Proofs of Claim & Burdens of Proof

So, you’ve filed for bankruptcy.  And in your case – whether it’s because you filed for bankruptcy under Chapter 13 or because you have assets that will be liquidated in Chapter 7 – creditors will be getting paid.
How will they be getting paid?  Well, creditors in these types of cases are directed to file what’s called a proof of claim.  This is a document filed with the bankruptcy court asserting that the creditor is entitled to payment in your bankruptcy case.  While creditors cannot be forced to file a proof of claim, they will not be paid if they do not file one.  Sometimes – that’s important.  For example, a mortgage creditor who never files a claim for arrears may pounce on you for foreclosure the moment you get out of bankruptcy.  Or, a child support claim that isn’t paid for lack of a proof of claim would jeopardize your discharge.  Fortunately, your attorney can file claims on behalf of certain critical creditors to try to avoid these problems.
All right, so we know that creditors are out of luck if they don’t file a proof of claim.  The Federal Rules of Bankruptcy Procedure, at 3001, 3002, and 3004 set forth the majority of criteria and deadlines for a proper proof of claim.  We know that we want certain creditors to file claims.  We also know that if certain other creditors (who received notice of the bankruptcy – see 11 U.S.C. § 523(a)(3)) don’t file claims – they’re out of luck.
But what about the creditors who do file claims?  What if we want to filter some of them out?  For example – you may have a dispute with a particular creditor over whether you owe them money or how much money you owe them.  You may also want to make sure that some clever and vindictive enemy of yours doesn’t catch wind of your bankruptcy case and try to lodge a false claim in the hope of getting paid.  Or, you may think that a particular claim was discharged in a prior bankruptcy.  What then?
Rule 3001(f) states that a properly filed proof of claim shall be considered prima facie evidence of the validity and amount of the claim.  What does that mean?  It means the court is not going to scrutinize every single claim that is filed in your case.  It’s not going to hold a hearing for each claim to make sure it’s a proper claim.  If you think a claim is improper, it’s up to you to bring it to the court’s attention (through your attorney, of course) by filing an objection to the claim.
The burden of proof then shifts to you, the debtor, to demonstrate that the claim is improper – with evidence sufficient to negate the claim’s original prima facie validity.  If you succeed, then the creditor bears ultimate responsibility for showing that the claim is valid by a preponderance of the evidence.
Or, as stated in two leading opinions on the matter:
Federal Rule of Bankruptcy Procedure 3001(f), provides that a proof of claim completed and filed in accordance with 11 U.S.C. § 501 and any applicable Bankruptcy Rules constitutes prima facie evidence of the validity and amount of the claim. Thus, if a procedurally proper claim is filed, the objecting party carries the burden of going forward with evidence contesting the validity or amount of the claim.  However, once the objecting party succeeds in overcoming the prima facie effect given to the claim by Rule 3001(f), the burden shifts to the claimant to prove the validity of his/her claim by a preponderance of the evidence.

In re Dumontier, 389 B.R. 890, 897-898 (Bankr. D. Mont. 2008)

The burden of proof for claims brought in the bankruptcy court under 11 U.S.C. § 502(a) rests on different parties at different times. Initially, the claimant must allege facts sufficient to support the claim. If the averments in his filed claim meet this standard of sufficiency, it is “prima facie” valid.  In other words, a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant’s initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said that the objector must produce evidence equal in force to the prima facie case. In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim’s legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence.  The burden of persuasion is always on the claimant.
In re Allegheny Int’l, Inc., 954 F.2d 167, 173-174 (3d Cir. Pa. 1992)

(Citations omitted.)

Discharge Violations and the Collection of Business Debts

From time to time, I will receive a phone call or letter from a former client of mine, concerned that they are still receiving billing statements in violation of the discharge they received in bankruptcy.  Sometimes, these are legitimate complaints.  Sometimes, the creditor wasn’t listed on the bankruptcy schedules (and for no-asset Chapter 7 cases, that’s not a big deal under Judge Kelley’s Guseck case).  In either case, we send a polite reminder to the creditor, and 99% of the time, that’s the end of it.  Very rarely do discharge violations need to be litigated in front of a bankruptcy judge.

