Dealing with Automobile Leases Post-BAPCPA
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) added a new provision regarding personal property leases, §365(p), which provides:
(1) If a lease of personal property is rejected or not timely assumed by the trustee under subsection (d), the leased property is no longer property of the estate and the stay under §362(a) is automatically terminated.
(2) (A) If the debtor in a case under chapter 7 is an individual, the debtor may notify the creditor in writing that the debtor desires to assume the lease. Upon being so notified, the creditor may, at its option, notify the debtor that it is willing to have the lease assumed by the debtor and may condition such assumption on cure of any outstanding default on terms set by the contract.
(B) If, not later than 30 days after notice is provided under subparagraph (A), the debtor notifies the lessor in writing that the lease is assumed, the liability under the lease will be assumed by the debtor and not by the estate.
(C) The stay under §362 and the injunction under §524(a)(2) shall not be violated by notification of the debtor and negotiation of cure under this subsection.
(3) In a case under chapter 11 in which the debtor is an individual and in a case under chapter 13, if the debtor is the lessee with respect to personal property and the lease is not assumed in the plan confirmed by the court, the lease is deemed rejected as of the conclusion of the hearing on confirmation. If the lease is rejected, the stay under §362 and any stay under §1301 is automatically terminated with respect to the property subject to the lease.
Automobile leases are the most common type of personal property leases in consumer bankruptcy cases. There is confusion both among the consumer bankruptcy bar as well as among automobile lessors regarding what is required for a debtor to assume a personal property lease post-BAPCPA.
Section 365(p) was added to clarify that the automatic stay terminates upon rejection of a personal property lease and in response to the pre-BAPCPA cases that held that chapter 7 debtors could not assume a lease. See In re Rogers, 359 B.R. 591, 593 (Bankr. D. S.C. 2007).
What Is the Required Form for Intent to Assume under §365(p)(2)(A)?
Other than the requirement that the communication be in writing, the statute does not require any particular form for the notice. Unlike reaffirmation agreements, the Code does not provide detail on what form a notice of assumption should take. The practice of the author is to prepare a notice of intent to assume pursuant to §365(p), using the case caption in that specific debtors case. The notice states that the debtor is, pursuant to 11 U.S.C. §365(p), to assume the debtor’s personal property lease with the lessor. In addition, the notice identifies the vehicle with specificity and includes the lessor’s account number. It is also the practice of the author to attach a certificate of service to the notice and file it with the bankruptcy court. However, neither the Code, nor the Federal Rules of Bankruptcy Procedure, requires filing such a notice.
What Response May a Lessor Make to a Notice under §365(p)?
The statute does not provide guidance as to how the lessor is required to respond. Curiously, the statute does specify that the lessor “may, at its option, notify the debtor that it is willing to have the lease assumed by the debtor and may condition such assumption on cure of any outstanding default on terms set by the contract.” See §362(p)(2)(A).
Beyond that, the statute is unclear as to exactly how assumption occurs. In response to the initial notice pursuant to §365(p)(2)(A), if the debtor and lessor don’t reach an agreement, the debtor can then provide a second notice pursuant to §365(p)(2)(B) and the lease is then assumed.
In the event that the lessor is not willing to permit assumption and the debtor is in default under the lease, the lessor can exercise its remedies under applicable non-bankruptcy state law. Finally, §365(p)(1) provides that if the trustee does not timely assume the lease, “the leased property is no longer property of the estate and the stay under §362(a) is automatically terminated.”
There Is No Requirement for Bankruptcy Court Approval or Involvement
A number of bankruptcy courts have held that bankruptcy courts should not get involved in the assumption of a personal property lease under §365(p). See, e.g., In re Rogers, 359 B.R. 591, 593 (Bankr. D. S.C. 2007); In re Gaylor, 379 B.R. 413, 414 (Bank. D. Conn. 2007); In re Finch, 2006 WL 3900111 (Bankr. D. Colo. Oct. 2, 2006) (No. 06-14016-SBD); In re Walker, 2007 WL 1297112 (Bankr. M.D.N.C. Apr. 27, 2007) (No. 06-11514C-7G); In re Kanan, No. 07-32270 (N.D. Ohio Jun. 26, 2007); In re English, No. 07-55986 (E.D. Mich. Oct. 30, 2008); In re Jeffery, No. 08-23634 (Bankr. N.D. Ind. 2009).
