In re Davis

• Decision Date: 04 August 2016
• Docket Number: Bankruptcy Case No. 13–41551–JDP
• Parties: In re: David T. Davis and Ronda K. Davis, Debtors.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho

554 B.R. 918

In re: David T. Davis and Ronda K. Davis, Debtors.

Bankruptcy Case No. 13–41551–JDP

United States Bankruptcy Court, D. Idaho.

Signed August 4, 2016

R. Sam Hopkins, chapter 7 Trustee, Pocatello, Idaho.

Dale T. Davis, Pocatello, Idaho, pro se, Creditor.

MEMORANDUM OF DECISION

Honorable Jim D. Pappas

, United States Bankruptcy Judge

Introduction

Chapter 7¹ trustee R. Sam Hopkins (“Trustee”) objected to allowance of the claim of creditor Dale T. Davis (“Creditor”) in this bankruptcy case. Dkt. No. 99. Creditor responded to Trustee's objection. Dkt. No. 104. On June 15, 2016, the Court conducted a hearing concerning the matter and took the issues under advisement. Dkt. No. 128. The parties filed post-hearing briefs. Dkt. Nos. 131, 132. Upon consideration of the record, briefs, and applicable law, this Memorandum constitutes the Court's findings of fact and conclusions of law, and sets forth the reasons for its decision. Rules 7052; 9014.

Facts

David T. Davis and Ronda K. Davis (“Debtors”) are the sole owners of a company they called DH Microsystems (“DHM”), a business that manufactures components, mostly for boats. For several years, they both drew salaries from DHM. However, when the business's cash flow was insufficient, they sought financial assistance from Creditor, David's² father.

Beginning in 2005, Creditor made several loans to DHM via Debtors, which they used to pay down the business's debt and as operating funds. These loans are outlined below.

On October 28, 2005, Creditor loaned DHM $15,000, interest free, to be repaid in installments of $500 beginning October 1, 2006. Proof of Claim No. 20, Dkt. No. 109. The agreement memorializing the loan contained the following provision: “If DH MicroSystems, Inc. encounters favorable business conditions early in 2006, and no unexpected additional tooling is required, the $500.00 monthly payments will begin as soon as practical but no later than October 15, as stated above.” Id. This loan was never repaid.

On July 3, 2007, Creditor loaned DHM $30,000, with interest, as evidenced in the record by Creditor's cancelled check. No agreement concerning the terms of repayment for this loan was supplied to the Court. According to Creditor, DHM made only one payment of $724.72 on this loan.

Finally, in July 2008, Creditor agreed to factor some of DHM's customer accounts receivable. Again, if they existed, the precise terms of the parties' factoring agreement were not submitted in evidence, other than Creditor's representation that he was to receive ten percent on the invoices he purchased. Creditor purchased invoices and provided a total of $32,494.22 to DHM under this factoring arrangement. He received payments of $6,133.33 on December 28, 2007, and $585.67 on February 19, 2008, for a total of $6,719.

In sum, Creditor loaned $77,494.22 to DHM between October 2005 and July 2008, and received only $7,443.72 in payments on those loans. While Creditor regularly “reminded” Debtors about their outstanding debts to him, because they were members of his family he took no legal action against them or DHM to collect the loans.

On December 16, 2013, Debtors filed a chapter 13 bankruptcy petition. Dkt. No. 1. The bankruptcy case was converted to a chapter 7 case on Debtors' motion on August 11, 2015. Dkt. No. 61. In their schedules, Debtors listed their ownership interest in DH Microsystems which they valued at “$0.00”. Schedule B, Dkt. No. 1. On Schedule F, Debtors list a debt owed to Creditor as a “Line of Credit” with a balance of $75,000. Dkt. No. 1.

On August 31, 2015, Creditor filed a proof of claim in Debtors' case. Claims Reg. No. 20; Dkt. No. 109. It alleges that Debtors owe him $70,050.50 for “money loaned.” Id. Trustee objected to allowance of Creditor's claim arguing that the loans made by Creditor are debts of DHM, not Debtors individually, and alternatively, even if the loans are Debtors' obligations, Creditor's claim is unenforceable under Idaho's statutes of limitation. Dkt. No. 99.

Analysis and Disposition

Under Rule 3001(f), a filed proof of claim “constitutes prima facie evidence of the validity and amount of the claim” which, via § 502(a), is deemed allowed unless a party in interest objects. Lundell v. Anchor Constr. Specialists, Inc., 223 F.3d 1035, 1039 (9th Cir.2000)

; In re Morrow, 03.2 IBCR 100, 101, 2003 WL 25273857 (Bankr.D.Idaho 2003). If an objection to a proof of claim is made, the Code instructs the Court to conduct a hearing, to determine the amount of the claim, and to allow the claim, except to the extent that “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured[.]” § 502(b)(1).

