In re: Desert Springs Financial, LLC

FILED
1 APR 20 2017
2 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-16-1374-KuFL
)
6 DESERT SPRINGS FINANCIAL, LLC,) Bk. No. 6:16-bk-14859-MW
)
7 Debtor. )
______________________________)
8 )
YUN HEI SHIN; RAMON PALM LANE,)
9 INC., )
)
10 Appellants, )
)
11 v. ) MEMORANDUM*
)
12 MITCHELL ALTMAN, )
)
13 Appellee. )
______________________________)
14
15 Argued and Submitted on March 23, 2017
at Pasadena, California
16
Filed – April 20, 2017
17
Appeal from the United States Bankruptcy Court
18 for the Central District of California
19 Honorable Mark S. Wallace, Bankruptcy Judge, Presiding
20 Appearances: Kathleen P. March argued for appellants; Todd L.
Turoci argued for appellee.
21
22 Before: KURTZ, FARIS and LAFFERTY, Bankruptcy Judges.
23
24
25
26 *
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8024-1.
1 INTRODUCTION
2 Yun Hei Shin and Ramon Palm Lane, Inc.1 appeal from an order
3 overruling their objection to the proof of claim Mitchell Altman
4 filed against the chapter 112 debtor Desert Springs Financial,
5 LLC.
6 The bankruptcy court determined that the facts in the record
7 at the time of the claim objection hearing were insufficient to
8 rebut the presumption of validity applicable to Mitchell’s
9 procedurally compliant proof of claim under Rule 3001(f).
10 Because the bankruptcy court’s determination was clearly
11 erroneous, we VACATE its order overruling the claim objection,
12 and we REMAND for further proceedings.
13 FACTS
14 Mitchell Altman is the son of Desert Springs Financial’s
15 managing member Murray Altman. Murray owns 75% of the debtor and
16 Shin owns 25%. Murray and Shin engaged in years of state court
17 litigation, and Shin claims she ultimately obtained a state court
18 judgment against Murray for roughly $1.4 million. Desert Springs
19 Financial’s schedules reflect that Shin (or her wholly owned
20 corporation) is a judgment creditor of the company for a similar
21 amount.
22
23
1
Ramon Palm Lane is Shin’s wholly owned corporation. For
24 purposes of this appeal, Ramon Palm Lane and Shin appear to have
an identity of interest. Unless otherwise indicated, all
25 references to Shin herein are to both Shin and Ramon Palm Lane.
26 2
Unless specified otherwise, all chapter and section
27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
all “Rule” references are to the Federal Rules of Bankruptcy
28 Procedure, Rules 1001-9037.
2
1 After Desert Springs Financial commenced its bankruptcy case
2 in May 2016, Mitchell filed a proof of claim in which he asserted
3 that Desert Springs Financial was indebted to him based on a
4 $600,000 secured loan he made to the company in May 2013. With
5 accrued prepetition interest, Mitchell claimed he was owed over
6 $760,000 as of the date of Desert Springs Financial’s petition
7 filing. Mitchell attached to his proof of claim a note and deed
8 of trust executed by his father Murray on behalf of Desert
9 Springs Financial in January 2014. The loan documents tend to
10 demonstrate that a debt exists and that it is secured by Desert
11 Springs Financial’s real property located in Palm Desert,
12 California, as described in the deed of trust.
13 Shin filed her claim objection in September 2016. Among
14 other things, Shin pointed out that the note and deed of trust
15 were executed by Murray – who qualified as an insider under the
16 Code’s statutory definition and who controlled Desert Springs
17 Financial as its managing member. Shin further pointed out that
18 on the other side of the purported loan transaction was Murray’s
19 son Mitchell – who also qualified as an insider under the Code.
20 Shin additionally noted that Murray executed the loan documents
21 roughly eight months after the loan transaction supposedly was
22 entered into.
23 While Shin did not point it out in her objection, it also
24 seems odd that the alleged loan apparently went into default
25 roughly 12 days after the parties got around to documenting it.
