I. Filing the Claim
A proof of claim is a relatively
simple form filed in a bankruptcy case which could result in recovery of
anywhere from a small percent of your client’s debt to millions of dollars. In
recent years, Debtor’s lawyers, Trustees, and Courts have all begun to
scrutinize claims more closely. Congress got into the act when it revised
Federal Rule of Bankruptcy Procedure 3001 to put more teeth into the rules
regarding proof of claims. This paper will examine the proof of claim form, the
Federal Rules of Bankruptcy Procedure, and recent case law to point out pitfalls
and best practices.
A. Signing/Submitting the Proof of Claim
1. Who Should Sign the
Claim?
Even though the signature on the
proof of claim is the last item on the form, it is the first thing an attorney
should think about. Note that a claim may be signed by the creditor or the
creditor’s attorney or authorized agent. Since an attorney can sign a lawsuit
on behalf of a client, shouldn’t the attorney be able to sign the proof of
claim as well? Only if he or she likes living dangerously.
The proof of claim requires the person signing to certify under penalty of
perjury that “I have examined the information in this Proof of Claim and have a
reasonable belief that the information is true and correct.” Does the typical
attorney have personal knowledge of the contents of a proof of claim? No. In
most cases, the attorney relies on his client to provide the information for
the proof of claim. If the attorney signs the claim, the Debtor or Trustee
could ask the attorney what information he relied on to file the claim. If the
attorney replies that he received the information from his client, he may have
waived the attorney-client privilege. It is almost always better for the client
to sign the proof of claim. The one exception may be where the claim is based
on a judgment obtained by the attorney. Even then, the attorney must rely on
the client to verify that all credits and offsets have been applied.
2.
Application of Rule 9011 to Filing Claims
Even if the attorney knows enough
not to sign the claim, the person submitting a claim does so subject to the
representations contained in Fed.R.Bankr.P. 9011(b) as follows:
By presenting to the court (whether
by signing, filing, submitting, or later advocating) a petition, pleading,
written motion, or other paper, an attorney or unrepresented party is
certifying that to the best of the person’s knowledge, information, and belief,
formed after an inquiry reasonable under the circumstances—
(1) it is not being presented for any improper purpose, such as to harass or to
cause unnecessary delay or needless increase in the cost of litigation;
(2)
the claims, defenses, and other legal contentions therein are warranted by
existing law or by a nonfrivolous argument for the extension, modification, or
reversal of existing law or the establishment of new law;
(3)
the allegations and other factual contentions have evidentiary support or, if
specifically so identified, are likely to have evidentiary support after a
reasonable opportunity for further investigation or discovery; and
(4)
the denials of factual contentions are warranted on the evidence or, if
specifically so identified, are reasonably based on a lack of information or
belief.
Thus, an attorney who signs a proof
of claim has represented to the court that, after an inquiry reasonable under
the circumstances, the allegations of the proof of claim have evidentiary
support and are supported by existing law. An attorney who signs a proof of claim which,
on its face, indicates that it is barred by limitations has violated Rule 9011.
In re M.A.S. Realty Corp., 326 B.R. 31 (Bankr. D. Mass. 2005) serves as
a powerful cautionary tale. In M.A.S., an attorney first asserted that
his client had been damaged in the amount of $600,000 in a pleading some five
months before the proof of claim was filed. During this time, the attorney
requested supporting documentation and received only reassurances from his
client that the claim was valid. After a hearing, the court found that the
client had at best a potential claim for return of a deposit. The court found
that the attorney violated Rule 9011 but could not be sanctioned because
debtor’s counsel did not comply with the safe harbor provision of Rule 9011.
In re Obasi, 2011 Bankr. LEXIS 5011 (Bankr. S.D. N.Y. 2011) is another
case where failure to comply with the safe harbor provisions protected an
attorney from sanctions. This case was particularly egregious. A litigation
support company partly owned by the lawyer prepared the proof of claim. The
attorney allowed his electronic signature to be affixed to the claim without
ever having reviewed the claim. The Court found that this was a clear violation
of Rule 9011 but that the U.S. Trustee had not complied with the safe harbor
provisions.
An attorney defending a motion for
sanctions under Rule 9011(b) for submitting a proof of claim should be familiar
with B-Line, LLC v. Wingerter (In re Wingerter), 594 F.3d 931 (6th Cir.
2010). Here, a claims buyer filed claims without ever receiving the originating
documents from its seller. However, the company received warranties from the
selling company that the claim was valid and only two out of 1,017 claims
purchased from the seller had been successfully challenged. In these
circumstances, the Court of Appeals found that B-Line had conducted an inquiry
sufficient to withstand Rule 9011(b).
3. Robo-Signing
The claim form contains a
representation that states, “I have examined the information in this Proof of
Claim and have a reasonable belief that the information is true and correct.”
