As most practitioners are aware, the Bankruptcy Code is a debtor's code, just as Article 9 of the UCC is a secured creditor's code. Thus, the Code seeks to give debtors what they most need: a chance at a fresh start.

Despite the Code's tilt in favor of debtors, it is not completely one-sided. In fact, the Code, as well as the Federal Rules of Bankruptcy Procedure, place certain burdens upon debtors. For example, the Rules place a burden on debtors in objecting to timely filed proofs of claim.

In many large cases, debtors file omnibus claims objections that object to hundreds, if not thousands, of claims in one objection. Such objections are filed with the hope that trade creditors and/or vendors will not respond and that the court will disallow their claims with little effort on the debtor's part, even though the debtor may be aware it is indebted to the trade creditor or vendor. One such objection commonly used in omnibus claims objections is that "the amount reflected on the claim filed by the trade creditor or vendor does not correspond to the amount reflected on debtor's books and records." The debtor will typically provide no other evidence to support this objection. Such omnibus objections do not meet the evidentiary standard to overcome the prima facie validity of a proof of claim, particularly in light of the fact that in the majority of cases, the debtor's books and records are at best in shambles, or the debtor cooked its books prior to the petition date.

Nonetheless, debtors commonly attempt to shift the burden to creditors, particularly trade creditors or vendors. This shifting of burdens appears contradictory to the Rules. This article addresses how a debtor fulfills its burden in objecting to timely filed proofs of claim.

The Prima Facie Validity of Proofs of Claim

The filing of a proof of claim constitutes prima facie evidence of its amount and validity. Fed. R. Bankr. P. 3001(f); In re Planet Hollywood International, 274 B.R. 391, 394 (D. Del. 2001); citing In re Allegheny Intern Inc., 954 F.2d 167, 173 (3d Cir. 1992). Thus, pursuant to Rule 3001(f), an objecting debtor has the burden of producing evidence rebutting the prima facie validity of such a claim. Stated otherwise, "[a] party objecting to a claim has the initial burden of presenting a substantial factual basis to overcome the prima facie validity of a proof of claim [and] [t]his evidence must be of a probative force equal to that of the creditor's proof of claim." In re Hinkley, 58 B.R. 339, 348 (Bankr. S.D. Tex. 1986); aff'd., 89 B.R. 608; aff'd., 879 F.2d 859; see, also, In re Lewis, 80 B.R. 39, 40 (E.D. Pa. 1987); citing 3 Collier on Bankruptcy ¶502.02 at 502-22.

Once a debtor has fulfilled this burden of production, the burden then shifts to the creditor. See Smith v. Sprayberry Square Holdings Inc. (In re Smith), 249 B.R. 382, 332-33 (Bankr. S.D. Ga. 2000). In fact, it is the creditor that has the ultimate burden of persuasion. In re Reilly, 245 B.R. 768, 773 (2d Cir. B.A.P. 2000); see, also, In re Circle J Dairy, 92 B.R. 832, 833 (Bankr. W.D. Ark. 1988). However, the burden reverts back to the creditor upon the debtor's meeting its burden to produce evidence that rebuts the initial presumption. Id. at 773-74; see, also, In re Brown, 221 B.R. 46, 47-8 (Bankr. S.D. Ga. 1998).

Based on the express language of Rule 3001(f), it is obvious that a proof of claim and an objection thereto is one area where Congress sought to even the playing field in favor of creditors, particularly unsecured creditors. In furtherance of Congress's efforts, certain courts have promulgated local rules addressing claims objections.

For example, the District of Delaware abrogated its local counsel requirement for claims-objection litigation. Del. L. R. Bankr. P. 9010-1(e)(i). The Bankruptcy Court for the Southern District of Texas, which has been recognized as a favorable venue for large chapter 11s, prohibits baseless objections aimed at small and/or out-of-town claimants by threat of sanction. See S.D. Tex. L. Bankr. R. P. Appendix E: Form Scheduling Order. Such local rules seek to remedy objections that seek to take advantage of the plight of unsecured creditors, as well as those frivolous objections that attempt to shift the burden to creditors without proper evidentiary support.

However, despite the unambiguous language of Rule 3001(f) and such local rules, many an unsecured creditor who timely filed its proof of claim, along with supporting documentation, has received a "books and records" objection. Indeed, the "books and records" objection has become common, with the District of Delaware promulgating local rules addressing the procedure for making such an objection. See Del. L. R. Bankr. P. 3007-1(I)(4).

