As those who regularly practice consumer bankruptcy law may have already figured out, change is afoot in Rule 3001. The increased examination of the content of and basis for mortgage proofs of claim elevated a long-running discussion about claims procedure to the national spotlight, and sparked a series of proposed changes to Rule 3001 that led to an unusually high level of formal comment by the consumer bankruptcy and credit industry practitioners. These proposals touched not only mortgage proofs of claim, but also applied new requirements to consumer credit card claims. As a result of the public comments, the Advisory Committee on Bankruptcy Rules has now revised the proposed language of the new Rule 3001. While the new proposed rule may resolve some of the issues raised in the comments, the new language leaves other issues unresolved.

The August 2009 Rule Proposal
The language of the initially proposed Rule 3001(c)(1) required that the creditor attach the last account statement sent to the debtor prior to the bankruptcy filing. These statements contain the claim amount at the time of the filing, as well as information about interest, fees and charges; however, while the information used to create the statements may be easily accessible to creditors, the statements themselves may be impossible for creditors to produce. The proposed rule also demanded a separate itemization of interest, fees and arrearages, but these are rolled into the balance of a revolving account each billing statement and cannot be separated back out.

The proposed rule included a sanction in Rule 3001(c)(2)(D) for failure to attach the last statement, which required that the creditor be precluded from presenting evidence of the information contained in the statement in any form as evidence in the case, unless the court determined that “the failure was substantially justified or harmless.”[2] The court could award “other appropriate relief” in addition to or instead of precluding the creditor from presenting evidence to prove up its claim.

Commentators opposed the sanction in the proposed rule as effectively creating a new basis for claim disallowance that is not found anywhere in the Bankruptcy Code itself. As the Supreme Court pointed out in Travelers Casualty Surety Co. of America v. Pacific Gas & Electric Co.,[3] only Congress has “the power to amend the Bankruptcy Code,” and“where Congress has intended to provide…exceptions to provisions of the Bankruptcy Code, it has done so clearly and expressly.”[4]

The New Rule Proposal
The Advisory Committee’s Report, issued on May 27, 2010, shifted the landscape of the Rule 3001 debate once again. The committee indicated that it had withdrawn the language “shall be precluded” from the proposed Rule 3001(c)(2)(D) and instead stated that the court “may, after notice and hearing, take either or both of the listed actions.”[5] “[T]he listed actions” presumably refers to (1) preclusion of presentation of the evidence that would have been listed on the documentation required by the rule, or (2) other appropriate relief, including reasonable expenses and attorney’s fees that resulted from the creditor’s failure to provide documentation with the proof of claim. The report also states that the committee note will state that the grounds for claim disallowance are only those listed in § 502(b), and that inadequate documentation alone is not one of them.

Additionally, the committee withdrew the proposed changes that made up the new Rule 3001(c)(1), and did not recommend that the rule now require that the creditor attach the last account statement sent to the debtor prior to the bankruptcy filing. Instead, the proposals published for comment in August 2010 will include Rule 3001(c)(3), which will again address documentation requirements for revolving consumer credit agreements and will remove those claims from the purview of Rule 3001(c)(1). It will instead require that a statement be filed with the proof of claim that specifies (1) the name of the entity from whom the creditor purchased the account, (2) the name of the entity to whom the debt was owed at the time of the last transaction on the account by an account holder, (3) the date of the last transaction on the account by an account holder, (4) the date of the last payment on the account and (5) the date on which the account was charged off. The rule also provides that a party in interest may obtain the writing on which the claim is based by making a written request for the documentation to the claim holder.

Why the New Rule Proposal Is Better
This proposal addresses the concerns about the August 2009 Rule in several ways:

1. The information required by the rule instead of the last statement is more likely to aid the debtor in identifying the debt associated with the filed claim. It also allows the creditor to present that information in a format that is more easily obtained or created than the last account statement sent to the debtor.

