By Ryan C. Wood
Proofs of claims are how people or businesses prove in bankruptcy cases the amount they are owed to get paid money from the bankruptcy estate of the person or company that filed for bankruptcy protection. Federal Rule of Bankruptcy Procedure 3001 (Proof of Claim) provides the rules and procedure for filing a proof of claim. A claim can be secured, priority unsecured or a general unsecured claim. The type of claim determines what the creditor is paid, if anything, through the bankruptcy estate. Since proofs of claims are always filed in chapter 13 reorganization cases that is what this article will focus on.
FRBP 3001 Prima Facie Proof of Claim
How FRBP 3001 works is the rule lists the documentation or evidence necessary to prove the amount owed for different types of claims. If the claim includes the proper documentation then it is assumed that the filed claim is prima facie proof as to the validity of the claim. This means that the amount of the claim provided by the person or company owed in the filed claim is automatically allowed and deemed valid assuming the proper documentation is provided. This is part of the problem. The claim itself might not be allowable, there may not be proper documentation of the interest or additional fees included in the claim, the amount of the claim could be wrong and other potential documentation problems. See FRBP 3001(f): Evidentiary Effect. 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.
Okay, well, who determines that the documentation filed with the claim is in accordance with FRBP 3001? In the beginning when the claim is filed it is the creditor filing the claim. Creditors are not supposed to file claims if the claim is not properly supported by evidence. That is not how it is in the real world. In the real world creditors and third party collection agencies file invalid claims all the time by simple mistake or potentially to see if they can get away with it and be paid money they are not legally entitled to. So initially the creditor can file a claim and do whatever they want regarding the documentation. After the proof of claim is filed the burden shifts to the bankruptcy filer to object to the validity of the claim or documentation supporting the validity of the filed claim.
There is No Incentive For a Creditor to Not File an Invalid Claim
Unfortunately for bankruptcy lawyers the law in this area is far from favorable. The courts have more or less said that is the bankruptcy filer’s responsibility to object to invalid or fraudulent filed claims.For Example: In a Chapter 13 case the debtor owes American Express $7,500 and the statute of limitations under California law of four years has expired. Every debt or claim has a time limitation in which the debt must be enforced or the holder of the debt loses their right to enforce the debt. Not paying a credit card is a breach of contract with a statute of limitations of four years under California law. What happens is American Express sells the debt to a third party collector so AMEX can get some money out of the debt. In our example let us say the last payment was made by the bankruptcy filer on January 1, 2010, and the bankruptcy filer filed for Chapter 13 Bankruptcy on January 30, 2014, over four years after breach of the contract. So the statute of limitations has expired under California law and the debt is no longer legally enforceable. So what does the third party collection agency do? They file a proof of claim for the $7,500 even though the claim is no longer enforceable given the statute of limitations has expired. Now the bankruptcy filer must object to the claim wasting valuable time and money. In this example where the bankruptcy attorney should receive their attorneys’ fees and costs for successfully objecting to and disallowing the fraudulent claim. That is an uphill battle though in California anyway. See Cal. Civ. Code § 1717(a). The effect of section 1717 is to make reciprocal an otherwise unilateral contractual obligation to pay attorney’s fees. Santisas v. Goodin, 17 Cal. 4th 599, 610–11 (1998). Depending upon the circumstances just filing an objection to the claim and succeeding may not be enough to be award attorneys’ fees and costs under FRBP 3001(c)(2)(D)(i)or(ii).
What Must be Proven to be Awarded Attorneys’ Fees When Objecting to a Claim Under California Law?
The Ninth Circuit Court of Appeals recently discussed CCP 1717 and provided three conditions that must be met before CCP 1717 applies: (1) the action generating the fees must have been an action “on a contact” (2) the contract must provide that attorneys’ fees incurred to enforce it shall be awarded either to one of the parties or the prevailing party and (3) the party seeking fees must have prevailed in the underlying action. See In re Penrod, 802 F.3d 1084, 1087 (9th Cir. 2015). This is a lot of time and money wasted due to a creditor filing an invalid claim with no guarantee that the fees incurred will be paid by the creditor that filed the invalid claim. Then to try and get the creditor that filed the claim to pay for the attorneys’ fees and costs will cost even more time and money with no guarantee of recovery.
What Can be Changed to Help?
Procedurally FRBP 3001 provides for sanctions. The problem is the sanctions are not strong enough for prevent creditors from filing invalid proofs of claims or proofs of claims for unenforceable debts. It happens far too often. When a claim is objected to it should be for a dispute as to the calculation or the amount of the claim or if anything is owed to the creditor at all. Not that the claim meets the requirements to be a valid prima facie claim.
Rule 3001. Proof of Claim
(a) Form and Content. A proof of claim is a written statement setting forth a creditor’s claim. A proof of claim shall conform substantially to the appropriate Official Form.
(b) Who May Execute. A proof of claim shall be executed by the creditor or the creditor’s authorized agent except as provided in Rules 3004 and 3005.
(c) Supporting Information.
