Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_06-cv-01371/USCOURTS-cand-5_06-cv-01371-1/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

IN RE CONSTANCE DUDLEY, 

Debtor.

 /

NO. C 06-1371 JW 

ORDER GRANTING EMERGENCY

MOTION FOR STAY PENDING

APPEAL; RELATING CIVIL CASE

NUMBER 06-1671 JF 

I. INTRODUCTION

An unsecured creditor, Charles K. Clapp (“Clapp”) initiated this suit to appeal the decision

of United States Bankruptcy Judge Arthur S. Weissbrodt approving a trustee’s compromise. The

compromise has the effect of returning to Clapp less than ten percent of the approximately

$1,000,000 unsecured loan he gave to debtor Constance Dudley (“Debtor”). Presently before the

Court is Clapp’s emergency motion for a stay of Judge Weissbrodt’s decision pending appeal. The

matter was heard on April 3, 2006. Based upon all papers filed to date, the Court grants the motion

for a stay. 

II. BACKGROUND

The Debtor filed for Chapter 11 bankruptcy on April 4, 2003. At the time, she apparently

owed Clapp approximately $1,000,000 for an unsecured loan, and owed other creditors, mostly

credit card companies, an additional $500,000. Nearly two years later, the bankruptcy court

appointed a Trustee and eventually converted the bankruptcy case to a Chapter 7.

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1

 The status of the State Court Litigation is unclear. The Trustee represents that the State

Court Litigation may have been dismissed on a demurrer. See Trustee’s Opposition to Motion for

Stay Pending Appeal, p.1.

2

There were only two potentially valuable assets to the Debtor’s bankruptcy estate. The first

was a lawsuit pending in the Monterey County Superior Court entitled Constance Dudley and Mari

Dudley v. Joe Stillwago, et al.,Case No. M71753 (“State Court Litigation”). The State Court

Litigation involves, among other things, loans made to Debtor and/or against properties owned by

Debtor. Debtor alleges, among other things, that third parties forged documents to transfer or

encumber her rights in real properties and that these documents and transfers were without her

knowledge and authorization. Significantly, Clapp is one of the defendants in the State Court

Litigation.1

The second and largest asset of the bankruptcy estate was the Debtor’s rights to an income

stream from the Lincoln Trust dated February 25, 1997 (“Lincoln Trust”). Under the terms of the

Lincoln Trust, Debtor was arguably to receive a life estate interest in the building commonly known

as “Linoc,” located at the corner of Ocean and Lincoln in Carmel, California (“Trust Property”). 

The life estate interest took the form of rents and net income from the Trust Property, which the

Debtor allegedly received at a rate of approximately $11,000 per month. The Lincoln Trust was set

up pursuant to a settlement between Debtor and Paul Laub, Debtor’s former husband, concerning the

dissolution of their marriage.

The parties involved in the bankruptcy case engaged in mediation at JAMS before the

Honorable Nat A. Agliano (Ret.), which ultimately led to an agreement between the bankruptcy

Trustee, the Lincoln Trust, the Debtor, and Mari Dudley, the debtor’s mother, with the following six

terms:

1. The agreement will be approved by both the bankruptcy court and the Monterey

County Superior Court.

2. The Lincoln Trust will pay to the bankruptcy estate $175,000, within thirty days

after the entry of the orders of the bankruptcy court and the Monterey County

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Superior Court approving the agreement.

3. The bankruptcy Trustee will assign to Debtor all of the bankruptcy estate’s right,

title and interest in the State Court Litigation. In the event Debtor prevailed in the

State Court Litigation, the Debtor will receive seventy-five percent (75%) of the net

proceeds (after attorneys’ fees and costs); and the Debtor’s mother will receive

twenty-five percent (25%). Thereafter, thirty-five percent (35%) of Debtor’s

seventy-five percent (75%) will be transferred to the bankruptcy estate.

4. The bankruptcy estate will retain the $10,000 that it previously received from the Trust

Property.

5. The parties will grant one another mutual general releases.

6. Upon approval of the agreement by the bankruptcy court and the Monterey

County Superior Court, the bankruptcy Trustee will move to convert the case to a

Chapter 7 liquidation proceeding.

On December 19, 2005, the bankruptcy Trustee filed a motion to approve the agreement

(also referred to as “compromise”). Clapp opposed the motion to approve the compromise, and

issued approximately thirteen subpoenas in an attempt to conduct discovery regarding the nature of

Debtor’s income from the Lincoln Trust.

