Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California, March 19, 2008
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. LA 05-40150-EC. Honorable Ellen A. Carroll, Bankruptcy Judge, Presiding.
Before: KLEIN, BRANDT, [ and MACDONALD, Bankruptcy Judges.
Hon. Philip H. Brandt, U.S. Bankruptcy Judge for the Western District of Washington, sitting by designation.
Hon. Donald MacDonald, Chief U.S. Bankruptcy Judge for the District of Alaska, sitting by designation.
MEMORANDUM
Two creditors appeal an order sustaining the chapter 7 trustee's objections to claims totaling $387, 959.01 premised on the individual debtors' liability for credit card debts on corporate accounts. The debtors were officers, directors, and 40 percent shareholders of the corporation.
Without stating its findings of fact and conclusions of law either on the record or in writing, the bankruptcy court concluded that the appellants did not provide sufficient documentation to prove personal liability of the debtors or of the estate for the corporate expense.
Nor did the bankruptcy court conduct the evidentiary hearing with witnesses available for direct and cross-examination on the disputed material factual issues, as required by Federal Rule of Bankruptcy Procedure 9014(d).
The result is that we are left with a record that does not permit appropriate appellate review of an important question. Hence, we VACATE and REMAND to the bankruptcy court for, at a minimum, explicit findings of fact and conclusions of law and the evidentiary basis for such rulings. The bankruptcy court may elect to conduct further proceedings in light of Rule 9014(d).
FACTS
Appellees Alan and Jerund Dolch are joint debtors in a chapter 7 case filed on October 14, 2005, in which appellee John J. Menchaca is the chapter 7 trustee.
According to the debtors' Schedule B and Statement of Financial Affairs, they were officers, directors and 40 percent shareholders of MC2 Custom Alloys, Inc., a California corporation. The corporation is insolvent.
Other principals of the corporation are apparently being pursued as putative guarantors of the corporation's debt.
In dispute are three general unsecured proofs of claim. American Express' Claim Nos. 6 ($169, 909.27) and 7 ($197, 386.87) and MBNA's Claim No. 16 ($20, 662.87). All of these proofs of claim were timely filed by the same law firm.
The trustee objected to Claim Nos. 6, 7, and 16, on July 3, 2007, as part of an omnibus objection to eight claims. The objections to Claim Nos. 6, 7, and 16 were on grounds that the claims lacked sufficient documentation which would give rise to liability on the part of the debtors or the estate for the debts.
Such an omnibus objection to claim is now generally not permitted by Federal Rule of Bankruptcy Procedure 3007, as amended effective December 1, 2007.
Hearing on the trustee's objections to the American Express claims and the MBNA claim occurred on August 29, 2007, in which the court continued the hearing until October 31, 2007, to provide additional time for the appellants to present the court with further evidence to prove that the debtors were liable for the corporate expenses.
Four of the other five claims (Claim Nos. 2, 3, 15, and 17) in the omnibus objection were resolved by order entered on September 7, 2007. The trustee withdrew the objection to Claim No. 14 on September 4, 2007.
At the continued hearing, the court sustained the trustee's objections to the American Express claims and the MBNA claim, apparently because of the insufficiency of evidence provided by appellants. The court, however, neither actually conducted an evidentiary hearing in compliance with Rules 9014(d) and (e), nor made findings of fact and conclusions of law in compliance with Civil Rule 52. Fed.R.Civ.P. 52(a), incorporated by Fed.R.Bankr.P. 7052 & 9014.
The order disallowing Claim Nos. 6, 7, and 16 in their entirety was entered on November 9, 2007.
This timely appeal ensued.
JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334 over this core proceeding under 28 U.S.C. § 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158(a)(1).
ISSUE
Whether the bankruptcy court erred in sustaining the trustee's objection to the appellants' filed proofs of claim without conducting an evidentiary hearing to resolve contested material facts and without stating findings of fact or conclusions of law.
STANDARD OF REVIEW
We review findings of fact for clear error and issues of law de novo. Hoopai v. Countrywide Home Loans, Inc. (In re Hoopai), 369 B.R. 506, 509 (9th Cir. BAP 2007).
DISCUSSION
This appeal presents potentially important questions regarding evidence in support of proofs of claim in the context of transactions that are conducted electronically. It presents variations on the theme that we addressed in our so-called Vinhnee decision where the issue related to introducing account statements in evidence. Am. Express Travel Related Servs. Co. v. Vinhnee (In re Vinhnee), 336 B.R. 437 (9th Cir. BAP 2005). Here, the issue relates to the manner of proving the existence and terms of underlying contracts, the outcome of which involves fundamental assumptions underlying electronic commerce.
We are presented with a record, however, that does not permit meaningful review of such an important question. The basic problem is that the bankruptcy court did not employ the requisite procedure for hearing the dispute, considering testimonial and documentary evidence admitted pursuant to the Federal Rules of Evidence, and making findings of fact and conclusions of law. While we have done our best to attempt to resolve the appeal on the merits, we would have to make so many assumptions about facts and procedures that we could not do so in good conscience on such an important question.
I
An objection to a claim is a " contested matter" governed by Federal Rule of Bankruptcy Procedure 9014. Litton Loan Serv'g, LP v. Garvida (In re Garvida), 347 B.R. 697, 704 (9th Cir. BAP 2006); see Advisory Committee Note to Fed.R.Bankr.P. 3007.
Under Rule 9014(d), " [t]estimony of witnesses with respect to disputed material factual issues shall be taken in the same manner as testimony in an adversary proceeding." Fed.R.Bankr.P. 9014(d).
