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Proofs of Claim Selected Issues
Hon. Frank J. Santoro United States Bankruptcy Judge
Eastern District of Virginia Norfolk and Newport News Divisions
600 Granby St. Norfolk, VA 23510
Kelly M. Barnhart Roussos, Lassiter, Glanzer & Marcus, PLC
580 E. Main St., Ste. 300 Norfolk, VA 23510
Table of Contents I. Introduction...................................................................................................................................... 1
II. Amended Claims.............................................................................................................................. 2
III. Bar Date ........................................................................................................................................... 4
IV. Objecting to Claim Versus Filing an Adversary Proceeding ........................................................... 6
V. Valuing Collateral on Secured Claims or in Plan – Which Governs ............................................... 7
VI. Assigned and Transferred Claims.................................................................................................... 9
VII. Documentation............................................................................................................................... 12
VIII. Mortgage Claims & Documentation .............................................................................................. 14
I. Introduction
Given the rise of bankruptcy cases in the past few years, it is inevitable that there has
been a rise in claims filed by creditors and parties in interest in bankruptcy cases. Generally,
claims are what allow creditors to receive distributions in the cases. It is good practice for
creditors to file proofs of claim in bankruptcy cases. Excluding chapters 9 and 11, filing of
claims is what allows unsecured creditors to receive distributions in cases.1
The purpose of this discussion is to highlight some of the issues regarding proofs of
claim, including: amended claims, the effect of the bar date, objections to claims versus filing
adversary proceedings, how secured claims are evaluated in bankruptcy, assigning and
transferring claims, documenting claims, and what kind of documentation is needed in order to
properly file proofs of claim specifically related to mortgages.
If a claim is properly prepared, it is prima facie evidence of the obligation owed by the
debtor.2 This is true as to validity and amount. As a result, such a claim is deemed allowed
pursuant to 11 U.S.C. 502(a), unless objected to by the debtor or other party in interest. If a
party objects, the initial burden of proof is on the objecting party to provide evidence to
overcome the presumption of validity of the claim. Once this is done, the claimant has the
burden of proof and persuasion that the claim should be considered valid and therefore allowed.3
State (or non-bankruptcy) law determines the substance of claims.4 Whether a creditor is
entitled to be paid, therefore, must be determined by referring to the underlying state (or non-
bankruptcy) law, not bankruptcy law.
1 Fed. R. Bankr. P. 3002(a). 2 Fed. R. Bankr. P. 3001(f). 3 In re Allegheny Int’l, Inc., 954 F.2d 167, 173-74 (3rd Cir. 1992). 4 Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 20, 120 S. Ct. 1951, 147 L. Ed. 2d 13 (2000) (citations omitted).
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II. Amended Claims
Pursuant to 11 U.S.C. § 502(a), a proof of claim is deemed allowed unless it is objected
to by a party in interest. There is no similar provision or rule that deals with amendments to
proofs of claim although a proper amendment to a proof of claim will relate back to the original
claim and should enjoy the same statutory presumption. The best reference to amended claims
is the official form for proofs of claim, which includes a box to check to indicate if the proof of
claim being filed is an amendment to an earlier claim. If the amendment is filed prior to the
expiration of the claims bar date, it is less likely to be problematic.
Generally speaking, bankruptcy courts take the position that amendments to claims
should be “freely allowed.”5 Such amendments include adjusting the claims to reflect either
increases or decreases in the amount, adding other bases for recovery or adding other
information applicable. “[A]mendment to a claim is freely allowed where the purpose is to cure
a defect in the claim as originally filed, to describe the claim with greater particularity or to plead
a new theory of recovery on the fact set forth in the original claim.”6
If the bankruptcy court determines that the amended claim is actually a new claim, such
amendment may not be permitted.7 This is especially true if the claim is amended to increase the
amount and the information related to the actual amount could have been determined at the time
the creditor filed the original proof of claim. Generally, there is a careful review of amended
claims filed after the bar date to make sure that there is no attempt to file a new claim labeled as
5 In re Hemingway Transp., 954 F.2d 1, 10 (1st Cir. 1992). 6 In re Int’l Horizons, Inc., 751 F.2d 1213, 1216 (11th Cir. 1985) (citations omitted). 7 See, e.g., In re CF&I Fabricators of Utah, Inc., 148 B.R. 332 (Bankr. D. Utah 1992).
