Alfred Galaz et al v. Lisa Ann Katona
MEMORANDUM OPINION AND ORDER AFFIRMING THE BANKRUPTCY COURT'S ORDER GRANTING KATONA'S MOTION FOR SUMMARY JUDGMENT AND ENJOINGING ALFRED GALAZ FROM PURSUING FUTURE CLAIMS AGAINST LISA ANN KATONA. Signed by Judge David A. Ezra. (wg)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
ALFRED GALAZ and RAUL GALAZ, §
LISA ANN KATONA f/k/a LISA ANN §
CV NO. 5:14-CV-967
MEMORANDUM OPINION AND ORDER AFFIRMING THE BANKRUPTCY
COURT’S ORDER GRANTING KATONA’S MOTION FOR SUMMARY
JUDGMENT AND ENJOINING ALFRED GALAZ FROM PURSUING
FUTURE CLAIMS AGAINST KATONA
Before the Court is an appeal from the bankruptcy court’s order, by
Presiding Judge Ronald B. King, brought by Appellants Alfred Galaz (“Alfred”)
and Raul Galaz (“Raul”) granting a Motion for Summary Judgment filed by
Appellee Lisa Ann Katona f/k/a Lisa Ann Galaz (“Katona”) and enjoining Alfred
from pursuing any future claims against Katona. For the reasons that follow, the
Court AFFIRMS the bankruptcy court’s order.
The instant case arises out of the ownership interest in Worldwide
Subsidy Group (“WSG”), a company that collects royalties owed to film and
television distributors. (Dkt. # 3 at 6; Dkt. # 6 at 2.) WSG was formed as a
California entity by Raul and his legal assistant, Marian Oshita (“Oshita”). (Dkt.
# 3 at 6.) When WSG was formed, Raul owed a 75% interest and Oshita owned a
25% interest. (Id.) At the time WSG was formed, Raul and Katona were married.
(See Dkt. # 3 at 6; Dkt. # 6 at 2–3.)
In May 2002, Raul and Katona divorced, at which time Katona
inherited half of Raul’s 75% interest in WSG. (Dkt. # 3 at 6; Dkt. # 6 at 2–3.)
Shortly thereafter, Raul sold his remaining interest—a 37.5% ownership interest—
to Oshita for $50,000, paid as an offset against monies WSG allegedly owed to
Oshita for unreimbursed expenses. (Dkt. # 3 at 6.) The transaction left Oshita and
Katona as co-owners of WSG. (See id.)
Sometime thereafter, Katona learned that Oshita’s claim for the
allegedly unreimbursed monies was fraudulent, and Katona filed suit against
Oshita in California state court (the “California Action”). Ultimately, the court
awarded Katona the 37.5% interest that Raul had transferred to Oshita, as well as
$18,750 in damages against Oshita, which Oshita never paid (the “Unpaid Money
Judgment”). (Id. at 6–7; Dkt. # 6 at 4.) Following the suit, Katona owned 75% of
WSG and Oshita owned her original 25%.
In October 2005, Katona assigned half of her interest—37.5%—to
Raul’s sister, Denise Vernon (“Vernon”). (Dkt. # 3 at 7; Dkt. # 6 at 4.) In 2007,
Vernon filed a suit against Katona in Texas state court to determine ownership and
control of WSG (the “WSG litigation”). (Dkt. # 3 at 7; Dkt. # 6 at 5.) Raul and
Vernon believed that Oshita had withdrawn from her participation in WSG’s
affairs and was no longer entitled to her 25% membership interest or earnings.
(Dkt. # 6 at 5.)
In December 2007, Katona filed a Chapter 13 bankruptcy suit and
removed the WSG litigation to bankruptcy court as a separate adversary
proceeding. (Dkt. # 6 at 5.) In May 2008, the bankruptcy court approved a
settlement between Raul, Vernon, and Katona, which allowed Katona to fund her
Chapter 13 plan and meet her living expenses until her plan was paid in full.
Motion to Compel Compliance with Mediation Agreement, In re Galaz, No.
07-53287-RBK, Dkt. # 431, at 1 (Bankr. W.D. Tex. Jan. 13, 2011). Specifically,
the settlement provided for: (1) a one-time distribution from WSG of $50,000 to
Katona; (2) monthly payments from WSG of $4,300 to Katona; (3) a one-time
distribution from WSG of $83,000 to Vernon; (4) monthly payments from WSG of
$5,000 to Vernon; and (5) an annual salary of $67,500 and back-pay of $221,000
from WSG to Raul. Order on Application to Approve Settlement, In re Galaz, No.
07-53287-RBK, Dkt. # 75, at 3 (Bankr. W.D. Tex. May 28, 2008). As part of the
settlement, Brian Boydston (“Boydston”) was appointed as a Business Manager of
On September 4, 2008, the bankruptcy court confirmed Katona’s
Chapter 13 plan. Order Confirming the Debtor’s Plan, In re Galaz, No. 07-53287RBK, Dkt. # 184 (Bankr. W.D. Tex. Sept. 4, 2008). Katona was ordered to pay
$648 over a term of 60 months. Id. at 9. Katona used the monthly payments that
she received from WSG to make those payments for several years. (Dkt. # 6 at 5.)
In February 2011, Katona commenced another adversary proceeding
against WSG and Vernon, requesting that the court remove Boydston as WSG’s
Business Manager, appoint a receiver for WSG, and liquidate WSG (“2011
Adversary Proceeding”). (Id. at 7.) In November 2011, Katona and Vernon
reached a settlement agreement in that action (“2011 Settlement Agreement”),
providing that Vernon would purchase Katona’s interest in WSG and would
release all future legal claims arising out of alleged acts or omissions by Katona.
(Id. at 8; Dkt. # 3 at 8.) The parties dispute whether, as part of the agreement,
Katona transferred only her interest in unliquidated claims against third parties,
including Oshita, or whether she transferred her interest in all claims, liquidated or
unliquidated, against third parties, including Oshita. (Dkt. # 3 at 8; Dkt. # 6 at 8.)
