Bankruptcy – ‘False Claims’ – Sanctions – FDCPA – Limitations

A Norfolk U.S. Bankruptcy Court says it has authority under §105 of the Bankruptcy Code to sanction a creditor for filing false or fraudulent claims, but the claims at issue here were fraudulent because they were not extinguished by expiration of the statute of limitations under Virginia law, and no sanctions are imposed.

Debtors’ Chapter 13 plan was confirmed on Feb. 12, 2008. On Sept. 19, 2007, debtors objected to Claim Number 1 and Claim Number 9, two credit card debts originally incurred by wife, as time-barred. The creditor later asked to withdraw the two claims.
The parties have entered into a stipulation that, among other points, includes statements that debtors’ credit reports did not show any judgment against debtors in favor of this creditor, Portfolio Recovery, or its assignors, nor any listing of these claims, and that it is not uncommon for Portfolio Recovery to file proofs of claims on accounts beyond the statute of limitations for filing a suit, and withdraw such a claim after the statute of limitations is asserted as an affirmative defense.

This matter arises at a time when bankruptcy courts are examining the integrity of the claims process in various contexts. Here, debtors argue these two claims are fraudulent and subject to sanction by this court pursuant to 11 U.S.C. § 105. Debtors allege an attempt to collect a debt which is time-barred has been found to be a violation of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, and that this court should find the reasoning from decisions under that Act to be analogous and conclude the filing of a proof of claim in this instance is fraudulent and sanctionable pursuant to 11 U.S.C. § 105.

In Burd v. Walters, 868 F.2d 665 (4th Cir. 1989), the 4th Circuit has recognized the authority of the Bankruptcy Court to use civil contempt to carry out the provisions of the Bankruptcy Code pursuant to § 105. No 4th Circuit decision appears to have considered the appropriateness of utilizing § 105 in the context of providing sanctions for a fraudulent proof of claim. Courts that have considered the availability of § 105 as a means to sanction the filing of fraudulent proof of claim are split over the question of whether § 105 provides a basis for the imposition of sanctions for the filing of such a claim.

Despite the availability of other statutory or rule-based remedies, the court’s power to remedy and punish for the filing of a false or fraudulent claim is within the strictures of its authority pursuant to § 105. In the instant matter, if the court finds Claim No. 1 or Claim No. 9 is false or fraudulent, sanctions may be imposed pursuant to § 105.

Laches, however, provides no basis for the imposition of sanctions, by reason of its inherent defensive status. Further, the divergent purpose of the FDCPA convinces the court that the application of decisions such as Kimber v. Federal Financial Corp., 668 F. Supp. 1480 (M.D. Ala.1987), to the instant matter is inappropriate.

The ultimate inquiry of this court, then is whether either Claim 1 or 9 is false or fraudulent.

In Virginia, a debt for which collection action has become barred by the running of the statute of limitations is not extinguished; rather, the bar of the statute operates to prevent enforcement. The bar of the statute of limitations must be asserted as an affirmative defense.

An examination of the two claims convinces the court that these claims are neither false nor fraudulent. The claims facially indicate the circumstances under which they were incurred; there is no attempt to obfuscate the timing of their incurrence so as to mask the potential bar of time. Most importantly, while collection of the claims is arguably time-barred, under Virginia law the debts continue to exist. The bar of the statute of limitations raised by debtors in their claim objections prevents enforcement of the claims, but the claims are not extinguished. As such, asserting the claims in the bankruptcy of debtors does not render the claims either “false” or “fraudulent,” and the imposition of sanctions is not appropriate.

The fact that the withdrawal of the claims is signed by a non-attorney is a violation of local court rules, but the court in its discretion declines to levy sanctions against the creditor by reason of the filing of the withdrawals, and the court will allow withdrawal of the claims.

In re Varona (St. John, J.) (Published) No. 07-71761, May 22, 2008; USBC at Norfolk, Va. VLW 008-4-022, 35 pp.