It’s worth pausing to note that, unlike stay violations, which have a clear statutory basis for the recovery of damages – 11 U.S.C. § 362(k) – there is no such provision in § 524.  To receive awards and sanctions in a discharge violation, you must invoke the court’s general powers and authorities in § 105 and case law.  The standard of proof is ‘clear and convincing’ evidence.  And if the violating creditor is the IRS – administrative remedies at 26 U.S.C. § 7433(3) must first be exhausted.

Sometimes, the creditor that the client is complaining about was listed on their schedules, was discharged, and yet – I have to tell my client that there is no violation of the discharge.  Why?  Because my client owned a business – either a corporation, partnership, LLC, or other separate legal business entity.  Let’s consider a very common example, so we don’t wander off into the land of abstracts.,,
John Doe is the sole owner, operator, and representative of Acme, LLC.  Acme LLC incurred a business loan through Moneypenny Bank, which John Doe was required to personally guarantee.  Acme LLC doesn’t do very well, and as a result, John Doe ceases business operations and files an individual bankruptcy case.  He does everything his lawyer tells him to do, he receives his discharge, and a month later, he starts receiving bills from Moneypenny Bank.
What went wrong?
Well, nothing, actually.  John Doe filed for bankruptcy.  Acme LLC did not.  The bankruptcy discharge protects John Doe from being personally collected against from Moneypenny Bank.  However, Moneypenny Bank can still attempt to collect against Acme LLC.  John Doe continues to receive correspondence because he is the owner and representative of Acme LLC.  John Doe looks at the billing statements again and realizes that the bills are not addressed to him (John) but to his business (Acme).
While this is not a violation of the discharge, John is annoyed by the billing statements.  Is there anything he can do to stop the billing statements?
Moneypenny can continue to collect against Acme LLC until one of three things happens…
Option 1:  Acme LLC pays the debt, as agreed.  This option is the likely route if John Doe intends for Acme LLC to continue to exist and operate.  Since John Doe is the sole owner of the LLC, this means that the money is ultimately coming out of his own pocket.  But that is the consequence of owning the LLC.
Option 2:  Acme LLC can file bankruptcy.  This is generally an unnecessary step if John Doe intends to fold the business.  There may be certain benefits to liquidation under Chapter 7 (such as the distribution of assets to priority creditors).  If Acme LLC is to continue operating but needs to file bankruptcy, it would have to do so under Chapter 11.  In either event, I leave it to bankruptcy attorneys who specialize in business filings to explain those benefits.
Option 3:  Formally dissolve Acme LLC.  Dissolution of a business is the corporate equivalent of death of an individual.  Creditors can’t collect against dead people (though they can collect against probate estates).  Nor can Moneypenny Bank collect against an LLC that doesn’t exist.  Again, I leave it to business attorneys to discuss the proper steps to formally dissolve a business (you want to make sure your LLC is dissolved properly to avoid issues with government agencies and taxing authorities).  But this is the simplest and most straightforward way to deal with the problem if John Doe does not intend to continue on with Acme LLC.
Of course, Moneypenny Bank will retain certain rights.  For example, if they have a lien on assets – they will be able to exercise those security rights.  They may also have rights if Acme LLC owns non-pledged assets.  To determine specific consequences of dissolution, speak to a competent business attorney.

Case Law Developments – Bronk and Clark

Last year I reported on two cases in the Western District of Wisconsin that had created some concern for debtors and debtors’ attorneys.  As always, I caution people who are reading this to be mindful that cases in the Western District of Wisconsin are not binding on cases in the Eastern District of Wisconsin (which covers the areas I typically practice in, including Green Bay, Appleton, Oshkosh, Marinette, Oconto, Sturgeon Bay, Kewaunee, Fond du Lac, and Sheboygan).  Nevertheless, I  like to share these cases because they may influence our judges here in the future, or be brought up on appeal to the circuit court, which would create binding law here.
The first case I reported on was Halling.  In this case, a son cosigned a loan for his mother, the mother made payments, and then later filed for bankruptcy.  Her payments on the loan would ordinarily just be considered an ordinary preference.  However, her payments were also deemed to benefit the cosigning son (the son being an insider) in terms of decreased liability from the son to the creditor.  Therefore, the payments the mother made to the creditor constituted an insider preference from the mother to the son.  The son was then sued to recover the value of this preference.  Unfortunately, there is no subsequent history on that case yet.
The second case was Bronk.  In this case, the bankruptcy court held that the debtor’s conversion of non-exempt assets into exempt assets was not done with intent to hinder, delay, or defraud creditors, but that the debtor – as account holder of several college savings accounts – was not entitled to take their value as exempt, as the statute permitting the exemption only permitted the beneficiaries to exempt their interest in such accounts.  Both issues have since been affirmed on appeal to the District Court.
There is a third case that I didn’t mention last time.  In re Clark, which has been appealed and ruled at 466 B.R. 135 (W.D. Wis. 2012).  In this case, the trustee objected to use of exemptions on an inherited retirement account.  On appeal, Judge Crabb noted that the statutes did not distinguish between retirement accounts that had been built up by the debtor and retirement accounts inherited by the debtor.  The decision of the bankruptcy court was overturned.

