In re: Gerald A. Wingerter v.

ELECTRONIC CITATION: 2008 FED App. 0014P (6th Cir.)File Name: 08b0014p.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: GERALD A. WINGERTER and )
JANET G. KELLER-WINGERTER, )
) No. 07-8063
Debtors. )
_____________________________________ )
Appeal from the United States Bankruptcy Court
for the Northern District of Ohio, Eastern Division.
Bankruptcy Case No. 06-50120.
Argued: May 14, 2008
Decided and Filed: October 8, 2008
Before: FULTON, PARSONS, and SCOTT, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ARGUED: Jonathan W. Young, WILDMAN, HARROLD, ALLEN & DIXON, Chicago, Illinois,
for Appellant. ON BRIEF: Jonathan W. Young, John W. Costello, Jeffrey L. Gansberg,
WILDMAN, HARROLD, ALLEN & DIXON, Chicago, Illinois, Jeremy M. Campana, Alan R.
Lepene, THOMPSON HINE, Cleveland, Ohio, for Appellant. Professor Dan S. Schechter,
LOYOLA LAW SCHOOL, Los Angeles, California, for Amicus Curiae.
____________________
OPINION
____________________
THOMAS H. FULTON, Bankruptcy Appellate Panel Judge. B-Line, LLC (“B-Line”)
appeals a bankruptcy court order sanctioning it under Federal Rule of Bankruptcy Procedure (“Rule”)
9011(b). The bankruptcy court issued its order after a show cause order and an evidentiary hearing
to determine the procedures that B-Line employs for processing and filing proofs of claim. The court
was concerned that B-Line, a company that exclusively purchases claims in bankruptcy, does not
request copies of originating documents before filing a proof of claim despite the requirement in
Rule 3001(c) and Official Form 10 that such documents be attached to proofs of claim.
I. ISSUES ON APPEAL
Whether the bankruptcy court abused its discretion in issuing an order (1) concluding that
B-Line did not fulfill its obligations under Rule 9011 when it filed its proof of claim in the debtors’
case; and (2) expressing the court’s view generally that filing a proof of claim without review of
originating documents falls short of reasonable inquiry under Rule 9011 when the obligation is not
scheduled by the debtor and the purchase of the claim is not accompanied by reliable representations
of validity.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal.
The United States District Court for the Northern District of Ohio has authorized appeals to the Panel
and a final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C.
§ 158(a)(1). For purposes of appeal, a final order “ends the litigation on the merits and leaves
nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489
U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). The bankruptcy court’s order
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imposing sanctions on B-Line for violating Rule 9011 in this case is a final order. Buckeye
Retirement Co., LLC, Ltd. v. Hake (In re Hake), 2006 WL 2621116 (B.A.P. 6th Cir. 2006) (unpub.)1
Decisions regarding the imposition of sanctions under Rule 9011 are reviewed for abuse of
discretion. Timmons v. Cassell (In re Cassell), 254 B.R. 687 (B.A.P. 6th Cir. 2000) (citing Corzin
v. Fordu (In re Fordu), 201 F.3d 693, 711 (6th Cir. 1999)). “An abuse of discretion occurs only
when the [trial] court relies upon clearly erroneous findings of fact or when it improperly applies the
law or uses an erroneous legal standard.” Volvo Commercial Fin. LLC the Americas v. Gasel
Transp. Lines, Inc. (In re Gasel Transp. Lines, Inc.), 326 B.R. 683, 685 (B.A.P. 6th Cir. 2005)
(citing Schmidt v. Boggs (In re Boggs), 246 B.R. 265, 267 (B.A.P. 6th Cir. 2000)). A court also
abuses its discretion if, upon review, the appellate court is left with a “definite and firm conviction
that the [bankruptcy court] committed a clear error of judgment.” Barlow v. M.J. Waterman &
Assocs., Inc. (In re M.J. Waterman & Assocs., Inc.), 227 F.3d 604, 607-08 (6th Cir. 2000) (quoting
Soberay Mach. & Equip. Co. v. MRF Ltd., Inc., 181 F.3d 759, 770 (6th Cir. 1999)). “The question
is not how the reviewing court would have ruled, but rather whether a reasonable person could agree
with the bankruptcy court’s decision; if reasonable persons could differ as to the issue, then there is
no abuse of discretion.” Mayor and City Council of Baltimore, Md. v. W. Va. (In re Eagle-Picher
Indus., Inc.), 285 F.3d 522, 529 (6th Cir. 2002).
The court’s findings of fact are reviewed under the clearly erroneous standard. Riverview
Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir. 2007). “A finding of
fact is clearly erroneous ‘when although there is evidence to support it, the reviewing court on the
entire evidence is left with the definite and firm conviction that a mistake has been committed.’” Id.(quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S. Ct. 1504 (1985)).
1
An order imposing Rule 9011 sanctions is only final upon assessment of fees and expenses. Buckeye
Retirement Co., LLC, Ltd. v. Hake (In re Hake), 2006 W L 2621116 (B.A.P. 6th Cir. 2006) (unpub.) (citing In re
Jeannette Corp., 832 F.2d 43, 46 (3rd Cir. 1987)). The bankruptcy court found that “[b]ecause of the time and energy
that B-Line’s senior management devoted in response to this Court’s show cause order . . . the Court does not view any
further sanctions to be necessary in this case.” Because the bankruptcy court essentially assessed fees and expenses in
the form of the show cause hearing itself and the attendant preparation, the order is sufficiently final. Compare In re
Jeannette Corp., 832 F.3d at 46 (explaining that order imposing sanctions is not final where the amount or form of
sanction is not yet determined).
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III. FACTS
Gerald Wingerter and Janet Keller-Wingerter (“Debtors”) filed a chapter 13 bankruptcy
petition in the United States Bankruptcy Court for the Northern District of Ohio on February 7, 2006.
According to the chapter 13 plan that was filed on the same date, the Debtors would pay their
unsecured creditors 100%. B-Line, LLC (“B-Line”) filed a proof of claim for an unsecured claim
in the amount of $431.57 on March 17, 2006, thirty-eight days after the Debtors filed their chapter
13 petition and nearly two months before the deadline for filing proofs of claim.
As its proof of claim, B-Line submitted a copy of Official Form 10 (“Form 10”) that listed
“B-Line LLC/Covenant Management/GTE” as the name of creditor. B-line’s Form 10 was
incomplete or incorrect in several places: it stated that the basis for the claim was “money loaned;”
the space for “Date debt was incurred” was left blank; and B-Line did not submit any copies of the
original documents evidencing the Debtors’ obligation. The only additional document B-Line filed
with Form 10 was a single computer-generated sheet entitled “Account Summary” that contained
the following information:
Debtor Name: WINGERTER, GERALD A
Debtor SSN: XXX-XX-8300
Debtor Address: 644 STAR DR.