Assumption Pursuant to §365(p)(2) Does Not Excuse Compliance with Reaffirmation Requirements under the Code
Bankruptcy courts also reasoned that §365(p) is independent of §524(c) and that §365(p) does not result in a waiver of discharge, and that to reaffirm the debtor’s obligations under the lease, a reaffirmation agreement is still necessary. In re Walker, 2007 WL 1297112 (Bankr. M.D.N.C. Apr. 27, 2007) (No. 06-11514C-7G); In re Finch, 2006 WL 3900111 (Bankr. D. Colo. Oct. 2, 2006) (No. 06-14016); In re Gaylor, 379 B.R. 413, 414 (Bank. D. Conn. 2007); In re Creighton, 2007 WL 541622 (Bankr. D. Mass. Feb. 16, 2007) (No. 06-13333); In re Finch, 2006 WL 3900111, (Bankr. D. Colo. Oct. 2, 2006) (No. 06-14016); In re Kanan, No. 07-32270 (N.D. Ohio Jun. 26, 2007).
Lien Stripping: Is It Worth It?
In In re Lane,( George Lane, et. Al v. Western Interstate Bancorp), 280 F.3d 663 (6th Cir. 2002), the Sixth Circuit Court of Appeals, following the direction of the U.S. Supreme Court’s decision in Nobleman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106 (1993), held that §1322(b)(2), or what is commonly known as the anti-modification clause, did not protect an unsecured mortgage-holder from modification of its lien through the chapter 13 plan process. What this means is that if the mortgage creditor is not a holder of an allowed “secured claim” as defined by §506(a), the debtor may “strip off” the mortgage and treat it as an allowed “unsecured claim,” thus receiving the same treatment as all other general unsecured creditors through a confirmed chapter 13 plan. Through this process, if the chapter 13 debtor completes his plan and receives a discharge, the court’s ruling effectively allows the debtor to remove the lien from the property while paying possibly only pennies on the loan. This could be an attractive prospect for a debtor whose home value is slumping in the current economic downturn. This article’s focus is on whether this process is beneficial for either party.
The now-unsecured mortgage-holder who has to wait anywhere from 20-60 months before receiving any monies from the chapter 13 estate obviously does not benefit from having it’s lien stripped. This creditor advanced funds with the expectation of repayment, or at least, a security interest in the collateral. Yet because of the slumping real estate market, the creditor must idle by while its claim is converted to an unsecured debt. While lien-stripping through the chapter 13 process is not new, it has become more prevalent in the past 12-16 months due to the substantial decrease of values of homes across the nation. Until the market recovers and values of homes begin to rise, mortgage lenders can expect debtors to continue to attempt to strip liens off their real estate through the chapter 13 process.
An interesting question is whether this process ultimately benefits the debtor/borrower. Debtors will of course be relieved to hear that they may be able to remove a worthless lien on their property and pay relatively little to unsecured creditors through the plan. However, debtors must be cautioned that permanent removal of the mortgage lien is only effectuated upon discharge under §1328(a). Due to the percentage of chapter 13 cases that fail, debtors may not realize that there is more to be done than just the filing of a petition in bankruptcy to avoid a lien. When a case is either dismissed or converted to a case under chapter 7, the lien is reinstated and likely will be far more delinquent than when the process began. The debtor may be forced to surrender the real estate in a chapter 7 process, or, in the case of dismissal, face immediate action by the mortgage lender. In my experience, the debtor may even be so delinquent as to preclude any loss-mitigation options that may have been available had the debtor treated the mortgage creditor differently through the chapter 13 process.
In addition, some debtors propose chapter 13 plans that attempt to strip the lien of an unsecured mortgage creditor without having filed an adversary proceeding pursuant to Fed. R. Bankr. P. 7001. The Sixth Circuit Court of Appeals seemed to suggest that an adversary is necessary when so expressed by the rules. See In re Ruehle, 412 F.3d 679 (6th Cir. 2005). In Ruehle, the Sixth Circuit upheld the bankruptcy court’s and Bankruptcy Appellate Panel’s decision that the “discharge by declaration” language, attempting to discharge a student loan as an undue hardship by mere recitation of such in a plan, violated the creditor’s due process rights, and resultantly, the loan was not discharged. The message the court delivered is that when Congress had contemplated the filing of an adversary, and the consequent heightened-notice requirements, attempting to circumvent such through a provision in a chapter 13 plan could result in the discharge being declared void or subject to attack through a Federal Rule of Civil Procedure 60(b) motion.
Attempting to strip a lien through the chapter 13 plan while not filing an adversary proceeding may lead to the same result as in Ruehle. Fed. R. Bankr. P. 7001 requires filing an adversary when determining the validity or extent of a lien. Failing to file an adversary could lead to the lien-strip being rendered invalid post-confirmation or post-discharge, leaving the debtor to face almost certain foreclosure and a failed chapter 13 process.