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an amended claim.8 If for example, a creditor is attempting to change the classification of the
claim from unsecured to secured, such change is really an attempt to file a new claim and
generally will not be permitted.9
It is within the sound discretion of the bankruptcy court whether the amendment to the
claim should be permitted.10 In making the determination of whether to allow the amended
claim, most courts use the “nexus” test, which considers the connection between the original
claim and amended claim.11 In other words, the amended claim should arise from the “same
conduct, transaction or occurrence.”12 If it does, the amended claim will be allowed. Other
courts have expanded on the nexus test, adding equitable considerations such as prejudice to
other creditors.13 Other factors considered include adequate notice to other parties and whether
there has been a delay in the filing of the amended claim.14
If a creditor is attempting to file an amended claim after the bar date has passed, the
trustee or debtor, in applicable situations, should review to determine whether the amendment is
simply a correction of the originally filed claim or if it can be considered a new claim. In
making this determination, consider whether the claim expands the scope of the claim, changes
8 Int’l Horizons, 751 F.2d at 1216; In re Dynamic Tours & Transportation, Inc., 349 B.R. 307, 316 (Bankr. M.D. Fla. 2006). 9 In re Nat’l Merchandise Co., Inc., 206 B.R. 993, 999 (Bankr. M.D. Fla. 1997). 10 In re Plunkett, 82 F.3d 738, 740 (7th Cir. 1996). 11 Int’l Horizons, 751 F.2d at 1216. 12 Id. 13 See, e.g., In re Dortch, 2009 Bankr. LEXIS 3789 (Bankr. N.D. Tex. Dec. 1, 2009) (objection to amended claim filed after bar date sustained and in reaching this decision, the Bankruptcy Court for the Northern District of Texas emphasized if such claim was allowed it would unduly dilute the distribution to unsecured creditors, thereby prejudicing them). 14 In re Lehman Group, LLC, 2006 Bankr. LEXIS 2152 (Bankr. N.D. Ill. Sept. 11, 2006).
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the classification of the claim (from general unsecured to priority, or from unsecured to secured),
or alleges a new theory of recovery that could have been indicated prior to the passing of the bar
date. In any of these situations, a party should object, especially if it means that unsecured
creditors are going to receive less if the claim is allowed as amended. While the practice of
amending claims is often acceptable, there is a limit to amendments if it is wrongfully improving
the creditor’s position. Query: what if the trustee or debtor filed the claim in the first instance
(prior to the expiration of the bar date) and the creditor amends the claim after the termination of
the bar date. Will the amendment be scrutinized as carefully? What should the trustee do in this
instance, if anything?
III. Bar Date
One of the key items when discussing claims is the claims bar date. This is the deadline
established for filing proofs of claim. The Bankruptcy Code does not set out a deadline for the
filing of claims but instead simply considers that there should be a deadline. This is evident
when reading 11 U.S.C. § 501, where it refers to proofs of claim being timely filed. Other than
this reference, no guidelines are provided as to when claims should be filed. Fed. R. Bankr. P.
3002 provides that claims should be filed within 90 days after the first date of the first meeting of
creditors in chapters 7, 12 and 13, for non-governmental units, and 180 days after the order of
relief is entered for governmental units. There are some exceptions to these deadlines. For
example, an unsecured claim arising as the result of entry of a judgment may be filed within 30
days after the judgment becomes final if it is for money or property or “avoids the entity’s
interest in property.”15 In addition, if the debtor rejects an executory lease or contract, then the
