Michael A. Fagone, United States Bankruptcy Judge.
Resurgent Capital Services, L.P. and the United States Trustee have locked horns in a pitched battle over Resurgent's claim filing practices in bankruptcy cases across the country. In this adversary proceeding, the United States Trustee takes particular aim at Resurgent's practice of affixing an employee's signature to a proof of claim and then filing the proof of claim, all without prior review of the proof of claim by that employee. By the United States Trustee's lights, this practice justifies the imposition of sanctions under Fed. R. Bankr. P. 9011 and otherwise. Resurgent concedes that this practice — which has since been discontinued — was not a best practice. It maintains, however, that the practice did not violate the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure and does not warrant the imposition of sanctions.
While aspects of Resurgent's practices could — and should — have been designed to produce more accurate proofs of claim, its practices were not so egregiously deficient to warrant the imposition of sanctions. On this summary judgment record, the Court is unwilling to declare that Resurgent should be sanctioned for the proof of claim it filed in the Cushmans' chapter 13 case.
Resurgent commenced this adversary proceeding against William K. Harrington, United States Trustee for Region 1 (the "UST"), by filing a complaint for declaratory relief under 28 U.S.C. § 2201. Specifically, Resurgent requests a declaratory judgment that (a) it is neither necessary nor appropriate to impose sanctions under Rule 9011, 11 U.S.C. § 105, or any other source of authority on account of the proof of claim filed by Resurgent in the Cushmans' chapter 13 case (the "Cushman POC"); and (b) to the extent that the amounts sought in the Cushman POC are factually accurate, Resurgent need not amend that proof of claim.
The UST answered Resurgent's complaint, asserted a counterclaim, and filed a third-party complaint against Resurgent's affiliate, LVNV Funding, LLC. Through the counterclaim and third-party complaint, the UST asks the Court to use Rule 9011, section 105(a), or its inherent authority, to (a) impose monetary sanctions against Resurgent and LVNV; (b) suspend Resurgent's CM/ECF privileges and impose a monitoring requirement on Resurgent's proof of claim filing in this District for one year; (c) strike the Cushman POC; and (d) enjoin Resurgent and LVNV from filing "Robo-signed" proofs of claim in this District.
After a pretrial conference, the Court issued an order making D. Me. Civ. R. 56(h) applicable to this proceeding. The parties then sought leave to file cross-motions for summary judgment and proposed a briefing schedule. The Court granted the parties' request and adopted their schedule. Resurgent and the UST then filed cross-motions for summary judgment on Resurgent's complaint. Although the cross-motions do not address the UST's counterclaim or his third-party complaint, the summary judgment record contains a significant amount of evidence
The evaluation of a summary judgment record is governed by D. Me. Civ. R. 56, which defines the evidence the Court may consider in determining whether genuine issues of material fact exist. See D. Me. LBR 7056-1 (making most of D. Me. Civ. R. 56 applicable in adversary proceedings);
The summary judgment record in this proceeding consists of several components. First, the parties filed a stipulation of facts containing 106 paragraphs ("Stip."). Second, the Court considered the allegations in the complaint that were admitted by the UST. Next, the Court took judicial notice of certain facts reflected on the docket in the Cushmans' chapter 13 case. Finally, the Court considered the statements of fact submitted by the parties under D. Me. Civ. R. 56. Resurgent submitted 84 statements of material fact ("SMF"). The UST admitted 32 of these facts, denied 15, and qualified his response to the remaining 37; he also submitted 93 counterstatements of material fact ("CSMF"). Resurgent admitted 51 of these facts, denied 9, and qualified its response to the other 33.
Before recounting the facts, some explanation of the Court's approach to the summary judgment record is warranted. Many of the facts — including all of the genuinely disputed facts and many of the undisputed facts — have been omitted from the recitation below because they are not material.
Finally, the Court expended significant efforts evaluating the facts that were qualified under D. Me. Civ. R. 56(c) and (d). The Court considered whether a qualification disputed the evidentiary support for the corresponding statement or, instead,
Laurence and Carlene Cushman started their chapter 13 case in August 2014. They scheduled Credit One Bank as the holder of a general unsecured claim in the amount of $540.00 arising out of Mrs. Cushman's credit card account ending in 0642. Shortly after the chapter 13 filing, Resurgent filed the proof of claim at the nucleus of this dispute. There were no objections to the claim, and it was expressly allowed. The Cushmans' plan was confirmed, and the chapter 13 trustee made a 100% distribution to the holders of allowed unsecured claims, including a distribution of $575.49 to Resurgent. In December 2017, the Cushmans received a discharge.
Resurgent filed the Cushman POC on behalf of LVNV, Stip. ¶ 3, using the CM/ ECF credentials assigned to Resurgent, SMF ¶ 51. The Cushman POC identified LVNV as the creditor and indicated that notices should be sent to Resurgent. It listed $575.49 as the amount of the claim and indicated that the claim arose out of a credit card. The proof of claim stated that LVNV identified the debtor with an account number ending in 0642, and that the debtor may have scheduled the account as held by Credit One Bank, N.A.
