Stephens v. Williams et al
ORDER reversing the substitution Order on the effective date in Case No. 4:13-cv-547. No-automatic-termination order in Case No. 4:13-cv-499 affirmed. Order denying relief from the stay in Case No. 4:14-cv-201 affirmed. Signed by Judge D. P. Marshall Jr. on 9/29/2014. (jak)
IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF ARKANSAS
JAMES J. NAPLES, Assignee of
Pinewood Enterprises and
RENEE S. WILLIAMS, Chapter 7
Trustee, LHSW; MICHAEL E.
COLLINS, Chapter 11 Trustee; ESTATE
OF WANDA J. STEPHENS; DAVID
KIMBRO STEPHENS, Individually and on
behalf of the A. K. Tennessee Irrevocable Trust,
the Kimbro Stephens Insurance Trust, and their
equitable beneficiaries; A. K. TENNESSEE
IRREVOCABLE TRUST; UNITED STATES
TRUSTEE; KIMBRO STEPHENS INSURANCE
TRUST; and LIVING HOPE INSTITUTE, INC.
JAMES J. NAPLES,
Assignee of Pinewood Enterprises
RENEE S. WILLIAMS, Chapter 7
Trustee, LHSWand MICHAEL E.
COLLINS, Chapter 11 Trustee, LHSE
JAMES J. NAPLES,
Assignee of Pinewood Enterprises
RENEE S. WILLIAMS, Chapter 7
Trustee, LHSW; UNITED STATES
TRUSTEE; and MICHAEL E.
COLLINS, Chapter 11 Trustee
A.K. TENNESSEE IRREVOCABLE TRUST;
KIMBRO STEPHENS INSURANCE TRUST;
DAVID KIMBRO STEPHENS, Individually and on
behalf of all the equitable beneficiaries of the
Kimbro Stephens Insurance Trust and the A.K.
Tennessee Irrevocable Trust
RENEE S. WILLIAMS; MICHAEL E. COLLINS;
UNITED STATES TRUSTEE; LIVING HOPE
INSTITUTE, INC.; ESTATE OFWANDAJ.
STEPHENS, afk/a Wanda J. Stephens; and
JAMES J. NAPLES
RENEE S. WILLIAMS, Chapter 7 Trustee, LHSW;
MICHAEL E. COLLINS, Chapter 11 Trustee;
JAMES J. NAPLES, Assignee of Pinewood
Enterprises, L.C.; U.S. TRUSTEE;
LIVING HOPE INSTITUTE, INC.; A.K. TENNESSEE
IRREVOCABLE TRUST; KIMBRO STEPHENS
INSURANCE TRUST; and DAVID KIMBRO
STEPHENS, Individually and on behalf of the A. K.
Tennessee Irrevocable Trust, the Kimbro Stephens
Insurance Trust, and their equitable beneficiaries
JAMES J. NAPLES, as Assignee
of Pinewood Enterprises, L.C.
RENEE S. WILLIAMS, Chapter 7
Trustee and MICHAEL E.
COLLINS, Chapter 11 Trustee
Three of these appeals are briefed on the merits and past due for a
1. Substitution of Naples for Pinewood. In No. 4:13-cv-547, James
Naples appeals the bankruptcy court's ruling that, though he should be
substituted for Pinewood Enterprises, L.C., the substitution would be effective
with a gap between early January 2013 and mid-March 2013. Some facts are
undisputed. Pinewood assigned all its rights in this litigation to Naples on 31
December 2012. Naples was Pinewood's sole member. He executed the
assignment for the company (as assignor) and for himself (as assignee). The
assignment was part of a large and complicated transaction. Naples is a
sophisticated business man, experienced in complicated transactions. Naples
didn't tell the bankruptcy court about the assignment for approximately three
months; and when he disclosed the transaction during a hearing, he did so by
saying he'd just learned about it. Pinewood filed papers in this and related
litigation for about two and a half months after the assignment without
disclosing it. On these facts, the bankruptcy court found that Naples's
explanation of belated understanding was not believable. Primarily applying
Federal Rule of Bankruptcy Procedure 7017 and Federal Rule of Civil
Procedure 17(a)(3), and guided by the Advisory Committee Notes (1966
Amendment) to Rule 17, the court held that no honest mistake occurred, and
so substitution with a gap was appropriate.
