Barbara J. Houser, United States Bankruptcy Judge.
Before the Court is the Debtor's Amended Objection to Claim of Christina Dudek (Claim No. 3) [ECF No. 40] and the Debtor's Amended Objection to Claim of Nacol Law Firm (Claim No. 4) [ECF No. 41]
Christina Dudek ("
The factual predicate for the Dudek Claim revolves around foundation problems Dudek experienced at her townhome and her desire to have the Association make and pay for the necessary repairs. In oversimplified terms, Dudek contends that under the terms of the Bylaws and related documents, the Association is responsible to repair the foundation of her townhome. Attached to the Dudek Claim as Exhibit C is an itemization of her alleged actual damages plus attorney's fees, costs of suit, and future repairs she apparently asserts will be necessary to the interior of her townhome, all of which total the $69,139.35 sought in the Dudek Claim.
The Nacol Law Firm, PC, Dudek's counsel in the state court lawsuit and here, filed Proof of Claim No. 4 on December 13, 2016 on its own behalf, asserting a $22,602.35 claim against the Association (the "
As noted previously, the Claim Objections were set for hearing before the Court on March 7, 2017 (the "
However, on March 23, 2017, the Court advised the parties by email from its Courtroom Deputy that (i) it had reconsidered its ruling sustaining the Association's evidentiary objection and that it wished to hear a proffer of the testimony that Nacol had sought to give at the Hearing, and (ii) once the proposed testimony was proffered, the Court would give the Association the opportunity to explain how it would be unfairly surprised and/or prejudiced by the admission of that proposed testimony. Nacol proffered his testimony on March 24, 2017, at a hearing already scheduled to consider, among other things, confirmation of the Association's proposed plan of reorganization. As the Court suspected, Nacol's testimony only related to the reasonableness of the fees that the Nacol Law Firm had incurred in representing Dudek. Because copies of the Nacol Law Firm's fee statement were attached to both the Dudek Claim and the Nacol Firm Claim, the Court concluded
At this later hearing, the Court reopened the evidentiary record to permit Nacol to testify consistent with his proffer and for the Association to offer rebuttal evidence, if any. At the hearing, Nacol offered testimony in support of the reasonableness of the fees and expenses the Nacol Law Firm incurred in its representation of Dudek (both before and after the Association's bankruptcy filing) and was subject to cross-examination. In turn, the Association offered rebuttal testimony regarding the reasonableness of the Nacol Law Firm's fees and expenses from: (i) its state court counsel, Jason Reed, with respect to the claimed prepetition fees and expenses of the Nacol Law Firm, and (ii) its bankruptcy counsel, Joyce Lindauer, with respect to the claimed post-petition fees and expenses of the Nacol Law Firm. The Court then re-closed the evidentiary record and heard further oral argument on the Claim Objections. The Court also permitted the parties to submit limited post-hearing briefs. Nacol filed the last brief on March 30, 2017, at which time the Court took the matter under advisement.
With this background in mind, the Court will turn to its analysis of the Association's objection to the Dudek Claim. For the reasons explained below, the Court sustains the objection and disallows the Dudek Claim in its entirety.
In bankruptcy, a proof of claim filed in accordance with Bankruptcy Rule 3001 is "prima facie evidence of the validity and amount of the claim." FED. R. BANKR. P. 3001(f); see California State Board of Equalization v. Official Unsecured Creditors' Committee (In re Fidelity Holding Co., Ltd.), 837 F.2d 696, 698 (5th Cir. 1988). However, the objecting party may rebut this prima facie validity by producing evidence "of a probative force equal to that of the creditor's proof of claim." Fidelity Holding Co., Ltd., 837 F.2d at 698; Simmons v. Savell (In re Simmons), 765 F.2d 547, 552 (5th Cir. 1985); see Southland Corp. v. Toronto-Dominion (In re Southland Corp.), 160 F.3d 1054, 1059 (5th Cir. 1998). In other words, and as this Court recently held, once the prima facie validity of a proof of claim under Bankruptcy Rule 3001(f) is established,
In re Wyly, 552 B.R. 338, 379 (Bankr. N.D. Tex. 2016) (citations omitted).