Thereafter, Vernon assigned Alfred, her and Raul’s father, all claims against
Oshita that she obtained from Katona under the agreement. (Dkt. # 3 at 8.)
In 2012, Alfred filed suit in California state court to enforce Katona’s
Unpaid Money Judgment, which Alfred believed he had received through
Vernon’s assignment (the “California Foreclosure Action”). (Dkt. # 3 at 9; Dkt.
# 6 at 9–10.) In November 2012, the court foreclosed on Oshita’s membership
interest in WSG in favor of Alfred to satisfy the judgment. (Dkt. # 3 at 9.)
As the successor in interest to Oshita, Alfred then filed suit against
Katona in Texas state court to recover damages that he believed Katona owed from
failing to recognize Oshita’s interest in WSG when she made monetary
distributions from WSG from 2007 to 2011 (the “Oshita claims”). (Dkt. # 3 at 10.)
Katona then removed the action as an adversary proceeding in Katona’s Chapter
13 bankruptcy suit. (Id.) In response to a motion to remand, the bankruptcy court
remanded the matter to state court, but explained from the bench that it could have
maintained jurisdiction if the suit was styled as a declaratory judgment action
brought by Katona. (Id.)
Katona then filed the adversary proceeding underlying the present
action in bankruptcy court, seeking to enjoin Alfred from pursuing the Oshita
claims in state court. Complaint, In re Galaz, No. 13-05101-rbk, Dkt. # 1 (W.D.
Tex. Bankr. Dec. 23, 2013). In May 2014, Katona filed a Motion for Summary
Judgment, which the bankruptcy court granted in July 2014. Motion for Summary
Judgment, In re Galaz, No. 13-05101-rbk, Dkt. # 49 (W.D. Tex. Bankr. May 15,
2014); Order, In re Galaz, No. 13-05101-rbk, Dkt. # 69 (W.D. Tex. Bankr. July 3,
2014). In granting the Motion, the bankruptcy court declined to resolve whether
the Oshita claims were liquidated or unliquidated or whether the Oshita claims
were discharged as a part of the final discharge order, instead holding that the
terms of the 2011 Settlement Agreement, which were accepted by court order,
unequivocally discharged Vernon and Katona’s rights to sue one another and that
the claim was otherwise judicially estopped. Transcript, Katona v. Galaz, No.
13-05101-rbk, Dkt. # 86, at 12–14 (Bankr. W.D. Tex. Aug. 15, 2014) [hereinafter
“Transcript”]. At the same time, the bankruptcy court denied Alfred’s crossMotion for Summary Judgment. Id. at 21. The bankruptcy court’s order of final
judgment enjoined Alfred from pursuing any cause of action relating to WSG
against Katona. Final Judgment, Katona v. Galaz, No. 13-05101-rbk, Dkt. # 73
(Bankr. W.D. Tex. July 3, 2014).
On July 15, 2014, Alfred and Raul filed a notice of appeal of the
bankruptcy court’s order. Defendants’ Notice of Appeal, In re Galaz, No.
13-05101-rbk, Dkt. # 79 (W.D. Tex. Bankr. July 15, 2014). On November 14,
2014, Alfred filed his opening brief. (Dkt. # 3.) On December 5, 2014, Katona
filed her answering brief. (Dkt. # 6.) On January 9, 2015, Alfred filed his reply
brief. (Dkt. # 10.)
Alfred identifies six issues for appeal:
(1) Whether the bankruptcy court lacked subject matter jurisdiction when there
was no longer a bankruptcy plan to administer;
(2) Whether the bankruptcy court erroneously failed to exercise mandatory
(3) Whether the bankruptcy court abused its discretion in refusing to exercise
(4) Whether the bankruptcy court erred in granting summary judgment based on
res judicata, compromise and settlement, and accord and satisfaction, when
the defenses were never raised in Katona’s pleadings or motion and when
the theories were without merit;
(5) Whether the bankruptcy court erred in granting summary judgment on the
grounds that Alfred’s claims were barred by judicial estoppel where Katona
did not raise the issue in her motion, Alfred and Oshita did not take
inconsistent positions in proceedings, and where Katona is precluded from
the defense by the doctrine of unclean hands; and
(6) Whether the bankruptcy court erred in denying Alfred’s Motion for
Summary Judgment where the Motion clearly established his entitlement to
judgment as a matter of law that Katona’s claims be dismissed.
(See Dkt. # 3 at 2.)
Subject Matter Jurisdiction and Adjudicative Authority
Alfred challenges both the bankruptcy court’s subject matter
jurisdiction and its adjudicative authority to issue a final order in the case. The
Court reviews questions of subject matter jurisdiction de novo. Wagner v. United
States, 545 F.3d 298, 300 (5th Cir. 2008).
Subject Matter Jurisdiction
Alfred first argues that the bankruptcy court lacked subject matter
jurisdiction over the case for several reasons, including that: (1) there was no
bankruptcy estate when the case was commenced because the case was closed in
2012 when Katona paid her creditors in full; (2) the bankruptcy court’s reliance on
In re National Gypsum Co., 118 F.3d 1056 (5th Cir. 1997) to establish jurisdiction
was erroneous; (3) the discharge order did not apply to the Oshita claims, and there
is no jurisdiction over parties whose claims were never discharged; (4) the
bankruptcy court lacked related-to jurisdiction over the claims; and (5) the
bankruptcy court lacked jurisdiction to reopen Katona’s case. (Dkt. # 3 at 15–26.)
Katona counters that the Court had “arising under, arising in, and related to”
jurisdiction over the claim. (Dkt. # 6 at 15–30.)
