Barbara M. Barron
Stephen W. Sather
Barron & Newburger, P.C.
7320 N. Mopac Expwy., Suite 400
Austin, TX 78701
The goal of filing a proof of claim is to collect money. However, errors in submitting claims can prove costly. Six different problems to avoid are illustrated below.
Failure to Attach Supporting Documentation
Cases Prior to 2011
B-Line, LLC v. Wingerter (In re Wingerter), 594 F.3d 931 (6th Cir. 2010)
Creditor filed a proof of claim without supporting documentation. The creditor withdrew the claim after the debtor objected. The Court then issued an order to show cause directing the creditor to explain its business practices and the handling of this specific claim. The Court found that B-Line violated Fed.R.Bankr.P. 9011 because it did not make a reasonable pre-filing inquiry that the claim was valid and supported by the evidence. However, because the creditor cooperated in response to the order to show cause, the Court did not assess sanctions. On appeal, the Court found that the controversy was not moot even though no monetary sanctions were assessed. The Court found that the creditor could appeal a non-monetary sanction to avoid injury to its reputation. The Court reversed the bankruptcy court’s sanctions order. It found that because the creditor obtained warranties from the entity from whom it purchased the debt as to its validity and had a track record of purchasing claims from this buyer that were not objected to 99.5% of the time, the creditor had done a reasonable pre-filing inquiry.
In re DePugh, 409 B.R. 84 (Bankr.S.D. Tex. 2009) and In re Gilbreath, 395 B.R. 356 (Bankr. S.D. Tex. 2008).
In both of these cases, a creditor filed a proof of claim but did not include any supporting documentation. After the debtor objected, the creditor filed an amended claim containing the supporting documentation. The Court chose to apply to the proofs of claim Fed.R.Bankr. P. 7015, which requires that a party ask for leave to amend a pleading. In one case, the creditor failed to request permission to amend and in the second case, the request to amend was denied. The Court ruled that in order for a claim to be entitled to prima facie validity, it must be filed with supporting documentation. If the claim was not entitled to prima facie validity, all the Debtor had to do was to object to require that the creditor meet its burden of proof to establish the claim’s validity. The creditor did not offer any evidence at the hearing. In its conclusion in the DePugh case, the Court stated:
The Court previously used the term “willful ignorance” to describe the position taken by LVNV and its counsel of record, Stromberg, in this case, but the term is a generous assessment of this attorney and his client’s outlook with respect to filing proofs of claim. A more apt description of Stromberg and LVNV’s actions in this case is “deliberate malfeasance.” . . . (I)t appears that Stromberg and his client have a standing policy which involves willfully violating Bankruptcy Rule 3001 because it is cost-effective to do so.
DePugh, supra, at 110-11.
Ruth v. LVNV Funding, LLC (In re Ruth), 473 B.R. 152 (Bankr. S.D. Tex. 2012).
Compare the Court’s holding in Ruth to its opinion in DePugh. Although the creditor in Ruth failed to attach supporting documentation, the debtor did not object to the claim until sixteen months after the deadline established by the local rules. The Court found that it could reconsider the allowance of the claim but that the debtors had failed to establish cause for their long delay. The Court also denied a request for sanctions for filing deficient claims and for vexatious litigation. Even though the Court had previously castigated the creditor in the DePugh case above and the creditor in Ruth had not changed its proof of claim filing practices, the debtors could not recover based on harm to third parties.
Cases After 2011
The cases discussed above have been partially superseded by the amendments to Fed.R.Bankr.P. 3001. Rule 3001(c)(2)(A) requires that any interest, fees, expenses or charges included in a claim be itemized.
Rule 3001(c)(2)(D) was also amended to allow penalties for failing to include supporting documentation when required. If the holder of a claim fails to provide the required information, the court may either “preclude the holder from presenting the omitted information in any form as evidence . . . unless the court finds that the failure was substantially justified or harmless” or “award other appropriate relief, including reasonable expenses and attorneys’ fees caused by the failure.” Based on this rule, some debtor’s lawyers routinely ask for attorneys’ fees incurred in objecting to an insufficient proof of claim.
Under new Rule 3001(c)(3), if a claim is based on a revolving or open-ended credit agreement, such as a credit card account, the creditor may file a summary containing the following information in lieu of attaching the account documents: (a) the name of the entity from which the creditor purchased the account; (b) the name of the entity to whom the debt was owed at the time of the account holder’s last transaction on the account; (c) the date of the account holder’s last transaction; (d) the date of the last payment on the account; and (e) the date on which the account was charged to profit and loss. However, the rule does require that the creditor, on written request, must provide the supporting documentation within thirty days. This rule does not apply to a closed-end debt, such as a payday loan or a medical bill.
