Deem et al v. Baron et al
MEMORANDUM DECISION and ORDER denying 48 Motion to Set Aside the Order Lifting the Stay; finding as moot 54 Motion to Continue Scheduling Conference; finding as moot 55 Motion to be Excused from Appearing at the Scheduling Conference. Signed by Judge David Sam on 6/15/2017. (blh)
UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION
DARRELL L. DEEM, et. al.,
TRACEY BARON, et. al.,
District Judge David Sam
This is a contract case, which was stayed pending mediation and arbitration. Following
this court’s order lifting the stay (Dkt. No. 46), a status report and scheduling conference was set.
In response, Defendants filed three “emergency” motions: (1) Emergency Motion to Set Aside
the Order (Dkt. No. 48), (2) Emergency Motion to Continue Scheduling Conference (Dkt. No.
54), and (3) Emergency Motion for Defendants to be Excused from Appearing at the Scheduling
Conference (Dkt. No. 55). The status conference was held on April 26, 2017, and the defendants
appeared by telephone. Following oral argument, the court requested supplemental briefing and
took the matter under advisement. After careful consideration of the supplemental briefing, the
court hereby denies the Motion to set aside the Order Lifting the Stay, and holds that the Oregon
bankruptcy stay applies only to those parties in this case who have filed bankruptcy, not the nondebtor parties.
Defendant argues that this court did not have jurisdiction to lift the stay of litigation
because of the court’s previous ruling that it could not hear the plaintiffs’ claims until mandatory
mediation had been conducted. This court did find it appropriate to stay the case pending
mediation and arbitration as required in the contract, but that ruling does not deprive this court of
jurisdiction over the matters now before it. See N-Tron Corp v. Rockwell Automation, Inc., 2010
U.S.Dist. LEXIS 14130 (S.D. Ala. 2010), at p. 3 (holding that complying with a dispute
resolution clause is not a condition precedent to filing a lawsuit, and failure of the parties to
comply does not render the court without subject matter jurisdiction)
Defendants argues that under the Rooker-Feldman doctrine, this court does not have
jurisdiction to reconsider and overrule the state court judge’s order. Rooker-Feldman is a narrow
rule of law that requires the existence of a judgment and other circumstances not present here,
that does not apply to this case.
Although mediation has not been completed and non-binding arbitration has not even
been attempted, the court agrees that Plaintiffs have “exhausted the process, and have completed
all that they could reasonably be expected to do in this regard.” Dkt. No. 64, at 3. After nearly a
year of trying to accomplish mediation and arbitration, the parties finally scheduled mediation
with Judge Newsome, an experienced mediator.
Prior to the scheduled mediation, Judge
Newsome emailed the parties, stating that in his personal opinion, “the parties in this case are at
a hopeless impasse,” and that “It would not be fair for me to accept money to go forward with a
mediation that I think has absolutely no chance of being fruitful.” Dkt. No. 44, Exhibit C. While
no attempt has been made to conduct non-binding arbitration, this court has no reason to believe
that the parties would be any more successful at that than they have been with the mediation.
Therefore the court holds that the stay was properly lifted and will remain lifted.
The court also holds that the Oregon Bankruptcy stay applies only to the parties to this
action who have filed bankruptcy. There are currently three bankruptcies which could
conceivably relate to this matter: that of Crimson Investments, LLC (a party to this action); that
of Turning Leaf Homes IV, LLC (not a party to this action); and Turning Leaf V, LLC (unclear
whether or not it is a party to this action).
It is undisputed that the Bankruptcy stay applies automatically to parties to this action
who have filed bankruptcy. Collier on Bankruptcy ¶ 362.03[d]. Except in unusual
circumstances, however, the stay does not apply to parties who have not filed bankruptcy.
Courts apply a fact-specific analysis to determine whether a Section 362 stay applies to nondebtors as well as debtors. Courts have held that the automatic stay does not protect a partner of
a partnership, (Patton v. Bearden, 8 F.3d 343 (6th Cir. 1993)), corporate shareholders (Collier on
Bankruptcy 362.03, p. 5 (15th 2015)), or guarantors (Credit Alliance Corp. v. Williams, 851
F.2d 119). Under certain circumstances, courts have applied the automatic stay to an action
against a debtor’s insurers. See MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 92 (2d Cir.
1988). Although an automatic stay may, on occasion, be applied to parties not in bankruptcy,
such application is rare and requires special circumstances. There has been no showing that this
case fits into the rare exceptions to this rule.
In determining whether the stay applies to non-debtors, courts also analyze the closeness
of the relationship between debtor and non-debtor. The non-debtor must prove that its interests
are so closely related to the debtor party’s that a judgment against the non-debtor will in effect be
a judgment against the debtor:
In order to invoke the automatic stay as to actions against a non-debtor, the party
seeking to do so must show that there is such identity between the debtor and the
non-debtor that the debtor may be said to be the real party defendant and that the
judgment against the non-debtor will in effect be a judgment or findings against
the debtor. Arnold v. Garlock, Inc., 278 F.3d 426, 436 (5th Cir. 2001); GATX
Aircraft Corp v. M/V Courtney Leigh, 768 F.2d 711, 717 (5th Cir. 1985); Reliant
Energy Servs., Inc. v. Enron Can. Corp., 349 F.3d 816, 825 (5th Cir. 2003).
