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Creditor's Claims in Bankruptcy Proceedings -- The Debtor-Creditor
Relationship In Bankruptcy -- Allowance and Payment of Claims
B. Asserting Claims To The Bankruptcy Estate|
1. Whether to File a Claim
a. Necessity of filing
(1) General rule: filing is required. The only claims allowed to share in the bankruptcy estate are those for which proofs have been filed. Wilson v. Allegheny Int'l, Inc., 134 B.R. 282 (N.D. Ill. 1991). When in doubt, file proof of claim.
(2) Exceptions to filing requirement
(a) Lack of knowledge
(i) Of bankruptcy case
(ii) Of existence of claim
(b) Debtor's schedules -- chapters 9, 11 [§§ 925, 1111(a)] -- list claim as undisputed, fixed, liquidated. Rule 3003(b)(1) (filing not required); see also Rule 1019 (effect of conversion of case to chapter 7).
(c) "No asset" chapter 7. Rule 2002(e), 3002(c)(5). In some jurisdictions, clerk will not accept proof of claim in "no asset" case.
b. Reasons for asserting a claim
(1) Involuntary petitions [§ 303]
(2) Administration of estate -- creditors' committees. §§ 1102, 1103. However, under current law, government eligibility for committee membership is limited.
(3) Objection to discharge [§ 727(e)]
(4) Voting on [§ 1126] or objecting to plan [§§ 1225, 1325]
(5) Participation in distribution of estate property through liquidation dividends or plan payments [§§ 726, 1123, 1222, 1322]
c. Considerations in deciding whether to file claim
(1) Sovereign immunity
(2) Jury trial
(3) Nondischargeable claims
(4) Secured claims (including setoff)
2. When to File a Claim in a Bankruptcy Case
a. "Bar date." The bar date establishes the date by which claims must be filed against the estate.
(1) Fixed by rule in chapters 7, 12 and 13 with some exceptions, e.g., upon timely request, court may extend deadline for U.S. to file. See Rule 3002(c). Note: as a rule, bankruptcy deadlines are relatively short. Time is of the essence.
(2) Set by court in chapters 9 and 11 [Rule 3003(c)(3)]
(3) "A claim of a governmental unit shall be timely filed if it is filed before 180 days after the date of the order for relief or such later time as the Federal Rules of Bankruptcy Procedure may provide."
(4) Rejected executory contracts and unexpired leases -- court sets date [Rule 3002(c)(4)]
(5) Postpetition claims. § 503. Note: a motion for an administrative expense shall be made upon application and notice pursuant to § 503 and not by proof of claim. Security Ins. Corp. of Hartford v. First Century Corp. (In re First Century Corp.), 166 B.R. 47 (Bankr. M.D. Pa. 1944). Section 213(c) of the Bankruptcy Reform Act of 1994 amends Code § 503 to provide that the court may permit tardy filing of an administrative expense claim for cause.
(6) Effect of conversion of case. Rule 1019; see United States v. Ginley (In re Johnson), 901 F.2d 513 (6th Cir. 1990) (upon conversion of case from ch. 11 to ch. 7, IRS was required to comply with the bar date set for claims arising in the superseded ch. 11 case with respect to taxes incurred postpetition but preconversion).
(7) Amendment of claims. Should be freely permitted, and amendment not creating new or additional claim may be filed after expiration of normal time limits. See Woburn Assocs. v. Kahn (In re Hemingway Transp., Inc.), 954 F.2d 1 (1st Cir. 1992); In re Unroe, 937 F.2d 346 (7th Cir. 1991); In re Donovan Wire & Iron Co.), 822 F.2d 38 (8th Cir. 1987); In re International Horizons, Inc., 751 F.2d 1213 (11th Cir. 1985); In re Dietz, 136 B.R. 459 (Bankr. E.D. Mich. 1992); In re Walls & All, Inc., 127 B.R. 115 (W.D. Pa. 1991). "The crucial inquiry is whether the opposing party would be unduly prejudiced by the amendment." Roberts Farms Inc. v. Bultman (In re Roberts Farms Inc.), 980 F.2d 1248, 1251 (9th Cir. 1992); see also Matter of Alliance Operating Corp., 60 F.3d 1174 (5th Cir. 1995) (Changing the type of claim from unsecured to priority sets forth a new claim and is not permitted through amendment of an existing proof of claim.); In re Brown, 159 B.R. 710 (Bankr. D.N.J. 1993).
