Zurich American Insurance Company et al v. Trans Cal Associates et al

Filing 90

ORDER signed by Judge William B. Shubb on 12/15/11 ORDERING that this action is STAYED pending resolution of the debtor individual defendants' bankruptcy proceedings. The Clerk of Court is instructed to administratively close this case, to be re opened after the conclusion of the bankruptcy proceedings upon written request and application of the parties and order of this court. IT IS FURTHER ORDERED that Zurich's motion to strike and to enter default be, and the same hereby is, DENIED without prejudice to renewal. (Becknal, R)

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UNITED STATES DISTRICT COURT
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EASTERN DISTRICT OF CALIFORNIA
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ZURICH AMERICAN INSURANCE
COMPANY; AMERICAN GUARANTEE
AND LIABILITY INSURANCE
COMPANY; and AMERICAN ZURICH
INSURANCE COMPANY,

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NO. CIV. 2:10-01957 WBS KJN
MEMORANDUM AND ORDER RE:
BANKRUPTCY STAY AND MOTION TO
STRIKE AND TO ENTER DEFAULT

Plaintiffs,
v.
TRANS CAL ASSOCIATES; TRANS
CAL INSURANCE ASSOCIATES,
INC.; SACRAMENTO SURPLUS LINES
INSURANCE BROKERS, INC.; MARK
SCOTT; GRAY SCOTT; and DOES
1-50,

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Defendants,
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/
AND RELATED COUNTERCLAIMS AND
THIRD-PARTY COMPLAINT.
/

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Plaintiffs Zurich American Insurance Company, American

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Guarantee and Liability Insurance Company, and American Zurich

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Insurance Company filed a complaint against defendants Trans Cal

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Associates, Trans Cal Insurance Associates, Inc. (“Trans Cal

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Insurance”), Sacramento Surplus Lines Insurance Brokers, Inc.,

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Mark Scott, and Gray Scott, arising from defendants’ alleged
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failure to remit over $1.1 million in insurance premiums that

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defendants had allegedly collected for plaintiffs.

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2011, plaintiffs and third-party defendant Zurich American

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Insurance Company of Illinois (collectively “Zurich”) filed a

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motion to strike Trans Cal Associates, Trans Cal Insurance, and

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Sacramento Surplus’s (collectively “entity defendants”) Answer

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and Trans Cal Associates’s Cross-Complaint and to enter their

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default for failure to retain counsel.

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court had previously granted defendants’ counsel’s motion to

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withdraw on May 10, 2011.

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On May 18,

(Docket No. 70.)

The

(Docket No. 69.)

Following the filing of the motion to strike and to

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enter default, Mark Scott and Gray Scott (collectively

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“individual defendants”) each filed bankruptcy under Chapters 7

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and 13, respectively.

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Scott have indicated that Zurich has filed complaints in both

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bankruptcy proceedings contesting the dischargeability of the

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debts owed to it.

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(Docket Nos. 72, 75.)

Mark Scott and Gray

(Docket No. 84.)

The court ordered the non-debtor parties to file briefs

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regarding the effect of the automatic stay pursuant to 11 U.S.C.

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§ 362(a) on this action.

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filed briefs.

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neither filed briefs with respect to the automatic stay nor filed

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a response to Zurich’s May 18 motion to strike and to enter

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default.

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enter default was held on September 12, 2011, at which the court

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continued the motion for ninety days in order to give the entity

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defendants further time in which to retain counsel.

(Docket No. 74.)

(Docket Nos. 75-76.)

Zurich and Mark Scott

The entity defendants

An initial hearing on Zurich’s motion to strike and to

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(Docket No.

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On October 4, 2011, Mark Scott was granted a discharge.1

82.)

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Recently, entity defendants’ former attorney, David F.

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Anderson, filed a statement with the court indicating that he had

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been retained to appear on behalf of the individual defendants,

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and stating that “[i]f necessary and appropriate, in the future

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[he] will represent one or more of the defendant entities.”

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(Docket No. 84 at 3:2-3.)

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appearance in this case.

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I.

Mr. Anderson has not filed an

11 U.S.C. § 362(a)(1)
The automatic stay of § 362(a)(1) prohibits the

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“commencement or continuation . . . of a judicial,

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administrative, or other action or proceeding against the debtor

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that was or could have been commenced before the commencement of

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the case under this title, or to recover a claim against the

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debtor that arose before the commencement of the case under this

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title.”

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Chapter 7 or a Chapter 13 bankruptcy, a stay issued pursuant to §

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362(a)(1) is lifted.

