1 

### NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: METAL RECOVERY SOLUTIONS , INC., Debtor

. BAP No. NV

- 22

- 1081

- BFL

Bk. No. 3:20

- 50660

- GS

MEMORANDUM ∗ DIFFERENTIAL ENGINEERING INC., Appellant,

v. GEO

- LOGIC ASSOCIATES, INC.; CHRISTOPHER BURKE, Chapter 7 Trustee, Appellee s

. Appeal from the United States Bankruptcy Court for the District of Nevada Gary A. Spraker, Bankruptcy Judge, Presiding
Before: BRAND , FARIS , and LAFFERTY , Bankruptcy Judges.
INTRODUCTION
Dr. Thom Seal is the sole shareholder and president of Appellant
D ifferential Engineering, Inc. ("Differential" ), and he and his wife own the debtor, Metal Recovery Solutions, Inc. ("MRS" or "Debtor" ). For years prior to the bankruptcy case, Dr. Seal provided consulting services to MRS pursuant to a consulting agreement. This agreement i ncluded the use of specialized

∗ This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 

# FILED

JAN 17 2023
SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT2 "Hydro

- Jex" technology. Ultimately, Dr. Seal obtained a patent for that technology and he caused MR S to enter into a patent license agreement with
Differential which provided for the retroactive payment of patent license fees. Thereafter, Geo

- Logic Associates, Inc. ("GLA"), a creditor of MRS, obtained an arbitration award that was entered as a judgment against MRS. At around the time of the arbitration award, MRS signed promissory notes in favor of Differential for the amounts allegedly owed to Differential under the two agreements and provided UCC

- 1 financing statements to secure the notes. In addition, Dr. Seal caused MRS to make distributions of $1.2 million to himself
and his wife as shareholders of MRS. After MRS filed a chapter 7 1 case, Differential filed two claims: one for the consulting fees and the other for the patent license fees. Each claim was supported by the promissory note and UCC

- 1 financing statemen t. GLA objected to the claims. The bankruptcy court sustained the objection to the claims and Differential appealed. Insider claims, such as these, are subject to rigorous scrutiny. An insider that files a claim must establish the existence of the debt by c redible and
reliable evidence. The insider has the burden to prove the good faith of the transaction and its inherent fairness, showing that the transaction carries the

earma rks of an arms
- length bargain. Here, after an evidentiary hearing, the bankruptcy court determined that Differential did not satisfy its burden with

1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 1 1 U.S.C. §§ 101

- 1532, all "Rule" references are to the Federal Rules of Bankruptcy Procedure, and all "Civil Rule" references are to the Federal Rules of Civil Procedure

.3 respect to either claim. We discern no error. Differential argued that the court did not find that GLA had rebutted the presumption of prima facie validity of its claims. As a result, Differential asserted that the court should not have looked behind the promissory notes at the underlying obligations that formed the basis of the notes to determine the
claims. But, as w ith its other arguments, Differential misstates the re cord. The bankruptcy court correctly conclude d that GLA had rebutted the prima facie validity of the claims , and it was proper for the court to consider the underlying obligation s in making its determin ation. Finding no error in the bankruptcy court's ruling, we AFFIRM.
FACTS
A. The parties and prior litigation
Dr. Seal has a PhD in Mining

- Metallurgical Engineering and has been in the mining business for over 40 years. He has several patents on the subject of heap leach mining, including the Hydro

- Jex technology. Differential, formed by Dr. Seal in 2008, holds the patent to the Hy dro

- Jex technology

. MRS was formed i n 2009 to build and operate the Hydro

- J ex technology. By 2015, Dr. Seal own ed 95% of MRS ; his wife more recently
owned the remaining 5%

. Dr. Seal served as a director of MRS from 2010 to
2020 and as president from 2011 to 2020; Mrs. Seal served as secretary/treasurer from 2017 to 2020 and was a lso a board member. In 2015, MRS contracted with GLA, a n international geological, geotechnical, civil, and environmental firm, for GLA's assistance with a4 mining project in Mexico using the Hydro

