Not a Good Idea to Object to Every Claim

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

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

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

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

A Few Facts

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

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

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

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

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

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

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

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

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

An Interesting Twist

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

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

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

The Ethical Obligations of the Debtor's Counsel

The Court was not amused as shown by the subheading "The Ethical Obligations of the Debtor's Counsel." The Court noted that filing the schedules and objecting to the claims, debtor's counsel

deliberately chose to (i) ignore the debtor's personal knowledge,and (ii) conduct no independent investigation prior to filing the debtor's bankruptcy schedules and claim objections."

Opinion, p. 21.

The Court went on to state:

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

Opinion, pp.21-22.

The Debtor's Obligation to Act in Good Faith

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

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

Opinion, pp. 22-23.

The Bottom Line

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

What It Means

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

Sixth Circuit Releases Remarkable Opinion on Debt Buyers, Mootness and Sanctions

Unsecured claims held by credit card companies, and in particular by debt buyers, have kept bankruptcy judges and appellate courts busy recently. In the typical case, a credit card company or debt buyer files a claim which contains a summary listing the original creditor, the last four digits of the account number and the amount of the claim. The debtor objects on the basis that the claim is not supported by the documents establishing the claims and/or that the debtor does not know who the debt buyer is. The creditor will offer varying amounts of proof ranging from none to the debtor's schedules and a business records affidavit with respect to the claim.

Some of the recent decisions include: In re Kirkland, 572 F.3d 838 (10th Cir. 2009), holding that an unsubstantiated claim may not be allowed upon objection by the trustee; In re Plourde, 418 B.R. 495 (1st Cir. BAP 2009), holding that failure of creditor to provide proof of nature of claim relegated claim to subordinated status for penalties; and In re DePugh, 409 B.R. 84 (Bank. S.D. Tex. 2009), holding that creditor who failed to include supporting documentation could not amend claim after objection was filed without leave of court.

U.S. Bankruptcy Judge Jeff Bohm (author of the DePugh decision) has adopted a Notice and Order That Federal Rule 15, As Made Applicable Bankruptcy Rule 7015, Shall Apply Whenever an Objection to a Proof of Claim is Filed," which provides that creditors who amend their claims without leave of court after an objection has been filed shall be subject to sanctions.

Suffice it to say that credit card creditors have not been feeling the love lately. However, a new decision out of the Sixth Circuit gives debt buyers a modicum of respect. In In re Wingerter, No. 08-4455 (6th Cir. 1/25/10), the Sixth Circuit reversed a bankruptcy court's sanctions order which struck at the heart of a debt buyer's business model.

The case began with a claim for $431.57 filed by B-Line, LLC, a debt buying firm. B-Line had bought the claim from Covenant Management, LLC, who in turn had purchased it from the original creditor, GTE. Unlike many of these cases, the Debtor insisted that he had never owed a debt to GTE. When B-Line could not obtain proof that the debt existed, it withdrew the claim.

However, that was not the end of the story. The Bankruptcy Court issued a series of show cause orders to B-Line to explain its business practices in general and its handling of the specific claim as well. The Court found that B-Line had violated Rule 9011(b) by failing to make a "reasonable pre-filing inquiry" that the claim was valid and supported by evidence.

The Bankruptcy Court stated:

This Court finds that B-Line did not fulfill its Rule 9011 obligations in filing the B-Line POC without having possession of the underlying transactional documents or any reliable proxy for such documents. As a prospective matter, B-Line and other purchasers in the claims trading industry should understand that this Court views the filing, without review of originating documents, of a proof of claim by an assignee/purchaser to fall short of reasonable inquiry under Rule 9011 when the obligation has not been scheduled by the debtors and the purchase of the claim was not accompanied by reliable representations of claim validity. Because of the time and energy that B-Line's senior management devoted in response to this Court's show cause order, however, the Court does not view any further sanctions to be necessary in this case.

In re Wingerter, 376 B.R. 221, 238 (Bankr. N.D. Ohio 2007).

