Hawkeye Entertainment, LLC

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION
In re:
HAWKEYE ENTERTAINMENT, LLC,
Debtor-in-Possession.
Case No.: 1:23-bk-11501-MB
Chapter 11
MEMORANDUM OF DECISION RE:
DEBTOR'S MOTION FOR PARTIAL
SUMMARY JUDGMENT
Hearing Held:
Date: November 4, 2025
Time: 1:30 p.m.
Place: Courtroom 303
21041 Burbank Blvd.,
Woodland Hills, CA 91367
FILED & ENTERED
DEC 08 2025
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	Cetulio
FOR PUBLICATION
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I. INTRODUCTION
The debtor is lessee of a portion of the historic Pacific Stock Exchange Building in downtown
Los Angeles, California. It subleases the premises to a non-debtor affiliate, which operates a popular
nightclub and concert venue known as "L.A. Exchange." When the debtor's current landlord (and the
prior landlord) acquired the building, it was subject to a long-term lease in favor of the debtor. The
landlord and its predecessor, however, have other plans for the building and have sought for many years
to declare defaults and terminate the lease. The debtor has resisted these efforts.
The result has been over a decade of litigation, both in state court and in the bankruptcy court.
This is the debtor's third chapter 11 case.1 In the prior cases, the debtor successfully assumed the subject
lease under Bankruptcy Code section 365(a).2 In the first chapter 11 case,3 the debtor did so pursuant to
a settlement with the landlord. In the second chapter 11 case,4 the debtor did so after extensive litigation
and a lengthy evidentiary hearing over the nature and existence of defaults under the lease.
Pursuant to Bankruptcy Code section 365(b), to assume a lease, a debtor in possession must cure
existing defaults, compensate for pecuniary loss resulting from those defaults, and provide adequate
assurance of future performance with respect to such defaults. Whether and to what extent a lease is in
default is the central issue in a motion to assume a lease. In the last bankruptcy case, the landlord had the
opportunity to litigate the existence and significance of all defaults then existing under the lease.
Notwithstanding its efforts, the Court approved assumption of the lease, which the Ninth Circuit Court
of Appeals affirmed.
In connection with its effort to assume the same lease in the present case, the debtor seeks—by
way of partial summary judgment—to limit the universe of defaults that may be alleged by the landlord
in opposition to that relief. The debtor relies on (i) the collateral attack doctrine, (ii) the doctrine of res
judicata (or "claim preclusion"), (iii) the doctrine of collateral estoppel (or "issue preclusion"), and (iv)
the application of a consensual release between the parties and/or their predecessors in interest. The
1 Case No. 1:23-bk-11501-MB (the "Third Bankruptcy Case" or "Bk III").
2 References herein to the "Bankruptcy Code" refer to title 11 of the United States Code, 11 U.S.C. §§ 101–1532.
3 Case No. 1:13-bk-16307-MT (the "First Bankruptcy Case" or "Bk I").
4 Case No. 1:19-bk-12102-MT (the "Second Bankruptcy Case" or "Bk II").
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landlord rejects these arguments, contending that all past defaults are fair game. Based on this premise,
the landlord has launched a barrage of discovery aimed at identifying defaults that either were litigated
or could have been litigated in the prior case.
After careful consideration of the applicable legal standards, and the circumstances presented,
the Court concludes (i) the collateral attack doctrine, claims preclusion doctrine and issue preclusion
doctrine are applicable here and each independently precludes the landlord from asserting and litigating
the existence of any default under the lease prior to entry of the assumption order in the prior case; and
(ii) the voluntary release granted by the landlord's predecessor is binding on the landlord and precludes
the assertion of any default existing under the lease at the time the release was granted. Accordingly, the
Court will enter a separate order granting partial summary judgment in favor of the debtor, limiting the
scope of the defaults that may be asserted in connection with the lease assumption.
II. JURISDICTION, ADJUDICATIVE AUTHORITY & VENUE
The Court has jurisdiction over the debtor's motion for partial summary judgment pursuant to 28
U.S.C. § 1334(b), because it arises under Bankruptcy Code section 365 and involves issues unique to
this and prior bankruptcy cases. See Bk III Dkt. 236 (the "MPSJ"). As such, the MPSJ pertains to
statutorily and constitutionally core matters over which this Court has the adjudicative authority to enter
final orders. See Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665 (2015). The Court also finds that
venue is proper under 28 U.S.C. § 1409(a) because the MPSJ was filed in the court where the Third
Bankruptcy Case is pending.
III. FACTUAL AND PROCEDURAL BACKGROUND
A. The Lease and Sublease
In 2009, PAX America Development, LLC ("PAX") was the owner of the historic twelve-story
commercial building located at 618 S. Spring Street, Los Angeles, CA 90014, known as the Pacific
Stock Exchange Building. The habitable and leasable portions of the building are the first four floors and
the basement, specifically the south end of the basement (the "Premises").
On July 17, 2009, PAX entered into a long-term lease of the Premises to Hawkeye
Entertainment, LLC (the "Debtor"). Bk III Dkt. 237 at Ex. A (the "Lease"). The Lease is guaranteed by
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Adi McAbian and W.E.R.M. Investments, LLC ("WERM"), a non-debtor affiliate. Id. at Ex. A, Ex. G
thereto. McAbian is the principal of the Debtor. Id. at ¶ 1.
On October 1, 2009, the Debtor subleased the Premises to WERM. Id. at Ex. B (the "Sublease").
WERM uses the Premises to operate a nightclub and entertainment venue under the name "Exchange
LA."
B. New Vision Acquires the Premises, Disputes Arise
On December 20, 2010, New Vision Horizon, LLC ("New Vision") acquired the Premises from
PAX at a non-judicial foreclosure sale. Michael Chang was the managing member of New Vision. Bk III
Dkt. 247-1 at ¶ 4 n.1.
C. The First Bankruptcy Case
Between 2009 and 2013, the Debtor withheld nearly $1 million in rents under the Lease, alleging
that New Vision failed to make certain improvements required by the Lease. The Debtor filed two
lawsuits against New Vision—one in 2011 and one in 2013. On September 20, 2013, New Vision
responded with a notice of default for failure to pay the withheld rental amount and five days to cure the
deficiency. On September 30, 2013, the Debtor filed a chapter 11 petition, initiating the First Bankruptcy
Case, over which the Hon. Maureen Tighe presided.
The Debtor moved to assume the Lease, which New Vision opposed. Bk I Dkt. 40 (the "First
Assumption Motion"); Bk I Dkt. 57. Following mediation, in August 2014, the Debtor and New Vision
reached a global resolution of their disputes. Bk I Dkt. 226 at Ex. A (the "New Vision Settlement"); Bk I
Dkt. 233 ("Stipulation for Assumption of Lease"); Bk I Dkt. 242 (the "2014 Assumption Order"); Bk I
Dkt. 257 (the "2014 Settlement Order"). Among other things, the New Vision Settlement voided certain
alleged amendments to the Lease, implemented certain other amendments to the Lease5 and conferred
mutual releases on the parties.
The New Vision Settlement states, in relevant part:
10. General Releases:
(a) On the Effective Date, except as otherwise provided in this Agreement, and except as
to the Parties' rights and obligations under the Lease and the First Amendment, the Parties,
on behalf of themselves and each of their predecessors, successors, assigns, officers,
5 Bk III Dkt. 237 at Ex. C ("First Amendment to Lease Agreement," dated August 19, 2014).
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directors, members, agents, and all other persons or entities acting on their behalf, hereby
fully and forever release each other, and each of their respective predecessors, successors,
assigns, officers, directors, members, agents, employees, insurers, representatives and
attorneys, from any and all claims, actions or causes of action, damages, demands, costs,
expenses, losses, and attorneys' fees, which they have, or could claim to have against each
other arising from or related to: (1) all claims alleged in the First or Second State Court
Actions; (2) all claims alleged in, or related to the [First] Assumption Motion, including
claims related to the Rent Commencement Date and any offsets to rent allegedly owed to
[the Debtor] by New Vision; (3) all claims related to the validity and enforceability of the
Lease; (4) all claims related to the validity and enforceability of the Sublease; (5) all claims
related to any Rent owed from the period July 17, 2009 through October 31, 2014; and (6)
all the Claims of New Vision arising under or related to POC No. 2. It is the parties' mutual
intent that by this SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF
CLAIMS the parties are resolving all disputes between them. Notwithstanding the
foregoing, nothing herein is intended to nor shall release claims, if any, that any Party may
have against Pax or its principals.
