As recognized by Rhonda L. Nelson in her On the Edge column, "Class Actions and Proofs of Claim: The Latest Minefield" (June 2001 ABI Journal at 16), debtors' attorneys have begun looking at the proof-of-claim process as ripe grounds for large-scale litigation.¹ Since the appearance of that article, the trend in proof-of-claim litigation has turned from attorney's fees listed on proofs of claim to the issue of how much information is required in the proofs of claim themselves, and bankruptcy courts are responding. For example, a bankruptcy court in North Carolina barred a creditor from filing future proofs of claim unless it provided a detailed itemization.² Similarly, a bankruptcy court in Washington state recently struck numerous claims on the grounds that they included insufficient documentation in support of the claims.³

This issue is of particular importance as giant consumer lenders merge or purchase the loan portfolios of smaller lenders, and their automated systems are called on to handle a record volume of accounts. At times, the sheer volume and need for standardization as claims are collected creates conflicts with bankruptcy claims practice and procedure. Indeed, in one critical area—filing the proof-of-claim form—the Bankruptcy Code provides no guidance about what must be in a proof of claim, and the Bankruptcy Rules are the only authority on this issue. In particular, Rule 3001 creates two problems for large consumer lenders: (1) what supporting "writings" are required by Rule 3001(c), and (2) the extent to which the creditor must itemize the amounts claimed on the proof of claim. Furthermore, if the bankruptcy court concludes that a proof of claim is insufficient under Rule 3001, it is unclear whether the creditor should be permitted to supplement or correct the proof of claim before it is stricken outright. Finally, there is no specific guidance on whether creditors can be sanctioned for simply filing insufficiently documented proofs of claim. With so many areas of uncertainty, it is no wonder that there is conflicting case law that further hinders the efforts of responsible lenders attempting to stay in compliance with the various rules governing claims practice.

Minimal Requirements for Unsecured Proofs of Claim

In resolving issues relating to the sufficiency of proofs of claim, it is important to note that "proofs of claim are not intended to be elaborately detailed documents."⁴ In fact, "[a] proof of claim for an unsecured creditor requires little more than a listing of name, address, amount of claim (or a listing as 'unliquidated' or 'contingent') and a signature. It should take less than five minutes to fill out."⁵ Other courts have added little to these basic requirements:

To be legally sufficient and, therefore, to be prima facie valid under the Bankruptcy Rules, a proof of claim must (1) be in writing, (2) make a demand on the debtor's estate, (3) express an intent to hold the debtor liable for the debt, (4) be properly filed and (5) be based on facts which would allow, as a matter of equity, the document to be accepted as a proof of claim.⁶

Consequently, any analysis of the sufficiency of an unsecured claim should begin with the premise that very little additional information is necessary.

Rule 3001(c) and the Writings Requirement

Although customers sign applications to obtain credit card accounts, the credit card companies do not, as a general rule, attach copies of the written applications, or any other contracts signed by the consumers, to the proofs of claim filed in consumers' bankruptcy cases. The question, therefore, is whether this practice fails to comply with Rule 3001(c), which provides:

Claim Based on a Writing. When a claim, or an interest in property of the debtor securing the claim, is based on a writing, the original or a duplicate shall be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim.

The first step in analyzing this issue involves a determination of whether the claim is even based on a written document.⁷ If the creditor's claim arises independent of a writing, then Rule 3001(c) is not applicable.

When collecting delinquent debt, a credit card issuer can either (1) sue on a "breach-of-contract" theory or (2) sue on an "open-account" theory. If the credit card company is using the breach-of-contract theory, Rule 3001(c) certainly will require proof of the existence of the contract and its terms by way of attaching a copy of the credit card application and latest applicable cardmember agreement. In Henry, the bankruptcy court stated, without discussion, that a credit card debt is a debt based on a writing: the credit card agreement and the fact that Rule 3001 requires the creditor to submit a copy of the agreement as proof of the existence of the debt.⁸

In contrast, the open-account theory derives from the "money counts" of the common-law action of "assumpsit."⁹ To cover situations where the debtor has money that he is not entitled to retain as against the creditor, the money counts rely on a contract implied in law, not an express contract. Because the "contract" between the creditor and debtor is implied by law, it is therefore unnecessary for the creditor to attach the application and cardmember agreement as supporting documents to obtain recovery. Instead, all that is needed is a statement of the amount owed. For example, an action for money lent is based solely on the allegation that there was money lent to the defendant. Because a promise by a debtor to repay a loan is implied for purposes of an action for money lent, the plaintiff must only show, to establish a prima facie case of action for money lent, that:

• the money was delivered to the defendant,
• the money was intended as a loan, and
• the loan has not been repaid.¹⁰

Under such circumstances, the debt is not "based on a writing" within the meaning of Rule 3001(c), and the claimant does not need to attach supporting documents to prove the existence of a contract.

