In Re: Steven Keith Zinnel
Filing
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ORDER signed by District Judge Troy L. Nunley on 6/4/13. The bankruptcy appeal is hereby STAYED pending the resolution of the criminal proceedings. (Manzer, C)
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UNITED STATES DISTRICT COURT
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EASTERN DISTRICT OF CALIFORNIA
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In Re:
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STEVEN KEITH ZINNEL,
No. 2:12-cv-01541-TLN
Bankruptcy No. 05-28800-C-7
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Debtor.
ORDER
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Appellant Steven Zinnel (“Zinnel”) brings this appeal of the Bankruptcy Court’s orders
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on: (1) application for interim compensation regarding Trustee Susan K Smith’s first interim
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application for allowance of compensation and reimbursement of expenses to counsel for the
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current Chapter 7 Trustee; and (2) application for interim compensation regarding Trustee Susan
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K Smith’s first interim application for allowance of compensation and reimbursement of expenses
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to accountants for the current Chapter 7 Trustee. (BK ECF 1.) Plaintiffs in the bankruptcy case
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are Creditors First Bank and Safeco Insurance, and Trustees Stephen M. Reynolds, Susan K.
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Smith and August B. Landis (collectively, “Plaintiffs”).
In light of the ongoing parallel criminal proceedings against Zinnel, and on the Court's
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own motion, this Court stays the current bankruptcy appeal, pending the resolution of the criminal
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charges.
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BACKGROUND
A. The Criminal Proceeding1
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On June 8, 2011, the government filed an indictment against Zinnel and Derian Eidson
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(“Eidson”). (2:11–cr–00234–TLN ECF 1.) A magistrate judge issued an arrest warrant later that
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day. (ECF 6.) On June 9, 2011, Deputy United States Marshals arrested Zinnel. (Id.)
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The indictment charges fourteen counts and a forfeiture allegation against Zinnel.
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(Id.) These counts include two counts under 18 U.S.C. § 152 for bankruptcy fraud, two counts
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under 18 U.S.C. § 1956(h) for money laundering conspiracy, ten counts under 18 U.S.C. § 1956
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for money laundering, and two counts under 18 U.S.C. § 1957 for transactions in criminally
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derived property. (Id.)
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With respect to the first count of bankruptcy fraud, the government alleges that Zinnel
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knowingly and fraudulently transferred and concealed property in contemplation of his
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bankruptcy. (Id. at 3.) With respect to the second count of bankruptcy fraud, the government
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alleges that Zinnel knowingly and fraudulently concealed certain interests from an officer of the
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court and from creditors. These interests include payments Zinnel received from Company 1
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through Done Deal, his interest in Done Deal's bank account, his interest in 4Results, his interest
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in Auto and Boat Store, and his interest in the Luyung Property. (Id. at 6.)
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In the money laundering conspiracy counts, the government alleges that Zinnel and
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Eidson knowingly conspired with each other and with at least one other person to commit
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offenses in violation of 18 U.S.C. §§ 1956 and 1957 by disguising payments to Zinnel as
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payments to Done Deal from Company 1 for purported sales of goods and services.
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(Id. at 8; 14.)
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The multiple money laundering counts consist of allegations that Zinnel and Eidson
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conducted and attempted to conduct financial transactions affecting interstate commerce;
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specifically, the negotiation of a check from Company 1 to Done Deal, which involved proceeds
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from violations of 18 U.S.C. § 152. (Id. at 11.)
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The 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
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in an illegal monetary transaction affecting interstate commerce when Zinnel made a transfer of
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approximately $172,000 in U.S. funds from Washington Mutual Bank to E–Trade, as these funds
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were derived through money laundering. (Id. at 13.)
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The forfeiture allegation seeks recovery of all real and personal property that constitutes,
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or is derived from, the proceeds traceable to the aforementioned counts. Such property would
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allegedly include property and proceeds otherwise subject to the bankruptcy proceeding,
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including the Luyung Property. (Id. at 19.)
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B. The Bankruptcy Proceedings
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On or about July 20, 2005, Zinnel filed a voluntary bankruptcy petition in his name, case
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number 05–28800–C-7, under Chapter 7 of Title 11 of the United States Code, in the United
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States Bankruptcy Court for the Eastern District of California. (2:12–cv–00249–TLN, ECF 1.)