In the end, in this author’s opinion, the lien-stripping process in chapter 13 fails to provide the benefits that the Bankruptcy Code intended to give to debtors with unsecured mortgages on their residences. Continuing down the path that is being paved right now will tighten mortgage lending and result in debtors losing the very real estate they attempted to protect when entering bankruptcy—ultimately benefiting neither party.
Chapter 7 Debtor May Not Expense 26 U.S.C. §401(k) Loan Repayment
The U.S. Court of Appeals for the Ninth Circuit recently affirmed a bankruptcy court’s decision to dismiss a chapter 7 case pursuant to §707(b)(3) in In re Egebjerg.[1] The bankruptcy court concluded that the debtor’s loan from his §401(k) plan was a secured loan, repayment of which can be expensed pursuant to §707(b)(2)(A)(iii). Nevertheless, the court found that the debtor could pay a significant portion of his debts after the loan was repaid, finding the case abusive under §707(b)(3).
The Ninth Circuit agreed. The debtor’s filing of his petition was presumptively abusive because the expensing of the repayment of a loan from a 401(k) plan was not a monthly payment for a secured debt pursuant to §707(b)(2)(A)(iii), nor an other necessary expense pursuant to §707(b)(2)(A)(ii)(I).
The Ninth Circuit sided with the vast majority of courts, particularly pre-BAPCPA rulings,[2] that find that a 401(k) loan obligation is not a debt as the term is defined by the Code. Nor did Congress effect any change to the definitions in enacting BAPCPA. The court equated “debt” with “claim” based on definitions found in the Code.[3] Furthermore, the obligation arising from a 401(k) loan is to the retirement plan participant, i.e., the debtor, rather than to any other party. Consequently, the loan is not a debt within §707(b)(2)(A)(iii).
Because Congress acts intentionally when omitting statutory language that it has included elsewhere, chapter 13 debtors’ right to expense 401(k) loan payments in projected disposable income is specifically preserved in §1322(f). In addition, the automatic stay does not bar an automatic payroll deduction for such a payment.[4] Finally, the court found its reasoning consistent with Congress’s intent to divert many would-be chapter 7 debtors into chapter 13.
The court also found that a 401(k) loan repayment was not an “other necessary expense” as permitted by §707(b)(2)(A)(ii)(I). Relying on the Internal Revenue Service’s guidelines, which are expressly incorporated into the Code by Congress, the court found that such an expense was not necessary but voluntary.[5] The court described a debt repayment as functionally equivalent to a voluntary retirement plan contribution, which the IRS determined to not be deductible as an other necessary expense.
The Ninth Circuit rejected the bankruptcy court’s holding that a 401(k) loan repayment might qualify as a special circumstance that could rebut the presumption of abuse.[6] The Code’s examples of such circumstances shared a feature that occurred beyond the control of the debtor. The Ninth Circuit acknowledged that, while a debtor’s resort to borrowing from his retirement plan might arise under special circumstances, justifying a special-circumstances loan repayment expense, the debtor here had made no such showing.
2. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
3. See 11 U.S.C. §§101(5) and (101)(12).
4. See 11 U.S.C. §362(b)(19).
5. These guidelines are found in the IRS’s Internal Revenue Manual. Importantly, the court’s reliance on these guidelines arguably determines the permissibility of many other expenses comprising the means-test regime including, e.g., transportation ownership expense when a debtor is under no obligation to make a vehicle loan or lease payment, or an additional operating expense ($200) for a debtor’s older or high-mileage vehicle.
6. See 11 U.S.C. §707(b)(2)(B).
ABI’s 16th Annual Northeast Bankruptcy Conference
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The 16th Annual Northeast Bankruptcy Conference will be held in conjunction with the 4th Annual Northeast Consumer Forum July 16-19 at the historic Mount Washington Resort in Bretton Woods, New Hampshire. This year’s program offers more than 8 hours of CLE and features a roster of the best regional speakers. Outdoor enthusiasts and families can take advantage of an array of activities as well. Several of the sessions will be of particular interest to the committee.
Panelists in the session “Nuts and Bolts of Representing a (Really) Small Business” will discuss basic guidelines and issues specific to small businesses in bankruptcy. Materials include a glossary of terms and a timeline. Lynne Riley of Altman Riley Esher LLP in Boston will moderate. Panelists will include William S. Gannon of William S. Gannon, PLLC in Manchester, N.H., Hon. Enrique S. Lamoutte of the U.S. Bankruptcy Court (D. P.R.) in San Juan and Thomas J. Raftery of Raftery Law Offices in Carlisle, Mass. Please click the link below to view the materials.
