In re Inter-Island Vessel Co., Inc., Bankruptcy No. 85-758-HL.

• Decision Date: 06 July 1988
• Docket Number: Bankruptcy No. 85-758-HL.
• Citation: 98 BR 606
• Parties: In re INTER-ISLAND VESSEL COMPANY, INC., d/b/a "Bill of Rights", Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

98 B.R. 606 (1988)

In re INTER-ISLAND VESSEL COMPANY, INC., d/b/a "Bill of Rights", Debtor.

Bankruptcy No. 85-758-HL.

United States Bankruptcy Court, D. Massachusetts.

July 6, 1988.

MEMORANDUM ON CLAIM OF JOSEPH M. DAVIS, SR.

HAROLD LAVIEN, Bankruptcy Judge.

The matters before the Court are the trustee's objections to two claims as a secured creditor filed by Polly Stiles in her capacity as conservator for her father, Joseph M. Davis, Sr. One secured claim is for the amount of $272,249.00 and the other secured claim is for the amount of $407,449.00.

The Court, at a hearing on April 22, 1988, disallowed the claim of Ms. Stiles for the amount of $272,249.00 as being duplicative. Counsel agreed during the same hearing that the remaining claim was unsecured. The claim was based on eight promissory notes issued by the debtor, Inter-Island Vessel Company ("I-IVC") to Joseph M. Davis, Sr., hereinafter referred to as Davis, Sr.¹ The matter was continued to May 9, 1988 for an evidentiary hearing on the factual issues raised by the trustee's objections; namely, the statute of limitations, payment and consideration or capital contribution.

At the May 9, 1988 hearing, Ms. Stiles proferred eight promissory notes issued by the debtor payable to Davis, Sr. as prima facie evidence of the debtor's obligation to Davis, Sr. The said notes are as follows:

Note 1 dated June 1, 1971 in the amount of $15,000, payable on demand;

Note 2 dated August 20, 1971 in the amount of $52,000, payable in full at the end of 10 years and guaranteed personally by Joseph M. Davis, Jr.;

Note 3 dated November 22, 1971 in the amount of $30,000, payable after 1 year Note 4 dated November 24, 1971 in the amount of $20,000, payable on demand;

Note 5 dated October 24, 1974 in the amount of $35,000, payable in full at the end of 10 years and guaranteed personally by Joseph M. Davis, Jr.;

Note 6 dated June 1, 1984 in the amount of $30,000, payable upon demand and guaranteed personally by Joseph M. Davis, Jr.;

Note 7 dated May 22, 1985, 1985 in the amount of $400, payable on demand;

Note 8 dated July 3, 1985 in the amount of $400; and payable on demand.

The trustee assented to allow Notes 7 and 8 as an unsecured claim for the amount of $800.

To further bolster her claim, Ms. Stiles submitted a July 23, 1985 sworn deposition of Davis, Sr., taken in his son's divorce action, in which Davis, Sr. testified that Notes 2, 5 and 6 were never repaid.² In addition, Ms. Stiles submitted a personal mortgage granted by Joseph M. Davis, Jr. (hereinafter referred to as Davis, Jr.) to Davis, Sr. on March 29, 1985 for the amount of $117,000 to secure the payment of Notes 2, 5 and 6, which Davis, Jr. personally guaranteed.

As to the deposition and mortgage, it appears that Davis, Jr., the son of Davis, Sr., was the chief executive officer of the debtor until he became embroiled in divorce proceedings which pre-dated both the mortgage and the deposition. It was in the Davis' interests to reduce the equity of Davis, Jr. in the debtor and also the value of the debtor's assets so as to lessen the property settlement. Davis, Jr.'s wife sought to reach the debtor's boat, its sole asset and, in fact, the bankruptcy was precipitated by the seizure of the boat. In his deposition, Davis, Sr. attempted to explain how the debtor is indebted to him. The testimony is vague, evasive, and contradictory. At one point, Davis, Sr. admits that the debtor obtained a mortgage on the debtor's property to pay him back on Note 2. He then makes the improbable claim that this corporate loan, secured by corporate assets was, in fact, a personal loan to Davis, Sr. and, therefore, he was never repaid. Notwithstanding counsel's unsubstantiated allegations that Davis, Sr. guaranteed the corporate loan, it is uncontested that Davis, Sr. was paid back in full on Note 2 from the corporate loan.

The deposition also contains contradictory testimony in which Davis, Sr. claims at one point to have bought stock in the debtor in 1983 but, at another point, claims to have bought all of his stock in the debtor in the early 1970's. The Court does not find the deposition very credible and both the deposition and mortgage have to be weighed in light of the acrimonious divorce with its potential self-serving motives. The Court does not find this evidence strong enough to support the claimant's burden of proof.

Another exhibit submitted by Ms. Stiles is a letter, on personal stationery, in which Davis, Jr. personally agreed on a March 11, 1983 letter, to pay $10,000—$12,000 in 1983 for Davis, Sr.'s tax program until a final accounting could be made. Ms. Stiles received this letter from Davis, Jr. after Davis, Jr. denied that he or the debtor owed Davis, Sr. money. Aside from the vagueness of the letter and its failure to refer to any corporate debts or notes, it is written on Joseph M. Davis, Jr.'s stationery and is only signed by him, individually.

The final piece of evidence is Joseph M. Davis, Sr.'s checkbook in which three check stubs from the period of 1971-1973 bear notations that the checks were written to pay interest on a $30,000 loan Davis, Sr. took out on behalf of the debtor. The checkbook also contains numerous notations of payments to the debtor and banks to which the debtor owed money. The debtor issued a $30,000 note to Davis, Sr. on November 21, 1971 and a $20,000 note to Davis, Sr. on November 24, 1971. Joseph M. Davis, Jr., chief executive officer of the debtor in 1971, testified that Davis, Sr. was given the first promissory note of $30,000 but it was never funded. Davis, Jr. also stated that actually, instead of the $50,000. represented by both notes, Davis, Sr. did loan the debtor $20,000 as represented by the November 24th promissory note. The other check stubs do no more than establish that Davis, Sr. gave money to the debtor and Joseph M. Davis, Jr. The Court has no means to determine if the checks were loans, capital contributions, or even gifts from a father to a son, as indicated in other testimony by Davis, Jr.

Counsel for Ms. Stiles claims that Notes 2, 5 and 6 were reaffirmed as outstanding debts by the debtor because they were listed on the debtor's bankruptcy petition. Rhode Island law, which counsel agreed is applicable in this case, has clearly ruled that the listing of debts in a bankruptcy schedule of debts does not reaffirm their existence, Hidden v. Cozzens, 2 R.I. 401 (1853); see also, In re Vertientes, 845 F.2d 57 (3rd Cir.1988). In addition, the Court will not give much credence to debts listed as owing to the person signing the schedule of debts without corroboration. In this case, the statements were obviously selfserving since Davis, Sr. signed the schedules.

The trustee challenged that any money was due under promissory notes 1-6. In support of his contention, the trustee had Davis, Jr. testify. Davis, Jr. stated that Notes 1, 3, 5 and 6 were never funded. Davis, Jr. explained that Davis, Sr.'s practice was to demand a promissory note when the debtor appeared to have a need for money and to fund the note afterwards if the debtor actually needed the money.

Davis, Jr. admits that Davis, Sr. did fund Notes 2 and 5. As previously explained, it is clear that Davis, Sr. loaned the full $52,000 referred to by Note 2 and was repaid. The second funded note is Note 4 in the amount of $20,000. Davis, Jr. claims that the debtor paid the...