In re Campano

• Decision Date: 29 May 2003
• Docket Number: No. CIV. 02-509-M.,CIV. 02-509-M.
• Citation: 293 B.R. 281
• Parties: In re Daniel S. CAMPANO, Debtor. Steven M. Notinger, Chapter 7 Trustee for the Estate of Daniel S. Campano, Appellant, v. Auto Shine Car Wash Systems, Inc., Appellee.
• Court: U.S. District Court — District of New Hampshire

293 B.R. 281

In re Daniel S. CAMPANO, Debtor.

Steven M. Notinger, Chapter 7 Trustee for the Estate of Daniel S. Campano, Appellant, v. Auto Shine Car Wash Systems, Inc., Appellee.

No. CIV. 02-509-M.

United States District Court, D. New Hampshire.

May 29, 2003.

COPYRIGHT MATERIAL OMITTED

Daniel S. Campano, Greenland, NH, pro se.

Deborah Ann Notinger, Donchess & Notinger, Nashua, NH, for appellant.

Jack B. Little, Law Offices of Jack Bryan Little, North Andover, MA, for appellee.

George Vannah, Manchester, NH, pro se.

ORDER

MCAULIFFE, District Judge.

Daniel S. Campano is a Chapter 7 debtor. Trustee Steven M. Notinger appeals a September 13, 2002, order of the bankruptcy court (Deasy, J.) overruling his objection to Auto Shine Car Wash Systems, Inc.'s proof of claim. For the reasons given below, the order of the bankruptcy court is affirmed.

Standard of Review

A bankruptcy court's findings of fact are not set aside unless clearly erroneous. Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir.1997) (citing FED. R. BANKR. P. 8013; Commerce Bank & Trust Co. v. Burgess (In re Burgess), 955 F.2d 134, 137 (1st Cir.1992); FED. R. CIV. P. 52(c), advisory committee's note to 1991 Amendment). However, a "bankruptcy court's legal conclusions, drawn from the facts so found, are reviewed de novo." Palmacci, 121 F.3d at 785 (citing Martin v. Bajgar (In re Bajgar), 104 F.3d 495, 497 (1st Cir.1997)).

Absent either a mistake of law or an abuse of discretion, the bankruptcy court ruling must stand. See Siedle v. Putnam Invs., Inc., 147 F.3d 7, 10 (1st Cir.1998). A bankruptcy court "may abuse its discretion by ignoring a material factor that deserves significant weight, relying on an improper factor, or, even if it [considered] only the proper mix of factors, by making a serious mistake in judgment." Id.

Picciotto v. Salem Suede, Inc. (In re Salem Suede, Inc.), 268 F.3d 42, 44 (1st Cir.2001). "On an appeal the district court ... may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." FED. R. BANKR. P. 8013.

Background

The facts of this case, in broad outline, are as follows. Campano is a former employee of Auto Shine Car Wash Systems, Inc. ("Auto Shine"), a corporation owned and operated by Frank DiTommaso. Auto Shine sold and serviced car wash systems. On March 10, 1999, Campano purchased Auto Shine's sales and service division, in a seller-financed sale, for $940,000. Campano executed two promissory notes in favor of Auto Shine, one for $890,000, the other for $34,000. Those notes were secured by the business assets Campano purchased, a second mortgage on Campano's home, and a limited guaranty from Campano's spouse. With the business assets he purchased from Auto Shine, Campano started his own business, Auto Shine Sales and Service, Inc. ("Sales and Service").

In February 2001, Sales and Service defaulted on its obligations to Auto Shine. On March 28, 2001, in the wake of a confrontation over unpaid rent between Campano and Sales and Service's landlord, Campano vacated the business premises. When he left, Campano took a laptop computer and some customer and vendor lists. Employee Sherry Curtis took several boxes containing paper copies of accounts payable and accounts receivable, and held those records until July 29, 2002, the date of the Bankruptcy Court's hearing on Auto Shine's proof of claim. Employees Bruce White and Louie Mattia loaded their Sales and Service trucks with tools, equipment, and inventory.¹ They stored those items at their homes and used them for servicing Sales and Service customers during the several-week interval between the demise of Sales and Service and the formation of DiTommaso's new business, Car Wash Systems & Equipment, LLC ("Car Wash"). Car Wash, in turn, hired White and Mattia at some point in April, 2001. When they came to work for Car Wash, White and Mattia brought with them Sales and Service's tools and any uninstalled inventory they had in their possession. DiTommaso, who had been present during the confrontation between Campano and the landlord, took Sales and Service's computers and telephone system. The remainder of Sales and Service's business assets, principally car wash system parts and office furniture, were left behind.

It is undisputed that Auto Shine never gave Campano notice that it intended to retain Sales and Service's business assets in full satisfaction of Campano's debt to Auto Shine. Rather, Auto Shine notified Campano, by letter, of its intention to collect collateral and then sell it. No such sale was ever conducted.

