United States District Court, M.D. Pennsylvania
October 17, 2005.
COAL CONTRACTORS (1991), INC., Appellant
GENERAL ELECTRIC CAPITAL CORPORATION, Appellee, ROYAL SCOT MINERALS, INC. APPELLEE.
The opinion of the court was delivered by: JAMES MUNLEY, District Judge
Presently before the Court for disposition is Appellant Coal
Contractors (1991), Inc.'s appeal of Bankruptcy Judge John J.
Thomas' decision to grant Appellee General Electric Capital
Corporation's claim. This matter has been fully briefed and is
ripe for disposition. For the reasons that follow, we will grant
the appeal in part and remand to the bankruptcy court for further
proceedings consistent with this opinion.
Coal Contractors is a coal mining company currently operating
in Chapter 11 bankruptcy in the Middle District of Pennsylvania.
Royal Scot Materials is a coal mining company currently in
Chapter 7 bankruptcy in the Southern District of West Virginia,
In re Royal Scot Materials, Inc., Chapter 7 Case No. 99-50629
(S.D.W.V.). General Electric Capital Corporation is the assignee
of all right, title, and interest of H. Lynden Graham, Royal
Scot's Chapter 7 trustee.
On January 6, 2003, H. Lynden Graham filed a proof of claim for
an undetermined amount in Coal Contractors' Chapter 11 case. He
alleges that on May 19, 1999, pursuant to a "Heads of Agreement" contract, Coal Contractors agreed to
purchase a coal processing plant, a sizing plant, and two
Demags*fn1 from Royal Scott for $1.2 million and royalties
from the sale of excavated coal. (Appellant App. 8-9). The claim
asserts that at the time of the sale, the equipment was located
at Royal Scot's coal mining operations in Greenbrier, West
Virginia. (Id. at 7). Coal Contractors filed an objection to
this claim, arguing that it entered into no such agreement, but
if it did, it had already paid the amounts due.
On January 31, 2005, the Bankruptcy Court for the Middle
District of Pennsylvania held a hearing to determine the validity
of the claim. Following the presentation of evidence from both
parties, the bankruptcy court overruled Coal Contractors'
objections and allowed Royal Scot's claim for $1.2 million
secured by the equipment. Coal Contractors appeals this decision.
We have jurisdiction over the instant bankruptcy appeal
pursuant to 28 U.S.C. § 158(a)(1), which provides that the
district courts of the United States have jurisdiction to hear
appeals from final judgments, orders, and decrees of the
III. Standard of Review
This court reviews the bankruptcy court's conclusions of law
de novo. In re O'Brien Environmental Energy, Inc.,
188 F.3d 116, 122 (3d Cir. 1999). The bankruptcy court's findings of fact
will only be set aside if clearly erroneous. BANK. R. 8013 ("On
appeal the district court . . . may affirm, modify, or reverse a bankruptcy
judge's judgment order, or decree or remand with instructions for
further proceedings. Findings of fact, whether based on oral or
documentary evidence, shall not be set aside unless clearly
erroneous, and due regard shall be given to the opportunity of
the bankruptcy court to judge the credibility of the
witnesses."); In re O'Brien, 188 F.3d at 122.
A bankruptcy claimant bears the initial burden to "allege facts
sufficient to support a legal liability to the claimant." In re
Allegheny International, Inc., 954 F.2d 167, 143 (3d Cir. 1992).
Once the claimant satisfies its initial burden, its claim is
prima facie valid. Id. To rebut the prima facie claim, the
objector "must produce evidence which, if believed, would refute
at least one of the allegations that is essential to the claim's
legal sufficiency." Id. at 174. If the objector meets this
burden, "the burden reverts to the claimant to prove the validity
of the claim by the preponderance of the evidence." Id.
