In re Stoecker, 92 C 4388.

• Decision Date: 14 September 1992
• Docket Number: No. 92 C 4388.,92 C 4388.
• Parties: In re William J. STOECKER, Debtor. BANK OF BELLWOOD, Appellant/Cross-Appellee, v. William J. STOECKER, Appellee/Cross-Appellant.
• Court: U.S. District Court — Northern District of Illinois

143 B.R. 879 (1992)

In re William J. STOECKER, Debtor.

BANK OF BELLWOOD, Appellant/Cross-Appellee, v. William J. STOECKER, Appellee/Cross-Appellant.

No. 92 C 4388.

United States District Court, N.D. Illinois, E.D.

September 14, 1992.

Kenneth Winter Bley and Keevan David Morgan, Durkin, Morgan, Roberts, Barnett & Bley, Chicago, Ill., for appellant.

Robert Radasevich, Neal, Gerber & Eisenberg, Chicago, Ill., for appellee.

Robert Radasevich, Tracy L. Potter, George Michael Hoffman, and James H. Bowhay, Neal, Gerber & Eisenberg, Chicago, Ill., for trustee.

ORDER

NORGLE, District Judge.

Before the court is the appeal of the Bank of Bellwood ("Bellwood") and the cross-appeal of Thomas E. Raleigh, as Trustee of the Estate of William J. Stoecker ("Trustee"), from the United States Bankruptcy Court for the Northern District of Illinois. For the following reasons, the decision of the bankruptcy court is reversed in part and affirmed in part.

FACTS

Bellwood's appeal is from the bankruptcy court's order dated February 28, 1992 143 B.R. 118 and reconsideration order dated May 26, 1992, 1992 WL 132566, disallowing Bellwood's proof of claim for failure to comply with Bankruptcy Rule 3001.¹ The Trustee cross-appeals from the portion of these orders holding that an earlier settlement agreement the Trustee and Bellwood entered into barred the Trustee from objecting to the proof of claim and holding that the doctrine of res judicata precluded the Trustee from objecting to the proof of claim.

On January 30, 1987, William J. Stoecker ("Stoecker") borrowed $750,000 from Bellwood, evidenced by a promissory note, with the principal amount due on February 1, 1989 and interest payable monthly. On February 21, 1989, an involuntary petition for bankruptcy was filed against Stoecker. During the ninety days preceding the bankruptcy petition, Bellwood allegedly obtained a judgment by confession on the loan. Bellwood claims it then perfected liens on Stoecker's property by the recording of memoranda of judgment against some of Stoecker's real property and the placing of writs of execution with the sheriff to seize personal property. Also, citations to discover assets were issued and levies were made.

On August 15, 1989, Bellwood filed its proof of claim against the Estate asserting a secured claim in the form of judgment liens on various Estate assets. This proof of claim contained a description of Bellwood's liens in some detail, although it failed to list the specific property which was the subject of the liens. More importantly, Bellwood failed to attach to the proof of claim the underlying documents evidencing the loan, the memoranda of judgment, and the executions perfecting the judgment liens as required by Bankruptcy Rule 3001.

The Trustee subsequently filed an adversary proceeding against Bellwood concerning interest payments Stoecker made on the loan in December 1988 and January 1989, the two months preceding the bankruptcy petition. The Trustee did not raise objections to Bellwood's proof of claim, which was based on judgment liens also allegedly perfected within ninety days of the petition. The Trustee claimed the interest payments were avoidable preferential transfers under section 547(b) of the Bankruptcy Code. The parties settled the adversary proceeding. The settlement agreement provided that Bellwood's distribution from the Estate would be reduced by the sum of $11,333.33. Further, the agreement released the Trustee and the Estate from all claims which Bellwood could assert, except those set forth in Bellwood's proof of claim. Additionally, the agreement released Bellwood from any claims that the Trustee asserted or could have asserted in the adversary proceeding.

On August 27, 1991, the Trustee filed objections to the proofs of claims Bellwood and various other creditors filed. Essentially, the Trustee argued that the bankruptcy court should treat Bellwood's claim as a general unsecured claim, although Bellwood asserted a secured claim, because Bellwood's security resulted from avoidable preferential transfers under section 547(b). Accordingly, the Trustee argued, the bankruptcy court should disallow the claim under section 502(d).

