Timothy K. Stancill; Timothy D. Stancill v. Harford Sands Inc

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 In Re: HARFORD SANDS INC;
HARFORD INDUSTRIAL MINERALS,
INCORPORATED,
Debtors.
TERRY D. STANCILL; JERRY STANCILL; No. 03-2249 TIMOTHY K. STANCILL; TIMOTHY D.
STANCILL,
Plaintiffs-Appellants,
v.
HARFORD SANDS INC,
Debtor-Appellee. 
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
J. Frederick Motz, District Judge.
(CA-03-1884-1-JFM; BK-00-5-9280-JS; BK-00-5-9281-JS)
Argued: May 5, 2004
Decided: June 16, 2004
Before WILKINSON and WILLIAMS, Circuit Judges, and
Bobby R. BALDOCK, Senior Circuit Judge of the
United States Court of Appeals for the Tenth Circuit,
sitting by designation.
Affirmed by published opinion. Senior Judge Baldock wrote the opin-
ion, in which Judge Wilkinson and Judge Williams concurred.

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COUNSEL
ARGUED: Charles Kevin Kobbe, PIPER RUDNICK, L.L.P., Balti-
more, Maryland, for Appellants. Troy Christopher Swanson, COHEN
& SWANSON, Baltimore, Maryland, for Appellee. ON BRIEF:
Richard M. Kremen, Jodie E. Buchman, PIPER RUDNICK, L.L.P.,
Baltimore, Maryland, for Appellants.
OPINION
BALDOCK, Senior Circuit Judge:
Debtor Harford Sands Inc. ("Harford Sands") voluntarily filed a
Chapter 11 bankruptcy petition. Appellants Terry D. Stancill, Jerry
Stancill, Timothy D. Stancill, and Timothy K. Stancill ("Stancills")
filed a proof of claim in the bankruptcy court. The Stancills claimed
Harford Sands owed them $250,688.17 for dirt they sold Harford
Sands on account. Harford Sands objected to the proof of claim. The
bankruptcy court sustained the objection and disallowed the claim
because it was speculative and unenforceable under non-bankruptcy
law. The district court affirmed for the same reasons. The Stancills
argue on appeal that the bankruptcy court and district court erred in
both respects.
"We review the judgment of a district court sitting in review of a
bankruptcy court de novo, applying the same standards of review that
were applied in the district court." Three Sisters Partners, LLC v.
Harden, 167 F.3d 843, 847 (4th Cir. 1999). We thus review the bank-
ruptcy court’s legal conclusions de novo and its factual findings for
clear error. United States Dep’t of Health & Human Serv. v. Smitley,
347 F.3d 109, 115-16 (4th Cir. 2003). Applying this standard, we
affirm for the same reasons as the bankruptcy court and district court.
I.
The Stancills have operated Stancills, Inc., a rubble landfill pit, on
a forty-five acre parcel of land known as the "Oak Avenue Property"
since the early 1980s. Larry Stancill (the brother of three Appellants
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and uncle of the other) is the owner and operator of Harford Sands,
which sells sand and gravel. Stancills, Inc. (through Appellants) alleg-
edly entered into an oral contract with Harford Sands (through Larry
Stancill) to remove dirt from the Oak Avenue Property in 1986. The
parties allegedly agreed Harford Sands would purchase the dirt at the
price of $1 per ton (later negotiated to $0.25 per ton). Under the
agreement, Harford Sands was to remove the dirt, weigh it, and report
the tonnage back to Stancills, Inc. in order to determine the amount
owed. Payment was not due under the alleged contract, however, until
Harford Sands had the financial ability to pay for the dirt.
The Stancills subsequently formed "Pappy Inc." in 1988. Shortly
thereafter, Pappy Inc. entered into a contract with Stancills, Inc. for
the purchase of the Oak Avenue Property. At the time of the sale, the
Stancills claimed Harford Sands owed Stancills, Inc. $104,000 for dirt
removed from the Oak Avenue Property. The contract of sale, how-
ever, did not reference the $104,000 asset. The Stancills nevertheless
assert the $104,000 asset was transferred from Stancills, Inc. to Pappy
Inc. when the former purchased the Oak Avenue Property. From 1988
to 1990, Harford Sands allegedly removed another $71,688 worth of
dirt from the Oak Avenue Property. Thus, according to the Stancills,
the total amount Harford Sons allegedly owed Pappy Inc. at the end
of 1990 was $175,688. Harford Sands continued to remove dirt from
the Oak Avenue Property until 1993. The Stancills estimated the dirt
removed between 1990 and 1993 was worth $75,000.1 Stancills, Inc.
subsequently obtained three deeds of trust from Harford Sands in the
mid-1990s. The deeds were executed for past due receivables pertain-
ing to dirt Harford Sands purchased from Stancills, Inc. Larry Stancill
believed the deeds of trust satisfied all his outstanding debt pertaining
to dirt removed from the Oak Avenue Property.
In 1997, the Stancills sold Pappy Inc. to an unrelated third party.