Chapter 20 Update

Last year, I mentioned Fair v. GMAC case, in which Judge Randa from the District Court in the Eastern District of Wisconsin ruled that there was nothing in the statutes that prevented the stripping of a wholly unsecured mortgage in a Chapter 13 case in which the debtor was not eligible for a discharge.
This past September, Judge Clevert – also in the District Court for the Eastern District of Wisconsin, ruled contrary to his colleague, in the case of Lindskog v. M&I Bank, 480 B.R. 916 (E.D. Wis. 2012).  This now sets up a split on the district court level.
The issue of whether lien stripping is permissible in so-called “Chapter 20” scenarios is heavily split throughout the country.  Although it is not expected that the Lindskog case will be appealed, it is likely that we will see a 7th Circuit appellate case or even a Supreme Court case on this issue in the next year or two.
Local attorneys have expressed concern over what was likely haphazard word selection by Judge Clevert in his decision, in which he remarked that “Lindskog did not qualify for a Chapter 13 having received a Chapter 7 discharge within four years of filing,” incorrectly suggesting that the statutes preclude a debtor from filing Chapter 13 unless the debtor is eligible for a Chapter 13 discharge.  It appears that omission has been corrected, as the language appearing on Lexis now includes the word “discharge” following “Chapter 13”.

Lindskog did not qualify for a Chapter 13 discharge having received a Chapter 7 discharge within four years of filing.

Lindskog v. M&I Bank, 480 B.R. 916, 919 (E.D. Wis. 2012)

Lien Perfection

Among the many documents requested by trustees are copies of mortgages and, in the case of vehicles that have liens on them, titles for those cars.  Ever wonder why?
Under 11 U.S.C. § 547, the trustee has the authority to void certain transactions called preferences.  Although the statute is quite lengthy, the vast majority of preferences include payments to individual creditors in excess of $600 (§ 547(c)(8)) in the 90 day period before the bankruptcy case is filed (§ 547(b)(4)(A)) or between 90 days and 12 months for insiders (§ 547(b)(4)(B)) – insiders being relatives and business partners.
It also includes acts to perfect a lien (§ 547(c)(3)) unless the lien was perfected within 30 days of acquisition of the collateral.  To err on the safe side, most attorneys will boil this down into simplified advice: new liens should be created and perfected at least 90 days before filing bankruptcy – and the date appearing on the title or the recording stamp of a mortgage is usually referenced.
Why are preferences avoidable and what happens if the trustee can avoid a preference?  Preferences are voidable by statute in order to deter certain activity and fulfill a public policy goal.  The activity being deterred is the debtor making payments and bestowing benefits to certain “preferred creditors” at the expense of all of their other creditors at large.  While the debtor may think that their Kohl’s credit card is worthy of special treatment, Congress and the Bankruptcy Courts look down on the practice of showing favoritism.  All creditors within a certain class ought to be treated equally in bankruptcy.
So, if a preference is voidable, that means the trustee has first dibs on whatever has been voided.  In the case of an ordinary preference or insider payment – he can sue to recover the preference payments.  In other words – that $5,000 you paid back to your mom right before filing for bankruptcy – that will likely have hurt your mother more than it helped her.
The trustee can also void improperly perfected liens: liens that were not perfected before the bankruptcy case was filed, liens that were perfected within 90 days of filing bankruptcy but after 30 days after acquisition.  In this event, the trustee steps into the shoes of the lien holder.  The debtor cannot exempt the value of a voided preference ahead of the trustee’s interest.
What usually happens?  Well, the trustee has a non-exempt asset that he wants to liquidate for the benefit of unsecured creditors.  This often results in a bidding war between the improperly perfected lienholder and the property owner / debtor.  The debtor is seldom in the financial ability to make an offer, but the potential to buy back the property with better financing terms exists – regardless of the probability.
Since the likelihood of a debtor obtaining financing is slim, the worst case scenario involves the debtor losing the collateral to the trustee and still being liable to the lienholder for the money due under the note.  As such, it is usually preferred that all PMSI liens be properly perfected before a bankruptcy case is filed.

