Recently at the National Bankruptcy Forum, I discussed In re: Wingerter. B-Line, LLC v. Wingerter, a recent Sixth Circuit Court of Appeals decision which addressed the issue of what creditors must do to file a valid proof  of claim.   In that case, B-Line, LLC purchased a creditor’s claim against Gerald Wingerter and filed a proof of claim, based upon that debt, in Wingerter’s Chapter 13 bankruptcy.  This claim was purchased from an intermediary that was not the original creditor, although the intermediary had warranted to B-Line that the claim was valid. The proof of claim did not include copies of the originating documents or contain an explanation of why copies of the originating documents were unavailable. When the Wingerters challenged the proof of claim, B-Line withdrew the claim, as it was unable to document the claim’s validity.

B-Line’s withdrawal of the proof of claim did not end the story, however.  The bankruptcy court subsequently issued a series of orders directing B-Line to explain both its business practices generally as well as its handling of the claim against Wingerter.  It later issued an opinion sanctioning B-Line for failing to comply with Rule 9011(b) of the Federal Rules of Bankruptcy Procedure.  The court found that B-Line had failed to make a “reasonable pre-filing inquiry” into whether the claim was valid and supported by the evidence.  The bankruptcy court went on to say that any party filing a proof of claim on an unscheduled claim must include copies of ‘originating documents or, when such documents are unavailable, an affidavit explaining the absence of such documents.  After a series of appeals, the Sixth Circuit Court of Appeals ultimately held that B-Line’s actions (submitting the proof of claim without supporting documentation) did not violate Rule 9011(b). The Sixth Circuit apparently felt that because the company who sold the debt to B-Line provided assurances of the debt’s validity, B-Line acted in good faith.

The important feature of the Wingerter case, from a commercial debtor’s perspective, is that Chapter 7 and Chapter 13 debtors (or their attorneys) must be vigilant in scrutinizing every proof of claim that is filed in their cases, because creditors (or companies that purchase the original debts, such as B-Line, L.L.C.) will sometimes file proofs of claim based upon scant or nonexistent evidence. Challenges to proofs of claim can be important as they can determine whether a particular debt is dischargeable or in some cases, whether the debtor gets to keep a particular asset.

If you receive a proof of claim in your bankruptcy case, a number of questions should be asked (apart from the obvious question of whether you actually incurred the debt).  Some of these issues are discussed in this recent article and include:  whether the proof of claim was filed in the proper court, whether the creditor (or assignee of the creditor) used the proper form,  whether it was filed electronically (a requirement in the Eastern District of Michigan Bankruptcy Court per Administrative Order No 05-04), whether it was timely (the proof of claim must be filed no later than 90 days after the first scheduled meeting of creditors in Chapter 7, 11, 12, and 13 cases in the Eastern District of Michigan), and whether supporting documentation was filed with the claim.  Each of these issues could be a basis for challenging the validity of the proof of claim.

Drew Broaddus