What if the creditor used an automated process to sign claims so that the
person whose name is affixed to the claim never reviewed it? In two separate
cases, the U.S. Trustee brought enforcement actions against a creditor accused
of robo-signing. Casamatta v. Resurgent Capital Services, LP (In re
Freeman-Clay), 578 B.R. 423 (Bankr. W.D. Mo. 2017); Resurgent Capital
Services, LP v. Harrington (In re Cushman), 589 B.R. 469 (Bankr. D. Me.
2018).
In the Freeman-Clay case, it
was alleged that thousands of claims had been filed bearing the electronic
signature of a Resurgent employee who had not actually reviewed the claims. On
Resurgent’s motion to dismiss, the Court stated, “(a)n individual with no
personal involvement in the preparation of the claim cannot make the
attestation required by (Rule 3001) and by the language of the form itself.”
Notwithstanding this violation, the Court dismissed this count of the complaint
because the U.S. Trustee had not alleged that Resurgent acted in bad faith and
had not alleged that any party had been damaged by the practice.
In the Cushman case, the U.S.
Trustee sought sanctions under Rule 9011 based on “the practice of affixing an
employee’s signature to a proof of claim and then filing the proof of claim,
all without prior review of the proof of claim by that employee.” Resurgent
admitted that this was not a “best practice” and represented to the Court that
it had abandoned the practice. The case has an interesting discussion as to who
the person was who made the applicable representations under Rule 9011: was it
Susan Gaines, the Resurgent employee whose electronic signature appeared on the
claim or was it Resurgent itself? There was no attorney involved in filing the
claim so that option was not present. The Court concluded that Resurgent was
the entity making the Rule 9011 representations rather than the specific
employee whose signature was placed on the claim. The Court then analyzed
whether Resurgent had made a reasonable pre-filing inquiry. Based on an
extensive review of Resurgent’s automated practices and the information that it
received from debt sellers, the court found that Resurgent engaged in a
reasonable pre-filing inquiry notwithstanding the fact that its employee who
signed the claim could not make the requisite representation.
The characterization of affixing the
signature of an employee who had not reviewed the claim as not a “best
practice” is an understatement. The fact that sanctions were not imposed in
these cases is remarkable. A compelling case could have been made that it was
bad faith for Resurgent to allow an employee to affix her signature to
thousands of proofs of claim without ever having reviewed them. These are a
pair of head scratching cases.
B. Supporting Documents
Official Form 410 states that filers
should “(a)ttach redacted copies of any documents that support the claim, such
as promissory notes, purchase orders, invoices, itemized statements of running
accounts, contracts, judgments, mortgages and security agreements.”
This obligation is reinforced by
Fed.R.Bankr.P. 3001(c)(1) which states that:
(c) Supporting Information.
(1) Claim Based on a Writing. Except for a claim governed by
paragraph (3) of this subdivision, when a claim, or an interest in property of
the debtor securing the claim, is based on a writing, a copy of the writing
shall be filed with the proof of claim. If the writing has been lost or
destroyed, a statement of the circumstances of the loss or destruction shall be
filed with the claim.
This raises an important question.
When is a claim based on a writing? Obviously, a claim based on a promissory
note or a sworn account is based on a writing. What about a claim based on an
oral contract? In that case, there would not be a document that forms the basis
for the claim and the claim can be prima facie valid without attaching any
documents. In re Archuleta, 2021 Bankr. LEXIS 609 (Bankr. D. N.M. 2021).
Even if a claim is based on a
writing, some claims do not require supporting documentation. Under
Fed.R.Bankr.P. 3001(c)(3), there is an exception for claims arising from
open-end or revolving consumer credit agreements:
(3) Claim Based on an Open-End or
Revolving Consumer Credit Agreement.
(A)
When a claim is based on an open-end
or revolving consumer credit agreement — except one for which a security
interest is claimed in the debtor’s real property — a statement shall be filed
with the proof of claim, including all of the following information that
applies to the account:
(i)
the name of the entity from whom the
creditor purchased the account;
(ii)
the name of the entity to whom the
debt was owed at the time of an account holder’s last transaction on the
account;
(iii)
the date of an account holder’s last
transaction;
(iv)
the date of the last payment on the
account; and
(v)
the date on which the account was
charged to profit and loss.
While the rule excuses failure to
attach supporting documents, Rule 3001(c)(3)(B) requires that the documents
must be provided upon a proper request.
(B) On written
request by a party in interest, the holder of a claim based on an open-end or
revolving consumer credit agreement shall, within 30 days after the request is
sent, provide the requesting party a copy of the writing specified in paragraph
(1) of this subdivision.
The proof of claim form has a trap
for the unwary creditor who wishes to take advantage of the summary in lieu of
supporting documents provision. Box 8 asks for the basis of the claim.
If a creditor describes the claim as
a payday loan but relies on the Rule 3001(c)(3)(B) summary exception, the claim
is internally inconsistent. Payday loans are not “open-end or revolving
consumer credit agreements.” Ellswick v. Quantum3 Group, LLC, 2018 U.S.