(b) It is the intention of the Parties that the releases provided in this Agreement, will be
effective to bar all claims, demands, controversies, causes of action, liabilities, costs,
expenses, attorneys' fees, and damages of whatever character, nature and kind, known or
unknown, suspected or unsuspected against one another. [New Vision and the Debtor]
expressly waive any and all rights and benefits conferred upon them by California Civil
Code section 1542, which states:
A general release does not extend to claims which the creditor does-not
know or suspect to exist in his or her favor at the time of executing the
release, which if known by him or her must have materially affected his or
her settlement with the debtor.;
(c) The Parties acknowledge and agree that this Agreement, including without limitation
the foregoing waiver of the provisions of California Civil Code section 1542, is intended
to effectuate a full and complete release of any and all claims for relief, whether known or
unknown, that may be asserted by them against each other; and
(d) The Parties acknowledge that the foregoing waiver of the provisions of California Civil
Code section 1542 is separately bargained for and expressly consented to, and that this
Agreement shall be given full force and effect in accord with each and all of its terms and
provisions, including those terms and provisions relating to known and unknown claims.
[…]
14. Legal Construction.
(a) This Agreement shall be governed in all respects, including validity, interpretation, and
effect, by the Bankruptcy Code and the laws of the State of California, without giving effect
to the principles of choice of law or conflicts of law thereof[.]
Bk I Dkt. 226-1 at 6-8.
The order approving the parties' stipulation for assumption of the Lease provides, in relevant
part:
[T]he Lease and Sublease shall be deemed current and reinstated as if no default exists or
ever existed, and that any and all monetary and non-monetary defaults alleged by New
Vision are deemed cured, satisfied and/or waived ab initio…; … the Debtor is in full and
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complete compliance each and every provision of Bankruptcy Code § 365(b)(1) (A), (B)
and (C)[.]
Bk I Dkt. 242 at 4.
On June 20, 2016, Judge Tighe issued an order confirming the Debtor's chapter 11 plan, which
order also confirmed the assumption of the Lease. See Bk I Dkt. 363 at ¶ 2. On April 28, 2017, the clerk
of the Court entered a final decree in, and closed, the First Bankruptcy Case. Bk I Dkt. 392.
D. Smart Capital Acquires the Premises
On January 24, 2018, Smart Capital Investment I, LLC, Smart Capital Investments II, LLC,
Smart Capital Investments III, LLC, Smart Capital Investments IV, LLC and Smart Capital Investments
V, LLC (collectively "Smart Capital") acquired the Premises from New Vision via recordation of a grant
deed. Bk III Dkt. 247-1 at ¶ 4 n.1. Chang is the managing member of Smart Capital. Id.
E. The Second Bankruptcy Case
On August 5, 2019, Smart Capital delivered to the Debtor a letter asserting non-monetary
defaults under the Lease. Bk III Dkt. 237 at ¶ 11 and Ex. H. Despite the Debtor's efforts to obtain more
specific information on the nature of the alleged defaults, Smart Capital then issued a three-day notice to
quit the Premises. Id. at ¶ 13. Shortly thereafter, on August 21, 2019, the Debtor filed a second chapter
11 petition initiating the Second Bankruptcy Case, over which Judge Tighe also presided.
In October 2019, the Debtor moved to assume the Lease pursuant to Bankruptcy Code section
365, which Smart Capital opposed. Bk II Dkt. 21 (the "Second Assumption Motion"); Bk II Dkt. 26.
From October 2019 to September 2020, i.e., for approximately one year, the parties conducted extensive
discovery on issues related to the Second Assumption Motion. See Bk II Dkt. 111 (setting August 28,
2020 as deadline to complete discovery); Bk II Dkt. 164 (ordering production of additional information);
In re Hawkeye Ent., LLC, 625 B.R. 745, 757 (Bankr. C.D. Cal. 2021) (Tighe, J.) (describing discovery
efforts as "extensive"). In October 2020, the Court conducted a four-day evidentiary hearing over the
nature and extent of alleged defaults under the Lease. Bk II Dkts. 266, 269, 270, 271 (transcripts of
evidentiary hearing).
On October 15, 2020, the Court approved the Debtor's assumption of the Lease; in relevant part,
Judge Tighe's oral ruling was as follows:
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[Regarding the alleged defaults raised by Smart Capital,] [t]he details of the default just
appeared manufactured, and minor, and made-up, sometimes. [Chang] understandably is
very upset. He's got an under-market lease, allegedly, [for] an historic building with all
sorts of restrictions that he's got to work closely with his tenant.
[…]
They're the kind of issues you work out in that kind of building, if they're real issues, but I
thought he was using immaterial issues, or manufacturing issues that hadn't been there, as
an attempt to characterize them as a default, and the bottom line is, there was no
preponderance of evidence on any of these issues to convince me there's a default.
Bk II Dkt. 269 at 110-101.
The defaults that I found occurred I found were not material, and I didn't find Mr. Chang
credible on them, … he was exaggerating them, and he had already certified that everything
was fine when he signed the estoppel, that there were no defaults, and then he kept moving
the target.
So I didn't find that there were any defaults … that weren't cured, and the curing of the late
payment … I don't know that you can characterize that as a default, where the lease itself
provides … you pay the late fee, and that was done.
Bk II Dkt. 271 at 55; see also Bk II Dkt. 230 (the "2020 Assumption Order") at 3:7-8 ("the Lease and
Sublease shall be deemed current and reinstated as if no default exists or ever existed.").
Smart Capital appealed the 2020 Assumption Order, which the Ninth Circuit Court of Appeals
affirmed. Smart Cap. Invs. I, LLC v. Hawkeye Ent., LLC (In re Hawkeye Ent., LLC), 49 F.4th 1232 (9th
Cir. 2022). The Court of Appeals held that the Court had incorrectly limited the curative requirements of
section 365(b)(1) to "material" defaults rather than all defaults. Id. at 1237. The Court of Appeals
concluded, however, that the error was harmless because (i) the Court had determined that all defaults
by the Debtor had been cured as of the time of assumption, and (ii) any adequate assurance required by
the statute in respect of the Debtor's defaults would not have implicated Smart Capital's substantive
rights:
[T]he record establishes that the bankruptcy court determined that any default was cured
as of the time of assumption, and that many of the alleged defaults were either not defaults
in the first place or were only minor deviations from the contract terms. Thus, any adequate
assurance responsive to the alleged defaults would be little more than simple promises not
to deviate from the contract terms again.
Id. at 1240–41.
On August 6, 2021, the Court confirmed the Debtor's chapter 11 plan in the Second Bankruptcy
Case. Bk II Dkt. 391. The Second Bankruptcy Case has not yet been closed. On January 23, 2024, it was
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reassigned to the undersigned judicial officer and redesignated as case no. 1:19-bk-12102-MB. Bk II
Dkt. 493.
F. The CUB Dispute
One of the ongoing disputes between the Debtor and Smart Capital involved the efforts by
WERM, the Debtor's subtenant, to renew the approval by the Los Angeles Department of City Planning
(the "Planning Department") for a conditional use of the Premises for the sale of alcoholic beverages (a
"CUB"). WERM is required by city ordinance to maintain a CUB to sell alcoholic beverages at the
Premises.6 To operate at the Premises as a nightclub and event venue, the Lease requires that WERM
obtain a CUB. Bk III Dkt. 237 at 14 (Lease Section 5.3).
On February 25, 2013, the Planning Department granted approval of WERM's plans to continue
on-site sales of a full line of alcoholic beverages. Bk III Dkt. 112 at Ex. A (the "CUB-PA4"); see
Planning Department case no. ZA-1995-830-CUB-PA4. Condition no. 47 of the CUB-PA4 provided that
in order to renew the Planning Department's authorization, WERM was required to submit a renewal
application before the CUB-PA4 expired, i.e., before March 12, 2023 (the "CUB-PA5 Application"). Id.
at 8. After expiry of an administrative appeal period, the CUB-PA4 became final and effective for a term
of ten years beginning on March 12, 2013.
WERM operated under the CUB-PA4 for the entirety of its term and, in 2022, began the process
to submit the CUB-PA5 Application. Over the course of approximately a year, Smart Capital refused to
provide the property owner with an affidavit necessary for WERM to submit the CUB-PA5 Application.7
Bk III Dkt. 237 at ¶ 16; Bk III Dkt. 247-1 at ¶ 29. So, the Debtor and WERM sought and obtained relief
from the Superior Court of California for the County of Los Angeles (the "Superior Court") compelling
Chang to sign and notarize the property owner affidavit. Bk III Dkt. 52 at ¶¶ 25-29.8
6 See L.A.M.C. § 12.24.W.1 (2025), https://codelibrary.amlegal.com/codes/los_angeles/latest/lapz/0-0-0-7378.
7 Where the holder of a CUB is the tenant (or subtenant) of a property, a CUB renewal application requires that the property
owner sign a property owner affidavit "to verify the application is being filed with their knowledge." Application Instructions
(CP13-7810), Los Angeles Department of City Planning (July 29, 2025), https://planning.lacity.gov/odocument/8d67e245-
e104-404a-8d07-efc8da8923dc/CP13-7810_DCP_Application_Filing_Instructions_10.31.23.pdf.
