Can a Claim Be Disallowed for Failure to Provide Supporting Documentation?

May a creditor’s claim be disallowed simply because he or she failed to provide supporting documentation in violation of Rule 3001 of the Federal Rules of Bankruptcy Procedure? The answer depends on which jurisdiction the creditor is pursuing its claim in, and courts are currently sharply divided on the issue. If the creditor is fortunate enough to be in a jurisdiction that follows the “exclusive” view, which is the majority rule, the answer to this problem will be yes. However, if the creditor happens to be in a jurisdiction that follows the “nonexclusive” view, which is the minority rule, the answer will be no.

The allowance of a creditor’s proof of claim is governed by 11 U.S.C. §502, which provides that a creditor’s proof of claim should be allowed except if the claim falls into one of the nine categories listed in §502(b) of the Bankruptcy Code. According to the exclusive view, a creditor’s claim can only be disallowed for one of the nine reasons listed in §502(b). Although failure to attach supporting documentation to a proof of claim is a violation of Fed. R. Bankr. P. 3001, courts that follow the exclusive view do not dismiss a creditor’s proof of claim for this violation because this violation is not one of the reasons listed in §502(b). By contrast, the nonexclusive view does allow a creditor’s claim to be dismissed for reasons other than those specifically stated in §502(b). Therefore, because failure to attach supporting documentation to a proof of claim is a violation of Fed. R. Bankr. P. 3001, courts that follow the nonexclusive view will dismiss a creditor’s proof of claim even though noncompliance with the Fed. R. Bankr. P. 3001 is not one of the reasons listed in §502(b).

This article first examines the provisions of federal law at issue in this court split: 11 U.S.C. §502 and Fed. R. Bankr. P. 3001. Second, this article explains the differences between the exclusive and nonexclusive views, principally by analyzing two recent cases: B-Line v. Kirkland (In re Kirkland), 379 B.R. 341 (10th Cir. B.A.P. 2007), which exemplifies the exclusive view, and In re Tran, 369 B.R. 312 (S.D. Tex. 2007), which exemplifies the nonexclusive view. This article concludes by discussing some important implications of this issue, specifically, the implications these two different views have on large third-party debt buyers. These third-party debt buyers, such as B-Line and eCast, buy thousands of unsecured claims from credit card companies for pennies on the dollar and then seek to collect these claims from debtors in bankruptcy. Depending on which of the two views is applied to their often-unsupported proofs of claim, these companies stand to gain, or lose, millions of dollars.

11 U.S.C. §502 and Rule 3001
The two provisions at the heart of the exclusive vs. nonexclusive view debate are 11 U.S.C. §502 and Fed. R. Bankr. P. 3001. Section 502 governs the allowance of a creditor’s claim, and §502(a) provides that a creditor’s proof of claim filed pursuant to the Bankruptcy Code will be deemed allowed unless a party to the action, such as a trustee or debtor, objects. Section 502(b) further provides for a court to hear any such party’s objection to a creditor’s claim and to allow the claim to stand after determining what the proper amount of the claim should be “except to the extent that” the creditor’s claim falls into one of the nine categories listed in §502(b). If a creditor’s claim falls into one of these nine categories, then it is dismissed. Noncompliance with Fed. R. Bankr. P. 3001 is not one of the categories listed.

Fed. R. Bankr. P. 3001 governs the proper manner for a creditor to file a proof of claim. Fed. R. Bankr. P. 3001(c) provides that when a creditor’s proof of claim is based on a written document, then “the original or a duplicate shall be filed with the proof of claim.” Fed. R. Bankr. P. 3001(f) further provides that a proof of claim “filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.” A proof of claim filed without the documentation mandated by Fed. R. Bankr. P. 3001 is not automatically dismissed; rather, such a claim is merely stripped on the prima facie validity that it otherwise would have enjoyed. These unsupported claims will be allowed unless challenged by a party-in-interest, such as a trustee. As a result, many claims can be, and are, automatically allowed against debtors even though no documentation is provided to prove that the claim even exists. If a party objects to a proof of claim filed without supporting documentation, the claim will not automatically be allowed; rather, the court will seek to determine the validity of the claim. However, courts disagree as to whether the ultimate result of a creditor’s failure to provide supporting documentation can be dismissal of the creditor’s claim.