Spotting fraud (and how literacy can help).

The other day, I received an e-mail from a a woman who works for a local bank.  She was concerned because one of my clients had taken to writing threatening e-mails to the bank, stating that the bank held no valid mortgages, that by accepting payment from the client, they were committing fraud, and demanding documents that (quite frankly) don’t exist.
It’s interesting to note that this bank is the creditor that I have sued more times than any other creditor for artificially pumping up appraisal values in order to give out home equity loans to homeowners who are already underwater with their first mortgage.  Why is that interesting?  I’ll get to that in a minute.
The banker asked me to investigate and reach out to my client to figure out what was wrong.  And so I did.  My client responded with two lengthy e-mails and two forms (eight pages in total) attached that I had to parse through.
Apparently, my client had been targeted by a group that I am going to refer to as “PT76”.  There isn’t a whole lot of information (and even less reputable information) available on this group.  But from what I could gather, this is an ultra-nationalist, quasi-anarchist, anti-corporate organization.  That’s the polite version.  A more apt description would be an ultra-radical gang of tinfoil hat wearing thugs.
The forms were nothing more than gibberish. Someone strung together a long mess of legal-sounding words in the apparent hope of sounding smart, tough, and ultimately – legitimate.  It’s not even fair for me to say that they were misstating the law.  More accurately,they weren’t saying much of anything.  Their intent appears to be to incite and rile up victimized American consumers.
Here’s the crazy part.  I *should* be with these people.  Anti big bank?  Hell yeah!  I’ve been working in bankruptcy too long not to have developed a vitriolic hatred for the big banks.  Pro government reform? Absolutely!  I’m tired of listening to Congressmen behave like spoiled brats on a school playground.
That forced me intro a little Cartesian bout with existentialism.  For those of you who haven’t had a class in Philosophy, think: Matrix.  I can only be aware of my own existence.  Everything else could be an illusion.  So, for all I know – I’m living in a fantasy world, and these people whom I have dubbed ‘tinfoil hat people’ are the only ones with their heads screwed on straight.
But I got over it, and here’s why.  My beef with PT76 is NOT that they are stupid or uninformed.  I do not think that a person has to be highly educated in order to express an opinion.  I do not think that a person must be wealthy enough to hire an attorney to be active in politics or government.
My problem with PT76 is that they are too emotional not to be involved, but also too lazy to be involved properly. It’s one thing to be stupid.  It’s quite another thing to be stupid, but try to pretend that you’re smart.  When you string a bunch of nonsensical and incoherent legalese together in order to feign legitimacy, intelligence, and strength, then you are no better than the ‘bank cartels’ you claim to be rising up against.  How can you call the bank’s conduct fraud when you yourself are engaged in fraud?
One of the dead giveaways that PT76 is a group of morons were the forms they supplied to my client.  A fifth grader could have composed better forms.
Cell phones and Twitter have been the biggest enemies of literacy – forcing people to abandon years of formal English training in favor of absurdly long acronyms and abbreviations.  People have a tendency to mock those of us who are sticklers for good grammar and spelling.  Some might call me a literary snob.  You know what?  I am.
You could argue that presentation is’superficial’ and unimportant relative to the content of the words.  But I disagree.  The use of good grammar and style – particularly in this case -had a much bigger impact on the forms presented by PT76 than the words did(which were meaningless drivel).
The forms offered by PT76 were riddled with misspelled words, poor grammar, faulty capitalization, faulty punctuation, poor spacing, poor alignment, and poor formatting.  Anyone who was educated enough to speak intelligently enough about the laws that PT76 was referring to would have had the basic composition skills necessary to churn out a decently formatted document.
Does that mean that all properly formatted documents are legitimate?  Of course not.
Does that mean that a document with a single type-o is not legitimate?  Of course not.
A document that reads like it was prepared by a fifth grader is, however, pretty indicative that its content is equally specious.
Grammar and style are important.  Using words properly goes a long way at effectively communicating your ideas with other people.  But more importantly – people who have to read your poorly-formatted documents will become fatigued when they have to spend half their energy trying to translate your poor grammar into actual English, and they are more likely to disregard what you have to say.