In Litton Loan Servicing, LP v. Garvida, No. 04-17846 (9th Cir. BAP July 31, 2006), the Bankruptcy Appellate Panel of the U.S. Court of Appeals for Ninth Circuit addressed two independent but related questions: (1) what procedure is necessary to object to a properly filed proof of claim, and (2) who bears the burden of proof, and the correlative risk of nonpersuasion, with regard to a disputed claim.
The court concluded that an adversary proceeding is not required to determine the validity of a claim as long as certain procedural safeguards are in place. Further, based on applicable nonbankruptcy law, the court held that the creditor bears the burden of proof in a claim objection proceeding. The debtors filed for chapter 13 bankruptcy protection to prevent Litton Loan Servicing, LP (“Litton”) from foreclosing on their home. Litton filed a proof of claim asserting that the total amount of the debt at the time of filing was $238,188.46, comprised of unpaid principal and accrued interest, with interest continuing to accrue at the contract rate of 8 percent. On Oct. 15, 2004, the debtors’ chapter 13 plan was confirmed by the court, and the debtors thereafter began making payments pursuant to the terms of their confirmed plan.
In December 2004, the debtors negotiated a mortgage refinance with another lender. The debtors filed a motion with the court requesting permission to refinance their mortgage and pay Litton in full. The court granted the motion and required the debtors’ escrow company to pay off the plan in full. The refinance escrow closed and sent Litton a check for $213,372.60, the figure provided by Litton to satisfy its claim. After closing, however, Litton rejected the escrow payoff check and demanded an additional $30,004.22, for a total of $265,961.06.
Assuming that the Litton demand was correct, the debtors proposed a plan modification whereby they would pay their new mortgage outside the plan, and pay Litton through the plan at $1,000 a month without interest until the debt was satisfied. Litton objected to the debtors’ failure to provide for a payment of interest on the balance. At the confirmation hearing for the modified plan, the debtors stated they would adjust their plan to pay whatever an accounting showed was owed to Litton.
The court directed Litton to provide such an accounting to the debtors. At a second hearing, the court was dissatisfied with the information provided by Litton detailing the amount due on the account. The hearing was continued, and Litton was persuaded by the court to accept the remaining escrow proceeds as partial payment of its claim.
Acceding to Litton’s interest demand, the debtors proposed a third amended plan, under which they would make monthly plan payments totaling $23,348.36 that would be sufficient to extinguish Litton’s claim. Litton once again objected, and filed an amended proof of claim for $33,435.46. Litton’s proof of claim was not supported by any documentation. At a subsequent hearing, the debtors offered evidence received from Litton that indicated the total owing on the claim as of that date was $15,149.04.
When the court once again requested that Litton provide a breakdown of its numbers so it could determine which of the payoffs was correct, Litton’s counsel merely responded that the debtors were working off of a “different” payoff. Finding that Litton had not carried the burden of proof with regard to the amount of its claim—despite multiple opportunities to do so—the court ruled that the remaining amount due and owing on the account was $19,149.04. An order was entered to this effect, and the modified plan was confirmed. A timely appeal was thereafter filed.
BAP first examined whether a debtor could object to the validity of a claim through a chapter 13 plan, or whether a formal objection was necessary pursuant to Rule 3007 of the Federal Rules of Bankruptcy Procedure. Noting that Fed.R.Bank.P. 3007 sets forth the procedure for objecting to a proof of claim under section 502(a) through an adversary proceeding, the court nonetheless found that an adversary proceeding is not necessarily required. It is permissible to object to a claim through a proposed plan as long as proper notice is given, the court held.
In the current case, Litton was provided ample notice and had the same opportunity to litigate one-on-one as it would have had in an adversary proceeding claim objection under Rule 3007, the court noted. Litton received notice that the debtors objected to its proof of claim, and actively participated in the process. Further, at no point did Litton object or question the procedure being utilized, and only raised the issue of procedural infirmity on appeal.
Based on Litton’s failure to insist on a separate claim objection proceeding, and because of the close resemblance of the two-party confirmation proceeding to a claim-objection proceeding, the court determined that Litton had waived the issue. Neither the interests of third parties nor the expectations or rights of third parties was affected by the incorrect procedure. The court found any procedural error harmless and refused to reverse a lower court for reasons that, while not in conformity with the letter of the Bankruptcy Rules, had no effect on any substantial rights.
The court then turned to the issue of whether the bankruptcy court had properly allocated the burden of proof, noting that nonbankruptcy law governs the substance of claims. The court found that the initial burden is on the creditor to demonstrate a prima facie showing of the existence of indebtedness or an obligation to pay. The creditor must then show that payment received was not sufficient to extinguish the debt or satisfy the lien. Based on this standard, the creditor has the burden of proving the final mortgage payoff amount, especially any charges in addition to principal and interest.
The court noted that Litton filed a proof of claim, which is prima facie proof of a claim’s validity under Fed.R.Bankr.P.3001(f). This prima facie proof did not, however, shift the burden of proof. To the contrary, Rule 3001(f) merely establishes an evidentiary presumption that shifts the burden of going forward, but does not affect the ultimate burden of persuasion which rests on the creditor. As such, the debtors were charged with presenting evidence to rebut Litton’s proof of claim. Once the debtors provided their counter-evidence rebutting Litton’s claim, the burden of going forward shifted back to Litton to put forth further evidence to support its claim and rebut the debtors’ evidence.
The ultimate burden of proof as to the validity of the claim always rested on Litton, which proved unwilling or unable to meet this burden. It failed to provide an accounting as to how its initial claim grew over the course of the proceeding, and failed to account for the money it did receive through the debtors’ chapter 13 plan. Litton’s only evidence was a list of payments that was neither itemized nor explained, and which the court regarded as unintelligible.
Having granted Litton multiple opportunities to prove its case, the bankruptcy court finally declared the evidentiary record closed. At that point it was up to the bankruptcy court to examine the conflicting evidence and make a determination. The bankruptcy court was within its rights to examine the evidence, including Litton’s unsubstantiated figures, and make a determination accordingly. The lower court found that the debtors successfully rebutted the prima facie validity of Litton’s proof of claim. It was at this point that Litton was required to come forward with additional evidence to prove the validity of its claim. Litton provided no such evidence and, thus, failed to sustain its burden.
The Ninth Circuit BAP concluded that Litton “had its due process opportunity and lost” by failing to provide sufficient evidence to support its claim and meet its burden of proof.