MAGDELINE D. COLEMAN, Bankruptcy Judge.
This involuntary proceeding arises from a dispute between the petitioning creditor, Catherine E. Moore (the "Petitioning Creditor" or "Moore") and her nephew, Thomas J. Elverson (the "Proposed Debtor" or "Elverson"), regarding loans allegedly made by Moore to Elverson over an almost twenty year time period. The Proposed Debtor requests that the Court dismiss the involuntary petition because (1) he is generally paying his debts as they become due, and (2) the alleged debts owed to Moore are subject to a bona fide dispute as to liability.
For the reasons discussed below, this Court finds that dismissal is warranted. Although the Proposed Debtor is generally not paying his debts as they become due and it is admitted that he has fewer than twelve creditors, the Petitioning Creditor's claim is subject to a bona fide dispute.
On December 13, 2011 (the "Petition Date"), Moore filed the involuntary petition ("Petition") against Elverson, the son of her deceased sister. He is apparently Moore's only family member who lives in the Philadelphia area. She presently resides at 200 N. Wynnewood Avenue, Apt. 1051, Wynnewood, Pennsylvania. He presently resides at 506 Ogden Avenue, Swarthmore, Pennsylvania (the "Property").
It appears that for the last fifteen to twenty years, Moore has written checks to Elverson to assist him with the payment of his various living expenses. As a result of this custom, the Petitioning Creditor claims to have loaned to the Proposed Debtor a total of $850,000 (the "Claim").
On January 20, 2012, the Proposed Debtor filed his Involuntary Answer and Counterclaim ("Motion to Dismiss") wherein the Proposed Debtor requested this Court dismiss the Petition. In the Motion to Dismiss, the Proposed Debtor denied that he was generally not paying his debts as they became due and argued that Moore lacked standing to file the Petition because her claim is subject to a bona fide dispute. The Proposed Debtor alleged that Moore had no expectation of repayment of the various checks written to the Proposed Debtor because they were gifts to him made in recognition of the Moore's gratitude for the assistance provided to her by the Proposed Debtor. Alternatively, the Proposed Debtor alleged that Moore's claim was barred by the applicable statute of limitations, and the doctrines of laches and estoppel. Finally, the Motion to Dismiss requested this Court find that the Proposed Debtor was entitled to a judgment pursuant to § 303(i) against Moore for his costs and attorney's fees plus punitive damages as sanction for Moore's alleged bad faith.
After the appearance of the parties before this Court, this Court entered an Order dated April 12, 2012, setting forth a schedule in anticipation of trial. The parties were ordered to complete discovery on or before May 11, 2012, to file any dispositive motions on or before May 25, 2012, and to appear at a trial scheduled for June 27, 2012 (the "Trial").
On June 25, 2012, counsel for the Proposed Debtor caused to be filed with this Court a letter raising for the first time his client's intent to contest the authenticity of certain documents that Moore intended to rely upon at the Trial. The Proposed Debtor apparently desired to obtain originals of the documents in order to have them reviewed by an expert in hand writing analysis. In this letter, the Proposed Debtor requested a continuance of the Trial that was set to be held two days later.
On June 26, 2012, the Proposed Debtor filed a formal motion requesting a continuance of the Trial scheduled for the following day. This motion restated the Proposed Debtor's intent to contest the authenticity of certain documents and the need to postpone the Trial to allow for their review by a handwriting expert. As stated by Moore's response to the Proposed Debtor's motion requesting a continuance, she did not consent to the continuance because of her belief that the Proposed Debtor's request was no more than a delay tactic. Moore correctly observed that this Court had scheduled a discovery period during which the Proposed Debtor had opportunity to address his concerns. Yet, for whatever reason, the Proposed Debtor waited until the eve of the Trial to raise these issues for the first time.
