In Re: Harford Sands Inc Harford Industrial Minerals, Incorporated, Debtors. Terry D. Stancill Jerry Stancill Timothy K. Stancill Timothy D. Stancill v. Harford Sands Inc, Debtor-Appellee
Docket: 03-2249
Court: Court of Appeals for the Fourth Circuit; June 16, 2004; Federal Appellate Court
Harford Sands Inc. voluntarily filed for Chapter 11 bankruptcy, prompting the Stancills—Terry D., Jerry, Timothy K., and Timothy D.—to file a proof of claim for $250,688.17, asserting that Harford Sands owed them for dirt sold on account. The bankruptcy court disallowed the claim, deeming it speculative and unenforceable under non-bankruptcy law, a decision that the district court affirmed. On appeal, the Stancills contended that both lower courts erred. The appellate court reviewed the case de novo, affirming the lower courts' decisions based on the same reasoning.
The Stancills have operated a rubble landfill known as the Oak Avenue Property since the early 1980s and allege that they entered into an oral contract with Harford Sands in 1986 for the sale of dirt at a negotiated price of $0.25 per ton. Payment was contingent upon Harford Sands' financial capability. They later formed "Pappy Inc." in 1988, which entered into a contract to purchase the Oak Avenue Property. At that time, the Stancills claimed Harford Sands owed $104,000 for dirt removed from the property; however, this amount was not included in the sale contract. The Stancills assert that the $104,000 asset was transferred to Pappy Inc. upon the property sale and claim that Harford Sands subsequently removed an additional $71,688 worth of dirt, bringing the total owed to $175,688 by the end of 1990.
Harford Sands removed dirt from the Oak Avenue Property until 1993, with the Stancills estimating its value at $75,000 for that period. In the mid-1990s, Stancills, Inc. secured three deeds of trust from Harford Sands related to unpaid receivables for the dirt purchased. Larry Stancill believed these deeds settled all debts owed to him. In 1997, the Stancills sold Pappy Inc. to a third party, which did not list any claims against Harford Sands as company assets; however, a "Harford Sands Receivable" was noted as an "Excluded Asset" in the sale contract without a specified value. Post-sale, the Stancills claimed ownership of this receivable. In 2000, they first demanded payment from Harford Sands, which denied any liability despite having a $175,688 liability recorded in its financial records to Pappy Inc. Harford Sands later filed for bankruptcy.
The Stancills contest the bankruptcy court's conclusion that they did not prove their claim’s amount and validity by a preponderance of the evidence. The Bankruptcy Code allows creditors to file proofs of claim in Chapter 11 proceedings, which serve as prima facie evidence of the claims. The burden shifts to the debtor to object, requiring them to present evidence to counter the claim's validity. If the debtor successfully rebuts the claim, the creditor must ultimately prove their claim’s amount and validity. Notably, if the creditor is deemed an "insider" of the debtor, the scrutiny on their claims increases, necessitating proof of fairness and good faith in the transaction. The Bankruptcy Code defines "insider" relationships broadly, including relatives of corporate directors or officers.
The Stancills' proof of claim was initially presumptively valid, but Harford Sands successfully objected by providing evidence against its validity. Harford Sands argued that the claim amount was arbitrary and unsupported, the Stancills lacked proof of ownership of the alleged $175,688 debt, and the claim was barred by Maryland’s four-year statute of limitations for breach of contract. Consequently, the Stancills bore the burden of proving their claim's validity and amount by a preponderance of the evidence, facing increased scrutiny as "insiders" related to Harford Sands’ control.
The bankruptcy court found that the Stancills did not meet this burden for two main reasons. First, they failed to substantiate the claimed amount of $175,688. Their accountant's testimony relied on undocumented sources, and the Stancills did not provide necessary supporting documents like tonnage slips or hauling receipts. Furthermore, testimony indicated that Harford Sands had never actually removed that amount of dirt, contradicting the Stancills' claims.
Second, the Stancills could not prove ownership of the alleged account receivable, as there was no evidence of an assignment from Pappy Inc. to them. Pappy Inc.'s balance sheets did not acknowledge the account, and the Stancills' argument regarding the account being an excluded asset in a property sale was deemed incorrect. Ultimately, the bankruptcy court deemed the Stancills' claim "highly speculative," leading to an affirmation of its ruling.
The contract of sale explicitly excludes the Harford Sands account receivable as an asset but fails to assign any value to it. The Stancills have not established the account's value due to a lack of evidence about the quantity of dirt removed from the Oak Avenue Property. As shareholders of a close corporation, the Stancills cannot fabricate this account receivable without any corporate records to support it. Consequently, they have not met their burden of proof regarding the claim's amount and validity. Their unconventional business practices raise concerns about fairness. The bankruptcy court properly upheld Harford Sands' objection to the Stancills' claim. The district court's October 6, 2003, order confirming this disallowance is affirmed. Additionally, the Stancills have abandoned their claim for $75,000 worth of dirt removed from 1990 to 1993. The bankruptcy rules align with other circuits on the burden of proof for claims under 11 U.S.C. § 501(a). The alleged payment structure would require an implausible volume of dirt removal, for which the Stancills lack necessary documentation. The bankruptcy court's disallowance of the claim is deemed appropriate, rendering further evaluation of enforceability under non-bankruptcy law unnecessary.