The account detail attached to the Cushman POC included Ms. Cushman's name, address, and redacted social security number; the name of the trustee when the proof of claim was filed; and the case number and chapter. The account detail identified the "Current Creditor" as "LVNV Funding, LLC its successors and assigns as assignee of FNBM, LLC"; indicated that LVNV purchased the debt from FNBM; and identified Credit One Bank, N.A. as an alternative name for the creditor and as the creditor at the time of the last transaction. The account detail provided the last four digits of the account number associated with the claim (0642); indicated that the debt was charged off on September 8, 2014; and stated that the last payment date and last transaction date were April 13, 2014. In addition, the account detail listed a balance of $575.49 as of the petition date, consisting entirely of principal with no interest or fees. This information about the balance and character of the debt was flagged with asterisks and a notation that the information "was obtained from the data files received from the assignor and other information such as Bankruptcy Court records."
Resurgent acquired information about the debt underlying the Cushman POC through the data string in the sale file that it received when it agreed to service the debt. SMF ¶¶ 4, 57, 60. Resurgent typically relies on the information provided in such files, and it did so here. SMF ¶ 58. The data string and the related credit card billing statements showed a principal balance of $396.46, CSMF ¶ 82, described the debt as being composed partly of interest, SMF ¶¶ 59-60, and detailed a total prepetition debt that matches the $575.49 on the proof of claim, SMF ¶¶ 59, 63. The data string reported a last payment date of April 13, 2014, but did not report a last
When the Cushman POC was filed in 2014, SMF ¶ 3, the applicable form was Official Form 10, SMF ¶ 42. Part 8 of that form, entitled "Signature," instructed the person signing the form to identify as the creditor, the creditor's authorized agent, or someone else. Official Form 10 included the following attestation above the signature line: "I declare under penalty of perjury that the information provided in this claim is true and correct to the best of my knowledge, information, and reasonable belief." Next to the signature line, Official Form 10 provided a space for the signer's printed name, title, and company.
Like many other Official Forms, Official Form 10 provided instructions to the user. The instructions did not purport to follow the law with exactitude; instead, they were "general explanations of the law." Instruction No. 8, relating to the date and signature, provided:
The Cushman POC was prepared on Official Form 10, CSMF ¶ 86, and bears the signature of Susan Gaines, Stip. ¶ 53. Above Ms. Gaines's signature, a box is checked indicating, "I am the creditor's authorized agent." Above Ms. Gaines's signature, the Cushman POC states, "I declare under penalty of perjury that the information provided in this claim is true and correct to the best of my knowledge, information, and reasonable belief." CSMF ¶ 75. Next to her signature, Ms. Gaines's name appears in print along with her title (Claims Processor) and company name (Resurgent Capital Services).
When the Cushman POC was filed, Ms. Gaines had no knowledge, information, or belief about any debts owed by the Cushmans, including any debts that they may have owed to Resurgent or LVNV. CSMF ¶¶ 21-22. Ms. Gaines did not review the Cushman POC before it was filed. Stip. ¶ 54. Instead, the information included in the proof of claim was reviewed and approved by Nancy Gosnell, Stip. ¶ 55, a
Resurgent services consumer debt portfolios for affiliated companies like LVNV, Stip. ¶¶ 1-2, and it regularly files proofs of claim in bankruptcy cases, Stip. ¶ 8. In so doing, Resurgent relies on data provided by others. Stip. ¶ 13. When LVNV acquires an account that Resurgent will service, the sale file from that purchase is loaded into Resurgent's Account Master Computer System ("AMCS"). Stip. ¶¶ 10-11. The sale file contains a string of data about the underlying debt, Stip. ¶ 12, such as the debtor's name, address, account number, social security number, debt origination date, last payment amount and date, charge-off balance and date, filing date balance, principal balance, and fee and interest balance, CSMF ¶ 28. The data string does not include a field for the date of the last transaction.
Resurgent takes several measures to ensure the quality of the data it receives and utilizes. SMF ¶ 6. Resurgent and its affiliates ordinarily secure representations and warranties for the material accuracy of the data related to debts that will be purchased or serviced, and one of Resurgent's affiliates received representations and warranties related to the debt underlying the Cushman POC. See SMF ¶¶ 7-8.
In the "match" step, Resurgent matches accounts that it services with new bankruptcy filings through a system known as Bankruptcy Notifications or "BKN." Stip. ¶ 80. Where BKN can determine with a high degree of reliability that a new bankruptcy filing matches an account serviced by Resurgent, the account moves automatically to the next step. Stip. ¶ 83. Where BKN cannot determine whether a new bankruptcy filing matches a Resurgent account, a Resurgent employee manually reviews the account information and the bankruptcy information. Stip. ¶ 84. When a match is established, the account is updated in AMCS to show that a bankruptcy case is pending, information about the account is loaded into Resurgent's bankruptcy servicing system ("BKS"), and the account moves on to the "research" step. Stip. ¶¶ 84-85.
The "research" step is designed to ensure that the debt was not discharged in a prior bankruptcy case. Stip. ¶ 86. When the debtor is a first-time filer or the debtor's prior bankruptcy cases were dismissed, the account moves automatically to the next step. Stip. ¶ 88. Otherwise, a Resurgent employee reviews the debtor's prior bankruptcy cases to determine whether the debt was discharged. Stip. ¶ 89.
