In re Davis, C/A No. 14-01909-HB

• Decision Date: 30 September 2019
• Docket Number: C/A No. 14-01909-HB
• Citation: 607 B.R. 522
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: IN RE: Jimmy L. DAVIS, Debtor(s).

607 B.R. 522

IN RE: Jimmy L. DAVIS, Debtor(s).

C/A No. 14-01909-HB

United States Bankruptcy Court, D. South Carolina.

Signed September 30, 2019

Jimmy L. Davis, Pendleton, SC, pro se.

Randy A. Skinner, Greenville, SC, for Trustee.

ORDER SETTING CLAIM OF JANET M. GARAFANO

Helen E. Burris, US Bankruptcy Judge

THIS MATTER is before the Court for consideration of the proof of claim filed by Janet M. Garafano. The Chapter 7 Trustee, Randy Skinner, objected to the claim¹ and Garafano filed a response.² A hearing was held on September 3, 2019. Garafano was the only witness and the Court received documentary evidence.

FACTS

Jimmy L. Davis ("Debtor") was the sole owner of Jimmy L. Davis, Inc. Debtor and his nephew, Nathan Davis, were members of and each held 50% ownership interests in God's Country Outfitters LLC, a sporting goods store located in Albemarle, North Carolina. Nathan Davis was the managing member of the LLC. Bob Chesshire is Garafano's cousin and a social and professional acquaintance of Debtor. Debtor discussed the need for money for the LLC with Chesshire. Chesshire then put Debtor, who lived in South Carolina, in contact with Garafano, who resides in New Jersey, regarding a possible loan.

Debtor and Garafano negotiated terms in February 2011 and she agreed to loan $250,000.00. Although the record contains no formal note evidencing the loan, the parties corresponded via email and Debtor provided Garafano with an amortization schedule, which included details of the monthly payment and interest amounts. According to this schedule, the loan was for a term of 34 months from April 1, 2011 through January 1, 2014, with monthly payments ranging from $2,000.00 to $60,000.00, and a final balloon payment of $133,337.40. The loan accrued 15.00% interest, which decreased by 2.5% each year to 10.00%. Scheduled payments totaled $325,337.40.

Garafano testified that she required Debtor's personal guaranty as a condition of her loan to the LLC and she would not have leant the money without it. To support this, Garafano presented Debtor's personal financial statements, which she required he provide during the loan negotiations to confirm his creditworthiness for the personal guaranty, and email correspondence. An email sent to Garafano on February 28, 2011, from Mary Yerdon at the email address mary_jldinc@bellsouth.net ("Yerdon Email") states:

Janet,

Per our conversation this morning, I am submitting this informal statement of agreement. I agree to the payment schedule and accompanying interest rate detailed in the attached file. I understand that this agreement is accompanied by no closing costs or other related costs. I understand that there are no prepayment penalties for accelerated pay off. I agree to offering my personal guarantee on the loan.

Thank you,

Jimmy L. Davis

God's Country Outfitters

....

mary_jldinc@bellsouth.net

Garafano testified that this email attached the amortization schedule, the "jldinc" in Yerdon's email address is an acronym for "Jimmy L. Davis, Inc." and she received other emails from Debtor from this email address. Garafano responded by emailing Debtor's nephew, Nathan Davis, on the same day and stated:

Nathan,

I got a note [from] someone, with what you sent and Jimmy's name. Her name is [M]ary. I asked that she either send it from Jimmy's email or have him sign it [a]nd scan and email back to me. I have not heard from them. Just wanted to let you know, because I am not releasing funds until I have [s]omething more official from him.

Nathan Davis responded, "I understand. Jimmy doesn't have a personal email. He is going back to his [o]ffice to sign. You should have a signed copy from Mary's email shortly. Mary [i]s his secretary." ("Davis Email").³ Garafano did not receive a signed copy from Debtor; instead, she informed Davis that same day, "thats [sic] ok, I sent my letter request for the transfer before I left ..."

Trustee asserts the Yerdon Email is inadmissible hearsay because it was not sent by Debtor, but rather is from Mary Yerdon's email address. He also asserts other email correspondence from Nathan Davis (but not the Davis Email referenced above) is inadmissible hearsay. Trustee does not dispute that Debtor is a party opponent to Garafano.

There is no dispute that Garafano's $250,000.00 loan was funded to the LLC on March 3, 2011. Thereafter, payments on the loan were made by the LLC, but stopped as of late 2012 and the store was forced to close in 2013. On December 31, 2013, Garafano filed a complaint in the United States District Court for the District of South Carolina against Debtor and the LLC, seeking damages for breach of contract related to the loan. Debtor's Answer was filed by counsel on January 27, 2014, which included a general denial as to the allegation of a personal guaranty and did not assert any affirmative defenses, including one based on the statute of frauds.