Nuts and Bolts of Representing a (Really) Small Business
Panelists in the session “Home Retention and Loss Mitigation Update” will outline the actions that lawmakers in New England states are taking to attempt to quell the rising tide of foreclosures as well as changes to government programs that are meant to help homeowners who are in trouble. Panelists will include Jerrold S. Levinsky of the Massachusetts Fair Housing Center in Holyoke, Mass., Hon. Joel B. Rosenthal of the U.S. Bankruptcy Court (D. Mass.) in Worcester and Mitchell E. Starr of Mitchell Starr, PC in Boston. Peter V. Guaetta of Guaetta & Benson, LLC in Chelmsford, Mass. will moderate. Please click the link below to view the materials.
Home Retention and Loss Mitigation Update
The session “Credit Card Defaults” will explain implications of the Credit Cardholder’s Bill of Rights Act of 2009, including unfair and deceptive acts, truth-in-lending and truth in savings. It will also address the impact of the Great Collapse of 2008 on the consumer debtor facing the prospect of a bankruptcy filing. Patricia Antonelli of Partridge, Snow & Hahn, LLP in Providence, R.I. will moderate. Panelists will include Hon. J. Michael Deasy of the U.S. Bankruptcy Court (D. N.H.) in Manchester, David C. Phalen of Bartlett Hackett Feinberg P.C. in Boston and Mary F. Stewart of the Stewart Law Offices in Concord, N.H. Please click the link below to view the materials.
Panelists in the session “Cramdowns Now and New: Ins and Outs of Chapter 13 Mortgage Cramdowns” will discuss the difficulties of completing a cramdown plan since the 2005 amendments to BAPCPA and how consumers are turning to alternative non-bankruptcy approaches. Deirdre Keady of Harmon Law Offices PC in Newton Highlands, Mass. will moderate. Panelists will include William J. Amann of Sheehan Phinney Bass & Green, PA in Manchester, N.H., Nicholas F. Ortiz of the Law Office of Nicholas F. Ortiz, PC in Boston and Hon. Mark W. Vaughn of the U.S. Bankruptcy Court (D. N.H.) in Manchester, N.H. Please click the link below to view the materials.
Cramdowns Now and New: Ins and Outs of Chapter 13 Mortgage Cramdowns
The session “High-income, High-debt Reorganization: Chapter 11 for the People” will address issues and ambiguities that arise for individual debtors who file chapter 11 in the post-BAPCPA environment. Nina M. Parker of Parker & Associates in Winchester, Mass. will moderate. Panelists will include James F. Molleur of James F. Molleur, LLC in Biddeford, Maine, Christopher J. Panos of Craig and Macauley, PC in Boston, Michael J. Pappone of Goodwin Procter LLP in Winchester, Mass. and Hon. Brian K. Tester of the U.S. Bankruptcy Court (D. P.R.) in San Juan. Please click the link below to view the materials.
High-income, High-debt Reorganization: Chapter 11 for the People
Please click the link below to read biographies of our esteemed faculty members at this year’s Northeast Consumer Forum.
ABI’s Atlanta Consumer Bankruptcy Skills Training - Part II
The writing skills portion of the program included three sessions that explained important fundamentals of writing clearly. Panelists for two of the three sessions decided to combine their expertise and present together. The first, “Preparation, Strategy and General Principles,” provided guidance in thinking about the writing process and gave tips on writing more clearly, careful proofreading and ensuring logic and accuracy. The session on “Writing Principles Demonstrated in Common Consumer Bankruptcy Pleadings” offered ten tips for success in writing consumer bankruptcy pleadings. Hon. James E. Massey of the U.S. Bankruptcy Court (N.D. Ga.) in Atlanta and Hon. C. Ray Mullins of the U.S. Bankruptcy Court (N.D. Ga.) in Atlanta were the lead panelists for the first session. Beth Anne Harrill and Karen D. Visser, both career law clerks for Judges Paul Bonapfel and Homer Drake, respectively, of the U.S. Bankruptcy Court (N.D. Ga.) in Atlanta and Newnan, Ga. were the lead panelists for the second session. Please click the link below to view the materials from both parts of the session.
Preparation, Strategy and General Principles
The third writing skills session, “How to Write a Brief or Memorandum of Law,” took attendees step by step through the brief-writing process and taught how to effectively and succinctly argue one’s case. Ezra H. Cohen of Troutman Sanders LLP in Atlanta presented. Please click the link below to view Mr. Cohen’s paper.
