On Gunslingers, Presumptions and Burdens of Proof

There have been an increasing number of cases dealing with objections to assigned credit card debt. These cases are a bit like a showdown between gunfighters with bad aim: there is a lot of shooting, but no one hits anything. While a gunfight where no one gets shot is a good thing, the court must still decide whether to allow or disallow the claim even when there is little or no evidence introduced. As a result, rules on presumptions and burden of proof often dictate the result.

Prima Facie Valid Or Not

The starting point is Fed.R.Bankr.P. 3001(f) states that “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.” Thus, if the creditor files its claim in accordance with the rules, it starts out with a presumption of validity. However, before the claim receives prima facie validity, it must be filed in accordance with the rules, particularly Rule 3001. Among other things, Rule 3001(c) provides that if a claim is based upon a writing, that writing must be attached or a statement must be provided explaining why the writing cannot be attached. Several courts have held that merely attaching a summary which lists the name of the original creditor, the last four digits of the account number and the balance claimed to be owed does not meet the requirement that the writing be attached to the claim, thus depriving the claim of prima facie validity. In re Tran, 369 B.R. 312 (S.D. Tex. 2007); In re Cox, 2007 Bankr. LEXIS 4048 (Bankr. W.D. Tex. 2007).

Courts have required different levels of documentation to satisfy the prima facie validity requirement. At the low end are courts requiring as little as a copy of an account statement from the original creditor, In re Griffin, 2007 Bankr. LEXIS 1749 (Bankr. W.D. Tex. 2007), while some courts require copies of the underlying contract, account statements and/or proof of assignment of the debt. In re Armstrong, 320 B.R. 97 (Bankr. N.D. Tex.2005)(account statement plus proof of assignment), In re Tran, 369 B.R. 312 (S.D. Tex. 2006)(requiring original contract), In re Leverett, 378 B.R. 793 (Bankr. E.D. Tex. 2007)(requiring documentary evidence of how claimant acquired the claim and proof that it is the holder of the claim); In re Plourde, 397 B.R. 207 (D.N.H. 2008)(requiring original contract plus statements plus proof of assignment); In re Kendall, 380 B.R. 37 (Bankr. N.D. Okla. 2007)(requiring contract plus itemization plus proof of assignment).

Effect of Prima Facie Validity

A recent opinion explained how failure to satisfy the requirements for prima facie validity affected the burden of proof on a claims objection.

Having little to none of the requirement information attached for a credit card debt, Roundup’s claim did not comply with Rule 3001(c). The Court, therefore, concludes that Roundup Funding’s claim is not entitled to prima facie validity under Bankruptcy Rule 3001(f). Without such validity, Debtors needed only to object to the claim pursuant to the applicable rules or statute, which they did. Debtors had listed this debt as ‘disputed’ so they did not judicially admit that they owe it. Although the Debtors did not attach any evidence to their objection to Claim Number 12, such as an affidavit, the objection was sufficient by being signed by their counsel under penalty of Rule 9011. (citation omitted).

After the Debtor’s valid objection, Roundup Funding had the burden of offering supporting documentation to carry its burden of proof in the face of an objection. It had to establish the claim by a preponderance of the evidence. (citation omitted). Roundup Funding presented no evidence to support its claim. Its information was submitted in the form of a response with attached exhibits, all in the nature of argument, and not by affidavit or by witness testimony. It provided no evidence to link the entity assigning the claim with an entity listed on the Debtor’s schedules. In any event, this attachment page to the claim is not a business record of the Debtor’s credit card account within the meaning of Federal Rule of Evidence 803(6).

In re Reyna, No. 08-10049 (Bankr. W.D. Tex. 7/28/08), Memorandum Opinion and Order, pp. 8-9; In re Plourde, 397 B.R. 207 (Bankr. D. N.H. 2008)(if claim is not prima facie valid, valid objection is all that is necessary to put creditor to its proof).

