Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_96-mc-00081/USCOURTS-azd-2_96-mc-00081-2/pdf.json

Nature of Suit Code: 999
Nature of Suit: other
Cause of Action: Civil Miscellaneous Case

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

In re:

Western United Nurseries, Inc., an

Arizona corporation,

Debtor. _________________________________

In re:

Western Group Nurseries, Inc., an Arizona

corporation,

Debtor. _________________________________

This Order Relates Only To MC 96-82:

Western Group Nurseries, Inc., an Arizona

corporation, 

Plaintiff, 

vs.

Charles L. Leemon, 

Defendant. 

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No. MC 96-0081-PHX-SMM

No. MC 96-0082-PHX-PGR (consolidated)

No. MC 96-0083-PHX-SMM (consolidated)

Br. No. 92-3004-PHX-GBN

Br. No. 92-3005-PHX-RGM

 (jointly administered under 92-3004)

Adv. No. 94-126

Adv. No. 94-185

Adv. No. 94-813

MEMORANDUM OF DECISION AND

ORDER

On July 3, 2000, the Court issued an Order resolving these consolidated matters.

Pending before the Court at that time were Proposed Findings of Fact and Conclusions of

Law issued by the bankruptcy court in three adversary proceedings, and accompanying

Case 2:96-mc-00081-SMM Document 57 Filed 09/17/07 Page 1 of 15
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1

Most of the background included here was set forth in the Court’s Order of July 3,

2000. It is repeated here for clarity. 

2

The background set forth here comes from a variety of sources, including the

pleadings filed by the parties in this Court and in the bankruptcy court, the accompanying

exhibits, and the opinions of other courts which have addressed the same transactions.

Primarily, however, this description comes from those facts set forth by the bankruptcy court

in its proposed findings of fact to which the parties have not filed Objections.

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Objections from the parties. The Court concluded that Western Group Nurseries, Inc.’s

(“Western”) claims were barred by the statute of limitations.

Western then filed a motion for reconsideration, informing the Court that it had

initiated suit against Defendant Charles L. Leemon (“Mr. Leemon”) before suing the other

Defendants. The Court therefore granted Western’s motion for reconsideration as to Mr.

Leemon. Consequently, the bankruptcy court’s Proposed Findings of Fact and Conclusions

of Law in Adversary Number 94-813, and the parties' Objections thereto, are again before

the Court. 

BACKGROUND1

The matters pending before the Court constitute only a few chapters in a saga of

litigation that has spanned over twenty years, involved at least a dozen courts, implicated the

laws of multiple states, and disrupted the lives and businesses of innumerable parties.

Fortunately, while the parties disagree sharply on the meaning and legal consequences of

their actions, the essential factual background is not in dispute.2

A. The Participants

1. The Sellers

In 1984, Sonora Nursery was the largest plant nursery business in the southwestern

United States. Sonora Nursery was actually the trade name for a group of nurseries owned

by a series of limited partnerships. Joseph Tyler, a Phoenix horticulturist, managed the dayto-day operations of the nurseries. Mr. Tyrone Kindor, a Phoenix businessman, served as a

business consultant and structured the limited partnerships as tax-favored investments.

Western United Nurseries, Inc. was the general and managing partner of the limited

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partnerships. Sometime in 1984, Tyler and Kindor decided to sell the nursery operations.

Collectively, the Court will refer to Tyler, Kindor, Western United Nurseries, Inc., and the

original limited partnerships and their members as the “Sellers.”

2. World Nurseries, Inc.

In late 1984, Kindor began to negotiate with World Nurseries, Inc. (“World”) for the

sale of Sonora Nursery. World was a Delaware corporation that specialized in creating

limited partnerships to serve as tax-favored investments, or tax shelters. World offered to

purchase the Sonora Nursery, and planned to immediately resell the nurseries to a limited

partnership. 

3. The Limited Partnership and the Limited Partners

World created Arizona World Nurseries Limited Partnership, (“the Limited

Partnership”), an Arizona limited partnership, to be the ultimate owner of the nurseries.

