AUDREY R. EVANS, Bankruptcy Judge.
On July 25, 2013, the Court heard Pinewood Enterprises, L.C.'S Motion for Relief From the Automatic Stay (the
The factual background and history of this Chapter 11 Debtor, as well as certain related entities and individuals, has been described extensively in the Addendum to: Order Granting Motions to Appoint Trustee (Dkt. #293) entered on July 9, 2013
The Motion for Relief currently before the Court seeks relief from the automatic stay to allow Naples to pursue litigation against the Debtor and 12 other defendants that has been pending in the Miller County Circuit Court since 2006 (the
There are two other active creditors in this case: the Southwest Trustee, who holds a liquidated claim in the amount of $1.19 million (the
Greg filed claims in this case on behalf of the Estate of Wanda Stephens and LHI.
The most recently amended complaint (the
Due to the bankruptcies of defendants Living Hope Southwest,
Relief from the automatic stay shall be granted "for cause" under 11 U.S.C. § 362(d)(1). The stay may be lifted "for cause" to allow litigation involving the debtor to proceed in another forum under certain circumstances. In re Blan (Blan v. Nachogdoches County Hospital), 237 B.R. 737 (8th Cir. BAP 1999) (citing H.R.Rep. No. 95-595, at 341 (1977), 1978 U.S.C.C.A.N. 5963, 6297-98; S.Rep. No. 95-989, at 50 (1978), 1978 U.S.C.C.A.N. 5787, 5835-37). Although a creditor moving for relief from stay must make a prima facie case that cause exists, the Debtor has the ultimate burden of proof in opposing motions for relief from stay except where equity in property is at issue. 11 U.S.C. § 362(g). See In re Anton, 145 B.R. 767, 769 (Bankr.E.D.N.Y.1992). The Bankruptcy Court has wide discretion in determining whether or not to lift the automatic stay. Id.
"In making the determination of whether to grant relief from the stay, the court must balance the potential prejudice to the Debtor, the bankruptcy estate and to the other creditors against the hardship to the moving party if it is not allowed to proceed in state court." In re Blan, 237 B.R. at 739 (citing Internal Revenue Service v. Robinson (In re Robinson), 169 B.R. 356, 359 (E.D.Va.1994); Matter of United Imports, 203 B.R. 162, 166 (Bankr. D.Neb.1996); In re Marvin Johnson's
Naples argues that all the Blan factors warrant relief from the automatic stay to proceed in state court. The Southwest Trustee disputes that the Blan factors warrant relief and argues that even if some factors weigh in favor of relief, the risk of Naples obtaining a constructive trust on the Debtor's assets is too great a burden on the estate and the other creditors. The Southeast Trustee asserts that the Court should consider all the circumstances of this case in addition to the Blan factors, particularly that he is in the process of finding a buyer for the Debtor. Having studied the record in this case, and taking into account the long litigious history of these parties, the Court denies relief from stay to allow the Miller County Case to proceed against the Debtor based on its analysis of the circumstances of this case and its current posture in addition to the Blan factors, as described below.
Naples asserts that in evaluating judicial economy, the Court must give great weight to its lack of jurisdiction over the 12 co-defendants and the duplication that would result from trying the co-defendants separately. Because the case has been remanded from district court already, and because relief from stay has been granted by Judge Taylor in Kimbro's case (and Judge Taylor also remanded the case back to Miller County on a prior removal), the case is ready to proceed against all defendants except the Debtor who is still protected by the automatic stay. If relief from stay is not granted, Naples will be required to try the same state law claims with the same witnesses and facts in this Court as well. Naples points out that there is a possibility of inconsistent results if that portion of the Complaint against the Debtor is tried in this Court while the case against the remaining co-defendants is tried in Miller County. Naples also raises the possibility that the Southeast Trustee will need to be present in Miller County whether Naples proceeds against the Debtor or just the other co-defendants due to the intertwining of the Debtor and other entities and individuals and the degree to which the cases are "inextricably intertwined."
