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Judge Sanctions Debtor Attorneys for Bad Faith Claim Objections

Published on November 21, 2011 in Chapter 13 and Proof of Claim. 0 Comments

by Damian A. Valladares, Esq.

There has been a new and important development in bankruptcies in the Southern District of Florida on the subject of objections to creditors’ Proofs of Claims. Responding to what he perceived to be a pervasive practice among debtors’ attorneys, last week Judge John K. Olson of the Fort Lauderdale Division, issued an order in which he imposed sanctions on several attorneys representing individual bankruptcy debtors for filing and prosecuting unwarranted or overzealous claim objections. In summary, the Court found that objections filed to dispute timely filed creditors’ proofs of claims which matched or nearly matched the amount of debts listed on the debtor’s schedules were in violation of Rule 9011(b) of the Federal Rules of Bankruptcy Procedure.

In most of the cases cited by the Court in its decision, the claims were scheduled by the debtors as non-contingent, liquidated and undisputed in amounts either identical or substantially identical to the filed Proofs of Claim. The Court held that the objections to claims of creditors which sought to strike claims in their entirety, most often based on “lack of documentation to support claim,” or “Debtor disputes amount owed,” constituted objective bad faith by the debtors’ attorneys, “in a manner designed to avoid reasonable review of the claims register” as required by Local Rule. Importantly, the Court states unequivocally that objections based on “lack of documentation” or “disputed amount owed” are not grounds to strike and disallow a claim, as the exclusive grounds for doing so are enumerated in section 502(b) of the Bankruptcy Code.
 
Going forward, this ruling will have a great effect on the Chapter 13 bankruptcy practice in the Southern District of Florida. We believe that this ruling highlights the importance of filing Proofs of Claim in individual Chapter 13 cases, including principal balance proofs of claims where the debtor is current in his/her payments, and cases where the property is surrendered in the debtor’s Chapter 13 Plan. There is no basis in section 502(b) to disallow such claims, and the filing of such a claim will help to protect your interests regardless of the treatment of the property in the Chapter 13 Plan. We also believe that this ruling will reduce the number of frivolous claim objections we face on a regular basis. It further provides ample grounds to seek reimbursement of attorneys’ fees when forced to defend a frivolous claim objection, and we therefore recommend including a prayer for attorneys’ fees in each litigated claim objection. In the case where the same debtor’s attorney repeatedly goes forward with claim objections, like those described by the Court which we believe will be rare going forward in light of this ruling, we can seek more serious sanctions.

If you have any questions on this matter, please contact Damian A. Valladares, Esq. Damian is an associate focused on bankruptcy services in the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA based in the Ft. Lauderdale office. He can be reached at 954.740.5234 or .

Alabama County Files Largest Ever Chapter 9 Municipal Bankruptcy: Is This A Trend?

Published on November 17, 2011 in Bankruptcy Filings. 0 Comments

By Scott D. Fink, Esq.

Last week, Jefferson County, Alabama filed for bankruptcy relief under Chapter 9 of the Bankruptcy Code as case number 11-5736 in the Northern District of Alabama.   This represents the 12th municipal entity to file a Chapter 9 Bankruptcy this year, following on the heels of a recent Chapter 9 filing by the City of Harrisburg, Pennsylvania last month.[1]    Based on the total amount of debt scheduled, this case represents the largest municipal Bankruptcy filing in U.S. history[2] , rivaling the bankruptcy filed by Orange County, California (case number 94-22272 filed in the Central District of California on December 6, 1994).    Debts related to Jefferson County’s sewer system, alone, exceed $3.1 billion.  According to the County’s bankruptcy counsel, Kenneth Klee, the filing came as a result of the inability of the County and its creditors to reach a deal to restructure the County’s debt, despite negotiations over the past several months.   Jefferson County had previously defaulted on bonds, which were used to refinance the county’s sewer system.  “There was an impasse reached,”  Klee stated to Bloomberg News in an interview last week.  “None of the creditors — zero– signed up to the deal that we have been negotiating for six weeks.”
 
By seeking Chapter 9 relief, the County may now have the ability to restructure and renegotiate its debt obligations over creditors’ objections.  In addition, Chapter 9 gives the County the option of assuming or rejecting executory contracts, which potentially encompass a whole range of potential obligations, including ongoing service contracts, vendor agreements and perhaps even existing agreements with public employee unions.

