November 24, 2015
by Ronald C. Scott and Reginald P. Corley
Scott & Corley, P.A. – USFN Member (South Carolina)
In a recent decision, the bankruptcy court disallowed a creditor’s claim of a stale debt listed on a debtor’s bankruptcy schedule because South Carolina law would not support the revival of the claim, and even if it did, federal interests would require that the claim be disallowed. [In re Vaughn, No. 15-02896-DD (Bankr. S.C. Sept. 2, 2015)].
The debtor filed for protection under chapter 13 of the Bankruptcy Code. On Schedule F, she listed a debt to LVNV Funding, LLC opened March 1, 2010 for $2,043. The debt was not marked as contingent, unliquidated, or disputed. The chapter 13 plan proposed to pay unsecured creditors with allowed claims approximately a 10 percent dividend. The debt was well past South Carolina’s three-year debt collection statute of limitations.
LVNV Funding, LLC filed a timely proof of claim, to which the debtor filed an objection. The debtor asserted that the claim is unenforceable under South Carolina law because enforcement of the debt is barred by the state’s three-year statute of limitations. The debtor amended her schedules, listing the debt in question as disputed. At the hearing, LVNV Funding, LLC contended that South Carolina law requires only a minimal acknowledgement of the debt to revive it, which it asserted included the listing of the debt on bankruptcy schedules without noting the debt as disputed.
The bankruptcy court said that when analyzing an objection to a proof of claim, the court must consider both the claimant’s rights under state law and whether those interests comport with federal interests within the Bankruptcy Code.
First, the court determined that even if South Carolina law revives a stale debt simply by its notation in the statements and schedules filed in connection with a bankruptcy petition, federal principle supplants the state law rule. The court based its decision on the federal principles within the Bankruptcy Code of harsh penalties for debtors who do not fully disclose their financial affairs; that the very broad definition of “claim” could lead to creditors that slept on their enforcement rights being able to recover to the detriment of creditors that did not sleep on their rights; and that 11 U.S.C. § 558 of the Bankruptcy Code provides that statutes of limitations protect both the debtor personally and the bankruptcy estate.
Second, the court discussed South Carolina debt revival law and concluded that state law does not support revival of the debt, conceding that recent case law in South Carolina is sparse. Citing and quoting nineteenth century cases, the court stated that for a debt to be revived the debtor must unequivocally admit that there is a debt and must make a new promise to pay that debt. The admission of a debt along with a statement that the debtor will not pay the debt does not revive a debt. The bankruptcy court compared the instant case to Black v. White, 13 S.C. 37 (S.C. 1880). In that case, the South Carolina Supreme Court ruled that while probating an estate, the listing of a stale debt on the estate’s inventory did not revive the debt. The bankruptcy court in Vaughn determined that the listing of the debt on the bankruptcy schedule was comparable.
Finally, the bankruptcy court disposed of LVNV Funding, LLC’s contention that because the debtor did not initially mark the debt as disputed, there was a new promise to pay the debt. The court said that debtors may freely amend their schedules and that marking a debt as disputed has no effect on a chapter 13 case.
The court concluded that neither federal principles nor South Carolina state law support the revival of the debt.
©Copyright 2015 USFN and Scott & Corley, P.A. All rights reserved.