Memorandum of Decision and Ruling
Ann M. Nevins, United States Bankruptcy Judge, District of Connecticut.
Eternal Enterprise, Inc. ("Debtor"), the chapter 11 debtor and debtor-in-possession in the underlying bankruptcy proceedings here, case number 14-20292 (AMN)("Main Case")
In addition to objecting to the Debtor scheduling the Purported Loan as an unsecured debt (the "First Count"), pursuant to Fed.R.Bankr.P. 3007(b), the Complaint further seeks to recharacterize the Purported Loan as an equity contribution pursuant to 11 U.S.C. §§ 105(a) and 502(b)(4) (the "Second Count") or, in the alternative, to equitably subordinate the Purported Loan under 11 U.S.C. § 510(c) (the "Third Count"). After considering the parties' pleadings, memoranda, the relevant documents filed on the docket in this adversary
A trial on the Complaint was held on May 23, 2016, see AP-ECF Nos. 59 and 60, and concluded on June 8, 2016, see AP-ECF No. 65, after which the court took the matter under advisement. At the request of the parties, the trial was consolidated with Hartford Holdings, LLC v. Mladen et. al., Adv. Pro. No. 15-02034 (AMN) due to the significant overlap in relevant facts. A separate Order and Opinion for Hartford Holdings, LLC v. Goran Mladen, Adv. Pro. No. 15-02034 (AMN) entered on September 16, 2016.
The Defendant, Goran Mladen, was represented by counsel but was not present at the trial. Defendant's counsel informed the court that he had spoken with Defendant prior to the trial and that the Defendant had represented to him that: 1) he was unavailable to attend; 2) he did not intend to testify regarding his claim against the Debtor; and, 3) he would rely instead on the documentary evidence produced during discovery as well as the testimony of his parents, Vera Mladen and Dusan Mladen, to establish the facts and circumstances relevant to the Purported Loan transaction. See AP-ECF No. 59 at 0:40-2:45.
Jurisdiction, Venue, and Standing
This court has jurisdiction over this action pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(b). This adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate), (B) (allowance or disallowance of claims against the estate ... and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 ...), and (O) (other proceedings affecting debtor-creditor-equity security holder relationships). This adversary proceeding arises under the chapter 11 Main Case pending in this district; therefore, venue is proper in this district pursuant to 28 U.S.C. § 1409. The Plaintiff, HHLLC, has standing to seek the relief sought in the Complaint because, as a holder of secured and unsecured claims in the Debtor's chapter 11 case, it is a party in interest within the meaning of 11 U.S.C. § 1109. Moreover, HHLLC has proposed its own chapter 11 plan that provides for separate classification and disparate treatment of the Mladens' scheduled claim as compared to those of other general unsecured creditors.
Findings of Fact
Section 1111(a) of the Bankruptcy Code provides that a "proof of claim or interest is deemed filed under section 501 of this title for any claim or interest that appears in the schedules filed under section 521(a)(1) or 1106(a)(2) of this title, except a claim or interest that is scheduled as disputed, contingent, or unliquidated." 11 U.S.C. § 1111(a). Here, the Purported Loan was scheduled by the Debtor as an unsecured debt that was not disputed, contingent, or unliquidated. By operation of section 1111(a), the Purported Loan was therefore deemed filed as a claim under 11 U.S.C. § 501. Pursuant to 11 U.S.C. § 502(a), the Purported Loan would have been deemed allowed but for the objection of HHLLC, a party in interest in the Main Case. Even when a party in interest objects, 11 U.S.C. § 502(b) mandates that the court "shall allow" the claim "except to the extent" that one of the nine conditions of § 502(b)(1)-(9) apply.
Section 502(b)(1) of the Bankruptcy Code provides that a court shall disallow a claim to the extent that "such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured." 11 U.S.C. § 502(b)(1). Here, the "applicable law" that determines whether the Defendant's claim is enforceable against the Debtor is a question of state law:
Travelers Cas. and Sur. Co. of Am. v. P. Gas and Elec. Co., 549 U.S. 443, 450-51, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) (some citations omitted).
