National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Proof of claim

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Bankruptcy Court Says Call First Before Seeking Attorney’s Fees

The Bankruptcy Court for the Eastern District of Michigan recently ruled whether a creditor must pay attorney’s fees to the objecting party when the creditor filed a claim with deficient information. In re Ball, No. 17-22574 (Bankr. E.D.MI. Jan. 22, 2019).

The issue was brought before the court by the chapter 13 trustee. A creditor, Financial Edge Credit Union (FECU), was owed a debt for overdraft charges which was an open-end consumer debt. FECU filed a deficient proof of claim that only attached a copy of the deposit account contract and did not include the last payment date or the date of the debtor’s last transaction.

[Read more…] about Bankruptcy Court Says Call First Before Seeking Attorney’s Fees

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Traffic Fines Not Given Priority in Chapter 13

Claims based on post-petition traffic fines are not administrative expenses entitled to priority in chapter 13 bankruptcy. City of Chicago v. Marshall, No. 17-2308 (lead case) (N.D. Ill. Nov. 27, 2017).

Bankruptcy debtors in seven separate cases and two courts incurred post-petition traffic fines in the City of Chicago. The City moved the courts to prioritize its claims as “administrative expenses” under sections 503 and 507(a). The courts denied the City’s motions. [Read more…] about Traffic Fines Not Given Priority in Chapter 13

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Advanced Sick Leave Is Debt Subject to Recoupment

Advanced sick leave created a debt in bankruptcy that was subject to recoupment by the creditor/employer. Patterson v. Social Security Administration, No. 14-65877, Adv. Proc. No. 15-5129 (Bankr. N.D. Ga. Oct. 5, 2017).

Chapter 7 debtor, Tyree Patterson, worked for the Social Security Administration. The SSA had a policy whereby an employee who has exhausted his sick leave can “borrow” against future sick leave and “repay” the borrowed days with later-accrued sick leave. After Mr. Patterson obtained his discharge in bankruptcy, the SSA “collected” on his pre-petition advanced sick leave by reducing his newly accrued sick leave. Mr. Patterson reopened his bankruptcy to complain that the SSA’s conduct violated the discharge injunction. [Read more…] about Advanced Sick Leave Is Debt Subject to Recoupment

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SCOTUS Finds Time-Barred POC Not FDCPA Violation

“Midland’s filing of a proof of claim that on its face indicates that the limitations period has run does not fall within the scope of any of the five relevant words of the Fair Debt Collection Practices Act.” Midland Funding, LLC v. Johnson, 2017 WL 2039159 (May 15, 2017) (case no. 16-348), reversing Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016).

Justice Breyer delivered the majority opinion finding that, because, under state law, the holder of a debt that is uncollectible due to lapse of the statute of limitations, retains a “right to payment,” a proof of claim on a time-barred debt falls within the meaning of “claim” in section 101(5)(A), and is not “false, deceptive, or misleading,” within the meaning of the FDCPA. Relying on the language and structure of Bankruptcy Code provisions, the Court noted that the Code provides for the possibility that a claim, while prima facie valid, may be contingent or disputed. Upon objection, section 502(b)(1) provides a method for disallowing an unenforceable claim. Under this structure the statute of limitations is an affirmative defense.

Moreover, when considering whether a statement is false, deceptive or misleading, the sophistication of the recipient is a relevant factor. Here, the Court found the bankruptcy trustee was likely to understand that a time-barred debt is subject to disallowance.

The Court turned to the “closer question” of whether assertion of a time-barred debt is “unfair” or “unconscionable.” In answering this question in the negative, the Court distinguished civil cases from bankruptcy. Factors in a civil suit, such as debtor ignorance of the statute of limitations defense, loss of records, and general embarrassment, may cause a debtor with a valid defense to nonetheless pay an uncollectible debt. Those considerations are attenuated in bankruptcy where the debtor has herself initiated litigation, there is a trustee to oversee the process and the Code provides for evaluation of claims.

Both the debtor, Aleida Johnson, and the United States as amicus argued that debt-buyers filing time-barred claims solely in the hope that they will successfully slip them past busy trustees and unsuspecting debtors is sanctionable and, therefore, “unfair” conduct. The Court disagreed, finding that the inherent protections in the Bankruptcy Code, as well as the possibility that the debtor herself could benefit from the stale claim being disallowed and discharged in bankruptcy, militated against carving out an exception to the affirmative defense rule.

The Court added that the differing purposes of the FDCPA—to protect consumers and possibly prevent bankruptcies, and the Bankruptcy Code—to strike a balance between rights of debtors and creditors, further supported treating the assertion of stale claims in bankruptcy differently from the way they are treated in the civil context.

Justice Breyer was joined in the majority by Chief Justice Roberts and Justices Thomas, Kennedy, and Alito.

Taking a real-world approach to the subject in which she recognized the extent of consumer debt and the proliferation of debt buyers, Justice Sotomayor dissented.

“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.’”

Citing NACBA’s amicus brief, Justice Sotomayor discussed the ever-growing industry of buying stale debts for pennies on the dollar. The practice relies on the likelihood that, after an extensive lapse of time, the debtor will not know or care to raise the affirmative defense of staleness. Because the state courts have uniformly found that filing suit on a stale claim violates the FDCPA debt-buyers have increasingly turned to the bankruptcy system to achieve their goals.

