McGee v. O'Connor ( 1998 )

Revised September 24, 1998
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 97-31283
Summary Calendar
In The Matter of: MICKEY O’CONNOR,
Debtor,
----------------------
FRANK MCGEE,
Appellant,
VERSUS
MR. HUGH O’CONNOR,
Appellee.
Appeal from the United States District Court
for the Eastern District of Louisiana
September 16, 1998
Before DAVIS, DUHÉ, and PARKER, Circuit Judges.
JOHN M. DUHÉ, JR., Circuit Judge:
The district court affirmed the bankruptcy court’s holding
that two proofs of claim survived attacks that: (1) they were the
result of a sham transaction, (2) former Article 1899 of the
Louisiana Civil code defeats the claim, and (3) under Louisiana
law, the debt on which the claims were premised was prescribed.
The Trustee appeals. We affirm.
BACKGROUND
On September 29, 1982, Hugh and Elaine O’Connor (“Appellees”),
Mickey O’Connor (“the Debtor”) and O’Connor Construction, Inc.
(“OCC”) entered into an option contract for the purchase of Clover
Contractors, Inc (“Clover”). The O’Connors contracted to sell
Clover to O’Connor Construction, Inc. (“OCC”) with the Debtor as
OCC’s surety. The contract required OCC to make five annual
payments of $20,000 to Appellees beginning in 1982 and a final
payment of $830,528 in 1987. Clover went bankrupt during the term
of the option contract.
In 1984, OCC defaulted on its annual payment and made no other
payments on the option. On April 14, 1987, Appellees sued OCC as
principal obligor for default, the Debtor, as guarantor, and his
former wife. The suit was dismissed for abandonment in 1995.
Debtor filed for bankruptcy under Chapter 11 on May 14, 1987.
Appellees filed two proofs of claim, one on November 18, 1987 and
the other on January 25, 1989, for payments remaining due under the
option contract and for interest.
The Trustee objected to the proofs of claim contending 1) the
option contract was a sham transaction and 2) that Appellees’
claims were prescribed. The bankruptcy court found no evidence to
support the Trustee’s contention that the contract was a sham.
2
Further, it concluded that Appellees’ claims were not prescribed
because the proofs of claim interrupted prescription of Debtor’s
obligation under LA. CIV. CODE ANN. art. 3060 (West 1994). The
district court affirmed, and Trustee appeals. He argues that the
Appellees, as insiders1 under 11 U.S.C. § 101(31)(A)(I), should
have had the burden of proving that the option contract was an arms
length transaction. Second, he argues that LA. CIV. CODE art. 1899
(Repealed) compels this Court to reject Appellees’ proofs of claim.
Alternatively, he argues that Appellees claims’ have prescribed.
STANDARD OF REVIEW
We review the district court’s decision by the same standard
it applied to its review of the bankruptcy court’s decision:
findings of fact for clear error and conclusions of law de novo.
Matter of Kennard, 970 F.2d 1455, 1457 (5th Cir. 1992); In re United
States Abatement Corp., 79 F.3d 393, 397 (5th Cir. 1996).
I.
The first issue is whether Appellees had the burden of proving
that the option contract was an arms length transaction.
The Trustee cites In re All-American Auxiliary Assoc., 95 B.R. 54O,
544 (Bankr. S.D. Ohio. 1989), to support his argument that the
burden is on the insider-claimant to show the inherent fairness and
good faith of the transaction. The Trustee misapprehends the
holding of that case.
1
The O’Connors are Mickey O’Connor’s parents.
3
Properly filing a proof of claim constitutes prima facie
evidence of the claim’s validity and amount. Rule 3001(f). If the
Trustee objects, it is his burden to present enough evidence to
overcome the prima facie effect of the claim. Brown v. Internal
Revenue Serv., 82 F.3d 801, 805 (8th Cir. 1996). If the Trustee
succeeds, the creditor must prove the validity of the claim. In re
Hemingway Transport, 993 F.2d 915, 925 (1st Cir. 1993). In All-
American Auxiliary, the court applied heightened scrutiny only
because the Trustee satisfied his burden. In re All-American
Auxiliary, 95 B.R. at 545. Here, the Trustee did not satisfy his
burden. Also, All-American Auxiliary concerned “services” under 11
U.S.C. § 502(b)(4), not a question of “insider” dealings.