On October 9, 2001, Campano filed a petition for protection under Chapter 7 of the Bankruptcy Code. Auto Shine filed a timely proof of claim in the amount of $873,534.55, representing the balance owing on the larger of the two promissory notes that Campano gave Auto Shine.² The Trustee objected to Auto Shine's Proof of Claim, arguing that: (1) Auto Shine fraudulently induced Campano to purchase its sales and service division; and (2) Auto Shine was precluded from asserting a claim against the bankruptcy estate because it had retained the collateral securing its note — Sales and Service's business assets — in complete satisfaction of Campano's debt, under the doctrine of strict foreclosure. In a Memorandum Opinion dated December 13, 2002, the Bankruptcy Court overruled the Trustee's objection. This appeal followed.

Discussion

The Trustee does not appeal the Bankruptcy Court's decision with respect to fraudulent inducement. Rather, he asserts four arguments challenging the Bankruptcy Court's decision to allow Auto Shine's claim, notwithstanding his invocation of the doctrine of strict foreclosure. Specifically, the Trustee argues that the Bankruptcy Court: (1) applied an incorrect burden of proof; (2) committed clear error by finding that he failed to produce substantial evidence of the invalidity of Auto Shine's claim; (3) committed clear error by failing to find that Auto Shine took possession of substantially all the assets of Sales and Service, thus precluding Auto Shine's claim under the strict foreclosure doctrine, see N.H. REV. STAT. ANN. ("RSA") 382-A:9-505 (§ 9-905 of the Uniform Commercial Code ("UCC")); and (4) committed legal error by failing to properly apply controlling precedent (Lamp Fair, Inc. v. Perez-Ortiz, 888 F.2d 173 (1st Cir.1989), and Banker v. Upper Valley Refrigeration Co., 771 F.Supp. 6 (D.N.H.1991)), which compels a decision in his favor.

I. Burden of Proof

The Trustee argues that the Bankruptcy Court's decision should be reversed, and the case remanded, because the Bankruptcy Court committed an error of law when it ruled that "the burden [was] on [him] to establish that Auto Shine's claim in the Debtor's bankruptcy case should be completely offset by Auto Shine's retention of corporate assets" (Mem. Op. at 12), and by finding that the Trustee had not "sustained his burden of establishing that Auto Shine's actions constituted strict foreclosure" (Mem. Op. at 16).

The Bankruptcy Court applied the correct burden of proof. "A claim [by a creditor of a bankruptcy debtor], ... proof of which is filed under section 501 of [the Bankruptcy Code], is deemed allowed, unless a party in interest ... objects." 11 U.S.C. § 502(a). "A proof of claim executed and filed in accordance with [the Federal Rules of Bankruptcy Procedure] shall constitute prima facie evidence of the validity and amount of the claim." FED. R. BANKR. P. 3001(f); see also Juniper Dev. Group v. Kahn (In re Hemingway Transp., Inc.), 993 F.2d 915, 925 (1st Cir.1993). "In order to rebut the presumption that attaches to a proof of claim, a party objecting must produce `substantial evidence.'" United States v. Clifford (In re Clifford), 255 B.R. 258, 262 (D.Mass.2000) (citing In re Hemingway, 993 F.2d at 925). "If the objecting party sufficiently rebuts the claimant's prima facie case, the burden shifts back to the claimant as it is ultimately `for the claimant to prove his claim, not for the objector to disprove it.'" In re G. Marine Diesel Corp., 155 B.R. 851, 853 (Bankr.E.D.N.Y.1993) (quoting In re Gorgeous Blouse Co., 106 F.Supp. 465, 465 (S.D.N.Y.1952)); see also In re Hemingway, 993 F.2d at 925 ("Once the trustee manages the initial burden of producing substantial evidence ... the ultimate risk of nonpersuasion as to the allowability of the claim resides with the party asserting the claim.") (citations omitted).

Notwithstanding the well-established burden-shifting scheme outlined above, one additional rule applies. In Raleigh v. Illinois Department of Revenue, the United States Supreme Court explained that "[t]he `basic federal rule' in bankruptcy is that state law governs the substance of claims." 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) (quoting Butner v. United States, 440 U.S. 48, 57, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)). The substance of a claim, in turn, includes its burden of proof. Raleigh, 530 U.S. at 20-21, 120 S.Ct. 1951 (citations omitted). The Court went on to explain that "[u]nless some federal interest requires a different result, there is no reason why [the state] interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Raleigh, 530 U.S. at 20, 120 S.Ct. 1951 (quoting Butner, 440 U.S. at 55, 99 S.Ct. 914) (alteration in the original). Based on those principles, the Raleigh court held that when the Illinois Department of Revenue made a claim against a bankruptcy estate, the trustee bore the burden of proof because the Illinois tax code placed the burden of proof on the taxpayer when he or she has been served with a notice of deficiency. 530 U.S. at 17, 120 S.Ct. 1951. While the underlying state law at issue in Raleigh was the Illinois tax code, its holding has been applied in other state-law contexts as well. See, e.g., In re Cantrell, 270 B.R. 551, 556 n. 13 (Bankr.D.Conn.2001) ("With...