Panelists in the session “Oral Skills and Persuasion Techniques” gave practical advice about how to speak in court persuasively and feel comfortable while doing so. R. Scott Williams of Haskell Slaughter Young & Rediker, LLP in Birmingham, Ala. and Mark M. Maloney of King & Spalding LLP in Atlanta presented. Please click the link below to view the materials.
Panelists in the session “Negotiation/Out-of-Courtroom Skills and Techniques” discussed guidelines for negotiating settlements, types of cases that are typically settled and the procedures and purposes of mediation. Panelists included Hon. Mary Grace Diehl of the U.S. Bankruptcy Court (N.D. Ga.) in Atlanta, Neil C. Gordon of Arnall Golden Gregory LLP in Atlanta and O. Byron Meredith, III, a chapter 13 trustee from Savannah, Ga. Please click the link below to view the materials.
The session “Professionalism in Oral and Written Advocacy, Including with Unrepresented Parties” presented attendees with a range of hypothetical situations and provided applicable rules to use as guidelines. David N. Lefkowitz of The Lefkowitz Firm, LLC in Atlanta led the session. Please click the link below to view the materials.
Panelists in the “Creditor Representation Breakout” session discussed new trustee procedures concerning section 341 meetings, specifics about properly filing a proof of claim and new guidelines for mortgage claims. The panelists also focused on important considerations when filing a proof of claim including submission of supporting documentation, filing for the proper amount and the “Anti-Ride Through” option. Panelists included Ronald A. Levine of Levine, Block & Strickland LLP in Atlanta, Whitney Warnke Groff of McCalla Raymer, LLC in Roswell, Ga. and Eric W. Roach from the Office of Nancy J. Whaley, Standing Chapter 13 Trustee in Atlanta. Please click below to view the materials.
Panelists in the “Debtor Representation Breakout” session discussed forms useful to any consumer debtor practice. The materials included forms explaining basic information about a client’s chapter 13 filing, checklists of necessary documents and information, questions that might be asked at the 341 hearing and helpful websites. Panelists included Richard H. Thomson of Clark & Washington, PC in Atlanta, Robert O. Colliersmith of Colliersmith & Associates PC in Marietta, Ga. and Melissa Herman of Herman & Russo P.C. in Atlanta. Please click the link below to view the materials.
Case Update: Whether a Claimed Expense Qualifies as an Adjustment to the Means Test Expenses Due to "Special Circumstances"
The Bankruptcy Code specifically provides for adjustments of current monthly income or expenses due to "special circumstances," but in order to qualify, there must be "no reasonable alternative." The Code sets forth a test, placing the burden of proof on the debtor to determine if a requested adjustment qualifies as a special circumstance: "In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment to income; and to provide (1) documentation for such expense or adjustment to income and (2) a detailed explanation of the special circumstances that make such expenses or adjustment to income necessary and reasonable."
The Code provides two examples of special circumstances, as "a serious medical condition or a call or order to active duty in the Armed Forces." Bankruptcy courts, although not unanimously, have found that expenses such as student loans, child support incurred postpetition and marital separation qualify as special circumstances. Additionally, courts have found that lump-sum withdrawals from retirement funds, as well as a loss of employment, qualify as special circumstances to justify adjustments to current monthly income.
The following are sample cases involving income adjustments.
In re Templeton, 365 B.R. 213 (Bankr. W.D. Okla. 2007): Found that the debtors have the burden to present documentation and detailed explanation of additional expenses, attest to these expenses under oath and demonstrate no reasonable alternative but to pay expenses.
Allowed under Special Circumstances:
In re Delbecq, 368 B.R. 754 (Bankr. S.D. Ind. 2007): Student loan repayment.
In re Armstrong, No. 06-31414, 2007 Bankr. LEXIS 1812 (Bankr. N.D. Ohio May 24, 2007): Expenses related to marital separation.
In re Littman, 370 B.R. 820 (Bankr. D. Idaho 2007): Expense for child support incurred postpetition.
In re Cribbs, 387 B.R. 324 (Bankr. S.D. Ga. 2008): 401(k) loan.
In re Dethample, 390 B.R. 716 (Bankr. D. Kan. 2008): One-time withdrawal from 401(k) constitutes special circumstance to allow deviation from current monthly income.
In re Heath, 371 B.R. 806 (Bankr. E.D. Mich. 2007): Loss of longstanding employment warrants adjustment in income.
In re Martin, 371 B.R. 347 (Bankr. C.D. Ill. 2007): Postpetition birth of a child.
In re Scarafiotti, 375 B.R. 618 (Bankr. D. Colo. 2007): Housing rental costs exceeding IRS standard with medical evidence of child with special needs.