End Balance: $431.57
Last Payment Date:
Last Payment Amount:
Last Purchase Date:
Last Purchase Amount:
Original Creditor: GTE
Related Account Number: XXXXXXXXXXXX1221
On September 1, 2006, the Debtors filed an objection to B-Line’s claim on grounds that they
were unaware of any contract or extension of credit with GTE or B-Line. On September 14, 2006,
B-Line filed a response to the Debtor’s objection, requesting an extension of sixty days “to obtain
supporting documentation for its claims pursuant to Rule 9006 because the Debtors did not schedule
the debt.” The bankruptcy court denied B-Line’s request for additional time, and a hearing was held
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on October 19, 2006, with respect to the Debtors’ objection to B-Line’s claim. At this hearing, the
Debtors testified that they had no recollection of ever entering into any contract with GTE or B-Line.
The bankruptcy court found the Debtors’ testimony credible and made a specific factual
finding accordingly. At the October 19 hearing, the bankruptcy court scheduled another hearing for
January 11, 2007, and prohibited B-Line from withdrawing its proof of claim unless it provided a
“complete explanation” therefor. On January 3, 2007, in direct contravention of the bankruptcy
court’s order, B-Line filed a document withdrawing its proof of claim without filing an
accompanying explanatory statement.
On January 8, 2007, five days later, B-Line submitted a sworn affidavit by Steven G. Kane
(“Kane”), the records custodian and operations manager of B-Line. Kane averred that, according
to B-Line’s computer database, in March 2006 B-Line purchased from Covenant Management
Group, LLC (“Covenant”) an account that Gerald Wingerter originally opened with GTE
Communications Company on December 21, 1993.2 Kane further averred that the account had an
outstanding balance of $431.57 when it was purchased from Covenant by B-Line.
Pursuant to a forward-flow purchase agreement (“Purchase Agreement”) entered between
Covenant and B-Line, B-Line would purchase from Covenant, on a periodic basis, claims on
accounts for which the obligor on each purchased account had filed a chapter 13 bankruptcy petition.
The claim purportedly owed by Gerald Wingerter was among the “portfolio” of claims B-Line had
purchased from Covenant in March 2006. The affidavit stated that B-Line withdrew its proof of
claim on January 3, 2007, after GTE informed B-Line that it was unable to locate original
documentation evidencing the Debtors' account.
On January 11, 2007, the bankruptcy court held another hearing during which it expressed
concern that B-Line had filed a proof of claim without sufficient inquiry into the factual or legal
basis for the claim. In order to address the matter further, the bankruptcy court scheduled a hearing
at which B-Line would “provide the Court with an explanation of its procedures regarding the due
2
Although the Kane Affidavit did not mention any intervening purchasers between the original creditor and
Covenant, testimony offered later by representatives of Covenant or B-Line reveal that Covenant had purchased the claim
at issue as a part of a portfolio of claims purchased from Professional Recovery Systems, LLC (“PRS”) on December
22, 2000. Additionally, PRS was believed to have purchased the claim at issue, not from GTE directly, but from another
intervening party.
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diligence it conducts to assure itself of the validity of a claim before filing a proof of claim.” B-Line
was directed to file a written explanatory statement prior to the hearing. The bankruptcy court
entered an order to this effect on January 26, 2007.
B-Line filed an explanatory statement on February 16, 2007. In the statement, B-Line
explained that it had entered the Purchase Agreement with Covenant in 2004. B-Line disclosed the
requirements for accounts it purchases from Covenant: (1) the debtor must be in a chapter 13
bankruptcy proceeding; (2) the debt has not been disputed or discharged; (3) the amount owed is
accurate; (4) the statute of limitations on the claim has not expired; and (5) the debt is not fraudulent.
B-Line stated further that “According to the Purchase Agreement, Covenant . . . represents that it will
use reasonable efforts in accordance with industry standards to create computer files for each account
and will provide account documents where available.”
Additionally, in its statement, B-Line explained that GTE had merged with another
telecommunications company in 2000 to form Verizon Communications Company. The Debtors
included a debt owed to Verizon on the schedules accompanying their bankruptcy petition. Although
the account number for the Verizon account scheduled by the Debtors did not match the GTE
account number purchased by B-Line, B-Line opined that the scheduled debt owed to Verizon might
be the same as the claim held by B-Line that was originally owed to GTE. Finally, B-Line stated that
it had intended the affidavit submitted by Kane to satisfy the bankruptcy court's requirement that a
“complete explanation” accompany the withdrawal of B-Line’s proof of claim, but that the Kane
affidavit was filed five days later because it had to be sent to a different B-Line attorney prior to
filing.
On March 8, 2007, the bankruptcy court entered a Show Cause Order and Notice of April 12,
2007 Hearing (“Show Cause Order”), in which it specifically recounted B-Line’s withdrawal of its
proof of claim in direct contravention of the bankruptcy court’s order. The bankruptcy court stated
further in this Show Cause Order:
The plan in the instant chapter 13 case provides that the Debtors will pay a 100%
dividend to the holders of unsecured claims. Thus, the Debtors had an incentive,
absent in the more common “pot plan” cases, to review the validity of the proofs of
claims that had been filed in their bankruptcy. In response to the Court’s inquiry, the
Chapter 13 Trustee’s Office serving Akron reports that in January and February of
this year, it disbursed over $15,000 to B-Line. If one makes the assumption that
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$7,500 represents an average monthly distribution in regard to the chapter 13 cases
pending in each of approximately 350 bankruptcy judges’ dockets in the United
States, one arrives at the working assumption that B-Line is receiving monthly
chapter 13 distributions, on a national aggregate basis, of over 2.6 million dollars.
Thus, this Court deems it material to the integrity of the bankruptcy system to
determine whether B-Line’s procedures for filing proofs of claim are based on a
reasonable inquiry, prior to filing, as to whether there is admissible evidentiary
support for the claim.
(Appellant’s App. Vol. I., Sect. 8 at 3.) The Show Cause Order then directed B-Line to file a
pre-hearing brief and proffer evidentiary support “showing cause why B-Line should not be
sanctioned under Rule 9011 for its acts in filing the B-Line [Proof of Claim] and in withdrawing that
same claim without an order of the Court pursuant to Rule 3006 or a lifting of the Court's oral
directive that the claim could not be withdrawn.” Finally, the Show Cause Order set forth eleven
specific questions that it expected B-Line to answer through the evidence it was to present at the
April 12, 2007 hearing.
These eleven questions focused on four primary issues: (1) how much human oversight,
inquiry, or review did B-Line dedicate to the bankruptcy claims filing process, and how much of the
work in filing a proof of claim was simply generated by computer software with no human oversight
or review; (2) how and when did B-Line obtain certain specific information relating to the purported
account between the Debtors and GTE; (3) what information did B-Line actually receive from
Covenant regarding the Debtors’ account, and what information was B-Line contractually obligated
to receive from Covenant; and (4) what evidence did B-Line accrue from sources other than
Covenant that was included on the proof of claim filed in the Debtors’ bankruptcy case.
B-Line filed its pre-hearing brief in which it purported to answer the questions posed by the
bankruptcy court. Along with its brief, B-Line filed sworn declarations of Rui Pinto-Cardoso,
B-Line’s President and Chief Operating Officer, Kane and Lihn K. Tran, B-Line’s in-house counsel.
