In re Today's destiny, Inc., Case No: 05-90080 (Bankr. S.D. Tex. 11/26/2008)

• Decision Date: 26 November 2008
• Docket Number: Case No: 05-90080
• Parties: IN RE: TODAY'S DESTINY, INC. Chapter 7, Debtor(s)
• Court: U.S. Bankruptcy Court — Southern District of Texas

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IN RE: TODAY'S DESTINY, INC. Chapter 7, Debtor(s)

Case No: 05-90080

United States Bankruptcy Court, S.D. Houston Division.

November 26, 2008.

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

Background

On October 13, 2005, Today's Destiny, Inc. ("Debtor") filed a chapter 7 bankruptcy petition. Debtor was in the business of selling "predictive dialing equipment" to dentists and chiropractors ("Customers"). "Predictive dialing equipment" is designed to increase the efficiency of telemarketers by connecting marketing agents only to "live" persons rather than unanswered phones, voice mail, or answering machines. Various financial institutions ("Lenders") financed the equipment sales and leases by entering into agreements with Customers.¹

Customers have filed over 300 proofs of claim for damages arising from the sales and leases. Customers largely contend that Debtor sold them worthless equipment while leaving each Customer obligated to make approximately $30-40,000 in lease or note payments to Lenders. As of October 29, 2008, Customers' proofs of claim amounted to over $20,000,000.

On March 21, 2006, the chapter 7 Trustee filed an adversary proceeding against Debtor's principals and Lenders. The Trustee contends that Debtor and Lenders conspired to defraud Customers through the fraudulent sale and leasing of the predictive dialing equipment. The Trustee's adversary complaint seeks contribution and indemnity from Lenders for Today's Debtor's liability on Customers' proofs of claim. Debtor's principals ("Insiders")² deny the allegations and Lenders deny any basis for joint liability.

During February through April of 2007, Insiders and Lenders filed Motions to Dismiss, Motions for More Definite Statement, and Motions to Abstain with respect to the Trustee's complaint. On April 11, 2008, the Court issued a Memorandum Opinion resolving a number of issues raised in the Insiders' and Lenders' motions. In re Today's Destiny, Inc., 388 B.R. 737 (Bankr. S.D. Tex. 2008).

One issue resolved by the April 11 Opinion was whether the Trustee could assert a contribution claim against Lenders. Lenders argued that the Trustee could not assert a contribution claim based on Today's Destiny's liability arising from proofs of claim, in part, because proofs of claim do not constitute judgments. Id. at 754. The Court noted that an essential prerequisite to a contribution claim is a "fixed" liability. Id. The Court used its discretion to set a deadline for objections to proofs of claim and explicitly authorized any Lender to file an appropriate objection. Id. at 755. The Court stated that, after all objections were resolved, the Court would issue orders allowing or disallowing the proofs of claim. At that point, Today's Destiny's liability on the proofs of claim would be "fixed." Id. Accordingly, the Court held that the Trustee could assert a contribution claim under the Texas Civil Practices and Remedies Code.M at 751.

Since the Court issued its April 11 Opinion, Lenders have objected to all of Customers' proofs of claim. Lenders primarily contend that the proofs of claim should be disallowed because the proofs do not contain the documentation and factual basis required by the Bankruptcy Rules.³ Lenders, largely, do not contest that Customers contracted with Debtor and Lenders or Customers' allegations that Debtor defrauded Customers by selling them worthless equipment.

On July 16, 2008, the Court held a hearing on the objections and made oral rulings with respect to how the Court would resolve the objections. The Court issues this Memorandum Opinion in support of its oral rulings.

Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. Venue is proper in this District pursuant to 28 U.S.C. §1408. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).

Proofs of Claim

The claim allowance process is governed by §§ 501 and 502 of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure 3001 and 3002. Sections 501 and 502 define what claims are allowed and disallowed. Rule 3001 prescribes the procedure for adjudicating claim objections. The Rule essentially assigns burdens of proof once a party in interest has made a valid objection to a proof of claim. Rule 3001 does not add or subtract to the substantive rights provided in §§ 501 and 502. Rule 3002 generally defines the place and deadlines for filing proofs of claim.

i Sections 501 and 502

Section 502(a) provides that a timely filed proof of claim shall be deemed allowed by the bankruptcy court unless a party in interest objects. 11 U.S.C. § 502(a).⁴ Section 502(b)(l)-(9) lists nine separate grounds for disallowing a proof of claim. 11 U.S.C. § 502(b).⁵ If an objecting party does not raise a basis for disallowance provided by § 502(b), the court "shall allow" the claim. The statute explicitly provides that the court "shall allow such claim in such amount, except to the extent that" a grounds for allowance provided by § 502(b)(l)-(9) applies. Id. (emphasis added); B-Line, LLC v. Kirkland (In re Kirkland), 379 B.R. 341, 345 (B.A.P. 10th Cir. 2007).