This left B-Line in the awkward position that it had dodged the bullet on sanctions in the particular case, but would be subject to sanctions in the future if it continued to file claims based on electronic records without viewing the originating documents. B-Line appealed to the Bankruptcy Appellate Panel which dismissed the appeal as moot. With one judge dissenting, the Sixth Circuit reversed both the Bankruptcy Appellate Panel and the Bankruptcy Court.

B-Line's Business Model

One thing which is interesting about this opinion is that the court of appeals went to great lengths to explain how a debt buyer, such as B-Line, does business. This business model forms the backdrop for the opinion.

B-Line is a business entity that specializes in purchasing "consumer bankruptcy debt." It purchases such debt from both original creditors and intermediaries. B-Line then files proofs of claim in the respective debtors' bankruptcy cases, or has existing proofs of claim transferred to it.

When B-Line purchases a claim, it does not acquire the supporting documentation. Instead, it requests several pieces of information from the claim's seller that B-Line stores in an electronic database. This information typically includes the debtor's name, address, contact information, and Social Security number, as well as the original account number, the original creditor's name, the original amount owed, the date the original account was opened, and the bankruptcy case information.

B-Line relies on the sellers from whom it purchases the claims to provide accurate, truthful information, and it negotiates a purchase agreement with these sellers to protect itself in case a seller misrepresents the validity of a claim. The purchase agreement requires, in particular, a warranty that each claim sold to B-Line "represents a legal, valid and binding obligation of the related Debtor." To keep down its costs, B-Line does not request copies of a claim's originating documents unless a debtor challenges the claim.

Opinion, p. 2.

Appeal Not Moot

The Bankruptcy Appellate Panel ruled that because no monetary sanctions were assessed that there was no live controversy to appeal. However, the Bankruptcy Court's order found that B-Line had violated Rule 9011 but that it did not view "any further sanctions to be necessary in this case." The Court of Appeals found that this was a non-monetary sanction which could be appealed just as an attorney could appeal a non-monetary sanction which affected his reputation. The majority concluded:

Compared to the somewhat vague injury to "reputation" suffered by sanctioned attorneys, which has the potential to harm their economic interests, B-Line's injury is more direct and certain because part of the company's core business practices has been declared sanctionable. B-Line's business is thus thrown into uncertainty, either forcing the company to comply with the bankruptcy courts more stringent (and more expensive) filing requirements or placing it at risk of being sanctioned in bankruptcy courts throughout the country. The court's sanctions order, therefore, has caused direct, financial injury to B-Line. Under these particular circumstances, B-Line's appeal of the court's sanctions order is not moot.

Opinion, p. 9.

Debt Buyer's Conduct Not Sanctionable

The Court of Appeals disagreed with the Bankruptcy Court's conclusion that B-Line did not conduct an adequate pre-filing inquiry. The Bankruptcy Court found that B-Line's inquiry was insufficient because it did not review original documents and because it did not obtain representations and warranties from the seller.

The Court of Appeals found the factual conclusion that B-Line did not obtain representations and warranties as to the validity of the claim to be clearly erroneous. It pointed to specific language in the transfer documents in which Covenant warranted that the accounts were eligible for purchase.

The Court ruled that reliance on Covenant's representations and warranties, along with the due diligence of both debt buyers was sufficient to constitute reasonable pre-filing inquiry. The Court of Appeals credited testimony that B-Line had purchased over 1,000 accounts from Covenant and that only two had been found to be invalid. It also discussed the due diligence which B-Line and Covenant conducted, which included review of electronic databases and the fact that the debtor had received several validation notices from debt collectors but had never disputed the debt.