26 On its face, the note dated January 16, 2014 provided for the
27 first annual interest payment of $36,000 to be made on January
28 23, 2014 – and provided for a five day grace period before the
3
1 nonpayment of interest became an event of default. The statement
2 of indebtedness attached to the proof of claim indicates that
3 Desert Springs Financial never made the the January 23, 2014
4 interest payment or any of the other annual interest payments due
5 under the note. It additionally seems peculiar that the
6 statement of indebtedness charged Desert Springs Financial for 31
7 months of prepetition interest at the default interest rate, when
8 there were only 28 months between the first interest payment
9 default and the date of Desert Springs Financial’s petition.3
10 Instead of focusing on the loan documents, Shin focused on
11 Desert Springs Financial’s books and records. She claimed to
12 have reviewed the company’s books and records between 2009 and
13 March 2014 and opined based on that review that there was no
14 evidence in those books and records of any loan from Mitchell to
15 Desert Springs Financial. Shin also characterized as suspicious
16 Desert Springs Financial’s inconsistent listing of the company’s
17 debts to Mitchell in its initial and amended bankruptcy
18 schedules. None of the variously scheduled amounts came anywhere
19 near the amount of the $600,000 note.
20 In his response to Shin’s claim objection, Mitchell noted
21 that, while Shin might dispute that he was the source of the
22 $600,000, there was no dispute regarding the existence of the
23 $600,000 or the use of those funds in May 2013 to pay off a
24
3
There is yet another curiosity in the note: one note
25 provision identifies interest payment dates as annual events,
26 whereas another note provision requires the borrower to make
“consecutive monthly installments” on each “Interest Payment
27 Date.” Presumably, a business entity executing bona fide loan
documents would be concerned about the note’s apparent
28 inconsistency regarding when interest payments were due.
4
1 $600,000 loan that Desert Springs Financial owed to Shin. As
2 Mitchell explained, Desert Springs Financial paid Shin the
3 $600,000 in May 2013 to prevent Shin from levying on a writ of
4 attachment she had obtained from the state court. Shin has not
5 disputed Desert Springs Financial’s payment of the $600,000 to
6 her for this purpose.
7 More importantly for purposes of this appeal, Mitchell
8 asserted that his proof of claim was filed in compliance with the
9 applicable bankruptcy rules, so his claim was entitled to a
10 presumption as to its validity and amount under Rule 3001(f).
11 According to Mitchell, nothing in Shin’s claim objection or in
12 the declarations accompanying her claim objection was sufficient
13 to rebut this presumption.
14 Mitchell contended that most of the contents of the claim
15 objection declarations was really argument, or lacked a
16 foundation as to the declarant’s personal knowledge, or both. In
17 furtherance of this contention, Mitchell filed evidentiary
18 objections at the same time he filed his claim objection
19 response. In relevant part, Mitchell challenged paragraph six of
20 Shin’s declaration, which stated:
21 From the Superior Court litigation against [Murray] and
DSF, I have copies of DSF’s books, from 2009 through
22 3/5/14 (date the supposed DOT was recorded). I have
reviewed those DSF books and records thoroughly, and
23 those DSF books and records do NOT show that Mitchell
Altman lent ANY money to DSF.
24
25 Shin Decl. (Sept. 13, 2016) at ¶ 6 (Emphasis in original).
26 Mitchell maintained that paragraph six was inadmissible based on
27 the following grounds: “Lack of personal knowledge, lack of
28 foundation, argument. Fed.R.Evid.602. Not the best evidence as
5
1 to contents of documents. Fed.R.Evid.1002. Inadmissible
2 hearsay. Fed.R.Evid.802. Improper opinion testimony.