The Trustee argues that the terms of the contract show that it
is a sham. We disagree. As the district court pointed out, two of
the five annual payments were made. We cannot hold that the
bankruptcy court’s determination that the option contract was at
arms length was clear error.
II.
We next examine the Trustee’s argument that Louisiana Civil
Code Article 18992 (Repealed)3 compels us to reject Appellees’
2
LA. CIV. CODE ANN. art. 1899 (West 1973) provided:
[I]f the contract consists of several successive obligations
to be performed at different times, and the equivalent is not given
in advance for the whole, but is either expressly or impliedly
promised to be given at future periods; then, if the cause of the
contract, corresponding to either of the successive obligations,
should fail, the obligation depending on it will cease also. Thus,
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claim. Article 1899 provided that if a successive obligation
fails, then the depending obligation also fails. The article gives
as an example a landlord/tenant situation in which the leased
property is destroyed. Once the property is destroyed, the tenant
is no longer obliged to pay rent.
The Trustee argues that once Clover went bankrupt and its
stock became valueless, OCC was no longer obliged to pay on the
option to purchase it. Thus, the Trustee argues, if OCC was not
obliged to pay, then Debtor, as OCC’s guarantor, was likewise no
longer obliged to pay.
We agree with the district court that Article 1899 does not
apply here because the option contract does not create successive
obligations. The Trustee contends that Appellees had even greater
future obligations than the landlord in the example; once the
landlord delivers possession, only the tenant owes performance.
This argument is patently incorrect. A landlord owes his tenant
three duties: 1) to deliver the property; 2) to maintain the
property; 3) to cause the tenant to be in peaceable possession
during the lease. LA. CIV. CODE ANN. art. 2692 (West 1994). These
in leases for years, the obligation to pay the yearly rent ceases,
if the property which is leased should be destroyed.
3
Because old article 1899 was in effect at the time the contract
was made, we must apply it here. Morris v. Friedman, 663 So. 2d 19,
23-24 (La. 1995) (holding that to the extent that Act 331 of 1984
changed any substantive provisions of the pre-existing law, courts
must follow the law in effect at the time the contract was
executed).
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obligations continue for as long as the lease is in effect. Here,
the Appellees had to perform only once when OCC completed its
payments. Once OCC made all its required payments and once
Appellees tendered their stock, Appellees no longer owed OCC or
Debtor any duty. Thus, Appellees, unlike a landlord, were not
successively obligated.
III.
Finally we consider whether Appellees’ claims are prescribed.
In Louisiana, the prescriptive period for breach of contract is ten
years from the date of the breach. LA. CIV. CODE art. 3499 (West
1994). Here, OCC defaulted in 1984. Thus, unless the prescriptive
period was interrupted, the claim prescribed in 1994.
Under LA. CIV. CODE ANN. art. 3462 (West 1994), prescription is
interrupted when
“. . . the obligee commences action against the
obligor in a court of competent jurisdiction and
venue....”
The Louisiana Supreme Court has interpreted this article to mean
that a petition notifying a defendant of legal demands for a
particular event interrupts the prescriptive period. Parker v.
Southern America Ins. Co., 590 So. 2d 55, 56 (La. 1991).
The bankruptcy court correctly held, and the district court
agreed, that Appellees’ proofs of claim were sufficient to
interrupt prescription against the debtor. As the district court
noted, there is no clear legislation on this particular issue.
6
However, the Louisiana legislature has specifically allowed proofs
of claim to suspend prescription in succession proceedings. LA.
CIV. CODE CIV PRO. art. 3245 (West 1994). By analogy, a proof of
claim in a bankruptcy proceeding would also interrupt
prescription.4
The Trustee argues that proof of claim in a succession
proceeding suspends prescription only because the Louisiana
legislature so provided. Without similar legislation for proofs of
claim in bankruptcy proceedings, proof of claim cannot interrupt.
We disagree.