World resold the nurseries to the Limited Partnership immediately after World purchased the

nurseries from the Sellers. The Limited Partnership consisted of a general partner and

approximately two hundred limited partners (“the Limited Partners”), including Charles

Leemon (“Leemon”). The general partner, Mr. Harvey Minars, marketed the Limited

Partnership to investors in 85 units, which investors could purchase for $100,000 per unit.

Investors could also purchase fractional units. Upon purchasing a unit or a portion of a unit,

an investor became a Limited Partner. All of the Defendants in this litigation were Limited

Partners.

In order to purchase the nursery from World, the Limited Partnership had to provide

World with a promissory note. The Confidential Private Offering Memorandum given to

prospective investors stated, on its first page: “In addition, each Investor will be personally

liable for a portion of the Partnership Note issued to World Nurseries in connection with the

purchase of the Nursery Stock and Plant Materials equal to $260,000 per Unit.” The

Partnership Agreement likewise specified: “By subscribing to the Agreement each Limited

Partner agrees to be personally liable for his pro rata share . . . of the Partnership Note equal

to $260,000 per Unit.” The same warning appeared again in the Subscription Agreements:

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“The Subscriber understands that pursuant to the Partnership Agreement . . . he is agreeing

to be personally liable for his proportionate share of the Partnership Note to World Nurseries

Inc. (“World Nurseries”) equal to $260,000 per Unit.” 

The Limited Partnership was formed pursuant to the laws of Arizona and registered

in Arizona, and the Partnership Agreement is governed by Arizona law. The Subscription

Agreement, however, contains a choice-of-law clause selecting New York law. 

4. Western Group Nurseries

The Sellers retained a security interest in the nursery property even after World resold

the property to the Limited Partnership. The Sellers also had a security interest in the

promissory note given by the Limited Partnership to World as part of the Limited

Partnership’s purchase of the nursery (“the Partnership Note”). When World and the Limited

Partnership defaulted on their obligations to the Sellers, the Sellers foreclosed on their

collateral and obtained a special writ of execution ordering a sheriff’s sale. The day before

the sale, some or all of the Sellers created a new business, Western Group Nurseries, Inc.

(“Western”). The original Sellers were the shareholders in Western, and they assigned a

portion of the judgment against World to Western. At a sheriff’s foreclosure sale, Sellers

purchased the physical property of the Limited Partnership and Western, using their assigned

portion of the judgment, purchased the Partnership Note. Western is the Plaintiff in this

litigation, which is essentially a deficiency action against the Limited Partners.

B. The Sales Transactions

1. The Sellers-World Sale

On December 11, 1984, Sellers and World entered into a Purchase Agreement for the

sale of the nursery business to World. The actual sale took place on December 31, 1984.

The Purchase Agreement set forth the general terms of the sale, and contained a choice-oflaw clause. The choice-of-law clause stated: “This Agreement and the transactions

contemplated herein have been consummated in the State of New York and shall be

construed and enforced in accordance with and governed by the laws of such state, without

regard to conflict of laws.” 

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Sellers and World ultimately settled on a sales price of $22.1 million, with a $3

million cash payment at closing, an additional payment of $2.1 million due no earlier than

January 1, 1986, and the balance covered by a $17 million cash flow promissory note. The

promissory note was non-recourse, and did not contain a choice-of-law clause. 

The parties also entered into a Security Agreement. The Security Agreement

contained a choice-of-law provision similar to that in the Purchase Agreement: “This

Security Agreement shall be governed by and interpreted under the laws of the State of New

York applicable to contracts made therein, without giving effect to the principles thereof

relating to the conflict of laws.” The Security Agreement also recited World’s intent to resell

the nursery to a limited partnership for a cash payment and a “wraparound note.” Then, the

Security Agreement granted the Sellers:

a purchase money security interest in and to the Properties and the

Wraparound Note (except that Secured Party shall not have the right

to sue the Limited Partners or General Partners of the Partnership

personally thereon other than to the extent of payments made to them

by the partnership) and the Partnership Security Agreements and all

additions, attachments and replacements thereto and all proceeds

therefrom (collectively, the “Collateral”) and agrees that such security

interest attaches upon the Closing of the Purchase Agreement.

