Court Opinion

ID: 9946033
Source: CourtListenerOpinion
Date Created: 2024-02-28 22:00:49.458931+00
Date Added: 2024-06-11T14:25:23.407228
License: Public Domain

RECOMMENDED FOR PUBLICATION
                                    File Name: 24b0001p.06

                    BANKRUPTCY APPELLATE PANEL
                                 OF THE SIXTH CIRCUIT

                                                       ┐
 IN RE: INSIGHT TERMINAL SOLUTIONS, LLC
                                                       │
                                           Debtor.     │
  ___________________________________________          │
 INSIGHT TERMINAL SOLUTIONS, LLC,                      │
                                                        >    No. 23-8004
                               Plaintiff-Appellant,    │
                                                       │
       v.                                              │
                                                       │
                                                       │
 CECELIA FINANCIAL MANAGEMENT, LLC; OASIS              │
 AVIATION LLC; HALAS ENERGY, LLC; JOHN J.              │
 SIEGEL, JR.,                                          │
                                Defendants,            │
                                                       │
                                                       │
 BAY BRIDGE EXPORTS, LLC,
                                                       │
                   Intervening Defendant-Appellee.     │
                                                       ┘

                      Appeal from the United States Bankruptcy Court
                     for the Western District of Kentucky at Louisville.
             Nos. 19-bk-32231; 21-ap-03013—Joan A. Lloyd, Bankruptcy Judge.

                                Argued: November 7, 2023

                           Decided and Filed: February 28, 2024

     Before: CROOM, DALES, and GUSTAFSON, Bankruptcy Appellate Panel Judges.

                                    _________________

                                        COUNSEL

ARGUED: Michael A. Kaplan, LOWENSTEIN SANDLER LLP, New York, New York, for
Appellant. Roger G. Jones, BRADLEY ARANT BOULT CUMMINGS LLP, Nashville,
Tennessee, for Appellee. ON BRIEF: Michael A. Kaplan, Robert M. Hirsh, Rasmeet K.
Chahil, LOWENSTEIN SANDLER LLP, New York, New York, for Appellant. Roger G. Jones,
BRADLEY ARANT BOULT CUMMINGS LLP, Nashville, Tennessee, for Appellee.
 No. 23-8004                     In re Insight Terminal Solutions, LLC                                 Page 2

                                            _________________

                                                  OPINION
                                            _________________

        SCOTT W. DALES, Bankruptcy Appellate Panel Judge. Had the principal witness in
this matter survived his deposition long enough to submit to cross-examination, the adversary
proceeding to disallow or recharacterize the claim at issue may have turned out differently. The
key witness, however, did not survive long enough to complete his direct examination, let alone
submit to cross-examination. So, in an unremarkable exercise of its discretion under the rules,
the Bankruptcy Court declined to admit his incomplete testimony.                      Such are the risks of
litigation.

        Consequently, after trial in the underlying adversary proceeding, the Bankruptcy Court
entered judgment allowing Proof of Claim No. 1 originally filed by Cecelia Financial
Management, LLC (the “Claim”) over the objection of chapter 11 debtor-in-possession Insight
Terminal Solutions, LLC (“ITS”). The court found that ITS failed to rebut the presumption of
validity and amount of the Claim that arose under Bankruptcy Rule 3001(f), rejecting ITS’s
effort to disallow the Claim (1) for want of consideration, or (2) as a disguised equity
contribution.1 ITS appealed from the judgment and, finding no reversible error, we AFFIRM.

                                          ISSUES ON APPEAL

        Though ITS listed twenty-two assignments of error in its Statement of Issues on Appeal,
the dispute distills into three main questions: (1) whether the Bankruptcy Court erred in refusing
to admit the incomplete deposition testimony of John J. Siegel, Jr.; (2) whether, in overruling
ITS’s challenge to the Claim, the Bankruptcy Court properly applied Bankruptcy Rule 3001(f)’s
presumption; and (3) whether the Bankruptcy Court properly refused to recharacterize the Claim
as equity.

        1
          The appeal involves numerous federal rules of procedure and evidence. The Panel will refer to each rule
simply as “Bankruptcy Rule __,” “Civil Rule ___,” or “Evidence Rule____”.
 No. 23-8004                        In re Insight Terminal Solutions, LLC                                        Page 3

                                                  JURISDICTION

         The Panel has jurisdiction to hear appeals “from final judgments, orders, and decrees”
issued by a bankruptcy court within a participating district. 28 U.S.C. § 158(a)(1). “Orders in
bankruptcy cases qualify as ‘final’ when they definitively dispose of discrete disputes within the
overarching bankruptcy case.” Ritzen Grp., Inc. v. Jackson Masonry, LLC, 589 U.S. __, 140
S. Ct. 582, 586 (2020) (citing Bullard v. Blue Hills Bank, 575 U.S. 496, 501, 135 S. Ct. 1686,
1692 (2015)). Historically, in a Bankruptcy Rule 3007 contested matter, “[a]n order allowing or
disallowing a claim is a final order.” In re Tench, No. 15-8026, 2016 WL 2892497, at *1
(B.A.P. 6th Cir. May 11, 2016) (citations omitted). Here, ITS has challenged the allowance of
the Claim by filing an adversary complaint. The order on appeal resolved the adversary
proceeding (the judicial unit in jurisdiction parlance) and allowed the Claim in
full. Accordingly, the order is final and appealable as of right.

