Reversing the Bankruptcy Appellate Panel, the Ninth Circuit evidently held that a claim will be allowed if the creditor supplies all of the information required by Bankruptcy Rule 3001(c), even when state law requires further documentation and authentication.
Respectfully, the BAP was right. Rule 3001(c) contains the guidelines for the form and content of a proof of claim to establish prima facie validity of a claim. Once prima facie validity is established, the burden shifts to the debtor to demonstrate the invalidity of the claim on one of the grounds in Section 502(b).
In the Ninth Circuit case, the debtor appears to have shown that the claim was not valid under Nevada law for lack of required documentation, thereby establishing grounds for disallowance under Section 502(b)(1), but the Court of Appeals held otherwise.
The Credit Card Claim
The lender filed a proof of claim in a chapter 13 case for a credit card debt of about $8,000. The debtor objected, contending that the lender had not supplied all of the documentation and authentication required by Nevada law when suing to collect credit card debt. The debtor conceded that the proof of claim contained all of the information and supporting documentation required by Rule 3001(c).
The bankruptcy court allowed the claim, but the BAP reversed and remanded. The circuit authorized an interlocutory appeal and reversed the BAP in a nonprecedential, per curiam opinion on November 21.
The Ninth Circuit based its reversal on Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). “Under Erie principles,” the appeals court said, “federal bankruptcy courts apply federal procedural law and state substantive law.”
“To determine whether a state law applies in a federal action,” the Ninth Circuit quoted its own precedent to say, “‘we decide whether the state law conflicts with a valid [federal procedural rule].’ Martin v. Pierce Cnty., 34 F.4th 1125, 1128 (9th Cir. 2022).”
The circuit panel said that “Rule 3001 clearly controls over Nevada laws.” More specifically, the circuit found that “Nevada laws conflict with this federal rule because the two give different answers to the same question: What must a creditor provide in support of a proof of claim on an open-end credit card account?”
The Ninth Circuit said that Rule 3001 is a “typical” and “valid procedural rule” that does “not impinge on substantive rights” and “does no more than set out the procedural requirements for a proof of claim.”
“Consequently,” the Ninth Circuit held that “Rule 3001 prevails over the Nevada laws, meaning that the Nevada laws are not ‘applicable law’ that can render a claim ‘unenforceable’ under 11 U.S.C. § 502(b)(1).”
The Ninth Circuit reversed and remanded, saying that the lender’s “failure to comply with Nev. Rev. Stat. §§ 97A.160 and 97A.165 is not a ground for disallowing its proof of claim.”
The BAP Opinion
Respectfully, the Ninth Circuit’s decision does not hold water compared to the BAP’s opinion, which, likewise, was nonprecedential. See Myers v. LVNV Funding (In re Myers), 22-1005, 2022 BL 264865, 2022 Bankr. Lexis 2080, 2022 WL 3012567 (B.A.P. 9th Cir. July 19, 2022).
The debtor appealed after the bankruptcy court allowed the claim. In the BAP, the debtor admitted that the credit card lender had supplied all of the information required by Rule 3001. However, Nevada law requires more “in any action brought to collect a debt owed to an issuer.” NRS § 97A.160(1).
Pertinent to the appeal, Section 97A.160 requires submission of “the written application for a credit card account” plus “periodic billing statements.” Significantly, the Nevada statute requires that the information be “authenticated.”
When credit card debt is being collected by a purchaser of the debt, Section 97A.165 additionally requires the complaint to include, among other things, the name of the issuer of the card and four digits of the original account number. Without this information, the statute says that “[n]o judgment [may be entered] in favor of the purchaser of credit card debt.”
The BAP characterized the debtor as contending that “the documentation provided was insufficient to enforce the debt under Nevada law.”
The debtor had lodged a request for the production of authenticated documentation required by Nevada law. Specifically, the BAP said that the lender “did not produce either an authenticated written credit card application or authenticated evidence that Debtors incurred charges on the account and made payments thereon.”
The BAP said that the lender “does not directly address the real issue, which is the enforceability of the claim under Nevada law.” The BAP never said that the proof of claim was deficient.
The BAP reversed the bankruptcy court and remanded, holding that the lender “did not provide the documentation required to enforce its claim under applicable law.”
Observations
The question is this: Are the requirements in the Nevada statute procedural or substantive? For instance, is the requirement to produce an authenticated credit card agreement substantive or procedural? Is the requirement of producing authenticated statements merely procedural, or is it substantive?
To this writer, the question seems to be answered by NRS § 97A.165(b)(2), which says that “no judgment may be entered in favor of the purchaser of credit card debt” unless the purchaser “has satisfied the standards of proof set forth in subsections 1 and 2 of NRS 97A.160.” [Emphasis added.] The Nevada statute does not require the documentation to be attached to the complaint, but it lays out the evidence that must be submitted to validate a claim.
To this reader, the “standards of proof” required by Nevada law mean that state law is substantive, not procedural. Consequently, the lack of proof required by state law should result in disallowance under Section 502(b)(1) because the claim would be “unenforceable against the debtor under . . . applicable law . . . .”
The Ninth Circuit apparently failed to recognize that compliance with Rule 3001 only establishes prima facie validity of a claim and does not specify all of the elements required for allowance of a claim.
As shown by the Ninth Circuit’s decision, allowing a claim on credit card debt by supplying information required by Rule 3001 and nothing more has the effect of nullifying state consumer protection laws, to this writer’s way of thinking. The same might be true with regard to allowance of a secured claim based on a mortgage, given state law requirements to establish the validity and enforceability of a mortgage.
If the Ninth Circuit’s decision means that credit card lenders in Nevada will have allowable claims in bankruptcy that would be disallowed in state court, it remains to be seen whether lower courts will feel bound by the Ninth Circuit’s nonprecedential opinion.
The opinions herein are those of the writer, not ABI.
Reversing the Bankruptcy Appellate Panel, the Ninth Circuit evidently held that a claim will be allowed if the creditor supplies all of the information required by Bankruptcy Rule 3001(c), even when state law requires further documentation and authentication.
Respectfully, the BAP was right. Rule 3001(c) contains the guidelines for the form and content of a proof of claim to establish prima facie validity of a claim. Once prima facie validity is established, the burden shifts to the debtor to demonstrate the invalidity of the claim on one of the grounds in Section 502(b).
In the Ninth Circuit case, the debtor appears to have shown that the claim was not valid under Nevada law for lack of required documentation, thereby establishing grounds for disallowance under Section 502(b)(1), but the Court of Appeals held otherwise.