Roxford Foods, Inc., In re

• Decision Date: 20 December 1993
• Docket Number: 92-16259,Nos. 92-16245,s. 92-16245
• Citation: 12 F.3d 875
• Parties: , 25 Bankr.Ct.Dec. 85, Bankr. L. Rep. P 75,639 In re ROXFORD FOODS, INC., Debtor. CIVIC CENTER SQUARE, INC., Plaintiff-Appellee, v. James M. FORD, as trustee of the Estate of Roxford Foods, Inc., Defendant-Appellant. PURINA MILLS, INC.; James M. Ford, as trustee of the Estate of Roxford Foods, Inc., Plaintiffs-Appellants, v. CIVIC CENTER SQUARE, INC., Defendant-Appellee, and Roxford Foods, Inc., Debtor.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 875

12 F.3d 875

27 Fed.R.Serv.3d 1235, 25 Bankr.Ct.Dec. 85,

Bankr. L. Rep. P 75,639

In re ROXFORD FOODS, INC., Debtor.

CIVIC CENTER SQUARE, INC., Plaintiff-Appellee, v. James M. FORD, as trustee of the Estate of Roxford Foods, Inc., Defendant-Appellant.

PURINA MILLS, INC.; James M. Ford, as trustee of the Estate

of Roxford Foods, Inc., Plaintiffs-Appellants, v. CIVIC CENTER SQUARE, INC., Defendant-Appellee, and Roxford Foods, Inc., Debtor.

Nos. 92-16245, 92-16259.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 2, 1993.

Decided Dec. 20, 1993.

Claudia L. Greenspoon, Bronson, Bronson & McKinnon, Los Angeles, CA, for defendant-appellant.

Malcolm Leader-Picone and Debra Murphy Lawson, Kennedy & Wasserman, Oakland, CA, for plaintiffs-appellants.

David R. Jenkins, Lang, Richert & Patch, Fresno, CA, for plaintiff-appellee.

Appeal from the United States District Court for the Eastern District of California.

Before: CHOY, CANBY, and NOONAN, Circuit Judges.

CHOY, Circuit Judge:

This appeal arises out of an adversary proceeding brought in the bankruptcy case of Roxford Foods, Inc. (Roxford) by appellee Civic Center Square, Inc. (CCS). James M. Ford, as Trustee for Roxford (the Trustee), and Purina Mills, Inc. (Purina) appeal the decision of the district court affirming the bankruptcy court's Order Denying Motion to Vacate Judgment. We reverse.

I. FACTUAL AND PROCEDURAL BACKGROUND

In March of 1990, Roxford filed for Chapter 11 in bankruptcy. In order to facilitate the sale of certain of its real property and equipment, Roxford filed three motions, including a Joint Motion for Order Authorizing Distribution of Sale Proceeds. On April 6, 1990, Purina filed an objection to this motion, contending that distribution should not proceed without requiring Caisse Nationale de Credit Agricole ("Credit Agricole") and Farm Credit Leasing Services Corporation ("Farm Credit"), who held claims secured by the facilities, to draw down approximately $2.5 million under letters of credit. These letters of credit were issued on appellee CCS's application, and are secured by a deed of trust against a CCS building.

As a result of these objections and subsequent negotiations and stipulations, the bankruptcy court issued an order authorizing the sale of assets and the assumption of certain contracts (the "Sale Order"). Paragraph 11.2 of the Sale Order was included essentially to protect any marshalling rights of the estate and of creditors junior to Credit Agricole and Farm Credit, and to enable the bankruptcy court to require Credit Agricole and Farm Credit to draw down on the letters of credit should the court determine that such marshalling rights exist.

The Roxford bankruptcy was converted from Chapter 11 to Chapter 7 on June 7, 1990, and shortly thereafter appellant James M. Ford was named as trustee. Apparently the Trustee had difficulty obtaining counsel to represent him due to insufficient funds in the bankrupt estate, as well as the fact that because of the complexity of the case many Fresno law firms were already representing the numerous parties in the proceeding.

Between the appointment of the Trustee and October of 1990, several hearings in the bankruptcy proceeding were postponed to enable the Trustee to obtain counsel. Eventually the court issued an order stating that if the Trustee did not obtain counsel by December 14, 1990, certain claims against Purina and another creditor would be deemed abandoned.

Meanwhile, on September 19, 1990, CCS commenced the adversary proceeding from which this appeal was taken, by filing a complaint seeking a declaratory judgment determining whether the named defendants could marshal the Credit Agricole and Farm Credit liens. This complaint was filed in the same bankruptcy court as the underlying pending bankruptcy. The complaint named the Trustee and other parties that CCS believed had the potential to assert marshalling rights as defendants. It did not name Purina because Purina's lien attached within 90 days of the Roxford petition, and therefore CCS contends it had been terminated under California Code of Civil Procedure Sec. 493.030(b). ¹

On September 21, 1990, all defendants in the declaratory relief action, including the Trustee, were served the summons and complaint by mail at their correct addresses, pursuant to Rule of Bankruptcy Procedure 7004(b)(1). Summons and proofs of service were filed on September 24, 1990. On November 1, 1990, CCS sent the Trustee a letter advising him to respond within five days or face default. The Trustee never responded to this letter. At the pretrial conference, on November 19, 1990, the Trustee did not appear, and the court granted CCS's request to take default. On November 26, 1990, CCS served the Trustee a proposed entry of default by mail, to which the Trustee did not respond. On December 4, 1990, a formal order of default was signed by the court, and on December 13, 1990, notice of entry of default was entered and the clerk's office was served.