                                                       FACTS2

         A brief description of the corporate structure and relationships of the debtor-in-
possession, ITS, and its original creditor, Cecelia Financial Management, LLC (“Cecelia”), is the
starting point to understanding this appeal, given the pre-bankruptcy roles that John J. Siegel, Jr.,
and his family members played in both entities. ITS is a Delaware limited liability company
with its principal place of business in Louisville, Kentucky. John J. Siegel, Jr., was the non-
member manager of ITS from its formation on October 19, 2017, until November 5, 2020, the
effective date of the chapter 11 plan in this case. ITS’s sole member was Insight Terminal
Holdings, LLC (“ITH”). Mr. Siegel’s wife was the sole member of ITH. Additionally, two adult
children of Mr. and Mrs. Siegel owned Cecelia, either directly or indirectly. Mr. Siegel was also
the non-member manager of Cecelia. This network of family and other relationships clearly
excited concern about the bona fides of the Claim that Cecelia filed in ITS’s bankruptcy case
(seeking $5,680,244.48 in principal and $283,198.00 in interest).

         2
         The parties filed a stipulation of facts prior to the trial, referred to herein as the “Stipulation.” (Adv. P. 21-
03013, ECF No. 106.).
 No. 23-8004                 In re Insight Terminal Solutions, LLC                         Page 4

       ITS filed a voluntary chapter 11 bankruptcy petition on July 17, 2019, and Cecelia timely
filed its Claim. After the Bankruptcy Court confirmed a chapter 11 plan, ITS filed an adversary
proceeding against Cecelia, Mr. Siegel, Halas Energy, LLC (“Halas”), and Oasis Aviation, LLC
(“Oasis”) to disallow or reduce the proofs of claim filed by Cecelia, Halas, and Oasis, to
recharacterize as equity or equitably subordinate the supposed indebtedness, and to hold Mr.
Siegel liable for fraud. Because Bay Bridge Exports, LLC (“Bay Bridge”) held a security
interest in the Claim, the Bankruptcy Court permitted Bay Bridge to intervene as a defendant.
(Adv. P. 21-03013, ECF Nos. 20–21.) At trial and now on appeal, Bay Bridge, rather than
Cecelia, pulled the laboring oar in defending the Claim it now holds.

       Before trial, the parties stipulated to reduce the Claim and dismiss several counts,
including the fraud claim against Mr. Siegel. (Adv. P. 21-03013, ECF No. 34.) Also, before
trial, the Bankruptcy Court granted ITS’s motion for summary judgment disallowing the Halas
and Oasis claims after those entities failed to respond to the motion. (Adv. P. 21-03013, ECF
No. 63.) Having cleared away the brush, the Bankruptcy Court proceeded to try the remaining
issues, principally (1) whether the Claim should be disallowed or further reduced under
Kentucky law and 11 U.S.C. § 502(b)(1); and (2) whether the Claim should be recharacterized as
equity, given the close-knit relationships just described, as well as the terms and history of the
advances reflected in the Claim.

       Shortly before trial, Cecelia formally assigned the Claim to Bay Bridge under Bankruptcy
Rule 3001(e)(2), presumably reflecting Bay Bridge’s enforcement of its security interest in the
Claim. (Bankr. Case 19-32231, ECF No. 442.) Evidently prompted by the foreclosure of Bay
Bridge’s security interest, Cecelia and the Clerk gave notice of Cecelia’s transfer of the Claim to
Bay Bridge. Without objection, Bay Bridge was “substituted for the transferor”—Cecelia—
under Bankruptcy Rule 3001(e)(2).       Cecelia did not attend the trial, though it technically
remained a party to the adversary proceeding challenging its former Claim.

       The Claim is based on the following promissory notes issued by ITS and its predecessor
in interest, TLS Holdings, LLC, dba Terminal Logistics Solutions, LLC (“TLS”), to Cecelia and
its predecessor in interest, Bowie Resource Partners, LLC (“Bowie”):
 No. 23-8004                 In re Insight Terminal Solutions, LLC                       Page 5

              1. Promissory Note and Guarantee dated March 3, 2017, issued by TLS,
       as borrower, and Cedars Energy, LLC (“Cedars”), as guarantor, in favor of Bowie
       (the “Original TLS Note”);
               2. First Amended Promissory Note dated October 23, 2017, issued by
       TLS, as borrower, in favor of Cecelia in the principal amount of $1,942,467.15
       (the “First Amended TLS Note”, and together with the Original TLS Note,
       collectively, the “TLS Notes”);
              3. Second Amended Promissory Note dated May 30, 2019, issued by ITS,
       as borrower, in favor of Cecelia in the principal amount of $5,436,444.48 (the
       “Second Amended ITS Note”);
               4. Third Amended Promissory Note dated July 15, 2019, issued by ITS,
       as borrower, in favor of Cecelia in the principal amount of $5,680,244.48 (the
       “Third Amended ITS Note”, and together with the Second Amended ITS Note,
       collectively, the “ITS Notes”, and the ITS Notes together with the TLS Notes, the
       “Notes”); and
              5. Fourth Amended Promissory Note dated October 31, 2019, issued by
       ITS, as borrower, in favor of Cecelia in the principal amount of $5,769,568.98
       (the “Fourth Amended ITS Note.”)

(See Stipulation at ¶¶ 11–14, Adv. P. 21-0313, ECF No. 106).