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11 U.S.C. § 362(a)(1).

Once a discharge is granted in a

11 U.S.C. § 362(c)(1)(C).

Here, the individual defendants have filed for

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bankruptcy.

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Accordingly, the claims against Gray Scott only are stayed under

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§ 362(a)(1).

See 11 U.S.C. § 362(a)(1).

“In the absence of special circumstances, stays

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Mark Scott obtained a discharge on October 4, 2011.

pursuant to [§] 362(a) are limited to debtors and do not include

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As the issuance of the discharge by the Bankruptcy
Court of the Eastern District of California is a fact “not
subject to reasonable dispute” because it is “capable of accurate
and ready determination by resort to sources whose accuracy
cannot reasonably be questioned,” Fed. R. Evid. 201, the court
will take judicial notice of it.
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[claims against] non-bankrupt co-defendants.”

Ingersoll-Rand

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Fin. Corp. v. Miller Mining Co., 817 F.2d 1424, 1427 (9th Cir.

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1987) (citing Teachers Ins. & Annuity Ass’n of Am. v. Butler, 803

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F.2d 61, 65 (2d Cir. 1986)); see also Cohen v. Stratosphere

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Corp., 115 F.3d 695, 697 (9th Cir. 1997) (“The automatic stay

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does not preclude us from deciding this appeal with regard to all

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parties other than [the bankrupt party], and we now proceed to do

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so.”).

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litigation must be disaggregated so that particular claims,

When possible, “[m]ultiple claim and multiple party

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counterclaims, cross claims and third-party claims are treated

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independently when determining which of their respective

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proceedings are subject to the bankruptcy stay.”

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68 F.3d 1131, 1137 (9th Cir. 1995) (quoting and adopting Mar.

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Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204-05 (3d Cir.

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1992)).

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Parker v. Bain,

The entity defendants have not filed for bankruptcy,

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and so the claims against them are not automatically stayed by §

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362(a)(1).

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Gray Scott may be able to “extend” the automatic

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bankruptcy stay under the “unusual circumstances” exception, a

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possibility raised by both sides in their supplemental briefs on

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the effect of extending the automatic stay to this proceeding.

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“The courts have carved out limited exceptions . . . where: (1)

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‘there is such identity between the debtor and the third-party

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defendant that the debtor may be said to be the real party

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defendant and that a judgment against the third-party defendant

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will in effect be a judgment or finding against the debtor,’ or

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(2) extending the stay against codefendants ‘contributes to the
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debtor’s efforts of rehabilitation.’”

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Cabezas Corp., 995 F.2d 1486, 1491 n.3 (9th Cir. 1993) (quoting

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A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986);

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Matter of S.I. Acquisition, 817 F.2d 1142, 1147 (5th Cir. 1987))

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(citations omitted); see Queenie, Ltd. v. Nygard Int’l, 321 F.3d

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282, 287 (2d Cir. 2003) (staying the proceedings against not only

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the debtor individual defendant, but also the non-debtor

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corporation co-defendant that was wholly owned by him because the

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“claim against the non-debtor will have an immediate adverse

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United States v. Dos

economic consequence for the debtor’s estate”).

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If the “unusual circumstances” exception applies,

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however, the weight of authority holds that it is the bankruptcy

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court that must extend the automatic stay, not this court.

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Placido v. Prudential Ins. Co. of Am., No. C 09-00668, 2010 WL

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334744, at *1 (N.D. Cal. Jan. 22, 2010) (relying on Boucher v.

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Shaw, 572 F.3d 1087, 1093 n.3 (9th Cir. 2009)); Alvarez v.

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Bateson, 932 A.2d 815, 821 (Md. Ct. Spec. App. 2007) (“[T]he

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weight of authority holds that, in order for an automatic stay

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pursuant to section 362 to be applied to a non-bankrupt

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co-defendant, the debtor must request and obtain a stay from the

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bankruptcy court where the current action is pending.”).

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II.

See

11 U.S.C. § 362(a)(3)
Section 362(a)(3) prohibits “any act to obtain

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possession of property of the [bankruptcy] estate or of property

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from the estate or to exercise control over property of the

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estate.”

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property of the estate).

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“continues until such property is no longer property of the

11 U.S.C. § 362(a)(3); see 11 U.S.C. § 541 (defining
A stay issued under § 362(a)(3)

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estate.”

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constitutes property of the estate under § 541 is a federal

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question, although bankruptcy courts will look to state law for

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assistance in answering that question.”

