Stephens v. Williams et al

Filing 40

OPINION AND ORDER denying 26 Motion to Expedite; denying 29 Motion to Strike, denying 31 Motion to Strike; denying as moot 33 Motion to Strike; granting 38 Motion to Withdraw. Further, the orders of the bankruptcy court denying Stephen s's motions for intervention and continuance, and denying Stephens's motion to reconsider and for new trial are AFFIRMED, and this appeal is DISMISSED. ***Civil Case Terminated. Signed by Honorable P. K. Holmes, III on July 10, 2014. (mll)

IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
TEXARKANA DIVISION
IN RE:

LIVING HOPE SOUTHWEST
MEDICAL SERVICES, LLC, Debtor

DAVID KIMBRO STEPHENS
v.

APPELLANT
Case No. 4:13-CV-04055

RENEE S. WILLIAMS

APPELLEE
OPINION AND ORDER

Appellant David Kimbro Stephens filed a notice of appeal from bankruptcy court on May 17,
2013. Currently before the Court are the following motions and related pleadings, which are ripe
for consideration:
•

Stephens’s motion to expedite appeal and to schedule oral argument (Doc. 26) and
brief in support (Doc. 27) and Appellee Renee S. Williams’s response (Doc. 28), and
Stephens’s motion to strike response (Doc. 31);

•

Stephens’s motion to strike supplement as defamatory and scandalous (Doc. 29) and
brief in support (Doc. 30), in which Stephens seeks to strike Williams’s supplement
to her appellee’s brief (Doc. 25);

•

Williams’s motion to strike supplement (Doc. 33) and brief in support (Doc. 34)
seeking to strike Stephens’s third supplementation to the designation of record on
appeal (Doc. 32), and Stephens’s response in opposition (Doc. 35) and brief in
support (Doc. 36); and

•

Stephens’s motion to withdraw supplement (Doc. 38), in which Stephens seeks to

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withdraw his third supplementation (Doc. 32).
This appeal is also ripe for review on the merits.
Stephens’s motion to withdraw supplement (Doc. 38) is GRANTED, and Stephens’s third
supplementation to designation of record on appeal (Doc. 32) will be stricken from the record as
withdrawn. As a result, Williams’s motion to strike supplement (Doc. 33) is DENIED AS MOOT.
Stephens’s motions to strike resemble reply briefs in that they consist primarily of argument
disputing the opposing arguments made by Williams. Furthermore, the Court does not find that any
language used by Williams was so scandalous as to warrant striking portions of the objected-to
filings. Stephens’s motions to strike (Docs. 29 and 31) are therefore DENIED. The Court has taken
into consideration the arguments made by Stephens in the filings.
Finally, the Court finds that this appeal may be decided on the parties’ filings and that no
hearing is necessary. The Court has also decided this appeal as expeditiously as possible given the
other demands of its docket and the voluminous record in this case. Stephens’s motion to expedite
appeal and to schedule oral argument (Doc. 26) is therefore DENIED. The Court will now turn to
the merits of the appeal.
I.

Background
The instant matter has a long and complex litigation history involving state court, bankruptcy