       The Stipulation identifies the parties involved and summarizes the chronology of the
advances, tracing the documentation of obligations from TLS (as original obligor) to ITS (as
successor obligor) under the more recent amendments of the promissory notes. As the advances
evidenced by the Original TLS Note mounted, the transacting parties amended and restated the
Original TLS Note four separate times. Significantly, ITS (as borrower) issued the Second,
Third, and Fourth Amended Promissory Notes. (Id. at ¶¶ 14–15.)

       The primary asset of ITS (and before that, TLS) was the right to negotiate a sublease and
operating agreement for the Bulk Oversized Terminal in the City of Oakland. TLS and later ITS
used the advances reflected in the TLS Notes and ITS Notes to acquire the sublease rights and
exercise options to continue those rights. “From [October 19, 2017, until November 5, 2020],
ITS generated no operating revenues.” (Id. at ¶ 20.)

       “From [ITS’s] Formation Date to ITS’s bankruptcy filing, funds were advanced to
ITS through the ITS Notes, which were the basis for the Cecelia Claim.” (Id. at ¶ 22.) “Cecelia
never recorded a lien or security interest in ITS’s assets.” (Id. at ¶ 23.) ITS’s initial list of
 No. 23-8004                 In re Insight Terminal Solutions, LLC                         Page 6

20 Largest Unsecured Claims did not include Cecelia. (Id. at ¶ 26.) In Schedule E/F, filed on
August 14, 2019, ITS listed Cecelia as having a contingent, unliquidated, and disputed unsecured
claim in the amount $5,680,244 for debt incurred on May 30, 2019. (Id. at ¶ 27.)

       On January 20 and 21, 2022, ITS commenced (and continued) a deposition of Mr. Siegel.
All parties were aware that, at the time of the deposition, Mr. Siegel was suffering from cancer in
an advanced stage. Before ITS could even complete its direct examination, Mr. Siegel rather
abruptly requested another adjournment, indicating that the examination “was a lot of hours for
me, to be honest, given the last few months.” (Jan. 21, 2022 Dep. Tr. at 165:24–25, Adv. P. 21-
03013, ECF No. 70.) The parties graciously adjourned the deposition to accommodate his dire
condition, but because Mr. Siegel succumbed to cancer in early April 2022 without resuming his
deposition, ITS did not complete its direct examination of Mr. Siegel and the defendants did not
cross examine him.

       On August 30, 2022, ITS filed a designation of the portions of Mr. Siegel’s deposition it
intended to offer at trial. That same day, Bay Bridge filed a motion in limine to exclude the
deposition testimony. The Bankruptcy Court denied the motion, in part, and accepted Siegel’s
deposition testimony as a proffer to be addressed at trial. (Sept. 19, 2022 Order, Adv. P. 21-
03013, ECF No. 115.)

       At trial, ITS’s only witness, Ms. Lisa Jarrett, confirmed that Cecelia and its related
entities made various advances to TLS and that those advances were included in the Schedule A
attached to each TLS Note. (Sept. 13, 2022 Hr’g Tr., 76:25–95:14, Adv. P. 21-03013, ECF No.
117.) Ms. Jarrett also testified that she was involved in preparing the Schedule A attached to
each ITS Note, which were cumulative and included the prior advances made to TLS, and that
she had “back up to all the numbers” included on each Schedule A. (Id. at 65:21–66:13.)

       Ms. Jarrett further testified that Cecelia and the related entities accounted for the
advances they made to ITS and the related entities as transfers from the related entities to
Cecelia, and loans from Cecelia to ITS. (Id. at 77–115.) As noted above, ITS also stipulated
that, from October 19, 2017, to ITS’s bankruptcy filing, “funds were advanced to ITS through
 No. 23-8004                    In re Insight Terminal Solutions, LLC                      Page 7

the ITS Notes, which were the basis for the Cecelia Claim.” (Stipulation at ¶ 22, Adv. P. 21-
0313, ECF No. 106)

        The Bankruptcy Court entered its Findings of Fact and Conclusions of Law (“Opinion”)
on January 11, 2023, ruling that the Claim enjoyed the presumption of validity under Bankruptcy
Rule 3001(f), and that ITS had not offered sufficient evidence to rebut the presumption. (Adv. P.
21-03013, ECF No. 125.) The court also found that the promissory notes were enforceable under
Kentucky Law and that ITS had assumed the TLS Notes. Finally, the Bankruptcy Court found
no basis for recharacterizing the claim as equity—addressing both the applicability of the
recharacterization factors to a non-insider holder of a claim, and the factors governing
recharacterization as set forth in Bayer Corp. v. MascoTech, Inc. (In re AutoStyle Plastics, Inc.),
269 F.3d 726, 747–53 (6th Cir. 2001). Accordingly, the Bankruptcy Court entered judgment for
Bay Bridge, in effect overruling ITS’s objection to the Claim.

        ITS timely filed this appeal.

                                             DISCUSSION

                  I. Exclusion of Mr. Siegel’s Incomplete Deposition Testimony

        ITS’s challenge to the Bankruptcy Court’s ultimate decision to allow the Claim in full
and without recharacterizing it as equity relies in large measure on Mr. Siegel’s deposition
testimony.    ITS asserts that the Bankruptcy Court erred in its assessment of Mr. Siegel’s
testimony. As the evidence shows, Mr. Siegel served on both sides of the transactions involving
ITS and Cecelia, through whom Bay Bridge derived its rights in the Claim. The Panel, therefore,
turns first to this crucial evidentiary issue.

