In re Vaughn

536 B.R. 670

In re: Sherry Lynne Vaughn, Debtor.

Case No. 15–02896–dd

United States Bankruptcy Court, D. South Carolina.

Signed September 2, 2015

Entered September 3, 2015

F. Lee O'Steen, O'Steen Law Firm, LLC, Rock Hill, SC, for Debtor.

ORDER DISALLOWING CLAIM

David R. Duncan, Chief US Bankruptcy Judge, District of South Carolina

THIS MATTER comes before the Court on the Objection to Claim of LVNV Funding, LLC (“Objection”) filed by Sherry Lynne Vaughn (“Debtor”) and the Response to Objection to Claim (“Response”) filed by LVNV Funding, LLC (“LVNV” or “Creditor”). For the reasons set forth below, after careful consideration of the applicable law, arguments of counsel, and evidence submitted, the Court sustains the objection and disallows the claim.

I. Facts and Procedural History

Debtor filed for protection under chapter 13 of the Bankruptcy Code on May 29, 2015.¹ She filed her schedules with her bankruptcy petition. On schedule F, she listed a debt to “Lvnv Funding Llc” at “Po Box 10497 Greenville, SC 29603.”² The claim is described as “Opened 3/01/10 Factoring Company Account Citibank South Dakota N.A.” The amount of the claim is listed as $2,043 owed on account number ... 6063. Debtor did not mark the claim as contingent, unliquidated or disputed. She filed her chapter 13 reorganization plan that same date, which proposes, inter alia, to pay unsecured creditors with allowed claims approximately a ten percent dividend.³

On June 23, 2015, a proof of claim was timely filed on behalf of “LVNV Funding, LLC its successors and assigns as assignee of Citibank (South Dakota), N.A” (the “LVNV proof of claim”).⁴ The proof of claim states that notices should be sent regarding this claim to Resurgent Capital Services at PO Box 10587 Greenville, SC 29603–0587. The debt listed in the proof of claim is $1,766.70 owed on account number ... 6063. Records attached to the proof of claim reflect that the last payment credited to the account was made on August 8, 2009, and the claim was transferred to LVNV on March 10, 2010.

On June 30, 2015, Debtor filed her Objection to the LVNV proof of claim, arguing that the claim is unenforceable under South Carolina law because enforcement of the debt is barred by South Carolina's three year statute of limitations.⁵ The Objection states that Debtor believes the last activity on the account was in 2010. LVNV responded, arguing that by listing the claim on her schedules, Debtor revived the debt under South Carolina law⁶ and the statute of limitations does not apply. On August 4, 2015, Debtor amended her schedules, listing the debt in question and a variety of other debts as disputed.

The Court held a hearing on the Objection and Response on August 10, 2015. At the hearing, Debtor argued that the claim should be disallowed because it is not enforceable under state law, is not revived by its inclusion on the schedules, and that permitting revival of the debt by listing it in bankruptcy schedules is contrary to federal bankruptcy law. Creditor responded that South Carolina law requires only a minimal acknowledgement of the debt to revive it, which includes listing the debt on bankruptcy schedules without noting the debt as disputed. Creditor asserts that Debtor is bound by her schedules, thus including the debt without notation of dispute is an assertion that the debt is recoverable in the bankruptcy proceeding. At the close of the hearing the Court took the matter under advisement.⁷

II. Discussion

At issue is allowance of LVNV's proof of claim. Debtor owed a debt⁸ to LVNV's predecessor, that is, she was liable on a claim in its favor. A creditor has a claim for bankruptcy purposes if it has a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” 11 U.S.C. § 101(5)(A). Creditors may file a proof of claim. 11 U.S.C. § 501(a). “A claim ... proof of which is filed under section 501 of this title, is deemed allowed unless a party in interest ... objects.” 11 U.S.C. § 502(a). An unsecured, non-priority creditor's right to payment in a reorganization bankruptcy case exists by virtue of it having an allowed claim. See Fed. R. Bankr. P. 3021.

