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In re Motley

United States Bankruptcy Appellate Panel of the Ninth Circuit
Feb 28, 2006
BAP CC-05-1099-KJB (B.A.P. 9th Cir. Feb. 28, 2006)

Opinion


In re: CECIL F. MOTLEY and ETHELYN MOTLEY, Debtor. SELECT PORTFOLIO SERVICING, INC., Appellant, v. CECIL F. MOTLEY and ETHELYN MOTLEY, Appellees BAP No. CC-05-1099-KJB United States Bankruptcy Appellate Panel of the Ninth CircuitFebruary 28, 2006

NOT FOR PUBLICATION

Argued and Submitted at Pasadena, California: January 18, 2006

Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Samuel L. Bufford, Bankruptcy Judge, Presiding. Bk. No. LA 98-53444-SB.

Before: KLEIN, JAROSLOVSKY, [ BRANDT, Bankruptcy Judges.

Hon. Alan Jaroslovsky, United States Bankruptcy Judge for the Northern District of California, sitting by designation.

MEMORANDUM

This appeal presents a new twist to the problem of the informal proof of claim in a manner that arguably contorts the doctrine to a degree that will not support the action that the court took when it sustained the debtors' " objection" to Select Portfolio Services, Inc.'s (" SPS") purported informal proof of claim and reduced the amount of the associated lien. For procedural reasons, however, including the absence of findings of fact and conclusions of law, we conclude that the record has not been sufficiently developed to enable review and VACATE and REMAND.

FACTS

On October 29, 1998, Cecil Motley and Ethelyn Motley, debtors and appellees, filed a voluntary chapter 11 petition. The debtors listed real property commonly known as 17 Hillscrest Manor, Rolling Estate, California (" residence"), which they valued at $1,200,000 subject to two deeds of trust.

This appeal relates to the Adjustable Mortgage Loan Note (" Note"), secured by a deed of trust, in the original principal amount of $704,000 in favor of Coast Federal Bank (which Note was later acquired by Washington Mutual and is now in the hands of SPS, which was formerly known as Fairbanks Capital Corporation). The Note defined principal as the sum of two parts. One part was the amount of $704,000 advanced by the Note holder on the date of the loan funds (the " Initial Principal Balance"), and the other part consisted of capitalized interest, which would be added to the " Initial Principal Balance" as further explained in the Note. In other words, the outstanding principal consisted of the impound portion of funds actually borrowed, plus capitalized interest.

Additionally, the Note provided that the monthly payment would be adjusted annually on March 1, and that " each of these dates" would be called a " Monthly Payment Adjustment Date." Additionally, " [i]n adjusting the monthly payment on each Monthly Payment Adjustment Date, the Note Holder" would determine the amount of monthly payments on the basis of the following factors: (1) the then outstanding principal balance (assuming all monthly payments have been made on schedule); (2) the interest rate in effect as of a date 45 calendar days before the Monthly Payment Adjustment Date (the " Payment Rate"); and (3) the then-remaining amortization term of the loan.

In resolution of a motion by Washington Mutual for relief from the automatic stay, the court entered on April 17, 2000, an Adequate Protection Order (" APO") requiring, as a condition of the stay remaining in effect, that the debtors make monthly payments to Washington Mutual of $5,117.49 " subject to change due to impound requirements and/or interest adjustments per the Promissory Note and Deed of Trust."

Later, Washington Mutual " sold its position" to Fairbanks Capital Corporation, which purportedly changed its name to Select Portfolio Servicing, Inc.

On May 4, 2004, the court authorized the debtors to obtain a loan to refinance the property, which was designed to " cure all delinquencies on the outstanding encumbrances and provide funds for the debtors to fund a plan or allow them to dismiss [the] case so that a compromise may be worked out [with] the IRS."

