Mahmud et al v. JTH Investment Group, LLC et al

“The term ‘strip off’ is used when a junior mortgage is totally unsecured, whereas1
the term ‘strip down’ is used when a mortgage is partially unsecured and partially secured.” In re
Talbert, 344 F.3d 555, 556 n.1 (6th Cir. 2003).
UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re : Chapter 13
MOHSIN MAHMUD and :
ELIZABETH MARTINEZ
Debtor : Bankruptcy No. 08-10855bf
____________________________________
MOHSIN MAHMUD and :
ELIZABETH MARTINEZ
Plaintiffs :
v. :
JTH INVESTMENT GROUP, LLC and :
DAVID HANG
Defendants : Adversary No. 08-0175
____________________________________
.................................................
MEMORANDUM
.................................................
Presently before me is an adversary proceeding commenced by the joint
chapter 13 debtors, Mr. Mohsin Mahmud and Ms. Elizabeth Martinez, against JTH
Investment Group, LLC and Mr. David Hang. The plaintiffs assert that the defendants’
secured claim is subject to “strip off” under 11 U.S.C. § 506(a), because it is in third lien
position and the value of the collateral is less than the amounts owed to the first two lien
creditors. The defendants responded by denying that the plaintiffs valuation of the1
collateral is accurate, as well as denying plaintiffs’ averments regarding defendants’ lien
priority and the amounts due the two other secured creditors.
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At the defendants’ request, and with the plaintiffs’ consent, the trial was2
postponed once so the parties would have additional time to present all relevant evidence. As
will be discussed below, the evidentiary record made was still limited despite the postponement.
2
For the reasons that follow, I conclude that the plaintiffs are not entitled to
relief under section 506(a) as to defendant Hang, as he does not hold nor assert any
secured claim in this bankruptcy case. Furthermore, the plaintiffs are not entitled to any
relief under section 506(a) as to defendant JTH Investment Group, LLC, because they
have not met their evidentiary burden to demonstrate that the mortgage lien held by this
defendant is wholly unsecured.
I.
The following facts were proven at trial.2
Mr. Mahmud testified credibly that in 1997 the plaintiffs purchased the real
property located at 431 Willows Avenue, Folcroft, Delaware County, Pennsylvania. They
paid $88,000 for the Folcroft property and financed its purchase with a mortgage from
Washington Mutual Bank. He also testified credibly that in 2001, the plaintiffs
refinanced their mortgage obligation to Washington Mutual by obtaining a $101,000
mortgage loan with Everhome Mortgage. Then, in 2006, the plaintiffs borrowed $35,000
from Citizens Bank, which loan also was secured by a mortgage on their Folcroft realty.
By an agreement dated November 30, 2006, an entity owned by Mr.
Mahmud, Moonlight Holdings, Inc., purchased a gas station and convenience store owned
by defendant JTH Investment Group, LLC. Ex. D-2. The latter entity is owned by
defendant David Hang. The purchase price was $125,000, plus the wholesale cost of the
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According to the debtors’ Statement of Financial Affairs, question #4, JTH3
commenced a prepetition foreclosure action.
3
inventory stock. Id. The closing of this sale took place in February 2007, at which time
the value of the inventory was fixed at $30,000. Furthermore, Moonlight agreed to pay
$80,000 to either JTH or Mr. Hang for a consultancy agreement.
At the closing, Moonlight paid more than $100,000 in cash to JTH. In
addition, Moonlight signed a promissory note in favor of JTH Investment Group, LLC,
dated February 23, 2007, in the amount of $125,000, payable over 60 months, with an
interest rate of 6.5%. Ex. D-3. That promissory note was secured by a mortgage on the
Folcroft realty in favor of JTH Investment Group, LLC., which mortgage was dated
February 23, 2007 and signed by Mr. Mahmud and Ms. Martinez as husband and wife.
Ex. D-1.