2. The newly proposed language of Rule 3001(c)(2)(D) has removed the requirement that a claim be effectively disallowed for failure to provide documentation. While such a sanction still remains optional as suggested under the rule, it is now permissive in its remedy language. Since it retains important judicial discretion that will be applied to the facts and circumstances of a particular case, a judge may continue to treat a diligent creditor’s honest mistake as an honest mistake, and allow the creditor the opportunity to prove up its claim. With the committee note now more explicitly pointing to § 502(b) as the grounds for claim disallowance, judges may hesitate to refuse to allow the creditor at least some leeway to prove up the debt, though some may still impose other sanctions instead.

3. Another effect of the new rule and committee note may be to require debtors who are routinely filing objections to claim due to lack if supporting documentation to explicitly state § 502(b) grounds for disallowance prior to a court agreeing to disallow a claim. This should be a threshold requirement before the burden shifts to the creditor to prove up its claim. A further improvement would be to include a provision in the rule that any debtor who is found to be filing frivolous objections in order obtain attorney’s fees or harass creditors out of filing claims should be subject to awards of attorney’s fees or other relief for the creditor.

Conclusion
The rule proposal to be published in August 2010 may still leave room for comment. For instance, for debt buyers, providing the date of the last payment on the account may be difficult when dealing with debtors who are continuing to make payment on the debt to the original creditor, but the rule does not explicitly state that the debt buyer may refer to only its own business records to be in compliance. The new requirement that the claim holder produce the writing upon which a claim is based may be impossible to fulfill because the rule provides no alternative to creditors who, for legitimate reasons such as account or age, are no longer able to obtain a copy of the writing upon which the claim is based (typically the credit application). In addition, the committee note suggests that the proposed rule will not eliminate the requirement for a separate itemization of interest, fees and arrearages, with no recognition of the fact that usually, the contract for a revolving account requires that any interest and fees that are not paid in one billing cycle will be rolled into the balance for the next billing cycle. In short, a lively comment period over Rule 3001(c) could still ensue. 

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Most people have had no difficulty meeting the debt limitations for chapter 13. As of April 1, 2010, an individual was eligible for chapter 13 with no more than $1,081,500 in secured debt and no more than $360,525 in unsecured debt.

Much has been written as to whether a debt is contingent or not, or liquidated or not, so as to be counted for purposes of chapter 13. Much has been written on whether an individual has regular income. Little has been written about regarding who is an “individual” for purposes of chapter 13. Why is this important?

Section 109(e) of the Bankruptcy Code, 11 U.S.C. § 109(e), provides:

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $360,525 and noncontingent, liquidated, secured debts of less than $1,081,500 or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $360,525 and noncontingent, liquidated, secured debts of less than $1,081,500 may be a debtor under chapter 13 of this title.

Who or what is an “individual” for the purposes of this provision? What happens if one spouse has debts less than these limits and the other spouse has her own debts that are also less than these limits? What if the total debt of both spouses is in excess of these limits? And what if the joint debt of the spouses together is relatively small?

Put another way, may an individual and that individual’s spouse, each of whom have debt less than the pertinent limits for chapter 13, file a joint case where the aggregate of all of their debt is greater than the limits for chapter 13?

This issue is now pending in the U.S. Bankruptcy Court for Northern District of Illinois, where the trustee has moved to dismiss, asserting that the debtors may not be joint debtors under chapter 13 where their combined debt exceeds the debt limits for an “individual” in chapter 13. On behalf of the debtors, we contend that each individual is a separate debtor and each debtor’s filing and eligibility is to be determined separately, even though they filed joint cases that are jointly administered.

The Code does not clearly articulate the debt limits in chapter 13 for married couples with separate debt who choose to file jointly. Bankruptcy Code § 101(3) defines an “individual with regular income” as an “individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this title, other than a stockbroker or a commodity broker.” Therefore, when Bankruptcy Code § 109(e) refers to an “individual with regular income and such individual’s spouse,” it would appear to apply to situations where a joint debtor is not an “individual with regular income” and therefore ineligible for chapter 13. In re Werts, 410 B.R. 677, 687 (Bankr. D. Kan. 2009). See also In re Johnson, 400 B.R. 639, 643 (Bankr. N.D. Ill. 2009) (in analyzing definition of “current monthly income,” court considers that distinction “between ‘debtor’ and ‘debtor’s spouse’ in a joint case conflicts with other provisions of the Code that treat both joint filers interchangeably as ‘debtors’”). But see In re Weiser, 391 B.R 902, 908 (Bankr. S.D. Fla. 2008) (“Section 109(e) clearly provides that husband and wife debtors filing joint petitions are limited to $336,900 in total unsecured debt.”).