- Jex technology. GLA later sued MRS over the Mexico project

. In 2019, a n arbitration award was entered in favor of GLA and against
MRS for $2,037,586 (plus interest). The district court confirmed the arbitration
award in January 202 0 , which MRS appealed and has not paid

. While th e arbitration award was pending confirmation, GLA moved for an injunction to prevent MRS from d istributing its assets. In opposition, Dr. Seal stated in a

sworn declaration that "MRS has, without exception, paid every uncontested
bill that was due an d owing since its inception." The injunction was denied.
GLA later discovered that the Seals caused MRS to make $1.2 million in equity distributions to themselves

– $ 1 million just before the arbitratio n hearing and $200,000 shortly afterward

. GLA then sued MRS, Differe ntial,
and the Seals to avoid certain transfers and declare them alter egos of each
other

. That m atter was stayed once MRS filed its bankruptcy case.
B

. Business dealings between Differential and MRS In February 2010, Differential and MRS entered into a consulting agreement , wherein Differential agreed to provide consulting services by
Dr. Seal to M RS for $11,666 monthly

. L ater that year, the 2010 contr act was
amended by MRS 's board to increase Differential's monthly fee to $11,711 and

to authorize Differentia l to perform the daily operations for MRS

. In May 2011, MRS's board of directors approved a second contract between Differential and MRS ("Contrac t ") which provided a m ore detailed description of Dr. Seal 's services for MRS. The Contract was for a term of five5 years unless mu tually extended by the parties. The monthly fee arrangement
with Differential remaine d unchanged , but now Differential would receive an annual bonus of 50% of MRS's pre

- tax profits. Ultimately, however, all approved annual bonuses were a flat fee of $60,000 without regard to profita bility. B oth entities' board meeting minutes fr om 2012 to 2018 provided
for ren ewal of the Contract

. B oard meetings were held by MRS and Differential

. O f note, MRS's board meeting minute s from 2013 included the followin g notation: "Differential Engineering: Track as a note between [Differential] and MRS the monthly fee and bonus if not enough funds to maintain capital to do a job."
MRS's minutes from 2015 acknowledged that the monthly fee included use of the Hydro

- Jex patent , but provided that once the patent's market value was
determined , MRS would owe Differential addition al patent license fees.
Diff erential's 2015 minutes contained simi lar language but noted that the additional patent license fees would be owed "retroactively." MRS's 2018
minutes reflected approval of the equity distributions to the S eals but noted
that MRS would still have eno ugh capital for three years of operations. T he
2019 minutes for both MRS and Differential discussed MRS's execution of promissory notes and UCC

- 1 filings for its outstanding debts to Differential

. MRS's 2019 minutes noted that MRS was under a "veil of insolvency" due to
the Differential not es and GLA's arbitration award.
C

. The bankruptcy filing and claims objection
MRS filed a chapter 7 bankruptcy case on July 6, 2020. Differentia l and6 GLA were the only secured creditors

. MRS had f ew g eneral unsecured
creditors with relatively small debts in comparison

. Christopher Burke was appointed as the chapter 7 trustee ("Trustee").
Differential filed two secur ed proofs of claim in MRS's case : one for $958,707 for "Consul t ing Fees per Contract" (" Consulting Claim") and the
other for $776,858 for a "Patent License" ("Patent Claim"). Attached to each
claim was a promissory note in favor of D ifferential, dated January 11 and July 19, 2019, respectively, w ith both notes due and payable o n J anuary 3,
2022. The note s , signed by Dr. Seal for Differential and Mrs. Seal for MRS, did

not describe the nature of the debt s but stat ed that they were secured by cash and two mining trailers. Also attached to each claim was a UCC

- 1 financ ing

statement in favor of Differential. The UCC

- 1 attached to the Consulting
Claim stated that the amount owed was "for services rendered and invoiced
b y [Differential] and not paid." The UCC

