Alleged Partnership of Ashbaugh and Hall

1 In a separate Decision issued in this case, the Court concludes that Debtor’s chosen
lawyers are not qualified for employment under § 327(a) of the Code. It is not clear that the
January 20 hearing will be able to proceed as scheduled. Wh ether it can depends on D ebtor’s
response to that ruling and the engagement of substitute counsel. If the parties are not able to
proceed on January 20, depending on the circumstances presented, the Court could exercise its
discretion under § 362(e) and Fed. R. Bankr. P. 4001 to extend the 30 day time within which the
final hearing must be concluded.
MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
IN RE )
)
Alleged partnership of PHILLIP ) Case No. 04-04184
ASHBAUGH and DAVID LEO )
HALL, d/b/a MERIDIAN DRY )
CLEANERS, )
)
Debtor. ) MEMORANDUM OF DECISION
)
________________________________ )
INTRODUCTION
Before the Court is a motion for relief from stay under § 362(d). Following
a preliminary hearing on December 22, 2004, see § 362(e), the Court took the
motion under advisement, but scheduled a final hearing for January 20, 2005, in
the event such a hearing was necessary. See Doc. No. 13. The Court concludes
that factual issues preclude a determination on the merits of the motion at this time,
and such factual issues must be resolved via a § 362(e) final hearing.1
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MEMORANDUM OF DECISION - 2
BACKGROUND AND FACTS
The “Alleged partnership of Phillip Ashbaugh and David Leo Hall, d/b/a
Meridian Dry Cleaners” (hereafter “Debtor”), filed a voluntary chapter 11 petition
for relief on November 22, 2004, commencing the instant case. Doc. No. 1.
Debtor claims to own certain real property in Meridian, Idaho, on which the dry
cleaning business is conducted. Doc. No. 4 at schedule A (claiming a fee simple
ownership interest in real property located at 1505 N. Main St., Meridian, Idaho,
worth $230,000.00). Debtor’s schedules list creditor Jerry Mortensen as holding a
$105,000.00 claim secured by that real property. Id. at schedule D.
On November 30, 2004, Jerry and Lorraine Mortensen filed a motion for
relief from the automatic stay of § 362(a). Doc. No. 2. In their motion, the
Mortensens alleged that they sold the property in January, 1996 “to David Leo
Hall and Phillip Ashbaugh, individually, as tenants in common.” Id. at 1. The
$121,500.00 note for the unpaid balance of the purchase price is signed by Hall
and Ashbaugh individually. Id. at Ex. B. The warranty deed to the property
conveys title to “D. Leo Hall and Phillip Ashbaugh” and the deed of trust securing
the Mortensens similarly referred to the two individuals by name, and is signed
and acknowledged in that form. Id. at Exs. A, C.
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2 The Court takes judicial notice of its files and records in that case, and in the instant
case. Fed. R. Evid. 201.
3 The parties agree a state court action relative to winding up the partnership pends
though is stayed. As discussed a little more fully in the Court’s other Decision in this case,
Ashbaugh passed aw ay, and his estate (through perso nal representative Jennifer M iller) is
asserting his partner interests. M iller sought and obtained stay relief in Hall’s prior bankruptcy in
order to co mm ence that state court action. See Case No. 03-02882 at Doc. Nos. 65-67, 87.
MEMORANDUM OF DECISION - 3
The Mortensens note that Hall previously filed a chapter 13 (later converted
to chapter 11) case, Case No. 03-02882.2 The Mortensens obtained stay relief in
that case and instituted nonjudicial foreclosure proceeding on the deed of trust. A
trustee’s sale, set for November 23, was stayed by Debtor’s filing.
The Mortensens argue that there is no Debtor partnership under Idaho law
and, further, that even if there were, the real property at issue is not partnership
property. Doc. No. 2 at 3-4. Debtor responds that the partnership exists in fact
and in law, and that the real property is an asset of that partnership, not the
individual partners. Doc. No. 11 at 2; Doc. No. 15 at 2-4.
Debtor does not dispute that the partnership, if it existed, was without a
written partnership agreement. Nor does Debtor disagree with the idea that (a)
Hall’s bankruptcy filing and/or (b) Ashbaugh’s death caused the “dissociation” of
those partners. See Idaho Code § 53-3-601(6)(i) and (7)(i). Debtor argues,
though, that the state court case3 is necessary to wind up the dissolved partnership,
and that the character of partnership property is not affected until that process
concludes. Doc. No. 15 at 5.
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4 Debtor also notes that this Court found the value of the property to exceed $225,000.00
in Hall’s earlier case. See Case No. 03-02882 at Doc. No. 26 (minute entry). Although not
binding in later cases, or even in different contexts in the same case, see § 506(a), this provides
some support for Debtor’s claimed value.
5 Debtor’s submissions to date indicate a desire to market and sell the property, pay the
Mortensens in full, and pay all other creditors from the excess proceeds. Debtor’s schedules list
less than $50,000.00 owed to creditors other than the Mortensens. Doc. No. 4.