        ITS argues the Bankruptcy Court hobbled its presentation of evidence principally by
making two purportedly erroneous rulings—the first regarding motions to quash two subpoenas,
and the second by excluding the incomplete deposition testimony of Mr. Siegel under Civil Rule
32 (made applicable here by Bankruptcy Rule 7032) and various rules of evidence. The Panel
finds the first issue waived, and the second without merit.
 No. 23-8004                        In re Insight Terminal Solutions, LLC                                      Page 8

         Regarding the motions to quash, ITS failed to include in the record on appeal the
transcript of the hearing upon which it relies in its challenge to the Bankruptcy Court’s decision
to quash the two subpoenas. The Panel regards the argument as insufficiently supported and
therefore waived.3

         Regarding the exclusion of Mr. Siegel’s testimony under Civil Rule 32, ITS fares no
better. Rule 32(a) provides in relevant part as follows:

         (1) In General. At a hearing or trial, all or part of a deposition may be used
         against a party on these conditions:
                  (A) the party was present or represented at the taking of the deposition or
                      had reasonable notice of it;
                  (B) it is used to the extent it would be admissible under the Federal
                      Rules of Evidence if the deponent were present and testifying; and
                  (C) the use is allowed by Rule 32(a)(2) through (8).

Fed. R. Civ. P. 32(a)(1). Under Rule 32(a)(4)(A), “[a] party may use for any purpose the
deposition of a witness, whether or not a party, if the court finds that the witness is dead.” Here,
there is no dispute that Mr. Siegel passed away and that Bay Bridge was present at the
deposition. There is also no dispute that ITS did not complete the deposition or tender the
witness for cross-examination. The inquiry, however, does not end there.

         The Bankruptcy Court excluded Mr. Siegel’s testimony because “ITS never completed its
direct examination of Mr. Siegel, and neither Bay Bridge nor Cecelia had any opportunity to
cross-examine Mr. Siegel.” (Op. at ¶ 22, Adv. P. 21-03013, ECF No. 125.) The Bankruptcy
Court elaborated, exaggerating somewhat: “Courts have uniformly held that Rule 32(a)(1)
requires that the party opposing admission of the statement have had a reasonable opportunity to

          3
            ITS argues the Bankruptcy Court erred by granting two motions to quash subpoenas, asserting the court
failed to conduct the required analysis to “‘weigh the relevance of the requested material against the burden of
producing the material,’” or afford an opportunity to respond to Bay Bridge’s arguments. (Appellant Br. at 15
(quoting Schnatter v. 247 Grp., LLC, 343 F.R.D. 325, 330 (W.D. Ky. 2022) (citation omitted).). Without the
transcript of the September 7, 2022, hearing on the motions, the Panel cannot evaluate the Bankruptcy Court’s
rulings in this regard. See Fed. R. Bankr. P. 8009(b)(1), (b)(5), and 8018(b)(1)(F) (appellant’s duty to order and file
transcripts); Coleman v. Shoney’s Inc., 79 F. App’x 155, 157 (6th Cir. 2003)(“plaintiff’s challenges to evidentiary
rulings and evidence are unreviewable without a trial transcript.”); cf. McPherson v. Kelsey, 125 F.3d 989, 995–96
(6th Cir. 1997) (citation omitted) (“It is not sufficient for a party to mention a possible argument in the most skeletal
way, leaving the court to . . . put flesh on its bones.”).
 No. 23-8004                       In re Insight Terminal Solutions, LLC                                   Page 9

cross-examine the deponent.” (Id. at ¶ 23.) ITS argues that the Bankruptcy Court misapplied the
law because, in the Sixth Circuit, the requirement for cross-examination prior to the admission of
deposition testimony is not absolute.

          At oral argument before the Panel, however, ITS conceded that the Bankruptcy Court had
discretion to exclude Mr. Siegel’s deposition under Rule 32, and the Panel is hard-pressed to
second-guess that exercise of discretion, especially when premised on the absence of cross-
examination—the judicial touchstone of reliability. Excluding prior testimony that has not been
subject to cross-examination falls well within the broad discretion trial courts have under the
Federal Rules of Evidence.

          Nevertheless, ITS urges the Panel to find that Evidence Rule 801(d)(2) requires
admission of the incomplete testimony against Cecelia—who technically remained a party even
though it did not appear at trial. The Panel rejects the argument largely for the same reasons the
Bankruptcy Court did: Cecelia and Bay Bridge are distinct entities. Moreover, the Bankruptcy
Court permitted Bay Bridge to intervene—a ruling not challenged on appeal—so Bay Bridge
was also a party. Under the circumstances, even assuming, arguendo, the uncrossed testimony
was admissible against Cecelia under Rule 801(d)(2), it was not thereby admissible against Bay
Bridge, a distinct party. The rules clearly provide that evidence may be admissible against some
but not all parties, and for some but not all purposes. Fed. R. Evid. 105. Moreover, “Rule
801(d)(2) does not include statements by predecessors in interest among the types of statements
the rule makes admissible.” Calhoun v. Baylor, 646 F.2d 1158, 1162 (6th Cir. 1981). So, the
cited rule provides no basis for tagging Bay Bridge with Mr. Siegel’s statements, even though
Bay Bridge succeeded to Cecelia’s rights under the Claim and was substituted in Cecelia’s
stead.4

