UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

CORBIN DIVISION

IN RE:

FLORENCE KING

DEBTOR CASE NO. 89-60564

MEMORANDUM OPINION

This matter comes before the Court on the objection of the debtor to the claim of Melvin Bolton which has been submitted for decision. The issues which arise in that regard are 1) whether the debtor has standing to object to Bolton's claim, and 2) whether debtor can overcome the presumption of validity of Bolton's claim by her objection.

The debtor herein ("debtor" or "Florence King") filed her Chapter 7 petition in this Court on October 11, 1989. Several years prior to the filing of her petition the debtor had been named as a defendant in Civil Action No. 81-CI-073, filed in Bell Circuit Court, Kentucky on February 27, 1981. The claimant Melvin Bolton ("Bolton") was the plaintiff in that action; the other defendants were the debtor's husband, Charles King, and Pinnacle Coal Company ("Pinnacle"). Bolton filed the suit to collect the balance due under an agreement entered into with Charles King on August 17, 1977, for the purchase of a partnership known as King and Bolton Coal Company ("King and Bolton"). Charles King defaulted on the agreement after payment of $75,000.00 of the $200,000.00 purchase price.

In Bolton's complaint the debtor and her husband were alleged to have fraudulently conveyed all their right, title and interest in and to any and all real or personal property in which they had an interest, including assets of King and Bolton, to Pinnacle. The complaint further alleged that the debtor and her husband treated Pinnacle and King and Bolton as alter egos of themselves, and that transfer of assets from themselves and King and Bolton constituted a fraudulent sale and sham agreement.

Charles King filed a Chapter 7 petition on April 17, 1984, resulting in a stay of the Bell Circuit Court action as against him. However, on March 12, 1985, a panel of arbitrators in the Bell Circuit Court action found that Charles King had breached the agreement with Bolton and awarded him the sum of $124,000.00. On June 13, 1986, the Bell Circuit Court confirmed the findings and award of the arbitration panel. On September 23, 1986, Charles King d/b/a King and Bolton Coal Corporation, Florence King, and Pinnacle commenced an adversary proceeding in this Court, No. 86-0229, against Bolton seeking an order holding him in contempt for violating the automatic stay, requiring him to release lis pendens notices filed against the plaintiffs' property, and enjoining him from efforts to collect the judgment entered in the Bell Circuit Court action after the filing of Charles King's bankruptcy. Judge Lee ruled that the judgment against Charles King was void and of no effect, and enjoined further efforts by Bolton to collect it.

The Bell Circuit Court entered an Order on February 26, 1987, which found that Charles King and the debtor transferred assets in which one or the other or both had an interest to Pinnacle, and that the transfer had been without consideration and fraudulent. It entered judgment against the debtor in the amount of $124,000.00 plus 12% interest from the date of filing of the findings of the arbitration panel. Pinnacle filed a Chapter 11 petition in this Court on August 8, 1987. The debtor and Pinnacle appealed the Bell Circuit Court order of February 26, 1987, to the Kentucky Court of Appeals sometime in 1987. The Court of Appeals ordered the appeal continued in abatement indefinitely on June 18, 1991.

On July 28, 1989, Bolton filed a claim for $124,000.00 in Pinnacle's case, based on the findings and award of the arbitration panel and a copy of the August 17, 1977 agreement. On October 3, 1989, Pinnacle as debtor in possession filed an objection to Bolton's claim. Pinnacle's Chapter 11 case was converted to a Chapter 7 on June 14, 1990. Pinnacle filed a objection to Bolton's claim, and the Court sustained the objection.

Bolton filed his original Proof of Claim herein on July 25, 1990. The debtor filed her Objection to the Claim of Melvin Bolton on November 15, 1995. Bolton filed an Amended Proof of Claim on December 7, 1995. The basis for the Amended Proof of Claim was the Bell Circuit Court Order of February 26, 1987. Bolton filed a Response to Objection on December 8, 1995, and the debtor filed a Reply on December 14, 1995. The debtor further filed a Supplemental Objection on January 16, 1996.

The Court will first consider whether the debtor has standing to object to Bolton's claim, since if she does not she may not challenge its validity. Most courts have held that "[a]s a general rule a Chapter 7 debtor is not a 'party in interest' for purposes of section 502(a) and therefore lacks standing to file an objection to a claim." In re Costello, 184 B.R. 166, at page 168 (Bkrtcy.M.D.Fla. 1995). As the Costello court goes on to say, however,

there is a recognized exception to this rule. When it appears that if the contested claims are disallowed there will be a surplus in the estate which may be returned to the debtor, the debtor has a cognizable pecuniary interest in the funds of the estate and therefore has standing to contest claims. ....(Cite omitted.)

At page 168. See also In re Creditors Service Corp., 206 B.R. 174 (Bkrtcy.S.D.Ohio 1997).

The debtor has alleged that if Bolton's claim is disallowed there will be a surplus for the estate. She has set out an accounting of funds which she alleges are available to the estate from the sale by the trustee of two parcels of real estate and of a coal tipple in the Pinnacle case. This estate did receive a distribution in the Pinnacle case, based on debtor=s status as a shareholder of the corporation. The record in the Pinnacle case does not, however, support her allegation that the trustee's accounting is incomplete, and that funds from the sale of the tipple have not been accounted for. Most significantly, the Order of Distribution entered by this Court in the Pinnacle case on July 10, 1996, sets out the funds available to be distributed by the trustee to Florence King in the amount of $18,890.97. There is no larger sum available to her.