Mr. Mahmud quickly concluded that the business purchased by Moonlight
from JTH was not profitable and offered to return it to the seller. That offer was
declined. Moonlight has not tendered any payments on the promissory note.3
Insofar as the value of the Folcroft realty is concerned, Mr. Mahmud
testified that he believed its present value is about $112,000. He described the property
as a 70 year old Cape Cod style residence, with 4 bedrooms and 1.5 bathrooms. The
realty needs some repairs and remodeling. He was also unaware of any recent sales of
neighboring homes. At the time of their bankruptcy filing on February 4, 2008, however,
Mr. Mahmud conceded that the debtors valued their home at $140,000. See Bankruptcy
Schedule A.
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The Statement of Financial Affairs, question #4, also reveals that Everhome4
Mortgage had commenced a prepetition foreclosure action. That state court complaint was not
offered in evidence.
This objection will be discussed below.5
4
No testimony or documents were offered at trial concerning the amounts
due creditors holding liens against the Folcroft realty as of the date of the debtors’ chapter
13 bankruptcy petition. To prove the extent of liens against this property with priority4
ahead of JTH’s lien, the plaintiffs requested that “judicial notice” be taken of two secured
proofs of claim filed in this chapter 13 case. The defendants objected, arguing that those
proofs of claim are inadmissible.5
This court’s claims register reflects that Citizens Bank filed a secured proof
of claim, docketed at claim #1, in the amount of $34,088.65. Attached to this claim are
copies of 2 non-consecutive pages from a “Pennsylvania Closed-End Mortgage.” These
pages show the Folcroft property as collateral, the original principal loan amount as
$35,040, and the signatures of the debtors. The mortgage is alleged to have been signed
on August 25, 2006. This proof of claim does not include the promissory note, the entire
mortgage, nor any itemization of the amount of the claim.
Claim #5 on the register was filed by Everhome Mortgage in the amount of
$114,696.97. The claim asserts it is secured upon real estate, but does not identify the
collateral nor the date the debt was incurred. (The debtors’ bankruptcy schedules reflect
only one property as owned by them.) Attached to the proof of claim is an “Itemization
of Total Debt and Arrearages As of the Time of Filing.” In addition, the Everhome claim
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While there are local bankruptcy court rules for this district, there is no rule6
9040-1. The exhibit summary also makes reference to “L.F. 9 Rev 05/03.” Again, while there
are local bankruptcy forms, there is no local form #9 in this district.
5
also has an “exhibit summary” listing a mortgage and note, but neither document is
attached. Instead, reference is made to “L.B.R. 9040-1.”6
Finally, defendant JTH Investment Group, LLC filed a secured proof of
claim in the amount of $174,166.00, and docketed at claim # 12. This proof of claim
asserts that the value of the collateral is $200,000. Mr. Hang did not file a secured proof
of claim in this case. Nor is he identified as a mortgagee in the mortgage agreement, a
payee of the promissory note, or a seller in the sales agreement. Exs. D-1 to D-3.
II.
A.
Section 506(a) of title 11, which provision is germane to all bankruptcy
cases, see 11 U.S.C. § 103(a), states:
An allowed claim of a creditor secured by a lien on property
in which the estate has an interest, or that is subject to setoff
under section 553 of this title, is a secured claim to the extent
of the value of such creditor's interest in the estate's interest in
such property, or to the extent of the amount subject to setoff,
as the case may be, and is an unsecured claim to the extent
that the value of such creditor's interest or the amount so
subject to setoff is less than the amount of such allowed
claim.
11 U.S.C. § 506(a).
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Under section 1322(b)(2) a chapter 13 plan may --7
modify the rights of holders of secured claims, other
than a claim secured only by a security interest in
real property that is the debtor's principal residence,
or of holders of unsecured claims, or leave
unaffected the rights of holders of any class of
claims.
Conversely, if the scope of the security interest includes more than the debtor’s8
residence (i.e., it includes personalty), bifurcation into allowed secured and unsecured
components is permitted in a chapter 13 case. See, e.g., In re Johns, 37 F.3d 1021 (3d Cir. 1994).
In this proceeding, the plaintiffs do not assert that defendant JTH holds a secured claim on more
than their residence.