Many other municipalities around the country will be watching this case closely, as they are faced with their own budget shortfalls, resulting from cuts in state and federal funding, as well as ever-increasing obligations for retirement benefits and health insurance for their workers and retirees.  Whether the decision to utilize Chapter 9 for debt relief becomes a trend or a cautionary tale remains to be seen.  We will continue to monitor the case as it progresses and will provide further updates as events warrant.

If you have any questions on this matter, please contact Mr. Scott Fink, Esq. Scott is an associate in the Bankruptcy Practice of Weltman, Weinberg & Reis Co., LPA located in the Brooklyn Heights office. He can be reached at 216.739.5644 and .

[1] Bloomberg News, November 9, 2011
[2] Id.

New Bankruptcy Rules Increase Scrutiny Regarding the Filing of Secured Claims and Mortgage Proof of Claims

Published on November 7, 2011 in Bankruptcy Act 2009. 0 Comments

By David H. Yunghans, Esq.

New bankruptcy rules are set to go into effect on December 1, 2011. Of concern to secured creditors and mortgage lenders are requirements imposed on filing proofs of claims secured by the debtor’s principal residence and claims based on writings. The changes are to the Federal Rules of Bankruptcy Procedure Rule 3001 and 3002.1.

Changes under 3001, which affect secured lenders when a claim or interest in property of the debtor is based on a writing, require the filing of the original document or duplicate with the claim. If the writing is lost or destroyed, a statement of circumstances of loss must be attached to the proof of claim. The claim must itemize interest, fees, expenses, and all charges incurred before the petition was filed. If a default is alleged, the amount to cure the default must also be provided. An escrow statement reflecting the escrow amount as of the date of filing the bankruptcy petition must be attached to the proof of claim as well.

Originally, the rule change required filing the last account statement with the proof of claim; however, this rule was withdrawn after public comment. Instead, rule 3001(c) was added and will go into effect on December 1, 2012. The change affects claims based on open-end or revolving consumer credit agreements. When filing the proof of claim, the creditor must include the name of the entity from whom the creditor purchased the account, the name of the entity to whom the debt was owed at the time of the last transaction, date of the last transaction, date of the last payment, and the date when the account was charged to profit and loss.

Changes under rule 3002.1, which affect mortgage lenders, require mortgagees to notify the debtor, debtor’s attorney, and the trustee of any change in the mortgage payment, interest rate, or escrow adjustment no later than 30 days before the change is set to occur. The holder of the claim must also file a notice itemizing all fees, expenses, or charges incurred in connection with the claim occurring after filing the bankruptcy case which the holder asserts are recoverable against the debtor or the residence. This notice must be filed no later than 180 days after the fees are assessed. Another important change requires the trustee to file a notice of final cure payment no later than 30 days after making the final payment of any cure amount on a claim secured by the debtor’s principal residence. If an amount to cure exists, the holder must respond within 21 days to the notice and file a statement to supplement the claim itemizing any amount still owed.

The consequences of failing to follow the new rules could result in a creditor losing the right to present the omitted evidence at any hearing, contested matter or adversary proceeding. Moreover, the court can also sanction the creditor reasonable expenses and attorney fees for failing to comply.

These new procedures place burdens on creditors that may be difficult to meet. Creditors already must use the official forms and timely file claims no later than 90 days after the first date set for the meeting of creditors. It may be difficult for creditors to file a timely claim with the added documentation and itemization requirements. Jurisdictions vary on whether there is a deadline for filing a secured proof of claim. Secured creditors, absent exceptional circumstances, should file the claim within 90 days or file a motion to extend the time to file the secured proof of claim. Even if the secured creditor files the proof of claim, it must be monitored for objections to the claim.

A bankruptcy court in Oregon has taken the issue of failing to respond to an objection to the proof of claim to an extreme. In that case, the mortgage lender filed a secured proof of claim, however the chapter 13 trustee objected to the claim as the trustee was not satisfied with the documentation attached to the claim. No response was filed to the objection and the claim was disallowed. The debtors subsequently completed their chapter 13 plan and received a discharge. The holder then sought to enforce the debt and foreclose on the property. The debtors reopened their bankruptcy case and argued that the lender was in violation of the discharge order. The court held that the mortgage lien was stripped as the claim was not an allowed secured claim, and thus was discharged in the chapter 13.

Creditors should be proactive in ensuring they have the best procedures for obtaining a correct itemization of the account and the official forms used to file claims. Creditors must also make sure they have a procedure in place to monitor filed claims for objections by the trustee or debtor. At best, creditors will face difficulty in complying with these new requirements.

David H. Yunghans is an associate in the Bankruptcy Group located in the Cincinnati office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 513.723.2211 or