Differences Between the Exclusive and Nonexclusive Views
In the absence of a clear, statutory answer as to whether a creditor who does not comply with Fed. R. Bankr. P. 3001 should have his or her claim dismissed, two different views of claims objections have developed among the courts: the “exclusive” view and the “nonexclusive” view. Courts adopting the exclusive view hold that a creditor’s claim can only be dismissed for one of the nine specific reasons listed in §502(b). For example, §502(b) provides that a creditor’s claim can be dismissed if the claim is for unmatured interest or if the claim is from an attorney of the debtor. Therefore, under the exclusive view, mere noncompliance with Fed. R. Bankr. P. 3001 is not an adequate reason to dismiss a creditor’s claim. In contrast, courts adopting the nonexclusive view hold that a creditor’s claim can be dismissed for reasons other than one of the nine specific reasons listed in §502(b). Therefore, under the nonexclusive view, noncompliance with Fed. R. Bankr. P. 3001 is an adequate reason to dismiss a creditor’s claim. This section seeks to further explore the reasoning behind both views and the way these views are practically applied by way of two recent case examples by first exploring the reasoning behind the adoption of the exclusive view and its practical application in B-Line v. Kirkland (In re Kirkland), 379 B.R. 341 (B.A.P. 10th Cir. 2007). This section then explores the reasoning behind the adoption of the nonexclusive view and its practical application by a district court in Texas in the case of In re Tran, 369 B.R. 312 (S.D. Tex. 2007).

The Exclusive View: B-Line v. Kirkland (In re Kirkland)
In B-Line, the Tenth Circuit Bankruptcy Appellate Panel (BAP) adopted the exclusive view of claims objections, holding that a creditor’s claim could only be dismissed for one of the nine specific reasons provided in §502(b). In B-Line, the debtor initially filed for bankruptcy protection under chapter 13. B-Line, 379 B.R. at 342. However, after her debt restructuring attempt failed, her case was converted into a chapter 7 liquidation case. Id. In her schedules the debtor listed a substantial amount of unsecured debt to a credit card company identified as Next Card. Id. Next Card then transferred its unsecured claim to a company known as B-Line,[1] which then filed a proof of claim against the debtor’s estate. Id. The trustee of the debtor’s estate objected to B-Line’s proof of claim, arguing that B-Line did not provide the necessary supporting documentation to prove that it had a valid claim[2] against the estate. Id. at 342-43. The trustee further argued that B-Line’s claim should be dismissed because its failure to supply supporting documentation violated Fed. R. Bankr. P. 3001. Id. The lower court agreed with the trustee, sustained the objection and disallowed B-Line’s claim. In re Kirkland, 361 B.R. 199, 205 (Bankr. D. N.M. 2007). The lower court adopted the nonexclusive view of claims objections. Id. The lower court noted that B-Line failed to present any supporting documentation with its proof of claim, even though it was given “ample opportunity” to produce it. Id. B-Line appealed, and both parties agreed to have the appeal decided by the Tenth Circuit BAP. B-Line, 379 B.R. at 343. The BAP reversed the lower court’s decision and firmly adopted the exclusive view of claims objections. Id. at 344.

The BAP in B-Line analyzed the language of §502 and Fed. R. Bankr. P. 3001, and concluded that the exclusive view was the proper one to follow. Id. at 345. The BAP reasoned that §502(b) firmly governed the reasons for which a creditor’s claim could be dismissed. Id. That is, §502(b) provided that a creditor’s claim could only be dismissed for one of the nine reasons listed in §502(b). The BAP further reasoned that §502(b) used “mandatory language” that mandated that a court “shall” allow a creditor’s claim “except” if a creditor’s claim met one of the nine reasons. Id. The BAP held that the plain language of the statute spoke in “absolute terms,” and therefore a creditor’s claim could only be dismissed for one of the nine reasons listed in §502(b). Id. The BAP then analyzed whether Fed. R. Bankr. P. 3001 modified the application of §502(b). Id. Specifically, the BAP analyzed whether the supporting documentation requirement of Fed. R. Bankr. P. 3001 provided an additional reason for a creditor’s claim to be dismissed. Id. The BAP noted that although Congress gave the Supreme Court the power to write the Bankruptcy Rules, Congress specifically provided that the Rules would not modify a substantive right of any party. Id. The BAP further noted that dismissal of a creditor’s claim for noncompliance with Fed. R. Bankr. P. 3001 would modify a creditor’s substantive rights. Id. Therefore, because allowing a creditor’s claim to be dismissed for noncompliance with Fed. R. Bankr. P. 3001 would modify a creditor’s substantive right, the BAP held that Fed. R. Bankr. P. 3001 did not provide an additional reason for a creditor’s claim to be dismissed. Id. 

