Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_12-cv-01541/USCOURTS-caed-2_12-cv-01541-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:1334 Bankruptcy Appeal

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

In Re:

STEVEN KEITH ZINNEL,

 Debtor.

No. 2:12-cv-01541-TLN

Bankruptcy No. 05-28800-C-7

ORDER

Appellant Steven Zinnel (“Zinnel”) brings this appeal of the Bankruptcy Court’s orders 

on: (1) application for interim compensation regarding Trustee Susan K Smith’s first interim 

application for allowance of compensation and reimbursement of expenses to counsel for the 

current Chapter 7 Trustee; and (2) application for interim compensation regarding Trustee Susan 

K Smith’s first interim application for allowance of compensation and reimbursement of expenses 

to accountants for the current Chapter 7 Trustee. (BK ECF 1.) Plaintiffs in the bankruptcy case 

are Creditors First Bank and Safeco Insurance, and Trustees Stephen M. Reynolds, Susan K. 

Smith and August B. Landis (collectively, “Plaintiffs”).

In light of the ongoing parallel criminal proceedings against Zinnel, and on the Court's 

own motion, this Court stays the current bankruptcy appeal, pending the resolution of the criminal 

charges.

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BACKGROUND

A. The Criminal Proceeding1

On June 8, 2011, the government filed an indictment against Zinnel and Derian Eidson 

(“Eidson”). (2:11–cr–00234–TLN ECF 1.) A magistrate judge issued an arrest warrant later that 

day. (ECF 6.) On June 9, 2011, Deputy United States Marshals arrested Zinnel. (Id.)

The indictment charges fourteen counts and a forfeiture allegation against Zinnel.

(Id.) These counts include two counts under 18 U.S.C. § 152 for bankruptcy fraud, two counts 

under 18 U.S.C. § 1956(h) for money laundering conspiracy, ten counts under 18 U.S.C. § 1956 

for money laundering, and two counts under 18 U.S.C. § 1957 for transactions in criminally 

derived property. (Id.)

With respect to the first count of bankruptcy fraud, the government alleges that Zinnel 

knowingly and fraudulently transferred and concealed property in contemplation of his 

bankruptcy. (Id. at 3.) With respect to the second count of bankruptcy fraud, the government 

alleges that Zinnel knowingly and fraudulently concealed certain interests from an officer of the 

court and from creditors. These interests include payments Zinnel received from Company 1 

through Done Deal, his interest in Done Deal's bank account, his interest in 4Results, his interest 

in Auto and Boat Store, and his interest in the Luyung Property. (Id. at 6.)

In the money laundering conspiracy counts, the government alleges that Zinnel and 

Eidson knowingly conspired with each other and with at least one other person to commit 

offenses in violation of 18 U.S.C. §§ 1956 and 1957 by disguising payments to Zinnel as 

payments to Done Deal from Company 1 for purported sales of goods and services. 

(Id. at 8; 14.)

The multiple money laundering counts consist of allegations that Zinnel and Eidson 

conducted and attempted to conduct financial transactions affecting interstate commerce; 

specifically, the negotiation of a check from Company 1 to Done Deal, which involved proceeds 

from violations of 18 U.S.C. § 152. (Id. at 11.)

 

1The factual background of the criminal proceeding is taken from the indictment background. 

(2-11-cr-00234-TLN ECF 1.)

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The count charging transactions in criminally derived property alleges that Zinnel engaged 

in an illegal monetary transaction affecting interstate commerce when Zinnel made a transfer of 

approximately $172,000 in U.S. funds from Washington Mutual Bank to E–Trade, as these funds 

were derived through money laundering. (Id. at 13.)

The forfeiture allegation seeks recovery of all real and personal property that constitutes, 

or is derived from, the proceeds traceable to the aforementioned counts. Such property would 

allegedly include property and proceeds otherwise subject to the bankruptcy proceeding, 

including the Luyung Property. (Id. at 19.)

B. The Bankruptcy Proceedings

On or about July 20, 2005, Zinnel filed a voluntary bankruptcy petition in his name, case 

number 05–28800–C-7, under Chapter 7 of Title 11 of the United States Code, in the United 

States Bankruptcy Court for the Eastern District of California. (2:12–cv–00249–TLN, ECF 1.) 

On the schedule of assets and liabilities filed in his bankruptcy case, Zinnel disclosed 

$842,620.00 in assets, excluding any interests in assets transferred as alleged above, 

$2,013,896.29 in secured debt and $4,036,466.25 in unsecured debt.