3 Fed.R.Evid.701.” Evid. Objections (Oct. 4, 2016).
4 Mitchell’s response to the claim objection did not contain
5 much in the way of evidence. Instead, Mitchell seemed content,
6 for the most part, to rely upon the prima facie validity of his
7 proof of claim. Mitchell did submit a half-page declaration in
8 support of his response. In it, Mitchell stated that: (1) he
9 loaned Desert Springs Financial $600,000 so that the company
10 could pay off Shin’s $600,000 loan; (2) even before the loan was
11 documented, he made the loan on the understanding that he would
12 be given a deed of trust securing the loan against Desert Springs
13 Financial’s property; and (3) he does not know why it took Desert
14 Springs Financial’s counsel eight months to document the
15 transaction. The only other evidence Mitchell presented with his
16 claim objection response pertained to the fact that the $600,000
17 was paid to Shin to prevent her from levying on the writ of
18 attachment she had obtained in that amount.
19 Shin filed a reply brief and a response to Mitchell’s
20 evidentiary objections. In an attempt to fend off Mitchell’s
21 best evidence objection regarding paragraph six of her
22 declaration, Shin filed a supplemental declaration and attached
23 to it what she represented were excerpts from Desert Springs
24 Financial’s books and records. The excerpts include what appears
25 to be a page from Desert Springs Financial’s general ledger. Two
26 ledger entries dated May 6, 2013 are of particular interest.
27 From the parties’ other evidence, on or about that date, Desert
28 Springs Financial repaid Shin’s $600,000 loan. The first ledger
6
1 entry shows a debit to Murray’s capital account in the amount of
2 $600,000 and the second ledger entry shows a credit to Shin’s
3 loan payable account in the same amount.
4 The same general ledger page on which these two ledger
5 entries appear contains other ledger entries dated between April
6 16, 2013 and May 23, 2013. None of these ledger entries show any
7 ledger activity on a loan payable account in Mitchell’s name.
8 In fact, the Desert Springs Financial Balance Sheet pages
9 accompanying Shin’s supplemental declaration reflect that, as of
10 September 25, 2013, Desert Springs Financial had no loan payable
11 account at all for Mitchell.
12 At the hearing on the claim objection, the bankruptcy court
13 sustained most of Mitchell’s evidentiary objections. Concerning
14 paragraph 6 of Shin’s declaration, the bankruptcy court sustained
15 the objection based on the best evidence rule and on a lack of
16 foundation. Shin argued that her supplemental declaration, with
17 the excerpts from Desert Springs Financial’s books and records
18 attached, cured any evidentiary defect in her original
19 submission. The bankruptcy court disagreed. As a threshold
20 matter, the bankruptcy court commented that there was no evidence
21 presented that Shin was an accountant or otherwise qualified to
22 explain what the books and records demonstrated in terms of the
23 May 2013 funding of Shin’s loan repayment. The court also
24 reasoned that the books and records excerpts did not include any
25 recent financials from around the time Desert Springs Financial
26 filed its bankruptcy petition. According to the court, the
27 assets and liabilities of the company at the time the petition
28 was filed (in May 2016) were critical and how the company
7
1 originally booked the transaction in May 2013 was not. The
2 following quote is representative of the bankruptcy court’s
3 reasoning:
4 All right. I think we are arguing paragraph 6 [of the
Shin declaration]. And the Court’s looked at the
5 attachments to the exhibits to Ms. Shin’s supplemental
declaration and the Court’s ruling [sustaining the
6 evidentiary objection to paragraph 6] stands. I think
that what’s attached is a partial excerpt from the
7 books and records balance sheets going back almost --
actually over three years and I think what counts is
8 what the financial -- what the books and records showed
on the petition date, not what they showed three years
9 ago.
10 Hr’g Tr. (Oct. 18, 2016) at 6:7-15; see also id. at 19:4-7 (“The
11 records that are attached are actually out-of-date records. They
12 show what might have been the state of affairs in 2013, but they
13 don’t show the state of affairs on the petition date.”).
14 Apparently, the court believed that, even if the funding of the
15 $600,000 was not originally conceived as a loan from Mitchell to
16 Desert Springs Financial in May 2013, it might have been re-
17 conceived as that at some point before Desert Springs Financial’s
18 bankruptcy filing. As the bankruptcy court reasoned, because of
19 the limited time period covered by Shin’s books and records
20 excerpts, they did not show whether “Murray Altman may have
21 gifted that loan to his son between 2013 and the petition date.”
