In re Harford Sands Inc.

• Decision Date: 16 June 2004
• Docket Number: No. 03-2249.,03-2249.
• Citation: 372 F.3d 637
• Parties: In Re: HARFORD SANDS INC; Harford Industrial Minerals, Incorporated, Debtors. Terry D. Stancill; Jerry Stancill; Timothy K. Stancill; Timothy D. Stancill, Plaintiffs-Appellants, v. Harford Sands Inc, Debtor-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

372 F.3d 637

In Re: HARFORD SANDS INC; Harford Industrial Minerals, Incorporated, Debtors Terry D. Stancill; Jerry Stancill; Timothy K. Stancill; Timothy D. Stancill, Plaintiffs-Appellants, v. Harford Sands Inc, Debtor-Appellee.

No. 03-2249.

United States Court of Appeals, Fourth Circuit.

Argued: May 5, 2004.

Decided: June 16, 2004.

ARGUED:

Charles Kevin Kobbe, Piper Rudnick, L.L.P., Baltimore, Maryland, for Appellants. Troy Christopher Swanson, Cohen & Swanson, Baltimore, Maryland, for Appellee.

ON BRIEF:

Richard M. Kremen, Jodie E. Buchman, Piper Rudnick, L.L.P., Baltimore, Maryland, for Appellants.

Before WILKINSON and WILLIAMS, Circuit Judges, and Bobby R. BALDOCK, Senior Circuit Judge of the United States Court of Appeals for the Tenth Circuit, sitting by designation.

Affirmed by published opinion. Senior Judge Baldock wrote the opinion, in which Judge Wilkinson and Judge Williams concurred.

BALDOCK, Senior Circuit Judge:

Debtor Harford Sands Inc. ("Harford Sands") voluntarily filed a Chapter 11 bankruptcy petition. Appellants Terry D. Stancill, Jerry Stancill, Timothy D. Stancill, and Timothy K. Stancill ("Stancills") filed a proof of claim in the bankruptcy court. The Stancills claimed Harford Sands owed them $250,688.17 for dirt they sold Harford Sands on account. Harford Sands objected to the proof of claim. The bankruptcy court sustained the objection and disallowed the claim because it was speculative and unenforceable under non-bankruptcy law. The district court affirmed for the same reasons. The Stancills argue on appeal that the bankruptcy court and district court erred in both respects.

"We review the judgment of a district court sitting in review of a bankruptcy court de novo, applying the same standards of review that were applied in the district court." Three Sisters Partners, LLC v. Harden, 167 F.3d 843, 847 (4th Cir.1999). We thus review the bankruptcy court's legal conclusions de novo and its factual findings for clear error. United States Dep't of Health & Human Serv. v. Smitley, 347 F.3d 109, 115-16 (4th Cir.2003). Applying this standard, we affirm for the same reasons as the bankruptcy court and district court.

I.

The Stancills have operated Stancills, Inc., a rubble landfill pit, on a forty-five acre parcel of land known as the "Oak Avenue Property" since the early 1980s. Larry Stancill (the brother of three Appellants and uncle of the other) is the owner and operator of Harford Sands, which sells sand and gravel. Stancills, Inc. (through Appellants) allegedly entered into an oral contract with Harford Sands (through Larry Stancill) to remove dirt from the Oak Avenue Property in 1986. The parties allegedly agreed Harford Sands would purchase the dirt at the price of $1 per ton (later negotiated to $0.25 per ton). Under the agreement, Harford Sands was to remove the dirt, weigh it, and report the tonnage back to Stancills, Inc. in order to determine the amount owed. Payment was not due under the alleged contract, however, until Harford Sands had the financial ability to pay for the dirt.

The Stancills subsequently formed "Pappy Inc." in 1988. Shortly thereafter, Pappy Inc. entered into a contract with Stancills, Inc. for the purchase of the Oak Avenue Property. At the time of the sale, the Stancills claimed Harford Sands owed Stancills, Inc. $104,000 for dirt removed from the Oak Avenue Property. The contract of sale, however, did not reference the $104,000 asset. The Stancills nevertheless assert the $104,000 asset was transferred from Stancills, Inc. to Pappy Inc. when the former purchased the Oak Avenue Property. From 1988 to 1990, Harford Sands allegedly removed another $71,688 worth of dirt from the Oak Avenue Property. Thus, according to the Stancills, the total amount Harford Sons allegedly owed Pappy Inc. at the end of 1990 was $175,688. Harford Sands continued to remove dirt from the Oak Avenue Property until 1993. The Stancills estimated the dirt removed between 1990 and 1993 was worth $75,000.¹ Stancills, Inc. subsequently obtained three deeds of trust from Harford Sands in the mid-1990s. The deeds were executed for past due receivables pertaining to dirt Harford Sands purchased from Stancills, Inc. Larry Stancill believed the deeds of trust satisfied all his outstanding debt pertaining to dirt removed from the Oak Avenue Property.