- 1 attached to the Patent Claim s tated
that the amount owed was " for patent license fee used since June, 2015 and
has not paid [sic] as of Aug 1, 2019." Also attached to the Consulting Claim was an "Account Payable Report" ("Report") identifying unpaid monthly fees
and annual bonuses owed to Diffe rential by MRS for every year from 2011 to 2018, except 2016. No accounting was attached to the Patent Claim to identify
how the amo unt outstanding was calculated.
Differential's claims were heavily contested by GLA

. The dispute
involved significant disco very , briefing, and a three

- day evidentiary hearing

. Initially, GLA argued that the claims lacked evid entiary support and that7 Differential should have attached the underlying bases for the notes

– i.e., the Contract and any patent f ee agreement or patent license. GLA also argued
that neither entity recognize d any real debt to Differential

. GLA argued that
Differential's claims were contradict ed by Dr. Seal's earlier testimony , where he stated that MRS paid every uncontested bill that was due and owi ng since its inception. And GLA further argued that the claims were in conflict with the $1.2 million in equity distributions MRS made to the Seals in 2019; if MRS owed Differential, it should have paid it as a creditor instead of making equity
distributions. In response, Differential maintained that it did not have to produce the underlying agreements between it an d MRS in support of the clai ms becau se the parties executed promissory no tes for the consulting fees and patent
license fees. Differential explained that it did not bill MRS for consulting
services unless MRS had sufficient cash

– an arrangement appr oved by
Differential in 2015. If an entry for a monthly consul ting fee or a year
- end bonus appeared on the Report, that meant MRS was not billed by Differential
for that fee or bonus and did not pay it. In contrast , if a monthly consulting fee or year

- end bonus did not a ppear on the Report, then it was in voiced to
MR S and MRS paid it. 2 Further , MRS used the "cash accounting" me thod,
which explained the lack of any accounts payable entries for Differential in
MRS's books or tax returns. Finally, Differential expressed concern about

2 Per the Report, the only amount owe d to Differential for 2017 was the $60,000 annual bonus. However, this contradicted another MRS document which showed that this bonus had been paid by check.8 GLA's discovery methods , Trustee's pending adversary proceeding, 3 and the "pe nding proceeding rule."
Dr. Seal was the sole testifying witness at the evidentiary hearing

. After post

- hearing briefs were filed, the bankruptcy court entered its Memorandum
Decision and Order disallowing Differential's claims in their entiret y. This timely appeal followed. JURISDICTION The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)( 2)(B). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Did the bankruptcy court err in finding that GLA presented sufficient
evidence to rebut the presumptive validity of Differential's claims?
2. Did the bankruptcy court er r in disallowing the Consulting Claim and
the Patent Claim?
STANDARDS OF REVIEW Claims objection appeals can involve both legal and factual issues. We review the legal issues de novo and the factua l issues for clear error. Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 918 (9th Cir. BAP 2011). Whether the bankruptcy c ourt identified and applied the correct burden of proof is a que stion of law we review de novo. Margulies Law Firm v.

3 A fter GLA filed the claims objection, Trustee filed an adversary complaint against Debtor, Diffe rential, the Seals, and a forme r CFO for Debtor. He alleged several claims, including fra udulent transfer , preference, and alter ego. He also challenged the validity of Differential's UCC

- 1 liens, alleging that they were not perfected.9 Placide (In re Placide), 459 B.R. 64, 71 (9th Cir. BAP 2011). Whether the evidence sufficiently rebutted the evidentiary presump tion under Rule 3001(f), however, is a question of fact reviewed for clear error. Garner v. Shier (In re Garner), 246 B.R. 617, 619 (9th Cir. BAP 2000) (citing Sierra Steel, Inc. v. Totten Tubes, Inc. ( In re Sierra Steel, Inc.), 96 B.R. 275, 277 (9th Cir. BAP 1989)). A bankruptcy court's factual findings are not clearly erroneous unless they are illogical, implausible , or without support in the record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 ( 9th Cir. 2010).
DISCUSSION
A. Legal standards for claims litigation A claim is deemed allowed absent obje ction from a party in interest. § 502(a). A procedurally compliant proof of claim is prima facie evidence of
the validity and amount of the claim. Rule 3001(f). " A mere formal claim objection, without evidence, cannot defeat a claim presumed to be valid under Rule 3001(f). " Shin v. Altman (In re Desert Springs Fin., LLC), BAP No. CC

