Judge Hopkins
MEMORANDUM OF DECISION ON ORDER PARTIALLY SUSTAINING OBJECTION TO CLAIM
Before the Court is a claim objection ("Objection")(Doc. 260) filed by Bryan Perkins, Administrator of the Estate of Troy S. Clements ("Perkins"). The Objection seeks the disallowance of a $1,228,488.62 claim ("Claim")(Claim No. 11-3) filed by Linda Hines. Linda Hines opposes the Objection. See Doc. 272. Subsequent to an evidentiary hearing, the parties filed post-hearing briefs. See Docs. 305, 306, and 307.
The Court has jurisdiction over this action pursuant to 28 U.S.C. § 1334(b) and the Standing Order of Reference entered in this District. Pursuant to 28 U.S.C. § 157(b)(2)(B), this is a core proceeding in which the Court possesses the authority to enter final judgment.1 This memorandum constitutes the Court's findings of fact and conclusions of law under Fed. R. Bankr. P. 7052.
Linda Hines ("Linda") is the mother of the Debtor's sole owner, James Hines ("James"). The Debtor, Inner City Properties, LLC ("ICP"), is a limited liability company incorporated by James on March 5, 2010. ICP's articles of organization identify the purpose of the company as "property management."
The basis for the Claim is "money loaned for purchase of rental properties & expenses." See Claim No. 11-3. Attached to the Claim are copies of fifteen checks totaling $1,331,244.80. According to Linda, the checks evidence loans she extended to ICP.
PRESUMPTION OF VALIDITY AND BURDEN OF PROOF "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). To rebut this presumption, a party objecting to the claim must establish a "colorable challenge" to the claim. In re Morton, 298 B.R. 301, 307 (B.A.P. 6th Cir. 2003). This must be done by means of "some legal reason or some factual evidence." In re McLaughlin, 320 B.R. 661, 665 (Bankr. N.D. Ohio 2005). If the presumption is rebutted, the burden shifts to the claimant to substantiate the claim by a preponderance of the evidence. Morton, 298 B.R. at 307; In re Hollars, 198 B.R. 270, 271 (Bankr. S.D. Ohio 1996); see also Bloomberg Law: Bankruptcy Treatise, pt. X, ch. 357, at II, (D. Michael Lynn et al. eds., 2016).
The Objection seeks the disallowance of the entire claim because: (1) nine of the checks pre-date the formation of ICP; (2) fourteen of the checks are cashier's checks that evidence no apparent relationship to Linda as the source of funds; (3) eleven of the cashier's checks expressly provide that they were "purchased by" James or his ex-wife Tracy Hines ("Tracy"); (4) only one of the checks is payable to ICP - a cashier's check which states it was purchased by James; (5) seven of the checks are payable to James; (6) several of the checks reference real property owned by James, not ICP; (7) the amount of the claim is inconsistent with ICP's books and records, which reflect a $340,000.00 debt to Linda according to Schedule F; and (8) the Claim does not include any loan documentation. These arguments raise significant questions whether Linda possesses a right to payment from ICP, see 11 U.S.C. § 101(5)(defining a "claim" as a "right topayment"), at least with respect to the amount claimed.2 Consequently, Perkins has established a colorable challenge to the Claim and the burden shifts to Linda to substantiate her Claim by a preponderance of the evidence.3
ELEVATED BURDEN OF PROOF WHEN CLAIMANT IS AN INSIDER Linda is an insider of ICP. When the debtor is a corporation, the Bankruptcy Code defines an "insider" as a "relative of a general partner, director, officer, or person in control of the debtor." See 11 U.S.C. § 101(31)(B)(vi); see also 11 U.S.C. § 101(45)(defining relative as an "individual related by affinity or consanguinity within the third degree as determined by the common law").
When an insider files a claim against the bankruptcy estate, the insider bears a "heavy" burden of proof and the claim must be "carefully scrutinized." In re Scheidmantel Olds-Cadillac, Inc., Case No. 92-21270, 1994 WL 386855 at *2 (Bankr. W.D. Pa. Jul. 12, 1994); In re Candy Braz, Inc., 98 B.R. 370, 373 (Bankr. N.D. Ill. 1988). Otherwise it would be too easy for the sole owner of a debtor corporation, who has no personal stake in the claims resolution process, to act in a manner that prejudices the debtor's non-insider creditors in favor of the insider.
