In re Freeman

540 B.R. 129

In re: Angela P. Freeman, Debtor.

Bky. No. 14–19611 ELF

United States Bankruptcy Court, E.D. Pennsylvania.

Signed November 4, 2015

Michael W. Gallagher, East Norriton, PA, for Debtor.

OPINION

ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE

I. INTRODUCTION

In this chapter 13 case, Debtor Angela P. Freeman (“the Debtor”) seeks both

(1) the disallowance of a proof of claim as unenforceable due to the expiration of the applicable statute of limitations; and

(2) sanctions against the claimant under Fed. R. Bankr. P. 9011for the filing of the proof of claim.

The Debtor frames her request for sanctions as an attempt to protect the bankruptcy claims allowance process from the conduct of a creditor who

file[d] a “stale” Proof of Claim ... with knowledge that the claim is unenforce[a]ble; not in the belief that the claim is valid, but in the hope that it will not be noticed, or that the Debtor will have no incentive to object.

(Debtor's Mem. at 7) (unpaginated). The Debtor asserts that such creditor conduct harms other creditors who hold and timely file valid proofs of claim by diluting their distribution from the bankruptcy estate. (Id.at 6).

For the reasons set forth below, I will disallow the proof of claim at issue because it is unenforceable under applicable nonbankruptcy law. However, I will deny the Debtor's request for sanctions because sufficient grounds do not exist in this case to impose sanctions on the claimant under Rule 9011for filing a “stale proof of claim.”¹

II. PROCEDURAL HISTORY

The Debtor filed a chapter 13 bankruptcy case on December 5, 2014. On February 23, 2015, Palisades Collections, LLC (“Palisades”) filed a proof of claim (“the POC”), asserting a general unsecured claim in the amount of $316.23. The claim is based on a bill from Verizon Pennsylvania, Inc. (“Verizon”) for unpaid telephone services. The POC identified Palisades as the creditor, but stated that notices should be sent to Vativ Recovery Solutions, LLC (“Vativ”). The POC was signed under penalty of perjury by Stephen Braun, who identified himself as Vativ's Assistant VP of Operations/Director of Litigation.

The POC was supported by copies of:

(1) a bill from Verizon dated April 28, 2004;

(2) a Bill of Sale of certain receivables from Verizon to Palisades Acquisition IX, LLC (“Palisades Acquisition”); and

(3) an assignment from Palisades Acquisition to Palisades of “certain receivables Palisades Acquisition purchased from Verizon.”

On August 4, 2015, the Debtor filed what she styled as a “Motion for Sanctions Pursuant to FRCP 11and FRBP 9011” (“the Motion”) (Doc. # 49).²In the Motion, the Debtor pointed out that the POC states neither the date of Verizon's last service nor the date of the last payment. However, based on the attached Verizon bill from April 2004—more than ten (10) years before the Debtor commenced her bankruptcy case—the Debtor asserted that the applicable statute of limitations, 42 Pa.C.S. § 5525(a), has expired and that the claim “is completely without the claimed value, uncollectable [sic] at law, and without reasonable basis in law or fact.” (Motion ¶ 10).

Only the Debtor's counsel appeared at the hearing on the Motion on September 1, 2015. At the conclusion of the hearing, I took the matter under advisement. The Debtor filed a memorandum of law in support of her position on September 15, 2015 and the matter is ready for decision.

III. DEBTOR'S STANDING TO OBJECT TO THE POC

The Debtor seeks disallowance of the Proof of Claim and monetary sanctions for prosecuting a successful objection to the Proof of Claim. Disallowance of the claim is requested under 11 U.S.C. § 502(b)(1).

The Debtor also requests that sanctions be imposed for the asserted violation of Fed. R. Bankr. P. 9011(b). In making this request, the Debtor asserts that:

• the filing the POC was for the improper purpose of securing payment on an invalid claim, seeFed. R. Bankr. P. 9011(b)(1)and

• the claimant's failed to make a reasonable inquiry into the validity of the POC, seeFed. R. Bankr. P. 9011(b)(2).

(Motion ¶¶ 13–14). In connection with the request for sanctions the Debtor posits that Palisades and Vativ filed an invalid claim based upon the expectation that the Debtor lacks a sufficient incentive to object to the claim and would not do so,³and that, similarly, the chapter 13 trustee was unlikely to object to the claim.⁴

The Debtor's statement, that the claimant would surmise that she lacks an incentive to object to an invalid proof of claim appears accurate. In this case, the Debtor's First Amended Plan, which was confirmed by order entered on August 19, 2015, provided for the payment of a fixed, base amount in plan payments and a pro-rata distribution to unsecured creditors after the distribution to more senior classes has been completed. (SeeDoc. # 's 40, 57). Thus, the allowance or disallowance of the POC cannot have any effect on the Debtor's payment obligations under the confirmed plan. Nor has the Debtor suggested that any of the allowed claims are nondischargeable. (If there were nondischargeable claims, the Debtor would have a financial incentive to seek disallowance of invalid claims so as to increase the distribution to the holders of the nondischargeable claims and decrease the balance due on the nondischargeable debt after the completion of the case).

