Exhibit,Appendix: ARNTSEN FAMILY PARTNERSHIP, LP, et al vs. GREGORY J DAVIS, et al

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Preview
                                Exhibit 1
(Feb. 24, 2023, Sua Sponte Bankruptcy Order Denying Request for Entry of
                  Default and Lifting the Automatic Stay)
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       1                         UNITED STATES BANKRUPTCY COURT
       2                         EASTERN DISTRICT OF CALIFORNIA
       3
           In re:                          )         Case No. 22-22700-B-7
       4                                   )
           DAVID MATTHEW BRAGG,            )         Adversary No. 22-2112
       5                                   )
                                           )
       6                   Debtor(s).      )
           ________________________________)
       7                                   )
           ROBERT ARNTSEN, MARY LEE,       )
       8   ARNTSEN FAMILY PARTNERSHIP, LP, )
           BRAIN CHRISTOPHER DUNN          )
       9   CUSTODIANSHIP, JOHN HO, and     )
           QUANYU HUANG,                   )
      10                                   )
                                           )
      11                 Plaintiff(s),     )
                                           )
      12   v.                              )
                                           )
      13   DAVID MATTHEW BRAGG,            )
                                           )
      14                                   )
                         Defendant(s).     )
      15   ________________________________)
      16
                  ORDER DENYING MOTION FOR ENTRY OF DEFAULT JUDGMENT AND
      17               ESTABLISHING OTHER CASE MANAGEMENT PROCEDURES
      18          The complaint that initiated this adversary proceeding was
      19   filed on December 22, 2022.        Docket 1.     The Summons was issued on
      20   the same date.       Docket 3.
      21          Defendant (and his attorney(s)) were served with the summons
      22   and a copy of the complaint on December 29, 2022.          Docket 7 at ¶¶
      23   4-5.       Defendant had thirty days from the date the summons was
      24   issued, or until Monday, January 23, 2023, to answer or respond
      25   to the complaint.1      Fed. R. Bankr. P. 7012(a).
      26          Defendant did not timely answer or respond to the complaint,
      27
      28          1
                 The thirtieth day was January 21, 2023, which was a
           Saturday which extends the deadline to Monday, January 23, 2023.
           See Fed. R. Bankr. P. 9006(a)(1)(C).
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       1   so on January 24, 2023, Plaintiffs requested entry of Defendant’s
       2   default.   Docket 8.    The clerk entered Defendant’s default two
       3   days later on January 26, 2023.     Docket 10.    Five days later, on
       4   January 31, 2023, Defendant filed a late answer.       Docket 13.
       5         The court has reviewed the complaint, its related exhibits,
       6   the answer, and all related documents.       The court has also
       7   reviewed and takes judicial notice of the dockets in this
       8   adversary proceeding, in the parent Chapter 7 case, and in
       9   related prepetition proceedings filed in and pending before the
      10   San Mateo County Superior Court (“State Court”) captioned Robert
      11   Arnsten, et al. v. David Bragg, et al., Case No. 22-CIV-01148
      12   (“State Court Case”).
      13         In the course of preparing for a status conference in this
      14   adversary proceeding, the court also reviewed the Plaintiffs’
      15   Motion for Default Judgment and its related exhibits filed on
      16   February 21, 2023.     See Docket 21.    It appears that the debt
      17   which Plaintiffs assert is nondischargeable in this adversary
      18   proceeding has not been established or liquidated because it
      19   arises out of and is based on state law claims alleged against
      20   the Defendant and his non-debtor co-defendants in the State Court
      21   Case.   See Docket 6, Ex. C.    Plaintiffs filed the State Court
      22   Case nearly one year ago, on March 15, 2022.       See Id., Ex. A.
      23         Substantial proceedings have occurred in the State Court
      24   Case.   For example, according to the Affidavit of Collin Vierra
      25   in Support of Motion for Default Judgment, Plaintiffs have
      26   incurred significant expense, a first amended complaint has been
      27   filed, substantial discovery has been served, and the State Court
      28   Case was active up to and including the day Defendant filed his

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       1   Chapter 7 petition on October 21, 2022.    See Docket 29.
       2         Considering the nature of the allegations against the
       3   Defendant (which are now disputed albeit by a late-filed answer),
       4   the amount of the Defendant’s potential nondischargeable
       5   liability (over $1,000,000.00), and the strong federal policy
       6   that favors disposition of claims on the merits and disfavors
       7   judgments by default, in exercise of its discretion this court
       8   declines to resolve this adversary proceeding through the default
       9   judgment procedure.   See Eitel v. McCool, 782 F.2d 1470, 1471-72
      10   (9th Cir. 1986).   The motion for default judgment will therefore
      11   be denied without prejudice.
      12         The court will also exercise its discretion to bifurcate the
      13   process of determining the dischargeability of the debt at issue.
      14   See Fed. R. Civ. P. 42(b); Fed. R. Bankr. P. 7042.    Making a
      15   determination regarding the dischargeability of a debt involves a
      16   two-step process: first, the establishment of the debt itself;
      17   and second, a determination as to the nature-dischargeable or
      18   nondischargeable-of the debt.   Banks v. Gill Distrib. Ctrs., Inc.
      19   (In re Banks), 263 F.3d 862, 868 (9th Cir. 2001).    Inasmuch as
      20   the debt at issue here has not been established or liquidated,
      21   the court sees no reason why the State Court should not perform
      22   the first step after which this court will undertake the second
      23   step.
      24         Factors such as convenience, economy, and avoidance of
      25   prejudice support allowing the State Court to establish the debt
      26   while reserving this court’s jurisdiction to determine the
      27   dischargeability of any debt established in the State Court Case.
      28   For example: (1) because the parties have already incurred

