California Court Discusses Res Judicata in Bankruptcy Cases

In many bankruptcy cases, there are insufficient funds to fulfill the debtor’s obligations. Thus, the creditors may enter into a stipulation regarding how any available money should be distributed. Such stipulations do not necessarily mean that a creditor cannot pursue any other claims against a debtor, however. The implication of a stipulation entered into by a creditor in a bankruptcy action on future claims was the topic of an opinion recently issued by a California court, in a case in which the debtor argued the IRS was barred from recovering taxes from the debtor. If you are unable to pay your debts, you could be eligible to file for bankruptcy, and you should meet with a trusted California bankruptcy attorney as soon as possible.

The Stipulation

It is reported that the plaintiff filed a Chapter 7 bankruptcy proceeding in May 2013 and received a discharge two years later. In March 2018, the IRS filed an amended proof of claim for unpaid taxes the plaintiff owed for 2007, 2008, 2009, and 2011. The franchise tax board (FTB) filed a proof of claim as well. The bankruptcy estate did not have enough funds to pay the IRS and FTB, and so they entered into a stipulation with the bankruptcy trustee regarding the division of the funds that were available.

Allegedly, the stipulation was approved by the bankruptcy court, and funds were distributed to the parties. The IRS then advised the plaintiff that he owed close to $500,000 for the 2009 tax year. The plaintiff filed an action with the bankruptcy court, arguing that the stipulation barred the IRS from recovering any additional funds from him for the 2009 tax year, and filed a motion for judgment on the pleadings. The bankruptcy court denied the motion, and the plaintiff appealed.

Res Judicata in Bankruptcy Cases

On appeal, the court affirmed the lower court ruling, finding that the stipulation did not state that any of the debts were dischargeable and the plaintiff was not a party to the stipulation. The court explained that the doctrine of res judicata bars any claims that either were or could have been raised in a prior action. It only applies, however, in cases where there is privity between the parties, an identity of claims, and a final judgment on the merits.

In the subject case, the court noted that the stipulation dictated how the trustee would distribute the funds among competing claims, and when the bankruptcy court entered an order on the stipulation, it constituted a final judgment. The court explained, though, that no identity of claims existed. Additionally, the plaintiff lacked privity as he was not a party to the stipulation. Thus, the court affirmed the bankruptcy court ruling.

Speak to an Experienced California Bankruptcy Attorney

Many people are able to get rid of overwhelming debts via bankruptcy, but not all debts are discharged, and it is important for debtors to understand their rights and obligations. If you are mired in debt, you should speak to a  bankruptcy lawyer as soon as possible to assess your options. Attorney Matthew D. Roy can advise you of your rights and help you to seek the best outcome available in your case.  You can reach Mr. Roy through the online form or by calling (916) 361-6028 to set up a conference.