These declarations contained statements the declarants were prepared to offer as testimony in order
to answer the eleven questions in the Show Cause Order.
Ultimately, two evidentiary hearings were held on April 12, 2007, and May 21, 2007, and
the bankruptcy court ordered post-trial briefs to be filed by June 22, 2007, at which point the matter
was taken under advisement. The bankruptcy court issued an opinion and order on October 1, 2007,
concluding that:
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particularly where a debtor has not scheduled any claim resembling the purportedly
assigned obligation that a claim purchaser wants to file in the debtor's case, the claim
purchaser needs to discharge its obligations under Rule 3001 and Rule 9011 at the
time it files a proof of claim. The assignee should not be able to shift the expense of
the initial examination of claims to other interested parties, e.g., chapter 7 trustees
and chapter 13 debtors and trustees. More specifically, the Court finds that when the
debtors have not scheduled any claim listing the originating creditor, Rule 9011
requires a claim purchaser, before filing a proof of claim with a bankruptcy court, to
obtain originating documents or, when such documents are not available, a clear
understanding of the nature of the original dealings that support the assertion of a
claim against the particular debtor. Having obtained those documents or that clear
understanding, the claim purchaser should then attach to the proof of claim form the
originating documents or an affidavit explaining the non-availability of such “media”
to the proof of claim form so the debtor and other interested parties are given fair
notice of the source and particulars of the claim.
In re Wingerter, 376 B.R. 221, 224 (Bankr. N.D. Ohio 2007).
The bankruptcy court found that, in addition to erroneously stating that the basis for B-Line’s
claim was “money loaned,” Form 10 accompanying B-Line's proof of claim was incomplete because
queries for “Date debt was incurred” and “Charges made Prior to Filing” were left blank; B-Line did
not respond to the query asking whether the claim included interest or other charges in addition to
the principal amount of the claim (Part 5 of the Form); B-Line did not comply with the instructions
on Form 10 to “[a]ttach itemized statement of all interest or additional charges”; B-Line did not
comply with Part 7 of Form 10, which instructs the claimant either to attach copies of originating
documents or to explain the unavailability thereof. Moreover, no testimony was offered as to how
the interest rate applied by Covenant to the outstanding balance purportedly owed was reached.
The bankruptcy court also made the following pertinent factual findings:
31. B-Line’s Pre-hearing Brief further acknowledged the fluidity of the computer
data set when it stated that computer files generated by the original creditor
are “updated to reflect any payments, credits or other transactions” and
“therefore represents the best and most current summary of the overall status
of the purchased account” . . . .
....
33. Covenant was never in possession of, or reviewed, originals or copies of any
application by Gerald Wingerter for services from GTE or any signed
agreement between those parties. Nor did Covenant possess or review copies
of any account statements mailed to Mr. Wingerter.
34. The purported assignment from Covenant to B-Line of a claim against a Mr.
Wingerter rests upon the Covenant/B-Line Forward Flow Agreement. Under
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this agreement, B-Line periodically purchases accounts owned by Covenant
as to which Covenant has been notified of a bankruptcy filing.
....
36. Section 5.7 of the Covenant/B-Line Forward Flow Agreement, which is titled
“computer files” states: “Seller has used reasonable efforts in accordance
with industry standards to create Computer Files which set forth each
Account designated in the Term Agreement, each of which meets the
Eligibility Requirements of the Cut-Off Date.” When trying to find a
warranty or representation as to the validity of the claims acquired by B-Line
from Covenant in the Covenant/B-Line Forward Flow Agreement, B-Line’s
counsel points to that section, arguing that it should be pieced together with
the section on Eligibility Requirements. The court finds, however, that there
is no representation or warranty in the Covenant/B-Line Forward Flow
Agreement as to the validity or enforceability of the claims summarized in the
data transmitted from Covenant to B-Line.
37. Rather, if an account in the purchased portfolio is not valid, B-Line has a
contractual remedy against Covenant, i.e., B-Line is entitled to “reassign” the
account to Covenant and to receive complete reimbursement of amounts paid
to B-Line to Covenant with respect to that account.
In re Wingerter, 376 B.R. at 229-30.
The bankruptcy court concluded that, although B-Line did not file its proof of claim for any
improper purpose, B-Line failed to comply with its obligations under Rule 9011(b) to make a
reasonable inquiry into the basis of its claim before filing the proof of claim in a bankruptcy case
because it made no effort to comply with Rule 3001(c) and Form 10. The court reasoned that when
a potential bankruptcy creditor has only limited information about a debtor, and the information it
holds was not warranted by the seller of the claim, the bankruptcy creditor’s obligation under Rule
9011(b)(2) and (3) requires the creditor to do more than simply file a proof of claim based on
information from a bulk claims seller and wait to see whether the debtor in bankruptcy will object
to the claim before the bankruptcy creditor conducts its own inquiry into the basis for its claim. The
court pointed out that Rule 3001(a) directs compliance with the Official Forms. B-Line did not
comply with Rule 3001(a) when it filed an incomplete Form 10 despite having sufficient information
to complete the queries on the form; its regular procedures for filing proofs of claim simply did not
make use of this information. B-Line failed to comply with Form 10 because it did not append
copies of the originating documentation or assert that the documents were too voluminous to do so.
In the bankruptcy court’s view, this omission indicated that B-Line “neglected [its] obligations to
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make reasonable inquiry”–sanctionable conduct. Further, Rule 3001(c) requires copies of originating
documents to be filed with a proof of claim when the claim at issue is based on a writing. Yet, by
its own admission, B-Line never requested or made any attempt to obtain copies of the written
agreement from which the claim purportedly derived. The bankruptcy court also was troubled by
the fact that B-Line filed its incomplete proof of claim and Form 10 roughly ninety days before the
deadline for filing proofs of claim in the Debtor’s bankruptcy case.
Despite finding that B-Line failed to comply with its obligations under Rule 9011(b), the
bankruptcy court did not issue monetary sanctions against B-Line or direct B-Line to take, or refrain
from taking, any specific action. Instead, the court deemed the expenses incurred by B-Line in
participating in the prior evidentiary hearings to be a sufficient sanction.
Lastly, the bankruptcy court expressed its view generally regarding Rule 9011(b) and the
filing of proofs of claim by stating, inter alia, as follows: “As a prospective matter, B-Line and other
purchasers in the claims trading industry should understand that this Court views the filing, without
review of originating documents, of a proof of claim by an assignee/purchaser to fall short of
reasonable inquiry under Rule 9011 when the obligation has not been scheduled by the debtors and
the purchase of the claim was not accompanied by reliable representations of claim validity.”
(Emphasis added) The bankruptcy court stated, in conclusion3:
When debtors have not admitted, through their schedules, the validity of the claim
in the hands of the originating creditor or any of its assignees, the filer should comply
with Rule 3006 and complete Official Form 10 by taking the time to obtain and
review originating documents before filing any proof of claim. If originating
documents cannot be obtained, and the assignee decides to file a proof of claim
notwithstanding the absence of such documents, the assignee must comply with Rule
3006 and Official Form 10 by providing a clear explanation (which would include
all non-confidential information in the hands of the assignee) of how the initial
obligation arose and setting forth the warranties and representations in the chain of
transfers that the assignee relies upon in asserting its claim.