8 Notably, this Court previously found that Chang's refusal to provide the property owner affidavit demonstrated an intent to
obstruct WERM from timely submitting the CUB-PA5 Application. Bk III Dkt. 137 at 11:24-28.
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On March 8, 2023, WERM submitted its renewal application (the "CUB-PA5 Application"). See
Planning Department case no. ZA-19950830-CUB-PA5. On November 22, 2024, the Planning
Department issued a determination approving the CUB-PA5 Application, i.e., the Planning Department
approved WERM's sale of alcoholic beverages on the Premises. Bk III Dkt. 237 at Ex. I (the "Planning
Decision").
Due to the nature of the parties' ongoing disputes, the Planning Department's consideration of the
CUB-PA5 Application "engendered a large amount of correspondence and testimony." Id. at 16. "Large"
is an understatement—the Planning Department's summary of the correspondence it received, and the
testimony and arguments it heard, spanned over 18 pages in single-spaced 12-point font. Id. at 20-38. In
relevant part, Smart Capital and its various representatives asserted that the CUB-PA5 Application could
not "be granted because the … CUB-PA4 was granted in error and is invalid due to [McAbian], instead
of [Smart Capital], having signed the [CUB-PA4] application and covenant and agreement." Id. at 43;
see also id. at 22-24, 29-31 (summarizing correspondence from various representatives of Smart Capital,
each making the same assertion); id. at 33-36 (summarizing comments made by Smart Capital at public
hearing, making the same assertion).
The Planning Department refused to invalidate the CUB-PA4, which had been in effect for 10
years and expired by its terms:
[T]he discussion on the validity of the CUB-PA4 … is moot. The [CUB-PA4] was issued
on February 25, 2013, having an appeal period that ended on March 12, 2013, with no
appeals filed. The opportunity to challenge [the CUB-PA4] and how the [CUB-PA4]
covenant was signed prior to its recordation against the [Premises] has long passed. Further,
the term of the [CUB-PA4] was limited to 10 years, and that term has ended. [The Debtor]
has been operating the [Premises], utilizing the privileges of that grant, for 10 years….
Id. at 43.
G. The Quiet Title Action
On November 20, 2024, two days before the Planning Decision was issued, Smart Capital filed a
complaint to quiet title to the Premises against McAbian in the Superior Court, initiating case no.
24STCV30709 (the "Quiet Title Action"). Bk III Dkt. 282 at Ex. D. In the complaint, Smart Capital
alleges that on March 13, 2013, McAbian fraudulently executed a Master Covenant and Agreement (the
"Master Covenant") as the purported owner of the Premises and caused the Master Covenant to be
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recorded against the Premises. Bk III Dkt. 284 at Ex. A. The complaint acknowledges that the Master
Covenant recordation was ancillary to the Planning Department's issuance of the CUB-PA4.9 To date,
the Quiet Title Action remains pending. See Bk III Dkts. 327, 334.10
H. The Third Bankruptcy Case
On October 16, 2023, Smart Capital served on the Debtor three different notices under California
Civil Procedure Code § 1161(4) purporting to terminate the Lease, declare a forfeiture of the leasehold,
and give the Debtor and its subtenant three days to vacate the Premises (the "Three-Day Notices"). See
Bk III Dkt. 45-7 at Ex. M. The Three-Day Notices allege that the Debtor breached the Lease by
committing or permitting to exist a nuisance on the Premises and using the Premises for an illegal or
unlawful purpose. The Debtor denies these allegations. On October 18, 2023, rather than wait for Smart
Capital to commence an unlawful detainer action in the Superior Court following expiration of the three-
day period provided under the Three-Day Notices, the Debtor filed a chapter 11 petition, commencing
this Third Bankruptcy Case.
1. The Motion to Dismiss and RFS Motion
On December 19, 2023, Smart Capital filed: (1) a motion to dismiss the Third Bankruptcy Case
as a bad faith filing under section 1112(b), and (2) a motion for relief from the automatic stay pursuant
to section 362(d) to proceed with an unlawful detainer action against the Debtor and to assert
counterclaims against the Debtor in the Superior Court. Bk III Dkt. 44 (the "Motion to Dismiss"); Bk III
Dkt. 48 (the "RFS Motion"). On February 14 and March 14, 2024, the Court held evidentiary hearings
on the Motion to Dismiss and RFS Motion. Bk III Dkts. 107, 133. On March 29, 2024, the Court held a
continued hearing in which it announced its decision to deny the Motion to Dismiss and to deny in part
the RFS Motion to the extent Smart Capital sought relief to proceed with an unlawful detainer action
regarding the Premises. Bk III Dkt. 156. On April 8, 2024, the Court issued a memorandum of decision
regarding the Motion to Dismiss and the RFS Motion. Bk III Dkt. 137; see also Bk III Dkts. 143, 197.
9 Condition no. 48 of the CUB-PA4 provided that within 60 days of its effective date, a form covenant acknowledging and
agreeing to comply with all the terms and conditions of the CUB-PA4 must be recorded against the Premises. Bk III Dkt. 112
at Ex. A.
10 This Court previously ruled that Smart Capital's prosecution of the Quiet Title Action does not violate the Debtor's
automatic stay in the Third Bankruptcy Case. Bk III Dkt. 296.
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2. The Third Assumption Motion
In the Third Bankruptcy Case, the Debtor filed a "Motion for an Order (1) Authorizing the
Assumption of Non-Residential Real Property Lease and Sublease, and (2) Determining the Debtor and
Sublessor Not to Be in Breach or Default, thereby Deeming them in Compliance with 11 U.S.C. section
365(b)(1)(A) and Excusing the Debtor from any Additional Compliance with 11 U.S.C section
365(b)(1)(B) and (C); or alternatively, Extending the Time Period within which the Debtor May Assume
or Reject Unexpired Non-Residential Leases and Executory Contracts." Bk III Dkt. 52 (the "Third
Assumption Motion").11
3. The Adversary Proceeding
On June 25, 2024, the Debtor filed a complaint against Smart Capital and Chang, commencing
adversary proceeding no. 1:24-ap-01031-MB (the "Adversary Proceeding"). Bk III Dkt. 168; Adv.
Dkt. 1 (the "Complaint").
a. The Complaint and First Injunction Motion
In the Complaint, the Debtor seeks issuance of: (1) a declaratory judgment that Smart Capital's
and Chang's alleged interference with the Debtor's and WERM's rights to operate pursuant to the CUB-
PA4 constitutes a violation of the automatic stay; and (2) a permanent injunction against Smart Capital
and Chang, enjoining them from interfering with the Debtor's and WERM's rights under the CUB-PA4,
including its efforts to renew the CUB-PA4 via the CUB-PA5 Application. The Debtor also filed a
motion for a preliminary injunction regarding the same. Adv. Dkt. 2 (the "First Injunction Motion").
b. The Counterclaims and Second Injunction Motion
On July 22, 2024, Smart Capital filed counterclaims against the Debtor and WERM. Adv. Dkt.
34 (the "Counterclaims"). In the Counterclaims, Smart Capital asserted causes of action for, among
others: (1) breach of the Lease; (2) breach of the implied covenant of good faith and fair dealing; and (3)
declaratory and injunctive relief regarding the purported alterations the Debtor and WERM caused to be
11 The Debtor also filed a "Motion for an (1) Order Deeming Debtor in Compliance with 11 U.S.C. section 365(d)(3) and (2)
Authorizing the Debtor to Pay All Monetary Obligations Pursuant to the Lease into the Rental Trust Account." Bk III Dkt. 57.
The continued hearings on that pending motion have trailed the hearings on the Third Assumption Motion.
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made to the Premises. Smart Capital also filed a motion for a preliminary injunction against the Debtor
and WERM regarding the same. Adv. Dkt. 44 (the "Second Injunction Motion").
c. The Third Injunction Motion
On July 22, 2024, the Debtor filed a motion for a preliminary injunction against Smart Capital
and Chang, this time seeking to enjoin them from interfering with the Debtor's attempts to remedy
ventilation and air conditioning problems on the Premises. Adv. Dkt. 37 (the "Third Injunction Motion"
and, together with the First and Second Injunction Motions, the "Injunction Motions").