Pursuant to this authorization, the debtors attempted to get a correct payoff amount from SPS so they could pay off the loan. The debtors' request, however, began an " on-going battle" between the parties regarding the correct payoff amount. Specifically, the debtors contend that SPS refuses to acknowledge the changes in the loan interest rates on the adjustable rate note over the course of the past four years.

SPS filed a motion for relief from stay on January 10, 2005, alleging that the debtors had defaulted upon their obligations under the April 17, 2000, APO.

The debtors' countered SPS's relief from stay motion in two ways. First, on January 13, 2005, the debtors filed an opposition to the relief from stay motion, and, second, filed an " objection to the secured claim of SPS" supported by the declaration of the debtors' counsel. The court's ruling on the debtors' objection is the order that is the subject of the instant appeal.

With respect to the debtors' opposition to the SPS relief from stay motion, the declaration of the debtors' counsel asserted that the SPS declaration in support of the relief from stay motion did not accurately represent the debtors' payments in excess of $206,477.00.

Without a hearing and apparently without knowledge of the debtors' opposition, the court entered an order on January 28, 2005, granting SPS relief from the automatic stay. Thereafter, on February 4, 2005, the debtors filed an ex parte application for an order vacating the order granting SPS relief from stay.

As to the debtors' " objection" to SPS's secured claim, the objection asserted that the debtors would ask the " Court to sustain their objection to the secured claim of SPS in the approximate amount of $985,672.03." However, neither Washington Mutual nor SPS had filed a proof of claim. In reality, the " objection" was to a payoff statement that had been directed to the debtor and that was attached as Exhibit A to the declaration of the debtors' counsel. The payoff statement, dated December 10, 2004 and expiring on December 30, 2004, listed an amount owed of $985,672.03.

The grounds for the objection to the sum stated in the payoff statement were that the amount demanded by SPS was " overstated, false, included unwarranted additional and illegal charges" and did not conform with the terms and conditions of the underlying Note and trust deed that created the obligation. The debtors' objection further contended that SPS's demand was the " product of nefarious, illegal and unacceptable accounting practices of SPS subject to proof at the trial on this matter."

In the prayer, the debtors' objection requested the court to: (1) sustain the debtor's objection to the secured claim of SPS in the approximate amount of $985,672.03 in its entirety; (2) cancel the associated deed of trust; and (3) award of damages to the estate incurred due to SPS's conduct according to proof at trial.

In response to the debtors' objection to claim, SPS filed the declaration of Diane Mitchell, wherein she explained that SPS prepared a payoff statement dated December 10, 2004 that expired December 30, 2004 which reflected an amount owed of $985,672.03. The declaration further asserted that the interest amount of $177,110.98 was a fair and accurate recitation of the amount owed.

Thereafter, on February 5, 2005, debtor Cecil Motley filed a declaration in reply to SPS's opposition to the debtors' objection to claim, wherein he explained that they were members of a class of claimants in a class action in the United States District Court of the District of Massachusetts in which it was alleged that Fairbanks/SPS defrauded claimants by means of improper accounting practices and other actions. The debtors requested the court take judicial notice of the Notice and Notice of Proposed Settlement they received from the court.

Mr. Motley's declaration further stated that on January 22, 2005, he received from SPS a notice of rate adjustment and principal and interest adjustment that reflected a " projected principal balance for calculation" of $695,423.34. The SPS notice was attached as Exhibit A.

The court held a hearing on February 8, 2005, on the debtor's objection to SPS's proof of claim and on the ex parte application to vacate the order granting SPS relief from stay. At the hearing, SPS made an oral motion to strike the debtors' reply because it was not received until the day before the hearing and then only by facsimile. The court denied the motion. No testimony was taken and no opportunity for cross-examination was provided.

The discussion at the hearing centered around the accounting of the loan (or lack thereof) and who had the burden of proof on the issue of what was owed. While SPS contended the debtors had the burden of proof, the court ruled that the bank had the burden of proof and that insufficient evidence by the debtors had no consequence, unless there was a prima facie case made by the bank.