22 Hr’g Tr. (Oct. 18, 2016) at 7:10-12.
23 On the merits, the bankruptcy court held that Mitchell was
24 entitled to the benefit of the Rule 3001(f) presumption and that,
25 to rebut this presumption, Shin had the burden of presenting
26 evidence with a “probative force . . . equal to or greater than
27 the probative force of the proof of claim.” Hr’g Tr. (Oct. 18,
28 2016) at 18:6-8. The court explained that the evidence Shin
8
1 presented in support of her claim objection – including the “out-
2 of-date” books and records excerpts – was insufficient to
3 overcome the Rule 3001(f) presumption. According to the court,
4 in light of Shin’s failure to overcome the presumption, it was
5 unnecessary to reach the larger burden of proof issues, which
6 would have required Mitchell to prove the validity of his claim
7 by a preponderance of the evidence.
8 The bankruptcy court entered its order overruling Shin’s
9 claim objection on October 20, 2016, and Shin timely appealed.
10 JURISDICTION
11 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
12 §§ 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C.
13 § 158, subject to the mootness discussion set forth immediately
14 below.
15 While this appeal has been pending, the bankruptcy court
16 entered an order dismissing the underlying bankruptcy case. In
17 light of the case dismissal, we must consider whether this appeal
18 is moot. If we no longer can grant any meaningful relief to Shin
19 even if she were to prevail on appeal, this appeal must be
20 dismissed as moot. Ellis v. Yu (In re Ellis), 523 B.R. 673, 676
21 (9th Cir. BAP 2014) (citing Pitts v. Terrible Herbst, Inc., 653
22 F.3d 1081, 1087 (9th Cir. 2011)).
23 It is debatable whether case dismissal can render moot an
24 appeal from an order allowing or disallowing a claim. Compare
25 Bevan v. Socal Commc’ns Sites, LLC (In re Bevan), 327 F.3d 994,
26 996–97 (9th Cir. 2003) (appeal from order overruling claim
27 objection not moot because of potential preclusive effect that
28 order might have in future litigation), with Center For
9
1 Biological Diversity v. Lohn, 511 F.3d 960, 965 (9th Cir. 2007)
2 (citing Pilate v. Burrell (In re Burrell), 415 F.3d 994, 998-99
3 (9th Cir. 2005)) (potential preclusive effect of the order on
4 appeal did not prevent the appeal from that order from becoming
5 moot).
6 We do not need to resolve this debate. Even if case
7 dismissal sometimes can render moot an appeal from an order
8 overruling a claim objection, this appeal has not yet become moot
9 because the time to appeal the case dismissal order has not yet
10 run. As long as the case dismissal order potentially is subject
11 to reversal on appeal, effective and meaningful relief for Shin
12 in her current appeal is not foreclosed.
13 The time to appeal the case dismissal order has not yet run
14 because that order is not yet final. The case dismissal order
15 explicitly reserved for future hearing, on a date certain, the
16 issue of whether its dismissal of the current bankruptcy case
17 should include a 180-day bar to the filing of a new bankruptcy
18 case. Requests for restrictions on future bankruptcy filings
19 typically are heard and determined as part of the case dismissal
20 proceedings, and rulings granting such restrictions typically are
21 appealed as part of the appellate review of the case dismissal
22 order. See Ellsworth v. Lifescape Med. Assocs., P.C. (In re
23 Ellsworth), 455 B.R. 904, 922 (9th Cir. BAP 2011) (stating that,
24 once the bankruptcy court has determined that cause for dismissal
25 exists, court should then determine whether any sort of
26 restriction on future bankruptcy filings should be imposed).