In the present case, the applicable choice of law rules are those of the forum state, Connecticut. See, In re Gaston & Snow, 243 F.3d 599, 602 (2nd Cir. 2001) (enforceability of claims against debtor based on state law required application of choice of law rules of forum state); but see, In re Coudert Bros. LLP, 673 F.3d 180, 191 (2nd Cir. 2012) (distinguishing Gaston and holding that bankruptcy courts should apply the choice of law rules for the state in which a prepetition complaint was filed under circumstances not present here). Here, the Defendant's claim is based on a Purported Loan, the terms of which, if ever reduced to a writing, were not introduced into evidence at trial. Assuming arguendo that the Defendant actually advanced funds to the Debtor, and that the repayment of those funds was governed by an agreement, the Defendant's claim is based on a contract.
As the District Court of Connecticut noted in Aruba Hotel Enterprises N.V. v. Belfonti, it is well settled that Connecticut courts apply the "modern" choice of law rules as found in the Restatement (Second) of Conflict of Laws (1971) (the "Restatement"), "which directs courts to adopt the `most significant relationship' approach when analyzing choice of law issues." Aruba Hotel Enterprises N.V. v. Belfonti, 611 F.Supp.2d 203, 208-09 (D. Conn. 2009) (citing Am. States Ins. Co. v. Allstate Ins. Co., 282 Conn. 454, 461, 922 A.2d 1043 (2007)). Section 188 of the Restatement controls when, as here, there is no choice of law provision in the contact because there is no written contract, and provides that "[t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6."
Burden of Proof
Although the substance of a claim is determined by state law, the Federal Rules of Bankruptcy Procedure supplement the Federal Rules of Evidence to allocate evidentiary burdens when claims that have been deemed filed are challenged. See Adv. Comm. Notes to Fed. R.Bank.P. 3001 and Fed.R.Evid. 1101.
Fed.R.Bankr.P. 3003(b)(1), cf., Fed. R.Bank.P. 3001(f). Accordingly, the party objecting to the claim — here, the Plaintiff, HHLLC — bears the initial burden of production to provide evidence the claim is legally insufficient, i.e. that it is unenforceable against the Debtor under applicable law. In re Arcapita Bank B.S.C.(c), 508 B.R. 814, 817 (S.D.N.Y. 2014). "To overcome this prima facie evidence, the objecting party must come forth with evidence which, if believed, would refute at least one of the allegations essential to the claim." In re Reilly, 245 B.R. 768, 773 (2nd Cir. BAP 2000). "The burden then shifts to the claimant, who must `prove by a preponderance of the evidence that under applicable law the claim should be allowed.'" In re Arcapita Bank B.S.C.(c), 508 B.R. at 817 (quoting In re Oneida, Ltd., 400 B.R. 384, 389 (Bankr. S.D.N.Y. 2009)). Ultimately, the claimant always bears the burden of persuasion regarding the allowance of its claim. See, In re Feinberg, 442 B.R. 215, 221 (Bankr. S.D.N.Y. 2010).
Application of the Law to the Facts
Here, the Plaintiff successfully rebutted any prima facie presumption regarding the Defendant's scheduled claim against the Debtor by establishing that any money loaned to the Debtor by Goran Mladen individually was advanced through Goran's Investors, Inc. and that any terms of the Purported Loan were not memorialized in writing. See, In re Arcapita Bank B.S.C.(c), 508 B.R. at 817. This evidence is sufficient to negate an essential representation upon which the Defendant's claim against the Debtor relies — that Goran Mladen personally lent $54,276.00 to the Debtor. See, In re Reilly, 245 B.R. at 773. Furthermore, as any terms of the Purported Loan were never reduced to a writing, any enforcement action brought by the Defendant against the Debtor under Connecticut law would likely be barred by the statute of limitations, see Conn. Gen. Stat. § 52-576, and the statute of frauds, see Conn. Gen. Stat. § 52-550. Accordingly, Goran Mladen bore the burden of proving, by a preponderance of the evidence, that the Purported Loan was enforceable against the Debtor under Connecticut state law.