The Trustee claims that he does not recall receiving the summons and complaint, or any notice of the intent of CCS to seek default, or any pleading in the adversary proceeding.

In the meantime, on November 30, 1990, Purina notified all parties in the underlying bankruptcy action, including CCS, that the Trustee proposed to retain Cindy Dennis of Dennis, Shafer, Fennelly & Creim ("DSF & C") as counsel. CCS responded by a letter on December 6, 1990, stating that retention of DSF & C as counsel was not appropriate, because Purina would be paying for the representation. According to CCS this created a conflict of interest if Purina asserted marshalling rights independent of the Trustee. On December 14, 1990, Purina responded with a letter to DSF & C and all parties stating that it was their position that it would be appropriate for the Trustee to pursue the marshalling claim. DSF & C was appointed as counsel for the Trustee on January 24, 1991, and notice of this was served on all parties.

On March 25, 1991, CCS filed a motion in the declaratory judgment action for summary judgment against all defendants. In reliance on the entry of default, CCS never served this motion on the Trustee or DSF & C, the counsel the Trustee had retained in the underlying bankruptcy proceeding. On April 25, 1991, summary judgment with respect to answering defendants and default judgment with respect to the Trustee was entered in favor of CCS, with no sustainable opposition offered by any party. The judgment made three determinations: (1) The letters of credit were not assets of the debtor; (2) Marshalling was not available against the letters of credit as to any defendant; and (3) No facts existed to support a claim of equitable subordination against CCS.

On June 14, 1991, the Trustee timely filed a motion to vacate the declaratory judgment under Fed.R.Civ.P. 60(b). Purina also moved to vacate the judgment. The bankruptcy court struck Purina's motion for lack of standing, and granted the portion of the Trustee's motion seeking to vacate the judgment pertaining to equitable subordination, but denied the Trustee's motion to vacate the rest of the judgment. On appeal, the district court affirmed the Order Denying Motion to Vacate Judgment.

II. DISCUSSION

A. The Automatic Stay was not Violated:

The Trustee asserts that the declaratory judgment should be vacated as void pursuant to Rule 60(b) because the adversary proceeding was commenced in violation of the automatic stay, under 11 U.S.C. Sec. 362. The bankruptcy court rejected this argument as inapplicable, because the declaratory relief sought "merely seeks to establish what is or is not property of the estate," rather than an attempt to obtain property from the estate. The district court also rejected this argument, but on a different ground. The court relied on In re North Coast Village, Ltd., 135 B.R. 641 (9th Cir. BAP 1992), which held that the stay did not apply to proceedings against the debtor commenced in the same bankruptcy court where the debtor's bankruptcy was pending. Id. at 643-44. The district court noted that In re North Coast Village followed this court's holding in In re Teerlink Ranch Ltd., 886 F.2d 1233, 1237 (9th Cir.1989), where this court held that "[t]he stay does not operate against the court with jurisdiction over the bankrupt."

Our decision on this issue is controlled by our decision in Teerlink Ranch, where this court found the automatic stay inapplicable to a suit commenced in the same court where the bankruptcy was pending. Therefore, the district court was correct in finding that the declaratory judgment is not void on this ground, as it was not commenced in violation of the automatic stay.

B. Failure to give 55(b)(2) Notice:

The Trustee contends that the declaratory judgment should be vacated pursuant to Fed.R.Civ.P. 60(b) because it is void for lack of notice under Fed.R.Civ.P. 55(b)(2). ² The standard of review for the denial of a 60(b) motion is for an abuse of discretion. In re Hammer, 940 F.2d 524, 525 (9th Cir.1991). The discretion of the court is limited by three policy considerations. First, because of the remedial nature of Rule 60(b), it must be liberally applied. Second, because default judgments are disfavored, cases should be decided on their merits if possible. Thirdly, so long as relief is timely sought, and there is a meritorious defense, any doubt should be resolved in favor of setting aside a default judgment. Wilson v. Moore and Assocs., Inc., 564 F.2d 366, 368 (9th Cir.1977).

Fed.R.Civ.P. 55(b)(2) provides in part:

If the party against whom judgment by default is sought has appeared in the action, the party (or, if appearing by representative, the party's representative) shall be served with written notice of the application for judgment at least 3 days prior to the hearing on such application.

The Trustee contends that because he was never given notice of the hearing on CCS's motion...