New York Bankruptcy Court: Debtors and Chapter 13 Trustees Should Object to Stale Proofs of Claim

One issue that frequently comes up in bankruptcy cases is the filing of “stale” (i.e., beyond the statute of limitations) claims. What happens is that debt buyers, such as LVNV, purchase a large volume of debt at pennies on the dollar. When a debtor files a Chapter 13 bankruptcy, they attempt to collect on that debt by filing a proof of claim. The debt, however, may be 10 years old and the debt collector could not have pursued the claim in state court. Confronting this issue, a bankruptcy court in the Southern District of New York had the following to say:

C. Debtors and Their Counsel, If They Are Represented, and the Chapter 13 Trustee Should Scrutinize and Object to Stale Claims

In most circumstances it would be enough for the Court to stop with its ruling sustaining the objections and expunging the claims. But these claims and objections highlight a larger problem for this and other bankruptcy courts across the country. Two of the three claims at issue here were filed by LVNV, one of numerous bulk-claims purchasers that regularly file stale claims in bankruptcy courts. As stated in In re Andrews, 394 B.R. at 387, "[t]he phenomena of bulk debt purchasing has proliferated and the uncontrolled practice of filing claims with minimal or no review is a new development that presents a challenge for the bankruptcy system."

While agreeing that the practice of bulk-claims purchasers filing stale claims is a serious problem, the court rejected the debtor's argument that the conduct was sanctionable, as had other courts before it. Id. (citing cases). As pointed out in Andrews:

Allowing claims based on unchallenged proofs of claim is efficient
and economical in most cases. However, requiring debtors to file
objections and to raise affirmative defenses to large numbers of stale
claims filed by assignees based on a business model rather than after
careful review and evaluation is both burdensome and expensive.

Id. The solution suggested by the court was rules amendments:

The court will ask the Advisory Committee on Bankruptcy Rules
to consider whether changes should be made to the Federal Rules of
Bankruptcy Procedure and to the Official Bankruptcy Forms to alleviate
the significant burden on individual debtors and on the bankruptcy system
caused by the large number of undocumented, stale claims being filed by
the bulk purchasers of charged-off debts. . . . Finally, because the federal
rule-making process typically takes no less than three years to produce a
new rule, this issue will also be referred, with the consent of the two other
judges of this district, to the Local Rules Committee . . . .

Id. at 389.

Unless and until local or national rules changes are made, it is incumbent on debtors, their counsel, and the Chapter 13 Trustee, carefully to scrutinize proofs of claims to identify and object, if appropriate, to stale claims. The Chapter 13 Trustee clearly has standing under Bankruptcy Code § 1302(b)(3) to object to stale claims. See Overbaugh v. Household Bank N.A. (In re Overbaugh), 559 F.3d 125, 129 (2d Cir. 2009). Particularly in cases with pro se debtors, the Chapter 13 Trustee plays a crucial role and has an important responsibility in assuring that only proper claims are allowed and paid from the debtor's estate.

In re Hess, — B.R. —-, 2009 WL 1285296 (Bkrtcy.S.D.N.Y. May 06, 2009).