Decision: In re Miguel Juarez and Heidi Lizeth Juarez, Case No. 16-40560-JDP (Bankr. D. Idaho, 28 Mar. 2017)
Judge: Honorable Jim D. Pappas, United States Bankruptcy Judge
Counsel for Debtors: Paul Ross, Idaho Bankruptcy Law, Paul, Idaho
Counsel for Creditor Midland Funding LLC: Thomas D. Smith, Service & Spinner, Pocatello, Idaho; Ryan M. Fawcett, Skinner Fawcett LLP, Boise, Idaho
Chapter 13 Trustee: Kathleen A. McCallister, Meridian, Idaho
Background
Miguel and Heidi Lizeth Juarez filed a Chapter 13 bankruptcy petition on 24 June 2016.
Their schedules listed a $3,166 debt owed to Synchrony Bank on a CareCredit account ending in 5181. The account had been opened in March 2016 to finance dental services provided by Seasons Dental in Burley, Idaho. The debt was not identified as contingent, unliquidated, or disputed.
On 5 October 2016, Midland Credit Management, Inc., acting as the authorized agent for Midland Funding LLC, filed a proof of claim for $3,166.09. The claim stated that Midland Funding had acquired the CareCredit account from Synchrony Bank.
The Debtors objected, arguing that the claim did not include sufficient documentation proving the assignment and that Midland Credit had not established its authority to collect the debt.
Midland Funding responded by filing an amended proof of claim. The amended filing included monthly CareCredit account statements, a bill of sale transferring charged-off accounts from Synchrony Bank to Midland Funding, and an affidavit from a Synchrony Bank documentation specialist confirming the sale.
Although the Debtors did not file a separate objection to the amended claim, the dispute proceeded to an evidentiary hearing on 21 February 2017. Both parties submitted additional briefing following the hearing.
The Court was asked to decide two principal issues:
- Whether an affidavit submitted by Midland Funding should be admitted into evidence; and
- Whether the Debtors’ objection to Midland Funding’s amended proof of claim should be sustained.
The Schellig Affidavit
Before the hearing, Midland Funding submitted an affidavit from Kelly Schellig, a bankruptcy operations manager for Midland Credit Management.
The affidavit described the relationship between Midland Funding and Midland Credit and asserted that Midland Credit was authorized to service accounts on Midland Funding’s behalf.
When Midland Funding attempted to introduce the affidavit at the hearing, the Debtors objected on three grounds.
Hearsay
The Debtors argued that the affidavit contained inadmissible hearsay.
Midland Funding claimed the affidavit qualified for the business-records exception under Federal Rule of Evidence 803(6). The Court disagreed.
Schellig was not present at the hearing and therefore could not be cross-examined. Her statements addressed facts directly at issue, including the relationship between Synchrony Bank and Midland Funding and the alleged servicing arrangement between Midland Funding and Midland Credit.
Midland Funding also failed to establish that the affidavit had been created as part of the company’s regularly conducted business activities rather than specifically for use in the litigation.
The Court therefore concluded that the business-records exception did not apply.
Best Evidence Rule
The Debtors also argued that the affidavit violated the best evidence rule under Federal Rule of Evidence 1002.
Schellig’s statements described the contents of a purchase agreement and servicing contract. Those underlying agreements, however, were not produced.
Because Midland Funding was attempting to establish the contents of written agreements, the best evidence rule required the original documents or admissible duplicates. Affidavit testimony describing what the documents allegedly said was not sufficient.
Testimony in a Contested Matter
The Debtors further argued that testimony in a contested bankruptcy matter generally must be presented in open court under Federal Rule of Bankruptcy Procedure 9014(d) and Federal Rule of Civil Procedure 43(a).
Midland Funding relied on the Ninth Circuit’s decision in In re Adair, which approved a local procedure allowing direct testimony to be submitted by affidavit.
Judge Pappas distinguished Adair. Under the local procedure considered in that case, the person signing the affidavit was required to appear at the hearing and remain available for live cross-examination.
Schellig was not made available for cross-examination in the Juarez hearing. The parties had not agreed to admit her testimony by affidavit, and Midland Funding identified no applicable rule or statute authorizing that procedure.
The Court excluded the Schellig affidavit on all three grounds.
The Debtors’ Objection to the Claim
The Debtors argued that Midland Funding’s amended proof of claim was not entitled to the presumption of validity ordinarily provided by Federal Rule of Bankruptcy Procedure 3001(f).
They contended that Midland Funding had not produced the documentation required under Rules 3001(b), 3001(c)(1), and 3001(e)(1) to prove that Midland Credit was authorized to file and collect the claim on Midland Funding’s behalf.
The Debtors also argued that their original objection should be treated as a written request for documentation under Rule 3001(c)(3)(B). Because Midland Funding did not provide all the requested information within 30 days, the Debtors argued that its claim should not receive a presumption of validity.
Finally, the Debtors contended that Miguel Juarez’s testimony was sufficient to rebut any presumption that might apply. Mr. Juarez testified that he had dealt only with Synchrony Bank and had no knowledge of Midland Funding or Midland Credit.
According to the Debtors, that testimony shifted the burden back to Midland Funding to prove that it owned and was authorized to collect the account.
Midland Funding’s Response
Midland Funding argued that the debt arose from an open-end revolving consumer credit account. Consequently, Rule 3001(c)(3)—rather than the general documentation requirement of Rule 3001(c)(1)—governed the claim.
Rule 3001(c)(3)(A) requires a proof of claim for this type of account to provide specific information identifying the debt and its history.