Itemization of Amount Owed

With regard to itemization, all of the large consumer lenders have automated processes that are capable of calculating the balance due and owing as of the bankruptcy filing date. These systems, however, were set up to comply with the disclosure requirements of the Truth in Lending Act (TILA),¹¹ not the Bankruptcy Code or the Bankruptcy Rules. For example, Regulation Z requires a creditor to disclose the amount financed.¹² In addition, the creditor must also provide an itemization of that amount, or in the alternative, a statement that the consumer may obtain an itemization if he wants it.¹³ Consequently, consumer lenders may argue that, by meeting TILA's disclosure requirements, the amount stated in the proofs of claim should be sufficient for the bankruptcy court's purposes.

Although consumer lenders certainly recognize the importance of calculating the actual balance due as of the time of the debtor's filing, the problem is that, even if the end result of the automated process is a computer-generated statement of account with an accurate final figure, there still may be questions about how the final number was reached. Such questions would arise when there is a difference between the amount in the creditor's last statement to the debtor and the amount on the proof of claim (which may be higher due to additional interest and charges). In a recent decision, the U.S. Bankruptcy Court for the Western District of North Carolina was confronted with multiple objections to the proofs of claim filed by a single large consumer creditor in multiple bankruptcy cases. In each case, the claims had a listing of principal balance plus interest and fees owed as of the petition date, but there was no supporting documentation showing how such calculations were made. In response to requests from the debtors' attorney, the lender subsequently furnished documentation indicating the breakdown for each amount in the claim. Because the lender provided this additional documentation, the bankruptcy court denied the objections and allowed the claims. On a prospective basis, however, the bankruptcy court ruled that the lender "shall file no more proofs of claim with the court and/or the trustee unless it complies with Bankruptcy Rule 3001 and provides a written itemization in understandable language specifically describing the basis of the claim, including the calculation of any 'interest and fees.'"¹⁴

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For large consumer lenders filing numerous proofs of claim throughout the country, trying to comply with the requirements of Bankruptcy Rule 3001 creates certain dilemmas on which there is little guiding case law.

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Because the Code and Rules provide little guidance and there is little case law on this issue, bankruptcy courts also may determine the sufficiency of information provided in proofs of claim by looking at cases dealing with subsequent amendment of a proof of claim after the bar date. In those cases, if the initial proof of claim does not give fair notice of the conduct, transaction or occurrence that forms the basis of the claim asserted in the amendment, then the amendment will be deemed to assert new claims and will not be allowed. On the other hand, amendments that merely cure defects in the previously filed claim, describe the claim in more detail, plead new theories of recovery on the same facts presented in the initial claim or increase damages do not constitute new claims.¹⁵ As the court said of a skeletal claim in MK Lombard Group I, the original claim did not give "even an iota of information regarding what it is about. It lacks a statement as to its basis or for that matter why it is silent on that point.... In short, [the claim] is a nullity and will be disallowed."¹⁶

The conclusion to be drawn from these cases is that, although the total amount claimed is accurate, a detailed breakdown of the fees may be necessary to sustain the claim. This is consistent with the instructions for §9 of the proof-of-claim form, Official Form B10, which provides that a claimant should "attach copies of supporting documents, such as...itemized statements of running accounts." Providing additional detail in such an itemization, at a minimum, will assist the lender in avoiding an objection down the line.

Results of a Failure to Attach a Writing or Itemization

Because, except in situations involving the determination of secured status covered by Rule 3001(d), there are only minimal requirements for unsecured proofs of claim, the failure to attach the appropriate "writing" or a detailed itemization should not constitute the sole basis for denying the claim. At most, the failure to attach the writing or itemization means that the proof of claim did not qualify as "prima facie evidence of the validity and amount of the claim" under Rule 3001(f).