In re Xenon Anesthesia of Texas, PLLC, 510 B.R. 106, 111-12 (Barkr.S.D.Tex. 2014).
The court in Pavers & Road Builders District Council Welfare Fund v. Core Contracting
of NY, LLC, 536 B.R. 48, 50 (E.D.N.Y. 2015) held that “the automatic stay, by its terms, protects
only debtors under the Bankruptcy Code . . . (a bankruptcy petition ‘operates as a stay . . . of . . .
the commencement or continuation . . . [of an] action or proceeding against the debtor . . .’) 11
U.S.C. § 362 (a)(1) (emphasis added).” When the defendants in that case asserted that the
automatic stay should apply to non-debtors as well because of an alter ego claim, the court
developed a two-tier analysis to determine whether a Section 362 stay should apply to a nondebtor party. First, the bankruptcy court should determine whether the debtor and non-debtor
corporations are alter egos. Second, the bankruptcy court must then determine if their interests
are so intertwined that the automatic stay must also apply to the non-debtor corporation. For two
corporations to be “alter egos” of each other, they must demonstrate a relationship that is more
than “mere majority or complete stock control.” See A. H. Robins Co. v. Piccinin, 788 F.2d 994,
999 (4th Cir. 1986). The court in Queenie, Ltd. V. Nygard Int’l, 321 F.3d 282. 287 (2d Cir.
2003) cited the Robins case in holding, “when a claim against the non-debtor will have an
immediate adverse economic consequence for the debtor’s estate,” the automatic stay applies to
Once the court determines that a corporation is an alter ego, the court must go on to
determine whether the interests of the debtor and non-debtor corporations are so intertwined that
a failure to apply the Section 362 stay to the non-debtor corporations will harm the debtor’s
estate. The Pavers court noted that the debtor could then make a motion to the bankruptcy court
to enjoin the district court from proceeding in the action against the non-debtor if “it would
prejudice other creditors of the debtor in a way the Bankruptcy Court would consider unfair.”
Pavers, at 53. If the bankruptcy court, in its discretion, chose not issue an injunction, the district
court could resolve the pending litigation against the non-debtor.
Under Pavers, a bankruptcy court will issue an injunction if it “is necessary to protect the
debtor’s estate or to effectuate its reorganization.” Id. at 52. Pavers cites an example of where
extending the stay to non-debtors would serve to protect the debtor: “it may be necessary to
extend the automatic stay . . . to protect the non-debtor entities, for not only may they be alteregos, but they may be holding the assets that should be used to satisfy all of the debtor’s
Just because two entities are alter egos does not make them both debtors under the
Bankruptcy Code. It simple means they are liable for each other’s debts. If the
nondebtor entity wants that protection, it need only file its own petition.
Id. at 51.
The facts of this case do not support application of the stay to non-debtors. Defendants
have not offered evidence concerning the intertwining of the LLCs, nor the control of one over
another. It does not appear that they control each other, are the alter ego of one another, or share
any of the same assets or management, so it cannot be said that a judgment against one would be
like having a judgment against the other as is required for application of the stay. There is no
evidence that they are “virtually the same entity” as is required.
As Plaintiffs state in their brief, it appears that the defendant is “seeking bankruptcy
protection for all of his companies without submitting all of his assets to bankruptcy supervision.
He seeks a selective, one-sided approach to bankruptcy. . . . He seeks to stop all creditors from
proceeding in any fashion against him or any of his assets through application of the bankruptcy
rules, but does not want those same bankruptcy rules to apply to himself.” Defendant insists that
the Oregon Bankruptcy Court’s comment that “you have to file a motion that they have violated
the automatic stay if they keep doing it,” means that the bankruptcy stay automatically applies to
all of the defendants in this action, including the non-debtor defendants. This court does not
agree. The automatic stay is automatic as applied to a debtor, as the statute says. But as the
Pavers court held, “As to non-debtors, it is relief that is available, but it is not automatic.”
Pavers at 53. This action will therefore continue as to the non-debtors, unless the bankruptcy
court orders otherwise.
The court hereby finds the following motions to be moot: the defendants’ Emergency
Motion to Continue Scheduling Conference (Dkt. No. 54) and Emergency Motion for
Defendants to be Excused from Appearing at the Scheduling Conference (Dkt. No. 55). The
court also denies the Motion to Set Aside the Order Lifting the Stay (Dkt. No. 48), and holds that
the Oregon bankruptcy stay applies only to those parties in this case who have filed bankruptcy.
DATED this 15th day of June, 2017.
BY THE COURT:
United States District Judge
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