27 More importantly, a bankruptcy court’s order is not final
28 and immediately appealable unless it fully adjudicated the issues
10
1 at bar and clearly evidenced “the judge’s intent that it be the
2 court’s final act in the matter.” Slimick v. Silva (In re
3 Slimick), 928 F.2d 304, 307 & n.1 (9th Cir. 1990). By expressly
4 reserving the 180-day bar issue for future determination, the
5 bankruptcy court manifested its intent that the dismissal order
6 was not its final act in the matter. Consequently, the order
7 dismissing Desert Springs Financial’s bankruptcy case has not yet
8 become final and appealable, and the time to appeal has not yet
9 run. Id.10 ISSUES
11 1. Was Mitchell’s proof of claim sufficiently compliant with
12 the Rules to qualify for the Rule 3001(f) presumption?
13 2. Did Shin present sufficient evidence in support of her claim
14 objection to overcome the presumptive validity of Mitchell’s
15 claim?
16 STANDARDS OF REVIEW
17 Claims objection appeals can involve both legal and factual
18 issues. We review the legal issues de novo and the factual
19 issues for clear error. See Veal v. Am. Home Mortg. Servicing,
20 Inc. (In re Veal), 450 B.R. 897, 918 (9th Cir. BAP 2011).
21 Whether the bankruptcy court identified and applied the
22 correct burden of proof is a question of law we review de novo.
23 Margulies Law Firm v. Placide (In re Placide), 459 B.R. 64, 71
24 (9th Cir. BAP 2011) (citing People’s Ins. Co. of China v. M/V
25 Damodar Tanabe, 903 F.2d 675, 682 (9th Cir. 1990)). On the other
26 hand, “[w]hether evidence is sufficient to rebut an evidentiary
27 presumption is a question of fact reviewed for clear error.”
28 Garner v. Shier (In re Garner), 246 B.R. 617, 619 (9th Cir. BAP
11
1 2000) (citing Sierra Steel, Inc. v. Totten Tubes, Inc. (In re
2 Sierra Steel, Inc.), 96 B.R. 275, 277 (9th Cir. BAP 1989)).
3 While interpreting the Rules to determine what is required
4 to file a procedurally compliant proof of claim is a question of
5 law, whether a particular proof of claim has been executed and
6 filed in compliance with those Rules is a question of fact
7 reviewed for clear error. Id. (citing Ashford v. Consolidated
8 Pioneer Mortg. (In re Consolidated Pioneer Mortg.), 178 B.R. 222,
9 225 (9th Cir. BAP 1995)).
10 “A bankruptcy court’s factual findings are not clearly
11 erroneous unless they are illogical, implausible or without
12 support in the record.” Ezra v. Seror (In re Ezra), 537 B.R.
13 924, 929 (9th Cir. BAP 2015) (citing Retz v. Samson (In re Retz),
14 606 F.3d 1189, 1196 (9th Cir. 2010)).
15 DISCUSSION
16 1. General Legal Standards Applicable To Claims Litigation
17 We travel a well-worn path in stating the respective burdens
18 and obligations of the parties in claims litigation.
19 Nonetheless, because this appeal hinges on the appropriate
20 allocation and application of these burdens and obligations, we
21 once again state them in detail.
22 A claim is deemed allowed absent objection from a party in
23 interest, § 502(a), and a procedurally compliant proof of claim
24 is prima facie evidence of the validity and amount of the claim.
25 Rule 3001(f).
26 A mere formal claim objection, without evidence, cannot
27 defeat a claim presumed to be valid under Rule 3001(f). Lundell
28 v. Anchor Constr. Specialists, Inc., 223 F.3d 1035, 1039 (9th
12
1 Cir. 2000). To overcome the Rule 3001(f) presumption, the
2 objecting party must present evidence tending to rebut the claim
3 – evidence with probative force equal to that of the creditor’s
4 proof of claim. Id. As a practical matter, “the objector must
5 produce evidence which, if believed, would refute at least one of
6 the allegations that is essential to the claim’s legal
7 sufficiency.” Id. at 1040 (quoting In re Allegheny Int’l, Inc.,
8 954 F.2d 167, 173–74 (3d Cir. 1992)) (emphasis omitted).