Debtor filed a voluntary petition for Chapter 11 relief on April 2, 2014. The List of Creditors Holding 20 Largest Unsecured Claims filed with Debtor's petition included Garafano.⁴ It described the nature of the claim as "God's Country – Personal Guarantee" in the amount of $313,530.00 and did not list it as contingent, unliquidated, disputed, or subject to setoff. Debtor's initial Schedule F was filed on April 28, 2014, and lists Garafano as an unsecured creditor with a claim in the amount of $313,530.00 for a debt described as "God's Country – Personal Guarantee."⁵ This debt is not marked as contingent, unliquidated, or disputed. Debtor filed Amended Schedules on June 3, 2014 that again listed Garafano's debt with the same description and amount as the initial schedules.⁶ The Schedules and Amended Schedules were signed by Debtor under penalty of perjury. Debtor's Amended Disclosure Statement included an exhibit describing his various business interests. This exhibit included the LLC and disclosed that the company's assets were liquidated in October 2013 and the business is no longer operating. It further stated that the LLC owes various debts, including one to Garafano of approximately $350,000.000, "all of which were personally guaranteed by Jimmy L. Davis, the Debtor."⁷

On May 14, 2014, Garafano filed an unsecured claim in the amount of $350,000.00 for money loaned.⁸ Attached to Garafano's claim was a summary of the debt, which explained that no formal note or guaranty was reduced to writing and referred to the amortization schedule and federal litigation.

Debtor's case was converted from Chapter 11 to Chapter 7 on March 31, 2015, and Skinner was appointed as Trustee. Trustee objected to Garafano's claim and asked that it be disallowed. Trustee does not contest the validity of the underlying debt owed to Garafano by the LLC or question whether that loan was made. Instead, he asserts there is no writing documenting the personal guaranty and it is, therefore, invalid under South Carolina's statute of frauds, S.C. Code Ann. § 32-3-10.⁹ At the hearing and in his brief filed after the hearing began, Trustee asserted the alternative argument that if the claim is allowed, it should be in the amount of $325,287.38 based on his calculation. After the hearing, Garafano filed a reply brief arguing, in part, that the amount of the claim is $321,432.80.¹⁰

DISCUSSION AND CONCLUSIONS

Pursuant to § 502(a) of the Bankruptcy Code, a claim is deemed allowed unless an objection is filed by a party in interest. A Chapter 7 trustee is a party in interest whose duties include reviewing filed proofs of claim and objecting to the allowance of any claim that is "improper" and if the objection would serve a purpose. 11 U.S.C. § 704(a)(5). Section 502(b) provides that if an objection to a claim is made, the Court, after notice and a hearing, shall determine the amount of the claim as of the date of the petition, and shall allow such claim in that amount, unless the claim is disallowed under exceptions listed in the Bankruptcy Code, including that the "claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law ..." 11 U.S.C. § 502(b)(2)(1).

This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(a) and (b). A determination concerning the allowance or disallowance of a claim against the estate is a core proceeding over which this Court has authority to enter a final order. 28 U.S.C. § 157(b)(2)(B).

The Federal Rules of Bankruptcy Procedure specify the form, content, and filing requirements for a valid proof of claim. See e.g. , Fed. R. Bankr. P. 3001. Specifically, Rule 3001(c) states that when a claim is based on a writing, "a copy of the writing shall be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim." Fed. R. Bankr. P. 3001(c)(1). Additionally, if the debtor is an individual and "[i]f, in addition to its principal amount, a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim." Fed. R. Bankr. P. 3001(c)(2)(A). When a claim is executed and filed in accordance with the Bankruptcy Rules, Rule 3001(f) provides that the proof of claim "shall constitute prima facie evidence of the validity and amount of the claim."

Generally, the burden of establishing the validity and amount of a bankruptcy claim shifts between the parties. However, if the requirements under Fed. R. Bankr. P. 3001 are not met and the claim lacks prima facie evidence of validity and amount, the burden is on the claimant to establish the validity and amount of the claim. See In re Devey , 590 B.R. 706, 721 (Bankr. D.S.C. 2018) ; In re Mazyck , 521 B.R. 726, 732 (Bankr. D.S.C. 2014). In such circumstances, the objecting party only needs to raise a basis for disallowance under § 502(b) to satisfy its burden, such as a dispute as to the amount, validity...