David R. Duncan, Chief US Bankruptcy Judge, District of South Carolina
THIS MATTER comes before the Court on the Objection to Claim of LVNV Funding, LLC ("Objection") filed by Sherry Lynne Vaughn ("Debtor") and the Response to Objection to Claim ("Response") filed by LVNV Funding, LLC ("LVNV" or "Creditor"). For the reasons set forth below, after careful consideration of the applicable law, arguments of counsel, and evidence submitted, the Court sustains the objection and disallows the claim.
Debtor filed for protection under chapter 13 of the Bankruptcy Code on May 29, 2015.
On June 23, 2015, a proof of claim was timely filed on behalf of "LVNV Funding, LLC its successors and assigns as assignee of Citibank (South Dakota), N.A" (the "LVNV proof of claim").
On June 30, 2015, Debtor filed her Objection to the LVNV proof of claim, arguing that the claim is unenforceable under South Carolina law because enforcement of the debt is barred by South Carolina's three year statute of limitations.
The Court held a hearing on the Objection and Response on August 10, 2015. At the hearing, Debtor argued that the claim should be disallowed because it is not enforceable under state law, is not revived by its inclusion on the schedules, and that permitting revival of the debt by listing it in bankruptcy schedules is contrary to federal bankruptcy law. Creditor responded that South Carolina law requires only a minimal acknowledgement of the debt to revive it, which includes listing the debt on bankruptcy schedules without noting the debt as disputed. Creditor asserts that Debtor is bound by her schedules, thus including the debt without notation of dispute is an assertion that the debt is recoverable in the bankruptcy proceeding. At the close of the hearing the Court took the matter under advisement.
At issue is allowance of LVNV's proof of claim. Debtor owed a debt
Properly filed proofs of claim, see Fed. R. Bankr. P. 3001(c), are prima facie evidence of the amount and validity of the claim. Fed. R. Bankr. P. 3001(f). If a party in interest objects to a properly filed proof of claim, the burden of proof shifts to the objecting party to overcome the prima facie presumption by offering evidence sufficient "to demonstrate the existence of a true dispute ... [with] probative force equal to the contents of the claim." Falwell v. Roundup Funding, LLC (In re Falwell), 434 B.R. 779, 784 (Bankr. W.D.Va.2009). This evidence must show that the claim falls within one of the categories of disallowed claims in § 502, such as being "unenforceable against the debtor... under ... applicable law." 11 U.S.C. § 502(b)(1). Although the ultimate burden of proof rests on the creditor to produce evidence and argument establishing the claim, Falwell, 434 B.R. at 784, this burden-shifting does not alter any substantive state law creating the claim, absent a prevailing provision in the Bankruptcy Code. Raleigh v. Ill. Dept. of Rev., 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) (holding that despite bankruptcy claims allowance burden shifting, Illinois tax law required the ultimate burden of proof to rest on the debtor; no bankruptcy law consideration or Code provision was counter to the state law requirement). The proper analysis of an objection to a proof of claim therefore requires not only consideration of the claimant's rights under state law, but also considering those rights in the context of the Bankruptcy Code to determine if other federal interests require a different result. Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
State law and non-bankruptcy federal law supply the underpinnings for much of the Bankruptcy Code. Property interests, security interests, and the debtor-creditor relationship turn on non-bankruptcy law. Referencing bankruptcy law prior to the current Code, the United States Supreme Court noted "`the Bankruptcy Act recognizes and enforces the laws of the state affecting dower, exemptions, the validity of mortgages, priority of payment and the like.'" Butner, 440 U.S. at 54 n. 9, 99 S.Ct. 914 (quoting Stellwagen v. Clum, 245 U.S. 605, 613, 38 S.Ct. 215, 62 L.Ed. 507 (1918)). "Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interest should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Id. at 55, 99 S.Ct. 914. This extends to security interests. Id. No reason exists why a reference to state law and consideration of contrary federal interests would not also extend to considering state law limitations on enforceability of claims to collect a debt.
Distilled to its essence, the question is whether, if South Carolina law revives a stale debt simply by its mention in lists and schedules filed in connection with a bankruptcy petition, some federal principle supplants the state law rule. The short answer to that is affirmative. "The bankruptcy system depends upon the cooperation and honesty of voluntary debtors."
If the debt can be revived as contemplated by Creditor, the revival would occur because Debtor included a stale debt on her schedules. There are several problems with this. First, debtors preparing to file for bankruptcy generally obtain the information in the schedules from their records, public records, and credit reports. Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, § 29.0 et. seq., Sec. Rev. Apr. 1, 2009, www.Ch13online. com, last accessed August 21, 2015. That information and the debtor's recollection may be incomplete or contain errors; thus the Bankruptcy Rules permit debtors to amend their schedules "as a matter of course at any time before the case is closed." Fed. R. Bankr. P. 1009(a). Because of the harsh penalties for omitting debts and assets, being all-inclusive on the schedules is consistent with the Code's principle of honest and full disclosure.
Second, the definition of the term "claim" as including unliquidated, contingent, unmatured, or disputed debts supports the idea of a need for full disclosure. The effect of reviving stale debts simply by including them in the lists would be to permit a creditor who slept on enforcement of its rights to have those rights revived by a debtor seeking relief from debt under federal law and acting consistent with a mandate of full disclosure. Such a creditor would then share in the pool of assets or income the debtor commits to her case, and generally do so at the expense of other creditors. Permitting this result undermines the balance made in the Code where honest debtors receive relief from debts, and creditors of equal rank, that is those who enjoyed similar and current rights to payment, share in the equal distribution of the debtor's assets.