Goran Mladen failed to establish that the Purported Loan was enforceable against the Debtor under Connecticut state law. At trial, the only testimony in support of the existence of the Purported Loan was presented by Vera Mladen, who did not recall the amount of money loaned or the circumstances surrounding the Purported Loan. See Findings of Fact, ¶ 13, supra. The only documentary evidence in support of the Purported Loan was a check from Goran's Investors, Inc. for $180,000.00 payable to the Debtor, signed by Goran Mladen and dated December 16, 2004. See Def.'s Ex. 2A. Contrary to the theory advanced by Defendant's counsel, Dusan Mladen testified that he alone had an interest in the funds advanced through Goran's Investors, Inc. See Findings of Fact, ¶ 16-19. The Defendant provided no evidence to support the theory that his ownership interest in Goran's Investors,
Assuming arguendo that Goran Mladen did have an ownership interest in Goran's Investors, Inc., and that the $54,276.00 scheduled by the Debtor could be attributable to this interest and the $180,000.00 advance from Goran's Investors, Inc., the Defendant's claim would still not constitute an enforceable debt against the Debtor under Connecticut state law. First, enforcement of the Purported Loan would be barred by the statute of frauds under Connecticut law. Conn. Gen. Stat. § 52-550(a)(6) provides
No writing documenting the Purported Loan, scheduled in the amount of $54,276.00, was presented during trial. See Findings of Fact, ¶ 10.
Second, enforcement of the Purported Loan would be barred by the statute of limitations under Connecticut law. See, Conn. Gen. Stat. § 52-576 (actions for an account, or on any simple or implied contract must be brought within six years); Conn. Gen. Stat. § 52-576 (action on any express contract or agreement not reduced to writing must be brought within three years). No evidence substantiating any payments on the Purported Loan by the Debtor was presented at trial. See Findings of Fact, ¶ 11. The transfer from Goran's Investors, Inc. to the Debtor was effected on December 16, 2004, over 9 years before the Debtor filed for chapter 11 bankruptcy protection. See Findings of Fact, ¶ 3. Accordingly, the limitations period on any cause of action to collect on the Purported Loan would have lapsed long before the Debtor filed its bankruptcy petition.
Conclusion and Order
Based on the scant record here, the court is compelled to conclude that Goran Mladen's Purported Loan is unenforceable against the Debtor under Connecticut state law. After considering the parties' pleadings, memoranda, the relevant documents filed on the docket in this adversary proceeding and the Debtor's Main Case, the arguments and testimony made during the trial, and for the reasons stated above, it is hereby
ORDERED, that HHLLC's objection to the scheduled $54,276.00 Purported Loan advanced by the Defendant is SUSTAINED; and it is further
ORDERED, the Defendant's scheduled claim of $54,276.00 is disallowed as an unsecured claim; and it is further
ORDERED, that judgment on Count One of the Complaint shall enter in favor of the plaintiff; and it is further
ORDERED, that judgment on Count Two of the Complaint shall not enter in favor of the plaintiff because the relief sought is MOOT; and it is further
ORDERED, that judgment on Count Three of the Complaint shall not enter in favor of the plaintiff because the relief sought is MOOT; and it is further
ORDERED, that the Debtor shall file amended schedules reflecting the effect of this Order by no later than September 30, 2016.
Travelers Cas. and Sur. Co. of Am. v. P. Gas and Elec. Co., 549 U.S. 443, 449, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007).
Allstate, 282 Conn. at 467-68, 922 A.2d 1043. Furthermore, section 188(2) lists five contacts to be considered in applying the principles set forth in § 6 to a contract dispute:
Id. at 468, 922 A.2d 1043.