* * *
As discussed below, all discovery pertaining to the Injunction Motions is stayed pending
adjudication of the MPSJ. See Adv. Dkt. 100; Bk III Dkt. 233.
4. The Discovery Disputes
On September 4, 2024, the Court entered an order that, among other things, set a deadline of
November 27, 2024, for the parties to complete discovery in connection with the Complaint, the
Counterclaims, the Third Assumption Motion and the Injunction Motions. Bk III Dkt. 181; Adv. Dkt. 72.
Smart Capital sought discovery from various parties pursuant to Federal Rule of Civil Procedure
26, made applicable to this contested matter by Federal Rule of Bankruptcy Procedure 9014(c)(1).
Specifically, Smart Capital sought information related to several categories of alleged defaults by the
Debtor under the Lease:
(1) the Debtor's purported violation of Lease section 2.6 by using the common area of the
Premises for revenue-generating events without Smart Capital's prior written consent,
including: "a photo shoot in September of 2021," a "Christmas event in December of 2023,"
a "Dungeons and Dragons event in May of 2024," and "boxing, sumo wrestling, [and] bikini
contests" on date(s) uncertain. Bk III Dkt. 247-1 at ¶¶ 55.b, 55.e, Ex. 14.
(2) the Debtor's purported violation of Lease section 10.2 by interfering with Smart Capital's
right of entry on multiple occasions in 2024. Id. at ¶ 55.d, Ex. 15.
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(3) the Debtor's purported violation of Lease section 10.3 by failing to maintain tenant utility
facilities in good condition and failure to repair or make replacements necessary to keep the
Premises in good condition; namely:
a. failing to maintain the interior ceilings, including damage to an "historic mosaic
ceiling tile" that purportedly fell on January 20, 2024. Id. at ¶¶ 30, 50-51, 58; Bk III
Dkt. 247-2 at ¶¶ 20-24, Exs. 12 and 18. Smart Capital also contends this constitutes a
violation of Lease section 9.4.
b. failing to perform requisite maintenance to the HVAC system since execution of the
Lease in 2009. Bk III Dkt. 247-1 at ¶¶ 52-55.c; Bk III Dkt. 212 (Smart Capital's RFA
no. 107: "Admit that during the period of January 1, 2009 to the present, there were
times when YOU did not keep the HVAC system at the PREMISES in good condition
and repair."). Smart Capital also contends this constitutes a violation of Lease section
5.7.
c. potential damage to the sump pump in the basement since execution of the Lease in
2009. Bk III Dkt. 247-1 at ¶ 55.a.
d. failing to provide adequate lighting on date(s) uncertain. Id. at ¶ 55.d.
(4) the Debtor's purported violation of Lease section 10.5 by performing alterations to the
Premises without prior notice to Smart Capital and without Smart Capital's prior written
consent, including: (a) retaining structural engineers, (b) receiving structural analyses in July
2022 and December 2023, and (c) submitting a building permit application to LADBS in
April 2024, all "regarding the installation of temporary rigging components at the Premises."
Id. at ¶¶ 38-49, 59-64, Exs. 11 and 19.
(5) the Debtor's purported violation of Lease section 11.3 by making changes to the common
area of the Premises; namely, the Debtor's alleged covering of Smart Capital's security
cameras in the common area during occasions since execution of the Lease in 2009. Id. at ¶
55.f; Bk III Dkt. 212 (Smart Capital's RFA no. 89: "Admit that on at least one occasion
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during the period of January 1, 2009 to the present, YOU obstructed [Smart Capital] from
controlling the COMMON AREA.").
(6) the Debtor's purported violation of paragraph 6 of the First Amendment to the Lease by using
the basement for non-storage purposes without Smart Capital's authorization, specifically
using the basement as a WERM employee breakroom. Bk III Dkt. 247-1 at ¶ 55.a; Bk III
Dkt. 247-6 at Ex. 17; Adv. Dkt. 94 (Smart Capital's RFA no. 61: "Admit that on at least one
occasion during the period of January 1, 2009 to the present, YOU used the basement of the
BUILDING for non-storage purposes.").
(7) the Debtor's purported violation of unidentified provision(s) of the Lease by:
a. obtaining the CUB-PA4, which Smart Capital contends was invalid because the
Debtor obtained it allegedly by misrepresenting that the Debtor was the owner of the
Premises. Bk III Dkt. 247-1 at 5-6 (¶¶ 25-29). Smart Capital's arguments regarding
the various CUBs have evolved considerably over time and across different forums.
In its current form, Smart Capital argues that the Debtor and WERM have illegally
sold alcohol at the Premises pursuant to the CUB-PA5, which purportedly is invalid
because the CUB-PA4 Application was obtained by fraud (i.e., McAbian signed the
Master Covenant as the purported owner of the Premises). See id. at ¶ 56.
b. on date(s) uncertain, walking through areas "outside the Premises for fire/life safety
inspections with the Los Angeles Fire Department without Smart Capital's knowledge
or consent." Id. at ¶ 55.g; Adv. Dkt. 96 at Ex. A (Peterson Deposition Transcript) at
pp. 76-77 ("Q: Did you see … any entity … occupying any space other than the
[Premises]? … A: … I saw Adi McAbian in other parts of the building, with the Fire
Department, because I did a tour.").
See also Bk III Dkt. 247 at 12:6-16:7; Bk III Dkt. 34.
In October and November 2024, the Debtor and Smart Capital filed numerous motions regarding
discovery disputes in the Third Bankruptcy Case and the Adversary Proceeding (collectively, the
"Discovery Disputes"):
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(1) the Debtor's motion to quash subpoenas issued by Smart Capital [Adv. Dkt. 75], filed October 3,
2024;
(2) Smart Capital's motions to compel WERM's responses to: requests for production [Adv. Dkt. 93],
requests for admission [Adv. Dkt. 94], and interrogatories [Adv. Dkt. 95], each filed November
18, 2024;
(3) Smart Capital's motions to compel the Debtor's responses to: requests for admission [Bk III Dkt.
212], requests for production [Bk III Dkt. 213], and interrogatories [Bk III Dkt. 214], each filed
November 18, 2024;
(4) Smart Capital's motion to compel further deposition of Elizabeth Peterson Group, Inc. [Adv. Dkt.
96], filed November 19, 2024;
(5) the Debtor's motion in limine to preclude Smart Capital from offering any evidence regarding
alleged defaults or breaches of the Lease occurring prior to the 2020 Assumption Order [Bk III
Dkt. 215], filed November 19, 2024;
(6) the Debtor's motion to compel Smart Capital's responses to interrogatories [Bk III Dkt. 217],
filed November 19, 2024.
In summary, Smart Capital argues that discovery regarding the Debtor's entire history of defaults
under the Lease is essential for this Court to determine whether the Debtor can assume the Lease in this
case. The Debtor argues that many of Smart Capital's discovery requests are improper because they are
aimed at developing evidence with respect to defaults that preceded entry of the 2014 Settlement Order,
2014 Assumption Order and the 2020 Assumption Order.
5. The MPSJ
On November 26, 2024, the Court conducted a status conference regarding the Discovery
Disputes and ordered the parties to present their dispute over the effect of the 2014 Assumption Order,
the 2014 Settlement Order and the 2020 Assumption Order as a motion for summary judgment. The
Court later memorialized its directive in a written order:
As the Court discussed with counsel, the Discovery Disputes all relate to a more substantial
legal dispute between the parties: whether and to what extent orders entered in the prior
bankruptcy cases of the Debtor are preclusive—as a matter of issue preclusion and/or claim
preclusion—of issues and/or claims raised in the Complaint, the Counterclaims, the Third
Assumption Motion and the Injunction Motions. The Court conclude[d] that the most
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efficient way to address these disputes is to adjudicate these legal issues first, pursuant to
one or more motions for summary judgment under Federal Rule of Civil Procedure 56.
See Adv. Dkt. 100; Bk III Dkt. 233. After this threshold issue is adjudicated, the Court can address any
outstanding discovery issues. Pending that decision, the Court ordered that "no additional motion
pertaining to discovery may be filed by the Debtor or Smart Capital" in the Third Bankruptcy Case or
Adversary Proceeding. Adv. Dkt. 100 at ¶ 3; Bk III Dkt. 233 at ¶ 3.12
On December 16, 2024, the Debtor filed the MPSJ, a declaration of McAbian and a request for
judicial notice. Bk III Dkts. 237, 238. On January 6, 2025, Smart Capital filed an opposition to the MPSJ
(the "Opposition"), together with declarations of Chang and Zachary Schorr, counsel for Smart Capital.
Bk III Dkt. 247. On January 20, 2025, the Debtor filed a reply to the Opposition. Bk III Dkt. 253. After
considering the oral arguments of counsel at multiple hearings, this matter is ripe for decision.
