| John Stemplewicz
Samuel R. Maizel
Commercial Litigation Branch
U.S. Department of Justice
June 2, 1996
CREDITOR'S CLAIMS IN BANKRUPTCY PROCEEDINGS
A. The Debtor-Creditor Relationship In Bankruptcy
1. Bankruptcy Code Definitions
a. "Claim" is defined as (A) right to payment, whether or not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. § 101(5).
b. "Debt" is defined as a liability on a claim. § 101(12).
c. "Debtor" is the subject of the case. § 101(13).
d. "Creditor" is an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor. § 101(10).
2. The Scope of Bankruptcy Claim Definition
a. "Congress intended . . . to adopt the broadest available definition of 'claim'." Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) (mortgage remains a "claim" subject to chapter 13 plan despite prior chapter 7 discharge of debtor's personal liability). Compare Ohio v. Kovacs, 469 U.S. 274 (1985) (obligation under prepetition state court order to clean up hazardous waste disposal site creates a claim that can be discharged in chapter 7 bankruptcy case) with Torwico Electronics v. New Jersey Dep't of Environmental Protection (In re Torwico Electronics), 8 F.3d 146 (3d Cir. 1993) (State's attempt to force a party to clean up a waste site posing ongoing hazard is not a "claim"), cert. denied, 114 S. Ct. 1576 (1994).
b. Congress intended that the meanings of "debt" and "claim" be coextensive. Pennsylvania Dep't of Public Welfare v. Davenport, 495 U.S. 552, 558 (1990).
c. A "right to payment" means "nothing more nor less than an enforceable obligation." Id.
d. "The concept of liquidation has been variously expressed. The common ... thread has been ready determination and precision in computation of the amount due. ... Some cases have stated the test as to whether the amount due is capable of ascertainment by reference to and agreement by simple computation." A debt is subject to simple calculation or "ready determination" if its amount can be determined in a simple hearing, as opposed to an extensive and contested evidentiary hearing in which it will be necessary to introduce substantial evidence to establish the amount of the debt. In re Loya, 123 B.R. 338, 340-41 (Bankr. 9th Cir. 1991); see generally Matter of Pearson, 773 F.2d 751 (6th Cir. 1985) (discussing competing theories of when a debt is unliquidated).
e. "A claim is contingent as to liability if the debtor's legal duty to pay does not come into existence until triggered by the occurrence of a future event and such future occurrence was within the actual or presumed contemplation of the parties at the time the original relationship of the parties was created." In re All Media Properties, Inc., 5 B.R. 126, 133 (Bankr. S.D. Tex 1980), aff'd, 646 F.2d 193 (5th Cir. 1981).
f. Setoff is not a claim. Setoff is an affirmative defense which does not assert a right of payment from the estate -- it merely seeks to reduce the recovery demanded by the estate. In re Concept Clubs, Inc., 154 B.R. 581, 588-89 (D. Utah 1993); accord In re M & L Business Machine Co., 178 B.R. 270, 272 (Bankr. D. Colo. 1995); Posey v. Dep't of Treasury, 156 B.R. 910, 919 (W.D.N.Y. 1993) (both holding that setoff when asserted as merely an affirmative defense, i.e., the party does not seek an affirmative recovery, is not a "claim" in bankruptcy); cf. In re Calderone, 166 B.R. 825, 830 (Bankr. W.D. Pa. 1994) ("A creditor asserting setoff is not requesting distribution from the bankruptcy estate res but is seeking to satisfy a debt owed to it by the debtor to the extent of the debt it owes to the debtor. Setoff permits parties to 'net' their respective obligations."). Contra In re Town & Country Home Nursing Servs., 963 F.2d 1146, 1150-51 (9th Cir. 1991) (asserting a setoff right results in an informal proof of claim).