          ITS also contends that the Bankruptcy Court erred in not considering admission of Mr.
Siegel’s testimony under Evidence Rules 804 or 807, as exceptions to the court’s hearsay
concerns. Rule 804(b)(1)(B), governing former testimony, expressly requires as a prerequisite to
admission that the opposing party have an opportunity to develop the testimony through its own

          4
          See Fed. R. Bankr. P. 3001(e)(2) (transferee of claim is “substituted for the transferor” if the transferor
does not object to notice of transfer).
 No. 23-8004                         In re Insight Terminal Solutions, LLC                   Page 10

examination of the declarant. Here, the Bankruptcy Court found as a matter of fact that ITS did
not complete its examination or tender Mr. Siegel to Bay Bridge for cross-examination. Indeed,
depositions typically proceed in this fashion, where the entity calling the deposition completes its
examination of the witness before other parties cross-examine. The Panel finds no error in the
Bankruptcy Court’s preliminary ruling under Evidence Rules 104 and 804(b)(1)(B).

        Finally on this score, ITS contends the Bankruptcy Court should have considered
admitting Mr. Siegel’s testimony under the “residual exception” for hearsay statements
“supported by sufficient guarantees of trustworthiness . . . .” Fed. R. Evid. 807(a)(1). The rule
requires the proponent to give advance notice of the intent to offer the statement—a requirement
satisfied here—but the record on appeal does not show that ITS ever invoked the residual
exception. In its brief on appeal, ITS says it raised Evidence Rule 807 at the hearing on Sept. 7,
2022,5 but Bay Bridge contends the reference targeted not Mr. Siegel’s testimony but the
admission of business records in connection with the motions to quash. As previously noted,
however, ITS has not favored the panel with a transcript of that hearing, and the Panel has found
no reference to Evidence Rule 807 in the trial transcript. The Panel finds that ITS did not
preserve any claim of error under Evidence Rule 807. See supra n. 3. Even without waiver, the
Bankruptcy Court’s opinion makes plain its concerns about the trustworthiness of the former
testimony, which would be a basis for rejecting admission of the Deposition testimony under the
residual exception of Evidence Rule 807(a)(1). (Op. at ¶¶ 36–40, Adv. P. 21-0313, ECF No.
125.)

        To summarize, the Bankruptcy Court acted well within its broad discretion, and within
the rules, in excluding the testimony that Mr. Siegel was unable to finish before he died.

                                II. Bankruptcy Court’s Allowance of the Claim

        The Bankruptcy Court found that ITS did not rebut the presumption of validity and
amount that benefits the Claim under Bankruptcy Rule 3001(f), and even if it had, Bay Bridge
met its burden of proving the validity and amount of the Claim. Both decisions involve the
Bankruptcy Court’s evaluation of the evidence, and the Panel reviews both with considerable

        5
            Appellant’s Br. at 21.
 No. 23-8004                  In re Insight Terminal Solutions, LLC                    Page 11

deference, as noted above. Irrespective of whether ITS rebutted the presumption of validity, it
has failed to persuade the Panel that the Bankruptcy Court erred in allowing the Claim based on
the entire record. It is difficult to improve upon the Bankruptcy Court’s decision allowing the
Claim, and the Panel affirms the Bankruptcy Court’s judgment in this regard largely for the
reasons set forth in the court’s Opinion, with only modest additional explanation.

       At trial, and again on appeal, ITS mounted three main attacks on the Claim: (1) the
promissory notes upon which Bay Bridge relies are unenforceable to the extent advances were
made by Cecelia’s related entities, rather than Cecelia; (2) ITS cannot be liable for advances
made to TLS, originally evidenced by notes that TLS signed, because there is no writing that ITS
signed evidencing its assumption of the TLS obligation under the earlier notes; and (3) ITS
cannot be liable for any amount set forth on Schedule A to the TLS Notes and/or the ITS Notes
for which there is not additional backup documentation.

       The Bankruptcy Court properly disposed of each facet of the three-pronged challenge
largely for the same reason: the ITS Notes were supported by consideration and as negotiable
instruments, the consideration (which may flow to a third party) makes the notes enforceable
against the issuer (ITS).    Ky. Rev. Stat. § 355.3-303(1)(b).     This finding disposes of the
challenge based on the supposed absence of supporting documents, or the suggestion that the
consideration for the ITS Notes may have flowed to another related entity because an instrument
is supported by consideration if it is given “for value” and that includes being “issued or
transferred as payment of, or as security for, an antecedent claim against any person, whether or
not the claim is due[.]” Id. at § 355.3-303(1)(c) (emphasis added). Moreover, to the extent ITS
relied on Mr. Siegel’s testimony to the effect that any notes payable to Bowie “went away,” the
Bankruptcy Court properly excluded that testimony, for the reasons set forth above. The Panel
similarly finds no error in the Bankruptcy Court’s conclusion that “[p]ursuant to the ITS Notes,
ITS expressly assumed TLS’s debt to Cecelia.” (Op. at ¶10, Adv. P. 21-0313, ECF No. 125
(citing Bay Bridge’s Exhibits 7 and 8, Adv. P. 21-03013, ECF Nos. 68–11, 68–12).)