The Debtor's candid observation that she lacks an incentive to object to the POC leads to a threshold question whether the Debtor even has standing to object to the POC, a question that the court is obliged to consider sua sponte. See, e.g., In re Gronczewski,444 B.R. 526, 532 n. 4 (Bankr.E.D.Pa.2011)(citing cases).

“The linchpin of standing, in the constitutional sense, is that the party seeking relief demonstrate exposure to some actual or threatened injury.” In re Gronczewski,444 B.R. 526, 533 (Bankr.E.D.Pa.2011)(quoting and citing cases) (quotations omitted). The Bankruptcy Code also addresses standing. Section 502(a) of the Bankruptcy Codeprovides that a proof of claim is deemed allowed “unless a party in interest ... objects.” 11 U.S.C. § 502(a). The Code does not define a “party in interest.” To give meaning to the term, many courts have concluded that, in the bankruptcy context, a party must have a “pecuniary interest” in the outcome of the dispute. See, e.g., In re Kaiser,525 B.R. 697, 705 (Bankr.N.D.Ill.2014); In re Bozman,403 B.R. 494, 496 (Bankr.S.D.Ohio 2006); In re Manshul Constr. Corp.,223 B.R. 428 (Bankr.S.D.N.Y.1998).

Here, to the extent the Debtor emphasizes that the filing and allowance of invalid claims does not have much impact on her, but rather harms creditors holding legitimate, allowed claims by diluting their distribution under her chapter 13 plan, she does not appear to be raising issues in which she has a pecuniary interest; she appears to be asserting the rights of third parties, not her own. A litigant's assertion of the rights of third parties is at odds with generally accepted principles of standing. See, e.g., Twp. of Piscataway v. Duke Energy,488 F.3d 203, 209 (3d Cir.2007)(as a matter of prudential standing, a “plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties”); see also Powers v. Ohio,499 U.S. 400, 410–11, 111 S.Ct. 1364, 113 L.Ed.2d 411 (1991).

Despite the concerns expressed above, I am satisfied that the Debtor has the requisite personal interest in the allowance or disallowance of the POC to provide her with standing to object to the claim.

Many confirmed chapter 13 plans are not completed, resulting in dismissal of the case under 11 U.S.C. § 1307(c)(4) and (6). SeeEd Flynn, Chapter 13 Case Outcomes by State,33–AUG Am. Bankr.Inst. J. 40, 76 (August 2014). Upon dismissal, a debtor remains liable on prepetition claims. In light of the real risk that a plan will not be completed, leaving the debtor liable on the prepetition claims, the debtor has a legitimate interest in seeing that only valid claims (to which he or she has no defense) are paid by plan distributions. In addition, if the chapter 13 trustee makes a distribution on a time-barred claim, the debtor has a legitimate concern that the trustee's payment pursuant to the debtor's plan may be asserted as an “acknowledgment” of the debt, resulting in the re-commencement of the limitations period.⁵SeeU.S. v. Quinones,36 B.R. 77, 79 (D.P.R.1983). But see In re Seltzer,529 B.R. 385, 389–90 (Bankr.M.D.Ga.2015). Consequently, I conclude that the Debtor in this case has a sufficient stake in the outcome of the dispute to confer standing to object to this POC.⁶

IV. DISALLOWANCE OF THE POC

A. Procedural Irregularities

In seeking disallowance of the POC by filing the Motion, the Debtor did not invoke the proper procedure. Fed. R. Bankr. P. 3007provides for disallowance of claims to be requested by objection, not motion.

There is a significant difference between a contested matter arising from a claims objection and one arising by motion. Motion practice typically imposes a response requirement, see, e.g.,L.B.R. 9014–3(I) (Bankr.E.D.Pa.) (“an answer to a motion shall be filed and served ... no later than 14 days after the date on which the movant serves the motion”),⁷with the potential for the grant of relief by default if no timely response is filed. Claims objection practice includes neither a response requirement nor a default procedure for failing to respond.⁸

The Debtor also erred by titling her motion as a motion for sanctions without indicating in the title that she was seeking disallowance of the POC. Nevertheless, these procedural irregularities do not preclude consideration of the merits of the Debtor's objection to the POC.

In both the body of the Motion and the accompanying proposed order, the Debtor made it crystal clear that she was objecting to the POC and was requesting its disallowance. Further, this matter proceeded in a manner entirely consistent with claims objection procedure, not motion procedure. The Debtor...