court, and various appeals from bankruptcy court to federal district court. The Court will attempt
to state the facts and procedural history of this case relevant to the motions and issues at hand.
On July 18, 2006, Living Hope Southwest Medical Services, LLC (“LHSW”) filed a petition
for relief under Chapter 11 of the bankruptcy code. LHSW’s Chapter 11 case was later converted
to a case under Chapter 7 of the bankruptcy code on August 15, 2006, and Renee S. Williams
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(“Williams” or “the Trustee”) was appointed as the Chapter 7 Trustee. Appellant David Kimbro
Stephens is a member of LHSW, as he owns a 1 percent interest in the company individually, with
his ex-wife Daphna Alice Stephens (“Alice”) owning the other 99 percent.
In February 2009, the Trustee filed several adversary proceedings (“AP”) against numerous
defendants related to the debtor, LHSW, including Living Hope Southeast, LLC (“LHSE”)1 and
Stephens, seeking to recover pre-petition and post-petition transfers by LHSW. The Trustee entered
into a settlement agreement with several of the AP defendants, including Stephens, on May 27, 2009.
The bankruptcy court granted approval of the settlement over the objections of two unsecured
creditors of LHSW, including Pinewood Enterprises, L.C. (“Pinewood”). The settlement, however,
was overturned on appeal. The parties then attempted to amend the settlement agreement. The
amended settlement was again overturned on appeal. The adversary proceeding was administratively
closed on July 19, 2011, but reopened on November 30, 2012. The same day the proceeding was
reopened, the Trustee dismissed Stephens from the AP by filing a stipulation of dismissal signed by
Stephens. The Trustee filed a motion to amend the complaint in the AP, which the bankruptcy court
granted on December 3, 2012. The Trustee then filed her third amended complaint, against LHSE
only, on December 4, 2012. As a result, the only parties remaining in the AP were the Trustee and
LHSE, and the only causes of action remaining were under 11 U.S.C. § 542 to recover property of
LHSW in possession of LHSE and 11 U.S.C. § 549 to recover unauthorized post-petition transfers.
(Doc. 1-6). A pre-trial hearing was held on December 18, 2012, at which the AP was set for trial
on January 15, 2013.
1

As the Court understands it, 99 percent of LHSE is owned by the AK Tennessee Irrevocable
Trust, whose trustee is Robert Williams—Alice’s father and Stephens’s ex-father-in-law. The
beneficiaries of the AK Trust are Stephens, Alice, and their children.
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On Sunday, January 13, 2013, Stephens filed a motion to intervene in the AP and motion for
continuance of the trial. The bankruptcy court2 heard argument on the motions prior to beginning
trial of the AP, denied both motions, and then proceeded to trial on the Trustee’s third amended
complaint against LHSE. During the middle of opening statements, Stephens interrupted the
proceedings to inform the bankruptcy court that counsel for LHSE, Jim Smith, had been terminated.
Alleged representatives of LHSE informed the bankruptcy court that they did not want to proceed
without an attorney. The bankruptcy court dismissed the attempt to terminate counsel, and the trial
continued. Ultimately, the bankruptcy court denied the Trustee’s request for a constructive trust but
awarded the Trustee an unsecured claim against LHSE in the amount of $1,190,000. Stephens filed
a motion for reconsideration, to alter or amend the bankruptcy court’s order, and for new trial. That
motion was heard and denied.
Stephens now appeals the bankruptcy court’s orders denying his motions for intervention and
continuance, denying the motion to reconsider and for new trial, and ultimately granting an
unsecured claim to LHSW against LHSE. Stephens also attempts to appeal the bankruptcy court’s
dismissal of the attempt to terminate Smith as counsel and the bankruptcy court’s allowance of
Kimberly Woodyard to represent LHSE with Smith at the AP. The Court finds that these last two
asserted issues were not properly raised by Stephens and are not properly raised before this Court.
II.

Standard of Review
A federal district court has jurisdiction, pursuant to 28 U.S.C. § 158, to hear appeals from

the rulings of a bankruptcy court and may “affirm, modify, or reverse” the bankruptcy court’s order

2

The Honorable James G. Mixon, now deceased, United States Bankruptcy Court for the
Western District of Arkansas.
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“or remand with instructions for further proceedings.” Fed. R. Bankr. P. 8013. Generally, the Court
examines the bankruptcy court’s findings of fact for clear error and its conclusions of law de novo.
In re Food Barn Stores, Inc., 107 F.3d 558, 561-62 (8th Cir. 1997). This standard was put into place
to “accord[] the findings of a bankruptcy judge the same weight given the findings of a district judge
under Rule 52 F.R.Civ.P.” Fed. R. Bankr. P. 8013, advisory committee’s notes. The Court should,
therefore, look specifically to the standard of review applied by the Eighth Circuit as to the issues
raised in this case. “[W]hether a person is entitled to intervention as a matter of right is a question
of law that [the Court] review[s] de novo.” Mille Lacs Band of Chippewa Indians v. State of Minn.,
989 F.2d 994, 998 (8th Cir. 1993). “[The Court] review[s] the [bankruptcy] court’s ruling on the
timeliness of a motion to intervene, however, only for abuse of discretion.” Id.
Stephens has requested that the Court schedule oral argument. (Doc. 26). “Oral argument
shall be allowed in all cases unless the district judge . . . determine[s] after examination of the briefs
and record . . . that oral argument is not needed.” Fed. R. Bankr. P. 8012. “Oral argument will not
be allowed if (1) the appeal is frivolous; (2) the dispositive issue or set of issues has been recently
authoritatively decided; or (3) the facts and legal arguments are adequately presented in the briefs
and record and the decisional process would not be significantly aided by oral argument.” Id. The
Court finds, having examined the briefs and the record, that oral argument is not needed in this case,
as the facts and legal arguments have been adequately set forth in the briefs and the record and the
decisional process would not be significantly aided by oral argument.
III.

