Insight Terminal Sols., LLC v. Cecelia Fin. Mgmt., LLC (In re Insight Terminal Sols., LLC)
- Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
- 10 months 2 weeks ago
- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- No. 23-8004 (6th Circuit, Feb 28,2024) Published
- Tag(s):
-
- Ruling:
- The U.S. Bankruptcy Appellate Panel of the Sixth Circuit held a bankruptcy court did not abuse its discretion in refusing to disallow or recharacterize a claim. A significant problem the appellant faced at trial (and on appeal) is that a primary witness passed away after his deposition commenced but before his direct testimony was complete, and before the other parties had the opportunity to cross examine him. This led the bankruptcy court to refuse to admit any of his deposition testimony into evidence at trial, winnowing the evidence available to challenge the claim.
- Procedural context:
- The BAP explained: "Though [the appellant] listed twenty-two assignments of error in its Statement of Issues on Appeal, the dispute distills into three main questions: (1) whether the Bankruptcy Court erred in refusing to admit the incomplete deposition testimony of [a principal witness]; (2) whether, in overruling [the appellant's] challenge to the Claim, the Bankruptcy Court properly applied Bankruptcy Rule 3001(f)’s presumption; and (3) whether the Bankruptcy Court properly refused to recharacterize the Claim as equity." In resolving each of these "main questions," the BAP reviewed the bankruptcy court's decision for an abuse of discretion, affording "considerable deference" to the bankruptcy court's findings of fact based on its evaluation of the trial evidence and party stipulations. The BAP also rejected two of the appellant's arguments as it failed to provide a transcript of the pertinent hearing in the record on appeal.
- Facts:
- The predecessor of Debtor/Appellant Insight Terminal Solutions, LLC (ITS) issued a promissory note in March 2017 to Bowie Resource Partners, LLC. ITS's predecessor issued a first amended promissory note later that year to Bowie's successor, Cecelia Financial Management, LLC. ITS then issued a second, third, and fourth amended note to Cecelia in 2019. All entities involved in the loan transactions had ties to John J. Siegel, Jr. and his family (referred to in the BAP opinion as a "network of family and other relationships"). ITS filed a voluntary chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Western District of Kentucky in July 2019, and Cecelia timely filed a proof of claim based on the original and amended promissory notes. After the court confirmed ITS's plan, it filed an adversary proceeding against, inter alia, Cecelia. ITS sought to disallow or reduce Cecelia's proof of claim, or to recharacterize its indebtedness as infused equity. After ITS filed the adversary proceeding, Appellee Bay Bridge Exports, LLC intervened as a defendant as it had (and subsequently foreclosed on) a security interest in Cecelia's claim; "[a]t trial and [ ] on appeal, Bay Bridge, rather than Cecelia, pulled the laboring oar in defending the Claim it now holds." During discovery, ITS commenced Mr. Siegel's deposition. However, he was in ill health and, during ITS's direct examination, Mr. Siegel asked to adjourn the deposition due to exhaustion. The parties agreed to adjourn the deposition but, before it could be reconvened and continued, Mr. Siegel died. ITS did not complete Mr. Siegel's direct examination, nor were the defendants able to cross examine him. Nevertheless, ITS gave notice of its intent to introduce portions of Mr. Siegel's deposition transcript at trial. Bay Bridge filed a motion in limine to exclude Mr. Siegel's testimony. The bankruptcy court denied the motion in limine and allowed Cecelia to present the testimony at trial as a proffer. After the trial, at which only one other ITS witness testified about the "various advances" made to ITS and its predecessor and how those advances were accounted for among the related entities' books, the bankruptcy court issued its opinion with findings of fact and conclusions of law. It found Cecelia's claim (held by Bay Bridge) was entitled to the presumption of validity under Fed. R. Bankr. P. 3001(f), which ITS had not rebutted. The court further held the original and amended notes were enforceable under Kentucky law against ITS. And, it concluded there was no basis to recharacterize the challenged debt as equity in ITS, applying the test in Bayer Corp. v. MascoTech, Inc. (In re AutoStyle Plastics, Inc.), 269 F.3d 726, 747–53 (6th Cir. 2001). Significantly, in its opinion, the court explained it would not admit any portion of Mr. Siegel's incomplete deposition testimony into evidence. ITS timely appealed.
- Judge(s):
- CROOM, DALES, and GUSTAFSON
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