15 Fed. R. Bankr. P. 3002(c)(3).
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other party to the lease or contract may file a claim within the time established by the bankruptcy
court.16
If the claim is not filed before the bar date, the claim may be disallowed. Pursuant to 11
U.S.C. § 502(b)(9), a claim may disallowed simply for not being filed timely, unless other
provisions, either in the Bankruptcy Code or Bankruptcy Rules, allow otherwise. For example,
Fed. R. Bankr. P. 9006 contemplates allowance of tardily filed claims if the party seeking
allowance of the claim establishes excusable neglect. The Supreme Court, in Pioneer Investment
Services Co. v. Brunswick Associates, Ltd. Partnership17, considered excusable neglect as it
pertained to the late filing of a proof of claim in the chapter 11 context. In Pioneer Investment,
an attorney who represented a number of unsecured creditors, filed proofs of claim for his clients
twenty days after the bar date had passed. The Supreme Court ruled that excusable neglect was
not limited to situations where the party missed the deadline through no fault of his own, but
could be based upon mistake, inadvertence, or even carelessness. The Court explained:
Because Congress has provided no other guideposts for determining what sorts of neglect will be considered "excusable," we conclude that the determination is at bottom an equitable one, taking account of all relevant circumstances surrounding the party's omission. These include, as the Court of Appeals found, the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.18
When applying these factors, some courts have held that no one factor should be more important
than the others.19 Other courts have concluded that it is not abuse of discretion, however, to give
16 Fed. R. Bankr. P. 3002(c)(4) 17 507 U.S. 380, 113 S. Ct. 1489, 123 L. Ed. 2d 74 (1993). 18 Id. at 395, 113 S. Ct. at 1498, 123 L. Ed. 2d at 89. 19 See George Harms Constr. Co. v. Chao, 371 F.3d 156, 164 (3rd Cir. 2004).
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greater weight to one factor than the other factors.20 The burden of proving excusable neglect is
on the movant, the late filing creditor.21 A creditor seeking leave to file a late claim should be
prepared to establish cause, not only in its motion, but at a hearing. Proffering the evidence may
not be acceptable; actual evidence may be necessary. It is important, especially at the early
stages of a case, to calendar important dates, such as claims bar dates, so that the deadlines are
not missed. This is axiomatic, but a source of a surprising amount of litigation.
IV. Objecting to Claim Versus Filing an Adversary Proceeding
The proof of claim form has a place where the secured creditor may assert the value of
the collateral acting as security for the claim. While secured creditors often believe that the
filing of the claim establishes the value of the collateral, this is not true. Pursuant to 11 U.S.C. §
506(a), there must be something else, in addition to the filing of a claim, to establish the value.
However, if the claim is properly prepared and filed, it is prima facie proof as to its validity.22 If
a party wishes to object to the validity, priority, or extent of a lien or other interest in property,
that party must initiate an adversary proceeding.23 Thus, if someone wishes to challenge the
legal force of a security agreement, the rank or position of the creditor, or the scope of the
security, then that party must initiate an adversary proceeding. This is because the party wishes
to challenge the basis of the lien itself.
In addition, if a party objects to the allowance of a claim based upon a failure properly to
perfect the lien, such an objection may be treated as an adversary proceeding since the action is
20 See, e.g., Mich. Self-Insurers’ Sec. Fund v. DPH Holdings, Corp. (In re DPH Holdings, Corp.), 434 B.R. 77 (S.D.N.Y. 2010) (explaining that in the Second Circuit, the third factor is given greater consideration than the other Pioneer factors). 21 Midland Cogeneration Venture Ltd. P’ship v. Enron Corp. (In re Enron Corp.), 419 F.3d 115, 121 (2d Cir. 2005). 22 Fed. R. Bankr. P. 3001(f). 23 Fed. R. Bankr. P. 7001(2).
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really a demand for relief under 11 U.S.C. §§ 547 and 549.24 Again, as in the situations described
above, it is more appropriate to determine this issue in an adversary proceeding, under the
Federal Rules of Bankruptcy Procedure.
If one simply wishes to challenge the amount of an unsecured claim, or the validity of the
claim, it is appropriate to do so in the form of an objection to the claim rather than an adversary
proceeding. In making such a determination it is wise for the party intending to object to review
the rules governing adversary proceedings in order to see whether it is appropriate to challenge
the claim as an objection or if it is necessary to file an adversary proceeding.
