Tag Archives: proof of claim

August 2, 2016

Eleventh Circuit Reaffirms its Prior Ruling that Debt Collectors who File Time-Barred Proofs of Claim are Subject to Liability Under the Fair Debt Collections Practices Act, and Further Concludes its Holding does not Place the FDCPA in Conflict with the B

In 2014 the Eleventh Circuit held that a debt collector violates the Fair Debt Collections Practices Act when it filed a proof of claim in a chapter 13 case on a debt that it knows to be time-barred. Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Circ. 2014). The United States District Court for the Southern District of Alabama subsequently held the Crawford decision as placing the FDCPA and the Bankruptcy Code in irreconcilable conflict. On appeal, the Eleventh Circuit found no such conflict, stating “Although the code certainly allows all creditors to file proofs of claim in bankruptcy cases, the Code does not at the same time protect those creditors from all liability,” and that a particular group of creditors—debt collectors—may be liable for damages for violating the FDCPA if they file claims in chapter 13 cases they know to be time-barred. Johnson v. Midland Funding, LLC, 2016 WL 2996372 (11th Cir. 2016).

The court reaffirmed its prior conclusion by looking to the language of the FDCPA, which prohibits a “false, deceptive or misleading representation,” 15. U.S.C. § 1692e, or “unfair or conconscionable means, 15 U.S.C. § 1692f, to collect a debt. Finding these terms to be ambiguous, the court adopted a “’least-sophisticated consumer’ standard” to determine whether a debt collector’s conduct is deceptive under the FDCPA. The court concluded in Crawford that filing a time-barred proof of claim is akin to filing a time-barred lawsuit, something which is prohibited by the FDCPA. As a result, in Crawford, the court held knowingly filing a time-barred proof of claim constituted misleading conduct under the FDCPA.

However, the court agreed it left unanswered in Crawford an additional question: whether the Bankruptcy Code preempts the FDCPA when creditors misbehave in bankruptcy. This specific question was not raised in Crawford but was raised in Johnson by the creditor, who argued the Bankruptcy Code, having been enacted subsequent to the FDCPA, preempted it as to claims for violation. The Eleventh Circuit disagreed and decided the two statutes could be read in harmony.

The court commenced its analysis by noting the Supreme Court interpreted the Bankruptcy Code’s definition of a “claim” in § 101(5)(A) as creating an entitlement for creditors to file a proof of claim where a right to payment exists. Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007). The court further noted that a “right to payment” under the Bankruptcy Code “is nothing more or less than an enforceable obligation.” Penn. Dept. of Pub. Welfare v. Davenport, 495 U.S. 552 (1990). The court continued its analysis by stating a the Bankruptcy Code contemplates that creditors may file unenforceable claims. In re McLean, 794 F.3d 1313 (11TH Cir. 2015). Further, the court noted that “having a claim is not the same as being entitled to a remedy,” and further noted that applicable state law provides the running of the statute of limitations does not extinguish a cause of action but rather makes the remedy unavailable. Consequently, the average creditor filing a time-barred claim will likely face a disallowance of its claim and will not receive a distribution from the bankruptcy estate.

However, the court noted that debt collectors are not the average creditor, as the FDCPA imposes requirements on debt collectors which don’t apply to other creditors. The FDCPA prohibits the use of unfair or unconscionable means to collect or attempt to collect a debt, as well as the use of any false, deceptive or misleading representation or means in connection with the collection of any debt. A debt collector who violates these proscriptions faces civil liability to the debtor. Debt collectors are a narrow subset of creditors who might file proofs of claim in chapter 13 cases. Contrary to the conclusion of the district court, the circuit court found no irreconcilable conflict between the Bankruptcy Code, which permits creditors to file time-barred proofs of claim, and the FDCPA which prohibits debt collectors from engaging in such conduct. The Eleventh Circuit reached this conclusion by noting first that repeals by implication are not favored and will not be presumed unless the intention of the legislature to repeal is clear and manifest. Nat’l Ass’n of Home Builders v. Defenders of Wildlife, 551 U.S. 644 (2007). The court noted the U.S. Supreme Court’s conclusion “[W]hen two statutes are capable of coextistence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.” J.E.M. Ag Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., 534 U.S. 124 (2001). The court stated that, for an irreconcilable conflict to exist, there must usually be some sort of “positive repugnancy” between the statutes, not merely “different requirements and protections.” Statutory repeal cannot be inferred unless the later statute expressly contradicts the earlier statute or an inference of repeal is “absolutely necessary” in order for the latter statute to have “any meaning at all.”