Finally, the Court of Appeals found that failure to attach documentation to the proof of claim was not sanctionable in and of itself. The Court stated:

Admittedly, as the bankruptcy court stressed, B-Line's proof of claim was submitted on an incomplete Form 10. This deficiency violated Rule 3001(c) of the Federal Rules of Bankruptcy Procedure, which requires that a proof of claim based on writing include a copy of that writing. The ramifications for this type of violation are well-established, however, and do not result in sanctions. See Heath v. Am. Express Travel Related Servs. Co., Inc. (In re Heath), 331 B.R. 424, 433 (B.A.P. 9th Cir. 2005) (explaining that a failure to comply with Rule 3001 results in the creditor's proof of claim not being prima facie evidence of the claim's validity and amount). Not complying with Rule 3001 might be a factor in determining whether a Rule 9011(b) violation has occurred under different circumstances, but it is not a relevant factor in this case given the track record and warranties between Covenant and B-Line and the efforts that both businesses undertook to validate the Wingerter claim.

Opinion, p. 13.

What It Means

Wingerter is significant because it is an appellate level decision which examined the practices of a debt buyer and did not find them wanting. B-Line did a good job of explaining how its business model worked and how it provided adequate protections. While many credit card cases are decided based upon an insufficient record, B-Line provided an extensive record. This case is also very important because the Court of Appeals considered disruption of a creditor's business model to be a relevant factor. Rather than dictating that the creditor change its business practices, the Court looked at whether the creditor's existing practices could be reconciled with the obligations under Rule 9011. Finally, the court of appeals refused to get on the lack of documentation bandwagon, finding that failure to attach supporting documents deprives a claim of prima facie validity, but does not indicate bad conduct by the creditor.

This is a case where the system worked. A creditor filed a claim which probably was not valid. The debtor challenged it. When the creditor could not obtain verification, it withdrew the claim. However, you can't help but notice that an awful lot of ink was devoted to one claim for $431.57.

Debtor Gets Mortgage Claim Denied. Now What?

I am in New York for the Commercial Law League conference, so it is appropriate to blog about a case from the Southern District of New York. While the Southern District of New York is known for its multi-billion dollar cases, a recent case highlights a consumer issue faced by courts nationwide. In (Name Withheld by Request), Case No. 09-22261 (Bankr. S.D. N.Y. 9/29/09), the Debtor's lawyer became frustrated with inconsistent information received from a mortgage servicer and filed an objection to claim. The mortgage servicer's submissions raised more questions, leading to denial of the claim. However, the bigger question is what denial of the claim means for the debtor.

A Proof of Claim Walks Into A Bankruptcy

In this chapter 13 case, PHH Mortgage filed a proof of claim on the debtor’s mortgage. PHH stated that it was the secured creditor. The proof of claim attached the following documents:

(a) a one-page itemization;
(b) pages 9 through 16 of a document identified as New York--Single Family . . . Fannie Mae/Freddie Mac UNIFORM INSTRUMENT MERS;
(c) a 4 page Fixed/Adjustable Rate Rider; and
(d) 16 pages out of a 24 page mortgage showing MERS as mortgage holder and Mortgage World Bankers, Inc. as lender.

In response to an inquiry from the Debtor’s attorney, PHH stated that it was the servicer and that US Bank as trustee for a securitization trust was the actual creditor. This was the first problem. The person who filed the claim was not the holder of the claim, but the agent for an undislosed principal.

The Debtor objected to the claim, arguing that the servicer lacked standing to file the claim and that the proof of claim did not demonstrate a complete chain of title from the originator to the securitization trust.

The Creditor Digs Itself In Deeper

In response to the objection, PHH Mortgage filed an affirmation of counsel, an affidavit and a memorandum of law. These documents created more problems for the purported creditor. The affirmation of counsel attached an Assignment of Mortgage from MERS to US Bank. The document was executed by Tracy Johnson as Assistant Vice-President of MERS. (MERS is Mortgage Electronic Recording Service, which exists to serve as a nominee for mortgage holders and allow mortgages to be transferred without the necessity of a formal assignment. In other words, MERS acts as nominee of whoever holds the mortgage.). It also included a power of attorney authorizing PHH to act on behalf of US Bank. The second affidavit was signed by Tracy Johnson, this time as Assistant Vice-President of PHH.

The Memorandum of Law stated that:

The ownership of the Note and Mortgage were subsequently transferred to US Bank. An Assignment of Mortgage was not executed at the time of the transfer. PHH intends to submit documentation to show that US Bank now has the beneficial interest in the Note and Mortgage by virtue of the pre-existing transfer of this loan. In addition, the documentation will demonstrate that PHH is still authorized to file the Proof of Claim as the loan servicing agent for US Bank.