       The Bankruptcy Court properly drew inferences from the parties’ Stipulation and the
cited exhibits and took the terms of the notes at face value. Simply put, ITS could not overcome
the force of its own promissory notes under applicable law.
 No. 23-8004                       In re Insight Terminal Solutions, LLC                                  Page 12

                                  III. Refusal to Recharacterize the Claim

         Over the last two decades, the United States Supreme Court has consistently reminded
the lower federal courts to use their equitable powers sparingly, and in a manner consistent with
tradition, state law, and federal statutes.6 Against these admonitions, the Panel evaluates the
Bankruptcy Court’s decision to deny ITS’s request to recharacterize the Claim.

         First, the Panel acknowledges that the Bankruptcy Code does not provide specific
statutory authority to recharacterize the Claim. Thus, recharacterization falls squarely into the
arena of judicially created doctrine based on equitable power. As the Sixth Circuit noted in
AutoStyle, bankruptcy courts’ power to recharacterize a claim as equity “stems from the authority
vested in the bankruptcy courts to use their equitable powers to test the validity of debts[,]” a
power evidently derived from § 105 of the Bankruptcy Code. AutoStyle, 269 F.3d at 748
(citation omitted). In this respect, it is fair to say that recharacterization is part of the claims
allowance (and disallowance) process authorizing disallowance of a claim that is “unenforceable
against the debtor and property of the debtor, under any agreement or applicable law for a reason
other than because such claim is contingent or unmatured[.]” 11 U.S.C § 502(b)(1). The Sixth
Circuit observed that “[r]echaracterization cases ‘turn on whether a debt actually exists, not on
whether the claim should be equitably subordinated.’” AutoStyle, 269 F.3d at 748 (quoting
Matthew Nozemack, Note, Making Sense Out of Bankruptcy Courts’ Recharacterization of
Claims: Why Not Use § 510(c) Equitable Subordination?, 56 Wash. & Lee L. Rev. 689, 716
(1999)).

         While ITS has only cited cases where the holder of the purported claim to be
recharacterized was held by a party that was either an insider or already an equity holder, the
Panel will nevertheless examine whether the claim here, which is held by a party that is neither

         6
           See, e.g., Taggart v. Lorenzen, 587 U.S. __, 139 S. Ct. 1795, 1801 (2019) (“the bankruptcy statutes
incorporate the traditional standards in equity practice for determining when a party may be held in civil contempt
for violating an injunction.”); Law v. Siegel, 571 U.S. 415, 421, 134 S. Ct. 1188, 1194 (2014) (citations omitted)
(“whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of
the Bankruptcy Code.”); Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15, 24, 120 S. Ct. 1951, 1957 (2000)
(“within the limits of the Code, courts may reorder distributions from the bankruptcy estate, in whole or in part, for
the sake of treating legitimate claimants to the estate equitably.”); Grupo Mexicano de Desarrollo S.A. v. All. Bond
Fund, Inc., 527 U.S. 308, 318–19, 119 S. Ct. 1961, 1968 (1999) (citation omitted) (“[T]he substantive prerequisites
for obtaining an equitable remedy . . . depend on traditional principles of equity jurisdiction.”).
 No. 23-8004                   In re Insight Terminal Solutions, LLC                        Page 13

an equity holder nor a statutory insider, can be recharacterized.         Recharacterization is not
formulaic, and the applicability of the doctrine is not dictated solely by the formalities of the
transaction.   As the Sixth Circuit recognized in AutoStyle, although the targets of the
recharacterization in that case purchased participation interests in another entity’s loan (without
purporting to be creditors), the court found it necessary to consider “whether the defendants’
participations in CIT’s loan to AutoStyle were in reality loans, or rather a method used to funnel
an equity contribution to AutoStyle.” AutoStyle, 269 F.3d at 749 n.11. At the end of the day, the
more a transaction resembles the product of an arm’s length negotiation, the more likely it
qualifies as a loan. Id. at 750.

        In other words, the premise of disallowance is 11 U.S.C. § 502(b)(1) and its reference to
non-bankruptcy law, not some vague or idiosyncratic notion of equity. Disallowance must be
grounded in applicable law, typically state law, albeit with the Bankruptcy Code’s gloss given
the statutory definition of “claim.” The Supreme Court put it this way:

        Creditors’ entitlements in bankruptcy arise in the first instance from the
        underlying substantive law creating the debtor’s obligation, subject to any
        qualifying or contrary provisions of the Bankruptcy Code. See Butner v. United
        States, 440 U.S. 48, 55, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979); Vanston
        Bondholders Protective Comm. v. Green, 329 U.S. 156, 161–162, 67 S. Ct. 237,
        91 L. Ed. 162 (1946). The “basic federal rule” in bankruptcy is that state law
        governs the substance of claims, Butner, supra, at 57, 99 S. Ct. 914, Congress
        having “generally left the determination of property rights in the assets of a
        bankrupt’s estate to state law,” 440 U.S., at 54, 99 S. Ct. 914 (footnote omitted).
        “Unless some federal interest requires a different result, there is no reason why
        [the state] interests should be analyzed differently simply because an interested
        party is involved in a bankruptcy proceeding.” Id. at 55, 99 S. Ct. 914.

