Court: United States Bankruptcy Court, E.D. Pennsylvania; November 4, 2015; Us Bankruptcy; United States Bankruptcy Court
Debtor Angela P. Freeman seeks to disallow a proof of claim filed by Palisades Collections, LLC, citing the expiration of the statute of limitations and requesting sanctions under Fed. R. Bankr. P. 9011 for filing a "stale" claim. The Debtor argues that the claim, based on a Verizon bill dated April 2004, is unenforceable and dilutes the distribution for other creditors with valid claims. The court agrees to disallow the proof of claim as unenforceable under non-bankruptcy law but denies the request for sanctions, finding insufficient grounds to impose them for filing the stale claim. The procedural history notes that the Debtor filed for chapter 13 bankruptcy on December 5, 2014, and the proof of claim was submitted on February 23, 2015. The Debtor contends that the claim lacks value and that the claimants did not conduct a reasonable inquiry into its validity, believing the Debtor would not object. The matter is ready for decision following a hearing on September 1, 2015.
The Debtor's First Amended Plan, confirmed on August 19, 2015, outlines fixed plan payments and pro-rata distributions to unsecured creditors after senior classes are paid. The outcome of the proof of claim (POC) does not affect the Debtor’s obligations under this confirmed plan, and the Debtor has not claimed any allowed claims are nondischargeable. If there were nondischargeable claims, the Debtor would likely seek to disallow invalid claims to benefit those creditors. The Debtor's lack of incentive to object raises a question of standing, which the court must consider. Constitutional standing requires demonstrating actual or threatened injury, while the Bankruptcy Code allows claims unless a party in interest objects. A "party in interest" is typically understood to have a pecuniary interest in the dispute's outcome. The Debtor's argument that invalid claims harm legitimate creditors suggests she is asserting third-party rights, which typically undermines standing. However, the court finds that the Debtor has sufficient personal interest to challenge the POC because if the plan fails and is dismissed, she remains liable for prepetition claims. Additionally, payments on time-barred claims could reset the limitations period, further justifying her concern. Therefore, the Debtor has the necessary stake to have standing to object to the POC.
The Debtor's attempt to disallow the Proof of Claim (POC) through a Motion was procedurally incorrect, as Federal Rule of Bankruptcy Procedure 3007 requires a claims objection rather than a motion. There are distinct differences between contesting a claim via objection and motion practice, including response requirements and default procedures. Despite the Debtor's procedural missteps, such as mislabeling the motion and incorrectly indicating that a response was required, these issues did not prevent the court from considering the merits of the objection. The process followed was consistent with claims objection procedures, including proper service and a hearing on the merits.
On the merits, the Debtor argued that the POC was unenforceable due to the expiration of the statute of limitations, which in Pennsylvania is four years. Evidence showed that the last bill issued to the Debtor was over ten years prior to the bankruptcy filing, indicating that the account had been in default for more than ten years. The claimant did not appear to provide evidence to counter this, leading to the conclusion that the claim was barred by the statute of limitations and should be disallowed.
Furthermore, the Debtor sought sanctions under Rule 9011 for the filing of the POC, which applies to proofs of claim. However, the court found that the Debtor did not demonstrate that the filing violated the standards of conduct set forth in Rule 9011, resulting in the denial of the request for sanctions.
Fed. R. Bankr. P. 9011 aims to deter abusive practices and streamline litigation, mirroring Fed. R. Civ. P. 11. Central to this rule is subsection (b), which outlines the conduct standards for attorneys and pro se parties when presenting documents to the court. Specifically, Rule 9011(b) mandates that by submitting a document, the party certifies, after a reasonable inquiry, that: (1) it is not for an improper purpose (e.g., harassment or unnecessary delay); (2) legal claims are warranted by existing law or a nonfrivolous argument for changing the law; (3) factual contentions have evidentiary support or are likely to after further investigation; and (4) denials of factual claims are warranted by the evidence or based on a reasonable lack of information. Violations can lead to sanctions, which may be monetary or non-monetary, imposed either upon a party's request or the court's initiative.
The relevant subsections for this case are (b)(1) and (b)(2). Rule 9011(b)(1) addresses improper purposes for which matters may be presented, with examples including harassment and unnecessary delays. The rule's scope is broad, allowing sanctions for any improper purpose, measured by an objective standard, meaning subjective intent to cause harm does not exempt a party from liability. Rule 9011(b)(2) focuses on the requirement for a reasonable inquiry before presenting claims or defenses, ensuring there is a legitimate basis for asserting that the claims are warranted by law.
The evaluation of whether a claim or defense is supported by a nonfrivolous argument utilizes an objective standard. Specifically, when assessing compliance with Rule 9011(b)(2), courts apply an "objective standard of reasonableness under the circumstances," without requiring a showing of bad faith or considering the subjective intent of the attorney or party involved. This standard dismisses justifications lacking a reasonable basis in fact and law. Parties, including pro se litigants, are expected to take reasonable preparatory steps before filing documents.
