FYI: 9th Cir Holds Debtor's Acknowledgement of Debt Does Not Excuse Untimely Proof of Claim

The U.S. Court of Appeals for the Ninth recently held that if a creditor wishes to participate in the distribution of a debtor's assets under Chapter 13, it must timely file a proof of claim, and the debtor's acknowledgment of the debt owed to the creditor does not relieve the creditor of this affirmative duty.

 

A copy of the opinion is available at:  Link to Opinion

 

The debtor filed a Chapter 13 bankruptcy petition.  The bankruptcy court issued a notice with a deadline for creditors to file a proof of claim.  The creditor was sent a copy of the notice with the deadline, as well as all versions of the debtors' Chapter 13 plan which was amended several times. 

 

Four months after the deadline to file proof of claims passed, the creditor filed one secured and two unsecured claims with the bankruptcy court.  After a hearing on the late filed claims, the bankruptcy court disallowed the claims because the proof of claims were not timely filed.

 

The creditor appealed, and the Ninth Circuit Bankruptcy Appellate Panel ("BAP") affirmed the decision.  This appeal followed.

 

As you may recall, in a bankruptcy proceeding, a debtor must file a schedule of assets and liabilities and a statement of financial affairs. Fed. R. Bankr. P. 1007(b)(1). In order to participate in and receive distributions through a Chapter 13 bankruptcy, a creditor must file a valid "proof of claim" and go through the allowance process set forth in 11 U.S.C. § 502. In re Blendheim, 803 F.3d at 484–85.  A secured creditor that does not wish to participate in a Chapter 13 plan, or that fails to file a timely proof of claim, does not forfeit its lien.  Id.

 

A bankruptcy court may disallow a claim for many reasons, including if the proof of claim was untimely. 11 U.S.C. § 502(b)(9); In re Blendheim, 803 F.3d at 485. Here, the creditor admitted it filed its proof of claims late. 

 

However, the creditor argued that the court should allow it take part in the plan because its debt was listed on the bankruptcy schedules.  The Ninth Circuit BAP disagreed.

 

The Federal Rules of Bankruptcy Procedure provide that, in a Chapter 13 plan, "[a]n unsecured creditor or an equity security holder must file a proof of claim or interest for the claim or interest to be allowed." Fed. R. Bankr. P. 3002(a). The Ninth Circuit previously made clear that the language in the statute should be given its "plain meaning" and enforced accordingly. Gardenhire v. IRS (In re Gardenhire), 209 F.3d 1145, 1148 (9th Cir. 2000).

 

The Ninth Circuit noted that the debtor's schedules are used by bankruptcy courts to determine whether debtors are eligible for relief, and by creditors to determine if they want to participate in the plan. See Guastella v. Hampton (In re Guastella), 341 B.R. 908, 918 (B.A.P. 9th Cir. 2006); Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 785 (9th Cir. 2001). A creditor may chose not to pursue a claim after evaluating all of a Chapter 13 debtor's debts and the proposed repayment plan. Perry v. Certificate Holders of Thrift Sav., 320 F.2d 584, 589 (9th Cir. 1963).

 

The Court also noted that "[t]he proof of claim plays the important role of 'alert[ing] the court, trustee, and other creditors, as well as the debtor, to claims against the estate,' and the creditor's intention to enforce the claims."  See In re Daystar of Cal., Inc., 122 B.R. 406, 408 (Bankr. C.D. Cal. 1990); see also Adair v. Sherman, 230 F.3d 890, 896 (7th Cir. 2000); Perry, 320 F.2d at 589.

 

The Ninth Circuit agreed with other courts that disallowed late filed claims even where the debt is listed on the debtor's bankruptcy schedules.  See, e.g., Bowden v. Structured Invs.

Co. (In re Bowden), 315 B.R. 903, 907 (Bankr. W.D. Wash. 2004); In re Greenig, 152 F.3d 631, 632–34 (7th Cir. 1998).

 

The creditor argued that by listing the debt on her schedule, the doctrine of judicial admissions applies, and the debtor is required to pay all debts listed. 

 

Judicial admissions are formal admissions in court pleadings which have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact.  Judicial admissions are conclusively binding on the party who made them.

 

The Ninth Circuit held that it has recognized the judicial admissions doctrine, but that it has never held that a bankruptcy schedule qualifies as a formal admission under the doctrine.  The Court did not reach that issue here either.  

 

Instead, the Court held that listing a debt on the bankruptcy schedules, even if it is a judicial admission, does not remove the requirement that a proof of claim be filed.  The Ninth Circuit explained "Congress chose to require Chapter 13 creditors to file proofs of claims that demonstrate their intent to enforce their claims; a judicial admission by a debtor does not fulfill this strict requirement or its purpose."