Thus, once an objecting party produces evidence rebutting a proof of claim, the burden then lies with whichever party would normally bear such burden under relevant substantive law. Id. at 378. Here, that relevant substantive law is Texas state law, which puts the burden of proof on Dudek to establish her breach of contract, negligence, gross negligence, and/or breach of fiduciary duty claims against the Association, along with her entitlement to a recovery of reasonable attorney's fees
With this understanding of the shifting burdens, the Court returns to its analysis. As previously explained, a proof of claim executed and filed in accordance with Bankruptcy Rule 3001 constitutes "prima facie evidence of the validity and amount of the claim." FED. R. BANKR. P. 3001(f). As applicable here, the general requirements under Bankruptcy Rule 3001 are that the proof of claim conform substantially with the appropriate Official Form, is executed by the creditor or the creditor's authorized agent, and, if the claim is based on a writing, it attach a copy of that writing. The Dudek claim meets these requirements. It was filed on Official Form 410, which is the official proof of claim form utilized in bankruptcy cases, and was signed by Nacol as Dudek's attorney. Claim No. 3 at 1-3. Moreover, Dudek attached multiple documents to her claim, including among these: (i) Plaintiff's Original Petition filed in the state court action, (ii) the Residential Earnest Money Contract (Resale) under which Dudek purchased her townhome and related documents, (iii) a copy of a prior version of the By-Laws,
Despite this, the Association argues that the Dudek Claim should not be afforded prima facie validity because (i) it fails to establish the required elements for its claims for breach of contract, negligence, and gross negligence, (ii) it is internally inconsistent, and (iii) the documents attached to the claim are inadmissible hearsay. Association's Letter Brief [ECF No. 88] at 1-4. Basically, the Association argues that, at the proof-of-claim stage, a claimant must submit evidence that fully supports its claim in a form that would be admissible under relevant evidentiary rules to be afforded prima facie validity. The Association, however, fails to cite the Court to a single case holding a proof of claim to such a high evidentiary standard before affording it prima facie validity. Instead, the Association relies on cases outside the proof-of-claim context to discuss burdens of proof and/or conflates the requirements for prima facie validity under Bankruptcy Rule 3001 with a party's ultimate burden at trial. Id. However, "nothing in Rule 3001 or other bankruptcy rules requires a claimant to reduce the evidence submitted with its proof of claim into a form that would be admissible under state law. Indeed, requiring a claimant to produce additional evidence to overcome a hearsay or other evidentiary objection directly undermines Rule 3001." In re Walston, 606 Fed.Appx. 543, 547 (11th Cir. 2015) (unpublished); see also LTV Corp. v. Gulf States Steel, Inc. of Ala., 969 F.2d 1050, 1058 (D.C. Cir. 1992) (explaining that "[p]roofs of claim are not intended to be elaborately detailed documents"); In re Burkett, 329 B.R. 820, 827 (Bankr. S.D. Ohio 2005) ("[T]he rules governing claims
Accordingly, based upon its review of the Dudek Claim, the Court concludes that it complies with the requirements of Bankruptcy Rule 3001 and serves as prima facie evidence of the validity and amount of Dudek's claims against the estate. FED. R. BANKR. P. 3001(f).
Because the Dudek Claim is afforded prima facie validity, it is the Association's burden to rebut that validity by "produc[ing] evidence at least equal in probative force to that offered by the proof of claim and which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency." Wyly, 552 B.R. at 375 (citing cases). In this regard, the Association argues that it has not breached any contract with Dudek because the Bylaws and related documents do not require it to repair Dudek's foundation. The Association further argues that it (i) did not fail to act as a reasonably prudent homeowner's association, (ii) carried out its duties under the Bylaws and related documents, and (iii) did not purposefully breach its duty to Dudek for which it could be held liable to Dudek for negligence and/or gross negligence. Finally, the Association argues that it did not breach any fiduciary duty to Dudek, since it has acted in a manner consistent with its duties under the Bylaws and related documents. And, because it is not liable to Dudek for any breach of contract, it is not liable to pay her reasonable attorney's fees and expenses. In support of its objection, the Association introduced various exhibits into evidence at the Hearing including the Bylaws [Association Ex. 8] and the Declaration of Covenants, Conditions and Restrictions of the Woodhaven Townhouse Subdivision [Association Ex. 9] (the "
Before considering this evidence, however, it is helpful for the Court to boil the parties' dispute down to its most basic element. Simply put, this dispute turns on the proper interpretation of the legal documents governing the parties' relationship—i.e., the Bylaws and the Covenants—and whether they impose a contractual or other duty on the Association to repair Dudek's foundation.
The parties, however, agree that Texas law governs this issue. Thus, Court must interpret the By-Laws and Covenants in accordance with the general principles of contract interpretation articulated
With this precedent in mind, the Court has carefully analyzed all of the provisions of the Bylaws and the Covenants; however, three provisions of the Bylaws and one provision of the Covenants are particularly relevant to the Courts' analysis. Article VIII, § 2(h) of the Bylaws is the starting point. It provides, in pertinent part, that:
By-Laws [Association Ex. 8] Art. VII, § 2(h).