(Emphasis added.) The parties sharply dispute the meaning and consequences of the Security

Agreement’s parenthetical limitation on the Sellers’ right to sue the Limited Partners.

2. The World-Limited Partnership Sale

Immediately after taking title to the nursery from Sellers, World resold the business

to the Limited Partnership. The Limited Partnership paid $6.7 million in cash and gave

World a promissory note for $26.43 million (“the Partnership Note”). The Purchase

Agreement between World and the Limited Partnership provided: “Each limited partner of

the Purchaser shall be personally liable for his proportionate share of principal of the Note

in the aggregate amount of $22,100,000.” The Purchase Agreement also contained a choiceof-law clause: “This Agreement and the transactions contemplated herein have been

consummated in the State of New York and shall be construed and enforced in accordance

with and governed by the laws of such state, without regard to conflict of laws.” 

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3

The tax laws of the early 1980's help explain the odd mix of recourse, limited

recourse, and non-recourse obligations established in the sales transactions. In order to

receive favorable tax treatment, the Limited Partners had to be liable for the debts of the

Partnership, at least in the eyes of the IRS. Thus, all of the documents proclaimed that the

Limited Partners were liable on the Partnership Note, the Partnership’s primarily liability.

On the other hand, the Limited Partners also wanted to minimize their risk. Therefore, they

required that Sellers, the actual beneficiaries of the Note, relinquish their right to pursue the

Limited Partners. Ironically, the IRS ultimately determined that the Limited Partners were

not sufficiently at-risk to obtain maximum tax benefits, but many of them have settled with

or been found liable to Western in deficiency actions.

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Also on December 31, 1984, the Limited Partnership executed the Partnership Note,

entitled “Secure Recourse Note.” The Partnership Note did not contain a choice-of-law

clause, but did state: “This Note is issued pursuant to and is entitled to the benefits of a

Purchase Agreement between Maker and Payee. . . [and] of a Security Agreement between

Maker and Payee.” The Partnership Note also contained a standard non-recourse clause.

Immediately following the non-recourse clause, however, the Note provided:

“Notwithstanding the foregoing, or any other provision of this Note to the contrary, each

limited partner of the Maker shall be personally liable to the extent of $260,000 per unit of

Limited Partnership interest for the principal hereon.”3

 

Along with the Purchase Agreement and the Partnership Note, World and the Limited

Partnership also entered a Security Agreement. The Security Agreement, like the Purchase

Agreement, contained a choice-of-law clause adopting New York law: “This Agreement

shall be governed by and interpreted under the laws of the State of New York applicable to

contracts made and to be performed therein, without giving effect to the principles thereof

relating to the conflict of laws.”

Finally, immediately after receiving the Partnership Note from the Limited

Partnership, World assigned or pledged that Note to Sellers. In an Assignment of Partnership

Security Agreement and Wraparound Note, dated December 31, 1984, World did “hereby

sell, assign and transfer” to Sellers “all Assignor’s right, title and interest in and to (but none

of its obligations under) a certain partnership security agreement dated December 31, 1984

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(“Partnership Security Agreement”) and a certain wraparound note dated December 31,

1984.”

C. The Defaults and Foreclosure

Sellers expected to receive their first payment from World, based on the nursery’s

cash flow, in January 1986. World did not make a payment to Sellers, and argued that no

payment was due under the cash-flow formula from which payments were to be calculated.

On February 7, 1986, Sellers sent World a letter declaring World to be in default and

purporting to accelerate World’s obligations to Sellers. 

On February 20, 1986, Sellers sent a second letter to both World and to the Limited

Partnership, again declaring default and accelerating the notes. Specifically, Sellers alleged

four events of default against the Limited Partnership. Sellers alleged that the Limited

Partnership was in breach of its obligations under the Partnership Security Agreement, three

of which were owed to World and one of which ran directly to Sellers. 