After completing the first two steps, in appropriate circumstances (i.e., a matched debt and no prior discharge of the debt), Resurgent moves to the last step, the "review" step. SMF ¶ 11. At that point, BKS automatically generates and populates a proof of claim form with the account information maintained in BKS, which is derived from AMCS and ultimately from the sale file provided by the account seller or owner. Stip. ¶¶ 15-16. The review conducted by Resurgent's claims processors is performed using the BKS platform. Stip. ¶ 17. BKS was originally designed so that claims processors did not ordinarily review the populated proof of claim form, but instead reviewed the data on the BKS screen that was used to populate the form. CSMF ¶ 25; Stip. ¶ 23. On the BKS screen, claims processors view four columns of information: (1) account information previously obtained by BKS from AMCS, which was used to populate the proof of claim; (2) up-to-date account information obtained by BKS from AMCS; (3) information about the filer and the bankruptcy case pulled from the court docket; and (4) co-filer information pulled from the court docket. Stip. ¶ 18. The BKS system highlights any information that does not match across the columns on the screen. Stip. ¶ 19. Some of the columns do not appear unless the BKS system highlights a discrepancy. CSMF ¶ 29.
Resurgent's work instructions direct claims processors to approve a proof of claim in the absence of a highlighted discrepancy, though claims processors may have some discretion to do otherwise. SMF ¶ 13; CSMF ¶ 30. Claims processors generally do not review the underlying documents related to a debt or otherwise verify the data pulled from BKS and AMCS.
When a claims processor approves a proof of claim, the proof of claim is filed, where possible, with a tool called "autopost," which automatically posts proofs of claim to claims registers using CM/ECF credentials. Stip. ¶¶ 26-27. In jurisdictions that do not permit automatic posting, the claims processor files the proof of claim manually through the CM/ECF system. Stip. ¶ 28. If the claims processor does not approve a proof of claim, the claims processor selects a basis for the rejection and the proof of claim goes into the rejection queue. Stip. ¶¶ 29-30.
Resurgent's quality control group conducts periodic audits of its proof-of-claim filing processes. Stip. ¶¶ 91, 93. In 2014, the quality control group reported that Resurgent maintained a 99.81% score in its unsecured claims filing process based on the criteria sampled. Stip. ¶ 98. The audit process compares the information on the proof of claim form with the information in the BKS system and does not involve review of documents extrinsic to the BKS system. Stip. ¶ 99. Other than identifying the correct account owner, none of the criteria sampled related to the substantive accuracy of a proof of claim. CSMF ¶ 88. When the quality control group identifies a mistake in a proof of claim, the mistake is discussed with the claims processor who reviewed and approved the proof of claim. Stip. ¶ 96.
Resurgent also has a proof of claim objection team that reviews each objection to a Resurgent proof of claim, and either handles the objection internally or retains counsel to respond. SMF ¶ 17. Less than four percent of the proofs of claim that Resurgent filed in 2013 and 2014 were subject to filed objections. SMF ¶ 16.
Resurgent has always used a fully manual process to prepare secured proofs of claim. Stip. ¶ 102. Resurgent's policy and practice has been that all proofs of claim for secured debt must be signed by the person who prepared or reviewed the proof of claim or the information contained in it. Stip. ¶ 101. Each of Resurgent's secured proofs of claim is therefore manually completed by an individual reviewer who gathers the necessary supporting documentation before personally signing and filing the proof of claim. Stip. ¶ 103.
In 2011, Resurgent began using Ms. Gaines's signature on all of its unsecured proofs of claim. Stip. ¶ 49. At that time, Ms. Gaines gave Resurgent a digital copy of her signature and authorized Resurgent to use it on all unsecured proofs of claim, including proofs of claim that she would not personally review. Stip. ¶ 51. From 2011 to April 2015, Resurgent's practice was to automatically affix Ms. Gaines's signature to all unsecured proofs of claim upon generation, regardless of whether Ms. Gaines reviewed the proof of claim or the information in it. Stip. ¶¶ 35-36, 49. During this period, claims processors did not have the ability to change the signature from Ms. Gaines's to their own, Stip. ¶ 37, even though the BKS system could have been designed to allow that. CSMF ¶ 2.
David Richard, a vice president in Resurgent's bankruptcy department, and Lisa Landreth, Resurgent's manager of contract management, authorized and were aware of Resurgent's practice of putting Ms. Gaines's signature on all unsecured proofs of claim. Stip. ¶ 38. They were unsure who had first decided to use Ms. Gaines's signature in that way and they did not know why that decision had been made. CSMF ¶ 5. Mr. Richard headed Resurgent's bankruptcy department between 2012 and November 2014. SMF ¶ 39. During that time, he received no training on Rule 9011 as it related to filing proofs of claim, and he may not have been aware of that rule. CSMF ¶ 3. At some point, Mr. Richard reviewed the proof of claim form and considered the propriety of Resurgent's practice of affixing Ms. Gaines's signature to all unsecured proofs of claim. SMF ¶¶ 40-41. Mr. Richard believes that he consulted with Resurgent's legal group about that practice, but it is not clear when that consultation might have occurred. CSMF ¶ 92.
Ms. Gaines has been a claims processor at Resurgent since 2004. Stip. ¶ 40. In 2014, her duties included reviewing and filing unsecured proofs of claim. Stip. ¶ 42. When reviewing proofs of claim, Ms. Gaines looked for discrepancies highlighted by the BKS system. CSMF ¶ 32. She did not engage in a manual review to determine whether the BKS system had missed something, and she did not look for anything other than highlighted discrepancies on the BKS screen. CSMF ¶ 32. If the BKS system highlighted a discrepancy, Ms. Gaines could either resolve the discrepancy or refer it to the research team or to her supervisor. CSMF ¶ 32. Ms. Gaines never rejected a claim unless the BKS system highlighted a discrepancy. CSMF ¶ 31. At the time that the Cushman POC was filed, she looked at the proof of claim form approximately one time out of every thousand claims. CSMF ¶ 26.
