Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_05-cv-00291/USCOURTS-caed-1_05-cv-00291-4/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 18:1962 Racketeering (RICO) Act

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1 Dennis Hagobian, Victoria Hagobian, the Dennis Hagobian

Residence Trust, the Victoria Hagobian Residence Trust, Dennis

Vartan, the Dennis Vartan Residence Trust, the Dennis Vartan

Family Trust, Judith Yeramian, the Lee Yeramian Exempt QTIP

Turst, the Judith Mary Yeramian Family Trust, W.D. Farming LLC,

Russell Davidson, William Davidson, Michael Hedberg, Rod

Christensen, and Yosemite Technologies, Inc. 

1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

JOE FLORES, an individual; and 

CONNIE FLORES, an individual, 

 Plaintiffs,

v. 

EMERICH & FIKE, a professional

corporation, et al.

 Defendants.

1:05-CV-0291 OWW DLB

ORDER RE APPLICABILITY OF

STAY

I. INTRODUCTION

This is the third case filed by Joe and Connie Flores

(“Plaintiffs”) concerning a series of packing and marketing

agreements entered into between Plaintiffs and DDJ, Inc., DDJ

LLC, and related entities and individuals. DDJ, Inc., and DDJ

LLC filed for Chapter 7 Bankruptcy Protection on January 3, 2005. 

Shortly thereafter, on March 1, 2005, Plaintiffs filed the

instant complaint (Flores III). 

On May 26, 2005, the district court ruled that claims

brought against a number of the defendants1 in Flores III are

subject to the automatic stay provision of the Bankruptcy Code,

because the allegations against those defendants concerned

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2 An additional defendant, Sandy L. Vartan, who had not

previously made an appearance in this case, filed an Ex Parte

application for an order staying the proceedings against her. 

Doc. 80, filed June 6, 2005. The district court ordered that the

time for Ms. Vartan to respond would be extended until further

order of the court. Doc. 82, filed June 6, 2005. 

2

property of or belonging to the bankruptcy estate. Doc. 72. The

district court requested further briefing on whether the stay

should apply to the remaining Flores III defendants: Emerich &

Fike, David R. Emerich, David A. Fike, Jeffrey D. Simonian,

Thomas A Pedreira, and Lawrence E Westerlund (the “Fike

Defendants”). Finally, the district court ordered off calendar

the pending motions to dismiss and to strike filed by the Fike

Defendants, pending a decision on the applicability of the stay.2

The Fike Defendants, the Flores’, and the bankruptcy trustee have

all responded to the district court’s request for further

briefing. 

As discussed at the hearing on the instant motions, it is

necessary to determine which claims against the Fike Defendants

are subject to the automatic stay and which may be assertable in

district court. At the conclusion of the hearing, the district

court ordered the bankruptcy trustee to file a report explaining

whether the trustee intends to pursue any of the claims in this

case on behalf of the estate. If the trustee chooses to

participate in this litigation, reconsideration of the

conclusions contained herein may be necessary. 

II. SUMMARY OF THE PARTIES’ ARGUMENTS

The Fike Defendants responded to the district court’s

request for further briefing with a supplemental memorandum, Doc.

81, filed June 6, 2005, arguing that the stay should not apply to

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3

the claims against them and urging the court to decide the

pending motion to dismiss. The Flores’ responded to this

memorandum by arguing that the stay should apply to the Fike

Defendants because the Flores III complaint alleges that the Fike

Defendants received property from the debtor’s estate and engaged

in a conspiracy to misappropriate assets of the estate. Doc. 83,

filed June 13, 2005, at 3. The Bankruptcy Trustee also filed

comments regarding the applicability of the stay, pointing out

that the Flores’ allege, among other things, that the Fike

defendants received at least $100,000 in legal fees at a time

when claimants, such as the Flores’ remained unpaid. Doc. 85,

filed June 14, 2005 at ¶7. The Bankruptcy trustee “believes that

it is his duty to investigate the payment of these funds and

attempt to recover, or preserve for recovery, these funds for the

PACA claimants in the estate which include the Flores’.” Id. 