(1) Claim Based on a Writing. Except for a claim governed by paragraph (3) of this subdivision, when a claim, or an interest in property of the debtor securing the claim, is based on a writing, a copy of the writing shall be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim.
(2) Additional Requirements in an Individual Debtor Case; Sanctions for Failure to Comply. In a case in which the debtor is an individual:
(A) If, in addition to its principal amount, a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim.
(B) If a security interest is claimed in the debtor’s property, a statement of the amount necessary to cure any default as of the date of the petition shall be filed with the proof of claim.
(C) If a security interest is claimed in property that is the debtor’s principal residence, the attachment prescribed by the appropriate Official Form shall be filed with the proof of claim. If an escrow account has been established in connection with the claim, an escrow account statement prepared as of the date the petition was filed and in a form consistent with applicable nonbankruptcy law shall be filed with the attachment to the proof of claim.
(D) If the holder of a claim fails to provide any information required by this subdivision (c), the court may, after notice and hearing, take either or both of the following actions:
(i) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or
(ii) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.
(3) Claim Based on an Open-End or Revolving Consumer Credit Agreement.
(A) When a claim is based on an open-end or revolving consumer credit agreement — except one for which a security interest is claimed in the debtor’s real property — a statement shall be filed with the proof of claim, including all of the following information that applies to the account:
(i) the name of the entity from whom the creditor purchased the account;
(ii) the name of the entity to whom the debt was owed at the time of an account holder’s last transaction on the account;
(iii) the date of an account holder’s last transaction;
(iv) the date of the last payment on the account; and
(v) the date on which the account was charged to profit and loss.
(B) On written request by a party in interest, the holder of a claim based on an open-end or revolving consumer credit agreement shall, within 30 days after the request is sent, provide the requesting party a copy of the writing specified in paragraph (1) of this subdivision.
(d) Evidence of Perfection of Security Interest. If a security interest in property of the debtor is claimed, the proof of claim shall be accompanied by evidence that the security interest has been perfected.
(e) Transferred Claim.
(1) Transfer of Claim Other Than for Security Before Proof Filed. If a claim has been transferred other than for security before proof of the claim has been filed, the proof of claim may be filed only by the transferee or an indenture trustee.
(2) Transfer of Claim Other than for Security after Proof Filed. If a claim other than one based on a publicly traded note, bond, or debenture has been transferred other than for security after the proof of claim has been filed, evidence of the transfer shall be filed by the transferee. The clerk shall immediately notify the alleged transferor by mail of the filing of the evidence of transfer and that objection thereto, if any, must be filed within 21 days of the mailing of the notice or within any additional time allowed by the court. If the alleged transferor files a timely objection and the court finds, after notice and a hearing, that the claim has been transferred other than for security, it shall enter an order substituting the transferee for the transferor. If a timely objection is not filed by the alleged transferor, the transferee shall be substituted for the transferor.
(3) Transfer of Claim for Security Before Proof Filed. If a claim other than one based on a publicly traded note, bond, or debenture has been transferred for security before proof of the claim has been filed, the transferor or transferee or both may file a proof of claim for the full amount. The proof shall be supported by a statement setting forth the terms of the transfer. If either the transferor or the transferee files a proof of claim, the clerk shall immediately notify the other by mail of the right to join in the filed claim. If both transferor and transferee file proofs of the same claim, the proofs shall be consolidated. If the transferor or transferee does not file an agreement regarding its relative rights respecting voting of the claim, payment of dividends thereon, or participation in the administration of the estate, on motion by a party in interest and after notice and a hearing, the court shall enter such orders respecting these matters as may be appropriate.
(4) Transfer of Claim for Security after Proof Filed. If a claim other than one based on a publicly traded note, bond, or debenture has been transferred for security after the proof of claim has been filed, evidence of the terms of the transfer shall be filed by the transferee. The clerk shall immediately notify the alleged transferor by mail of the filing of the evidence of transfer and that objection thereto, if any, must be filed within 21 days of the mailing of the notice or within any additional time allowed by the court. If a timely objection is filed by the alleged transferor, the court, after notice and a hearing, shall determine whether the claim has been transferred for security. If the transferor or transferee does not file an agreement regarding its relative rights respecting voting of the claim, payment of dividends thereon, or participation in the administration of the estate, on motion by a party in interest and after notice and a hearing, the court shall enter such orders respecting these matters as may be appropriate.
(5) Service of Objection or Motion; Notice of Hearing. A copy of an objection filed pursuant to paragraph (2) or (4) or a motion filed pursuant to paragraph (3) or (4) of this subdivision together with a notice of a hearing shall be mailed or otherwise delivered to the transferor or transferee, whichever is appropriate, at least 30 days prior to the hearing.
(f) Evidentiary Effect. 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.
(g) To the extent not inconsistent with the United States Warehouse Act or applicable State law, a warehouse receipt, scale ticket, or similar document of the type routinely issued as evidence of title by a grain storage facility, as defined in section 557 of title 11, shall constitute prima facie evidence of the validity and amount of a claim of ownership of a quantity of grain.