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In re Del Mission Limited

filed: October 23, 1996.

IN RE DEL MISSION LIMITED, DEBTOR. STATE OF CALIFORNIA EMPLOYMENT DEVELOPMENT DEPARTMENT; STATE OF CALIFORNIA STATE BOARD OF EQUALIZATION, APPELLANTS,
v.
HAROLD S. TAXEL, TRUSTEE FOR DEL MISSION LIMITED, APPELLEE.



Appeal from the Ninth Circuit Bankruptcy BAP No. SC-94-1191-JhR. Appellate Panel Jones, Hagan and Russell,. Bankruptcy Judges, Presiding.

Before: Betty B. Fletcher and A. Wallace Tashima, Circuit Judges, and Jane A. Restani, Court of International Trade Judge.*fn* Opinion by Judge Tashima.

Author: Tashima

TASHIMA, Circuit Judge:

This appeal presents two important issues. First, we consider whether failing to return bankruptcy estate property in a timely manner constitutes a violation of the automatic stay provision of 11 U.S.C. § 362(a)(3). We conclude that it does. Next, we resolve whether a bankruptcy court may award fees and costs incurred in prior appellate proceedings as a contempt sanction under 11 U.S.C. § 105(a). We conclude that it may not.

BACKGROUND

This is the second round of litigation between these parties. The first round arose when appellants California Employment Development Department and State Board of Equalization (collectively the "State") refused to approve the sale of Chapter 7 debtor Del Mission Limited's ("Del Mission") liquor license until it paid all outstanding taxes and interest accrued thereon. The trustee of Del Mission, appellee Harold S. Taxel ("Taxel"), paid the disputed taxes under protest, and then brought a proceeding in the bankruptcy court seeking repayment. The bankruptcy court found that the State's action violated the automatic stay provision of 11 U.S.C. § 362(a)(3), and ordered the State to pay Del Mission $15,604.*fn1 Taxel v. California Employment Dev. Dep't (In re Del Mission Ltd.), 116 Bankr. 734 (Bankr. S.D. Cal. 1990) (" Del Mission I "), aff'd, 130 Bankr. 362 (Bankr. 9th Cir. 1991) (TABLE in Westlaw) (" Del Mission II "), aff'd, 998 F.2d 756 (9th Cir. 1993) (" Del Mission III ").

The failure of the State to repay the disputed taxes in a timely manner is the subject of this second round of litigation. In spite of the bankruptcy court's order, the State did not repay the disputed taxes while the underlying case was being appealed. Following our decision in Del Mission III, Taxel filed a motion with the bankruptcy court seeking to hold the State in civil contempt of the automatic stay for failing to repay the disputed taxes in a timely manner.*fn2 As sanctions, Taxel requested attorney's fees and costs incurred in enforcing the automatic stay on appeal in Del Mission II and Del Mission III. The bankruptcy court denied the motion, concluding that the automatic stay violation merged into the previously awarded money judgment. As an alternative ground for its decision, the court also concluded that it had no legal authority to award fees incurred on prior appeals. The bankruptcy appellate panel ("BAP") reversed on both issues, and awarded Taxel the fees and costs he incurred in Del Mission II and Del Mission III, on the prior appeals.*fn3

We have jurisdiction of this appeal under 28 U.S.C. § 158(d), and we affirm in part and reverse in part.

Discussion

I. Continuing Violation of the Automatic Stay

The first issue we must decide is whether the State's failure to repay Del Mission in a timely manner constituted a continuing violation of 11 U.S.C. § 362(a)(3). "Because we are in as good a position as the BAP to examine the decision of the bankruptcy court, we independently review the bankruptcy court's ruling." Havelock v. Taxel (In re Pace), 67 F.3d 187, 191 (9th Cir. 1995) (citation omitted). We review de novo whether the automatic stay provision of § 362(a) has been violated. Chugach Timber Corp. v. Northern Stevedoring & Handling Corp. (In re Chugach Forest Prod., Inc.), 23 F.3d 241, 244 (9th Cir. 1994). We conclude that the State's retention of the disputed taxes did violate the automatic stay.

A. The Merger Doctrine

The doctrine of merger is a subset of res judicata and precludes a plaintiff from maintaining an action on the original claim after a final judgment has been entered. Restatement (Second) of Judgments § 18 (1980). The bankruptcy court reasoned that under this doctrine, the State's violation of the automatic stay ended with a final judgment in Taxel's favor. When judgment was entered, the violation of the stay ceased to exist and all remaining rights between the parties merged into the money judgment. It therefore rejected Taxel's motion for contempt, concluding that the State's retention of the disputed taxes could not, under the doctrine of merger, be a continuing violation of the automatic stay. We decline the State's invitation to adopt the reasoning of the bankruptcy court.

The bankruptcy court's analysis stretches the doctrine of merger beyond its intended limits. The doctrine of merger does not extinguish "advantages to which the plaintiff was entitled with respect to the original claim . . . ." Id. at ยง 18, cmt. g. For example, "if a creditor has a lien upon property of the debtor and obtains a ...


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