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       1   significant expense and engaged in substantial discovery in the
       2   State Court Case, duplicating those efforts in this adversary
       3   proceeding would be unduly expensive, time-consuming, and
       4   unnecessarily burdensome; (2) the State Court Case involves non-
       5   debtor co-defendants to whom the automatic stay of 11 U.S.C. §
       6   362(a) does not apply and against whom the State Court Case may
       7   proceed which means severing Defendant from the State Court Case
       8   runs the risk of conflicting or inconsistent factual
       9   determinations by this court and the State Court; and (3)
      10   Defendant is entitled to a jury trial on the state law claims
      11   alleged in the first amended complaint filed in the State Court
      12   Case whereas there is no such right before this court in a
      13   nondischargeability proceeding under 11 U.S.C. § 523(a).
      14         To facilitate this process, and to the extent necessary, the
      15   court will sua sponte terminate the automatic stay of 11 U.S.C. §
      16   362(a) to the extent it is or is asserted to be in effect and
      17   allow Plaintiffs to proceed against Defendant in the State Court
      18   Case including, but not limited to, all pre-trial, trial, and
      19   appellate proceedings to the point of a final judgment by the
      20   State Court.   In re Bellucci, 119 B.R. 763, 779 (Bankr. E.D. Cal.
      21   1990).2   There shall, however, be no enforcement of any judgment
      22   entered against Defendant by the State Court and any such
      23   judgment, if any, shall be enforced only as a claim in the parent
      24   bankruptcy case and in this adversary proceeding for purposes of
      25
      26
                 2
                 Defendant’s Chapter 7 discharge was entered in the parent
      27   bankruptcy case on January 31, 2023. See Bankr. Docket 17.
           Entry of the discharge terminated the automatic stay as to the
      28   Defendant. See 11 U.S.C. § 362(c)(2)(C).

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       1   determining if the debt created by any State Court judgment is
       2   nondischargeable.
       3         This procedure is not unique.      See e.g., Kempton v. Clark
       4   (In re Clark), 2014 WL 5646640 (9th Cir. BAP Nov. 4, 2014).       The
       5   creditor in Clark filed a nondischargebility proceeding under 11
       6   U.S.C. §§ 523(a)(2)(A) and (a)(6).       Id. At *2.   The debt at issue
       7   there was based on claims made against the debtor in a
       8   prepetition state court case that was pending when the debtor
       9   filed her bankruptcy petition.    Id.     Following a case management
      10   conference, the bankruptcy court entered a case management order
      11   in which it stayed the adversary proceeding, terminated the
      12   automatic stay, ordered the debt to be established in the state
      13   court case, ordered the debtor to appear in the state court case,
      14   and ordered the parties to return to the bankruptcy court for
      15   further proceedings on any state court judgment.       Id.   Finding no
      16   error with the process, the Ninth Circuit Bankruptcy Appellate
      17   Panel concluded as follows:
      18         In these circumstances, we do not perceive an abuse of
                 discretion in the bankruptcy court’s decision to lift
      19         the automatic stay of § 362 to allow the State Court
                 Litigation to proceed in the California state courts
      20         prior to moving forward with the Adversary Proceeding,
                 and we conclude that the bankruptcy court did not err
      21         in entering the Case Management Order.
      22   Id. at *9.
      23         One final note.   Plaintiffs’ attorney shall refrain from
      24   personal attacks in future documents filed with this court.
      25   Personal attacks against an opposing party or its attorney(s)
      26   have no place in filings in this court.       Nor are such attacks in
      27   any sense necessary to present Plaintiffs’ arguments in this
      28   case.   Plaintiffs’ attorney is warned that personal attacks in

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       1   future documents filed with this court will, at a minimum, result
       2   in the court striking the document(s).      See Williams v. Warden
       3   for Nev., Women’s Corr. Fac., 489 F. Supp. 2d 1171, 1179-80 (D.
       4   Nev. 2007) (granting motion to strike document that included
       5   personal attacks against opposing counsel).
       6         Based on the foregoing, and other good cause appearing:
       7         IT IS ORDERED that Plaintiffs’ motion for entry of default
       8   judgment is DENIED WITHOUT PREJUDICE, and the hearing on the
       9   motion on March 28, 2023, at 9:30 a.m. is VACATED.
      10         IT IS FURTHER ORDERED that the automatic stay of 11 U.S.C. §
      11   362(a) is TERMINATED and VACATED for all purposes stated
      12   hereinabove to allow Plaintiffs to proceed against Defendant-and
      13   to require Defendant to appear-in the State Court Case.
      14         IT IS FURTHER ORDERED that this adversary proceeding is
      15   STAYED pending further order of the court.
      16         IT IS FURTHER ORDERED that Plaintiff shall file a status
      17   report every sixty (60) days with the first status report filed
      18   sixty (60) days after March 1, 2023.
      19
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       1                    INSTRUCTIONS TO CLERK OF COURT
                                     SERVICE LIST
       2
                The Clerk of Court is instructed to send the attached
       3   document, via the BNC, to the following parties:
       4
           Collin Vierra
       5   99 South Almaden Boulevard
           Suite 600
       6   San Jose CA 95113
       7   Peter G. Macaluso
           7230 South Land Park Drive #127
       8   Sacramento CA 95831
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