 

The creditor tried to argue that listing the debt on the schedules was an informal proof of claim.  "Creditors, failing to file a timely formal proof of claim, often assert that an informal proof of claim can function to establish the creditor's claims."  See Cty. of Napa v. Franciscan Vineyards, Inc. (In re Franciscan Vineyards, Inc.), 597 F.2d 181, 183 (9th Cir. 1979).

 

"To qualify as an informal proof of claim: (1) the document must state an explicit demand showing the nature and amount of the claim against the estate, and (2) the document must evidence an intent to hold the debtor liable." Sambo's Restaurants, Inc. v. Wheeler (In re Sambo's Rests., Inc.), 754 F.2d 811, 815 (9th Cir. 1985).

 

In the Ninth Circuit, establishing an informal proof of claim requires among other things an affirmative action by the creditor within the required time frame. In re Bowden, 315 B.R. at 907 (rejecting argument that debtor's schedules alone suffice to establish an informal proof of claim). Here, the creditor took no affirmative action and relied solely on the bankruptcy schedules.  The Court stated that the schedules do not demand or demonstrate the intent to hold the debtor liable. 

 

The creditor further argued that the debtor's bankruptcy schedules constitute a debtor's proof of claim. However, the Court again did not agree. First, the bankruptcy schedules were not filed within the time period allowed for filing proofs of claim, and did not otherwise meet the requirements of Rule 3004. Second, the schedules do not qualify as a debtor's proof of claim. "Rule 3004 requires that debtors make an additional showing of their desire to include an unasserted claim in their Chapter 13 plan after receiving notice of which creditors intend to enforce their claims." No such additional showing was made by the debtor.

 

Finally, the creditor argued it would be inequitable if its claims are not allowed.  The Ninth Circuit stated that even though it might not be fair, it noted that it previously "has repeatedly held that the deadline to file a proof of claim in a Chapter 13 proceeding is rigid, and the bankruptcy court lacks equitable power to extend this deadline after the fact." In re Gardenhire, 209 F.3d at 1148.  Further explaining, the Court noted that it would be difficult for creditors to get a fresh start if creditors are able to continuously add claims after the deadlines expire. In re Goodwin, 58 B.R. at 77).

 

Accordingly, the Court held that in order to participate in distributions of a debtor's assets under her Chapter 13 plan, the creditor was required to file a proof of claim by the prescribed deadline, and the bankruptcy court properly rejected them.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Fla App Ct (2nd DCA) Holds Substituted Mortgagee Need Not Prove Standing at Time of Substitution

The District Court of Appeal of Florida, Second District, recently confirmed that a substituted plaintiff would have to demonstrate its standing to enforce a note and mortgage at the time of trial, and the original plaintiff's standing at the time the foreclosure complaint was filed.

 

In so ruling, the Court rejected the argument a substituted mortgagee must also prove its standing at the time of a court-ordered substitution.

 

A copy of the opinion is available at:  Link to Opinion

 

A mortgagee filed a foreclosure action asserting two counts: an action to reestablish the note which was allegedly lost or destroyed, and an action to foreclose the mortgage. A lis pendens against the property was also recorded.  The borrower defaulted and never set aside the judicial default.

 

The borrower subsequently filed for bankruptcy and surrendered his interest in the property to the bankruptcy trustee. The third party purchased the property from the bankruptcy trustee sale in July 2013.  The original mortgagee was placed into receivership with the FDIC, and the new mortgagee was substituted in its place as plaintiff in the foreclosure.

 

The third party property purchaser intervened in the foreclosure, and the substituted mortgagee filed a motion to amend the complaint to assert itself as the holder of the note.

 

At trial, the third party property purchaser argued that the substituted mortgagee plaintiff had to prove its standing to enforce the note at the time of the court-ordered substitution, the original plaintiff's standing to enforce the note when the complaint was filed, and the substituted mortgagee's standing at the time of trial.

 

The substituted mortgagee noted that the third party property purchaser did not raise any affirmative defense in their answer, and therefore the affirmative defense should be deemed waived. 

 

Nevertheless, the trial court dismissed the foreclosure.  The substituted mortgagee  appealed.

 

On appeal, the Second District focused on two issues with the trial court's ruling.

 

First, the Appellate Court held that the third party property purchaser should not have been heard to argue a defense at trial that it never previously raised.  The Court noted that an intervenor may not inject a new issue into the case.  By intervening, the Court held, the third party property purchaser must take the suit as it found it.  When the third party property purchaser intervened in the case, the borrower had already defaulted, and lack of standing was never asserted in any pleading. 

