In re Wingerter

Decision Date08 October 2008
Docket NumberBAP No. 07-8063.
Citation394 B.R. 859
PartiesIn re Gerald A. WINGERTER and Janet G. Keller-Wingerter, Debtors.
CourtU.S. Bankruptcy Appellate Panel, Sixth Circuit

ARGUED AND ON BRIEF: Jonathan W. Young, John W. Costello, Jeffrey L. Gansberg, Wildman, Harrold, Allen & Dixon, Chicago, IL, Jeremy M. Campana, Alan R. Lepene, Thompson Hine, Cleveland, OH, for Appellant.

Professor Dan S. Schechter, Loyola Law School, Los Angeles, CA, for Amicus Curiae.

Before FULTON, PARSONS, and SCOTT, Bankruptcy Appellate Panel Judges.

OPINION

THOMAS H. FULTON, Bankruptcy Judge.

B-Line, LLC ("B-Line") appeals a bankruptcy court order sanctioning it under Federal Rule of Bankruptcy Procedure ("Rule") 9011(b). The bankruptcy court issued its order after a show cause order and an evidentiary hearing to determine the procedures that B-Line employs for processing and filing proofs of claim. The court was concerned that B-Line, a company that exclusively purchases claims in bankruptcy, does not request copies of originating documents before filing a proof of claim despite the requirement in Rule 3001(c) and Official Form 10 that such documents be attached to proofs of claim.

I. ISSUES ON APPEAL

Whether the bankruptcy court abused its discretion in issuing an order (1) concluding that B-Line did not fulfill its obligations under Rule 9011 when it filed its proof of claim in the debtors' case; and (2) expressing the court's view generally that filing a proof of claim without review of originating documents falls short of reasonable inquiry under Rule 9011 when the obligation is not scheduled by the debtor and the purchase of the claim is not accompanied by reliable representations of validity.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the Panel and a final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). The bankruptcy court's order imposing sanctions on B-Line for violating Rule 9011 in this case is a final order. Buckeye Retirement Co., LLC, Ltd. v. Hake (In re Hake), 2006 WL 2621116 (6th Cir. BAP 2006) (unpub.)1

Decisions regarding the imposition of sanctions under Rule 9011 are reviewed for abuse of discretion. Timmons v. Cassell (In re Cassell), 254 B.R. 687 (6th Cir. BAP 2000) (citing Corzin v. Fordu (In re Fordu), 201 F.3d 693, 711 (6th Cir. 1999)). "An abuse of discretion occurs only when the [trial] court relies upon clearly erroneous findings of fact or when it improperly applies the law or uses an erroneous legal standard." Volvo Commercial Fin. LLC the Americas v. Gasel Transp. Lines, Inc. (In re Gasel Transp. Lines, Inc.), 326 B.R. 683, 685 (6th Cir. BAP 2005) (citing Schmidt v. Boggs (In re Boggs), 246 B.R. 265, 267 (6th Cir. BAP 2000)). A court also abuses its discretion if, upon review, the appellate court is left with a "definite and firm conviction that the [bankruptcy court] committed a clear error of judgment." Barlow v. M.J. Waterman & Assocs., Inc. (In re M.J. Waterman & Assocs., Inc.), 227 F.3d 604, 607-08 (6th Cir.2000) (quoting Soberay Mach. & Equip. Co. v. MRF Ltd., Inc., 181 F.3d 759, 770 (6th Cir.1999)). "The question is not how the reviewing court would have ruled, but rather whether a reasonable person could agree with the bankruptcy court's decision; if reasonable persons could differ as to the issue, then there is no abuse of discretion." Mayor and City Council of Baltimore, Md. v. W. Va. (In re Eagle-Picher Indus., Inc.), 285 F.3d 522, 529 (6th Cir.2002).

The court's findings of fact are reviewed under the clearly erroneous standard. Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir.2007). "A finding of fact is clearly erroneous `when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" Id. (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)).

III. FACTS

Gerald Wingerter and Janet Keller-Wingerter ("Debtors") filed a chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Northern District of Ohio on February 7, 2006. According to the chapter 13 plan that was filed on the same date, the Debtors would pay their unsecured creditors 100%. B-Line, LLC ("B-Line") filed a proof of claim for an unsecured claim in the amount of $431.57 on March 17, 2006, thirty-eight days after the Debtors filed their chapter 13 petition and nearly two months before the deadline for filing proofs of claim.

