Opinion
Case No. 2:00 CV 0017
May 9, 2000
MEMORANDUM OPINION ORDER
This matter is before the court on appellant Salt Lake Mattress and Manufacturing Company's consolidated appeals from the bankruptcy court. A hearing was held in this matter on Monday, May 8, 2000. The appellant was represented by Donald J. Winder. The debtor/appellee was represented by Jory Trease. Oral argument was heard and the matter was taken under advisement. The court has carefully considered all pleadings, memoranda, and other materials submitted by the parties. The court has further considered the law and facts relevant to the parties' motions. Now being fully advised, the court enters the following memorandum and order.
I. FACTUAL BACKGROUND
Debtor David Bradley and non-debtor Nancy Halverson were owners of a business known as Moontime 500, Inc. that made purchases on credit from Salt Lake Mattress and Manufacturing Company ("Serta"). In March of 1997, David Bradley and Nancy Halverson signed a Credit Application and Purchase Agreement that included the Personal Guaranty of both Bradley and Halverson. Subsequently, Moontime 500, Inc. incurred a substantial outstanding balance for which Serta sought to collect from Bradley and Halverson based upon the personal guarantees.
After Serta filed suit in the Third District Court, David Bradley filed for bankruptcy protection which is the subject of this appeal. Bradley was dismissed without prejudice from the state court action, and the case was certified as ready for trial by Serta. Thereafter, Halverson moved for summary judgment, alleging that Halverson did not sign the personal guaranty. Serta moved the Bankruptcy Court for relief from the automatic stay to depose Bradley to defend against Halverson's motion for summary judgment.
The Bankruptcy judge denied Serta's motion for relief to depose Bradley because any judgment obtained by Serta against Halverson could, in theory, be added to Halverson's adversary proceeding claims against Bradley, thereby possibly jeopardizing Bradley's estate. This appeal followed. Last month, Halverson's Motion for Summary Judgment was denied. Serta's Second Motion for Relief from Stay was also denied as to the ability to call debtor as a witness at trial. Serta has since consolidated the appeals.
II. STANDARD OF REVIEW
In the review of orders from the Bankruptcy Court, there are three standards of review that may be applied. First, where the Bankruptcy Court is the finder of fact, the court's factual determinations will not be set aside unless they are "clearly erroneous." See Bankruptcy Rule 8013 and Bankruptcy Rule 8013 and Taylor v. I.R.S., 69 F.3d 411 (10th Cir. 1995). A finding of fact is clearly erroneous only if the court has a definite and firm conviction that a mistake has been committed. See In re Mama D'Angelo, Inc., 55 F.3d 552 (10th Cir. 1995). Secondly, a bankruptcy court's ruling involving findings of fact may be overturned if the findings are premised on improper legal standards or on proper legal standards improperly applied. In these instances, the review of this court shall be de novo. See In re Hedged-Investment Associates, Inc., 84 F.3d 1267 (10th Cir. 1996). Lastly, this court will exercise de novo review over the Bankruptcy Court's conclusions of law. Further, mixed questions of law and fact which involve primarily a consideration of legal principles are reviewed de novo. See In re Ruti-Sweetwater, Inc., 836 F.2d 1263 (10th Cir. 1988). Acting as an appellate court in reviewing the bankruptcy court's denial of leave to lift the automatic stay, the court reviews the appeal in the same manner as the bankruptcy court ruled on the initial motion for leave to lift the stay. Because the determination of whether to lift an automatic stay is a mixed question of law and fact, this court will exercise de novo review.
III. DISCUSSION A. Appeal from the Decision of the Bankruptcy Court
Because this court has determined that a live controversy exists and that the requests to depose Bradley and call him as a witness for trial are encompassed within the broad scope of requested relief sought by Serta's Motion for Relief, the issues before the court are not moot.
The court in In re Johns-Manville Corp. (Norton), 39 B.R. 659 (S.D.N.Y. 1984) allowed the non-bankrupt party to depose a debtor in order to prepare for collateral litigation. In so ruling, the court explained that lifting an automatic stay to conduct limited discovery is proper because to do otherwise would leave the litigants "enormously prejudiced by denial of access to discovery." Id. at 661-63. Likewise, the court in In re Johns-Manville Corp. (Occidental Chemical), 41 B.R. 926 (S.D.N Y 1984), also allowed relief from an automatic stay so that the defendants in collateral civil litigation could depose various debtor representatives. In that case, the court considered the competing interests and hardships of the debtor and the third-party litigant, and allowed limited discovery to avert "a degree of hardship and prejudice which no court should countenance." Id. at 931. This balancing test leads the court to conclude, that with the imposition of limitations, allowing the deposition and testimony of Mr. Bradley would not result in prejudice to the debtor. This is particularly true due to the fact that the bankruptcy court has already ruled that the 2004 examination of Mr. Bradley should be allowed to be used as evidence in the state court proceeding. Following this reasoning and the great deference given to allowing depositions of critical witnesses, Serta should be allowed to depose a nonparty witness in order to defend against a non-debtor's motion for summary judgment and to prepare for testimony at trial in the state court action.
Counsel for appellee contends that the debtor and his estate will be prejudicially impacted if appellants are granted leave to depose and question debtor at trial. However, where there is no threat to the debtor's property or estate, there is no violation of the automatic stay. See In re Holtkamp, Inc., 669 F.2d 505 (7th Cir. 1982). Because debtor has been dismissed as a defendant from the civil lawsuit, his property or estate is not at risk. The only other potential detriment cited by appellee is the potential financial impact debtor will suffer by forcing him to participate in the state court action. This impact is non-existent as appellants have offered to pay reasonable attorneys fees in connection with the debtor's deposition and examination at trial.
Further, the bankruptcy court's concern that the information obtained in a deposition could eventually increase the adversary proceeding judgment against debtor was an improper basis to deny relief from the stay. Looking to In re Hillsborough Holdings Corp., 130 B.R. 603 (Bk. M.D. Fla 1991), the court could have permitted limited discovery with the order that none of the information obtained by Serta in the deposition would be admissible against Bradley in the Halverson adversary proceeding.
Therefore, for the reasons stated above it is hereby ORDERED that the bankruptcy court is REVERSED and that Appellant Salt Lake Mattress and Manufacturing Company's request to obtain relief from the automatic stay to depose and call debtor to testify at trial are GRANTED. However, use of the deposition and testimony is limited to use only in the state court proceeding. Further, appellant is ORDERED to pay the reasonable attorneys fees in conjunction with debtor's deposition and trial testimony.