In 2014, Ms. Gaines was Resurgent's only full-time claims processor, but Resurgent had nine other employees who worked as claims processors on a part-time basis. Stip. ¶ 41; CSMF ¶ 33. Ms. Gaines had no supervisory authority over other claims processors, Stip. ¶ 43, but she was the primary trainer for every other Resurgent employee who reviewed, approved, or filed unsecured proofs of claim, SMF ¶ 23. Ms. Gaines was responsible for training claims processors to follow Resurgent's work instructions. SMF ¶ 25. When claims processors were new to the system, they received one-on-one training from Ms. Gaines and were given a copy of the work instructions. SMF ¶ 24; CSMF ¶ 34. Those work instructions did not include any information about the penalties for perjury, the instructions on the proof of claim form, Rule 9011, or the fact that the BKS system put Ms. Gaines's signature on
Ms. Gosnell received training from Ms. Gaines on how to review and approve unsecured proofs of claim before she reviewed and approved the Cushman POC. SMF ¶ 53. She generally followed Resurgent's work instructions when determining whether to approve proofs of claim. SMF ¶ 54. She understood that a person signing a proof of claim had to believe that the information contained in the proof of claim was accurate. SMF ¶ 55. But, she was not sure whether the signature on the proof of claim form was made under penalty of perjury, had never read the instructions on the form "word for word," and was unaware of the existence of Rule 9011. CSMF ¶¶ 41-43. In 2014, Ms. Gosnell did not look at the actual proof of claim form or review billing statements before approving a proof of claim. CSMF ¶ 46. At that time, claims processors rarely reviewed the populated proof of claim form when reviewing a proof of claim. Stip. ¶ 23. Instead, they reviewed the columns shown on the BKS screen, which reflected, among other information, the data used to populate the proof of claim form. Stip. ¶ 23.
Although Ms. Gaines was familiar with the instructions on the proof of claim form, SMF ¶ 19, she did not provide any information to claims processors about those instructions, CSMF ¶ 37. She only "ask[ed] that they review the proof of claim form and let [her] know if they had any questions." CSMF ¶ 37. When she was deposed by the UST, Ms. Gaines did not know who at Resurgent was responsible for ensuring compliance with legal requirements for filing proofs of claim, and she did not remember asking anyone about legal compliance during the last several years. CSMF ¶ 13. As of July 2017, Ms. Gaines had never read or seen a copy of Rule 9011. CSMF ¶ 14. She did not know, even approximately, how many claims were reviewed by others and then filed using her signature under penalty of perjury. CSMF ¶ 17.
Ms. Gaines was not an expert in many of Resurgent's processes. CSMF ¶ 24. She did not know whether Resurgent's clients all provided the same account information; had no familiarity with the entities that sold claims to Resurgent's affiliates; did not know whether the sale file provided by debt sellers or customers included billing statements; did not know which department imported information into AMCS; did not know where case information came from; did not know what would happen if there was an error in the data; did not know whether anyone else at Resurgent checked debtor schedules or other information outside of AMCS to verify the accuracy of proofs of claim; and did not know whether Resurgent's affiliates received any representations or warranties from the seller. CSMF ¶ 24. She was aware that others audited Resurgent's proofs of claim, SMF ¶ 34, but was not involved in that auditing process and did not know what criteria the quality control group used in its audits, CSMF ¶ 24. Ms. Gaines's responsibilities did not extend to many facets of Resurgent's bankruptcy department, and she had only limited knowledge of many of Resurgent's processes other than proof of claim review and filing. SMF ¶ 31.
However, Ms. Gaines was aware that other Resurgent employees were responsible for other aspects of Resurgent's systems and believed that those employees were competent and professional. SMF ¶ 37. Based on her confidence in Resurgent's systems and her colleagues, she testified: "I trust the system, I know the people, I have confidence that it's correct." SMF ¶ 38. Ms. Gaines had a general understanding that Resurgent had systems other than proof of claim review and filing that related to proofs of claim. SMF ¶ 36. She had no knowledge, information, or belief about the debts in relation to which other claims processors reviewed and approved proofs of claim, or the bankruptcy cases in which such proofs of claim were filed. SMF ¶ 21. But, she had confidence in the other Resurgent employees who reviewed and approved proofs of claim and had confidence in the reliability of Resurgent's systems and processes for validating account information and generating proofs of claim. SMF ¶ 20. She knew that those claims processors were required to maintain an accuracy rate of at least 97% based on the criteria surveyed in Resurgent's internal audits. SMF ¶ 27. She was aware that Resurgent's quality control group informed claims processors when it found errors in their work. SMF ¶ 28. She was also aware that Resurgent only rarely received objections to its proofs of claim. SMF ¶ 29. During the period that her signature was being affixed to all of Resurgent's unsecured proofs of claim, Ms. Gaines trusted the system. SMF ¶ 30.
