Tucson Estates, Inc., In re

• Decision Date: 30 August 1990
• Docket Number: Nos. 88-15745,88-15776,s. 88-15745
• Citation: 912 F.2d 1162
• Parties: Bankr. L. Rep. P 73,613 In re TUCSON ESTATES, INC., Debtor. Alphus CHRISTENSEN; Homer Lawrence; Thomas Ward, Petitioners-Appellants, v. TUCSON ESTATES, INC., an Arizona corporation, Debtor-Appellee. Alphus CHRISTENSEN; Homer Lawrence; Thomas Ward, Petitioners-Appellees, Gordon Cox; Randall Newman; Murray Samuell, Jr., Intervenors-Appellants, v. TUCSON ESTATES, INC., an Arizona corporation, Debtor-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1162

912 F.2d 1162

Bankr. L. Rep. P 73,613

In re TUCSON ESTATES, INC., Debtor.

Alphus CHRISTENSEN; Homer Lawrence; Thomas Ward, Petitioners-Appellants, v. TUCSON ESTATES, INC., an Arizona corporation, Debtor-Appellee.

Alphus CHRISTENSEN; Homer Lawrence; Thomas Ward, Petitioners-Appellees, Gordon Cox; Randall Newman; Murray Samuell, Jr., Intervenors-Appellants, v. TUCSON ESTATES, INC., an Arizona corporation, Debtor-Appellee.

Nos. 88-15745, 88-15776.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 12, 1990.

Decided Aug. 30, 1990.

John A. Baade, Miller & Pitt, Tucson, Ariz., for petitioners-appellants-appellees.

Robert E. Miles, Streich, Lang, Weeks & Cardon, Phoenix, Ariz., for intervenors-appellants.

Scott H. Gan, Mesch, Clark, & Rothschild, Tucson, Ariz., for debtor-appellee.

Appeal from the United States District Court for the District of Arizona.

Before FLETCHER, PREGERSON and NELSON, Circuit Judges.

FLETCHER, Circuit Judge:

Petitioners-appellants appeal the district court's affirmance of the bankruptcy court's stay of their state litigation against the debtor, Tucson Estates, Inc., and its three sole shareholders, who are also its officers and directors. The bankruptcy court permitted the state court to litigate one of plaintiffs' (petitioners-appellants in this court) claims but not another, prevented the state court from determining liability to individual claimants in respect to the litigated claim, and prohibited the state court from entering judgment. The three officers cross-appeal the district court's reversal of the bankruptcy court's order directing release of the recordation of the state court judgment against the officers which was recorded by the plaintiffs. We reverse the bankruptcy court's order staying the litigation and find the cross-appeal moot.

FACTS

Tucson Estates, Inc. (TE, Inc.) filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code on November 24, 1987. At that time, a state court class action lawsuit against TE, Inc. and its three individual shareholders, directors, and officers, Murray Samuell, Jr., Gordon Cox, and Randall F. Newman, was about six years old. The class action plaintiffs are homeowners in a mobile home subdivision, Tucson Estates I (TE I), in which TE, Inc. owns the streets and common facilities.

The homeowners pay a fee to TE, Inc. for maintaining these facilities, among which is a golf course. Prior to gaining class action status, the original three individual homeowner plaintiffs made two claims in their state lawsuit, commenced in November 1981: (1) the homeowners are entitled to an accounting of the uses to which their maintenance fee had been put In March 1984, the state court ordered TE, Inc. to make annual accountings of the maintenance fee to the homeowners. After examining the first such accounting, the homeowners amended their complaint to allege a class action for damages for misappropriation of the maintenance fees. The plaintiffs joined the officers as individual defendants in January 1987.

and (2) the homeowners are entitled to enforcement of the promises and representations made by the subdivision's original developer creating an implied restrictive covenant that the golf course would be maintained for TE I residents' exclusive use.

On November 2, 1987, the state court granted partial summary judgment to the homeowners, holding that there was an implied restrictive covenant that the golf course be for "Tucson Estates" residents' exclusive use. The court left for trial the question of exactly what properties were encompassed by the term "Tucson Estates"--only TE I, the subdivision inhabited by the homeowners in the class action, or two neighboring areas as well. One of the neighboring areas is Tucson Estates II (TE II), owned by TE, Inc. ¹

Appeal: Bankruptcy Court Stay

TE, Inc. filed its bankruptcy petition on November 24, 1987, shortly before the state trial was scheduled to begin (on December 1). The bankruptcy court lifted the automatic stay on the state court lawsuit on December 1, allowing the state trial to proceed, which it did on December 3. The bankruptcy court held an evidentiary hearing on the stay, requested by TE, Inc., on December 5.