A. Prima Facie Claim
Coal Contractors argues that the bankruptcy court erred in
finding that it failed to rebut the prima facie validity of
General Electric's claim. We agree.*fn2 The testimony of
Jack Munley*fn3 rebutted the prima facie claim because he
set forth evidence, which if believed, refuted General Electric's
allegation that Coal Contractors entered into the "Heads of Agreement" contract in 1999 to purchase the equipment from Royal
Scot. The bankruptcy court found that Munley testified only that
he was unaware of the transaction, which, given Munley's general
lack of knowledge of the company's purchases, was irrelevant to a
determination of when and where Coal Contractors purchased the
Munley, Coal Contractors' Controller, testified that the two
mining plants allegedly purchased in the Heads of Agreement were
in fact located at Coal Contractors' Gowen mine when he began
working for the company in 1994. (Tr. 14). He further testified
that the company purchased the two Demags sometime between 1995
and 1997 from Demag and financed the purchase through Deutsche
Credit. (Tr. 15). Later, Komatsu Mining purchased Demag, and Coal
Contractors continues to make payments to Komatsu for the
equipment. (Tr. 15). On cross examination, Munley testified that
he did not oversee payments made under the Heads of Agreement nor
did he know if anybody else made these payments. (Tr. 34).
Furthermore, although he balanced Coal Contractors' bank
statements, he did not know the purpose of numerous transactions
between Coal Contractors and Royal Scot involving hundreds of
thousands, or even millions, of dollars. (Tr. 35-42). He was
unaware if any payment listed on the Coal Contractors's bank
statement was related to the Heads of Agreement. (Tr. 44-45). He
was unaware of the purpose of any check written by Coal
Contractors to Royal Scot. (Tr. 46).
General Electric argues that Munley's testimony was ambiguous
at best, and we should uphold the bankruptcy court's decision to
disregard his testimony. When asked who sold the equipment to
Coal Contractors, Munley stated, "I imagine I think from Demag
in the beginning, and they were financed through a company, Deutsche
Credit." (Tr. 15). When asked who held the lien on the equipment,
he stated, "I believe its Komatsu Mining. Komatsu mining being
the company that purchased Demag." (Tr. 15).
We find that the bankruptcy court erred in finding Munley's
testimony insufficient to satisfy the minimal burden to rebut the
prima facie validity of General Electric's claim. Although Coal
Contractors was required to produce evidence beyond a mere formal
objection, it needed only to produce evidence "equal in force to
the prima facie case," which is merely an allegation sufficient
to support liability. In re Allegheny International, Inc.,
954 F.2d at 143. While we agree that his testimony is not
particularly persuasive as to which company sold the equipment to
Coal Contractors, we find that, if believed, his testimony on the
whole refutes General Electric's claim that in 1999 Royal Scot
sold the equipment that was located in West Virginia to Coal
Contractors. Munley unequivocally explained that Coal Contractors
continues to pay Komatsu for the equipment. (Tr. 15). He also
stated that the plants were operating at the Gowen site as early
as 1994, and Coal Contractors purchased the Demags between 1995
and 1997. (Tr. 14-17). Jack Munley's testimony was not too
ambiguous to rebut the claim, as it directly contradicts General
Electric's claim that Coal Contractors purchased the equipment
from Royal Scot in 1999. Contrary to General Electric's
assertion, we will not defer to the bankruptcy court's
credibility determinations at this stage because Munley's
credibility was not at issue. To rebut the prima facie claim,
Coal Contractors was required to "produce evidence which, if
believed, would refute at least one of the allegations that is
essential to the claim's legal sufficiency." In re Allegheny
International, Inc., 954 F.2d at 143 (emphasis added). Coal Contractors merely had a burden of production, not
persuasion. The burden of persuasion remained with General
Electric at all times. Id. Thus, we find that Coal Contractors
met its burden of producing some evidence to refute General
Electric's claim that Coal Contractors entered into a Heads of
Agreement contract in 1999 to purchase the equipment from Royal
B. Burden of Persuasion
Once Coal Contractors satisfied its burden of production, the
burden reverted to General Electric to prove the claim by the
preponderance of the evidence. Coal Contractors argues that
General Electric did not meet this burden because it relied
entirely on inadmissible hearsay and we should therefore reverse
the bankruptcy court and sustain its objection to the claim in
We decline to do so, and instead will remand to the bankruptcy
court to determine whether General Electric can establish its
claim, including the existence of the agreement, by the
preponderance of the evidence. The bankruptcy court never
required General Electric to establish the existence of the
agreement because it found that the agreement existed based on
the prima facie claim.
The bankruptcy court should analyze this issue in the first
instance. Given the numerous objections, the record was not fully
developed to determine the existence of the agreement. For
example, as Coal Contractors argues, the bankruptcy court ruled
that the Heads of Agreement contract itself was inadmissible
hearsay. (Tr. 169). This demonstrates that the court did not
analyze whether an agreement existed, because a contract is
nonhearsay if offered to prove the existence of an agreement.