In re Turner, 376 B.R. 370 (Bankr. D. N.H. 2007): Business mileage.
Disallowed under Special Circumstances
In re Vaccariello, 375 B.R. 809 (Bankr. N.D. Ohio 2007): Student loans.
In re Delunas, 2007 Bankr. LEXIS 803 (Bankr. E.D. Mo. March 6, 2007): Dependent's education.
In re Zahringer, No. 07-30217, 2008 Bankr. LEXIS 1770 (Bankr. E.D. Wis. May 30, 2008): Student loans.
McVay v. Otero, 371 B.R. 190 (W.D. Tex. 2007): 401(k) loan.
In re Parulan, 387 B.R. 168 (Bankr. E.D. Va. 2008): Loss of overtime.
In re Patterson, 392 B.R. 497 (Bankr. S.D. Fla. 2008): Storage unit costs and unreimbursed on-the-job meal expenses.
In re Hernandez, No. 08-31588, 2008 Bankr. LEXIS 3609 (Bankr. N.D. Ohio Dec. 1, 2008): Choosing to work reduced hours and changing finances due to marriage.
In re Demonica, 345 B.R. 895 (Bankr. N.D. Ill. 2006): Housing expense for grandmother's home.
In re Davis, No. 08-32507, 2008 Bankr. LEXIS 2905 (Bankr. N.D. Ohio Sept. 12, 2008): Life and health insurance for nondependent adult child.
In re Schley, No. 08-26146, 2008 Bankr. LEXIS 2214 (Bankr. E.D. Wis. Aug. 22, 2008): Wages paid in nine months per year only since employed by school system.
In re Tranmer, 355 B.R. 234 (Bankr. D. Mont. 2006): Excessive transportation cost from home to work due to distance of commute.
In re Martin, 371 B.R. 347 (Bankr. C.D. Ill. 2007): Transportation costs due to distance to employment and household errands.
On Gunslingers, Presumptions and Burdens of Proof
There have been an increasing number of cases dealing with objections to assigned credit card debt. These cases are a bit like a showdown between gunfighters with bad aim; there is a lot of shooting, but no one hits anything. While a gunfight where no one gets shot is a good thing, the court must still decide whether to allow or disallow the claim even when there is little or no evidence introduced. As a result, rules on presumptions and burden of proof often dictate the result.
Prima Facie: Valid or Not
The starting point is Fed. R. Bankr. P. 3001(f) states 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." If the creditor files its claim in accordance with the rules, it starts out with a presumption of validity. However, before the claim receives prima facie validity, it must be filed in accordance with the rules, particularly Rule 3001. Among other things, Rule 3001(c) provides that if a claim is based on a writing, that writing must be attached or a statement must be provided explaining why the writing cannot be attached. Several courts have held that merely attaching a summary which lists the name of the original creditor, the last four digits of the account number and the balance claimed to be owed does not meet the requirement that the writing be attached to the claim, thus depriving the claim of prima facie validity. In re Tran, 369 B.R. 312 (S.D. Tex. 2007); In re Cox, 2007 Bankr. LEXIS 4048 (Bankr. W.D. Tex. 2007).
Courts have required different levels of documentation to satisfy the prima facie validity requirement. At the low end are courts requiring as little as a copy of an account statement from the original creditor. In re Griffin, 2007 Bankr. LEXIS 1749 (Bankr. W.D. Tex. 2007). Some courts require copies of the underlying contract, account statements and/or proof of assignment of the debt. In re Armstrong, 320 B.R. 97 (Bankr. N.D. Tex. 2005) (account statement plus proof of assignment), In re Tran, 369 B.R. 312 (S.D. Tex. 2006) (requiring original contract), In re Leverett, 378 B.R. 793 (Bankr. E.D. Tex. 2007) (requiring documentary evidence of how claimant acquired claim and proof that it is holder of claim); In re Plourde, 397 B.R. 207 (D. N.H. 2008) (requiring original contract plus statements plus proof of assignment); In re Kendall, 380 B.R. 37 (Bankr. N.D. Okla. 2007) (requiring contract plus itemization plus proof of assignment).
Effect of Prima Facie Validity
A recent opinion explained how failure to satisfy the requirements for prima facie validity affected the burden of proof on a claims objection.
Having little to none of the requirement information attached for a credit card debt, Roundup's claim did not comply with Rule 3001(c). The Court, therefore, concludes that Roundup Funding's claim is not entitled to prima facie validity under Bankruptcy Rule 3001(f). Without such validity, Debtors needed only to object to the claim pursuant to the applicable rules or statute, which they did. Debtors had listed this debt as 'disputed' so they did not judicially admit that they owe it. Although the Debtors did not attach any evidence to their objection to Claim Number 12, such as an affidavit, the objection was sufficient by being signed by their counsel under penalty of Rule 9011. (citation omitted).