Dist. LEXIS 45991 (N.D. Ala. 2018). In the Ellswick case, the creditor filed a
claim based on a payday loan but used the Rule 3001(c)(3)(B) summary rather
than attaching supporting documents. The debtor sued under the Fair Debt
Collection Practices Act contending that the assertion that the claim was an
open-ended credit was a false representation. The Bankruptcy Court dismissed
for failure to state a claim, but the District Court reversed and remanded the
case to proceed.
Creditors should not fall into the trap of using the summary and then proving that they were not entitled to use the summary only.
To summarize, Fed.R.Bankr.P. 3001 has three requirements:
(a) There is a general rule to attach supporting documents for a claim based on a writing;
(b) There is an exception to provide a summary with five specific data points; and
(c) If the exception applies, the claimant must provide the supporting documents on written request within 30 days.
Rule 3001 contains one provision which directly addresses failure to attach required documents and one which addresses it indirectly. Rule 3001(c)(2)(D) provides that:
(D) If the holder of a claim fails to provide any
information required by this subdivision (c), the court may, after notice and
hearing, take either or both of the following actions:
(i) preclude the holder from presenting the omitted information, in any form,
as evidence in any contested matter or adversary proceeding in the case, unless
the court determines that the failure was substantially justified or is
harmless; or
(ii) award other appropriate relief, including reasonable expenses and
attorney’s fees caused by the failure.
This provision states that if a
party fails to include the relevant information, the Court can exclude the
omitted information unless the failure to do so was substantially justified or
harmless. If a party makes a mistake, it can’t go back and cure unless there
was a really good reason or the omission was harmless. The Court can also
“award other appropriate relief,” which includes attorney’s fees. This can be
harsh.
There are cases in which a creditor
failed to supply initial documents leading to a claim objection and
subsequently provided those documents. In some cases, the courts have allowed
the claim but imposed sanctions for the original failure to provide documents. In
re Ball, 2019 Bankr. LEXIS 179 (Bankr. E.D. Mich. 2019); In re Milliman,2018
Bankr LEXIS 858 (Bankr. D. Kan. 2018). In other cases, the courts have refused
to allow the omitted documents into evidence resulting in denial of the claim. In
re Jimenez, 487 B.R. 543 (Bankr. D. Col. 2013).
This applies also to failure to
provide documents evidencing an open-end claim after a proper request. Snedeker
v. PYOD, LLC, 2018 Bankr. LEXIS 2184 (Bankr. M.D. Pa. 2018). However,
failure to provide requested documents will not invalidate a claim where the
debtor has failed to articulate a reason why the claim should be denied. In
re Isherwood, 2019 Bankr. LEXIS 507 (Bankr. D. Md. 2019). Even if a
creditor fails to attach supporting documentation, the claim may be allowed if
it matches a debt contained in the debtor’s schedules. In re Napier,
2018 Bankr. LEXIS 1505 (Bankr. W.D. Va. 2018).
There is a trend among some debtor’s
lawyers to object to allowance of a claim and to request an award of fees. Many
creditors make a cost-benefit analysis in deciding whether to respond to a
claims objection. Say that a creditor files a claim for $300 in a Chapter 13,
case which will pay 10% to creditors. If the claim is allowed and the plan
makes it to completion, the creditor will recover $30. If the debtor objects to
the claim and it would cost the creditor anything more than $30 to respond, it
would not make economic sense to reply. However, if the claims objection
includes a request for attorneys’ fees of $500, failure to respond can get
expensive.
Many courts recognize that there is
not an automatic entitlement to attorneys' fees for objecting to a proof of
claim. In Case No. 17-30175, In re Andrade, (Bankr. S.D. Tex.
12/4/20), Dkt. #85, a debtor objected to a claim based on the statute of
limitations and requested attorneys' fees. The creditor filed a response which
conceded the objection but disputed the debtor's entitlement to attorneys'
fees. Prior to the date set for hearing, the Court sustained the objection but
stated, "the Court finds no basis for an award of attorneys' fees to the
debtor." When faced with a request for attorneys' fees in connection with
a claims objection, creditors should check to see whether the Debtor's attorney
entered into a "no look" fee agreement with the debtor. Under the
local rules in many districts, the services included in a "no look"
fee include objecting to claims if necessary. If the Debtor's attorney has
already been compensated for objecting to claims, there should not be a basis
for additional compensation for this service.
C.
Disclosing Additional Charges
Box 7 of the claim form asks for the
amount of the claim and whether the amount includes interest or other charges.
If a claim includes additional charges and the creditor fails to check this
box, then the creditor has made a false statement under penalty of perjury.
While this appears to be a fairly
innocuous provision, it has given rise to substantial litigation. In re
Derby, 2019 Bankr. LEXIS 945 (Bankr. E.D. Va. 2019); Brooks v. Midland
Funding, LLC (In re Thomas), 592 B.R. 99 (Bankr. W.D. Va. 2018); In re
Maddux, 2016 Bankr. LEXIS 4116 (Bankr. E.D. Va. 2016). In each of these
cases, the allegation was that a claims purchaser filed a claim which checked
the box “No” for whether the claim included interest or other charges. The
claims buyers argued that under industry rules, they were allowed to roll other
fees into the principal balance.