No clear error exists in the bankruptcy court's factual findings about
Naples's knowledge or his credibility. Ritchie Special Credit Investments, Ltd.
v. U.S. Trustee, 620 F.3d 847, 853 (8th Cir. 2010). Naples is a man of many
lawyers and many deals. His counsel in this case, for example, knew nothing
about the Pinewood assignment that Naples had done with his tax and
transactional lawyers. The bankruptcy court's finding-that Naples's wide
experience in business and litigation undercut his assertion that he didn't
learn about or understand his December 2012 assignment until March
2013- is not clearly erroneous.
On de novo review of the legal issues about substitution, In re Treadwell,
637 F.3d 855,863 (8th Cir. 2011), this Court reverses nonetheless. Federal Rule
of Civil Procedure 25(c) is more applicable than Rule 17(a)(3). Naples should
have disclosed the assignment immediately.
But, notwithstanding the
transfer and the nondisclosure, Pinewood could continue as a party until the
bankruptcy court ordered substitution. Pinewood's actions were effective in
law. FED. R. CIV. P. 25(c); ECLA Enerprises, Inc. v. Sisco Equipment Rental &
Sales, Inc., 53 F.3d 186, 191 (8th Cir. 1995). And its actions became Naples's
when he was substituted. No argument is made that Naples gained some
tactical advantage, or that any party suffered any prejudice, from his silence.
What happened dented his credibility, but had no legal effect insofar as this
Court can see. The substitution was effective for all purposes, looking
forward and backward, when the bankruptcy court ordered it.
The Court understands the bankruptcy court's and the parties' focus on
Rule 17 because of the withdrawn Barton motions for leave to file complaints.
But given the advanced stage of this litigation, and Naples's knee-deep
involvement, neither Rule 17 nor the precedent interpreting it have any real
work to do. In that important sense, the substitution issue here is, as Naples
suggests, much like the one Chief Judge Holmes faced in No. 4:13-cv-4028, NQ
44. Whatever the persuasive power of the Advisory Committee's Notes in
sham-litigation cases, no such live issue remained in this case when Naples
moved for substitution. Metal Forming and like cases are distinguishable:
most importantly, the substitution here involved ongoing litigation, not
starting a new lawsuit; the delay was a few months, not more than a year; and
whatever advantage Naples may have been seeking by holding back on the
assignment, as things developed, he gained nothing in this case. Compare
Metal Forming, Technologies, Inc. v. Marsh & McLennan Co., 224 F.R.D. 431,
432-34 (S.D. Ind. 2004). Naples was properly substituted for Pinewood, but
the carve out for post-assignment/ pre-notice filings was unnecessary and
2. The Stay of the Miller County Case. Naples challenges in No. 4:13cv-499 and No. 4:14-cv-201 the bankruptcy court's handling of the automatic
stay of related litigation. The court erred, he argues, in concluding that the
stay hadn't ended by operation of law and, in any event, in refusing to lift the
stay. These issues are best addressed together.
No. 4:13-cv-499. Did the bankruptcy court's handling of Naples's
motion to lift the automatic stay result in the stay's termination by operation
of law? The bankruptcy court answered no, reasoning that 11 U.S.C. §
362(e)(l)'s strict deadlines and requirements did not apply because Naples
isn't a secured creditor of Living Hope Southeast. N2 1-23, B. N2 276. Naples
argues hard from the statute's plain meaning that this reading was wrong as
a matter of law. It's common ground that the statutory deadlines and
requirements were not met. This Court reviews de novo. In re Treadwell, 637
F.3d at 363. The controlling statute's text is in the margin.