The prima facie validity of the proof of claim afforded to a creditor by Rule 3001(f) does not allocate the burden of proof concerning the validity of the debt; it merely operates as a rebuttable evidentiary presumption in favor of the creditor. In other words, while the Rule satisfies the creditor's “burden of going forward” in support of its claim, In re Garvida, 347 B.R. 697, 706 (9th Cir. BAP 2006)

, the applicable “burden of proof is an essential element of the claim itself [and] one who asserts a claim is entitled to the burden of proof that normally comes with it.” Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 20–21, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000).

In this case, the applicable law defining Creditor's burden of proof for his claim under § 502(b)(1) is Idaho law. In re Morrow, 03.2 IBCR at 101

(citing In re West One Mineral, Inc., 96.1 IBCR 12, 13 (Bankr.D.Idaho 1996)). As noted above, Trustee objects to allowance of Creditor's claim because he contends the loans Creditor made to Debtors are no longer enforceable under applicable statutes of limitation. While Creditor's claim enjoys prima facie validity under the Rules, given Trustee's objection, Creditor must ultimately prove that the loans constitute debt of Debtors individually, as opposed to being the debts of their corporation, DHM. In re Gray, 522 B.R. 619, 625 (Bankr.D.Idaho 2014) (under § 502(b)(1), following Trustee's rebuttal of the prima facie presumption, “the ultimate burden of persuasion remains on the [creditor] to demonstrate by preponderance of the evidence that the claim deserves to share in the distribution of the debtor's assets.”); see also,

In re Parrott Broadcasting Ltd. P'ship, 492 B.R. 35, 38 (Bankr.D.Idaho 2013) ; In re Schweizer, 354 B.R. 272, 279–80 (Bankr.D.Idaho 2006). On the other hand, the statute of limitations is an affirmative defense, and the party asserting it bears the burden of proof. Mason v. Tucker and Assocs., 125 Idaho 429, 871 P.2d 846, 854 (Idaho App.1994) (citing Hawley v. Green, 117 Idaho 498, 788 P.2d 1321, 1327 (1990) ). Therefore, here, assuming the loans are Debtors' debts, Trustee bears the burden of proving that the Idaho statutes of limitation apply to bar enforcement those debts against Debtors.

Applying these rules, the Court will consider each of the loans made by Creditor in turn.

A. The 2005 Loan

This loan was made on October 28, 2005. Attached to Creditor's proof of claim is a written agreement memorializing this loan signed by Debtors individually, and a check for the loan proceeds made payable to DMH.

Even assuming this loan is Debtors' personal obligation, and not the debt of DMH, Trustee contends the 2005 loan can not be enforced against Debtors under Idaho's statute of limitations, Idaho Code § 5–216

, which requires that an action “upon a contract, obligation or liability founded upon an instrument in writing” be commenced within five years.

Trustee is partly correct; most of the loan balance is unenforceable. Creditor acknowledges that the loan was to be repaid in monthly installments beginning in October 2006, and that no payments were ever made. This was not disputed by Trustee, nor is there any evidence in the record to the contrary. Absent an acceleration clause in the parties' agreement,³ in Idaho, “[w]here money is payable in installments, the statute of limitations begins to run against a cause of action for the recovery of a delinquent installment as of the time it becomes due.” Horkley v. Horkley, 144 Idaho 879, 173 P.3d 1138, 1139 (2007)

(citing H.M. Chase Corp. v. Idaho Potato Processors, Inc., 96 Idaho 398, 529 P.2d 1270, 1274 (1974) ).

For this loan, the date that the first installment payment became due was October 15, 2006. Given that the loan was for $15,000 and was interest free, and the installment payments were to be $500 each, presumably the parties intended that 30 monthly installment payments would be made. Therefore, the last installment payment was due on approximately April 15, 2009. And because no payments were made on this loan, all of the installments were delinquent no later than May 15, 2009. Based upon the Court's calculations, then, and applying the Idaho statute of limitations, Creditor could still enforce payment of some of the delinquent installments on this loan as of the date of Debtors' bankruptcy filing. More precisely, it appears the installments that became due on the 2005 loan in November and December of 2008 (and thus became delinquent in December and January of 2009), as well as installments due in January through April, 2009 (and thus delinquent in February through May, 2009) would not be barred by the Idaho statute of limitations as of the December 16, 2013 bankruptcy petition date. In other words, Creditor may seek to collect $3,000 of the 2005 loan balance via his proof of claim.

Of course, even if not barred by the statute of limitations, Trustee contends that the 2005 loan was made by Creditor to DHM, a corporation, rather than to Debtors individually, and as such, the loan can not support a valid claim in Debtors' bankruptcy case. The Court agrees.

The Code defines “debt” as “liability on a claim.” § 101(12)

. In turn, “claim” is defined as “right to payment, whether or...