Discussion
“On timely motion, the court must permit anyone to intervene who: (a) is given an

unconditional right to intervene by statute; or (b) claims an interest relating to the property or
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transaction that is the subject of the action, and is so situated that disposing of the action may as a
practical matter impair or impede the movant’s ability to protect its interest, unless existing parties
adequately represent that interest.” Fed. R. Civ. P. 24(a) (emphases added). Therefore, besides
timely application, an applicant for intervention must show (1) that the applicant has a recognized
interest in the subject matter of the litigation; (2) that the interest is one that might be impaired by
the disposition of the litigation; and (3) that the interest is not adequately protected by existing
parties. United States v. Union Elec. Co., 64 F.3d 1152, 1160 (8th Cir. 1995). The Court finds that
the bankruptcy court’s denial of Stephens’s motion to intervene should be affirmed for the bases
stated by the bankruptcy court—that the motion was not timely and that Stephens had no protectable
interest in the action.
“Whether a motion to intervene is timely is determined by considering all the circumstances
of the case.” Mille Lacs Band, 989 F.2d at 998. “In determining timeliness, factors that bear
particular consideration are the reason for the proposed intervenor’s delay in seeking intervention,
how far the litigation has progressed before the motion to intervene is filed, and how much prejudice
the delay in seeking intervention may cause to other parties if intervention is allowed.” Id. Stephens
knew of the filing of the third amended complaint at least as of early December 2012, when he
actually signed a stipulation of dismissal agreeing to be dismissed as a party to the AP so that the
Trustee could proceed against LHSE only. Stephens had been involved with this same AP for almost
four years at that point and knew that LHSW would be seeking to recover for fraudulent post-petition
transfers. If Stephens believed that his interests would be implicated in the proceeding such that he
should be allowed to litigate those interests, he should not have agreed to be dismissed as a
defendant. Essentially, Stephens wanted to avoid the risk of any actual liability, but still be able to
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litigate his defense. In any event, having agreed to his own dismissal in early December, and
knowing the relief sought by the Trustee, Stephens should at the very least have sought to intervene
as soon as possible after the third amended complaint was filed on December 4, 2012. Instead,
Stephens did not file his motion to intervene until the Sunday before the AP trial was set to begin
on January 15, 2013. Stephens’s asserted reason for the delay—that he was attempting to work out
a strategy with LHSE’s counsel, Jim Smith, does not justify any delay. Stephens asserts that he
should have been allowed to intervene to protect his own interests. Smith’s representation of LHSE
had nothing to do with any decision Stephens made to protect his own personal interests.
Furthermore, LHSW and LHSE would have been prejudiced by both a delay in the having the AP
heard and by Stephens’s unnecessary participation in a proceeding to determine a relatively
uncomplicated issue between LHSW and LHSE. It is in LHSE’s best interest to move the litigation
along in order to proceed with forming a reorganization plan in its own Chapter 11 proceeding.
Taking into consideration the totality of the circumstances, the bankruptcy court did not abuse its
discretion in finding that Stephens’s motion to intervene was untimely.3
Apart from his motion being untimely, Stephens did not have a cognizable and legally
protectable interest as contemplated by Rule 24. To have a cognizable interest, an applicant for
intervention’s interest in the subject matter of the litigation must be direct (as opposed to tangential
or collateral), substantial, and legally protectable. Union Elec. Co., 64 F.3d at 1161. “The purpose
of intervention is to promote the efficient and orderly use of judicial resources by allowing persons,
3