9 If the objecting party successfully rebuts the presumption,
10 the claimant bears the burden of proof to show by a preponderance
11 of the evidence that its claim is valid, and “the ultimate burden
12 of persuasion remains at all times upon the claimant.” Id. at
13 1039.
14 But if the objecting party does not rebut the presumption,
15 the claims litigation ends there; the claim should be allowed
16 without the claimant bearing any further burden to demonstrate
17 the validity of its claim. Id. at 1041.
18 2. Applicability of Rule 3001(f) Presumption
19 Rule 3001(f) states: “A proof of claim executed and filed in
20 accordance with these rules shall constitute prima facie evidence
21 of the validity and amount of the claim.” (Emphasis added.) In
22 turn, other parts of Rule 3001 set forth the various requirements
23 for a procedurally compliant proof of claim. Subdivision (a) of
24 Rule 3001 requires proofs of claim to be in writing and to
25 substantially conform to the Official Form (currently, Official
26 Form 410). With exceptions not relevant here, subdivision (b) of
27 Rule 3001 specifies that a proof of claim should be signed by the
28 creditor or its authorized agent. Meanwhile, subdivision (c)(1)
13
1 required Mitchell to attach to his proof of claim the writings on
2 which his claim and his security interest were based – the note
3 and the deed of trust – and subdivision (d) required Mitchell to
4 submit with his proof of claim evidence that his security
5 interest had been perfected.
6 On its face, Mitchell’s proof of claim satisfied all of the
7 above requirements. While there are additional requirements for
8 claims arising from open-end or revolving consumer credit
9 agreements, see Rule 3001(c)(3), and for claims against
10 individual debtors, see Rule 3001(c)(2), none of those special
11 requirements apply here.
12 Shin argues that Mitchell’s proof of claim was not
13 procedurally compliant, but most of her arguments make no sense.
14 Shin contends that the proof of claim should have been signed by
15 Mitchell, should have been signed by someone with personal
16 knowledge of the original loan transaction and should have been
17 accompanied by a supporting declaration signed under penalty of
18 perjury and by foundational evidence authenticating
19 the note and the deed of trust. None of these items are
20 identified in the Rules as proof of claim requirements, nor has
21 Shin cited us any authority making them requirements. Of
22 particular note, Mitchell’s proof of claim was signed by the same
23 attorney who has been representing Mitchell throughout this claim
24 dispute, and in the proof of claim’s signature block, Mitchell’s
25 attorney checked the appropriate box on the Official Form
26 reflecting that he is “the creditor’s attorney or authorized
27 agent.”
28 Most of the other points Shin raises in an attempt to
14
1 demonstrate that Mitchell was not entitled to the Rule 3001(f)
2 presumption more properly pertain to the issue of whether there
3 was adequate evidence in the record to rebut the presumption.
4 There is, however, one aspect of Shin’s challenge to the
5 application of Rule 3001(f) that we must consider more carefully.
6 In essence, Shin argues that, because Murray and Mitchell both
7 were insiders and because Murray was the managing member of
8 Desert Springs Financial, Rule 3001(f) should not apply at all to
9 Mitchell’s proof of claim. Put another way, Shin asserts that,
10 in light of Supreme Court and Ninth Circuit authority calling for
11 heightened scrutiny of insider transactions with debtor business
12 entities, the Rule 3001(f) presumption should not apply at all to
13 claims arising from insider transactions. Shin relies upon
14 Pepper v. Litton, 308 U.S. 295 (1939), and Brewer v. Erwin &
15 Erwin, P.C. (In re Marquam Investment Corp.), 942 F.2d 1462 (9th
16 Cir. 1991). These two cases stand for the general proposition
17 that, in bankruptcy claims litigation, insider transactions must
18 be “subjected to rigorous scrutiny” and the insider claimant has
19 the additional burden of proving “the good faith of the
20 transaction” and “its inherent fairness.” Pepper, 308 U.S. at21 306; accord, Marquam Inv. Corp., 942 F.2d at 1465.