On appeal to this court are two orders of the Bankruptcy Court: one granting an interim 

compensation for attorneys’ fees in the amount of $80,000 (BK ECF 513), and one granting an 

interim compensation of accountancy fees in the amount of $3,000. 

STANDARD

While a district court may stay civil proceedings pending the outcome of parallel criminal 

proceedings, such action is not required by the Constitution. Federal Sav. & Loan Ins. Corp. v. 

Molinaro, 889 F.2d 899, 902 (9th Cir.1989); Sec. & Exch. Comm'n v. Dresser Indus., 628 F.2d 

1368, 1375 (D.C. Cir.), cert. denied, 449 U.S. 993 289 (1980); see generally United States v. 

Kordel, 397 U.S. 1, 90 (1970). The Ninth Circuit has held that “in the absence of substantial 

prejudice to the rights of the parties involved, simultaneous parallel civil and criminal 

proceedings are unobjectionable under our jurisprudence.” Keating v. Office of Thrift 

Supervision, 45 F.3d 322, 324–25 (9th Cir.1995) (quoting Dresser, 628 F.2d at 1374). 

Nevertheless, a court may decide in its discretion to stay civil proceedings “when the interests of 

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justice seem to require such action.” Id. (quoting Kordel, 397 U.S. at 12 n. 27).

When deciding whether to stay civil proceedings, courts should consider “the particular 

circumstances and competing interests involved in the case[s].” Id. (quoting Molinaro, 889 F.2d 

at 902). The Ninth Circuit has instructed the court to consider “the extent to which the 

defendant's Fifth Amendment rights are implicated.” Id. (internal quotation omitted).

In determining whether to stay a parallel civil proceeding, courts should consider the 

following factors:

(1) the interest of the plaintiffs in proceeding expeditiously with this litigation or 

any particular aspect of it, and the potential prejudice to plaintiffs of a delay; (2) 

the burden which any particular aspect of the proceedings may impose on 

defendants; (3) the convenience of the court in the management of its cases, and 

the efficient use of judicial resources; (4) the interests of persons not parties to the 

civil litigation; and (5) the interest of the public in the pending civil and criminal 

litigation.

Id. at 325 (citing Molinaro, 889 F.2d at 903).

The Ninth Circuit has cautioned, however, that “[a] defendant has no absolute right not to 

be forced to choose between testifying in a civil matter and asserting his Fifth Amendment 

privilege.” Id. at 326. Not only is it permissible to conduct a civil proceeding at the same time 

as a related criminal proceeding, even if that necessitates invocation of the Fifth Amendment 

privilege, but it is even permissible for the trier of fact to draw adverse inferences from the 

invocation of the Fifth Amendment in a civil proceeding.” Id. Despite the generosity of the 

standard, it is nonetheless true that permitting simultaneous proceedings may seriously undermine 

the ability of a person presumed innocent to defend himself and may provide the prosecution with 

an undue advantage because it will have access to the evidence tendered in the bankruptcy 

proceedings. In re SK Foods, L.P., 2010 WL 5136189 (E.D.Cal. Dec.10, 2010) order clarified

by 2011 WL 1442332 (E.D.Cal. Apr.14, 2011).

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ANALYSIS

A. Relationship Between Adversary Proceedings and Criminal Indictment

The strongest case for deferring civil proceedings until after completion of criminal 

proceedings is where a party under indictment for a serious offense is required to defend a civil or 

administrative action involving the same matter. Dresser, 628 F .2d at 1375–76. Specifically, 

“[t]he noncriminal proceeding, if not deferred, might undermine the party's Fifth Amendment 

privilege against self-incrimination, expand rights of criminal discovery beyond the limits of 

Federal Rule of Criminal Procedure 16(b), expose the basis of the defense to the prosecution in 

advance of criminal trial, or otherwise prejudice the case.” Id. at 1376. In Dresser, the D.C. 

Circuit considered whether a corporation was entitled to special protection against an SEC 

subpoena because of a parallel grand jury investigation of the same issue. The D.C. Circuit 

reasoned that, “[t]he case at bar is a far weaker one for staying the administrative investigation 

[because no indictment has been filed, and thus,] no Fifth Amendment privilege is threatened.”

Id. The Ninth Circuit adopted this reasoning in Molinaro, where it held that the district court did 

not abuse its discretion by deciding that the burden on the defendant's Fifth Amendment privilege 

was negligible because no related criminal indictments were pending against him at the time of its 

ruling. Molinaro, 889 F.2d at 903.