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On the schedule of assets and liabilities filed in his bankruptcy case, Zinnel disclosed
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$842,620.00 in assets, excluding any interests in assets transferred as alleged above,
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$2,013,896.29 in secured debt and $4,036,466.25 in unsecured debt.
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On appeal to this court are two orders of the Bankruptcy Court: one granting an interim
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compensation for attorneys’ fees in the amount of $80,000 (BK ECF 513), and one granting an
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interim compensation of accountancy fees in the amount of $3,000.
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STANDARD
While a district court may stay civil proceedings pending the outcome of parallel criminal
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proceedings, such action is not required by the Constitution. Federal Sav. & Loan Ins. Corp. v.
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Molinaro, 889 F.2d 899, 902 (9th Cir.1989); Sec. & Exch. Comm'n v. Dresser Indus., 628 F.2d
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1368, 1375 (D.C. Cir.), cert. denied, 449 U.S. 993 289 (1980); see generally United States v.
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Kordel, 397 U.S. 1, 90 (1970). The Ninth Circuit has held that “in the absence of substantial
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prejudice to the rights of the parties involved, simultaneous parallel civil and criminal
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proceedings are unobjectionable under our jurisprudence.” Keating v. Office of Thrift
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Supervision, 45 F.3d 322, 324–25 (9th Cir.1995) (quoting Dresser, 628 F.2d at 1374).
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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
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circumstances and competing interests involved in the case[s].” Id. (quoting Molinaro, 889 F.2d
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at 902). The Ninth Circuit has instructed the court to consider “the extent to which the
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defendant's Fifth Amendment rights are implicated.” Id. (internal quotation omitted).
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In determining whether to stay a parallel civil proceeding, courts should consider the
following factors:
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(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.
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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
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be forced to choose between testifying in a civil matter and asserting his Fifth Amendment
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privilege.” Id. at 326. Not only is it permissible to conduct a civil proceeding at the same time
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as a related criminal proceeding, even if that necessitates invocation of the Fifth Amendment
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privilege, but it is even permissible for the trier of fact to draw adverse inferences from the
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invocation of the Fifth Amendment in a civil proceeding.” Id. Despite the generosity of the
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standard, it is nonetheless true that permitting simultaneous proceedings may seriously undermine
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the ability of a person presumed innocent to defend himself and may provide the prosecution with
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an undue advantage because it will have access to the evidence tendered in the bankruptcy
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proceedings.
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by 2011 WL 1442332 (E.D.Cal. Apr.14, 2011).
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In re SK Foods, L.P., 2010 WL 5136189 (E.D.Cal. Dec.10, 2010) order clarified
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ANALYSIS
A. Relationship Between Adversary Proceedings and Criminal Indictment
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The strongest case for deferring civil proceedings until after completion of criminal
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proceedings is where a party under indictment for a serious offense is required to defend a civil or
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administrative action involving the same matter. Dresser, 628 F .2d at 1375–76. Specifically,
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“[t]he noncriminal proceeding, if not deferred, might undermine the party's Fifth Amendment
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privilege against self-incrimination, expand rights of criminal discovery beyond the limits of
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Federal Rule of Criminal Procedure 16(b), expose the basis of the defense to the prosecution in
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advance of criminal trial, or otherwise prejudice the case.” Id. at 1376. In Dresser, the D.C.
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Circuit considered whether a corporation was entitled to special protection against an SEC
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subpoena because of a parallel grand jury investigation of the same issue. The D.C. Circuit
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reasoned that, “[t]he case at bar is a far weaker one for staying the administrative investigation
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[because no indictment has been filed, and thus,] no Fifth Amendment privilege is threatened.”
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Id. The Ninth Circuit adopted this reasoning in Molinaro, where it held that the district court did
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not abuse its discretion by deciding that the burden on the defendant's Fifth Amendment privilege
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was negligible because no related criminal indictments were pending against him at the time of its
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ruling. Molinaro, 889 F.2d at 903.
