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In Re: Machne Menachem

February 18, 2011


The opinion of the court was delivered by: Judge Caputo


This is an appeal from two orders of the Bankruptcy Court, viz, 1) Order of March 4, 2010(D.I.838) and 2) Order of March 31, 2009 (D.I.825). These orders essentially denied Appellant's claims that he was entitled to the repayment of $286,000 as loans made by Appellant to the Debtor, a New York Not-for-Profit Corporation.*fn1


28 U.S.C. § 158(a) provides that the District Courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under Section 157 of Title 28 of the United States Code. 28 U.S.C. § 158(a)(1). The order complained of by Appellant constitutes a final order, that being the order dated March 4, 2010. Consequently, this Court has jurisdiction over the instant matter. See also, In re: Kovalchick, 2006 WL 2707428 at *1 (M.D. Pa. 2006).


Findings of fact made by the Bankruptcy Court may be reversed only for clear error. Neal v. Eckersley, 2009 WL 3241789 at *1 (M.D.Pa. 2009), citing In Re: Nelson Co., 959 F.2d 1260, 1263 (3d Cir. 1992) (citations omitted). However, legal questions and conclusions are subject to plenary, de novo review. Id., also citing In Re: O'Brien Envtl. Energy, Inc., 188 F.3d 116, 122 (3d Cir. 1999).

A properly filed proof of claim is deemed allowed unless a party in interest objects. In Re: Graboyes, 371 B. R. 113, 119 (E.D. Pa. 2007), citing 11 U.S.C. § 501. If an objection is filed to a proof of claim, the burden of proof may shift. In Re: Graboyes, 371 B.R. at 119, citing United States v. Baskin and Sears, P.C., 207 B. R. 84, 86 (E.D. Pa. 1997). The Court of Appeals has concisely summarized the shifting burden as follows:

"[A] claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant's initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said that the objector must produce evidence which, if believed, would refute one of the allegations that is essential to the claimant's legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the Proof of Claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence."

In Re: Graboyes, 371 B. R. at 119 (E.D. Pa. 2007), citing, In Re: Allegheny Int'l, Inc., 954 F.2d 167, 173-4 (3d Cir. 1992) (citations omitted), In Re: Gimelson, 2004 WL 2713059 at *13 (E.D. Pa. 2004), In Re: Galloway, 220 B.R. 236, 244 (Bankr. E.D. Pa. 1998).

Appellant contends that as a result of a permanent injunction which enjoined directors Goldman, Heber and Hershkop from "interfering, in any way, with the administration of the affairs of the . . . camp . . .", Appellant had control of the camp (Debtor). The injunction was issued by Judge I. Leo Glasser of the United States District Court for the Eastern District of New York, and it was effective from July 1, 1997 through October 1, 2002. Appellant reasons that since Goldman, Heber and Hershkop were not to interfere in the administration of the camp, Appellant had sole control of it during this period. Moreover, Appellant argues that money advanced as loans to the Debtor during this period should be repaid as loans. On October 21, 2002, Judge Glasser restored Goldman, Heber and Hershkop as directors of Debtor.

Regarding the Bankruptcy Court's conclusion that the funds advanced by Appellant were donations, and not loans, Judge Thomas likened Appellant's advances to the decision in Cohen v. K B Mezzanine Fund II (In Re: SubMicron Systems Corp.), 432 F.3d 448 (3d Cir. 2006). In addressing the issue of the characterization of the infusion of funds into a corporation, the Third Circuit Court of Appeals noted:

While some cases are easy (e.g., a document titled a "Note" calling for payments of sums certain at fixed intervals with market-rate interest and these obligations are secured and are partly performed, versus a document issued as a certificate indicating a proportional interest in the enterprise to which the certificate relates), others are hard (such as a "Note" with conventional repayment terms yet reflecting an amount proportional to prior equity interests and whose payment terms are ignored). . . . Form is no doubt a factor, but in the end it is no more than an indicator of what the parties actually intended and acted on."

Id. at 456.

Here, there were no loan documents either contemporaneous with the advancements or otherwise; there were no corporate resolutions regarding the advances; and, there were no terms, viz, duration, interest rate or payment schedule. Moreover, although the Court of Appeals found no clear error in the district court's finding that the transactions there were loans, it duly noted some of the factual circumstances that supported such a finding. There, the subject individuals were lenders who the district court found were making further loans to protect their earlier ones. Id. Further, the finding of the district court that the lenders, while on the board of directors, did not dominate or control it, did not support an equity characterization. Id. at 458. In addition, the ...

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