- 16

- 1374

- KuFL, 2017 WL 1434403, at *5 (9th Cir. BAP Apr. 20, 2017) (citing Lundell v. Anchor Constr. Specialists, Inc.), 223 F.3d 1035, 1039 (9th Cir. 2000)).
T o defeat a prima facie valid claim under section 502, the objector must come forward with sufficient evidence and show facts te nding to defeat the claim by probative force equal to that of the allegations of the proofs of claim themselves. 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 clai mant to prove the validity of the claim by a preponderance of the evidence. The ultimate burden of persuasion remains at all times upon the claimant.10 In re Placide, 459 B.R. at 72 (cleaned up).
This same b urden shifting process applies to the claims of insiders. An
insider's claim is entitled t o the presumption of validity in Rule 3001(f). In re Desert Springs Fin., LLC, 2017 WL 1434403, at *7 (citing Stancill v. Harford Sands Inc. (In re Harford Sands Inc.), 372 F.3d 637, 640

- 41 (4th Cir. 2004); McGee v. O'Connor (In re O'Connor), 153 F.3d 258, 260

- 61 (5th Cir. 1998 )). "However, because of the influence and control an insider may wield, an insider's transactions with a debtor are subject to rigorous or strict scrutiny ." Schlossberg v. Abell (In re Abell), 549 B.R. 631, 669 (Bankr. D. Md. 2016) (citing In re Harford Sands Inc., 372 F.3d at 641); s ee also Pepper v. Litton, 308 U.S. 295,
306

- 07 (1939) (insider transactions are "subjected to rigorous scrutiny" and the
insi der claimant has the additional burden of proving "the good faith of the transaction" and "its inherent fairness;" the test is "whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain"); Brewer v. Erwin & Erwin, P.C. (In re Marquam Inv. Corp.), 942 F.2d
1 462, 1465 (9th Cir. 1991) . If the objecting party presents material evidence of unfair conduct which rebuts the prima facie validity of the insider claim, the

" burden is on an insider claimant to show the i nherent fairness and good faith of the challenged transaction. " In re Abell, 549 B.R. at 6 70 (quoting In re Harford Sands Inc., 372 F.3d at 641); accord In re Desert Springs Fin., LLC, 2017 WL 1434403, at *7

- 8 (recognizing the additional burden on insiders under Pepper
and Marquam if the objector succes sfully rebuts the presumption).11 B. The bankruptcy court did not err in finding that GLA presented sufficient evidence to reb ut the presumptive validity of Differential's claims

. As an initial matter, and over GLA's objection, the bankruptcy court found that the promissory notes and UCC

- 1s attached to the Consulting Claim and the Patent Claim, plus the Report attached to the Consulting Claim, were prima facie evidence of the validi ty and amounts of the claims

u nder Rule 3001(f). The court then found that GLA successfully rebutted t he evidentiary presumption as to both claims

. Differential makes several related, and at times contradictory , arguments on appeal. First, Differential argues that the bankruptcy court did not specifically rule that GLA had met its own burden in its objection, so
therefore the burden should never have shifted to Differential to defend its
claims. Alternatively, Differential contends the bankruptcy court ruled that its
insider status eliminated GLA's burden to rebut the presumption of validity and obligated Differential to provide additional docum entation. Along this same line, Differential argues that the bankruptcy court completely ignored the sufficiency of what was attached to the claims and conducted its own, "unwarranted" investigation into prior dealings between MRS and Differential. Put simply, Differential disagrees with the bankruptcy cour t's supported ruling that GLA successfully rebutted the evidentiary presumptio n, which then allowed for review of the underlying debt represented by the notes and shifted the burden to Differential to establish the validity of the debt that provided the ba sis for its claims. That Diff erential12 disagrees with the court's findings in support of its decision does not
constitute reversible error. See Anderson v. City of Bessemer City, 470 U.S. 564,
574 (1 985) (if there are two permissible views of the evidence, the trial judge's
choice between them cannot be clearly erroneous). On this record, we see no clear error in the bankruptcy court's finding s that GLA rebutted the evidentiary presumption so as to shift the burden to
Differential to prove the validity of its claims.
C. The bankruptcy court did not err in disallowing the Consulting Claim and the Patent Claim.

