Michigan

Debt Buyers should be very careful in bankruptcy court

My colleague, David Lerner, has been described by our mutual friends as "blisteringly smart." I have cross swords with Mr. Lerner and have a great deal of respect for his abilities as do most attorneys that know him. Mr. Lerner made the cover of Michigan Lawyers Weekly on February 8, 2010 for his commentary on the case of In Re: Wingerter.

In this case, the debtors had challenged a proof of claim that had been filed by a debt buyer. When the debt buyer could not produce the original documents to support the claim, it withdrew its claim. The debtors were not happy with that result, alone. The debtors asked the court for sanctions against B-Line, the debt buyer for not adequately investigating its claim prior to filing it, pursuant to Bankruptcy Rule 9011(b). B-Line dodged a bullet in the trial court as the judge said that B-Line in fact did not adequately investigate its claim but did not award sanctions.

On appeal, the 6th Circuit court reversed the lower court and held that B-Line's pre-filing investigation was reasonable. The court found the fact that B-Line received a warranty as to the validity of claims it purchased, coupled with B-Line's cursory review of the claims, as persuasive that the claims that B-Line filed in the bankruptcy court, were filed in good faith and in compliance with its pre-filing obligations under Rule 9011(b). While the court did not find that these claims were, in fact valid, the court did find that having received such warranties from its seller, made B-Line's reliance upon the validity of these claims, reasonable and hence, its pre-filing investigation requirements were met in good faith.

Moral of the story to those filing claims on purchased debt in the bankruptcy court.- I am no fan of purchased debt. But if you are filing proofs of claims on these debts in bankruptcy court, be sure that the debt buyer's purchase agreement through which it bought these debts contains warranties that the claims are valid. Furthermore, be sure that your client has thoroughly vetted these claims for obvious anomalies such as incorrect social security numbers and bad addresses.

Query for you consumer lawyers: If this case had gone the other way and the 6th Circuit held that B-Line had violated its duties under Bankruptcy Rule 9011(b), do you think the debtors would be potential plaintiffs for a claim under Fair Debt Collection Practices Act?

Full post as published by Michigan Collection Law Blog on February 10, 2010 (boomark / email).