IV. LEGAL STANDARDS
A. Summary Judgment under Fed. R. Civ. P. 56
Summary judgment should be granted "if the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c);
Fed. R. Bankr. P. 7056 (incorporating Fed. R. Civ. P. 56).
The moving party has the burden of establishing the absence of a genuine issue of material fact.
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the absence of a genuine
issue of material fact, the nonmoving party must go beyond the pleadings and identify facts that show a
genuine issue for trial. Id. at 324. In determining whether a genuine issue of material fact exists, "'the
evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor.'"
Tolan v. Cotton, 572 U.S. 650, 651 (2014) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255
(1986)). To establish a genuine issue, the non–moving party "must do more than simply show that there
is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586 (1986); see also Anderson, 477 U.S. at 252 ("The mere existence of a scintilla of
12 In September 2025, Smart Capital attempted to circumvent this order by filing a motion to examine the Debtor's bank
pursuant to Federal Rule of Bankruptcy Procedure 2004, which the Court denied and declined to reconsider. Bk III Dkts. 331,
338, 339, 344.
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evidence in support of the [non–moving party]'s position will be insufficient."). Rather, the nonmoving
party must provide "evidence of such a caliber that 'a fair–minded jury could return a verdict for the
[nonmoving party] on the evidence presented.'" United States v. Wilson, 881 F.2d 596, 601 (9th Cir.
1989) (quoting Anderson, 477 U.S. at 252).
B. Assumption of Unexpired Lease Under 11 U.S.C. § 365
Bankruptcy Code section 365(a) provides that "the trustee, subject to the court's approval, may
assume or reject any executory contract or unexpired lease of the debtor." 11 U.S.C. § 365(a). In a
chapter 11 case, the debtor in possession may exercise this power. 11 U.S.C. § 1107(a). Section
365(b)(1), however, establishes some of the restrictions on this power:
If there has been a default in an executory contract or unexpired lease of the debtor, the
trustee may not assume such contract or lease unless, at the time of assumption of such
contract or lease, the trustee—
(A) cures, or provides adequate assurance that the trustee will promptly cure, such
default other than a default that is a breach of a provision relating to the satisfaction
of any provision (other than a penalty rate or penalty provision) relating to a default
arising from any failure to perform nonmonetary obligations under an unexpired
lease of real property, if it is impossible for the trustee to cure such default by
performing nonmonetary acts at and after the time of assumption, except that if such
default arises from a failure to operate in accordance with a nonresidential real
property lease, then such default shall be cured by performance at and after the time
of assumption in accordance with such lease, and pecuniary losses resulting from
such default shall be compensated in accordance with the provisions of this
paragraph;
(B) compensates, or provides adequate assurance that the trustee will promptly
compensate, a party other than the debtor to such contract or lease, for any actual
pecuniary loss to such party resulting from such default; and
(C) provides adequate assurance of future performance under such contract or lease.
11 U.S.C. § 365(b)(1).
Thus, a debtor in possession may assume a lease only if it: (A) cures the default (or provides
adequate assurances that it will); (B) provides compensation for any actual pecuniary loss resulting from
the default (or provides adequate assurances that it will); and (C) provides adequate assurances of future
performance under the lease. 11 U.S.C. § 365(b)(1)(A)–(C). If no default has occurred, section
365(b)(1)'s requirements—cure, compensation, and adequate assurances of future performance—are not
triggered. See Hawkeye Ent., LLC, 49 F.4th at 1236.
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V. DISCUSSION
The Debtor asserts that Smart Capital, in opposing the pending Third Assumption Motion, is
precluded from asserting any defaults that may have existed under the Lease prior to the assumption of
that Lease in 2014 and 2020.13 The Debtor makes four principal arguments. The first three arguments are
premised on distinct but related doctrines that preclude a party from litigating a matter based on a prior
litigation and/or adjudication by a court: (i) the collateral attack doctrine, (ii) claim preclusion, and (iii)
issue preclusion. The fourth argument is premised on a voluntary settlement and release of claims
between the parties in 2014.
A. Collateral Attack Doctrine
The Debtor contends that Smart Capital's assertion of defaults that may have existed prior to
entry of the 2020 Assumption Order is barred as an impermissible collateral attack on that order. The
Court agrees.
"The legal system and society generally have a significant interest in the finality of court orders
and judgments. In turn, this interest requires that federal court orders carry the full force of law unless
and until extinguished through appropriate processes." Foster v. First Interstate Bank (In re Shoot the
Moon, LLC), 642 B.R. 21, 23 (Bankr. D. Mont. 2022) (footnotes omitted). One such process is a direct
appeal. Id. at 24. Another, less direct challenge, is a motion for relief from an order or judgment under
Federal Rule of Civil Procedure 60(b). Id.
Otherwise, "collateral attacks on the judgments, orders, decrees or decisions of federal courts are
improper." Mullis v. U.S. Bankr. Ct. for Dist. of Nev., 828 F.2d 1385, 1393 (9th Cir. 1987) (citing Brown
v. Baden, 815 F.2d 575, 576-77 (9th Cir. 1987)) (affirming district court's denial of injunctive relief
against bankruptcy court as improper collateral attack).
Unlike a direct appeal, a collateral attack questions the validity of a judgment or order in a
separate proceeding that is not intended to obtain relief from the judgment. 18 Moore's
Federal Practice, § 131.02[2]. It seeks, through the second suit, to avoid or evade the earlier
judgment, or to deny its force and effect. Even where the second action has an independent
purpose and contemplates some other relief, it is a collateral attack if, in some fashion, it
would overrule a previous judgment.
13 Because the Court concludes below that the 2020 Assumption Order acts as a bar to asserting all defaults preceding its
entry, the Court only analyzes the preclusive effect of the 2020 Assumption Order. The preclusion of defaults preceding entry
of the 2020 Assumption Order necessarily includes all defaults that would have preceded the earlier 2014 Assumption Order.
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Uecker & Assocs., Inc. v. L.G. Hunt & Assocs., Inc. (In re Am. Basketball League, Inc.), 317 B.R. 121,
128 (Bankr. N.D. Cal. 2004). "This collateral attack doctrine prevents courts from effectively overruling
or altering final orders via indirect routes and is firmly grounded on the need for finality." Shoot the
Moon, LLC, 642 B.R. at 24 (citing Am. Basketball League, Inc., 317 B.R. at 128) (footnote omitted).
Moreover, this doctrine "applies equally in the bankruptcy context." Id. & n.12 (citing authorities).
The decretal language of the 2020 Assumption Order not only approves assumption of the Lease
under Bankruptcy Code section 365(a) but also expressly "deems" the Lease "reinstated … as if no
default exists or ever existed." Bk I Dkt. 242 at 4; Bk II Dkt. 230 at 4. Smart Capital's present effort to
litigate the existence of prior defaults under the Lease is an impermissible collateral attack on the 2020
Assumption Order.
The 2020 Assumption Order was appealed by Smart Capital but ultimately affirmed by the Ninth
Circuit Court of Appeals. Although the Court of Appeals found that the Court used the wrong legal
standard, it found the error harmless and affirmed the 2020 Assumption Order without alteration to any
decretal provision. Hawkeye Ent., LLC, 49 F.4th 1232. Furthermore, the time to seek relief under Federal
Rule of Civil Procedure 60(b) has long since expired.
Smart Capital argues that it is not bound by the 2020 Assumption Order because, at that time,
defaults existed that it was not aware of and therefore did not assert in opposition to the Second
Assumption Motion. But the argument is unavailing. The express language of the 2020 Assumption
Order "deems" the Lease reinstated "as if" no such defaults "ever existed." In other words, the operative
language of the order declares that going forward, any prior default will be treated as if it never existed.
Smart Capital's attempt to litigate the existence and nature of prior defaults here is in direct contradiction
of that judicial declaration.
That Smart Capital may contend this language was improper or unjustified is unpersuasive. Even
an order premised on legal error may not be collaterally attacked. See United Student Aid Funds, Inc. v.
Espinosa, 559 U.S. 260, 275 (2010) (bankruptcy court order discharging student loan debt was legal
error but nevertheless enforceable against creditor that had notice of error and failed to timely object or
appeal). The Debtor gave Smart Capital notice of the provisions proposed to be used in the 2020
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Assumption Order, and Smart Capital did not object to such use. See Bk II Dkt. 228 (Debtor's notice of
lodgment of proposed 2020 Assumption Order); Bankr. C.D. Cal. Local R. 9021-1(b)(3) (providing
procedure to file objection to form of lodged order). The Court subsequently issued the 2020
Assumption Order without altering the Debtor's proposed language. Compare Bk II Dkt. 228 with Bk II
Dkt. 230. Smart Capital appealed that order, and the Court of Appeals affirmed it without alteration. The
order is now final and binding on Smart Capital.
