In r e : Daniel S . Campano CV-02-509-M 05/29/03 UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE
In r e : Daniel S . Campano, Debtor
Steven M . Notinger, Chapter 7 Trustee for the Estate of Daniel S . Campano, Appellant
v. Civil N o . 02-509-M Opinion N o . 2003 DNH 094 Auto Shine Car Wash Systems, Inc., Appellee
O R D E R
Daniel S . Campano is a Chapter 7 debtor. Trustee Steven M .
Notinger appeals a September 1 3 , 2002, order of the bankruptcy
court (Deasy, J.) overruling his objection to Auto Shine Car Wash
Systems, Inc.’s proof of claim. For the reasons given below, the
order of the bankruptcy court is affirmed.
Standard of Review
A bankruptcy court’s findings of fact are not set aside
unless clearly erroneous. Palmacci v . Umpierrez, 121 F.3d 7 8 1 , 785 (1st Cir. 1997) (citing F E D . R . BANKR. P . 8013; Commerce Bank &
Trust C o . v . Burgess (In re Burgess), 955 F.2d 1 3 4 , 137 (1st Cir.
1992); F E D . R . C I V . P . 52(c), advisory committee’s note to 1991
Amendment). However, a “bankruptcy court’s legal conclusions,
drawn from the facts so found, are reviewed de novo.” Palmacci,
121 F.3d at 785 (citing Martin v . Bajgar (In re Bajgar), 104 F.3d
495, 497 (1st Cir. 1997)).
Absent either a mistake of law or an abuse of discretion, the bankruptcy court ruling must stand. See Siedle v . Putnam Invs., Inc., 147 F.3d 7 , 10 (1st Cir. 1998). A bankruptcy court “may abuse its discretion by ignoring a material factor that deserves significant weight, relying on an improper factor, o r , even if it [considered] only the proper mix of factors, by making a serious mistake in judgment.” Id.
Picciotto v . Salem Suede, Inc. (In re Salem Suede, I n c . ) , 268
F.3d 4 2 , 44 (1st Cir. 2001). “On an appeal the district court .
. . may affirm, modify, or reverse a bankruptcy judge’s judgment,
order, or decree or remand with instructions for further
proceedings.” F E D . R . BANKR. P . 8013.
Background
The facts of this case, in broad outline, are as follows.
Campano is a former employee of Auto Shine Car Wash Systems, Inc.
2 (“Auto Shine”), a corporation owned and operated by Frank
DiTommaso. Auto Shine sold and serviced car wash systems. On
March 1 0 , 1999, Campano purchased Auto Shine’s sales and service
division, in a seller-financed sale, for $940,000. Campano
executed two promissory notes in favor of Auto Shine, one for
$890,000, the other for $34,000. Those notes were secured by the
business assets Campano purchased, a second mortgage on Campano’s
home, and a limited guaranty from Campano’s spouse. With the
business assets he purchased from Auto Shine, Campano started his
own business, Auto Shine Sales and Service, Inc. (“Sales and
Service”).
In February 2001, Sales and Service defaulted on its
obligations to Auto Shine. On March 2 8 , 2001, in the wake of a
confrontation over unpaid rent between Campano and Sales and
Service’s landlord, Campano vacated the business premises. When
he left, Campano took a laptop computer and some customer and
vendor lists. Employee Sherry Curtis took several boxes
containing paper copies of accounts payable and accounts
receivable, and held those records until July 2 9 , 2002, the date
of the Bankruptcy Court’s hearing on Auto Shine’s proof of claim.
3 Employees Bruce White and Louie Mattia loaded their Sales and
Service trucks with tools, equipment, and inventory.1 They
stored those items at their homes and used them for servicing
Sales and Service customers during the several-week interval
between the demise of Sales and Service and the formation of
DiTommaso’s new business, Car Wash Systems & Equipment, LLC (“Car
Wash”). Car Wash, in turn, hired White and Mattia at some point
in April, 2001. When they came to work for Car Wash, White and
Mattia brought with them Sales and Service’s tools and any
uninstalled inventory they had in their possession. DiTommaso,
who had been present during the confrontation between Campano and
the landlord, took Sales and Service’s computers and telephone
system. The remainder of Sales and Service’s business assets,
principally car wash system parts and office furniture, were left
behind.
It is undisputed that Auto Shine never gave Campano notice
that it intended to retain Sales and Service’s business assets in
full satisfaction of Campano’s debt to Auto Shine. Rather, Auto
1 Some of the inventory that White and Mattia took had already been paid for by customers.
4 Shine notified Campano, by letter, of its intention to collect
collateral and then sell i t . No such sale was ever conducted.