1. The Consulting Claim Section 502(b)(4) provides that a claim must be disallow ed where it is
for "servic es" of an insider and exceeds the reasonable value of the services. Under § 502(b)(4), the insider claimant "bears the burden of proof on the question of reasonableness of compensation for services." In re Placide, 459 B.R. at 72 ( citations omitted).
Howe ver, before the court reaches the issue of "reasonableness," it must first examine the evidence presented in support of the insider claim: A claim by an insider must be carefully examined, and the obligation of the D ebtor to the insider claimant must be established, in the first instance, by credible and reliable evidence. If the debt, liability or obligation of the D ebtor to the insider claimant is not established by credible and reliable evidence, the claim must be disallowed. It is only after the de bt is established by credible and reliable evidence that § 502(b)(4) and the reasonable value of an insider' s services become an issue.13 Boehm v. At on Components, Inc. (In re Aton Components , Inc.), 99 F.3d 1138, at *1 (6th Cir. 1996) (table) (emphasis added) ; see also In re Lani Bird, Inc., 129 B.R. 203, 206 (Bankr. D. Haw . 1991). The bankruptcy court found that the Consulting Claim lacked the inherent fairness and good faith required for allowance of an insider services
claim und er § 502(b)(4) , as did the debt accrued and captured in the
p romissory note. There was ample evidence in the record to support this finding.
T he Contract require d monthly payments of $11,711 and annual bonuses equal t o 50% of MRS's pre

- tax profits. As to the b onuses, t he court
found that the $60,000 bonuses were inconsistent with the Contract which required that they be paid only if MRS was profitable and were to be
calculated based on the amount of profit. The only evidence supporting the bonus charges were bo ard meeting minute entries for MRS and Differential
that ro utinely referenced approval of the m

. There was no discussion as to the basis for the bonus or its calculation. To the extent the bonus obligations were simply issued by fiat of MRS in favor of Diff erential, the court found that
there was no basis to evaluate the reasonableness of that commitment. There was also no evidence as to what Differential actually did to earn any bonus or why MRS should pay one. Regarding the mont hly consulting fee , the cou rt noted that Dr. Seal was unable to answer the question of how and on what basis it was decided when
MRS had sufficient operating capital to warrant making payments to14 Differential

. W hen MRS did appear to have sufficient cash reserves in 2016 and 2017, Dr. Seal could not explain why it paid Differential only the current monthly fees and not the outstanding balances owed from 2011 through 2015.
The $1.2 million distributed to the Seals in 2019 further establ ished that MRS had sufficient cash to pay the entire balance due under the Contract but cho se to pay its owners rather than its putative creditor Differential. 4
The court also found that the Report for the Consulting Claim lacked
any indicia of reliability

. There was no testimony as to who, or how, the Report was kept. Dr. Seal said he could not recall what documents he relied upon to produc e the Report. And t here was no payment his tory detailing
when and how Contract payments were made

. When c onfronted with his prior district court test imony, that MRS paid every uncontested bill since its inception, Dr. Seal testified that he did not consider the notes to Differential when he made that statement because they

we re not "bills." Yet , Dr. Seal testified just moments earlier that h e considered
the promissory note to be a " bill " for Differential's consulting services. The court found Dr. Seal's explanation for the conflicting testimony "mere sophistry." In sum, the court found that Dr. S eal's testimony about uncontested bills confirmed what the intermittent payment history showed: whether acting as Differential or MRS, Dr. Seal considered the Contract to be a

4 The bankruptcy cou rt found Dr. Seal's testimony "evasive and unpersuasive" on the questions of how he determined when MRS had enough money for Differential to invo ice it for the monthly amounts and what accountant advised him to authorize $1.2 million in shareholder distrib utions to the Seals. In contrast, Dr. Seal displayed a "sharp memory" for details regarding the Hydro