Sellers incorporated their allegations of default into a lawsuit pending in the Arizona

Superior Court for Maricopa County. The lawsuit involved multiple claims between the

different Sellers and between the Sellers and World and the Limited Partnership. On May

8, 1986, Sellers moved for partial summary judgment against World and the Limited

Partnership seeking foreclosure. On October 22, 1986, the Maricopa court entered judgment

on Sellers’ motion and against both World and the Limited Partnership. The court found that

World and Limited Partnership were in default on their obligations to Sellers, entered a

money judgment against World, and foreclosed on Sellers’ security interest in all collateral

held by World and the Limited Partnership. The Maricopa Court invited Sellers to apply for

a special writ of execution so that the collateral could be sold at a sheriff’s sale.

World and the Limited Partnership immediately filed a motion to stay the foreclosure

sale, and then attempted to surrender the collateral to Sellers in order to avoid the sale.

Sellers rejected this offer, and World and the Limited Partnership sought a second stay. After

two hearings, the state court denied the request for a stay and ordered the collateral sold by

the sheriff. World and the Limited Partnership then unsuccessfully sought a stay from the

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4

From the record before it, the Court cannot determine how the Maricopa court

concluded that it lacked personal jurisdiction over the Limited Partners. Each of the Limited

Partners invested no less than $32,000 to become members of a limited partnership formed

under a partnership agreement governed by Arizona law, registered in Arizona, and with all

of its assets in Arizona.

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Arizona Court of Appeals. The Maricopa County Sheriff conducted a sale on December 2,

1986. Sellers purchased the physical assets of the nurseries, and Western purchased the

Partnership Note for $677,000. In November, 1987, the Arizona Court of Appeals affirmed

the decisions of the trial court. The supreme court denied review.

D. Subsequent Litigation

On December 3, 1986, Western filed a deficiency action against the Limited

Partnership and the Limited Partners in Maricopa County Superior Court. In its Amended

Complaint, Western alleged: “Defendants, Arizona World, Harvey Minars and the 201

limited partners have breached their agreement with the Sellers . . . and said Sellers were

entitled to accelerate and did accelerate on February 20, 1986, November 14, 1986 and

November 19, 1986, the [Partnership] Note attached hereto. . . .” The limited partners moved

to dismiss the claims against them for lack of personal jurisdiction. The Maricopa court

granted the motion to dismiss, and Western proceeded to obtain judgment against the Limited

Partnership only, and not the Limited Partners.4

 

 Since 1986, Western has pursued additional deficiency actions against many of the

Limited Partners, with varying degrees of success. In litigation in New York, a group of the

Limited Partners obtained a declaratory judgment preempting Western’s claims. See Hauser

v. Western Group Nurseries, Inc., 767 F. Supp. 475 (S.D.N.Y. 1991). The Limited Partners

successfully argued that the clause in the Sellers’ Security Agreement that barred Sellers

from suing the Limited Partners on the Note also barred Western’s deficiency action. See

id. at 485-487. In Colorado, the courts reached the opposite conclusion, and Western

obtained judgment against the Limited Partners. See Western Group Nurseries, Inc. v.

Pomeranz, 867 P.2d 12 (Col. App. 1993). In Florida, a district court granted summary

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Western United Nurseries, Inc. also filed for bankruptcy in early 1992. The

bankruptcy court jointly administered the two bankruptcies.

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judgment against the Limited Partners. However, the Eleventh Circuit reversed, holding that

the proper interpretation of the various contracts raised issues of fact. See Western Group

Nurseries, Inc. v. Ergas, 167 F.3d 1354 (11th Cir. 1999).

E. The Bankruptcy

Western filed for bankruptcy on March 12, 1992.5

 During the course of the

bankruptcy, Western initiated at least four adversary proceedings against different groups of

limited partners. The bankruptcy court conducted an evidentiary hearing in one of the

adversaries to determine whether Western could proceed against the Limited Partners. After

concluding that the liability of the limited partners on the Note was limited only as to Sellers

but not as to Western, the bankruptcy court proceeded to recommend the entry of summary

judgment against the limited partners in each of the adversaries. The bankruptcy court

rejected a variety of defenses, including arguments based on the statute of limitations,

collateral estoppel, and fraud.