The Trustee admits that he has not been able to investigate the

matter thoroughly, but believes that there may be actionable

legal malpractice claims against the Fike defendants. Id. at

¶¶8, 10. The trustee “respectfully requests this Court determine

that the automatic stay has application to the claims against the

[Fike Defendants]... to allow both the Trustee to investigate the

estate’s claims further, and to allow either for an order for

relief from the automatic stay to be entered in the bankruptcy

court or [to approve] an agreement between the parties

[identifying] a procedurally appropriate manner for the Trustee

to join or intervene in this action prior to this matter moving

forward....” Id. at 4. 

The Fike Defendants filed objections to the Bankruptcy

Trustee’s comments, Doc. 87, filed June 15, 2005, questioning

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whether the Bankruptcy Trustee has standing to comment, arguing

that the trustee misunderstands the nature of the complaint’s

allegations. 

III. PROCEDURAL HISTORY

Plaintiffs’ filed their initial complaint against DDJ, Inc.,

DDJ LLC, and others in 1999, asserting claims under the

Perishable Agricultural Commodities Act (“PACA”), along with

state law contract and tort claims. See Flores et al v. DDJ,

Inc., et al., 1:99-cv-5878 AWI DLB (“Flores I”). In 2003, a jury

found for the Flores’ on all claims against DDJ Inc. and DDJ LLC

(“the Judgment Debtors”). 

On October 15, 2004, the Flores’ filed a second lawsuit,

alleging that individual officers of the Judgment Debtors

fraudulently transferred assets from the Judgment Debtors into

their own names. See In Re Joe Flores, et a. v. Dennis Hagobian,

et al., 1:04-cv-6405 OWW DLB (“Flores II”). 

On January 3, 2005, DDJ, Inc. and DDJ, LLC filed for Chapter

7 bankruptcy protection. Further proceedings in Flores I were

stayed pursuant to the automatic stay provision of the Bankruptcy

Code. Flores I, Doc. 408 at 2. Similarly, Flores II has been

stayed pending notice of whether the bankruptcy trustees will

allow the case to proceed. Flores II, Doc. 19 at 3. 

Shortly after the bankruptcy filing, the Flores’ filed the

141-page complaint in this case (“Flores III”). The third

complaint alleges various forms of alter ego liability,

fraudulent transfers, and the existence of a racketeering

enterprise. Doc. 1 (“Compl.”), filed Mar. 1, 2005. Flores III

names as defendants many of the individual and corporate

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defendants named in Flores I and Flores II, although the Judgment

Debtors (DDJ Inc. and DDJ LLC) are not named. The new instant

complaint names as defendants: Emerich & Fike, a law firm that

represented DDJ Inc. and DDJ LLC in Flores I, and a number of

individual lawyers who practice at Fike (the “Fike Defendants”). 

Plaintiffs request damages, injunctive relief, and attorney’s

fees. 

On May 10, 2005, counsel for DDJ Inc. and DDJ LLC filed a

“notice of filing bankruptcy” in this case, asserting that these

proceedings also are subject to the automatic stay because the

pending claims concern property belonging to the debtors’ estate. 

The district court determined that the automatic stay applied to

some of the defendants, but requested further briefing on the

applicability of the stay to the remaining defendants. Doc. 72.

 

IV. ALLEGATIONS IN FLORES III

Plaintiffs’ complaint, which is 142 pages long, presents the

following eleven “causes of action.” 

1. Alter ego liability. Compl. at 26.

2. Malicious prosecution. Compl. at 46. 

3. Malicious use of process, spoilation of evidence, and

fraudulent concealment of evidence. Compl. at 51. 

4. Violation of the Uniform Fraudulent Transfer Act [Civil

Code § 3439 et seq.]. Compl. at 60.

5. Violation of 7 U.S.C. §§ 499(b)(1), (2) & (4); PACA §§

2(2) &(5); 21 U.S.C. §§ 331(a), (b), (c) & (k). 

Compl. at 84. 

6. Fraud, Deceit, Intentional and Negligent Fraud, and

Constructive Fraud and Breach of Fiduciary Duty. 

