ERIC L. FRANK, Bankruptcy Judge.
Presently before the court is the Debtors' Objection to the Proof of Claim filed by PRA Receivables Management, LLC ("PRA"). In its Proof of Claim, PRA asserts that it holds a claim of $13,024.46 as an assignee of a credit card account. The Debtors contest the allowance of the claim based upon the lack of documentation attached to the Proof of Claim. In particular, the Debtors assert that the claim should be disallowed because PRA did not attach documentary evidence to the proof of claim supporting: (a) the validity and amount of the debt or (b) its status as assignee of the account. (See Debtors' Objection ¶¶ 4-5) (Doc. # 21).
At the hearing held on the Objection, neither party presented any evidence.
Reasonable minds can differ (and have differed) on these issues.
In this case, I conclude that:
Wayne and Geraldine O'Brien ("the Debtors") commenced this chapter 13 case on January 29, 2010. In their bankruptcy schedules, they listed a priority tax claim and a number of unsecured claims. (Doc. # 1, Schedules E and F). The creditor scheduled as holding the priority tax claim filed a claim in the amount of $9,118.82, asserting secured status rather than priority status. (See Claim No. 6). Unsecured claims totaling $38,212.64 also have been filed with the court.
In their chapter 13 plan, the Debtors propose to: (a) pay their scheduled priority tax claim in full (i.e., the claim filed as a secured claim)
PRA, as "agent of Portfolio Recovery Assocs. and successor in interest to SQUARETWOFINANCIAL (Bank of America)," filed an unsecured claims, Claim No. 3, in the amount of $13,024.46, on March 16, 2010. PRA's proof of claim ("the Proof of Claim") was executed by Carole E. Hardy, VP for Bankruptcy. It identifies Geraldine O'Brien as the Debtor.
On its face, the Proof of Claim states that the basis for the claim is a "credit card" account and provides a four-digit number. However, it does not state whether that four-digit number is the account number used by the original creditor or the number which PRA uses to identify the account. The Proof of Claim further states that the Debtor may have scheduled the account as "Bank of America."
At the July 20, 2010 confirmation hearing, the Debtors acknowledged that their current plan is not adequately funded and that they must file an amended plan to increase the plan's funding in order to pay all allowed unsecured claims in full. However, they requested that the court first rule on two pending objections to claims so that they may calculate the necessary plan funding level before filing their amended plan. The court granted that request and continued the confirmation hearing.
One of the two claims objections pending on July 20, 2010 has since been sustained. The Debtor's other objection is to PRA Proof of Claim of $13,024.46. The hearing on the Debtors' Objection ("the Objection") to the Proof of Claim was held on July 20, 2010. The Debtors' counsel was present at the hearing, but neither the Debtors nor any PRA representative appeared. The Debtors filed a post-hearing Memorandum of Law in support of the Objection on August 17, 2010. (Doc. # 46). The matter is now ready for decision.
In analyzing objections to proofs of claim, bankruptcy courts must consider two primary sources: the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.
Section 502(a) of the Code provides that a proof of claim "is deemed allowed, unless a party in interest ... objects." 11 U.S.C. § 502(a). In this Circuit, the Court of Appeals has held that a proof of claim
In re Allegheny Int'l, Inc., 954 F.2d 167, 173-74 (3d Cir.1992). The principle expressed in Allegheny Int'l is rooted in past practice under the former Bankruptcy Act.
Fed. R. Bankr.P. 3001(f) addresses the same subject as Allegheny Int'l, i.e., which party has the burden of going forward at a
If a claimant complies with rules of court and its proof of claim achieves prima facie evidentiary status through Rule 3001(f), the burden of going forward with evidence contesting the validity or amount of the claim shifts to the objector.
At the hearing on the Objection, the Debtors did not present any evidence in support of the Objection and PRA did not appear. With no evidence offered by either party at the hearing, the decision in this case depends on the allocation of the burden of proof.
The Debtors contend that the burden of proving the validity and amount of the Proof of Claim remains with PRA because the Proof of Claim does not conform with Fed. R. Bankr.P. 3001(c) and the instructions that are part of Official Form 10.
In short, the Debtors contend that once it is determined that a proof of claim is not entitled to prima facie status under Rule 3001(f), as a matter of law, the burden of production remains on the claimant and, if the claimant does not come forward with additional evidence to support the claim,
I begin by considering whether the Proof of Claim is entitled to prima facie evidentiary effect under Rule 3001(f). This requires a determination whether the Proof of Claim was "executed and filed in accordance with" the rules of court. See Fed. R. Bankr.P. 3001(f). The relevant rules of court include Rule 3001(a)-(e).