Naples further asserts that judicial economy will be served if the case is tried in Miller County because there is no outstanding discovery in the Miller County Case; the State Court judge, the Honorable Kirk Johnson, is familiar with the case; the location of witnesses and documents is neutral; Judge Susan Hickey already found the case was ready for trial; and there are no preliminary bankruptcy
The Southwest Trustee, who has a liquidated claim for $1.19 million, argues that while principles of judicial economy prefer that a case be tried in a forum with jurisdiction over all the parties, this factor is not dispositive in this case (citing United Imports, Inc., 203 B.R. 162). The Southeast Trustee also asserts judicial economy is not served by allowing the Miller County Case to proceed in Miller County because even if the case is tried there, this Court will still need to adjudicate Naples's claim, as other creditors who are not parties to the Miller County Case (such as the Southwest Trustee) would likely object to any claim filed by Naples in this case.
291 B.R. at 174. Naples distinguishes the Patel case on its facts and argues that litigation over the proof of claim is not the same as litigation to establish liability; that proof of claim litigation is additional litigation but not duplicative litigation. The Patel case involved two separate lawsuits, both of which were pending against the debtor, and one of which was pending against a related entity whose bankruptcy case was being jointly administered with the debtor's. However, despite these factual differences, many of the pronouncements made by the Patel court apply equally here. Specifically, that court's emphasis on fairness to all parties, allowing the debtor a breathing spell from litigation, and providing a better mechanism for determining which issues are ultimately of consequence in a Chapter 11 case are particularly applicable to this case. For instance, the Patel Court states:
Id. at 173-74.
While the Court agrees that principles of judicial economy are generally best served by allowing the court with jurisdiction over all defendants to try that particular case, the posture of this Debtor's bankruptcy case challenges that general rule. In this case, as in Patel, nonbankruptcy court litigation will likely be extremely wasteful. If the case is tried in Miller County against the Debtor, the Trustee will incur administrative expenses defending that suit, when the claim may be worthless in any case (depending on the value of the Debtor and the amount of administrative expenses and any other priority claims). Further, even if Naples establishes liability against the Debtor in Miller County, there will likely be continued claims litigation in this Court. The Court also notes that Greg has filed two claims in this case, which are factually related to the Miller County Case, but he has not moved for relief to proceed in Miller County, and this Court will have to adjudicate those claims provided there are funds with which to pay them and no settlement is reached. Allowing the Trustee to proceed with his efforts to sell the Debtor without the distraction of trying of a lawsuit in Miller County is reasonably certain to reduce the total amount of litigation in this case, which is beneficial to both the parties, the Debtor's creditors, and the courts. Under these circumstances, the Court does not find that judicial economy weighs in favor of granting Naples relief from stay.
In asserting that the Miller County Case is ready to proceed in Miller County, Naples points out that Judge Hickey has already concluded that the Miller County Court "appears poised" to try the case, and that Judge Taylor likewise held in connection with Kimbro's Chapter 7 bankruptcy case that the Miller County Case was a "well-progressed lawsuit" and could be timely resolved there. Naples points to what has transpired in that case already: (1) Judge Johnson held a hearing and issued a preliminary restraining order; (2) a consent judgment was entered against LHI; and (3) Judge Johnson held a hearing on various discovery matters in February 2012 and also denied motions to dismiss filed by all of the defendants except Debtor whose motion to dismiss was stayed as a result of the bankruptcy filing.
Arguing that the Miller County Case is not trial-ready, the Southwest Trustee points out that the Debtor has yet to file an Answer in the Miller County Case; the Debtor has a pending motion to dismiss; as the recently appointed trustee, he has not had the opportunity to conduct his own discovery or otherwise defend the lawsuit; and that other defendants may need to conduct additional discovery as well. Specifically, the Southeast Trustee argues that more discovery is needed as to which assets of the Debtor Naples seeks to impose a constructive trust, as well as the circumstances under which Pinewood received a $1.3 million consent judgment against LHI whose guarantee of the lease at issue was
Additionally, the Southeast Trustee asserts that Judge Hickey's finding that Miller County was "poised to adjudicate the case" in her ruling to remand the Miller County Case to Miller County based on mandatory abstention is not the same as a finding the case is trial-ready for purposes of relief from stay, and that accordingly, issue preclusion does not apply. The Southeast Trustee points out that whether a case can be timely adjudicated in another forum is an element of mandatory abstention that must be answered yes or no, while the degree of trial-readiness is simply a factor for the Bankruptcy Court to consider while ruling on a motion for relief from stay to allow litigation to continue in another forum. The Court agrees that issue preclusion does not preclude this Court from reaching a different conclusion as to the degree the Miller County Case is ready for trial, particularly where a trustee has since been appointed for the Debtor.
