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 petition on 24 June 2016. Their schedules listed a debt to Synchrony Bank, a CareCredit account ending in 5181, opened in March 2016, in the amount of $3,166, incurred to pay for dental services at Seasons Dental in Burley, Idaho. The account had been charged off in July 2016. The debt was not listed as contingent, unliquidated, or disputed.
On 5 October 2016, Midland Credit Management, Inc. filed a proof of claim as the authorized agent of Midland Funding LLC, asserting a claim of $3,166.09 acquired from Synchrony Bank on that account. The Debtors objected on 11 October 2016, arguing that the claim lacked documentation of the assignment and that Midland Credit was an improper party to collect.
Midland Funding responded by filing an amended proof of claim on 18 October 2016, adding monthly CareCredit/Synchrony Bank account statements, a bill of sale from Synchrony Bank transferring charged-off accounts to Midland Funding, and an affidavit from a Synchrony Bank documentation specialist attesting to the sale. The Debtors did not separately object to the amended claim but set the matter for an evidentiary hearing, held on 21 February 2017. Both parties filed post-hearing briefs.
Two issues were before the Court: whether a creditor affidavit submitted at the hearing should be admitted into evidence, and whether the Debtors’ objection to the amended proof of claim should be sustained.
The Schellig Affidavit
Before the hearing, Midland Funding filed an affidavit from Kelly Schellig, a bankruptcy operations manager at Midland Credit Management, Inc., describing the corporate relationship between Midland Funding and Midland Credit and Midland Credit’s authorization to service accounts on Midland Funding’s behalf. At the hearing, Midland Funding offered the affidavit into evidence. The Debtors objected on three grounds.
Hearsay. The Debtors argued the affidavit contained inadmissible hearsay. Midland Funding responded that the affidavit qualified as a business record under Federal Rule of Evidence 803(6). The Court agreed with the Debtors. Schellig was not present for cross-examination, her statements went directly to the contested facts, the connection between Synchrony and Midland Funding and between Midland Funding and Midland Credit, and Midland Funding had not shown the affidavit was prepared in the ordinary course of business rather than in response to the litigation. The business records exception did not apply.
Best Evidence Rule. The Debtors argued that Federal Rule of Evidence 1002 required production of the underlying documents, the purchase agreement and the servicing contract, rather than affidavit testimony describing them. The Court agreed. Schellig’s statements implied the existence of original records that were never produced, and the best evidence rule required either the originals or admissible duplicates, not testimony about what those documents said.
Rule 9017. The Debtors argued that Rule 9014(d) required witness testimony in contested matters to be taken in open court under Civil Rule 43(a), absent party agreement or specific authority otherwise. Midland Funding pointed to the Ninth Circuit’s decision in In re Adair, 965 F.2d 777 (9th Cir. 1992), which approved a local rule permitting direct testimony by affidavit. The Court distinguished Adair: the local rule in that case required the affiant to be available for live cross-examination, which Midland Funding did not offer here. With no agreement of the parties and no applicable rule or statute authorizing the procedure, submitting affidavit testimony without affording the Debtors an opportunity to cross-examine was impermissible.
The Court excluded the Schellig affidavit on all three grounds.
The Objection to the Amended Proof of Claim
The Debtors’ Position. The Debtors argued the amended proof of claim was not entitled to prima facie validity under Rule 3001(f) because it did not include writings required under Rules 3001(b), 3001(c)(1), and 3001(e)(1) to establish Midland Credit’s authority to file and collect on Midland Funding’s behalf. They further argued that their objection to the original claim constituted a written request under Rule 3001(c)(3)(B), and that Midland Funding’s failure to comply with that request within 30 days defeated any presumption of validity. Finally, even if the amended claim was presumptively valid, the Debtors contended that Miguel Juarez’s hearing testimony, that he had dealt only with Synchrony Bank and had no knowledge of Midland Funding or Midland Credit, was sufficient to rebut that presumption and shift the burden back to Midland Funding to prove its authority to collect.