Here, Zinnel faces criminal charges of bankruptcy fraud, money laundering, money 

laundering conspiracy, and transactions in criminally derived property. (Indictment, 2:11–cr–

00234–TLN–1, ECF 1.) These charges are closely related to the issues involved in Zinnel's 

bankruptcy appeal. Specifically, the issues involved in Zinnel's bankruptcy appeal include: (1) 

whether the Bankruptcy Court awarded reasonable compensation for services rendered and 

reimbursement for actual and necessary expenses; (2) whether the Bankruptcy Court took into 

account the time spent on such services, the rates charged, and whether the services were 

necessary; and (3) whether the Bankruptcy Court allowed compensation for unnecessary 

duplication of services and services that were not reasonably likely to benefit the debtors estate 

and necessary to the administration of the case.

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The assets sought in the criminal forfeiture proceedings overlap to a significant degree 

with the assets sought in the adversary proceedings. Specifically, the government seeks forfeiture 

of a sum of money equal to the total amount of money involved in the scheme, and vacant land 

known as “The Luyung Property” located in Rancho Cordova, California. (Indictment, 2:11–cr–

00234–TLN–1, ECF 1, at 19.) Moreover, Zinnel's Fifth Amendment rights will be implicated any 

time he testifies in the civil case or responds to discovery requests, as his responses will be 

admissible to prove that he engaged in the conduct alleged in the indictment. SK Foods, 2010 

WL 513618, at *7. The relevant conduct can exceed the specific allegations of the indictment. 

Specifically, under Federal Rule of Evidence 404(b), evidence of crimes, wrongs, and acts not 

alleged in the indictment, may be used to prove “motive, opportunity, intent, preparation, plan, 

knowledge, identity, or absence of mistake or accident.” Id. Under this rule, for example, 

evidence that Zinnel fraudulently transferred assets might be used to prove that Zinnel intended to 

commit the fraudulent acts alleged in the indictment, or had a plan to conceal fraudulently 

obtained assets. This evidence would clearly jeopardize Zinnel's Fifth Amendment rights.

Thus, although the specific allegations of the indictment and the adversary proceedings 

may differ to some degree, the bankruptcy litigation seriously implicates Zinnel's Fifth 

Amendment rights. Zinnel has been criminally accused of engaging in an enterprise through 

which he allegedly obtained assets illegally. The Trustee now seeks to recover these assets and to 

prevent Zinnel from fraudulently transferring them. Therefore, the implication of Zinnel's Fifth 

Amendment rights weighs strongly in favor of staying Zinnel's bankruptcy appeal, pending the 

resolution of the related criminal charges against him.

B. Other Factors Relevant to Court's Decision to Stay

1. Plaintiffs' Interest in Proceeding

In addition to the extent that a defendant's Fifth Amendment rights are implicated, courts 

must also consider “the interest of the [Plaintiff] in proceeding expeditiously with this litigation 

or any particular aspect of it, and the potential prejudice to [Plaintiff] of a delay.”

Keating, 45 F.3d at 325 (citation and quotation marks omitted). Plaintiffs certainly have an 

interest in proceeding expeditiously to trial. The Court finds that Plaintiffs have an interest in 

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seeing this case proceed as scheduled. Plaintiffs commenced this action in July of 2005 and have 

waited almost eight years for it to finish. However, Zinnel was not indicted until June 2011. 

The amount of time that has transpired since the initial bankruptcy filing balanced with the much 

more recent indictment weighs slightly in Plaintiffs' favor, as the Plaintiffs have an interest in 

seeing this case proceed as scheduled and any further delay may result in prejudice to the 

Plaintiffs. Cf. Estate of Hernandez–Rojas v. Customs & Border Patrol Agent 7663, 2012 WL 

5429091 (S.D.Cal. Nov.7, 2012) (finding that this factor weighed heavily in plaintiffs' favor when 

the defendants had not been indicted).

2. Burden on Defendants

The next factor courts consider is “the burden which any particular aspect of the 

proceedings may impose on defendants.” Keating, 45 F.3d at 325 (citation and quotation marks 

omitted). As discussed above, the instant civil proceeding implicates Zinnel's Fifth Amendment 

rights to a significant degree. Allowing the civil case to proceed in parallel with the criminal 

prosecution would effectively force Zinnel to choose between defending himself in the civil case 

and preserving his Fifth Amendment rights. S.E.C. v. Alexander, 2010 WL 5388000 (N.D.Cal. 

Dec. 22, 2010). Even if Zinnel elects to invoke his Fifth Amendment privilege in the civil 

proceeding, discovery as to non-party witnesses would prejudice Zinnel in at least two ways. 