6
In general, secured claims can be bifurcated into allowed secured and
unsecured components, with the secured claim limited by the value of the collateral. See,
e.g., In re Johns, 37 F.3d 1021, 1023-24 (3d Cir. 1994); In re Hammond, 27 F.3d 52,
55-56 (3d Cir. 1994); Sapos v. Provident Inst. of Sav. in Town of Boston, 967 F.2d 918
(3d Cir. 1992).
A recognized exception to this bifurcation principle is found in section
1322(b)(2) of the Bankruptcy Code. This provision prohibits a chapter 13 debtor from7
modifying the rights of a secured creditor who holds only a security interest in the
debtor's principal residence. Thus, section 506 cannot be used to bifurcate a secured8
claim protected by the antimodification provisions of 1322(b)(2). See, e.g., Nobelman v.
American Savings Bank, 508 U.S. 324 (1993); In re Ferandos, 402 F.3d 147, 151 (3d Cir.
2005).
In In re McDonald, 205 F.3d 606 (3d Cir.), cert. denied sub nom., Master
Financial, Inc. v. McDonald, 531 U.S. 822 (2000), the Third Circuit held that Congress
did not intend to apply the protection of section 1322(b)(2) to those junior lien claims that
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The Third Circuit Court of Appeals offered this explanation:9
Perhaps the clearest explanation of how the [Supreme] Court's
discussion [in Nobelman] of the two sections can be reconciled is
to point out that while the antimodification clause uses the term
“claim” rather than “secured claim” and therefore applies to both
the secured and unsecured part of a mortgage, the antimodification
clause still states that the claim must be “secured only by a security
interest in . . . the debtor's principal residence.” 11 U.S.C. §
1322(b)(2) (emphasis added). If a mortgage holder's claim is
wholly unsecured, then after the valuation that Justice Thomas said
that debtors could seek under § 506(a), the bank is not in any
respect a holder of a claim secured by the debtor’s residence. The
bank simply has an unsecured claim and the antimodification
clause does not apply. On the other hand, if any part of the bank's
claim is secured, then, under Justice Thomas's interpretation of the
term “claim,” the entire claim, both secured and unsecured parts,
cannot be modified.
In re McDonald, 205 F.3d at 611-12.
7
are “wholly unsecured.” Id., 205 F.3d at 614. An asserted secured claim is wholly
unsecured when the value of the collateral does not exceed the amount due to lienholders
with priority over the challenged lien. Id.; see, e.g., In re Bartee, 212 F.3d 277, 290
5th Cir. 2000).9
Thus, the material facts of this adversary proceeding concern the value of
the plaintiffs’ residence, as well as the amounts of and priority of the various liens
asserted against it. Since the mortgage held by JTH created a lien solely upon the
debtors’ Folcroft residence, in order for this mortgage claim of JTH to be treated as
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Although there are decisions that reach a conclusion different from McDonald,10
Third Circuit precedential decisions are binding upon bankruptcy courts in this circuit. See, e.g.,
In re Wolf, 2001 WL 34373014, at *1 n.1 (Bankr. M.D. Pa. 2001) (the McDonald decision is
binding); see generally Sperrazza v. University of Maryland, 2008 WL 818616, at *5 (E.D. Pa.
2008) (“federal courts of Pennsylvania are bound by the decisions of the United States Court of
Appeals for the Third Circuit”); In re William P. Brogna and Co., Inc., 64 B.R. 390, 391 (Bankr.
E.D. Pa. 1986).
8
wholly unsecured, the value of the residence cannot exceed the sum of all liens with
priority over JTH’s mortgage claim.10
B.
In deciding whether the plaintiffs are entitled to the relief they seek—a
determination that the defendants hold only an unsecured claim in this chapter 13 case by
virtue of section 506(a)—certain evidentiary issues should be considered.
First, I conclude that the plaintiffs have the evidentiary burden of
persuasion for relief under section 506(a). In so doing, I recognize that a creditor has the
ultimate burden of persuasion when an objection to that creditor’s claim has been filed
pursuant to 11 U.S.C. § 502(a), with the objector having only an initial burden of
production. See, e.g., In re Allegheny International, Inc., 954 F.2d 167, 173-74 (3d Cir.
