“Smokey, this is not ‘Nam. This is [bankruptcy]. There are rules.”
– Walter Sobchak, The Big Lebowski (as modified)
Does technical noncompliance with the Bankruptcy Rules and the official proof of claim form warrant disallowance of a claim, or does that approach simply put form over substance? Do you think the answer is clear? Think again. It turns out that courts are divided on whether noncompliance with the stated requirements of the Bankruptcy Rules and the official proof of claim form can, alone, warrant disallowance of claims. Or is it all just a tempest in a teapot? Let’s see, shall we?
In In re Tatro, the chapter 7 debtor was formerly a licensed stock broker and investment advisor (with the emphasis on “formerly”). After Tatro commenced his chapter 7 case, a group of over one hundred claimants (all represented by a single law firm) filed 102 separate, but substantially identical, proofs of claim. Each of the proofs of claim attached a one-page rider stating that the documents evidencing the claimant’s investments and losses thereon were too “voluminous” to attach and to “[p]lease advise if something specific is needed.”
Enter Bankruptcy Rule 3001, which provides:
(a) Form and Content. A proof of claim is a written statement setting forth a creditor’s claim. A proof of claim shall conform substantially to the appropriate Official Form [for proofs of claim].
. . .
(c) Supporting Information. (1) Claim Based on a Writing. Except for a claim governed by paragraph (3) of this subdivision [a claim based on an open-ended or revolving consumer credit agreement], when a claim, or an interest in property of the debtor securing the claim, is based on a writing, a copy of the writing 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. . . .
Two years after the claims bar date, Tatro objected to all 102 claims on the “narrow procedural ground” that the claimants had failed to attach supporting documentation to those proofs of claim, as required by the Bankruptcy Rules. In the first instance, he argued that Bankruptcy Rule 3001(c)(1) requires that claims based on a writing include a copy of that writing with the proof of claim. Second, he noted that Bankruptcy Rule 3001(a) mandates that proofs of claim conform to the official proof of claim form which, in turn, requires the filer to attach copies of any documents that show that the alleged debt exists. Accordingly, Tatro moved for disallowance on the grounds that the claimants had all failed to support the existence of their claims (for example, by submitting an investment agreement or a written new account form agreement to prove that a broker-client relationship had, in fact, existed between Tatro and each claimant).
Some courts would side with Tatro’s approach, having ruled that noncompliance with Bankruptcy Rule 3001 can provide a legitimate basis for an objection to a proof of claim. Indeed, the only circuit court to have ruled on the issue has held accordingly. In that case, the Tenth Circuit Court of Appeals reasoned that requiring compliance with that rule was necessary and appropriate, given that a contrary outcome would improperly shift the burden to the objecting party to disprove an unsubstantiated claim. The United States Bankruptcy Court for the Southern District of New York has held similarly.
Other courts, however, have ruled that only section 502 of the Bankruptcy Code provides a substantive basis for objections to claims. This “exclusive view” holds that section 502 “sets forth the exclusive grounds for disallowance of a claim, and failure to file documentation is not among them.” This “exclusive view,” according to the Tatro court, is premised on four potential rationales. First, looking to the plain language of section 502(b), that section does not include noncompliance with the Bankruptcy Rules as a basis for disallowance of a claim. Second, such a view could unfairly permit debtors to defeat claims that they “admittedly owe” so long as they have an evidentiary advantage (or a formalistic basis for an objection). Third, many courts have viewed proofs of claim as though they are complaints or depositions – and if a proof of claim is considered as evidence in its own right (without supporting documentation), it may not be fair to require the objector have to come forward with evidence to contest the claim, even in the absence of documentation to otherwise support a prima facie claim. And fourth, requiring compliance with the Bankruptcy Rules and the official proof of claim form would encourage fair and efficient resolution of claims, allowing courts to balance the burdens on each party to come forward with evidence to support and/or refute a proof of claim.
The court in Tatro added that, since 2011 (after the Tenth Circuit rendered it decision, as noted above), Bankruptcy Rule 3001(c)(2)(d) has made sanctions available if a proof of claim does not include the information required by that rule. Absent from the potential sanctions, however, is disallowance of the claim. Indeed, the Advisory Committee noted that “[f]ailure to provide the required information does not itself constitute a ground for disallowance of a claim.” Accordingly, the Bankruptcy Rules and the notes thereto suggest that the drafters of the Bankruptcy Rules specifically intended that bankruptcy courts notdisallow claims on the grounds that they failed to comply with those rules and the official claim form. In light of the foregoing, the United States Bankruptcy Court for the Western District of New York – parting ways with its sister court in the Southern District – adopted the “exclusive view” and denied the debtor’s objection to the investors’ claims.
“But wait!” you say? What about Bankruptcy Rule 3007(d)(6), which contemplates omnibus objections to any claims that are “presented in a form that does not comply with applicable rules,” if “the objection states that the objector is unable to determine the validity of the claim because of the noncompliance.” That rule seems to create a basis for an objection to a proof of claim, and which is not otherwise created by section 502(b) of the Bankruptcy Code!
And consider Rule 3007-1(d) of the Local Rules for the United States Bankruptcy Court for the District of Delaware, for example, which deems “non-substantive” objections to include any objections to “[a] claim that does not have a basis in the debtor’s books and records and does not include or attach sufficient information or documentation to constitute prima facie evidence of the validity and amount of the claim as contemplated by Fed. R. Bankr. P. 3001(f).” Indeed, Bankruptcy Rule 3001(f) specifically notes that “[a] proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.” Conversely, one would think that proofs of claim that are not executed in accordance with the Bankruptcy Rules would fail to constitute prima facie evidence of the claim, and should therefore be disallowed!
So where does all this leave us?
It seems that Tatro (and cases similarly adopting the “exclusive view”) are not necessarily in complete disagreement with procedural objections to proofs of claim. Instead, they appear to suggest that claimants with otherwise valid claims cannot be subjected to “gotcha” objections where the objecting party has no reason to believe that they are not valid claims (or, perhaps, himself acknowledges the validity of those underlying claims). Indeed, the facts in Tatro weighed strongly in favor of a decision in favor of the claimants. The debtor had scheduled almost all of the investors in the claimant group among his list of creditors, which suggested that he knew that the claimants had, in fact, been investors (and therefore need not show proof of that status with their proofs of claim). Moreover, the court recognized that no documentation may have been necessary in the first place because the investors’ claims may not have been “based on a writing.” Add to that the fact that the denial of the objection did not necessarily preclude the debtor from filing a more complete objection to the investors’ claims (if, in fact, an objection on their merits was warranted), and a finding in the claimants’ favor seems abundantly fair.
On the other hand, pursuant to Bankruptcy Rule 3007, a simple statement (i.e., that the debtor does not believe the claim is valid) is sufficient to serve as support for an otherwise purely procedural and formalistic objection. Or, as the Delaware bankruptcy court would have it, procedural objections to claims lacking supporting documentation are appropriate, but only if that claim does not have a basis in the debtor’s books and records. If this is all that is necessary to support an objection for failure to include sufficient documentation with a proof of claim, it appears that the practical implications are limited regarding the current debate over whether noncompliance with the rules justifies disallowance of a claim. Unless, of course, a court concludes that the list of objections in Bankruptcy Rule 3007 is inconsistent with the stated bases for objection in 502(b) – which would cause quite a ruckus in the bankruptcy courts. Any takers?