- Jex technology.15 convenience rather than a true debt, and it was not until the arbitration was
he ading toward a hearing that MRS rolled the past due amount into a note. To that end, the court observed that MRS ' s agr ee ment to ente r into a promissory

note was at odds with the agreement that MRS need only pay Differential
when it had sufficient cash.
Th e court was further troubled by Dr. Seal's testimony that Differential's practice of receiving intermittent payments was designed to keep MRS from triggering the defau lt provision of the Contract , because he wanted MRS to
have a " good record of payment" when it came time to sell the business . The
court found Dr. Seal's testimony to be the "very definition of an insider preference, not only by choosing not to enforce Differential's contractual rights immediately, but by also continuing a non

- perfo rming contract." The court opined that neither of these accommodations would have been provided in an a rms
- length transaction, and that the intentional manipulation of MRS's payment obligations would be tantamount to commercial fraud by
any third party tha t considered MRS's finances.
Given the above, the court found that any obligation for MRS to pay was either barred by Differential's agreement that the obligation would not come due until MRS had sufficient cash reserves, or it did not satisfy the strict scrutiny requirements for an insider claim under § 502(b)(4). As a separate and independent basis for disallowing the Consulting
C laim, the court found that the Contract was illusory. Differential chose not to require any payments from MRS on its deficien cy even when MRS had the16 funds to do so. Thus, Dr. Seal chose not to have MRS perform its alleged contract obligations, and Differential was charged with Dr. Seal's knowledge. This failure to pay demonstrated that the Contract between MRS and
Differential was illusory. But even if not illusory, the court found that the amounts sought by Differential were simply not owed under the Contract because MRS had insufficient cash and no working capital. The court' s ruling to sustain the objection to the Consulting Claim was well supported by the
record.

2. The Patent Claim Section 502(b)(1) provides that the court shall determine the amount of a claim and shall allow such claim except to the extent that it is "unenforceable against the debtor or property of the debtor, under any agreement or applicable law for a reason other than because such cla im is contingent or
unmatured." The Patent Claim consisted of the retroactive calculation of patent license fees owed by MRS t o Differential. While not a ttached to the Patent Claim, Differential offered at the evidentiary hearing a spr eadsheet showing the $776,858 it claimed was owe d by MRS for fees accruing from June 2015, when the patent was issued, through July 2019, when Differential began licensing th e Hydro

- Jex patent to Jex Technologies, Inc. and its market value was finally establish ed. Dr. Seal explained that these monthly fees were due whether or not MRS used the patent, and the amount of each monthly fee was based upon the market price of eleven ounces of gold

.17 The bankruptcy court di sallowed the Patent Claim on two grounds. First, the patent license agreement as memorialized in the MRS board meeting minutes lacked valid consideration and was therefore unenforceable. Second,
even if a valid patent license agreement existed, under the rigorous scrutiny applied to insider claims, the evidence presented was not sufficient to prove
that Differential was entitled to a retroactive claim for patent license fees. Again, the court' s findings were wel l supported in the record.
Differential asserted that the basis for the obligation to pay patent license fees
was the Contract as modified later in board meeting minutes. The court first
found that the Contract provided MRS the right to use the Hydro

- Jex

t echnology in exchange for the established monthly consulting fee of $1 1,711

. The Contract did not include any language about additional fees for a patent license. Those discussions were contained only in the board meeting minutes
for Differentia l and MRS. Because t here was no provision in the Contract for additional fees to be paid once Differential patented the technology MRS was already using, much less to apply those fees retroactively , the court concluded
that the charging of these fees required a ne w c ontract . Therefore, under the
pre
- existing duty rule, the court found that Differential could not retroactively compel MRS to pay more for something that it already had a right to use.
In additi on, the court found that the Patent Claim lacked the inherent fairness and good faith required for a claim by an insider. On that point, the
court found that the retroactive nature of MRS' s obligation to pay for technology it already had the right to use was not consistent with third