In 1997, the Stancills sold Pappy Inc. to an unrelated third party. At the time of sale, Pappy Inc.'s financial records did not reference any claims against Harford Sands as an asset of the company. The contract of sale, however, referenced a "Harford Sands Receivable" as an "Excluded Asset." The contract did not mention the value of the putative account receivable. After the sale, the Stancills assert they became the individual owners of the putative account receivable because it was excluded from the contract of sale. In 2000, the Stancills requested payment for the dirt Harford Sands removed from the Oak Avenue Property for the first time. Harford Sands rejected the demand and denied any liability for the dirt. Harford Sands' financial records, however, referenced a $175,688 "liability" and "account payable" to Pappy Inc. Harford Sands also referenced the $175,688 liability on its federal income tax returns for the years 1987 to 1999. Harford Sands petitioned for bankruptcy shortly after the demand for payment.

II.

The Stancills challenge the bankruptcy court's finding that they failed to prove the amount and validity of their claim by a preponderance of the evidence. The Bankruptcy Code provides that a creditor in a Chapter 11 bankruptcy proceeding may file a proof of claim. 11 U.S.C. §§ 103(a), 501(a); see also Fed. R. Bankr.P. 3003(c)(1); Pioneer Inv. Servs. Co. v. Brunswick Assoc. Ltd. P'ship., 507 U.S. 380, 382, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). A proof of claim is the creditor's statement as to the amount and character of the claim. Fed. R. Bankr.P. 3001(a). "[T]he allowance or disallowance of a claim in bankruptcy is a matter of federal law left to the bankruptcy court's exercise of its equitable powers." Canal Corp. v. Finnman, 960 F.2d 396, 404 (4th Cir.1992). The holder of an "allowed claim" may receive distributions from the bankruptcy estate in a Chapter 11 proceeding. 4 Collier on Bankruptcy ¶ 502.01 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2004) ("Collier").

The Bankruptcy Code establishes a burden-shifting framework for proving the amount and validity of a claim. The creditor's filing of a proof of claim constitutes prima facie evidence of the amount and validity of the claim. 11 U.S.C. § 502(a); Fed. R. Bankr.P. 3001(f). The burden then shifts to the debtor to object to the claim. 11 U.S.C. § 502(b); Finnman, 960 F.2d at 404. The debtor must introduce evidence to rebut the claim's presumptive validity. Fed. R. Bankr.P. 9017; Fed.R.Evid. 301; 4 Collier at ¶ 501.02[3][d]. If the debtor carries its burden, the creditor has the ultimate burden of proving the amount and validity of the claim by a preponderance of the evidence.² Id. at ¶ 502.02[3][f]. The creditor's burden is heightened when it is an "insider" of the debtor. See Pepper v. Litton, 308 U.S. 295, 306, 60 S.Ct. 238, 84 L.Ed. 281 (1939). The Code defines an "insider" as, among other things, the relative of a director, officer, or person in control of the debtor corporation. 11 U.S.C. § 101(31)(B)(vi). An insider's dealings with a bankrupt corporation are ordinarily subject to "rigorous" or "strict" scrutiny. Fabricators Inc. v. Technical Fabricators, Inc., 926 F.2d 1458, 1465 (5th Cir.1991); Brewer v. Erwin & Erwin, P.C., 942 F.2d 1462, 1465 (9th Cir.1991); In re Inter-Island Vessel Co., Inc., 98 B.R. 606, 608-09 (Bankr.D.Mass.1988). In such a situation, the "burden is on an insider claimant to show the inherent fairness and good faith of the challenged transaction." Id.

Applying the burden-shifting framework in this case, the Stancills' claim was presumptively valid when they filed their proof of claim. Harford Sands, however, objected to the claim and introduced evidence of the claim's invalidity. Specifically, Harford Sands introduced evidence that: (1) the amount of the claim was arrived at arbitrarily without any supporting documentation; (2) the Stancills were not the rightful owners of the alleged $175,688 debt because no evidence existed demonstrating Stancills, Inc. assigned the debt to Pappy Inc., and even assuming such assignment, no evidence existed demonstrating Pappy Inc. assigned the debt to the Stancills; and (3) the claim was time-barred under Maryland's four year statute of limitations, see Md. Comm.Code § 2-725(1), for breach of contract actions. The bankruptcy court found, and we agree, Harford Sands carried its burden of rebutting the claim's presumptive validity.

Accordingly, the Stancills had the ultimate burden of proving the amount and validity of their claim by a preponderance of the evidence. Additionally, the Stancills are "insiders" under the Code because they are relatives of the person in control of Harford Sands (Larry Stancill). As such, the Stancills' claim is subject to rigorous scrutiny. As the bankruptcy court found, the Stancills have not carried their heightened burden for two reasons.

First, the Stancills failed to prove the actual amount of their claim. In the bankruptcy court, and again on appeal, the Stancills maintain their accountant arrived at a figure of $175,688 for their claim based on tonnage slips and hauling receipts Harford Sands provided them under the alleged oral contract. The Stancills, however, have not included any such tonnage slips or hauling receipts in the record on appeal.³ The Stancills' accountant, Carl Ray Mann, testified he arrived at the $175,688 figure based on some "adding machine tape," handwritten notes, and hauling tickets received between 1982 and 1987.⁴ Mann did not explain how such evidence, assuming it exists, proves Harford Sands...