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Here, Zinnel faces criminal charges of bankruptcy fraud, money laundering, money
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laundering conspiracy, and transactions in criminally derived property. (Indictment, 2:11–cr–
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00234–TLN–1, ECF 1.) These charges are closely related to the issues involved in Zinnel's
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bankruptcy appeal. Specifically, the issues involved in Zinnel's bankruptcy appeal include: (1)
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whether the Bankruptcy Court awarded reasonable compensation for services rendered and
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reimbursement for actual and necessary expenses; (2) whether the Bankruptcy Court took into
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account the time spent on such services, the rates charged, and whether the services were
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necessary; and (3) whether the Bankruptcy Court allowed compensation for unnecessary
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duplication of services and services that were not reasonably likely to benefit the debtors estate
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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
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with the assets sought in the adversary proceedings. Specifically, the government seeks forfeiture
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of a sum of money equal to the total amount of money involved in the scheme, and vacant land
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known as “The Luyung Property” located in Rancho Cordova, California. (Indictment, 2:11–cr–
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00234–TLN–1, ECF 1, at 19.) Moreover, Zinnel's Fifth Amendment rights will be implicated any
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time he testifies in the civil case or responds to discovery requests, as his responses will be
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admissible to prove that he engaged in the conduct alleged in the indictment. SK Foods, 2010
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WL 513618, at *7. The relevant conduct can exceed the specific allegations of the indictment.
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Specifically, under Federal Rule of Evidence 404(b), evidence of crimes, wrongs, and acts not
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alleged in the indictment, may be used to prove “motive, opportunity, intent, preparation, plan,
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knowledge, identity, or absence of mistake or accident.” Id. Under this rule, for example,
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evidence that Zinnel fraudulently transferred assets might be used to prove that Zinnel intended to
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commit the fraudulent acts alleged in the indictment, or had a plan to conceal fraudulently
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obtained assets. This evidence would clearly jeopardize Zinnel's Fifth Amendment rights.
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Thus, although the specific allegations of the indictment and the adversary proceedings
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may differ to some degree, the bankruptcy litigation seriously implicates Zinnel's Fifth
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Amendment rights. Zinnel has been criminally accused of engaging in an enterprise through
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which he allegedly obtained assets illegally. The Trustee now seeks to recover these assets and to
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prevent Zinnel from fraudulently transferring them. Therefore, the implication of Zinnel's Fifth
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Amendment rights weighs strongly in favor of staying Zinnel's bankruptcy appeal, pending the
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resolution of the related criminal charges against him.
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B. Other Factors Relevant to Court's Decision to Stay
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1. Plaintiffs' Interest in Proceeding
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In addition to the extent that a defendant's Fifth Amendment rights are implicated, courts
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must also consider “the interest of the [Plaintiff] in proceeding expeditiously with this litigation
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or any particular aspect of it, and the potential prejudice to [Plaintiff] of a delay.”
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Keating, 45 F.3d at 325 (citation and quotation marks omitted). Plaintiffs certainly have an
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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
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waited almost eight years for it to finish. However, Zinnel was not indicted until June 2011.
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The amount of time that has transpired since the initial bankruptcy filing balanced with the much
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more recent indictment weighs slightly in Plaintiffs' favor, as the Plaintiffs have an interest in
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seeing this case proceed as scheduled and any further delay may result in prejudice to the
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Plaintiffs. Cf. Estate of Hernandez–Rojas v. Customs & Border Patrol Agent 7663, 2012 WL
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5429091 (S.D.Cal. Nov.7, 2012) (finding that this factor weighed heavily in plaintiffs' favor when
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the defendants had not been indicted).
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2. Burden on Defendants
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The next factor courts consider is “the burden which any particular aspect of the
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proceedings may impose on defendants.” Keating, 45 F.3d at 325 (citation and quotation marks
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omitted). As discussed above, the instant civil proceeding implicates Zinnel's Fifth Amendment
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rights to a significant degree. Allowing the civil case to proceed in parallel with the criminal
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prosecution would effectively force Zinnel to choose between defending himself in the civil case
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and preserving his Fifth Amendment rights. S.E.C. v. Alexander, 2010 WL 5388000 (N.D.Cal.
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Dec. 22, 2010). Even if Zinnel elects to invoke his Fifth Amendment privilege in the civil
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proceeding, discovery as to non-party witnesses would prejudice Zinnel in at least two ways.