In November 2014, Mr. Richard was transitioned out of Resurgent's bankruptcy leadership. Stip. ¶ 74. Among the catalysts for the change was an email sent in September 2014 by Bryan Faliero, who was then employed by Sherman Capital Markets, to Benjamin Navarro and Brett Hildebrand, who were also principals of Sherman Capital Markets. Stip. ¶¶ 75-76; CSMF ¶ 60. In the email, Mr. Faliero raised numerous concerns, including a concern that the signature on Resurgent's proofs of claim did not match the identity of the person who reviewed those proofs of claim. Stip. ¶ 78. Mr. Faliero stated "POC filing process (like affidavits) same person review must sign — we find internally that signature of reviewer is not reviewer." Stip. ¶ 78. Mr. Navarro forwarded the email to Tim Grant, then-CEO of Resurgent, with the comment "Seems like it's time to make a change. What do you think?" CSMF ¶ 60.
Within a month after Mr. Faliero's email, Resurgent began developing an upgrade to its BKS system, known as BKS 1.6.0, that would allow proofs of claim to be generated and filed with the electronic signature and CM/ECF credentials of the individual claims processor who approved the proof of claim. Stip. ¶¶ 63, 79. The BKS upgrade took several months to execute and was ultimately implemented in April 2015. Stip. ¶¶ 65-66.
Meanwhile, on December 1, 2014, Resurgent created a draft policy, "BU PT-086," that specified that "[a]ll proofs of claim are reviewed and approved by the claim signer." Stip. ¶ 67. The policy was drafted, in part, because a potential seller of debt to LVNV had requested a copy of such a policy. Stip. ¶ 67. The policy and its specification as to the claim signer were approved on December 29, 2014. Stip. ¶ 68. The policy was not implemented by Resurgent until February 19, 2015 or later. Stip. ¶ 69.
BKS 1.6.0 was rolled out in April 2015. Stip. ¶ 73. Since that time, Resurgent has required, for every unsecured proof of claim, that the reviewer, signer, and filer (i.e., where applicable, the individual whose CM/ECF credentials are used to file the proof of claim) be the same person. Stip. ¶ 64. Its current practice is to affix the signature of the claims processor who reviewed the claim to the proof of claim form upon approval. Stip. ¶ 25. Since July 2016, Resurgent has also required claims processors to review the PDF proof of claim form generated by BKS in addition to their review of the information used to populate the proof of claim form. SMF ¶ 49.
Resurgent has historically understood that interest on a credit card debt was recapitalized monthly, such that the total prepetition balance would be properly identified on a proof of claim as principal. SMF ¶ 64. In December 2016, the United States Bankruptcy Court for the Eastern District of Virginia ruled that, notwithstanding any such recapitalization, Rule 3001 requires a proof of claim to itemize principal and interest. SMF ¶ 65 (citing
While the USTP's investigation into Resurgent's signing and filing practices was ongoing, between July 2016 and January 2017, Resurgent caused Ms. Gaines to review, in every bankruptcy case open at that time, all proofs of claim filed with her signature that were originally reviewed and approved by a different claims processor. SMF ¶ 79. Ms. Gaines reviewed approximately 85,000 proofs of claim, using the same process that she typically uses when reviewing proofs of claim prior to filing. SMF ¶ 80. In that review, she found fewer than 50 proofs of claim for which the BKS system highlighted discrepancies, and
In October 2011, the Maryland State Collection Agency Licensing Board and Office of the Commission of Financial Regulation entered a summary order directing Resurgent, LVNV, and other affiliates and officers to cease debt collection activities in Maryland. Stip. ¶ 105. The Board found, among other things, that Resurgent had submitted affidavits that were "false," "deceptive," "deficient," and "misleading." CSMF ¶ 59. The Board found that Resurgent had submitted affidavits that were based on employees' review of Resurgent's books and records, SMF ¶ 72, and determined that those employees did not have sufficient personal knowledge of the records to offer competent testimony as required by the Maryland Rules of Procedure, SMF ¶ 73. The Board also found that Resurgent's employees were not competent to testify about the creation and maintenance of the business records of certain originating creditors or their business practices. SMF ¶ 74. Without admitting any allegations, Resurgent and LVNV settled the matter in June 2012, agreeing to pay a penalty of $1 million, to dismiss 3,564 cases filed in Maryland, and to provide credits of more than $3.8 million to consumers. Stip. ¶ 106.
In 2015, Official Form 10 was replaced by Official Form 410. The attestation in Official Form 410 provides: "I have examined the information in this Proof of Claim and have a reasonable belief that the information is true and correct. I declare under penalty of perjury that the foregoing is true and correct." The revised form also contains an instruction in the margin near the signature line, which reads "The person completing this proof of claim must sign and date it. FRBP 9011(b)."
The entry of a summary judgment is warranted only when "there is no genuine dispute as to any material fact" and a party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). When evaluating a motion for summary judgment, the Court views the record in the light most favorable to the opposing party, drawing all reasonable inferences in that party's favor.
"Cross-motions for summary judgment do not alter the summary judgment standard, but instead simply require [the Court] to determine whether either of the parties deserves judgment as a matter of law on the facts that are not disputed."
