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FILING TIME BARRED PROOF OF CLAIMS:
May 15, 2017: Resolving a split of circuits, the Supreme Court held 5/3 in Midland Funding LLC v. Johnson 6-348 (Sup. Ct. May 15, 2017) that a debt collector who files a claim that is “obviously” barred by the statute of limitations has not engaged in false, deceptive, misleading, unconscionable, or unfair conduct and thus does not violate the federal Fair Debt Collection Practices Act.
Writing the opinion for the majority in favor of the debt collector, Justice Stephen G. Breyer said that the conclusion on one issue — false, deceptive or misleading — was “reasonably clear.” The second issue — unfair or unconscionable — presented a “closer question,” he said. The dissent replied that “Professional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy proceedings to collect it, and hoping that no one notices that the debt is too old to be enforced by the courts. This practice is both ‘unfair’ and ‘unconscionable.'”
The majority of the Court did not rule that the later adoption of the Bankruptcy Code implicitly repealed aspects of the FDCPA. However, the opinion opens the door for debt collectors to purchase time-barred claims for pennies on the dollar and profit by filing those otherwise uncollectable claims, because trustees and debtors will not always object.
(History of Midland: In an action under the Fair Debt Collection Practices Act, 15 U.S.C. sections 1692e and 1692f, arising out of a Chapter 13 bankruptcy case in which a creditor filed a claim asserting that debtor owed a credit-card debt and noting that the last time any charge appeared on debtor’s account was more than 10 years ago, which exceeded the 6-year statute of limitations, the Eleventh Circuit Court of Appeals’ decision that the FDCPA applied to the case is reversed in Midland where the filing of a proof of claim that is obviously time barred is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act.)
In re Barker (9th Cir) re late filed POC – chapter 13 creditor cannot file late POC and court does not have authority to extend the deadline (despite being a court of equity).
Arizona statute of limitations:
MERTOLA, LLC, v. SANTOS, No. 1 CA-CV 16-0168 (AZ Court of Appeals, Division 1,Decided: March 02, 2017) We hold in this case that, absent agreement to the contrary, a cardholder’s failure to make a minimum monthly credit-card payment does not trigger the statute of limitations on a claim for the entire unpaid balance on the account. Absent contrary terms in the account agreement, the lender’s claim for the balance does not accrue, and limitations does not begin to run, until the lender accelerates the debt or otherwise demands payment in full.
On a question where the courts are divided, Bankruptcy Judge Mary Ann Whipple of Toledo, Ohio, took sides with the Seventh Circuit and held that the claim filing deadline in Bankruptcy Rule 3002(c) applies to secured creditors in chapter 13 cases, even though secured creditors are not required to file claims in chapter 13 cases.
In chapters 7 and 13, secured creditors are not required to file claims. After bankruptcy, they may enforce their liens against the debtor’s property, although they would have waived any unsecured deficiency claims and retained no claims against the debtor personally. Secured creditors will often refrain from filing claims to avoid submitting to the jurisdiction of the bankruptcy court and the possibility of having consented to entry of a final order in bankruptcy court.
In In re Pajian, 785 F.3d 1161 (7th Cir. 2015), the bankruptcy judge believed that a secured creditor could file a claim in a chapter 13 case at any time before confirmation. On direct appeal, the Seventh Circuit reversed in May 2015, holding that secured creditors must file claims in chapter 13 cases by the same deadline that applies to unsecured creditors.
In re Dumbuya, 15-33176 (Bankr. N.D. Ohio Feb. 6, 2017) Judge was persuaded by the Seventh Circuit’s conclusion that “principles of sound judicial administration” call for making the deadline applicable to secured claims, otherwise a secured creditor could “swoop in at the last minute and upend a carefully constructed payment schedule.”