Raleigh, 530 U.S. at 20, 120 S. Ct. at 1955; see also 28 U.S.C. § 1652. The high court
recognized a small reservoir of equitable power, but pointedly reminded courts to exercise that
power with an eye on the Bankruptcy Code and applicable law:

        Bankruptcy courts do indeed have some equitable powers to adjust rights between
        creditors. See, e.g., § 510(c) (equitable subordination). That is, within the limits
        of the Code, courts may reorder distributions from the bankruptcy estate, in whole
        or in part, for the sake of treating legitimate claimants to the estate equitably. But
        the scope of a bankruptcy court’s equitable power must be understood in the light
        of the principle of bankruptcy law discussed already, that the validity of a claim is
 No. 23-8004                  In re Insight Terminal Solutions, LLC                       Page 14

       generally a function of underlying substantive law. Bankruptcy courts are not
       authorized in the name of equity to make wholesale substitution of underlying law
       controlling the validity of creditors’ entitlements but are limited to what the
       Bankruptcy Code itself provides. See United States v. Reorganized CF & I
       Fabricators of Utah, Inc., 518 U.S. 213, 228–229, 116 S. Ct. 2106, 135 L.Ed.2d
       506 (1996); United States v. Noland, 517 U.S. 535, 543, 116 S. Ct. 1524, 134
       L.Ed.2d 748 (1996).

Raleigh, 530 U.S. at 24–25, 120 S. Ct. at 1957. More recently, the Supreme Court warned
bankruptcy courts to stay within the statutory lines and not stray too far from the text of the
Bankruptcy Code, even when addressing situations that may appear inequitable. Siegel, 571 U.S.
at 421, 134 S. Ct. at 1194–95.

       Mindful of these dictates, and based upon the present record, the Panel shares the
Bankruptcy Court’s reluctance to use recharacterization to disallow a claim derived from an
entity (Cecelia) who itself holds no interest or control over the debtor. As ITS’s counsel
conceded at oral argument, this expansion of AutoStyle would be without precedent in our
Circuit. Even the decision in Aquino v. Black (In re AtlanticRancher, Inc.), 279 B.R. 411
(Bankr. D. Mass. 2002), mentioned as the only opinion counsel could find in which a court
recharacterized the claim of a non-shareholder, involved substantial evidence that the purported
creditor was an insider.     Id. at 435 (finding that purported creditor was “insider” under
§ 101(31)(B)(iii) in view of his pervasive control of the debtor under loan documents). Beyond
the statements of counsel about the corporate relationships, the record in the present case only
hints at such control, relying heavily on inferences drawn from corporate relationships which
alone do not warrant insider treatment. See Spradlin v. Monday Coal, LLC (In re Licking River
Mining, LLC), 571 B.R. 241, 254 (Bankr. E.D. Ky. 2017) (the mere fact that an entity is owned
and controlled by any insider of the debtor does not make that entity an insider of the debtor).

       Here, without the benefit of Mr. Siegel’s testimony, the closest ITS comes to proving
relationships between the purported creditor and the debtor that invariably accompany other
recharacterization decisions is limited to three paragraphs within the Stipulation between ITS and
Bay Bridge, which establish only the following:
 No. 23-8004                       In re Insight Terminal Solutions, LLC                                   Page 15

    •    John J. Siegel, Jr. (“Siegel”) was the non-member Manager of ITS from the
         Formation Date until November 5, 2020;
    •    ITS’s sole member was Insight Terminal Holdings, LLC (“ITH”), and Siegel’s
         wife was ITH’s sole member;
    •    Siegel was the non-member Manager of Cecelia, and Siegel’s wife and two adult
         children are the owners of Cecelia, either directly or indirectly.

(Stipulation at ¶¶ 2–4, Adv. P. 21-0313, ECF No. 106.) While it may be tempting to infer
control—a task assigned to the trial court as factfinder—these sorts of relationships, without
more, do not require such a finding.7 In other words, related companies are not per se precluded
from making loans to sister companies in a family of closely held entities. It is not surprising,
therefore, on this record, that the Bankruptcy Court balked at applying recharacterization.8

         Even if the Panel were to assume that recharacterization is allowable given the stipulated
relationships in this appeal and the flexibility expressed in the AutoStyle opinion, reversing the

         7
           Inference plays different roles at different stages of the proceedings. Here, for example, by entering
summary judgment recharacterizing the claims of Oasis and Halas when those putative creditors failed to oppose
Insight’s Rule 56 motion, the Bankruptcy Court simply concluded on the summary judgment record (1) that a jury
could find that those entities made capital contributions rather than loans, and (2) that the opposing parties did not
raise a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254–55, 106 S. Ct. 2505, 2513 (1986)
(“The question [under Rule 56] is whether a jury could reasonably find either that the plaintiff proved his case by
the quality and quantity of evidence required by the governing law or that he did not.”). Saying that a jury could
find for the moving party by a preponderance of the uncontested evidence presented on a Rule 56 motion is a far cry
from saying that the actual finder of fact, after trial, must do so. The roles and records are different. Cf. Dupree v.
Younger, 598 U.S. 729, 735–36, 143 S. Ct. 1382, 1389 (2023) (“an appellate court’s review of factual challenges
after a trial is rooted in the complete trial record, which means that a district court’s factual rulings based on the
obsolete summary-judgment record are useless.”). At trial, the Bankruptcy Court was free to draw its own
inferences. These differences explain how the Bankruptcy Court could enter an order recharacterizing the Oasis and
Halas claims at the summary judgment stage but decline to do so after trial on the Cecelia Claim.
         8
           The Panel recognizes that the sixth AutoStyle factor (which considers the proportion of the advance to the
claimant’s stock ownership) is but one of several factors to be considered in the recharacterization analysis, and that
“[n]o one factor is controlling or decisive.” AutoStyle, 269 F.3d at 750, 751–52. Nevertheless, recharacterizing a
non-equity holder’s “claim” as “equity” is counter-intuitive: the Panel has found no caselaw within our circuit in
which a mere creditor whose claim is challenged ends up holding an equity interest in the debtor. Ordinarily, a
creditor who asserts no equity interest in a debtor and who suffers a successful challenge to its claim ends up
holding a disallowed or subordinated claim, not an equity interest. This likely explains the inability of ITS’s counsel
to cite a single case in which a non-owner, non-insider suffered that fate. Moreover, although recognizing a
phantom equity interest in the process of recharacterizing a claim generally has no practical effect where the
distribution waterfall does not reach equity, it could have reverberations in a subchapter V small business case
where Congress has suspended the absolute priority rule. See 11 U.S.C. §1181(a) (making §1129(b) inapplicable in
subchapter V cases); see also 11 U.S.C. §1191(c) (establishing requirements for nonconsensual plan in subchapter V
cases). The recognition of informal equity interests, like the disallowance of claims, is probably best left to
applicable non-bankruptcy law.
 No. 23-8004                       In re Insight Terminal Solutions, LLC                                   Page 16