Ultimately, the court determined that it was necessary for SPS to provide an accounting of all the payments under the loan. Because the court was going to consider the late-filed reply and request for judicial notice, SPS requested appropriate time to respond to the reply and provide an accounting. The court proposed to give SPS " 48 hours to do that." Counsel for SPS responded, " Okay. That's fine."

The court continued the matter until February 22, 2005, and ruled that " for the interim between now and then, I'm suspending the order for relief from the automatic stay."

Before the continued hearing, several documents were filed regarding debtor's objection. On February 10, 2005, SPS filed evidentiary objections to the debtors' declarations. The next day, SPS filed the declaration of Diane Mitchell in support of its response to the debtors' reply. Six days later the debtors filed declarations in " reply to response of SPS to debtor's reply of SPS response of objection to secured claim."

The continued hearing was held on February 22, 2005. No testimony was taken. At the outset of the hearing, SPS objected on procedural grounds, arguing that not only had it not filed a proof of claim, that the debtors had not attached a claim to their objection as required by the local rules, and that the debtors had merely objected to a letter they believed to be a payoff amount. The court noted that the Ninth Circuit has held that there can be objections to informal proofs of claim. Counsel for SPS responded that that had never been before the court and that the debtors had not theretofore alleged that the letter containing the payoff demand constituted an informal proof of claim.

Next, SPS objected on " substantive grounds" contending that the debtors' assertion that they made over $206,000 in payments was not supported by the evidence. SPS argued that the burden was on the debtor to show that she made $206,000 in payments, while the court explained that the burden fell on the creditors to show that the demand was correct. Within this discussion, SPS clarified that it began servicing the loan in October 2003 and that it had no competent evidence of any payments received before that date from Washington Mutual.

The court did not make findings of fact and conclusions of law. However, it granted judgment in favor of the debtor as to the payoff amount, ruling as follows:

I've not heard anything to change the tentative ruling. So judgment is granted to the debtor. The pay-off is $695,423.34 as of March 1, 2005, and that the debtor can pay that amount plus any interest that may accrue thereafter, if the closing is after March 1, at whatever is the appropriate interest rate as determined by the latest application of the provisions of the variable - calculation of the variable interest rate.

The " tentative ruling" to which the court referred does not appear to have been made part of the record by the court. Although the ruling squares with the $695,423.34 balance stated in the SPS notice of rate adjustment and principal and interest adjustment that the debtor had received on January 22, 2005, there was no analysis of whether and how the document squared with the terms of the Note and Deed of Trust that also were in evidence. Nor was there any analysis of the effect of the APO and the objection.

The court entered an order " sustaining objection to secured claim of Select Portfolio Services, Inc." that provided: (1) the payoff principal balance was $695,423.34; (2) the debtors shall have 60 days to refinance the property; (3) the debtors are entitled to recover costs of suit and shall file a memorandum of costs; and (4) the debtors may file a separate motion or complaint for damages incurred by the actions and delay of SPS; and (5) the order granting relief from the stay is suspended for an additional sixty days.

This timely appeal ensued.

On appeal, SPS argued (as it had also argued before the bankruptcy court) that " no [proof of] claim of any kind was properly before the Bankruptcy Court for determination" and that the debtors' objection, coupled with a demand for relief of the kind specified in Bankruptcy Rule of Procedure 7001, required an adversary proceeding. In addition, SPS argued that, assuming there was an informal proof of claim, the bankruptcy court erred by not giving the informal proof of claim a presumption of validity which then purportedly shifted the burden to the debtor to establish that the " alleged informal claim was wrong." The final SPS argument was that the bankruptcy court's decision that the amount owed was $695,423.34 was clear error.

At oral argument of this appeal, SPS changed its theory of the case and abandoned its argument that there was no informal proof of claim and that an adversary proceeding was required. To the contrary, it contended for the first time that the payoff demand letter was an informal proof of claim and then attempted to argue the underlying merits of the dispute on the premise that the informal proof of claim was entitled to the same presumption of validity as a formal proof of claim.