Eleventh Circuit holds that filing a proof of claim in bankruptcy on a time-barred debt violates the FDCPA. In Crawford v. LVNV Funding, LLC, the Eleventh Circuit became the first federal circuit court of appeals to hold that filing a proof of claim on a time-barred debt in a bankruptcy case violates the Fair Debt Collection Practices Act (“FDCPA”). See No. 13-12389,__ F.3d __, 2014 WL 3361226 (11th Cir. July 10, 2014). The case arose when LVNV filed a proof of claim in Crawford’s bankruptcy case on a debt for which the statute of limitations had expired. In response, Crawford filed an adversary proceeding against LVNV, alleging that LVNV routinely filed proofs of claim on time-barred debts and that LVNV’s actions violated the FDCPA.
The Court concluded that “a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt.” Id. at 4. The “least sophisticated consumer” may therefore fail to object to the claim, and, due to the Bankruptcy Code’s automatic allowance provision, the claim will be paid out of the debtor’s wages. For these reasons, the court found that filing a proof of claim on a time-barred debt was unfair, unconscionable, deceptive, and misleading, in violation of §§ 1692e and 1692f of the FDCPA.
In re: Los Gatos Lodge, Inc. (01/17/02 – No. 00-16916) (9th Cir. Ct App) bankruptcy trustee may not surcharge a creditor for expenses in preserving a property under 11 USC 506(c) after the secured creditor’s claim has been disallowed, even if the claim was deemed an “allowed secured claim” afterwards.
PROOF OF CLAIM:
Mastan v. Salamon (In re Salamon) (4/20/17) The Ninth Circuit affirmed the BAP, concluding that the junior creditor lost its right to convert its nonrecourse claim to a recourse claim under section 1111(b) of the Bankruptcy Code as a result of the senior creditor’s sale of the collateral. Section 1111(b) requires a nonrecourse claim “secured by a lien on property of the estate” to be treated as recourse “whether or not [the creditor] had recourse against the debtor on account of such claim.”
In Re J.H. Investment Services, Inc., (11/22/11 – Ct of Appeals 11th Cir) held that the IRS had waived its right to an unsecured deficiency by filing a proof of claim that evidenced a secured claim but failed to note that a portion of the claim may be unsecured. The court held that the latter set of rights, plan voting and distribution towards the unsecured portion of an otherwise secured claim, could be waived if not pursued through express reference in a proof of claim.
Can a debtor file a proof of claim for the creditors? Yes, the debtor may file a claim for a creditor up to 30 days after the claims bar date. See BR 3004.
December 1, 2011: rule changes related to proofs of claim: Pursuant to Rule 3001(c), proofs of claim must be made in writing. Official Form B-10 is the proof of claim form. Official Form B-10 has changed and the instructions for completing the proof of claim have changed. Creditors must now include information about the interest rate, each creditor must now sign off on a statement that it has attached documentation that is evidence of the creditor’s perfected security interest, and the signature block of Official Form B-10 has changed.
Rule 3001(c)(2) has been amended and is now entitled “Additional Requirements in an Individual Debtor Case; Sanctions for Failure to Comply”. The changes require a claimant to include an itemized statement of the prepetition interest, fees, expenses or charges with a proof of claim, as well as a statement of the amount necessary to cure a default as of the petition date. If the mortgage payments include an escrow payment, an escrow statement must also be attached to the proof of claim. These requirements can be partially fulfilled by the completion and filing of new Official Form B10, Attachment A.
To complete Official Form B10, Attachment A, Part 1, the mortgage creditor must itemize the amount of principal and interest due as of the date of the filing of the bankruptcy petition, and the total interest due as of the petition date must be broken down by interest rate and the corresponding time periods. Part 2 requires a description of the fees, expenses and charges incurred in connection with the claim, as of the petition date, the dates these charges were incurred and the amounts of these charges.