6 See LBR 4001.2(3)(2) (addressing preliminary hearing procedures).
MEMORANDUM OF DECISION - 4
DISCUSSION AND DISPOSITION
If the Meridian real property is property of Debtor’s estate under § 541(a),
stay relief would not appear to be appropriate on the state of this record. Debtor
asserts a substantial equity cushion in the property that protects the Mortensens’
interest. See Doc. No. 4 at schedule D (value of $230,000.00 and debt of
$105,000.00).4 Debtor also asserts a need for the property in reorganizing its
financial affairs.5
While the Mortensens note the long time that has passed since the last
payment on the indebtedness, Doc. No. 2 at 2, their motion fails to set forth the
value of the property as LBR 4001.2(b)(4) requires. And the Mortensens made no
representation at the preliminary hearing to the effect that there was an absence of
equity in the property. Instead, the Mortensens’ arguments were directed to the
idea that Debtor had no legal interest in the property.
It therefore seems, on the pleadings and preliminary hearing
representations,6 that there is an equity cushion protecting the Mortensens,
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7 No proof has been provided that any of the relevant factual disputes have as yet been
adjudicated in state court, nor have the parties raised any issue preclusion argumen ts.
MEMORANDUM OF DECISION - 5
§ 362(d)(1), and equity in the property as well as a need for the property for an
effective reorganization, § 362(d)(2)(A), (B).
On the other hand, if it is established that the property is not property of the
partnership, and thus not property of this Debtor’s bankruptcy estate, stay relief
would be appropriate.
Upon preliminary review, the Court concludes that the resolution of the
property characterization issue turns on facts that have not been established before
this Court.7 Thus, resolution of the motion at this time and without final hearing
would be improper.
Both parties direct the Court’s attention to Idaho Code § 53-3-204. That
section provides:
53-3-204. W hen property is partnership property. – (a)
Property is partnership property if acquired in the name of:
(1) The partnership; or
(2) One (1) or more partners with an indication in the
instrument transferring title to the property of the person’s
capacity as a partner or of the existence of a partnership but
without an indication of the name of the partnership.
(b) Property is acquired in the name of the partnership by a
transfer to:
(1) The partnership in its name; or
(2) One (1) or more partners in their capacity as partners in
the partnership, if the name of the partnership is indicated in
the instrument transferring title to the property.
(c) Property is presumed to be partnership property if purchased
with partnership assets, even if not acquired in the name of the
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MEMORANDUM OF DECISION - 6
partnership or of one (1) or more partners with an indication in the
instrument transferring title to the property of the person’s capacity
as a partner or of the existence of a partnership.
(d) Property acquired in the name of one (1) or more of the
partners, without an indication in the instrument transferring title to
the property of the person’s capacity as a partner or of the existence
of a partnership and without use of partnership assets, is presumed to
be separate property, even if used for partnership purposes.
Idaho Code § 53-3-204.
The documents attached to the motion, which Debtor has not disputed are
the operative documents, show no partnership by name or otherwise; nor do they
show that either Hall or Ashbaugh acted in the capacity of a partner. Idaho Code
§ 53-3-204(a) and (b) therefore appear inapplicable.
Idaho Code § 53-3-204(d) on its face creates a presumption as to separate
property status. The Official Comment elaborates:
Ultimately, it is the intention of the partners that controls
whether property belongs to the partnership or to one or more of the
partners in their individual capacities, at least as among the partners
themselves. RUPA [the “Revised Uniform Partnership Act”] sets forth
two rebuttable presumptions that apply when the partners have failed
to express their intent.
First, under subsection (c), property purchased with partnership
funds is presumed to be partnership property, notwithstanding the name
in which title is held. The presumption is intended to apply if
partnership credit is used to obtain financing, as well as the use of
partnership cash or property for payment. . . .
. . .
Second, under subsection (d), property acquired in the name of
one or more of the partners, without an indication of their capacity as
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8 There may be other factual matters relevant to the § 362(d) issues, and the Court, by its
identification of som e, does not intend to restrict the parties’ presentation of their cases.
MEMORANDUM OF DECISION - 7
partners and without use of partnership funds or credit, is presumed to
be the partners’ separate property, even if used for partnership
purposes. In effect, it is presumed in that case that only the use of the
property is contributed to the partnership.
Idaho Code § 53-3-204 cmt. at ¶ 3.
The formation of the partnership has yet to be established before this Court.
Similarly, the intentions of the putative partners, and the source and nature of the
funds used in the acquisition of the real property, are likewise unproven.8
CONCLUSION
The presence of unresolved issues of fact requires a final hearing under
§ 362(e), Rule 4001, and LBR 4001.2. The hearing on January 20 shall remain on
calendar, subject to a seasonable and adequately supported request for extension of
the 30-day time period for conclusion of the final hearing, given the Court’s ruling
regarding the ineligibility of Debtor’s chosen counsel under § 327(a).
DATED: January 6, 2005
TERRY L. MYERS
CHIEF U. S. BANKRUPTCY JUDGE
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