If the claim is entitled to prima facie validity, the Debtor must introduce sufficient evidence to rebut the prima facie case. In order to rebut the prima facie validity of a claim, the objecting party must produce “evidence tending to defeat the claim that is of a probative force equal to that of the creditor’s proof of claim.” In re Simmons, 765 F.2d 547, 552 (5th Cir. 1985). Sometimes the claim itself may be sufficient to rebut its own prima facie validity. In the case of In re Bootka, No. 08-11506 (Bankr. W.D. Tex. 2/23/09), the attachment to the proof of claim stated that the debt had been charged off more than four years before the petition date. As a result, the debt appeared to be barred by the four year statute of limitations applicable in Texas. The creditor filed an affidavit from the prior owner of the claim stating that a payment had posted to the account on January 18, 2008. This was significant because a payment could revive the statute of limitations under Texas law. However, the Court found that the creditor failed to meet its burden of proof because it did not state who made the payment or when it was actually made (as opposed to when it was posted). As a result, the prima facie case was rebutted and the creditor failed to prove its case by a preponderance of the evidence.

Judicial Estoppel/Party Admission

Sometimes, the creditor can prove its case simply because the debtor has already admitted the validity of the claim. If the debtor has scheduled a claim which can be identified to the proof of claim in approximately the same amount and has identified the claim as undisputed, then the debtor will be estopped to deny the validity of the claim or will be deemed to have made a party admission. Of course, if the debtor has scheduled the claim as disputed or if there is a significant variation between the claim and the schedules, then judicial estoppel will not apply. The case of In re Cox, 2007 Bankr. LEXIS 4048 (Bankr. W.D. Tex. 2007) illustrates how far the judicial admission doctrine may extend. In that case, the debtor scheduled three claims owing to Chase Bank. As an illustration, one claim was scheduled in the amount of $20,312.83 with the last four digits 0445. B-Real, LLC filed a claim in the amount of $21,534.50 in the name of B-Real, LLC/Chase Bank USA, N.A. on a claim with the last four digits 0445. The claim (as amended) was supported by account statements from Chase Bank showing the amount owed. Although the identity of the creditor was different, the court still found that the debtor had made a party-admission that the debt was owed. See also In re Kendall, 380 B.R. 37 (Bankr. N.D. Okla. 2007)(if debtor has listed claim as not disputed in its schedules, this is some evidence of validity). On the other hand, where the identity of the creditor was different, the schedules and the claim included different portions of the sixteen digit account number and the claim amounts were different, the court refused to apply judicial estoppel. In re Reyna, No. 08-10049 (Bankr. W.D. Tex. 7/28/08).

Judicial estoppel will only apply as to the debtor. Several courts have refused to apply judicial estoppel to the chapter 13 trustee. In re Plourde, 397 B.R. 207 (Bankr. D.N.H. 2008); In re Bootka, No. 08-11506 (Bankr.W.D. Tex. 2/23/09). The opinion from the Western District of Texas is based on Fifth Circuit precedent requiring that parties be identical for judicial estoppel to apply. Kane v. National Union Fire Insurance Co., 535 F.3d 380 (5th Cir. 2008). This result seems to follow the logic of judicial estoppel the closest, since only the party making the admission should be estopped. An opinion by the 10th Circuit BAP held that the trustee would not be bound by the debtor’s admission in the schedules, but that the schedules provided some evidence in favor of allowing the claim. In re Kirkland, 379 B.R. 341, 344, n. 12 (10th Cir. BAP 2007).

Proof of Assignment

Courts have disagreed on the extent to which proof of assignment must be established. The most creditor-friendly courts note that Rule 3001 only requires proof of assignment where the original creditor has previously filed a proof of claim. In re Gonzales, 356 B.R. 905 (Bankr. S.D. Fla. 2006); In re Griffin, 2007 Bankr. LEXIS 1748 (Bankr. W.D. Tex. 2007). Where only one creditor files a claim with respect to a debt scheduled by the debtor, the creditor will not be required to show how the debt was assigned to it. These cases take the position that if the debtor owes the debt and only one party is claiming to own it, that the debtor should not escape payment based on failure of the specific creditor to establish how it came to own the account. On the other hand, some courts have required proof of assignment and have gone further and required that the assignment reflect the specific debt rather than merely a blanket assignment. In re Armstrong, 320 B.R. 97 (Bankr. N.D. Tex.2005); In re Leverett, 378 B.R. 793 (Bankr. E.D. Tex. 2007); In re Kendall, 380 B.R. 37 (Bankr. N.D. Okla. 2007). Finally, some courts require proof of assignment, but will accept a blanket assignment. In re Samson, 392 B.R. 724 (Bankr. N.D. Ohio 2008).