In deciding whether to reimpose the stay, the bankruptcy court expressed concern that it would be bound by the state court judgments regarding (1) the amount of damages awarded and (2) the area benefitted by the restrictive covenant. Evidence indicated that applying the covenant to benefit only TE I would diminish the value of TE II, and thus the estate as well, by between $1.18 million and $2.8 million. On December 8, the bankruptcy court reimposed the stay on the state trial of the covenant issue but permitted the parties to try the misappropriation claim. The bankruptcy court prohibited the state court, however, from determining the liability to each claimant and entering a final judgment against the bankrupt. ²

The three officers had intervened in the stay proceeding, and the bankruptcy court stayed execution of any judgment against both them and TE, Inc. The court was concerned that the officers were "really the alter ego of Tucson Estates" and that the plaintiff class could circumvent the stay against TE, Inc. by executing a judgment against the officers. Transcript of Proceedings at 15 (Dec. 5, 1987) [hereinafter Dec. 5 Transcript]. ³

On October 28, 1988, the district court on appeal found that the bankruptcy court did not abuse its discretion in staying litigation of the covenant issue and prohibiting determination of and entry of final judgment on the misappropriation damage claims. The homeowners appeal this ruling.

Cross-Appeal: Release of Judgment Recordation

The jury reached a verdict in the state trial on December 22, 1987. The state court entered judgment against the officers for $4.8 million but reserved jurisdiction to enter judgment against TE, Inc. if and when permitted by the bankruptcy court. The homeowners recorded the judgment

against the officers the next day. The officers sought relief from the recordation, alleging that the bankruptcy court's stay prohibited it. On February 16, 1988, the bankruptcy court ordered the release of the recordation. The homeowners appealed the release order, arguing that the stay permitted recordation, although not execution. The district court reversed on October 28, 1988. On December 21, 1988, the Arizona Court of Appeals affirmed in part, reversed in part, and remanded the state case, appealed by the officers, to the Arizona trial court for retrial because of state law errors in the first trial. The Arizona Supreme Court denied a petition and cross-petition for review on June 5, 1990. The officers cross-appeal from the district court's decision denying release of the recordation.

JURISDICTION

An order denying relief from a bankruptcy stay is appealable. In re Kemble, 776 F.2d 802, 805 (9th Cir.1985). We have jurisdiction under 28 U.S.C. Sec. 158(d).

STANDARD OF REVIEW

We review the district court's decision on an appeal from a bankruptcy court de novo. See In re Windmill Farms, Inc., 841 F.2d 1467, 1469 (9th Cir.1988) (review of Bankruptcy Appellate Panel decision). We apply the same standard of review to the bankruptcy court findings as does the district court: findings of fact are reviewed under the clearly erroneous standard, and conclusions of law, de novo. Id. We may reverse the bankruptcy court's denial of the stay if that court abused its discretion. In re Universal Farming Indus., 873 F.2d 1334, 1337 (9th Cir.1989).

DISCUSSION

I. Appeal: Bankruptcy Stay

A bankruptcy filing imposes an automatic stay of all litigation against the debtor. 11 U.S.C. Sec. 362(a). A bankruptcy court "shall" lift the automatic stay "for cause." Id. Sec. 362(d)(1). "Cause" has no clear definition and is determined on a case-by-case basis, In re MacDonald, 755 F.2d 715, 717 (9th Cir.1985). Where a bankruptcy court may abstain from deciding issues in favor of an imminent state court trial involving the same issues, cause may exist for lifting the stay as to the state court trial. See In re Castlerock Properties, 781 F.2d 159, 163 (9th Cir.1986).

The circumstances under which a bankruptcy court should abstain are spelled out in 28 U.S.C. Sec. 1334, part of the 1984 amendments to the Bankruptcy Act of 1978. Congress passed the amendments to heal constitutional infirmities in the Act's jurisdictional provisions found by the Supreme Court in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). Bankruptcy Amendments and Federal Judgeship Act of 1984, Statements by Legislative Leaders, 1984 U.S.Code Cong. & Admin.News 576. The Court held in Marathon that a traditional state common-law action subjected to federal adjudication because of a bankruptcy filing must be heard by an Article III judge. See id. at 92, 102 S.Ct. at 2882 (Burger, C.J., dissenting) (describing the plurality's holding as limited by the concurring opinion); Castlerock, 781 F.2d at 160 n. 1.

Section 1334 sets forth when a bankruptcy court must abstain and when it may abstain in favor of state court adjudication of an issue. Because the parties do not address the propriety of mandatory abstention under 28 U.S.C. Sec. 1334(c)(2) and because we reverse on permissive abstention grounds, we need not consider mandatory abstention. Section 1334(c)(1) governs permissive abstention:

Nothing in this section prevents a district court in the interest of justice or in the interest of comity with State courts or respect for the State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.

A Texas bankruptcy court has summarized the factors a court should consider when deciding whether to abstain (1) the effect or lack thereof on the efficient administration of the estate if a Court recommends abstention, (2) the...