Mr. Leemon was the Defendant in Adversary Number 94-813. Western had

previously sued Mr. Leemon in Florida and in New York. In New York, Western filed a

Motion for Summary Judgment in Lieu of Complaint, pursuant to a unique New York

procedure, on December 19, 1991. The New York state court denied the motion for

summary judgment on June 5, 1992, but gave Western twenty days to continue the action by

filing a formal complaint. On June 9, 1992, Western removed the New York action from

state court to the United States District Court for the Eastern District of New York. Western

did not file a complaint in the New York action until January 26, 1994. On September 19,

1994, the New York court transferred the action to the United States Bankruptcy Court for

the District of Arizona, where it became Adversary Number 94-813.

Because all of the adversary proceedings against the limited partners involved noncore issues, the bankruptcy court submitted proposed findings of fact and conclusions of law

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In the fourth action, adversary number 94-183 (MC 97-21-PHX-SMM), none of the

parties filed objections. The Court therefore entered judgment on the recommendations of

the bankruptcy judge. 

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to this Court. In three of the four adversary proceedings, all of the parties then filed

Objections to the rulings of the bankruptcy court.6

 Western, which would largely prevail

under the findings and conclusions of the bankruptcy judge, objected only to the

recommendations denying attorneys’ fees and setting the applicable interest rate. 

Mr. Leemon filed an extensive set of Objections to the following decisions of the

bankruptcy court: 

STANDARD OF REVIEW

When a bankruptcy judge submits proposed findings of fact and conclusions of law

to a district court on a non-core proceeding, the district court shall enter judgment “after

considering the bankruptcy judge’s proposed findings and conclusions and after reviewing

de novo those matters to which any party has timely and specifically objected.” 28 U.S.C.

§ 157.

Although the bankruptcy court did hold one evidentiary hearing, it otherwise resolved

the adversary proceedings on Western’s motions for summary judgment. The Court must

grant summary judgment if the pleadings and supporting documents, viewed in the light most

favorable to the nonmoving party, show that there is no genuine issue as to any material fact

and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c);

see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). Substantive law determines

which facts are material. See Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). Only

disputes over facts that might affect the outcome of the suit under the governing law will

properly preclude the entry of summary judgment. See id.

A principal purpose of summary judgment is to isolate and dispose of factually

unsupported claims. See Celotex, 477 U.S. at 323-24. Summary judgment is appropriate

against a party who fails to make a showing sufficient to establish the existence of an element

essential to that party's case, and on which that party will bear the burden of proof at trial.

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See id. at 322. The moving party need not disprove matters on which the opponent has the

burden of proof at trial. Id. at 317. The party opposing summary judgment “may not rest

upon the mere allegations or denials of [the party's] pleadings, but . . . must set forth specific

facts showing that there is a genuine issue for trial.” Fed. R. Civ. P. 56(e).

DISCUSSION

1. Statute of Limitations

In response to Plaintiff’s motion for reconsideration, Mr. Leemon argued that the

statute of limitations applied to him as well. However, the action originally filed in New

York in 1991 has been continuously pending before one court or another and was never

dismissed (except once by the bankruptcy court in an order that was later vacated and

therefore has no effect). Mr. Leemon never sought to have this action dismissed; therefore,

the action is timely.

2. Objections 1 & 2

Mr. Leemon argues that the bankruptcy court unfairly applied the results of an

evidentiary hearing for the other adversaries to his case. However, the bankruptcy court

repeatedly stated that it would not and did not do this. (See Order of Referral, ¶ 3; transcript

of 6/18/96 at 8, transcript of 3/21/96 at 21-23). Moreover, Mr. Leemon has not provided

any evidence to support his argument. Therefore, this Court reaffirms the statements made

by the bankruptcy court, and holds that the results of the evidentiary hearing were not

unfairly applied. Moreover, even if the bankruptcy court did improperly incorporate findings

from the evidentiary hearing, it would not matter because the issue can be decided as a matter

of law. The primary and ultimate purpose of contract interpretation under Arizona law is

to effectuate the parties' intent. See Taylor v. State Farm Mut. Auto. Ins. Co., 854 P.2d 1134,

1138 (Ariz.1993) (in banc). "Interpretation of a contract is a question of law for the court

where the terms of a contract are found to be plain and unambiguous." Chandler Med. Bldg.

