judgment was rendered.” Migra v. Warren
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City Sch. Dist. Bd. of Ed., 465 U.S. 75, 81, 104 S. Ct. 892, 896, 79 L. Ed. 2d 56 (1984); see
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also White v. City of Pasadena, 671 F.3d 918, 926 (9th Cir. 2012). In determining the
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preclusive effect of a state administrative decision or a state court judgment, federal courts
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follow the state’s rules of preclusion. Kremer v. Chem. Constr. Corp., 456 U.S. 461, 482,
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102 S. Ct. 1883, 1898, 72 L. Ed. 2d 262 (1982). “The preclusive effect of a judgment is
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defined by claim preclusion and issue preclusion, which are collectively referred to as ‘res
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judicata.’” Taylor v. Sturgell, 553 U.S. 880, 892, 128 S. Ct. 2161, 2171, 171 L. Ed. 2d 155
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(2008).
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In California, “a final judgment precludes further proceedings if they are based on the
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same cause of action.” Maldonado v. Harris, 370 F.3d 945, 952 (9th Cir. 2004). California
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law defines a “cause of action” for purposes of the res judicata doctrine by analyzing the
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primary right at stake. “That concept ‘is indivisible: the violation of a single primary right
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gives rise to but a single cause of action.’” San Diego Police Officers’ Ass’n v. San Diego
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City Emps. Ret. Sys., 568 F.3d 725, 734 (quoting Crowley v. Katleman, 8 Cal. 4th 666, 681,
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34 Cal. Rptr. 2d 386, 395 (1994)). That is, “if two actions involve the same injury to the
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plaintiff and the same wrong by the defendant then the same primary right is at stake even if
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in the second suit the plaintiff pleads different theories of recovery, seeks different forms of
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relief and/or adds new facts supporting recovery.” Id. (quoting Eichman v. Fotomat Corp.,
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147 Cal. App. 3d 1170, 1174, 197 Cal. Rptr. 612, 614 (1983)). In conducting a primary
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rights analysis, “[w]hat is critical to the analysis ‘is the harm suffered; that the same facts are
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involved in both suits is not conclusive.’” Id. (quoting Agarwal v. Johnson, 25 Cal. 3d 932,
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954, 160 Cal. Rptr. 141, 155 (1970)).
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Under California’s claim preclusion doctrine “‘a valid, final judgment on the merits
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precludes parties or their privies from relitigating the same ‘cause of action’ in a subsequent
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suit.’” Id. (quoting Le Parc Cmty. Ass’n v. Workers’ Comp. Appeals Bd., 110 Cal. App.4th
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1161, 1169, 2 Cal. Rptr.3d 408, 415 (2003)). “Thus three requirements have to be met: (1)
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the second lawsuit must involve the same “cause of action” as the first one, (2) there must
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have been a final judgment on the merits in the first lawsuit and (3) the party to be precluded
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must itself have been a party, or in privity with a party, to that first lawsuit.” Id.
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The Court concludes that, applying these principles, the Orange County Superior
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Court’s Judgment confirming the arbitration award is entitled to full faith and credit
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notwithstanding § 502(b)(4). Based on this de novo legal review, the Bankruptcy Court’s
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order on the claim objection must be reversed.
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Although Kirk also challenges the Bankruptcy Court’s factual findings concerning
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the reasonable value of his services, this Court concludes that those findings are not clearly
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erroneous. Like the Bankruptcy Court, this Court is troubled by Kirk’s conduct. However,
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the mandates of 28 U.S.C. § 1738 require this Court to accord the Orange County Superior
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Court’s Judgment confirming the arbitration award with full faith and credit. As a result,
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even if this Court might have reached a different conclusion than did the arbitrator, this
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Court is nevertheless bound by that Judgment.
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. . . .
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Conclusion
For all of the foregoing reasons, the Court reverses the Bankruptcy Court’s order on
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the objection to Kirk’s claim.
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IT IS SO ORDERED.
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DATED: September 17, 2015
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Percy Anderson
UNITED STATES DISTRICT JUDGE
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cc: Bankruptcy Court
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