On October 9, 2001, Campano filed a petition for protection
under Chapter 7 of the Bankruptcy Code. Auto Shine filed a
timely proof of claim in the amount of $873,534.55, representing
the balance owing on the larger of the two promissory notes that
Campano gave Auto Shine.2 The Trustee objected to Auto Shine’s
Proof of Claim, arguing that: ( 1 ) Auto Shine fraudulently induced
Campano to purchase its sales and service division; and (2) Auto
Shine was precluded from asserting a claim against the bankruptcy
estate because it had retained the collateral securing its note –
Sales and Service’s business assets – in complete satisfaction of
Campano’s debt, under the doctrine of strict foreclosure. In a
Memorandum Opinion dated December 1 3 , 2002, the Bankruptcy Court
overruled the Trustee’s objection. This appeal followed.
2 At issue is Auto Shine’s right to approximately $94,000 in proceeds from the sale of Campano’s home.
5 Discussion
The Trustee does not appeal the Bankruptcy Court’s decision
with respect to fraudulent inducement. Rather, he asserts four
arguments challenging the Bankruptcy Court’s decision to allow
Auto Shine’s claim, notwithstanding his invocation of the
doctrine of strict foreclosure. Specifically, the Trustee argues
that the Bankruptcy Court: (1) applied an incorrect burden of
proof; (2) committed clear error by finding that he failed to
produce substantial evidence of the invalidity of Auto Shine’s
claim; (3) committed clear error by failing to find that Auto
Shine took possession of substantially all the assets of Sales
and Service, thus precluding Auto Shine’s claim under the strict
foreclosure doctrine, see N . H . R E V . STAT. A N N . (“RSA”) 382-A:9-505
(§ 9-905 of the Uniform Commercial Code ( “ U C C ” ) ) ; and (4)
committed legal error by failing to properly apply controlling
precedent (Lamp Fair, Inc. v . Perez-Oritz, 888 F.2d 173 (1st Cir.
1989), and Banker v . Upper Valley Refrigeration C o . , 771 F . Supp.
6 ( D . N . H . 1991)), which compels a decision in his favor.
6 I. Burden of Proof
The Trustee argues that the Bankruptcy Court’s decision
should be reversed, and the case remanded, because the Bankruptcy
Court committed an error of law when it ruled that “the burden
[was] on [him] to establish that Auto Shine’s claim in the
Debtor’s bankruptcy case should be completely offset by Auto
Shine’s retention of corporate assets” (Mem. O p . at 1 2 ) , and by
finding that the Trustee had not “sustained his burden of
establishing that Auto Shine’s actions constituted strict
foreclosure” (Mem. O p . at 1 6 ) .
The Bankruptcy Court applied the correct burden of proof.
“ A claim [by a creditor of a bankruptcy debtor], . . . proof of
which is filed under section 501 of [the Bankruptcy Code], is
deemed allowed, unless a party in interest . . . objects.” 11
U . S . C . § 502(a). “ A proof of claim executed and filed in
accordance with [the Federal Rules of Bankruptcy Procedure] shall
constitute prima facie evidence of the validity and amount of the
claim.” F E D . R . BANKR. P . 3001(f); see also Juniper Dev. Group v .
Kahn (In re Hemingway Transp., I n c . ) , 993 F.2d 915, 925 (1st Cir.
1993). “In order to rebut the presumption that attaches to a
7 proof of claim, a party objecting must produce “‘substantial
evidence.’” United States v . Clifford (In re Clifford), 255 B.R.
258, 262 (D. Mass. 2000) (citing In re Hemingway, 993 F.2d at
925). “If the objecting party sufficiently rebuts the claimant’s
prima facie case, the burden shifts back to the claimant as it is
ultimately ‘for the claimant to prove his claim, not for the
objector to disprove it.’” In re G. Marine Diesel Corp., 155
B.R. 8 5 1 , 853 (Bankr. E.D.N.Y. 1993) (quoting In re Gorgeous
Blouse Co., 106 F. Supp. 465, 465 (S.D.N.Y. 1952)); see also In
re Hemingway, 993 F.2d at 925 (“Once the trustee manages the
initial burden of producing substantial evidence . . . the
ultimate risk of nonpersuasion as to the allowability of the
claim resides with the party asserting the claim.”) (citations
omitted).
Notwithstanding the well-established burden-shifting scheme
outlined above, one additional rule applies. In Raleigh v .
Illinois Department of Revenue, the United States Supreme Court
explained that “[t]he ‘basic federal rule’ in bankruptcy is that
state law governs the substance of claims.” 530 U.S. 1 5 , 20
(2000) (quoting Butner v . United States, 440 U.S. 4 8 , 57 (1979)).