Rule 3001(a) requires that the proof of claim "conform substantially to the appropriate Official Form," which is Official Form No. 10. Rule 3001(b) requires that the proof of claim be executed by the creditor or the creditor's authorized agent. Rule 3001(c) provides that if a claim is "based on a writing," a copy of the writing be attached to the proof of claim unless it has been lost or destroyed, in which case a statement of the "circumstances of the loss or destruction" must be filed with the claim. Rule 3001(d) provides that if the claimant asserts that it holds a security interest in property of the debtor, the proof of claim "shall be accompanied by evidence that the security interest has been perfected." Rule 3001(e) addresses certain obligations of holders of claims that were transferred to the holder.
Official Form No. 10, effectively incorporated through Rule 3001(a), appears to relax the requirements of Rule 3001(c). Paragraph 7 initially instructs the claimant to attach copies of documents "that support the claim, such as promissory notes, purchase order invoices, itemized statements of running accounts, contracts, judgments, mortgages, and security agreements." It further states, without qualification, "You may also attach a summary." (emphasis added).
There are many reported decisions involving objections to proofs of claim based on credit card agreements held by assignees of the original creditor. In such cases, two separate issues arise frequently:
It is less clear, however, precisely what documents must be filed with the proof of claim to satisfy Rule 3001(c)'s requirement that the "writing" on which the claim is "based" be filed. "The case law is split with regard to whether the writing, on which a [credit card] claim is based ... is the credit card agreement, the transactional record of each charge, or both the credit card agreement and a record of each transaction that is related to the claim." In re Irons, 343 B.R. 32, 40 (Bankr. N.D.N.Y.2006).
The second common area of contention regarding proofs of claim based on credit card debt arises because these claims often are filed by assignees of the original creditor. As a result, courts have considered whether, in addition to documenting the basis for the underlying indebtedness, Rule 3001(c) also requires the claimant to document the assignment itself and, if so, what documents satisfy this additional requirement.
To determine whether the Proof of Claim in this case is entitled to prima facie evidentiary status, I need not wade deeply into this jurisprudential thicket. Assuming arguendo that the attachment to the Proof of Claim constituted a summary sufficient to satisfy the first requirement described above (relating to the attachment of the writings on which the underlying indebtedness is based), I conclude that it failed to satisfy the second requirement (relating to the writings that document the assignment of the account to the claimant). On this question, I agree with and will follow In re Kincaid, 388 B.R. 610 (Bankr. E.D.Pa.2008).
In Kincaid, Judge Sigmund reasoned:
Kincaid, 388 B.R. at 616-17 (emphasis added) (citations and footnotes omitted); accord In re Samson, 392 B.R. 724, 732 (Bankr.N.D.Ohio 2008) (assignee "must still match the evidentiary requirements of Bankruptcy Rule 3001 which [the assignor] would have faced").
In short, I hold that, for purposes of Rule 3001(c), a proof of claim filed by an assignee is "based," in part, on the assignment. Therefore, to satisfy Rule 3001(c) and obtain prima facie evidentiary status under Rule 3001(f), an assignee filing a proof of claim must attach the written assignment or set forth a summary of the document.
Here, the Proof of Claim lacks any documentation regarding the assignment of the claim to PRA. Therefore, to satisfy Rule 3001(c), it must provide an adequate summary of the assignment. I find that it does not.
The information on the face of the Proof of Claim and the attachment is elliptical. The face of the Proof of Claim states conclusorily that PRA is a successor in interest to SQUARETWOFINANCIAL (BANK OF AMERICA). The attachment states that the account "was purchased from SQUARETWOFINANCIAL on 2/25/10," but does not explain what the phrase "SQUARETWOFINANCIAL (BANK OF AMERICA)" means. Is SQUARETWOFINANCIAL a separate entity or simply a part of Bank of America? If SQUARETWOFINANCIAL is a separate entity, is it an assignee of Bank America, making PRA a subsequent assignee? If so, when did the assignment to SQUARETWOFINANCIAL take place?
Bankruptcy Rule 3001(c) is designed to provide the debtor with "fair notice of the conduct, transaction and occurrences that form the basis of the claim," In re Sandifer, 318 B.R. 609, 611
For these reasons, the Proof of Claim does not comply with Rule 3001(c). It follows that Rule 3001(f) does not accord the Proof of Claim prima facie evidentiary status.