The next day, the parties appeared before this Court. This Court denied the Proposed Debtor's request for a continuance and proceeded with the Trial as scheduled. At the Trial, this Court heard the testimony of Moore and the Proposed Debtor. At the close of the Trial, this Court advised the parties that the evidence was sufficient to establish that the Proposed Debtor was generally not paying his debts as they became due. The parties then requested the opportunity to submit briefs addressing the issue of whether, based on the evidence provided to this Court, Moore's claim was subject to a bona
Section 303(b) of the Code provides that a single petitioning creditor may commence an involuntary bankruptcy case if (1) "there are fewer than 12 such holders;" 11 U.S.C. § 303(b)(2); and (2) the petitioning creditor's claim is "not contingent as to liability or the subject of a bona fide dispute as to liability or amount ..." 11 U.S.C. § 303(b)(1). The parties do not dispute that the Proposed Debtor has fewer than twelve creditors and this Court finds that the evidence produced at Trial was sufficient to establish that the Proposed Debtor was generally not paying his debts as they became due. Therefore, the only issue for this Court to address is whether the Petitioning Creditor has standing to file the Involuntary Petition. To have standing, the Petitioning Creditor must be the holder of a bona fide claim against the Proposed Debtor. Landon v. Hunt, 977 F.2d 829, 832 (3d Cir.1992) ("The Bankruptcy Code clearly states that an involuntary proceeding can only be filed by creditors who hold claims that are not contingent as to liability or subject to a bona fide dispute") (emphasis in original); B.D.W. Assocs., Inc. v. Busy Beaver Bldg. Ctrs., Inc., 865 F.2d 65, 66 (3d Cir.1989) (recognizing that if a creditor's claim is subject to a bona fide dispute, that creditor lacks standing to file an involuntary petition); In re Tama Manufacturing Co., Inc., 436 B.R. 763, 768 (Bankr.E.D.Pa. 2010) (same).
To be not subject to a bona fide dispute, a petitioning creditor's claim must be certain as to both liability and amount. 11 U.S.C. § 303(b)(1); In re Skyworks Ventures, Inc., 431 B.R. 573, 578 (Bankr. D.N.J.2010) (finding that petitioning creditor lacked standing where "claim was disputed as to liability and amount"); In re Euro-American Lodging Corp., 357 B.R. 700, 712 n. 8 (Bankr.S.D.N.Y.2007) (stating that as a result of the 2005 amendments "any dispute regarding the amount that arises from the same transaction and is directly related to the underlying claim should render the claim subject to a bona fide dispute."); In re Mountain Dairies, Inc., 372 B.R. 623, 633 (Bankr.S.D.N.Y. 2007) (stating "That a claim could have been filed in good faith when a substantial portion of that claim was the subject of a dispute on its face is untenable"). Ultimately, a petitioning creditor's claim is the subject of a bona fide dispute if "there is a genuine issue of a material fact that bears upon the debtor's liability, or a meritorious contention as to the application of law to undisputed facts." B.D.W. Assoc., Inc., 865 F.2d at 65; Tama Manufacturing Co., 436 B.R. at 768 (applying Busy Beaver standard).
The Petitioning Creditor bears the burden of providing prima facie evidence that her Claim is not subject to a bona fide dispute. Once the Petitioning Creditor meets her prima facie burden, the Proposed Debtor bears the burden of establishing that a bona fide dispute does exist with regard to the Petitioning Creditor's Claim. Bartmann, 853 F.2d at 1543-44 (discussing burden shifting standard with regard to a creditor's standing to file an involuntary petition); In re Dilley, 339 B.R. 1, 6 (1st Cir. BAP 2006) (discussing shifting burdens); Mountain Dairies, Inc., 372 B.R. at 633 ("the petitioning creditor must first establish a prima facie case that no bona fide dispute exists"); In re Mylotte, David & Fitzpatrick, Bky. No. 07-11861, 2007 WL 2033812, at *6 (Bankr.
