In re Kirkland

• Decision Date: 21 December 2007
• Docket Number: Bankruptcy No. 01-15748-M7.,BAP No. NM-07-021.
• Citation: 379 B.R. 341
• Parties: In re Patricia M. KIRKLAND, Debtor. B-Line, LLC, Successor in interest to Next Card, Appellant, v. Patricia M. Kirkland and Michael J. Caplan, Trustee, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

379 B.R. 341

In re Patricia M. KIRKLAND, Debtor B-Line, LLC, Successor in interest to Next Card, Appellant, v. Patricia M. Kirkland and Michael J. Caplan, Trustee, Appellees.

BAP No. NM-07-021.

Bankruptcy No. 01-15748-M7.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

December 21, 2007.

Submitted on the briefs:^* Linh K. Tran, Seattle, Washington, for Appellant.

Michael K. Daniels, Albuquerque, New Mexico, for Appellees.

Before BOHANON, MICHAEL, and BROWN, Bankruptcy Judges.

OPINION

BROWN, Bankruptcy Judge.

Appellant B-Line, LLC appeals an order of the bankruptcy court disallowing its claim against Patricia M. Kirkland ("Debtor"). The bankruptcy court sustained the Objection of Michael J. Caplan ("Trustee"), whose only objection to the claim was that it failed to meet the requirements of the Federal Rules of Bankruptcy Procedure because the claimant had not attached any supporting documentation.¹ Holding that 11 U.S.C. § 502(b) provides the exclusive grounds for disallowance of a claim and that the Rules may not modify substantive rights, we reverse.²

I. BACKGROUND

Debtor filed a voluntary Chapter 13 petition on August 22, 2001. In her schedule of unsecured creditors, Debtor listed a debt for credit card purchases to "Nextcard" in the amount of $5,004. On September 25, 2001, "NextBank, NA/B-Line, LLC" filed a proof of claim (the "Claim") on Official Form 10 in the amount of $5,328.19 as an unsecured claim. There was no supporting documentation attached to the Claim.

The attempt at debt restructuring failed, and the case was converted to a case under Chapter 7 on May 20, 2005. Trustee was appointed to serve as the Chapter 7 trustee. On June 22, 2006, Trustee filed an objection to the Claim (the "Objection"). Thereafter, the Appellant filed a Notice of Transfer of Claim (the "Notice of Transfer"), indicating the Claim had been transferred to it by "Next Card." No supporting documentation was attached to the Notice of Transfer.

The bankruptcy court held a hearing on the Objection on November 15, 2006. Neither the Appellant nor the Trustee offered any additional evidence regarding the Claim. The Appellant asked the bankruptcy court to take judicial notice of the schedules filed by Debtor, and the court did so. The Trustee raised an additional argument regarding the Appellant's ownership of the Claim, because it had also failed to attach supporting documentation to the Notice of Transfer. The bankruptcy court did not consider this argument because the transferor had not objected to the Notice of Transfer pursuant to Federal Rule of Bankruptcy Procedure 3001(e)(2).³ But the bankruptcy court sustained Trustee's objection and disallowed the Claim on the ground that, "[Appellant] was required to present some evidence that it has a valid claim. Failing that, the Claim must be disallowed."⁴ Appellant now, brings this timely appeal.

II. APPELLATE JURISDICTION

This Court has jurisdiction to hear timely-filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.⁵ Neither party elected to have this appeal heard by the United States District Court for the District of New Mexico. The parties have therefore consented to appellate review by this Court.

A decision is considered final "if it `ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'"⁶ In this case, the order of the bankruptcy court disallowed Appellant's Claim. Nothing remains for the bankruptcy court's consideration. Thus, the decision of the bankruptcy court is final for purposes of review.⁷

III. STANDARD OF REVIEW

To resolve the issue on appeal we must interpret and apply § 502 and Federal Rule of Bankruptcy Procedure 3001. The interpretation of federal statutes and rules involves legal questions. On appeal, we review legal conclusions under a de novo standard.⁸ De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision.⁹

IV. ANALYSIS

Section 502(a) of the Bankruptcy Code provides that, once a proof of claim is filed, it is "deemed allowed," unless a party in interest objects to it. Section 502(b) states that, once an objection is lodged, the court "after notice and a hearing, shall determine the ... claim[.]" It further mandates that the court "shall allow" the claim, except to the extent it falls within one of nine enumerated categories of prohibited claims. The statute does not list among the grounds for disallowance the proof of claim's failure to adhere to the requirements of the Federal Rules of Bankruptcy Procedure, namely Rule 3001. Rule 3001(a) requires the proof of claim filed to "conform substantially to the appropriate Official Form," which form imposes a requirement to attach supporting documents. Rule 3001(c) directs creditors filing a proof of claim "based on a writing" to attach either the original or a duplicate of the writing. Rule 3001(f) provides that a claim "filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." But neither the statute nor the Rule expressly addresses the consequence of filing a proof of claim that fails to meet all of the Rule's requirements.

