James M Ryan

MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
IN RE 	)
)
TACTICAL ORDINANCE & 	) 	Case No. 04-04422 TLM
EQUIPMENT CORPORATION, 	)
)
Debtor. 	) 	MEMORANDUM OF DECISION
)
_______________________________ 	)
)
IN RE 	)
)
JAMES M. RYAN, 	) 	Case No. 04-04423 TLM
)
Debtor. 	)
)
________________________________ 	)
)
IN RE 	)
)
MARK ALLAN WEISS, 	) 	Case No. 04-04424 TLM
)
Debtor. 	)
)
________________________________ 	)
BACKGROUND AND FACTS
Petitions for relief were filed by the each above named debtors on
December 13, 2004. The case of Tactical Ordinance & Equipment Corporation
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1 TOE, Ryan and Weiss are collectively referred to herein as “Debtors.”
MEMORANDUM OF DECISION - 2
(“TOE”) is a chapter 7 liquidation. The cases of James M. Ryan (“Ryan”) and
Mark Allan Weiss (“Weiss”) are chapter 13 reorganizations.1
On December 14, 2004, the day after the bankruptcy filings, creditors
Richard A. Garcia, Joyce A. Olenik and TriTech Training, Inc. (collectively
“Creditors”) filed a motion in each case asking the Court to lift the § 362(a)
automatic stay so they could prosecute a jury trial in state court against Debtors.
All three Debtors oppose Creditors’ motion. The chapter 7 trustee in the
TOE case, Richard Crawforth (“TOE Trustee”), filed no formal objection but also
opposes Creditors’ motion. The chapter 13 trustees for Debtors Ryan and Weiss
do not object to stay relief.
The underlying state court litigation (all within the courts of the Fourth
Judicial District of the State of Idaho, in and for Ada County) has a lengthy
history. As explained by the state court in its memorandum of decision regarding
partial summary judgment, Ex. 21, the litigation between these parties began when
Creditors filed a small claims lawsuit against Debtors alleging a breach of a license
agreement. Immediately before the small claims action was to be tried, TOE filed
an action in the district court against one of the Creditors, Richard Garcia, alleging
breach of fiduciary duty, conversion, unjust enrichment, negligence, and
interference with prospective economic advantage. TOE asked the district court to
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MEMORANDUM OF DECISION - 3
consolidate this suit with the small claims action, but apparently neglected to ask
the small claims court, which entered a default judgment in favor of Creditors.
After that judgment was set aside, the small claims case was tried and another
judgment, for $4,035.00, was entered in favor of Creditors. Creditors filed another
complaint against Debtors in the district court in which they again alleged several
counts including breach of a shareholders’ agreement and licensing agreement.
The two district court cases were consolidated. Id. at 1-3.
A preliminary injunction was entered against Debtors, and the court also
entered partial summary judgment in favor of Creditors. However, two days
before the trial was to start, Debtors filed their bankruptcy petitions.
Creditors immediately requested that this Court lift the automatic stay on an
emergency basis to allow them to try the action as scheduled. The Court refused
this extraordinary relief, and Creditors thereafter continued to urge their request for
stay relief so that they could obtain another trial date and proceed in state court.
A final hearing under § 362(e) was held before this Court on February 10,
2005. After reviewing the evidence presented at the hearing and the arguments of
the parties, the Court concludes Creditors’ motion for stay relief should be denied
at this time. 	The Court’s findings of fact and conclusions of law, as required by
Rule on these contested matters, are set forth in this Decision.
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2 Section 362(d), in relevant part, states:
On request of a party in interest and after notice and a hearing, the court shall grant
relief from the stay provided under subsection (a) of this section, such as by
terminating, annulling, modifying, or conditioning such stay —
(1) for cause, including the lack of adequate protection of an interest in
property of such party in interest.