Other Objections

Assuming that the claim is supported by prima facie evidence, the debtor’s objection to the claim must fall within one of the grounds identified by 11 U.S.C. §502(b), including that a claim is not enforceable under applicable law. In re Kirkland, 379 B.R. 341 (10th Cir. BAP 2007). Thus, a debtor could not object to a claim on the basis that the creditor had failed to redact the debtor’s social security number as required by Bankr. Rule 9037. Cordier vs. Plains Commerce Bank, No. 08-2037 (Bankr. D.Ct. 3/26/09). While the creditor violated a procedural rule, this was not a statutory ground for denying the claim.

Failure to file a timely claim is a stated ground for objection under 11 U.S.C. §502(b)(9). However, what happens if the claims bar date runs while the case has been dismissed, but is later reinstated? A thoughtful opinion holds that due process requires that the court be allowed to set a new bar date in this instance. In re Gulley, No. 07-33271 (Bankr. N.D. Tex. 3/3/2009).

Conclusion

Courts are struggling with objections to assigned credit card debt. Courts generally agree that a mere account summary prepared by the assignee will not satisfy the requirement to attach the documents on which the claim is based. However, courts differ as to whether the underlying contract or the account statement must be produced. A series of account statements will show that the debtor used the card and establish the pattern of dealings between the parties. This may be enough to prove the existence of a contract. Creditors should look to the proof required by a state court. If a sworn account or account statements would be adequate in state court, it should be sufficient in bankruptcy court. The underlying contract should not be necessary to satisfy the prima facie validity requirement (although many courts have required it). However, if the debtor objects to items such as calculation of interest or fees, the creditor may be required to provide the agreement in order to satisfy its ultimate burden of proof.

Courts also differ on whether proof of an assignment should be provided. On the one hand, proof of assignment is an element in establishing that the creditor is the holder of the claim. However, where the debtor has admitted owing the underlying account and no other party has filed a claim, it may be reasonable to conclude that a valid assignment occurred. Some courts have noted that Fed.R.Bankr.P. 3001(e) only requires proof of assignment of a claim if another creditor has already filed a claim. This may be misleading. Rule 3001(e) is designed to settle disputes between an original creditor and a party claiming to be an assignee. Where the claim is assigned prior to bankruptcy or prior to a claim being filed by the original creditor, there is no need to resolve this dispute. Instead, the issue concerns the more fundamental question of whether the creditor holds the claim.

The process for determining allowance of an assigned credit card debt can be summarized as a decision tree.

1. Does the claim include sufficient documentation to receive prima facie validity?
If yes, debtor must rebut prima facie case before creditor must put on case.
If no, debtor need only raise a valid objection to require creditor to carry burden of proof.

2. If claim is prima facie valid, has debtor rebutted the prima facie case?
If yes, creditor must prove claim by preponderance of the evidence.
If no, claim is allowed.

3. Has debtor judicially admitted validity of claim?
If yes, claim is allowed (unless a party other than the debtor is objecting).
If no, creditor must prove claim by preponderance of the evidence.

4. Has creditor established valid assignment of claim?
If yes, claim is allowed assuming creditor has met other requirements.
If no, claim is denied unless debtor is judicially estopped from denying claim or in jurisdictions which do not require proof of assignment.

5. If neither party has prevailed at this point, who produced more credible evidence?
If creditor, then claim is allowed.
If debtor, then claim is denied.

This article originally appeared in the ABI Consumer Bankruptcy Committee Newsletter, Vol. 7, No. 2 (April 2009).