V. Valuing Collateral on Secured Claims or in Plan – Which Governs
Pursuant to 11 U.S.C. § 1327(a), upon the confirmation of the plan, the provisions
contained in the plan are binding on the debtor as well as the creditors. This is so regardless of
whether the claim of a creditor is provided for in the plan, and regardless of whether a creditor
has objected to the plan, accepted the plan or rejected the plan. Upon confirmation, a secured
creditor may not demand that it receive a greater payment than provided for in the plan.25
Typically, confirmation of a plan occurs before the claims bar date has passed. Only creditors
with allowed claims will receive distributions pursuant to the confirmed chapter 13 plan.26 If a
secured creditor wishes to have an allowed claim, it must file a proof of claim. Normally, the
plan does not determine whether a claim is deemed allowed or disallowed.
24 See In re Johnson, 279 B.R. 218, 223 (Bankr. M.D. Tenn. 2002). 25 In re Goos, 253 B.R. 416, 419 (Bankr. W.D. Mich. 2000). 26 Fed. R. Bankr. P. 3021.
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If the plan values the collateral securing the claim, and such plan is confirmed, the
collateral is properly valued. There is no need to have an adversary proceeding to determine the
collateral’s value.27 The plan controls as to value, not the filed claim.28
The issue between whether the claim or plan determines the value of the collateral arises
because, as previously indicated, plans are typically confirmed prior to the expiration of the bar
date. However, confirmation of a plan simply means the plan will provide for distribution only
to allowed claims. In addition, most often plans are pot plans (plans that provide for a fixed
amount to be paid, regardless of what claims are filed and the percentage received by creditors is
determined, not by the plan, but by the total amount of allowed/approved claims). Because at the
time of confirmation it is unknown which claims will be allowed, the plan states only claims that
are allowed will be paid. The trustee is permitted only to pay funds to creditors with allowed
claims.29 Thus, claims may still be challenged and if successfully challenged will be deemed
disallowed, resulting in a higher distribution to the creditors who have allowed claims.
While amount and validity are determined by the proof of claim, the amount of the
secured portion of the claim may be determined by the plan, and upon confirmation the amount
of the collateral securing the claim is set.30 Upon confirmation, it is unnecessary for a debtor to
object to a proof of claim which values the collateral at a different amount.31 “Where a Chapter
13 plan values a secured claim and the plan is confirmed, with or without objection of the
secured creditor, the creditor is bound by the plan’s value notwithstanding that the creditor filed
27 Lee Servicing Co. v. Wolf (In re Wolf), 162 B.R. 98, 106 (Bankr. D.N.J. 1993). 28 See, e.g., In re Smith, 2007 Bankr. LEXIS 1857 (Bankr. E.D. WI. 2007); Johnson, 279 B.R. 218. 29 Fed. R. Bankr. P. 3021. 30 In re Shank, 315 B.R. 799, 805-06 (Bankr. N.D. Ga. 2004). 31 In re Sernaque, 311 B.R. 632 (Bankr. S.D. Fla. 2004); In re Duggins, 263 B.R. 233 (Bankr. C.D. Ill. 2001).
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a proof of claim stating a higher value before confirmation and that no objection to the claim was
filed before confirmation.”32 Thus, if a plan provides for the value of the collateral, proper
notice of the plan is provided, and the service requirements are met, once the plan is confirmed,
the value of the collateral securing a claim has been determined. This is so regardless of whether
a strip-down or a strip-off is accomplished. Valuation is binding on all parties, including the
secured creditor. This is one area where there are significant differences based on local practice,
so make sure to stay familiar with the decided cases in your geographic practice area.
VI. Assigned and Transferred Claims
It has become common practice for claims to either be assigned or transferred. This is
often seen in chapter 13 cases with respect to credit card claims, or in large and/or complex
chapter 11 cases, where companies buy claims in bulk betting on the outcome of the cases. In
order for a claim to be properly transferred, a party needs to follow Fed. R. Bankr. P. 3001(e).33
This rule provides that if the claim is transferred prior to the bar date expiring, and prior to a
claim being filed, only the transferee may file the claim. For these transferred claims, it is good
practice to include with the proof of claim evidence of the transfer, however such proof is not
required.34 By providing such proof, however, the transferee may stave off an objection. If such
proof is not provided and cannot be provided, and an objection is filed, the claim should not be
allowed, since it cannot be established who the debtor owes the money.35 This may be especially
true in situations involving chapter 13 debtors who pay into “pot plans”, which, as explained
32 Duggins, 263 B.R. at 244. 33 This discussion only deals with assignments/transfers that are not for security. 34 In re Simms, 2007 Bankr. LEXIS 4134, *4 (Bankr. N.D. W.Va. 2007). 35 In re King, 2009 Bankr. LEXIS 2722, *15 (Bankr. E.D. Va. 2009).
