In re Mr. Movies, Inc.

• Decision Date: 23 December 2002
• Docket Number: No. 02-40311.,No. 02-40312.,No. 02-40310.,02-40310.,02-40311.,02-40312.
• Citation: 287 B.R. 178
• Parties: In re MR. MOVIES, INC., Andrews-Johnson, Inc., Tiger Lilly Corporation, Debtors.
• Court: U.S. Bankruptcy Court — District of Minnesota

287 B.R. 178

In re MR. MOVIES, INC., Andrews-Johnson, Inc., Tiger Lilly Corporation, Debtors.

No. 02-40310.

No. 02-40311.

No. 02-40312.

United States Bankruptcy Court, D. Minnesota.

December 23, 2002.

COPYRIGHT MATERIAL OMITTED

Michael L. Meyer, Ravich, Meyer, Kirkman, McGrath, Minneapolis, MN, for debtors.

ORDER ALLOWING CLAIM NO. 28 OF RENTRAK CORPORATION

NANCY C. DREHER, Bankruptcy Judge.

The above-entitled matter came on for hearing before the undersigned on October 16, 2002, on objections by Mr. Movies, Inc. ("Debtor") and the Official Committee of Unsecured Creditors ("the Committee") to Claim Number 28 filed by Rentrak Corporation ("Rentrak"), and on a motion for sanctions against Debtor's counsel filed by Rentrak. Appearances were noted on the record. The court, having considered the evidence, the arguments of counsel, and all of the files, pleadings, and records herein, makes the following:

FINDINGS OF FACT

Throughout much of 2001, Debtor and Rentrak were engaged in litigation in state court in Oregon concerning amounts allegedly owing to Rentrak for Debtor's failure to pay a promissory note and accrued interest, failure to pay amounts owing under Rentrak's National Account Agreement, failure to pay revenue sharing fees, damages for unreturned video tapes, and for Rentrak's lost revenue resulting from breach of contract. At the same time, Seacoast Capital ("Seacoast"), Debtor's largest secured creditor, was actively attempting to structure a workout arrangement amongst all of Debtor's creditors. Part of its efforts included negotiations with Rentrak in anticipation of Debtor filing a chapter 11 bankruptcy case. Seacoast offered to set aside funds from a foreclosure or chapter 11 asset sale if Rentrak would accept a cash payment of $145,000.00, if paid by June 30, 2002, in full settlement of all amounts owed by the Debtor.

In light of Seacoast's offer, and rather than proceeding to litigation, Rentrak and Debtor stipulated to the entry of a judgment against Debtor and, contemporaneously with the judgment, a Settlement Agreement And Covenant Not To Execute ("Agreement"). The stipulated judgment was approved by the state court judge on January 22, 2002, then Mr. Movies filed Chapter 11 on January 24, 2002, and judgment was entered on January 29, 2002.¹ In Schedule F of its bankruptcy petition, Debtor listed Rentrak's claim in the amount of $690,000 and did not indicate it was contingent, unliquidated, or disputed.

The stipulated judgment was in the amount of $690,239.59 plus interest accruing from October 1, 2001, costs, disbursements, and attorneys' fees. This amount corresponded precisely to the amounts that Rentrak had sought for breach of contract damages and damages attributable to failure to pay principal and interest due on the promissory note. It did not include liquidated damages that Rentrak could have sought under Section 3.2 of an Addendum to the National Account Agreement dated August 17, 1998. The stipulated judgment, however, only specified the principal amount of the judgment, prejudgment interest, the formula for calculation of post-judgment interest, costs, and attorney's fees. It did not make any factual findings as to the actual amounts owing under each count of Rentrak's complaint.

In the Agreement, Debtor acknowledged and agreed that it was "obligated to Rentrak for claims as set forth in Rentrak's First Amended Complaint in the sum of $690,239.50," plus interest, costs and fees. The Agreement provides that it is "governed by and construed and enforced in accordance with the laws of the state of Oregon ..." and further provides that Rentrak would not take any steps to execute on the stipulated judgment before June 30, 2002. If Debtor or Seacoast paid Rentrak $145,000.00 by June 30,2002, and the payment was not recovered as a preference or otherwise avoided, Rentrak would satisfy the judgment against Debtor. If Debtor or Seacoast failed to pay $145,000.00 prior to the deadline, Rentrak was free to execute on its judgment.