In re Wingerter, 376 B.R. at 239 (emphasis added).
3
The bankruptcy court made a similar statement in the introduction of its opinion.
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IV. DISCUSSION
In imposing Rule 9011 sanctions, a bankruptcy court must determine whether the individual’s
conduct was reasonable under the circumstances. In applying this test to the filing of proofs of
claim, the bankruptcy court “is not to use the benefit of hindsight but ‘should test the signer’s
conduct by inquiring what was reasonable to believe at the time the . . . [claim] . . . was submitted.’”
Timmons v. Cassell (In re Cassell), 254 B.R. 687, 691 (B.A.P. 6th Cir. 2000) (quoting Mapother &
Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472, 481 (6th Cir. 1996)). “Factors to consider
in making this determination include the amount of time available for investigation, the nature of the
investigation, and whether the claim is based on a plausible view of the law.” Id. (citing Davis v.
Crush, 862 F.2d 84, 88 (6th Cir. 1988)). As discussed above, the Panel reviews imposition of Rule
9011 sanctions for abuse of discretion.
Before the Panel can address whether the bankruptcy court abused its discretion, the Panel
must address whether this appeal is moot or otherwise not justiciable. In this regard, the bankruptcy
court’s order should be considered in two parts–the portion of the order directed at the case at hand
and the portion ostensibly addressing future conduct.
The issue of mootness has not been raised by the parties. However, because mootness
suggests the question of jurisdiction, the Panel raises the issue sua sponte, and addresses the issue
of mootness on the Panel’s own motion. Berger v. Cuyahoga County Bar Assoc., 983 F.2d 718, 721
(6th Cir. 1993). Under Article III of the United States Constitution, the Panel may adjudicate only
actual, ongoing cases or controversies. Lewis v. Cont’l Bank Corp., 494 U.S. 472, 477, 110 S. Ct.
1249 (1990).
[F]ederal courts have ‘no authority to render a decision upon moot questions or to
declare rules of law that cannot affect the matter at issue.’ NAACP v. City of Parma,
263 F.3d 513, 530 (6th Cir. 2001) (citing Church of Scientology v. United States, 506
U.S. 9, 12, 113 S. Ct. 447, 121 L.Ed.2d 313 (1992)). ‘Simply stated, a case is moot
when the issues presented are no longer ‘live’ or the parties lack a legally cognizable
interest in the outcome.” County of Los Angeles v. Davis, 440 U.S. 625, 631, 99 S.
Ct. 1379, 1383, 59 L.Ed.2d 642 (1979) (quoting Powell v. McCormack, 395 U.S.
486, 496, 89 S. Ct. 1944, 1951, 23 L.Ed.2d 491 (1969)); see also Carras v. Williams,
807 F.2d 1286, 1289 (6th Cir. 1986) (“Mootness results when events occur during
the pendency of a litigation which render the court unable to grant the requested
relief.”). This court determined mootness ‘by examining whether an actual
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controversy between the parties exists in light of intervening circumstances.’ Fleet
Aerospace Corp. v. Holderman, 848 F.2d 720, 723 (6th Cir. 1988).
Hood v. Keller, 229 F. App’x 393 (6th Cir. 2007).
B-Line seeks reversal of the bankruptcy court’s order finding B-Line in violation of Rule
9011. Even if the Panel were to find that B-Line did not violate Rule 90114, however, it cannot
fashion any relief from the bankruptcy court’s order because the only sanction levied was the
answering of the show cause order. The Panel cannot undo the show cause hearings now. See
Carras v. Williams, 807 F.2d 1286, 1289 (6th Cir. 1986) (where relief will not be forthcoming,
appellant no longer has an interest in the outcome which justifies a federal court’s decision on the
underlying factual and legal issues). Because there is no live case or controversy, the issue of
whether B-Line violated Rule 9011 in this case is moot. Where it is impossible for the Panel to grant
any effectual relief, the appeal must be dismissed. Church of Scientology of Cal. v. U.S., 506 U.S.
9, 12, 113 S. Ct. 447 (1992); United States v. Thomas, 43 F. App’x 728 (6th Cir. 2002).
B-Line also seeks reversal of the portion of the bankruptcy court’s order in which the
bankruptcy court expresses its views regarding future filings of proofs of claim. This presents two
issues. First, this portion of the bankruptcy court’s order is not final. While the concept of finality
is applied more flexibly in bankruptcy cases, to be final, an order must dispose of discrete disputes
within a larger case. See Millers Cove Energy Co. v. Moore (In re Millers Cove Energy Co.), 128
F.3d 449 (6th Cir. 1977); In re Dow Corning Corp., 86 F.3d 482 (6th Cir. 1996). The portion of
the bankruptcy court’s order at issue here does not dispose of a discrete dispute within a larger case.
In fact, it addresses hypothetical situations which have not yet occurred. As such, it is not final and
appealable.
Second, because this portion of the order addresses hypothetical future situations, the appeal
seeks an impermissible advisory opinion. B-Line argues that the bankruptcy court is requiring that
B-Line comply with Rule 9011 in the future, all purchasers in the claims trading industry obtain and
review originating documents, or, in the absence of originating documents, provide an explanation
of how the initial obligation occurred and the warranties received in the chain of transfers. Such
efforts will, in B-Line’s view, “add expense, delay and uncertainty to the claims resolution process.”
4
Although the Panel does not address the merits here, the Panel notes that the bankruptcy court engaged in
extensive fact-finding before rendering its decision.
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B-Line further argues that with these requirements the bankruptcy court has “eliminated the
adversarial framework, dramatically increased the cost, and diminished the convenience and fairness
of the bankruptcy claims resolution process for B-Line.” While B-Line does not object to obtaining
documents where B-Line feels that is warranted, it “objects to being subjected to a universal
requirement of pulling documents in every case where the debt is unscheduled, regardless of the size
of the claim, or the presence of a dispute.”
Article III of the Constitution prohibits the Panel from considering hypothetical or abstract
questions. Mu Ju Li v. Mukasey, 515 F.3d 575, 579 (6th Cir. 2008) (citing United States v. McGee,
494 F.3d 551, 558 (6th Cir. 2007)). In this portion of the appeal, B-Line is essentially asking the
Panel to consider a hypothetical question in future cases, not this case, where a debtor has not
scheduled a debt and a purchaser in the claims trading industry, not necessarily B-Line, files a proof
of claim without reviewing the originating documents. Through B-Line’s arguments and objections
detailed above, the question essentially becomes: what must a purchaser in the claims trading
industry do to comply with Rule 9011 when filing a proof of claim? Answering this question would
require the Panel to issue an advisory opinion which it is prohibited from doing by Article III of the
Constitution.5 Sankyo Corp v. Nakamura Trading Corp., 139 F. App’x 648, 650 (6th Cir. 2005)
(unpub.).