Partners v. Chandler Dental Group, 855 P.2d 787, 791 (Ariz.Ct.App.1993). In the present

case, the Court interprets the language of the contract to be clear and unambiguous.

Therefore, the findings from the evidentiary hearing become immaterial. 

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3. Objection 3, Collateral estoppel

Due to the number of Courts involved in these actions, and the different decisions

each of them have reached at one time or another, all of them have concluded that it would

be unfair and inappropriate to apply the doctrine of collateral estoppel. Therefore, the Court

agrees with this rationale and holds that collateral estoppel does not apply in this action as

well. 

4. Objection 4, effect of 9-504

UCC 9-504 is a safe harbor provision that protects the purchaser of an asset, such as

the note here, who purchases the asset at a foreclosure sale. Mr. Leemon argues that this

provision does not apply here for three reasons. First, he argues that 9-504 refers only to the

discharge of the “security interest” under which a sale of collateral has been made, and does

not provide for the discharge of the Security Agreement itself. Second, he argues that UCC

9-504 expressly limits the discharge of a security interest to purchasers who “do not buy in

collusion with the secured party.” Mr. Leemon claims that Western and WUN were acting

in collusion with each other and therefore the discharge of security interest would not apply.

 And finally, he argues that UCC 9-504(4) cannot apply to the December 2, 1986 sheriff’s

sale because the Partnership Note was not sold “by a secured party” as required by the

statute.

 The first and third reasons are based on strained readings of the statute, and the case

quotes cited by Mr. Leemon are taken out of context. The second stated reason is trumped

by UCC 9-507, which states that a judicially approved sale is by definition commercially

reasonable, and a purchaser at such a sale takes all rights free and clear of any restrictions.

The sale here was approved by the Arizona state courts, both at the trial and appellate levels.

Therefore, the provisions under UCC 9-504 do apply to the present, and the purchaser of the

note is protected under this safe harbor. 

5. Objection 5, Effect of limitation on right to sue in security agreement.

Although the Court may agree that Article 3 does not apply, there is no issue arising

from the application of the limitation on the right to sue. The limitation is in the security

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agreement. It is appended to a sentence that states that Sellers are secured parties with a

security interest and all of the rights of a secured party except the right to sue directly. The

limitation therefore has no existence apart from the security interest. It is only by virtue of

the security interest that Sellers would gain the right to sue, and so it is only in the context

of the security interest that the limitation has any meaning.

When the security interest was discharged in the judicially approved foreclosure sale,

the limitation ceased to have any meaning. By its own terms, it applied only to the Sellers

(secured party) in the context of the security interest. The reason for the provisions of article

9 on foreclosure sales, especially judicially approved foreclosures, is to maximize value by

allowing the purchaser to take free of such restrictions. Therefore, the Court overrules this

objection and holds that there is no issue arising from the application of the limitation on the

right to sue.

Objection 6: Collusion and bad faith. 

Because, as set forth above, judicially approved sales are reasonable, Mr. Leemon

cannot reach the judgment of collusion and bad faith. Therefore, this objection is overruled.

6. Objection 7: More collateral estoppel.

Mr. Leemon claims that he was not precluded by collateral estoppel from challenging

whether the sheriff’s sale had been conducted pursuant to Article 9. Having already

determined that the bankruptcy court correctly determined that the safe harbor provisions of

UCC § 9-504 do apply here, the Court finds that Leemon’s argument is moot. 

