In re Mace

• Decision Date: 13 August 2013
• Docket Number: No. 10–42899.,10–42899.
• Citation: 496 B.R. 252
• Parties: In re Carl MACE and Cindy Mace, Debtors.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

496 B.R. 252

In re Carl MACE and Cindy Mace, Debtors.

No. 10–42899.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Submitted: May 14, 2013.

Decided and Filed: Aug. 13, 2013.

Appeal from the United States Bankruptcy Court for the Northern District of Ohio, Case No. 10–42899, Adv. No. 10–04239.

Gary J. Rosati, Niles, OH, for Appellants.

P. Raymond Bartholomew, Bartholomew, Mudrinich & Nesbit, Hermitage, PA, for Appellees.

Before EMERSON, McIVOR, and PRESTON, Bankruptcy Appellate Panel Judges.

OPINION

GEORGE W. EMERSON, Bankruptcy Appellate Panel Judge.

The Debtors, Carl and Cindy Mace, appeal an order overruling their objection to an unsecured claim in the amount of $313,781.36. The claimants are the Debtors' former business partners in a feed and livestock supply corporation. The claim is based on a breach of an oral promise Carl Mace allegedly made to have the claimants released from liability for a business debt. In overruling the Debtors' objection to the claim, the bankruptcy court held that the Debtors failed to rebut the prima facie validity of the claim. For the reasons set forth below, the bankruptcy court's order overruling the Debtors' objection to claim is REVERSED.

ISSUES ON APPEAL

The issues presented in this appeal are: (1) Whether the bankruptcy court erred in finding that Mace made an enforceable oral agreement with the Kellys to release them from their liability as guarantors on a loan; and (2) Assuming the facts support a finding there was an oral agreement, did the bankruptcy court err in finding that the oral agreement gave rise to a legal liability for damages?

JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the BAP, and no party has timely elected to have this appeal heard by the district court. 28 U.S.C. § 158(b)(6), (c)(1). A “final” order of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 797, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (internal quotations and citations omitted). A bankruptcy court's order overruling debtor's objection to claim is a final order for purposes of appeal. Morton v. Morton (In re Morton), 298 B.R. 301, 303 (B.A.P. 6th Cir.2003) (citation omitted).

This Panel reviews the bankruptcy court's findings of fact for clear error. Fed. R. Bankr.P. 8013; Rosinski v. Boyd (In re Rosinski), 759 F.2d 539, 540 (6th Cir.1985). “A finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Anderson v. City of Bessemer City, N. C., 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (citation omitted) (internal quotation marks omitted). The Panel reviews the bankruptcy court's conclusions of law de novo. See, e.g., Corzin v. Fordu (In re Fordu), 209 B.R. 854, 857 (B.A.P. 6th Cir.1997), aff'd,201 F.3d 693, 696 n. 1 (6th Cir.1999).

A “court's rulings on evidentiary matters will only be reversed on a clear showing of abuse of discretion.” In re Creekside Senior Apartments, L.P., 477 B.R. 40, 46 (B.A.P. 6th Cir.2012)(internal quotation marks and citations omitted). A court has broad discretion in ruling on evidentiary requests and those decisions will only be reversed if the abuse of discretion caused more than harmless error.” In re Pertuset, 485 B.R. 478 (B.A.P. 6th Cir.2012) (internal quotation marks and citations omitted). “This means the appellate court will defer to the trial court's findings of fact ‘unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses.’ “ Nat'l City Bank. v. Plechaty (In re Plechaty), 213 B.R. 119, 121 (B.A.P. 6th Cir.1997) (citing Fed. R. Bankr.P. 7052; Fed.R.Civ.P. 52(a)). “If the district court's account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently. Where there are two permissible views of the evidence, the fact finder's choice between them cannot be clearly erroneous.” Anderson, 470 U.S. at 573–74, 105 S.Ct. at 1511.

FACTS

Carl Mace and Cindy Mace (collectively “Debtors”) ¹ filed their Chapter 13 petition for bankruptcy relief on July 30, 2010. The Debtors listed Timothy Kelly and Sharon Kelly (collectively “Kellys”) ² on schedule F of their petition with an unsecured claim resulting from a civil suit. The Debtors listed the claim as “disputed” and represented that the amount of the claim was “unknown.”

On October 21, 2010, the Kellys filed an unsecured proof of claim in the Debtors' case in the amount of $313,781.36 (Proof of Claim No. 13–1). As the basis for the claim, the Kellys listed “promise to assume guarantee liability on FNB note.” ( Id.). The Kellys did not include any documents to support their claim.