Accordingly, pursuant to the express terms of the 2020 Assumption Order, Smart Capital is
barred from asserting any defaults under the Lease that may have existed at the time the 2020
Assumption Order was entered.
B. Claim Preclusion
The doctrine of res judicata, more recently referred to as claim preclusion,14 prohibits relitigation
"of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of
whether they were asserted or determined in the prior proceeding." Lucky Brand Dungarees, Inc. v.
Marcel Fashions Grp., Inc., 590 U.S. 405, 4121 (2020) (quoting Brown v. Felsen, 442 U.S. 127, 131
(1979)). "A final judgment on the merits of an action precludes the parties or their privies from
relitigating issues that were or could have been raised in that action." Federated Dep't Stores, Inc. v.
Moitie, 452 U.S. 394, 398 (1981) (citing Commissioner v. Sunnen, 333 U.S. 591, 597 (1948)).
"The preclusive effect of a federal-court judgment is determined by federal common law." Taylor
v. Sturgell, 553 U.S. 880, 891 (2008) (citing Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497,
507–08 (2001)). Under federal law, application of the claim preclusion doctrine requires: (1) an identity
of claims; (2) a final judgment on the merits; and (3) the same parties or privity between parties. Owens
v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 713 (9th Cir. 2001). "[T]he proponent of preclusion
has both the burden of persuasion and the correlative risk of non-persuasion." George v. City of Morro
14 "Although the Latin terms 'res judicata' and 'collateral estoppel' historically have been used to describe preclusion
principles generally, in modern usage these terms have been retitled and their distinct meanings emphasized. 'Res judicata' is
now referred to as claim preclusion, and 'collateral estoppel' is referred to as issue preclusion." Yaikian v. Yaikian (In re
Yaikian), 508 B.R. 175, 182 (Bankr. S.D. Cal. 2014); see also Taylor v. Sturgell, 553 U.S. 880, 892 n.5 (2008) ("These terms
have replaced a more confusing lexicon.").
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Bay (In re George), 318 B.R. 729, 737 (B.A.P. 9th Cir. 2004) (citing Educ. Credit Mgmt. Corp. v. Repp
(In re Repp), 307 B.R. 144, 148 n.3 (B.A.P. 9th Cir. 2004)).
The Debtor argues the doctrine of claim preclusion prohibits Smart Capital from asserting in this
case any defaults under the Lease in existence prior to the 2020 Assumption Order—even defaults that it
did not assert at the time. The Debtor argues that because Smart Capital had the opportunity to assert
such defaults as defenses to (i.e., in opposition to) the Second Assumption Motion, it should be barred
from asserting any such defaults now. In contrast, Smart Capital argues that claim preclusion should not
apply here and that it should be free to assert any defaults that have ever existed under the Lease,
irrespective of its prior litigation of the Second Assumption Motion.
The parties do not dispute that the same parties are involved here that were involved in the prior
litigation. The parties disagree, however, on the other two elements: whether there is an identity of
claims and a final judgment on the merits. The Court concludes below that the remaining elements are
satisfied.
1. Identity of Claims
The Ninth Circuit Court of Appeals has adopted a four-factor test for determining whether there
is an "identity of claims" for purposes of claim preclusion: "'(1) whether the two suits arise out of the
same transactional nucleus of facts; (2) whether rights or interests established in the prior judgment
would be destroyed or impaired by prosecution of the second action; (3) whether the two suits involve
infringement of the same right; and (4) whether substantially the same evidence is presented in the two
actions.'" Warfield v. Nance (In re Nance), 156 F.4th 961, 966 (9th Cir. 2025) (quoting Mpoyo v. Litton
Electro-Optical Sys., 430 F.3d 985, 987 (9th Cir. 2005)).
These factors are meant to be flexible; "identity of causes of action 'cannot be determined
precisely by mechanistic application of a simple test.'" Costantini v. Trans World Airlines, 681 F.2d
1199, 1202 n.7 (9th Cir. 1982) (quoting Abramson v. Univ. of Haw., 594 F.2d 202, 206 (9th Cir. 1979)).
Moreover, the transactional nucleus of facts factor "is the most important." Id. at 1202 (citing Harris v.
Jacobs, 621 F.2d 341, 343 (9th Cir. 1980)).
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This case presents the unusual situation in which a chapter 11 debtor is seeking the same relief,
under the same statute, with respect to the same unexpired lease, in a subsequent chapter 11 case. The
typical claim preclusion problem requires the Court to compare two civil complaints and assess whether
there is an identity of claims between causes of action asserted in each complaint. Nevertheless, claim
preclusion applies in bankruptcy and "'must be properly tailored to the unique circumstances that arise
when the previous litigation took place in the context of a bankruptcy case.'" Alary Corp. v. Sims (In re
Associated Vintage Grp., Inc.), 283 B.R. 549, 558–59 (B.A.P. 9th Cir. 2002) (quoting E. Minerals &
Chems. Co. v. Mahan, 225 F.3d 330, 337 (3rd Cir. 2000)).
Faithful application of the applicable legal standards demonstrates that there is an "identity of
claims" between the prior and current lease assumption litigation.
a. Transactional Nucleus of Facts
The Second and Third Assumption Motions share a common transactional nucleus of facts.
Under Bankruptcy Code section 365(a), the entitlement of a debtor in possession to assume a lease
depends on the debtor's status as lessee, the validity of the lease, and the unexpired status of that lease.
Under Bankruptcy Code section 365(b)(1), assumption is conditioned on the existence, nature and extent
of defaults under the lease and whether the debtor in possession has taken (or will take) certain curative
or compensatory measures with respect to those defaults.
In the Second Bankruptcy Case, Smart Capital opposed the Second Assumption Motion. Smart
Capital had approximately one year to conduct discovery and participated in a four-day evidentiary
hearing focused on the very issues contemplated by section 365(b)(1). As the lessor opposing the
Debtor's assumption of the Lease, Smart Capital had the opportunity to assert and demonstrate all
defaults that may have occurred under the Lease during the eleven-year period in which the Debtor was
lessee of the Premises, and to demand satisfaction of the curative and compensatory provisions of
section 365(b)(1).
In its opposition to the Third Assumption Motion in this case, Smart Capital wants to take
discovery and litigate the existence of defaults that may have existed both before and after entry of the
2020 Assumption Order. Its effort to litigate the existence and significance of such defaults is based on
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the very same transactional nucleus of facts at issue in the Second Bankruptcy Case: the conduct of the
Debtor and its subtenant with respect to the operation and maintenance of the Premises during the period
preceding the 2020 Assumption Order.
Naturally, Smart Capital could not raise in the prior case any conduct that had not yet occurred.
Thus, the conduct of the Debtor and its subtenant that may constitute a default following entry of the
2020 Assumption Order is not part of the common transactional nucleus of facts and is not subject to
claim preclusion.
Pointing to the text of section 365(b)(1), Smart Capital insists that it should be permitted to
litigate and oppose assumption here based on any defaults that have occurred at any time under the
Lease. Bk. III Dkt. at 10-11. In Hawkeye Entertainment, LLC, the Court of Appeals noted that the
curative provisions of the statute are triggered "[i]f there has been a default." 49 F.4th at 1237 (quoting
11 U.S.C. § 365(b)(1)) (emphasis added). The Court of Appeals held that "[u]sing the present-perfect
tense in this this way refers to situations where a default has occurred regardless of whether that default
has been resolved or is ongoing." Id. Thus, Smart Capital argues that it should be able to rely on any
default in the past to support its opposition to the Third Assumption Motion.
But its argument conveniently ignores the doctrine of claim preclusion. Whatever the scope of
section 365(b)(1), claim preclusion intervenes to provide finality and conserve judicial resources on
"issues that were or could have been raised" in prior litigation under that statute. See Federated Dep't
Stores, Inc., 452 U.S. at 398. In most cases, this would not be an issue because a motion seeking
assumption of a lease normally is the first and only time those issues have been litigated. But this is not
most cases. Here, Smart Capital had a full and fair opportunity to litigate, in a prior bankruptcy case, all
defaults that may have existed at the time—which make up the transactional nucleus of facts.15
15 Smart Capital makes a slightly different but related argument that fares no better. Smart Capital contends that it must be
able to conduct discovery into and assert defaults that occurred prior to the entry of the 2020 Assumption Order because those
alleged defaults—i.e., all defaults since the inception of the Lease—are relevant to the requirement that the Debtor provide
"adequate assurance of future performance" under Bankruptcy Code section 365(b)(1)(C). Again, the argument misses the
point. Together, the 2020 Assumption Order and the Court of Appeals' decision affirming that order concluded
(notwithstanding certain harmless errors) that the requirements of section 365(b)(1) were essentially satisfied. By operation
of claim preclusion, Smart Capital is now barred from litigating under section 365(b)(1)(C) the adequate assurance issue with
respect to any defaults that preceded entry of that order.