With respect to trial readiness, the Court finds that the Miller County Case is far enough along to find that this factor weighs in favor of granting relief from stay, although not strongly, as the Debtor must still file an answer, some additional discovery is needed, and the Southeast Trustee would now be involved. However, other factors, discussed below, simply outweigh the trial readiness factor at this time.
Although Naples asserts there was no evidence of any preliminary bankruptcy issues to be decided in the stayed action and that the Complaint involves only state law issues, the Southeast Trustee and the Southwest Trustee argue there are preliminary bankruptcy issues because Naples has not filed a proof of claim and may not be entitled to share in the distribution of any estate assets in any case. In support, both the Southeast Trustee and the Southwest Trustee cite United Imports, supra, and Benedor Corp. v. Conejo Enters., Inc. (In re Conejo Enters., Inc.), 96 F.3d 346, 352-53 (9th Cir.1996). In United Imports, the court held that a bankruptcy estate should not "be forced to defend a lawsuit in which any monetary judgment obtained in the suit could not be enforced against assets of the estate." 203 B.R. at 168. Likewise, the Ninth Circuit Court of Appeals in Conejo held that
Conejo at 352-53. Conejo also involved a situation where the District Court had determined that mandatory abstention required the case be remanded to state court, but the appellate court determined that the question of stay relief is a separate analysis that should take into account whether or not the creditor has filed a
This Court agrees with the Southeast Trustee's position. Determining whether Naples has an allowable claim in this bankruptcy proceeding is a preliminary bankruptcy issue. At trial, the Southeast Trustee argued that Naples's Motion for Relief constitutes an informal proof of claim;
Additionally, the Southwest Trustee argues that the avoidance powers of § 544(a)(3) might trump any attempt to impose a constructive trust sought by Naples in Miller County. See e.g., In re Paul J. Paradise & Associates, Inc., 249 B.R. 360, 366-67 (D.Del.2000); In re Perrow, 498 B.R. 560, 575-76 (Bankr.W.D.Va.2013); In re Project Homestead, Inc., 374 B.R. 193 (Bankr.M.D.N.C.2007). This argument is well-taken because it illustrates the complexity that will result should relief from stay be granted. However, it is not necessary to discuss at length, as relief from stay is not granted to allow a constructive trust to be imposed on the Debtor's assets in any case, as discussed below.
Naples contends he is likely to succeed on the merits of the Miller County Case, based on rulings by Judge Johnson in Miller County and Judge P.K. Holmes III. Specifically, while describing the background of the Southwest AP in a decision reversing the approval of a settlement of that case, Judge Holmes stated that the Stephenses (Alice and Kimbro) had fleeced both Living Hope Southwest and LHI, used those assets to fund the Debtor (LHSE), and then used LHSE as their primary source of money. Judge Johnson found in a Preliminary Injunction/Restraining Order that Naples's predecessor, Pinewood, was likely to prevail on the merits and be able to pierce the veils of the
The Court finds that collateral estoppel does not apply to Judge Johnson's preliminary injunction. While the order finds that corporate veils are likely to be pierced, and that Kimbro and Alice have likely made fraudulent transfers, it makes no findings with respect to transfers from LHI to the Debtor and the likelihood of success with respect to a constructive trust on LHSE's assets. Further, preliminary injunctions are not considered final orders for purposes of collateral estoppel. See generally Medtronic, Inc. v. Gibbons, 684 F.2d 565, 569 (8th Cir.1982) ("Moreover, the doctrine of collateral estoppel requires a prior final judgment; the granting or denial of a preliminary injunction is generally not based on a final decision on the merits and is not a final judgment for the purposes of collateral estoppel.") (citing Starbuck v. City & County of San Francisco, 556 F.2d 450, 457 n. 13 (9th Cir. 1977), citing 1B Moore's Federal Practice PP 0.401, .409(1), .441(2) (2d ed. 1947)). Accordingly, the Court must examine more closely whether Naples is likely to succeed in Miller County.
