Can a Debtor Sue a Creditor for Filing a False Claim?

Can a Debtor Sue a Creditor for Filing a False Claim?

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Prior to the Debtor’s bankruptcy he had some serious real estate tax issues. He owned real property in Pendleton County, Kentucky (the “Rogers Property”) but failed to pay taxes for tax years 2003, 2004, 2006 and 2007.  The County sold the tax certificates to Kentucky Tax Bill Servicing, Inc. (“KTBS”) which filed a state court lawsuit in 2010. The lawsuit requested a personal judgment against the debtor, foreclosure of the certificates and public sale of the property.  The Debtor did not respond and the state court entered an “In Rem Judgment and Order of Sale” against the Rogers Property.  The 2012 judgment was silent as to the Debtor’s in personal liability.  Ultimately the Rogers Property was conveyed to KTBS.

Three years later KTBS filed a second state court complaint for a personal judgment against Debtor and foreclosure of Debtor’s current home (the “Williamstown Property”).  KTBS initially obtained a default judgment, but this was set aside on Debtor’s motion. The motion contended that the 2012 order in the first case was an in rem judgment against [the Rogers Property], not a judgment against him personally.” Ky. Tax Bill Servicing, Inc. v. Nagel, No. 2017-CA-000432-MR, 2018 Ky. App. Unpub. LEXIS 773, at *3-4 (Ky. Ct. App. Nov. 2, 2018). The trial court granted the motion. Id.

In 2019, the Debtor filed a chapter 13 bankruptcy.  KTBS filed a claim in the amount of $25,890.92 secured by a judgment lien.  KY Tax Bill Servicing Claim 5-1 As evidence of the lien, KTBS cited the tax certificates and the 2012 judgment.  Debtor objected to the Claim and filed a Memorandum in support.  The Debtor argued the 2012 was in rem only and therefore could not support any further claim against the Debtor. Objection to Claim 5

KTBS filed a response and reply brief asserting the Debtor was liable for the amount as an unsecured debt.  KTBS also amended its proof of claim. KY Tax Bill Servicing Claim 5-2 Response to Objection to Claim 5

On December 5, 2019, The Bankruptcy Court sustained the claim objection holding that the 2012 Judgment was a final judgment on the merits that decided all claims based on the tax certificates.Order on objection to claim 5-2

At about the same time the objection to claim was filed, the Debtor also filed a Class Action Complaint against KTBS.Nagel 1st Amended Class Action Complaint

The Complaint set forth a series of allegations concerning KTBS’s conduct in other bankruptcy cases in the Eastern District of Kentucky to support Debtor’s claim that KTBS files false liens and claims in the Bankruptcy Court to further an illegal scheme.  The Complaint contained seven counts:

Count Cause of Action
1 Filing False Claims in Bankruptcy
2 Violation of KRS § 434.155—Filing an Illegal Lien
3 Violation of KRS § 134.452
4 Slander of Title
5 Abuse of Process
6 Injunctive Relief
7 Declaratory Relief

Specifically, in Count 1 the Debtor

…alleges KTBS made false representations in its proof of claim filed in Debtor’s underlying bankruptcy case by stating that it (1) held a secured claim, (2) held a valid judgment lien against Debtor and his real property, (3) had a legally enforceable claim, and (4) was entitled to interest on fees in violation of KRS § 134.452. Debtor argues that under § 105(a), the Court may award monetary damages and declaratory and injunctive relief against KTBS because it filed a false claim.

Nagel v. Ky. Tax Bill Servicing, Inc. (In re Nagel), No. 19-20055, at *6-7 (Bankr. E.D. Ky. Feb. 21, 2020).

KTBS filed a Motion to Dismiss arguing the Debtor had no private right of action under federal law for filing false claims in bankruptcy.  Therefore, argued KTBS, the Debtor was not entitled to injunctive or declaratory relief in Counts 6 and 7.   Finally KTBS argued that the Bankruptcy Court did not have jurisdiction of the state law claims found in Counts 2-5.

The Court agreed with KTBS as to Count 1, and the rest of the counts fell like dominos.

A federal statute makes it a crime to “knowingly and fraudulently present[] any false claim for proof against the estate of a debtor.” 18 U.S.C. § 152(4). However, as many courts have explained, “there is no private cause of action under 18 U.S.C. § 152(4) for filing a false proof of claim in a bankruptcy proceeding. ” Heavrin vBoeing Capital Corp., 246 F. Supp. 2d 728, 731 (W.D. Ky. 2003), aff’d sub nomHeavrin vNelson, 384 F.3d 199 (6th Cir. 2004); see also Yee vDitech FinLLC (In re Yee), No. NC-16-1237-JuFB, 2017 Bankr. LEXIS 2167, at *9 (B.A.P. 9th Cir. Aug. 3, 2017) (same); Wood vU.S(In re Wood), 341 B.R. 804 (Bankr. S.D. Fla. 2006) (same); Clayton vRaleigh FedSavBank, 194 B.R. 793, 796 (M.D.N.C. 1996), aff’d, 107 F.3d 865 (4th Cir. 1997) (same). Accordingly, Debtor’s claims cannot survive on this basis.

Debtor tries to sidestep 18 U.S.C. § 152(4) through reliance on § 105(a). Section 105 is an omnibus provision allowing a broad exercise of power in the administration of a bankruptcy case and states:

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. 11 U.S.C. § 105(a).

However, the Sixth Circuit has emphasized that Courts cannot use § 105 to create a remedy for a violation of a Code provision where Congress did not explicitly create one. See Pertuso vFord Motor Credit Co., 233 F.3d 417, 423 (6th Cir. 2000) (“[W]e do not read § 105 as conferring on courts such broad remedial powers. The ‘provisions of this title’ simply denote a set of remedies fixed by Congress. A court cannot legislate to add to them.”). There is no cause of action for “false claims” in the Code and Debtor’s attempt to distinguish Pertuso is without merit. The Circuit’s interpretation of § 105(a) leaves no doubt that Count 1 must be dismissed because § 105(a) may not be used to create a private cause of action that does not otherwise exist.