The existence of cross-motions for summary judgment on Resurgent's complaint suggests that neither party perceives a need for a trial on that pleading. That said, the issuance of a summary judgment is not ensured by the parties' desire to avoid a trial. See Wright & Miller, 10A Fed. Prac. & Proc. Civ. § 2720 (4th ed. 2018) ("The fact that both parties simultaneously are arguing that there is no genuine dispute of fact ... does not establish that a trial is unnecessary[.]"). Rule 7056 and its counterpart, Civil Rule 56, do not allow the Court to engage in factfinding. Instead, the Court is required to determine whether there is any genuine dispute of material fact. In this proceeding, because the imposition of sanctions is squarely within the Court's discretion, the Court has considerable latitude to identify and weigh the facts that might affect the outcome. See
Resurgent seeks a declaration that sanctions under Rule 9011, section 105, or the Court's inherent authority are not warranted. The UST contends that Resurgent is subject to sanctions, should be sanctioned, and therefore is not entitled to the requested declaration as a matter of law. There is no statute, rule, or controlling caselaw allocating the burdens of proof on these disputes. Some courts assign the burden of proof under Rule 9011 to the party seeking sanctions under that rule. See, e.g.,
Although Resurgent initiated this proceeding by filing a complaint for a declaratory judgment, the parties bear the same burdens of proof that they would have shouldered had the proceeding been brought by the UST. See
Most papers filed in a bankruptcy case must be signed, by either a party's attorney or, in the case of an unrepresented party, by the party. Fed. R. Bankr. P. 9011(a). When a paper is presented to the court, the attorney or party that signed the paper makes certain representations to the court. Fed. R. Bankr. P. 9011(b). In particular, Rule 9011(b) establishes that:
Fed. R. Bankr. P. 9011(b). Like Rule 9011(a), Rule 9011(b) applies to attorneys and unrepresented parties.
Taken together, Rule 9011(a) and (b) dictate a logical sequence. First, an attorney must make a reasonable inquiry into certain matters, including the reasons why a particular paper is being submitted to the court, Fed. R. Bankr. P. 9011(b)(1), the support for the legal arguments in that paper, Fed. R. Bankr. P. 9011(b)(2), and the evidentiary support for factual matters (i.e., contentions and denials of contentions) in the paper, Fed. R. Bankr. P. 9011(b)(3), (4). After these inquiries have been made and before the paper is submitted to the court, the paper must be signed.
In construing and applying Rule 9011, the Court is mindful of the rule's central purpose and the manner in which it has been interpreted and applied by the Supreme Court, the First Circuit, and other courts. See, e.g.,
When Rule 9011(b) has been violated, the court may, subject to certain limitations, "impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation." Fed. R. Bankr. P. 9011(c).
The initial question is which person or entity was subject to the strictures of Rule 9011 when the Cushman POC was presented to the Court. See
The implication of the UST's initial argument is that Ms. Gaines had a separate and nondelegable duty under Rule 9011. The UST's attempt to treat Ms. Gaines as the Rule 9011 actor finds some traction in the personal pronouns used in the instructions on Official Form 10, the form's references to the "individual" completing the proof of claim, and its citation to Rule 9011. The UST's alternate focus on Resurgent's processes is consistent with the view
Rule 9011 does not, as the UST seems to argue, apply to three categories of actors: attorneys, unrepresented parties, and agents of unrepresented parties (here, Susan Gaines). See Fed. R. Bankr. P. 9011(a)-(b). Rule 9011 binds only two categories of actors: attorneys and unrepresented parties. See
Although Ms. Gaines was the individual who signed the Cushman POC, she is not a party in the Cushmans' chapter 13 case and was not the "unrepresented party" who filed the Cushman POC. See Fed. R. Bankr. P. 9011(b). Ms. Gaines had no right to enforce the claim and did not seek to activate the claims allowance process for her own benefit when her signature was affixed to the proof of claim form. Instead, Resurgent was the real party in interest as to the Cushman POC. See
In general, a legal entity can act only through its authorized agents, and when agents perform tasks within the scope of their authority, the entity is responsible for those delegated tasks. An entity's nonlawyer agents may not ordinarily represent the entity in federal court; instead, the entity must appear through a licensed attorney.
Nevertheless, the Court agrees with the UST's assertion that the claims processor who reviewed the Cushman POC should have been the person who signed it. When the Cushman POC was filed, the instructions on Official Form 10 required the individual who completed a proof of claim to sign it and make a declaration under penalty of perjury. Those instructions and the declaration were intended to impose a standard of reasonableness upon "a real, live person" who was to "take responsibility for assuring the accuracy of a proof of claim." Minutes, Advisory Comm. on Bankr. Rules, April 29-30, 2010, at 21. Because her signature was affixed to the Cushman POC, Ms. Gaines declared "under penalty of perjury that the information provided in [that] claim [was] true and accurate to the best of [her] knowledge, information, and reasonable belief." See Official Form 10. The parties disagree about whether Ms. Gaines could have relied on Resurgent's systems to make that declaration in the absence of any personal knowledge of the contents of the Cushman POC, and they dispute the extent to which proofs of claim can be analogized to affidavits. There is no need to resolve those disputes here. This proceeding does not involve a request for damages for perjury, a criminal prosecution for perjury, or any sort of request for relief against Ms. Gaines individually. Instead, this proceeding turns on an alleged violation of Rule 9011(b) and a request for a declaratory judgment as to the propriety of sanctions against Resurgent under, inter alia, Rule 9011(c).
Resurgent may have failed to comply with the instructions on Official Form 10 by affixing Ms. Gaines's signature to all unsecured proofs of claim generated by the BKS system, including the Cushman POC. If so, Resurgent may have also contravened Rule 3001(a), which requires a proof of claim to "conform substantially to the appropriate Official Form." Fed. R. Bankr. P. 3001(a). But the analysis under Rule 9011 is a separate matter. See
Although the instructions on Official Form 10 referenced Rule 9011, failure to comply with those instructions is not necessarily the equivalent of a failure to comply with the rule. The instructions on the form — on which the UST places significant
The nature of a reasonable prefiling inquiry varies depending on all the circumstances of the particular case.