Midland Funding argued that its amended claim supplied each required element. It identified:
- Synchrony Bank as the entity from which Midland Funding acquired the account;
- Synchrony Bank as the creditor to whom the debt was owed on the date of the account’s last transaction;
- 3 July 2016 as the date of the last transaction;
- No date for the last payment because no payment had been made; and
- 3 July 2016 as the account’s charge-off date.
Midland Funding also argued that the Debtors had acknowledged the validity and amount of the Synchrony Bank debt in their bankruptcy schedules.
Their unfamiliarity with the debt buyer’s name, Midland Funding, did not create a genuine dispute over whether Midland Funding had acquired the account.
The Court’s Ruling
Judge Pappas denied the Debtors’ objection and allowed Midland Funding’s amended proof of claim.
Documentation Required for a Revolving Credit Account
The Court held that Rule 3001(c)(3) governs proofs of claim based on open-end or revolving consumer credit agreements, including credit card and CareCredit accounts.
Rule 3001(c)(3) expressly replaces the more general documentation requirements of Rule 3001(c)(1) for these claims. Therefore, Midland Funding was not required to attach the original credit agreement or complete assignment documentation for its claim to receive prima facie validity.
The Court explained that the five pieces of information required by Rule 3001(c)(3)(A) are intended to allow debtors to connect a debt buyer’s proof of claim with an account listed in their bankruptcy schedules.
Midland Funding’s amended proof of claim included each required element and was therefore entitled to the presumption of validity under Rule 3001(f).
The Objection Was Not a Formal Written Request
The Court rejected the Debtors’ argument that their claim objection qualified as a written request under Rule 3001(c)(3)(B).
That rule allows a debtor to make a formal written request directly to the holder of the claim for additional documentation relating to the account. The holder must provide the requested information within 30 days.
A pleading filed with the bankruptcy court is not the same as a written request delivered directly to the creditor under Rule 3001(c)(3)(B).
The Court noted that other bankruptcy courts considering the issue had reached the same conclusion.
The Debtors Did Not Rebut the Presumption
Once a proof of claim receives prima facie validity, the party objecting to it must present evidence sufficient to raise a genuine factual dispute concerning the claim.
The Court found that Miguel Juarez’s testimony did not meet that burden.
The Debtors did not allege that the account belonged to someone else, that the amount was incorrect, or that they did not owe the underlying debt. Mr. Juarez testified only that he was unfamiliar with Midland Funding and Midland Credit because he had dealt directly with Synchrony Bank.
That unfamiliarity was understandable because the account had been sold, but it did not constitute evidence that Midland Funding did not own the claim.
The Court observed that allowing a debtor’s unfamiliarity with a debt buyer to defeat a claim would undermine the purpose of Rule 3001(c)(3), which was specifically designed to address claims involving transferred revolving credit accounts.
The Debtors’ bankruptcy schedules also identified Synchrony Bank, the account number, and a balance of approximately $3,166. Those statements constituted evidentiary admissions under Federal Rule of Evidence 801(d)(2) and provided additional support for the validity of Midland Funding’s claim.
If the Debtors genuinely questioned Midland Funding’s ownership or authority, the proper procedure would have been to send the creditor a formal written request under Rule 3001(c)(3)(B).
Had Midland Funding failed to respond to that request within 30 days, its failure could have been presented as evidence at the claim-objection hearing. No such formal request was made in this case.
Why This Matters
- Different documentation rules apply to revolving consumer credit accounts. Rule 3001(c)(3), rather than Rule 3001(c)(1), governs proofs of claim based on open-end or revolving consumer credit agreements. A creditor generally does not have to attach the original credit agreement or complete assignment records if it supplies the information required by Rule 3001(c)(3)(A).
- The required account information can establish prima facie validity. A claim involving a transferred credit account may receive the presumption of validity when it identifies the original creditor, the entity from which the claim was acquired, the last transaction date, the last payment date, and the charge-off date.
- A claim objection is not a formal request for supporting documents. Debtors seeking additional account records must send a written request directly to the holder of the claim under Rule 3001(c)(3)(B). Raising the issue in an objection filed with the Court does not satisfy that requirement.
- The creditor has 30 days to respond to a proper written request. If the creditor fails to provide the requested documentation within that period, the failure may be introduced as evidence in a subsequent claim-objection proceeding.
- Unfamiliarity with a debt buyer does not rebut an otherwise valid claim. A debtor must present evidence creating a genuine dispute about the debt or the claimant’s ownership. Merely stating that the debtor recognizes the original creditor but not the company that later purchased the account is not enough.
- Bankruptcy schedules may be used as evidence against the debtor. Statements identifying a debt, account number, and balance in a debtor’s schedules may constitute evidentiary admissions supporting the validity of a creditor’s claim.
- Affidavits cannot ordinarily replace live testimony in contested matters. When an affidavit addresses disputed facts, the opposing party must generally be given an opportunity to cross-examine the person who signed it. Without an agreement or other legal authority, an affidavit from an unavailable witness may be excluded.
- The best evidence rule applies to purchase and servicing agreements. A witness cannot establish the contents of an agreement merely by describing it in an affidavit. When the terms of a written agreement are at issue, the original document or a properly authenticated duplicate should be introduced.
Full Decision: Available on PACER, Case No. 16-40560-JDP, Doc. 87 (Bankr. D. Idaho 28 Mar. 2017)
Order Denying Objection: Doc. 88 (Bankr. D. Idaho 28 Mar. 2017)