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b. Impairment of Established Rights and Interests
Before it can approve a debtor's assumption of an unexpired lease, the bankruptcy court must
find that the curative requirements of section 365(b)(1) have been satisfied with respect to defaults under
the lease. See Hawkeye Ent., LLC, 49 F.4th at 1236–37. Otherwise, the statute does not permit
assumption. See id. Thus, the Court could not have issued the 2020 Assumption Order unless, at that
time, it determined that the Debtor had cured any defaults under the Lease.
Permitting Smart Capital to turn back the clock, relitigate the issue, and assert defaults it did not
raise at the time would call into question the very premise on which that order was entered, the rights
that were granted to the Debtor under the order, and the grounds on which the order was affirmed on
appeal. Doing so also would undermine the Court's order confirming the Debtor's chapter 11 plan in the
Second Bankruptcy Case, which order expressly relied on the entry of the 2020 Assumption Order as a
material component and enabled the Debtor to reorganize its business affairs.
c. Infringement of the Same Right
The rights involved in the Second and Third Assumption Motions are identical. In both instances,
the Debtor is asserting its right as a debtor in possession to assume the Lease under section 365(a),
subject to the requirements of section 365(b)(1). In opposition, Smart Capital is asserting its rights to
curative relief under section 365(b)(1). The rights are being asserted in separate bankruptcy cases and at
separate moments in time, but the rights themselves are identical.
d. Substantially Same Evidence
In the prior case, the universe of relevant evidence covered the Debtor's conduct as a lessee
under the Lease since at least 2014 through its assumption in 2020. But for the application of claim
preclusion principles, the universe of relevant evidence would cover the same period and extend further
into the present. The resulting overlap would be substantial and would encompass evidence that was or
could have been presented in the prior case.
2. Final Judgment on the Merits
The 2020 Assumption Order is a final judgment on the merits. As noted, Smart Capital appealed
the 2020 Assumption Order, which the Ninth Circuit Court of Appeals affirmed in a detailed opinion that
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addressed the merits of the order. See Hawkeye Ent., LLC, 49 F.4th 1232. Smart Capital nevertheless
argues that the 2020 Assumption Order is not a "final judgment on the merits" because the Court of
Appeals held that the Court had incorrectly limited the curative requirements of section 365(b)(1) to
"material" defaults. Id. at 1237.
Smart Capital is wrong. The Court of Appeals ultimately found that the error was harmless
because the Court had determined that all defaults by the Debtor had been cured as of the time of
assumption and that any adequate assurance required by the Debtor's defaults would not have implicated
Smart Capital's substantive rights. Id. at 1240-41. Based on that finding, the Court of Appeals affirmed.
Nothing in the Court of Appeals' decision alters the finality of the 2020 Assumption Order or alters its
nature as a decision on the merits.
3. The Effect of Claim Preclusion
For the foregoing reasons, the Court concludes that claim preclusion applies here. Based on the
litigation that culminated in the 2020 Assumption Order, Smart Capital is barred from asserting—in
opposition to assumption of the Lease in this case—any default thereunder that may have existed prior
to entry of the 2020 Assumption Order, regardless of whether it was previously raised. See Federated
Dep't Stores, Inc. v. Moitie, 452 U.S. at 398 (claim preclusion "precludes the parties or their privies from
relitigating issues that were or could have been raised in [the prior] action"). Conversely, any Lease
default that has occurred after entry of the 2020 Assumption order is not barred.
This result is not surprising. Courts repeatedly have barred the nondebtor party to an unexpired
lease or executory contract from asserting in a subsequent action any default that it failed to raise prior
to assumption. See, e.g., Arriva Pharms., Inc. v. Lezdey (In re Arriva Pharms., Inc.), 456 B.R. 419, 424–
25 (Bankr. N.D. Cal. 2011) (barring assertion of breaches under executory license agreement that were
not raised in opposition to assumption of agreement under chapter 11 plan); NCL Corp. v. Lone Star
Bldg. Ctrs. (E.) Inc., 144 B.R. 170, 179 (S.D. Fla. 1992) (barring environmental cleanup claims under
lease against lessee that were not asserted in opposition to assumption of lease by predecessor chapter 11
debtor); Georgia Ports Auth. v. Diamond Mfg. Co. (In re Diamond Mfg. Co.), 164 B.R. 189, 199 (Bankr.
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S.D. Ga. 1994) (barring environmental indemnity claims under lease that were not asserted in opposition
to lease assumption).
Smart Capital contends that it should not be precluded from asserting two specific defaults under
the Lease because, at the time of the 2020 Assumption Order, Smart Capital was not aware of the
underlying facts, could not have been aware of them, and was prevented from becoming aware of them
by Debtor's purported concealment of them. See Bk III, Dkt. 247 at 30-33.
Smart Capital's first contention is that the Debtor (or its subtenant) made alterations to the
Premises in violation of the Lease prior to entry of the 2020 Assumption Order. Smart Capital argues
that it was not aware of these alterations because the Debtor did not provide appropriate notice and/or
request permission, as required by the Lease. Smart Capital contends it only began to make inquiries
into this matter when a ceiling tile at the Premises fell in 2024. Smart Capital suggests that it was
unaware of any alterations made in breach of the Lease prior to issuance of the 2020 Assumption Order
and therefore could not have raised them as an objection to the Second Assumption Motion.
Smart Capital's second contention is that the Debtor's subtenant has been violating the Lease by
serving alcohol without the necessary approval of the City of Los Angeles. Its argument is based on
tortured logic, but goes something like this: (i) McAbian, the principal of the Debtor and its subtenant,
WERM, secured City permission to serve alcohol under the prior authorization, called CUB-PA4, by
making fraudulent representations to the City of Los Angeles, (ii) McAbian improperly recorded the
CUB-PA4 document in the records of the Los Angeles County Recorder's Office, (iii) based on the
foregoing, the CUB-PA4 was void ab initio (even though it was never revoked by the issuing agency
and Smart Capital did not seek to revoke it until after it had expired), and (iv) therefore, the Debtor's
subtenant has been serving alcohol in violation of the Lease since 2013. Smart Capital contends that it
was unaware of the circumstances giving rise to these arguments during the Second Bankruptcy Case.
The Court is not persuaded. First, generally, a party's prior lack of knowledge, or its subsequent
discovery of new evidence, is not an exception to the application of claim preclusion. See Constantini v.
Trans World Airlines, 681 F.2d 1199, 1202-03 (9th Cir. 1982) (holding that exception to claim preclusion
not available where precluded party did not allege any efforts in prior suit to discover purportedly
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concealed information); see also Hudson v. Hedge, 27 F.3d 274, 276 (7th Cir. 1994); Saud v. Bank of
New York, 929 F.2d 916, 920 (2nd Cir. 1991). Second, it is not clear in the Ninth Circuit whether there is
a "fraudulent concealment exception" to claim preclusion. Constantini, 681 F.2d at 1202-03 (declining
to decide that legal question but nevertheless rejecting appellant's contention that there were adequate
allegations to sustain a finding of concealment). Third, even assuming such an exception exists, the
Court is not persuaded by any evidence in the summary judgment record that Smart Capital was
prevented or otherwise unable to discover in the prior case the facts on which these defaults are now
asserted.
As for alleged alterations to the Premises, Smart Capital had ample opportunity during the
Second Bankruptcy Case to discover the evidence it belatedly seeks in this case. As noted, in the Second
Bankruptcy Case, Smart Capital had nearly a year to conduct formal discovery under the Federal Rules
of Civil Procedure. Among other things, those rules provide for both the production of documents and
the entering onto land for purposes of inspection. See Fed. R. Civ. P. 34; Fed. R. Bankr. P. 7034
(incorporating Fed. R. Civ. P. 34). And even before the Second Assumption Motion was filed, Smart
Capital had the right as lessor to inspect and examine the Premises on 24 hours' notice. Bk III Dkt. 237
at 20 (Lease Section 10.2). The evidence in the summary judgment record does not substantiate or even
raise a material dispute suggesting that Smart Capital was prevented from exercising these rights prior to
the four-day trial on the Second Assumption Motion. The declaration testimony of Chang offered in
opposition to the MPSJ does describe his thought process in wanting to explore the issue of alterations
to the Premises following the detachment of a ceiling tile in 2024, but it does not support the contention
that Smart Capital could not have discovered any alterations that existed at the time of the Second
Assumption Motion. See Bk III Dkt. 247-1 at 11-12 (¶¶ 56-67).