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above, are plans based upon a set dollar amount per month for the life of the plan, regardless of
what claims are allowed.36
Rule 3001(e) also provides that if the claim is transferred after the proof of claim has
been filed, the transferee must file proof of the transfer. Notice to the transferor must be
provided and any objection to the transfer by the transferor must occur within 21 days of the
mailing of this notice. If the transferor timely objects, and the court finds, after notice and
hearing, that the claim has been transferred, an order will be entered substituting the transferor
with the transferee. If no objection is filed, the transferor is substituted with the transferee
without the need for a hearing.
If the transfer occurs after the expiration of the bar date, evidence of the transfer must be
provided. In most cases, the evidence of the transfer is the actual agreement pertaining to the
transfer. While disclosure of the transfer should be provided within a reasonable period of time,
it does not need to be provided prior to the bar date.
One major issue involving the transfer of claims is the lack of documentation provided
related to the underlying claim. Transferees usually find themselves in three situations with
respect to its claims: (1) proof of the transfer if the underlying obligation owed by the debtor to
the transferor, along with specific proof of the debt owed by the debtor; (2) proof of transfer of
accounts from the transferor to the transferee without proof of the debtor’s obligation being
transferred, along with proof of the underlying debt being owed by the debtor to the transferor;
or (3) proof of a blanket transfer of transferor’s accounts to the transfer, without proof of the
specific transfer of the debtor’s obligations, and without proof of the underlying debt being owed
by the debtor. While the transferee’s claim may be given prima facie status under the first two
scenarios, this is not so for the third. Finally, depending on state law, an assignee/transferee may 36 Id.
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not be able to pursue the claim it purchased in bankruptcy, if, for example, there is a break in the
chain of assignment.37 Counsel for debtors and creditors should be familiar with the underlying
state law as to assignments and transfers in order to successfully pursue or object to claims based
upon assignments and transfers.
Given the growth of the mortgage market, including the securitizing and servicing of
these loans by affiliates of lending institutions and/or independent loan servicers, there has been
an inevitable increase in problematic claim filings, which will be discussed in more detail later in
the material. However, some of the problems directly relate to transfer issues involving
mortgage claims. Some mortgage companies, or their agents, have filed proofs of claim without
proper documentation, or have filed proofs of claim, but another mortgage company, or its agent,
has filed a motion for relief against the same debtor for the same property. For example, in In re
Hayes38, the debtor executed a note and mortgage for property with Argent Mortgage Company,
LLC (“Argent”), as the lender. AMC Mortgage Services, Inc. (“AMC”), not Argent, filed a
proof of claim in the debtor’s bankruptcy case, as loan servicer for Argent. The debtor objected,
claiming that the fees sought were unreasonable and excessive, and that AMC failed to attach a
copy of the note or mortgage. One month later, Deutsche Bank filed its motion for relief, as
trustee of Argent Mortgage Securities, Inc. In the motion, Deutsche Bank alleged it was the
current holder of the mortgage, that the Debtor failed to stay current on post-petition mortgage
payments, there was little to no equity in the property, and that the property was unnecessary for
a successful reorganization. The debtor objected to the motion, asserting she did not have
37 See, e.g., Green v. Cavalry Portfolio Servs. LLC, 305 Ga. App. 843, 843, 700 S.E.2d 741, 742 (2010) (holding that because the assignee could not show the chain of assignment it could not establish that it was the appropriate party in interest to bring suit on the contract). 38 393 B.R. 259 (Bankr. Mass. 2008).
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sufficient information to either admit or deny the allegation that she had failed to make post-
petition payments and objected to Deutsche Bank’s standing to bring the motion.
AMC responded to the claim objection attached a copy of the note and mortgage, along
with a loan history. Approximately 16 months later, an attorney filed a transfer of claim other
than for security, related to this claim, whereby AMC attempted to transfer the claim it filed on
behalf of Argent to Citi Residential Lending, Inc., as loan servicer for the secured creditor
Deutsche Bank National Trust Company, as trustee, in trust for the registered holders of Argent
Securities, Inc. One can understand the confusion surrounding this sequence of events.
