United States Bankruptcy Appellate Panel of the Sixth Circuit
Submitted: May 14, 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, Ohio, for Appellants.
P. Raymond Bartholomew, BARTHOLOMEW, MUDRINICH & NESBIT, Hermitage, Pennsylvania, for Appellees.
Before: EMERSON, McIVOR, AND PRESTON, Bankruptcy Appellate Panel Judges.
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 (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 (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.
Carl Mace and Cindy Mace (collectively "Debtors") filed their Chapter 13 petition for bankruptcy relief on July 30, 2010. The Debtors listed Timothy Kelly and Sharon Kelly (collectively "Kellys") 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 estate owned by Carl V. Mace from the business debt and loan.
5. In the event of a buy out offer K&M shall not be sold unless Timothy S. Kelly gives approval of the buyout.
(Id. at 1-2). Mace testified that the statement in paragraph 3 providing for the release of his property as collateral for the 1998 Loan was included because "[t]he initial part of the buyout was to have my property released, to get forty thousand dollars ($40, 000) and to pay off any other existing vendor debt." (Docket No. 163, Tr. of Hr'g, p. 74).
Mace testified that the purpose of the One Year Agreement was to transfer all ownership of K&M's stock to him so he could attempt to sell the business. (Id. at 72). Although Kelly admitted that Mace did want to sell K&M, he also claimed that Mace needed "some form of paperwork for a Sky Bank loan that he had entered into." (Id. at 18). According to Kelly's testimony, Mace needed something on paper which indicated he owned K&M outright before he could obtain a loan from Sky Bank. (Id. at 19). Mace testified that he did not have a loan with Sky Bank at the time the One Year Agreement was executed, but that he subsequently obtained one in August 2002. Mace testified that the purpose of the Sky Bank loan was to pay off over $250, 000 in vendor debt Kelly had allegedly incurred while in charge of operations at K&M. (Id. at 73).
Although the One Year Agreement was dated January 1, 2002, it is undisputed that the agreement was not signed on that date. Rather, it was signed at a later time and then backdated with everyone's consent to January 1, 2002. Mace claims that it was signed "a couple days" after January 1, 2002. (Id. at 73). Kelly claims that the One Year Agreement was not signed until sometime between October and December 2002. (Id. at 14). In support of this claim, the Kellys submitted a copy of an October 23, 2002 letter from K&M's attorney, Robert Clark. The letter was addressed to the Kellys and the Debtors and stated "Please find enclosed a new draft of the Agreement and Promissory Judgment Note. . . . [W]e need to move forward by making arrangements to have them signed and have the stock transferred to Carl and Cindy." (Docket No. 136-2, Exhibit 1, Kellys' Reply Br. to Debtor's Amended Obj. To Proof of Claim). The Promissory Judgment Note provided for in the One Year Agreement states that "K & M Feeds, Inc., by Carl V. Mace . . . promises to pay to the order of Timothy S. Kelly and Sharon L. Kelly . . . Forty ($40, 000) Thousand at zero (0%) percent interest per annum." (Docket No. 126-3, Exhibit 3 to Memo. in Support of Debtors' Objection to Proof of Claim). Pursuant to its terms, the note matured on May 1, 2008. Although the note is also dated January 1, 2002, the parties agree it was backdated with everyone's consent. Both Kelly and Mace agree that the Promissory Judgment Note was not executed until April or May 2004.
The transfer of Kelly's stock in K&M was accomplished by Kelly's assignment of his shares on the back of the stock certificate. The assignment provides that "for value received, I hereby sell, assign and transfer unto Carl V. Mace shares represented by the within Certificate . . . ." (Docket No. 126-2, Exhibit 2 to Memo. in Support of Debtors' Obj. to Proof of Claim). Although the assignment indicates it was signed on January 1, 2002, the parties admit that it was consensually backdated. The parties do not agree, however, as to when the stock transfer took place. Kelly claims that he did not transfer the stock until April or May 2004. (Docket No. 163, Tr. of Hr'g, pp. 12, 49, 74). Mace claims that Kelly transferred the stock in early January 2002. (Id. at 74-75). Despite his contention that he did not transfer the stock until the spring of 2004, Kelly stopped reporting any capital gains or losses from the stock on his tax returns after 2001. (Id. at 13-14).