MEMORANDUM OF DECISION - 4
DISCUSSION AND DISPOSITION
A. Standards for stay relief
When the bankruptcy petitions were filed, an automatic stay went into
effect under § 362(a)(1), prohibiting Creditors from continuing the state court
litigation against Debtors. The “breathing spell” debtors receive under § 362(a) is
a well recognized, intentional benefit of bankruptcy relief, and among other things
permits debtors to evaluate their situation and propose a repayment plan. See, e.g.,
Benedor Corp. v. Conejo Enters., Inc. (In re Conejo Enters., Inc.), 96 F.3d 346,
351-52 (9th Cir. 1996). The stay also protects creditors from one another, and
furthers the bankruptcy design of an orderly, collective claim resolution and
payment process. Id.
But while the automatic stay is one of the fundamental protections for
bankruptcy debtors, creditors are not without recourse. Section 362(d) directs
courts to grant relief from the stay when cause is shown.2
“Cause” is not defined in the Bankruptcy Code. Instead, this Court must
exercise its discretion on a case by case basis to determine whether sufficient cause
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MEMORANDUM OF DECISION - 5
has been demonstrated to support relief from the automatic stay. See Christensen
v. Tucson Estates, Inc. (In re Tuscon Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir.
1990); Santa Clara County Fair Assoc., Inc. v. Sanders (In re Santa Clara County
Fair Assoc., Inc.), 180 B.R. 564 (9th Cir. BAP 1995).
In appropriate circumstances, stay relief can be granted to allow litigation in
non-bankruptcy forums to continue. Such a possible modification of the stay was
clearly contemplated by Congress:
[I]t will often be more appropriate to permit proceedings to continue in
their place of origin, when no great prejudice to the bankruptcy estate
would result, in order to leave the parties to their chosen forum and to
relieve the bankruptcy court from many duties that may be handled
elsewhere.
H.R.Rep. No. 95-595 at 341 (1977); S.Rep. No. 95-989 at 50 (1978), reprinted in
1978 U.S.C.C.A.N. 5787, 5836; but see In re Curtis, 40 B.R. 795, 799 (Bankr. D.
Utah 1984) (noting that Congress intended to limit such stay relief “to a fairly
narrow category of circumstances bearing little relationship to the bankruptcy case
or to the purpose of the stay.”).
In order to determine if cause exists to modify the stay and allow pending
litigation to continue in another forum, several courts have come up with lists of
“factors” to be weighed. Recently, the court in Truebro, Inc. v. Plumberex
Specialty Products, Inc. (In re Plumberex Specialty Products, Inc.), 311 B.R. 551,
559 (Bankr. C.D. Cal. 2004), listed the following twelve nonexclusive factors:
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3 As the Plumberex Specialty court recognized, the factors a court considers when
deciding whether to lift the stay for litigation to continue in another forum “are closely related to
those that a bankruptcy court must consider in deciding whether to exercise permissive abstention
under 28 U.S.C. § 1334(c)(1).” 311 B.R. at 558 (noting the Ninth Circuit’s decision in Tucson
Estates, 912 F.2d at 1165-67, and the twelve factors for permissive abstention listed therein).
MEMORANDUM OF DECISION - 6
1. Whether the relief will result in a partial or complete resolution of
the issues;
2. The lack of any connection with or interference with the bankruptcy
court;
3. Whether the foreign proceeding involves the debtor as a fiduciary;
4. 	Whether a specialized tribunal has been established to hear the
particular cause of action and whether that tribunal has the expertise to
hear such cases;
5. Whether the debtor’s insurance carrier has assumed full financial
responsibility for defending the litigation;
6. Whether the action essentially involves third parties, and the debtor
functions only as a bailee or conduit for the goods or proceeds in
question;
7. Whether the litigation in another forum would prejudice the interests
of other creditors, the creditors’ committee and other interested parties;
8. 	Whether the judgment claim arising from the foreign action is
subject to equitable subordination under Section 510(c);
9. Whether movant’s success in the foreign proceeding would result in
a judicial lien avoidable by the debtor under Section 522(f);
10. 	The interests of judicial economy and the expeditious and
economical determination of litigation for the parties;
11. Whether the foreign proceedings have progress to the point where
the parties are prepared for trial, and
12. The impact of the stay on the parties and the “balance of hurt.”
311 B.R. at 559 (quoting Curtis, 40 B.R. at 799-800); see also Edmondson v. Am.
W. Airlines, Inc (In re Am. W. Airlines, Inc.), 148 B.R. 920, 922 (Bankr. D. Ariz.
1993) (listing three general determinations and seven specific factors a court
should consider in determining whether to modify the stay).3
Certain factors may tilt decidedly in favor of the motion, and others in the
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4 See also 3 Collier on Bankruptcy § 362.10 at 362-118 (Alan N. Resnick & Henry J.