The Southwest Trustee questions Naples's likelihood of success in Miller County by pointing out that Naples's theory of liability against the Debtor is predicated on applying a reverse veil piercing theory to establish liability on the Debtor for LHI's guarantee of Living Hope Southwest's lease agreement which was capped at $500,000. The Southwest Trustee also cites Grundy's testimony in the Southwest AP trial (the transcript of which was put into evidence during the hearings on the motions to appoint the trustee) in which he stated that the Debtor never received any assets from LHI and used LHI's provider number pursuant to a contractual agreement. The Southwest Trustee also contends that Naples's success of obtaining a constructive trust on the Debtor's assets is slim as it is a remedy rarely granted and only in the most egregious circumstances. See United Imports at 169 (citing Chiu v. Wong, 16 F.3d 306 (8th Cir.1994)).
Likewise, the Southeast Trustee argues that Naples's likelihood of success in obtaining a constructive trust is questionable given that Judge Mixon's ruling that no actual assets passed from Living Hope Southwest to the Debtor, and Grundy's testimony regarding LHI and the Debtor (as described above). With respect to Naples's reverse veil-piercing theory, the Southeast Trustee argues that there is no basis under which a court can find that LHI and the Debtor are the alter egos of each other because there is no parent-subsidiary relationship between the Debtor and LHI and the two entities do not share common shareholders (i.e., the shareholder of LHI was Wanda Stephens, and the members of the Debtor are Kimbro Stephens and the A.K. Trust). Naples responds that he is seeking to pierce the veil of all entities to Kimbro (i.e., although Kimbro is not the shareholder of LHI, Naples maintains he was in fact controlling LHI) to assert liability against the Debtor LHSE.
Despite the difficulty in establishing alter ego liability and particularly reverse piercing, given the actions of some of the individuals involved, the Court finds it is likely Naples can pierce the veils of some defendants — after all, this Court has already found that Kimbro controls LHSE for his own benefit — but the Court does not find a strong likelihood that Naples will successfully establish liability against the Debtor LHSE for the debts of LHI given the complexities of Naples's legal theories, and Grundy's previous testimony in this case regarding the relationship between LHI and LHSE.
The parties make several distinct arguments regarding the burdens they face if the Miller County Case is allowed to proceed
Naples argues that the burden he faces if forced to litigate in two forums (in Miller County against all the defendants except Debtor and in Bankruptcy Court to establish a claim against Debtor) outweighs any prejudice on the Debtor's estate. Naples further argues that any prejudice to the Southeast Trustee if Naples is allowed to proceed against Debtor in Miller County is illusory in that the Southeast Trustee will likely need to participate in or closely monitor the Miller County Case regardless of the Debtor's status as a defendant there due to the presence of Kimbro and Grundy (who are described by Naples as the Debtor's control persons). Naples also asserts that the Miller County Case would not distract the Southeast Trustee from overseeing the Debtor or attempting to sell it because he admitted that the lawsuit would not affect him personally, that he would delegate the trial to litigators in his law firm, and that selling Chapter 11 Debtors is routine and something he frequently does. Naples also points out that since Grundy is an individual defendant in the Miller County Case, he would be required to participate whether or not the case proceeds against the Debtor in Miller County. Additionally, Naples argues that Grundy would have to participate in both trials, should the case against Debtor proceed in this Court. With respect to the cost of defense, Naples argues that the cost to the estate is insufficient to deny relief from stay, and that in any case, the cost would likely increase if the Debtor is involved in two trials.
The Southeast Trustee argues that Naples has not proven any particular hardship by pursuing his claim against the Debtor in bankruptcy court. The evidence cannot grow further stale; Naples has appeared in Little Rock numerous times in this case and others. The Southeast Trustee further maintains that allowing the Miller County Case to proceed will subject the Debtor's estate to the costs of litigating in Miller County and notes that monitoring a trial is far less costly than actually litigating one.