In Maddux, the Court
consolidated fifteen claims objections in six separate chapter 13 cases where a
debt buyer originally claimed that no interest or other charges were included.
After the debtor objected to the claims, the creditor amended the claims to
supply the required information. The court found that failure to include the
required information meant that the claims were not entitled to prima facie
validity, but nevertheless, found that the creditor met its burden to prove up
the claims and denied the objections. However, based on Rule 3001(c)(2)(D), the
Court found that the initial failure to provide the itemization of fees and
expenses was not substantially justified and awarded attorneys’ fees to the
debtor’s attorneys. The Court ultimately awarded $219,986.00 in fees and
$8,876.82 in expenses to the debtors’ counsel.
In Brooks v. Midland Funding
and In re Derby, the Debtors sued creditors for violations of the FDCPA
based on their failure to itemize interest and other charges in proofs of
claim. In both cases, the creditor sought to have the complaint dismissed for
failure to state a cause of action. In Brooks v. Midland Funding, the
Court found that a complaint alleging that the creditor had a business practice
of filing false claims stated a cause of action under the FDCPA. In Derby,
the Court dismissed the FDCPA claim and found that the appropriate remedy was
contained in Rule 3001(c)(2)(D). The takeaway is that in both cases the Court
allowed claims to proceed against creditors for failure to itemize interest and
other charges.
The creditor received a more
favorable ruling in Arcila v. Portfolio Recovery Associates, 2021 U.S.
Dist. LEXIS 54388 (D.N.J. 2021). In Arcila, the creditor filed a proof of claim
which did not disclose fees and charges. The debtor did not object to the claim
but later brought suit under the FDCPA. The debtor did not dispute the
total amount of the claim. The District Court found that the FDCPA claim was
barred by issue preclusion. Where the debtor had an opportunity to object to
the claim and did not, it could not make a collateral attack on the proof of
claim under the FDCPA.
D. Redacting
Personal Information
The instructions to the claim form
require creditors to redact “information that is entitled to privacy on this
form or on any attached documents.” Under Fed.R.Bankr.P. 9037(a):
(a) Redacted Filings. Unless the
court orders otherwise, in an electronic or paper filing made with the court
that contains an individual's social-security number, taxpayer-identification
number, or birth date, the name of an individual, other than the debtor, known
to be and identified as a minor, or a financial-account number, a party or
nonparty making the filing may include only:
(1) the last four digits of the social-security number and
taxpayer-identification number;
(2) the year of the individual's birth;
(3) the minor's initials; and
(4) the last four digits of the financial-account number.
A claim based on private school tuition, might include the full name of a minor as well as a full account number.
A claim for child support could
include the child’s name and birth year. Additionally, a claim for medical
expenses could include information which may not be disclosed under HIPAA. All
of these are instances in which a claimant can violate the law by filing an
unredacted proof of claim.
Courts are divided over whether a
debtor may sue for disclosure of information required to be redacted. In In
re Branch, 2016 Bankr. LEXIS 3194 (Bankr. E.D. N.C. 2016), a healthcare
provider filed many proofs of claim which included the patients’ full social
security numbers and account numbers. Three debtors filed motions for sanctions
and to restrict public access. In response to the motions, the provider moved
to restrict access to an additional 2,819 claims in closed cases and 1,390
claims in open cases. It also offered the debtors one year of creditor
monitoring. At the hearing on the motions, a representative of one of the
creditors testified that she had not received any training in how to redact
information from claims, did not have any contact with the provider’s legal
department and did not have anyone reviewing the claims that she filed. The
company’s Chief Legal Officer, who was hired shortly before the first motion
for sanctions was filed, testified that she did not have any training with
regard to redacting claims and had not appeared in federal court in nineteen
years (which was before electronic filing was adopted). However, upon receiving
the motions to restrict access and for sanctions, she launched an investigation
and initiated remedial measures. The creditor testified that it had spent over
$300,000 in addressing the problem.
The court noted that Fed.R.Bankr.P.
9037 does not provide a private right of action for failure to redact. However,
it concluded that it could sanction parties for contempt under 11 U.S.C. §105
where “it was shown that a creditor flaunted the law with knowledge of its
proscriptions, failed to take remedial action once violations were discovered,
or acted deliberately as opposed to mistakenly or inadvertently.” The Court
found that the creditor did not act intentionally to flaunt the law but was
“more than negligent.” The Court found that the creditor failed to take prompt
remedial action because it took four weeks from receiving notice of the problem
before it acted. The Court awarded actual and punitive damages of $21,140.69 to
two debtors, attorneys’ fees of approximately $59,000 and ordered that
sanctions in the amount of $50,000 be paid to the Clerk of the Court. All in
all, the failure to redact proofs of claim cost the creditor close to half a
million dollars (including the costs incurred by the creditor to fix its
practices).