In late 2001 or early 2002, Kelly and Mace met with Thomas Skelton who owned a business adjacent to K&M. The three met and discussed the possibility of Skelton coming into K&M as a one-third owner; however, Skelton was never made a one-third owner of K&M. Instead, through the efforts of Kelly and Skelton, K&M refinanced the 1998 Loan with FNB, allegedly in anticipation of Kelly and Skelton purchasing Mace's interest in K&M. Mace was not involved in the negotiations for this loan. (Id. at 22). The loan was executed on May 24, 2002 ("2002 Loan"). The principal amount of the loan was $347, 000. The loan documents indicate that the purpose of the loan was "for business use to refinance existing debt." (Docket No. 126-4, Exhibit 4 to Memo. in Support of Debtors' Obj. to Proof of Claim). According to the loan's terms, K&M was to make monthly payments of $3, 130 for 60 months, with a balloon payment due at maturity in May 2007. Testimony given by Mace indicates that K&M made all monthly payments on the 2002 Loan with FNB until the Note came due in May of 2007.
Pursuant to the terms of the 2002 Loan, FNB released Mace's real property in Ohio as collateral. FNB also released Mace and Dan Travolini from their personal guaranties for the loan. The Kellys and the Skeltons became the new guarantors of the loan and they pledged the Skeltons' farm as collateral. At no point in time did Mace or Kelly transfer any K&M stock to Skelton and Skelton never had any formal ownership interest in the company. Despite this fact, Skelton signed the 2002 Loan as "Secretary/Treasurer" of K&M. Kelly signed the 2002 Loan as "President" of K&M. (Id.). On cross examination, Kelly admitted that there was no formal corporate resolution providing for these changes in K&M ownership, but he contended that he and Mace orally agreed to make Kelly president and Skelton secretary/treasurer for the limited purpose of executing the 2002 Loan documents. (Docket No. 163, Tr. of Hr'g, pp. 34-35). Mace disputed this allegation and testified that he did not recall ever giving Kelly or Skelton authority to act as president or secretary/treasurer, respectively, for any purpose. (Id. at 78).
As stated supra, the parties disagree about the timing of Kelly's transfer of his K&M stock. Mace contends it was transferred in January 2002, while Kelly asserts the transfer did not occur until sometime in 2004. Although the One Year Agreement provided for the transfer of Kelly's stock in exchange for the Promissory Judgment Note, Kelly testified that there was additional consideration for the transfer: Mace's oral promise to release the Kellys from their personal liability on the FNB debt. (Id. at 51). Mace vigorously disputes this contention and asserts that his offer to try and get the Kellys released from their personal liability was not made in exchange for the transfer of Kelly's K&M stock. (Id. at 76). Mace also testified that his offer was not an absolute guarantee that he would in fact obtain a release of the Kellys' liability:
A. Well, I can't remember guaranteeing anything. I cannot guarantee what the bank does. The bank has their own mind. They'll do what they want to do.
Q. Did you make any statement to Mr. Kelly that you would release him from the loan obligation?
A. I didn't, and I did follow up on that. I made a request to - which was documented in here-to First National Bank, then of Slippery Rock, to have both Tom and Tim released as guarantees [sic].
Q. So you agreed with Mr. Kelly that you would have him released?
A. I would try at that point, yes.
(Id. at 76). Kelly contends that an attorney drafted an agreement committing Mace's oral promise to writing. (Id. at 136-37). An unsigned copy of this document was submitted as an exhibit during the bankruptcy court hearing ("Draft Agreement"). The Draft Agreement states in relevant part: "Mace and K & M agree to release Kelly from any and all outstanding notes, mortgages, or liens that they may have personally signed for on behalf of K & M. Said release shall occur in writing regarding all documents on or before December 31, 2004." (Docket No. 136-3, Exhibit B to Kellys' Reply Br. to Debtor's Amended Obj. to Proof of Claim) (emphasis added). The Draft Agreement is attached to a letter dated March 11, 2004, addressed to the Kellys and the Debtors. The letter provides "Please find enclosed a draft of a simple agreement, which I have prepared along with a copy of a Promissory Judgment Note based on recent conversations that I have had with Tim." (Id.). The promissory judgment note referenced in the Draft Agreement is not included in the record.
In April or May 2004, the Draft Agreement was revised ("Revised Agreement") (Docket No. 136-4, Exhibit C to Kellys' Reply Br. to Debtor's Amended Obj. to Proof of Claim). The Revised Agreement calls for a payment schedule to pay $40, 000 on the following terms:
K & M agrees to execute a Promissory Judgment Note payable to Kelly in the amount of forty thousand dollars ($40, 000.00), the terms of which shall be no interest with a payment of $10, 000.00 on or before December 31, 2004 and an additional sum of $10, 000.00 on or before September 30, 2005 and a final payment of $20, 000.00 on or before May 1, 2008.
(Id.). The Revised Agreement also includes language to reflect a mutual release: "Mace and K &
M agree to a complete release of Kelly . . . Likewise, Kelly grants a complete release of Mace and K & M . . . ." (Id.). An additional provision in the contract provides that "it is a requirement of this agreement that First National Bank of Slippery Rock release Kelly." Id. (emphasis added). The Revised Agreement was never signed and there is no evidence in the record to support that Mace, either individually or ...