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October 17, 2005.

COAL CONTRACTORS (1991), INC., Appellant

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.

I. Background

  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.

  II. Jurisdiction

  We have jurisdiction over the instant bankruptcy appeal pursuant to 28 U.S.C. ยง 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 bankruptcy courts.

  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.

  IV. Discussion

  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 ...

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