Part 3 requires a statement of the amount necessary to cure the default as of the petition date. It is in this section that a mortgage creditor will check off the box indicating whether or not the mortgage payments that are in arrears include an escrow component. If so, the mortgage creditor must include a copy of an escrow statement. Also required in Part 3 is the date the last payment was received by the creditor, the number of payments due, and the amount of the payments due which the mortgage creditor must further analyze by adding the total of prepetition fees and expenses to the overdue payments and subtracting the total of any unapplied funds, resulting in an amount which is the total amount necessary to cure the default as of the petition date.
The bankruptcy court can impose sanctions against a creditor who files a proof of claim, but fails to provide the documentation and information required by Rule 3001(c). Those sanctions can be evidentiary, monetary or punitive.
Proofs of claim must be signed under penalty of perjury that the statements in the claim are “true and correct and to the best of my knowledge, information and reasonable belief.” The penalty for presenting a fraudulent claim is a fine of up to $500,000 or imprisonment for up to five years, or both. The changes to Rule 3001 and the addition of Rule 3002.1 are designed to respond to cases with facts and circumstances that bankruptcy courts found to be unacceptable. The liability for attorneys and proof of claim preparers who sign inaccurate forms can be substantial.
The changes also require an ongoing requirement for claimants in Chapter 13 cases. Creditors in Chapter 13 cases whose claims are secured by a security interest in a debtor’s principal residence and whose claims are for arrearages being cured through a Chapter 13 plan, are required to file a Notice of Payment Change (Official Form B10, Supplement 1) no later than 21 days before the new amount is due. This consists of a change in the mortgage payment amount, including those changes which arise from escrow adjustments or from interest rate changes. The Notice of Payment Change must be served upon the debtor, the debtor’s counsel and the Chapter 13 trustee. The Notice of Payment Change must be filed as a proof of claim supplement in the proof of claims registry.
The consequences for the mortgage creditor who fails to file a timely Notice of Payment Change will render the payment change ineffective. Mortgage creditors who fail to comply can expect evidentiary sanctions, where the court can prohibit a creditor from presenting evidence in a dispute about the claim. The court also has discretion to “award appropriate relief, including reasonable expenses and attorneys’ fees”.
Mortgage creditors in Chapter 13 cases whose claims are secured by a security interest in a debtor’s principal residence and whose claims are being paid through a Chapter 13 plan, are required to file a Notice of Fees, Expenses and Charges (Official Form B10, Supplement 2) every 180 days (the “Notice of Fees”) while the Chapter 13 case is ongoing. The Notice of Fees must be filed as a supplement to the mortgage creditor’s proof of claim in the bankruptcy court’s claims registry, and it must be served on the debtor, the debtor’s attorney and the Chapter 13 trustee within 180 days of when the charges were incurred. Failure to timely file the Notice of Fees will result in the inability for the creditor to collect the fees and expenses which should have been disclosed in the Notice of Fees.
Fees, expenses and charges include late fees, attorneys’ fees, inspection fees, taxes advanced, property preservation fees and forced place insurance. The trustee and/or the debtor have up to one year after the filing of the Notice of Fees to file a motion requesting a hearing on whether or not the payment of the fees and charges in the Notice of Fees are lawful.
Pursuant to Rule 3002.1(f) – (h), within 30 days after a debtor completes all Chapter 13 plan payments, the trustee must file and serve a notice stating the debtor has paid in full the amount required to cure the default on the creditor’s claim (the “Final Cure Notice”). The Final Cure Notice must include a statement that advises mortgage creditors of their obligation to file a response within 21 days after the Final Cure Notice. Failure to file the written response within this time period may be fatal to the creditor’s position.
The mortgage creditor’s response must state: (1) whether it agrees with the assertion that the debtor has paid the amount needed to cure the default on the creditor’s claim; (2) whether the debtor is otherwise current; or (3) if the creditor asserts the debtor has not cured the default, the creditor must provide an itemization of the cure amount. The mortgage creditor’s required response also must be filed as a supplement to the mortgage creditor’s proof of claim in the claims registry, in addition to being served on the debtor, debtor’s attorney and the Chapter 13 trustee.