At the time of sale, Pappy Inc.’s financial records did not reference
any claims against Harford Sands as an asset of the company. The
contract of sale, however, referenced a "Harford Sands Receivable"
as an "Excluded Asset." The contract did not mention the value of the
1On appeal, the Stancills have abandoned their claim for the $75,000
worth of dirt allegedly removed between 1990 and 1993. (Aplt.’s Br. at
18 n.2).
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putative account receivable. After the sale, the Stancills assert they
became the individual owners of the putative account receivable
because it was excluded from the contract of sale. In 2000, the Stan-
cills requested payment for the dirt Harford Sands removed from the
Oak Avenue Property for the first time. Harford Sands rejected the
demand and denied any liability for the dirt. Harford Sands’ financial
records, however, referenced a $175,688 "liability" and "account pay-
able" to Pappy Inc. Harford Sands also referenced the $175,688 liabil-
ity on its federal income tax returns for the years 1987 to 1999.
Harford Sands petitioned for bankruptcy shortly after the demand for
payment.
II.
The Stancills challenge the bankruptcy court’s finding that they
failed to prove the amount and validity of their claim by a preponder-
ance of the evidence. The Bankruptcy Code provides that a creditor
in a Chapter 11 bankruptcy proceeding may file a proof of claim. 11
U.S.C. §§ 103(a), 501(a); see also Fed. R. Bankr. P. 3003(c)(1); Pio-
neer Inv. Servs. Co. v. Brunswick Assoc. Ltd. P’ship., 507 U.S. 380,
382 (1993). A proof of claim is the creditor’s statement as to the
amount and character of the claim. Fed. R. Bankr. P. 3001(a). "[T]he
allowance or disallowance of a claim in bankruptcy is a matter of fed-
eral law left to the bankruptcy court’s exercise of its equitable pow-
ers." Canal Corp. v. Finnman, 960 F.2d 396, 404 (4th Cir. 1992). The
holder of an "allowed claim" may receive distributions from the bank-
ruptcy estate in a Chapter 11 proceeding. 4 Collier on Bankruptcy
¶ 502.01 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev.
2004) ("Collier").
The Bankruptcy Code establishes a burden-shifting framework for
proving the amount and validity of a claim. The creditor’s filing of
a proof of claim constitutes prima facie evidence of the amount and
validity of the claim. 11 U.S.C. § 502(a); Fed. R. Bankr. P. 3001(f).
The burden then shifts to the debtor to object to the claim. 11 U.S.C.
§ 502(b); Finnman, 960 F.2d at 404. The debtor must introduce evi-
dence to rebut the claim’s presumptive validity. Fed. R. Bankr. P.
9017; Fed. R. Evid. 301; 4 Collier at ¶ 501.02[3][d]. If the debtor car-
ries its burden, the creditor has the ultimate burden of proving the
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amount and validity of the claim by a preponderance of the evidence.2
Id. at ¶ 502.02[3][f]. The creditor’s burden is heightened when it is an
"insider" of the debtor. See Pepper v. Litton, 308 U.S. 295, 306
(1939). The Code defines an "insider" as, among other things, the rel-
ative of a director, officer, or person in control of the debtor corpora-
tion. 11 U.S.C. § 101(31)(B)(vi). An insider’s dealings with a
bankrupt corporation are ordinarily subject to "rigorous" or "strict"
scrutiny. Fabricators Inc. v. Technical Fabricators, Inc., 926 F.2d
1458, 1465 (5th Cir. 1991); Brewer v. Erwin & Erwin, P.C., 942 F.2d
1462, 1465 (9th Cir. 1991); In re Inter-Island Vessel Co., Inc., 98
B.R. 606, 608-09 (Bankr. D. Mass. 1988). In such a situation, the
"burden is on an insider claimant to show the inherent fairness and
good faith of the challenged transaction." Id.
Applying the burden-shifting framework in this case, the Stancills’
claim was presumptively valid when they filed their proof of claim.
Harford Sands, however, objected to the claim and introduced evi-
dence of the claim’s invalidity. Specifically, Harford Sands intro-
duced evidence that: (1) the amount of the claim was arrived at
arbitrarily without any supporting documentation; (2) the Stancills
were not the rightful owners of the alleged $175,688 debt because no
evidence existed demonstrating Stancills, Inc. assigned the debt to
Pappy Inc., and even assuming such assignment, no evidence existed
demonstrating Pappy Inc. assigned the debt to the Stancills; and (3)
the claim was time-barred under Maryland’s four year statute of limi-
tations, see Md. Comm. Code § 2-725(1), for breach of contract
actions. The bankruptcy court found, and we agree, Harford Sands
carried its burden of rebutting the claim’s presumptive validity.
2We have not previously addressed how the bankruptcy rules allocate
the burden of proof for purposes of establishing the amount and validity
of a claim filed pursuant to 11 U.S.C. § 501(a). Our reading of the bank-
ruptcy rules, however, is in accord with our sister circuits that have
addressed the issue. See Juniper Dev. Group v. Kahn, 993 F.2d 915, 925
(1st Cir. 1993); In re Allegheny Int’l, Inc., 954 F.2d 167, 173-74 (3d Cir.