1992); In re Kincaid, 2008 WL 2278895, at *2 (Bankr. E.D. Pa. 2008). I also appreciate
that some courts have compared a party’s request for a determination of secured status
under section 506(a) to an objection to a proof of claim under section 502. See, e.g.,
Evabank v. Baxter, 278 B.R. 867, 878 (N.D. Ala. 2002); Matter of Lampert, 61 B.R. 785,
787 (Bankr. W.D. Wis. 1986). I find such a comparison unpersuasive.
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9
When a party seeks relief under section 506(a), which relief is based, not
upon the validity of the secured claim but, upon the value of collateral and the amount
owed to lienholders holding greater priority, such relief does not seek to disallow a claim
within the meaning of section 502(b). See In re Fareed, 262 B.R. 761, 765-66 (Bankr.
N.D. Ill. 2001); see generally In re Cluff, 313 B.R. 323 (Bankr. D. Utah 2004) (provisions
of section 502(b) are the exclusive grounds for disallowance of a claim). None of the
nine grounds for disallowance found in section 502(b) are applicable in this proceeding.
Thus, the evidentiary burdens under section 506(a) are not the same as those applicable to
section 502(b).
Moreover, the burden of persuasion has typically been placed upon the
party seeking relief under sections 506(b) and 506(c). See Matter of T-H New Orleans
Ltd. Partnership,116 F.3d 790, 798 (5th Cir. 1997); In re C.S. Associates, 29 F.3d 903,
906 (3d Cir. 1994). A similar result should apply to section 506(a) relief. Indeed, it is
understood that a debtor seeking to avoid a judicial lien under section 522(f)—which, as
with section 506(a), involves valuation and possibly priority issues and may result in the
judicial lien creditor holding only an allowed unsecured claim—is placed upon the debtor
seeking such avoidance. See, e.g., In re Catli, 999 F.2d 1405, 1406 (9th Cir. 1993); In re
Soost, 262 B.R. 68, 74 (B.A.P. 8th Cir. 2001).
Accordingly, in this adversary proceeding the plaintiffs bear the evidentiary
burden to establish that defendant JTH’s lien is wholly unsecured within the meaning of
section 506(a). See generally In re Bethoney, 384 B.R. 24, 31 (Bankr. D. Mass. 2008); In
re Finnegan, 358 B.R. 644, 650 (Bankr. M.D. Pa. 2006) (“A debtor bears the burden of
proof on the issue of valuation under § 506(a).”); In re Webb, 99 B.R. 283, 287 n.5
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The debtors here have acknowledged that they cannot confirm their proposed11
chapter 13 plan unless they prevail in this proceeding.
10
(Bankr. E.D. Pa. 1989); see also In re Young, 390 B.R. 480, 486 (Bankr. D. Me. 2008)
(placing burden of persuasion upon a chapter 13 debtor when the result of the section 506
adversary proceeding is to aid in confirmation of a proposed chapter 13 plan.).11
C.
The defendants complain at the outset that the plaintiffs have not met their
evidentiary burden as to valuation, because no appraisal evidence was offered.
Homeowners, however, are competent to offer opinions as to the value to their property.
See Advisory Committee Note to Fed. R. Evid. 702 (1972) (“[W]ithin the scope of the
rule are not only experts in the strictest sense of the word, . . . but also the large group
sometimes called ‘skilled’ witnesses, such as bankers or landowners testifying to land
value.”); see, e.g., United States v. 68.94 Acres of Land, 918 F.2d 389, 397 (3d Cir. 1990)
(“The Federal Rules of Evidence generally permit landowners to give opinion evidence as
to the value of their land due to the special knowledge of property which is presumed to
arise out of ownership.”); United States v. 7.92 Acres of Land, 769 F.2d 4, 12 (1st Cir.
1985); United States v. 215.7 Acres of Land, 719 F. Supp. 273, 276 (D. Del. 1989).