Memorandum, p. 3.

Unfortunately, PHH did not obtain the documentation. The following exchange took place at the hearing on the claims objection:

THE COURT: . . . what is the evidence of the transfer of the mortgage to US Bank?

MR. ______: All I have is PHH’s representations, Judge.

THE COURT: By the woman who also appears to be working for MERS and who isn’t here.

Transcript, pp. 15-16.

The Ruling

In the end, the Court expunged the claim. The Court’s findings are summarized as follows:

1) The documentation attached to the claim was incomplete and did not identify the holder of the note. Recall that the claim included pages 9 through 16 from one document and 16 pages out of 24 pages of another. The Court this selective attachment of partial documents to be suspicious, since the omitted pages would have identified the holder of the debt. As a result, the Court found that the claim was not entitled to prima facie validity.

2) The Court did not accept the affiant as a custodian of records, apparently due to the fact that the same person claimed to be custodian of records for two different entities and because the affidavit was contradictory.

3) The Note contained a stamp indicating that it was transferred from the securitization trust to the servicer, PHH. As the court stated, "To my knowledge of how these securitized mortgage nonte/trusts are structured, it doesn't make sense and it's not explained anywhere in the affdavit as to how it would make sense that it would be transferred to the servicer of the trust, the note would be transferred to the servicer of the trust. That's an odd thing for me to accept." Transcript, p. 24.

4) There was no evidence of assignment of the mortgage to the purported creditor other than the uncorroborated statement of the servicer.

As a result, the Court stated:

You know what, what I will say is this, the owner of the mortgage as far as I can see and the owner of the note has not filed a proof of claim in the case. That’s what I’ve found. Someone filed a proof of claim who’s not been able to establish that they hold the note and the mortgage.

Transcript, pp. 24-25.

What Does This Mean?

Consider what this means. There is someone somewhere who holds a mortgage upon the debtor’s home. That person is not the person who filed the claim. As a result, the true creditor is somewhere outside of the bankruptcy case. A secured creditor can choose to remain outside of the bankruptcy process, in which case the lien will ride through unaffected. The real creditor may appear at some point and ask to lift the stay. If not, at the end of the case, the debtor will receive a discharge from her personal liability but will still be subject to the lien. Of course, if the creditor is never able to prove up its paperwork, then at some point, the lien would be barred by limitations.

Ignoring What We Know To Be True

This leads to the second important point. Complete, consistent documentation matters. The claim was expunged based on incomplete documentation which failed to identify the holder of the note and the mortgage. The affidavits submitted compounded the problem because the same person claimed to be custodian of records for two different entities. The lawyer for PHH forthrightly acknowledged the problem when he stated:

I agree with you, Judge. I think that the reality is that . . . we’re ignoring what we know to be true because we can’t get our hands on the documents.

Transcript,pp. 16-17.

That is a powerful admission. If the creditor’s lawyer cannot get his hands on the documents, where are they? This case started with an originator who advanced actual money which allowed the debtor to purchase a home. For years prior to bankruptcy, the debtor made payments to a servicer. These payments were accepted. The debtor received statements of account. There was never a question raised as to whether the right person was being paid. It was only when the bankruptcy case was filed that questions were raised about proper paperwork.

This raises an interesting question. Was the right person being paid prior to bankruptcy? One possibility is that PHH’s lawyer is correct and that “we’re ignoring what we know to be true because we can’t get our hands on the documents.” The other possibility is that somewhere along the line, there has been a disconnect between the party entitled to payment and the party receiving payment. In this instance, the aggrieved party would be the true holder of the note and mortgage. If the phantom real holder doesn’t complain that its funds are being diverted, what is the debtor’s right to complain? If the debtor’s loan has been lost somewhere in a securitization black hole, does that mean that the debtor gets a free house? This case points out a difficult tension between acknowledging “what we know to be true” and putting the creditor to its proof.