Finally, the Panel questions whether the bankruptcy court’s order in fact sets specific filing
requirements for proofs of claim. The Panel reads the language in question as a recommendation
of best practices–what creditors ought but are not necessarily required to do to avoid potential Rule
9011 trouble. At most, the bankruptcy court requires that a creditor provide a “clear explanation”
of the source of its claim, which seems nothing more than a restatement of the obvious. Ultimately,
it must be remembered that the bankruptcy court engaged in an exhaustive investigation and
thorough analysis of the underlying facts and circumstances of B-Lines proof of claim before finding
5
For example, in United States v. McGee, the appellant, a criminal defendant convicted of possession with
intent to distribute cocaine, argued that the presumption of reasonableness applicable to a sentence within the Sentencing
Guidelines range “is not necessarily the appropriate way to review sentences,” and asked the Sixth Circuit Court of
Appeals “to reconsider its standard of review and to better define what a criminal defendant must do to rebut the
presumption of reasonableness.” 494 F.3d at 558. The Sixth Circuit found that by “asking the panel to ‘better define
what a criminal defendant must do to rebut the presumption of reasonableness,”’ the appellant was “simply inviting the
panel to issue an advisory opinion or to consider hypothetical or abstract questions” which is prohibited by Article III
of the Constitution. Id.-13-
B-Line in violation of Rule 9011. The Panel finds no reason to believe that the bankruptcy court will
do otherwise in other cases in the future.6
V. CONCLUSION
For the foregoing reasons, the appeal is dismissed because it is moot and seeks an
impermissible advisory opinion.
6
In the unlikely event that the bankruptcy court were to do otherwise–establish rigid, mechanical filing
requirements–the Panel might very well find an abuse of discretion.
-14-
MARCIA PHILLIPS PARSONS, Chief Bankruptcy Appellate Panel Judge, dissenting.
Because I conclude that this appeal is neither moot nor impermissibly seeks a advisory opinion, and
that it presents a dispute ripe for review, I respectfully dissent. Additionally, as discussed below, I
respectfully would reverse the order of the bankruptcy court on the merits of this appeal.
As to the ripeness issue, the majority divides the bankruptcy court’s order into two parts: the
conclusion that B-Line violated Rule 9011 in the instant case and the court’s directives regarding the
filing of future proofs of claim. According to the majority, the former is final although moot because
no sanctions were levied, while the latter is not final and thus not appealable because it addresses
hypothetical situations that may or may not occur in the future.
In my view, the bankruptcy court’s order is not so readily divisible. Rather than the
directives being separate and apart from the bankruptcy court’s conclusion that B-Line violated Rule
9011, the directives appear to be a type of nonmonetary sanction imposed because of B-Line’s rule
violation. See Fed. R. Bankr. P. Rule 9011(c)(2) (“Nature of Sanction; Limitations. A sanction
imposed for violation of this rule . . . may consist of, or include, directives of a nonmonetary nature
. . . .”) (emphasis supplied); Stoecklin v. United States, No. 89-182-CIV-OC-16, 1997 WL 1039239,
*3 (M.D. Fla. 1997) (stating that sanctions under Rule 11 can take the form of monetary fines or
nonmonetary directives and that in extreme cases, such nonmonetary directives can include a court
order barring the offending party from asserting particular claims or defenses); May v. United States,
80 Fed. Cl. 442, 449 (Fed. Cl. 2008) (stating that nonmonetary directives are permitted by Rule 11
and ordering that pro se plaintiff must obtain permission of court before filing any future complaint).
The majority implicitly reject this view, stating that the bankruptcy court did not “direct B-
Line to take, or refrain from taking, any specific action.” According to the majority, the bankruptcy
court’s discussion was merely “a recommendation of best practices–what creditors ought but are not
necessarily required to do to avoid potential Rule 9011 trouble.” This conclusion, however, ignores
the mandatory language used by the bankruptcy court:
[T]he court finds that when the debtors have not scheduled any claim listing the
originating creditor or any direct or indirect assignee of the originating creditor, Rule
9011 requires a claim purchaser, before filing a proof of claim with a bankruptcy
court, to obtain originating documents or, when such documents are not available,
-15-
a clear understanding of the nature of the original dealings that support the assertion
of a claim against the particular debtor. Having obtained those documents or that
clear understanding, the claim purchaser should then attach to the proof of claim
form the originating documents or an affidavit explaining the non-availability of such
“media” to the proof of claim form so the debtor and other interested parties are
given fair notice of the source and particulars of the claim.
In re Wingerter, 376 B.R. 221, 224 (Bankr. N.D. Ohio 2007) (emphasis added).
If originating documents cannot be obtained, and the assignee decides to file a proof
of claim notwithstanding the absence of such documents, the assignee must comply
with Rule 3006 [sic] and Official Form 10 by providing a clear explanation (which
would include all non-confidential information in the hands of the assignee) of how
the initial obligation arose and setting forth the warranties and representations in the
chain of transfers that the assignee relies upon in asserting its claim.
Id. at 239 (emphasis added). While the bankruptcy court did at times use the more permissive verb
“should,” it was clear from the court’s discussion that the statements were not merely “best practices
recommendations,” but were instead explicit directives detailing what the court will require in the
future. As stated by the bankruptcy court:
As a prospective matter, B-Line and other purchasers in the claims trading industry
should understand that this Court views the filing, without review of originating
documents, of a proof of claim by an assignee/purchaser to fall short of reasonable
inquiry under Rule 9011 when the obligation has not been scheduled by the debtors
and the purchase of the claim was not accompanied by reliable representations of
claim validity.
Id. at 238.
Moreover, this language contradicts the majority’s conclusion that B-line is not at risk for
future sanctions because “the bankruptcy court engaged in an exhaustive investigation . . . before
finding B-Line in violation of Rule 9011” and will presumably do so in other cases in the future.
To the contrary, rather than indicating that the court will undertake such an exhaustive investigation
again, the above-quoted language demonstrates that if B-Line fails in the future to comply with the
court’s directives, sanctions will be imposed by the court. As such, the bankruptcy court’s order was
a final order in all respects, subject to review on appeal.
Alternatively, even if the majority is correct that the bankruptcy court’s order is, in effect, two
orders, one addressing past behavior and the other future, both are reviewable by this Panel. With
respect to the portion of the order that pertains to the finding that B-Line violated Rule 9011, the
majority maintains that the issue is moot and therefore non-reviewable because no monetary
-16-
sanctions were imposed on B-Line. While there is no Sixth Circuit Court of Appeals case directly
on point, the First Circuit Court of Appeals addressed a similar situation in Sterling Consulting
Corp. v. Internal Revenue Service (In re Indian Motocycle Co., Inc.), 452 F.3d 25 (1st Cir. 2006).
In Indian Motocycle, protracted bankruptcy litigation between two companies over the rights to the
Indian Motocycle trademark and a settlement of that litigation led to a dispute with the IRS regarding
respective taxes due from the receivership and bankruptcy estates following the sale of assets. The
district court, which had withdrawn the order of reference, was troubled by the IRS’s maintenance
of inconsistent tax assessments against the parties. The IRS asserted that the inconsistent
assessments were necessary to protect itself until final determinations were made regarding total
taxes due on the asset sale, a tactic regularly used by the IRS.