In not dismissing B-Line’s proof of claim, the BAP reasoned that adopting the nonexclusive view would result in more litigation as to whether a creditor’s proof of claim substantially complied with conflicting instructions. The instructions in conflict are found in Fed. R. Bankr. P. 3001 and in Official Form 10. Id. at 353. Fed. R. Bankr. P. 3001 instructs a creditor on how to properly file a proof of claim, and Official Form 10 is used by a creditor to prepare its proof of claim.  However, Fed. R. Bankr. P. 3001 and Official Form 10 each instruct a creditor to provide different documentation with its proof of claim. For example, Fed. R. Bankr. P. 3001 instructs a creditor to submit the original or duplicate of any document upon which its claim is based. Official Form 10 instructs a creditor to submit a summary of lengthy documents upon which its claim is based. Therefore, if a creditor complied with Official Form 10 and submitted only a summary of a long document upon which its claim was based, it would technically violate Fed. R. Bankr. P. 3001 because it failed to provide the original or duplicate of the document upon which its claim was based. The BAP explained that adopting the nonexclusive view would result in trustees and debtors filing objections to such supporting documentation—seeking to have the creditor’s claim dismissed—because the creditor did not “substantially comply” with Fed. R. Bankr. P. 3001. Id. at 352-54. Deciding these constant objections would cause a dramatic increase in litigation. Id. To avoid this increase in litigation, the court adopted the exclusive view. Id.

The Nonexclusive View: In re Tran
In In re Tran, the U.S. District Court for the Southern District of Texas adopted the nonexclusive view of claims objections, holding that a creditor’s claim could be dismissed for a reason other than one of nine specific reasons provided in §502(b). The court allowed a creditor’s claim to be dismissed because the creditor violated Fed. R. Bankr. P. 3001 by not providing supporting documentation with its proof of claim. In re Tran, 369 B.R. 312, 322 (S.D. Tex. 2007). In In re Tran, the debtor filed for chapter 13 bankruptcy protection. Among the debtor’s creditors were three credit card issuers. Id. at 314. However, these credit card issuers did not submit claims against the debtor’s estate. Id. Instead, the credit card issuers assigned their claims to a company known as eCast.[3] Id. eCast then submitted a proof of claim against the debtor’s estate. Id. The debtor objected, claiming that “eCast was a stranger” and that she did not owe them any money. Id. The debtor further argued that because eCast did not submit any supporting documentation with its proof of claim, in violation of Fed. R. Bankr. P. 3001, its proof of claim should be dismissed. Id at 316, 318. Instead of then providing the required supporting documentation, eCast responded by providing a “general assignment agreement” between itself and the three credit card issuers and a document containing “boilerplate” language that professed to contain a summary of its claims against the debtor. Id. at 317, 319. The bankruptcy court agreed with the debtor, sustained the objection and dismissed eCast’s claim. Id. at 314. The bankruptcy court adopted the nonexclusive view of claims objections. eCast appealed, and the appeal was heard by the U.S. District Court for the Southern District of Texas. Id. The district court affirmed the bankruptcy court’s decision and adopted the nonexclusive view of claims objections. Id.

The court in In re Tran analyzed the language of §502 and Fed. R. Bankr. P. 3001 and concluded that the nonexclusive view was the proper one to follow. Id. at 322. The court analyzed the language of Fed. R. Bankr. P. 3001 and concluded that eCast’s proof of claim was not entitled to prima facie validity. Id. at 317. The court noted that Fed. R. Bankr. P. 3001(f) provides that a creditor’s proof of claim submitted in accordance with the Federal Rules of Bankruptcy Procedure will enjoy prima facie validity. Id. at 316–17. If eCast submitted its proof of claim with supporting documentation, as required by Fed. R. Bankr. P. 3001(c), then its proof of claim would enjoy prima facie validity—a presumption that its claim was valid. The burden of proof would then be on the debtor to disprove the presumed validity of eCast’s proof of claim. Id. at 317-18. However, the court explained that because eCast did not submit supporting documentation with its proof of claim, a violation of Fed. R. Bankr. P. 3001(c), its proof of claim was not entitled to prima facie validity. Id. at 317. The debtor did not have to overcome the burden of disproving the validity of eCast’s proof of claim. Id. Rather, the debtor merely objected to the improperly filed proof of claim and placed the burden of proof on eCast to prove the validity of its proof of claim. Id. The court then concluded that since eCast declined to produce the documentation mandated by Fed. R. Bankr. P. 3001(c), its claim should be dismissed. Id. at 322.