The Third Circuit Court of Appeals has cautioned that a homeowner would
not be qualified to offer an opinion as to value if his testimony were simply a repetition of
a valuation opinion stated by an expert who did not testify at trial. See United States v.
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Indeed, as will be mentioned, the plaintiffs contend that the amount of liens12
against their property should be determined by the proofs of claims filed in this case. Both
Everhome Mortgage and Citizens Bank used Official Bankruptcy Form 10 to file their claims,
which form requests that the creditor state the “amount of claim as of date case filed.” Therefore,
the claims filed by Everhome Mortgage and Citizens Bank reflect the amounts they alleged as
due and owing at the time of the debtors’ bankruptcy filing. See generally In re Lennington, 288
B.R. 802, 803 (Bankr. C.D. Ill. 2003); Local Bankr. R. 3001-1(b)(1) (secured proof of claim in
chapter 13 case should include “the balance of principal due on the debt”).
Since those proofs of claim reflect amounts due as of the commencement of the
case, the plaintiffs’ attempted reliance upon the allegations in those proofs of claim appears
implicitly to agree that the appropriate time to value their home and thereby determine whether
JTH is wholly unsecured is the commencement of their bankruptcy petition.
11
68.94 Acres of Land, 918 F.2d at 398. In this proceeding, the husband/debtor’s testimony
is not based on any hearsay expert opinion, and so is not objectionable as such.
Nonetheless, the defendants successfully impeached Mr. Mahmud’s
testimony that his realty was worth only $112,000 by obtaining his admission that he
previously had valued the property in his bankruptcy schedules at $140,000. To the
extent that the husband/debtor’s testimony made reference to the current poor state of the
current housing market, the more relevant time for valuation purposes, given the debtors’
intention to retain the collateral, was the time of their bankruptcy filing. See, e.g., In re12
Rodriguez, 375 B.R. 535, 541 n.5 (B.A.P. 9th Cir. 2007); In re Philadelphia Consumer
Discount Co., 37 B.R. 946, 950 (E.D. Pa. 1984); In re Solis, 356 B.R. 398 (Bankr. S.D.
Tex. 2006); In re Cerminaro, 220 B.R. 518, 524-25 (Bankr. N.D.N.Y. 1998); see also
In re Markos Gurnee Partnership, 252 B.R. 712, 717 (Bankr. N.D. Ill. 1997):
Where the value of the collateral is not sufficient to secure the
entire claim of a creditor, then, under § 506(a) of the Code,
the creditor has a secured claim, subject to adequate
protection, limited to the value of the collateral securing the
claim as of the time of the bankruptcy filing.
Thus, any postpetition decrease in value would not be relevant for purposes of section
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As will be discussed below, the assertion by defendant JTH in its proof of claim13
that the property was worth $200,000 is inadmissible hearsay. See generally In re Harmony
Holdings LLC, 393 B.R. 409, 414 (Bankr. D.S.C. 2008).
12
506(a) relief in this proceeding.
The defendants elected to offer no evidence of value for the Folcroft
realty. Given the original purchase price for the realty, as well as the plaintiffs’ ability13
to refinance in 2001 and obtain a second mortgage in 2006, the valuation found in the
debtors’ bankruptcy schedules is reasonable. Therefore, for purposes of this adversary
proceeding, I conclude that the plaintiffs’ residence was worth approximately $140,000
on February 4, 2008: the date this chapter 13 case was commenced.
III.
The primary dispute in this proceeding is the remaining evidentiary issue.
Mr. Mahmud offered his own testimony that Everhome Mortgage and
Citzens Bank obtained mortgage liens prior to the one obtained in February 2007 by JTH.
He also offered testimony as to the original amounts of the Everhome Mortgage lien in
2001 and the Citizens Bank lien in 2006. The only evidence, however, offered as to the
amount of these two liens against the debtors’ Folcroft realty at the time of their
bankruptcy filing in February 2008 is plaintiffs’ request that judicial notice under Fed. R.
