In re: Desert Springs Financial, LLC
CC-16-1374-KuFL
| 9th Cir. BAP | Apr 20, 2017Background
- Desert Springs Financial, LLC (debtor) filed Chapter 11; managing member Murray Altman (75% owner) and Yun Hei Shin (25% owner) had prior state litigation; Shin held a ~$1.4M judgment against Murray.
- Mitchell Altman (Murray’s son) filed a proof of claim asserting a $600,000 secured loan to the debtor in May 2013 (claimed ~ $760,000 with interest), attaching a note and deed of trust executed by Murray in Jan. 2014.
- Shin objected, citing insider status of Murray and Mitchell, timing irregularities (loan documented eight months later; interest payment default 12 days after documentation), and debtor books showing repayment to Shin in May 2013 with no ledger entries showing a Mitchell loan.
- Bankruptcy court sustained most of Mitchell’s evidentiary objections to Shin’s declarations and concluded Shin’s evidence was insufficient to rebut the prima facie validity of Mitchell’s procedurally compliant proof of claim under Fed. R. Bankr. P. 3001(f), overruling the objection.
- On appeal, BAP held the undisputed ledger and documentary irregularities constituted evidence equal in probative force to the proof of claim, so the bankruptcy court’s finding that Shin failed to rebut the Rule 3001(f) presumption was clearly erroneous.
- BAP vacated the order overruling the objection and remanded; on remand, Mitchell would bear the burden to prove his claim by a preponderance and to show good faith/inherent fairness given the insider context.
Issues
| Issue | Plaintiff's Argument (Shin) | Defendant's Argument (Mitchell) | Held |
|---|---|---|---|
| Whether Mitchell’s proof of claim qualified for Rule 3001(f) presumption | Proof insufficiently reliable because insider transaction, late documentation, and missing ledger support; insider claims require heightened scrutiny | Proof complied with Rule 3001 (form, attachments, signature by authorized agent); presumption applies even for insiders | Rule 3001(f) presumption applies to Mitchell’s procedurally compliant claim; no per se insider exception |
| Whether Shin rebutted the Rule 3001(f) presumption | Ledger entries and timing irregularities rebut the claim; evidence shows repayment to Shin and no Mitchell loan payable account | Shin’s evidence was inadmissible/insufficient; presumption unrebutted so claim stands without further proof | Shin presented evidence of equal probative force to the proof of claim; bankruptcy court’s contrary factual finding was clearly erroneous — remand required |
Key Cases Cited
- Pepper v. Litton, 308 U.S. 295 (1939) (insider transactions require rigorous scrutiny and proof of good faith and fairness)
- Brewer v. Erwin & Erwin, P.C. (In re Marquam Inv. Corp.), 942 F.2d 1462 (9th Cir. 1991) (applies Pepper’s heightened scrutiny to insider transactions)
- Lundell v. Anchor Constr. Specialists, Inc., 223 F.3d 1035 (9th Cir. 2000) (procedurally compliant proof of claim prima facie; objector must produce evidence equal in force to rebut)
- Stancill v. Harford Sands Inc. (In re Harford Sands Inc.), 372 F.3d 637 (4th Cir. 2004) (Rule 3001(f) presumption still applies to insider claims; Pepper duties apply if presumption rebutted)
- McGee v. O’Connor (In re O’Connor), 153 F.3d 258 (5th Cir. 1998) (similar treatment of insider claims and application of Rule 3001(f) presumption)