The second relevant provision is Article XII, § 2 entitled "Purposes of Assessments." It provides that:
Id. Art. XII, § 2. At the Hearing, Garrett testified that Members of the Association pay monthly dues to the Association of $225.75 each, for an aggregate monthly total of approximately $9,000-$10,000, given that some Members do not pay their dues on time and/or are behind in their payments. As Article XII, § 2 states, assessments may be used to maintain the Properties (defined in the Covenants as "the Lots and the Recreation and Common Areas . . .") "including the exterior of Owners' dwelling on the Lots. . . ." So, the question becomes, is Dudek's foundation part of the exterior of her "dwelling?" And, once again, the Court would not normally consider the foundation to be part of the exterior of Dudek's dwelling, thinking that the exterior of her home would be the brick or siding covered walls, along with the roof.
Finally, Article XII, § 4 entitled "Special Assessments" provides that:
Id. Art. XII § 4. So, this provision would permit a Special Assessment if there were a deficit in the annual budget of the Association, but sheds no real light on what exterior maintenance of a Lot includes or whether the foundation is part of the exterior of Dudek's dwelling.
So, while the Bylaws are not particularly clear, the Court would likely conclude that repairing an Owner's foundation was not
Covenants [Association Ex. 9] Art. IX, § 3. And, while it clearly provides that each owner shall be responsible for the "repair. . . of the interior of his main residential structure," the Court would not normally consider the foundation to be part of the interior of Dudek's "main residential structure" like floor coverings, wall coverings, window shades, draperies, interior walls, etc.
But, that leaves us where we started. Who is responsible for repairs to the foundation of Owners' townhomes? Someone is responsible for them and there are only two possibilities—i.e., the Association or the Owners. Given that the provisions of the Bylaws and Covenants are arguably inconsistent with each other, the Court concludes that the governing documents are ambiguous. To resolve this ambiguity, the Court can no longer rely solely on the language of the governing documents to determine the parties' intent, and must look to extrinsic or parol evidence. Carpenters Amended and Restated Health Ben. Fund v. Holleman Const. Co. Inc., 751 F.2d 763, 766 (5th Cir. 1985). If a contract is ambiguous, as here, then "[p]arol evidence—such as the parties' course of performance—may be used to ascertain the intent of the parties . . . ." See Addicks Servs., Inc. v. GGP-Bridgeland, LP, 596 F.3d 286, 294 (5th Cir.2010).
From the Court's perspective, the Association has introduced evidence "equal in probative force" to that offered by the proof of claim and which, if believed, would refute at least one of the allegations that is essential to the Dudek Claim's legal sufficiency. It did this by (i) placing the Bylaws and Covenants into evidence, and (ii) adducing the testimony of Capote (the owner of The Foundation Company) who testified that in his opinion the foundation is not an exterior surface. The Association's counsel also made legal arguments regarding the effect of the governing documents.
But the Association went even further, it offered the testimony of Garrett, who testified that since she had been President of the Association's Board of Directors, the Association had consistently taken the position that repairing foundations was each Owner's responsibility, not the responsibility of the Association. Moreover, Garrett credibly testified that given the low monthly dues, it was unrealistic of Owners to think that the Association was responsible for foundation repairs. Garrett also testified that the Association had consulted counsel and was advised that foundation repairs were not its responsibility under the governing documents. See, e.g., Association Ex 26. Finally, Garrett testified that when the foundation underlying her townhome (and the townhomes of other Owners in her building that share the common
Thus, the ultimate burden of persuasion has shifted back to Dudek to prove her claim by a preponderance of the credible evidence. And, given her failure to file a witness or exhibit list or come to the Hearing with any witnesses other than Nacol (who only testified to the reasonableness of his attorney's fees and expenses), there is simply no evidence in the record establishing that, at the time the Bylaws and Covenants were executed, the parties intended that foundation repair was the Association's responsibility. Without evidence that the Association is contractually obligated to repair the foundations of individual Owner's townhomes, the Dudek Claim fails.
Moreover, Dudek put on no evidence regarding the amount of her alleged damages. Thus, even if the Association is responsible for the repair of Dudek's foundation, which Dudek has failed to prove, the Dudek Claim must be disallowed for her failure to prove up the cost to repair her foundation.
For these reasons, the Court concludes that the Association's objection must be sustained and the Dudek Claim disallowed. As noted previously, the Nacol Firm Claim was withdrawn on the record on March 24, 2017 as a duplicate, derivative claim of the Dudek Claim.
The Court directs counsel for the Association to upload an Order disallowing the Dudek Claim within seven days of the