Evid. 201 be taken of the two secured proofs of claim filed in this chapter 13 case by
those creditors. Those proofs of claim state the amounts that the secured creditors assert
were owed as of February 2008. The defendants contend that “[t]hose proofs of claim
have never been considered or litigated and are not binding on Defendants.” Defendants’
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The Federal Rules of Evidence are incorporated into adversary proceedings and14
contested matters by Fed. R. Bankr. P. 9017.
13
Posttrial Memorandum, at 3. The issue thus posed by the defendants’ objection is
whether the plaintiffs can meet their burden of persuasion under section 506(a) primarily
through judicial notice of the secured proofs of claims filed by Everhome Mortgage and
Citizens Bank.
In general, the factual allegations made in a proof of claim are out-of-court
statements under Fed. R. Evid. 801. Thus, unless those allegations are non-hearsay14
under Rule 801(d) (e.g., an admission by a party-opponent), or some exception to the
hearsay rule is applicable, they may be inadmissible. See, e.g., In re Harmony Holdings
LLC, 393 B.R. 409, 414 (Bankr. D.S.C. 2008); In re Giquinto, 388 B.R. 152, 168 n. 29
(Bankr. E.D. Pa. 2008); In re Serda, 2008 WL 4671823, at *1 (Bankr. E.D. Cal. 2008)
(although the court accepts as credible testimony from the debtor concerning the amount
of a secured creditor’s prepetition claim, it holds that the proof of claim filed by that
creditor “is hearsay as to the actual amount of the senior debt”).
Federal Rule of Evidence 201 permits judicial notice of adjudicative facts:
those facts “not subject to reasonable dispute in that [they are] either (1) generally known
within the territorial jurisdiction of the trial court or (2) capable of accurate and ready
determination by resort to sources whose accuracy cannot reasonably be questioned.” Fed.
R. Evid. 201(b). Certainly, the fact that a document, such as a proof of claim, has been
filed with the court falls within the scope of Rule 201(b). As explained by a
commentator, however, judicial notice of the existence of a document filed with the court
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14
is not the same as judicial notice of the truth of factual assertions contained in that
document:
It is generally accepted that a bankruptcy judge may take
judicial notice of the bankruptcy court's records. . . .
What then, is meant by taking judicial notice of a court's own
records? There exists a mistaken notion that it means taking
judicial notice of the truth of facts asserted in every document
in a court file, including pleadings and affidavits. However, a
court may not take judicial notice of hearsay allegations as
being true merely because they are part of a court record or
file. It is difficult to understand why the filing of a document
with a court should magically result in the contents of the
document attaining a sufficient degree of reliability to
overcome evidentiary objections such as hearsay to its
admissibility in a trial before a bankruptcy judge.
Russell, Bankruptcy Evidence Manual § 201:5 (2008 ed.) (citation omitted); see, e.g., In
re James, 300 B.R. 890, 895 (Bankr. W.D. Tex. 2003) (“This Court is well aware that
judicial notice can be taken as to the existence of documents, such as proofs of claim or a
debtor's schedules, without inquiring whether the information contained in them is true.”).
Clearly, taking judicial notice of a document filed with the court addresses
issues of the authenticity of the document for purposes of Fed. R. Evid. 901. The
authenticity of a document, however, does not guarantee its admissibility:
The taking of judicial notice is often merely a way of
simplifying the process of authenticating documents which
would generally require certification under FRE 901 and 902,
and overcoming FRE 1002 best evidence problems (i.e. the
concept that because they are in the Court's own files they are
accepted as genuine). It is clear however, that authenticating
a document does not automatically insure its introduction into
evidence in the face of other objections, such as hearsay.
Russell, Bankruptcy Evidence Manual § 201:5 (2008 ed.).
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15
The Third Circuit Court of Appeals has recognized this limitation upon
judicial notice:
We hasten to add that the fact that a document is included in
the relevant record does not mean that the bankruptcy judge,
or the reviewing district court judge, is entitled to use it for
any purpose. Just as with documents in the record of a civil
action filed in a district court, there are principles that limit its
use.