Sommer eds., rev. 15th ed. 2002) (discussing the shifting burden)
MEMORANDUM OF DECISION - 7
opposite direction. Still others may add little to the balance. At best, these factors
provide analytic tools by which proof can be sifted and weighed, assisting the
Court in appropriately exercising its discretion. See Plumberex Specialty, 311
B.R. at 559-60 (noting that not all twelve factors will be relevant and some factors
may weigh heavier in a court’s determination than others).
B. Burdens
A stay relief motion also presents a shifting burden. See Plumberex
Specialty, 311 B.R. at 557 (citing Sonnax Indus., Inc. v. Tri Component Prods.
Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1285 (2d Cir. 1990)). 4 Initially,
the party requesting relief from stay must make a prima facie showing of cause
under § 362(d)(1). See Collier on Bankruptcy § 362.10 at 362-117 (“Failure to
prove a prima facie case requires denial of the requested relief”). Once that is
accomplished, the burden of persuasion shifts to debtor to demonstrate why stay
relief should not be granted. See also §§ 362(g)(1), (g)(2) (opponent bears burden
of proof on all issues save that of debtor’s equity in property).
C. Analysis
1. 	The chapter 7 case of TOE
The TOE Trustee opposes stay relief. He correctly notes that his duties
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5 Congress recognized that “it is important that the trustee have an opportunity to
inventory the debtor’s position before proceeding with the administration of the case.” H.R.Rep.
No. 95-595 at 341 (1977); S.Rep. No. 95-989 at 50 (1978), reprinted in 1978 U.S.C.C.A.N. 5787,
5836
MEMORANDUM OF DECISION - 8
include evaluating all the assets of the estate, including the causes of action TOE
asserts against Creditors. In bankruptcy terms, the TOE case is relatively
“young.” The TOE Trustee is not yet in a position to speak to the value of this
asset, or fully evaluate the potentially offsetting liabilities Creditors contend exist.
The TOE Trustee is reasonably entitled to the time and opportunity to undertake
his analysis and determine how best to administer the property of the estate.5
The termination of the stay in favor of state court litigation would put the
TOE Trustee in an unnecessarily difficult position. Continuation of the stay will
allow him to evaluate all relevant information regarding this complex litigation
(including information that Creditors, as well as Debtors, would like him to
consider) and determine what course is best for creditors generally and for the
estate. His options are several: the TOE Trustee may seek to prosecute the causes
of the estate, through his own or special counsel; he may seek to abandon the
claims under § 554; or he may negotiate and seek Court approval of compromise
of the claims between the estate and Creditors.
Of the several factors that weigh on the question of stay relief in the chapter
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6 In general, the Court views the Plumberex factors that apply (several being irrelevant)
as preponderating against stay relief.
7 Obviously, those developments might moot the need for such relief. The inability to
predict those future events with certainty is one of the stronger reasons supporting denial of the
motion at the present time.
MEMORANDUM OF DECISION - 9
7 case, the Court finds these considerations paramount.6 The TOE Trustee should
and will be allowed an opportunity to do his job and evaluate his options. Lifting
the stay would essentially make that choice for him, or at least drastically alter the
dynamics of the decision. Creditors’ motion as to TOE will be denied. Denial is
without prejudice, and the request may be renewed depending on further
developments in the case.7
2. 	The Weiss and Ryan chapter 13 cases
The chapter 13 Debtors strongly oppose stay relief. They contend, and the
evidence would support, that there is no insurance providing for their defense of
the actions in state court. Stay relief thus, they argue, would have a dramatic
impact on their attempts to reorganize. See, e.g., § 1325(b) (addressing debtor’s
commitment of “disposable income” to the plan).
Creditors argue that neither Weiss’ nor Ryan’s chapter 13 proceedings are
likely to succeed. Creditors point to several issues that, at least in their view,
almost conclusively establish a prospective inability of either Weiss or Ryan to
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8 One should be careful not to paint with too wide a brush. Each debtor presents
different facts and circumstances, as well as similar ones.