28 U.S.C. § 1334 confers jurisdiction to bankruptcy courts for (1) all
cases under title 11 and civil proceedings (2) arising under title 11, (3) arising in
cases under title 11, or (4) related to cases under title 11. 28 U.S.C. § 1334(a) &
(b); In re U.S. Brass Corp., 301 F.3d 296, 303–04 (5th Cir. 2002). “The second,
third, and fourth categories, all listed in § 1334(b), ‘operate conjunctively to define
the scope of jurisdiction. Therefore, it is necessary only to determine whether a
matter is at least ‘related to’ the bankruptcy.’” U.S. Brass Corp., 301 F.3d at 304.
When a bankruptcy plan has been confirmed by the bankruptcy court,
the scope of a bankruptcy court’s jurisdiction is somewhat circumscribed.
Although “[s]ection 1334 does not expressly limit bankruptcy jurisdiction upon
plan confirmation,” id., the Fifth Circuit adheres to a “more exacting theory of
post-confirmation bankruptcy jurisdiction”: “After a debtor’s reorganization plan
has been confirmed, the debtor’s estate, and thus bankruptcy jurisdiction, ceases to
exist, other than for matters pertaining to the implementation or execution of the
plan.” In re Craig’s Stores of Tex., Inc., 266 F.3d 388, 390 (5th Cir. 2001).
Accordingly, although “a bankruptcy court [cannot] lose jurisdiction over
pre-confirmation claims based on pre-confirmation activities,” “a bankruptcy court
may lack jurisdiction over post-confirmation claims based on post-confirmation
activities.” In re Enron Corp. Secs., 535 F.3d 325, 335 (5th Cir. 2008); Craig’s
Stores, 266 F.3d at 391. Notwithstanding, it is well established that a bankruptcy
court has jurisdiction to interpret and enforce its own prior orders. Travelers
Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009).
The instant action is a declaratory judgment action, seeking a
declaration from the bankruptcy court that Alfred’s state law action is barred. This
is not an uncommon procedural posture. See, e.g., In re Nat’l Gypsum, 118 F.3d
1056, 1064 (5th Cir. 1997) (holding “that a declaratory judgment action seeking
merely a declaration that collection of an asserted preconfirmation liability is
barred by a bankruptcy court’s confirmation of a debtor’s reorganization plan (and
the attendant discharge injunctions under sections 524 and 1141 of the Bankruptcy
Code)” arises under title 11); Lycoming Engines v. Superior Air Parts, Inc., No.
3:13-CV-1162-L, 2014 WL 1976757, at * 2–3 (N.D. Tex. May 15, 2014)
(affirming subject matter jurisdiction in closed bankruptcy case because “the relief
requested in the original complaint requires the court to interpret and enforce prior
orders of this court and determine the scope of the bankruptcy discharge”); Weaver
v. Tex. Capital Bank, 410 B.R. 453, 458 (N.D. Tex. 2009) (affirming subject
matter jurisdiction in a declaratory action suit to declare a state court suit as
violative of the order confirming the bankruptcy reorganization plan because the
case “specifically calls into question certain facts and legal implications of the
confirmed reorganization plan”). 1
Katona relies on two main theories to support jurisdiction: (1) that the
Oshita claims were discharged by the bankruptcy court’s discharge order, and that
Alfred therefore violated Katona’s discharge rights; and (2) that Alfred’s state
court claim to ownership over the Oshita claims arises out of a disputed provision
in the 2011 Settlement Agreement, which the bankruptcy court approved and over
which the bankruptcy court explicitly retained jurisdiction. Complaint, Katona v.
The Fifth Circuit has also affirmed a similar holding in the unpublished decision
In re Baker, 593 F. App’x 416, 417 (5th Cir. 2015).
Galaz, No. 13-05101, Dkt. # 1, at 7 (Bankr. W.D. Tex. Dec. 23, 2013); Order on
Stipulation of Dismissal with Prejudice, Galaz v. Worldwide Subsidy Grp., LLC,
No. 11-5015, Dkt. # 100, at 2 (W.D. Tex. Bankr. Nov. 16, 2011) (“[T]he Court
shall retain jurisdiction over this matter to . . . enforce the terms of any settlement
of the parties.”). There is no dispute that the bankruptcy court had jurisdiction
over the bankruptcy proceeding in which it ultimately discharged Katona or the
2011 adversary proceeding which culminated in the 2011 Settlement Agreement.
The violation of Katona’s discharge rights is the most obvious source
of jurisdiction, as it directly implicates the courts “arising under” jurisdiction.
Although “jurisdiction over bankruptcy proceedings [generally] ceases with the
closing of the bankruptcy case,” in circumstances where a former debtor seeks to
enforce the bankruptcy court’s discharge order, the bankruptcy court retains
jurisdiction over the matter. In re Bradley, 989 F.2d 802, 804 (5th Cir. 1993).
This is because “[i]f a lender could wait until the conclusion of a bankruptcy
case—and then impose disallowed charges—the debtor’s fresh start [which is a
fundamental purpose of bankruptcy law] would not be fresh at all.” In re Padilla,
379 B.R. 643, 652 n.4 (Bankr. S.D. Tex. 2007).
To the extent it is argued by appellants, the fact that the discharge
issue is disputed is irrelevant in assessing subject matter jurisdiction. See Bradley,
989 F.2d at 804 (noting that there was a dispute as to whether the debt was in fact
discharged and remanding to the bankruptcy court to make that determination).
This is because jurisdiction is assessed based on the claims at issue, not a court’s
ultimate ruling on those claims. Nor is the Court persuaded that the jurisdictional
question is affected by the fact that the plan was completed and Katona was
granted a discharge as of January 9, 2012. See Discharge of Debtor After
Completion of Chapter 13 Plan, In re Galaz, No. 07-53287, Dkt. # 479, at 1
(Bankr. W.D. Tex. Jan. 9, 2012). In circumstances where the discharge itself is the
issue, the action will necessarily “occur after the resolution of the bankrupt’s
estate.” Bradley, 989 F.2d at 804; see also In re Franklin, 802 F.2d 324, 326–27
(9th Cir. 1986) (affirming jurisdiction, even though the bankruptcy case had been
dismissed, because the bankruptcy court was construing and effectuating an order
made prior to dismissal); In re Rodriguez, 396 B.R. 436, 454 (Bankr. S.D. Tex.