JURISDICTION

The bankruptcy court had jurisdiction via 28 U.S.C. § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(1).

ISSUE

1. Whether adequate appellate review is possible on the present record.

2. Whether the court erred by regarding the purported informal proof of claim as sufficiently formal to permit the debtors' objection to the substantive merits to go forward in a contested matter.

STANDARD OF REVIEW

The application of the rules of procedure is a question of law reviewed de novo. Gonzalez v. Munoz (In re Munoz), 287 B.R. 546, 550 (9th Cir. BAP 2002). The existence of an informal proof of claim involves a question of law reviewed de novo. Hi-Tech Commc'ns Corp. v. Poughkeepsie Bus. Park, LLC (In re Wheatfield Bus. Park, LLC), 308 B.R. 463, 465 (9th Cir. BAP 2004) (" Wheatfield").

Whether a proof of claim is executed and filed in accordance with the Federal Rules of Bankruptcy Procedure is a question of fact that is reviewed for clear error. Garner v. Shier (In re Garner), 246 B.R. 617, 619 (9th Cir. BAP 2000). Whether evidence is sufficient to rebut an evidentiary presumption is a question of fact reviewed for clear error. Garner, 246 B.R. at 619. We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Hardin v. Gianni (In re King St. Invs., Inc.), 219 B.R. 848, 852 (9th Cir. BAP 1998).

DISCUSSION

As noted at the outset, this appeal appears to contort the informal proof of claim doctrine beyond recognition. Although SPS abandoned its contention that there was no proof of claim to which to object at oral argument of this appeal, the problem remains that there was never enough formality associated with the purportedly informal proof of claim to permit the debtors' objection on the substantive merits to go forward. Indeed, for the reasons we shall proceed to explain, the procedure that was followed has left a record that is too vague to permit effective review of the novel and complex issues of the underlying merits.

Accordingly, we vacate and remand for the prosecution of either a proper claim and objection thereto or an adversary proceeding.

I

The treatment of the payoff statement submitted by SPS to the debtors as an informal proof of claim creates several conceptual and procedural problems that, in part, stem from using the informal proof of claim doctrine in a context outside of its usual framework. Simply put, the informal proof of claim doctrine is a judge-made doctrine that ordinarily rescues creditors from an otherwise untimely proof of claim. It has not been applied as a platform for dealing with an objection focused on the underlying merits of the claim. Moreover, an informal proof of claim has never been sufficient to permit a trustee to make payment from a bankruptcy estate without the actual filing of a formal proof of claim.

A

" An informal proof of claim is something which is not, and was not intended to be, a proof of claim." 9 COLLIER ON BANKRUPTCY ¶ 3001.05 [1] (Alan N. Resnick & Henry J. Sommer eds. 15th ed. rev. 2005) (" COLLIER"). We recently summarized the informal proof of claim doctrine in the Ninth Circuit. Wheatfield, 308 B.R. at 467.

The Ninth Circuit has held that even though no document is filed with the bankruptcy court, an informal proof of claim may arise out of demands against the estate or out of correspondence between a creditor and the trustee or debtor-in-possession which demonstrate an intent on the part of the creditor to assert a claim against the bankruptcy estate. Sullivan v. Town & Country Home Nursing Servs., Inc. (In re Town & Country Home Nursing Servs., Inc.), 963 F.2d 1146, 1153-54 (9th Cir. 1991); Anderson-Walker Indus. v. Lafayette Metals, Inc. (In re Anderson-Walker Indus., Inc., 798 F.2d 1285, 1287-88 (9th Cir. 1986).