The bankruptcy court consolidated the hearings on the objections to the claim and
motion. At trial, Deutsche Bank actually presented a witness, a bankruptcy specialist with Citi
Residential Home Lending, Inc. With respect to the claim issue, the court held that there was
insufficient evidence presented to establish that the claim could be traced from Argent to AMC
and then from AMC to Argent Securities Inc. It disallowed the claim and denied the motion for
relief.39 The facts of this case demonstrate why “it is axiomatic that in federal courts a claim may
only be asserted by the real party in interest.”40
VII. Documentation
When filing a proof of claim, the party filing such claim must comply with Fed. R.
Bankr. P. 3001. If the claim is based upon a writing, the creditor should provide the original or a
copy of the writing with the claim. If such documentation has been lost, the claimant should
disclose this with the proof of claim. While summaries of documentation may be permitted,
39 Id. at 270. 40 In re Smith, 41 B.R. 622, 628 (Bankr. E.D. Va. 2008)
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such summaries cannot simply be a restatement of what is contained within the form of the proof
of claim.41
A majority of courts have held that a lack of documentation, however, does not mean that
an objection to the claim will be sustained, but rather the claim will not receive the presumption
of validity.42 A debtor, when objecting to a proof of claim, must have some other basis for the
objection, not simply a pleading issue, such as a lack of documentation. “Simply put, it is not
fair to a creditor to sustain an objection to its proof of claim based on inadequate documentation
unless the objecting party alleges some basis for objecting on grounds that would require
disallowance or reduction under § 502(b).”43
11 U.S.C. § 502(b) lists the bases for disallowance of a claim, including: (1) the claim is
unenforceable against the debtor or the debtor’s property; (2) the claim is for unmatured interest;
(3) if the claim is based upon tax assessed against property of the estate, such claim exceeds the
value of the interest of the estate in the property; (4) if the claim is for services of an insider or
counsel of the debtor, such claim exceeds the reasonable value of the services; (5) the claim is
for a debt that is unmatured as of the filing date and is excepted from the discharge; (6) the claim
is based upon damages resulting from a rejection of the lease and is for more than permitted
under the Bankruptcy Code; (7) the claim is owed to an employee for damages resulting from
termination and the claim exceeds the compensation provided for by contract, without
acceleration, for one year following the earlier of the date of the petition filed; or the date on
which the employer directed the employee to terminate, or such employee terminated,
41 Shank, 315 B.R. at, 810. 42 See, e.g., Id; In re Habiballa, 337 B.R. 911, 916-17 (Bankr. E.D. Wis. 2006); Dove-Nation v. eCast Settlement Corp. (In re Dove-Nation), 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004). 43 Id. at 812. See also, Peron v. eCAST Settlement Corp. (In re Perron), 2006 Bankr. LEXIS 2639, * 12 (B.A.P. 6th Oct. 13, 2006).
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performance under such contract, plus, any unpaid compensation due under such contract,
without acceleration, on the earlier of such dates; (8) the claim is based upon a reduction, due to
late payment, in the amount of an otherwise applicable credit available to the debtor in
connection with an employment tax on wages, salaries or commissions earned by the debtor; or
(9) the claim is not timely filed, with certain exceptions. None of these relates to the failure to
provide appropriate documentation in support of the claim filed. This issue is best analyzed on a
case by case basis, subject to the specific facts presented to the Court.
VIII. Mortgage Claims & Documentation
If the creditor filing a proof of claim has a mortgage owed by the debtor, the creditor
should include, with its proof of claim, evidence of perfection of its lien. Otherwise, the creditor
has failed to comply with Fed. R. Bankr. P. 3001(d). However, if a proof of claim lacks
sufficient documentation it may nevertheless become prima facie evidence of the claim when
considered in conjunction with the debtor’s schedules. This is because while the proof of claim
itself does not establish the prima facie validity, the schedules signed under oath and penalty of
perjury by the debtor, would.44 Even if the creditor did not get the presumption, its claim may
still be allowed if it can prove its claim by a preponderance of the evidence.45
Some servicers or mortgage companies have filed proofs of claim even though at the time
of filing, they are not owed anything by the debtor. In a case before the Northern District of
Ohio, Countrywide Home Loans referred a loan account to a law firm to file a proof of claim and
objection to confirmation of the debtor’s chapter 13 plan, although the property in question had
44 In re Jorczak, 314 B.R. 474 (Bankr. D. Conn. 2004). 45 In re Porter, 374 B.R. 471, 483 (Bankr. D. Conn. 2007); In re Tran, 369 B.R. 312, 317 (Bankr. S.D. Tex. 2007).