The scope of a reasonable inquiry is, of course, informed by the elements of the applicable substantive law. For example, if a plaintiff files a complaint seeking recovery on a legal theory that requires proof of extreme and outrageous conduct, the plaintiff must have made a prefiling inquiry to determine whether the defendant's conduct could be fairly characterized as extreme and outrageous. See
Resurgent made a reasonable inquiry and a representation supported by evidence in its possession as to Ms. Cushman's liability on the debt described in the Cushman POC. Consistent with its ordinary practices, Resurgent confirmed that Ms. Cushman had filed a bankruptcy case and that the debt had not previously been discharged. Resurgent's affiliate obtained representations and warranties as to the validity of the debt. Resurgent obtained data from its affiliate when it agreed to service the debt and it relied on that data in the ordinary course of business. That data indicated a total debt in the amount of $575.49 and Resurgent asserted a claim for that exact amount. Resurgent thus discharged its Rule 9011 duty to investigate and secure evidence supporting its allegation as to Ms. Cushman's liability for the asserted debt. Cf.
Resurgent also made a reasonable inquiry and a representation supported by evidence in its possession as to the date of the last payment on the debt underlying the Cushman POC. The data string reported a last payment date of April 13, 2014. Resurgent's automated processes transferred that date from the data string to AMCS, from AMCS to BKS, and from BKS onto the statement attached to the Cushman POC. Resurgent also obtained billing statements associated with the claim that reported a last payment date of April 12, 2014. When reviewing the Cushman POC before filing, Resurgent did not compare the last payment date reported on the data string with the last payment date reported on the billing statements. Instead, it relied exclusively on the data string.
The same cannot be said of Resurgent's allegation of the last transaction date. The data string associated with the debt underlying the Cushman POC did not include a column for, or otherwise
Resurgent may have also transgressed Rule 9011(b) by characterizing the entire amount of Ms. Cushman's credit card debt as principal. The data string reported a filing date balance ($575.49) in one column, set forth a principal balance ($396.46) in another column, and aggregated interest and fees ($197.59) in another column. Resurgent apparently relied on its belief that credit card debt recapitalizes interest as principal each month and caused its automated process of data transfer to allege that the claim consisted of $0.00 in interest, $0.00 in fees, and $575.49 in principal. The UST contends that belief was unreasonable and effectively short-circuited Resurgent's inquiry. The Court need not decide whether that belief was reasonable, and there is no need to make factual findings on these issues after a trial. For the purposes of this decision, the Court assumes, without deciding, that Resurgent violated Rule 9011(b) by failing to make well-supported allegations of principal, interest, and fees on the statement attached to the Cushman POC.
The UST asserts that, in order to comply with Rule 9011(b), Resurgent must review the billing statements underlying a claim and compare the information in those statements with the information in the proof of claim. To the extent that Resurgent's data string is not designed to capture the kinds of information that must be reported on a proof of claim, the Court agrees. However, the Court is not persuaded that Resurgent should be required to corroborate all of the information reported on the data string by engaging in an independent review of the billing statements in every circumstance. The Court is even less persuaded by the UST's contention that a reasonable inquiry preceding the filing of a proof of claim must involve review of the schedules filed by the debtor. Debtors' schedules may carry evidentiary weight in some contexts. See, e.g., Fed. R. Bankr. P. 3003(b)(1) (providing that, in a chapter 9 or chapter 11 case, the schedule of liabilities "shall constitute prima facie evidence of the validity and amount of the claims of creditors, unless they are scheduled as disputed, contingent, or unliquidated");
Next, the Court rejects the UST's contention that Resurgent violated Rule 9011 because it did not require its claims processors to review the actual proof of claim form. The Court is convinced that claims processors' review of the BKS screen was the functional equivalent of reviewing the proof of claim form because that screen held the data that was used to populate the form. Reviewing the information on the BKS screen is, as Resurgent observes, similar to reviewing the online fields used to file a proof of claim through the Court's ePOC system, a system that allows a proof of claim to be filed without the filer actually reviewing the proof of claim form. In some respects, a preprinted form like the proof of claim form differs from most pleadings or motions prepared by an attorney. The proof of claim form contains instructions or headings in each field, prompting alphanumeric data entries of a specific nature that can be easily automated for general unsecured proofs of claim. Unlike the preparation of that form, the preparation of pleadings and motions requires legal skill and judgment. To a certain extent, these differences justify a less literal application of Rule 9011's "read before signing" requirement to a proof of claim asserting a general unsecured claim.
