In re Wingerter
| Decision Date | 25 January 2010 |
| Docket Number | No. 08-4455.,08-4455. |
| Citation | 594 F.3d 931 |
| Parties | In re Gerald WINGERTER and Janet G. Keller-Wingerter, Debtors. B-Line, LLC, Appellant, v. Gerald A. Wingerter and Janet G. Keller-Wingerter, Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Linh K. Tran, Seattle, Washington, for Appellant.
ON BRIEF:
Linh K. Tran, Louis H. Treiger, Seattle, Washington, for Appellant.
Before: SILER, GILMAN, and ROGERS, Circuit Judges.
GILMAN, J., delivered the opinion of the court, in which SILER, J., joined. ROGERS, J. (pp. 942-46), delivered a separate dissenting opinion.
B-Line, LLC purchased a creditor's claim against Gerald Wingerter and filed a proof thereof in the Chapter 13 bankruptcy of Wingerter and his wife Janet G. Keller-Wingerter. 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.
After a series of hearings, the bankruptcy court determined that B-Line had violated Rule 9011(b) of the Federal Rules of Bankruptcy Procedure by filing its proof of claim without supporting documents or an explanation of why such documents were unavailable. B-Line appealed to the Bankruptcy Appellate Panel (BAP), which dismissed the appeal on procedural grounds. For the reasons set forth below, we REVERSE the decisions of both the BAP and the bankruptcy court.
B-Line is a business entity that specializes in purchasing "consumer bankruptcy debt." It purchases such debt from both original creditors and intermediaries. B-Line then files proofs of claim in the respective debtors' bankruptcy cases, or has existing proofs of claim transferred to it.
When B-Line purchases a claim, it does not acquire the supporting documentation. Instead, it requests several pieces of information from the claim's seller that B-Line stores in an electronic database. This information typically includes the debtor's name, address, contact information, and Social Security number, as well as the original account number, the original creditor's name, the original amount owed, the date the original account was opened, and the bankruptcy case information.
B-Line relies on the sellers from whom it purchases the claims to provide accurate, truthful information, and it negotiates a purchase agreement with these sellers to protect itself in case a seller misrepresents the validity of a claim. The purchase agreement requires, in particular, a warranty that each claim sold to B-Line "represents a legal, valid and binding obligation of the related Debtor." To keep down its costs, B-Line does not request copies of a claim's originating documents unless a debtor challenges the claim.
With regard to the Wingerters' bankruptcy case, B-Line purchased a claim against them from Covenant Management, LLC. The claim allegedly originated with the former business entity GTE and was in the amount of $431.57. B-Line filed a proof of claim for the $431.57 in the Wingerters' Chapter 13 bankruptcy case. The Wingerters had not acknowledged a debt to GTE or scheduled the payment of a claim for that amount.
B-Line's proof of claim was submitted on Bankruptcy Form 10, but that form was not filled out completely. Specifically, the Form 10 lacked information about whether the claim included interest charges in addition to the principal and, as B-Line admits, incorrectly stated that the basis of the claim was "money loaned." In addition, B-Line did not supplement the Form 10 with any supporting documents that demonstrated the origins of its claim, but instead attached a printout from its electronic database with various pieces of information. This information included Mr. Wingerter's name, the last four digits of his Social Security number, an address, the amount of $431.57, and four digits of a "related account number."
After the Wingerters filed an objection to B-Line's proof of claim, the bankruptcy court set a date for a hearing. B-Line then attempted to find copies of the alleged originating documents that showed a debtor-creditor relationship between GTE and Mr. Wingerter, but was unable to do so. As a result, B-Line withdrew its proof of claim.
The bankruptcy court subsequently issued a series of orders directing B-Line to explain both its business practices generally and its handling of the GTE claim against the Wingerters in particular. This resulted in a series of evidentiary hearings before the bankruptcy court, supplemented by evidentiary submissions and briefs.
The bankruptcy court ultimately issued an opinion sanctioning B-Line for failing to comply with Rule 9011(b) of the Federal Rules of Bankruptcy Procedure. Rule 9011 provides in pertinent part as follows:
...
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.
Fed. R. Bankr.P. 9011(b)(3). In its opinion, the court found that B-Line had failed to make a "reasonable pre-filing inquiry" that the claim was valid and supported by the evidence. This purported failure violated Rule 9011(b)'s requirement that any filing with a bankruptcy court be based on "knowledge, information, and belief, formed after an inquiry reasonable under the circumstances." Specifically, the bankruptcy court ruled 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.
The bankruptcy court then stated that "[b]ecause of the time and energy that B-Line's senior management devoted in response to this Court's show cause order, however, the Court does not view any further sanctions to be necessary in this case." But the court did opine that proceeding as B-Line did in the present case violates Rule 9011(b), that creditors should avoid doing so, and that such proofs of claim should be filed with supporting documents (or with an explanation for their absence) in the future. This opinion, which is published, has been cited by other bankruptcy courts and at least one bankruptcy appellate panel.
As B-Line explains, the bankruptcy court's order essentially prohibits B-Line's current 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. Complying with this order will significantly increase B-Line's cost of doing business.
B-Line appealed the bankruptcy court's order to the BAP, which affirmed in a 2-to-1 decision. The BAP majority determined that B-Line was appealing two distinct issues: (1) the bankruptcy court's determination that B-Line violated Rule 9011(b), and (2) the bankruptcy court's warning that B-Line and other entities not engage in similar behavior in the future. On the Rule 9011(b) violation, the BAP concluded that the issue was moot because the bankruptcy court imposed no monetary sanctions on B-Line. The BAP also determined that addressing the second issue was unnecessary because the warning was "not final" and because deciding the matter would, in any event, require the BAP to render a constitutionally prohibited advisory opinion. For these procedural reasons, the BAP never substantively addressed the bankruptcy court's holding that B-Line violated Rule 9011(b) and thereby engaged in sanctionable conduct. The dissenting member of the BAP, on the other hand, concluded that B-Line's appeal was not moot and that its proof of claim had not violated Rule 9011(b). This appeal followed.
In a bankruptcy appeal, we independently review the decision of the bankruptcy court that has been appealed to the BAP. Tidewater Fin. Co. v. Curry (In re Curry), 509 F.3d 735, 735 (6th Cir.2007). The bankruptcy court's findings of fact are reviewed under the clear-error standard, and its conclusions of law are reviewed de novo. Behlke v. Eisen (In re Behlke), 358 F.3d 429, 433 (6th Cir.2004).
We review the bankruptcy court's imposition of sanctions using the abuse-of-discretion standard. Corzin v. Fordu (In re Fordu), 201 F.3d 693, 711 (6th Cir.1999). An abuse of discretion occurs where the reviewing court has "a definite and firm conviction that the court below 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) (citation, alterations, and internal quotation marks omitted). "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." Id. at 608.
We will first address the issue of mootness, which was the basis of the BAP's decision to dismiss B-Line's appeal. The BAP generally concluded that B-Line's appeal was both moot and that B-Line was requesting an impermissible advisory opinion. We respectfully disagree with both conclusions.
To begin with, the BAP analyzed the potential mootness of B-Line's appeal by splitting the bankruptcy court's ruling into...
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