b. Missed deadlines
(1) Avoiding default
(a) First, look for an exception to the filing requirement, e.g., failure to provide adequate notice. See City of New York v. New York, New Haven & Hartford R.R. Co., 344 U.S. 293 (1953) (where creditor was not given reasonable notice of bar date for filing proof of claim, creditor was not barred from asserting claim post-confirmation); In re Spring Valley Farms, Inc., 863 F.2d 832 (11th Cir. 1989); Broomall Indus. v. Data Design Logic Sys., 786 F.2d 401, 405 (Fed. Cir. 1986) (even if creditor had actual notice of bankruptcy proceeding, "that fact would not have obviated the necessity for the service of formal notice" on creditor); Reliable Elec. Co., Inc. v. Olson Constr. Co., 726 F.2d 620, 622-23 (10th Cir. 1984); In re Intaco Puerto Rico, Inc., 494 F.2d 94, 99 (1st Cir. 1974); In re Harbor Tank Storage Co., Inc., 385 F.2d 111, 115 (3d Cir. 1967); In re Arlington Heights Congregate Housing Partnership, 189 BR 187 (Bankr. S.D. Ind. 1995) (without formal notice, actual knowledge of the bankruptcy case will not suffice and a known creditor's claim must be allowed even if late filed); In re Interstate Cigar Co., 150 B.R. 305, 309 (Bankr. E.D.N.Y. 1993).
(b) Informal proof of claim
(c) Excusable neglect
(2) Consequences of missing filing deadline
(a) Secured claims: "Ordinarily, liens and other secured interests survive bankruptcy." Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991). "Because an unchallenged lien survives the discharge of the debtor in bankruptcy, a lienholder need not file a proof of claim under section 501." Folendore v. SBA (In re Folendore), 862 F.2d 1537, 1539 (11th Cir. 1989). However, creditor loses right to proceed in personam against the debtor. See Johnson v. Home State Bank, 501 U.S. at 84.
(b) Setoff: Nothing in § 553 requires that a right of setoff be asserted in a proof of claim to be preserved. To the contrary, § 553 expressly provides that nothing in the Code affects a creditor's right to setoff unless explicitly stated in § 553, which makes no mention of proofs of claim. Despite this, whether failing to file a proof of claim or failure to assert a right of setoff in a proof of claim may waive that right is subject to controversy. Compare In re Davidovich, 901 F.2d 1533, 1539 (10th Cir. 1990) (proof of claim not prerequisite to retention of setoff right); Willcox v. Goess, 92 F.2d 8, 16 (2d Cir. 1937), cert. denied, 303 U.S. 647 (1938) (setoff under Bankruptcy Act allowable on provable claim even if no proof made and bar date passed); Bloor v. Shapiro, 32 B.R. 993, 1002 (S.D.N.Y. 1983) (setoff permissible even in absence of timely filed proof of claim); In re Aquasport, Inc., 155 B.R. 245, 247 (S.D. Fla. 1992), aff'd, 985 F.2d 579 (11th Cir. 1993); In re Concept Clubs, Inc., 154 B.R. 581, 589 (D. Utah 1993); Stratton v. Equitable Bank, 104 B.R. 713, 735 (D. Md. 1989); In re Calderone, 166 B.R. 825, 830 (Bankr. W.D. Pa. 1994); In re Selma Apparel Corp., 155 B.R. 241, 244 (Bankr. S.D. Ala. 1992); In re Suncrete Corp., 100 B.R. 102, 104 (Bankr. M.D. Fla. 1989); In re Denby Stores, 86 B.R. 768, 777 (Bankr. S.D.N.Y. 1988); Lawrence P. King, 4 Collier on Bankruptcy ¶ 553.01, at 553-6 (15th ed. 1993) (all allowing setoff without filing proof of claim) and In re Custom Ctr., Inc., 163 B.R. 309, 315-17 (Bankr. E.D. Tenn. 1994) (failure to assert setoff in original proof of claim does not waive right to setoff) with In re Britton, 83 B.R. 914, 919-921 (Bankr. E.D.N.C. 