Circuit Court Denies Claim For Lack of Supporting Documentation

The 10th Circuit has ruled that a trustee's objection to an assigned proof of claim should be sustained based on lack of supporting documentation even though the debtor scheduled a similar claim. In re Kirkland, No. 08-2017 (10th Cir. 7/14/09). The opinion can be found here.

In Kirkland, the debtor scheduled a debt in the amount of $5,004 for a credit card account ending in 2787. NextBank, N.A./B-Line, LLC filed a proof of claim in the amount of $5,328.19 for a credit card account ending in 2787, but did not include any supporting documentation. The chapter 7 trustee objected to the claim. Neither the trustee nor the creditor offered any evidence at the hearing, although the creditor asked the court to take judicial notice of the debtor's schedules. The Bankruptcy Court sustained the objection, finding that the creditor had failed to prove up its claim. In re Kirkland, 361 B.R. 199 (Bankr. D.N.M. 2007). The Bankruptcy Appellate Panel reversed. In re Kirkland, 379 B.R. 341(10th Cir. BAP 2007).

The 10th Circuit held that the Bankruptcy Court was correct in denying the claim. It stated:

The bankruptcy court appropriately determined that because B-Line bore the burden of proof for its claim and failed to meet its burden, its claim was disallowed. See In re Kirkland, 361 F.3d at 205. The plain language of the bankruptcy Code and its associated procedural rules support the court’s ruling. The Bankruptcy Code provides that “[a] creditor . . . may file a proof of claim.” 11 U.S.C. § 501(a). Because the code does not define “proof of claim,” we look to the Federal Rules of Bankruptcy Procedure. “A proof of claim is a written statement setting forth a creditor’s claim. . . . [It] shall conform substantially to the appropriate Official Form.” Fed. R. Bankr. P. 3001(a). The relevant form is Official Form 10, which requires a claimant to “[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.” Fed. R. Bankr. P. Official Form 10. Form 10 also instructs a claimant that “[i]f the documents are not available, please explain.” Id. When a proof of claim is executed and filed in accordance with the provisions of Rule 3001 (including Official Form 10), it “constitutes prima facie evidence of the validity and amount of the claim.” Fed. R. Bankr. P. 3001(f).

B-Line has failed to produce a single document to support its proof of claim. B-Line has also failed to explain its failure to provide supporting documentation. Although the bankruptcy court took judicial notice of the Debtor’s appended schedules of unsecured creditors, it correctly determined that the schedules were of no evidentiary value against the Trustee. Therefore, B-Line has failed to present “prima facie evidence of the validity and amount of the claim.” Id. In response to the Trustee’s objection, the bankruptcy court held an evidentiary hearing. Even then, B-Line produced no evidence in support of its claim and no explanation for its failure to do so. On this record, we conclude that the bankruptcy court appropriately disallowed B-Line’s claim. Had the bankruptcy court allowed B-Line’s claim despite B-Line’s failure to provide either supporting evidence or an explanation for its failure to provide supporting evidence, the burden would have improperly rested with the Trustee to disprove an unsubstantiated claim. (citation omitted).

Opinion, at 5-6.

The Court of Appeals' reasoning can be summarized as follows:

1. A properly filed proof of claim is entitled to prima facie validity.

2. A claim without supporting documentation is not a properly filed proof of claim and is not entitled to prima facie validity.

3. The trustee is not estopped by the debtor's schedules.

4. If a claim is not entitled to prima facie validity and is not supported by competent evidence, the claim must be denied without the necessity for the objecting party to offer any proof.

This is an issue which has been percolating through the lower courts for some time now. See On Gunslingers, Presumptions and Burdens of Proof and Assigned Credit Card Debt: A Problem of Paper, Electronic Images and Faith. However, this appears to be the first Circuit Court opinion to weigh in on the effect fo failure to attach documentation to a credit card claim. However, the ruling may be of primary benefit to trustees, since the trustee was not estopped by the debtor's schedules. If the objection had been brought by a debtor, the result might have been different.

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).