Disclosing Personal Info in Bankruptcy Claims Leads to Sanctions

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By Diane Davis

Sept. 2 — A creditor that disclosed debtors' personal information in bankruptcy claim filings that should have been redacted should be sanctioned, a bankruptcy court in North Carolina held Aug. 31 ( In re Branch, 2016 BL 284975, Bankr. E.D.N.C., No. 14-02379-5-SWH, 8/31/16 ).

Judge Stephani W. Humrickhouse of the U.S. Bankruptcy Court for the Eastern District of North Carolina concluded that sanctions were appropriate in two out of three debtors' cases for failing to redact Social Security numbers and dates of birth in proofs of claim filed in their cases, failing to take remedial action once violations were discovered, and acting deliberately.

In addition to attorneys' fees, the court awarded punitive damages of $70,000.

Sanctions ‘Fully Justified.'

“I think the court was fully justified in sanctioning WakeMed for its violation of [Federal] Rule [of Bankruptcy Procedure] 9037 in failing to redact personal information from its proofs of claim,” Prof. Charles J. Tabb, of counsel, Foley & Lardner LLP and Mildred Van Voorhis Jones Chair in Law, University of Illinois, Champaign, Ill., told Bloomberg BNA Sept. 1.

“WakeMed’s violation was extreme, extensive, and ongoing,” Tabb said. “Such cavalier actions by an institutional creditor that is a repeat player in hundreds of bankruptcy cases simply cannot be countenanced, and it was appropriate for the court to send a strong message that such creditors cannot just ignore the law,” he said. Tabb is an editor of Bloomberg Law: Bankruptcy Treatise.

“Some large repeat players do sometimes have horrible policies,” Tabb said, noting the similarities in this case to the infamous case of In re Latanowich, 207 B.R. 326 (Bankr. D. Mass. 1997), where “Sears flouted the reaffirmation rules nationwide.”

According to Tabb, Sears, Roebuck & Co. got into “deep, deep trouble for abusing the discharge and reaffirmation provisions of the Bankruptcy Code. And after the revelation that Sears routinely solicited and executed reaffirmation agreements with bankruptcy debtors without compliance with Bankruptcy Code Section 524(c), it quickly became apparent that Sears was not alone in these improper reaffirmation practices, especially that of failure to file the reaffirmation agreement with the bankruptcy court as required,” Tabb said.

“With so many consumer creditors flouting the Code-prescribed reaffirmation procedures, there was a flood of government and private lawsuits. The resulting liability of Sears alone was hundreds of millions of dollars, including tens of millions of dollars in criminal fraud fines, and it all started with one Chapter 7 debtor in Massachusetts, Frances Michael Latanowich, who finally brought to light the systematic schemes of Sears and many other retailers to circumvent the Bankruptcy Code's discharge and reaffirmation rules,” Tabb said.

More Than Negligent

The court said it was difficult to say that WakeMed “flaunted” the law, or acted deliberately, but the magnitude of the violation, and the fact that there was no supervision or training of the woman who was tasked with filing the proofs of claim indicates that WakeMed was more than negligent. “An institution that participates in the bankruptcy process as frequently as WakeMed simply cannot ignore the requirements of the court,” the bankruptcy court said.

Rule 9037, the court said, requires redaction of “an individual's social-security number, taxpayer-identification number, or birth date, the name of an individual, other than the debtor, known to be and identified as a minor, [and] a financial-account number,” specifying what portions of those identifiers may be included in a filing. The remedy under Rule 9037(d) for a failure to comply is that the court may “limit or prohibit a nonparty's remote electronic access to a document filed with the court.”

The bankruptcy court also has “inherent authority to sanction a party for contempt and equitable powers to enforce a specific provision of the Bankruptcy Code under § 105,” the court said.

Debtors Seeking Sanctions

All three debtors asked the court for sanctions, including actual damages, punitive damages, and attorneys' fees for WakeMed's failure to properly redact their personal information before filing the attachments to WakeMed's proofs of claim. According to the debtors, because the public has access to this information through the court's Public Access to Court Electronic Records (PACER), they are at risk of having their personal and medical information stolen.

WakeMed submitted claims that included full Social Security numbers and dates of birth in both debtor Janis Monroe Clark's and debtor Carla Lynette Bostick's case, as well as in thousands of other cases, the court said. In debtor Wayne Edward Branch's case, however, WakeMed didn't disclose any information that clearly must be redacted under Rule 9037, the court said, and therefore, sanctions aren't appropriate.

Sanctions Awarded

The court awarded debtor Clark actual damages for her expenses pursuing this matter as she and her counsel “did the court and the public a service by bringing this matter to the attention of the court.” The court also awarded Clark's counsel, the Sasser Law Firm, more than $20,000 in attorneys' fees for its work in this case, and another $16,000 for its work in 157 other motions to restrict access on the same issue.

The court awarded Bostick's counsel, Stubbs & Perdue, more than $22,000 for its work in the case. Stubbs & Perdue also represented Branch, but wasn't entitled to compensation because the matter was undertaken on a contingency arrangement, the court said. Because the court didn't find a clear violation of Rule 9037 in Branch's case, the court didn't award any fees related to that case.

Punitive damages of $70,000 were appropriately awarded in this case, the court said, with $50,000 directed to the court, and $10,000 each to Clark and Bostick for their roles as “stalking horses” in bringing the matter to the attention of the court and forcing corrective action by WakeMed.

The court also required WakeMed to take certain actions to ensure that it complies with the court's rules going forward. For five years WakeMed must submit quarterly reports to the Bankruptcy Administrator detailing the training conducted with respect to claims filing, the number of claims filed during that quarter, a certification that those claims were properly redacted, and an outline of office procedures in place for claims filed during that quarter, the court said. WakeMed must also maintain electronic copies of all claims submitted on its behalf, and maintain paper copies with the original “wet-ink” signature of filed claims,” the court said.

Joseph Zachary Frost, Stubbs & Perdue, P.A., Raleigh, N.C., and Trawick H. Stubbs, Jr., Stubbs & Perdue, P.A., New Bern, N.C., represented debtor Wayne Edward Branch; James B. Angell, Howard, Stallings, From & Hutson, P.A., Raleigh, N.C., is the trustee in debtor Branch's case; Joseph Zachary, Frost Stubbs & Perdue, P.A., and William H. Kroll, Raleigh, N.C., and Trawick H. Stubbs, Jr., Stubbs & Perdue, P.A., New Bern, N.C., represented debtor Carla Lynette Bostick; John F. Logan, Office Of The Chapter 13 Trustee, Raleigh, N.C., is the trustee in debtor Bostick's case; Travis Sasser, Cary, N.C., represented debtor Janis Monroe Clark; John F. Logan, Office Of The Chapter 13 Trustee, Raleigh, N.C., is the trustee in debtor Clark's case.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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