Stephens, in the context of the timeliness of his motion, raises the issue of whether the third
amended complaint was filed in violation of Federal Rule of Bankruptcy Procedure 4001(a)(3). That
is an issue which is not properly raised on appeal. Rather, if LHSE believed the filing of the third
amended complaint was defective, LHSE should have raised that issue before either the LHSW
bankruptcy court or in its own bankruptcy proceeding.
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who might otherwise have to bring a lawsuit on their own to protect their interests or vindicate their
rights, to join an ongoing lawsuit instead.” United States v. Metro. St. Louis Sewer Dist., 569 F.3d
829, 840 (8th Cir. 2009) (quotation omitted).
Stephens argued before bankruptcy court that he should have been able to intervene in the
AP as a matter of right because he was a defendant in three other lawsuits stemming directly from
LHSW’s bankruptcy, “all containing common questions of law and facts.” (Doc. 1-19, ¶ 3).
Stephens asserted that “[t]he answers to these common questions of law and fact will affect the
outcome of many issues between the parties by virtue of res judicata and collateral estoppel.” Id.
at ¶ 5. Although the lawsuits may share some common issues of law and fact, Stephens agreed to
his voluntary dismissal from the AP, was therefore not a party to the litigation, and no issue was
actually decided by the bankruptcy court that would have resulted in the application of res judicata
or collateral estoppel as to Stephens in his other pending cases. The issue decided by the bankruptcy
court was limited to the LHSW Trustee’s claim against LHSE and did not involve making any
findings that would have preclusive effect as to Stephens. Furthermore, Stephens’s stipulation to
his dismissal as a party to the AP is at logical odds with his later claim that he should be able to
intervene in the very same proceeding as a matter of right. By stipulating to his dismissal as a party,
Stephens was shielding himself from liability and at least implicitly recognizing that he did not have
a stake in the proceeding that he wished to litigate. This stipulation lessens the credibility of his
argument made less than two months later that he must be allowed to intervene to protect his
interests.
It is clear that Stephens wanted to intervene in the AP not to safeguard any legally protectable
interest, but to tell his own story on his terms. When asked by Judge Mixon at the hearing on his
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motion to intervene “aren’t you really saying that you want to join sides with Mr. Smith and help him
defend the case?”, Stephens responded, “[a]bsolutely. I have spoken to him several times about
defending this case and he doesn’t seem to be interested in what I have to say. And so that’s why
I’m here today. I do not believe he can adequately represent my interest because he has no interest
in my position.” (Doc. 2-28, p. 30, lines 5-12). As Judge Mixon stated to Stephens, Mr. Smith did
not represent Stephens. Mr. Smith represented LHSE.
This AP was not about Stephens personally. It was about two entities as to which Stephens’s
characterization of his alleged involvement varies depending on the day, and Stephens has not
convinced the Court that his interest in either entity was of such a nature that he should have been
allowed to intervene. The very argument that Stephens makes for being allowed to intervene—
essentially that the actions of either LHSW or LHSE (or both) must be construed as Stephens’s own
actions—is probably more likely to be harmful to his interests in any pending “piercing-the-veil” or
“alter-ego” actions than a general finding made by the bankruptcy court as to post-petition transfers
between LHSW and LHSE. Stephens simply wanted to get his day in court, as he repeatedly said
to Judge Mixon. Stephens’s day in court must, however, come in the other proceedings to which he
is a party and in which he has an actual interest. The courts hearing those proceedings can
adequately come to their own conclusions about Stephens’s actions based on the argument and
evidence presented and without being bound by any statements made by counsel or Judge Mixon in
relation to the AP proceeding in the LHSW bankruptcy.4
4