Nagel v. Ky. Tax Bill Servicing, Inc. (In re Nagel), No. 19-20055, at *7-8 (Bankr. E.D. Ky. Feb. 21, 2020)

Since Counts 6 and 7 were dependent upon a cognizable federal claim, they were dismissed.  Finally, although the Court recognized it had jurisdiction over the state law claims alone, it declined to accept jurisdiction.  The adversary proceeding was dismissed.

Practice Pointers

  • This case stands for the proposition that 18 U.S.C. § 152 nor 11 U.S.C. § 105 create a private right of action against a creditor for filing a false claim. Are there other claims the Debtor may have against such a creditor?
  • 9011
    • “We are confident that Rule 9011 provides an adequate remedy for dealing with baseless proofs of claim. See In re Wingerter,394 B.R. 859, 868 (6th Cir. BAP 2008) (Rule 9011 applies to proof of claim abuse and court “should test the signer’s conduct by inquiring what was reasonable to believe at the time the [claim] was submitted.”); Rogers v. B-Real, L.L.C. (In re Rogers),391 B.R. 317, 323 (Bankr.M.D.La.2008) (“Rule 9011 can be used to sanction a creditor that files a proof of claim without proper prefiling investigation and support.”); In re Dansereau,274 B.R. 686, 688-89 (Bankr.W.D.Tex. 2002); In re McAllister,123 B.R. 393, 395 (Bankr.D.Or.1991);  Adair v. Sherman,230 F.3d 890, 895 n. 8 (7th Cir.2000) (Rule 9011 applies to filing fraudulent proofs of claim).” In re Chaussee, 399 B.R. 225, 240 (B.A.P. 9th Cir. 2008).
  • Automatic stay.
    • Many courts have held that “[f]iling a false proof of claim does not violate bankruptcy’s automatic stay. 11 U.S.C. § 362.” Bradley v. Rich’s, FACS Grp., Inc. (In re Bradley), Nos. 95-10084, 97-01035A, 2000 Bankr. LEXIS 2032, at *20 (Bankr. S.D. Ga. Aug. 7, 2000). “In determining that the filing of even inaccurate proofs of claim did not violate the automatic stay, this court reasoned, “‘the automatic stay serves to protect the bankruptcy estate from actions taken by creditors outside the bankruptcy court forum,  not legal actions taken within the bankruptcy court.’ Stated differently, ‘the stay does not operate against the court with jurisdiction over the bankrupt.'”  (quoting In re Sammon, 253 B.R. at 680; Robert Christopher Assocs. v. Franklin Realty Group, Inc. (In re FRG, Inc.), 121 B.R. 710, 714 (Bankr. E.D. Pa. 1990)). The court concluded that even inaccurate proofs of claim by the creditor, as alleged by the plaintiffs, did not violate the automatic stay. This court then reviewed cases involving similar claims of violations of the automatic stay and concluded that “[e]very other court considering the issue in a reported decision has reached a similar conclusion.” In re Sims, 278 B.R. at 472 (citing Inslaw, Inc., 932 F.2d 1467, 289 U.S. App. D.C. 383; Nelson v. Providian Nat’l Bank (In re Nelson), 234 B.R. 528, 534 (Bankr. M.D. Fla. 1999); In re Fiedel Country Day School, 55 B.R. 229, 230 (Bankr. E.D.N.Y. 1985)) (other citations omitted).” Turner v. Am. Express Centurion Bank (In re Turner), Nos. 09-15230, 11-1092, 2011 Bankr. LEXIS 3572, at *8-9 (Bankr. E.D. Tenn. Sep. 16, 2011)
  • Section 105
    • Debtor should also remember that bankruptcy courts possess authority pursuant to § 105(a) “to impose sanctions for a pattern of bad faith conduct that transcends conduct addressed by particular rules or statutes.” Price v. Lehtinen (In re Lehtinen),332 B.R. 404, 412 (9th Cir. BAP 2005) (citation omitted). While § 105(a) empowers bankruptcy courts to impose civil, but not criminal or punitive sanctions, Id., if a purported creditor abuses the claims process, we are confident that § 105(a) provides an effective mechanism for addressing that misconduct. In re Chaussee, 399 B.R. 225, 240-41 (B.A.P. 9th Cir. 2008).
  • Violation of FDCPA
    • The Supreme Court case of Midland “does not mean that there is some irreconcilable conflict between the Bankruptcy Code and the FDCPA, or—like Caliber would have this Court accept—that the FDCPA can never apply in the context of filing a proof of claim or similarly related filing within the chapter 13 context.While there is at least one post-Midland Funding bankruptcy court that holds that the filing of a proof of claim cannot be an unconscionable debt collection practice prohibited by the FDCPA, many other courts continue to evaluate FDCPA claims arising from creditor conduct occurring during a bankruptcy case on their merits.” Trevino v. HSBC Mortg. Servs. (In re Trevino), Nos. 10-70594, 13-7031, 2020 Bankr. LEXIS 268, at *32 (Bankr. S.D. Tex. Jan. 31, 2020)
  • Violation of Bankruptcy Rules 3001 and 3002.1.
  • Remember, Bankruptcy Rules 3001(c)(2)(D)(ii) and 3002.1(i)(2) allows payment of reasonable attorney’s fees for failure to attach certain information to claims.
  • If a creditor failed to produce information necessary to demonstrate its claim, the court may award attorneys fees under these rules.

A copy of the opinion is here: Nagal AP Order

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