2008) (“[T]his Court retains subject matter jurisdiction over a closed case to
consider whether a defendant violated the confirmation order.”).
For those reasons, National Gypsum is directly on point. See 118
F.3d at 1064. National Gypsum arose out of a declaratory judgment action
alleging that National Gypsum’s confirmed reorganization plan and subsequent
discharge barred the Insurance Company of North America’s collection efforts,
which were preconfirmation claims that the Company was attempting to enforce in
a series of demand letters. Id. at 1059–60. The court held that a declaratory
judgment action seeking a declaration that collection of a preconfirmation liability
is barred by a discharge injunction arises under title 11 and therefore confers
subject matter jurisdiction on the court. Id. at 1064. Here, the underlying state
action alleges that Katona controlled WSG’s finances and failed to pay out
proceeds from WSG in conjunction with Oshita’s 25% membership interest
beginning in 2007. Application for Preliminary Injunction, Katona v. Galaz, No.
13-5101, Dkt. # 10-2 at 2–3.) Given that Katona’s plan was not confirmed until
2008, the claim for nonpayment is a preconfirmation claim that, according to
Katona, was subject to the 2012 order of discharge. The order of discharge
necessarily implicates the “implementation or execution of the plan.” See Bradley,
989 F.2d at 804. Accordingly, for the same reasons that the National Gypsum
court found arising under jurisdiction, the Court finds that the bankruptcy court had
jurisdiction here. 2
The Court is unpersuaded by Alfred’s argument, as it pertains to jurisdiction
based on the discharge claim, that National Gypsum’s holding is limited in scope
and does not confer jurisdiction on this particular declaratory action seeking to
enforce a bankruptcy court order. Compare with In re Superior Air Parts, Inc., 516
B.R. 85, 94 (Bankr. N.D. Tex. 2014) (distinguishing National Gypsum on the basis
that it involved a discharge injunction, which is a substantive right under the
Bankruptcy Code, whereas the case before the court involved claims that did not
arise from the plan or confirmation order but from a termination of a postconfirmation business relationship and an agreement governing that postconfirmation relationship).
The Court notes that National Gypsum may not have controlled the
instant case, had Katona’s complaint not included a discharge-based jurisdictional
Notwithstanding, Alfred also argues that the bankruptcy court lacked
the adjudicative authority to enter a final judgment in the case because he
specifically refused to consent to the bankruptcy court’s exercise of jurisdiction
over noncore matters. (Dkt. # 3 at 25.) Katona counters that, because the claims
either arose under or in the bankruptcy proceeding, the proceeding was a core
proceeding in which the bankruptcy court had the authority to issue a final
judgment. (Dkt. # 6 at 31.)
Under 28 U.S.C. § 157, bankruptcy courts only have full judicial
power to adjudicate core proceedings arising under or arising in a case under title
11; if a proceeding is noncore, but otherwise related to a case under title 11, the
bankruptcy court must submit proposed findings of fact and conclusions of law to
the district court, subject to de novo review. See also In re Wood, 825 F.2d 90, 95
(5th Cir. 1987).
Although § 157 does not explicitly define “core proceeding,” § 157(b)
provides a non-exhaustive list of matters considered core proceedings.
hook and instead relied solely on the bankruptcy court’s authority to enforce its
order on the 2011 Settlement Agreement. This is because the 2011 Settlement
Agreement concerned WSG, which was Katona’s income stream, and the income
stream may have lost its relationship to the “implementation or execution of the
plan” once the plan was fully paid out. Nonetheless, since Katona has a separate
jurisdictional hook that clearly establishes subject matter jurisdiction, the issue is
not relevant to the instant proceeding.
Extrapolating from this list, the Fifth Circuit defines core proceedings as those that
“involve a right created by the federal bankruptcy law” or that “would arise only
in bankruptcy.” Wood, 825 F.2d at 97. “If the proceeding does not invoke a
substantive right created by the federal bankruptcy law and is one that could exist
outside of bankruptcy it is not a core proceeding; it may be related to the
bankruptcy because of its potential effect, but under section 157(c)(1) it is an
‘otherwise related’ or non-core proceeding.” Id.
Again, National Gypsum resolves the issue here:
Although a discharge in bankruptcy can constitute an affirmative
defense to a state law contract claim, [a debtor’s] action to enforce the
discharge injunction—and to construe the scope and effect of the
confirmed reorganization plan—need not, indeed cannot, resolve any
state law contract issues, only whether [a] pre-confirmation claim, as
stated, was discharged or otherwise barred by the Bankruptcy Court’s
confirmation of [the] reorganization plan. As such, the adversary
proceeding is a federal cause of action, asserting a statutory right
under the Bankruptcy Code.
118 F.3d at 1063–64.
Just like National Gypsum, the instant action, which seeks to enjoin
the discharge injunction against Alfred’s state law case, asserts a statutory right
under the Bankruptcy Code. Accordingly, it is a core proceeding in which the
bankruptcy court had the adjudicatory authority to issue a final judgment. See id.
at 1064 (“a declaratory judgment action seeking merely a declaration that
collection of an asserted preconfirmation liability is barred by a bankruptcy
court’s . . . discharge injunction . . . is a core proceeding”); Wood, 825 F.2d at 97
(defining core proceeding as those that “involve a right created by the federal
Alfred next argues that even if there was jurisdiction, the bankruptcy
court erroneously failed to exercise mandatory abstention. (Dkt. # 3 at 28.)
Katona counters that mandatory abstention does not apply because the action was a
core proceeding and mandatory abstention only applies to “related to” proceedings.
