INFORMAL PROOFS OF CLAIM

PCFS Financial v. Spragin (In re Nowak), 2008 WL 1924974 (B.A.P. 6th Cir. 2008). The debtors executed a mortgage in favor of PCFS on their residence. Three years later when they filed bankruptcy, the trustee filed a complaint to avoid the lien of PCFS on the basis that the mortgage was not executed in accordance with the laws of the State of Ohio. The Bankruptcy Court entered an order avoiding the lien, and PCFS appealed to the B.A.P., which certified to the Ohio Supreme Court a question concerning the constitutionality of former Ohio Revised Code § 5301.234, a statute which purported to preserve mortgages notwithstanding certain irregularities. After the Ohio Supreme Court issued its opinion concluding that the statute was unconstitutional, the B.A.P. affirmed the Bankruptcy Court’s decision avoiding PCFS’s lien.

While the adversary proceeding was pending, the trustee filed a notice of intent to sell and a motion to avoid lien, claim, or encumbrance, whereby she proposed the sale, free and clear of PCFS’s lien, of the debtors’ residence on the basis that PCFS’s lien was in bona fide dispute. PCFS objected. Additionally, PCFS filed a motion for relief from stay and abandonment. The Bankruptcy Court overruled PCFS’s objection to the trustee’s sale motion, and PCFS withdrew its stay relief motion. While the adversary proceeding was on appeal, the trustee filed an amended sale notice, and PCFS did not object.

Upon the filing by the trustee of her final report, PCFS filed an objection and motion to allow informal proof of claim, requesting that the Court consider collectively as an informal proof of claim its previously filed motion for relief from stay pleadings and its filings in the adversary proceeding. The Bankruptcy Court overruled PCFS’s objection and denied its motion.

In reviewing whether an informal proof of claim existed, the B.A.P. applied the five-factor Sixth Circuit test as set forth in In re N.J. Waterman & Assocs., Inc.¸ 227 F.3d 604 (6th Cir. 2000). In order to constitute an informal proof of claim, this test states that: (1) the proof of claim must be in writing; (2) the writing must contain a demand by the creditor on the debtor’s estate; (3) the writing must express an intent to hold the debtor liable for the debt; and (4) the proof of claim must be filed with the Bankruptcy Court. Only if the filing meets all these criteria, then may the court consider whether, as a fifth element, it would be equitable to allow the amendment of the informal proof of claim. Thus, the first four factors are indicative of the proposed claim’s validity, and the fifth factor answers the question whether the amendment should be allowed once the informal proof of claim is determined to be valid.

On appeal, the B.A.P. found that the objection filed by PCFS to the trustee’s proposed sale, its motion for relief from stay pleadings, and its defense of the adversary proceeding all evidenced a representation that the debtors were indebted to it and that PCFS was seeking to hold the debtors’ estate liable for the debt. The objection estimated the current balance on the promissory note and the stay relief motion set forth the exact outstanding balance, the same as if PCFS were filing a proof of claim. PCFS had attached a copy of its promissory note from the debtors to its objection to the trustee’s proposed sale and to its motion for relief from stay. Thus, all the information that PCFS would have been required to include in a formal proof of claim had been set forth in the stay relief motion and other documents.

However, the B.A.P. found that deference must be given to a bankruptcy court’s judgment regarding whether the allowance of an informal proof of claim would be equitable. In concluding that the allowance of PCFS’s informal claim would be inequitable, the Bankruptcy Court considered PCFS’s lack of explanation for its failure to timely file a proof of claim. The Court also took into account that, contrary to other creditors who had only three months notice to file proofs of claim, PCFS had over four years to file its claim, from the time the trustee first filed the complaint to avoid PCFS’s lien to 30 days after the judgment in the adversary proceeding as affirmed by the B.A.P. became final. Additionally, but for PCFS’s claim, other creditors, who timely followed the rules, would receive payment in full plus interest. However, if PCFS’s claim were allowed, the Bankruptcy Court found that these creditors would receive less than a third of their claims, without interest, while PCFS would receive the bulk of the distribution. Thus, the B.A.P. concluded that the Bankruptcy Court’s rejection of this outcome had not been unreasonable and was not an abuse of discretion. The B.A.P. affirmed the Bankruptcy Court’s decision, and therefore, PCFS’s informal proof of claim was not allowed.

SUPPLEMENTAL NOTICES TO FILE PROOFS OF CLAIM

In re Jarvis, Case No. 06-52553 (Bankr. N.D. Ohio May 1, 2008) (J. Shea-Stonum). Debtor filed a no-asset case, however, after the trustee received life insurance policy and 401k plan funds in the amount of $23,000.00 resulting from the death of the debtor’s husband, the trustee filed a first notice of assets on April 30, 2007. On May 2, 2007, the Clerk’s office served upon all creditors a notice to file a proof of claim, giving them until July 20, 2007 within which to file a proof of claim. Five proofs of claim totaling $23,785.38 were filed by the bar date. Subsequently, in November 2007, a second installment of funds, over $28,000.00, was received by the trustee. When transmitting the funds to the trustee, the debtor’s counsel requested prompt administration of the estate, as the debtor had already lost her home, her car, and her husband, and she needed the money to pay pending bills. Debtor recognized that according to the claims previously filed, she would be receiving $19,000.00 of those funds. Instead, the trustee filed a second notice of assets on January 31, 2008, and the Clerk’s office mailed a second notice of need to file proofs of claim, allowing all creditors until March 3, 2008 to file claims. Four additional claims totaling approximately $11,000.00 were received.