1988); In re Butler, 61 B.R. 790 (Bankr. S.D. Fla. 1986); and 4 Collier on Bankruptcy ¶ 553.07, at 553-43 (all asserting that failure to preserve setoff in proof of claim is waiver of that right). See also In re Village Craftsman, Inc., 160 B.R. 740, 748 (Bankr. D.N.J. 1993) (setoff waived when creditor files unsecured proof of claim and does not object to unsecured treatment in plan of reorganization); In re Apex Int'l Mgmt. Servs., Inc., 155 B.R. 591 (Bankr. M.D. Fla. 1993); In re Sound Emporium, 48 B.R. 1 (Bankr. W.D. Tex. 1984) (both holding that setoff permitted if failure to assert that right in proof was good faith mistake and led to no detrimental reliance by other parties).
(c) Unsecured claims:
3. Filing the Claim
a. Proof of claim "shall be executed by the creditor or the creditor's authorized agent . . . ." Rule 3001(b) (emphasis added).
b. Filing on behalf of the government
(1) Filing proof of claim is analogous to filing a complaint in a civil action for purposes of litigation authority. Thus, DOJ or U.S. Attorney files the claim with the court. (Note: this is particularly important where multiple agencies are involved in the case and where preserving sovereign immunity is a primary consideration.)
(2) Creditor agency may file if agency has litigation authority or by arrangement with DOJ, e.g., IRS Special Procedures function for filing tax claims, or in emergency. In re Schibilsky, 185 B.R. 81 (Bankr. N.D. Ga. 1995) (IRS has properly delegated authority to file proofs of claim on behalf of United States.).
(3) Third parties may file. § 501(b), (c). However, third party does not waive sovereign immunity by filing claim on behalf of government. See legislative history of § 106. H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 317 (1977); S. Rep. No. 95-989, 95th Cong., 2d Sess. 29-30 (1978).
c. What to file
(1) Proof of claim. A "written statement" which "shall conform substantially to the appropriate Official Form." Rule 3001(a); see Official Form 10 (Rev. 6/91).
This claim reflects the known liability of the debtor to this agency of the United States. The United States reserves the right to amend this claim to assert subsequently discovered liabilities. This agency holds subject to setoff against this claim a debt owed to the debtor of _____________ (amount). The identification of any sums held subject to setoff is without prejudice to any other right under 11 U.S.C. § 553 to set off, against this claim, debts owed by this or any other Federal agency.
(2) Supporting documents. Rule 3001(c), (d). Copies of the documents evidencing the government's claim, including its lien position if applicable, should be attached with a certified statement of account showing the amount owing on the petition date.
(3) Internal documents: Claims Collection Litigation Report. See 4 C.F.R. § 105.2. Applicable to claims under Civil Division cognizance. See attachments to this outline regarding current Nationwide Central Intake Facility procedures applicable in bankruptcy cases. (Note: NCIF procedures and CCLR do not apply to tax claims, which are filed by IRS, or to environmental claims, which as a general rule are forwarded by the agency directly to the Environment and Natural Resources Division for filing.)C. Allowance and Payment of Claims
a. Proof of claim is prima facie evidence of validity and amount of claim. Rule 3001(f). See § 502(a) (claim deemed allowed absent objection); In re White, 168 B.R. 825, 828-29 (Bankr. D. Conn. 1994).