In the usual context, as noted, the informal proof of claim doctrine rescues creditors from untimeliness. Generally, a creditor uses the informal proof of claim doctrine to its advantage so that it can then amend the informal proof of claim with a formal proof of claim that is filed after the bar date has passed and to which there can be an objection to claim addressed to the merits. Wheatfield, 308 B.R. at 469 (copy of proof of claim sent by creditor's attorney to debtor's counsel before the deadline to file a claim expired fulfilled the requirements of presenting an informal proof of claim that is subject to amendment by filing of a formal proof of claim); Pizza of Hawaii v. Shakey's Inc. (In re Pizza of Hawaii, Inc.), 761 F.2d 1374, 1380 (9th Cir. 1985)(creditors' actions and documents filed in the bankruptcy court constituted informal proof of claim that could be amended by formal proof of claim); Anderson-Walker Indus., 798 F.2d at 1288 (creditor's letter sent to trustee's attorney constituted an amendable informal proof of claim); Sambo's Rest., Inc. v. Wheeler (In re Sambo's Rest., Inc.), 754 F.2d 811, 816 (9th Cir. 1985)(creditor's complaint, together with correspondence and joint motion with debtor to transfer case to bankruptcy court, constituted amendable informal proof of claim); County of Napa v. Franciscan Vineyards, Inc. (In re Franciscan Vineyards, Inc.), 597 F.2d 181, 183 (9th Cir. 1979)(creditor's letter to trustee enclosing two tax bills was sufficient to supply " the substance of a proof of claim, and to warrant amendment to supply the absent items of proof").

In this instance, the debtor, instead of the creditor, invoked the informal proof of claim doctrine as the basis for a contested matter addressed to the merits of the underlying claim. The use of an informal proof of claim that is now urged upon us is largely unprecedented. The ultimate difficulty is that a court's action on an informal proof of claim might not suffice to enable trustees to make payment, there being no authority permitting trustees to make payment on informal proofs of claim that have never been amended by formal proofs of claim.

Although there is an example of an informal proof of claim being used as a weapon against a governmental creditor in order to establish that sovereign immunity was waived, that situation involved an adversary proceeding. Sullivan, 963 F.2d at 1153-54.

B

Another complication in using the informal proof of claim doctrine in this context is that the court has not set a bar date and, thus, it is premature for the debtors to file a proof of claim on the creditor's behalf and then object to it. 11 U.S.C. § 501(c); Fed.R.Bankr.P. 3004.

Pursuant to Rule 3003, the court shall fix the time within which proofs of claims or interest may be filed. Fed.R.Bankr.P. 3003(c). When a creditor has not filed a proof of claim within the time period set by the court, a creditor invokes the informal proof of claim doctrine. If the creditor can point to an informal document that sufficiently meets the requirements for an informal proof of claim, the court will deem the informal document an informal proof of claim, which the creditor can then amend, and, thereafter participate in the estate. Wheatfield, 308 B.R. at 469; Pizza of Hawaii, 761 F.2d at 1380; Anderson-Walker Indus., 798 F.2d at 1288; Sambo's, 754 F.2d at 816; County of Napa, 597 F.2d at 183.

As such, courts ordinarily have deemed something other than a proof of claim to be an informal proof of claim in an effort to ameliorate the harsh result of strict enforcement of a bar date. 9 COLLIER ¶ 3001.05 [1]; Pizza of Hawaii, 761 F.2d at 1381; Sambo's Rest., Inc., 754 F.2d at 816; County of Napa, 597 F.2d at 183 (citations omitted); Wheatfield, 308 B.R. at 468. Here, the court has not yet set a bar date and, thus, the usual purpose for using the informal proof of claim doctrine is not in play.

Nor could the debtors have filed (and objected to) a formal proof of claim on behalf of the creditor at this stage of the case because the bar date had not passed. Although § 501(c) permits a debtor to file a proof of claim if the creditor does not timely file a proof claim, the court has not yet in this case set a bar date for the filing of claims pursuant to Federal Rule of Bankruptcy Procedure 3003(c)(3). Hence, the debtors did not have standing to file a proof of claim on behalf of SPS pursuant to § 501(c) because there was no proof of claim that the debtors could have filed on behalf of SPS, and because SPS had not filed a proof of claim, there was no proof of claim on file to which the debtors could have objected.