In the context of filing stale proofs of claim, the Debtor has not identified a specific subsection of Rule 9011(b) for sanctions, but precedent supports her position under both (b)(1) and (b)(2). A key case is Matter of Sekema, where the debtor successfully objected to a stale proof of claim from a creditor, leading the court to initiate a show cause hearing for sanctions. The Sekema court found that Rule 9011(b)(2) applies to proofs of claim and necessitates an objective inquiry into the obviousness of a debtor’s statute of limitations defense. The court deemed the defense "blindingly obvious," noting that the charge-off date exceeded the six-year statute of limitations, and inferred that the claimant had not conducted any reasonable investigation into the defense, thus concluding that filing the proof of claim violated Rule 9011(b)(2).
Sekema establishes that Rule 9011(b) requires parties to conduct a “reasonable inquiry” to assess any obvious affirmative defenses related to claims. This principle is widely recognized in case law, with Sekema being directly applicable to the current case, differing mainly in that the Debtor initiated the motion for Rule 9011 sanctions, whereas the Sekema court acted sua sponte. In In re Feggins, it was suggested that filing a claim that is clearly time-barred violates Rule 9011(b)(1), as such claims lack merit and may exploit the automatic claims allowance process under § 502(a). This constitutes an abuse of the bankruptcy system and undermines the court's integrity. Bankruptcy Rule 9011 permits sanctions against creditors who file claims for improper purposes or unsupported legal assertions. Various cases, including Torres v. Asset Acceptance and In re Chaussee, have indicated that submitting time-barred claims breaches Rule 9011. There is a significant concern regarding the influx of time-barred claims filed by debt buyers, which has been characterized as an abuse of the claims process. Bankruptcy is designed to provide a fresh start for insolvent debtors while ensuring equitable distribution of assets among valid creditors. Claims filed without merit further dilute the limited resources available to legitimate creditors, contradicting the fundamental objectives of bankruptcy law.
Legal authority exists that contradicts the Debtor's stance, particularly highlighted in the case of In re Keeler. In this case, the debtor initiated an adversary proceeding against a creditor, alleging that the creditor knowingly filed a time-barred claim in violation of various statutes, including the FDCPA and the Pennsylvania Unfair Trade and Consumer Protection Law. The court dismissed the complaint, affirming that the creditor did not act improperly by filing a stale proof of claim.
The Keeler court presented several rationales for its decision. First, it distinguished between the existence of a "claim" as defined by 11 U.S.C. § 101(5) and its "allowance," noting that the broad definition of "claim" includes rights to payment that may not be enforceable. Consequently, the Code allows creditors to file proofs of claims even if barred by the statute of limitations.
Second, the court referenced historical practices under the Bankruptcy Act, indicating that the prior allowance of time-barred claims was not intended to be overturned by the 1978 enactment of the current Code. It highlighted that legislative history does not suggest a significant shift in practice regarding stale claims.
Third, the court drew upon bankruptcy court decisions from other jurisdictions, which indicated that while stale proofs of claim can be filed, they may be challenged based on the statute of limitations. These courts confirmed that the expiration of the statute does not eliminate a claim, but introduces a procedural hurdle. In Pennsylvania, the court noted that debts barred by the statute of limitations remain valid and can be waived if the defense is not raised by the defendant.
Ultimately, the Keeler court upheld that there was no impropriety in the creditor's filing of a stale proof of claim within the context of bankruptcy, aligning with interpretations of non-bankruptcy law concerning the statute of limitations.
Debtors, their counsel, and Chapter 13 Trustees are responsible for scrutinizing proofs of claim for stale claims unless local or national rules change. The case of Keeler suggests that while creditors can seek allowance of stale claims, the burden rests on the debtor or trustee to object. The Alabama bankruptcy court in In re Jenkins similarly concluded that filing a stale claim compliant with material requirements does not constitute egregious conduct under Rule 9011. Concerns were raised about potential implications of labeling claims as frivolous or groundless merely because they are later disallowed. The court questioned whether it would be obligated to examine all claims for statute of limitations defenses, even without objections.
In the current analysis, the court does not need to choose between conflicting case lines (Sekema/Feggins vs. Keeler/Jenkins) regarding Rule 9011. The court finds no basis for sanctions under Rule 9011(b)(1), disagreeing with Feggins' assertion that filing a stale proof of claim is for an improper purpose, as it does not align with the rule's examples of such purposes. Instead, a stale proof of claim aims to achieve valid claim relief. Evaluations of whether a claim warrants sanctions should be made under Rule 9011(b)(2), not (b)(1).
Under Rule 9011(b)(2), sanctions for filing a stale proof of claim are deemed inappropriate due to the uncertain state of the law. The standard for imposing Rule 9011 sanctions is high, applicable only in exceptional cases where a claim is clearly unmeritorious or frivolous. Evaluations of conduct should be made based on the reasonableness at the time of filing, not hindsight bias, and all doubts should favor the claimant. The existing case law is divided on the issue, with some support for the claimant's position and no binding precedents to the contrary. Consequently, there is no basis for sanctions under Rule 9011(b)(2) for filing a stale proof of claim, especially when circuit case law remains unsettled and allows for nonfrivolous arguments. A significant split in the case law further complicates the imposition of sanctions, as rational arguments for such filings exist until a definitive resolution by the Supreme Court clarifies the matter.
