Proofs of Claims A Look at the Forest

Proofs of Claims A Look at the Forest

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Over the course of the last several months, three submissions to the ABI Journal have dealt with proof-of-claim documentation and related issues.1 This topic has sharply divided bankruptcy practitioners into the obvious segments of creditors vs. debtors, but has also caused dissention within their respective ranks. Not all consumer counsel agree with the position of Mr. Rao. At the same time, some creditors are critical of others because rulings such as In re Henry2 impact everyone, not just the parties in that case. It seems warranted at this time to refresh the discussion by looking through the trees at the forest. All parties involved with these issues should remember why there is a bankruptcy process and what we hope to accomplish through our participation in it. While it is understandable that creditors and debtors may not have the same goals, a visit to the fundamentals might help lift the fog over the current litigation and clarify what the real issues, ideally, should be.

The notion of U.S. bankruptcy courts as being "courts of equity" or, at least, courts that have the power to fashion equitable remedies, is based on longstanding history and custom in the area of bankruptcy and insolvency proceedings in general. A decision "in equity" was understood to be based on conscience, rather than on the strict rules of common law, and in accordance with natural justice in cases for which the law did not provide adequate remedy, or in which the law's operation would have been unfair. Under the Bankruptcy Act of 1898, bankruptcy courts were true courts of equity. The Bankruptcy Act of 1978 was interpreted as granting broader jurisdiction in that the former system and bankruptcy judges were vested with the powers of both law and equity.3 This concept is more or less codified in 11 U.S.C. §105:

§105. Power of court
(a) The court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

[I]s the filing of a claim for an unsecured debt intended to inform the debtor of the claim or to prove the debt?

Section 105 is an omnibus provision phrased in such general terms as to be the basis for a broad exercise of power in the administration of a bankruptcy case. The basic purpose of §105 is to assure the bankruptcy courts' power to take whatever action is necessary in aid of the exercise of their jurisdiction.4 This concept is easier said than explained, and there exists some conflict over the breadth of a bankruptcy courts' power.5 Nonetheless, there is an undercurrent in bankruptcy proceedings that the courts are empowered to act as necessary to effectuate the purposes of the Code without running afoul of it.

The power of a bankruptcy court to act under §105 extends to the process of determining claims:

[T]he bankruptcy court, in passing on allowance of claims, sits as a court of equity. In the exercise of its equitable jurisdiction, the bankruptcy court has the power to sift the circumstances surrounding any claim to see that injustice or unfairness is not done in administration of the bankruptcy estate.
Pepper v. Litton, 308 U.S. 295, 307-308 (1939).

Related concepts are embodied in Bankruptcy Rule 1001, which states:

The Bankruptcy Rules and Forms govern procedure in cases under Title 11 of the U.S. Code... These rules shall be construed to secure the just, speedy and inexpensive determination of every case and proceeding.
When Congress enacted general revisions of the bankruptcy laws in 1898 and 1938, it gave "special attention to the subject of making [the bankruptcy laws] inexpensive in [their] administration..." Moreover, [the Supreme] Court has long recognized that a chief purpose of the bankruptcy laws is "to secure a prompt and effectual administration and settlement of the estate of all bankruptcy within a limited period...."
Katchen v. Landy, 382 U.S. 323, 328-29 (1966).

It is useful to apply the above principles of equity and ease of administration to the current debate over proofs of claims. The purpose of bankruptcy, of course, is to provide a debtor with a fresh start, relieved of the burdens of unmanageable debt. In regard to consumers, chapter 13 and 7 asset cases contemplate repayment to creditors in an orderly manner and free from harassment. The method of repayment begins with the debtor's petition and schedules, which, among other things, list all pre-petition debts. Debts not listed will not be included in the debtor's discharge in an asset case,6 thus the debtor has an incentive to complete his schedules accurately and completely.7 Next, creditors of the debtor acknowledge the bankruptcy and participate in it by filing proofs of claim.

The debtor is given an opportunity to object to any claims filed in the case that the debtor believes should not be paid. Claims will be allowed unless objected to and disallowed by court order. The process of allowance and disallowance of claims is codified in 11 U.S.C. §502. The grounds on which a claim may be disallowed are listed at subsection (b). Through these sections, the Code contemplates a system of judicial intervention in the event of claim disputes.

The Trees

Assuming that documentation should accompany a proof of claim, the logical concern then becomes exactly what documentation is required. Since the Bankruptcy Rules are intended to govern procedure, not substantive rights, the answer to "what" depends not only on what the Rule says,8 but also must consider the purpose of the Rule. Specifically, is the requirement of documentation for unsecured claims intended to be evidentiary or merely informational? Said differently, is the filing of a claim for an unsecured debt intended to inform the debtor of the claim or to prove the debt? The next question is whether a claim lacking sufficient documentation nonetheless carries any evidentiary weight in its own right, regardless of the documents attached. The Rule itself provides some answers.

