Attacks on Stale Claims Continue to Dominate Courts’ Attention

In recent times, proofs of claim, especially those filed by consumer lenders and debt purchasers, have come under increased scrutiny. Rule 3001 of the Federal Rules of Bankruptcy Procedure (FRBP) has been amended twice since 2010 to define more specifically what information is required to be included with claims. Generally, the amended rule continues to require “the writing” upon which the claim is based.[1] For an individual debtor, if “in addition to its principal amount, a claim includes interest, fees, expenses, or other charges incurred before the petition was filed,” an itemized statement of such charges must be included.[2]

If the claim is based on an open-end or revolving account, information is required to identify the original creditor, the current creditor, the charge-off date, the last transaction date and the last payment date.[3] The Advisory Committee Notes to Bankruptcy Rule 3001 explain: “Disclosure of the information required by paragraph (3) will assist the debtor in associating the claim with a known account. It will also provide a basis for assessing the timeliness of the claim.”[4]

The law regarding the effect of the filing of a proof of claim is well settled. A properly executed and filed proof of claim is presumed to be valid.[5] The official form for proofs of claim requires the following acknowledgments: “I have examined the information in this Proof of Claim and have a reasonable belief that the information is true and correct. I declare under penalty of perjury that the foregoing is true and correct.”[6] It also specifically refers to Bankruptcy Rule 9011: “The person completing this proof of claim must sign and date it. FRBP 9011(b).” “A claim ... is deemed allowed, unless a party-in-interest ... objects.”[7] Thereupon, the court shall, after notice and a hearing, allow the claim except to the extent that it is excepted by one of the specified provisions of the statute in 11 U.S.C. § 502(b),[8] one of which is that it is unenforceable under applicable law.[9]

One such applicable law is a statute of limitations. If a debtor chooses, he/she may object to a claim and allege the affirmative defense of the expiration of the limitations period for filing suit. If the debtor prevails, the court typically disallows the claim. However, neither the debtor nor any other party-in-interest is required to object to claims that are out of statute and unchallenged, and such claims are entitled to distributions from the bankruptcy estate.[10] In almost every state, the running of the applicable statute of limitations does not extinguish the obligation, and a debtor may voluntarily repay an out-of-statute debt outside of bankruptcy.[11]

As to bankruptcy’s straightforward and relatively uncomplicated objection to the claims process, debtors have added a resort to asserting violations of the Fair Debt Collection Practices Act (FDCPA), contending a violation when a “debt collector” knowingly filed an out-of-statute claim.[12] More specifically, such claims are alleged to violate the FDCPA’s prohibition against making false or misleading representations and of engaging in unfair or deceptive acts or practices. The FDCPA is a strict liability statute, providing for actual damages, statutory damages of up to $1,000 and, significantly, attorneys’ fees. The potential outcome of an FDCPA case challenging a debt collector’s filing of an out-of-statute proof of claim clearly has financial advantages over the more economical contested-matter process, wherein the typical remedy for an objectionable claim is set forth in the Bankruptcy Code, viz., disallowance. Historically, such a strategy has borne little fruit. More recently, and especially after the Eleventh Circuit’s decision in Crawford v. LVNV Funding,[13] this approach has gained some traction, with some closely watched appellate litigation ongoing.

Another recent tactic has been a demand for sanctions to be imposed on a filer of a proof of claim for an account on which the statute of limitations has run, pursuant to the relevant provisions of Bankruptcy Rule 9011:

(b) Representations to the court

By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,

(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;

(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.

But just what implicates the rule, in simpler terms? One court determined that “[a] motion that attempts to re-litigate a decided issue or introduces nothing new is frivolous.... Further, [Bankruptcy Rule] 9011 is specifically designed to prohibit the re-argument of issues already ruled upon by the Court.”[14] Furthermore, “[a] legal position is not sanctionable unless case law clearly establishes that the position is frivolous.”[15]

“The purpose of Rule 9011 is equivalent to that of [Fed. R. Civ. P.] 11.”[16] Regarding the latter, the Third Circuit explained that “[t]‌he Rule imposes an obligation on counsel and client [that is] analogous to the railroad crossing sign, ‘Stop, Look and Listen.’ It may be rephrased, ‘Stop, Think, Investigate and Research before filing papers either to initiate a suit or to conduct the litigation.”[17] However, the court continued with tempering — even cautionary — words: “It bears repeating that the target is abuse — the Rule must not be used as an automatic penalty against an attorney or a party advocating the losing side of a dispute.”[18] It is important to remember that

[a]s a starting point, “the test for [Bankruptcy Rule] 9011 sanctions is a stringent one.” Rule 9011 sanctions are imposed only in exceptional circumstances where the claim is “patently unmeritorious or frivolous,” i.e., where it is “clear that a claim has absolutely no chance of success.” Rule 9011 is not intended to chill an attorney’s creativity in pursuing legal theories. Sanctions should not be imposed based on hindsight bias, but rather, the conduct should be evaluated based on what was reasonable at the time of the filing. All doubts should be resolved in favor of the signer of the filed document.[19]

One bankruptcy court decided sua sponte to impose Bankruptcy Rule 9011 sanctions, after notice and hearing, for the filing of proofs of claim for stale debt.[20] According to the court, while the requisite pre-filing inquiry does not need to be exhaustive, it must be “reasonable under the circumstances,” encompassing the “obvious” defenses to the claim.[21] The court found the claimants’ conduct sanctionable because information showing the claim was beyond the applicable statute of limitations was provided by the claimants themselves, on their proofs of claim.[22] Perhaps that explains the court’s pique:

[The] Debtors’ statute of limitations defense to both claims was blindingly obvious. It does not take a rocket scientist to figure out that December 1998 ... or May 2001 [the claims’ respective charge off dates] are well beyond six years before the March 2014 date [that] the debtors filed this case. A third-grader could do the math.[23]

It also did not help that the claimants neither responded to the court’s show-cause order nor appeared at the hearing.[24] Conversely, another court determined that such a filing is not sanctionable because of the perilous extension of such a rule and its incompatibility with the Bankruptcy Code:

By way of an example, assume [that] a creditor files a proof of claim that is not fraudulent, although the creditor knew or should have known [that] its claim might be disallowed on statute-of-limitations grounds if that objection is raised by the debtor or the trustee. Under the plaintiff’s logic, that creditor has exposed itself to the imposition of sanctions. If sanctions were appropriate in such an instance, they likewise should be imposed if the claim [was] subject to disallowance for other affirmative defenses that could be deemed “obvious,” such as ... accord and satisfaction, payment, res judicata, estoppel, release, lack of consideration, setoff, or recoupment. Any creditor filing a claim, not just those identified as debt collectors under the FDCPA, whose filed claims are later disallowed on virtually any affirmative defense grounds would be exposed to sanctions if the affirmative defense were deemed “obvious.” Such logic would chill the filing of any claim that was even arguably subject to an affirmative defense, and stands in opposition to the Code’s invitation for “[a] creditor ... [to] file a proof of claim....,” which will be “deemed allowed, unless a party-in-interest ... objects.” [11 U.S.C.] §§ 501(a), 502(a).[25]

The court concluded that “the filing of a claim on a debt that is stale under state law — where the proof of claim is otherwise in all material respects compliant — is not egregious and offensive conduct that Rule 9011 was intended to address.”[26] Another court similarly declined to impose a sanction on a filer of a proof of claim for a debt on which the limitations period had run.[27] In dictum, the court speculated:

The more pertinent (but closer) question, as to which I have located no binding authority in this Circuit, is whether (or the degree to which) Rule 9011 imposes a duty on a claimant to investigate responses it may have to a meritorious affirmative defense that appears “obvious” on the face of the document filed by the claimant. It is not obvious how this Rule 9011 principle can be squared with the general proposition that affirmative defenses can be waived.[28]

In the end, the court reasoned that the filing was not “for any improper purpose,” Bankruptcy Rule 9011‌(b)‌(1), nor were sanctions appropriate under the circumstances, particularly because relevant case law is unsettled and split; the statute of limitations is an affirmative defense that may be waived; and the movant failed to show that the claimant’s pre-filing inquiry was not reasonable under the circumstances.[29] Because “[a]‌ll doubts should be resolved in favor of the signer of the filed document,”[30] the court disallowed the claim pursuant to 11 U.S.C. § 502‌(b)‌(1), but declined to impose any sanctions.[31]

Earlier, a court refused to sanction a filer of a proof of claim for stale debt.[32] It observed that the law under the Bankruptcy Act (the Code’s predecessor) preserved the right to file such,[33] the sole proper response to which was disallowance of the claim, a treatment unchanged by Congress, and indeed protected by the Code’s expanded definition of a “claim.”[34] It reminded that under apposite state law, the statute of limitations remains unextinguished, and that it is a waivable affirmative defense.[35] It concluded:

Therefore, along with numerous other courts to have considered the issue, I conclude that [the] defendant ... in this adversary proceeding held a claim within the meaning of section 101‌(5)‌(A), even though that claim was based upon a debt barred by the statute of limitations. And by holding a claim, it was a bankruptcy creditor of the debtor with the right to file a proof of claim by virtue of section 501‌(a).[36]

Very similar analysis and reasoning prevailed in Glenn v. Cavalry Invs. LLC (In re Glenn):[37]

The preceding analysis makes [it] clear that these creditors have claims. They are, therefore, entitled to assert them. The existence of the claim does not ... guarantee a recovery, of course, as the Bankruptcy Code, Bankruptcy Rules and Official Forms apply conditions on how claims are handled. These conditions include those that apply to time-barred claims, which are anticipated and handled under all of the foregoing....

While it may be the case that a time-barred claim will be disallowed, it [might] also be the case that it will not be. The end result is not clear unless and until the matter is heard by the court. But it is the court that is uniquely positioned to make those determinations, and it may only do so if the creditor is not prevented from asserting its claim.[38]

Conclusion

A court in North Carolina recently rejected a debtor’s request pursuant to 11 U.S.C. § 105 to penalize a creditor for its out-of-statute claim in an effort to deter it from continuing its practice. The court reasoned that to do so would equate the out-of-statute claim to a false or fraudulent filing.

Here, there is no identifiable right to sanctions under § 105 for filing a stale claim. Even though the Code provides for the disallowance of stale claims in § 502(b)(1), it does not prohibit the filing of such claims. Thus, § 105 cannot be construed as containing an independent right of action to sanction a creditor for filing a stale claim.[39]

Thus, according to the court, otherwise-proper claims for out-of-statute debt are permissible, at least until Congress permits amendment to procedural rules,[40] or amends the Bankruptcy Code.