22 Even so, nothing on the face of Rule 3001(f) (or on the face
23 of Pepper or Marquam) restricts insider creditors from the
24 benefit of the presumption, and the circuit decisions that have
25 specifically considered the relationship between insider claims
26 and Rule 3001(f) have concluded that the presumption still
27 applies. More specifically, the additional burden under Pepper
28 and Marquam comes into play only if the proof of claim does not
15
1 procedurally qualify for the presumption or if the objecting
2 party successfully rebuts the presumption. See, e.g., Stancill
3 v. Harford Sands Inc. (In re Harford Sands Inc.), 372 F.3d 637,
4 640–41 (4th Cir. 2004); McGee v. O’Connor (In re O’Connor), 153
5 F.3d 258, 260–61 (5th Cir. 1998).
6 Harford Sands’ and O’Connor’s treatment of the
7 interrelationship between Rule 3001(f) and the Pepper/Marquam
8 rigorous scrutiny standard makes sense. Congress obviously knew
9 how to qualify and restrict the claims of insiders when it wanted
10 to do so. See § 502(b)(4). And yet nothing in the Code or Rules
11 suggests that insiders should not have the benefit of the Rule
12 3001(f) presumption. In the absence of a Congressional
13 directive, or some explicit qualifying language in the Rules, we
14 decline Shin’s invitation to create our own insider exception to
15 the Rule 3001(f) presumption based on the general principles of
16 equity Pepper and Marquam relied upon. To engage in this type of
17 equitable revision of the Code or the Rules would invite
18 reversal. See, e.g., Law v. Siegel, 134 S. Ct. 1188, 1196-97
19 (2014) (reversing bankruptcy court’s order surcharging exemption
20 on equitable grounds not set forth in Code); Gardenhire v. IRS
21 (In re Gardenhire), 209 F.3d 1145, 1152 (9th Cir. 2000)
22 (reversing Panel decision affirming allowance of an untimely
23 proof of claim because Panel impermissibly extended on equitable
24 tolling grounds claim filing deadline specified in Rules).
25 Thus, the bankruptcy court did not err in applying the Rule
26 3001(f) presumption to Mitchell’s claim.
27 3. Evidence In The Record Countering the Presumption
28 Having concluded that the Rule 3001(f) presumption applied,
16
1 we next must consider whether Shin rebutted the presumption of
2 validity arising from Mitchell’s procedurally compliant proof of
3 claim. The undisputed facts in the record establish that:
4 (1) the debtor LLC’s managing member executed the note and deed
5 of trust in favor of his son roughly eight months after the loan
6 transaction supposedly occurred; (2) the note and the statement
7 of indebtedness attached to the proof of claim contained errors
8 and/or irregularities; (3) the debtor’s general ledger entries at
9 the time the Shin loan was repaid included a $600,000 credit to
10 the Shin loan payable account and a $600,000 debit to the Murray
11 capital account; and (4) the same books and records showing the
12 repayment of the Shin loan do not show any Mitchell loan payable
13 account or any activity related to such an account.4
14 Taken together, the above-referenced undisputed facts
15 potentially tend to show that Mitchell and Murray, after the
16 transaction occurred, attempted to re-label what actually was a
17 capital investment by Murray as a secured loan from Mitchell in
18 an attempt to keep Desert Springs Financial’s assets away from
19 its creditors. These facts were “some evidence” that Murray and
20 Mitchell fabricated documentation for a nonexistent loan in a
21
22 4
Both parties at oral argument claimed that the bankruptcy
23 court did not consider the books and records Shin presented with
her reply brief. This claim is incorrect. The bankruptcy
24 court’s evidentiary rulings only addressed Shin’s original
declaration; nothing in the record suggests that the bankruptcy
25 court excluded any part of Shin’s supplemental declaration or any
26 of the exhibits attached to the supplemental declaration. To the
contrary, the bankruptcy court specifically stated that it had
27 considered the books and records Shin presented and specifically
addressed those documents in the process of explaining its
28 reasoning for overruling Shin’s claim objection.