8 The substance of a claim, in turn, includes its burden of proof.
Raleigh, 530 U.S. at 20-21 (citations omitted). The Court went on
to explain that “[u]nless some federal interest requires a
different result, there is no reason why [the state] interests
should be analyzed differently simply because an interested party
is involved in a bankruptcy proceeding.” Raleigh, 530 U.S. at 20
(quoting Butner, 440 U.S. at 55) (alteration in the original).
Based on those principles, the Raleigh court held that when the
Illinois Department of Revenue made a claim against a bankruptcy
estate, the trustee bore the burden of proof because the Illinois
tax code placed the burden of proof on the taxpayer when he or
she has been served with a notice of deficiency. 530 U.S. at 1 7 .
While the underlying state law at issue in Raleigh was the
Illinois tax code, its holding has been applied in other state-
law contexts as well. See, e.g., In re Cantrell, 270 B.R. 5 5 1 ,
556 n.13 (Bankr. D. Conn. 2001) (“With respect to the standard of
proof required to establish the existence of the [resulting]
trust, the same standard applies in bankruptcy as outside of
bankruptcy.”).
9 In light of Raleigh’s holding that “one who asserts a claim
is entitled to the burden of proof that normally comes with it,”
530 U.S. at 2 1 , it is necessary to examine the state-law basis
for Auto Shine’s claim in order to determine the burden of proof
to which Auto Shine is entitled. Both parties agree that Auto
Shine’s rights as a secured creditor are governed by New
Hampshire’s version of UCC (before the amendments effective on
July 1 , 2001).
Under New Hampshire’s UCC, a secured creditor has three
avenues of recourse against a debtor in default. First, the
secured creditor may “reduce his claim to judgment, foreclose or
otherwise enforce the security interest by any available judicial
procedure.” RSA 382-A:9-501(1) (1994). Second, the secured
creditor “may take possession of the collateral,” RSA 382-A:9-503
(1994), “sell, lease or otherwise dispose of any or all of the
collateral,” RSA 382-A:9-504(1) (1994), and then apply the
proceeds to “the satisfaction of indebtedness secured by the
security interest under which the disposition is made,” RSA 382-
A:9-504(1)(b) (1994). O r , third,
10 a secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation. Written notice of such proposal shall be sent to the debtor and except in the case of consumer goods to any other secured party who has a security interest in the collateral and who has duly filed a financing statement indexed in the name of the debtor in this state or is known by the secured party in possession to have a security interest in i t . If the debtor or other person entitled to receive notification objects in writing within 30 days from the receipt of the notification or if any other secured party objects in writing within 30 days after the secured party obtains possession the secured party must dispose of the collateral under Section 9-504. In the absence of such written objection the secured party may retain the collateral in satisfaction of the debtor’s obligation.
RSA 382-A:9-505(2) (emphasis added). Section 9-505(2) of the UCC
is alternatively known as “the ‘retention’ or ‘strict
foreclosure’ option.” LaRoche v . Amoskeag Bank (In re LaRoche),
969 F.2d 1299, 1303 (1st Cir. 1992).
The legal effect of exercising the retention or strict
foreclosure option has been described as follows:
[t]he Code makes clear . . . that retention of the collateral normally completely satisfies the debt; the secured party must abandon any claim for deficiency (unless the debtor signs a written statement permitting such a claim . . . ) . U.C.C. § 9-505, comment 1 ; 2 J. White and R. Summers, Uniform Commercial Code 585; Tanenbaum v . Economics Laboratory, Inc., 628 S.W.2d 769, 771 (Tex. 1982). The Code also states that the
11 secured party must give notice of its intention to retain the collateral in satisfaction of the obligation, so that the debtor may object to retention and demand that the collateral be sold.
Lamp Fair, 888 F.2d at 176 (interpreting Connecticut’s UCC)
(emphasis in the original); see also Banker, 771 F. Supp. at 8
(“The New Hampshire U.C.C. provisions applicable to the instant
case [§§ 5 0 1 , 5 0 4 , and 505 of Article 9 ] are identical in all
material respects to those construed in Lamp Fair, and this Court
is unaware of any reason why New Hampshire’s reading of these
provisions would differ from Connecticut’s.”).