Compl. at 86. 

7. Conversion. Compl. at 89. 

8. Civil Racketeering in violation of 18 U.S.C. § 1961. 

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3 The excessive length and repetitive nature of the

complaint make it exceedingly difficult to understand and

arguably violates Federal Rule of Civil Procedure 8(a)(requiring

that a complaint contain a short and plain statement of the

claims).

4 The Flores’, in their supplemental response, cite to

cases that do not shed light upon the legal questions presented

in this motion. For example, they cite In re Continental

Airlines, Inc., 152 B.R. 420 (D. Del. 1993), In re Parkinson, 102

B.R. 141 (C.D. Ill. 1988), Matter of McGaughey, 24 F.3d 904 (7th

Cir. 1994), In re Countryside Manor, Inc., 188 B.R. 489 (D. Conn.

6

9. Negligent interference with or procurement of a breach

of contract. Compl. at 124. 

10. Conspiracy to defraud and commit various other offenses

against Plaintiff’s business interests. Compl. at

127. 

11. Invasion of privacy. Compl. at 132. 

Many of these causes of action are subdivided into numerous

separate claims.3

V. DISCUSSION

A. General Legal Standard

The filing of a petition for bankruptcy, voluntary or

otherwise, operates to automatically stay:

the enforcement, against the debtor or against property

of the estate, of a judgment obtained before the

commencement of the case under this title;

11 U.S.C. § 362(a)(2). The automatic stay provision usually

precludes an action against non-debtor defendants. See United

States v. Dos Cabezas Corp., 995 F.2d 1486, 1491 (9th

1993)(unless assets of bankrupt estate are at stake, automatic

stay does not extend to actions against parties other than

debtor); Matter of Lockard, 884 F.2d 1171, 1177-79 (9th Cir.

1989).4

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1995), and In re Conejo Enterprises, Inc., 96 F.3d 346 (9th Cir.

199), each of which discusses the test(s) that the Bankruptcy

Court must apply to determine whether to modify the operation of

an automatic stay. These case do not address the threshold

jurisdictional question of whether the automatic stay bars the

district court from hearing a claim. Similarly, the Flores’ cite

a number of cases concerning the Bankruptcy Court’s “related to”

jurisdiction: In re WorldCom, Inc., Securities Litigation, 293

B.R. 308 (S.D.N.Y 2003); In re Boston Regional Medical Center,

Inc., 265 B.R. 645 (D. Mass. 2001); Concerto Software, Inc. v.

Vitaquest Intern., Inc., 290 B.R. 448 (D. Me. 2003); Davis v.

Life Investor’s Ins. Co of America, 282 B.R. 186 (S.D. Miss

2002); In re Karta Corp., 296 B.R. 305 (S.D.N.Y. 2003). Again,

all of these cases concern the authority of the Bankruptcy Court

to hear claims, not the operation of the automatic stay upon

claims before the district court. These cases might be relevant

in the context of an appeal from a Bankruptcy court’s decision on

a petition for relief from the stay, but are not relevant to the

instant motion. 

7

B. Claims That Do Not Name the Fike Defendants

The first (alter ego), fifth (violations PACA and related

statutes), and sixth (“Fraud, Deceit, Intentional and Negligent

Fraud, and Constructive Fraud and Breach of Fiduciary Duty”) do

not name the Fike Defendants. These claims are stayed pursuant

to previous orders in this case. 

C. Claims that Clearly Do Not Implicate the Assets of the

Bankruptcy Estate.

Four additional causes of action, which do name the Fike

Defendants, do not implicate assets of the Bankruptcy estate: 

Second Cause of Action for Malicious Prosecution.

Plaintiffs’ malicious prosecution claim appears to allege, among

other things, that the Fike Defendants asserted a breach of

contract cross-complaint against the Flores without probable

cause. Compl. at ¶158. Plaintiffs do not allege, however, that

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5 This claim is more appropriately labeled “Defamation”

and the Fike Defendants refer to it as such.

8

any of the assets of the bankruptcy estate were affected by this

alleged conduct. 

