Gerner & Kearns Co., L.P.A.

Proofs of Claim: A Discussion of the Pending Changes

For the past couple of years, the Advisory Committee on Bankruptcy Rules has been working on amending a variety of bankruptcy rules. Two such instances are changes to Federal Rule of Bankruptcy Procedure 3001 and the implementation of Federal Rule of Bankruptcy Procedure 3002.1. What started in 2009 as a preliminary draft has made its way through publication and comment, approval by the Standing Committee, Judicial Conference and the Supreme Court. Unless Congress blocks its passage, these rule changes will take effect on December 1, 2011.

RULE 3001

The predominant changes are with the supporting information filed in conjunction with the Proof of Claim which is found in subsection (c) of Rule 3001. Local rules adopted in our various jurisdictions already had many of these requirements; for some in the industry, these won't seem overly burdensome - but to others, these requirements will be eye‐opening.

Before discussion of the changes to supporting information, attention should be paid to the actual Proof of Claim form itself, Official Form B10. The structure of the form itself has changed with a variety of new fields and boxes. One such box is for the interest rate. If the rate is variable, the claim preparer needs to make sure the interest rate listed on the Proof of Claim was the rate in effect when the bankruptcy petition was filed. The caveat being that this could be a different rate than the current rate. Additionally, the signature block includes the following language, "I declare under penalty of perjury that the information provided in this claim is true and correct to the best of my knowledge, information and reasonable belief." This should stand to further emphasize the requirements of Bankruptcy Rule 9011(b) when preparing Proofs of Claim.

With the filing of a Proof of Claim, the filing party must also file an itemized statement outlining the interest, fees, expenses and/or other changes incurred before the petition was filed. If the Proof of Claim is for real property, a statement of the amount necessary to cure any default as of the date the petition was filed must also accompany the filed Proof of Claim. This is currently slated to be called Official Form B10, Attachment A (Mortgage Proof of Claim Attachment).

If the loan is an escrowed loan, an escrow account statement must be prepared as of the date of the filing of the bankruptcy petition. This account statement can be prepared in the same format used in non‐bankruptcy contexts.

Lastly, as it relates to Rule 3001, if the claim holder fails to provide any of the information required, the Court can take certain action. They can prevent the claim holder from introducing the omitted information into evidence at any contested matter or adversary proceeding in the case, unless the Court determines the failure to provide this was substantially justified or harmless. The Court can also award other relief including reasonable expenses and attorney's fees that were caused by the failure to provide the information. The Court will have to issue a notice and hold a hearing should either of these penalties come into play. The claim itself would still be allowed unless it is deemed disallowed separately by Section 502(b). While this standard could be classified as subjective, simply making sure all of the required information is attached to the Proof of Claim will help in making sure the claim is processed smoothly.

RULE 3002.1

This rule is new to the Bankruptcy Rules and works in conjunction with Section 1322(b)(5) of the Code as it relates to curing mortgage default amounts and maintaining ongoing mortgage payments. The goal is to provide the debtor the EXACT amount to cure pre‐petition arrearage and maintain post-petition payments. Again, many of the procedures enacted by the implementation of this rule have been local rules and practices for many in the industry, but new Rule should add some normalcy to the wide range of what is to be filed, when it is to be filed, by whom it should be filed and to whom it should be served upon.

The first item this Rule addresses is payment changes. No later than twenty‐one days before the new payment amount is due, the claim holder must file with the Court and serve the debtor, debtor's counsel and the Trustee a copy of Form B10 (Supplement 1 - Notice of Mortgage Payment Change). The form instructs the filer to indicate the reason for the changed payment amount and when it will take effect. As the form name indicates, this is to be filed as a supplement to the Proof of Claim. The form also features the same verbiage in the signature block as seen in the Proof of Claim form itself.

Should any fees, expenses or charges become incurred during the bankruptcy, the claim holder must serve file with the Court and serve the debtor, debtor's counsel and the trustee with a copy of Form B10 (Supplement 2 - Notice of Post‐Petition Mortgage Fees, Expenses and Charges). These must be itemized and should state if they are recoverable against the debtor or their estate. This form must be filed within 180 days of the fees, expenses and/or charges being levied. Also, this form is to be filed as a supplement to the filed Proof of Claim.

If the debtor and/or trustee do not agree with the charges, they must object within one year after service of the pleading. The Court will then hold a hearing and determine whether or not the claimed expense, fee or charge is permissible according to the underlying agreement and, if so, if it is necessary under Section 1322(b)(5) of the code, meaning is the charge necessary to cure a default and/or maintain post‐petition payments.

No later than 30 days after the debtor complete their bankruptcy plan, the trustee will file a "Notice of Final Cure Payment" and serve that pleading upon the debtor, debtor's counsel and the claim holder. This notice will state that the debtor has paid all amounts necessary to cure any default on the claim. Within twenty‐one days of service upon the claim holder, the holder must file a statement agreeing or disagreeing that the default has been cured and whether or not the debtor is current on all payments. This statement must further itemize the amounts the holder believes remain unpaid, whether they are pre‐petition or post‐petition. This document is to be served on the debtor, debtor's counsel and the trustee. The debtor or trustee then has twenty‐one days of their own to file a motion with the Court to determine if any default remains and if the debtor is post‐petition current with their mortgage payment.

It is also worth noting that the same potential sanctions apply to this Rule as apply in Rule 3001. If the claim holder does not provide the requisite information, the court can preclude evidence from being proffered at future hearings and/or award reasonable expenses and attorney's fees caused by not proving the information, unless the Court deems the failure was substantially justified or harmless.

This increased transparency will show the consumer and debtor communities that our industry is doing the right thing, the right way, at the right time. Now is the time to put these procedures in place with the work‐flow. Let's all work together to assure compliance across the board.

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