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been sold in a short sale prior to the bankruptcy filing.46 Countrywide provided to the firm a
copy of the note and mortgage, but not the payment history, or notes for the file. According to
the proof of claim filed, the debtor owed approximately $88,000, all of which was secured.47 It
should be noted that the mortgage and note had been entered into with Ameriquest Mortgage
Company, not Countrywide, and the proof of claim failed to attach any assignment or other
transfer documents from Ameriquest to Countrywide. The debtor responded to the objection to
confirmation and objected to the claim, alleging that she had sold the property in a short sale
prior to the filing of her bankruptcy case, with Countrywide’s permission. The court sustained
the objection to the proof of claim, but, unfortunately for Countrywide, that was not the end of
the matter. Given the circumstances of the case, the Office of the U.S. Trustee argued that
Countrywide was guilty of abusing the court process, acting recklessly and in bad faith.48 Given
what transpired in the case, the court determined that sanctions were appropriate, because of the
violations of Rule 9011 of the Federal Rules of Bankruptcy Procedure and 11 U.S.C. §105, and
also “other sanctions sufficient to deter repetition of this conduct or comparable conduct by
others” and scheduled another trial with respect to the appropriate level of sanctions.49
Subsequently, Countrywide Home Loans, Inc. appealed the bankruptcy court’s decision, and the
46In re O’Neal, Case No. 07-51027 (Bankr. N.D. Ohio May 1, 2009). The debtor, given the short sale, did not list Countrywide or any other mortgage company in her schedules, nor did she list the property as being an asset. 47 Id. at 15. 48 Id. at 18. 49 Id. at 22-23. See also, In re Varona, 388 B.R. 705, 717 (Bankr. E.D. Va. 2008) (explaining, “Despite the availability of other statutory or rule-based remedies, the Court’s power to remedy and punish for the filing of a false or fraudulent claim is within the strictures of its authority pursuant to 11 U.S.C. § 105.”)
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District Court for the Northern District of Ohio, Eastern Division reversed the bankruptcy court’s
decision to issue sanctions.50
Similarly, in In re Wells51, the chapter 13 debtors objected to a mortgage arrearage proof
of claim. The debtors, in their schedules, listed Aegis Mortgage Corp. as a secured creditor,
holding a claim for $96,000.00, secured by the debtors’ residence, and identified Ocwen as an
additional party to receive notice. U.S. Bank National Association (“U.S. Bank”), as Trustee for
the Registered Holders of Aegis Asset Backed Securities Trust Mortgage Pass-Through
Certificates, Series 2005-4 filed a proof of claim, secured by the debtors residence, and listed
Ocwen to receive notices. The claim was signed by an individual in the Quality Control,
Bankruptcy Department, without identifying for whom she filed it. The claim did not have a
power of attorney designation or attachment. Other documents, including an itemization of the
claim, payoff information, expense breakdown, mortgage and note, were attached to the proof of
claim form. Nothing was attached evidencing the transfer of the note to U.S. Bank. Later, U.S.
Bank provided copies of two assignments of the note and mortgage. The first assignment was
from MERS as nominee for Aegis Lending Corporation to U.S. Bank, Successor-in-Interest to
Wachovia Bank, National Association, as Trustee for the Registered Holders of Aegis Asset
Bank Securities Trust Mortgage Pass-Through Certificates, Series 2005-4. The second
assignment was made by U.S. Bank for Wachovia, to U.S. Bank, as Trustee for the Registered
Holders of Aegis Asset Backed Securities Trust Mortgage Pass-Through Certificates, Series
2005-4. While the second assignment was dated August 23, 2007, it was notarized on March 24,
2009 and filed on April 3, 2009, well after the proof of claim was filed.