On May 26, 2011, the Debtors filed an objection denying any and all liability to the Kellys on their claim and arguing that “[t]he claim is not supported by a statement of facts or other documents to support the basis of the claim.” (Docket No. 114, Amended Obj. to Proof of Claim at 1–2). The Debtors requested that the bankruptcy court find “that because of the sparse and speculative nature of the claim, it shall not be entitled to prima facie validity” and therefore, the Kellys bear the burden of proving the legitimacy of their claim by a preponderance of the evidence. ( Id.).

On June 22, 2011, the Kellys filed a response to the Debtors' objection to claim and attached two documents in support of their claim: (1) A letter from FNB dated April 21, 2008, notifying the Kellys that the FNB note matured and was due in full, and the bank would initiate legal proceedings against them as guarantors if a plan for payment was not put in place by April 30, 2011; and (2) A deposition transcript wherein the Kellys allege Mace acknowledged his promise to release the Kellys as guarantors on the FNB note. (Docket No. 117, Resp. to Amended Obj. to Proof of Claim).

On May 29, 2012, the bankruptcy court conducted an evidentiary hearing on the Debtors' objection to the Kellys' claim. On June 15, 2012, the bankruptcy court issued a Memorandum Opinion and entered an order overruling the Objection to Claim and allowing the Kellys' unsecured claim in full (Docket No. 152, Memo. Op.). In issuing its opinion, the bankruptcy court framed the only issue in the case as follows: “[W]hether there is sufficient evidence to support the existence of the alleged oral agreement.” ( Id. at 10). After hearing the testimony of Carl Mace, Timothy Kelly, Thomas Skelton and reviewing the documentary evidence submitted by the parties, the bankruptcy court determined that the evidence supported the Kellys' argument that the oral agreement did exist, that it was enforceable, and that Mace had breached it. The court allowed the Kellys' claim in the amount of $313,781.36. The Debtors filed a timely notice of appeal on June 29, 2012.

The dispute in this case centers around a corporation known as K & M Feeds, Inc. (“K & M”), and debts associated therewith. In December 1995, Kelly and Mace formed K & M for the purpose of operating a hardware and livestock feed store in Pennsylvania. Both of them owned a one-half interest in K & M with Mace serving as K & M's president and Kelly serving as secretary and treasurer. In late 1997, Kelly took over responsibility for the day-to-day operations at K & M's store for which he was paid a salary. Kelly stayed in that position until May 2004.

In 1998, K & M entered into a loan agreement with First National Bank of Slippery Rock (“FNB”) (“1998 Loan”). The Debtors, the Kellys, K & M, and a K & M employee, Dan Travolini, were obligated on that loan. As collateral for the 1998 Loan, Mace pledged his home and farm in Ohio and executed a personal guaranty. Kelly and Dan Travolini also personally guaranteed the loan. None of the parties indicated how much K & M borrowed from FNB under the 1998 Loan.

Some time after the 1998 Loan was executed, the Debtors and the Kellys entered into an agreement titled “One Year Agreement.” (Docket No. 126–1, Exhibit 1 to Memo. in Support of Debtors' Obj. to Proof of Claim). The agreement provided as follows:

1. K & M agree [sic] that all stock in K & M Feeds, Inc. should be transferred to Carl V. Mace.

2. K & M agrees to execute a Promissory Judgment Note to Timothy S. Kelly and Sharon L. Kelly, his wife [sic] in the amount of $40,000.00. In the event of the sale of K & M, Timothy S. Kelly and Sharon L. Kelly, his wife [sic] shall be reimbursed [sic] the sum of $40,000.00 to carry out the terms of the Promissory Judgment Note.

3. Timothy S. Kelly and Sharon L. Kelly, his wife [sic] shall be authorized to purchase all outstanding shares of K & M for the sum of $40,000.00. The parties agree that the buy-out shall be re-evaluated and reviewed yearly and a written document acknowledged [sic] by K & M and Mace based on the equity of the business. Real estate owned by Carl V. Mace in Ohio shall be released from the business debt at the time of this transfer.

4. In the event of the death of Carl V. Mace the parties agree that all outstanding shares of K & M shall be transferred to Timothy S. Kelly. It is agreed that the estate of Carl V. Mace shall finance K & M Feeds, Inc., but no transfer of stock shall occur until the outstanding debt owed by Timothy S. Kelly and Sharon L. Kelly is paid in full. Stock shall be transferred only in conjunction with or subsequent to the release of Ohio real...