In re Lunden, 524 B.R. 410 (Bankr. D. Mass. 2015) is a case where an
attorney attached a financial statement to a pleading filed in court. The
document contained the debtor’s full social security number, home telephone
number, address and date of birth. The attorney refused to withdraw the
offending document and attempted to justify its use. The Debtor’s attorney
moved to strike the document from the public record and for sanctions. The
Court granted the motion to strike the document pursuant to Fed.R.Bankr.P. 9037
and set a hearing on sanctions. The Court rejected the argument that the
document was part of the public record in an earlier state court proceeding
because it was designated as confidential and kept out of the public record in
that proceeding. The Court found that although Rule 9037 does not contain a
private right of action, the Court could sanction contemptuous behavior under
11 U.S.C. §105(a). The Court stated:
The
mere failure to redact may not always give rise to sanctions for contempt. But
in this case, when the error was brought to his attention, Attorney Chernin
refused to take any corrective action and then defended his failures with ex
post facto excuses bordering on the frivolous.
The court ordered the attorney to
pay for credit monitoring for the debtor in the future and also to pay $1,000
in punitive damages. While this case involved a pleading instead of a proof of
claim, it involves a scenario which can frequently arise with regard to proofs
of claim.
The two cases above can be contrasted
with Cordier v. Plains Commerce Bank (In re Cordier), 2009 Bankr. LEXIS
888 (Bankr. D. Ct. 2009) where the creditor had only a single violation and
acted promptly to redact the claim. In Cordier, the creditor filed a proof of
claim which included the Debtor’s unredacted social security number. Rather
than requesting the creditor to redact the number, the Debtor filed an
adversary proceeding against the creditor. Upon receiving the adversary
proceeding, the creditor promptly moved to restrict the claim from public
viewing under Fed.R.Bankr.P. 9037. The creditor then moved to dismiss the
adversary proceeding. The Court granted the motion to dismiss, finding that the
remedy created by Rule 9037 is to remove the offending document from public
view. However, it did not create a private cause of action.
The lesson from these two cases is
that if you accidentally file a claim with: (a) the full social security
number; (b) the debtor’s birth date; or (c) the full name of a minor child or a
full account number, you should promptly file a motion to withdraw the document
from the public record. This is a motion that can be granted on an ex parte
basis.
E. Other Grounds for Imposing Liability Based on Submitting a
Proof of Claim
The Supreme Court has ruled that a
debtor cannot bring an action under FDCPA based on filing a claim which is
beyond the statute of limitations. Midland Funding, LLC v. Johnson, 137
S.Ct. 1407 (2017). However, there are plenty of other situations in which filing
a proof of claim can result in liability to the creditor.
1. Filing Non-Existent Claims
On February 5, 2016, Bankruptcy
Judge Marvin Isgur initiated a Miscellaneous Proceeding where three creditors
were ordered to show cause why they should not be sanctioned based on claims
they had filed. In particular, the court was concerned with “a series of claims
(often in the amount of $390) without supporting documentation or otherwise not
in compliance with the Federal Rules of Bankruptcy Procedure.” In re Atlas
Acquisitions, LLC, et al, Misc. Pro. No. 16-302 (Bankr. S.D. Texas). The
ensuing investigation revealed that a broker had purchased a batch of purported
payday loans and then sold them to a debt buyer who in turn resold a portion of
them to another debt buyer. Once the two debt buyers began filing claims, they
began to draw objections leading to the court’s issuance of the show cause
order. Eventually, it was revealed that an unscrupulous actor had taken a
database of personal information submitted by persons applying for payday
loans, put them into a spreadsheet and represented that they were real debts.
Because the broker and the debt buyers cooperated with the Bankruptcy Court’s
inquiry, the Court did not impose sanctions beyond a payment to reimburse the
Chapter 13 trustee for his expenses. The fraudster was not so lucky. On July
13, 2021, he was convicted on multiple grounds including two counts of
bankruptcy fraud and sentenced to 150 months of confinement. He was also
ordered to pay restitution in the amount of $8,057,079.95. Case No.
4:18-cr-00153-RK, United States of America v. Joel Jerome Tucker (W.D.
Mo. 7/13/21), Dkt. #61. The case is a lesson that creditors should perform due
diligence before filing a claim purchased from a third party. If the claim does
not exist, it can get very expensive.
2. Submitting and Continuing to Pursue a False Claim
In Grossman v. Wehrle (In re
Royal Manor Mangagement), 2016 U.S. App. LEXIS 11018 (6th Cir. 2016), a pro
se creditor named Gertrude Gordon submitted a proof of claim. The claim relied
on a redacted agreement. The Committee objected and the objection was granted
when the claimant did not reply. Attorney Grossman then appeared on behalf of
Gertrude and sought reconsideration. Reconsideration was denied and the
creditor appealed. The unredacted claim revealed that the debt was owed by a
third party and not by the debtor. The District court denied the appeal and
Grossman then appealed to the Sixth Circuit. The Sixth Circuit affirmed. The
Trustee moved for sanctions on the basis that “there was no credible evidence
or legal basis to support that the Gordons were general unsecured creditors of
. . . any . . . debtor entity, yet Gertrude and Grossman continued to file
frivolous pleadings to vexatiously multiply the proceedings.” Gertrude settled
with the Trustee for $50,000. The Bankruptcy Court awarded sanctions against
Grossman in the amount of $207,004. The Sixth Circuit affirmed, finding that
Grossman obtained the unredacted document early in his representation but
continued to press forward on the claim.