- party,18 arm ' s
- length deal s. Rather, this was something that could only arise between insiders, particularly those controlled by the same principals. The court noted that, because the Contract effectively gave Differential control of every aspect of MRS, MRS had no power to negotia te or protect itself in this transaction, and an agreement for retroactive contractual liability was contrary to its
fin ancials interests . In the court's opinion, no bona fide business could, or would, operate under such conditions.
3. Differential's cont entions on appeal Differential raises several arguments for why we should reverse the bankruptcy court's order. First, Differential argues that the majority of the legal argum ents in the Memorandum D ecision were either not raised directly by GLA in the in itial claims objection, or they were products of the court extrapolating later

- raised arguments by GLA, Trustee, or th e court itself. For example, argues Differential, the court impermi ssibly " broadened " GLA's argument that the claims were not supported by sufficient documentation , to
that it was the underlying debt recognized by the promissory notes that GLA was actually challenging. While GLA challenged the sufficiency of the
documentation atta ched to the claims, it also argued that the claims did not
withstand the strict scrutiny applied to insider claims and that MRS and Differential never recognized any real debt to Differential. Differential even acknowledges that one of GLA's initial objections was that Differential could not establish any basis for its claims for consulting services or patent license
fees.19 To the extent GLA further supported its objections with evidence gathered during discovery or admitted at the evidentiary hearing, this is not surprising, and it certainly was not preju dicial since Differential had the opportunity to address it. Any perceived "new arguments" raised by the bankruptcy court were merely extensions of and entirely consistent with the fundamental basis of GLA's objections

– the claims did no t represent real
d ebt, and they were not inherently fair, in good faith, or arm's length.
Differential assert s that GLA's arguments that were related to the alter ego act ion or Trustee's adversary should not have been raised in the claims objection or considered by the cou rt. But, Differential fails to articulate exactly what these impermissible arguments were. In any event, the fact of Dr. Seal's total control of Differential and MRS was highly relevant to GLA's claims objection and went to the heart of the fairness, good faith, and arm's length

nature of the claims. That it is also relev ant to the alter ego issues and adversary complaint did not preclude the court from considering it in this

matter. Differential next argues that the bankruptcy court erred in disallowing the Patent Claim in its entirety. We have already overruled Differential's first argument here, that the court erred by looking beyond the four corners of the promissor y notes to disal low the c laim. Differential's next argument makes no sense. It argues that the court erroneously found that the promissory note was not supported by consideration. The court made no such finding as to the promissory note. Rather, it found that Differential 's attempt to retroactively20 charge MRS a license fee for a patent that it already had the right to use lacked consideration. Whether consideration for the promissory note was the provision of a s ecurity interest was not relevant because, as the court held, the
debt secured was simply not owed by MRS. 5 Next, Differential argues that the bankruptcy court should not have disallowed the claims in their entirety, but rather should have modified them
to their reasonable value. No one has dis puted that signific ant time and money was spent by Dr. Seal, MRS, and Differential on MRS's mining projects and that, at times, the projects were profitable. But based on the evidence and case law, we see no error in the court's decision to reject them outright as opposed to modifying them to their reasonable value. After a painstaking analysis, the court found that Differential failed to establish either debt with credible and reliable evidence, which Differential has not demonstrated was a
clearl y erroneous finding. Consequ ently , the court did not need to consider or
determine the reasonable value of Differential's services. See In re Aton Components, Inc., 99 F.3d 1138, at *1; In re Lani Bird, Inc., 129 B.R. at 206. Differential's next arguments also fall flat. First, Differential argues that
i t was a clear violation of the pending proceeding rule to allow GLA to proceed with its Rule 2004 examinations and other related discovery for its claims objection, when Trustee 's adversary involved the same or substan tially similar subject matter. When an adversary proceedi ng or contested matter has

5 Differential does not address the court's alternate basis for disal lowing the Patent Claim

– that it lacked the inherent fairness and go od faith requ ired for an insider claim.21 been commenced during the bankruptcy, those mat ters become pending proceedings subject to the so