Rule 3001(c), together with the Official Form for Proof of Claims, states that a claim based on a writing must be accompanied by the writing, a summary if the writings are voluminous or, if the documents are lost or destroyed, a statement to that effect. Rule 3001(f) states that a claim executed and filed properly is entitled to prima facie validity.9 It follows that a proof of claim that does not include the actual documents, but includes either a "summary of the documents" or a statement that they are lost or destroyed, would nevertheless be considered prima facie valid under Rule 3001(f). Thus, Rule 3001(c), as applied to unsecured claims, would seem to be in the nature of informational, rather than evidentiary. Contrast Rule 3001(c) with 3001(d), entitled "Evidence of Perfection of Security Interest," which states, "If a security interest in property of the debtor is claimed, the proof of claim shall be accompanied by evidence that the security interest has been perfected." Clearly, in the case of a secured claim, the requirements of the Rule are explicitly intended to require evidence, likely owing to the remedies available to a properly secured creditor against the estate. Thus, the sufficiency of documentation hinges in part on a court's determination regarding the purpose of an unsecured claim and the documentation requirement in light of the underlying goals of bankruptcy.

If a court has determined that a claim fails to include sufficient documentation, the next concern is the appropriate remedy for the estate and the debtorÑspecifically, what is the penalty, if any, for non-compliance or defective compliance? The Bankruptcy Rules are intended to prescribe procedure in bankruptcy cases and "shall not abridge, enlarge or modify any substantive right." In light of this and the enumerated bases for claim disallowance in 11 U.S.C. §502(b), it would seem that disallowance of a claim on Rule 3001 grounds is not within the court's statutory authority. Rather, §502 directs the court to "determine the amount of the claim" in the event of an objection. In making such a determination, the court must first decide whether it considers a claim lacking in documentation to be any evidence of the debt whatsoever. If it does, then the debtor must meet at least that minimal evidence with counter-evidence. If it does not, and the court is unable to "determine the amount of the claim," the court must decide if the creditor should be afforded an opportunity to amend the claim.

The Forest

In recalling the essential purposes of bankruptcy, and assuming that all parties are acting in good faith and with the intent to participate fairly in the process, the essential inquiry should be this: Is there sufficient information available to the debtor, trustee and the court so that they may make a determination regarding the claim? Or, more basically, has the debt (under the circumstances) been shown to be owed by the debtor and not subject to disallowance under §502, thus entitled to be administered through the bankruptcy system? If so, the claim should be allowed. If not, it should be disallowed.

Bankruptcy courts have exercised these equitable powers in passing on a wide range of problems arising out of the administration of bankrupt estates. They have been invoked to the end that fraud will not prevail, that substance will not give way to form, that technical considerations will not prevent substantial justice from being done. Pepper v. Litton, 308 U.S. 295, 305 (1939).

This not to suggest that the Code and Rules are unimportant or should be disregarded. To the contrary, creditors and debtors alike should participate fairly and properly in the system according to the law and rules. Penalties should be imposed for abuses or for other conduct that contradicts the basic tenets of bankruptcy. In refereeing this debate, courts necessarily will make judgment calls. In doing so, however, seeing the forest through the trees is in everyone's best interest.


1 Jurs, S. Andrew, "Unsecured Claims and Rule 3001: How Much 'Writing' or Supporting Information Is Required?" ABI Journal, Vol. XXIII, No. 5, June 2004; Rao, John, "Debt Buyers Rewriting of Rule 3001: Taking the 'Proof' Out of the Claims Process," ABI Journal, Vol. XXIII, No. 6, July/August 2004; Lee, Thomas A. and Becket, Alane A., "Letter to the Editor," ABI Journal, Vol. XXIII, No. 8, October 2004. Return to article

2 311 B.R. 813 (Bankr. W.D. Wa. 2004). Other recent reported cases on this issue include In re Cluff, 313 B.R. 323 (Bankr. D. Utah 2004); In re Blue, 2004 U.S. Dist. LEXIS 14771 (N.D. Ill.); In re Kemmer, 2004 Bankr. LEXIS 1550 (E.D. Tenn.); In re Hughes, 2004 Bankr. LEXIS 1550 (E.D. Mich.); and In re Shank, 2004 Bankr. LEXIS 1597 (N.D. Ga.). Return to article

3 See Ciallella, Janine C., "Note: Should Bankruptcy Judges Be Permitted to Conduct Jury Trials?" 8 Am. Bankr. L.J. 1 Spring 2000. Return to article

4 United States v. Energy Resources Co. Inc., et. al., 495 U.S. 545, 549 (1990). Return to article

5 2 Collier on Bankruptcy ¦105.01[2] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev., 2004). Return to article

6 11 U.S.C. §523(a)(3). Return to article

7 Over and above the penalties of perjury. Return to article

8 Indeed, Rule 3001(c) addresses debts generally, rather than by specific type. Return to article

9 The question arises as to whether a claim must merely be signed and submitted to the court for filing in order to be considered valid or if the other requirements of 3001 must also be met. That issue is not addressed in this article. Return to article

Journal Date: 
Wednesday, December 1, 2004

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