The Eleventh Circuit concluded the Bankruptcy Code and the FDCPA can be construed in a way that allows both to exist. A conclusion that the Bankruptcy Code repealed the FDCPA was not “absolutely necessary” in order for § 501 of the Bankruptcy Code to have “any meaning at all.” The Bankruptcy Code allows all creditors to file claims, with the overlay from the FDCPA that a certain subgroup of creditors—debt collectors—may face liability by filing a time-barred proof of claim if they do so knowing it is time-barred. The court concluded the goals and purposes of both statutes can still be served with this construction. The purpose of the FDCPA is to punish debt collectors who engage in misleading or unconscionable conduct, not to punish debt collectors who file proofs of claim in chapter 13 cases. As a result, the court determined that the statutes were not in irreconcilable conflict and that the Bankruptcy Code did not effect a repeal of the FDCPA.

March 15, 2016

Secured Creditors Beware: Ninth Circuit Holds a Chapter 13 Debtor may Avoid Liens Even if not Entitled to a Discharge

Congress enacted § 1328(f) of the Bankruptcy Code when its passed BAPCPA. This section prohibits the granting of a chapter 13 discharge if the debtor received a chapter 7 discharge within four years prior to the commencement of his chapter 13 case. The Ninth Circuit in In the Matter of Blendheim, 803 F.3d 477 (9th Cir. 2015) held a chapter 20 debtor may in his chapter 13 case avoid a lien under § 506(d) even if § 1328(f) precludes him from receiving a discharge.

The creditor in Blendheim was HSBC Bank, which held a deed of trust lien on the debtors’ home. The debtors filed a chapter 7 case and received a discharge. Soon thereafter, they filed a chapter 13 case, mainly to restructure debts relating to their primary residence. HSBC timely filed a secured proof of claim based on its deed of trust against the debtors’ residence. The debtors objected to the claim, substantively objecting on the grounds that the note which formed the basis for the claim bore a forged signature. For some unknown reason, HSBC never responded to the debtors’ objection, and the bankruptcy court entered an order disallowing HSBC’s secured claim. In fact, after receiving notice that its secured claim had been disallowed, HSBC withdrew its proof of claim and requested the court to no longer send it electronic notifications in the case.

Thereafter, the debtors filed an adversary proceeding against HSBC seeking to void HSBC’s lien under § 506(d) which provides “to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” The debtors contended they were entitled to avoid the lien because the plain language of the statute says a lien securing a debt which is not an allowed secured claim is void. HSBC defended, asserting the debtors were not entitled to avoid the bank’s lien because the debtors were precluded from receiving a discharge by § 1328(f), which provides that a debtor may not receive chapter 13 discharge if he has received a chapter 7 discharge within four years prior to the commencement of his chapter 13 case.

The Ninth Circuit agreed the debtors could avoid HSBC’s liens even though they could not receive a chapter 13 discharge. First, the court concluded the plain language of § 506(d) entitled the debtors to avoid HSBC’s lien. Because this section provides that a lien is void if it secured a debt which is not an allowed secured claim, the court concluded that Congress’ intent was manifest, and held the purpose of § 506(d) was to nullify a creditor’s legal rights in a debtor’s property if the creditor’s claim is disallowed. The court stated its belief that the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992) confirmed its interpretation. In Dewsnup, the debtors argued that the creditor’s claim was not an allowed secured claim because it was undersecured, and therefore they could avoid it under § 506(d). The Supreme Court rejected this argument, holding “§ 506(d) did not void the lien on his property because the creditor’s claim has been fully ‘allowed.’”

HSBC argued that such a conclusion would be inconsistent with decisions from the Eighth,[1] Fourth[2] and Seventh[3] Circuits, all of which held that avoiding liens for claims which were disallowed because they were untimely filed violated the long-standing principle that valid liens pass through bankruptcy unaffected. Viewing these decisions as holding that filing an untimely claim is akin to not filing a claim at all, the court determined the reasoning of these cases to be inapplicable since HSBC’s claim was disallowed on the merits. The court also noted that the Eleventh[4] and Fourth[5] Circuits have held that a chapter 13 debtor who cannot receive a discharge because of § 1328(f) may still void liens under § 506(d).