The determination that the Proof of Claim lacks prima facie status under Rule 3001(f) leads to another question. If a proof of claim lacks prima facie evidentiary effect through Rule 3001(f), should the claim be disallowed upon objection if the claimant does not come forward with additional evidence in support of the claim? Stated differently, can a proof of claim which does not comply with the Rules otherwise achieve prima facie evidentiary status?
This issue has divided bankruptcy courts for more than 100 years. See 3 Collier 14th § 57.09, at 185.
A majority of the courts that have considered the issue have held that the failure to comply with Rule 3001 is not, by itself, grounds for disallowance of a claim. See In re Hartman, 2009 WL 4043096, at *3
Several rationales have been offered to support the majority position.
First, some courts reason that the outcome is dictated by the plain language of 11 U.S.C. § 502(b), which does not include the failure to comply with the rules of court as a ground for disallowance, along with the principle that the rules of court may not modify substantive rights grounded in the statute. See, e.g., Kirkland, 379 B.R. at 345.
Second, some courts express concern that the contrary rule would undermine the integrity of the bankruptcy system, permitting debtors, in particular, to invoke technical grounds to defeat claims that they would otherwise have to concede are valid. For example, in In re Simms, 2007 WL 4468682 (Bankr.N.D.W.Va. Dec.17, 2007), the court reasoned:
2007 WL 4468682, at *3. Similarly in In re Lapsansky, 2006 WL 3859243, at *2 (Bankr.E.D.Pa. Oct.31, 2006), Judge Fehling of this court overruled claims objections "because the Objections do not attack Debtor's liability for the claims or the amount of the underlying debts, but instead are based solely on the argument that the claims should be disallowed because they do not attach the documentation required by Rule 3001(c)." Underlying this line of cases is a legitimate concern that a contrary outcome might permit debtors to employ the Rule as a tool "to object to claims they admittedly owe based on perceived evidentiary advantages." Kincaid, 388 B.R. at 618.
A third rationale for the majority position may be derived from the historic principle in proof of claim jurisprudence that a proof of claim should be treated as if it were a verified complaint or a deposition. This has been the practice under both the Act
Fourth, the majority view finds support in the overall purpose and functioning of the claims resolution process. The process is designed to achieve the fair and inexpensive resolution of claims objections through a summary procedure that mirrors, but does not slavishly conform to, the formalities of conventional civil litigation. See In re Sacko, 394 B.R. at 99 (citing In re Shank, 315 B.R. 799, 814 (Bankr. N.D.Ga.2004)). To accomplish this purpose, courts must be practical and flexible, not rigid, in their application of the rules of court, see Fed. R. Bankr.P. 1001, and strike a balance between the interest of the claimant in setting forth its claim without undue burden or expense and the interest in the debtor or trustee in obtaining sufficient information to permit evaluation the claim's validity without under burden or expense. As Judge Sigmund observed in Kincaid,
388 B.R. at 618.
However, a minority of courts have taken the intuitive position that court rules adopted to facilitate administration of the claims allowance process should be enforced. Enforcement of a court rule usually requires that there be an adverse consequence to a litigant who fails to comply with the rule. These courts employ the logical converse of Rule 3001(f): if a proof of claim does not comply with the rules, it lacks prima facie evidentiary effect. There is ample case law supporting that proposition under the former Act. See n. 12, supra.
Having reviewed the competing lines of authority, I find the majority approach to be the better view and that compliance with Rule 3001(f) is not the sole vehicle for a proof of claim to achieve prima facie status. It is therefore possible for a proof of claim that does not satisfy Rule 3001(f) to nonetheless impose on the objector the burden of producing some evidence to rebut the claim.
Accepting the majority's position, the issue may be distilled down to a single inquiry: Does the proof of claim provide sufficient indicia of the claim's validity and amount (despite its nonconformance with Rule 3001) to justify imposing the burden (and expense) of responding with contrary evidence?
In determining whether a non-conforming proof of claim has shifted the burden of production to the objecting party, courts following the majority approach usually consider other information available in the bankruptcy record. The most common source consulted is the debtor's schedules, which may contain admissions that shore up shortfalls in the proof of claim. See, e.g., In re Campbell, 336 B.R. 430, 436 (9th Cir. BAP 2005); Minbatiwalla, 424 B.R. at 116; In re Stauder, 396 B.R. 609, 612 (Bankr.M.D.Pa.2008) In re Samson, 392 B.R. at 733; Kincaid, 388 B.R. at 617-18; In re Herron, 381 B.R. 184, 189 (Bankr. D.Md.2008).
I consider it appropriate for the court to review information in the bankruptcy record that is subject to judicial notice when deciding whether the burden of production has shifted to a debtor who is objecting to a proof of claim.