1992); Fabricators Inc. v. Technical Fabricators, Inc., 926 F.2d 1458,
1465 (5th Cir. 1991); FDIC v. Union Entities, 83 F.3d 1020, 1025 & n.3
(8th Cir. 1996); Agricredit Corp. v. Harrison, 987 F.2d 677, 680 (10th
Cir. 1993); see also 2 William L. Norton, Jr. Norton Bankruptcy Law and
Practice § 41:6 (2d ed. 2003).
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Accordingly, the Stancills had the ultimate burden of proving the
amount and validity of their claim by a preponderance of the evi-
dence. Additionally, the Stancills are "insiders" under the Code
because they are relatives of the person in control of Harford Sands
(Larry Stancill). As such, the Stancills’ claim is subject to rigorous
scrutiny. As the bankruptcy court found, the Stancills have not carried
their heightened burden for two reasons.
First, the Stancills failed to prove the actual amount of their claim.
In the bankruptcy court, and again on appeal, the Stancills maintain
their accountant arrived at a figure of $175,688 for their claim based
on tonnage slips and hauling receipts Harford Sands provided them
under the alleged oral contract. The Stancills, however, have not
included any such tonnage slips or hauling receipts in the record on
appeal.3 The Stancills’ accountant, Carl Ray Mann, testified he
arrived at the $175,688 figure based on some "adding machine tape,"
handwritten notes, and hauling tickets received between 1982 and 1987.4
Mann did not explain how such evidence, assuming it exists, proves
Harford Sands removed 175,688 tons of dirt from the Oak Avenue
property between 1986 and 1990.
Despite the dearth of evidence on how they arrived at the $175,688
figure, the Stancills nevertheless argue the claim is not speculative
because the figure appeared in Harford Sands’ balance sheets as a lia-
bility. Harford Sands’ acknowledgment of the debt, however, does not
prove how that debt arose. Moreover, Larry Stancill did not know
why the $175,688 liability was reported on Harford Sands’ financial
records. According to Larry Stancill, Mann wrote the $175,688 liabil-
ity into Harford Sands’ balance sheets at the direction of Terry Stan-
3Based on the terms of the alleged oral contract (i.e., Harford Sands
owed $1.00 for each ton of dirt removed), Harford Sands would have had
to remove at least 175,688 tons (or over 351-million pounds) of dirt from
the forty-five acre parcel of land over a four year period. Appellants’
counsel conceded at oral argument that the Stancills did not have tonnage
slips or hauling receipts accounting for 175,688 tons of dirt removed
from the Oak Avenue Property.
4Mann was also the accountant for Harford Sands. As the district court
noted, the bankruptcy court may have discredited Mann’s testimony
because he "labored under substantial conflicts of interest."
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cill. Larry Stancill further claimed Harford Sands never removed
$175,688 worth of dirt from the Oak Avenue Property and that he
repaid the Stancills in three separate deeds of trust for any dirt the
company did remove from the property. The bankruptcy court obvi-
ously found Larry Stancills’ testimony more credible than the Stan-
cills’ and Mann’s testimony. We do not re-weigh the credibility of
witnesses on appeal. See Fed. R. Bankr. P. 8013. Without any other
evidence in the record demonstrating how the Stancills arrived at the
$175,688 figure, we must affirm the bankruptcy court’s finding that
the amount and nature of the Stancills’ claim is "highly speculative."
Second, the Stancills never produced any evidence demonstrating
they were the rightful owners of the putative account receivable.
Instead, the Stancills attempt to succeed to the rights of Pappy Inc.
The record, however, does not contain any evidence Pappy Inc.
assigned the putative account receivable to the Stancills. In fact,
Pappy Inc.’s balance sheets never acknowledged the existence of the
Harford Sands account receivable. The Stancills’ argument that they
succeeded to the Harford Sands account receivable because it was an
excluded asset when they sold the Oak Avenue Property to a third
party is misplaced. The contract of sale for the property does list the
Harford Sands account receivable as an excluded asset; however, the
contract does not place any value on the amount of the account. As
discussed above, the Stancills have not proven the value of the alleged
account because no evidence exists regarding how much dirt Harford
Sands actually removed from the Oak Avenue Property. Additionally,
the shareholders of a close corporation, such as the Stancills, cannot
simply "create" an account receivable for the first time in a contract
of sale when the corporation has no records whatsoever of that
alleged account.
In sum, the Stancills have failed to carry their burden of proving
the amount and validity of their claim by a preponderance of the evi-
dence. The Stancills, as insiders of Harford Sands, have clearly failed
to demonstrate the inherent fairness surrounding their exceptionally
unconventional business dealings with Harford Sands. The bank-
ruptcy court correctly sustained Harford Sands’ objection to the Stan-
cills’ proof of claim.5
5We need not reach the issue of whether the Stancills’ claim is
enforceable under non-bankruptcy law because the bankruptcy court
properly disallowed the Stancills’ claim under 11 U.S.C. § 502.
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For the foregoing reasons, the district court’s October 6, 2003
Order affirming the bankruptcy court’s disallowance of the Stancills’
claim is
AFFIRMED.
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