Sunday, April 10, 2011

Not a Good Idea to Object to Every Claim

You know that nothing good can come from an opinion which begins like this:

This is a case about an affluent debtor who sought to manipulate bankruptcy procedures to accomplish what the Code prohibits--the elimination of all of her credit card debts despite her obvious ability to repay those debts over time. The debtor, Diane Davis, obtained confirmation of a plan in which she proposed to pay her credit card debts in full. The debtor subsequently objected to every claim filed by her creditors based on their alleged failure to attach sufficient documents to their proofs of claim. The debtor withdrew several objections after the creditors responded. The Court has before it the debtor's request for a default order sustaining the remaining objections.

In re Diane Davis, No. 09-42865 (Bankr. E. D. Tex.3/31/11). p. 1. You can find the opinion here.

The Davis case is one of a debtor who tried to follow the letter but not the spirit of the law. The debtor was an above median income debtor who would not qualify for relief under chapter 7. She filed under chapter 13 but tried to avoid paying any of her unsecured debts. She scheduled all of her unsecured debts as disputed and then objected to every claim filed. If the creditor responded, she withdrew her objection. Since most of the creditors did not respond, she thought that she was home free. However, the court had other ideas.

A Few Facts

The Debtor was a single woman with gross monthly wages of $10,428 and disposable income of $3,923.92. The only debts she was delinquent upon were credit cards. She scheduled eight creditors with debts totaling $81,564. Every debt was listed as disputed with the notation "Debtor listed the balance shown on last statement; debtor not presently able to determine if balance is correct and is uncertain if trade name is correct legal creditor."

The debtor filed a plan proposing to pay $3,190 to the chapter 13 trustee for 60 months. Twelve creditors filed proofs of claim totaling$147,400.68. Because the plan proposed to pay $190,400 on claims which were less than this amount, no creditors objected to the plan and it was confirmed.

Then the debtor objected to every claim. The objections asserted that the creditors had not attached sufficient documentation to the claim and that the debtor would withdraw the objection if presented with adequate documentation. The debtor withdrew her objections to five claims after the creditors filed responses. However, the debtor sought default orders on the remaining seven claims. One of the claims that the debtor sought a default on was from Neiman Marcus. Neiman Marcus amended its claim to add documentation but did not file a response. The debtor's statement of financial affairs revealed that the debtor had been making payments on this claim prior to bankruptcy.

The court conducted several hearings on the claims objections. While the debtor was present at one hearing, she did not testify. Debtor's counsel offered a brief on why the claims should be denied but never presented any substantive grounds why the debtor did not owe the debts.

Can the Debtor Deny the Claims of the Non-Responding Creditors?

The Court's answer was "no." Failure to attach supporting documentation, without more, is not a sufficient ground for denying a claim. Judge Rhoades stated:

If an objection to a claim is raised, Section 502(b) provides that the court "shall allow the claim in such amount, except to the extent that" a grounds for disallowance provided by Section 502(b)(1)-(9) applies. (citation omitted). Thus, the Code requires us to overrule a claim objection that does not comply with Section 502(b)--even if the claimant does not appear to raise the issue.

Opinion, p. 11. Thus, the mere fact that the creditor failed to attach sufficient documentation to the claim and then failed to respond to the claims objection was not grounds for denying the claim.

Not only that, the court found that the claims did "substantially" conform to Bankruptcy Rule 3001 such that they were entitled to prima facie validity. Because the debtor did not produce evidence sufficient to rebut the prima facie validity of the claims, the creditor had no duty to respond.

An Interesting Twist

While Judge Rhoades found that the objections should be denied, she also raised the possibility that the debtor was asking for something she really didn't want.

The discharge in a chapter 13 case is different than in a chapter 7 case. (citation omitted). In a chapter 13 case, upon completion of plan payments, a debtor generally is discharged of all debts "provided for by the plan or disallowed under section 502" of the Code. (citation omitted). Section 1328(a) does not, by its terms, discharge a chapter 13 debtor of her obligation to repay claims denied solely under Bankruptcy Rule 3001.

Opinion, p. 15. Thus, had the debtor been successful in her non-substantive objections, she would not have discharged the debts.

The Ethical Obligations of the Debtor's Counsel

The Court was not amused as shown by the subheading "The Ethical Obligations of the Debtor's Counsel." The Court noted that filing the schedules and objecting to the claims, debtor's counsel
deliberately chose to (i) ignore the debtor's personal knowledge,and (ii) conduct no independent investigation prior to filing the debtor's bankruptcy schedules and claim objections."
Opinion, p. 21.

The Court went on to state:

It appears to the Court that the debtor and her counsel were motivated by the off-chance that the claimants would not respond to the objections and, consequently, that this Court would sustain the objections without substantive review. 'An off-chance does not satisfy [Bankruptcy] Rule [9011].' (citation omitted). 'This approach of throwing it against the wall and seeing what sticks is precisely the sort of conduct [Bankrutpcy Rule 9011] seeks to counter. (citations omitted).

Opinion, pp.21-22.

The Debtor's Obligation to Act in Good Faith

The Court was not any more impressed with the debtor's conduct.

Regardless of the advice the debtor may have received from her counsel regarding the claims allowance process, she has an obligation to the Court to act in good faith. To confirm a chapter 13 plan, the bankruptcy court must find, among other elements, that 'the plan has been proposed in good faith.' (citation omitted). . . Good faith in this context is not an esoteric legal concept that only lawyers and judges can understand. The question is whether the totality of the circumstances indicates that the plan is unreasonable or that the debtor is attempting to abuse the spirit of the Code. (citation omitted).

Opinion, pp. 22-23.

The Bottom Line

The Court overruled the claims objections, vacated the order confirming the plan, gave the debtor 30 days to file a new plan and scheduled a hearing to determine whether debtor's counsel violated Rule 9011.

What It Means

The chapter 13 bargain is about paying creditors in return for a discharge. The debtor had enough disposable income to pay all of the filed claims in less than sixty months. This would have been a good deal because the debtor would have been able to repay the debts without interest. However, the debtor tried to take a shortcut and eliminate all of her claims on a defect of form. The Court was right to be concerned about the good faith of this practice.


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Joe said...

Wow - thats pretty interesting.

But how did the Judge overcome In Re Armstrong, 320 BR 97, 104-05 (N.D. Tex 2005):

"in the case of a credit card or consumer account creditor, in order for the proof of claim to be given prima facie effect, the creditor must attach an account statement ... or attach enough monthly account statements so that this information can be easily determined".

And from In Re Tran 369 BR at 318 (S.D. Tex):

"A debtor has no evidentiary burden to overcome in objecting to a proof of claim that is not prima facially valid".