Third Cause of Action for Malicious Use of Process,

Spoilation of Evidence, and Fraudulent Concealment of Evidence.

This cause of action appears to allege that the Fike Defendants

conducted Discovery in an unfair and/or unlawful manner. For

example, Plaintiffs allege that the Fike Defendants (1) levied

excessive copying charges upon Plaintiffs; (2) improperly sent a

UCC-1 Financial Statement concerning the Flores’ to another fruit

packer (3) failed to produce documents in discovery that they

later attempted to use at trial; and (4) destroyed relevant and

discoverable documents. Compl. at ¶¶ 180, 182, 184, 189-192,

196. This cause of action does not appear to implicate any

assets of the bankruptcy case. Whether it states a claim is a

separate issue.

Ninth Cause of Action Negligent Interference With or

Orocurement of a Breach of Contract. Plaintiffs’ negligent

interference with contract claim alleges that the Fike Defendants

negligently sent a copy of the Flores’ financial statement to

another fruit packer. As a result, Plaintiffs’ assert that they

lost their contract with that fruit packer. This claim does not

implicate assets of the bankruptcy estate. 

Eleventh Cause of Action for Invasion of Privacy:

5

Referencing the UCC-1 Financial statement that was allegedly sent

by the Fike Defendants to another fruit packer, Plaintiffs allege

that this conduct constitutes an invasion of privacy. this

allegation do not implicates any assets belonging to the

bankruptcy estate. 

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In sum, the second, third, ninth and eleventh causes of

action against the Fike Defendants do not implicate assets of the

bankruptcy estate. It has not been shown that the automatic stay

bars litigation of these claims. The Fike Defendants motion to

dismiss and to strike as to these claims will be re-calendared

for hearing. 

D. Claims Requiring Additional Analysis.

The four remaining causes of action -- the fourth, seventh,

eighth, and tenth –- require additional analysis. 

The Fourth Cause of Action for Violation of the Uniform

Fraudulent Transfer Act. Plaintiff alleges that various

defendants engaged in unlawful transfers in violation of the

Uniform Fraudulent Transfers Act (UFTA). The complaint sets

forth the dates, amounts, and parties involved in each allegedly

fraudulent transfer. The Fike Defendants are not mentioned in

any of these specific fraudulent transfer allegations. However,

the Complaint does allege that:

[T]he malicious prosecution as alleged in the SECOND

CAUSE OF ACTION, the malicious abuse of process as

alleged in the THIRD CAUSE OF ACTION, [the statutory

violations] as alleged in the EIGHTH CAUSE OF ACTION,

and Conspiracy to Defraud, to Interfere with the

Business Relationship, to Unlawfully Injure a Business,

to Destroy a Business, and to Defraud a Creditor...as

alleged in the TENTH CAUSE OF ACTION...played a major

contributing factor in allotting time for the planning

of the actual fraudulent transfer of proceeds belonging

to ALTER EGO DDJ, INC. and AlTER EGO DDJ, LLC by [the

Fike Defendants] with the actual intent to hinder,

delay or defraud some or all of ALTER EGO DDJ, INC. and

ALTER EGO DDJ, LLC’s then and future creditors

including and principally Plaintiffs in connection with

the collection of their claims. 

Compl. at 71. This passage arguably suggests that the Fike

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6 The Fike Defendants note that their previously-filed

Motion to Dismiss asserts that these allegations fail to state a

fraud claim at all, let alone a RICO claim. 

10

Defendants aided and abetted the fraudulent transfers by

“alloting time for the planning of the actual fraudulent transfer

of proceeds....” Id.

The Seventh Cause of Action for Conversion. Plaintiffs

allege that many of the individual and corporate defendants

committed a number of acts of conversion. As with the UFTA claim

above, Plaintiffs assert that the Fike Defendants aided the other

defendants’ acts of conversion, by “conspiring, participating,

and aiding and abetting by and through their actions as

attorney(s) of record for Defendants... [the]

successful...unlawful practice of conversion by means of []

fraudulent transfers...” Compl. ¶342.