Finally, the Code specifically addresses statutes of limitations and other defenses personal to debtors in § 558, providing
11 U.S.C. § 558. While the trustee is the representative of the bankruptcy estate, § 323(a) and preservation extends to the estate, not the debtor, preserving the statute of limitations against Creditor's revival claim works to benefit the estate and other creditors. Other bankruptcy courts have recognized the right of debtors to raise the statute of limitations defense. In re Hess, 404 B.R. 747, 749 (Bankr.S.D.N.Y.2009); Simpson v. PRA Receivables Mgmt., LLC (In re Simpson), Case No. 08-00344-TOM-13; Adv. Pro. No. 08-00137, 2008 WL 4216317, 2008 Bankr.LEXIS 2457 (Bankr.N.D.Ala. August 29, 2008); see also 5 Collier on Bankruptcy ¶ 558.01[1][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) ("By contrast, a defense is something that may prevent an unjust claim against the estate. If a defense can be raised by both the trustee and the debtor, the possibility of recovery from the estate is minimized."). As such, federal interests require disallowing the claim and denying revival of the debt.
If the federal principle is not sufficient in itself to support disallowing LVNV's proof of claim, the claim should also be disallowed because state law does not support revival of the debt. The parties agree that South Carolina law is applicable here. Actions to recover debts in South Carolina must generally be brought within three years of the default on the debt. S.C. Code Ann. § 15-3-530 (2015). This bar only effects the remedy available to a collecting party rather than the underlying right: it does not erase the debt. Knox v. McCall's Adm'r, ("[A]lthough it [statutes of limitation] takes away the remedy, [it] does not destroy the right: for a debt, or duty, once fairly contracted, remains such ... notwithstanding the means of its enforcement be removed.") (emphasis original); In re Mazyck, 521 B.R. 726, 730 (Bankr.D.S.C.2014) ("When applicable, the bar of a statute of limitation does not extinguish a creditor's underlying right to payment, but it does cause the remedy — enforcement of the right to payment — to be withheld.") (emphasis original).
Because the debt is not extinguished, stale debts could previously be revived at common law and may now statutorily be revived by either partial payment of the debt or "some writing signed by the party to be charged thereby." S.C. Code Ann. § 15-3-120 (2015).
Although modern case law in South Carolina on debt revival is sparse, older cases provide enough guidance for this Court to conclude that Debtor's inclusion of the debt in her schedules did not reset the statute of limitations. As noted supra, a mere acknowledgement of a debt as a debt that will be paid in accordance with other debts does not revive the debt. Horlbeck, 26 S.C.L. at 201. The notice provided by listing a debt on bankruptcy schedules is notice to a creditor that its debt will be paid along with the debtor's other debts, in accordance with the filed proof of claim, claims objection process, and other bankruptcy provisions. It does not create a right to payment and does not signify a promise to pay. Listing it on the schedules does not evidence an "undertaking to pay." Horlbeck, 26 S.C.L. at 201.
This result is further supported by Black v. White, the most analogous of the old cases to the present case. There, the administrator of a probate estate included a time-barred debt he had owed the decedent on an estate inventory. Black, 13 S.C. at 39-40. The South Carolina Supreme Court directly posed the question whether simply including this debt on an inventory list was sufficient to revive the debt and concluded it was not. Id. at 40. The Court noted that the duty of probate administrators is to include all debts and assets on the inventory. Id. The probate process would later determine whether "it could be shown, when called upon to account, that they [the debts] were collectible." Id. at 41. As such, inclusion of those debts in the inventory "cannot be regarded as an unqualified admission of a subsisting legal liability." Id. at 40-41.
Creditor makes much of the fact that Debtor did not mark the debt as disputed in her initial schedules. Debtors have the option of indicating on their schedules that claims are disputed, contingent, or unliquidated. While it may be a good practice to identify a claim a debtor believes is unenforceable as disputed, the omission of the mention of a dispute is not an "unequivocal and unqualified" promise to pay. First, as already noted, the Debtor may freely amend her schedules. Additionally, marking a debt as "disputed" in a chapter 13 schedule has no effect on the chapter 13 case, nor, generally, on the debtor or creditor. The creditor must still file a proof of claim which, upon filing, is deemed allowed until an objection is raised. In contrast, in a chapter 9 or 11 case, for which the same form schedules are used, marking a claim as disputed is significant because creditors whose debts are not disputed do not need to file proofs of claim. Fed. R. Bankr. 3003(a)(1). Finally, the significance of the "contingent" and "unliquidated" options are unrelated to claims treatment in a chapter 13 bankruptcy: however, they do identify the debts included in the chapter 13 eligibility analysis. 11 U.S.C. § 109(e). Omitting checking one of these boxes has no effect on the payment made on the claim in bankruptcy, and therefore is not evidence of a promise to pay.
Creditor also asserts that the schedules, because they are signed under penalty of perjury, are binding promises. Creditor has submitted no case law in support of this proposition and the Court has found none. True, there are instances where admissions on schedules are binding, E.g., Sovran Bank, N.A. v. Anderson, 743 F.2d 223, 225 n. 1 (4th Cir.1984) (noting that the market value of real property listed on the schedules, unamended or contested, was binding for the purpose of determining whether there was equity in the property), or at the very least carry evidentiary weight, Campbell v. Verizon Wireless S-CA (In re Campbell), 336 B.R. 430, 436 (9th Cir. BAP 2005) ("[T]he bankruptcy court may properly consider as admissions or evidence any information contained in debtor's bankruptcy schedules...."). But, presuming good faith, schedules may always be amended during the course of a bankruptcy case. No court has held otherwise, thus this Court cannot conclude that simply
Debtor's objection to LVNV's proof of claim is sustained. The claim is disallowed.
AND IT IS SO ORDERED.