Debtor objected to the trustee’s second notice of assets and request for notice to creditors, arguing that the set of claims filed in response to the trustee’s first notice of assets had not been promptly administered and that granting creditors an additional opportunity to file proofs of claim was detrimental to debtor. The trustee admitted that one of the reasons he filed the second notice of assets was to increase distributions to creditors and, thus, increase his trustee’s fee. This had been the regular practice of panel trustees in the Akron Court.

Recognizing that it was presented with a question of first impression, the Court determined that no statutory authority exists for the sending out of a second request to file proofs of claim after the bar date has passed. The Court stated that the creditors’ right to payment of dividends should be accomplished as promptly as practicable, and a trustee must close a bankruptcy estate as expeditiously as is possible. In the case at hand, the Court noted that the particular problem resulted from the fact that creditors who did timely file proofs of claim did not see the prompt administration of the case for their benefit, and the trustee had not put forth a compelling reason why the first body of claims could not have been administered promptly after receipt of the second installment of estate funds in November 2007. The Court rejected the trustee’s concern that a substantial sum of money might be returned to debtor as an appropriate ground for requesting the filing of additional proofs of claim. The Court did note that a different situation could have resulted if no proofs of claim had been filed by the bar date or if the trustee was continuing to collect estate funds. The Court reduced the trustee’s fee and calculated it based solely on the distributions made pursuant to the claims filed by the bar date, however, it did establish a procedure by which Akron panel trustees can, for cause, seek approval before filing a supplemental notice of need to file proofs of claim.

COMMENT: After this opinion, it is uncertain whether trustees can send letters on their own soliciting proofs of claim as opposed to having the clerk's office issue an additional notice. Judge Shea-Stonum might frown upon such an attempt. In the Canton Bankruptcy Court, however, the clerk's office has never issued supplemental notices but has always allowed trustees to solicit additional proofs of claim through their own efforts.

Aaron Ridenbaugh

§ 544(a)(3) - Avoidance of Mortgage Lien Pursuant to Defective Acknowledgement

Geygan v. World Savings Bank, FSB (In re Nolan), 383 B.R. 391 (B.A.P. 6th Cir. 2008). One of the issues before the B.A.P. was whether the phrase “witness my hand” was substantially equivalent to the phrase “acknowledged before me” under Ohio law regarding acknowledgements.

The debtors signed a note in the amount of $327,600.00 in favor of the defendant. On the signature page of the mortgage, below the signatures of the debtors and handwritten beside the signature of the notary public, was the phrase “Witness my hand this 23rd day of May, 2000.” The notary’s name was hand-printed below her signature. Below the notary’s name was the printed phrase “ATTACH INDIVIDUAL NOTARY ACKNOWLEDGEMENT,” beside which were the hand-written words “See Attachment,” although no notary acknowledgement was attached. The following page contained the signatures of the notary and another person as witnesses and the next page contained a notary stamp for the notary.

The bankruptcy trustee commenced an adversary proceeding against the defendant alleging that the mortgage was not executed in accordance with Ohio law and, therefore, was avoidable pursuant to 11 U.S.C. § 544(a)(3).

To determine whether the bankruptcy court was correct in ruling that the certificate of acknowledgement did not comply with the requirements of Ohio law regarding acknowledgements, the B.A.P. first turned to O.R.C. § 5301.01(A), which states that a mortgage “shall” be signed by the mortgagor and that “[t]he signing shall be acknowledged by the . . . mortgagor . . . before a . . . notary public . . . who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgement.” The combination of O.R.C. §§ 147.53, 147.54, and 147.55 prescribe what is required of an acknowledgment. It must be acknowledged in front of a notary public or similar person, the person taking the acknowledgement must know the person acknowledging or have satisfactory evidence that the person acknowledging was the person described in and who executed the instrument, it must be in a form prescribed by Ohio law or have the words “acknowledged before me,” or their substantial equivalent, and it must list the state of, county of, and the language that “[t]he foregoing instrument was acknowledged before me this (date) by (name of person acknowledged). (Signature of person taking acknowledgment) (Title or rank).”

The purported acknowledgment, which had only the phrase “witness my hand,” did not meet the requirements of § 147.54. It was not in the form prescribed by § 147.55, and it did not contain the words “acknowledged before me.” The words “acknowledged before me” are defined terms in the Ohio Revised Code, meaning that the person acknowledging appeared before the person taking the acknowledgement, the person acknowledges that he executed the agreement, and the person taking the acknowledgement either knew or had satisfactory evidence that the person acknowledging was the person named in the instrument or certificate. O.R.C. § 147.541. In contrast, the words “witness my hand” are not defined in the Ohio Revised Code and taking their ordinary meaning, indicate only that the witnessing individual observed the signing of the document by another individual. Additionally, the words “See Attachment” suggested that there was no intention to rely on the words “witness my hand” as an acknowledgment and that the parties intended to attach a formal acknowledgement. Furthermore, the Court found that even if the phrase “witness my hand” was determined to be the substantial equivalent of “acknowledged before me,” the acknowledgement was defective because the names of the borrowers were not recited. On that and other grounds, the B.A.P. affirmed the bankruptcy court’s decision.