17
1 manner that is reminiscent of the sham transaction described in
2 Pepper, 308 U.S. at 297-301. And we conclude that this evidence
3 was of equal probative force to the proof of claim and its
4 attachments (including the note and the deed of trust).
5 The bankruptcy court’s determination that the above-
6 referenced facts were insufficient to rebut the presumption of
7 validity arising from Mitchell’s proof of claim was illogical and
8 hence clearly erroneous. The bankruptcy court relied upon its
9 own speculation that Murray and Mitchell might have agreed to
10 change the nature of the transaction after it occurred. (This
11 theory is inconsistent with the loan documentation and with
12 Mitchell’s declaration, in which he insisted that the transaction
13 always was conceived of as a secured loan from him to Desert
14 Springs Financial.) More to the point, the bankruptcy court’s
15 reliance on this theory begs the question as to whether Shin
16 presented sufficient evidence to rebut the presumption of
17 validity – a question we have now answered in the affirmative.
18 Because we have determined that the bankruptcy court’s order
19 overruling Shin’s claim objection must be vacated as it was based
20 on a clearly erroneous factual finding, we do not need to
21 consider any of the bankruptcy court’s evidentiary rulings
22 against Shin.
23 4. Proceedings On Remand
24 We acknowledge that the bankruptcy court has entered an
25 order dismissing Desert Springs Financial’s bankruptcy case. As
26 a result, the bankruptcy court on remand might determine that
27 there is no need (or continuing jurisdiction) to address further
28 Shin’s claim objection unless an appeal is taken from the case
18
1 dismissal order and unless that order is reversed on appeal.
2 Should there be any future claim objection proceedings
3 following remand, in light of Shin’s rebuttal of Mitchell’s prima
4 facie case, Mitchell would bear the burden of proof to establish
5 the validity of his claim by a preponderance of the evidence,
6 Lundell, 223 F.3d at 1039, plus Mitchell would bear the
7 additional burden of showing both good faith and the inherent
8 fairness of the transaction. In re Marquam Inv. Corp., 942 F.2d
9 at 1465; accord In re Harford Sands Inc., 372 F.3d at 640–41; In
10 re O’Connor, 153 F.3d at 260–61.
11 If further claim objection proceedings do take place after
12 remand, unless the parties agree otherwise, the bankruptcy court
13 likely would need to reopen the record and likely would need to
14 hold an evidentiary hearing to resolve the claim objection. We
15 understand why the bankruptcy court previously did not hold an
16 evidentiary hearing. Neither party argued that an evidentiary
17 hearing was necessary. Instead, both parties asserted that they
18 should prevail without the need for an evidentiary hearing. The
19 bankruptcy court largely agreed with Mitchell’s position, ruling
20 that Shin had not presented sufficient evidence to rebut the
21 presumption of validity of Mitchell’s claim, so no further
22 proceedings (evidentiary or otherwise) were necessary. In
23 addition, Shin has not argued on appeal that the bankruptcy court
24 should have held an evidentiary hearing.
25 Sometimes, claim objections can be so lacking in merit, and
26 in evidence presented, that an evidentiary hearing would not be
27 needed to properly dispose of them. Compare In re Garner, 246
28 B.R. at 623-25, with Reliance Steel & Aluminum Co. v. Locklin (In
19
1 re Locklin), 2015 WL 8267995, at *6-7 & n.4 (Mem. Dec.) (9th Cir.
2 BAP Dec. 7, 2015). This is not one of those cases. Here, the
3 bankruptcy court overruled Shin’s claim objection without holding
4 an evidentiary hearing based on the incorrect premise that Shin
5 had not presented sufficient evidence to overcome the presumption
6 of validity of Mitchell’s claim. On remand, the bankruptcy court
7 will need to reevaluate the necessity of an evidentiary hearing
8 in light of our holding.
9 CONCLUSION
10 For the reasons set forth above, the bankruptcy court’s
11 order overruling Shin’s claim objection is VACATED, and this
12 matter is REMANDED for further proceedings consistent with this
13 decision.
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