C

Assuming that the payoff statement constituted an informal proof of claim, the next procedural step is that a creditor ordinarily must amend the informal proof of claim to conform to the requirements of Rule 3001(a), so that there is eventually a formal proof of claim on the table. 9 COLLIER ¶ 3001.05[4]. In other words, an informal proof of claim primarily serves as a platform for a formal amended proof of claim. Pizza of Hawaii, 761 F.2d at 1379 (9th Cir. 1985); Sambo's, 754 F.2d at 816 (9th Cir. 1985); County of Napa, 597 F.2d at 183, citing, In re Patterson-MacDonald Shipbldg. Co. v. McLean, 293 F. 190, 191 (9th Cir. 1923) and Sun Basin Lumber Co., Inc. v. United States, 432 F.2d 48, 49 (9th Cir. 1970). Once there is a proper proof of claim, an objection addressed to the merits would be in order.

Here, there was never an amendment to the purportedly informal proof of claim. Thus, there was no formal document that the debtors could have objected to. To regard an informal proof of claim as sufficient to permit the debtors' objection to go forward, correlatively requires the conclusion that if there had been no objection, the trustee would have been required to pay an informal proof of claim. It does not even appear that the trustee must seek out informal proofs of claim for review and potential objection. 9 COLLIER ¶ 3001.05[4].

Because a creditor must amend an informal claim to participate in the estate, and, thus, may not complain about a failure to receive a distribution from the estate if no claim complying in form with Rule 3001 was filed in the time required by Rule 3002 and 3003, 9 COLLIER ¶ 3001.05[4], it appears that there cannot be an objection to an informal proof of claim under these circumstances. As such, we conclude that the informal proof of claim was not sufficiently formal to permit the debtors' objection to go forward in a contested matter.

Section 1111(a) does not change the analysis because the debtors did not designate the claim in the schedules as " disputed, contingent, or unliquidated." 11 U.S.C. § 1111(a). Nevertheless, that is not enough on which to premise a claim objection.

Although the underlying questions are interesting and complex, the informality of the proceedings in the trial court has produced a record that is too incomplete to permit intelligent review.

II

Since objection to claim procedure was not available under the circumstances, the alternative would have been an adversary proceeding.

Here, the debtors demanded relief that requires an adversary proceeding under Rule 7001. They sought a declaratory judgment reducing SPS's lien from an alleged $985,672.03 to $695,423.34, cancellation of the second deed of trust, and damages according to proof at trial. While (assuming there was a proper proof of claim on file) a mere objection would have been sufficient to establish what was owed for purposes of bankruptcy distribution, the focus here was mainly for the nonbankruptcy purpose of determining the proper payoff amount on the underlying Note for purposes of nonbankruptcy refinancing. Rule 7001(2) provides that " a proceeding to determine the validity, priority, or extent of a lien or other interest in property" is an adversary proceeding. Fed.R.Bankr.P. 7001(2).

Under any view of the situation, the debtors' objection was joined with a demand for relief of the kind specified in Rule 7001, that (assuming there was a proof of claim to which there would be objection) is required by Rule 3007 to " become" an adversary proceeding. When this situation arises in the context of a procedurally correct objection to claim, the court needs to assign an adversary proceeding number and to clarify the status of the pleadings and either require an amended complaint or deem the objection filed in the parent case to constitute the complaint in the adversary proceeding. The omission of such steps produces the type of procedural chaos that we now confront.

III

To complicate matters further, to the extent that the court could have treated the " objection" as a mere objection to claim, it would nevertheless have been subject to Federal Rule of Bankruptcy Procedure 9014.