Eighth Cause of action for Civil Racketeering in violation

of 18 U.S.C. § 1961. In this cause of action, Plaintiffs allege

generally that the “Defendants” engaged in Racketeering to

further the general goal of misappropriating funds belonging to

the bankruptcy estate. Specifically, the complaint alleges that

one of the individual (non-Fike) defendants committed mail fraud

by mailing allegedly fraudulent documents prepared by one of the

individual non-Fike defendants. In addition, the complaint

alleges that the Fike Defendants committed wire fraud when, among

other things, the Fike Defendants faxed allegedly false documents

to Plaintiffs during discovery in Flores I.

6

Tenth Cause of Action for Conspiracy to Defraud. This claim

alleges, among other things, that the Fike Defendants conspired

with other individual defendants to (1) cover up unlawful

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activities by filing a counterclaim against Plaintiffs in Flores

I; and (2) interfering with Plaintiffs’ contractual business

relationship with another fruit packing company. Here, Plaintffs

finally allege that the Fike Defendants may have come into

possession of some assets of the bankruptcy estate. 

Specifically, the complaint asserts that Emerich & Fike were paid

more than $100,000 in attorneys fees to accomplish many of the

allegedly “questionable business transactions” described in the

complaint. Compl. at 510. In response, the Fike Defendants

assert that they received only $10,000 from their clients, with

the remaining balance being paid out by the clients’ insurer,

Fireman’s Fund. See David Fike Decl. at ¶8 (attached to Doc.

34). 

The Fourth, Seventh, Eighth, and Tenth causes of action

described above set forth three types of allegations against the

Fike Defendants: (1) that the Fike Defendants engaged in

Racketeering, and otherwise aided the efforts of and/or conspired

with the other defendants to misappropriate funds properly

belonging to the bankruptcy estate; and (2) that the Fike

Defendants received property of the bankruptcy estate in the form

of attorney’s fees from the other defendants. 

The automatic stay provision usually precludes an action

against non-debtor defendants. See Dos Cabezas Corp., 995 at

1491. However, courts have carved out limited exceptions to this

general rule: (1) where "there is such identity between the

debtor and the third-party defendant that the debtor may be said

to be the real party defendant and that a judgment against the

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7 “[W]hile seemingly broad in scope, the automatic stay

provisions should be construed no more expansively than is

necessary to effectuate legislative purpose.” In re Chugach

Forest Prod., Inc., 23 F.3d 241, 245 (9th Cir. 1994). The stated

purpose of § 362(a)(3) is to “to prevent dismemberment of the

estate” and to “enable an orderly distribution of the debtor's

assets.” Id. (quoting H.R. Rep. No. 595, 95th Cong., 1st Sess.

341 (1977)). So long as conduct does not “threaten to dismember

the bankruptcy estate or impede the reorganization proceedings,”

incidental effects upon the bankruptcy estate are not sufficient

to trigger the operation of the stay. Id.

12

third-party defendant will in effect be a judgment or finding

against the debtor,” or (2) where “extending the stay against

codefendants contributes to the debtor's efforts of

rehabilitation." Id. at 1491 n.3 (9th Cir. 1993); see also

Morgan Stanley Mortg. Capital Inc. v. Insurance Com'r of State of

Cal., 18 F.3d 790, 794 (9th Cir. 1994); In re 48th Street

Steakhouse, Inc., 835 F.2d 427, 431 (2d Cir.1987) ("[W]here a

non-debtor's interest in property is intertwined... with that of

a bankrupt debtor [and] [i]f action taken against the

non-bankrupt party would inevitably have an adverse impact on

property of the bankrupt estate, then such action should be

barred by the automatic stay."), cert. denied, 485 U.S. 103

(1988).7

A recent Bankruptcy case out of the Northern District of

Illinois applying the above exceptions is instructive. In In re

Kmart Corp., 285 B.R. 679 (N.D. Ill. 2002). In Kmart, a creditor

brought fraud, civil conspiracy, and other claims against a

nondebtor. The Bankruptcy Court examined two lines of cases

establishing exceptions to the general rule that the automatic

stay provision does not extend to claims against a nondebtor. 