There's force in Naples's argument from the statute's words. In the
Miller County case, Naples seeks to impose a constructive trust on Living
* Thirty days after a request under subsection (d) of this
section for relief from the stay of any act against property of the
estate under subsection (a) of this section, such stay is terminated
with respect to the party in interest making such request, unless
the court, after notice and a hearing, orders such stay continued
in effect pending the conclusion of, or as a result of, a final
hearing and determination under subsection (d) of this section.
The court shall order such stay continued in effect pending the
conclusion of the final hearing under subsection (d) of this section
if there is a reasonable likelihood that the party opposing relief
from such stay will prevail at the conclusion of such final hearing.
If the hearing under this subsection is a preliminary hearing, then
such final hearing shall be concluded not later than thirty days
after the conclusion of such preliminary hearing, unless the 30day period is extended with the consent of the parties in interest
or for a specific time which the court finds is required by
11 U.S.C. § 362(e)(1).
Hope Southeast's assets. When the company filed its petition, 11 U.S.C. §
362(a)'s automatic stay stopped proceedings against the debtor. Naples
moved to lift the stay of an act (the lawsuit) against the property of the estate
(Living Hope Southeast's assets).
As Living Hope Southeast's chapter 11 trustee says, and Naples
acknowledges,§ 362(e)(1)'s termination provisions must be read in tandem
with§ 362(a)'s various stay provisions. Congress did not define the phrase
"stay of any act against the property of the estate under subsection (a) of this
section[.]" The parties spar over how the subsections work together and
which provisions of subsection (a) the termination provision embraces. One
reading, not urged by either side, is that subsection (e) may reach each of
subsection (a)'s provisions. The sum of all this, this Court concludes, is
ambiguity, not the certainty of plain words. Compare Owner-Operator
Independent Drivers Association v. United Van Lines, LLC, 556 F.3d 690,693 (8th
To resolve the ambiguity, this Court must consider § 362(e)(1)'s
purpose. The Third Circuit's decision in In re Wedgewood is particularly
helpful on this score. The automatic stay almost always favors the interests
of debtors and unsecured creditors by creating a breathing spell, especially
against secured creditors, who could otherwise be liquidating their rights.
Sections 362(d) & (e) provide balance: a certain method for secured creditors
to get a prompt determination- either in a merits ruling or by default from
the calendar-that the breathing spell is over. In re Wedgewood Realty Group,
Ltd. v. Wedgewood Realty Group, Ltd., 878 F.2d 693, 696-98 (3rd Cir. 1989). The
legislative history of§ 362(e), while not dispositive, illuminates the statute.
United States v. Vogel Fertilizer Co., 455 U.S. 16, 26-7, 31 (1982). According to
the House and Senate Reports, the provision was written to protect secured
creditors. H.R. REP. NO. 95-595 at344 (1977), reprinted in 1978 U.S. CODECONG.
& ADMIN. NEWS at 6300; S. REP. No. 95-989 at 53 (1978), reprinted in 1978 U.S.
CODE CONG. & ADMIN. NEWS at 5839; see also In re Looney, 823 F.2d 788, 793
(4th Cir. 1987). The cases seem to speak as one: § 362(e)'s protections are
limited to secured creditors. Naples hasn't cited a case adopting his novel
reading of the statute, and the Court has found none. The leading treatise's
discussion of§ 362(e) and its evolution, finally, lends no support to Naples's
argument. See generally, 1, 3 COLLIER ON BANKRUPTCY at~~ 1.01, 1.05, 362.08,
362.LH (16th ed.).
All material things considered, the bankruptcy court construed this
ambiguous statute correctly: the automatic stay didn't terminate
automatically because Naples isn't a secured creditor.
No. 4:14-cv-201. The last question is whether the bankruptcy court
abused its discretion in denying Naples's motion to lift the stay. The parties
agree on the standard of review and the Blan factors. In re Blan, 237 B.R. 737,
739-40 (B.A.P. 8th Cir. 1999); In re Wiley, 288 B.R. 818,821-23 (B.A.P. 8th Cir.