The statements of the bankruptcy court to which Stephens most strenuously objects are not
binding findings as to any ultimate issue. Rather, statements to the effect that Stephens was involved
in fraudulent transfers were dicta made in support of the bankruptcy court’s ultimate determination
and are, in fact, no more incriminating to Stephens as dicta in this Court’s own prior opinion that
“[t]he Debtor, LHSW, as well as LHI, have both essentially been fleeced by the Stephenses such that
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Stephens had no interest in the AP between LHSW and LHSE; Stephens was not a party to
the case, having stipulated to being dismissed almost two months prior to trial of the AP; and there
was no risk of collateral estoppel or res judicata being imposed in other proceedings as to Stephens
based on what happened in the AP. Stephens does not get to intervene as a party in any proceeding
where his actions might be discussed or he might have a personal interest in the outcome. See
Metropolitan St. Louis Sewer Dist., 569 F.3d at 829 (stating that although the applicant for
intervention “would certainly like to participate” in the action, “a federal case is a limited affair, and
not everyone with an opinion is invited to attend” (quotation omitted)).5 Stephens can adequately
protect his interests and vindicate his rights in the other actions pending against him or in which he
is involved. Allowing Stephens’s participation in the AP would not have promoted judicial
efficiency and would, instead, only have served to delay the proceedings and interject extraneous
matters into the record. Stephens’s asserted interests were not direct, substantial, or legally
protectable and, therefore, were insufficient to mandate his intervention as a party to the AP pursuant
to Rule 24.6
Finally, any interests that Stephens had in the litigation were adequately represented by the

any recoverable assets in these underlying proceedings are being held by LHSE.” In re Living Hope
Sw. Med. Servs., LLC, 481 B.R. 485, 493 (W.D. Ark. 2012).
5

Stephens also argues that he was a necessary party to the AP. For the same reasons stated
by the Court in finding Stephens was not entitled to intervene, Stephens was also not a necessary
party to the AP pursuant to Federal Rule of Civil Procedure 19(a).
6

This is also true of any asserted economic interest that Stephens claims to have as to LHSE.
Such an interest is tangential to the outcome of the AP proceeding. And, in any event, a mere
economic interest in the outcome of a litigation “does not rise to the level of a legally protectable
interest necessary for mandatory intervention.” Curry v. Regents of Univ. of Minn., 167 F.3d 420,
422 (8th Cir. 1999).
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existing parties. “Typically, persons seeking intervention need only carry a minimal burden of
showing that their interests are inadequately represented by the existing parties.” Mille Lacs Band,
989 F.2d at 999 (internal quotation omitted). It is clear from a review of the record that Stephens
failed to satisfy even this minimal burden.
Although Stephens’s and LHSE’s motives may have been different, both had an interest7 in
challenging LHSW’s assertions that assets were fraudulently transferred post-petition from LHSW
to LHSE. Counsel for LHSE did challenge those assertions, using many of the same arguments
Stephens now raises in this appeal to argue against the merits of the bankruptcy court’s decision to
allow LHSW a liquidated claim. LHSE succeeded in defeating LHSW’s request for imposition of
a constructive trust on the assets of LHSE and in having the bankruptcy court find that there was “no
proof that [LHSE] is in possession of any of [LHSW’s] assets.” (Doc. 2-24, p. 1). Counsel for
LHSE also argued against LHSW getting a liquidated claim and presented evidence in favor of
LHSE’s position, including calling Stephens as a witness. Stephens was allowed to present
testimony in an attempt to justify or negate any alleged transfers from LHSW to LHSE. The fact that
Stephens may have wanted to pontificate differently, without the stricture of responding to questions,
or that he might have wanted to present different evidence or make different objections does not
mean his interests were not aligned with LHSE’s and does not entitle him to intervention.
Challenges to litigation strategy are not grounds to allow for intervention. Jenkins by Jenkins v. State
of Mo., 78 F.3d 1270, 1275 (8th Cir. 1996) (“A difference of opinion concerning litigation strategy
or individual aspects of a remedy does not overcome the presumption of adequate representation.”).
7

