What are the consequences of a secured lender’s failure to comply with R. 3002.1 in a prior case when the debtor files again? Significant, it seems.
The issue came before the SD Texas bankruptcy court in Alvarez, No. 22-33889 (Bankr. S.D. Tex. Aug. 9, 2023) when the debtor objected to the mortgage claim of the non-institutional lenders which included some $12,000 in attorneys fees from the prior, dismissed Chapter 13.
The lenders admitted they hadn’t filed a notice of the fees in the earlier case as required by R. 3002.1(c), since their attorney said he “didn’t see the need” to do so. [ Can you guess, now, how this comes out? ]
The debtor asserted three grounds for disallowing the attorneys fees portion of the mortgage claim:
- the fees were barred for failure to file the required notice in the earlier case
- the fees were unreasonable
- the claim failed to provide a detailed statement of the work done
Creditor argued that Bankruptcy Code § 349 absolved them of any consequences of the failure to file R. 3002.1(c) notices. That provision reinstates voided liens and transfers, vacates judgments and orders, and revests property in the entity that held it at the commencement of the case on dismissal.
Let’s see how the debtor’s arguments fared.
Prior dismissal is no shield
Judge David Jones declined to extend the reach of §349 beyond the effects listed in the statute. Nothing in §349(b) vitiates the requirements of R. 3002.1, he observed. Rather, the oversight of fees charged to a debtor is a core duty of a bankruptcy court. “The issue is one of transparency and goes to the very heart of the bankruptcy process”.
But what about the provision of R.3002.1(c)(1) which empowers the court to prevent a non-compliant party from introducing the omitted information in any proceeding “in the case“? The matter before the court involved failures from a previous case.
There’s no such limitation in (c)(2), which allows the court to award “other appropriate relief…” without express limitation. And so he did, denying all of the disputed fees included in the proof of claim.
Debtor also scored on the companion ground that the fees sought were unreasonable for the work done. For instance, creditor’s counsel claimed a hour’s time for “research” on PACER to determine the deadline to object to confirmation and additionally, and more for becoming familiar with Chapter 13. The judge noted that if presented with the opportunity to review the fees in the prior case, the fees would have been substantially reduced.
The incomplete proof of claim
Debtor’s third argument was a winner, as well. The court emphasized that the denial of fees was further grounded in the creditor’s failure to provide an itemized statement of the fees at issue, as required by R. 3001(c)(2)(A). Resort to the evidence-exclusion provisions of that subsection was not required, because the debtor’s objection to the proof of claim merely sought disallowance.
And in case the message wasn’t clear enough, the court explicitly reminded the creditor that compliance with the Code and the Rules was not discretionary.
Sequential filings are a part of world in which we practice. We need to assess what went on, or didn’t go on, in prior cases to get the best outcome for clients. We can be content that we have a growing body of law that extends our reach.