Properly filed proofs of claim, see Fed. R. Bankr. P. 3001(c), are prima facie evidence of the amount and validity of the claim. Fed. R. Bankr. P. 3001(f). If a party in interest objects to a properly filed proof of claim, the burden of proof shifts to the objecting party to overcome the prima facie presumption by offering evidence sufficient “to demonstrate the existence of a true dispute ... [with] probative force equal to the contents of the claim.” Falwell v. Roundup Funding, LLC (In re Falwell), 434 B.R. 779, 784 (Bankr.W.D.Va.2009). This evidence must show that the claim falls within one of the categories of disallowed claims in § 502, such as being “unenforceable against the debtor ... under ... applicable law.” 11 U.S.C. § 502(b)(1). Although the ultimate burden of proof rests on the creditor to produce evidence and argument establishing the claim, Falwell, 434 B.R. at 784, this burden-shifting does not alter any substantive state law creating the claim, absent a prevailing provision in the Bankruptcy Code. Raleigh v. Ill. Dept. of Rev., 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) (holding that despite bankruptcy claims allowance burden shifting, Illinois tax law required the ultimate burden of proof to rest on the debtor; no bankruptcy law consideration or Code provision was counter to the state law requirement). The proper analysis of an objection to a proof of claim therefore requires not only consideration of the claimant's rights under state law, but also considering those rights in the context of the Bankruptcy Code to determine if other federal interests require a different result. Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

A. Federal Interests at Issue

State law and non-bankruptcy federal law supply the underpinnings for much of the Bankruptcy Code. Property interests, security interests, and the debtor-creditor relationship turn on non-bankruptcy law. Referencing bankruptcy law prior to the current Code, the United States Supreme Court noted “ ‘the Bankruptcy Act recognizes and enforces the laws of the state affecting dower, exemptions, the validity of mortgages, priority of payment and the like.’ ” Butner, 440 U.S. at 54 n. 9, 99 S.Ct. 914 (quoting Stellwagen v. Clum, 245 U.S. 605, 613, 38 S.Ct. 215, 62 L.Ed. 507 (1918) ). “Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interest should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” Id. at 55, 99 S.Ct. 914. This extends to security interests. Id. No reason exists why a reference to state law and consideration of contrary federal interests would not also extend to considering state law limitations on enforceability of claims to collect a debt.

Distilled to its essence, the question is whether, if South Carolina law revives a stale debt simply by its mention in lists and schedules filed in connection with a bankruptcy petition, some federal principle supplants the state law rule. The short answer to that is affirmative. “The bankruptcy system depends upon the cooperation and honesty of voluntary debtors.”

In re Andrews, 428 B.R. 855, 860 (Bankr.E.D.Ark.2010). It provides harsh penalties for debtors who do not fully disclose their financial affairs, including denial of discharge or dischargeability if a debtor knowingly fails to disclose transferred assets, 11 U.S.C. §§ 727(a)(4) and 523(a)(10) ; imposition of criminal penalties for failure to list and disclose property, 18 U.S.C. § 152(7) ; and adverse applications of collateral estoppel, res judicata, and/or judicial estoppel if causes of action are not listed and fully disclosed, e. g., Superior Crewboats Inc. v. Primary P & I Underwriters et. al. (In re Superior Crewboats), 374 F.3d 330, 335 (5th Cir.2004) (holding that failure to disclose a $2.5 million prepetition personal injury claim estopped debtors from prosecuting the cause of action). Bankruptcy law favors rules that encourage full disclosure, Biesek v. Soo Line R. Co., 440 F.3d 410, 413 (7th Cir.2006) ; it is the “high” and “onerous” price debtors pay in exchange for their discharge, In re Arana, 456 B.R. 161, 169 (Bankr.E.D.N.Y.2011). Indeed, state law on revival of debt discharged in bankruptcy⁹ recognizes such policy considerations and supremacy law concerns.

If the debt can be revived as contemplated by Creditor, the revival would occur because Debtor included a stale debt on her schedules. There are several problems with this. First, debtors preparing to file for bankruptcy generally obtain the information in the schedules from their records, public records, and credit reports. Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, § 29.0 et. seq., Sec. Rev. Apr. 1, 2009, www.Ch13online.com, last accessed August 21, 2015. That information and the debtor's recollection may be incomplete or contain errors; thus the Bankruptcy Rules permit debtors to amend their schedules “as a matter of course at any time before the case is closed.” Fed. R. Bankr. P. 1009(a). Because of the harsh penalties for omitting debts and assets, being all-inclusive on the schedules is consistent with the Code's principle of honest and full disclosure.

Second, the definition of the term “claim” as including unliquidated, contingent, unmatured, or disputed debts supports the idea of a need for full disclosure. The effect of reviving stale debts simply by including them in the lists would be to permit a creditor who slept on enforcement of its rights to have those rights revived by a debtor seeking relief from debt under federal law and acting consistent with a mandate of full disclosure....