Bankruptcy Judge Robert E. Nugent of Wichita, Kansas reminded lenders again why it is often a good idea to have an attorney who is familiar with complicated requirements of the Federal Rules of Bankruptcy Procedure prepare, or at least review, a Proof of Claim (“POC”) before filing it. 

Some of the most complicated POCs we help our clients prepare are those related to mortgage claims.  Indeed, it was an improper mortgage related POC that resulted in Judge Nugent issuing a sanction that was 16 times the amount in controversy against the lender in In re Milliman, 17-10393 (Bankr. D. Kan. March 23, 2018).

Rule 3001(c)(2)(C) sets forth the documents that MUST be submitted when the creditor claims a security interest in the debtor’s principal residence. What Rule 3001(c)(2)(C) doesn’t do is point the lender to the proper forms to submit with its POC; these requirements are laid out in Bankruptcy Official Form 401A “Mortgage Proof of Claim Attachment” and the instructions regarding the same.  Additionally, if an escrow account has been established in connection with the claim, an escrow account statement prepared as of the date the petition must be filed and in a form consistent with applicable non-bankruptcy and also attached to the POC.

Rule 3001(c)(2) gives bankruptcy judges the authority to sanction creditors for failing to follow these requirements when filling POCs in cases where the debtor is an individual.   In
In re Milliman, Judge Nugent sanctioned the mortgage lender for “willful failure to corporate” with the Rules. Specifically, Judge Nugent found the Lender: (1) filed a proof of claim asserting that the escrow shortage was $4,383 when it was admittedly $369; (2) ignored the debtor’s informal attempts at correcting the proof of claim for more than 200 days; (3) forced the debtor to file a formal claim objection; (4) ignored the debtor’s formal discovery requests; and (4) put the debtor, the trustee and the court “to unnecessary expense, effort, and frustration,” the judge said. As a sanction under Bankruptcy Rule 3001(c)(2)(D), Judge Nugent directed the lender to pay the debtor’s counsel fees of almost $6,000, which he found “reasonable.”

Judge Nugent went on to say that creditors “need to know that courts take filing incorrect proofs of claim seriously.” Recognizing that the sanction “exceeds the amount in controversy,” he reminded the lender “that had it paid any attention to this matter…[the debtor] would not have had to incur this expense.”

Judge Nugent’s ruling is a gooe d reminder that the requirements of the Bankruptcy Code and the Bankruptcy Rules of Procedure are complicated. A little outside help to make sure that the proper forms and procedures are followed in Bankruptcy Court is always #WorthIt!

Questions or comments on this blog? Contact one of our Omaha attorneys, Sioux City attorneys, or Sioux Falls attorneys today!


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