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940, 942 (Bankr. D. Colo. 1983).

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11. U.S.C. § 362(c)(1).

“The question of what

In re Loughnane, 28 B.R.

As discussed above, the bankruptcy court issued Mark

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Scott a discharge on October 4, 2011, terminating the automatic

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stay that was in place pursuant to § 362(a)(1).

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his bankruptcy estate has filed a Notice of Assets,2 however,

The trustee for

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indicating that there are assets remaining in the estate so that

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the automatic stay under § 362(a)(3) remains in effect.

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Spirtos, 221 F.3d 1079, 1081 (9th Cir. 2000) (noting that “[s]o

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long as there are assets in the estate, then, the stay [as to the

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property of the estate] remains in effect”).

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obtain a judgment in its favor against Mark Scott, it would turn

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to the bankruptcy estate in order to collect on that debt.

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Accordingly, the automatic stay as to Zurich’s claims against

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Mark Scott remains in place unless and until Zurich obtains

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relief from the stay from the bankruptcy court.

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III. Claims Against the Entity Defendants

In re

If Zurich were to

The claims that Zurich brings against the entity

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defendants and the individual defendants arise out of the same

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set of facts--the defendants’ alleged failure to remit over $1.1

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million in insurance premiums that defendants had allegedly

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As this is a fact “not subject to reasonable dispute”
because it is “capable of accurate and ready determination by
resort to sources whose accuracy cannot reasonably be
questioned,” Fed. R. Evid. 201, the court will take judicial
notice of it.
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collected for plaintiffs.

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fiduciary duty, conversion, fraud, and accounting) are asserted

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against all defendants, and while the remaining two claims

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(breach of contract and breach of the implied covenant of good

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faith and fair dealing) are not asserted against all defendants,

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they are asserted against both entity and individual defendants.

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Trans Cal Associate’s counterclaim also arises from the same

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conflict over collected premiums.

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Four of the six claims (breach of

If the court were to permit Zurich to proceed with its

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claims against the entity defendants only and Trans Cal

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Associates to proceed with its counterclaim, a later trial of the

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claims against the individual defendants would involve the

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relitigation of most if not all of the issues litigated in the

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first proceeding involving the entity defendants.

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finds that the better course is to stay the claims against the

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entity defendants and the counterclaims brought by Trans Cal

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Associates pursuant to the court’s inherent authority.

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Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458,

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1465 (9th Cir. 1983) (A “trial court may, with propriety, find it

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is efficient for its own docket and the fairest course for the

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parties to enter a stay of an action before it, pending

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resolution of independent proceedings which bear upon the

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case.”); see, e.g., SCI Northbay Commerce Fund 4, LLC v. SCI Real

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Estate Invs., LLC, No. 8:11–cv–31, 2011 WL 1133898, at *1 (M.D.

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Fla. Mar. 28, 2011) (“The Court concludes that a stay of

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Plaintiffs' claims against Adelman are appropriate, in the

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interests of judicial economy and under the Court's inherent

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authority to manage its cases.”);
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The court

See

Beardsley v. All Am. Heating,

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Inc., No. C05-1962P, 2007 WL 1521225, at *2 (W.D. Wash. May 22,

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2007) (“[E]ven if the automatic stay does not extend to all of

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AAH's co-defendants, the Court has inherent authority to stay

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this litigation in its entirety.”).

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The parties do not give an estimate of when the

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bankruptcy proceedings will be concluded.

As it appears that the

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action will be stayed due to the bankruptcy proceedings for the

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foreseeable future, this case shall be ordered administratively

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closed.

See Dees v. Billy, 394 F.3d 1290, 1294 (9th Cir. 2005)

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(“[T]he ‘effect of an administrative closure is no different from

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a simple stay, except that it affects the count of active cases

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pending on the court’s docket; i.e., administratively closed

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cases are not counted as active.’” (discussing and quoting Mire

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v. Full Spectrum Lending Inc., 389 F.3d 163, 167 (5th Cir.

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2004))).

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IT IS THEREFORE ORDERED that this action is STAYED

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pending resolution of the debtor individual defendants’

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bankruptcy proceedings.

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administratively close this case, to be reopened after the

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conclusion of the bankruptcy proceedings upon written request and

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application of the parties and order of this court.

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The Clerk of Court is instructed to

IT IS FURTHER ORDERED that Zurich’s motion to strike

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and to enter default be, and the same hereby is, DENIED without

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prejudice to renewal.

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DATED:

December 15, 2011

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