Werts distinguished Weiser due to the difference in procedural posture. In Weiser, the debtors filed a chapter 13 and a creditor objected to confirmation due to their lack of eligibility under § 109(e). At the confirmation hearing, debtors’ counsel made an oral motion to bifurcate the husband and wife’s case, presumably to cure the defect in eligibility. The court held that doing so was untimely and bifurcation of a case was not procedurally possible. 391 B.R. 902. But see In re Butler, No. 10-00317, 2010 WL 2035373 (Bankr. D. D.C. May 21, 2010) (holding joint chapter 13 case could be severed to cure ineligibility defect).

In Werts, the debtors filed a chapter 7 case, in which debt limits do not apply, and ultimately filed a motion to convert to chapter 13. Since the issue of eligibility arose at the time of the motion to convert and a plan had not yet been filed, the court felt that the facts could be distinguished from those in Weiser. 410 B.R. at 687. However, the procedural posture of the case in Werts was not outcome-determinative to the substance of the holding as the court went on to interpret how § 109(e) should be read.

A pragmatic reading of § 109(e) in our view is the better rule and is in line with recent decisions issued by the Supreme Court. See Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007) (holding conversion under § 706(a) not absolute despite Senate and House Committee Reports to contrary, but looked to implicit language in §§ 706(d) and 1307(c) for denying conversion due to debtor’s bad faith), United Student Aid Funds Inc. v. Espinosa, 559 U.S. ___, 2010 WL 1027825 (U.S. March 23, 2010) (holding that student loan debts could be discharged without undue hardship determination as required by § 523(a)(8) and Rule 7001(6) due to instructions in § 1325(a) that a bankruptcy court “confirm a plan only if the court finds, inter alia, that the plan complies with the ‘applicable provisions’ of the Code.”), and Hamilton v. Lanning, 560 U.S. ___, 2010 WL 2243704 (June 7, 2010) (holding that “projected disposable income” allows bankruptcy courts to account for changes in the debtor’s income that are “known or virtually certain at the time of confirmation” instead of using “current monthly income” calculated by § 101(10A)(A)(i) minus expenses calculated by §§ 707(b)(2) and 1325(b)(3)(A) to determine projected disposable income).

BAPCPA evokes the policy choice of Congress favoring chapter 13 over chapter 7. To limit the debts of married couples to the same amount as individuals does not encourage chapter 13 filings. Werts, 410 B.R. at 688. Debt limits for joint debtors should not simply be doubled. As Colliers on Bankruptcy §109.06[4] (16th Ed. Rev. 2010) states:

[I]n come cases, adding the debts of a spouse will cause those debts to exceed the statutory limits, and the limits are not doubled in a joint case. In such cases, only one spouse may be able to file as a chapter 13 debtor. Alternatively, if few of the debts are joint, each spouse may be eligible to file a separate chapter 13 case.

We believe that debtors who are each eligible to file their own chapter 13 case, however, should be able to file a joinly as authorized by Bankruptcy Code § 302(b). Werts, 410 B.R. at 688. This is because § 302(b) establishes that the commencement of a joint case creates two separate estates. “The court shall determine the extent, if any, to which the debtors’ estate shall be consolidated.” Therefore, “each joint debtor has a separate estate unless the two estates are substantially consolidated under § 302(b).” In re Banker, 205 B.R. 125, 134 (Bankr. N.D. Ill. 1997) (citing Ageton v. Cervenka (In re Ageton), 14 B.R. 833 (9th Cir. B.A.P. 1981).

Even though debtors here could each file separate chapter 13 petitions, this would elevate form over substance by forcing them to pay additional court and attorney fees for separate petitions. This could reduce funds available for creditors due to increased administrative expenses. Werts, 410 B.R. at 688.

We urge chapter 13 trustees to encourage joint debtors to file chapter 13 cases under these circumstances and avoid needless motions to dismiss resulting in the need to file two separate chapter 13 cases and motions for procedural consolidation.

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