Prior to the June 5, 2002, claim filing deadline, Rentrak filed a timely proof of claim in the amount of $756,187.19, representing the amount of the stipulated judgment, interest and costs. On September 13, 2002, Debtor objected to Rentrak's claim. Debtor acknowledged an indebtedness to Rentrak of only $350,000, and asserted that it was prevented from paying Rentrak the $145,000 before June 30, 2002 by the terms of the Plan of Reorganization which had been confirmed by order dated August 14, 2002. The Committee joined in Debtor's objection, asserting that the claims should be allowed only for $145,000, $350,000, or whatever sum the court held was actually due regardless of the amount of the stipulated judgment. It also asserted separately that whatever the amount allowed, Rentrak's claim should be subordinated to the other general unsecured creditors, pursuant to 11 U.S.C. § 510(c), to the extent Rentrak's claim exceeds $145,000. Debtor later joined in this request for subordination.

CONCLUSIONS OF LAW

A. BURDEN OF PROOF

A proof of claim is deemed allowed unless a party in interest objects and constitutes "prima facie evidence of the validity and amount of the claim" pursuant to Federal Rule of Bankruptcy Procedure 3001(f). 11 U.S.C. § 502(a); FED. R. BANKR. P. 3001(f); see also FED. R. BANKR. P. 3007. The burden of proof is a "substantive" aspect of a claim and "one who asserts a claim is entitled to the burden of proof that normally comes with it." Raleigh v. Illinois Dep't of Revenue, 530 U.S. 15, 21, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). Once Debtor and the Committee objected, if Rentrak's proof of claim provides "some evidence as to its validity and amount" and the evidence is "strong enough to carry over a mere formal objection without more [,]" then Rentrak meets its initial burden of proof. Wright v. Holm (In re Holm), 931 F.2d 620, 623 (9th Cir.1991) (citing 3 LAWRENCE P. KING, COLLIER ON BANKRUPTCY ¶ 502.02, at 502-22 (15th rev.ed.1991)).

Since the proof Rentrak provides of its claim is evidence of a valid state court judgment against Debtor, the claim is allowed unless the Committee or the Debtor present sufficient evidence and "show facts tending to defeat the claim by probative force equal to that of the allegations of the proofs of claim themselves." In re Holm, 931 F.2d at 623. Neither the Committee nor Debtor, however, produced any evidence to dispute the validity of Rentrak's judgment. If they had, the burden would revert back to Rentrak to prove the validity of its claim by a preponderance of the evidence since the ultimate burden of persuasion remains at all times upon the claimant. Lundell v. Anchor Constr. Specialists, Inc., 223 F.3d 1035, 1039 (9th Cir.2000).

B. THE ISSUES

As this matter developed, it became clear that the parties have raised the following issues:

1) Are the Debtor and the Committee barred by any preclusion doctrine from relitigating the amount due on the claim?

2) Is the contract to pay the judgment in full unless the $145,000 payment was made before June 30, 2002, void due to the doctrine of impossibility?

3) Is the Debtor excused from its agreement to pay the agreed-upon amount as memorialized in the judgment because Rentrak materially breached the contract when it filed its proof of claim for the contracted-for amount on March 8, 2002, well in advance of the June 30, 2002 payment deadline?

4) Should the allowed claim be subordinated under § 510(c) of the Bankruptcy Code?

C. SUMMARY JUDGMENT

All parties in interest have assumed that these issues are ripe for determination without evidentiary hearing. In essence, they have all treated the objection and responses as cross-motions for summary judgment and have asserted that there are no material facts to be decided which would foreclose the entry of summary judgment. This is appropriate under the Federal Rules of Bankruptcy Procedure. See FED. R. BANKR. P. 3007 ("If an objection to a claim is joined with a demand for relief of the kind specified in Rule 7001, it becomes an adversary proceeding."); FED. R. BANKR. P. 7001 ("The following are adversary proceedings: ... (8) a proceeding to subordinate any allowed claim or interest, except when a chapter 9, chapter 11, chapter 12, or chapter 13 plan provides for subordination"); and FED. R. BANKR. P. 9014(C) (making Rule 7056 applicable to contested proceedings).

Summary judgment is governed by Federal Rule of Civil Procedure 56, which is made applicable to this motion by Bankruptcy Rule 9014. Rule 56 provides:

The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

FED. R. CIV. P. 56(c). The moving party on summary judgment bears the initial burden of showing that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

The party with the burden must present evidence that establishes all elements of its claim or defense. Celotex, 477 U.S. at 325, 106 S.Ct. 2548; United Mortg. Corp. v. Mathern (In re Mathern), 137 B.R. 311, 314 (Bankr.D.Minn.1992), aff'd, 141 B.R. 667 (D.Minn.1992). When the moving party has met its burden of production under Rule 56(c), the burden then shifts to the nonmoving party to produce evidence that would support a finding in its favor. Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). This responsive evidence must be probative, and must "do more than simply show that there is some metaphysical doubt as to the material fact." Matsushita, 475 U.S. at 586, 106 S.Ct. 1348. If the nonmoving party fails to come forward with specific facts showing that there is a genuine issue for...