The Court finds that Naples will be burdened by pursuing his claim against the Debtor in bankruptcy court while separately trying his suit against the other defendants, but that burden does not outweigh the prejudice to this estate and other creditors if required to litigate in Miller County, particularly since the Debtor's value (if successfully sold) may not be high enough to pay any claim Naples may establish. The administrative expenses incurred in defending this litigation would only further deplete estate resources. The Southeast Trustee's participation in the Miller County Case against 12 defendants will undoubtedly be more expensive than litigating Naples's claim in bankruptcy if it is even necessary to do so.
Naples contends the overwhelming evidence of his burden is how long Naples has had to wait to try his claims against the Debtor and others due to their actions — specifically, the bankruptcies of two entities and one individual, an injunction in one case, and two attempted removals to federal court based on bankruptcies, resulting in a delay of over five years. However, as pointed out by the Southwest Trustee, Pinewood did not seek relief from the stay in the Living Hope Southwest case for more than three years. Naples responded that Pinewood was adequately protected during that time and therefore did not move for relief from stay.
Naples's focus on the actions of Debtor and related entities, in filing for bankruptcy
Naples argues the impact on other creditors is minimal in that if Naples is successful in Miller County, the other creditors' pro-rata distributions in this bankruptcy case might be reduced (which would happen no matter where Naples's claim is tried) and a constructive trust might be imposed on assets transferred from LHI to the Debtor. Naples does not explain how a constructive trust would have a minimal impact on other creditors, but argues that because the Southwest Trustee was allowed to litigate her claims against the Debtor in another court and also sought a constructive trust on assets transferred to the Debtor, Naples should be allowed to do so as well.
Citing United Imports, both the Southeast Trustee and the Southwest Trustee argue that the imposition of a constructive trust would necessarily impose great hardship on the estate, and that even though Naples states he does not seek to enforce any judgment he obtains in Miller County against the Debtor, it may be legally impossible to keep him from enforcing such a judgment against the Debtor's estate if he in fact obtains a constructive trust in state court. In effect, by allowing relief from the stay for the Miller County Case to proceed, the Miller County Court may determine what is property of the Debtor's estate, and that is, in fact, a core bankruptcy proceeding which should be determined by the bankruptcy court. The Court agrees with this point and with the analysis in In re Rogan, 2009 Bankr.LEXIS 2090 (Bankr.N.D.Iowa 2009), cited by the Southwest Trustee, where the court explained, "[b]ecause of its exclusive jurisdiction over § 541(a) property, the bankruptcy court is both statutorily empowered and perhaps statutorily required to retain and exercise control over determinations which affect claims to estate property, and as a result affect distributions to creditors in a bankruptcy case." Rogan, at 53.
203 B.R. at 169-70. The United Imports court also quoted Bistate Oil Co. v. Heston Oil Co. (In re Heston Oil Co.), 63 B.R. 711 (Bankr.N.D.Okla.1986) to illustrate the same point:
Id. at 170-171. See also In re MJK Clearing, Inc., 286 B.R. 109 (Bankr.D.Minn. 2002) ("Although a post-petition constructive trust may be imposed to prevent a fraudulent debtor from being unjustly enriched, FBW has not proven that the circumstances of this case support the imposition of a post-petition constructive trust. The circumstances of this case simply do not rise to a level so egregious as to warrant the disruption of priority schemes.").
This Court previously granted relief from stay to allow Judge Mixon to decide whether or not to impose a constructive trust on the Debtor's assets in the Southwest AP, noting the well-reasoned holding
Finally, the Southwest Trustee is concerned that should the matter proceed in Miller County, the Debtor's co-defendants will attempt to reach a settlement with Naples that "hangs the Debtor out to dry." Southwest Trustee's Brief at 9. The Southwest Trustee points to the prior consent judgment proposed by and entered into between Greg and Kimbro allowing the Greg Stephens entities a $1.3 million judgment against the Debtor and other codefendants as well as a constructive trust on the Debtor's assets. The Court agrees that there is a substantial risk agreements could be made in state court that put the Debtor's estate at further risk.