(Dkt. # 6 at 33.) A district court reviews a bankruptcy court’s conclusions of law
de novo. In re Renaissance Hosp., 713 F.3d at 293 (citing In re Gerhardt, 348 F.3d
89, 91 (5th Cir. 2003)).
Mandatory abstention is governed by 28 U.S.C. § 1334(c)(2), which
Upon timely motion of a party in a proceeding based upon a State law
claim or State law cause of action, related to a case under title 11 but
not arising under title 11 or arising in a case under title 11, with
respect to which an action could not have been commenced in a court
of the United States absent jurisdiction under this section, the district
court shall abstain from hearing such proceeding if an action is
commenced, and can be timely adjudicated, in a State forum of
By its terms, mandatory abstention does not apply to cases arising in
or arising under the Bankruptcy Code, nor does it apply to core proceedings. See
In re TXNB Internal Case, 483 F.3d 292, 300 (5th Cir. 2007) (“We have
interpreted this provision to mandate federal court abstention where (1) the claim
has no independent basis for federal jurisdiction, other than § 1334(b); (2) the
claim is a non-core proceeding, i.e., it is related or in a case under title 11; (3) an
action has been commenced in state court; and (4) the action could be adjudicated
timely in state court.”). Because the Court has decided that there was arising under
jurisdiction in this core proceeding, mandatory abstention is inapplicable, and the
bankruptcy court did not err in failing to exercise it. See also Nat’l Gypsum Co.,
118 F.3d at 1061 n.9 (noting that the bankruptcy court found that mandatory
abstention did not apply to a declaratory judgment action raising a core matter).
Alfred next argues that the bankruptcy court abused its discretion in
failing to exercise permissive abstention, maintaining that all of the permissive
abstention factors weigh in favor of abstention. (Dkt. # 3 at 30.) Katona counters
that the permissive abstention factors weigh in favor of retaining jurisdiction and
against abstention. (Dkt. # 6 at 35.) The Court reviews the bankruptcy court’s
decision not to abstain for abuse of discretion. TXNB Internal Case, 483 F.3d at
28 U.S.C. § 1334(c)(1) grants bankruptcy courts broad discretion to
abstain from hearing a case arising under title 11 “in the interest of justice, or in the
interest of comity with State courts or respect for state law.” See also In re Gober,
100 F.3d 1195, 1206 (5th Cir. 1996). To assess whether permissive abstention is
appropriate, courts have developed various factor-based tests, which typically
include some combination of the following considerations:
Effect or lack thereof on the efficient administration of the
estate if the court recommends remand or abstention;
Extent to which state law issues predominate over bankruptcy
Difficult or unsettled nature of applicable law;
Presence of related proceeding commenced in state court or
other non-bankruptcy proceeding;
Jurisdictional basis, if any, other than § 1334;
Degree of relatedness or remoteness of proceeding to main
The substance rather than the form of an asserted core
The feasibility of severing state law claims from core
bankruptcy matters to allow judgment to be entered in state
court with enforcement left to the bankruptcy court;
The burden of the bankruptcy court’s docket;
(10) The likelihood that the commencement of the proceeding in
bankruptcy court involves forum shopping by one of the
(11) The existence of a right to a jury trial;
(12) The presence in the proceeding of non-debtor parties;
(13) Comity; and
(14) Possibility of prejudice to other parties in the action.
In re Hous. Reg’l Sports Network, L.P., 514 B.R. 211, 215 (Bankr. S.D. Tex.
2014); see also In re Coho Energy, Inc., 309 B.R. 217, 222 (Bankr. N.D. Tex.
2004) (concluding that abstention was appropriate in light of considerations related
to jurisdiction, predominance of state law, non-debtor interested parties, and
Nonetheless, the factors are merely a tool “to arrive at the equitable
application of the permissive abstention doctrine,” and are not dispositive to a
court’s assessment of the appropriateness of abstention. Hous. Reg’l Sports
Network, 514 B.R. at 217; In re Schlotzsky’s, Inc., 351 B.R. 430, 424–37 (Bankr.
W.D. Tex. 2006) (“While helpful, [the multi-factor tests] are by their very nature,
not dispositive. Mechanical applications of such tests to rule on equitable issues
that are heavily fact-specific are often doomed to produce incorrect outcomes.”).
“Whether permissive abstention is appropriate in a given case will, of necessity, be
driven by equitable considerations germane to that case.” Schlotzsky’s, 351 B.R.
Factors Favoring Retention
The bulk of the factors—Factors 2, 3, 5, 6, 7, 8, 9, and 12—weigh in
favor of retention. Factor 2, the extent to which state law issues predominate over
bankruptcy issues, favors retention. The major issue in Katona’s adversary
complaint is whether the state court proceeding is barred by the discharge order
issued in the case, which is an issue under bankruptcy law. The other issues in the
case concern whether Lisa’s claim is liquidated or unliquidated, which requires an
interpretation of the terms of the 2011 Settlement Agreement accepted by order of
the bankruptcy court, and whether the case is otherwise barred by preclusion,
laches, or judicial estoppel. Because the bars are either based on the bankruptcy
case or the 2011 adversary proceeding resulting in the 2011 settlement, federal law
determines their applicability. See In re Southmark Corp., 163 F.3d 925, 934 (5th
Cir. 1999) (setting out elements of estoppel and claim preclusion); In re Eads, 417
B.R. 728, 744 (Bankr. E.D. Tex. 2009) (setting out elements of laches and citing
Elvis Presley Enters., Inc. v. Capece, 141 F.3d 188, 205 (5th Cir. 1998)).
Factor 3, the difficulty or unsettled nature of applicable law, also
favors retention. To the extent that bankruptcy law is relevant in assessing whether
the discharge order affects the underlying state court action, the bankruptcy court
can most efficiently adjudicate the issue. The other applicable legal principles are
well established, as discussed above.
Factor 5, the jurisdictional basis, favors retention, since there is
federal question jurisdiction over this matter which arises out of § 1334.
