Restructuring

Section 105(a) of the Bankruptcy Code acts as the Bankruptcy Code’s equitable backstop, empowering bankruptcy courts to “issue any order, process, or judgment that is necessary or appropriate to carry out [its] provisions” and to, “sua sponte, take[e] any action or mak[e] any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.”  Does section 105(a), though, authorize a bankruptcy court to issue sanctions against a creditor that knowingly files stale claims?  
That was the question at issue in In re White, a case in which the bankruptcy court was faced with a creditor whose nationwide business model was to buy time-barred debt and then file in bankruptcy courts across the country computer-generated claims it knew, or should have known, to be stale and thus subject to disallowance under section 502(b)(1) of the Bankruptcy Code.  The creditor counted on most debtors and trustees failing to identify such claims as time-barred, resulting in the claims’ allowance and payment.  The debtors in White sought to deter this conduct by seeking sanctions against this creditor pursuant to section 105(a).
Although sympathizing with the debtors and acknowledging “the inherent inefficiency in allowing a creditor to file a claim that [was] destined to be disallowed,” the court nevertheless found that “there [was] no identifiable right to sanctions under [section] 105 for filing a stale claim.”  The court reasoned that “[e]ven though the Code provides for the disallowance of stale claims in [section] 502(b)(1), it does not prohibit the filing of such claims” and therefore “[section] 105 cannot be construed as containing an independent right of action to sanction a creditor for filing a stale claim.”  Moreover, according to the court, awarding sanctions in this situation “would essentially elevate a claim [from a time-barred, but otherwise valid, debt] to [that of] a false or fraudulent claim.”
In reaching this result the court noted that its power under section 105 could only be invoked when necessary to “preserve an identifiable right conferred elsewhere in the Bankruptcy Code.”  (Citing Jamo v. Katahdin Federal Credit Union).  A general exception to this limitation being section 105 sanctions based on “a court’s inherent power to sanction improper conduct,” such as the filing of a false or fraudulent claim.  The claims at issue, according to the court, were not false or fraudulent, but simply represented a valid debt that could not be enforced as a result of application of the statute of limitations.  This is consistent with Fed. R. Civ. Proc. 8(c)(1), which requires a party asserting the defense of statute of limitations to affirmatively state the defense in response to a pleading, and Fed. R. Civ. Proc. 12(b), which requires every defense to a claim for relief to be asserted in the responsive pleading if one is required.
Thus, the only remedy that the court could fashion for the debtors was to disallow the time-barred claim at issue in their case and to reiterate the need for either the Bankruptcy Code to be amended or for the applicable rule committees to fashion a rule dealing with the “stale claim problem.”  Until then, the court cautioned that “section 105(a) does not provide bankruptcy courts with a roving writ, much less a free hand.”
Christina Brown is an Associate at Weil Gotshal & Manges in New York.