3. When A Claim Arises For Bankruptcy Purposes
a. Although § 101(5) defines claim, the Code does not establish clearly when a right to payment arises. Carter Day Indus., Inc. v. EPA (In re Combustion Equip. Assocs.), 67 B.R. 709, 712 (S.D.N.Y. 1986). At a minimum, some "triggering act" constituting the basis for a cause of action must have occurred prior to the filing of the bankruptcy petition. Danzig Claimants v. Grynberg (In re Grynberg), 113 B.R. 709 (Bankr. D. Colo. 1990), aff'd, 966 F.2d 570 (10th Cir. 1992). Claims "arise" for bankruptcy purposes when (1) all "transactions" or acts necessary for liability occur, and for government claims, (2) there is some prepetition relationship, "such as contact, exposure, impact, or privity" between the United States and the debtor such that the Government is able to "fairly contemplate" that it might have a claim against the debtor. See Epstein v. Official Committee of Unsecured Creditors, 58 F.3d 1573 (11th Cir. 1995) (applying this standard to non-governmental claims); Lemelle v. Universal Mfg. Corp., 18 F.3d 1268, 1274-77 (5th Cir. 1994) (same); In re Jensen, 995 F.2d 925 (9th Cir. 1993) (9th Circuit adopts "fair contemplation test" rather than "underlying transaction" test used by the BAP); In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991) (claim requires a prepetition relationship); Matter of Firestone, 179 B.R. 148, 148-49 (Bankr. D. Neb. 1995) (claim against the United States for tax refund "arises upon the end of the taxable year, the time of filing the tax return is merely a procedural requirement to claim the amount already owed"); In re Midway Indus. Contractors, Inc., 167 B.R. 139, 142-43 (Bankr. N.D. Ill. 1994) (same), rev'd on other grounds, 178 B.R. 734 (N.D. Ill. 1995); In re Finley, Kumble, Wagner, Heine, 160 B.R. 882, 891-92 (Bankr. S.D.N.Y. 1993) (when obligation stems from a contractual obligation, even a postpetition breach will be treated as giving rise to a prepetition liability if the contract was executed prepetition); In re Houbigant, 188 B.R. 347, 355 (Bankr. S.D.N.Y. 1995) (same); In re Chateaugay Corp., 115 B.R. 760, 773-74 (Bankr. S.D.N.Y. 1990) (same).
b. A claim arises regardless of enforcement efforts (i.e., future litigation) or of whether the claim is contingent, unliquidated, or unmatured when the petition is filed. See In re Stewart Foods, Inc., 64 F.3d 141, 146 (4th Cir. 1995) ("[T]hat the payments became due after the bankruptcy filing does not alter the conclusion that the payments are pre-petition obligations.") (citing Chiasson v. J. Louis Matherne & Assocs. (In re Oxford Mgmt., Inc., 4 F.3d 1329, 1335 n.7 (5th Cir. 1993) ("A claim is not rendered a post-petition claim simply by the fact that time for payment is triggered by an event that happens after the filing of the petition."); United States v. Gerth, 991 F.2d 1428, 1433 (8th Cir. 1993) ([D]ependency on a postpetition event does not prevent a debt from arising prepetition."); Braniff Airways v. Exxon, 814 F.2d 1030, 1336 (5th Cir. 1987) ("The character of a claim is not transformed from pre-petition to postpetition simply because it is contingent, unliquidated, or unmatured when the debtor's petition is filed.")); Matter of DG Acquisition Corp., 188 B.R. 918, 922 (Bankr. D. Del. 1995) ("A creditor may possess a bankruptcy claim and not possess a cause of action on that claim."); In re Metco Mining and Minerals, Inc., 171 B.R. 210, 216-17 (Bankr. W.D. Pa. 1994) ("When parties agree in advance that one party will indemnify the other in the event of a certain occurrence, there exists a "right to payment", albeit contingent, upon the signing of the agreement."); In re Express Freight Lines, 130 B.R. 288 (Bankr. E.D. Wis. 1991) (unmatured debts); In re Fred Sanders, 33 B.R. 310 (Bankr. E.D. Mich. 1983) (unliquidated debts); In re Wilson, 29 B.R. 54 (Bankr. W.D. Ark.1982) (inchoate tax refunds); 4 Collier on Bankruptcy ¶ 553.01; see also In re Remington Rand Corp., 836 F.2d 825 (3d Cir. 1988) (claim arose for bankruptcy filing purposes when government knew of debtor's liability despite federal statute which requires a federal contracting officer's decision before claim arises). Therefore, a claim is prepetition if, at the time the bankruptcy petition is filed, the debt is absolutely owed but is not presently due, or when a definite liability has accrued but is not yet liquidated. In re Young, 144 B.R. 45, 46-47 (Bankr. N.D. Tex. 1992).