- called "pending proceeding rule." The rule
stand s for the proposition that if an adversary proceeding or a contested matter is pending and related to the instant dispute , then the parties to that proceeding or matter may no longer utiliz e the liberal provisions of Rule 2004
and should util ize the discover y devices provided for in Rules 7026 through
7037. In re Art & Architecture Books of the 21st Century, No. 2:13

- BK

- 14135

- RK, 2019 WL 9243053, at *6 (Bankr. C.D. Cal. Dec. 6, 2019) (citing In re Nat'l Risk Assessment, Inc., 547 B.R. 63, 65 ( Bankr. W.D.N.Y. 2016)). The concern is that parties could use Rule 2004 examinations as a tactic to circumvent the

s afeguards provided by Rules 7026 through 7037, such as the right to have counsel present, the right to cross

- examine witnesses, the greater rights to object to immaterial or improper questions, and the right to have issues
defined beforehand. See In re Dinubilo, 177 B.R. 932, 939

- 40 (E.D. Cal. 1993).
What Differential fails to mention is that GLA noticed D r. Seal's depositions (as representa tive for Debtor and for Differential ) under Rule 7030
and Civil Rule 30(b)(6), not Rule 2004. In addition, Dr. Seal was represented by counsel at his deposition, and his counsel lodged several objections on the record, instructing Dr. Seal not to answer some of the questions . GLA also noticed its request for production und er Rule 7026 and Civil Ru le 26. We also reject Differential's repeated arguments that GLA's claims objection and Trustee's adversary complaint were imp roperly seeking the
same relief and that GLA's claims objection required an adversary proceeding

.22 As Differential knows , Trustee was challenging only t he liens securing its claims, alleging that Differential had failed to perfect its UCC

- 1 liens, and thus the claims, if found to be allowed , would be unsecured. Conversely, GLA was challenging the underlying claims themselves and thei r amounts, not the lie ns securing them. Moreover, b ecause GLA's claims obj ection was not challenging the validity, priority or extent of a security interest, an adversary proceeding was not required. The bankruptcy court recognized the distinction betwee n the two matters, and t hat its rejection of Differential's claims essentially renders moot
Trust ee's complaint as to the purported security interests is simply the

conse quence of litigation. And Differential's perceived "prejudice" as to itself, MRS, and D r. Seal in other matters such as Trustee's adversary, the pending appeal of the arbitration award, or the stayed di strict court action is not well

taken. The facts are what they are. That they might also be relevant to or impact other proceedings against D ifferential, MRS, or the Seals was no reason to preclude the bankrup tcy court from consider ing them

. Differential
has not cite d any authority to the contrary. Finally, Differential argues that the bankruptcy court erred by considering Trustee's impromptu illusory contract arg ument made in closing

statement at the evidentiary hearing. Differential argues that its counsel was "ambushed" by Trustee's counsel's argu ment, and though he made every effort to respond, he had not reviewed the authority cited by Trustee's counsel23 and was not aware that this, or the related "lack of consideration" arg ument , were going to be raised.
While the term "illusory contract" was fi rst raised in closing statements

at the evidentiary hearing, it was actually GLA's counsel who first rais ed it. He argued that the "pay when able" arrangement between MRS and
Differential was "a classic example of an illusory promise" and so the claims

wer e unenforceable. Trustee's counsel then expounded on this argument, citing the cases Different ial references. When Differential's counsel noted in his closing statement that this was a new argument being raised by GLA and Trustee, the court agreed that the term illusory contract had not previously been used, but noted that the "concept" was "embedded in this."
In an y event, what Differential does not mention is that it address ed this argument in its post

- hearing brief

. Its counsel also gave a commendable o ff

the

- cuff opposing argument in his closing statement at the evidentiary hearing. Thus, any perceived "ambush" against Differential was alleviated with these opportunities for it to be heard on the subject. See Mathews v. Eldridge, 424 U.S. 319, 333 (1976 ) ( " fundamental requirement of due process is
the opportunity to be heard at a meaningful time and in a meaningful

manner " ) (cleaned up)

. CONCLUSION
For the r easons stated above, we AFFIRM.