Finally, the court rejected HSBC’s argument that allowing avoidance of its lien in these circumstances would effectively grant the debtors on a de facto basis, the discharge to which they were not entitled. The court stated this argument ignored the difference between in personam and in rem liability. By enacting § 1328(f), Congress affected only the debtor’s in personam liability: “We take Congress at its word when it said in § 1328(f) that Chapter 20 debtors are ineligible for a discharge, and only a discharge.” The court further noted there is no language in the Bankruptcy Code which prevents Chapter 20 debtors from receiving the other benefits chapter 13 has to offer, and had Congress intended to prevent these debtors from avoiding liens, it would have included specific language when it enacted BAPCPA.

 

[1] In re Shelton, 735 F.3d 747 (8th Cir. 2013)

[2] In re Hamlett, 322 F.3d 342 (4th Cir. 2003)

[3] In re Tarnow, 749 F.2d 464 (7th Cir. 1984)

[4] In re Scantling, 754 F.3d 1323 (11th Cir. 2014)

[5] In re Davis, 716 F.3d 331 (4th Cir. 2013)

May 23, 2012

District of Colorado Holds that Lack of Documentation Not Fatal to Proof of Claim

In 2011, Federal Rule of Bankruptcy Procedure 3001(c) was amended to prescribe with greater specificity the supporting information required to accompany certain proofs of claim and, in cases in which the debtor is an individual, the consequences for failing to provide the required information.  Rule 3001(c)(1) states that “[w]hen a claim…is based on a writing, the original or a duplicate 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.”  Rule 3001(c)(2) provides the specific information that is required in a proof of claim and penalties a court may impose, in an individual case, for a creditor’s failure to comply with the documentation requirements.  Notably, Rule 3001(c)(2)(D) allows a court to take either or both of the following actions if the holder of a claim fails to comply with the documentation requirements—(i) the court may preclude the holder from presenting the omitted information as evidence in any contested matter or adversary proceeding, unless the court determines that the failure was justified or is harmless; or (ii) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure. 

The District of Colorado recently had an opportunity to interpret and apply amended Rule 3001(c) in In re Reynolds, 2012 Bankr. LEXIS 1506 (Bankr. D. Colo. Apr. 9, 2012).  In In re Reynolds, the Debtors requested the court disallow the proofs of claim (the “Claims”) of several credit card companies (the “Creditors”) who failed to attach the written credit card agreements upon which the Claims were based.  The only documentation attached to the Claims were account summaries.  While the court found that none of the Claims complied with Rule 3001(c)(1), it nevertheless allowed the Claims even though the Creditors failed to object to the Debtors’ motions to disallow. 

The Debtors relied on Caplan v. B-Line, LLC (In re Kirkland), 572 F.3d 838 (10th Cir. 2009) to support their argument that the Claims may be disallowed solely on a creditors failure to attach the requisite documentation.   However, because of Rule 3001(c)’s amendment, the court found the Debtors’ reliance to be misplaced as In re Kirkland was decided under former Rule 3001(c).  Accordingly, the court chose to rely on the express language of revised Rule 3001 to the extent that In re Kirkland conflicted with the language added since In re Kirkland was decided.

The court concluded that Rule 3001(c)(2)(D) does not include disallowance of a claim as a permissible remedy for insufficient documentation.  In reaching this conclusion, the court found that the phrase “other appropriate relief” as used in Rule 3001(c)(2)(D)(ii) must be construed to allow a remedy of the same character as the specifically enumerated example of “reasonable expenses and attorney’s fees caused by the failure” and that claim disallowance falls “far outside the ambit of any permissible interpretation of the scope of a court’s discretion.”  Moreover, the court noted that the Advisory Committee Notes to Rule 3001(c)(2)(D) expressly provides that the failure to provide the required information contained in Rule 3001(c)(2), “does not itself constitute a ground for disallowance of a claim.”   Accordingly, the court held that the revised Rule 3001 makes clear that a creditor who fails to fully comply with Rule 3001(c)’s documentation requirements, “primarily faces the evidentiary sanction of being precluded from introducing its documents at a subsequent hearing on a substantive objection to its proof of claim under § 502(b)” and a court is not permitted to disallow the claim solely based on a creditor’s failure to attach the appropriate documentation.  Regardless, of the scope of sanctions contained in Rule 3001(c)(2)(D), the court nevertheless would have allowed the Claims because it found that the debtor was judicially estopped from denying liability on the Claims as the Debtors listed them in their bankruptcy schedules.  Therefore, the court denied the Debtors’ motions and allowed the Claims.