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First, in using discovery to mount his defense in the civil case, Zinnel may be forced to expose
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the basis of his defense to the criminal bankruptcy fraud charges. Id. Second, permitting
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Plaintiffs to engage in broad civil discovery would unfairly expand the scope of criminal
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discovery beyond the limits of Federal Rule of Criminal Procedure 16(b). Id . These are both
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well-recognized consequences of parallel criminal and civil proceedings that may support a stay
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or deferral of discovery in cases where delay would not seriously injure the public interest or
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otherwise cause prejudice. See Dresser, 628 F.2d at 1376. The Court therefore finds that
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permitting the bankruptcy appeal to proceed could seriously burden Zinnel as a defendant and
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prejudice his criminal defense. This factor weighs strongly in favor of a stay.
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3. Convenience and Efficiency
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The third factor courts consider is “the convenience of the court in the management of its
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case, and the efficient use of judicial resources.” Keating, 45 F.3d at 325. For example, the
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Ninth Circuit has held that a district court has an interest in clearing its docket and that this factor
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weighs in favor of denying a motion to stay. Molinaro, 899 F.2d at 903. On the other hand, “a
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number of courts have concluded that staying a parallel civil proceeding in its early stages may
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prove more efficient in the long-run.” Alexander, 2010 WL 5388000 at *5. Indeed, “[a]llowing
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the criminal action to proceed first may narrow the issues and streamline discovery in the civil
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proceeding.” Douglas v. United States, 2006 WL 2038375 at *5 (N.D.Cal. July 17, 2006).
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Additionally, collateral estoppel based on findings in the criminal case may expedite resolution of
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the civil case. S.E.C. v. Nicholas, 569 F.Supp.2d 1065, 1070 (C.D.Cal.2008). A stay will also
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allow civil discovery to “proceed unobstructed by concerns regarding self-incrimination.”
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Jones v. Conte, No., 2005 WL 1287017 at *2 (N.D.Cal. Apr.19, 2005)
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Thus, in this case, the overlapping issues and common assets sought to be recovered by
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the parties weighs in favor of a stay, as allowing Zinnel's criminal case to proceed would likely
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narrow the civil issues and expedite discovery. This factor therefore militates in favor of a stay.
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4. Interests of Non–Parties
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Next, courts consider “the interests of persons not parties to the civil litigation.” Keating,
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45 F.3d at 325 (citations and internal quotations omitted). The United States, a third party to the
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bankruptcy appeal, has an interest in an unimpeded criminal investigation that favors a stay.
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“Additionally, it is conceivable that discovery may touch on the Fifth Amendment rights of
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witnesses who are not parties to the bankruptcy appeal but who may be targets of the criminal
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investigation.” This factor also favors a stay in this case. See Ashworth v. Albers Med., Inc., 229
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F.R.D. 527, 532 (S.D.W.Va.2005).
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5. Interest of the Public
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The final factor courts must consider is “the interest of the public in the pending civil and
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criminal litigation.” Keating, 45 F.3d at 325 (citation and quotation marks omitted). While the
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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
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scheme and punishing those responsible for that scheme. Id. This factor therefore favors a stay
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as well.
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C. Balance of Interests
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Based on the above analysis, the Court finds that a stay is warranted under the particular
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circumstances of the parallel criminal and civil proceedings against Zinnel. This case presents
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what has been described as one of the strongest cases for granting a stay: “where a party under
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indictment for a serious offense is required to defend a civil or administrative action involving the
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same matter.” Dresser, 628 F.2d at 137576. Although the Court recognizes that Plaintiffs and the
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public have an interest in expeditious resolution of the civil proceedings, the Court finds that
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those interests are unlikely to be seriously prejudiced by a stay. If the bankruptcy appeal
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proceeds, Zinnel will be forced to choose between preserving his privilege against self-
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incrimination, thereby subjecting himself to a one-sided discovery process and adverse inferences
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drawn from his invocation of the Fifth Amendment, and waiving the privilege in order to mount a
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vigorous defense in the civil case. In addition, even if Zinnel invokes the privilege, the discovery
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Zinnel seeks from third-party witnesses may expose the basis of his criminal defense. Weighing
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these interests and burdens, the Court concludes that delaying the civil case will not seriously
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injure the public interest and would alleviate a severe burden on Zinnel's rights and ability to
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defend himself in both proceedings. Accordingly, the Court finds that a stay is warranted.
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CONCLUSION
For the foregoing reasons, Zinnel's bankruptcy appeal IS HEREBY STAYED pending the
resolution of criminal proceedings against him.
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Dated: June 4, 2013
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Troy L. Nunley
United States District Judge
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