Midland Funding’s Position. Midland Funding argued that because the claim arose from an open-end revolving consumer credit account, Rule 3001(c)(3) governed and displaced the documentation requirements of Rule 3001(c)(1). The amended proof of claim satisfied each element of the Rule 3001(c)(3)(A) statement: it identified Synchrony Bank as the entity from whom Midland Funding acquired the account, listed Synchrony Bank as the creditor at the date of the last transaction, stated the date of the last transaction as 3 July 2016, left the date of last payment blank as no payment was ever made, and identified 3 July 2016 as the charge-off date. As to rebuttal, Midland Funding argued that the Debtors’ hearing testimony, acknowledging the validity of the debt while offering only unfamiliarity with Midland as their objection, fell well short of raising a genuine factual dispute about who held the claim.
The Court’s Ruling. The Court denied the Debtors’ objection and allowed the claim.
On the documentation question, the Court held that Rule 3001(c)(3) expressly displaces Rule 3001(c)(1) for open-end and revolving consumer credit claims. No copy of any underlying writing is required. The 2012 Advisory Committee notes make this explicit: the five-element statement required by Rule 3001(c)(3)(A) is what enables a debtor to connect a proof of claim to a scheduled debt after the account has been sold, and that purpose is served without requiring assignment documentation. The amended proof of claim satisfied every element of that statement.
On the written request issue, the Court declined to treat the Debtors’ claim objection as the equivalent of a written request under Rule 3001(c)(3)(B). That provision contemplates a formal written demand made directly to the holder of the claim, not a pleading filed with the court. Other bankruptcy courts had consistently so held, and the Court agreed.
On rebuttal, the Court found that Miguel Juarez’s testimony failed to raise a genuine factual dispute about ownership of the claim. To overcome the presumption of prima facie validity, a debtor must allege that the debt is owed to someone else or is not owed at all, not merely that the debtor did not recognize the name of the entity that purchased the account after the petition was filed. Permitting that to suffice would render Rule 3001(c)(3) meaningless. The Debtors’ own schedules, identifying Synchrony Bank, the account number, and a balance of $3,166, constituted evidentiary admissions under Federal Rule of Evidence 801(d)(2) that further supported the claim’s validity. The Court noted that the Debtors’ proper avenue, had they genuinely doubted Midland Funding’s authority, was to make a formal written request under Rule 3001(c)(3)(B) for the underlying documentation; if Midland Funding had then failed to comply, that failure could have been offered as evidence to overcome the presumption. That did not happen here.
Why This Matters
1. Rule 3001(c)(3) displaces Rule 3001(c)(1) for revolving and open-end credit claims. A proof of claim for a credit card or revolving account need not attach the underlying credit agreement or assignment documentation. Compliance with the five-element statement in Rule 3001(c)(3)(A) is sufficient for prima facie validity. Objections resting solely on the absence of assignment papers will fail.
2. A claim objection is not a Rule 3001(c)(3)(B) written request. The mechanism for compelling production of underlying documentation is a formal written request made directly to the holder of the claim, not an objection filed with the court. Debtors who want the agreement must ask for it in writing. A creditor’s failure to respond within 30 days to such a request then becomes usable evidence at the objection hearing.
3. Rebutting prima facie validity requires more than unfamiliarity with the claimant. A debtor must raise a genuine factual dispute about who holds the claim, alleging the debt is owed to someone else or is not owed at all. Testimony that the debtor dealt only with the original creditor and does not recognize the debt buyer does not meet that standard.
4. Affidavits submitted in contested matters without the affiant available for cross-examination will be excluded. Rule 9014(d) requires testimony in contested matters to be taken in open court in the same manner as in an adversary proceeding. Without party agreement or specific rule authority, a creditor cannot establish contested facts through affidavit alone. In re Adair is not a refuge unless the affiant is made available for live cross-examination at the hearing.
5. The best evidence rule applies to claims about underlying documents. Where an affiant describes the contents of purchase or servicing agreements without producing them, that testimony will be excluded. The actual documents, or properly authenticated duplicates, must be in the evidentiary record.
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)