Section 5 02(b)'s nine grounds for disallowance do not include failure to comply with Bankruptcy Rule 3001. Bankruptcy Rules may not contravene substantive rights contained in the Bankruptcy Code. In re Padilla, 379 B.R. 643, 657 (Bankr. S.D. Tex. 2007) (citing 28 U.S.C. § 2075); In re Waindel, 65 F.3d 1307, 1309 (5th Cir. 1995). "The Rules implement the Bankruptcy Code." Id. "The Rules governing claims cannot vary the terms of the statute by providing additional bases for an objection." In re Kirkland, 379 B.R. at 345. Bankruptcy Rule 3001 allocates the burden of proof with respect to a proof claim for which an objecting party has raised an objection that would warrant disallowance under § 502(b). "Bankruptcy Rule 3001 does not enlarge the Debtors' statutory reasons to disallow a claim; it merely `defines the process by which [the claims] may be effected." In re Kirkland, 379 B.R. at 345 (citing In re Cluff, 313 B.R. 323, 332 (Bankr. D. Utah 2004)).

Accordingly, if an objecting party asserts only that the claimant's proof of claim does not comply with Bankruptcy Rule 3001, without asserting a ground for disallowance provided under § 502(b), a cognizable claim must be allowed. In re Kirkland, 379 B.R. at 343-44 (Section 502(b) "mandates that the court `shall allow' the claim, except to the extent it falls within one of nine enumerated categories of prohibited claims. The statute does not list among the grounds for disallowance the proof of claim's failure to adhere to the requirements of the Federal Rules of Bankruptcy Procedure, namely Rule 3001."); In re Heath, 331 B.R. 424, 435 (B.A.P. 9th Cir. 2005) ("objections that relied solely on the alleged lack of prima facie validity of the proofs of claims . . . [are] not a sufficient objection recognized by Section 502, which deems claims allowed and directs that the bankruptcy court `shall' allow claims with limited exceptions . . ."; Dove-Nation v. eCast Settlement Corp. (In re Dove-Nation), 318 B.R. 147, at 152 (B.A.P. 8th Cir. 2004) ("even if the claims had not substantially complied with Rule 3001, the claims are still allowed claims under Section 502 of the Bankruptcy Code unless the Debtor establishes an exception under Section 502(b)"); In re Chalakee, 385 B.R. 771, 775 (Bankr. N.D. Okla 2008) ("In the absence of a substantive objection based on one of the enumerated exceptions listed under § 502(b), the claim is deemed allowed, and Debtors' Objection on this basis is overruled."); In re Shank, 315 B.R. 799, 812 (Bankr. N.D. Ga. 2004) ("At a minimum, the bankruptcy rules must be interpreted as requiring that a challenge to a proof of claim assert a basis for its disallowance or reduction under 11 U.S.C. § 502(b) — the existence of at least a potential dispute — before the procedures governing the determination of disputes in the claims allowance process are even invoked.").

The Court finds the 10th Circuit B.A.P's interpretation of § 502(b) persuasive. In re Kirkland, 379 B.R. at 345. The Panel noted:

Section 502 uses mandatory language, by providing that the court "shall" allow a claim "except to the extent that" one of nine exceptions apply. None of these exceptions recognize the failure to adhere to the requirements of the Rules. The list of exceptions is not preceded by the word "including," which would have established a non-exclusive list. Thus, the statute speaks in absolute terms: the court "shall allow" a claim "except to the extent that" the claim falls into one or more of the enumerated categories of claims.

Id.

However, the claim must contain sufficient information for parties to discern the general basis of the claim. The Rules contemplate an objection based on the inability to determine the validity of a claim because of the claimant's failure to comply with Rule 3001. Rule 3007(d) states how omnibus objections shall be made. Subsection (6) specifically provides that objecting parties may object to a proof of claim if the validity of the claim cannot be determined because of the claimant's failure to comply with the Bankruptcy Rules. Fed. R. Bankr. P. 3007(d)(6)⁶ Accordingly, if an objecting party cannot discern whether there is a §502(b) objection to the claim because the claimant failed to comply with the Bankruptcy Rules, the Court does not read the Code and Rules as requiring allowance. Due process requires no less.

ii Rule 3001

Subsections (a)-(e) of Rule 3001 state how a proof of claim should be filed. Fed. R Bankr. P. 3001(e)-(f). A Proof of claim generally" shall be executed by the creditor or the creditor's authorized agent." Fed. R Bankr. P. 3001(b). If a claim is based on writing, the creditor generally must include the original or a duplicate of the writing. Fed. R. Bankr. P. 3001(c). If a claim alleges a security interest, the claimant must include evidence of a perfected security...