The Petitioning Creditor alleges that her Claim is derived from the Proposed Debtor's failure to repay a loan in the amount of $850,000. To provide prima facie evidence of her Claim, the Petitioning Creditor must provide evidence of the alleged loan. In re VitaminSpice, 472 B.R. 282, 291 (Bankr.E.D.Pa.2012) (recognizing that loan documents introduced by petitioning creditors were sufficient to establish prima facie validity of claims); In re Taub, 439 B.R. 261, 274-75 (Bankr. E.D.N.Y.2010) (finding that petitioning creditor lacked standing where she had presented no evidence of the underlying agreement supporting her claim); In re Rimell, 111 B.R. 250, 253 (Bankr.E.D.Mo. 1990) aff'd by 946 F.2d 1363 (8th Cir.1991) (evaluating underlying agreements to determine whether claim was subject to a bona fide dispute). As stated by the Third Circuit, "[u]nder common law, to constitute a loan there must be (i) a contract, whereby (ii) one party transfers a defined quantity of money goods, or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date." Boston University v. Mehta (In re Mehta), 310 F.3d 308, 313 (3d Cir.2002) (addressing what constitutes a loan under § 523(a)(8)). Put another way, to establish the prima facie validity of her Claim, the Petitioning Creditor must establish the existence of one or more contracts obligating the Proposed Debtor to repay $850,000. Her Claim would consist of the obligations imposed on the Proposed Debtor by this contract.
To determine whether she has established her prima facie case that no bona fide dispute exists, this Court will address the evidence within the framework of traditional contract law. Axiomatically, a breach of contract claim, of which the Claim is a species, requires as a prerequisite the formation of an enforceable contract. Under Pennsylvania law,
As evidence of the contract that gives rise to her Claim, the Petitioning Creditor primarily relies on an Instant Memo dated July 6, 2011 (the "Instant Memo").
Trial Exh. P8 (strikethrough in original).
This Court finds that the Instant Memo alone is sufficient to establish that the parties shared a mutual expectation that the monies loaned to the Proposed Debtor would be repaid to the Petitioning Creditor. In the Instant Memo, the Proposed Debtor acknowledges that he owes $850,000 to the Petitioning Creditor. Despite this acknowledgement, this Court finds the Instant Memo to be insufficient to prove the existence of an enforceable contract because it makes no reference to the essential terms of whatever loan agreement that may exist between the parties. Mackay v. Mackay, 984 A.2d 529, 534 (Pa.Super.2009) (recognizing that when a party seeks to enforce an oral agreement, the party must establish the essential terms and conditions of the alleged agreement); CoreStates Bank, N.A. v. Cutillo, 723 A.2d 1053, 1058 (Pa.Super.1999) (stating that a party must establish the essential terms of a contract in order to state a claim for breach of contract); Estate of Rodgers v. Morris Chapel Missionary Baptist Church, No. 04-1577, 2005 WL 3602536 (Pa.Ct.Com.Pl. Dec. 14, 2005) (holding failure to establish terms of an
Reference to parole evidence is of no assistance to cure the failure of the Instant Memo to establish the essential terms of whatever agreement governs repayment of Moore's claim. For example, it is clear to this Court that the Property played some role in the agreement. At the Trial, the Petitioning Creditor stated that pursuant to her agreement with the Proposed Debtor she was to be repaid from the sale of the Property or, alternatively, that the alleged loan agreement required the Proposed Debtor to transfer his interest in the Property to her. Audio recording of Trial 6/27/2012 @ 12:00pm (11:59:59-12:00:05) Bky. No. 11-19455MDC (stating "Because I was going to be paid back ... from the sale of his house"); Audio recording of Trial 6/27/2012 @ 1:33 pm (1:33:40-1:33:47) Bky. No. 11-19455MDC (stating "He was desperate for money and I would get the whole house.") (emphasis added). From this testimony, this Court is left with several questions. Was the sale of the Property supposed to trigger the Proposed Debtor's repayment obligations? Was the Property intended to serve as some sort of security for the Proposed Debtor's repayment obligations? Did the Proposed Debtor agree to sell her the Property in consideration of the alleged loan? Was the alleged loan itself consideration for the sale of the Property?
Whatever the import of the Petitioning Creditor's statements regarding the role of the Property in the alleged agreement between the parties, it is clear that the Property played a significant role in whatever agreement that may or may not have existed between the parties. From the Petitioning Creditor's testimony, it is clear that she believes whatever agreement she may or may not have with the Proposed Debtor conveys upon her some interest in the Property or is in some way conditioned upon the sale of the Property. Failing to establish all of the essential terms of the alleged loan agreement, the Petitioning Creditor did not establish the existence of an enforceable agreement between the parties let alone that the existence of such an agreement is not subject to a bona fide dispute.