The record in this case shows that claims have been filed by the following:

1. George Fabe, Ohio Superintendent of Insurance, Liquidator of the American Druggists' Insurance Co., in the amount of $266,479.19;

2. Internal Revenue Service for taxes owed for the period ending 12/31/85 in the amount of $494.72;

3. Cumberland Surety Insurance Company, Inc. (formerly Reclamation Surety Insurance Company, Inc.) in the amount of $2,882.00 plus 12% judgment interest;

4. William A. Hayes in the amount of $49,600.00;

5. Melvin Bolton in the amount of $124,000.00, plus interest;

6. The United States Trustee for fees in the debtor's original Chapter 11 case for the second quarter of 1990 in the amount of $150.00;

7. Internal Revenue Service for taxes owed for the period ending 12/31/89 in the amount of 921.44.

The debtor objected to the claim set out in number 1 above, and her objection was sustained by Order entered herein on June 26, 1997. The only other claim she has specifically objected to is Bolton's. The claim of William A. Hayes is, however, based upon Bolton's claim stemming from the state court judgment being considered here. If the debtor's objection to Bolton's claim is sustained, Mr. Hayes' claim would also be subject to challenge, and it will therefore not be considered for purposes of determining whether the debtor has standing to object. The other claims set out above total $4,448.16. The debtor could expect a distribution of more than $14,000.00 if Bolton's claim and Mr. Hayes' related claim are disallowed. She therefore has standing to object.

The Court next considers the validity of Bolton's claim, and the debtor's objection to it. As stated in In re Allegheny Intern., Inc., 954 F.2d 167 (3rd Cir. 1992),

The burden of proof for claims brought in the bankruptcy court under 11 U.S.C.A. '502(a) rests on different parties at different times. Initially, the claimant must allege facts sufficient to support the claim. If the averments in his filed claim meet this standard of sufficiency, it is 'prima facie' valid. .... In other words, a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant's initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said that the objector must produce evidence in equal force to the prima facie case. .... In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence. .... The burden of persuasion is always on the claimant. (Cites omitted.)

At pages 173-174. See also In re Fullmer, 962 F.2d 1463 (10th Cir. 1992).

Bolton's claim was timely and properly filed, and is based on a valid state court judgment. There is no doubt that it is prima facie valid. The debtor attempts to rebut the presumption by pointing to decisions of this Court in the related cases of Charles King and Pinnacle which she alleges are dispositive of the issue of the validity of Bolton's claim against her. The two decisions which she assigns the greatest weight are Judge Lee's opinions in the adversary matter in Charles King's bankruptcy case, Adversary No. 86-0229, in which Charles King, the debtor and Pinnacle sued Bolton to enjoin him from attempting to collect the award of the arbitration panel, and in the Pinnacle bankruptcy case in which Judge Lee ruled on Bolton's claim in that case.

In Adversary No. 86-0229 the Court found that "the action taken by the arbitration panel and the Bell Circuit Court in determining liability of the debtor subsequent to this bankruptcy case was in violation of the automatic stay, is void and of no effect." It seems clear that the Court was addressing an issue arising in Charles King's bankruptcy case, and that the consequences of the decision as to the effect of the state court judgment rested on that debtor. As concerns the ruling in the Pinnacle bankruptcy, Judge Lee found that Melvin Bolton was not a creditor of Pinnacle. Bolton's claim in the Pinnacle case was based on the 1985 arbitration award. Judge Lee did not rule on whether Bolton was a creditor of the debtor herein.

The debtor makes much of the complicated interrelationships among the three bankruptcy cases, the various rulings in each one, and their effect on each other. This Court does not believe that these arguments are sufficient to overcome the presumption of validity of Bolton's claim. The debtor does not address the fact that Bolton's claim is based on the judgment entered in the Bell Circuit Court action on February 26, 1987. She has made no argument, and the Court has found no authority for the proposition that the fact that the action was appealed kept Bolton from filing a claim. The Court would further point out that the debtor was always free to prosecute her appeal, since the automatic stay has no effect on her.

The debtor has made the statement that there has never been a final and non-appealable judgment entered against her in the Bell Circuit Court action. She is incorrect about the finality of the judgment against her. In Vaughn's Adm'r v. Louisville & N.R. Co., 179 S.W.2d 441, Ky. (1944) the court stated:

As a plea, a former adjudication is a bar to subsequent suits for the same cause; it is conclusive of the facts therein established. .... The rule of res judicata means that when a court of competent jurisdiction has determined a fact or question which was actually and directly in issue in a former suit, the judgment until reversed or modified, is final and conclusive in respect to such fact or question as between the parties to the suit and their privies.

At page 444. This is the rule in Kentucky. See Louisville Trust Company v. Smith, 330 F.2d 483, 485 (6th Cir. 1964).

Therefore the fact that the Bell Circuit Court action was appealed and remains in abatement on appeal matters not at all; the judgment of the Bell Circuit Court has not been reversed or modified and so it is final so far as claims allowance is concerned. Further, the fact that it may have been wrong does not alter the res judicata effect of the judgment. See Winslow v. Williams Group, 134 B.R. 949, 958 (D.Colo. 1990). It is this Court's opinion that it is also dispositive of the issue of whether or not Bolton has a valid claim against the debtor. An order overruling the debtor's objection to Bolton's claim will be entered separately.

Dated:

By the Court -

__________________________

Judge

Copies to:

Debtor

J. Randall Reinhardt, Esq.

Bill Hayes, Esq.

James R. Westenhoefer, Esq., Trustee