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The Bankruptcy Rules state that 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. It follows, that the burden of going forward with the proof is on the objecting party, not the claimant. That burden is not satisfied by the mere filing of an objection.
The debtors filed a petition for reorganization under chapter 11 of the Bankruptcy Code ("the Code"). Against the estate thereby formed, the First Peoples National Bank ("the Bank") filed three proofs of claim. In support of the first proof of claim (No. 15) it appears that the debtors conveyed a mortgage on a parcel of real estate to the Bank in exchange for a construction loan with which to improve the subject property. This mortgage was executed for a denominated indebtedness of $200,000.00 although only $125,000.00 was advanced at settlement. The Bank later advanced $170,000.00 to the debtors through a series of unsecured loans, none of which, the Bank concedes, were charged against the original mortgage. Apparently, after some criticism of these advances from its auditors, the Bank convinced the debtors to grant another mortgage for $350,000.00 using the now improved property as collateral and allocating $125,000.00 of the proceeds to satisfy the original mortgage and $177,520.00 to discharge the unsecured indebtedness and interest. The mortgage was then properly filed and recorded. At the hearing the Bank presented conflicting testimony on the outstanding balance remaining on the mortgage due to its faulty recordkeeping practices.
Is the Bank entitled to the claim?
The debtors argued that the lack of supporting documents and mismanagement of the file should invalidate the Bank's claim. However, the burden of proof is not on the Bank to substantiate its claim with extensive documentation, the onus is on the debtor to overcome the presumption of validity. Although the court recognizes the wife-debtor's hardship in supplying this evidence, without guidance or her husband's records, the law is clear that with no evidence offered by the debtors to invalidate the loan or the properly recorded mortgage, the claim must be upheld. However, because of conflicting statements by the Bank's own employees on the balance of the indebtedness, the court adopted the Bank's lowest figure of $300,000.00. The Bank should rightfully bear the burden of the ambiguity in light of its abysmal bookkeeping.