`Signed instruments such as wills, contracts, and
promissory notes are writings that have independent
legal significance, and are nonhearsay.' A contract
is a verbal act. It has legal reality independent of
the truth of any statement contained in it. . . .
The admission of a contract to prove the operative
fact of that contract's existence thus cannot be the
subject of a valid hearsay objection. To introduce a
contract, a party need only authenticate it.
Kepner-Tregoe, Inc. v. Leadership Software, Inc., 12 F.3d 527
540 (5th Cir. 1994) (internal citations omitted, emphasis added).
Thus, Coal Contractors' assertion that General Electric could not
satisfy its burden to prove the existence of the agreement
because the agreement itself was hearsay is erroneous.
Furthermore, Coal Contractors' argument that General Electric
produced no admissible evidence of an agreement is meritless.
General Electric produced two certified copies of Coal
Contractors' pleadings from Royal Scot's Chapter 7 bankruptcy
case, wherein Coal Contractors admitted to the existence of an
agreement. Royal Scot's trustee filed a complaint against Coal
Contractors for the turnover of the equipment, which included the
"14. By the Agreement dated May 19, 1999 (hereinafter
"Agreement"), Royal Scot, the Administrators on
behalf of Rackwood and the Defendants, Coal
Contractors and Dennis Bell, Inc., and a third-party,
Viper International Holdings Ltd . . . Entered a
contract by which, inter alia, the following payments
would be made to Royal Scot:
(A) that Coal Contractors would pay Royal Scot the
sum of one million, two hundred thousand dollars
($1,200,000) for the purchase from Royal Scot of a
coal processing plant, a sizing plant, two (2) Demags
and other equipment (hereinafter `Sale Equipment'). (Appellant App. 210).
In its answer to this Complaint, Coal Contractors stated,
The Defendants admit the allegations of paragraph 14
of the Complaint that the Debtor, . . . Coal
Contractors . . . executed a written Heads of
Agreement dated May 19, 1999, but deny the
allegations of said paragraph that the Complaint
accurately sets forth the terms of the Agreement. In
particular, the amount to be paid for the Equipment
is not $1,200,000, but only $800,000, under paragraph
1 of the Agreement.
(Appellant App. 221-22).
In its amended complaint, Royal Scot's trustee again asserted
that Coal Contractors agreed to purchase the equipment for $1.2
million. (Appellant App. 231). In its answer, Coal Contractors
again admitted the existence of the Heads of Agreement contract.
(Appellant App. 292).
Coal Contractors argues that these pleadings are not conclusive
and binding judicial admissions in this case. While the pleadings
are not binding judicial admissions here, they are admissible as
admissions of a party opponent. Universal American Bard Corp.,
v. J-Chem, Inc., 946 F.2d 1131, 1142 (5th Cir. 1992). A judicial
admission is an entirely distinct concept from evidentiary
admissions. Judicial admissions are "admissions in pleadings,
stipulations, etc. and which do not have to be proven in the
same litigation." Giannone v. United States Steel Corp.,
238 F.2d 433, 547 (3d Cir. 1956). Thus, Coal Contractors' answer in
Royal Scot's Chapter 7 bankruptcy case constitutes a judicial
admission in that case only. "However, pleadings which do not
amount to judicial admissions . . . may be used as evidence of
factual allegations." Id. (citations omitted). Although the
bankruptcy court was not bound by these pleadings, it was free to
consider them for their probative value as admissions of a party opponent as to the existence of the agreement.*fn4 J-Chem,
Inc., 946 F.2d at 1142.
Thus, we will not reverse the bankruptcy court in the entirety,
but rather will remand to allow it to determine, consistent with
this opinion, whether General Electric can establish its claim by
a preponderance of the evidence. An appropriate order follows. ORDER
AND NOW, to wit, this 17th day of October 2005, Appellant
Coal Contractors (1991) Inc.'s appeal (Doc. 1) is hereby
GRANTED in part. The appeal is granted solely to the extent
that the bankruptcy court erred in finding that Coal Contractors
failed to rebut General Electric's prima facie claim. This case
is hereby REMANDED to the bankruptcy court for further
proceedings consistent with this opinion. Appellant's motion for
a stay pending resolution of the appeal (Doc. 17) is DENIED as
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