MEMORANDUM OF DECISION - 10
confirm a chapter 13 plan. 8 To some degree, the chapter 13 trustees share this
view; both noted several existing or potential concerns related to confirmation or
successful completion of their respective debtor’s chapter 13 plan.
These arguments, however, miss the point. The hearings were not on
requests for dismissal or conversion of the chapter 13 cases under § 1307(c), nor
were they hearings on confirmation of the plans initially proposed by Weiss and
Ryan. The issue was whether the stay should be lifted. If the stay is lifted, Weiss
and Ryan would be required to defend in state court, at their own expense, or risk
entry of default judgment. In either event, the impact on their ability to
reorganize, and thus the interests of their other creditors, is placed at issue.
The litigation, under Creditors’ motion, is for purposes of liquidating the
claim, and Creditors admit that they would be required to return to this Court to
assert their judgment. See Case No. 04-04423-TLM, Doc. No. 5 at 1; Case No.
04-04424-TLM, Doc. No. 8 at 1. Creditors give short shrift to the bankruptcy
processes that exist to address questions of claims. Section 502(c)(1), for
example, allows for estimation of contingent or unliquidated claims where
liquidation might unduly delay administration. Similarly, the entire process of
plan proposal and confirmation may have an impact on whether the claims must
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9 The parties argued at some length at the § 362(e) hearing the merits of their state law
claims against one another. They will note that the Court has not addressed them in detail in this
Decision. The conclusion not to do so is intentional. First, the strength or weakness of any of the
claims, running either direction, is not directly relevant to the question of whether the stay should
be lifted. Second, there is an appropriate sensitivity to the possibility that the merits of these
(continued...)
MEMORANDUM OF DECISION - 11
be liquidated.
Further, nothing prohibits Creditors (or the chapter 13 trustees for that
matter) from seeking dismissal or conversion if they feel they can meet the
standards of § 1307(c). Dismissal would terminate the stay. Were one or both
cases converted to chapter 7 liquidations, another set of considerations would be
presented that might impact the parties’ decisions about litigating the claims.
All in all, the chapter 13 bankruptcy process provides sufficient protection
to Creditors, including the ability to renew the request for stay relief depending on
developments in these cases. The bankruptcy processes move quickly enough that
the impact on Creditors from delay is ameliorated in the event they later obtain
stay relief and ask the state court for a new trial setting.
The Court has considered all the factors identified in the above cited cases,
and those argued by the parties at hearing. Certainly a few might be viewed as
favoring Creditors and stay relief. However, the Court concludes that the majority
of the factors identified herein, including those discussed, support denial of the
motions and allowing the chapter 7 and chapter 13 bankruptcy processes to go
forward.9
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9(...continued)
unadjudicated causes may need to be addressed in the future by either this Court or the state
court.
MEMORANDUM OF DECISION - 12
CONCLUSION
Upon the foregoing, the Court concludes that each of the stay lift motions
will be denied, though without prejudice to renewal later in the respective cases
depending upon developments. Orders will be entered accordingly.
DATED: March 17, 2005
TERRY L. MYERS
CHIEF U. S. BANKRUPTCY JUDGE
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MEMORANDUM OF DECISION - 13
CERTIFICATE RE: SERVICE
A “notice of entry” of this Decision, Order and/or Judgment has been
served on Registered Participants as reflected by the Notice of Electronic Filing.
A copy of the Decision, Order and/or Judgment has also been provided to non-
registered participants by first class mail addressed to:
Thomas P. Mulally
SZABO, SPENCE & MULALLY
14156 Magnolia Blvd., Suite 200
Sherman Oaks, CA 91423
Jeffrey A. Strother
STROTHER LAW
P.O. Box 1712
Boise, ID 83701
Case No. 04-04422-TLM (Tactical Ordinance & Equipment Corporation)
Case No. 04-04423-TLM (James M. Ryan)
Case No. 04-04424-TLM (Mark A. Weiss)
Dated: March 17, 2005
/s/
Jo Ann B. Canderan
Judicial Assistant to Chief Judge Myers
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