Factor 6, the relatedness of the proceeding to the main bankruptcy
case, also favors retention. As the Court has discussed several times, one of the
major issues in this case concerns the discharge order in the bankruptcy case.
Because the discharge question arises under title 11 by virtue of its connection to
the original bankruptcy proceeding, the instant adversary proceeding is closely
Factor 7, the substance of the complaint, favors retention. This is a
core proceeding concerning issues that the bankruptcy court is well-equipped to
Factor 8, the feasibility of severance, also favors retention. The
procedural posture of this case has effectively severed the state law issues that
Alfred has raised in his state law complaint from the bankruptcy issues that Katona
Factor 9, the burden of the bankruptcy court’s docket, is also neutral.
There is no evidence suggesting that the state court’s docket is more or less
congested than the bankruptcy court’s docket. See Hous. Reg’l Sports Network,
514 B.R. at 217. Given that the case is complicated and has a lengthy history,
judicial efficiency supports retaining jurisdiction in this case, despite the Western
District of Texas’s large case load. See Transcript at 4 (“[The case is] a career case
to some of the attorneys and to some of the parties. To me, it’s like a television
soap opera, Melrose Place or Peyton Place. You have to be born there to
understand what’s going on. And fortunately, or unfortunately, I’ve lived it for
Finally, factor 12, presence of non-debtor parties favors retention.
Katona is the debtor in her bankruptcy action and the instant suit comes out of that
Factors Favoring Abstention
Factor 1, the effect on the efficient administration of the estate, favors
abstention. As the Court has previously discussed, Katona has fully paid out her
plan and her debt has been discharged. The instant litigation will therefore have no
effect on the administration of the estate, which ceased to exist at the plan’s
confirmation. Craig’s Stores, 266 F.3d at 390. Factor 11, the existence of right to
a jury trial, also favors abstention, since Alfred has a right to a jury trial in state
court, but the parties do not have a right to a jury trial in bankruptcy court.
Factors 4, 10, 13, and 14 are all neutral. Factor 4, the presence of the
related proceeding in state court, is neutral because, although the instant action
relates directly to a pending state court case, the case involves federal issues that
are effectively severed from the state case.
Factor 10, the likelihood of forum shopping, is also neutral. As the
Western District of Texas has explained:
All plaintiffs who have a choice of forums in which to bring litigation
engage in de facto ‘forum shopping’ as soon as they pick one
available forum over the other. All defendants who have the ability to
do so similarly engage in ‘forum shopping’ when they remove state
court litigation to federal court, or when they invoke a particular
remedy (such as a jury demand) in order to get out of the bankruptcy
court and into the district court. In all these situations, however, the
parties are simply exercising rights afforded them under the law—
rights which can serve their interest in selecting the forum they deem
most favorable, but which are no less rights entitled to vindication
regardless the motivation behind their use. For forum shopping to
become a significant factor in the abstention calculus, it must rise to a
level demonstrating an attempt to abuse or manipulate the judicial
Schlotzsky’s, 351 B.R. at 435–36.
Alfred argues that Katona is engaged in forum shopping because there
is “[n]o logical connection” between the instant action and bankruptcy court and
because she prevailed in a separate bankruptcy suit against Raul. (Dkt. # 3 at 33.)
However, as the Court has discussed, the instant case is closely related to the
bankruptcy action. The mere fact that Katona has previously prevailed in
bankruptcy court is insufficient to demonstrate an abuse or manipulation of the
judicial process. Accordingly, the forum shopping factor is neutral.
Factor 13, comity, is also neutral. To the extent that state law is
implicated, there are no novel issues implicating a state interest.
Factor 14, prejudicial effect, does not have an effect on the analysis.
Contrary to Alfred’s argument, the instant case is a core proceeding, over which
the bankruptcy court has final adjudicative authority. Because neither abstention
or retention would prejudice either party, the factor is neutral.
Equitable Application of Permissive Abstention
Given the significant number of factors in favor of retention, and the
minimal weight of the factors favoring abstention, the Court finds that the
bankruptcy court did not abuse its discretion in failing to exercise permissive
Whether the Bankruptcy Court Erred in its Rulings on Res Judicata,
Compromise and Settlement, and Accord and Satisfaction
Alfred next argues that the bankruptcy court clearly erred in finding
that the Oshita claims were barred by res judicata, compromise and settlement, and
accord and satisfaction because Katona did not raise the defenses in her Amended
Complaint or Motion for Summary Judgment and because the defenses fail on the
merits. (Dkt. # 3 at 45.) Katona argues that the arguments are waived because
Alfred failed to present them in his issue statement, as required by Federal Rule of
Bankruptcy Procedure 8006, 3 and that the bankruptcy judge was entitled to decide
the case on an unpleaded legal theory when there were no facts in dispute. (Dkt.
# 6 at 41–44.) A district court reviews a bankruptcy court’s findings of fact for
clear error. Fed. R. Bankr. P. 8013; In re Renaissance Hosp. Grand Prairie Inc.,
713 F.3d 285, 293 (5th Cir. 2013). Conclusions of law are reviewed de novo.
Renaissance Hosp., 713 F.3d at 293 (citing In re Gerhardt, 348 F.3d 89, 91 (5th
Bankruptcy Rule 8006 requires an appellant to “file with the
bankruptcy clerk and serve on the appellee a designation of the items to be
included in the record on appeal and a statement of issues to be presented.” Fed.
R. Bankr. P. 8009(a)(1)(A). “It is clear under the law of this circuit that an issue
that is not designated in the statement of issues in the district court is waived on
appeal when the district court rules on the merits, even if the issue was argued
before the district court.” In re McClendon, 765 F.3d 501, 506 (5th Cir. 2014)
(quoting In re McCombs, 659 F.3d 503, 510 (5th Cir. 2011)).