After the Debtor's valid objection, Roundup Funding had the burden of offering supporting documentation to carry its burden of proof in the face of an objection. It had to establish the claim by a preponderance of the evidence. (citation omitted). Roundup Funding presented no evidence to support its claim. Its information was submitted in the form of a response with attached exhibits, all in the nature of argument, and not by affidavit or by witness testimony. It provided no evidence to link the entity assigning the claim with an entity listed on the Debtor's schedules. In any event, this attachment page to the claim is not a business record of the Debtor's credit card account within the meaning of Federal Rule of Evidence 803(6).
In re Reyna, No. 08-10049 (Bankr. W.D. Tex. July 28, 2008), Memorandum Opinion and Order, p. 8-9; In re Plourde, 397 B.R. 207 (Bankr. D. N.H. 2008) (if claim is not prima facie valid, valid objection is all that is necessary to put creditor to its proof).
If the claim is entitled to prima facie validity, the debtor must introduce sufficient evidence to rebut the case. In order to rebut the prima facie validity of a claim, the objecting party must produce "evidence tending to defeat the claim that is of a probative force equal to that of the creditor's proof of claim." In re Simmons, 765 F.2d 547, 552 (5th Cir. 1985). Sometimes the claim itself may be sufficient to rebut its own prima facie validity. In In re Bootka, No. 08-11506 (Bankr. W.D. Tex. Feb. 23, 2009), the attachment to the proof of claim stated that the debt had been charged off more than four years before the petition date. As a result, the debt appeared to be barred by the four-year statute of limitations applicable in Texas. The creditor filed an affidavit from the previous owner of the claim stating that a payment had posted to the account on Jan. 18, 2008. This was significant because a payment could revive the statute of limitations under Texas law. However, the court found that the creditor failed to meet its burden of proof because it did not state who made the payment or when it was actually made (as opposed to when it was posted). As a result, the prima facie case was rebutted and the creditor failed to prove its case by a preponderance of the evidence.
Judicial Estoppel/Party Admission
Sometimes, the creditor can prove its case simply because the debtor has already admitted the validity of the claim. If the debtor has scheduled a claim that can be identified to the proof of claim in approximately the same amount and has identified the claim as undisputed, then the debtor will be estopped to deny the validity of the claim or will be deemed to have made a party admission. If the debtor has scheduled the claim as disputed or if there is a significant variation between the claim and the schedules, then judicial estoppel will not apply. In re Cox, 2007 Bankr. LEXIS 4048 (Bankr. W.D. Tex. 2007), illustrates how far the judicial admission doctrine may extend. In that case, the debtor scheduled three claims owing to Chase Bank. As an illustration, one claim was scheduled in the amount of $20,312.83 with the last four digits 0445. B-Real LLC filed a claim in the amount of $21,534.50 in the name of B-Real LLC/Chase Bank USA NA, on a claim with the last four digits 0445. The claim (as amended) was supported by account statements from Chase Bank showing the amount owed. Although the identity of the creditor was different, the court still found that the debtor had made a party-admission that the debt was owed. See also In re Kendall, 380 B.R. 37 (Bankr. N.D. Okla. 2007) (if debtor has listed claim as not disputed in its schedules, this is some evidence of validity). On the other hand, where the identity of the creditor was different, the schedules and the claim included different portions of the 16-digit account number and the claim amounts were different, the court refused to apply judicial estoppel. In re Reyna, No. 08-10049 (Bankr. W.D. Tex. July 28, 2008).
Judicial estoppel will only apply as to the debtor. Several courts have refused to apply judicial estoppel to the chapter 13 trustee. In re Plourde, 397 B.R. 207 (Bankr. D. N.H. 2008); In re Bootka, No. 08-11506 (Bankr. W.D. Tex. Feb. 23, 2009). The opinion from the Western District of Texas is based on Fifth Circuit precedent requiring that parties be identical for judicial estoppel to apply. Kane v. National Union Fire Insurance Co., 535 F.3d 380 (5th Cir. 2008). This result seems to follow the logic of judicial estoppel the closest, since only the party making the admission should be estopped. An opinion by the 10th Circuit BAP held that the trustee would not be bound by the debtor's admission in the schedules, but that the schedules provided some evidence in favor of allowing the claim. In re Kirkland, 379 B.R. 341, 344, n. 12 (10th Cir. B.A.P. 2007).
