January 29, 2015

Indiana Bankruptcy Court Sanctions Creditors For Being Bad at Math

Adding to the apparent deluge of issues surrounding the Eleventh's Circuit decision in Crawford v. LVNV Funding, LLC, the Bankruptcy Court for the Northern District of Indiana has sanctioned two creditors for not being able to do math. More accurately, the Sekema court awarded sanctions of $1000 for no-showing a show-cause hearing to explain why filing a time-barred claim did not violate Rule 9011. The underlying debts were subject to Indiana's six-year statute of limitations. The debtors successfully objected to the claim on that basis, and the Court issued a Show Cause Order on its own initiative ("By filing that claim, it appears that [creditors] violated Rule 9011(b)(2) of the Federal Rules of Bankruptcy Procedure because the claim was not warranted by existing law or a non-frivolous argument for its extension and a reasonable pre-filing inquiry would have revealed that lack of merit. See In re Excello Press, Inc., 967 F.2d 1109, 1112-13 (7th Cir. 1992) (Rule 11 requires the filer to investigate any obvious affirmative defenses)"). The creditors failed to appear and the Sekema court took the matter under submission.

According to the court, "It does not take a rocket scientist to figure out that December 1998 . . . or May 2001 . . . are well beyond six years before the March 2014 date the debtors filed this case." This conclusion may ignore that calculating the expanse of time between two dates and knowing the effect of an Indiana statute requires two different skill sets. While the former, according to the court, may be available to a third grader, the latter requires some legal analysis and training. This is why courts have sanctioned non-lawyer bankruptcy petition preparers for the unauthorized practice of law when they cite code sections on Schedule C. We rightfully expect lawyers to understand statutes of limitations, but should every non-lawyer AR-clerk be held to that standard?

You don't need to be a lawyer to file a proof of claim. The claim form itself says so ("I am the creditor"). In fact, there are good reasons why clients, and not their lawyers, should be signing form B10. Because all claims against a debtor are, by design, centralized and administered as quickly as possible, the claims process works best when it is cheap and simple. A requirement that lawyers and non-lawyers alike possess the same deep appreciation of the nuances of various affirmative defenses (limitations, repose, discovery rule, etc.) in every state before submitting a two-page proof of claim would likely add a great deal of cost and complexity to the process. Because Sekema was, in essence, a default on a show-cause hearing, it is hard to say what conclusions we should draw. (Other than, of course, "attend the show cause hearing.")

There is another interesting angle to this decision. For instance, Sekema set the sanction level using an express reference to the Fair Debt Collection Practices Act. This is interesting (and potentially problematic), because the filing of a proof of claim is itself not subject to the FDCPA. The Seventh Circuit so stated Buckley v. Bass & Associates. Moreover, after Sekema, the Bankruptcy Court for the Northern District of Illinois ruled in Lagrone v. LVNV Funding LLC (In re Lagrone) that filing a proof of claim does not violate the FDCPA. Recognizing that filing a lawsuit to collect a time-barred debt violates the Act, the Lagrone court identified four distinctions with filing a proof of claim: 1) the trustee has a fiduciary duty to examine proofs of claim and object; 2) the debtor has less at stake in bankruptcy than in a collection action; 3) the debtor is normally represented by counsel when the proof of claim is filed; and 4) the proof of claim will provide the debtor with the necessary information to analyze a statute of limitations. As discussed in a prior post, the Bankruptcy Court for the Eastern District of Kentucky has held, like Lagrone, the filing of a proof of claim does not violate the FDCPA.

The Crawford decision and its progeny should concern creditors. The creditor in Crawford has filed a petition for certiorari to the Supreme Court which could resolve the circuit split. While the Eleventh Circuit is in the minority, caution should be exercised as more courts follow Crawford. Even if not subject to FDCPA liability, a creditor could be subject to Rule 9011 sanctions.