Complicating matters, the Petitioning Creditor's testimony regarding that her loans to the Proposed Debtor conferred upon her some interest in the Property creates a bona fide issue with regard to the application of the Pennsylvania Statute of Frauds, 33 P.S. § 1. Under the Pennsylvania Statute of Frauds, any transfer of an interest in real property is not enforceable unless evidenced in writing. 33 P.S. § 1; Bozzi v. Greater Delaware Valley Sav. and Loan Ass'n, 255 Pa.Super. 566, 389 A.2d 122, 124 (1978) ("The statute of frauds requires any agreement granting an interest in land to be in writing."). This Court need not decide the scope of that interest or even whether such an interest was transferred. This Court must only determine whether a meritorious contention as to the application of law exists as to the enforcement of the alleged loan agreement. According to the testimony of the Petitioning Creditor, the alleged agreement may confer upon her an interest in
This Court notes that it is not finding that an enforceable agreement does not exist or that the Instant Memo may not serve as evidence of such an agreement. This Court is only recognizing that substantial issues relate to the use of the Instant Memo as the primary evidence of a contract underlying the Claim. Absent other evidence to resolve these uncertainties, these issues necessarily create bona fide disputes as to the Petitioning Creditor's alleged Claim.
In addition to the Instant Memo, the Petitioning Creditor also provided a copy of a Promissory Note dated December 22, 2002 (the "Promissory Note"), a document that purports to obligate the Proposed Debtor to pay $152,200 plus accrued interest to the Petitioning Creditor.
The application of the New York statute of limitations creates a bona fide dispute as to the enforceability of the Promissory Note. The Promissory Note was executed on December 22, 2002. Under New York law, an action to recover on a promissory note must be commenced within six years. N.Y. C.P.L.R. § 213; Morrison v. Zaglool, 88 A.D.3d 856, 931 N.Y.S.2d 82, 84 (N.Y.App.Div.2011). With regard to a promissory note that is payable as of a specific date, New York law provides that the cause of action to enforcement such note accrues as of the specific date the note becomes payable. Id. With respect to a note payable in installments, New York law provides that a separate cause of action accrues upon the nonpayment of each past due installment. Id.
The Promissory Note's first payment came due upon July 1, 2003, and its final payment was due on December 22, 2005. The terms of the Promissory Note state that the entire principal balance was to be paid on or before December 22, 2005. Therefore, the applicable statute of limitations would have barred the Petitioning Creditor from asserting any claim brought after December 22, 2011. However, she filed the Involuntary Petition on December 13, 2011. Because the state of limitations did not run prior to the filing of the Involuntary Petition, it appears that the Petitioning Creditor is not barred from pursuing a cause of action against the Proposed Debtor for nonpayment of the principal balance payment that was due on December 22, 2005.
However, the Promissory Note also provided for bi-annual payments of accrued interest beginning on July 1, 2003.
The Petitioning Creditor testified that she began making demands upon the Proposed Debtor to make payments immediately after the Promissory Note was alleged to be executed. Despite her demands, she admits that she never received any of the payments due pursuant to the terms of the Promissory Note and that she has taken no action prior to the filing of the Involuntary Petition to enforce its terms. Audio recording of Trial 6/27/2012 @ 1:10 pm (1:10:53-1:11:45) Bky. No. 11-19455MDC. Without making any conclusions, this Court observes that the Proposed Debtor's conduct certainly had the color of an unequivocal repudiation. If so, the statute of limitations would have expired on July 1, 2009, six years from the date the first interest payment was due and prior to her taking any action to enforce the Promissory Note. While this Court is unprepared to find whether the facts are sufficient to establish that the Proposed Debtor unequivocally repudiated the Promissory Note, this Court is prepared to recognize that a bona fide issue exists with regard to whether the Proposed Debtor's failure to pay the interest payments in the face of the Petitioning Creditor's demands constitutes an unequivocal repudiation.
