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FILING CLAIMS ON BEHALF OF THE MORTGAGE CREDITOR AFTER PAJIAN. MALPRACTICE IF YOU DON’T?

June 9, 2015

By:  Steven P. Taylor

Law Office of Steven P. Taylor, PC

Bankruptcy Rule 3002(c) requires creditors to file proofs of claim within 90 days of the date set for the meeting of creditors.  However, getting a timely filed proof of claim by a mortgage creditor has long been an exercise in frustration. This has been due to significant changes in the proof of claim form that creditors must file to support their claims in bankruptcy.  Some of these changes are the explicit requirement that all writings supporting a claim or showing perfection of a security interest must be attached.   In addition, the signer of the proof of claim must include a statement under the penalty of perjury that all of the information is “true and correct to the best of the signer’s knowledge, information, and reasonable belief.”  The practical effect of these requirements is that creditors personally review all information and supporting documentation with greater scrutiny to avoid issues and liability.

Bankruptcy courts have come to conflicting conclusions on whether Rule 3002(c)’s deadline applies to all creditors or merely unsecured ones.  However, a recent Seventh Circuit decision has not only impact for creditor practice for proof of claim filings but debtor’s counsel. In re Pajian,  No. 14-2052 (7th Cir. May 11, 2015).   In re Pajian involved the debtor’s objection to a proof of claim filed by his secured creditor more than 90 days after the meeting of creditors. The bankruptcy court overruled the debtor’s objection as to the secured portion of the claim, concluding that a secured creditor seeking a distribution under a debtor’s plan need only file a proof of claim before the plan’s confirmation.

The Seventh Circuit reversed that decision and concluded that all creditors are bound by the Rule 3002(c) deadline.  It is blackletter law that a secured creditor’s failure to file a claim does not void its lien.  This is codified in 11 U.S.C. §506(d)(2).  The secured creditor’s failure to file a claim means that the creditor does not participate in the distribution from the bankruptcy estate.  Only  the Chapter 13 Trustee or the Debtor may file a timely proof of claim (for thirty days) after the secured creditor has failed to do so timely.

Unfortunately that also means that the carefully crafted Chapter 13 plan that provided for Trustee conduit mortgage payments and cure payments for the mortgage arrears is now worthless unless the debtor (through counsel) or the Chapter 13 Trustee does file a proof claim on the mortgage company’s behalf.  If that is not done, you could be contributing disposable income that will not go to the intended secured creditor, but ultimately unsecured creditors.  This could expose your client to a deficiency at the end of the bankruptcy.  It would seem unlikely that negligently failing to file a proof of claim (based on your plan numbers) to protect your plan and your client would not raise issues of legal malpractice.  To establish legal malpractice under negligence, it is necessary to demonstrate the following:

  • The lawyer owed a duty to provide competent and skillful representation;
  • The lawyer breached the duty by acting carelessly or by making a mistake;
  • The lawyer’s breach caused an injury or harm;
  • The harm caused a financial loss.

On the other side, very rarely does Debtor’s counsel have all of the supporting documents of the debt, evidence of the perfection or sometimes even the proper party to receive payments.  Conceivably, debtor’s counsel may need order a title search and obtain missing documents to ensure that he can file a proof of claim with a “reasonable belief”.  In addition, most attorneys are not well versed in the minutiae of escrow analysis or amortization tables.  It is not likely that a Debtor’s proof of claim (in a mortgage context) is going to be somewhat accurate as to the ongoing payment if there is any kind of arrearage at all.  Potentially, the failure to provide accurate information could lead to sanctions from the court.  The penalty for filing a fraudulent claim is a fine of up to $500,000 or imprisonment for up to 5 years, or both.

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