Likewise, the summary judgment record does not support the contention that Smart Capital could
not have conducted discovery in the prior case regarding its theory that CUB-PA4 authorizing alcohol
sales was somehow invalid. The CUB-PA4 was issued by the City of Los Angeles in 2013. If Smart
Capital had any concerns about the bona fides of the CUB-PA4—or was looking for any possible
defaults on which to challenge the Second Assumption Motion, as it appears to be doing—Smart Capital
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could have easily conducted discovery into the issuance of that approval. Nothing about the facts it
claims to have recently discovered were concealed or otherwise unavailable. Indeed, the Master
Covenant recorded against the Premises pursuant the CUB-PA4, which is central to Smart Capital's
theory, is literally a public record. See Bk III Dkt. 247-6 at 124–35. The Master Covenant was recorded
at the Los Angeles County Recorder's Office in 2013. Nothing in the summary judgment record
establishes that Smart Capital could not have found this document by way of a routine search of real
property records.
Smart Capital had a full and fair opportunity to discover and assert any default that may have
existed prior to entry of the 2020 Assumption Order. Claim preclusion bars Smart Capital from doing so
now.
C. Issue Preclusion
The doctrine of collateral estoppel, now referred to as issue preclusion, "generally refers to the
effect of a prior judgment in foreclosing successive litigation of an issue of fact or law actually litigated
and resolved in a valid court determination essential to the prior judgment, whether or not the issue
arises on the same or a different claim." New Hampshire v. Maine, 532 U.S. 742, 749 (2001); see also
Oyeniran v. Holder, 672 F.3d 800, 806 (9th Cir. 2012).
"The burden is on the party seeking to rely upon issue preclusion to prove each of the elements
have been met." Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1050–51 (9th Cir. 2008). "This means
providing 'a record sufficient to reveal the controlling facts and pinpoint the exact issues litigated in the
prior action.'" Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456, 462 (B.A.P. 9th Cir. 2015)
(quoting Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (B.A.P. 9th Cir. 1995), aff'd, 100 F.3d 110 (9th
Cir. 1996)).
"The preclusive effect of a federal-court judgment is determined by federal common law." Taylor
v. Sturgell, 553 U.S. at 891 (2008). The requirements for issue preclusion under federal common law
are:
(1) there was a full and fair opportunity to litigate the issue in the previous action;
(2) the issue was actually litigated in that action;
(3) the issue was lost as a result of a final judgment in that action; and
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(4) the person against whom issue preclusion is asserted in the present action was a party
or in privity with a party in the previous action.
U.S. Internal Revenue Svc. v. Palmer (In re Palmer), 207 F.3d 566, 568 (9th Cir. 2000).
The Debtor argues that, in connection with the Section Assumption Motion, the Court
determined the nature and extent of the Lease defaults existing at the time. As such, the Debtor argues
that Smart Capital is barred by issue preclusion from relitigating those issues.
The 2020 Assumption Order is a federal court judgment, so federal common law on issue
preclusion controls. See Taylor v. Sturgell, 553 U.S. at 891. Regarding the first element, as a creditor in
the Second Bankruptcy Case, Smart Capital had a full and fair opportunity to litigate the existence of
defaults prior to the 2020 Assumption Order. The parties conducted "extensive" discovery for nearly a
year. Hawkeye Ent., LLC, 625 B.R. at 757; Bk II Dkts. 111, 164. As for the second element, Smart
Capital actually did litigate the existence of such defaults by opposing the Second Assumption Motion,
participating in a four-day trial on it, and unsuccessfully appealing the result of that trial to the Ninth
Circuit Court of Appeals. As noted above, the 2020 Assumption Order is a final judgment. Finally, Smart
Capital does not contest that it was a party to and participated extensively in the Second Bankruptcy
Case.
Accordingly, even if application of the claim preclusion doctrine did not bar Smart Capital from
asserting any default under the Lease that may have existed prior to entry of the 2020 Assumption Order,
the doctrine of issue preclusion does.
D. Voluntary Settlement and Release of Claims
The Debtor argues that the New Vision Settlement, which the Court approved in the 2014
Settlement Order, constitutes a general release between the Debtor and Smart Capital's predecessor
regarding any claimed breaches or defaults, both known and unknown, based on actions that occurred
prior to entry of the 2014 Settlement Order. Bk III Dkt. 236 at 30-31; Bk III Dkt. 253 at 21-24. Relying
on the enumerated list of claims released in Section 10(a) of the New Vision Settlement, Smart Capital
contends that the New Vision Settlement constitutes a "limited release," and that Smart Capital's
predecessor did not release claims related to the Debtor's alleged "construction on the Premises, use of
the Premises for an unlawful purpose, or fraudulently applying for the CUB-PA4." Bk III Dkt. 247 at 31.
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Smart Capital offers no legal authorities in support of its narrow interpretation of the New Vision
Settlement. Id.
The New Vision Settlement states that the Bankruptcy Code and California law governs its
interpretation. Bk I Dkt. 226-1 at 8. When interpreting a contract under California law, "[t]he whole of a
contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause
helping to interpret the other." Cal. Civ. Code § 1641; see also Cal. Civ. Proc. Code § 1858 ("where
there are several provisions or particulars, such a construction is, if possible, to be adopted as will give
effect to all."). Where general and specific provisions are inconsistent, the specific provision will
control, Cal. Civ. Proc. Code § 1859; however, "[p]articular clauses of a contract are subordinate to its
general intent." Cal. Civ. Code § 1650. The apparent main purpose of the parties is to be given effect.
See Cal. Civ. Code §§ 1652, 1653, 1648.
Here, the intent of the parties in the New Vision Settlement is unambiguous per its terms. The
parties' mutual intent was to "fully and forever" "resolv[e] all disputes between them" and "to effectuate
a full and complete release of any and all claims for relief, whether known or unknown, that may be
asserted by them against each other." Bk I Dkt. 226-1 at 6-7 (§§ 10(a), (c)). When giving effect to this
main purpose, the result is obvious: Smart Capital is precluded from raising any default under the Lease
that may have existed prior to entry of the 2014 Settlement Order.
While the New Vision Settlement does include an enumerated list of claims that the parties
contemplate being waived pursuant to the general release, that particular clause is subordinate to the
general intent of the New Vision Settlement. See Cal. Civ. Code § 1650. Moreover, the language
preceding that list is particularly instructive: "the Parties … hereby fully and forever release each other
… from any and all claims … which they have, or could claim to have against each other arising from or
related to: … (2) all claims alleged in, or related to the [First] Assumption Motion…." Bk I Dkt. 226-1 at
6 (emphasis added). Contrary to Smart Capital's assertions, this broad language means that the parties'
waiver does not concern solely the issues that the parties had raised in the litigation and contested
matters pending between them at the time they executed the New Vision Settlement (e.g., solely the
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defaults actually alleged in New Vision's opposition to the First Assumption Motion). Instead, the
parties' waiver includes any issues that they could have raised.
As noted previously, in opposition to the First Assumption Motion, Smart Capital's predecessor
could have raised any default under the Lease that may have existed prior to entry of the 2014
Settlement Order. The New Vision Settlement contemplates waiver of Smart Capital's right to raise all
such defaults, regardless of whether those alleged defaults were "known or unknown, suspected or
unsuspected." See id. at 6-7 (§§ 10(a), (b)).
The New Vision Settlement contains only two exceptions to the parties' general release: (i) "the
parties' rights and obligations under the Lease and the First Amendment," and (ii) the "claims, if any,
that any Party may have against Pax or its principals." Bk I Dkt. 226-1 at 6 (§ 10(a)). Only the first
exception is relevant here. Pursuant to that exception, Smart Capital's predecessor did not waive Smart
Capital's rights to assert Lease defaults that allegedly occurred after entry of the 2014 Settlement Order.
Accordingly, Smart Capital is barred from asserting any defaults under the Lease that may have existed
at the time the 2014 Settlement Order was entered.
VI. CONCLUSION
As set forth above, the Debtor has met its burden of showing that there is no genuine issue of
material fact that Smart Capital is precluded from asserting or seeking discovery on alleged defaults
existing under the Lease prior to entry of the 2020 Assumption Order.16 Smart Capital is not precluded
from asserting defaults under the Lease occurring after entry of the 2020 Assumption Order.
Accordingly, the Court will enter a separate order granting the MPSJ.
16 This necessarily includes any alleged defaults existing at the time the 2014 Assumption Order and the 2014 Settlement
Order were entered.
Date: December 8, 2025
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