All that [Rule 3001] says, so far as bears on this case, is that the filing of a proof of claim with the required documentation is prima facie evidence that the claim is valid. If the documentation is missing, the creditor cannot rest on the proof of claim. It does not follow that he is forever barred from establishing the claim.... A creditor should therefore be allowed to amend his incomplete proof of claim (what is often called an "informal proof of claim") to comply with the requirements of Rule 3001, provided that other creditors are not harmed by the belated completion of the filing.¹⁷

In Henry, the bankruptcy court even stated that, although the proofs of claim failed to comply with Rule 3001(c), the debtors were not entitled to attorneys' fees and costs against the creditors, and the sole remedy was to deny the claims any prima facie effect. "The plain language of §502(a) permits a creditor to file a claim that is invalid on its face but that is deemed valid unless an interested party objects."¹⁸ This conclusion is supported by analogy to the cases dealing with amendments to proofs of claim. "Late-filed amendments to proofs of claim should be treated with liberality, as leave to amend in a straight bankruptcy proceeding is freely allowed where the purpose is to cure a defect in the claim as originally filed."¹⁹ Consequently, when a "writing" should have been attached to the proof of claim pursuant to Rule 3001(c) or a more detailed itemization of the amount claimed is necessary, the appropriate remedy is for the bankruptcy court to permit the creditor to amend or supplement the proofs of claim.

Conclusion

For large consumer lenders filing numerous proofs of claim throughout the country, trying to comply with the requirements of Bankruptcy Rule 3001 creates certain dilemmas on which there is little guiding case law. Such lenders may not need to attach supporting "writings" to comply with Rule 3001(c) if they can satisfy the requirements for common-law claims of "money lent," but the lender should itemize the amounts claimed to the greatest amount possible to avoid drawing an objection. Additionally, in the event the bankruptcy court concludes that the proof of claim is insufficient under Rule 3001, the bankruptcy court should permit the creditor to supplement or correct the proof of claim instead of simply striking it entirely.

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Footnotes

¹ Nelson, Rhonda L., "Class Actions and Proofs of Claim: The Latest Minefield," ABI Journal, June 2001. Return to article

² In re Blair, No. 02-11400 (Bankr. W.D.N.C. filed Feb. 10, 2004). Return to article

³ In re Henry, No. 03-25104 (Bankr. W.D. Wash. filed April 14, 2004). Return to article

⁴ LTV Corp. v. Gulf States Steel Inc. of Alabama, 969 F.2d 1050, 1058 (D.C. Cir. 1992). Return to article

⁵ In re Great Western Cities Inc., 88 B.R. 109, 114 (Bankr. N.D. Tex. 1988), rev'd. on other grounds, 107 B.R. 116 (N.D. Tex. 1989). Return to article

⁶ In re Circle J Dairy Inc., 112 B.R. 297, 299-300 (W.D. Ark. 1989) (citing In re Scholz, 57 B.R. 259 (Bankr. N.D. Ohio 1986)). Return to article

⁷ See State Board of Equalization v. Los Angeles Int'l. Airport Hotel Assocs. (In re Los Angeles Int'l. Airport Hotel Assocs.), 106 F.3d 1479 (9th Cir. 1997) (holding that, because tax liability arose statutorily without the need for a writing, documentation was not required to be attached to a proof of claim and the claim was entitled to presumptive validity under Fed. R. Bankr. P. 3001(f)). Return to article

⁸ In re Henry, No. 03-25104 slip op. at 6 (Bankr. W.D. Wash. April 14, 2004). Return to article

⁹ The various forms of general assumpsit are indebitatus assumpsit, the quantum counts (quantum meruit and quantum valebant), the money counts (money had and received, money lent and money paid), and the count upon an account stated (insimul computassent). These various forms are also known as the common counts. 1 Am.Jur. 2d Actions §18. Return to article

¹⁰ 66 Am.Jur. 2d Restitution and Implied Contracts §171. Return to article

¹¹ Truth In Lending Act, 15 U.S.C. §§1601, et seq. Return to article

¹² 12 C.F.R. §226.18(b). Return to article

¹³ 12 C.F.R. §226.18(c). Return to article

¹⁴ In re Blair, No. 02-11400 slip op. at 4 (Bankr. W.D.N.C. Feb. 10, 2004). Return to article

¹⁵ In re MK Lombard Group I Ltd., 301 B.R. 812 (Bankr. E.D. Pa. 2003). Return to article

¹⁶ Id. at 817. Return to article

¹⁷ In the Matter of Stoecker, 5 F.3d 1022, 1028 (7th Cir. 1993). Return to article

¹⁸ In re Henry, No. 03-25104, slip op. at 13 (Bankr. W.D. Wash. April 14, 2004). Return to article

¹⁹ In re Unioil Inc., 962 F.2d 988, 992-93 (10th Cir. 1992) (citations omitted). Return to article