The Court will refer to Rule 8006 because that was the rule in effect when Alfred
filed his statement of issues. However, the Court notes that the text of Rule 8006
was moved to Rule 8009 as part of the amendments that went into effect on
December 1, 2014. See Fed. R. Bankr. P. 8009 advisory committee’s note to 2014
Alfred points to the following statement in his issue statement as
designating the issue for appeal:
Whether the Bankruptcy Court erred by rendering judgment in favor
of Plaintiff and against Defendant Alfred Galaz where Plaintiff failed
to meet her summary judgment burden of establishing the grounds
presented in her Motion for Summary Judgment and where
Defendants raised a genuine, material issue of fact as to Plaintiff’s
claims against them.
(Dkt. # 1 at 34–35.) Alfred maintains that “[w]hether the bankruptcy court
could enter summary judgment on grounds not urged by Katona is naturally
encompassed in Alfred’s statement that Katona did not meet her burden of
establishing the grounds that were expressly set forth in her motion.” (Dkt.
# 10 at 20.)
The court in McClendon considered a similar argument and found
waiver. There, the court determined that the appellant waived his argument that
the bankruptcy court’s interpretation of § 523(a)(6) impermissibly shifted the
burden of proof to the debtor—an argument about the bankruptcy court’s
decisionmaking—concluding that it was not encompassed in the issue statement of
whether the bankruptcy court erred by finding the debt nondischargeable under §
523(a)(6)—an argument about the merits of the case. Id. at 506. The
circumstances here are much the same. The original issue statement concerns the
merits of the bankruptcy court’s summary judgment motion—Katona’s success in
meeting her summary judgment burden—while the instant argument concerns the
bankruptcy court’s decisionmaking—deciding the motion on a legal theory not
raised by Katona. Because the argument is not encompassed within the issue
statement, the argument is waived on appeal.
Alfred contends that summary judgment on the grounds of res
judicata, compromise and settlement, and accord and satisfaction was nevertheless
improper because Alfred was bringing his claims as the successor in interest to
Oshita, not the successor in interest to Vernon. (Dkt. # 3 at 37–39.) Katona
counters that the bankruptcy court properly found that the 2011 Settlement
Agreement barred the claims because Vernon could not have assigned to Alfred a
right she had previously forfeited. (Dkt. # 6 at 47.)
The Oshita claims arise out of Oshita’s ownership interest in WSG,
which Alfred obtained by foreclosing on Katona’s Unpaid Money Judgment from
the California action. Viewing the facts in the light most favorable to Alfred, the
nonmoving party, 4 Alfred inherited the right to foreclose on the Unpaid Money
Judgment through rights that were assigned from Vernon. Vernon inherited those
The Court recites the facts in this manner because the bankruptcy court did not
decide if the right to the money judgment was a liquidated or unliquidated claim
and whether that right was transferred to Vernon as part of the 2011 settlement
rights from Katona as a result of the 2011 Settlement Agreement. In the 2011
Settlement Agreement, Vernon specifically released Katona from “any claim” that
Vernon or WSG could assert based on any alleged responsibility of Katona
running from the beginning of time through the settlement agreement. Transcript
Given those facts, there are two questions at issue: (1) did Vernon’s
release carry over to Alfred when she assigned her rights to the Unpaid Money
Judgment; and (2) if so, is the ownership interest a legal substitute for the Unpaid
Money Judgment for the purposes of that release, or is the ownership interest
legally distinct from the rights that Alfred inherited from Vernon?
“An ‘assignment’ is simply a transfer of some right or interest.”
Shipley v. Unifund CCR Partners, 331 S.W.3d 27, 28 (Tex. App. 2010). It is well
settled that when a claim is assigned, the assignee “steps into the shoes of the
[assignor] and is considered under the law to have suffered the same injury as the
assignors and have the same ability to pursue the claims.” Sw. Bell Tel. Co. v.
Mktg. on Hold Inc., 308 S.W.3d 909, 916 (Tex. 2010). However, the assignee is
also “subject to all defenses which the opposing party may have been able to assert
against his assignor.” Irrigation Ass’n v. First Nat’l Bank of Frisco, 773 S.W.2d
346, 348 (Tex. App. 1989). Accordingly, when Vernon transferred her interest in
the Unpaid Money Judgment to Alfred, he took that interest subject to the release
of liability against Katona.
Nonetheless, that release only bars the instant suit if the ownership
interest is a legal substitute for the right to foreclose on the Unpaid Money
Judgment, which is the interest that Katona assigned to Vernon and that Vernon
assigned to Alfred. Alfred maintains that the two are legally distinguishable, since
he is suing on the ownership interest as the assignee of Oshita, not the assignee as
The Court looks to the California Code of Civil Procedure, which
governed the California foreclosure action in which Alfred foreclosed on the
Unpaid Money Judgment. The Code provides that, in enforcing a money judgment
against a judgment debtor, “all property of the judgment debtor is subject to
enforcement of a money judgment.” Cal. Code Civ. P. § 695.010(a); see also
§ 681.010(a) (“A money judgment is enforceable as provided in Division 2
(commencing with Section 695.010).”). Presumably, this is the authority upon
which the state court relied in awarding Alfred Oshita’s interest in WSG. 5
The parties have not provided the underlying state court ruling as part of the
Given the procedures set forth in the Code for enforcing money
judgments, the Court finds that Oshita’s ownership interest in WSG was awarded
as a legal substitute for the Unpaid Money Judgment. Because Alfred’s state court
action against Katona on the Oshita claims is based on an alleged breach of
Katona’s responsibilities as part-owner of WSG between 2007 and 2011, the state
court action is barred by the terms of the release in the 2011 Settlement
Agreement. Accordingly, the Court affirms the bankruptcy judge’s holding that
the Oshita claims are barred by the terms of the 2011 Settlement Agreement.