3. Submitting an Inaccurate Claim.
Ameriquest Mortg. Co. v. Nosek (In
re Nosek), 609 F.3d 6 (1st Cir. 2010) is a
good illustration of how serious a simple error can be, although the ultimate
sanction was drastically reduced on appeal. Ameriquest originated a mortgage
loan which was assigned to a securitization trust but retained the servicing
rights. After the debtor filed for bankruptcy, Ameriquest filed a proof of
claim and a motion to lift stay indicating that it was the creditor as opposed
to the servicing agent for the creditor. The debtor sued Ameriquest over its
handling of the mortgage loan and received a judgment for $250,000 which was
reversed and remanded. On remand, the bankruptcy court awarded $750,000 in
damages. The $750,000 judgment was also reversed. However, prior to the
judgment being reversed, Ameriquest disclosed that it did not hold the
mortgage. The bankruptcy court issued an order to show cause as to why
Ameriquest should not be sanctioned under Fed.R.Bankr.P. 9011 for
misrepresenting its status as holder of the note. The bankruptcy court imposed
sanctions of $250,000. On appeal, Ameriquest admitted that its proof of claim
violated Rule 9011 but argued that the sanction was too high. The Court of
Appeals agreed and reduced the sanction to $5,000.
4. Submitting a Claim on a Discharged Debt
Green Point Credit, LLC v. McLean
(In re McLean), 794 F.3d 1313 (11th Cir. 2015)
involved a creditor which submitted a claim in a bankruptcy proceeding even
though it had been discharged in a prior case. In 2006, the debtors filed a Chapter
13 proceeding which was converted to chapter 7. They received a discharge.
Green Point was listed as a creditor and received notice of the discharge. In
2012, the debtors filed a second Chapter 13 case. Although Green Point was not
scheduled as a creditor, it filed a proof of claim. If the claim had been
allowed, the debtors’ payments under the plan would have doubled.
The debtors objected to the claim
and also filed an adversary proceeding. Four days after the adversary
proceeding was filed, Green Point withdrew the proof of claim. The bankruptcy
court ruled that filing a proof of claim on a discharged debt violated the
discharge injunction in the prior case. It also awarded punitive sanctions in
the amount of $50,000 and compensatory sanctions for emotional distress. On
appeal, the Eleventh Circuit affirmed the finding that the proof of claim
violated the discharge. However, it vacated and remanded the two awards of
sanctions. The Court found that the bankruptcy court did not consider whether
Green Point acted with reckless disregard when it filed the proof of claim. It
also found that the bankruptcy court did not perform the proper analysis for
awarding damages for emotional distress. The Eleventh Circuit remanded the case
for a new hearing on damages.
II. Objecting to
Claims
A claim shall be allowed unless a party
in interest objects to it. 11 U.S.C. Sec. 502(a), In re WMC Kim Holdings,
LLC, 2021 Bankr. LEXIS 352 (Bankr. N.D. Ga. 2021). Objections to claims are
governed by 11 U.S.C. Sec. 502 and Fed.R.Bankr.P. 3007 as well as various local
rules. The starting point to an objection is determining whether the claim has
prima facie validity.
A. Rebutting Prima Facie Validity and Burden of Proof
Under Fed.R.Bankr.P. 3001(f),
"(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." If a claim is entitled to prima facie validity, the objecting
party must submit sufficient evidence to rebut the prima facie validity of the
claim. On the other hand, if the claim is not entitled to prima facie validity,
all the objecting party need do is say "I object."
What is enough evidence to rebut the
prima facie validity? "(T)he objector must produce evidence equal in
force to the prima facie case which, if believed, would refute at least one of
the allegations that is essential to the claim's legal sufficiency." In
re Defeo, 2015 Bankr. LEXIS 4031 (Bankr. E.D. N.Y. 2015) at *7. Another court
has referred to "evidence of a probative force equal to that of the
creidtor's proof of claim." In re Bryant, 600 B.R. 533 (Bankr. N.D.
Tex. 2019), aff'd, 2020 U.S. Dist. LEXIS 169388 (N.D. Tex. 2020). While
the amount of evidence sufficient to rebut the presumption is not great, it
must consist of more than disagreeing with the claim.
Once the prima facie validity has
been rebutted, the burden of proof to sustain the claim falls upon the party
that would have the burden under applicable non-bankruptcy law. Raleigh v.
Illinois Dept. of Revenue, 528 U.S. 1068 (U.S. 2000). While this will
generally place the burden on the claimant, some laws, such as tax laws, will
place the burden on the objecting party.
B. What Are Valid Grounds to Object?
Most courts agree that the only
grounds for objecting to a claim are those listed in 11 U.S.C. Sec.
