April 30, 2014
by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA
USFN Member (Ohio, Kentucky)
The USFN Bankruptcy Subcommittee has been hard at work analyzing, discussing, and debating the 354 pages of Proposed Amendments to the Federal Rules of Bankruptcy Procedure (FRBP). On August 15, 2013, new bankruptcy rules and forms were unveiled that would, amongst other things, mandate a form Chapter 13 Plan to be used nationally and require almost immediate action in bankruptcy cases to file proof of mortgage servicers’ claims. After being invited to submit comments on the new rules and forms, USFN summarized its discussions and submitted comments to the Committee on Rules of Practice and Procedure. Here is a summary:
Proposed Changes Governing POC Filing is Inconsistent with Existing Ethical and Legal Rules
The proposed rule changes attempt to resolve the challenges inherent in Chapter 13 plan confirmation hearings, which are typically held prior to existing deadlines to file proofs of claim (POC) in a case. The proposed rule shortens the time for filing a POC to 60 days after the petition date (as opposed to approximately 120 days under the current rules). The proposed rule then provides an additional 60 days for filing required documentation. Simply put, creditors have 60 days to file the POC with the figures and 120 days to file the loan documents. Unfortunately, the 120-day cushion does not apply to much more than the loan documents. If an escrow account has been established in connection with the claim, the deadline to file the required escrow account statement prepared as of the date the bankruptcy was filed with the POC will be 60 days from the bankruptcy filing. This proposed bifurcated process creates a conflict.
The previous amendments, effective in 2011, increased the detail and required documentation to support mortgage POCs and provided sanctions for incomplete filings. Further, the person signing the POC must verify: “I declare under penalty of perjury that the information provided in this claim is true and correct to the best of my knowledge, information, and reasonable belief.” Additionally, attorneys signing the POC must meet the requirements of FRBP Rule 9011 — the rule requiring the attorney filing the document to certify to the best of the attorney’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, that the proof of claim is warranted and has evidentiary support. Executing and filing a claim as allowed by the proposed rule without a review of supporting documentation raises the question of whether the signor is violating the terms of execution and possibly Rule 9011.
Proposed Changes Governing POC Filing Increases Administrative Expenses for Everyone
The bifurcated claim process creates the potential for double the amount of filings for every POC and a review of claims at two points in time instead of one, thereby increasing the administrative burden and associated costs. It is logical to presume that the claim amounts would be verified for plan feasibility at 60 days post-petition and again when the supporting documentation is later filed. Servicers, servicers’ counsel, Chapter 13 trustees and their staff, as well as borrowers and their counsel will be taxed with this additional review, with the likely result being increased costs to borrowers in higher attorney and trustee fees.
As an alternative, USFN recommended decreasing the total time for filing a POC to 90 days post-petition rather than impose a two-step process. This adjustment would allow plans to be confirmed in a timely manner, decrease administrative burdens, and allow a reasonable time for the creditors to submit fully verified claims. The National Conference of Bankruptcy Judges, whose membership is restricted to actively serving or retired bankruptcy judges, shared a similar recommendation by commenting that it “believes it would be better to set a single, longer period during which both the Proof of Claim and the attachments must be filed together rather than separate periods for different parts of a single Proof of Claim.”
Proposed Changes Governing POC Filing are Unclear as to No-Asset Chapter 7 Cases
The proposed rule can be read to require POCs in “No Asset” Chapter 7 cases, which would increase administrative burdens and costs without any benefit. As an alternative, USFN requested that the rules clearly indicate that the timeline for Chapter 7 proofs of claim is solely for those cases in which a notice of possible distribution is filed by the trustee.
Amendments Streamlining Chapter 13 Plan Confirmation
The proposals increase the burdens on mortgage creditors, while shortening timelines. In addition, the same mortgage creditors are required to comply with additional requirements imposed by the CFPB and National Mortgage Settlements. The increased responsibilities, combined with shortened timelines, conflict with the goals of increasing factual accuracy of claims and transparency. Further, the proposed rules will result in additional strains on the bankruptcy system, including courts, debtors, trustees, and creditors. This will bring more costs, which may ultimately interfere with a debtor’s ability to obtain a fresh start.
The Advisory Committee will decide whether to submit the proposed amendments to the Committee on Rules of Practice and Procedure and will likely publish a new version of the form plan and rules, with a new comment period ending August 15, 2014. The proposed amendments would then become effective on December 1, 2015, if they are approved and if Congress does not act to defer, modify, or reject them.
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Spring 2014 USFN Report