In addition to the Instant Memo and Promissory Note, the Petitioning Creditor provided copies of approximately 104 negotiated checks, two handwritten ledgers identifying some but not all of the alleged checks provided to the Proposed Debtor
Like the Instant Memo, an oral agreement between the parties would be between Pennsylvania residents and appears to have been negotiated, entered into, performed, and breached in Pennsylvania. Under such circumstances, such an agreement would be governed by Pennsylvania law. Benevento v. Life USA Holding, Inc., 61 F.Supp.2d 407 (E.D.Pa.1999) (identifying factors Pennsylvania courts will consider in determining the law of which jurisdiction would apply to breach of contract action). Under Pennsylvania law, the applicable statute of limitations is four years and is set forth in 42 Pa.C.S.A. § 5525:
42 Pa.C.S.A. § 5525; see also In re Irwin, Bky. No. 10-14407, 2010 WL 4976226, at *4 (Bankr.E.D.Pa.2010).
With regard to oral agreements to repay a loan, the statute of limitations begins to run at the time the loan is made. In re Irwin, Bky. No. 10-14407, 2010 WL 4976226, at *4 (Bankr.E.D.Pa. 2010) ("With respect to an oral contract to repay a loan ... the limitations period commences when the loan was made."); In re Michael Angelo Corry Inn, Inc., 297 B.R. 435, 438 (Bankr.W.D.Pa.2003) ("When an oral contract to repay a loan is formed, the statute of limitations runs from the time the loan was made."); In re Pagnotti, 269 B.R. 326, 334-35 (Bankr.M.D.Pa.2001) (finding that Pennsylvania statute of limitations
The Bankruptcy Abuse Prevention and Consumer Act of 2005 ("BAPCPA") amended Bankruptcy Code Section 303(b) to clarify the definition of "bona fide dispute" to include disputes as to liability or amount. Therefore, a petitioning creditor lacks standing even if only a portion of her claim is subject to a bona fide dispute. In re Taub, 438 B.R. 761, 773-74 (Bankr. E.D.N.Y.2010) (finding that petitioning creditor's failure to produce evidence sufficient to substantiate the amount of her claim required dismissal of involuntary petition); In re Hentges, 351 B.R. 758, 777 (Bankr.N.D.Okla.2006). By operation of the statute of limitations, it appears that a significant portion of the Petitioning Creditor's Claim is uncollectable.
Finally, this Court finds that the letters written by the Proposed Debtor regarding the indebtedness he apparently paid off sometime during the 1990s do not resolve whether later round of checks were intended as loans. While these letters do evidence that the parties had previously entered into loan agreements, this Court cannot say that they are conclusive as to the parties' intent regarding a later agreement.
As stated above, this Petitioning Creditor has failed to introduce evidence sufficient to establish her prima facie case that no bona fide dispute exists. The evidence presented is insufficient to establish the essential terms of an agreement that is purported to obligate the Proposed Debtor to repay the amount of her Claim. Even assuming the Petitioning Creditor has produced sufficient evidence to establish the terms of the underlying agreement, this Court finds that issues relating to the Pennsylvania Statute of Frauds and the applicable statutes of limitations are sufficient to demonstrate that a bona fide dispute does exists as to both liability and amount. Substantial issues of law and fact must be resolved in order to determine the legitimacy of the Petitioning Creditor's Claim. The proper venue for resolution of these issues is a court of general jurisdiction. The Petitioning Creditor is therefore without standing to file the Involuntary Petition and it therefore must be dismissed.
An Order consistent with this Memorandum will be entered.
Goldberg v. Wine, 326 Pa. 335, 192 A. 252, 253 (1937) (emphasis added); see also Goslin v. Edmunds, 325 Pa. 154, 188 A. 851, 854 (1937) ("The endorsement of a check absolute in form is sufficient to give rise to a presumption of a gift of the check."). Therefore, the checks are not in and of themselves evidence of a loan. It remained incumbent upon the Petitioning Creditor to provide independent evidence that any checks provided to the Proposed Debtor were in fact intended as loans.