b. Claims scheduled as undisputed, fixed, liquidated in chapters 9, 11 [Rule 3003]
c. Estimation of claims [§ 502(c)]
d. Temporary allowance to permit voting on plan where objection is pending [Rule 3018(a)]
2. Resolving Objections
a. A "party in interest" may object. § 502. This becomes a "contested matter." See Rule 9014. If the objection is joined with a demand for relief of the kind specified in Rule 7001, it becomes an adversary proceeding. Rule 3007. Once the objector produces some evidence (the mere filing of an objection is insufficient) disputing the validity of a claim, the burden shifts to the claimant. The claimant bears the ultimate burden of establishing a valid claim by a preponderance of the evidence. In re South Motor Co., 161 B.R. 532, 547 (Bankr. S.D. Fla. 1993).
b. Objections to government claims. Differing views regarding extent of notice that must be given to United States. Compare In re Morrell, 69 B.R. 147 (N.D. Cal. 1986) (objection to IRS claim must be served upon Attorney General and U.S. Attorney in addition to the IRS because the U.S. is the actual claimant) with In re Hejl, 85 B.R. 399 (Bankr. W.D. Tex. 1988) (Rule 3007 does not require service upon U.S. Attorney where IRS claim is involved), rev'd, No. MO-88-CA-165 (W.D. Tex. Oct. 11, 1988). See generally In re M & L Business Machine Co., Inc., 190 B.R. 111, 115-16 (D. Colo. 1995) ("In light of the comparatively lenient procedure in bankruptcy, persons effecting service must provide correct notice in accordance with the rules. Thus, strict compliance with Rule 7004 serves to protect due process rights as well as assure bankruptcy matters proceed expeditiously." (citations omitted)). Unless the plan expressly reserves the debtor's right to object to claims postconfirmation, there is "no place in the postconfirmation world" for objections to claims. The only means to challenge a claim postpetition is through a motion to reconsider under § 502(j). Matter of Bernard, 189 B.R. 1017, 1020 (Bankr. N.D. Ga. 1996) (Filing an objection 26 months after confirmation -- when the chapter 13 plan expressly required objections to be filed within 6 months of confirmation -- was "unreasonable and unjustifiable.").
c. Determining tax claims [§ 505]
d. Subordination [§ 510]
e. Reconsideration [§ 502(j); Rule 3008]
f. Appeal [Rules 8001-8019]
3. Payment of Claims
a. In liquidation cases
(1) Distribution to secured creditors. Trustee satisfies secured claims through proceeds from sale of property [§ 363], or abandonment [§ 554] or other disposition [§ 725] of collateral. Also, secured claims may be satisfied through foreclosure or exercise of setoff after obtaining relief from the automatic stay under § 362.
(2) Distribution to unsecured creditors. Dividends [see Rule 3009] paid according to § 726(a) ranking:
(a) First, priority claims [§ 507]
(b) Second, general unsecured claims
(c) Third, tardily filed claims
(d) Fourth, fines, penalties or forfeitures, or multiple, exemplary or punitive damages not compensating for actual, pecuniary loss
(e) Fifth, interest
b. Under chapter 11, 12, or 13 plans
(1) As provided for by the plan
(2) Protections afforded secured claims under the Code. §§ 1111(b), 1129(a)(7), 1129(b)(2)(A), 1225(a)(5), 1325(a)(5).
(3) As to unsecured claims, § 726 order of distribution does not apply [see § 103(b)], but, absent consent, priority claims must be paid [see §§ 1129(a)(9), 1222(a)(2), 1322(a)(2)], and other unsecured claims must receive at least as much as they would have received if § 726 applied [§§ 1129(a)(7), 1225(a)(4), 1325(a)(4)]
(4) Plan payments [Rule 3021]
c. Sale or transfer of claims [Rule 1003]
d. Reaffirmation agreements [§ 524(c)(d)]
e. Other sources of payment -- insurance, guarantees, co-debtors