Best Western International, Inc. v. Fish Creek Holdings, LLC, et al

Filing 31

ORDER, Defendant Sue Martinsen is hereby dismissed from this case; Plaintiff's motion/memorandum for default judgment 30 is denied; Plaintiff shall, on or before 5/2/11, file a memorandum advising the Court of how it wishes to proceed in this case. Signed by Judge David G Campbell on 4/11/11. (REW)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Best Western International, Inc.,

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Plaintiff,

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vs.

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Fish Creek Holdings, LLC, et al.,

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Defendants.

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No. CV10-0740 PHX DGC

ORDER

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On February 7, 2011, this Court denied Plaintiff’s motion for default judgment against

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defendants without prejudice and ordered Plaintiff to file a memorandum showing cause why

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the case should not be dismissed and the claims adjudicated in Defendant Martinsen’s

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bankruptcy adversary action.

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memorandum and renewed motion for default judgment against Defendant Fish Creek

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Holdings, LLC (“Fish Creek”) on February 11, 2011. Doc. 30.

Doc. 29.

Plaintiff complied by filing a combined

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Plaintiff concedes that its claims against Defendant Sue Martinsen should be

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dismissed in light of the latter’s bankruptcy petition. Doc. 30 at 3:1-2. Good cause

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appearing, Defendant Sue Martinsen will be dismissed from this case.

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Plaintiff also moves anew for default judgment against Fish Creek. Doc. 30 at 6. In

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its February 7 order (“the Order”), the Court noted that Plaintiff’s complaint identified Henry

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Martinsen, Defendant Sue Martinsen’s husband, as the “owner” of Fish Creek. Doc. 29 at 1.

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The Court observed that to the extent Fish Creek represents property of the Martinsen

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bankruptcy estate, Plaintiff’s motion for default judgment runs counter to the automatic stay

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of 11 U.S.C. § 362(a). In its memorandum, Plaintiff argues for the first time that the

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Martinsens’ bankruptcy petition does not disclose any ownership interest in Fish Creek

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(Doc. 30 at 4), suggests that such disclosure failure may be an oversight (id. at 5:9), and

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implies that its initial belief as to the ownership of Fish Creek could have been mistaken (id.

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at 5:2). Plaintiff also asserts that Fish Creek was dissolved on January 7, 2011, that another

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entity named Fish Creek Management, LLC was also dissolved on the same date, and that

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the Martinsens had a 50% interest in the latter entity. Doc. 30 at 4. Finally, Plaintiff argues

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that even if the Martinsens had an ownership interest in Defendant Fish Creek, the automatic

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stay of § 362(a) would not preclude judgment against Fish Creek because the latter is not a

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debtor. Doc. 30 at 2. Plaintiff cites for support to Groner v. Miller (In re Miller), 262 B.R.

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499, 503-04 (B.A.P. 9th Cir. 2001), In re Chugach Forest Products, Inc., 23 F.3d 241, 246

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(9th Cir. 1994), and In re Advanced Ribbons & Office Products, Inc., 125 B.R. 259, 263

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(B.A.P. 9th Cir. 1991). Doc. 30 at 2, 5.

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Moreover, Plaintiff’s contention that the bankruptcy stay would not apply against Fish

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Creek even if bankruptcy-debtor Henry Martisen was the owner of Fish Creek is tenuous.

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The Ninth Circuit has held, for example, that a debtor’s pre-foreclosure right to redeem a

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note is property of the estate, and that a creditor who moves to lift the stay has the “burden

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of proof on the question of a debtor’s lack of equity in property.” In re Bialac, 712 F.2d 426,

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430-32 (9th Cir. 1983). The Bialac court recognized that even options or contingent interests

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are “property of the bankruptcy estate.” Id. at 431. It follows, therefore, that a bankruptcy-

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debtor’s significant interest in an LLC is property of the bankruptcy estate. See Segal v.

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Rochelle, 382 U.S. 375, 379 (1966) (“The main thrust of [11 U.S.C. § 541] is to secure for

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creditors everything of value the bankrupt may possess in alienable or leviable form when

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he files his petition.

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generously . . . .”). It also follows that to the extent a judgment against Fish Creek would

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substantially reduce the value of the Martinsen bankruptcy estate, entertaining such a

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judgment may run contrary to the principles of the automatic stay.

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To this end the term ‘property’ has been construed most

Out-of-circuit case law provides further persuasive considerations related to this point.
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The Fourth Circuit has held in A.H. Robins Co. v. Piccinin that an automatic stay may apply

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to non-debtors in “unusual circumstances,” such as occur when “there is such identity

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between the debtor and the third-party defendant that the debtor may be said to be the real

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party defendant and that a judgment against the third-party defendant will in effect be a

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judgment or finding against the debtor.” 788 F.2d 994, 999 (4th Cir. 1986). The Ninth

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Circuit has declined to adopt this rule in cases where the rule was not dispositive, but it has

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not completely closed the door on this principle. E.g., In re Chugach, 23 F.3d at 247.

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The Court does not have before it sufficient facts to assess whether the “unusual

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circumstances” rule would or would not apply with respect to Fish Creek. With regard to the

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“identity between the debtor and the third-party defendant,” Plaintiff is ambiguous as to the

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extent of bankruptcy debtors’ interest in Fish Creek. The complaint identifies Henry

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Martinsen as the owner of Fish Creek (Doc. 1 ¶ 23), an allegation Defendant Sue Martinsen

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admitted (Doc. 12 at 2). This would imply complete ownership by debtor Henry Martinsen

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and could trigger the “unusual circumstances” rule. Plaintiff’s most recent memorandum is

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ambivalent, as discussed above. Plaintiff could have conducted discovery to ascertain this

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fact from debtors themselves. In re Miller, 262 B.R. 499, 507 (B.A.P. 9th Cir. 2001)

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(holding that discovery subpoenas may issue to a bankruptcy debtor as a third-party witness

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in a case against a non-debtor).

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Plaintiff’s cited case law does not support a different conclusion. In re Advanced

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Ribbons held that foreclosure of a shareholder’s interest in a debtor corporation does not

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violate the bankruptcy stay. 125 B.R. at 264. In re Chugach held that an in rem seizure of

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a vessel that did not belong to debtor but carried debtor’s cargo did not violate the automatic

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stay against debtor’s estate because the vessel was not the property of the debtor, was a

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distinct person-defendant in a maritime in rem action under admiralty law, and unloading of

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debtor’s cargo was not possible after the vessel was arrested. 23 F.3d at 245-47. And In re

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Miller concerned the issue of whether subpoenas to a debtor third-party witness in litigating

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claims against a non-debtor violated the stay against debtor. 262 B.R. at 505-07. None of

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the aforementioned cases address the issue and facts in this case.
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In sum, Plaintiff has failed to persuade the Court that default judgment against Fish
Creek is proper. The motion will be denied for the reasons stated above.

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IT IS ORDERED:

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1.

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Defendant Sue Martinsen is hereby dismissed from this case. The Clerk
shall update the docket accordingly.

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2.

Plaintiff’s motion for default judgment (Doc. 30) is denied.

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3.

Plaintiff shall, on or before May 2, 2011, file a memorandum advising the

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Court of how it wishes to proceed in this case.
DATED this 11th day of April, 2011.

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