In making this statement, the Court is not making a finding that Stephens had a legally
protectable interest. Rather, Stephens had an interest insofar as he alleged that interest in the
bankrupcty court.
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Mr. Smith made strategic litigation decisions presumably in the interests of the debtor he was
charged with representing—LHSE. LHSE is not appealing the ultimate decision of the bankruptcy
court, and if Stephens believes that Mr. Smith violated some duty Mr. Smith had to Stephens
personally, this is not the proper forum for raising such a claim.
Permissive intervention likewise requires a timely motion. Fed. R. Civ. P. 24(b). The Court
has already found that the bankruptcy court did not abuse its discretion in finding Stephens’s motion
to be untimely. Furthermore, the Court finds no abuse of discretion in the bankruptcy’s court’s
denial of Stephens’s motion for permissive intervention. Stadin v. Union Electric Co., 309 F.2d 912
(8th Cir. 1962) (denial of permissive intervention not appealable absent abuse of discretion). “In
exercising its discretion, the court must consider whether the intervention will unduly delay or
prejudice the adjudication of the original parties’ rights.” Fed. R. Civ. P. 24(b)(3). Even assuming
that Stephens met one of the criteria for which permissive intervention would have been allowed
under Rule 24(b), it is beyond legitimate dispute that allowing Stephens to intervene would have
unduly delayed the already hopelessly protracted litigation of, at that point in time, a narrow issue
that did not involve or impinge upon the rights of Stephens personally.
Much of Stephens’s briefs on appeal is dedicated to complaining about Mr. Smith’s
representation of LHSE, including allegations of collusion and other misconduct. Stephens claims
that the bankruptcy court denied LHSE its due process rights by denying it the right to terminate its
counsel at the beginning of the AP trial. First, Stephens has no standing to appeal the bankruptcy
court’s decisions as to LHSE, and LHSE is not appealing any action of the bankruptcy court.
Second, an appeal to a district court is not the proper procedure for bringing any allegations of
misconduct against an attorney. Third, Mr. Smith did not represent Stephens in the AP, so Stephens
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has no basis for alleging misconduct. Fourth, the record does not indicate that Mr. Smith acted
contrary to LHSE’s interests, and Mr. Smith was not obligated to act in the interest of Stephens
personally.
Stephens’s basis for intervention was grounded in the fact that he thought he had the best
information—the best story to tell about what happened during the formation of LHSE. Stephens
wanted to intervene to pontificate and to run the AP as he saw fit. See, e.g., Doc. 1-19, ¶ 6 (“Mr.
Stephens is the only person that can bring clarification and understanding to the true facts and
circumstances of this case.”). These are not sufficient grounds for either mandatory or permissive
intervention. The bankruptcy court was right to deny Stephens’s motion for intervention. The Court
further finds that there was no basis for the bankruptcy court to reconsider its order denying
intervention, and the bankruptcy court’s order denying Stephens’s motion for reconsideration should
likewise be affirmed.
Because the Court has affirmed the bankruptcy court’s denial of Stephens’s motion to
intervene, the Court does not need to reach Stephens’s challenges to the merits of the judgment and
findings rendered by Judge Mixon in the AP. It is well settled “that only parties to a lawsuit, or those
that properly become parties, may appeal an adverse judgment.” Marino v. Ortiz, 484 U.S. 301, 587
(1988). Any remaining issues Stephens attempts to raise are not properly at issue in this appeal, as
Stephens was either not the proper party to appeal such issues and/or this Court is not the proper
forum to bring them.
IV.

Conclusion
For all the reasons stated above IT IS ORDERED that Stephens’s motion to withdraw

supplement (Doc. 38) is GRANTED, and Stephens’s third supplementation to designation of record
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on appeal (Doc. 32) will be stricken from the record as withdrawn.
IT IS FURTHER ORDERED that Williams’s motion to strike supplement (Doc. 33) is
DENIED AS MOOT.
IT IS FURTHER ORDERED that Stephens’s motions to strike (Docs. 29 and 31) and motion
to expedite appeal and to schedule oral argument (Doc. 26) are DENIED.
IT IS FURTHER ORDERED that the orders of the bankruptcy court denying Stephens’s
motions for intervention and continuance, and denying Stephens’s motion to reconsider and for new
trial are AFFIRMED, and this appeal is DISMISSED.
IT IS SO ORDERED this 10th day of July, 2014.

/s/P. K. Holmes, III
P.K. HOLMES, III
CHIEF U.S. DISTRICT JUDGE

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