As its proof of claim, B-Line submitted a copy of Official Form 10 ("Form 10") that listed "B-Line LLC/Covenant Management/GTE" as the name of creditor. B-line's Form 10 was incomplete or incorrect in several places: it stated that the basis for the claim was "money loaned;" the space for "Date debt was incurred" was left blank; and B-Line did not submit any copies of the original documents evidencing the Debtors' obligation. The only additional document B-Line filed with Form 10 was a single computer-generated sheet entitled "Account Summary" that contained the following information:

                Debtor Name:              WINGERTER, GERALD A
                Debtor SSN:               XXX-XX-8300
                Debtor Address:           644 STAR DR
                End Balance:              $431.57
                Last Payment Date
                Last Payment Amount
                Last Purchase Date
                Last Purchase Amount
                Original Creditor:        GTE
                Related Account Number:   XXXXXXXXXXXX1221
                

On September 1, 2006, the Debtors filed an objection to B-Line's claim on grounds that they were unaware of any contract or extension of credit with GTE or B-Line. On September 14, 2006, B-Line filed a response to the Debtor's objection, requesting an extension of sixty days "to obtain supporting documentation for its claims pursuant to Rule 9006 because the Debtors did not schedule the debt." The bankruptcy court denied B-Line's request for additional time, and a hearing was held on October 19, 2006, with respect to the Debtors' objection to B-Line's claim. At this hearing, the Debtors testified that they had no recollection of ever entering into any contract with GTE or B-Line.

The bankruptcy court found the Debtors' testimony credible and made a specific factual finding accordingly. At the October 19 hearing, the bankruptcy court scheduled another hearing for January 11, 2007, and prohibited B-Line from withdrawing its proof of claim unless it provided a "complete explanation" therefor. On January 3, 2007, in direct contravention of the bankruptcy court's order, B-Line filed a document withdrawing its proof of claim without filing an accompanying explanatory statement.

On January 8, 2007, five days later, B-Line submitted a sworn affidavit by Steven G. Kane ("Kane"), the records custodian and operations manager of B-Line. Kane averred that, according to B-Line's computer database, in March 2006 B-Line purchased from Covenant Management Group, LLC ("Covenant") an account that Gerald Wingerter originally opened with GTE Communications Company on December 21, 1993.2 Kane further averred that the account had an outstanding balance of $431.57 when it was purchased from Covenant by B-Line.

Pursuant to a forward-flow purchase agreement ("Purchase Agreement") entered between Covenant and B-Line, B-Line would purchase from Covenant, on a periodic basis, claims on accounts for which the obligor on each purchased account had filed a chapter 13 bankruptcy petition. The claim purportedly owed by Gerald Wingerter was among the "portfolio" of claims B-Line had purchased from Covenant in March 2006. The affidavit stated that B-Line withdrew its proof of claim on January 3, 2007, after GTE informed B-Line that it was unable to locate original documentation evidencing the Debtors' account.

On January 11, 2007, the bankruptcy court held another hearing during which it expressed concern that B-Line had filed a proof of claim without sufficient inquiry into the factual or legal basis for the claim. In order to address the matter further, the bankruptcy court scheduled a hearing at which B-Line would "provide the Court with an explanation of its procedures regarding the due diligence it conducts to assure itself of the validity of a claim before filing a proof of claim." B-Line was directed to file a written explanatory statement prior to the hearing. The bankruptcy court entered an order to this effect on January 26, 2007.

B-Line filed an explanatory statement on February 16, 2007. In the statement, B-Line explained that it had entered the Purchase Agreement with Covenant in 2004. B-Line disclosed the requirements for accounts it purchases from Covenant: (1) the debtor must be in a chapter 13 bankruptcy proceeding; (2) the debt has not been disputed or discharged; (3) the amount owed is accurate; (4) the statute of limitations on the claim has not expired; and (5) the debt is not fraudulent. B-Line stated further that "According to the Purchase Agreement, Covenant ... represents that it will use reasonable efforts in accordance with industry standards to create computer files for each account and will provide account documents where available."

Additionally, in its statement, B-Line explained that GTE had merged with another telecommunications company in 2000 to form Verizon Communications Company. The Debtors included a debt owed to Verizon on the schedules accompanying their bankruptcy petition. Although the account number for the Verizon account...

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