502(b). In re Today’s Destiny, Inc., 2008 Bankr. LEXIS 3577 (Bankr.
S.D. Tex. 2008). Sec. 502(b) provides:
(b)
Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this
section, if such objection to a claim is made, the court, after notice and a
hearing, shall determine the amount of such claim in lawful currency of the
United States as of the date of the filing of the petition, and shall allow
such claim in such amount, except to the extent that--
(1)
such claim 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;
(2)
such claim is for unmatured interest;
(3)
if such claim is for a tax assessed against property of the estate, such claim
exceeds the value of the interest of the estate in such property;
(4)
if such claim is for services of an insider or attorney of the debtor, such
claim exceeds the reasonable value of such services;
(5)
such claim is for a debt that is unmatured on the date of the filing of the
petition and that is excepted from discharge under section 523(a)(5) of this
title;
(6)
if such claim is the claim of a lessor for damages resulting from the
termination of a lease of real property, such claim exceeds--
(A)
the rent reserved by such lease, without acceleration, for the greater of one
year, or 15 percent, not to exceed three years, of the remaining term of such
lease, following the earlier of--
(i)
the date of the filing of the petition; and
(ii)
the date on which such lessor repossessed, or the lessee surrendered, the
leased property; plus
(B)
any unpaid rent due under such lease, without acceleration, on the earlier of
such dates;
(7)
if such claim is the claim of an employee for damages resulting from the
termination of an employment contract, such claim exceeds--
(A)
the compensation provided by such contract, without acceleration, for one year
following the earlier of--
(i)
the date of the filing of the petition; or
(ii)
the date on which the employer directed the employee to terminate, or such
employee terminated, performance under such contract; plus
(B)
any unpaid compensation due under such contract, without acceleration, on the
earlier of such dates;
(8)
such claim results from a reduction, due to late payment, in the amount of an
otherwise applicable credit available to the debtor in connection with an
employment tax on wages, salaries, or commissions earned from the debtor; or
(9)
proof of such claim is not timely filed, except to the extent tardily filed as
permitted under paragraph (1) , (2) , or (3) of section 726(a) of this title or
under the Federal Rules of Bankruptcy Procedure, except that a claim of a governmental
unit shall be timely filed if it is filed before 180 days after the date of the
order for relief or such later time as the Federal Rules of Bankruptcy
Procedure may provide, and except that in a case under chapter 13, a claim of a
governmental unit for a tax with respect to a return filed under section 1308
shall be timely if the claim is filed on or before the date that is 60 days
after the date on which such return was filed as required.
The most common objection would be that the claim is unenforceable against the debtor or the property of the debtor which is just a fancy way of saying the debtor doesn't owe the money.
Notably, this list does not include
failure to include supporting documentation. Failure to include required
documentation may result in a claim losing prima facie validity. However, it is
not a ground in and of itself for denying the claim. In re Andrade-Garcia,
627 B.R. 158 (Bankr. D. Nev. 2021); In re Isherwood, 2019 Bankr. LEXIS
507 (Bankr. D. Md. 2019); In re Rodriguez, 2018 Bankr. LEXIS 3742
(Bankr. E.D. Wis. 2018); In re Gorman, 495 B.R. 823 (Bankr. E.D. Tenn.
2013). That being said, there is a backdoor way to get to that result. Rule
3001(f) states that a proof of claim filed in accordance with the rule is
entitled to prima facie validity. This shifts the burden to the objecting party
to rebut the prima facie case before the creditor is required to prove that the
claim should be allowed. However, if supporting documents are not attached, the
claim has no prima facie validity and the creditor bears the burden of
supporting the claim. Let’s say that a creditor files a claim based on a Cash
Express payday loan but fails to attach supporting documentation. If the debtor
objects and states that he doesn’t remember ever having a Cash Express payday
loan or that he did have one, but paid it off, the burden shifts to the
creditor to prove up the claim. However, the creditor may be precluded from
offering the omitted documents. As a result, the rule granting prima facie validity
to properly filed claims makes it easier to object to deficient claims.
A claim may also be denied because
it is late-filed. In Chapter 11, the Court may allow a late-filed claim based
on excusable neglect. Pioneer Investment Serv. Co. v. Brunswick Assocs.,
Ltd. P'ship, 507 U.S. 380 (U.S. 1993). However, late filed claims are not
allowed in Chapter 12 or Chapter 13. In re Moore, 2021 Bankr. LEXIS 2849
(Bankr. N.D. Ia. 2021). One exception to this rule is that the debtor or
trustee may file a claim for a creditor within 30 days after the expiration of
the deadline to file a claim. Fed.R.Bankr.P. 3004. In a Chapter 7 case, there
is not a deadline to file a claim unless the trustee files an asset
notice. However, if a claim is filed after the expiration of the bar date,
it can still be allowed although it will be subordinated to all timely filed
claims. 11 U.S.C. Sec. 726(a)(3).
