As I recently discussed here, one important step in a Chapter 7 or Chapter 13 bankruptcy case is the filing of the “proof of claim.” A proof of claim is a document a creditor files with the Bankruptcy Court to prove that the debtor owes a debt to that particular person or entity.  One recent decision from the Sixth Circuit Court of Appeals reiterates how important it is for the debtor and/or debtor’s counsel to carefully review proofs of claim and where appropriate, challenge them. This case is In re: Wingerter. B-Line, LLC v. Wingerter (the entire opinion is available here).

In Wingerter, 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 same after 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.

Although B-Line had already given up on the Wingerter claim, it appealed this holding to a Bankruptcy Appellate Panel (“BAP”), arguing that the bankruptcy court’s order essentially prohibited B-Line’s business practice of relying on account information and not seeking out copies of a claim’s originating documents unless and until a debtor objects to the proof of claim.  B-Line also asserted that complying with this order would significantly increase its cost of doing business.  However, the BAP dismissed the appeal on procedural grounds (specifically, that the claim was moot).

B-Line appealed that dismissal to the U.S. Court of Appeals for the Sixth Circuit.  The Sixth Circuit held that the issue was not moot, and 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 this case, from a commercial debtor’s perspective, is that companies such as B-Line will be able to continue to purchase debts and file proofs of claim with little or no supporting documentation.  It will therefore be up to the Chapter 7 or Chapter 13 debtor (or their attorney) to scrutinize and potentially challenge improper claims, as Wingerter successfully did here.

-Drew Broaddus