A Primer on Proofs of Claim and Objections to Claims

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.