The parties' arguments about the propriety of sanctions under Rule 9011(c) focus on Resurgent's prior practice of affixing Ms. Gaines's signature to all unsecured proofs of claim regardless of who later reviewed them, and Resurgent's prior practice of reviewing those proofs of claim by causing its claims processors to review the BKS screen rather than the form itself. Resurgent contends that it should not be sanctioned under Rule 9011(c) because: (a) its change to its signature practices in 2015 obviated any need for specific deterrence, and the amendment to the proof of claim form in 2016 eliminated any need to generally deter others from signing a proof of claim without personally reviewing it; and (b) there is no evidence that its prior signature practices caused any harm, or that it engaged in those practices in willful violation of the law or with the intent to injure others. Resurgent also argues that it should not be required to amend the Cushman POC because the amended proof of claim would be the same as the one currently on file, and that remedy would be "tantamount to disallowing" the claim. The UST responds that Resurgent should be subject to a significant sanction under Rule 9011(c) because it cut costs and "undermined the foundations of the claims system." From the UST's perspective, the instructions on Official Form 10, the settlement of the Maryland proceeding in 2011, and the email sent by Mr. Faliero in 2014 should all have placed Resurgent on notice that its signature practice
The Court has already concluded that although Resurgent's prior signature practice may have failed to comport with the instructions on Official Form 10 and run afoul of Rule 3001(a), that practice did not violate Rule 9011(b). Similarly, Resurgent's practice of reviewing the information on the BKS screen rather than the proof of claim form did not contravene Rule 9011(b). Despite the parties' fixation on these particular practices, the Court has determined that Resurgent violated Rule 9011(b) in a different way — by alleging a last transaction date in the Cushman POC that lacked evidentiary support. The Court has also assumed — but not decided — that Resurgent ran afoul of the rule by failing to secure an evidentiary foundation for its allegations of principal, interest, and fees on the statement attached to the proof of claim.
Neither of these shortcomings warrants the imposition of sanctions under Rule 9011(c) in this proceeding. The statements of principal, interest, fees, and last transaction date are, by design, subsidiary allegations. See Fed. R. Bankr. P. 3001 Advisory Committee Note 2012 (explaining that disclosure of the information required by Rule 3001(c)(3) is intended to help the debtor match the claim with an account). When those allegations are not set forth as required, Rule 3001(c)(2)(D) expressly provides that "the court may, after notice and a hearing, ... (i) preclude the holder from presenting the omitted information ... 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." Fed. R. Bankr. P. 3001(c)(2)(D) (emphasis added). The unsupported allegations in the Cushman POC do not warrant relief under Rule 3001(c)(2)(D) for several reasons. First, the creditor and account number identified in the proof of claim match a debt scheduled by the Cushmans, and the amount listed on the claim ($575.49) is relatively close to the amount of the scheduled debt ($540.00). Under these circumstances, the allegations at issue could not have interfered with the debtors' ability to identify the claim. See
If it were proper to invoke Rule 9011 for unsupported allegations of the type required by Rule 3001(c), multiple factors would counsel against sanctioning Resurgent under Rule 9011 on account of those allegations in the Cushman POC. As an initial matter, contrary to the UST's contentions, the Cushman POC was not "radically deficient." Although further inquiry in the form of a better process would have provided an evidentiary basis for the allegations of last transaction date, principal, interest, and fees, those allegations were not critical to the validity of the claim under section 502, and "further inquiry would not have shown the [proof of claim] to have been baseless." See
Ultimately, requiring Resurgent to amend the Cushman POC would elevate technical procedural requirements over substance, as there is no dispute that the Cushmans were liable for the debt in the total amount set forth in the proof of claim. See
The Court will not utilize its authority under 11 U.S.C. § 105(a) to sanction Resurgent for filing the Cushman POC. Under section 105(a), "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy
The processes that Resurgent used to generate and submit the Cushman POC did not comply with Rule 9011 in certain respects and may have infringed Rule 3001. Under the right set of circumstances, conduct that violated Rules 3001 and 9011 could be discouraged or remedied in accordance with those rules. As already explained, those circumstances are not present here. If they were, the Court would dispense the relief contemplated by the rules instead of deploying the equitable powers conferred by section 105(a). See
The Court is also unwilling to use its inherent powers to sanction Resurgent for filing the Cushman POC. "Federal courts possess certain inherent powers, not conferred by rule or statute, to manage their own affairs so as to achieve the orderly and expeditious disposition of cases."
The UST asserts that because Resurgent "has repeatedly and deliberately filed documents in clear violation of the unambiguous instructions on the Court's own form, the Court may properly invoke its inherent power to regulate conduct before it and protect against litigation abuses which threaten to impugn the court's integrity." The UST may be motivated by a concern that, in the absence of a significant sanction that grabs the attention of Resurgent and others in the debt servicing industry, parties in interest will only be able to test and force compliance with the rules or the instructions on the proof of claim form on a claim-by-claim basis. If this is the UST's concern, the concern is understandable. There is no doubt that testing compliance with the proof of claim requirements on a case-by-case basis would be expensive and burdensome, perhaps even prohibitively so. In the right case, a significant sanction designed to remedy harm to the integrity of the bankruptcy system and to provide an effective deterrent could be imposed. In the final analysis, however, the UST has simply not established that this is the right case for that type of sanction. See
Resurgent seeks a declaration that it is not subject to sanctions under Rule 9011, section 105(a), the Court's inherent powers, or "any other authority" on account of the Cushman POC. The parties briefed the issue of sanctions under Rule 9011, section 105(a), and the Court's inherent powers. They did not brief the issue of whether sanctions are warranted under some "other authority." As such, the Court deems that aspect of Resurgent's complaint waived. Resurgent is entitled to a summary judgment on its complaint for a declaration that it is not subject to sanctions under Rule 9011, section 105(a), or the Court's inherent powers for filing the Cushman POC, and that it need not amend that proof of claim. A separate order will issue.