 

Therefore, the Appellate Court held the third party property purchaser could not raise the waived defense.

 

Second, the Court held that the substituted mortgagee would only need to demonstrate its standing to enforce the note and mortgage at the time of trial, and the original plaintiff s standing at the time the complaint was filed.

 

Thus, the Appellate Court rejected the third party purchaser's attempt to add "a third temporal point for required standing in foreclosure proceedings — a prior, substituted plaintiff's at the time of a court-ordered substitution — in order for a holder to enforce a mortgage."

 

Accordingly, the Second District reversed the trial court's dismissal.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 5th Cir Rejects FLSA "Loan Officer Overtime" Collective Action Based on Opt-Out State Court Class Settlement

The U.S. Court of Appeals for the Fifth Circuit recently held that claims of an opt-out class in a previously-settled California state class action that released any existing federal Fair Labor Standards Act ("FLSA") claims by mortgage loan officers against lenders that failed to pay them overtime were precluded by res judicata because the previous opt-out state court settlement met due process requirements, and the FLSA did not expressly or impliedly create an exception to the Full Faith and Credit Act, 28 U.S.C. § 1738.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2005, a group of mortgage loan officers sued two national banks and their affiliated mortgage companies in California state court, alleging that the loan offices were misclassified as exempt employees and not paid overtime, in alleged violation of the FLSA.  The case was removed to federal court and the parties reached a settlement during mediation in February 2011.

 

In March of 2011, another lawsuit (the "Lofton" case) was filed in California state court raising state law claims based on the same failure to pay overtime due to misclassification. One of the state law claims relied on alleged FLSA violations as its basis.

 

In April of 2011, the Lofton court preliminarily approved a $19 million settlement. The settlement process involved the sending of notices to class members, who had to either opt out or in by completing and returning the appropriate form.

 

The terms of the Lofton settlement released any claims existing under the FLSA, and the Lofton court granted final approval of the settlement in July of 2011, finding that class members "who have not opted out of the Settlement are bound by the release." The judgment was not appealed.

 

In the federal case, one of the lenders moved for summary judgment, arguing that the plaintiffs "were precluded by the Lofton settlement because none of [them] had opted out."

 

The trial court granted the lender's motion for summary judgment, holding that "the waiver of FLSA claims as part of the Lofton settlement has res judicata effect even though it was accomplished through an opt out class action." The trial court also held "that there was no due process violation that would preclude the application of res judicata because the interests of the Lofton class representative and class counsel were always aligned with the interests of the California Plaintiffs…" and, in addition, the Lofton judgment was final as of July 27, 2011 for purposes of res judicata. The plaintiffs appealed.

 

On appeal, the Fifth Circuit began by explaining that "a plaintiff asserting that preclusion should not apply because the prior class action settlement violated due process has the burden of proving a due process violation."

 

The Court then turned to address "the question of whether the Lofton settlement — in which a state court approved an opt out class action settlement that released FLSA claims — can preclude the California Plaintiff's FLSA claims at issue in this appeal."

 

The Court began its analysis with the federal Full Faith and Credit Act, 28 U.S.C. §1738,  which "mandates that the 'judicial proceedings' of any State 'shall have the same full faith and credit in every court within the United States … as they have by law or usage in the courts of such State … from which they are taken."

 

The Fifth Circuit found "instructive" the Supreme Court of the United States' two-part test in Matsushita Elec. Indus. Co. v. Epstein: "(1) whether the 'state law indicates that the particular claim or issue would be barred from litigation in a court of that state,' and (2) whether the FLSA expressly or impliedly creates an exception to the Full Faith and Credit Act such that we should not give preclusive to the judgment of the state court."

 

Addressing the first prong of the Matsushita test, the Fifth Circuit reasoned that "[u]nder California law, 'res judicata applies if (1) the decision in the prior proceeding is final and on the merits; (2) the present proceeding is on the same cause of action as the prior proceeding; and (3) the parties in the present proceeding or parties in privity with them were parties to the prior proceeding.'"

 

The Court pointed out that as part of the settlement process in Lofton, the notice warned class members that if they did not opt out by a date certain, they would be bound by the settlement. "Critically, the California Plaintiffs did not opt out."

 

Because the Lofton court found that the notice process satisfied due process requirement, the settlement terms were "fair reasonable and adequate," and then gave final approval to the settlement, the Court concluded that "standard California preclusion rules would bar the FLSA claims raised in the instant action unless the FLSA creates an exception to how preclusion rules apply."