Concluding that the IRS had willfully engaged in presenting meritless arguments for purposes
of delay, the district court formally declared as a sanction that the IRS’s conduct was unacceptable
and inappropriate, but did not impose any punishment. Id. at 27. The IRS appealed but prior to
consideration on appeal, the controversy between the trustee and the IRS settled, bringing the
proceedings in the district court to an end. Upon review, the First Circuit Court of Appeals initially
questioned whether any injury currently existed that was reviewable. The court answered the
question in the affirmative, explaining:
On appeal, the government has referred briefly to two different interests that
its says are impaired or threatened by the sanctions order. One is the IRS’s
reputation; the other is the risk that the findings of misconduct could be used against
it as part of an “unclean hands” defense in related litigation . . . .
Reputational interests can be cognizable; that is what defamation and expungement
of record cases are about. But merely to refer to reputation does not in this case
denote a concrete threat, as it might if a lawyer were sanctioned and bar discipline
was in prospect. . . .
Perhaps, where the conduct of a party (or counsel) is expressly condemned
as improper by a formal sanction order, that ought to be enough for review. At least
by implication, however, our own case law may be more demanding even in the
presence of a formal order. But where a formal order has been entered, we hold that
it is sufficient for standing to appeal, and enough to refute any charge of mootness,
that the sanction order continues to have potential real-world impact upon the
sanctioned party. That test is met in this case.
The conduct condemned by the district court is not some idiosyncratic event;
we know (from case law) that the IRS regularly uses [these tactics]. Nor was the
district court making a passing negative comment; it formally declared in a sanction
-17-
order that the regular practice of the IRS, an institutional litigant, amounts to willful
misconduct that invites penalties.
The IRS has a self-evident concrete interest in maintaining practices of this
kind. The . . . sanction order is a disincentive for the IRS to repeat its conduct in the
same or any sister court; if nothing else, the IRS would have to consider the peril to
which doing so would expose its own lawyers. We hold that foreseeable practical
consequences give the IRS adequate and justifiable incentive to litigate these appeals
and that the government has Article III standing to proceed.
Id. at 29-30 (internal footnotes and citations omitted).
Applying these principles to the instant case, the appeal is not moot. B-Line’s conduct that
the bankruptcy court found sanctionable was not an idiosyncratic event. Rather, it represented the
customary business practices of a company whose entire business is purchasing claims against
individuals who are debtors in bankruptcy court. Moreover, the bankruptcy court was not making
a passing comment, but was issuing a formal ruling that these customary business practices are
sanctionable as violations of Rule 9011. Undeniably, the bankruptcy court’s order has a real-world
impact upon B-Line: if it continues business as normal, the court will almost certainly sanction B-
Line again for the very same conduct. On the other hand, if B-Line modifies its practice to address
the conduct the court found sanctionable, its cost of doing business, according to B-Line, will be
substantially increased Accordingly, I would hold, in the words of the First Circuit Court of
Appeals, that “foreseeable practical consequences” give B-Line “adequate and justifiable incentive
to litigate” this appeal.
As to the second component of the bankruptcy court’s order, the court’s directives regarding
future filings, the Sixth Circuit Court of Appeals has explained that in determining whether a claim
is ripe, an appellate court should examine:
(1) the likelihood that the harm alleged will ever come to pass; (2) whether the
factual record is sufficiently developed to allow for adjudication; and, (3) hardship
to the parties if judicial review is denied. Adult Video Ass’n v. United States, 71 F.3d
563, 568 (6th Cir. 1995). For pre-enforcement challenges, a case is ordinarily ripe
for review ‘only if the probability of the future event occurring is substantial and of
sufficient immediacy and reality to warrant the issuance of a declaratory judgment.’
Nat’l Rifle Ass’n of America v. Magaw, 132 F.3d 272, 284 (6th Cir. 1997) (citations
and internal punctuation omitted).
Norton v. Ashcroft, 298 F.3d 547, 554 (6th Cir. 2002).
-18-
This standard is met here. The likelihood that B-Line will file other proofs of claim is certain
given the nature of its business.1 The factual record is sufficiently developed for review by an
appellate court; there is an extensive record with detailed testimony from the parties. Lastly, B-Line
faces certain punishment if its proofs of claim fail to have the necessary attachments in cases where
the debtors have not scheduled the claims. Therefore, based on the foregoing, I would find that this
appeal is ripe for review.
Turning now to the merits of this appeal, I respectfully would reverse the bankruptcy court’s
conclusion that B-Line violated Rule 9011. In reaching this conclusion, the bankruptcy court used
an erroneous legal standard and relied upon a clearly erroneous finding of fact.
With respect to the legal standard, the bankruptcy court held that a claims purchaser must
review a debtor’s schedules before filing a proof of claim to determine whether the debtor has
scheduled a claim that resembles the purchased claim. According to the bankruptcy court, if a debtor
has not scheduled a claim, “Rule 9011 requires” a claims purchaser to attach originating documents
to its proof of claim. If such documents are not available, the claims purchaser “must” attach to the
proof of claim an affidavit explaining the absence and setting forth how the initial claim arose, along
with the warranties and representations in the chain of transfers that the purchaser is relying upon
in asserting its claim. The court held that this process is necessary to meet Rule 9011’s requirement
of a reasonable pre-filing inquiry.
While I respect the bankruptcy court’s desire to formulate a procedure for the filing of
purchased claims, I believe that the process demanded by the court is not required by Rule 9011 and
exceeds the court’s authority. Rule 9011 provides in pertinent part that:
By presenting to the court (whether by signing, filing, submitting or later advocating)
a petition, pleading, written motion, or other paper, an attorney or unrepresented
party is certifying that to the best of the person’s knowledge, information and belief,
formed after an inquiry reasonable under the circumstances,–
....
(3) the allegations and other factual contentions have evidentiary support or,
if specifically identified, are likely to have evidentiary support after a
reasonable opportunity for further investigation or discovery . . . .
1
As the bankruptcy court noted in its opinion, B-Line’s business centers on purchasing consumer bankrupt
accounts. According to its website, B-Line has purchased and serviced more than $45 billion of bankruptcy receivables
since its founding in 1997. In re Wingerter, 376 B.R. at 221 n.1.
-19-
Fed. R. Bankr. P. 9011(b)(3) (emphasis added). As explained by the Sixth Circuit Court of Appeals
in addressing the question of whether an attorney violated Rule 11 by commencing a particular
bankruptcy case:
In this circuit, the test for imposition of Rule 11 sanctions is whether the
individual attorney’s conduct was reasonable under the circumstances. The relevant
inquiry is whether a specific finding was, if not successful, at least well founded. . . .
The [trial] court, however, is expected to avoid using the wisdom of hindsight
and should test the signor’s conduct by inquiring what was reasonable to believe at
the time the pleading, motion or other paper was submitted. The attorney’s conduct
must be tested by an objective standard of reasonableness. The determination of
whether an attorney conducted “reasonable inquiry” is judged by objective norms of
what reasonable attorneys would have done. Id. That is, what was reasonable for the
attorneys to believe at the time the bankruptcy petition was filed? This of course is
a fact-oriented inquiry.
