As those who regularly practice consumer bankruptcy law may have already figured out, change is afoot in Rule 3001. The increased examination of the content of and basis for mortgage proofs of claim elevated a long-running discussion about claims procedure to the national spotlight, and sparked a series of proposed changes to Rule 3001 that led to an unusually high level of formal comment by the consumer bankruptcy and credit industry practitioners. These proposals touched not only mortgage proofs of claim, but also applied new requirements to consumer credit card claims. As a result of the public comments, the Advisory Committee on Bankruptcy Rules has now revised the proposed language of the new Rule 3001. While the new proposed rule may resolve some of the issues raised in the comments, the new language leaves other issues unresolved.
The August 2009 Rule Proposal
The language of the initially proposed Rule 3001(c)(1) required that the creditor attach the last account statement sent to the debtor prior to the bankruptcy filing. These statements contain the claim amount at the time of the filing, as well as information about interest, fees and charges; however, while the information used to create the statements may be easily accessible to creditors, the statements themselves may be impossible for creditors to produce. The proposed rule also demanded a separate itemization of interest, fees and arrearages, but these are rolled into the balance of a revolving account each billing statement and cannot be separated back out.
The proposed rule included a sanction in Rule 3001(c)(2)(D) for failure to attach the last statement, which required that the creditor be precluded from presenting evidence of the information contained in the statement in any form as evidence in the case, unless the court determined that “the failure was substantially justified or harmless.”[2] The court could award “other appropriate relief” in addition to or instead of precluding the creditor from presenting evidence to prove up its claim.
Commentators opposed the sanction in the proposed rule as effectively creating a new basis for claim disallowance that is not found anywhere in the Bankruptcy Code itself. As the Supreme Court pointed out in Travelers Casualty Surety Co. of America v. Pacific Gas & Electric Co.,[3] only Congress has “the power to amend the Bankruptcy Code,” and“where Congress has intended to provide…exceptions to provisions of the Bankruptcy Code, it has done so clearly and expressly.”[4]
The New Rule Proposal
The Advisory Committee’s Report, issued on May 27, 2010, shifted the landscape of the Rule 3001 debate once again. The committee indicated that it had withdrawn the language “shall be precluded” from the proposed Rule 3001(c)(2)(D) and instead stated that the court “may, after notice and hearing, take either or both of the listed actions.”[5] “[T]he listed actions” presumably refers to (1) preclusion of presentation of the evidence that would have been listed on the documentation required by the rule, or (2) other appropriate relief, including reasonable expenses and attorney’s fees that resulted from the creditor’s failure to provide documentation with the proof of claim. The report also states that the committee note will state that the grounds for claim disallowance are only those listed in § 502(b), and that inadequate documentation alone is not one of them.
Additionally, the committee withdrew the proposed changes that made up the new Rule 3001(c)(1), and did not recommend that the rule now require that the creditor attach the last account statement sent to the debtor prior to the bankruptcy filing. Instead, the proposals published for comment in August 2010 will include Rule 3001(c)(3), which will again address documentation requirements for revolving consumer credit agreements and will remove those claims from the purview of Rule 3001(c)(1). It will instead require that a statement be filed with the proof of claim that specifies (1) the name of the entity from whom the creditor purchased the account, (2) the name of the entity to whom the debt was owed at the time of the last transaction on the account by an account holder, (3) the date of the last transaction on the account by an account holder, (4) the date of the last payment on the account and (5) the date on which the account was charged off. The rule also provides that a party in interest may obtain the writing on which the claim is based by making a written request for the documentation to the claim holder.
Why the New Rule Proposal Is Better
This proposal addresses the concerns about the August 2009 Rule in several ways:
1. The information required by the rule instead of the last statement is more likely to aid the debtor in identifying the debt associated with the filed claim. It also allows the creditor to present that information in a format that is more easily obtained or created than the last account statement sent to the debtor.
2. The newly proposed language of Rule 3001(c)(2)(D) has removed the requirement that a claim be effectively disallowed for failure to provide documentation. While such a sanction still remains optional as suggested under the rule, it is now permissive in its remedy language. Since it retains important judicial discretion that will be applied to the facts and circumstances of a particular case, a judge may continue to treat a diligent creditor’s honest mistake as an honest mistake, and allow the creditor the opportunity to prove up its claim. With the committee note now more explicitly pointing to § 502(b) as the grounds for claim disallowance, judges may hesitate to refuse to allow the creditor at least some leeway to prove up the debt, though some may still impose other sanctions instead.
3. Another effect of the new rule and committee note may be to require debtors who are routinely filing objections to claim due to lack if supporting documentation to explicitly state § 502(b) grounds for disallowance prior to a court agreeing to disallow a claim. This should be a threshold requirement before the burden shifts to the creditor to prove up its claim. A further improvement would be to include a provision in the rule that any debtor who is found to be filing frivolous objections in order obtain attorney’s fees or harass creditors out of filing claims should be subject to awards of attorney’s fees or other relief for the creditor.
Conclusion
The rule proposal to be published in August 2010 may still leave room for comment. For instance, for debt buyers, providing the date of the last payment on the account may be difficult when dealing with debtors who are continuing to make payment on the debt to the original creditor, but the rule does not explicitly state that the debt buyer may refer to only its own business records to be in compliance. The new requirement that the claim holder produce the writing upon which a claim is based may be impossible to fulfill because the rule provides no alternative to creditors who, for legitimate reasons such as account or age, are no longer able to obtain a copy of the writing upon which the claim is based (typically the credit application). In addition, the committee note suggests that the proposed rule will not eliminate the requirement for a separate itemization of interest, fees and arrearages, with no recognition of the fact that usually, the contract for a revolving account requires that any interest and fees that are not paid in one billing cycle will be rolled into the balance for the next billing cycle. In short, a lively comment period over Rule 3001(c) could still ensue.
1. The authors thankfully acknowledge the contributions made to this article by David Melcer, also of Bass & Associates PC in Tucson, Ariz.
2. Paraphrased from Proposed Rule 3001(c)2(D), Proposed Amendments to the Federal Rules of Appellate, Bankruptcy, Civil, and Criminal Procedure, and the Federal Rules of Evidence - August 2008 [now withdrawn]
3. Travelers Casualty Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443, 1227 S.Ct. 1199 (2007).
4. Travelers, 549 U.S. 443 at 453, 127 S.Ct. 1199 at 1206 (citing FCC v. Next Wave Personal Communications, Inc., 537 U.S. 293, 123 S.Ct. 832 (2003)).
5. Paraphrased from a Memorandum from Honorable Laura Taylor Swain, Chair Advisory Committee on Bankruptcy Rules to Honorable Lee H. Rosenthal, Chair Standing Committee on Rules of Practice and Procedure presenting the Report of the Advisory Committee on Bankruptcy Rules (May 27, 2010) available at www.lsta.org/WorkArea/downloadasset.aspx?id=10462