 

The plaintiffs argued that "FLSA claims released as part of an opt out class action settlement can never be given preclusive effect against absent class members (unless the opt in) because they are not parties, or in privity with a party, with respect to the release of FLSA claims… [B]ecause an FLSA collective action requires that a party opt in under 29 U.S.C. § 216(b) in order to be bound by the collective action, they never became parties to the release of their FLSA claims given that they did not opt in."

 

In addition, the plaintiffs argued that the Lofton settlement should not have preclusive effect because it was not a final judgment given pending appeals related to the settlement and the plaintiffs in the instant case who did not submit claim forms in Lofton were not precluded because they did not receive any money in return for releasing their FLSA claims.

 

The Fifth Circuit examined the release of FLSA claims in the Lofton settlement, rejecting the plaintiffs' argument that "because they did not opt into the Lofton settlement, they did not become parties to the Lofton settlement with respect to releasing their FLSA claims."

 

The Court reasoned that while "[t]he California Plaintiffs would not have been parties without opting in had Lofton been an FLSA collective action … that was not the case. Instead, Lofton asserted state causes of action in an opt out class action, and the California Plaintiffs became parties to the Lofton settlement because they did not opt out. Thus, they became bound by the settlement terms, including the release of their FLSA claims."

 

The Fifth Circuit also rejected the plaintiffs' argument that "the FLSA creates an exception to how preclusion rules should apply", concluding that "the FLSA did not create a special exception to the enforceability of judicially approved settlement agreements."

 

Turning to the finality of the Lofton settlement, the Court rejected the plaintiffs' argument that the Lofton judgment was not final because an appeal was pending because "the relevant appeal for preclusion purposes would have been an appeal from the judgment entering the Lofton settlement, which did not occur. Because the judgment became final in 2011 when the time to appeal expired, "[t]he possibility that some later action may be taken to vacate or affect that judgment after the time to appeal has expired does not alter its finality."

 

The Fifth Circuit then addressed the plaintiffs who did not file a claim form in Lofton, finding that they "cannot avoid the preclusive effect of their failure to opt out of the Lofton settlement simply because they did not receive a payment." It distinguished its own 2015 decision in Bodle v. TXL Mortgage Corp., relied upon by the plaintiffs, because "that case does not stand for the proposition that a class member in a prior settlement who failed to return a claim form can avoid the preclusive effects of the settlement as if that class member had opted out." Thus, the Lofton settlement precluded even the claims of the plaintiffs who did not receive any payment from the Lofton settlement.

 

The Court concluded that since "the FLSA does not create an exception to how California preclusion law would treat the enforcement of an opt out class action settlement, and the Lofton settlement was a final judgment for preclusion purposes[,] … the California Plaintiffs' FLSA claims in the instant appeal would be precluded by the Lofton settlement under California law."

 

Having found that the Lofton settlement had preclusive effect under California law, the Fifth Circuit addressed the second prong of the Supreme Court's test in Matsushita: "whether the FLSA creates an exception to the Full Faith and Credit Act, 28 U.S.C. § 1738, such that preclusive effect should not be granted…."

 

The Court reasoned that since the FLSA does not have any language addressing its relationship to the Full Faith and Credit Act "or the preclusive effect of related state court proceedings[,] … we must determine whether the FLSA creates an implied exception to § 1738 because there is an 'irreconcilable conflict' between the two statutes … while keeping in mind that the Supreme Court has 'seldom, if ever, held that a federal statute impliedly repealed § 1738."

 

Because the Lofton class action did not assert any claims under the FLSA, the Fifth Circuit concluded that "the FLSA does not create an implied exception to § 1738. There is no irreconcilable conflict between allowing preclusive effect to a class action settlement that released FLSA claims and the FLSA's mandate under § 216(b) that FLSA claim cannot be asserted using an opt out class action."

 

The Court then turned to the plaintiffs' final argument, that even if the Lofton settlement precluded their FLSA claim, the district court erred by entering summary judgment because issues of fact existed as to whether the settlement satisfied due process: 1) whether the class had adequate representation by counsel; and 2) whether the notice sent to class members was inadequate.

 

The Fifth Circuit concluded that neither was enough to find a due process violation, reasoning that the attorneys accused of improperly representing the class were not class counsel in Lofton, "and there is no evidence or allegation that the Lofton class representative or class counsel received a benefit from [the allegedly improper actions of other counsel] separate from the rest of the class."

 

In addition, the Court reasoned that the notice sent to the members of the Lofton class "was not constitutionally deficient" because it clearly and specifically released any claims existing under the FLSA and thus was "sufficient to apprise class members that the settlement included the release of FLSA claims."

 

Accordingly, the trial court's judgment was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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