Proof of Assignment
Courts have disagreed on the extent to which proof of assignment must be established. The most creditor-friendly courts note that Rule 3001 only requires proof of assignment where the original creditor has previously filed a proof of claim. In re Gonzales, 356 B.R. 905 (Bankr. S.D. Fla. 2006); In re Griffin, 2007 Bankr. LEXIS 1748 (Bankr. W.D. Tex. 2007). Where only one creditor files a claim with respect to a debt scheduled by the debtor, the creditor will not be required to show how the debt was assigned to it. These cases take the position that if the debtor owes the debt and only one party is claiming to own it, the debtor should not escape payment based on failure of the specific creditor to establish how it came to own the account. On the other hand, some courts have required proof of assignment and have gone further to require that the assignment reflect the specific debt rather than merely a blanket assignment. In re Armstrong, 320 B.R. 97 (Bankr. N.D. Tex. 2005); In re Leverett, 378 B.R. 793 (Bankr. E.D. Tex. 2007); In re Kendall, 380 B.R. 37 (Bankr. N.D. Okla. 2007). Finally, some courts require proof of assignment, but will accept a blanket assignment. In re Samson, 392 B.R. 724 (Bankr. N.D. Ohio 2008).
Other Objections
Assuming that the claim is supported by prima facie evidence, the debtor's objection to the claim must fall within one of the grounds identified by 11 U.S.C. §502(b), including that a claim is not enforceable under applicable law. In re Kirkland, 379 B.R. 341 (10th Cir. B.A.P. 2007). A debtor could not object to a claim on the basis that the creditor had failed to redact the debtor's Social Security number as required by Bankr. R. 9037. Cordier vs. Plains Commerce Bank, No. 08-2037 (Bankr. D. Ct. March 26, 2009). While the creditor violated a procedural rule, this was not a statutory ground for denying the claim.
Failure to file a timely claim is a stated ground for objection under 11 U.S.C. §502(b)(9). However, what happens if the claims bar date runs while the case has been dismissed, but is later reinstated? An opinion holds that due process requires that the court be allowed to set a new bar date in this instance. In re Gulley, No. 07-33271 (Bankr. N.D. Tex. March 3, 2009).
Conclusion
Courts are struggling with objections to assigned credit card debt and generally agree that a mere account summary prepared by the assignee will not satisfy the requirement to attach the documents on which the claim is based. However, courts differ as to whether the underlying contract or the account statement must be produced. A series of account statements will show that the debtor used the card and established the pattern of dealings between the parties and may be enough to prove the existence of a contract. Creditors should look to the proof required by a state court. If a sworn account or account statements would be adequate in state court, it should suffice in bankruptcy court. The underlying contract should not be necessary to satisfy the prima facie validity requirement (although many courts have required it). However, if the debtor objects to items such as calculation of interest or fees, the creditor may be required to provide the agreement in order to satisfy its ultimate burden of proof.
Courts also differ on whether proof of an assignment should be provided. On the one hand, proof of assignment is an element in establishing that the creditor is the holder of the claim. However, where the debtor has admitted owing the underlying account and no other party has filed a claim, it may be reasonable to conclude that a valid assignment occurred. Some courts have noted that Fed. R. Bankr. P. 3001(e) only requires proof of assignment of a claim if another creditor has already filed a claim, but this may be misleading. Rule 3001(e) is designed to settle disputes between an original creditor and a party claiming to be an assignee. Where the claim is assigned prior to bankruptcy or a claim being filed by the original creditor, there is no need to resolve this dispute. Instead, the issue concerns the more fundamental question of whether the creditor holds the claim.
The process for determining allowance of an assigned credit card debt can be summarized as a decision tree.
- Does the claim include sufficient documentation to receive prima facie validity?
If yes, debtor must rebut prima facie case before creditor must put on case.
If no, debtor need only raise a valid objection to require creditor to carry burden of proof. - If claim is prima facie valid, has debtor rebutted the prima facie case?
If yes, creditor must prove claim by preponderance of the evidence.
If no, claim is allowed. - Has debtor judicially admitted validity of claim?
If yes, claim is allowed (unless a party other than the debtor is objecting).
If no, creditor must prove claim by preponderance of the evidence. - Has creditor established valid assignment of claim?
If yes, claim is allowed assuming creditor has met other requirements.
If no, claim is denied unless debtor is judicially estopped from denying claim or in jurisdictions which do not require proof of assignment. - If neither party has prevailed at this point, who produced more credible evidence?
If creditor, then claim is allowed.
If debtor, then claim is denied.