Whether the Bankruptcy Court Erred in its Rulings on Judicial Estoppel
Alfred next argues that the bankruptcy court clearly erred in finding
that the Oshita claims were barred by judicial estoppel because Katona did not
raise the defense in her Amended Complaint or Motion for Summary Judgment
and because the defense fails on the merits. (Dkt. # 3 at 49–51.) Katona counters
that Alfred’s first argument is waived for the reasons discussed above and that the
bankruptcy court correctly applied judicial estoppel to bar the claim. (Dkt. # 6 at
44.) The Court reviews a judicial estoppel determination for abuse of discretion.
Love v. Tyson Foods, Inc., 677 F.3d 258, 262 (5th Cir. 2012).
For the same reasons discussed above, the Court agrees with Katona
that Alfred has waived his argument that the bankruptcy court did not have the
power to decide the judicial estoppel issue without briefing from the parties, since
that argument is not encompassed within his statement of issues. Accordingly, the
Court addresses only the merits of the judicial estoppel ruling.
“The doctrine of judicial estoppel is equitable in nature and can be
invoked by a court to prevent a party from asserting a position in a legal
proceeding that is inconsistent with a position taken in a previous proceeding.” Id.
at 261. Courts evaluate the following factors in deciding whether to apply judicial
estoppel: “(1) the party against whom judicial estoppel is sought has asserted a
legal position which is plainly inconsistent with a prior position; (2) a court
accepted the prior position; and (3) the party did not act inadvertently.” Id.
(quoting Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en banc)).
“However, judicial estoppel is not governed by inflexible prerequisites or an
exhaustive formula for determining its applicability, and numerous considerations
may inform the doctrine’s application in specific factual contexts.” Id. at 262
(quoting New Hampshire v. Maine, 532 U.S. 742, 749–50 (2001)).
After taking judicial notice of all of the filings in the bankruptcy case,
the adversary proceedings under that case, the filings and opinions in the appeals
of the bankruptcy case and adversary proceedings, and the opinions in the
California litigation, the bankruptcy court identified several places where Vernon,
as Alfred’s predecessor in interest, asserted that Oshita did not own an interest in
WSG. Transcript at 8–15. The bankruptcy court held that Alfred, as Vernon’s
predecessor in interest, has therefore admitted that Oshita had no interest in WSG,
thereby estopping his ability to argue that Katona failed to pay Oshita
appropriately on her claims. Id. at 15.
The Court agrees. For the reasons discussed above with regard to the
2011 settlement, Oshita’s ownership interest is a legal substitute for Katona’s
original money judgment against Oshita, and therefore Alfred’s ownership of that
membership derives from Vernon’s assignment. As her assignee, Alfred inherits
the positions she has taken throughout the litigation. See, e.g., In re Bilstat, Inc.,
314 B.R. 603, 610 (S.D. Tex. 2004) (applying judicial estoppel where the trustee
took a position inconsistent with the positions taken by his predecessor-in-interest).
The Court is unconvinced by Alfred’s argument that the bankruptcy
court abused its discretion in applying judicial estoppel because Katona came to
the instant suit with unclean hands. (Dkt. # 3 at 42.) Alfred contends that Katona
has taken completely different positions in sworn pleadings and testimony
regarding Oshita’s interest in WSG, which precludes her from raising the same
argument against Vernon. Although Alfred does not provide any record citations
of any such inconsistent statements, the bankruptcy court acknowledged Alfred’s
argument and found that Katona’s statements did not constitute an admission as to
Oshita’s ownership interest. Transcript at 8 (reading an excerpt of a filing into the
record and summarizing, “So, that’s the verified complaint that is alleged by
Alfred Galaz to be an admission of some sort by [Katona] that Marian Oshita’s
interest is 25 percent as of that time”). Based on the record excerpts that the
bankruptcy court read into the record at the hearing on the motion for summary
judgment, the bankruptcy court found:
Lisa’s pleading in the complaint, the original complaint, but not the
amended complaint, says [Oshita’s interest] is in dispute. [Oshita]
had a 25 percent interest, which it’s clearly undisputed that when
WSG was – was opened, or – was chartered, that Oshita had a 25
percent interest in it. So the question is: At what point in time did
Oshita have the 25 percent interest? And at the time the complaint
was filed in this adversary proceeding, 11-5015, Lisa said it was in
dispute; that [Oshita] had owned 25%, but that she had not done what
she was supposed to do, and so it was in dispute. But, clearly, Denise
Vernon said Oshita has no interest.
Transcript at 15. Given that the bankruptcy court’s conclusion was not
based on erroneous factual findings, the Court finds that the bankruptcy
court did not abuse its discretion in applying judicial estoppel.
Whether the Bankruptcy Court Erred in Denying Alfred’s Motion for
Finally, Alfred argues that the bankruptcy court erred in denying his
Motion for Summary Judgment because the motion established as a matter of law
that Katona’s defenses to the state court action were unfounded. (Dkt. # 3 at 52.)
The Court would only have the power to entertain Alfred’s argument on the denial
of his Motion for Summary Judgment had it reversed the bankruptcy court’s
granting of Katona’s Motion for Summary Judgment, since denials of motions for
summary judgment are not generally appealable final orders and are only
reversible if the reversal of an order granting a cross-motion for summary
judgment effectively decided the issue that was previously denied. See In re
Corrugated Container Antitrust Litig., 694 F.2d 1041, 1042 (5th Cir. 1983)
(discussing the “extraordinarily limited nature of the ‘collateral order’ doctrine”);
see also Owsley v. San Antonio Indep. Sch. Dist., 187 F.3d 521, 527 (5th Cir.
1999) (reversing partial summary judgment granted to plaintiffs and rendering
summary judgment in favor of the defendant on the basis of issues decided during
the reversal). Because the Court has affirmed the bankruptcy court’s order
granting Katona’s Motion for Summary Judgment, the Court will not address
Alfred’s arguments on his own Motion for Summary Judgment.
For the foregoing reasons, the Court AFFIRMS the bankruptcy
IT IS SO ORDERED.
DATED: San Antonio, Texas, September 21, 2015.
David Alan Ezra
Senior United States Distict Judge
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