To substantiate her claim at the evidentiary hearing, Linda introduced three lending agreements in the aggregate, principal amount of $1,028,488.62. See Claimant's Exs. 5, 20, and 22. The agreements, however, raise some of the same questions raised by the checks appended to the Claim. Linda is the lender under each agreement. However, the borrower under each agreement is James, not ICP. One of the agreements is dated prior to ICP's formation. None of the agreements reference ICP.
Linda also introduced an additional cashier's check that was not appended to her Claim. It is a $40,000.00 cashier's check made payable to ICP. See Claimant's Ex. 23.The check identifies Linda as the remitter.
Linda and Carlos Hines ("Carlos") were divorced in 2005. Prior to the divorce, they jointly owned a business known as A. Hines Racing Engines. A separation agreement, incorporated into the divorce decree, provided that "[the] business will be turned over to [Linda] for the purposes of allowing their son, [James], to . . . have ownership of said business with [Linda]." See Claimant's Ex. 1. Carlos quitclaimed the business real estate to Linda. See Claimant's Ex. 2. Shortly thereafter, Linda quitclaimed the same to James and herself. See Claimant's Ex. 3.
FIRE AND THE INSURANCE PROCEEDS In 2008, the business was destroyed by a fire. As compensation for a total loss, Erie Insurance Exchange issued nine checks totaling $788,488.62. See Claimant's Ex. 4. Six of the checks are jointly payable to James and Linda. Two of the checks are payable to A. Hines Racing Engines. One check is payable to James alone.
JAMES' BUSINESS ACTIVITY BEFORE AND AFTER THE FIRE Prior to the fire, James engaged in at least two different business activities: (1) A. Hines Racing Engines; and (2) real estate rentals of single-family and multi-family homes and apartments. Long before the fire, James individually acquired approximately twenty-four rental properties. The fire put an end to James' business activity related to A. Hines Racing Engines. James' real estate activity has continued to the present.
FIFTH THIRD "LINE OF CREDIT" Linda opened a joint account at Fifth Third Bank ("Fifth Third Joint Account") and deposited the insurance proceeds. The account owners were Linda, James, and Tracy.4
Linda and James testified that they viewed Linda as the owner of the insurance proceeds. James testified that he approached Linda in 2009 and suggested that he borrow the funds to invest in real estate. According to Linda and James, they agreed that: (1) James could borrow the funds for the sole purpose of building a real estate rental business; and (2) the Fifth Third Joint Account would serve as a "line of credit" for this purpose; and (3) James was authorized to withdraw funds from the Fifth Third Joint Account, as a joint owner of the account, without prior approval of Linda.
Linda believed that James was good at buying and selling property because James had done so with apparent success for several years. She wanted to provide a way for James to generate income after the fire.
Linda testified that the first of the three lending agreements ("Agreement I"), dated March 1, 2009, memorialized the "line of credit" agreement. In that agreement, Linda is identified as the lender and James is identified as the borrower. Agreement I further states that $788,488.62 is loaned to James "for the sole purpose of operating expense." ICP is not mentioned anywhere in Agreement I.
Eleven of the checks attached to the Claim are drawn on Fifth Third Bank. See Claimant's Exs. 6-14, and 16. All of these checks are cashier's checks. Each check identifies the purchaser. None were purchased by Linda. Nine were purchased by James. Two were purchased by Tracy. To prove that the funds were drawn from the Fifth Third Joint Account, Linda introduced bank statements that allegedly evidence corresponding debits from the Fifth Third Joint Account. See Claimant's Exs. 6-14, and 16.
Only one of the checks identifies ICP as payee. Nine of the checks were issued prior to ICP's March 5, 2010 incorporation.
The following table identifies the checks by date, purchaser, payee, and amount.
The checks drawn on Fifth Third Bank total $931,244.80.5
FIFTH THIRD JOINT ACCOUNT RECORDS As mentioned previously, Linda introduced account statements to establish that the Fifth Third Bank checks were drawn on the Fifth Third Joint Account. The statements, however, reveal that at least two of the checks appear to have been drawn on a different account that was also jointly owned by Linda, James, and Tracy.
Unfortunately, or perhaps intentionally, Linda failed to introduce the first page of any...