The first set of cases concerns non-debtor defendants who might

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have contribution claims against debtor defendants “sufficient

[to create] identity of interest [] warrant[ing] staying

litigation against [the] nondebtors.” Id. at 688-89. This

exception the court found inapplicable under the circumstances. 

The court then examined a second line of cases “where the

debtor’s key personnel are diverted from the reorganization by

the demands of discovery related to the third-party suit,” citing

cases that suggest irreparable harm would result when resources

of the debtor are consumed in third-party litigation. Id. at

689. The Kmart court found this exception inapplicable as well

because (1) “uncontraverted evidence shows that Kmart has not

participated in the trial since being severed from the case;” (2)

the case would not demand burdensome discovery from the debtor;

and (3) there was little chance that a judgment would threaten

the debtor’s interests. 

Here, the claims brought against the Fike Defendants are

intimately intertwined with the conduct of their former clients

who are officers and directors of the debtors. The Plaintiffs

assert that the Fike Defendants in effect conspired with their

former clients to injure Plaintiffs’ economic interests arising

out of Plaintiffs’ business dealings with the DDJ parties. A

verdict in favor of the Flores’ on a RICO claim against the Fike

Defendants would likely implicate the remaining defendants,

which, in turn, might require recovery from the debtors. 

Extending the stay to these claims against the Fike Defendants

arguably would “contribute to the debtor's efforts of

rehabilitation." Dos Cabezas Corp., 995 at 1491 n.3.

By contrast, staying the aforementioned intertwined claims

would not prejudice the Fike Defendants. Although the Fike

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Defendants “strenuously resist any dely in adjudicating the

inflammatory and baseless claims that have been lodged against

them” and suggest that the claims demand “prompt adjudication

because they are patently without merit,” they have not

demonstrated any real potential for prejudice. 

Based on the bankruptcy trustee’s assertions, it is not

unreasonable to afford the trustee a limited time to investigate

the nature of the claims against the Fike Defendants. A sixty

(60) day stay is imposed to permit the trustee to evaluate

potential claims. As to the claims that do not implicate assets

of the bankruptcy estate, allowing the claims to go forward

results in piecemeal litigation. Nevertheless, the Fike

Defendants are entitled to have their motion to dismiss heard and

decided. As to claims that might impose potential liability upon

the bankruptcy estate, these are not presently errors and

omission claims against attorneys by their former clients or by

an adverse party claiming to be a third party beneficiary of the

attorney-client contract. Rather, because the alleged acts of

the Fike Defendants are so intertwined with the financial

dealings of individuals associated with the debtor, these claims

must be stayed. 

VI. CONCLUSION

For the reasons set forth above:

(1) The first (alter ego), fifth (violations PACA and

related statutes), and sixth (“Fraud, Deceit,

Intentional and Negligent Fraud, and Constructive Fraud

and Breach of Fiduciary Duty”) remain STAYED pursuant

to previous orders in this case;

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(2) The second (malicious prosecution), third (malicious

use of process, spoilation of evidence, fraudulent

concealment of evidence), ninth (negligent interference

with contract) and eleventh (invasion of privacy)

causes of action against the Fike Defendants are not

subject to the automatic stay; 

(3) The fourth (violation of the UFTA), seventh

(conversion), eighth (civil racketeering), and tenth

(conspiracy) causes of action have the potential to

implicate assets of the bankruptcy estate and therefore

must be STAYED, pending further order of the court.

(4) With respect to those claims against the Fike

Defendants that have not been stayed (the second,

third, ninth, and eleventh causes of action), the Fike

Defendants’ motion to dismiss will be heard on

September 26, 2005, at 10:00 a.m. in Courtroom 2,

unless the court, upon receipt and review of the

bankruptcy trustee’s forthcoming status report, finds

it necessary to take the motion off calendar.

SO ORDERED.

Dated: July 5, 2005

/s/ OLIVER W. WANGER

 

 Oliver W. Wanger

UNITED STATES DISTRICT JUDGE

Case 1:05-cv-00291-AWI -DLB Document 89 Filed 07/05/05 Page 15 of 15