The Southeast Trustee's most persuasive argument against granting relief from stay is that litigating in Miller County will negatively impact the Trustee's process of selling the Debtor to maximize the value of the estate. The Southeast Trustee argues the best way to determine the Debtor's value will be to find a willing buyer. The Southeast Trustee asserts that once the assets are liquidated, it may not be necessary to litigate claims, particularly if estate resources are depleted by paying attorneys to litigate in other forums. More specifically, the Southeast Trustee explains:
Having carefully considered the parties' arguments with respect to the burdens each will face, the Court finds that while Naples will be burdened by having to pursue his claims against the Debtor separately from his claims against the other defendants, the Debtor's estate and other creditors face a larger burden. Naples seeks a constructive trust on some of Debtor's assets which will disrupt the priority scheme in Debtor's bankruptcy case and negatively impact other creditors. Finally, and most importantly, allowing the Southeast Trustee to move forward with a sale of the Debtor without the distractions of defending the Miller County Case is the best way to bring closure to this case while preserving value for the estate.
At first glance, this appears to be a case where relief from stay should be granted to allow Naples to continue his lawsuit against the Debtor and other defendants. It appears that Kimbro has used various entities to avoid paying Naples, and has successfully used the bankruptcy system to create further delay. However, Naples is not the Debtor's only creditor, and this is not a two-party dispute between Naples and the Debtor, or the Stephenses. Understandably, Naples's goal has been to be paid in full by the Debtor and other Debtor-related persons and entities. Naples seeks to establish liability and distribution to himself based on his view of alleged pre-bankruptcy agreements, obligations, and losses. In contrast, this Court's sole purpose is to ensure that Debtor's obligations to its creditors are established, and its assets are distributed under principles as codified by the Bankruptcy Code. To achieve that goal, this Court has devoted substantial resources to the studied and informed resolution of all issues raised in this case. Against this background, and after carefully analyzing the complexities presented by this Motion for Relief, the Court denies Naples's request for relief from stay. The Trustee plans to sell the Debtor. Litigation in Miller County will impede that process and will result in increased and possibly wholly unnecessary administrative fees. However, if not encumbered by litigation in Miller County, the Trustee can find a buyer for the Debtor, and the sale amount will establish the value available for distribution. When the amount is known, then litigation should be tempered by the reality of Debtor's monetary value. To force Debtor to litigate in Miller County prior to the determination of its value lacks rationale.
In sum, the best way to bring an end to eight years of litigation between these parties is to allow the court-appointed trustee to market the Debtor, find a buyer, and establish the Debtor's value so the parties can make rational decisions. This is also the only chance of any creditor being fairly paid, which is the goal of the bankruptcy process. To allow Naples to litigate against the Debtor in Miller County will, without doubt, either make Debtor unmarketable or reduce its value substantially. The harm to creditors in allowing relief from stay far exceeds the harm to Naples. While the sale process continues, the danger to creditors of further loss or manipulation is mitigated by the Debtor's ability to continue to generate profits under the control of an independent trustee. The Court will hold periodic status conferences to monitor the progress of the Southeast Trustee's efforts to sell the Debtor to ensure
For these reasons, it is
Emphasis added. This language would indicate Naples's complaint would not seek to impose a constructive trust on assets transferred to the Debtor; however, his brief and arguments at trial acknowledged that he does in fact seek a constructive trust on assets transferred to the Debtor from LHI. See e.g., Transcript at 9:20; 45:12-14; 100:9-14.
Id. at 682 (quoting In re Donovan Wire & Iron Co., 822 F.2d 38, 39 (8th Cir.1987) (per curiam) and Tarbell v. Crex Carpet Co., 90 F.2d 683, 685-86 (8th Cir.1937) (emphasis added)).
Although it may be difficult to find an Arkansas alter ego/piercing-the-veil case that pierces an entity in favor of a third-party control person with no actual ownership interest, that did occur in Constellation (in the context of invalidating a lien purportedly held by that third party), and accordingly, a direct parent-subsidiary relationship may not be essential to a piercing-the-veil claim in Arkansas. However, as noted by the Arkansas Court of Appeals, "the rule of piercing the fiction of a corporate entity should be applied with great caution." Humphries v. Bray, 271 Ark. 962, 611 S.W.2d 791 (Ark.Ct.App.1981). So while it may not be impossible to assert a veil-piercing claim against a non-owner, even veil-piercing in the traditional context is not favored, and is difficult to prove.
Id. at 840 n. 12. Judge Eisele also expressed reservations about the viability of triangular piercing stating that the doctrine
Id.