In determining whether an attorney had or had not conducted a reasonable
inquiry, a court undoubtedly should consider a variety of pre-filing factors. In this
case, for example, what information about the client's business did the attorneys
have? Was the information verified? How involved had these attorneys been in their
client's business? For how long? Were other professionals, such as accountants or
bankers consulted? What independent investigation, if any, did the attorneys
undertake prior to the filing? What did their clients tell them? Were they justified
in believing what their clients told them? Did a time problem exist when a decision
to file was made? What was the business (and legal) sophistication of the clients and
the attorneys? These along with a myriad of other factual details would be crucial
to have in hand before determining whether the action taken or not taken by the
attorneys prior to filing the bankruptcy petition was or was not reasonable.
In re Big Rapids Mall Assocs., 98 F.3d 926, 930-31 (6th Cir. 1996) (internal citations omitted).
It is clear from this discussion that the “reasonable inquiry” mandated by Rule 9011 turns on
a consideration of all the facts present in each particular case. As such, it was erroneous for the
bankruptcy court to conclude as a matter of law that a “reasonable inquiry” for a holder of an
unscheduled, purchased claim always requires the holder to attach the originating documents to its
proof of claim, or set forth in an affidavit attached to the proof of claim an explanation for the
documents’ absence, a statement of how the claim arose, and all warranties in the chain of title.
Granted, Rule 3001(c) and the proof of claim form, Form 10, direct attachment of documentation
-20-
of a claim based on a writing.2 As interpreted by the courts, such information, along with the other
requirements of the rules, is necessary in order for the claim to have prima facie effect under
paragraph (f) of Rule 3001. See In re Perron, 350 B.R. 628, 2006 WL 2933827, *5 (B.A.P. 6th Cir.
2006) (unpub. table op.) (holding that creditor’s failure to comply with Rule 3001 is not grounds to
disallow claim; result of failure to comply is to lose prima facie evidence of validity and amount);
In re Heath, 331 B.R. 424, 436 (B.A.P. 9th Cir. 2005) (same); In re Dove-Nation, 318 B.R. 147, 152
(B.A.P. 8th Cir. 2004) (same). Loss of prima facie effect, however, or even disallowance of a claim
for failure to supply this information, is a far cry from the bankruptcy court’s holding that the failure
to supply this information or explain its absence when the claim is unscheduled is a violation of Rule
9011, sanctionable by the court.3
Moreover, I would respectfully reverse the bankruptcy court’s conclusion that B-Line
violated Rule 9011 in the present case, and would hold to the contrary that B-Line made a reasonable
inquiry under the circumstances sufficient to satisfy Rule 9011. The bankruptcy court’s primary basis
for this holding was that B-Line was asserting a claim that it had purchased from another party, not
only without possession of the originating documents, but also without any representation or
warranty from the seller as to the validity or enforceability of the claim. This finding, however, is
clearly erroneous.
Paragraph 5 of the Purchase Agreement between B-Line and Covenant sets forth the Seller’s
Representations and Warranties. In Paragraph 5.7, Covenant as Seller represents and warrants that
2
Rule 3001(c) provides as follows:
(c) Claim based on a writing. W hen a claim, or an interest in property of the debtor securing the claim,
is based on a writing, the original or a duplicate shall be filed with the proof of claim. If the writing
has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed
with the claim.
Official Bankruptcy Form 10, entitled “Proof of Claim” states at paragraph no. 7:
Documents: Attach redacted copies of any documents that support the claim, such as promissory notes,
purchase orders, invoices, itemized statements of running accounts, contracts, judgments, mortgages,
and security agreements. You may also attach a summary. Attach redacted copies of documents
providing evidence of perfection of a security interest. You may also attach a summary. (See definition
of “redacted” on reverse side.)
DO NOT SEND ORIGINAL DOCUM ENTS. ATTACHED DOCUMENTS MAY BE DESTROYED
AFTER SCANNING.
3
In reaching this conclusion, I do not intend to suggest that failure to comply with Rule 3001 can never be a
factor in determining whether Rule 9011 has been violated. I simply do not agree that failure of a claims purchaser to
comply with Rule 3001 is a per se violation of Rule 9011 where the debtor has not scheduled the debt in question.
-21-
“[a]s of the Closing Date . . . [it] has used reasonable efforts in accordance with industry standards
to create Computer Files which set forth each Account designated in the Term Agreement, each of
which meets the Eligibility Requirements as of the Cut-off Date.” (Sealed App. at Tab 1, p. 5.)
(emphasis supplied). “Eligibility Requirements” is a term defined under Paragraph 1.14 of the
Agreement as “the requirements set forth in Paragraph 9.1 through 9.9 with respect to each
Account.” (Sealed App. at Tab 1, p. 2.) Paragraph 9.4(ii) provides that “the Account represents a
legal, valid and binding obligation of the related Debtor.” (Sealed App. at Tab 1, p. 7.) Similarly,
Paragraph 9.1(ii) states that “the debt is not disputed by the Debtor or Trustee,” while Paragraph 9.1
(iv) provides that “no proof of claim has been or will be rejected or successfully objected to by any
person . . . .” (Sealed App. at Tab 1, p. 7.) Thus, there were explicit representations and warranties
from Covenant that the accounts purchased by B-Line were valid obligations of the account debtors,
including the Debtor herein.
Furthermore, there was no evidence that B-Line’s reliance on Covenant’s warranties and
representations was unreasonable. At the time the proof of claim at issue was filed, B-Line had been
purchasing claims from Covenant for nearly two years. Of the 1,017 proofs of claim filed by B-Line
as the result of purchases from Covenant, only five, including the claim at issue in this case, had
been disputed, with three of the five having been resolved in B-Line’s favor.
Additionally, the evidence presented at the hearing in this matter established that Covenant’s
warranties and representations were based on its own reasonable investigation and prior successful
experiences. According to the undisputed evidence presented at the hearing, Covenant had
purchased the Debtor’s account from Professional Recovery Systems, LLC (“PRS”), a company from
whom it had previously purchased valid claims. As a part of its standard business practices,
Covenant first inquired into the origin and nature of the purchased accounts. Covenant then
employed collection agencies to contact the account debtors, including the Debtor herein, by mail
to validate the account and to inform the account debtors that they had 30 days to dispute the account
should they wish to do so. Per Covenant’s instructions, if the collection agency received a dispute,
Covenant would be notified, the file would be temporarily closed, and a determination whether to
contest the dispute would be made. Covenant’s Chief Executive Officer testified that the account
of the Debtor herein had been placed with at least two collection agencies for collection prior to its
-22-
sale to B-Line. Notwithstanding the collection efforts by these two agencies, the Debtor never
disputed the indebtedness and none of the mail sent by those agencies to the Debtor was returned.