c. When a claim arises should be determined by looking to the Bankruptcy Code rather than state law. Butler v. NationsBank, N.A., 58 F.3d 1022, 1029 (4th Cir. 1995); Grady v. A.H. Robins Co., 839 F.2d 198 (4th Cir. 1988); In re Piper Aircraft Corp., 162 B.R. 619, 624 (Bankr. S.D. Fla. 1994); In re Finley, Kumble, Wagner, Heine, 160 B.R. 882, 892 (Bankr. S.D.N.Y. 1993).
Compare United States v. LTV Corp. (In re Chateaugay Corp.), 944 F.2d 997 (2d Cir. 1991) (CERCLA response costs create prepetition claims, dischargeable in bankruptcy, regardless of when incurred or when their full amount and applicable locations are discovered, so long as they concern release or threatened release occurring prepetition) with California Dep't of Health Services v. Jensen (In re Jensen), 995 F.2d 925 (9th Cir. 1993) (CERCLA response cost obligations are discharged to the extent creditor has knowledge of potential liability and contingent claim before petition is filed) and In re National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1993) (to extent costs are "fairly contemplated" by the parties at time of bankruptcy filing); see also In re Chicago, M., St. P. & P.R.R., 974 F.2d 775 (7th Cir. 1992) (where potential claimant can tie debtor to a known release of hazardous substance which claimant knows will give rise to CERCLA response costs, and when claimant has, in fact, conducted tests with regard to this contamination problem, this potential claimant has at least a contingent claim); United States v. Union Scrap Iron & Metal, 123 B.R. 831 (D. Minn. 1990) (mere release of hazardous substance prior to confirmation of plan does not give rise to a CERCLA claim which is discharged by confirmation).
d. Environmental cleanup costs
Rule that no claim arises in bankruptcy until a cause of action would accrue under nonbankruptcy law seen as too narrow; rule that claim arises upon occurrence of acts giving rise to liability presents constitutional issues. Emerging view seems to favor acts giving rise to liability plus some privity, contact, or relationship between debtor and potential tort victim. See discussion in Lemelle v. Universal Mfg. Corp., 18 F.3d 1268, 1274-78 (5th Cir. 1994).
f. Government contracts
See Kilbarr Corp. v. GSA (In re Remington Rand Corp.), 836 F.2d 825 (3d Cir. 1988) (notwithstanding Contract Disputes Act provision requiring contracting officer's decision, Government must look beyond CDA and consult contract principles in determining the existence of a claim under the Bankruptcy Code); see also Wayne H. Coloney Co. v. United States, 89 B.R. 924 (Bankr. N.D. Fla. 1988) (rejecting "knowledge" test of Remington Rand in favor of "legal relationship").
g. "Involuntary gap" period claims are considered prepetition. § 502(f).
h. Claims arising from rejection of executory contracts and unexpired leases are considered prepetition. § 502(g). See In re Klein Sleep Products, Inc., 173 B.R. 296, 299 (S.D.N.Y. 1994) ("Section 365 merely establishes the method for determining the date upon which a breach of an [executory contract] is deemed to occur. It does not purport to assign the priority awarded to damages flowing from the rejection of a[n executory contract]."). But see generally Matter of Southmark Corp., 62 F.3d 104, 106 (5th Cir. 1995) (a party to an executory contract has a claim against the debtor only when the debtor has rejected the contract).