One objection which is used more
often than it should be is "the claim does not comport with the debtor's
books and records." As Judge Marvin Isgur pointed out at the recent
Westbrook Bankruptcy Conference, which books and records did you review? Is
this the type of claim that would even appear on the debtor's books and
records?
The problem with the objection is
that it doesn't tell the creditor what the problem is. Do the debtor's books
and records list the claim, but in a different amount? If the debt is not
listed in the debtor's books and records, how accurate are those books and
records? A better objection would be any of the following:
- The debtor does not have any record of having done
business with this creditor;
- The debtor's records indicate that the lesser amount of
x should be allowed; or
- The debt is not owed by this debtor.
Other examples of good objections
would be that the debt is barred by limitations, In re Andrade-Garcia,
627 B.R. 158 (Bankr. D. Nev. 2021), the claim is barred by res judicata, the
claim is actually an equity interest, In re Live Primary, LLC, 626 B.R.
171 (Bankr. S.D. N.Y. 2021), or the claim has been paid. In short, an
objection to claim may be based on any defense that could have been raised to
the claim if the creditor had filed suit in an appropriate non-bankruptcy
court.
C.
Omnibus Objections to Claim
Fed.R.Bankr.P. 3007(c), (d) and (e)
govern omnibus objections to claims. The general rule is contained in Rule
3007(c) which states that unless ordered by the court or allowed by subsection
(d), an objection to claim may only include a single claim. The purpose of an
omnibus objection is to allow determination of a group of similar claims in an
economical manner.
Rule 3007(d) allows similar
objections to be filed together if they fall within one of the following
categories:
(1) they
duplicate other claims;
(2) they
have been filed in the wrong case;
(3) they
have been amended by subsequently filed proofs of claim;
(4) they
were not timely filed;
(5) they
have been satisfied or released during the case in accordance with the Code,
applicable rules, or a court order;
(6) they
were presented in a form that does not comply with applicable rules, and the
objection states that the objector is unable to determine the validity of the
claim because of the noncompliance;
(7) they are
interests, rather than claims; or
(8) they
assert priority in an amount that exceeds the maximum amount under §507 of the
Code.
However, because Rule 3007(c) allows
omnibus objections to be filed as "otherwise ordered by the court,"
it is possible to file omnibus objections for other groups of similar claims if
prior approval is obtained from the court.
The types of omnibus objections
allowed are generally ones that do not require extensive factual review. For
example, if duplicate claims have been filed, it is enough to identify two
claims from the same creditor for the same debt. For a late filed claim, it is
sufficient to show the bar date and when the claim was filed. In contrast, it
should not be adequate to file an omnibus objection based on the fact that the
claim does not appear in the debtor's books and records. There can be many
different reasons why a claim does not appear in the debtor's books and records
and due process will require the objecting party to provide more information to
rebut the prima facie validity of the claim.
An omnibus objection must meet six
requirements under Rule 3007(e). It must:
(1)
state in a conspicuous place that
claimants receiving the objection should locate their names and claims in the
objection;
(2)
list claimants alphabetically,
provide a cross-reference to claim numbers, and, if appropriate, list claimants
by category of claims;
(3)
state the grounds of the objection
to each claim and provide a cross-reference to the pages in the omnibus
objection pertinent to the stated grounds;
(4)
state in the title the identity of
the objector and the grounds for the objections;
(5)
be numbered consecutively with other
omnibus objections filed by the same objector; and
(6)
contain objections to no more than
100 claims.
These form requirements are designed to ensure that a
creditor receives reasonable notice to understand that their claim is being
objected to, why the claim is being objected to, and what they need to do to
respond.
As a debtor's lawyer, I have used
omnibus objections. Sometimes we may file an omnibus objection to just four or
five claims. What I find frustrating as a creditor's lawyer is receiving dozens
of omnibus objections and having to click on the link and scroll through many
lines of small print. Where a creditor is represented by an attorney who has
appeared, it is arguably sufficient to serve the creditor's attorney through
CM/ECF. However, the best practice is to always serve the omnibus objection on
the creditor at its notice address in the claim and also notify the claimant's
attorney.
III. Summary
of Relevant Rules and Statutes
A.
Statutes
11
U.S.C. Sec. 501 governs filing claims
11
U.S.C. Sec. 502 governs objections to claims
B.
Rules
Fed.R.Bankr.P.
3001 governs filing proofs of claim and the requirements for a proof of claim
Fed.R.Bankr.P.
3004 governs filing of proofs of claims by the Debtor or Trustee
Fed.R.Bankr.P.
3007 governs objections to claims, including omnibus objections
Fed.R.Bankr.P.
3008 governs reconsideration of claims
Note: Part One of this article is
based on a presentation I gave to the Commercial Law League of America in 2019.
Part Two was inspired by a presentation given at the 2021 Westbrook Bankruptcy
Conference and includes some comments from the conference. That presentation
was given by Elizabeth Freeman, Julie Harrison and Erin McKeighan with
assistance from Judges Marvin Isgur, David Jones and Chris Lopez.