As amended in 2002, unless waived by the parties, Rule 9014 requires testimony with respect to disputed material factual issues to be taken in the same manner as in the trial of an adversary proceeding. Fed.R.Bankr.P. 9014(d); Khachikyan v. Hahn (In re Khachikyan), 335 B.R. 121, 126 (9th Cir. BAP 2005). The court must also provide procedures to enable parties to ascertain whether a scheduled hearing will be an evidentiary hearing at which witnesses may testify. Fed.R.Bankr.P. 9014(e); Khachikyan, 335 B.R. at 126-27.

Moreover, findings of fact and conclusions of law are required to be rendered in contested matters and in adversary proceedings. Specifically, Federal Rule of Civil Procedure 52 applies to both categories of bankruptcy litigation. Fed.R.Civ.P. 52, incorporated by Fed.R.Bankr.P. 7052 and 9014. Examples of potentially material questions that ordinarily would be resolved in findings would be whether the document on which the court ruled squares with the Adjustable Rate Note, whether the payments pursuant to the APO had an effect upon the situation, and whether any of the additional sums claimed by SPS were permissible in light of the terms of the Note or otherwise.

The purposes for requiring findings of fact and conclusions of law are, primarily, that the exercise promotes care by assuring that the trier of fact focuses on all pertinent elements in a disciplined manner and, secondarily, to enable more thoughtful appellate review. Yadidi v. Herzlich (In re Yadidi), 274 B.R. 843, 853 (9th Cir. BAP 2002).

Judge Frank's classic statement of the value of formal findings can hardly be improved upon:

For, as every judge knows, to set down in precise words the facts as he finds them is the best way to avoid carelessness in the discharge of that duty: Often a strong impression that, on the basis of the evidence, the facts are thus-and-so gives away when it comes to expressing that impression on paper.

United States v. Forness, 125 F.2d 928, 942 (2nd Cir. 1942).

In short, the multiple procedural omissions, especially the absence of findings of fact and conclusions of law, convinces us that we lack a record sufficient to permit effective review of the many " interesting" questions that might repose in this appeal.

CONCLUSION

For the foregoing reasons, we cannot in good conscience reach the question urged upon us by SPS. Accordingly, we VACATE and REMAND for further proceedings.

JAROSLOVSKY, Bankruptcy Judge, concurring:

I concur completely with the analysis and conclusions of my brethren. However, I would go one step further and hold that in situations like the one before us the sine qua non of an informal proof of claim is a desire by the creditor to file a formal proof of claim. Since SPS never expressed such a desire, it was entitled to the procedural protections of an adversary proceeding.

The filing of a proof of claim has both positive and negative consequences for a creditor. One positive consequence is that a creditor can participate in the distribution of estate assets. One negative consequence is being subject to lesser procedural protections. Because the bankruptcy court erroneously deemed its payoff statement to be an informal proof of claim, SPS was suddenly swept into serious bankruptcy litigation on the basis of a simple motion. It had every right to demand a more formal proceeding and the failure to afford that right renders the bankruptcy court's judgment subject to reversal on appeal. In re Lyons, 995 F.2d 923, 924 (9th Cir. 1993).

SPS never sought a distribution from the general assets of the estate. Pursuant to § 506(d)(2) of the Bankruptcy Code, it did not need to file a proof of claim in order to protect its lien. Because it never desired to file a formal proof of claim, its payoff statement was not an informal proof of claim. For this reason alone, I concur that absent a formal proof of claim the extent of the SPS lien can be properly decided by the bankruptcy court only in the context of an adversary proceeding.


Summaries of

In re Motley

United States Bankruptcy Appellate Panel of the Ninth Circuit
Feb 28, 2006
BAP CC-05-1099-KJB (B.A.P. 9th Cir. Feb. 28, 2006)
Case details for

In re Motley

Case Details

Full title:In re: CECIL F. MOTLEY and ETHELYN MOTLEY, Debtor. v. CECIL F. MOTLEY and…

Court:United States Bankruptcy Appellate Panel of the Ninth Circuit

Date published: Feb 28, 2006

Citations

BAP CC-05-1099-KJB (B.A.P. 9th Cir. Feb. 28, 2006)