In In re Cassell, 254 B.R. 687, 692 (B.A.P. 6th Cir. 2000), this Panel held that a reasonable
inquiry for purposes of Rule 9011 may include reliance on the personal knowledge of a third party.
See also Dubois v. United States Dept. of Agric., 270 F.3d 77, 82 (1st Cir. 2001) (“signer’s
obligation personally to comply with the requirements of Rule 11 clearly does not preclude the signer
from any reliance on information from other persons”). The bankruptcy court herein rejected B-
Line’s reliance upon Cassell because:
[N]either B-Line nor Covenant can point to any actor who has personal knowledge
that Debtor Gerald Wingerter has an unfulfilled obligation to GTE, nor has B-Line
or Covenant produced any custodian for business documents evidencing such an
obligation. In the absence of anyone with such personal knowledge or reliable
business records, and given that the Debtors did not schedule any obligation relating
to GTE, the Court finds that a reasonable inquiry into the facts should have included
possession and review of alleged transactional documents between Mr. Wingerter
and GTE or some reliable proxy for those documents.
In re Wingerter, 376 B.R. at 235-36.
B-Line argues that the bankruptcy court’s reference to the failure to produce a custodian for
business documents evidencing a claim against the Debtor is misleading and somewhat inaccurate.
B-Line indicates that the record shows that two of B-Line’s witnesses at the show cause hearing, one
from B-Line and one from Covenant, were qualified to authenticate the computer files that contained
the claim at issue as ordinary business records of their respective companies. According to B-Line,
the procedural posture of the case, a show case hearing initiated by the court rather than an adversary
proceeding with opposing counsel, obviated the need or the opportunity for B-Line to lay a
foundation for its business records, which it could have readily done if there had been an objection
to its business records.
Upon a review of the record, I would attach no significance to B-Line’s failure to authenticate
its business records since its does not appear that any party challenged the admission of its business
records. Further, it is insignificant that neither B-Line nor Covenant was able to identify a actor with
“personal knowledge” of the Debtor’s alleged obligation. For authentication purposes, “[p]ersonal
knowledge is not strictly limited to activities in which the declarant has personally participated. . . .
Personal knowledge can come from review of the contents of business records, and [a witness] may
-23-
testify to acts that she did not personally observe but which are described in business records.”
AT&T Corp. v. Overdrive, Inc., No. 1:05CV1904, 2006 WL 3392746, *2 (N.D. Ohio 2006) (internal
citations omitted). See also Lorraine v. Markel Am. Ins. Co., 241 F.R.D. 534, 546 (D. Md. 2007)
(“[I]t is not required that the authenticating witness have personal knowledge of the making of a
particular exhibit if he or she has personal knowledge of how that type of exhibit is routinely made.”)
The bankruptcy court’s rejection of B-Line’s records as “unreliable” simply because it was ultimately
established that Debtor did not owe B-Line was based on “hindsight” and a demand for certainty
rather than Rule 9011’s reasonableness standard. See Dubois v. United States Dept. of Agric., 270
F.3d at 82-83 (Rule 11 does not require absolute certainty); Kraemer v. Grant County, 892 F.2d 686,
689 (7th Cir. 1990) (same); H.J. Rowe, Inc. v. Spiegel, Inc. (In re Talon Holdings, Inc.), No. 97 B
37535, 1999 WL 150337, *5 (Bankr. N.D. Ill. 1999) (law does not require standard of perfect
knowledge under Rule 9011).
In this regard, it must be noted that in addition to relying on the information it obtained from
Covenant, B-Line conducted its own brief investigation. Before purchasing the portfolio of claims
containing the Debtor’s account, B-Line received a computer file for the account from Covenant
which contained the Debtor’s name, address, Social Security number, name of the original creditor
on the account, original account number, original principal balance, current balance, rate of interest,
date the account was opened, date the original creditor charged off the account, date the bankruptcy
petition was filed and its case number, the chapter under which it was filed, and the name of the
Debtor’s counsel. B-Line then reviewed that information for obvious flaws, such as an obviously
incorrect Social Security number (i.e., all zero’s or nine’s or not enough, or too many numbers), or
an address which does not exist, and compared it to the electronic records of the bankruptcy court
to determine if the data matched. B-Line also searched available electronic databases to determine
whether the Debtor had filed any prior bankruptcy cases in which the debt at issue had been
discharged.
After completing this process and finding no inconsistencies, B-Line purchased the Debtor’s
account along with ten others. Subsequent to the purchase, B-Line essentially repeated the above
process, and confirmed that the bankruptcy case had not been dismissed, converted from a chapter
13, or that the bar date for filing proofs of claim has passed in the interim. Only then did it prepare
and file the proof of claim in question.
-24-
The bankruptcy court summarily dismissed these undertakings by B-Line as a focus on
“proofreading.” While there was certainly a proofreading element to B-Line’s actions, they were
nonetheless relevant to the reasonableness inquiry because they indicate that B-Line appropriately
wanted to ensure that it had the correct individual referenced in the documents obtained from
Covenant and that the obligation had not been discharged. When these legitimate steps are
combined with B-Line’s past successful experience with claims purchased from Covenant,
Covenant’s activity regarding the account and Covenant’s representations and warranties, the
conclusion is inescapable that B-Line filed the proof of claim after conducting a reasonable inquiry
under the circumstances. See Glatter v. Mzor (In re Mroz), 65 F.3d 1567, 1573 (11th Cir. 1995)
(sanctions are warranted where party has absolutely no evidence to support allegations); Davis v.
Carl, 906 F.2d 533, 536-37 (11th Cir. 1990) (whereas complete lack of evidence may justify
sanctions, simply weak evidence will not usually justify sanctions).
The only factual basis in support of the bankruptcy court’s conclusion to the contrary was the
Debtor’s failure to schedule the debt. According to the bankruptcy court, the Debtor’s mere failure
to schedule the debt at issue was a “red flag” rendering B-Line’s reliance unreasonable and
demanding further inquiry. Cf. In re McAllister, 123 B.R. 393, 396-97 (Bankr. D. Oregon 1991)
(Rule 9011 sanctions imposed where Oregon taxing authority filed proof of claim for income taxes
allegedly owed by debtor during years where no returns were filed without first determining whether
debtor had obligation to pay such taxes; debtor did not list Oregon as creditor on schedules and was
not an Oregon resident during years in question). However, it is not unusual for debtors to fail to
initially schedule a debt, even though such schedules are filed under the penalty of perjury. See
Steven W. Rhodes, An Empirical Study of Consumer Bankruptcy Papers, 73 Am. Bankr. L.J. 653(Summer 1999) (“[T]he lack of care and understanding of the debtors and attorneys in fulfilling the
disclosure requirements [of the bankruptcy schedules and statements] is palpable and disturbing.”).
As such, when all of the circumstances of this case are considered, the Debtor’s failure to schedule
the debt did not, in and of itself, render B-Line’s otherwise reasonable inquiry unreasonable. Based
on the foregoing, I would respectfully reverse as clearly erroneous the bankruptcy court’s holding
that B-Line violated Rule 9011 by failing to conduct a reasonable pre-filing inquiry.
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