Insight Terminal Sols., LLC v. Cecelia Fin. Mgmt. (In re Insight Terminal Sols., LLC)

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
6 months 4 days ago

Case Type:

Business

Case Status:

Reversed and Remanded

Citation:

No. 24-5222 (6th Circuit, Aug 25,2025) Published

Tag(s):

Ruling:

The U.S. Court of Appeals for the Sixth Circuit held a bankruptcy court erred in excluding a key witness's deposition testimony at trial. The witness, who was scheduled to testify over multiple days, died before the deposition ended. While trial courts have discretion in admitting evidence, the bankruptcy court's opinion didn't state it was exercising its discretion. The testimony met the three express conditions of Fed. R. Civ. P. 32(a)(1) and the opportunity to cross-examine isn't a condition. Further, newly amended Fed. R. Evid. 801(d)(2) would have allowed the hearsay testimony's use.

Procedural context:

On appeal, the appellant contended the bankruptcy court (1) wrongly excluded the key witness's deposition testimony from evidence at trial; (2) erred in refusing to recharacterize prepetition loans as equity contributions; and (3) wrongly adopted a party's tendered findings of fact and conclusions of law as the trial opinion. The Sixth Circuit reversed on the first issue and, thus, did not rule on the other two--but expressed concern with the lower court's verbatim adoption of a party-prepared opinion. Notably, in a concurrence, Judge Murphy (who also authored the primary opinion) also raised "significant concerns" with Sixth Circuit authority allowing "bankruptcy courts an extraordinary federal power: the power to turn a company’s creditors into its owners by 'recharacterizing' their loans as equity contributions. However much I peruse the Bankruptcy Code, I cannot find this significant power in its text."

Facts:

Over time, coal industry professional John Siegel and his family owned and controlled corporate entities that "tried to develop a port terminal for coal shipments in Oakland, California." "Siegel relied on family-owned limited liability companies to operate his coal projects. To facilitate the terminal project, he directed some family-owned companies to send money to other such companies. And this complex case boils down to a relatively simple question: Did the fund-paying companies make a loan to—or invest equity in—the companies that received the funds?" Bankruptcy courts, under existing law in the Sixth Circuit (In re AutoStyle Plastics, Inc., 269 F.3d 726, 748–49 (6th Cir. 2001)), may "recharacterize" a party's purported "loan" payment to a debtor as, instead, an equity investment by that party in the debtor. This changes the party from being a higher-priority lender/creditor to a lower-priority owner. Ultimately, Debtor Insight Terminal Solutions, LLC, a Siegel-related entity, obtained a sublease of the Oakland port terminal, generated no revenue from its operations, and filed a bankruptcy petition in the U.S. Bankruptcy Court for the Western District of Kentucky. The bankruptcy court approved a reorganization plan. Thereafter, the reorganized Debtor objected to a claim by another Siegel-related entity, Appellee Cecelia Financial Management, LLC ("Cecelia"), for over $6 million based on amounts Cecelia provided to Debtor prepetition. The reorganized Debtor also filed an adversary complaint, asking "the bankruptcy court to recharacterize Cecelia’s claim for debt as one for equity under the AutoStyle factors. This recharacterization would effectively extinguish Cecelia’s claim because equity holders received nothing under the confirmed plan." As the adversary proceeding progressed, Siegel developed cancer and, as a result, "[t]he parties intended to preserve his testimony through a deposition in case he could not appear at trial." Siegel's declining health prevented him from completing his direct testimony, no cross-examination occurred, and he passed away before the two-day trial. When the reorganized Debtor attempted to use Siegel's testimony at trial, the bankruptcy judge granted a motion to exclude it as inadmissible hearsay. At the trial's end, the court asked the parties to tender proposed findings of fact and conclusions of law. The court adopted one of the submissions in full--which held the deposition testimony inadmissible and rejected the recharacterization claim. The reorganized Debtor appealed to the U.S. Bankruptcy Appellate Panel for the Sixth Circuit, which affirmed, leading to a further appeal to the Sixth Circuit.

Judge(s):

MURPHY, DAVIS, and BLOOMEKATZ

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