Bankruptcy Court would be anathema to the very deferential standard of review under Rule
52(a)(6), applicable both to oral and documentary evidence.9 Fed. R. Bankr. P. 7052 (making
Fed. R. Civ. P. 52 generally applicable in adversary proceedings).

         Although the Bankruptcy Court observed, perhaps with some overstatement, that the
AutoStyle factors were “inapplicable here because Cecelia was not an equity owner of TLS or
ITS,” (Op. at ¶ 19, Adv. P. 21-03013, ECF No. 125), the court thoughtfully considered those
inherently fact-based factors, drawing reasonable and permissible inferences, before further
concluding that ITS failed to establish its case for recharacterization. Several AutoStyle factors
pointed decidedly against recharacterization, such as the names of the transaction documents
(promissory notes), the maturity on demand, and the fixed rate of interest (6%) payable in kind,
for example. Other factors pointing to the loan side of the spectrum also found support in the
record, such as the prior testimony from Vikas Tandon, the source of repayment (here, the
“monetization” of the Oakland terminal lease), the ratio of the advance in proportion to stock
ownership, and the debtor’s ability to obtain outside funding (here, from Autumn Wind Lending,
LLC, and Bay Bridge). Even if other factors favored recharacterization as equity (such as the
absence of security or a sinking fund), or were neutral, the Sixth Circuit teaches that no one
factor is controlling.       More to the point, given the present posture of the matter and the
deferential standard of review, “[t]he determination of whether advances to a corporation are
loans or capital contributions depends on whether the objective facts establish an intention to
create an unconditional obligation to repay the advances.” Roth Steel Tube Co. v. Comm’r, 800
F.2d 625, 630 (6th Cir. 1986) (citation omitted). The intention of the parties to a transaction, in
the end, presents a factual question for the trial court to resolve.

         Having considered the entire record on appeal, the Panel finds no basis for disturbing the
Bankruptcy Court’s factual findings, which do not appear erroneous, let alone clearly so, and
perceives no point in adding to the Bankruptcy Court’s careful and sure-footed opinion.

         9
           For example, a trial court’s evidentiary rulings are reviewed for abuse of discretion resulting in more than
merely harmless error. In re Pertuset, No. 12-8014, 2012 WL 6598444, 485 B.R. 478 (table) (B.A.P. 6th Cir. 2012).
The Panel is hard-pressed to criticize the Bankruptcy Court’s decision not to admit Mr. Siegel’s testimony when his
death precluded cross-examination. Similarly, the Panel would be barred from disturbing the Bankruptcy Court’s
inherently fact-bound balancing of the factors set forth in AutoStyle, 269 F.3d at 747–53 (6th Cir. 2001), except for
clear error, which the Appellant has not shown.
 No. 23-8004                  In re Insight Terminal Solutions, LLC                       Page 17

ITS’s view of the evidence is certainly permissible, but so was Bay Bridge’s. The Panel respects
the trial court’s role in evaluating evidence, and “[w]here there are two permissible views of the
evidence, the fact finder’s choice between them cannot be clearly erroneous.” Anderson v. City
of Bessemer City, N.C., 470 U.S. 564, 573–74, 105 S. Ct. 1504, 1511 (1985) (citation omitted).

       The Panel finds no error in the Bankruptcy Court’s rejection of ITS’s demand to
recharacterize the Claim as equity.

                                         CONCLUSION

       Before trial, the preponderance of the evidence standard applicable to the exercise of
original jurisdiction in a civil matter and the uncertain outcome of several evidentiary rulings
(especially involving Mr. Siegel’s former testimony), likely explained ITS’s willingness to
pursue recharacterization with such vigor. After the trial court made its evidentiary rulings and
factual findings against recharacterization, however, the continued pursuit of relief in this
inherently fact-bound matter appears more quixotic. The judgment under review involves trial
court decisions that appellate courts do not lightly disturb, especially with respect to evidentiary
rulings and findings of fact. On the present record, and especially given the thoughtful and well-
crafted opinion of the Bankruptcy Court, the judgment is AFFIRMED.