Parties opposing the filing of stale claims in bankruptcy argue that it abuses the claims allowance system, a view supported by some courts. The bankruptcy court lacks the authority to sanction the filing of stale proofs of claim under Fed. R. Bankr. P. 9011, which complicates the objections from other parties and courts. Despite concerns, there is a valid argument for claimants to file stale claims since the statute of limitations can be waived. Consequently, Rule 9011 is not suitable for addressing this issue as it is designed to tackle litigation process abuses, not to remedy broader issues within the Bankruptcy Code aimed at equitable asset distribution among valid creditors.
The court granted the Debtor’s Motion in part and denied it in part, disallowing Claim No. 3 from Palisades Collections, LLC, while denying the request for sanctions. The Debtor’s term "stale proof of claim" refers to claims that are otherwise valid but unenforceable due to the expiration of the statute of limitations before the bankruptcy case began. The matter is governed by Rule 9011, which is similar to Fed. R. Civ. P. 11, with precedents under Rule 11 applicable to Rule 9011. The Debtor's memorandum highlights that objecting to proofs of claim is often not beneficial, particularly in cases outside of certain Chapter 13 plans, and notes that neither Chapter 13 Trustees nor the U.S. Trustee have shown a willingness to challenge worthless claims, potentially leading to exploitative practices by debt-buyers.
The chapter 13 trustee's reluctance to engage in claims litigation is acknowledged, raising the question of whether the trustee should file objections to claims that appear time-barred, especially in cases with pro rata distribution plans. Under 11 U.S.C. § 1302(b)(1) and § 704(a)(5), the trustee has a duty to examine proofs of claim and object to any improper claims. The trustee's hesitance may stem from limited access to necessary information for evaluating claims, although the debtor is required to cooperate under 11 U.S.C. § 521(a)(3). Claims often present clear grounds for objection based on the statute of limitations. Pennsylvania law states that a debt acknowledgment can restart the limitations period. Other courts have recognized the standing of chapter 13 debtors to object to proofs of claim. The national bankruptcy rules establish deadlines for responding to motions but do not impose a specific requirement for responses to claims objections. A properly filed proof of claim serves as prima facie evidence of its validity, making it difficult to default a claimant who does not respond to an objection.
A hearing is required for an objection to be sustained, where the objector must present evidence that undermines an element of the claim, shifting the burden of proof to the claimant thereafter. The Notice of Motion incorrectly stated a need for a response to the claims objection but was correct regarding a response to the sanctions request. Under 42 Pa.C.S. 5525(a), certain actions must commence within four years, including those based on express contracts not in writing and certain instruments payable on demand, with the time frame starting from the demand or any payment made. The Debtor seeks sanctions against Palisades, the claimant, and Vativ, the agent that filed the proof of claim (POC) on behalf of Palisades. It is unclear if one or both parties may face sanctions, as the POC was signed by Vativ's representative as an agent for Palisades. The court does not need to determine the sanctionable party due to the denial of the sanctions request. Rule 9011 includes a safe harbor provision requiring a 21-day period for withdrawal or correction of the challenged document before seeking sanctions; the Debtor complied with this requirement. The question of whether a document filed for improper purposes violates Rule 11 while also being warranted by existing law is noted but not addressed in this case. According to Pennsylvania law, a cause of action exists only when a party has the right to bring suit; thus, premature lawsuits may be dismissed.
A judgment cannot be issued against a promissor for a promissory note before it matures, and while Pennsylvania prohibits civil actions on unmatured claims, Congress allows such claims to be filed as proofs of claim under 11 U.S.C. 101(5)(A). The distinction between a "claim" and "allowed claim" under 11 U.S.C. 502(a) raises questions about the legitimacy of filing time-barred claims. The act of filing a claim is subject to Rule 9011, which mandates that claimants may need to investigate any obvious affirmative defenses before filing. The Second Circuit noted that a statute of limitations defense must be pleaded and proved to bar a claim. Although a lack of merit in a claim can indicate improper purpose under Rule 9011(b)(1), it remains uncertain whether sanctions could be imposed based solely on the unenforceability of a claim due to the statute of limitations. The record lacks evidence of the claimant's pre-filing inquiry, which complicates the court's ability to assess reasonableness under Rule 9011(b)(2). Silence in the record may suggest no reasonable inquiry occurred, as noted in related case law. The burden of proof regarding pre-suit inquiry might shift to the non-movant in Rule 11 sanctions, but there is debate over whether this shift is appropriate. Possible solutions to address these issues include amending court rules to require explicit assertions regarding the statute of limitations in proofs of claim or applying the Fair Debt Collection Practices Act to such filings, which is currently under consideration by the Third Circuit.