On January 20, 2006, the bankruptcy court approved the motion to compromise and denied

Clapp’s motion to compel production of documents responsive to his subpoenas. Clapp filed an

appeal and requested a stay. The bankruptcy court denied the request.

Clapp now appeals both rulings, and seeks a stay pending appeal from this Court. The

Trustees of the Lincoln Trust and the bankruptcy Trustee oppose the motion for a stay pending

appeal.

III. STANDARDS

A motion for a discretionary stay under Rule 8005 of the Federal Rules of Bankruptcy

Procedure is evaluated under standards similar to that of a motion for a preliminary injunction:

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“[A]ppellants must show: (1) a likelihood of probable success on the merits and the possibility of

irreparable injury; or (2) that serious questions going to the merits are raised and the balance of

hardships tips sharply in its favor.” Southwest Voter Registration education Project v. Shelley, 344

F.3d 914, 917 (9th Cir. 2003) (en banc, per curiam); Roe v. Anderson, 134 F.3d 1400, 1401-1402 (9th

Cir. 1998).

IV. DISCUSSION

Applying the standards set forth above, the Court finds that a stay is warranted because there

are serious questions going to the merits of the appeal, and that the balance of hardships tips sharply

in Clapp’s favor. This Court is being asked to review the bankruptcy court’s determination that the

compromise was reasonable, fair, and equitable. In order to conduct such a review, the Court is

required to consider all of the factors set forth in In re A&C Properties, 784 F.2d 1377, 1381 (9th Cir.

1986), which are numerous and factually and legally complex. Among other things, there are

serious issues involving (1) whether the Lincoln Trust is a spendthrift trust under the bankruptcy

laws; (2) whether Debtor’s interest in the Lincoln Trust is a form of alimony, support and/or

maintenance; (3) whether the Trustees of the Lincoln Trust have discretion to withhold future

distributions to the Debtor; and (4) whether the income stream from the Trust Property could be

sold. The parties and the bankruptcy court spent considerable time on these issues, and apparently

there are no clear cut answers. This alone suggests to this Court that there are serious questions

going to the merits of Clapp’s appeal.

The hardship Clapp faces in the absence of a stay is clear: potential funds to pay him back

for the $1,000,000 he loaned to Debtor will probably be dissipated. In contrast, a stay is not likely

to cause the Debtor, the Lincoln Trust, or other creditors severe hardship. The parties opposing the

stay argue that a stay would cause further delay, continue to leave interested parties uncertain as to

their fate, and harm the public interest by preventing finality. These generalized arguments against a

stay do not begin to outweigh the specific and immediate harm Clapp faces if a stay is not granted. 

//

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United States District Court

For the Northern District of California

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V. CONCLUSION

For the reasons set forth above, the emergency motion for stay pending appeal is

GRANTED. The opening briefs on appeal must be filed and served no later than April 17, 2006;

the responsive briefs must be filed and served no later than May 1, 2006. The matter will be heard

on Tuesday, May 16, 2006, at 1:00 p.m.

In the interim, the Trustees of the Lincoln Trust are granted leave to file their motion for

approval of the compromise with the Monterey County Superior Court; however, the motion is

subject to the outcome of the May 16, 2006 proceedings.

Further, the parties may file motion(s) to seek modification of the stay, provided there is

good cause for such relief. 

Finally, pursuant to Civil Local Rule 3-12, and based upon the representations of the party at

the hearing, In re Constance Dudley, Debtor, civil case number 06-1671 JF is ordered RELATED to

the above-entitled action. Absent a stipulation, the parties shall brief Debtor’s appeal in accordance

with the schedule outlined above.

Dated: April 3, 2006

06cv1371stay

/s/James Ware 

JAMES WARE

United States District Judge

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United States District Court

For the Northern District of California

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THIS IS TO CERTIFY THAT COPIES OF THIS ORDER HAVE BEEN DELIVERED TO:

Christopher Alliotts calliotts@sulmeyerlaw.com 

Sandi Meneely Colabianchi smcolabianchi@luce.com 

Rebecca Connolly Rebecca.Connolly@grunskylaw.com, 

debbie.yee@grunskylaw.com

 Amy E Wallace Potter amy.wallace@dlapiper.com, andrea.ayala@dlapiper.com 

Dated: April 4, 2006 Richard W. Wieking, Clerk

By:_/s/JW Chambers______

Melissa Peralta

Courtroom Deputy

Case 5:06-cv-01371-JW Document 14 Filed 04/04/06 Page 6 of 6