Yet the books and records of most debtors are in disarray when the bankruptcy petition is filed, resulting in an industry of bankruptcy accountants who unravel the mysteries of otherwise encrypted books and records. After all, how logical is a "books and records" objection from an Enron, an Adelphia or other similarly situated debtors?

The Necessary Evidentiary Proof to Rebut a Timely Filed Proof of Claim

Based on Rule 3001(f)'s express language, more than conclusory statements denying liability are necessary to rebut the presumption raised by the timely filing of a proof of claim. See In re Brown, 221 B.R. 46, 48 (Bankr. S.D. Ga. 1998). Indeed, "[t]o overcome this prima facie evidence, the objecting party must come forth with evidence which, if believed, would refute at least one of the allegations essential to the claim." In re Reilly, 245 B.R. 768, 773 (B.A.P. 2d Cir. 2000). Yet few, if any, courts have addressed how much evidence a debtor must produce to support an objection to a timely filed proof of claim.

Certain courts have given guidance based on the specific facts and disputes in the respective case. For example, where a debtor objected to a secured creditor's deficiency claim asserting that the foreclosure sale was not commercially reasonable, the introduction of NADA values and mere conclusory statements alone was insufficient to demonstrate a lack of commercial reasonableness. See In re Brown, 221 B.R. 46, 47-8 (Bankr. S.D. Ga. 1998). The court held, therefore, that the debtor failed to produce the minimal evidence necessary to overcome the prima facie validity of the creditor's claim. Id. at 48.

In another example, the debtors failed to produce any evidence that they were not indebted to the Internal Revenue Service (IRS), that the IRS was not authorized to assess tax against them, or that any defects affected the enforceability of the claim. Under such facts, the court held that the debtors simply did not rebut the prima facie validity of the IRS's proof of claim. In re Busch, 213 B.R. 390, 393-96 (Bankr. M.D. Fla. 1997).

As such, and when objections are merely formal objections without evidence, courts can summarily overrule such objections. See In re Garner, 246 B.R. 617, 623 (B.A.P. 9th Cir. 2000). In Garner, the debtor objected to a proof of claim asserting that "there is no valid obligation to pay...and there are no written documents or other competent evidence of any valid obligations owed to said creditor." At the hearing, the debtor offered no evidence in support of such assertions. The bankruptcy court ruled that the debtor did not fulfill the burden of production to rebut the presumption of validity. See Garner, 246 B.R. at 620.

On appeal, the Ninth Circuit B.A.P. affirmed the bankruptcy court, noting "[t]hat the difficulty in this instance is that appellant proffered no evidence whatsoever, choosing instead to stand on a mere formal objection that the proofs of claim were not good enough." Garner, 246 B.R. at 623. Stated otherwise, "one who chooses to make a mere formal objection is electing to narrow the issue to whether the proof of claim is executed and filed in accordance with the rules." Id. It is interesting to note that the objection asserted in Garner is very similar to the "books and records" objection. No court, however, has addressed the sufficiency of the "books and records" objection.

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[A] proof of claim and an objection thereto is one area where Congress sought to even the playing field in favor of creditors, particularly unsecured creditors.

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Nonetheless, what is universal in these cases is that an objection that sets forth no evidence of a lack of indebtedness, no evidence of a lack of a necessary element to a claim, no evidence of why the debtors' scheduled amount is correct over the prima facie claim amount and no evidence of any sort of why any part of a claim is not valid, is insufficient to meet burden of production. As such, merely disagreeing with the amount of a claim cannot rise to the level of producing evidence equal to the weight given to the claim itself as is necessary to rebut the presumption of prima facie validity. In re Williams, No. 92-50546, 1994 WL 329328, *3 (Bankr. S.D. Ga. March 30, 1994).

After all, the prima facie validity of a proof of claim is "strong enough to carry over a mere formal objection without more." See In re Schlehr, 290 B.R. 387, 395 (Bankr. D. Mont. 2003). And, while an objecting party may attach an affidavit swearing to a review of books and records, which reflect an amount different from that stated on the claim, such evidence simply does not carry the probative force of a timely filed, and appropriately supported, proof of claim.

Conclusion

To most creditors, the basic premise of having to assert a claim in a bankruptcy proceeding seems unfair. After all, the debtor owes money, so why must one now spend additional time and expense to preserve a claim to which it is already entitled? Nonetheless, that is the cost of doing business, because having a workable bankruptcy system is a prerequisite to a self-sustaining economy.

However, there is also a need to protect the rights and interests of creditors. Unsecured creditors were given one advantage: the prima facie validity of their proofs of claim. But when debtors can avoid such prima facie validity, the balancing of interests tilts off its axis and toward the debtor—something that Congress did not contemplate.