***
Another limitation is the rule requiring evidentiary
competence. Under this rule, a document cannot be put to a
hearsay use for most purposes, and for this reason, a
previously filed court document will generally not be
competent evidence of the truth of the matters asserted
therein.
In re Indian Palms Associates, Ltd., 61 F.3d 197, 205 (3d Cir. 1995); see In re Goetz, 120
F.3d 268 (Table), 1997 WL 415340, at *1-*2 (9th Cir. 1997) (bankruptcy court properly
refused to take judicial notice of “schedules, proofs of claim and various documents filed
in each underlying bankruptcy case as proof of the amount the debtors owed to unsecured
creditors”).
There may be circumstances in which the existence of documents in the
court’s records is germane, without consideration of the truth of the factual allegations, if
any, in those documents. See, e.g., In re Harmony Holdings, LLC, 393 B.R. at 413-14; In
re H.E. Graf, Inc., 125 B.R. 604, 606 (Bankr. E.D. Cal. 1991); In re American Solar King
Corp., 90 B.R. 808, 829 n.41 (Bankr. W.D. Tex. 1988). As generally observed by the
Court of Appeals:
Documents in the case record will be relevant to many issues,
including waiver, estoppel, preservation of an issue for
appeal, the fact and length of litigation delay, limitations
issues, prejudice to an opposing party, and the like. The use
of documents in the case record for such purposes does not
offend the limitations discussed above because the documents
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16
are not being used to determine disputed facts relating to the
merits of the case and their use thus does not impose on a
party's ability to meet the evidence against it. Similarly, it is
not seriously questioned that the filing of documents in the
case record provides competent evidence of certain facts-that
a specific document was filed, that a party took a certain
position, that certain judicial findings, allegations, or
admissions were made.
In re Indian Palms Associates, Ltd., 61 F.3d at 205.
To the extent that a party requests a court to take judicial notice of
documents filed with the court for purposes beyond authentication,
[u]nless they relate to a preliminary question of admissibility
as to which the rules of evidence (other than privilege) do not
ordinarily apply, or are not adjudicative facts, statements
therein must be admissible under the Federal Rules of
Evidence.
In re Bestway Products, Inc., 151 B.R. 530, 541 (Bankr. E.D. Cal. 1993), aff'd, 165 B.R.
339 (B.A.P. 9th Cir. 1994), and aff'd. sub nom. In re Wetherbee, 165 B.R. 339 (B.A.P.
9th Cir. 1994).
Here, the plaintiffs rely upon Fed. R. Bankr. P. 3001(f) for the admissibility
of the proofs of claim filed by Everhome Mortgage and Citizens Bank. See Plaintiffs’
Posttrial Memorandum, at 11. This rule provides: “A proof of claim executed and filed in
accordance with these rules shall constitute prima facie evidence of the validity and
amount of the claim.”
The Advisory Committee Note (1983) to Bankruptcy Rule 3001 states:
“Subdivision (f) of this rule supplements the Federal Rules of Evidence as they apply to
cases under the Code.” Similarly, the Advisory Committee Note (1983) to Bankruptcy
Rule 9017 lists Rule 3001(f) as an example of a “bankruptcy rule[] containing matters of
an evidentiary nature[.]” Thus, I agree with the plaintiffs’ premise that judicial notice of
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Averments in the proof of claim as to the value of the collateral, however,15
remain inadmissible hearsay as not addressed by Rule 3001(f).
17
a proof of claim that has prima facie validity under Rule 3001(f) overcomes the hearsay
objection to those factual averments underlying its claim, such as the amount owed to that
creditor as of the date of the bankruptcy filing. See In re Millspaugh, 302 B.R. 90, 96 n.9
(Bankr. D. Idaho 2003) (for purposes of determining that a claim is wholly unsecured
under section 506(a), court accepts as true the averments of a secured proof of claim that
was prima facie valid under Rule 3001(f)); see also In re Carlisle, 312 B.R. 555, 558-59
(Bankr. M.D. Pa.) (Rule 3001(f) makes authentication under Fed. R. Evid. 901
unnecessary), aff’d, 320 B.R. 796 (M.D. Pa. 2004); 20 Proof of Facts 3d, 521 § 7 (Am.