The § 9-505 retention option provides a method for
satisfying a secured debt, but it also provides an affirmative
defense that may be raised by a debtor when a creditor attempts
to use the § 9-501 reduction-to-judgment option. See, e.g.,
LaRoche, 969 F.2d at 1302 (“LaRoche raised the defense of payment
[to Amoskeag’s action to collect on a debt], arguing that
Amoskeag’s reregistration of the pledged shares . . . constituted
a proposal to accept and retain the collateral in full
satisfaction of the indebtedness pursuant to Article 9 of the New
Hampshire Uniform Commercial Code.”); Lamp Fair, 888 F.2d at 174-
12 75 (defendant/debtor asserted § 9-505 as defense against
plaintiff/creditor’s suit for judgment on the debt); Banker, 771
F . Supp. at 7 (same).
Here, Auto Shine’s claim against the bankruptcy estate
constitutes an “available judicial procedure” for purposes of §
9-501, which makes the Trustee’s § 9-505 argument an affirmative
defense. The debtor would bear the burden of proof with respect
to that defense outside the bankruptcy context. Because the
Trustee’s invocation of § 9-505 is an affirmative defense to Auto
Shine’s § 9-501 claim, the burden does not shift back to Auto
Shine to prove that it did not retain collateral in full
satisfaction of Campano’s debt; the burden remains on the Trustee
to prove that Auto Shine did retain collateral in full
satisfaction of that debt. See Raleigh, 530 U . S . at 17
(“bankruptcy does not alter the burden imposed by the substantive
law”); see also 4 COLLIER ON BANKRUPTCY (Alan N . Resnick & Henry J .
Sommer eds., 15th ed. rev.) ¶ 502.02[3][f] (“The trustee bears
the burden of proving any affirmative defenses . . . ” ) . 3
3 Several state courts have ruled that the debtor bears the burden of proving that a creditor availed itself of the § 9-505 retention option. In Munao v . Lagattuta, the Appellate Court of Illinois held that “[a]bsent written notice [from a creditor
13 Accordingly, the Bankruptcy Court did not incorrectly shift the
burden of proof when it ruled that the Trustee failed to
establish that Auto Shine’s claim was barred by the strict
forfeiture doctrine. It was the trustee’s burden to establish
full satisfaction, not Auto Shine’s burden to disprove i t .
II. Substantial Evidence of the Invalidity of Auto Shine’s Claim
The Trustee also argues that the Bankruptcy Court
incorrectly determined that he failed to produce substantial
evidence that Auto Shine retained its collateral in full
satisfaction of Campano’s debt. There is no need to address the
Trustee’s argument on substantial evidence because the Bankruptcy
Court never decided that the Trustee failed to carry his burden
indicating its intention to proceed under § 9-505], a debtor . . . has the burden of establishing that the parties agreed to a retention of the collateral in full satisfaction of the debt,” 691 N.E.2d 8 1 8 , 822 (Ill. App. C t . 1998); see also I F G Leasing C o . v . Gordon, 776 P.2d 6 0 7 , 614 n.32 (Utah 1989) (citations omitted); Nelson v . Armstrong, 582 P.2d 1100, 1108 (Idaho 1978) (explaining that § 9-505(2) is “a statutory analogue to the common law concept of accord and satisfaction” under which burden is on the debtor to “show[] that the creditor definitely assented to that arrangement”) (citations omitted). In New Hampshire, as in Idaho, the burden of proving an accord and satisfaction is on the defendant who asserts accord and satisfaction as a defense against an action for breach of contract. See, e.g., Post Road Realty, Inc. v . Zee-Bar, Inc., 117 N . H . 136, 139 (1977) (citations omitted); Kramas v . Beattie, 107 N . H . 3 2 1 , 324 (1966) (citing 6 ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS, § 1280 (1962)).
14 of production. Rather, the Bankruptcy Court necessarily found
that the Trustee did meet his burden of production, because the
Court went on to resolve the Trustee’s strict foreclosure
argument on its merits. Accordingly, the Trustee’s second ground
for appeal is unavailing.
III. Strict Foreclosure on the Merits
As a preliminary matter, it is not at all clear that the
Trustee is entitled to assert strict foreclosure, because Auto
Shine concededly never provided Campano with written notice of a
proposal to avail itself of the § 9-505(2) retention option.
Notwithstanding the explicit notice requirement in § 9-
505(2), a majority of courts have taken the view that a secured
party’s conduct can, under appropriate circumstances, bring a
transaction with a debtor “within the scope of the § 9-505(2)
‘retention option,’ irrespective of whether or not [the secured
party] consciously chose to invoke this option.” Lamp Fair, 888
F.2d at 176 (citations omitted). In a case that post-dated
Banker, the New Hampshire Supreme Court recognized that some
courts have found implicit retention “where the secured party
15 retains the collateral for ‘an unreasonable period of time’
without written notice of intent . . . or when ‘the secured
party, by his actions, manifest[s] an intent to retain the
collateral in satisfaction of the obligation.” Jenkins v . G2S
Constructors, Inc., 140 N.H. 219, 227 (1995) (quoting Cohen v .