2003). After a hearing, the bankruptcy court filed a lengthy opinion applying
the factors in light of the parties' many contending arguments. NQ 2-67; B. NQ
450. Naples argues several things on appeal: at least one error of law
compromised the bankruptcy court's decision; the court erred in various
particulars on each Blan factor; and the court in general misevaluated the
First, whether to lift the stay of Naples's suit against Living Hope
Southwest Miller County is, in this Court's view, a close question. That
circumstance counsels deference to the experienced judge who has been living
in the details of this case for more than two years. There's no substitute on
appellate review for the trial judge's feel for the case as a whole.
Second, the bankruptcy court stumbled on the preclusive effect that
could be accorded a preliminary injunction. On de novo review, this Court
concludes that Naples has the better of this argument about an unsettled point
of Arkansas law. The legal error was harmless, however, because, as the
bankruptcy court correctly held, the Miller County circuit court's findings
were not sufficiently particularized about Living Hope Southeast such that its
likely-success finding should be accorded preclusive effect.
Restatement makes plain, this is a nuanced matter. RESTATEMENT (SECOND) OF
JUDGMENTS § 13 and comment g. The bankruptcy court was concerned, and
rightly so, about whether the parties were fully heard about Living Hope
Southeast and whether the circuit court's decision was sufficiently detailed
about that one among the thirteen defendants. Perhaps most importantly,
though the circuit court studied voluminous exhibits and held a hearing, it
heard no testimony. The intent issues swirling around imposition of a
constructive trust make testimony essential.
Chief Judge Holmes's
conclusion, in a related case, that the Stephenses had fleeced various entities,
weighs in the balance but is not dispositive on the particulars of Living Hope
Southeast. Preclusion is strong medicine, which should be administered
sparingly. The bankruptcy court correctly exercised independent judgment
on the likely-success issue and, again based in part on its great familiarity
with the case, found Naples's chances on his novel and complicated claim
were less than a lock.
Third, this Court sees no clear error in judgment in weighing all the
material circumstances. Aaron v. Target Corp.,357 F.3d 768,774 (8th Cir. 2004).
Here again, Naples is partly right, in this Court's view, but the bankruptcy
court's ultimate conclusion was among the reasonable choices presented.
Judicial economy probably does favor letting the Miller County case go
It's moss bound; and the stay will put Naples to duplicative
litigation. That's undoubtedly a hardship. Trial readiness is a wash- more
work must be done, especially in discovery, wherever Naples's claim is
litigated. Most preliminary bankruptcy issues appear to have been resolved.
But if Naples prevailed in Miller County, the bankruptcy court would have
to resolve tangled avoidance issues under 11 U.S.C. § 544 (a)(3). On likely
success, the bankruptcy court's evaluation was understandable and
reasonable, especially given Judge Mixon's finding in the adversary
proceeding that no assets passed from Living Hope Southwest to Living Hope
Southeast. Imposing a constructive trust is, as the cases say, anathema to
bankruptcy's goals. This point leads to the last: the bankruptcy court's
conclusion -lifting the stay would divert resources unnecessarily to more
lawyer's fees in the short run, could impede the sale of Living Hope
Southwest in the middle run, and could harm other creditors in the long
run- was reasonable. In re Blan, 237 B.R. at 739-40. A sale, as soon as
possible, does seem the best outcome for all parties.
Balancing the hardship to Naples of maintaining the stay against the
potential prejudice to Living Hope Southeast estate is ultimately a matter of
judgment. There's no perfectly clear answer one way or the other. There are
simply too many pieces moving, and too many ifs, to know with certainty
what's really best in the circumstances. The bankruptcy court's judgment call
that Naples's claim against Living Hope Southeast should be resolved in the
bankruptcy court was not an abuse of discretion.
Substitution order reversed on the effective date in Case No. 4:13-cv547. No-automatic-termination order in Case No. 4:13-cv-499 affirmed. Order
denying relief from the stay in Case No. 4:14-cv-201 affirmed.
D.P. Mar;hall Jr. 7
United States District Judge
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