Jur. 2008) (to establish a lack of equity under section 362(d)(2), a creditor may rely upon
secured proofs of claim that are prima facie valid under Rule 3001(f)).15
To achieve such prima facie status, however, Rule 3001 contains certain
conditions:
(c) Claim based on a writing
When a claim, or an interest in property of the debtor securing
the claim, is based on a writing, the original or a duplicate
shall be filed with the proof of claim. If the writing has been
lost or destroyed, a statement of the circumstances of the loss
or destruction shall be filed with the claim.
(d) Evidence of perfection of security interest
If a security interest in property of the debtor is claimed, the
proof of claim shall be accompanied by evidence that the
security interest has been perfected.
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Official Bankruptcy Form #10 instructs that copies of supporting documents16
such as promissory notes and mortgages should be attached to the proof of claim. Moreover, if
the supporting documents are not available, Form #10 states that the creditor should provide an
explanation for such unavailability.
Arguably, the proof of claim filed by Citizens Bank may also not comply with17
the documentation requirements of Rule 3001.
I also note that if one were to add the amounts averred as owing by Citizens Bank
and Everhome Mortgage, the total exceeds the value of the collateral by less than $9,000.
Compliance with Rule 3001 may have permitted JTH to demonstrate that the claims asserted by
the two other secured creditors were overstated (e.g., the claim includes charges and fees not
permitted under Pennsylvania law, or not permitted by the creditor’s note or mortgage
agreement).
18
To meet the requirements of Rule 3001(c), the mortgagee should attach at least a copy of
the underlying promissory note and mortgage. See In re Sako, 394 B.R. 90, 100 (Bankr.
E.D. Pa. 2008); see generally In re Taylor, 363 B.R. 303, 308 (Bankr. M.D. Fla. 2007).16
I recognize that the failure of a creditor to file a proof of claim that fails to
meet the requirements of Rule 3001, and thus is not prima facie valid, does not mean that
the claim is disallowed for purposes of section 502(b). See In re Kirkland
379 B.R. 341 (B.A.P. 10th Cir. 2007); In re Heath, 331 B.R. 424, 435 (B.A.P. 9th Cir.
2005) (“Noncompliance with Rule 3001(c) is not one of the statutory grounds for
disallowance.”); In re Dove-Nation, 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004); In re
Cluff, 313 B.R. 323, 332 (Bankr. D. Utah 2004). As noted above, however, the issue
posed in this adversary proceeding is not disallowance of a claim under section 502(b) but
determination of secured status under section 506(a).
In this proceeding, the Everhome Mortgage proof of claim clearly does not
meet the requirements of Fed. R. Bankr. P. 3001(c). Thus, it cannot be accorded prima17
facie status under Rule 3001(f). Its averment as to the loan amount due that creditor at
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While a party can waive an evidentiary objection such as hearsay, see, e.g., In re18
Litwok, 4 Fed. Appx. 43, 44 (2d Cir. 2001); In re Stewart, 2008 WL 4526130, at *15 (Bankr.
E.D. Va. 2008), and in that circumstance judicial notice of a non-prima facie proof of claim may
be taken for the truth of its assertions, there was no such waiver in this instance.
19
the time of the plaintiffs’ bankruptcy filing in February 2008 constitutes hearsay, the
admission of which was properly objected to by the defendants. Furthermore, as the18
plaintiffs offered no other evidence regarding the amount due this creditor, they have not
met their burden of persuasion to establish that the mortgage lien held by JTH Investment
Group, LLC is wholly unsecured under section 506(a), as required by In re McDonald.
(And, as mentioned earlier, they did not demonstrate that defendant David Hang is
asserting any secured claim in this bankruptcy case.)
Therefore, an appropriate order in favor of defendants shall be entered.
____________________
BRUCE FOX
United States Bankruptcy Judge
Dated: December 4, 2008
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