Rains, 769 S.W.2d 3 8 0 , 387 (Tex. C t . App. 1989)). The Court,
however, stopped short of adopting either of those “methods for
avoiding strict compliance with the written notice provisions of
RSA 382-A:9-505,” because it was able to resolve the question
before it on other grounds. Jenkins, 140 N.H. at 227. In other
words, the New Hampshire Supreme Court has not yet read the
notice requirement out of RSA 382-A:9-505(2), and may not do s o .
See LaRoche, 969 F.2d at 1303 (noting that party seeking to rely
on strict foreclosure doctrine conceded that secured party did
not give written notice, but contended “that the New Hampshire
courts may yet adopt an alternative interpretation of U.C.C. § 9-
505(2), which might save the day”).
The Trustee faces two difficult problems – first, no notice
was given, and, second, even if the New Hampshire Supreme Court
would hold that written notice is not strictly required, and
16 would recognize strict foreclosure by implication, the Trustee
still would not prevail in this case.
A. Factual Matters
The Trustee argues that the following factual findings by
the Bankruptcy Court, relevant to strict foreclosure by
implication, were clearly erroneous:
that Auto Shine did not take possession of substantially all of Sales and Service’s assets
that most of the equipment and inventory removed by White and Mattia on March 2 8 , 2001, had been previously paid for by customers; and
that most, if not all, of the equipment and inventory removed by White and Mattia was installed at customer sites before they went to work for Car Wash.
Based upon the record developed at the July 2 9 , 2002, hearing,
this court’s deferential standard of review on factual matters,
and, given the Trustee’s burden of proving that Auto Shine
retained its collateral in full satisfaction of Campano’s debt,
and, even in light of the April 6, 2001, letter in which
DiTommaso’s attorney stated “[his] understanding that M r . Campano
has voluntarily surrendered substantially all of the corporate
assets to M r . DiTommaso, a secured creditor,” it was still not
17 clearly erroneous for the Bankruptcy Court to find that Auto
Shine did not retain substantially all of Sales and Service’s
business assets. For example, Auto Shine never obtained Sales
and Service’s receivables, nor did it retain or otherwise control
the items of inventory installed by White and Mattia in the
interval between the end of Sales and Service and the formation
of Auto Shine. Given the assets that Auto Shine never possessed
(i.e., the receivables), the assets it possessed but never used
(i.e., the telephone system and computers), and the equipment and
inventory that DiTommaso purchased in order to get Car Wash off
the ground, the two remaining factual determinations are not
critical to determining the ultimate question, which is whether
Auto Shine retained its collateral in full satisfaction of
Campano’s debt. Accordingly, no basis exists upon which to set
aside the Bankruptcy Court’s findings of fact.
B. Legal Questions
The Trustee also argues that the Bankruptcy Court committed
legal error by: (1) ruling, by implication, that pre-paid
inventory items were not subject to the claims of secured
creditors; and (2) failing to correctly apply the holdings in
18 Lamp Fair and Banker. The Bankruptcy Court committed no error of
law.
It was not clearly erroneous for the Bankruptcy Court to
find that Auto Shine did not retain substantially all of Sales
and Service’s business assets, regardless of the status of the
disputed inventory. Therefore, any legal error in characterizing
that inventory would be harmless. But, perhaps more importantly,
as the Trustee himself acknowledges, the Bankruptcy Court did not
issue any ruling of law with respect to the pre-paid inventory.
Even if the Trustee’s legal argument about the status of the pre-
paid inventory is correct, there is simply no ruling of law to be
reversed.
The Bankruptcy Court also correctly distinguished Lamp Fair
and Banker. The creditors in those cases retained substantially
all the business assets of their respective debtors. Auto Shine
did not retain substantially all of Sales and Service’s business
assets. Moreover, the record discloses that for some months
after Sales and Service went under, and Campano found other
employment, Campano continued to work on several accounts for Car
19 Wash, with the understanding that if he were able to bring
sufficient new business to Car Wash, Auto Shine might release its
mortgage on his home. Thus, Campano’s own conduct refutes his
current claim that Auto Shine had been fully satisfied by
retention of Sales and Service’s business assets.
Conclusion
For the reasons given, the order of the Bankruptcy Court is
affirmed.
SO ORDERED.
Steven J. McAuliffe United States District Judge
May 2 9 , 2003
cc: Deborah A . Notinger, Esq. Jack B . Little, Esq. George Vannah, Clerk, US Bankruptcy Court Daniel S . Campano