In re Jimenez, 487 B.R. 543 (Bankr. D. Col. 2013) is a good example of application of the new rules. A bank filed a proof of claim which disclosed late fees of $2,231.93 and attorneys’ fees of $12,095.67. In fact, the amounts described as attorneys’ fees consisted of attorneys’ fees of $7,868.90, an appraisal in the amount of $970.00 and other expenses such as public trustee fees, title fees, filing fees, fax costs and photocopy costs in the amount of $3,208.67. The debtor objected to the claim and sought to preclude the bank from offering evidence as to the costs which were not properly itemized. Prior to the hearing, the bank provided debtor’s counsel with invoices for its fees. The court allowed the attorneys’ fees as reasonable. However, it refused to consider evidence as to the appraisal fee and miscellaneous costs for the reason that they were not itemized as required by Fed.R.Bankr.P. 3001(c)(2)(A). The Court stated that failure to separately list the various charges deprived the debtor of valuable information in deciding whether to object. The Court also ordered the bank to pay the debtor’s attorneys’ fees incurred in objecting to the claim.
Failure to Redact Personally Identifiable Information
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 Fed. R. Bankr. P. 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 to pay sanctions of $50,000 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.
In re Lunden, 524 B.R. 410 (Bankr. D. Mass. 2015)
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.
Cordier v. Plains Commerce Bank (In re Cordier), 2009 Bankr. LEXIS 888 (Bankr. D. Ct. 2009)
The two cases above can be contrasted with this case 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; (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.
Submitting an Inaccurate Claim
Ameriquest Mortg. Co. v. Nosek (In re Nosek), 609 F.3d 6 (1st Cir. 2010)
This case 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 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.
Submitting a Time-Barred Claim
Numerous recent cases have dealt with whether it is a violation of the Fair Debt Collection Practices Act to file suit on a debt that is beyond the applicable statute of limitations. These cases follow a similar fact pattern. A debtor files a chapter 13 petition. A creditor then files a proof of claim on a debt on which enforceability is very restricted because it arose after the applicable statute of limitations had run. The debtor then sues for violation of the FDCPA.
In Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), the Eleventh Circuit Court of Appeals ruled that filing a time-barred proof of claim was similar to filing suit on a time-barred claim and could violate the Fair Debt Collection Practices Act. The Eleventh Circuit reaffirmed this ruling in Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016).
Meanwhile, the Fourth, Seventh and Eighth Circuits have each rejected this theory. Dubios v. Atlas Acquisitions, LLC (In re Dubios), 2016 U.S. App. LEXIS 15682 (4th Cir. 2016); Owens v. LVNV Funding, LLC, 2016 U.S. App. LEXIS 14706 (7th Cir. 2016); Nelson v. Midland Credit Management, LLC, 828 F.3d 749 (8th Cir. 2016). The issue is pending before the Fifth Circuit Court of Appeals in Robinson v. JH Portfolio Debt Equities, LLC, 2016 Bankr. LEXIS 2742 (Bankr. W.D. La. 2016), where the Bankruptcy Court dismissed a suit based on the Crawford theory and then certified the case for direct appeal to the Fifth Circuit.
Petitions for writ of certiorari have been filed before the Supreme Court in both the Johnson v. Midland Funding, LLC and Owens v. LVNV Funding, LLC cases and are currently pending
Even if the Supreme Court rules that filing a time-barred proof of claim does not violate the FDCPA, filing claims on debts that are unenforceable should be considered very carefully. Even if liability under the FDCPA is off the table, creditors that file large numbers of out of statute claims could find themselves subject to an order to show cause and sanctions.
Submitting a Claim on a Discharged Debt
Green Point Credit, LLC v. McLean (In re McLean), 794 F.3d 1313 (11th Cir. 2015)
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.
Submitting and Continuing to Pursue a False Claim
Groissman v. Wehrle (In re Royal Manor Mangagement), 2016 U.S. App. LEXIS 11018 (6th Cir. 2016)
Gertrude Gordon submitted a proof of claim on a pro se basis. 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.
Flatau v. Sherman Financial Group, LLC, 2015 U.S. Dist. LEXIS 166706 (M.D. Ga. 2015)
It is not sufficient to say that a claim has no basis when it has been reduced to judgment in state court and that judgment has not been set aside. Arrow Financial Services sued Calvin Davis on a credit card debt allegedly acquired from Wells Fargo Bank. Davis claimed that he did not owe a credit card debt to Wells Fargo. Arrow served Davis at an address where he had lived several years previously but was not his address at the time. The process server swore that he personally served Davis at the address where he did not live. The state court entered judgment against Davis. Arrow then transferred the debt to LVNV. When LVNV served a writ of garnishment, Davis disputed the validity of the judgment. However, rather than moving to set aside the judgment, he filed bankruptcy. LVNV assigned the debt to Sherman Acquisition who assigned it to Atlas Acquisitions. Atlas filed a proof of claim in the bankruptcy case. After the bankruptcy case was over, Davis sued all of the parties in the chain of title, including Atlas which had filed the proof of claim. The District Court ruled that under the Rooker-Feldman doctrine, Davis could not file suit in federal court on a theory which required challenging the validity of a state court judgment. Thus, although it certainly appeared that Davis was sued on a debt he did not owe and was not served with process, he lacked a remedy because he did not seek to have the judgment set aside.