We look to the Louisiana Supreme Court’s holding in Parker for
guidance. There, the plaintiff initially filed a worker’s
compensation suit also seeking monetary damages against her
husband’s employer based on her husband’s death. Parker, 590 So. 2d
at 56. The case was dismissed for failing to state a cause of
action. Three years after her husband died, plaintiff sued
Southern American Insurance Company, the employer’s insurer,
seeking damages for her husband’s death despite the Louisiana
prescriptive period of one year from the date of injury. The
question before the Supreme Court was whether the first suit
interrupted prescription. Id. The Supreme Court first noted that
“when a petition notifies a defendant that legal demands are made
4
For our purposes, the distinction between suspension of
prescription and interruption of prescription is of no importance,
and the parties do not contend otherwise.
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for a particular occurrence, prescription is interrupted.” Id. It
ultimately held that the first suit served as notice that the
employer and his insurer were potentially liable on a tort claim
arising from the husband’s death. The Supreme Court reasoned that
a compensation suit does not exclude the concept of fault. Rather,
it gives the employer a shield against tort liability. Thus,
because the first suit held that there was no compensation
coverage, the employer and his insurer were aware of potential tort
liability. Id.
The key to Parker is that the defendant there received notice.
Here, the proof of claim put the Debtor on notice that he may be
liable for OCC’s payments to Clover. Thus, because notice
interrupts a prescriptive period and because the proofs of claim
were proper notice, the ten year prescriptive period was
interrupted with the filing of the two proofs of claim in 1987 and
1989, respectively.5
Because the prescriptive period against the Debtor was
interrupted, we must decide whether the interruption was also
sufficient against the principal obligor, OCC. If the principal
5
We note that Hilbun v. Goldberg, 823 F.2d 881 (5th Cir. 1987)
held that plaintiff’s proof of claim for net proceeds in an auction
house’s bankruptcy proceeding did not serve to interrupt
prescription in a tortious conversion suit against the auction
house’s employee. The court held that the proof of claim was
insufficient to interrupt prescription because the claim against
the employee was not part of the obligation claimed in the
bankruptcy proceeding. Id. at 884. Hilbun, though, is
distinguishable. Appellees’ proofs of claim are for the Debtor’s
obligation.
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obligation is prescribed, then the surety’s obligation is
unenforceable. LA. CIV. CODE ANN. art. 3059 (West 1994).
Article 3060 states in pertinent part:
The interruption of prescription against a surety is
effective against the principal obligor and other
sureties only when such parties have mutually agreed
to be bound together with the surety against whom
prescription was interrupted. LA. CIV. CODE ANN. art.
3060 (West 1994).
While this article was not in effect when the option contract was
made, it is retroactive because the statute addresses prescription
so it is procedural. Chance v. American Honda Motor Company, 635
So. 2d 177, 178 (La. 1994). Further, Article 6 of the Louisiana
Civil Code states that procedural laws apply prospectively and
retroactively unless the legislature has expressed otherwise, which
it has not.
To determine whether prescription against OCC has been
interrupted, we must decide whether OCC and the Debtor are mutually
bound. The option contract provides that the Debtor personally
guarantees all of OCC’s obligations thereunder. The Debtor signed
the option contract as the guarantor. As a result, we hold that
the Debtor and OCC mutually agreed to be bound together.
Therefore, when the proofs of claim interrupted prescription
against the Debtor, they also interrupted prescription against OCC.
The Trustee argues that comment (c) to Article 3060 shows that
the legislature intended for the article to apply to parties bound
“in solido”. Further, Article 3045, in effect at the time the
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parties contracted, treated sureties as secondarily liable unless
they had expressly agreed to be bound in solido. The Trustee
contends that the parties did not agree to be bound solidarily; so,
the proof of claim against the Debtor does not interrupt the
prescriptive period against OCC.
We disagree. If the legislature intended Article 3060 to
apply only to those parties who are bound in solido, then it could
have so stated. Instead, the legislature used the term “mutually
agreed to be bound”. We assume that the legislature meant what it
said. Because the Debtor and OCC mutually agreed to be bound,
Article 3060 applies. The prescriptive period against OCC was
interrupted with the filing of the proof of claim.
CONCLUSION
For the above reasons, we AFFIRM the bankruptcy and district
courts.
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