Courts disagree on whether an objection based solely on a claim's nonconformity, in this case failing to attach supporting documents, constitutes a ground for disallowance of the claim. As discussed further below, some courts addressing this issue have held that § 502(b) provides the exclusive basis for disallowance of claims (the "Exclusive View").¹⁰ Other courts find the failure to attach documents to be a valid ground for a claim objection (the "Nonexclusive View"). Once an objection is lodged, according to the Nonexclusive View, if the creditor fails to remedy the defect or to otherwise prove its claim at hearing, then the claim must be disallowed.¹¹

In the present case, at the hearing, the Appellant offered only the Claim and the Debtor's schedules, which also reflected an undisputed claim in substantially the same amount. The Appellant's evidence was meager, but it was nevertheless some evidence.¹² The Trustee offered no evidence to disprove the Claim, nor any legal argument that the Claim was unenforceable under non-bankruptcy law. The bankruptcy court disallowed the Claim, based solely on the lack of supporting documentation, thereby adopting the Nonexclusive View.

We adopt the Exclusive View and reverse the bankruptcy court. The Exclusive View adheres to the plain language of 502(b). It recognizes an objection based on lack of supporting documentation, but only when the absence of documentation would render a claim unenforceable under non-bankruptcy law. Moreover, the Exclusive View supports the overall purpose of the Rules. We reject the Nonexclusive View as unnecessary to curb against false claims or to enable a trustee to fulfill his duty to review claims. And, the Nonexclusive View would invite additional technical objections regarding "substantial conformity" with the Rule.

A. The Exclusive View Adheres to the Plain Language of the Statute.

The Exclusive View gives effect to the plain language of the statute. Section 502 uses mandatory language, by providing that the court "shall" allow a claim "except to the extent that" one of nine exceptions apply. None of these exceptions recognize the failure to adhere to the requirements of the Rules. The list of exceptions is not preceded by the word "including," which would have established a non-exclusive list.¹³ Thus, the statute speaks in absolute terms: the court "shall allow" a claim "except to the extent that" the claim falls into one or more of the enumerated categories of claims.

The Rules governing claims cannot vary the terms of the statute by providing additional bases for an objection.

The Bankruptcy Rules do not effect [sic] substantive rights, "for when Congress accorded the Supreme Court authority to promulgate the Bankruptcy Rules, it stated `[s]uch rules shall not abridge, enlarge, or modify any substantive right.'" The alteration or elimination of a creditor's proof of claim effects a substantive right. Bankruptcy Rule 3001 does not enlarge the Debtors' statutory reasons to disallow a claim; it merely "defines the process by which [the claims] may be effected." Therefore, even if an objecting party files an objection asserting facts in a form sufficient to rebut the presumption of Bankruptcy Rule 3001(f), the objection alone does not "implicate any of the statutory reasons which Congress has determined warrant denial of a claim."¹⁴

To date, only three appellate courts have considered this issue. In In re Stoecker,¹⁵ the Chapter 7 trustee objected to a secured creditor's proof of claim on the grounds that its judgment liens were preferential and it did not attach the necessary documentation. The creditor defended in part based on its assertion that its prior settlement with the trustee precluded this subsequent attack on its claim. The bankruptcy court disallowed the claim due to the failure to attach documentation. The district court reversed and remanded to allow the creditor to submit the required documentation.

In Stoecker, the Court of Appeals for the Seventh Circuit affirmed the district court in part, ruling that a creditor should be allowed to amend its claim "provided that other creditors are not harmed by the belated completion of the filing."¹⁶ It held that a creditor should not be barred from establishing its claim, as nothing in the statute or the Rules "justifies so disproportionate a sanction for a harmless error."¹⁷ The Seventh Circuit disagreed with the notion that compliance with the Rule was mandatory. "All that the rule says, so far as bears on this case, is that the filing of a proof of claim with the required documentation is prima facie evidence that...