Rule 9014(d) was adopted in 2002 to stop a practice by which some courts required that Rule 9014 contested matters be resolved based on affidavits, as is permitted with respect to motions by virtue of Federal Rule of Civil Procedure 43(e). The Advisory Committee Note is explicit on the point:
Subdivision (d) is added to clarify that if the motion cannot be decided without resolving a disputed material issue of fact, an evidentiary hearing must be held at which testimony of witnesses is taken in the same manner as testimony is taken in an adversary proceeding or at a trial in a district court civil case. Rule 43(a), rather than Rule 43(e), F.R. Civ. P. would govern the evidentiary hearing on the factual dispute. Under Rule 9017, the Federal Rules of Evidence also apply in a contested matter. Nothing in the rule prohibits a court from resolving any matter that is submitted on affidavits by agreement of the parties.
Fed. R. Bankr. P. 9014(d), Advisory Committee Note.
There plainly were disputed material issues of fact. Nor does it appear that the parties agreed that the matter could be submitted on affidavits. The transcripts, rather, support the proposition that the parties were required by the court to present affidavits. Moreover, there is no indication in the record that the court complied with the requirement under Rule 9014(e) that there be procedures " that enable the parties to ascertain at a reasonable time before any scheduled hearing whether the hearing will be an evidentiary hearing at which witnesses may testify." Fed.R.Bankr.P. 9014(e).
Even if we inferred that the parties' conduct at the hearings indicated that they de facto consented to the proceedings as if stipulating to admission of the affidavits without cross-examination, we are reluctant to overlook the procedural error, especially in light of the absence of evidentiary rulings and findings of fact and conclusions of law.
II
Rule 9014 incorporates the provisions of Federal Rule of Civil Procedure 52, which require that findings and conclusions be stated on the record after the close of the evidence or to appear in an opinion or memorandum of decision filed by the court. Specifically, in an action tried on the facts without a jury, " the court must find the facts specially and state its conclusions of law separately." Fed.R.Civ.P. 52(a)(1), incorporated by Fed.R.Bankr.P. 7052.
These findings must be sufficient to indicate the factual basis for the court's ultimate conclusion. Unt v. Aerospace Corp., 765 F.2d 1440, 1444 (9th Cir. 1985).
The Supreme Court has explained that without " statements of the preliminary and basic facts" on which the trial court relied, " their findings are useless for appellate purposes." Dalehite v. United States, 346 U.S. 15, 24 n.8, 73 S.Ct. 956, 97 L.Ed. 1427 (1953); Mattel, Inc. v. Walking Mountain Prods., 353 F.3d 792, 815 (9th Cir. 2003).
The findings must be explicit enough to give the appellate court a clear understanding of the basis of the trial court's decision, and to enable it to determine the ground on which the trial court reached its decision. Mattel, Inc., 353 F.3d at 815; Unt, 765 F.2d at 1444.
Effective review should not depend upon the intuition of the appellate judges or their ability to divine the critical facts or the trial court's reasons for its judgment. Williams v. Levi (In re Williams), 323 B.R. 691, 700 (9th Cir. BAP 2005).
It is difficult to review the bankruptcy court's ruling in this instance because there are no detailed findings of fact or conclusions of law, either on the record or in a separate opinion or memorandum decision.
With respect to American Express Claim Nos. 6 and 7, the court's complete findings and conclusion regarding Claim Nos. 6 and 7 are as follows:
THE COURT: I'm going to sustain these two objections as well. I just think there hasn't been adequate documentation to show that these individuals who may have been officers of the corporate entity are personally liable on these corporate credit card accounts, and I also find the -- the newer arguments relating to Section 1624 of the Civil Code [Statute of Frauds] to be not persuasive.
Hr'g Tr. at 3:12-18 (Oct. 31, 2007).
As to MBNA Claim No. 16, the bankruptcy court made no findings of fact and summarily concluded, " I'm going to sustain the objection to this claim, " after listening to appellant's argument regarding legibility of the account application. Hr'g Tr. at 2:10-11 (Oct. 31, 2007).
These findings are inadequate to support a conclusion that the trustee's objections to $387, 959.01 in claims should be sustained. Findings of fact and conclusions of law are essential to appellate review of the order sustaining these objections. We cannot divine the critical facts or the trial court's reasons for its judgment. Williams, 323 B.R. at 700.
Moreover, as indicated, this case is too complex and too important to be decided without the benefit of focused findings of fact and conclusions of law by the trial judge.
While some cases are reviewable despite shortcomings in findings, there is not enough in this record to warrant our review. Cf. Unt, 765 F.2d at 1444 (" while it is a close case, we do not believe we must remand for more detailed findings, for despite the factual shortcomings, the basis for the court's decision is clear"); Williams, 323 B.R. at 700 (" while the pickings in the order are indeed slim, there is enough in its statement of undisputed facts and the legal justification for the decision to allow our review"). Since we do not know what the evidentiary rulings were, we do not even know what was in evidence.
In short, the record is inadequate for meaningful review.
CONCLUSION
The bankruptcy court did not conduct the required evidentiary hearing with witnesses available for direct testimony and cross-examination on the disputed material factual issues, as required by Rule 9014(d). Furthermore, the absence of detailed findings of fact and conclusions of law in support of the bankruptcy court's decision to sustain the trustee's objections to Claim Nos. 6, 7, and 16, coupled with the absence of a record of an evidentiary hearing that might enable us independently to fill the gaps in findings, makes meaningful appellate review impossible.
Since this case is too complex and too important to be decided based on the inadequate record before us, we VACATE and REMAND for further proceedings consistent with this decision.