With these principles in mind, I consider the Proof of Claim at issue here.
As in Part III.C, I will focus on PRA's asserted status as an assignee and assume arguendo that the Proof of Claim otherwise satisfies Rule 3001(c) with respect to the validity and the amount of the underlying credit card account claim.
There is some information in the Debtors' schedules that correlates to the Proof of Claim. Schedule F sets forth a debt that references Bank of America (the original creditor identified in the Proof of Claim) for almost the exact amount stated in the Proof of Claim.
Some courts have accepted a claimant's asserted assignee status where the debtor has scheduled a debt that corresponds to the proof of claim. See In re
In summary, PRA has not sustained its burden of proof on an essential element of its claim in this contested matter. The Proof of Claim facially did not comply with Rule 3001(c), there also is nothing further in the record to support PRA's asserted status as an assignee of the claim at issue and PRA did not appear at the hearing on the Objection to offer evidence supporting its claim.
For the reasons set forth above, the Debtors' Objection to PRA's Proof of Claim will be sustained. Claim Number 3 in the amount of $13,024.46 will be disallowed.
In re Castle Braid Co., 145 F. 224, 228 (S.D.N.Y.1906) (citing Whitney v. Dresser, 200 U.S. 532-535, 26 S.Ct. 316, 50 L.Ed. 584 (1906)); see also James W. Moore and Lawrence P. King, 3 Collier on Bankruptcy ¶ 57.18[5] (14th ed. 1974) ("Collier 14th").
Effective October 1, 1973, the Supreme Court adopted Bankruptcy Rule 301. Rule 301(b), titled "Evidentiary Effect," provided that "[a] proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim," the same language now found in Rule 3001.
Rule 301 superseded § 57a of the Bankruptcy Act. At the time of Rule 301's adoption, the Rules Enabling Act, 28 U.S.C. § 2075, permitted the Bankruptcy Rules to supersede procedural provisions of the statute. See Lawrence P. King, The History and Development of the Bankruptcy Rules, 70 Am. Bankr. L.J. 217, 220 (Summer 1996). The supersession provision of the Rules Enabling Act was repealed in 1978 by § 247 of the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549.
The reference in Sabre Shipping to a "sworn statement" reflects that prior to 1960, § 57a of the Act required that the proof of claim be made under oath. Collier 14th ¶¶ 57.03[20, 57.04]. Currently, Official Form 10 advises, just below the signature line that: "Penalty for presenting fraudulent claim: Fine of up to $500,000 or imprisonment for up to 5 years, or both. 18 U.S.C. §§ 152 and 3571." (emphasis in original). In a case under the Code, at least one court has treated the notice on the Official Form of the penalties for presenting a fraudulent claim as the functional equivalent of a verification. See In re Cluff, 313 B.R. 323, 338 (Bankr.D.Utah 2004); aff'd, 2006 WL 2820005 (D.Utah. Sept.29, 2006). But see In re DePugh, 409 B.R. at 98 n. 9.
I consider the court's sua sponte review of the debtor's schedules to be a salutary practice. Review of the schedules permits the court to identify and reject claims objections that might not be based on a bona fide dispute regarding the validity or amount of the claim. The need to protect the integrity of the bankruptcy system, as well as the efficient and inexpensive operation of the claims allowance process, warrant such a proactive judicial approach.
Further, I do not consider this approach to place an undue burden on objecting debtors. There are a number of ways a debtor can rebut the information in a proof of claim in a manner that is consistent with the overriding goal of "facilitat[ing] the efficient, economical resolution of claims allowance disputes." Sacko, 394 B.R. at 94. A debtor's counsel can appear without the debtor and offer a sworn statement from the debtor into evidence (that may be received, despite its hearsay character, because the creditor is not present to object). Or, the debtor's counsel can serve discovery requests on the claimant and, upon receiving no response, offer into evidence the requested discovery and the fact that the claimant failed to respond. See n. 11, supra. Or, the debtor can appear at the hearing and either be available to testify while their counsel make an offer of proof to the court or actually testify. If the stakes are sufficient to justify the filing of a claims objection, all of these are reasonable options.
I recognize that there is some tension between the adversary nature of a contested matter and a judicial practice of regularly consulting and taking judicial notice of the debtor's schedules. However, because many credit card proofs of claim are for relatively modest sums that do not justify the expenditure of significant resources by the claimant or are filed by claimants who are located far from the courthouse, many claims objection hearings are uncontested. Review of the schedules assists the court in maintaining a proper balance of power in the claims allowance process.