7. Objection 8: Motion to Dismiss or Stay.

Mr. Leemon argues that the bankruptcy court erred by refusing to stay or dismiss this

proceeding. However, the Court finds that Mr. Leemon has no convincing authority for why

the action should not have proceeded here. Mr. Leemon simply repeats the argument he

made to the bankruptcy court: that the “first to file rule” dictates dismissing or staying this

proceeding until the Florida case was completed. However, as Plaintiff/Debtor’s represented

in their Response to Leemon’s Objections to the Findings of Fact and Conclusions of Law,

the parallel proceeding in Florida was dismissed without prejudice. Moreover, the Court

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agrees with the bankruptcy court’s determination that the circumstances of this case merit an

exception to the “first to file rule.” As the Ninth Circuit has previously held, the first to file

rule is not a rigid rule to be applied mechanically. Church of Scientology v. United States

Dep’t of Army, 611 F.2d 738, 750 (1979). Rather, the rule is intended to promote judicial

efficiency and avoid “the embarrassment of conflicting judgments.” Id. Here, the bankruptcy

court already dealt with nearly identical legal and factual issues in companion adversary

proceedings and the parallel proceeding in Florida was dismissed, thereby eliminating the

risk of conflicting judgments. Therefore, the Court affirms the bankruptcy court’s finding

that this case serves as an exception to the first to file rule was correct and Leemon’s

objection is overruled. 

8. Objection 9: Pre-Judgment Interest Rate.

Mr. Leemon argues that the federal pre-judgment interest rate, as opposed to the New

York rate, applies to the monies owed to Western. However, it is undisputed that the

underlying claim in this adversary proceeding is based on state substantive law. The

Bankruptcy Court originally ruled that the federal pre-judgment interest rate applied, but

then modified its order and determined that when a federal judgment is based upon a state

law claim, the court must look to state law to determine the propriety of prejudgment interest.

The Court agrees with the bankruptcy court’s reasoning: since this matter was based upon

state law, not federal law, state law should determine the propriety of prejudgment interest.

Thus, Mr. Leemon’s objection is overruled and the New York prejudgment interest rate

applies. 

9. Objection 10: Attorneys’ fees.

Western objects to the bankruptcy court’s finding that attorneys’ fees are not

recoverable because New York law, rather than Arizona law, controls. Western asserts that

Arizona law governs the attorneys’ fees inquiry since the Partnership Agreement is the

contract that established the limited partners’ liability. 

The Limited Partnership was formed pursuant to the laws of Arizona and was

registered in Arizona. The Partnership Agreement is governed by Arizona law. The

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remaining agreements involved in the underlying lawsuit were governed by New York law

per the parties choice of law in the following agreements: 1) Subscription Agreement, 2)

Purchase Agreement and 3) Security Agreement. The bankruptcy court determined that New

York law applied to the action because the Partnership Agreement governed the relationship

between the limited partners, but not between the limited partners and Western. The Court

finds that it is unclear from the record which law should govern the attorneys’ fees inquiry.

As Western asserts, the Partnership Agreement is governed by Arizona law. Moreover, this

is a contract action and Arizona has had significant contacts with the transactions at issue,

which supports Western’s contention that it is entitled to attorneys’ fees. See Aries v. Palmer

Johnson, Inc., 153 Ariz. 250, 735 P.2d 1373 (App. 1987). Therefore, the Court will sustain

this objection and remand this case back to the bankruptcy court on the issue on attorneys’

fees.

CONCLUSION

Therefore, in light of the reasons set forth above, all of the objections to the

bankruptcy court’s findings, except Western’s objection regarding the award of attorney’s

fees, are OVERRULED and IT IS HEREBY ORDERED adopting the the bankruptcy

court’s Proposed Findings of Fact and Conclusions of Law in Adversary Number 94-813

excepting only the bankruptcy court’s findings of fact and conclusions of law regarding the

award of attorneys’ fees. 

IT IS FURTHER ORDERED remanding this case back to the bankruptcy court for

additional inquiry into whether Western is entitled to an award of attorneys’ fees. 

IT IS FURTHER ORDERED directing the Clerk of Court to forward a copy of this

Order to Bankruptcy Judge George B. Neilsen, Jr.

DATED this 14th day of September, 2007.

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