During an October 11, 1991 hearing, Bellwood agreed to waive the formal presentation of evidence because the Trustee, on invitation of the bankruptcy court, stipulated that the Trustee did not object to allowing Bellwood's claim as a general unsecured claim and stipulated that there was no objection as to the amount of the claim. Both parties stipulated to the facts in the Trustee's Request for Admissions, including that Bellwood perfected judgment liens in the amount of $750,000. The bankruptcy court set a December 16, 1991 hearing date and afforded the parties an opportunity to introduce evidence. The parties felt that an evidentiary hearing would be unnecessary because the only facts relevant to the bankruptcy court's determination were undisputed: that the security interest Bellwood admittedly procured benefited Bellwood and that it was procured while the debtor was insolvent and within ninety days before the bankruptcy petition. Both counsel stipulated that the earlier settlement agreement, the order dismissing the adversary proceeding, and Bellwood's proof of claim were "uncontested facts." In relation to the pending section 502(d) objection, the Trustee's attorney stated, "I don't know what issue, what facts, remain to be tried. I think it is a purely legal question before the court." The Trustee's attorney also stated, "there is no need for any evidence from the trustee's perspective." Consequently, the parties did not supplement their pleadings with oral testimony or other evidentiary matters. In essence, Bellwood's proof of claim was uncontested except for the Trustee's objection based on section 547(b).

The bankruptcy court treated the Trustee's objection as a contested matter under Fed.R.Bankr.P. 9014 and, in an order dated February 28, 1992, disallowed Bellwood's secured claim because Bellwood failed to support the claim with the writings upon which it based its claim or with evidence that it perfected its liens pursuant to Bankruptcy Rule 3001(c), (d). As a result, Bellwood's filed claim did not constitute sufficient evidence of the secured status of its claim and the bankruptcy court could not trace Bellwood's assertions to specific property or proceeds in the Trustee's possession. The court stated that Bellwood failed to prove its liens, "unavoidable though they might be."

Nonetheless, the bankruptcy court further held that the settlement agreement entered into between the Trustee and Bellwood in the adversary proceeding barred the Trustee from objecting to Bellwood's secured proof of claim. Further, the bankruptcy court determined that the agreed order dismissing the adversary proceeding also precluded the Trustee from objecting to Bellwood's proof of claim under the doctrine of res judicata. Both parties filed motions for reconsideration and the bankruptcy court, by order dated May 26, 1992, denied these motions.

On appeal, Bellwood raises numerous arguments against the disallowance of its claim for its failure to follow Bankruptcy Rule 3001. The Trustee appeals only from the bankruptcy court's decisions that the settlement agreement and the doctrine of res judicata barred his objection to Bellwood's proof of claim.

DISCUSSION

On an appeal from an order of the bankruptcy court, the district court reviews factual findings for clear error and reviews conclusions of law de novo. In re Bonnett, 895 F.2d 1155, 1157 (7th Cir.1989).

I. Appeal of the Bank of Bellwood.

The issue in Bellwood's appeal is whether the bankruptcy court properly disallowed Bellwood's claim sua sponte for failure to comply with Bankruptcy Rule 3001 when the Trustee's only objection to the creditor's claim is that the claim is avoidable under section 547(b), not that it is an invalid claim or that there is insufficient proof of such claim. The court concludes that the bankruptcy court erred when it disallowed Bellwood's claim without first providing sufficient opportunity for Bellwood to amend its proof of claim and proceed with its burden of proving its claim.

Bankruptcy Rule 3001(c) requires a creditor to attach a writing to its proof of claim if the creditor bases its claim on a writing, and Rule 3001(d) requires a creditor to accompany a proof of claim with evidence that the creditor perfected a security interest if it claims a security interest in property of the debtor. Compliance with the rule allows the proof of claim to constitute prima facie evidence of the validity of the claim. Fed.R.Bankr.P. 3001(f).

There is no authority for the proposition that the failure to attach documents to a proof of claim requires the bankruptcy court to disallow the claim on that basis. See In re Steele, No. 91-1384-K, No. 91-1386-K, No. 91-1387-K, 1992 WL 122756, 1992 U.S.Dist. LEXIS 8494 (D.Kan. May 29, 1992) (no support for the position that the failure to include attachments to proof of claim is a "permanent, incurable defect which deprives the claimants of the presumption created by Rule 3001(f)"; claimants had submitted four proofs of claims, one of which failed to contain supporting documents). The rule merely provides that a proof of claim does not constitute prima facie evidence of the claim's validity unless the proof of claim complies with the rules and sets forth facts necessary to support the claim. 8 Collier on Bankruptcy 3001-22 (1992).

Thus, the proper procedure for the bankruptcy court is not to disallow the claim if the claimant fails to strictly adhere to the rule; it should merely refuse to consider the proof of claim prima facie evidence of the claim's validity and should give the claimant an opportunity to amend or prove its claim. See First Nat'l Bank v. Circle J. Dairy (In re Circle J. Dairy, Inc.), 112 B.R. 297, 300 (W.D.Ark.1989) (where claim was facially defective...