4. Relevance Of When A Claim Arises
a. Discharge. Generally, discharge will extend to all claims arising before the petition date in a liquidation, § 727(b), or before plan confirmation, § 944(b), § 1141(d), or that are provided for by the plan, §§ 1228(c), 1328(c).
b. Setoff. Bankruptcy preserves, with some limitations, the right to set off mutual prepetition debt against a prepetition claim. See § 553(a). However, if one arose prepetition and the other postpetition, setoff may be prohibited. Braniff Airways v. Exxon, 814 F.2d 1030 (5th Cir. 1987).
c. Priority. Timing can affect priority, e.g., some postpetition claims may be entitled to administrative expense status and receive first priority. See §§ 503, 507.
d. Requirement to file proof of claim. If claim exists, must file proof of claim to receive distribution (except as discussed below). See FRBP 3002. However, if claim arose postpetition and has administrative expense status, compensation may have to be sought via application process. See FRBP 2016.
5. How Claims Relate to Property of the Bankruptcy Estate
a. Secured claims
(1) Definitions -- "lien" [§ 101(37)], "security" [§ 101(49)], "security interest" [§ 101(51)], "security agreement" [§ 101(50)], "secured claim" [§ 506(a)]
(2) Determination of secured status
(a) An allowed claim secured by a lien on property in which the estate has an interest, or that is subject to setoff, is a "secured claim" to the extent of the value of the creditor's interest in the estate's interest in the property, or the amount subject to setoff. § 506(a).
(b) Oversecured creditor: value of property securing claim exceeds debt amount; creditor entitled to postpetition interest. § 506(b); United States v. Ron Pair Enterprises, 489 U.S. 235 (1989).
(c) Undersecured creditor: lower property value results in bifurcation of claim, i.e., a claim secured by a lien on estate property is a "secured claim" to the extent of property's value and an "unsecured claim" to the extent debt exceeds property's value. See § 506(a).
(3) Secured claim carries right to "adequate protection" of collateral. §§ 361-364; See United Savs. Ass'n v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988).
(4) Trustee may recover from property securing an allowed secured claim reasonable and necessary costs and expenses of preserving or disposing of the property. § 506(c).
(5) Cramdown -- requirements for confirming plan over secured creditor's objection. See §§ 1129(b)(2)(A), 1225(a)(5), 1325(a)(5).
(6) Per § 1111(b), undersecured creditor is treated as having recourse as to the deficiency even if creditor did not have recourse against the debtor outside of bankruptcy; creditor may elect to forego deficiency and have claim treated as fully secured.
b. Unsecured claims
(1) Share, pro rata and according to rank, in unencumbered estate property, i.e., property not subject to allowed secured claims.
(2) Priority unsecured claims
(a) Include administrative expenses under § 503 and several other categories of unsecured claims that receive priority in distribution of estate assets. See § 507.
(b) A "superpriority" may be triggered by failure of adequate protection, § 507(b), or may be authorized as an inducement to provide postpetition financing, § 364(c).
(c) Priority claims are paid ahead of general unsecured creditors but may not be paid out of encumbered assets absent secured creditor consent or application of § 506(c). See Gravel, Shea & Wright, Ltd. v. Bank of New England (In re New England Carpet Co.), 744 F.2d 16, 17 (2d Cir. 1984); General Elec. Credit Corp. v. Levin & Weintraub (In re Flagstaff Foodservice Corp.), 739 F.2d 73, 76 (2d Cir. 1984); In re Trim-X, Inc., 695 F.2d 296, 301 (7th Cir. 1982); In re American Resources Management Corp., 51 B. R. 713, 721 (Bankr. D. Utah 1985).
(d) Effect of priority on plan confirmation. See §§ 1129(a)(9), 1222(a)(2), 1322(a)(2).
[updated June 1998] [cited in Civil Resource Manual 62]
(3) Cramdown -- requirements for confirming plan over unsecured creditor's objection. See §§ 1129(b)(2)(B), 1225(b), 1325(b).