50 Countrywide Homes Loans, Inc. v. McDermott, 426 B.R. 267 (N.D. Oh. 2010).
51 407 B.R. 873 (Bankr. N.D. Ohio 2009).
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The Wells court sustained the objection of the debtors, concluding that while the claim
was filed by U.S. Bank, the documents attached did not establish it was a secured creditor of the
debtors and therefore the court disallowed the claim.52 As noted previously, a creditor must
provide sufficient documentation with its proof of claim to establish that the debtor owes the
money to the party filing the claim. If the creditor cannot do this, it is not entitled to receive any
distributions in the bankruptcy case.
Even if the claimant is the right party, that fact does not alleviate other important proof of
claim issues, including claiming the appropriate amounts as being owed. If the amounts alleged
as being owed in the proof of claim are unclear or incorrect, bankruptcy courts may order
damages to be paid by the filing party. For example, the Bankruptcy Court for the Eastern
District of Louisiana ordered Wells Fargo to pay $10,000.00 in damages to the debtor, plus
$12,350.00 in legal fees, “for the abusive imposition of unwarranted fees and charges….”53 In
Stewart, Wells Fargo was held accountable for unwarranted fees and charges, imposition of fees,
the negligent imposition of fees and costs not due, the improper calculation of escrow payments,
the misapplication of fees, the failure to notify the debtor of fees and charges, and the improper
payment of unnoticed fees and charges during the bankruptcy case.54 The court also ordered
Wells Fargo to audit every proof of claim filed on or after April 13, 2007, and to include a loan
history with each claim.55 In addition, the court ordered Wells Fargo to review proofs of claim
already filed, and to amend, where necessary.
52 Id. at 883. 53 In re Stewart, 391 B.R. 327, 357 (Bankr. E.D. La. 2008). 54 Id. 55 Id.
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Wells Fargo, in a separate case, also before the Eastern District of Louisiana, admitted
that there were irregularities in how it accounted for payments on its claims, including: (a)
application of trustee payments to post-petition charges rather than payments towards the
prepetition debt they were remitted to satisfy; (b) applying debtor payments to prepetition
arrearages although intended for current mortgage payments; (c) failure to notify borrowers of
charges; (d) postpetition imposition of professional (attorney) fees without prior court approval;
and (e) imposition and payment of postpetition fees from estate funds without disclosure.56
Wells Fargo further admitted that these practices occurred in every case filed in the United
States.57 Wells Fargo contended that, although it suggested that it had systemic problems in
every bankruptcy case, every debtor should have to make a challenge, by separate suit, to the
proofs of claim filed by Wells Fargo.58
There are multiple potential problems associated with this position, including the simple
fact that Wells Fargo may have admitted presenting incorrect information in proofs of claim in
contravention of specific statutes warning against and perhaps criminalizing such behavior. The
idea that this conduct is acceptable as long as it remains unchallenged with regard to each
specific claim is problematic. “Wells Fargo’s position also requires the Court to participate in its
egregious conduct…. Because Wells Fargo takes a ‘scream or die’ approach to judicial review,
it would require this Court to not only honor, but enforce collection on illegally imposed debt.”59
As a result, the court ordered injunctive relief directing Wells Fargo to account for all
56 In re Jones, Case No. 03-16518, Section A, 14 (Bankr. E.D. La. Oct. 1, 2009). 57 Id. 58 Id. at 14-15. 59 Id. at 16-17.
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postpetition payments received as professional fees and to verify that estate funds were not being
used in a manner in conflict with the provisions of plans and confirmation order.
Attorneys who file either proofs of claim on behalf of mortgagees or servicers should
keep in mind that by signing, filing, or arguing in support of a pleading, they have a duty to the
court to tell the truth and are to be held accountable for mistakes and may be the person
sanctioned for a violation. If a court finds that a party has violated Rule 9011 of the Federal
Rules of Bankruptcy Procedure, the attorney may be held accountable. Every attorney is under a
duty to make a reasonable investigation before filing a document or submitting a document with
the court for consideration. When preparing proofs of claim, it may not be wise solely to rely on
information supplied by a client, without further inquiry.