First, in using discovery to mount his defense in the civil case, Zinnel may be forced to expose 

the basis of his defense to the criminal bankruptcy fraud charges. Id. Second, permitting 

Plaintiffs to engage in broad civil discovery would unfairly expand the scope of criminal 

discovery beyond the limits of Federal Rule of Criminal Procedure 16(b). Id . These are both 

well-recognized consequences of parallel criminal and civil proceedings that may support a stay 

or deferral of discovery in cases where delay would not seriously injure the public interest or 

otherwise cause prejudice. See Dresser, 628 F.2d at 1376. The Court therefore finds that 

permitting the bankruptcy appeal to proceed could seriously burden Zinnel as a defendant and 

prejudice his criminal defense. This factor weighs strongly in favor of a stay.

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3. Convenience and Efficiency

The third factor courts consider is “the convenience of the court in the management of its 

case, and the efficient use of judicial resources.” Keating, 45 F.3d at 325. For example, the 

Ninth Circuit has held that a district court has an interest in clearing its docket and that this factor 

weighs in favor of denying a motion to stay. Molinaro, 899 F.2d at 903. On the other hand, “a 

number of courts have concluded that staying a parallel civil proceeding in its early stages may 

prove more efficient in the long-run.” Alexander, 2010 WL 5388000 at *5. Indeed, “[a]llowing 

the criminal action to proceed first may narrow the issues and streamline discovery in the civil 

proceeding.” Douglas v. United States, 2006 WL 2038375 at *5 (N.D.Cal. July 17, 2006). 

Additionally, collateral estoppel based on findings in the criminal case may expedite resolution of 

the civil case. S.E.C. v. Nicholas, 569 F.Supp.2d 1065, 1070 (C.D.Cal.2008). A stay will also 

allow civil discovery to “proceed unobstructed by concerns regarding self-incrimination.” 

Jones v. Conte, No., 2005 WL 1287017 at *2 (N.D.Cal. Apr.19, 2005)

Thus, in this case, the overlapping issues and common assets sought to be recovered by 

the parties weighs in favor of a stay, as allowing Zinnel's criminal case to proceed would likely 

narrow the civil issues and expedite discovery. This factor therefore militates in favor of a stay.

4. Interests of Non–Parties

Next, courts consider “the interests of persons not parties to the civil litigation.” Keating, 

45 F.3d at 325 (citations and internal quotations omitted). The United States, a third party to the 

bankruptcy appeal, has an interest in an unimpeded criminal investigation that favors a stay. 

“Additionally, it is conceivable that discovery may touch on the Fifth Amendment rights of 

witnesses who are not parties to the bankruptcy appeal but who may be targets of the criminal 

investigation.” This factor also favors a stay in this case. See Ashworth v. Albers Med., Inc., 229 

F.R.D. 527, 532 (S.D.W.Va.2005).

5. Interest of the Public

The final factor courts must consider is “the interest of the public in the pending civil and 

criminal litigation.” Keating, 45 F.3d at 325 (citation and quotation marks omitted). While the 

California public undoubtedly has an interest in the resolution of Zinnel's claims, that interest 

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pales in comparison to the public interest as a whole in unraveling the criminal counterfeit 

scheme and punishing those responsible for that scheme. Id. This factor therefore favors a stay 

as well.

C. Balance of Interests

Based on the above analysis, the Court finds that a stay is warranted under the particular 

circumstances of the parallel criminal and civil proceedings against Zinnel. This case presents 

what has been described as one of the strongest cases for granting a stay: “where a party under 

indictment for a serious offense is required to defend a civil or administrative action involving the 

same matter.” Dresser, 628 F.2d at 137576. Although the Court recognizes that Plaintiffs and the 

public have an interest in expeditious resolution of the civil proceedings, the Court finds that 

those interests are unlikely to be seriously prejudiced by a stay. If the bankruptcy appeal 

proceeds, Zinnel will be forced to choose between preserving his privilege against selfincrimination, thereby subjecting himself to a one-sided discovery process and adverse inferences 

drawn from his invocation of the Fifth Amendment, and waiving the privilege in order to mount a 

vigorous defense in the civil case. In addition, even if Zinnel invokes the privilege, the discovery 

Zinnel seeks from third-party witnesses may expose the basis of his criminal defense. Weighing 

these interests and burdens, the Court concludes that delaying the civil case will not seriously 

injure the public interest and would alleviate a severe burden on Zinnel's rights and ability to 

defend himself in both proceedings. Accordingly, the Court finds that a stay is warranted.

CONCLUSION

For the foregoing reasons, Zinnel's bankruptcy appeal IS HEREBY STAYED pending the 

resolution of criminal proceedings against him.

Dated: June 4, 2013

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