A recent case decided in the sixth circuit court of appeals outlines what is considered “reasonable” inquiry under Rule 9011(b) and what documentation is required to support a proof of claim filed which is not listed on the bankruptcy petition. Rule 9011(b) requires when filing documents with the court, the party filing is, “certifying that to the best of the person’s knowledge, information, and belief”, the documents filed are supported by facts. Further, under rule 9011 a party filing documents without “reasonably” inquiring into the factual basis is subject to sanctions. In the context of filing proofs of claims the issue may arise when documentation supporting the proof of claim is difficult to obtain or nonexistent and does not appear on the bankruptcy petition. A creditor filing a claim may be subject to sanctions if they file an unsupported proof of claim. To avoid potential sanctions creditors should keep in mind the following guidelines and procedures for filing a proof of claim and claims regarding debt not scheduled on a bankruptcy petition.
First, a creditor if a debt purchaser should make sure the purchase agreement contains an explicit representation and warranty from the seller that the accounts being purchased are valid obligations of the debtor. Including these terms in the purchase agreement demonstrate that the purchaser has acted in a reasonable manner to support evidence of the debt. Second, the creditor should investigate the claim after purchase by researching the origins of the claim. By contacting the debtor through mail to inform the debtor they have thirty days to dispute the debt owed will validate the claim and be considered sufficient investigation. Third, before purchasing the debt a creditor should verify account information for flaws such as an invalid address or social security number. If these steps are followed creditors and debt purchasers can avoid violations of rule 9011(b) and potential monetary damages.
The next question is once a creditor has “reasonably” investigated the claim under the sixth circuit standard what documents should they attach to the proof of claim. The federal rules of bankruptcy procedure require that a proof of claim based on writing include a copy of the writing. So if the origination document is available it should be attached to the proof of claim. If this is unavailable the creditor must follow the “reasonableness” test outlined above to substantiate the claim and avoid sanctions under Rule 9011. The creditor can also file a document explaining why copies of the originating documents are unavailable.
The bottom line is that even if you attach nothing to a proof of claim if the above steps are followed a creditor can satisfy the “reasonableness” standard and avoid sanctions for filing unsupported claims.
Yesterday, representatives from the United States Trustee’s Office (“UST”) conducted a town hall meeting with representatives from the creditor’s bar to provide details on a new initiative they are moving forward with called the “Credit Abuse Program.” During the meeting, the UST indicated that it will be more closely scrutinizing documentation submitted by mortgage lenders with their proofs of claim, Reaffirmation Agreements and attachments to Motions for Relief from Stay. This increased scrutiny will not just be limited to the Cleveland Bankruptcy Court, but will extend to all five (5) courts in the Northern District of Ohio. The UST will be focusing its inquiry on the following issues:
- Whether the collateral was properly perfected
- Whether the moving party is entitled to enforce the claim
- Whether payments were misapplied
- Whether escrow was miscalculated
- Whether certification attesting to lost notes is in a blank form
- Whether certification attesting to missed payments was pre-signed
- Whether the documents filed with the courts are legally and factually sufficient
If an issue comes to light, the UST will informally contact creditors by phone or letter to correct an issue or provide additional documentation. Also, the UST may formally make its requests through objections to proof of claims or objections to motions for relief and abandonment. In extreme situations, the UST indicated that it would file motions for an order to show cause or motions for sanctions to correct an issue or provide additional documentation.
Specific Areas of Concern
The UST is paying particular attention to the following issues that come up with mortgage creditors:
- Failure to attach assignments of mortgage
- Failure to attach documents showing who owns the claim
- Failure to itemize statement of amounts (UST is requesting the items be specific)
- Failure to take out improper fees or fees that are vague, estimated, excessive or unsubstantiated by law or contract
- Miscalculation of arrearage
- Failure to attach supporting documents
- Attaching boilerplate affidavits of lost note
- Disclosing personal identifiable information in violation of Rule 9037
What does this mean to mortgage creditors?
With closer scrutiny by the UST, it is imperative to have your documents together before any timelines or deadlines come due. Also, review the documents you are providing to the court and omit any items that are not appropriate. If this additional work is not done on the front end, the result may very well be increased cost and time in attempting to respond to and comply with UST inquiries and/or requests.
What does this mean to all creditors?
Documentation is important to substantiate your claim. All creditors should make it a practice to attach the appropriate documentation and make sure all personal identifiable information is omitted or risk contact from the UST seeking remedial action.