In dismissing eCast’s proof of claim, the court rejected its argument that the court should follow case law from courts in the Ninth Circuit that had adopted the exclusive view. Id. at 316. eCast argued that although its proof of claim was not filed in accordance with Fed. R. Bankr. P. 3001, it could not be dismissed because noncompliance with the Fed. R. Bankr. P. 3001 is not one of the nine dismissal reasons listed in §502(b). Id. The court rejected eCast’s argument, noting that its ruling was “consistent with Fifth Circuit law,” and adopted the nonexclusive view of claims objections, which allowed for eCast’s claim to be dismissed for failing to comply with Fed. R. Bankr. P. 3001. Id. at 315, 322.    

Important Implications of the Exclusive and Nonexclusive Views
There are a number of important implications regarding the adoption of the exclusive and nonexclusive views, and two will be examined in this section. First, the effect of these two views on the conservation of judicial resources is examined, and this section concludes by examining the effects both views have on the operations of large third-party debt buyers, such as B-Line and eCast.

The exclusive view better conserves judicial resources than the nonexclusive view.  The exclusive view conserves judicial resources by eliminating the incentive for trustees to object to a creditor’s proof of claim for every technical violation. Under the exclusive view, a trustee no longer has the incentive to object to every technical violation in a creditor’s proof of claim because he or she knows that the claim can only be dismissed for one the reasons listed in §502(b). By contrast, under the nonexclusive view, a trustee has the incentive to object to every technical violation in a creditor’s proof of claim because he or she knows that the claim can be dismissed for such technical violations. Moreover, rather than create an incentive for a trustee to object to every technical violation, the exclusive view encourages a trustee to utilize the broad discretion to object to a creditor’s claim granted in §704 of the Bankruptcy Code. Specifically, the exclusive view encourages a trustee to use discretion and object to a creditor’s claim only when the claim appears genuinely invalid. Additionally, the exclusive view conserves judicial resources by allowing courts to avoid the difficult determination of whether supporting documentation attached to a creditor’s proof of claim “substantially” complies with the Federal Rules of Bankruptcy Procedure, notwithstanding technical defects.

The exclusive view supports the operations of large third-party debt buyers better than the nonexclusive view. These third-party debt buyers, such as B-Line and eCast, buy debt accounts of debtors who have filed for bankruptcy from unsecured creditors, which are frequently credit card companies. These third-party debt buyers buy these claims for pennies on the dollar and then attempt to collect on these claims in bankruptcy proceedings against the debtor. These debt buyers have adopted a common practice of filing proofs of claim with little to no supporting documentation, a clear violation of Fed. R. Bankr. P. 3001. See, e.g., In re Kemmer, 315 B.R. 706 (Bankr. E.D. Tenn. 2004); In re Henry, 311 B.R. 813 (Bankr. W.D. Wash. 2004). Nevertheless, even though these proofs of claim are filed in violation of Fed. R. Bankr. P. 3001, they are merely stripped of prima facie validity, and absent a challenge from a debtor or a trustee these claims are automatically allowed. However, even if a debtor or a trustee does challenge one of these defective proofs of claim, the exclusive view provides further protection for creditors because the exclusive view only allows a proof of claim to be dismissed for the reasons specifically listed in §502(b). Courts will still not dismiss a proof of claim for being submitted without adequate documentation. It can be argued that the exclusive view allows the practices of these third-party debt buyers to flourish because these companies are allowed to violate Fed. R. Bankr. P. 3001 without fear of having their claims dismissed. In fact, an eCast representative testified that forcing third-party debt buyers to provide the proper documentation in strict compliance with Fed. R. Bankr. P. 3001 would be “cost prohibitive.” In re Armstrong, 320 B.R. 97, 101–02 (Bankr. N.D. Tex. 2005).

The nonexclusive view does not support the operation of large third-party debt buyers and serves to encourage compliance with Fed. R. Bankr. P. 3001 by threatening to dismiss the defective claims of these third-party debt buyers. For example, in In re Gilbreath, 395 B.R. 356, 358, 364 (Bankr. S.D. Tex. 2008), the court endorsed the nonexclusive view and stated that it would continue to police the “shoddy practices” of creditors like eCast and B-Line who submit proofs of claim without adequate supporting documentation. The court further stated that it would not permit these third-party debt buyers to continue to submit proofs of claim, which violates Fed. R. Bankr. P. 3001. Id. at 359. Under the nonexclusive view, these third-party debt buyers have a powerful incentive to comply with Fed. R. Bankr. P. 3001, a practice that would dramatically decrease the profits in their lucrative businesses. Cf. In re Armstrong, 320 B.R. at 101-2.