Justice Sotomayor reasoned that the same considerations in state court findings of FDCPA violations, are present in the bankruptcy context. Bankruptcy debtors may feel pressure to make a small payment on the debt, thereby unwittingly restarting the running of the limitations period, or simply fail to realize that they have the ability to object to the claim. The gatekeeping function of the trustee is illusory. “The problem with the majority’s ipse dixit [that the presence of the trustee is protection enough] is that everyone with actual experience in the matter insists that it is false.”

Justice Sotomayor disagreed with the majority’s reasoning that because the debtor in bankruptcy has initiated the legal process she should be held to a higher level of sophistication than a defendant in a civil debt collection action, noting that debtors are in bankruptcy often as a result of lack of sophistication. To the majority’s reasoning that debtors could benefit from the filing of a stale claim because it may lead to disallowance and discharge, the dissent again interjected reality. In fact, a stale claim that slips through the bankruptcy process may result in resuscitation of an otherwise uncollectible debt and a debtor may find herself worse off after bankruptcy than before.

Justice Sotomayor ended with a ray of hope, “I take comfort only in the knowledge that the Court’s decision today need not be the last word on the matter. If Congress wants to amend the FDCPA to make explicit what in my view is already implicit in the law, it need only say so.”

Justice Sotomayor was joined her dissent by Justices Kagan and Ginsburg.

Justice Gorsuch did not take part in the decision.

Midland SCt opinion May 2017

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Res Judicata Does Not Bar Post-Confirmation Objection to POC

Plan confirmation did not adjudicate claim allowance on contested unsecured claims, therefore, res judicata did not bar the debtors’ post-confirmation challenges to the proofs of claim. LVNV Funding v. Harling, No. 16-1346, and LVNV Funding v. Rhodes, No. 16-1347 (4th Cir. March 30, 2017).

In two chapter 13 cases, LVNV filed proofs of claim prior to plan confirmation. The debtors, Derrick and Teresa Harling, and Jeffrey Rhodes, objected after plan confirmation but prior to the claims bar date. LVNV argued that the objections should have failed under the doctrine of res judicata. The bankruptcy courts found that res judicata did not apply, and disallowed the claims on the basis that the underlying debts were uncollectible due to the passage of the statute of limitations.

LVNV appealed both cases directly to the Fourth Circuit.

Res judicata applies when 1) there is a prior, final, judgment on the merits, 2) identical parties, and 3) the same cause of action in both proceedings. Finding that res judicata bars relitigation of issues that were actually litigated or determined in a prior hearing, the court turned to the Code: specifically, the confirmation and claims allowance provisions. Under section 502(a), a claim is deemed “allowed” unless a party objects. Under section 1325(a) a bankruptcy court “must” confirm a plan that is: 1) proposed in good faith, 2) does not unfairly discriminate between unsecured creditors, and 3) is in the best interest of creditors. Unsecured claims are generally pro-rata recipients of distributions from a pool of estate assets and, therefore, individual unsecured claims are not subject to scrutiny at the confirmation stage. Because of disparate timelines for confirmation and claims procedures, a party typically may file a proof of claim or object to a filed claim after the plan has been confirmed.

In these cases, the court found that because the claims were presumed allowed at the time of the confirmation hearing, the issue of allowance of the claims was not raised until post-confirmation when the debtors objected. Likewise, no issues addressed at the confirmation hearing were relevant to the claims allowance determination. For that reason, res judicata did not bar the debtors’ objections to LVNV’s claims.

Contrary to LVNV’s argument, neither Covert v. LVNV Funding, LLC, 779 F.3d 242 (4th Cir. 2015), nor D & K Properties Crystal Lake v. Mutual Life Insurance Co. of New York, 112 F.3d 257 (7th Cir. 1997), supported application of res judicata. In Covert, the plaintiffs filed post-discharge federal consumer protection claims against LVNV without having objected to its claim in bankruptcy and without listing the FDCPA claim as a bankruptcy estate asset. Covert, thus, stands for the proposition that “debtors who do not object to proofs of claim during their bankruptcy proceeding are precluded from later litigating the subject matter of those claims for personal gain outside the Chapter 13 bankruptcy proceeding as a way to avoid including the claim as an asset in their bankruptcy estate.” D & K Properties involved a secured creditor and actual adjudication in bankruptcy of the issue the debtors attempted to raise post-discharge in district court.

The court concluded that plan confirmation and the validity of individual unsecured claims are “distinctly separate” processes, and therefore the identity of causes of action between the two adjudications, as required for application of res judicata, was absent.

NCBRC filed an amicus brief in support of the debtor in this case.

Harling 4th Cir opinion March 2017

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Court Denies “Comfort Order” to File Late POC

Neither the Code nor the Bankruptcy Rules permit a Bankruptcy Court to grant a “comfort order” allowing a late proof of claim where no objection has been made to the filing. In re Rodriguez, No. 16-70150 (Bankr. S.D. Tex. Feb. 13, 2017).

Karina Rodriguez listed Ovation as a tax lien creditor on Schedule D of her chapter 13 petition. Ovation filed its claim, along with a motion to allow late filing, after the filing deadline had passed. Ovation’s contemporaneous motion objecting to confirmation because the plan did not provide for full payment of its claim was granted pursuant to an agreed order. [Read more…] about Court Denies “Comfort Order” to File Late POC

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Elimination of Statute of Limitations Is Not Due Process Violation

The abrogation of the six-year statute of limitations on government actions to collect student loan debts paid by a loan guaranty agency was not a due process violation. United States v. Falcon, No. 13-16588 (9th Cir. Nov. 9, 2015) (per curiam). [Read more…] about Elimination of Statute of Limitations Is Not Due Process Violation